RAILROAD TRANSPORTATION 
 
 ITS HISTORY AND ITS LAWS 
 
 BY 
 
 ARTHUR T. HADLEY 
 
 COMMISSIONER OF LABOR STATISTICS OF THE STATE OF CONNECTICUT 
 INSTRUCTOR IN POLITICAL SCIENCE IN YALE COLLEGE 
 
 NEW YORK AND LONDON 
 
 G. P. PUTNAM'S SONS 
 
 S;^£ ItnitliErbocher ^nss 
 i8S6
 
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 lo3l 
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 COPYRIGHT BV 
 
 G. P. PUTNAM'S SONS 
 
 Picss of 
 
 G. P. Putnam's Sons 
 
 New York
 
 PREFACE. 
 
 This book deals with those questions of railroad his- 
 tory and management which have become matters of 
 public concern. It aims to do two things : first, to pre- 
 sent clearly the more important facts of American rail- 
 road business, and explain the principles involved ; second, 
 to compare the railroad legislation of different countries, 
 and the results achieved. 
 
 The two things need to be viewed in connection with 
 one another. The attempt to manage railroads without 
 regard to the demands of public policy, or to legislate 
 concerning railroads without regard to the necessities of 
 railroad business, results in disastrous failure. This fact 
 has been gradually recognized by thoughtful men on both 
 sides. But it has been hard to get any comprehensive 
 view of the subject in its different aspects. The brilliant 
 book of C. F. Adams, Jr., stands almost alone; and even 
 this treats of but a few questions among many. The man 
 who would really study the subject, must seek his material 
 among hundreds of different arguments and reports ; 
 many of them extremely able, but few of them easy of 
 access, and still fewer at all complete in themselves. 
 
 It was to meet this want that the author first under- 
 took to deliver a course of lectures on Railroads and the 
 Social Problems connected with them. Part of the ma- 
 terial of these lectures is here presented to the public. 
 
 One of the pleasantest things in the whole work has been 
 
 ill
 
 iv PREFACE. 
 
 the cordial help which the author has uniformly received 
 from men, in all positions, to whom he has had occasion 
 to apply for information. Special acknowledgments are 
 due to Mr. S. Wright Dunning, of TJie Railroad Gazette, 
 for constant suggestions with regard to the work, as well 
 as for the ready permission to use material which has 
 appeared, both signed and unsigned, in the columns of his 
 journal. 
 
 New Haven, Conn., Oct. i, 1S85.
 
 CONTENTS. 
 
 CHAPTER PAGB 
 
 I. — The Modern Transportation System . . . i 
 II. — The Growth of United States Internal Com- 
 merce ........ 24 
 
 III. — Railroad Ownership and Railroad Speculation, 40 
 
 IV. — Competition and Combination in Theory . . 63 
 
 V. — Competition and Combination in Practice . . 82 
 
 VI. — Railroad Charges and Discriminations . . 100 
 
 VII. — Railroad Legislation in the United States . -125 
 
 VIII. — The English Railroad System .... 146 
 
 IX. — English Railroad Legislation . . . .163 
 
 X. — Railroad Policy in France . . . . .187 
 
 XL — The Railroad Systems of Central Europe . . 203 
 XII. — Railroad Legislation in Italy . . . .219 
 
 XIII. — Results of State Railroad Management . . 236 
 Appendix . . . ... . . . 259 
 
 Index 267
 
 RAILROAD TRANSPORTATION 
 ITS HISTORY AND ITS LAWS. 
 
 CHAPTER I. 
 
 THE MODERN TRANSPORTATION SYSTEM. 
 
 Its importance in history — Growth of the postal service — The telegraph — 
 Merchant shipping — Substitution of steam for sail — Invention of rail- 
 roads — Misunderstanding as to their real character and uses — Changes 
 since 1850 — Consolidation — Railroad extension — Development of busi- 
 ness — Reduction of rates — Widened field for speculation — Growth of 
 large cities and large establishments — Discrimination — Jealousy of rail- 
 road power — Characteristics of railroad legislation since 1870. 
 
 A. de Foville : " De la Transformation des Moyens de Transport." 
 Paris, 1880. 
 
 E. Sax : " Die Verkehrsmittel in Volks- und Staatswirthschaft." Vienna, 
 1878. 
 
 F. X. V. Neumann-Spallart : " Uebersichten der Weltwirthschaft, Jahr- 
 gang 1 88 1-2." Stuttgart, 1884. 
 
 On the fourth of July, 1828, Charles Carroll, last sur- 
 viving signer of the Declaration of Independence, laid the 
 first rail of the Baltimore and Ohio Railroad. One man's 
 life formed the connecting link between the political 
 revolution of the last century and the industrial revolu- 
 tion of the present. 
 
 The second reaches wider and deeper than the first. 
 Yet there are few who realize its full importance, or who 
 seriously try to understand it. A new system of com-
 
 2 RAILROAD TRANSPORTATION. 
 
 mercial and social relations has arisen among us. Small 
 industries and independent workmen are giving place to 
 large factories and factory operatives. We no longer 
 produce for the home market, but for the world's markets. 
 A rapidly increasing share of productive wealth is held 
 by corporations. The men who manage this mass of 
 corporate capital form the sole connecting link between 
 investors, workmen, and consumers. The classes become 
 more and more sharply marked. Conflicts of interest 
 arise between them — sometimes apparent, sometimes real, 
 — which result in disastrous struggles or in class legisla- 
 tion of the worst type. Yet the majority of men seem 
 indifferent to the real importance of these events. Occa- 
 sionally they make feeble efforts to resist them. More 
 often they allow themselves to be hurried on in the gen- 
 eral movement, without even trying to understand what 
 it means or whither it is leading. 
 
 Of these changes the railroad is at once an instrument 
 and an example. As a carrier, it furnishes the means 
 which has made modern business methods possible. As 
 an organization, it furnishes in itself an extreme type of 
 those methods. No one symptom, in business or in poli- 
 tics, marks the direction of national activity so clearly as 
 does the way in which the transportation system is organ- 
 ized and controlled.' 
 
 This last fact is by no means confined to modern his- 
 tory. The greatness of ancient Rome had no more char- 
 acteristic monument than her system of military roads. 
 With the fall of the Roman Empire the roads fell into 
 decay ; and distant communication on a large scale was 
 first revived by a league of independent towns, which, 
 from the thirteenth to the fifteenth century, controlled 
 
 ' M. M. V. Weber : " Nationalitat und Eisenbahnpolitik." Vienna, 1876.
 
 THE MODERN TRANSPORTATION SYSTEM. 3 
 
 the commerce of Northern Europe on water and on land. 
 The history of this Hanseatic League, extending from 
 Norway to Belgium, from London to the heart of Russia, 
 is one of the most striking illustrations of the political 
 system of the Middle Ages. With a change of political 
 system the transportation system changed also. One of 
 the first steps of Louis XL of France, in his efforts to 
 create a national power and national life, was to take the 
 postal service out of the hands of the cities or other feudal 
 authorities and make it a matter of national administra- 
 tion. Modern history — the history of nations as such- 
 may almost be said to have begun at this point. 
 
 Two or three centuries later, France obtained a national 
 system of roads and canals. The idea was largely due to 
 Colbert, the minister of Louis XIV. It was not executed 
 in detail till the middle of the last century. Many abuses 
 grew up in connection with it ; but on the whole it was 
 probably the soundest and most efficient part of the 
 French administration. A system of lines of communica- 
 tion, radiating from Paris, was constructed by skilled 
 engineers, and placed under the supervision of men of 
 talent, specially trained for the purpose at the Ecole des 
 Fonts et Chaussees. The whole arrangement was further 
 improved by Napoleon, and has served as a basis for the 
 present system of railroad supervision. 
 
 In no other country was the same completeness of or- 
 ganization possible. In England there was no such 
 organization at all. The roads were cared for — and badly 
 cared for — by local authorities. Through communication 
 was established, not by government, but by private en- 
 terprise. Turnpikes were first constructed at the begin- 
 ning of the last century. The first great English canal 
 was built in 1760. The next forty years was a period
 
 4 RAILROAD TRANSPORTATION. 
 
 of great activity in canal building ; but it was left to 
 private enterprise, with little or no government inter- 
 ference." 
 
 While England was thus far behind in the matter of 
 land communication, on the sea she took the lead in a 
 policy of her own. The Navigation Act of 1651, denying 
 foreign vessels the right to carry to or from England the 
 commerce of any country but their own, was in every 
 sense a national measure. It was a systematic attempt to 
 advance the shipping interests of England at the expense 
 of those of other states. It bore the stamp of English 
 character in every line. By crippling the commerce of 
 Holland, it gave England her supremacy on the sea. It 
 was imitated by other nations in the vain hope of produ- 
 cing similar results. It continued in force for nearly two 
 centuries ; being regarded as the bulwark of England's 
 maritime power, when really it had ceased to be of any 
 service to her shipowners, and had become an intolerable 
 nuisance to her merchants." 
 
 These matters of transportation policy in past centuries 
 are chiefly important as illustrating the drift of the gen- 
 eral history of the time. In itself the transportation 
 business was small. The movement of goods in a year 
 on all the through routes of the world a century ago 
 would not equal the movement on a single one of our 
 trunk-lines of railroad at the present day. Transporta- 
 tion policy was but a straw showing the direction of the 
 political wind. To-day all this has changed. Transporta- 
 tion has not merely become important in itself, it has be- 
 come a controlling factor which gives shape to each 
 
 'GustavCohn: " Untersuchungen liber die Englische Eisenbahnpolitik." 
 Leipzig, 1874. Vol. i., pp. ii-i6. 
 
 'W. S. Lindsay: " History of Merchant Shipping." London, 1874-76. 
 Vol. iii., pp. 53-286.
 
 THE MODERN TRANSPORTATION SYSTEM. 5 
 
 man's private business, and to the public policy of every 
 civilized nation. 
 
 All this has grown up within a century ; nearly all, 
 within half a century. The opening of canals, and the 
 development of river navigation, mark the beginning of 
 the change : but it was only a beginning. The canal 
 system of America was fairly well developed fifty years 
 ago ; that of Europe still more completely so. Yet it is 
 astonishing to find how little long-distance communication 
 there had been up to that time. It was not until 1833 
 that a daily mail was established between London and 
 Paris. Even after that, there was communication with 
 the other parts of the continent only twice a week. The 
 English charge on foreign letters, apart from the ship's 
 postage and the expense in foreign countries, varied from 
 twenty-eight to eighty-four cents. The inland communi- 
 cation was more frequent, but the charges were exorbitant, 
 averaging about twenty cents per sheet. No wonder that 
 a vast deal of private letter conveyance was done, in defi- 
 ance of the government monopoly. In the years 1834-5 
 the pressure in favor of low rates began to make itself felt. 
 The movement was headed by Rowland Hill, whose work 
 on " Postal Reform, its Importance and Practicability " ap- 
 peared in 1837. His proposal to reduce inland postage 
 to one-tenth its former figure was so sweeping as to 
 create a great sensation, and not a little opposition ; but 
 the idea was carried out in 1840, postage stamps being in- 
 troduced at the same time. The financial results did not, at 
 first, meet the more sanguine expectations ; but the so- 
 cial effects far outweighed any temporary financial loss. 
 
 The example thus set by England was soon followed 
 by other civilized nations. The first changes in the United 
 States were made in 1845. The previous rates had been
 
 6 RAILROAD TRANSPORTATION. 
 
 from six to twenty-five cents, according to distance. They 
 were now reduced to five or ten cents ; and soon after- 
 wards (1851, 1855) in general to three cents. The same 
 policy was followed throughout Europe at almost the 
 same time. With lower rates came better service and 
 better facilities. In the year 185 1 these reforms were 
 tolerably complete as far as concerned national postage of 
 the leading countries ; and by a series of postal treaties 
 they were rapidly extended to international correspond- 
 ence within Europe itself. In the ocean postal service 
 the high rates continued much longer. The attempt to 
 subsidize steamship lines led to an attempt to tax the 
 letters carried by those steamships. England was thus 
 for a long time actively opposed to the lowering of 
 ocean postage rates ; the United States did not take 
 strong ground in its favor until after the abandonment of 
 the Collins line subsidy in 1858. From that time forward 
 there was a steady lowering of rates, culminating in the 
 establishment of the Postal Union in 1874-5, with its 
 uniform rate of five cents per half ounce between a num- 
 ber of countries on both sides of the Atlantic. This 
 Union was more closely organized in 1879; ^"^^ '^^ ^^^s 
 gradually come to include the whole civilized world. 
 The statistics of the Union show that the total number 
 of letters and packages delivered by mail now amounts to 
 10,000,000,000 annually.' 
 
 In the same year (1837) with the appearance of Row- 
 land Hill's proposals for cheap postage, the electric tele- 
 graph" was first patented. Four distinct patents were 
 
 ' For details, see Neumann-Spallart : " Uebcrsichten," 389-398. 
 
 ' De Foville, pp. 203-205. For detailed statistics on the telegraph see 
 Neumann-Spallart, 399-413 ; " Tenth Census of the U. S." (1880), vol. 
 iv., pp. 804-849 (numbers at the bottom of page). The latest authority on 
 the telegraph in its industrial or political aspect is Schottle : " Der Tele- 
 graph in administrativer and finanzieller Hinsicht." Stuttgart, 1883.
 
 THE MODERN TRANSPORTATION SYSTEM. 7 
 
 issued almost simultaneously. The first working line 
 seems to have been established in England about 1839. 
 The U. S. Government enabled Prof. Morse to construct 
 the first American telegraph — between Baltimore and 
 Washington — in 1844. The attempt was made in many 
 countries of continental Europe to confine the use of the 
 telegraph to the government, and not allow private indi- 
 viduals to send messages. But this was too much against 
 the spirit of the age to be carried out successfully ; and 
 while the governments retained their monopoly of tele- 
 graph ownership, they were obliged to give up the attempt 
 to monopolize its use. The telegraph service of Germany 
 and Austria dates from 1849; that of France from 1851. 
 Telegraphic communication between Europe and America, 
 which had been held for about a month in 1858, was first 
 permanently secured in 1865. Technical improvements 
 and inventions have followed one another in such rapid 
 succession in recent years that we cannot even enumerate 
 them ; nor can we give any history of the telephone, the 
 most important of them all. There are now about 600,000 
 miles of telegraph line, with at least 1,600,000 miles of 
 wire ; an increase of some 50 per cent, in ten years. The 
 total number of messages of all kinds cannot fall far short 
 of 200,000,000 annually. 
 
 Of scarcely less importance has been the development 
 of merchant shipping. The nominal tonnage of the 
 world's marine has increased from about 5,000,000 in 1830 
 to 20,000,000 in 1880' — 300 per cent in fifty years. But 
 the increase in effective carrying power was far greater 
 than these figures would indicate. The effectiveness de- 
 
 ' These figures, especially for the earlier date, can only be roughly given, 
 and authorities differ widely. For more careful attempts at computation, 
 on a somewhat different basis, see Kiaer : " Statistique Internationale de la 
 Navigation Maritime." Christiania, 1881.
 
 8 RAILROAD TRANSPORTATION. 
 
 pends not only upon the tonnage but also upon the 
 vapidity of movement ; and this was fast increasing. A 
 part of the increase was due to improvements in build ; a 
 part to improved methods of handling freight. A part 
 was due to the opening of new lines of communication, 
 like the Suez Canal. A part — and by no means a small 
 one — was due to the study of the prevailing winds, first 
 taken up on a large scale by Lieut. Maury some forty 
 years ago. It was found that the winds had a certain 
 regularity even in those parts of the ocean where they 
 seemed to blow quite irregularly. By taking, not the 
 shortest course, but a course where the winds are likely to 
 be favorable, the average duration of the voyage on many 
 routes was shortened thirty or forty per cent. 
 
 But the most radical change was made by the gradual 
 substitution of steam for sail as a mode of propulsion.' 
 The practical usefulness of the invention dates from the 
 early years of the present century." It was long after it 
 had been employed on inland waters or in the coasting 
 trade before it was supposed possible that it could com- 
 pete with sail on ocean routes. The first efforts of Eng- 
 land to secure ocean steamship lines were the result of 
 political rather than business considerations. But what 
 seemed a hazardous experiment in 1838 was a proved 
 success in 1850. There was a hard fight beginning be- 
 tween steam and sail ; each new invention gave steam a 
 new advantage. The substitution of the screw for the 
 side-wheel and the introduction of compound engines 
 economized force and fuel. The attempts to use sailing 
 vessels with auxiliary screw were not very successful. 
 The increase in the size of vessels gave steamers a relative 
 
 ' Lindsay : " History of Merchant Shipping," vol. iv. 
 ' *' Tenth Census of the U. S.," iv., 649-652.
 
 THE MODERN TRANSPORTATION SYSTEM. 9 
 
 advantage ; for, while it somewhat increased the con- 
 sumption of fuel, it increased the carrying capacity much 
 faster. There are now steamships which burn but half an 
 ounce of coal per ton of cargo per mile. The rather 
 questionable device of water ballast and the rise of the 
 " ocean tramp " — the name given to such steamers as 
 have no regular route, but run wherever and whenever 
 they can get a cargo — still further tends to drive sailing 
 vessels out of lines of trade in which they had hitherto 
 felt themselves secure. The effect is clearly enough seen 
 in the statistics. Of the world's tonnage in 1870, eleven 
 per cent, was steam, eighty-nine per cent. sail. In 1880 
 twenty-five per cent, was steam, seventy-five per cent. sail. 
 Now a steamer, on account of superior speed, is from 
 three to five times as efficient as a sailing vessel of the 
 same size. With an apparent increase of only fifteen per 
 cent: in tonnage, there has been an actual increase of 
 fro-m thirty-five to fifty per cent, in carrying power — an 
 increase with which international trade has more than 
 kept pace.' 
 
 What happened on sea, in the substitution of steam for 
 sail, was more than paralleled on land in the substitution 
 of railroads for roads and canals. 
 
 The change dates from the beginning of the present 
 century. In 1801 the first chartered line of rails was laid 
 — a short horse-railroad from Wandsworth to Croydon, in 
 the suburbs of London. Similar lines were built in 
 almost every succeeding year. In 18 14 it was discovered 
 that cars could be propelled by the adhesion of a smooth 
 wheel to a smooth rail. This showed how steam power 
 could be applied. It only remained to find a practicable 
 
 1 M. G. Mulhall : " Balance Sheet of the World." London, 1881. Table 
 10 and remarks.
 
 lO RAILROAD TRANSPORTATION. 
 
 means of generating this power in a locomotive engine. 
 Two things were necessary for this purpose — sufficient 
 draft to keep up a hot fire, and a large heating surface in 
 a small compass on which to apply it. The escape-steam 
 blast provided the draft. The tubular boiler provided 
 the heating surface. When George Stephenson combined 
 the two, the result was the modern railroad locomotive, 
 complete in its essential features.' 
 
 It had required a hard struggle to secure a charter for 
 the Liverpool and Manchester railroad, so strong was the 
 opposition of vested interests. Only such a politician as 
 Huskisson could have done it at all; and even he had to 
 spend i^70,000 to carry it through. But the success of 
 this one railroad assured the construction of many others, 
 not in England only, but elsewhere. The United States 
 had already made a beginning in railroad construction ; 
 the work was now actively pushed forward at half a dozen 
 different points. The Belgian Government was quick to 
 lay out an admirable railroad system ; and several districts 
 of Germany were not far behind. 
 
 It was not a mere accident of history that France took 
 no part in this movement. Nor was it simply because 
 her admirable system of roads and canals made railroads 
 seem less necessary. It was because France disliked to 
 build railroads at all until it could be done under a com- 
 prehensive plan. It was not in the French character to 
 do things piece-meal. Yet this was exactly what other 
 nations were doing, and were forced to do, with their first 
 railroads. Nowhere, except in Belgium, were the lines 
 systematically arranged. Nowhere was the management 
 any thing better than a makeshift. They were playing 
 
   W. II. ISrown : " History of the First Locomotives in America." New 
 York, 1871. pp. 49-51.
 
 THE MODERN TRANSPORTATION SYSTEM. II 
 
 and experimenting with a new device, of whose uses and 
 laws they had but a faint idea. They supposed that its 
 chief use would be the conveyance of passengers, and that 
 it would be subject to the same laws as the old turnpike 
 roads. When the first charters were granted in England 
 and Germany, it was assumed that the company would 
 own the road-bed, simply as a canal company would own 
 its canal ; that any man could own cars and run trains, 
 just as he would own and run canal boats or wagons. 
 Under this view, the railroad charges were to be nothing 
 more nor less than a system of tolls. Many railroad 
 charters contained long schedules of this kind, with 
 hundreds of different provisions, none of them of any 
 practical use. These more obvious absurdities have been 
 gradually abandoned ; but many of the indirect effects of 
 this idea are still felt in the legislation of the present 
 day.' 
 
 The early railroad engineers overestimated the speed 
 which could be readily attained. Fifty years ago it was 
 generally expected that passenger trains would soon run 
 at rates of from seventy-five to one hundred miles an 
 hour — a prediction which has as yet remained unfulfilled. 
 On the other hand, they underestimated the railroad's 
 capacity for doing work cheaply. It was not supposed 
 that railroads would ever be able to compete with water 
 routes in the carriage of freight, except where speedy 
 delivery was of the first importance. Nor was it at that 
 time desired that they should do so. The first English 
 railroad charter contained provisions expressly intended 
 to prevent such competition. A generation later, in the 
 State of New York itself, there was a loud popular cry 
 
 ' Chas. Francis Adams, Jr. : " Railroads and Railroad Questions." New 
 York, 1878. pp. 82-84. Cohn: "Untersuchungen," chapters i., ii.
 
 12 RAILROAD TRANSPORTATION. 
 
 that the New York Central must be prohibited from 
 carrying freight ni competition with the Erie Canal.' 
 The main field of usefulness of railroads, and the means 
 by which that field was to be developed, were not merely 
 ignored, they were positively shunned. 
 
 This period of railroad infancy ended about the year 
 1850. The crisis of 1847 marked its close in England. 
 The Revolution of 1848-51 was the dividing line on the 
 continent of Europe. The land grants of 1850, and the 
 formation of three trunk lines * from the seaboard to the 
 interior may be taken as the beginning of the new era in 
 the United States. It began to be seen and felt that a 
 steam railroad was something more than an exaggerated 
 turnpike or horse railroad, and that it had functions and 
 laws of its own. The changes were : first, the consolida- 
 tion of old roads ; second, the construction of new ones in 
 a great variety of conditions ; third, and most important, 
 the development of traffic by cheap rates and new methods. 
 
 I. Consolidation. — The early railroad charters were for 
 short independent lines. In England they averaged only 
 about fifteen miles in length. In the year 1847 there were 
 five thousand miles of railroad open, owned by several 
 hundred different companies. Twenty-five years later 
 there were thirteen thousand miles, virtually the whole 
 of which was in the hands of twelve different companies. 
 In France, the number of independent systems was re- 
 duced from thirty-three in 1847 to eleven in 1852, and six 
 in 1859. -^^ ^^'^ follow back the history of almost any rail- 
 road in the United States, we find the same tendency 
 
 ' Henry V. Poor : " Manual of Railroads of the United States for 1S81." 
 Introduction, pp. 24-39. 
 
 ' There had been for ten years previous an all-rail route across New York 
 State, but its consolidation under one company did not take place till 1853. 
 The Erie was opened as a through route in 1851, the Pennsylv.inia in 1854.
 
 THE MODERN TRANSPORTATION SYSTEM. 1 3 
 
 illustrated. The line of the New York Central between 
 the Hudson and Lake Erie alone represents the union of 
 what was originally sixteen different companies. The 
 economic laws which govern this movement will form a 
 subject of subsequent discussion.' Railroad consolidation 
 has always been regarded by the public with a kind of 
 vague fear. As long as it was a mere union of connecting 
 lines into one through route, the advantages to the pub- 
 lic in speed, accuracy, and good organization have been so 
 obvious as to silence the fear of corporate power. When 
 it was a case of the union of competing lines, the advan- 
 tages to the public have been less obvious, the dangers 
 apparently greater, and the opposition always louder and 
 sometimes more effective. 
 
 2. Extension. — Consolidation of itself created through 
 routes and long-distance traffic. Improvements in engi- 
 neering produced the same results in another way. It 
 had been at first supposed that railroads could only work 
 to advantage on level routes; in general, where good roads 
 or canals already furnished cheap transportation. It was 
 now found possible to build mountain railroads ; not 
 merely to supersede existing means of communication, 
 but to go far beyond them. The first railroad across the 
 Alps — the Semmering from Vienna toward Trieste — was 
 built in 1854. The Brenner Railroad from Munich 
 to Italy was completed in 1867. The Mt. Cenis, from 
 Lyons to Turin, with a tunnel seven and a half miles in 
 length, was opened in 1871 ; the St. Gothard, through 
 Switzerland, with a nine-mile tunnel under the very heart 
 of the Alps, in 1882. Other parts of the world had shared 
 in this progress. The Union and Central Pacific route 
 was opened in 1869; so many other roads across the 
 
 ' Chapters iv., v.
 
 14 RAILROAD TRANSPORTATION. 
 
 Rocky Mountains have since been built that we cease to 
 count them any thing extraordinary. British India is 
 traversed by railroads in every direction, eleven thousand 
 miles in all. A railroad across the main chain of the 
 Andes from Chili to Buenos Ayres is just being com- 
 pleted. A line across the Ural Mountains and far into 
 Siberia is in process of construction. 
 
 Some of these roads have created international trade 
 where formerly there was little or no communication. 
 Others have pushed on in advance of civilization itself, 
 creating the communities which were to support them. 
 These roads could not be built expensively ; it was a 
 question between a cheap road or no road at all. In 
 America the question how to build such roads took care 
 of itself. Land was cheap ; wood was cheap ; it only 
 remained to select such a course as would involve the 
 least outlay for grading, cuttings, or bridges ; put down 
 sleepers on the ground itself, lay the cheapest rails that 
 would hold together, and trust to the future for any more 
 solid construction. In Europe, on the other hand, the 
 question was made the subject of scientific study. Great 
 attention was paid to systems of narrow-gauge railroad 
 construction to be applied in the case of localities with 
 light traffic, in mountainous districts, or under stress of 
 military necessity.' 
 
 Military and political reasons have had a great deal to 
 do with the bolder instances of railroad extension. It is 
 to such reasons that we owed the building of the Union 
 Pacific. The same thing may be said of all the large 
 mountain railroads of the Old World. But railroads have 
 
 ' The engineering literature on the subject is large. From the political 
 standpoint the most noticeable work is probably " M. M. v. Weber: Der 
 Staatliche Einfluss auf die Entwickelung der Eisenbahnen minderer Ord- 
 nung." Vienna, 1878.
 
 THE MODERN TRANSPORTATION- SYSTEM. 1 5 
 
 a special use in modern war quite apart from these more 
 general considerations of political influence. Napoleon is 
 quoted as saying, that the strength of an army lies in its 
 legs. Modern improvements have made this saying still 
 truer to day than it was eighty years ago. The lack of a 
 few miles of railroad connection in 1859 probably caused 
 Austria to lose the battles of Solferino and Magenta, and 
 changed the whole destiny of Italy. The energetic con- 
 trol and use of every railroad line in 1870 enabled 
 Germany to put her troops where they were most needed, 
 and strike those telling blows which virtually decided the 
 contest in the first few days. One of the most important 
 lessons of our war was upon the value of railroad communi- 
 cation at the very front. We learned to destroy it for the 
 enemy quickly and thoroughly ; to repair or construct it for 
 ourselves less thoroughly but about as quickly. How this 
 lesson has been taken to heart is shown by the military 
 railroads of France in Tunis, of England in Egypt, of 
 Russia beyond the Caspian. It is seen on a larger scale 
 in the system of railroads in Prussia, Austria, Russia, or 
 India ; many of them built not as one would build docks 
 and canals, but as one must build forts and arsenals. 
 
 Under all these influences the railroad mileage of the 
 world increased from twenty thousand in 1850 to sixty- 
 six thousand in i860, one hundred and thirty-seven thou- 
 sand in 1870, two hundred and twenty-five thousand in 
 1880, and about two hundred and eighty-five thousand at 
 present. Of the later construction very little was 
 intended to meet the wants of existing business. Some 
 of it was due to political considerations ; the remainder — 
 perhaps two thirds of the whole amount — was intended to 
 develop new regions and new trade.* 
 
 ' Neumann-Spallart, pp. 413-430.
 
 l6 RAILROAD TRANSPORTATION. 
 
 3, Business Development. — Rapid as has been the 
 growth of the railroad mileage, traffic has kept pace with 
 it. It is estimated that the total number of tons moved 
 in 1875 was about eight hundred million. At present it 
 is about twelve hundred million annually, while the pas- 
 senger movement has increased from fourteen hundred 
 million to twenty-four hundred million. If wc could take 
 distance as well as quantity into account, the change (for 
 freight at any rate) would be still greater. To a certain 
 extent this increased intensity of use of railroads is due to 
 improvements in engineering ; to a much greater extent 
 it is the result of improved business methods. 
 
 It took some time for railroad authorities to wake up 
 to a fact wdiich now seems self-evident, namely, that the 
 profitableness of a railroad as a whole, or of any particular 
 part of its business, depends quite as much upon the 
 volume of traffic secured as upon the absolute price 
 charged. It was further seen that certain lines of business 
 were of such a character that little or no movement could 
 be obtained at high rates, while a great deal could be had 
 if the rates were made low enough. This was found to 
 be the case with many cheap articles of common use — 
 above all, with coal ; also with stone, lumber, or even food 
 products. A reduction of rates on these articles had the 
 further advantage that it stimulated business in such a 
 way as to give the railroads more of other articles to carry. 
 Thus a change which would have been ruinous if applied 
 to the whole system, was found highly advantageous in 
 many instances. The principle was not merely applied in 
 favor of certain classes of business, but in favor of the 
 long-distance traffic in general. The old system of tolls, 
 by which certain rates per mile were charged, was abso- 
 lutely prohibitory to most long-distance traffic. For
 
 THE MODERN TRANSPORTATION SYSTEM. 1/ 
 
 instance, a rate of three cents per ton per mile, which was 
 usual thirty years ago, would make it cost about a dollar 
 a bushel to get wheat from Chicago to New York. To 
 reduce rates suddenly on all traffic might have proved 
 ruinous. What they actually did was to reduce rates 
 where there would be an increase in the volume of business 
 to make up for it. This marked the abandonment of the 
 crude idea of tolls, and the substitution of the principle of 
 making rates to develop business.' 
 
 The actual effect of this change was a general reduction 
 of rates (at almost every point), combined with vastly in- 
 creased efficiency on the part of the railroad system.* 
 Unfortunately its action has been unequal, producing fre- 
 quent instances of hardship and of abuse. These abuses 
 have been sometimes so flagrant, as to call forth serious 
 attempts to return to the old system of tolls. The system 
 of making rates to develop business, or of " charging what 
 the traffic will bear," rightly applied, has been the means 
 — and we shall find it to be the only possible means — of 
 securing efficient service and low rates. It has been so 
 abused and misunderstood by all parties as to have become 
 a synonym for unchecked extortion — a pretext for char- 
 ging what the traffic will not bear. 
 
 Between 1850 and 1880 rates were reduced on an aver- 
 age to about one half their form.er figures, in spite of the 
 advance in price of labor and of many articles of con- 
 sumption. A variety of means were made to contribute 
 to this result. The inventions of Bessemer and others, by 
 which it became possible to substitute steel rails for iron, 
 made it profitable for the railroads to carry larger loads 
 
 ' The change began independently in several countries — particularly Eng- 
 land, Belgium, and the United States ; but it has been carried farther in the 
 United States than anywhere else. 
 
 ' Compare chapter vi.
 
 1 8 RAILROAD TRANSPORTATION. 
 
 at a reduction in rates. Improvements in management 
 increased the effective use of the rolHng stock, while the 
 consumption of fuel and the cost of handHng were dimin- 
 ished. By other changes in railroad economy it became 
 possible to compete for business of every kind, with the 
 best canals or with natural water-courses. The railroad 
 rates of to-day are but a small fraction of the canal charges 
 of two generations ago ; while in volume of business, 
 speed, and variety of use there is an inestimable advance. 
 
 When the Austrian Government, fifty years ago, re- 
 garded railroads with dislike as being of a revolutionary 
 nature, it judged rightly. Improved communication has 
 played havoc with the European system of Metternich 
 and of the Holy Alliance. The diffusion of intelligence 
 by the post-of^ce and the telegraph has forced the most 
 conservative authorities to move. The rush of travel has 
 broken down the passport system. The extension of 
 trade is forcing us into unity of money, weights, and 
 measures. It has prevented each nation from settling its 
 own problems by itself. The land rents which lie at the 
 base of the social order in England are threatened by 
 changes in the production of wheat in Dakota or Ne- 
 braska. Chicago and Calcutta are virtually nearer to one 
 another to-day, in all matters of business, than London 
 and Vienna, not to say London and Paris, were a century 
 ago. The policy of protective tariffs is but a slight obsta- 
 cle to international trade. Cheapened transportation more 
 than counteracts it. 
 
 We no longer produce for the home market, but for the 
 world's markets. It is by the world's supply and demand 
 that prices are made. The development of transportation 
 has been the main instrument of this change. It has 
 gone hand in hand with the extension of the credit sys-
 
 THE MODERN TRANSPORTATION SYSTEM. 1 9 
 
 tern ; each has supplemented the other. The bill of 
 lading is made to serve the same purpose as the bill of 
 exchange. The movements of international trade are 
 helped forward by telegraphic transfers of money. Trans- 
 actions which w^ould formerly have taken months to com- 
 plete are now settled in half an hour. In one sense, time, 
 money, and risk are spared. Yet the very possibility of 
 doing all these things so smoothly is the most powerful 
 stimulant to speculation, and creates more risks than it 
 annuls. 
 
 If it becomes possible for me to sell my goods in mar- 
 kets five thousand miles distant, it becomes possible for a 
 hundred other producers in a dozen different parts of the 
 globe to do the same thing, and compete with me at 
 almost every point. Of the conditions under which my 
 competitors are working I can judge but imperfectly ; of 
 the mistakes which they are hkely to make, I can hardly 
 judge at all. No one producer can judge of the aggre- 
 gate supply and demand of the world. If a few reckless 
 producers make a mistake, it means not merely local over- 
 supply, but over-supply in every market, a fall of prices 
 everywhere. The ruin of a few drags down all the rest 
 into cut-throat competition. In this over-production, real 
 or apparent, railroads are not merely the instruments, but 
 also the sufferers. The causes which lead to increased 
 prices and increased production, lead to the multiplication 
 of railroads beyond all reason. When prices fall, railroad 
 charges have to be reduced to unremunerative figures in 
 order to retain any business at all. And railroads have not 
 the refuge, available in most other lines of business, either 
 of contracting their capital or of driving their competitors 
 out of business. A railroad once built is come to stay. It 
 can neither retire from business voluntarily, nor be forced
 
 20 RAILROAD TRANSPORTATION. 
 
 to do SO by any other competitor. Drive it into bank- 
 ruptcy, and it only fights the more strongly and reck- 
 lessly. The railroad is thus at once the instrument and 
 the extreme sufferer, in the speculation, over-production, 
 and commercial crises of the present day. 
 
 The concentration of industry in large cities is directly 
 connected with improved transportation. When roads 
 were the chief means of transportation, the size of cities 
 was limited by the available supply of food. Railroad 
 enterprise has so widened these limits by its express 
 services for milk, fruit, or vegetables, and its cheap long- 
 distance movement of grain or meat, that there is practi- 
 cally no such restraint felt. But there has been much more 
 than a mere removal of barriers. Reference has already 
 been made to the inequality of railroad rates. This 
 inequality always operates in favor of large cities. The 
 reduction in rates was made under the stress of competi- 
 tion. It was made first and fullest where competition was 
 sharpest. Even in those countries in Europe where the 
 state owned many of the railroads, but feeble opposition 
 was offered to this tendency during the years 1 850-1 872. 
 In England and the United States it was pursued with 
 utter recklessness. 
 
 The aggregation of business in cities, of itself gives 
 the large establishment an advantage over the small dealer. 
 The latter has no longer a local custom of which he is 
 sure. His personal attention to details begins to count 
 for less. His competitor's large capital and wide connec- 
 tion count for more. Too often, mere unscrupulousness 
 in business may seem to count for most of all. The small 
 capitalist and the independent workman are crushed out. 
 The distinction of employers and employed becomes more 
 sharply drawn. The workman can no longer confidently
 
 THE MODERN TRANSPORTATION SYSTEM. 21 
 
 hope to become the employer of his own labor. It is 
 these tendencies which give force to the agitation in favor 
 of socialism. Unfortunately the effect of the policy of 
 most of our railroads is to intensify these tendencies. 
 They do not merely favor cities ; they favor individual 
 producers. The largest or most unscrupulous concern 
 gets the best rates. Differences are made which are 
 sufficient to cripple all smaller competitors, and sooner 
 or later drive them to the wall, and concentrate industry 
 in a few hands. 
 
 What makes things seem worse is that in this matter, 
 as in speculation, the railroad is not merely an instrument 
 fostering monopoly ; it is itself an example of the ten- 
 dency toward monopoly. Railroad consolidation has put 
 the control of the country's business into the hands of a 
 few large corporations. The owners may be numerous, 
 the actual managers are few. It is useless to strive 
 against this tendency. Consolidation lowers rates and 
 makes enlightened economy possible. It usually lessens 
 the specific abuses of power. But the power itself is 
 vastly increased ; while the owners are at the same time 
 removed from all apparent contact or sympathy with the 
 communities whom they serve. Serious conflicts of in- 
 terests concerning a turnpike or bridge were almost 
 impossible, because those who owned them and those 
 who used them were to a large extent the same, or, at 
 any rate, came in personal contact. But where one set of 
 men own a railroad and another set of men use it, the two 
 only coming in contact through the medium of the rail- 
 road management, we have a state of things corresponding 
 to the " absenteeism " of Irish landlords, and involving 
 conflicts or dangers of the same kind.' 
 
 * Iowa Railroad Commissioners' Report, 1884, pp. 5, 6.
 
 22 RAILROAD TRANSPORTATION. 
 
 This condition of things became obvious about 1870; 
 and it is against these evils and dangers that subsequent 
 legislation has been almost entirely directed. The years 
 1870-3 are marked by a change in the aims of railroad 
 legislation, more obvious perhaps than the change in 
 principles of railroad management twenty years earlier. 
 A noticeable thing about the changes of legislative aim 
 was the suddenness with which they made themselves 
 felt all over the world. Hitherto the object had been to 
 secure rapid increase of railroad facilities. With this end 
 in view England allowed the utmost freedom from restric- 
 tion ; the United States granted almost reckless subsi- 
 dies of land, or guaranteed bonds ; on the continent of 
 Europe some states gave direct pecuniary assistance to 
 private companies, other states built railroads themselves. 
 The main object was support rather than control. The 
 most they feared was that charges in general might be too 
 high, and this they sometimes sought to prevent by law. 
 That the community might be injured by the reduction 
 of some charges more than others, scarcely entered the 
 minds of the majority of legislators and statesmen. The 
 very worst forms of discrimination were given by state 
 railroads themselves, apparently without suspicion of 
 harm. 
 
 The reaction was sudden and widespread. In the years 
 immediately following 1872, the Granger movement did 
 its work in the United States ; the Railway Commission 
 was established in England ; Belgium and Prussia de- 
 termined to change from a mixed system to a system of 
 state ownership pure and simple ; France and Italy began 
 a policy — eventually unsuccessful — of state purchase and 
 management. The general object was the same in every 
 case. Hitherto legislation had been conceived from the
 
 THE MODERN TRANSPORTATION SYSTEM. 23 
 
 standpoint of the investor — whether that investor was a 
 private company or the state itself, mattered httle. Hence- 
 forward things were looked at from the standpoint of the 
 shipper, and especially of those shippers who under the 
 old system were being driven to the wall. 
 
 It can hardly be doubted that the reaction was a health- 
 ful one in itself. It is still more certain that it was often 
 carried to an unfortunate extreme. It is safe to say that 
 a large part of the railroad legislation of the last twelve 
 years could never be carried out at all, and that a large 
 part of the remainder would do more harm than good to 
 all concerned. The attempt to legislate for the shippers 
 without regard to the railroads is as much of a mistake as 
 the attempt to legislate for the railroads without regard 
 to the shippers. To reconcile these two interests — ap- 
 parently conflicting and yet mutually dependent upon 
 one another — is one of the most serious problems of 
 modern business or modern politics.
 
 CHAPTER II. 
 
 THE GROWTH OF UNITED STATES INTERNAL COMMERCE. 
 
 Badness of early means of communication — Construction of turnpike roads — 
 National aid to internal improvements' — The Cumberland road — Water 
 routes — The Erie Canal — Other canals — First experiments in railroad 
 building — The Baltimore and Ohio — Railroads about Philadelphia ; in 
 the South ; in New York ; in Massachusetts — Development of railroads 
 in New England 1840-1850 ; in the Central States 1850-56 — Land- 
 grant roads before and after the war-'— Successive periods of speculative 
 railroad development' — Different aspects of railroad history.' 
 
 Tenth Census of the United States, 1880, vol. iv. 
 
 Introduction to Poor's " Manual of Railroads of the U. S.," 1881. 
 
 M. Chevalier : " Histoire et Description des Voies de Communication en 
 Amerique." 3 vols. Paris, 1S40. This was an excellent work in its time. 
 An American authority of about the same date is li. S. Tanner : " Canals 
 and Railroads of the United States." 
 
 P. F. Kupka : " Die Verkehrsmittel in den Vereinigten Staaten von 
 Nordamerika." Leipzig, 1883. A mere compilation, but containing much 
 good material. 
 
 One hundred years ago the United States had no 
 system of transportation. Except on natural water- 
 courses it had very little transportation of any kind. 
 The roads were built by local authorities for local pur- 
 poses — and badly built at that. Wagon conveyance 
 was slow and expensive. It took a week to go from 
 Boston to New York by stage, and nearly three weeks 
 to reach Charleston. Although this was the most fre- 
 quented route, there was only a tri-weekly mail at best. 
 The postal service was irregular and unsafe. Passenger 
 journeys were attended with discomfort, and not infre- 
 
 24
 
 UNITED STATES INTERNAL COMMERCE. 2$ 
 
 quently with danger." Long-distance freight movement 
 was absolutely impossible. The charge for hauling a 
 cord of wood twenty miles was three dollars. For haul- 
 ing a barrel of flour one hundred and fifty miles it was 
 five dollars. Either of these charges was sufficient to 
 double the price of the article and set a practical limit to 
 its conveyance. Salt, which cost one cent a pound at the 
 shore, would sometimes cost six cents a pound three 
 hundred miles inland, the difference representing the bare 
 cost of transportation.'' It was on these cheap articles of 
 common use that the charge bore most heavily. It 
 forced every community to live within itself. To what 
 extremes it was carried is shown by the whiskey insurrec- 
 tion of 1798. The settlers of Western Pennsylvania had 
 no manufactures of their own. They depended upon the 
 East for all such supplies, and could only pay for them by 
 the produce of their farms. Grain in its natural state 
 was so bulky that the cost of transporting it across the 
 Alleghanies was simply prohibitory. Distilled into 
 whiskey, its bulk was far less in proportion to its value, 
 and the cost of transportation correspondingly less. 
 The tax upon whiskey was to them a tax upon their sole 
 exchangeable product, and threatened to deprive them of 
 all commerce with the outside world. Had there been no 
 improvement in the means of transportation, this piece 
 of history must have repeated itself. 
 
 Three successive improvements were introduced in the 
 next generation : turnpikes, canals, and railroads. 
 
 Turnpike roads marked an advance, not merely be- 
 cause they were better built, but because they were built 
 to accommodate through traffic. The early roads had 
 
 1 MacMaster : " History of the People of the United States," i., 52-68. 
 " "American State Papers," vol. xx. , p. gig.
 
 26 RAILROAD TRANSPORTATION. 
 
 been administered by local authorities — the townships in 
 New England, the counties elsewhere. The system was 
 taken from England. But in England it had broken 
 down a century and a half ago, and had been supple- 
 mented by a system of " turnpike trusts " — that is, the 
 trustees were empowered to borrow money to build such 
 roads, and were empowered to charge such tolls as would 
 suffice to pay the interest on the investment, and gradu- 
 ally to pay off the principal also.' In other words they 
 were built by bonds without stock. In America they 
 were usually built by stock without bonds — that is, turn- 
 pike companies took the place of turnpike trusts, and no 
 attempt was made to pay up the principal. This was on 
 the whole an improvement on the English system. 
 
 The first American turnpike was built in 1790. The 
 system developed first in Pennsylvania, then in New York 
 and Southern New England. South of the Potomac it 
 took practically no root. On the whole the State of New 
 York seems to have carried out the system most com- 
 pletely. Several of the States — notably Pennsylvania, 
 and later, Kentucky — gave subsidies to turnpikes.* Up to 
 1822 Pennsylvania had paid nearly two million dollars, or 
 over one thousand dollars a mile in this way — about one 
 third of the total cost. 
 
 On the whole these roads seem to have paid a fair re- 
 turn on the investment, and to have given reasonable 
 satisfaction to the public. In spite of rather high tolls, 
 they so reduced wear and fatigue of movement, as to 
 cheapen transportation, in many cases nearly fifty per 
 cent. 
 
 The subject of national aid to roads was first vigorously 
 
 ' Edinburgh Review, April, 1864. 
 ' Kupka, pp. 6-8,
 
 UNITED STATES INTERNAL COMMERCE. 2/ 
 
 taken up by Gallatin in 1808, and again by Calhoun in 
 1818.' It was argued by Gallatin that the money spent 
 on roads would be far more than saved in transportation 
 expenses ; so that if you put a moderate duty on im- 
 ported goods and spent this revenue on roads, the cheap- 
 ened transportation would lessen the average price of 
 goods more than the tariff would raise it. Gallatin, who 
 was Secretary of the Treasury at the time, put the whole 
 matter on economic grounds ; Calhoun, ten years later, 
 took up the matter as Secretary of War, and argued the 
 subject on the grounds of military strength. But the 
 actual decision of the question was based on political 
 grounds rather than on economic or military ones ; and 
 in this aspect it was taken up by the party opposed to 
 Gallatin and Calhoun. There were three reasons for the 
 Whig support of a policy of national aid to internal im- 
 provements: first, it tended to bind the country together; 
 second, it increased the constitutional functions of the 
 United States ; third, it seemed to furnish additional 
 reasons for a high tariff. The second was the main point 
 contended for. President Monroe, in 1822, vetoed a per- 
 fectly unobjectionable, and indeed unimportant, bill for 
 repairs, simply to assert his opposition to the constitu^ 
 tional principle involved ; but he afterwards changed his 
 mind on this very point. 
 
 Gallatin's original plan contemplated an expenditure 
 of from sixteen to twenty million dollars. He proposed- 
 first, a line of road parallel to the coast, extending from 
 Maine to Georgia ; second, a system of lines — road or 
 canal — connecting the navigable waters of the coast with 
 those of the Mississippi valley ; third, three long roads 
 radiating from Washington, leading to Detroit, St. Louis, 
 
 ' " Amer. State Papers," xx., 724-921 ; xxi., 533.
 
 28 RAILROAD TRANSPORTATION. 
 
 and New Orleans. Needless to say no such plan was car- 
 ried out. Numbers of bills for national aid to roads were 
 introduced, and some of them were passed ; but they were 
 mere individual pieces of work, forming no part of any 
 general system. There was a great deal of talk, and very 
 little direct action. President Jackson's opposition at the 
 critical point was too strong to be overcome.^ 
 
 The one really important tangible result of all this 
 agitation was the Cumberland Road — the "National 
 Pike " from Washington to the Mississippi River. The 
 original bills (1806-8) provided for a road from Cumber- 
 land to Brownsville, furnishing direct and easy communica- 
 tion between Washington and Wheeling. In the course 
 of the next twenty years provision was made for succes- 
 sive extension to Columbus, Vandalia, and Jefferson City. 
 The last section was never completed. The total expendi- 
 ture up to 1837 was four million three hundred thousand 
 dollars." 
 
 The road system as a matter of national importance is 
 a thing of the past. The system of internal water-routes 
 is a'thing of the present in more senses than one. When 
 no longer used, its influence is still felt, because it has laid 
 down the lines of the country's development. 
 
 The stream of emigration flowed from the Hudson, the 
 Susquehanna, or the Potomac, toward the great lakes on 
 the one hand, or the Ohio and the Mississippi valley on 
 
 ' The constitutional point was evaded by a distribution of the surplus 
 among the States. A great deal of United States money was thus actually 
 spent on internal improvements. For the broader political aspects of the 
 question, see Alexander Johnston's article " Internal Improvements," in 
 Lalor's " Cyclopedia of Political Economy," Chicago, 18S1-84. For details, 
 see E. G. Bourne's careful investigation of the " History of the Surplus Reve- 
 nue of 1837." New York, 1885. 
 
 ' H. R. Reports, 1836-37, iii., 850. For a description of travel on this 
 route, see Harper's Magazine, Nov., 1879.
 
 UNITED STATES INTERNAL COMMERCE. 29 
 
 the other. The southwestern movement was at first more 
 important than the northwestern. Pittsburg and Cincin- 
 nati, the two main points of transhipment on this route, 
 had become important business centres, while Buffalo and 
 Cleveland were the merest frontier settlements. Of this 
 southwest movement, Philadelphia was the natural start- 
 ing-point. After the beginning of the present century, 
 the road from Philadelphia to Pittsburg was fairly good. 
 The construction of the National Road farther south does 
 not seem to have seriously threatened Philadelphia's ad- 
 vantage of position. 
 
 The change came from another quarter, with the sub- 
 stitution of canals for roads. The advantage was now to 
 lie not with the short route, but with the level route. 
 And the level route ran through New York State. From 
 Alabama to New York the chain of the Alleghanies is all 
 but unbroken. In New York on the line of the Erie 
 Canal it is almost completely broken. 
 
 The first man who really foresaw the future of canal 
 communication was George Washington. Even before 
 the Revolution he called attention to the possibilities'of a 
 canal westward from the Hudson ; although his main 
 efforts, both then and afterward, were directed toward 
 the establishment of communication on a line much far- 
 ther south, from the Chesapeake to the Ohio. It was at 
 first supposed that the canal v/ould run to Lake Ontario 
 instead of Lake Erie. A company with this object in 
 view was formed in 1792. It did some rather ineffective 
 work and then became bankrupt. In 1808 the State 
 bought out whatever remained of this company; in 1810 
 the Erie Canal commission was appointed with De Witt 
 Clinton at its head. An effort was made to secure na- 
 tional aid ; but Madison was unfavorable to the project.
 
 50 RAILROAD TRANSPORTATION. 
 
 and the War of 1812, for the time being, put a stop to all 
 action. At the close of this war New York wisely de- 
 cided to go on with her own resources, without asking 
 national aid. Clinton was the life of the whole move- 
 ment. His " Appeal " was published in 18 16. Workwas 
 begun July 4, 1817. The middle section was completed 
 in 1819; the Champlain branch in 1820; the eastern 
 section in 1822. The whole was finished in 1825.' The 
 cost had been five million seven hundred thousand dollars. 
 Probably no one event in the history of the United 
 States was hailed with such universal rejoicing. And the 
 usefulness of the canal more than justified expectations. 
 Wherever it met a natural water-course, a city grew up 
 rapidly — witness the rise of Syracuse, Rochester, and Buf- 
 falo. The receipts from canal tolls, $762,000 in 1826, had 
 nearly doubled in 1833. A reduction in rates of about 
 forty per cent, in 1834 so increased business that the total 
 receipts continued to grow almost as rapidly as before. 
 In 1836 arrangements were made for deepening and widen- 
 ing the canal in such a way that the transportation itself 
 was cheapened. In spite of constant reductions in rates, 
 the canal fund grew so rapidly, that in 1845 the managers of 
 this fund were buying up their bonds at twenty per cent, 
 premium. In 1852-3 the tolls per ton were only about one 
 third their original figures ; the revenue was over three mil- 
 lion dollars in each year. From that time forward begins 
 the history of contests between canal and railroad. The use 
 of the canal continued to increase ; its receipts at one time 
 also increased largely ; but its commercial power slowly 
 diminished. From 1853 to 1859 there was a fight for 
 supremacy between canal and railroad. For twelve years 
 more there was a contest for profits. Then it became a 
 
 • " Tenth Census," iv., 731, 732. -
 
 UNITED STA TES INTERNAL COMMERCE. 3 I 
 
 question whether the canal could pay expenses of main- 
 tenance ; a question which was finally decided in the nega- 
 tive.' 
 
 The construction of the Erie Canal reduced transpor- 
 tation charges to little over one tenth their former figures. 
 Branches were built in rapid succession. The low rates 
 enabled it to compete for the trafific of the Ohio River 
 valley. Two canals connecting Lake Erie with the Ohio 
 were built in the years 1825-38, one starting from Cleve- 
 land, the other from Toledo. 
 
 Apart from the Erie Canal and its connections, the first 
 canals were those for coal transportation. Some were 
 built in Pennsylvania as early as 1813. The Lehigh Coal 
 and Navigation Company began its activity in 18 18-21. 
 The Delaware and Hudson Canal dates from 1826. The 
 Morris Canal was begun about the same time. More 
 general activity was first called forth in the years 1830-37. 
 The Pennsylvania system of public works established a 
 "composite route "of canal, railroad, and stationary-engine 
 service, which did useful work in its time, though quite 
 unable to compete with modern railroads. The canals of 
 Virginia were unsuccessful ; those of Indiana flagrantly 
 so. Some of the worst of these works were more or less 
 directly encouraged by subsidies from the United States.^ 
 
 The crisis of 1837 put a complete stop to speculative 
 canal building. For the time being it was impossible to 
 continue these works at all ; and when the country had in 
 some measure recovered, it was felt, in the first place, that 
 
 ' See chapter vi. For details see successive N. Y. State reports of the 
 Auditor of the Canal Department, the State Engineer, and special com- 
 missions. 
 
 ' Besides the distribution of the surplus (see Bourne, " History of the 
 Surplus Revenue of 1837 "), there were 4,000,000 acres of land granted to 
 canals or in aid of canal construction.
 
 32 RAILROAD TRANSPORTATION. 
 
 these systems of public works had done more harm than 
 good ; and, secondly, that the chief means of internal 
 communication was not to be water, but rail. Some local 
 canals, chiefly coal canals, continued to be of service to 
 local traffic. Two great systems of water communication — 
 the Lakes and Erie Canal on the north, the Mississippi 
 River on the south — have continued to wage a more or 
 less equal contest with the great railroad systems of the 
 present day. The history of these contests belongs to a 
 subsequent chapter. 
 
 Before the canal mania reached its height, railroad 
 building had begun almost simultaneously at half a dozen 
 different points. The idea took root most suddenly. 
 There had been no such previous series of experiments 
 with horse railroads as in England. The Quincy tram- 
 road * (1827), by which stone was hauled for the Bunker 
 Hill Monument, is hardly important enough to be noted 
 as an exception. Of somewhat greater importance were 
 the Mauch Chunk Railroad, completed in the autumn of 
 
 1827, and the Carbondale and Honesdale, built by the 
 Delaware and Hudson Canal Company, and opened in 
 
 1828. The first locomotive seen in America was imported 
 from England for the use of this road.° But these roads, 
 and one or two others immediately following them, were 
 built for special purposes rather than for general public 
 use. 
 
 The honor of taking the lead in the construction of a 
 full-fledged railroad may fairly be given to Maryland. 
 The Baltimore and Ohio was really the pioneer railroad. 
 It was chartered in 1827 and begun in 1828. The first 
 
 * Adams : " Railroads," pp. 37-39. 
 
 ' It did not serve its purpose. W. H. Brown : " Hist, of First Locomo- 
 tives," pp. 74-92.
 
 UNITED STATES INTERNAL COMMERCE. 33 
 
 section, fifteen miles in length, was opened in the begin- 
 ning of the year 1830. Horse-power and even sails were 
 at first tried as means of propulsion. It was not until the 
 latter part of 1831 that steam was definitely chosen for 
 the motive power. 
 
 The early railroads were like modern street railroads in 
 their construction. That is to say, instead of having trans- 
 verse sleepers, they were laid upon heavy wooden beams or 
 sills, placed lengthwise. These beams were the real sup- 
 porting power ; the rail was simply a flat strip of iron, to 
 protect the underlying wood from wear. The first locomo- 
 tives, imported from England, were found too heavy to be 
 borne by a road thus constructed. There was also much 
 delay in their arrival. America almost immediately began 
 to manufacture her own locomotives ; the West Point 
 Foundry Works taking the lead in this matter.' 
 
 By the close of the year 1835, the Baltimore and Ohio 
 with the Washington branch had attained a length of 
 one hundred and fifteen miles. Pennsylvania had been in 
 some respects still more active, her railroads, chiefly coal 
 roads, having attained the highly respectable length of 
 about two hundred miles '^ — one quarter of the whole 
 mileage of the United States at the time. South Caro- 
 lina had one hundred and thirty-seven miles open for 
 trafific ; Massachusetts, New York, and New Jersey, not 
 far from one hundred miles each. The remaining roads 
 were chiefly in Virginia. Railroad extension was not seri- 
 ously checked by the crisis of 1837. In one sense it may 
 have been helped rather than hindered ; for as the building 
 of new canals was given up, the necessity of new railroads 
 was all the more apparent. 
 
 'Brown : " Locomotives," 145, 159 ff. 
 
 ' Inciuding some private railroads not mentioned in the United States 
 Census returns.
 
 34 RAILROAD TRANSPORTATION. 
 
 The most rapid growth centred around Philadelphia. 
 To the northwest was a system of coal roads. The first of 
 them were mere private lines connecting mining properties 
 with points of shipment by water. In 1833 the Phila- 
 delphia and Reading Railroad was chartered ; it was opened 
 in 1838. Farther to the south, directly west of Phila- 
 delphia, was a line of State railroad opened in 1834. This 
 was part of the composite route already mentioned. The 
 Pennsylvania Railroad itself was not chartered till 1846. 
 The west end of the Camden and Amboy route was 
 opened as early as 1832-34. Regular communication 
 with New York was established in 1839. A year before 
 this the Philadelphia, Wilmington, and Baltimore Rail- 
 road, chartered in 183 1-2, had been opened to Balti- 
 more.* 
 
 The Baltimore and Ohio advanced but slowly after 1835. 
 More activity was displayed farther South. By the year 
 1840 there seems to have been a continuous line of rail 
 open from Fredericksburg via Richmond to Wilmington. 
 The first section built — that between Petersburg and 
 Weldon, thirty-one years later the object of such hard 
 fighting, — was opened in 1833. South Carolina had been 
 still more enterprising. The Charleston and Hamburg 
 Railroad, one hundred and thirty-seven miles in length, 
 was chartered in 1829. When opened in 1833 it was the 
 longest line of railroad under one management in the world. 
 A number of branches were built in the years succeeding 
 1840; while Georgia was developing a well-planned system 
 of railroads under State ownership. State aid in various 
 forms was quite prevalent in the South at this time ; the 
 
 ' These and subsequent figures are obtained by a comparison between the 
 historical matter in Poor's " Manual" and " History" (New York, i860), 
 and the returns in the Tenth Census, iv., 301-387 (bottom figures).
 
 UNITED STATES INTERNAL COMMERCE. 35 
 
 policy had been stimulated if not started by the distribu- 
 tion of the surplus in the United States Treasury. In 
 Georgia and South Carolina it was done with profit and 
 success. Elsewhere it was not so well applied. ' 
 
 The earliest New York railroads were built near Albany. 
 The Mohawk and Hudson (Albany and Schenectady) was 
 opened in 1831 ; the Saratoga and Schenectady in 1832; 
 the Rensselaer and Saratoga in 1835. The New York 
 Central route was opened to Utica in 1836, and to Buffalo, 
 by a somewhat devious line, in 1842, though the consoli- 
 dation of the different sections did not take place till 
 eleven years afterward. Meantime the Harlem Railroad 
 had been opened, and many other roads were well under 
 construction, notably the Erie, which had received liberal 
 assistance from the State. The main line of the Erie 
 was, however, not opened through its "U'hole length till 185 1. 
 
 Three Massachusetts railroads from Boston toward 
 Providence, Worcester, and Lowell respectively, were 
 opened almost simultaneously in 1835.^ The whole line 
 of the Boston and Albany was completed in 1842. This 
 railroad has the distinction of being the first road operated 
 as an important through route, and not merely supported 
 by local trafific. It was not the only instance of continu- 
 ous railroad connection. There was already an almost 
 continuous line from New York to North Carolina. A 
 rail connection from Albany to Buffalo was on the point 
 of completion. But each of these was simply a succes- 
 sion of local lines managed for local interests, while the 
 Boston and Albany was built with some conscious idea, 
 though an imperfect one, of the work that it was to do in 
 the future. 
 
 ' Bourne ; " History," chapters vi-xi. 
 ^ Adams : " Railroads," pp. 52-79.
 
 36 RAILROAD TRANSPORTATION. 
 
 The years 1 840-1 850 formed a period of rapid railroad 
 I construction in New England — more rapid than it was in 
 any other section of the country during that decade, 
 and more rapid than it has been in New England 
 during any subsequent decade. If we look at the rail- 
 road map of the United States in the year 1850, we find 
 that the New England system has developed its main 
 outlines ; that the Middle and South Atlantic States have 
 seized the idea of their lines of development, but have not 
 as yet carried it out, while the States of the Mississippi 
 valley are just making their first experiments in railroad 
 construction. In Ohio, part of the Cincinnati, Sandusky, 
 and Cleveland had been built about 1837. But it had for 
 a long time stood alone. It was not until 1848 that 
 through rail communication, by any route whatever, was 
 secured from Cincinnati to the lakes. 
 
 After the year 1850, railroad construction in New Eng- 
 land diminished, while in other parts of the country it 
 increased rapidly. The Middle and South Atlantic States 
 in the next seven years filled out the skeleton of railroads 
 which they had previously possessed. The group of 
 States east of the Mississippi in the same period laid 
 down the main lines of its subsequent development. The 
 Cleveland, Columbus, and Cincinnati line was opened in 
 185 1 ; the Cleveland and Pittsburg in 1852. In the same 
 year the Michigan Central and Michigan Southern lines 
 were both opened. The connecting link between Cleve- 
 land and Toledo was opened in the next year, furnishing 
 through rail communication to Chicago. In 1854 this was 
 extended westward as far as the Mississippi via the Chi- 
 cago and Rock Island. The Chicago and Galena, the 
 nucleus of the Northwestern system, was opened in 1855, 
 followed in quick succession by the Chicago and Alton ;
 
 UNITED STATES INTERNAL COMMERCE. 3/ 
 
 Chicago, Burlington, and Quincy ; and Illinois Central. 
 The Ohio and Mississippi, from Cincinnati to St. Louis, 
 was opened about the same time. The first line to reach 
 the Missouri was the Hannibal and St. Joseph in 1858. 
 
 The rapid extension of railroads in the West and South 
 at that time was favored by the policy of land grants.* 
 The Illinois Central was the first railroad aided in this 
 way, although such grants in favor of roads and canals 
 had not been uncommon in the time preceding the crisis 
 of 1837. The Illinois Central scheme was first proposed 
 as far back as 1836 ; but it was not until 1850-51 that it 
 received its land grant ; similar grants being at the same 
 time made to Mississippi and Alabama in behalf of the 
 Mobile and Ohio Railroad. The example was followed 
 only too speedily in other States; in 1852 in Missouri, in 
 1853 in Arkansas, in 1856 in Michigan, Wisconsin, Iowa 
 on the one hand, in Florida and Louisiana (besides 
 additional grants in Alabama and Mississippi) on the 
 other. The sectional interests of North and South were 
 played off against one another in this scramble for spoils. 
 Eight million acres were granted under Fillmore, nineteen 
 million under Pierce. 
 
 The crisis of 1857 put an effective stop to new railroads, 
 especially in the West ; and land-grant projects ceased at 
 the same time. The war then stopped railroad building 
 still more completely. But instead of stopping land 
 grants, it gave them a new field and a wider scope. Before 
 the war these grants, with unimportant exceptions, had 
 been made to the States and by them to the railroads. 
 Now began a system of direct grants of territorial lands 
 on a scale hitherto unknown. A railroad to California 
 
 * Forty-sixth Cong., 3d Sess,, H. R. Ex. Doc, 47, part iv. (Report of the 
 Land Commission).
 
 38 RAILROAD TRANSPORTATION. 
 
 was a political necessity, to be obtained at almost any 
 price. The Union ' and Central Pacific railroads received 
 what was virtually intended as a money subsidy of over 
 twenty-five thousand dollars a mile, and land grants aggre- 
 gating over thirty million acres. The Northern Pacific 
 failed to get an expected money subsidy, but received in- 
 stead, just before the close of the war, a double allowance 
 of land — forty-eight million acres in all. With the restora- 
 tion of peace, the urgent political necessity ceased, but 
 not the grants of land. New grants were made in the 
 Northwest, on a scale exceeding that of ten years before. 
 In the South the forfeited grants were renewed, and new 
 ones added. In the extreme Southwest new routes to 
 the Pacific were richly endowed. Where gifts of lands 
 were impossible or insufficient, towns and counties, in 
 East and West alike, vied with one another in subscribing 
 to the securities of new railroads. For the upper Missis- 
 sippi valley in particular the years 1868-72 were the years 
 of rapid railroad development 
 
 The causes which led to the crisis of 1873 and the 
 depression which followed it, the speculation of the years 
 1880-82, and the crisis of 1884, must be treated elsewhere." 
 Railroad extension in the five years 1874-78 was confined 
 within as narrow limits as possible. In 1879 ^^ began to 
 revive ; and the four succeeding years did for the South- 
 western States and for the Rocky Mountain region what 
 the years 1869-72 did for the upper Mississippi valley. 
 The increase in these groups during four years was 126 
 and 168 per cent, respectively; while in the country east 
 of the Mississippi it was only twenty-four per cent.^ 
 
 ' On Ihe history of the Union Pacific Railroad at this period, see J. B. 
 Crawford: " The Credit Mobilier of America." Boston, 1880. 
 ' Chapter iii. 
 ' For detailed history see Railroad Gazette, 1884, pp. 568, 5S6.
 
 UmTED STATES INTERNAL COMMERCE. 39 
 
 These years will undoubtedly be remembered as the 
 period of the building of the great trans-continental 
 routes, which had been chartered in the earlier period of 
 speculation, but, with the exception of the Central Pacific, 
 had been forced to await the second wave of speculation 
 before they could be completed. 
 
 The mere external history is but the smallest part of 
 any account of railroad development in the United States. 
 The internal history of railroads, their organization and 
 management, presents problems of far deeper interest and 
 importance. There are distinct questions affecting the 
 relations of railroads to their owners, to one another, to 
 their patrons, and to the government.' They have been 
 rapidly developing side by side, in one sense independent, 
 in another sense closely connected. They involve some 
 of the most serious problems of modern industrial life. 
 To understand the relations of railroads to their owners, 
 we must study the growth of corporations, the modern 
 forms of speculation, the history of commercial crises. 
 In the relations of railroads to one another and their 
 patrons, there are involved not merely questions of trade 
 geography, but questions of industrial principle, of com- 
 petition and combination, of monopoly and its effects. 
 And finally, in the relation of railroads to the government, 
 there are political questions involved which have already 
 become important, and which are destined to be of far 
 greater importance in the immediate future. 
 
 * In this enumeration we have omitted an equally important class of ques- 
 tions, which lies outside of the scope of this book — the relations of railroads 
 to their employees, whidi are barely touched upon in chapter vii. To treat 
 them with the thoroughness which they deserve would require a book by 
 itself.
 
 CHAPTER III. 
 
 RAILROAD OWNERSHIP AND RAILROAD SPECULATION. 
 
 Distinctive features of railroad business — Corporate ownership — Its present 
 extent — Past history — Good and evil connected with it — Speculation — 
 Commercial crises — Events preceding the crisis of 1884 — Speculative 
 railroad building and its results — Attempts to control it — Railroad 
 accounts — The income account and the general balance sheet — Diffi- 
 culty of separating maintenance from construction — How far railroad 
 reports can be serviceable to the investors. 
 
 Until about 1850, it was assumed that railroad business 
 was subject to the same laws as any other business, and 
 in particular to the so-called law of competition, by whose 
 free action rates would be brought down to cost of service. 
 It was gradually seen that this assumption was not strictly 
 true ; that in many instances it was very far from the 
 . truth. 
 
 A railroad differs from many other business enter- 
 prises, in the existence of a large permanent investment, 
 which can be used for one narrowly defined purpose, and 
 for no other. The capital, once invested, must remain. 
 It is worth little for any other purpose than the one in 
 question. A railroad cannot contract its capital merely 
 because it does not pay ; nor can it be paralleled at short 
 notice when it happens to pay remarkably well. In these 
 respects it differs quite sharply from a bank or store ; and, 
 to a certain extent, from a factory. The different lines of 
 business — bank, store, factory, railroad — form a series, at 
 one end of which wc have an elastic business capital, 
 
 40
 
 RAILROAD OWNERSHIP AND SPECULATION. 4 1 
 
 which can be readily expanded or contracted, while at 
 the other end we have a large permanent investment of 
 " fixed " capital, which cannot thus adapt itself to the 
 wants of trade. This is why it is so often said that the 
 ordinary laws of political economy do not operate in the 
 case of railroads.' The early political economists were 
 for the most part men who had made a special study of 
 banking business. David Ricardo, the man who did more 
 than any one else to give English political economy its 
 present shape, was himself by profession a banker. He 
 was thus led to treat capital as something not fixed, but 
 freely circulating, which could be at once withdrawn from 
 a business when it became unprofitable. In the case of a 
 factory this is by no means true ; in the case of a railroad 
 it is absolutely untrue. 
 
 This large permanent investment necessarily affects the 
 relations of a railroad to its owners, to its users, and to 
 the law. It is owned, almost of necessity, by a corpora- 
 tion. As concerns the users, it is almost necessarily a 
 monopoly. Very few points have the benefit of more 
 than one line of road ; even at these points it is often 
 easy to come to an agreement. In all these cases, com- 
 petition is not directly felt. When a railroad makes arbi- 
 trary rates, whether justified or not, there is no appeal 
 to any controlling influence. The attempt is therefore 
 constantly made to bring the railroads under the authority 
 of special legislation. There is no lack of grounds on 
 which to base such special action. Corporate existence in 
 itself renders a certain amount of legal control necessary. 
 Common carriers have from time immemorial been made 
 subject to special responsibility. When a single carrier, or 
 a very few of them, have a virtual monopoly of the whole 
 
 ' Adams : " Railroads," p. 8i.
 
 42 RAILROAD TRANSPORTATION. 
 
 business, this responsibility needs to be still more strictly 
 enforced. This was the doctrine of the United States 
 Supreme Court in the Granger cases, in which the re- 
 served police power of the State was so strongly asserted.' 
 The railroads themselves recognize their peculiar position 
 under the law, in claiming to exercise the right of eminent 
 domain to take land without the owner's consent. If they 
 get the benefit of their character as a " public use," they 
 must accept the drawbacks which that character involves. 
 
 Finally, the chief practical reason why so much special 
 legislation is directed against railroads, is that we are 
 dealing with a new business, without the benefit of estab- 
 lished precedents in its favor. The public is jealous of 
 the railroad power. It will not allow it to manage its 
 business without interference, because it is afraid that it 
 w^ill grow so strong that all interference will be impossible. 
 The public sees no limit to the growing power of corpo- 
 rations, and it regards this growth with a kind of vague 
 fear. This fear is none the less potent because men are 
 at a loss to tell exactly what they are afraid of. It gives 
 rise to much wild talk, and some ill-judged legislation. 
 
 These manifestations drive some men to the opposite 
 extreme. Because the fear is vague, they insist that it 
 is groundless. Because the talk is wild, they insist that 
 it is much ado about nothing. Because the legislation is 
 ill-judged, they insist that no legislation is needed. 
 
 Either extreme is bad. It is not well to be frightened 
 at the growth of corporate power ; but it is not well to 
 shut our eyes to the plain fact of the case. Not far from 
 one quarter of the wealth of the United States is held by 
 trading corporations. It is not improbable that half the 
 permanent business investment of the country is owned 
 
 ' Munn vs. Illinois, 94 U. S., 113.
 
 RAILROAD OWNERSHIP AND SPECULATION. 43 
 
 in this way.' It is certain that, not in the United States 
 only, but in tlie whole civilized world, corporate property 
 is increasing many times faster than other forms of 
 wealth.^ It is safe to say that, amid the many important 
 business changes of the present century, this sudden 
 growth of corporations is the most important. 
 
 So rapid has been the change that men's thoughts have 
 been hardly able to adapt themselves to it ; still less has 
 the law been able to keep pace with it. The change has 
 brought evils and dangers, previously unknown, and even 
 now imperfectly understood. Against these dangers, old 
 safeguards have proved useless ; new legislation, based on 
 a merely superficial view of the facts, has proved worse 
 than useless. If our remedies are to be of any avail, they 
 must be based on a thorough understanding of the evils 
 against which they are directed. To understand the evils, 
 we must understand the character of the system, and the 
 causes which have led to its growth. 
 
 The distinctive feature of the modern trading corpora- 
 tion is the limited liability of its members. 
 
 ^ Using the words "permanent investment " in a somewhat narrow sense, 
 to exclude the value of land itself — which though a permanent investment 
 on the part of many individual holders, is from the standpoint of the com- 
 munity mostly capitalized rental value. The wealth of the country as esti- 
 mated in the United States Census of 1880, vii., p. 11, is found to be forty- 
 three to forty-six thousand million dollars ; probably from sixteen to eighteen 
 thousand million should be classed as permanent investment. It is probable 
 that on this basis of valuation the total amount of corporate property amounted 
 to ten or twelve thousand million dollars, about three fourths of which should 
 be classed as permanent investment. But these figures are very uncertain. 
 
 " Here we stand on surer ground in making our estimates. It is not 
 probable that in the years from 1870 to 1880 the total wealth of the world 
 increased much more than ten per cent. But the use of machinery, as indi- 
 cated by the consumption of coal and iron, increased from forty to fifty per 
 cent. ; and the railroads of the world increased seventy-five per cent. See 
 Mulhall: "Balance Sheet of the World, 1870-1880"; Neumann Spallart : 
 " Uebersichten," 1884, ]ip. 266-289, 439.
 
 44 RAILROAD TRANSPORTATION. 
 
 This is what distinguishes it from a partnership/ If a 
 man puts a thousand dollars into a partnership, and the 
 firm contracts debts in excess of its resources, he may be 
 called upon to pay many thousands more to satisfy the 
 claims of creditors. But if he puts his thousand dollars 
 into railroad stock, he is quit of all further responsibility. 
 His liability is limited to the amount of his original in- 
 vestment. If the company is well managed he will get 
 his dividends. If it is badly managed he will probably 
 lose his money. But in no case can he be compelled to 
 pay more than the face value of his stock subscription. 
 If the liabilities of the company exceed its resources, that 
 is the creditors' look-out. They can take possession of 
 the concern and run it to suit themselves ; but they have 
 no further claims against the individual stockholders. 
 
 What is true of railroad stock is generally true of manu- 
 facturing stocks, and partially true of the stock of banks 
 and other trading corporations. The liability of the indi- 
 vidual stockholders is in each case accurately defined by law. 
 
 In this respect the corporations of to-day are sharply 
 distinguished from those of the middle ages. The mem- 
 ber of a mediaeval guild did not lose one jot of his liability 
 for what the corporation might do. His whole person- 
 ality was bound up in the corporation. He ceased to 
 have an individual existence apart from it. John Smith, 
 A. D. 1300, was not, primarily, a citizen of England, but a 
 member of the guild of smiths in the city of London, 
 which city was a member of the English body politic. 
 Whether he wrought or fought, he did it not as a free-born 
 Englishman, but as a Smith of London. Any analogy 
 between the medi.xval guild and the modern corporation 
 
 ' This is of course not intended as a legal definition (compare Taylor on 
 Corporation^ xhaps. iii.^ iv. J but as a popular statement .of facts.
 
 RAILROAD OWNERSHIP AND SPECULATION. 45 
 
 is almost always misleading." The former was an associ- 
 ation asserting its claims in every direction while the 
 state was still weak. The latter is an association estab- 
 lished for specific purposes by a state which has become 
 strong enough to protect the association in its privileges, 
 and to limit it to the purposes for which it was organized. 
 
 The first corporation of the modern type was a bank 
 chartered at Genoa, in 1407, for the purpose of funding 
 the national debt of that city.^ The next important in- 
 stances were the great merchant shipping companies of 
 Holland, England, and France, of which the English East 
 India Company has been the most famous. The first of 
 these was chartered about the year 1600. This form of 
 organization grew in public favor for a hundred years. 
 Then the wild speculations connected with John Law's 
 bank in France in 1720, and the "South Sea Bubbles" in 
 England, at the same date, produced a reaction, and the 
 development of corporate business was checked until after 
 the close of the Napoleonic wars. Their really rapid 
 growth dates from 18 15. 
 
 There is a necessity for such corporations in the nine- 
 teenth century which did not exist in the eighteenth. 
 The development of the steam-engine has caused large 
 enterprises to take the place of small ones. The era of 
 large factories began about 181 5 ; that of railroads in 1830. 
 In two generations we have seen an investment of over 
 $30,000,000,000 in applied steam power.^ 
 
 The work was indispensable, — but where was the money 
 
 ' J. E. Thorold Rogers : " Six Centuries of Work and Wages," London and 
 New York, 1884, pp. 106-113. 
 
 ^ F. Kleinwachter in Schonberg's " Handbuch der politischen Oekonomie," 
 pp. 197, 198. Tubingen, 1S82. 
 
 *Engel: "Zeitschrift des Konigl. Preuss. Stat. Bureaus " (Berlin), 1880, 
 p. 121.
 
 46 RAILROAD TRANSPORTATION. 
 
 to come from ? The largest fortunes of half a century 
 ago were inadequate to meet the demands of the factory 
 and railroad systems, even if their owners had been in- 
 clined to take the whole risk of these untried enterprises. 
 On the other hand, the small capitalists needed just such 
 a chance of investing their savings, provided it could 
 be done without undue danger. The investment needed 
 the small capitalist, and the small capitalist needed the 
 investment. The problem was solved by applying the 
 system of limited liability to all these undertakings. The 
 modern form of corporation prevailed because it was 
 found to be the best form of ownership for the large per- 
 manent investments under concentrated management 
 which are required in modern industry. 
 
 This result was not reached off-hand. Many people 
 were violently opposed to the new system. It gradually 
 forced itself into public favor, because the communities 
 which refused to adopt it got very little good and a great 
 deal of harm from their refusal. The laws of Massa- 
 chusetts sixty years ago were unfavorable to joint-stock 
 enterprise. Capital was thereby driven into other States 
 for investment. The growth of Massachusetts business 
 was hindered, and its character was not really helped. 
 The final result was that the laws had to be modified.' 
 
 The case of England was still more marked. In the re- 
 action from the speculations of 1720 the principle had 
 been adopted that limited liability should be granted only 
 by special charter from Parliament. The result was an 
 infinite amount of expense and jobbery at this point. 
 Whether an enterprise received its charter, depended 
 
 ' Angell and Ames on Corporations (gth Ed., Boston, 1871), pp. 607- 
 610. Amer. Jurist, 4, 307. For the history of the " General Railroad Law" 
 see chapter vii.
 
 RAILROAD OWNERSHIP AND SPECULATION. 4/ 
 
 quite as much upon the skill of its lobbyist as upon the 
 soundness of its prospects. The smaller undertakings 
 could not go to the expense of securing special charters. 
 Too often they were thus thrown out of the hands of bona 
 ^^<? investors, and into the hands of those who, having little 
 to lose, had little to fear. Speculation was thus fostered 
 by the laws which were meant to restrain it. One after 
 another these laws had to be repealed.' Some of the ob- 
 noxious provisions still remain; but the failure, in 1878, 
 of the City of Glasgow Bank, which was organized under 
 the old system, gave the death-blow to that system. 
 Hundreds of small investors were irretrievably ruined ; 
 and this fact did more than any amount of talk would 
 have done to show the folly of sending the investor to 
 the poor-house in order to protect the creditor from any 
 loss whatsoever. The small investor is a necessity of 
 modern industry ; and the modern form of corporation 
 has been found the one available means to encourage and 
 protect him. The fact that it was adopted reluctantly 
 makes the proof of its necessity all the stronger. 
 
 In laying stress upon the necessity of corporations in 
 their present form, we do not pretend that they have 
 been productive of unmixed good. On the contrary, 
 their growth has been attended with evils and dangers at 
 every step.^ There are evils involved in the existence of 
 large permanent investments of any kind. There are 
 other evils involved in the corporate ownership of such 
 investments. Some abuses are connected with the busi- 
 ness management of a railroad or a factory, simply be- 
 cause it is a railroad or a factory ; others are due to the 
 fact that it is owned and managed by a joint-stock com- 
 
 ^ Kleinwiichter, pp. 201, 202. 
 
 " Simon Sterne : " The Corporation : Its Benefits, its Evils." New York, 
 1880.
 
 48 RAILROAD TRANSPORTATION. 
 
 pany. The former cause is more important than the 
 latter. Many of the evils attributed to joint-stock owner- 
 ship are due to the character of the enterprise rather than 
 to the way in which it is owned, and show themselves just 
 as strongly in enterprises of the same kind which are owned 
 and managed by individuals. Some of these evils affect 
 the general public. Others more directly affect the investor. 
 It is with the latter class that we are at present concerned ; 
 a class of evils which may be included under the somewhat 
 vague name pf speculation. 
 
 Speculation, in the narrowest sense of the word, is the 
 attempt to make money out of fluctuations in the value 
 of property, as distinct from its earnings. 
 
 In a wider sense, speculative business is that business 
 which involves large risks for the chance of large gains 
 
 In a still wider sense, speculative management is the 
 management of property by inside rings for purposes 
 distinct from the permanent interests of its owners. 
 
 To the first of these forms of speculation, corporate 
 property is liable, in common with almost all other prop- 
 erty. To the second it is specially liable, because large 
 permanent investments involve special risks. To the 
 third it is still more specially liable, because the mass of 
 owners have no direct voice in its management. 
 
 Each of these forms of speculation always goes on to a 
 certain extent. But there are times of comparative rest ; 
 and, on the other hand, times when speculation develops 
 an unusual and abnormal activity. A time of active spec- 
 ulation is almost always followed by a more or less severe 
 reaction. It is this reaction which constitutes a commer- 
 cial crisis.' This alternation between unhealthy activity 
 
 ' There is a decided lack of literature on the history of commercial crises. 
 The best book is Max Wirth : " Geschichte der Handelskrisen," Frankfort,
 
 RAILROAD OWNERSHIP AND SPECULATION. 49 
 
 and depression, this ebb and flow of the industrial life, con- 
 stitutes one of the most serious problems with which the 
 political economist has to deal. The moral evils of the 
 period of speculation, and the material evils of the crisis, 
 are alike fraught with danger to the community. 
 
 Legislation is of little avail against these evils. The 
 causes which produce them lie beyond the sphere of 
 effective state interference. Legislation against commer- 
 cial crises is about as effective as legislation against chills 
 and fever. You may provide good sewage by public 
 authority; but it rests with the individuals whether they 
 will bring themselves into proper connection with the 
 sj/stem. If you legislate too much, you may so weaken 
 individual responsibility as to do more harm than good. 
 Once let the idea go forth that it is the duty of the state 
 to take care of everybody, and everybody will cease to 
 take care of hirnself. 
 
 There is another difficulty with such attempts to limit 
 speculation by law — the impossibility of separating the 
 bad from the good. Speculation is a necessity of modern 
 life. Modern business involves large risks ; some one 
 must take them. The important thing is that the risks 
 should be taken by men with judgment to foresee the 
 probable effects, and property to stand the possible 
 strains; and that men who lack the judgment and the 
 property should not take the risks.' 
 
 It rests with individuals to learn the lessons of each 
 crisis, and protect themselves, as best they can, from a 
 
 1874. W. M. Grosvenor : "American Securities, etc., from 1872 to 1885" 
 (issued too late for detailed reference) is an important addition to our authori- 
 ties on this matter. See also article " Commercial Crises," by Horace White, 
 in Lalor's Cyclopaedia, vol. i. 
 
 ' See article " Speculation," in Lalor's Cyclopaedia, vol. iii., and the refer- 
 ences there given.
 
 50 RAILROAD TRANSPORTATION. 
 
 recurrence of the same evils. The crisis of 1857 taught 
 us the folly of business based on speculative banking. 
 That of 1873 taught us the folly of land speculation, and 
 of stock speculation in some of its grosser forms. It taught 
 the business men of the country to look forward to the 
 possibility of a sudden panic, and guard against its effects. 
 
 But the conditions which preceded the present crisis 
 were radically different from those of 1873 or 1857. There 
 was almost no speculative banking. There was a notice- 
 able absence of land speculation. Most remarkable of all, 
 the crisis of 1884 has thus far been attended by no general 
 panic of the first rank, though we stood on the verge of 
 one in May of that year. There has been no crash at 
 any one point, but a steady sinking all along the line. 
 Men who were prepared to weather a sudden storm, how- 
 ever severe, have found it impossible to resist this steady 
 downward tendency, month after month. 
 
 All these things, which we had been accustomed to 
 consider necessary precursors of a crisis, were conspicuous 
 by their absence. The conditions which did exist, and 
 which seem to have most to do with causing the present 
 crisis, were, first, an unprecedently rapid expenditure of 
 capital for railroads and other permanent investments, 
 and, second, a system of business methods which rendered 
 it easy for inside rings to manipulate the market for their 
 own purposes. It is important to analyze the workings 
 of these causes, especially the first. 
 
 After the long period of depression following the crisis 
 of 1873, the year 1879 witnessed a revival of confidence. 
 The volume of business increased decidedly ; there was a 
 general advance in prices, and in some lines — iron produc- 
 tion, for instance — where the old facilities could not be at 
 once increased to meet the new demand, an extraordi-
 
 RAILROAD OWNERSHIP AND SPECULATION. 5 1 
 
 narily rapid advance. Good wheat harvests in the West, 
 combined with an active European demand, caused this 
 expansion of business to continue through the years 1880 
 and 1 88 1. 
 
 Any increase of price, or even of volume of business, 
 means a far greater proportionate increase of.net earnings. 
 If the price of $30 a ton on pig-iron gives a profit of $5, a 
 sudden increase to $35 will give a profit of about $10. An 
 increase of 17 per cent, in the price would thus make a 
 difference of 100 per cent, in the profit on the transaction. 
 If new capital could at once come into competition, such 
 profits could last but a few weeks. But it takes time to 
 build a successful furnace, factory, or railroad. Those 
 who were already in the business had, for the time being, 
 a partial monopoly, Avhich they strengthened by pooling 
 arrangements. 
 
 The years of expansion were years of large return to 
 the owners of the old investments. A large part of this in- 
 creased return was not spent on luxuries, but re-invested. 
 Another large mass of money for re-investment was set 
 free when the United States Government called in its 
 bonds. These two causes created an active demand for 
 good investments. The prices of all good securities went 
 up so high that it was impossible to obtain satisfactory 
 rates of interest. In the desire to obtain old rates of 
 interest, capital sought new investments. 
 
 A new permanent investment is almost necessarily 
 speculative. But investors did not look at the matter in 
 that light. Men who would not have thought of taking 
 risks to secure ten per cent, instead of six per cent., took 
 worse risks to avoid the reduction from six per cent, 
 to five per cent. If an investment promised but six 
 per cent, interest, they thought it prima facie sound.
 
 52 RAILROAD TRANSPORTATION. 
 
 If it was in the form of a first-mortgage bond, it seemed 
 prima facie secure. Only a small part of the stock specu- 
 lation was of the first form. There was a great deal of 
 unconscious stock speculation of the second form ; and 
 this opened the way for the third and worst form of specu- 
 lation, which was practised on a large scale. 
 
 In the three years 1 880-1 882 we built 29,000 miles of 
 railroads, an addition of thirty-four per cent, to the rail- 
 road mileage of the country. Not more than one third 
 of these were justified by existing business. Another 
 third, perhaps, were likely to be profitable at some future 
 date, or at any rate to be of real service to the com- 
 munity ; but not now. Of the remainder, some were 
 built to increase the power of existing systems, where 
 they were not needed and not likely to be needed on their 
 own account. Some were built to put money into the hands 
 of the builders, as distinct from the owners. Some were 
 built to sell, as a blackmailing scheme against other roads. 
 
 To make money out of the building of a railroad, it was 
 only necessary to subscribe the small sum requisite for 
 obtaining a charter, with the right to issue first-mortgage 
 bonds. The original subscribers would then have at 
 their disposal whatever funds the bondholders might 
 furnish. They could pay themselves a good commission 
 for selling the bonds. They could then organize as a con- 
 struction company, and contract to pay themselves a high 
 price for building the road. These are but two means 
 among many which afforded them an opportunity of 
 transferring the bondholder's money to their own pockets 
 in their double capacity as directors and contractors.' 
 
 ' Hassler, C. W. : " Railroad Rings, and Their Relation to the Railroad 
 Question in this Country." New York, 1876. 
 
 In other cases, rather less frequent, the botia-Jide stockholders were
 
 RAILROAD OWNERSHIP AND SPECULATION. 53 
 
 This was not the worst. When the money came out of 
 the bondholders' pockets, the bondholders were in some 
 sense responsible for being duped. Sometimes the money- 
 came out of the pockets of the stockholders of rival 
 roads, who were in no sense responsible. Some roads 
 were built because they could so injure existing roads by 
 competition as to force those roads to buy them out. 
 The system of receiverships, originally intended as a pro- 
 tection to investors, has been carried to a point where it 
 tends to the furtherance of schemes like these. Such 
 was the character and purpose of many of the recent 
 railroad projects.' 
 
 The rest of the story is soon told. Insolvent themselves, 
 they dragged their solvent competitors down to their own 
 level. The causes which in iS/Q-'Si had operated to pro- 
 duce an advance, soon passed away. The natural decline, 
 which at best would have cut down the profit of the 
 permanent investments, found some of them loaded with 
 a weight of new debt, and many of them struggling 
 against the reckless competition of insolvent rivals. This 
 is where we stand to-day. What has been true of rail- 
 roads has been true of other forms of permanent invest- 
 ment. First, high charges and high profits. Then 
 speculative investments in the same line. Next, an 
 overstocked market, and no profit at all. Finall}', cut- 
 throat competition and widespread insolvency.'^ 
 
 saddled with a load of debt and other fixed charges out of which the inside 
 ring could make its profit. 
 
 ' Compare the detailed history of the West Shore Road, as given in 
 Bradstreei's, April 25, 1885. 
 
 " The Raihuay Age (Chicago) publishes at the beginning of each year 
 a really valuable table of mileage and capital of railroads sold under foreclos- 
 ure in the series of years preceding. In the years 1876-1880, while the crisis 
 of 1873 was working out its full effect, nearly a quarter of the railroad mileage 
 of the country was thus foreclosed or reorganized.
 
 54 RAILROAD TRANSPORTATION. 
 
 To the community, the present crisis is a lesson on the 
 folly of reckless investment. Over-production, of which 
 we hear so much, is a small matter compared with this. 
 Mere over-production can be remedied in a few months. 
 Over-investment means lasting over-production till the in- 
 vestment itself is worn out, or till the business of the 
 country slowly grows up to a higher point. Our present 
 crisis is directly connected with ill-judged over-investment. 
 The folly of investors provoked it; the inclination of 
 managers favored it ; the knavery of rings was able to 
 make a profit from it. 
 
 Under the stress of this experience, a great many favor 
 hmitation of railroad construction.' Whether this can 
 ever be effectively carried out is more than questionable. 
 That it would be desirable in many cases, there can be no 
 doubt. But it is not easy to introduce a principle so 
 foreign to the general tendency of our laws ; and it may 
 be questioned whether any advantages gained at one 
 point would not be dearly purchased at another. The 
 whole matter will have to be settled on practical grounds; 
 and it is not easy to predict which way the balance will 
 incline. Of this there can be no doubt : that it is desir- 
 able to limit the facilities for constructing railroads with 
 other people's money.' Yet even here the practical en- 
 
 ' Kirkman, M. M. : " The Relation of the Railroads in the U. S. to 
 the People and the Commercial and Financial Interests of the Country." 
 Chicago, 1885. Also an able review of this pamphlet in The Nation (N. Y.), 
 xl., 133- 
 
 Compare the recommendations of N. Y. State R. R. Commissioners in 
 each of their reports thus far issued. 
 
 " J. B. Hodgskin, in N. V. Nation, xii., 398, on " The Borrowing Power 
 of Corporations." 
 
 This is the most serious evil connected with the system of stock-watering. 
 Stock-watering has three forms : i. Where new stock is issued to represent 
 money which, instead of being paid out as a dividend, is used in improving
 
 RAILROAD OWNERSHIP AND SPECULATION. 55 
 
 forcement of any law is more difficult than would at first 
 sight appear. 
 
 To individuals, whatever else the present crisis may- 
 teach, it teaches : i. That the evils of speculation are not 
 avoided by avoiding its first and most obvious forms. 2. 
 
 the property. 2. Where new stock is issued to represent an actual increase 
 in the earning capacity and market value of the property, so that the par 
 value shall represent as nearly as possible the real value. 3. Where stock is 
 issued to give certain parties control of the road without actually risking any 
 thing like the amount of money represented by the par value of their shares. 
 
 The second is on the whole the commonest form. It is resorted to for two 
 reasons : either to equalize the share of the stockholders of different roads in 
 a consolidation, or else to furnish an excuse for paying higher dividends than 
 the law or public sentiment would otherwise allow. Any such evasion of the 
 law is a bad thing in many ways. But the immediate effect is not as bad as is 
 commonly supposed ; for, as we shall see in a subsequent chapter, the attempt 
 to keep rates down by limiting dividends defeats its own purposes ; and the 
 fact that such a limitation of dividends is evaded, therefore makes very little 
 difference to the shipper. 
 
 The third form of stock-watering, for purely speculative purposes, is by 
 far the worst — in fact it is one of the worst evils of its kind under which the 
 country suffers. And it is a great misfortune that it is not more clearly dis- 
 tinguished in the public mind from the first and second forms. The real 
 evils of the third form are allowed to go on unchecked, because they are not 
 treated separately from the much less real evils of the first and second forms. 
 The unsuccessful attempt to prohibit them all prevents any successful attempt 
 to prohibit the worst of them. 
 
 For a somewhat different view, see Simon Sterne, in Lalor's Cyclopaedia, 
 Art. " Railways," pp. 527, 528. 
 
 See also Report of Special Com. on R. R. Transportation of the N. Y. 
 Chamber of Commerce, on " Watering the Stocks of Corporations," Nov. i, 
 1883. The position taken in this report seems quite different from the one 
 just advocated ; but, in reality, it comes to nearly the same thing. The 
 committee, it is true, would prohibit all three forms ; but they would, at the 
 same time so modify the law or feeling, with reference to high rates of 
 dividend, as to take away nearly all inducement for stock-watering of the 
 first or second forms. This is the effect and intention of proposition 6, on p. 5 
 of the report. This would. bring the law sharply to bear against the third and 
 worst form.
 
 56 RAILROAD TRANSPORTATION. 
 
 That when large quantities of capital are seeking invest- 
 ment, it may be as unsafe to try to avoid a reduction of 
 rates of interest as it is at other times to take risks to 
 secure an advance. 3. That investors are under obHga- 
 tions to themselves and to the community to make sure 
 that their property is not managed for other interests 
 than their own. The interests of the investor are the 
 permanent interests of the property ; those of the director 
 are often temporary, and sometimes purely personal ones. 
 The two may readily conflict. If the permanent interests 
 are sacrificed, it must result in ruin to the investors, and 
 may result in commercial distress for the whole com- 
 munity.' 
 
 It is in this connection that the study of railroad ac- 
 counts assumes its public importance.' The fact that so 
 few among the many owners of a railroad have any direct 
 share in its management, makes it all the more important 
 that its published accounts should present a true view of 
 its financial condition. They are too often arranged to 
 conceal the truth instead of presenting it. 
 
 The general principles involved in the published accounts 
 of a railroad are simple. Their practical application is 
 difficult in the extreme. We can do no more than show 
 what these principles arc, and where the chief difificulties 
 and dangers lie. 
 
 A railroad has two ways of getting money ; it may earn 
 it, or borrow it. It has three ways of getting rid of money ; 
 it may spend it, invest it, or divide it. These things will 
 generally nearly balance one another ; any difference will 
 
 ' Herbert Spencer : " Railway Morals and Railway Policy," Edinburgh 
 Review, Oct., 1854. 
 
 ' Massaciiusetts R. R. Commissioners' Reports, 1874-1878. Kirkman : 
 " Railway Expenditures : Their Extent, Object, and Economy," Chicago, 
 1880, vol. ii., pp. I-136.
 
 RAILROAD OWNERSHIP AND SPECULATION. 5/ 
 
 be represented by variations in the amount of cash assets 
 on hand from time to time. The whole is summarized in 
 the treasurer's balance sheet for the year, which includes 
 all the financial transactions, of any sort whatever, during 
 the time in question. The form, much condensed, is as 
 follows : 
 
 A. B., Treas'r, in acct with the M. and N. R. R. 
 
 Dr. Cr. 
 
 Cash assets, January I, Expenses^ $750,000 
 
 1884 $ 50,000 Permanent investment^ 70,000 
 
 Gross earnings . . . 1,000,000 Dividends 240,000 
 
 Increase of debt ' . . 65,000 Cash assets, Dec. 31, 
 
 1884 55,000 
 
 $1,115,000 $1,115,000 
 
 This is the fundamental account of which the others are 
 but parts. Comparatively few railroads publish their treas- 
 urer's balance sheet ; but with the aid of two successive re- 
 ports of a railroad, a man moderately familiar with these 
 matters can deduce the treasurer's balance sheet for the in- 
 tervening time. 
 
 From merely looking at this account it is clear that if the 
 item, " Increase of debt," had been made $75,000 instead 
 of $65,000, the amount of dividends might have been 
 $250,000 instead of $240,000, without either changing any 
 of the other items, or destroying the balance of the whole 
 account. In other words, the amount apparently available 
 for dividends varies with the amount of increase of debt ; 
 and this last matter is largely under the control of the 
 directors. Here is where most of the abuses of railroad 
 accounting arise. 
 
 ' Either in the form of bonded debts, notes payable, or simply bills and ac- 
 counts payable. Every thing not in the form of bonds is included under the 
 title of floating debt. 
 
 ° Operating expenses, interest, rentals, and taxes. 
 
 ' New construction, equipment, etc., as distinct from mere repairs.
 
 58 RAILROAD TRANSPORTATION. 
 
 The matter comes up in this general form. As the facts 
 are presented to the directors, it is found that the gross 
 earnings of the road for the year have been $1,000,000. 
 The total expenditures of every kind have amounted to 
 $820,000, of which (say) $700,000 have been paid, leaving 
 $120,000 unpaid. The treasury then has on hand $300,- 
 000 (besides an amount of unused cash assets, materials, 
 etc., of $50,000, which must be kept at about that 
 figure). If they pay up all their bills, they have $180,000 
 to divide. If they pay none of them they have $300,000. 
 The question is, how much shall they pay ? 
 
 The first impulse of most men is to say, let them pay 
 their bills first, and then divide what is left. A closer ex- 
 amination shows a great many cases in which this principle 
 cannot be applied. Suppose a railroad builds a branch line 
 to secure new trafific. To attempt to pay for this out of 
 current earnings would perhaps be impossible. To try to 
 pay any considerable part in this way, would be to keep 
 money out of the investor's pocket which had been really 
 earned, and apply it to an extension of the business. A 
 private individual may do this. He can readily invest his 
 capital in extension of his own business. But a railroad 
 manager cannot do this. He is dealing with the property 
 of a large number of independent investors who want ac- 
 tually to receive whatever is really earned, and not be 
 forced to re-invest it, whether they will or no. If a rail- 
 road man wishes to build branches, or to double his track, 
 or to make large additions to his equipment — all of which 
 increases the permanent investment, and probable earning 
 capacity of the road, — he feels justified in borrowing 
 money to pay for it. In the case in question, of the 
 $120,000 spent and unpaid, the theory would be to pay all 
 that was due to current expenses, or perhaps a little more.
 
 RAILROAD OWNERSHIP AND SPECULATION. 
 
 59 
 
 and borrow whatever was used for permanent investment, 
 or perhaps a little less. The amount of earnings remaining 
 in hand, after the current expenses have been paid, is the 
 sum available for dividends. 
 
 They then separate the account into two parts : one, the 
 "income account," giving the current receipts and ex- 
 penses; the other, to be incorporated in the "general 
 balance sheet " of assets and liabilities of a more perma- 
 nent nature. 
 
 The income account will then read thus : 
 
 Gross earnings 
 
 Expenses. . , 
 Dividends . . 
 Surplus for year 
 
 $1,000,000 Expenses $750,000 
 
 240,000 
 10,000 
 
 $1,000,000 $1,000,000 
 
 The rest of the account is added to the general balance 
 sheet of the previous year, thus : 
 
 General Balance Sheet, Jan. i, 1884. 
 
 Assets 
 
 Liabilities. 
 
 Stock $4,000,000 Construction 
 
 Bonds 2,000,000 Equipment . 
 
 Floating debt . . . 200,000 Investments ' 
 
 Surplus 100,000 Cash assets . 
 
 $6,300,000 
 
 $5,000,000 
 
 700,000 
 
 550,000 
 
 50,000 
 
 $6,300,000 
 
 To which must now be added from the year's account, 
 every thing not included in the current earnings and ex- 
 penditures, thus : 
 
 Cash assets, Jan. i, 18S4 
 Increase of debt . 
 Surplus for year ' 
 
 $50,000 
 65,000 
 10,000 
 
 ^125,000 
 
 New construction . . 
 Cash assets, Jan. i, 1885 
 
 $70,000 
 55,000 
 
 5125,000 
 
 ' Real estate, stock of other corporations, etc. 
 
 * Whatever a road earns, and does not spend or divide, constitutes the 
 surplus for the year. In the income account it appears on one side, to make
 
 6o RAILROAD TRANSPORTATION. 
 
 The first item in this account cancels the last item of 
 the general balance at the beginning of the year, and we 
 then have by simple addition 
 
 General Balance Sheet, Jan. i, 1885 * : 
 
 Stock $4,000,000 Construction . . . $5,070,000 
 
 Bonds 2,000,000 Equipment .... 700,000 
 
 Floating debt . , . 265,000 Investments .... 550,000 
 
 Surplus 110,000 Cash assets .... 55, 000 
 
 $6,375,000 $6,375,000 
 
 The theory is simple enough. But there is an enor- 
 mous practical difficulty in knowing what are current ex- 
 penses and what are permanent investments. 
 
 A railroad has a wooden bridge which needs repair. 
 Instead of repairing it the company substitutes an iron 
 bridge whose first cost is much greater. How much of 
 the cost shall be charged to repairs and how much to new 
 construction? Or, to take a problem which was con- 
 stantly coming up a few years ago : A road takes up 
 iron rails which cost it $50 per ton, substitutes steel rails 
 at $60 per ton, and sells the old iron at $30. How shall 
 the debits and credits be divided between the repairs and 
 construction account? These are far from being excep- 
 tionally difficult cases to deal with. 
 
 Even with the best of intentions on the part of railroad 
 managers, these things are hard to decide. When the 
 
 the payments balance the receipts. In that part of the account which is car- 
 ried over to the general balance sheet, it must appear on the other side, to 
 make the liabilities balance the assets. Sometimes there is a deficit instead 
 of a surplus. Then the whole matter is reversed. 
 
 ' The general balance sheet at any given time is really nothing more nor 
 less than a sum of the permanent part of all previous balance sheets ; the 
 successive permanent investments on one side, the means by which they 
 were paid for on the other.
 
 RAILROAD OWNERSHIP AND SPECULATION. 6 1 
 
 intentions are not the best, it is easy to decide them 
 wrongly, and hard to detect the wrong. It will quite 
 frequently happen that the management is far more inter- 
 ested in having a road declare large dividends than in 
 having its capital account on a sound basis. To declare 
 a dividend which they have not earned, they must find a 
 pretext for borrowing money. This they usually do by 
 swelling the item of new construction unfairly. If they 
 charge to new construction what really belongs to repairs, 
 they can borrow money to pay for what should really 
 have been paid out of earnings, and apply the money, 
 thus unfairly saved, to swell the sum available for divi- 
 dends. This is one among many ways ; but it is more 
 common than all the rest put together.' 
 
 We have thus far treated the question from the inside 
 point of view : The facts being given, what dividends 
 should be or can be paid ? To the general public 
 the matter appears in a somewhat different light. A 
 dividend having been paid, how can an outsider deter- 
 mine from the accounts whether it has presumably been 
 earned ? It is impossible to give a really satisfactory 
 answer to this question. We can only call attention to 
 a few of the more decisive indications. 
 
 We have seen that the common way of swelling divi- 
 dends is to charge repairs to new construction, and borrow 
 money to pay for it. If then we find that the sum for 
 repairs is small, and for new construction large, and that 
 there is a constant increase of the floating debt, there is a 
 strong presumption against the management, and against 
 the honesty of the dividend. It requires some technical 
 knowledge to decide whether the amounts charged to 
 
 ^ Another way of doing the same thing, is to charge high prices for haul- 
 ing the materials which a road uses in its own construction. The earnings 
 are thus swelled at the expense of the construction account.
 
 62 RAILROAD TRANSPORTATION. 
 
 repairs and construction respectively are really large or 
 small. They have to be compared both with the statis- 
 tics of what has been actually done, and with previous 
 annual reports of the same company. From one such 
 report we can learn but little. If in a series of years we 
 find the repairs diminishing, and the new construction 
 increasing, without any marked change in the general 
 condition of the road, we may be reasonably sure that 
 something is wrong. 
 
 It is rather easier to draw these inferences now than it 
 was a few years ago. One of the best pieces of work 
 done by the Massachusetts Commission was on this mat- 
 ter of railroad accounts. In consultation with the ofificers 
 of the companies, they attempted, some ten years ago, to 
 secure a certain uniformity in railroad returns, and w^ere 
 so far successful that their example was followed in other 
 States. In the years 1878-9 there was an effort made by a 
 number of different State commissions to secure com- 
 mon forms of return throughout the country ; and in this 
 they were reasonably successful. 
 
 No system of accounting, however perfect, will secure 
 the public against false original entries; nor will any 
 amount of technical knowledge avail to detect certain 
 forms of rascality. If a man says he has spent money for 
 coal, when really he has put part of it into his own pocket 
 in the form of a commission, nothing short of personal 
 comparison between the vouchers and the quantity de- 
 livered can do more than raise an unproved suspicion. 
 But if the evil lies not in the original entries, but in the 
 deceptive manipulation of those entries, the requirement 
 of a good system of returns will do much to check it, and 
 the intelligent study of those returns will do a great deal 
 more.
 
 CHAPTER IV. 
 
 COMPETITION AND COMBINATION IN THEORY.' 
 
 Different forms of monopoly — Recent growth of industrial monopolies — The 
 law of competition as commonly stated — Cases where it fails to operate 
 — Difference between mercantile competition and the competition of 
 factories or railroads — Forms of combination — Pools — Labor combina- 
 tions — The legal view of these matters, and its results. 
 
 H. Sidgwick : " Principles of Political Economy," London, 1883 ; 
 book ii., chap. x. : "Of Monopoly and Combination." 
 
 T. H. Farrer: "The State in its Relation to Trade," London, 1883, 
 chap. X. This chapter is condensed from an article by the same author in 
 the Quarterly Review, October, 1870, entitled " Industrial Monopolies." 
 
 H. D. Lloyd: "Lords of Industry," A^tirM American Reviezv, June, 
 1884. 
 
 Fr. Kleinwachter : "Die Kartelle : ein Beitrag zur Frage der Organiza- 
 tion der Volkswirthschaft." Innsbruck, 1883. 
 
 For authorities dealing specially with the subject of railroad combination, 
 see next chapter. 
 
 Competition is the effort of rival sellers to secure a 
 market for their goods, each striving to offer better terms 
 than his competitors. Competition is what prevents any 
 individual from fixing prices to suit himself, because his 
 rivals will give lower prices, and he will get no business 
 at all. 
 
 The opposite of competition is monopoly. Where com- 
 petition does not act at all, there is complete monopoly; 
 where it acts imperfectly, there is partial monopoly. 
 
 ' Part of this chapter appeared in the Andover Review, Nov., 1884 ; part 
 in the Indepeitdent, Jan. 29, 1.885 — one of a series of articles which have 
 furnished material for chapters iii., vi., vii. , and xiii. 
 
 63
 
 64 RAILROAD TRANSPORTATION. 
 
 A monopoly may be either legal, natural, or industrial. 
 
 A legal monopoly is where competition is prohibited 
 by law. The trade guilds of the middle ages were com- 
 plete legal monopolies, because no one outside of the 
 guild was allowed to engage in the trade. The postal 
 service is a monopoly of the United States Government, 
 because no private individual or corporation is allowed to 
 compete in the business of letter-canying. Protected in- 
 dustries are partial monopolies, because no foreign pro- 
 ducer is allowed to compete with the home producer on 
 equal terms.* 
 
 A natural monopoly is where competition is physically 
 impossible. The water supply of large cities is often a 
 tolerably complete natural monopoly, because the avail- 
 able sources of supply are so few that they will often be 
 in the hands of a single company. It is the same way 
 with canals and with docks, with mines, and even with 
 lands. The land which is best available for any particular 
 purpose is so small that the owners of other land can 
 compete but imperfectly with the owners of the most 
 favored spots, who can therefore exact a return for their 
 monopoly privileges in the form of ground rent.'' Rent is 
 the price paid for the use of a natural monopoly. 
 
 An industrial monopoly is where the business interests 
 
 ' Wilh these exceptions there are no legal monopolies in the United States 
 (unless patents or copyrights be thought to have that character). In times 
 past, such monopolies were frequent. Steamboat navigation in the State of 
 New York was for many years a legal monopoly. Efforts were made by 
 certain railways in Massachusetts to obtain monopoly rights — not entirely 
 ■without success (Adams, p. 56). Compare the history of the Camden and 
 Amboy Transportation Co. in New Jersey. 
 
 On the continent of Europe legal monopolies are by no means uncommon 
 at the present day. 
 
 ' A large part of the monopoly of existing railroads consists in the posses' 
 sion of city real estate which gives them superior terminal facilities.
 
 COMPETITION AND COMBINATION. 65 
 
 of the parties concerned make competition practically im- 
 possible, even when there is neither law nor natural obsta- 
 cle to hinder it. And the present age is an age of industrial 
 monopoly, however we may try to shut our eyes to the fact. 
 We have not free competiton, nor can we fairly expect 
 to have it in the future. Instead of moving toward it, 
 we are moving away from it. This is a fact to which 
 people are just beginning to open their eyes. They 
 begin to see that in a great many cases prices are deter- 
 mined, not by competition, but by combination. They 
 do not yet see the real extent to which this tendency 
 prevails. Still less do they understand the reasons why 
 it must prevail, now and in the immediate future. 
 
 We are generally supposed to live in an age of free 
 competition. The legal restraints upon business which 
 two centuries ago were the rule have now become the ex- 
 ception. They are only in force on the national frontiers, 
 in the form of a protective tariff against the foreigner. 
 Within these frontiers a man is allowed to use his own 
 judgment as to the best chance of making a living ; he 
 is neither restricted in his choice, nor supported if he 
 makes a mistake. He must look out for his own market. 
 None will be compelled by law to have their flour ground 
 at his mill, or their clothes made at his shop. 
 
 Physical as well as legal hindrances to competition are 
 passing away. The invention of railroads has made 
 transportation ten times quicker and ten times cheaper. 
 Two generations ago, the expense of cartage was such 
 that wheat had to be consumed within two hundred 
 miles of where it was grown. To-day, the wheat of 
 Dakota, the wheat of Russia, and the wheat of India 
 come into direct competition. The supply at Odessa is 
 an element in determining the price at Chicago. Two
 
 ^^ RAILROAD TRANSPORTATION. 
 
 generations ago, the market-gardeners of the suburbs had 
 a monopoly of the supply of fresh fruit and vegetables for 
 the city ; now, fast trains bring the whole country for hun- 
 dreds of miles into competition with them. Western beef 
 now competes with Eastern beef even in the country towns 
 of New England. Cabbages from Germany contend with 
 cabbages from Missouri in the markets of New York. 
 The local tradesman is no longer sure of the local trade. 
 Mercantile houses in the city, doing business by agent or 
 by correspondence, try to undersell the jobbers of smaller 
 towns, or even to take away business from the country 
 stores. Factories, which twenty years ago Avere not 
 within arm's reach of one another, can now get railroad 
 rates low enough to enable them to carry a fierce com- 
 petitive war over the whole district which they supply. 
 
 The old monopolies are dead, the old barriers to trade 
 are disappearing. But the same movement which has done 
 away with legal monopolies, and has gone so far toward 
 abolishing many natural ones, has created a system of in- 
 dustrial monopolies even more widespread and formidable. 
 We are seeing how this tendency acts in the case of rail- 
 roads in the United States. It has been no less marked 
 in Europe. George Stephenson foresaw the future of 
 railroad combination from the first. " Where combina- 
 tion is possible," he said, " competition is impossible." A 
 few English statesmen agreed with him. The majority 
 were either too blind to see, or too weak to act. It was 
 only by the hardest experience that they learned the 
 lesson ; but once learned, it was learned thoroughly.' On 
 the continent of Europe, railroad combination prevailed 
 yet more completely. On either side of the Atlantic, 
 most persons who have really looked into the subject have 
 
 ' See chap. ix.
 
 COMPETITION AND COMBINATION. 6/ 
 
 come to regard railroads as a sort of natural monopoly, 
 not regulated by the ordinary laws of trade, and needing 
 to be closely watched by public authority. 
 
 But we are now beginning to find combination in a mul- 
 titude of other cases where, until now, we have supposed 
 ourselves to enjoy the benefits of free competition. The 
 story of the Standard Oil Company' opened the eyes of a 
 great many people. Some twenty years ago two or three 
 men, of small capital but great business ability, got hold 
 of a new process for refining petroleum. Their ability and 
 their process gave them an advantage over their competi- 
 tors, who found the competition ruinous, and one after 
 another were led either to make terms with them or with- 
 draw from the field. The result was an organized associa- 
 tion, with a capital which ultimately reached eighty million 
 dollars, including nearly all the refineries in the country. 
 The association settled just what prices should be charged 
 in each district, and there was no man who had a chance 
 of competing with them independently. For the company, 
 besides the power obtained by controlling an enormous 
 capital, had come into such relations with the railroads and 
 the pipe-lines that no independent refiner had any chance 
 whatever. These contracts, more discreditable to the rail- 
 roads than to the Standard Oil Company, were what 
 attracted public attention to its doings. In other respects 
 its work seems to have been good. The quality of oil has 
 been improving, the price has been declining rapidly ; it 
 could hardly have declined faster under free competition. 
 But the public are alarmed at the growth of such a power 
 in their midst, — able, apparently, to dictate the price of a 
 
 ' Among the numerous articles on this subject may be mentioned those 
 of Messrs. Camden and Welch {pro and con) in the North American Review, 
 vol. 136, pp. iSi-200.
 
 68 RAILROAD TRANSPORTATION. 
 
 necessary of life, and subject to no restraint or control 
 from outside. Statesmen, lawyers, and journalists held up 
 their hands in holy horror, and exclaimed : " Can such 
 things be ? " 
 
 But the more they looked, the more they were forced to 
 the conclusion that such things could be and had been, 
 and are still increasing. Nearly every industry employing 
 fixed capital on a large scale has its pool, whether they call 
 it by that name or not.' The Anthracite Coal Combina- 
 tion has been less successful than the Standard Oil Com- 
 pany ; but its method of crushing small rivals by denying 
 them transportation facilities has made it almost equally 
 notorious.* And now the system of combinations has 
 extended to other coal regions besides the anthracite. 
 Again, every branch of hardware, from rails to carpet tacks, 
 has its combination to keep up prices or restrict production. 
 The cases are only too frequent where the combination 
 pays certain mills for not running more than they could 
 earn by running. For lumber and for paper, for cattle and 
 for milk, for cartridges and for matches, — in each business 
 there is an organized combination, fixing rates and often 
 limiting production.^ The waterways themselves, which, 
 we are so often assured, are to protect us from the mon- 
 opoly of the railroads, have their rates fixed and their 
 trafific pooled by combinations of greater or less influence, 
 — from the local barge association of some interior town to 
 the great North Atlantic Steam Conference. How much 
 freight each of the leading steamships is to carry is not 
 
 ' This is not confined to America. See Kleinwachter, pp. 137-8, and 
 elsewhere ; Georges Salomon " Les Coalitions Commerciales d'Aujourd'hui." 
 Paris, i385. 
 
 " For a brief statement of its purposes, see Report on the Internal Com- 
 merce of the United States, 1879, pp. 179-182. 
 
 ' Lloyd, " Lords of Industry," p. 549.
 
 COMPETITION AND COMBINATION. 69 
 
 infrequently made the subject of agreement with the 
 owners of rival vessels.' 
 
 What is to be done in the face of a system like this ? 
 Our first impulse is to say that its growth must be stopped 
 at all hazards. We are inclined to sympathize with the 
 anti-monopolists in demanding that the laws which have 
 fostered abuses of this kind should be abolished or re- 
 formed. But have the laws actually fostered these 
 abuses ? It is hard to make out that they have, except 
 in the most indirect manner ; in its direct action the law 
 hinders and thwarts them. Contracts for the restriction 
 of trade are illegal, and the State will not enforce them ; 
 railroads feel this at every turn. The pools of to-day are 
 not like the monopolies of past centuries, or the guilds of 
 the middle ages, creatures and pets of the law ; they 
 arise from very different causes, and grow strong in the 
 face of adverse legislation. 
 
 All our education and habit of mind make us believe 
 in competition. We have been taught to regard it as a 
 natural if not necessary condition of all healthful business 
 life. We look with satisfaction on whatever favors it, 
 and with distrust on whatever hinders it. We accept 
 almost without reserve the theory of Ricardo, that, under 
 open competition in a free market, the value of different 
 goods will tend to be proportional to their cost of pro- 
 duction. According to this idea, if the supply of a par- 
 ticular kind of goods is short, and the price therefore so 
 high as to be greatly in excess of the cost of production, 
 outside capital will be attracted into the business until 
 the supply is sufficiently increased to meet the wants of 
 the market. But as soon as this point is passed, and the 
 
 ' See Blue Book of Select Gommittee on Railway Rates, etc. Evidence, 
 1881, qu. 14,309-14,330.
 
 70 RAILROAD TRANSPORTATION. 
 
 price begins to fall below cost of production, people will 
 refuse to produce at a disadvantage, the supply will be 
 lessened, and the price rise to its normal figure. If all 
 this be true, competition indeed furnishes a natural regu- 
 lator of prices, with which it is wicked to interfere. 
 
 It was approximately true when Ricardo wrote ; but, 
 in the business of to-day, one point in the chain of rea- 
 soning fails, and the whole breaks down with it.' It is 
 not true that when the price falls below cost of production 
 people always find it for their interest to refuse to produce 
 at a disadvantage. It very often involves worse loss to 
 stop producing than to produce below cost. 
 
 Let us take an instance from railroad business, — here 
 made artificially simple for the sake of clearness, but in 
 its complicated forms occurring every day. A railroad 
 connects two places not far apart, and carries from one to 
 the other (say) 100,000 tons of freight a month at 25 cents 
 a ton. Of the $25,000 thus earned, $10,000 is paid out 
 for the actual expenses of running the trains and loading 
 or unloading the cars ; $5,000 for repairs and general ex- 
 penses ; the remaining $10,000 pays the interest on the 
 cost of construction. Only the first of these items varies 
 in proportion to the amount of business done ; the interest 
 is a fixed charge, and the repairs have to be made with 
 
 ' The early political economists dealt chiefly with banking business, where 
 the circulating capital was large and the fixed capital comparatively small. 
 For such business their theory was true enough. But in the business of the 
 present day — and especially in railroad business — the theory is far from rep- 
 resenting the real facts of the case. Economists are far from perceiving the 
 full difference between their assumptions and the reality. F. A. Walker and 
 others have shown how the law of competition fails to act smoothly in prac- 
 tice. Adolph Wagner shows how its action produces bad results. But they 
 ought to go much farther. In the case of industries with large permanent 
 investment, the law is not merely imperfect or bad in practice, it is false in 
 theory.
 
 COMPETITION AND COMBINATION. 7 1 
 
 almost equal rapidity, whether the material wears out, 
 rusts out, or washes out. Now suppose a parallel road is 
 built, and in order to secure some of this business offers 
 to take it at 20 cents a ton. The old road must meet the 
 reduction in order not to lose its business, even though 
 the new figure does not leave it a fair profit on its invest- 
 ment ; better a moderate profit than none at all. The 
 new road reduces to 15 cents ; so does the old road. A 
 15-cent rate will not pay interest unless there are new 
 business conditions developed by it ; but it will pay for 
 repairs, which otherwise would be a dead loss. The new 
 road makes a still further reduction to 1 1 cents. This 
 will do little toward paying repairs, but that little is better 
 than nothing. If you take at 11 cents freight that cost 
 you 25 cents to handle, you lose 14 cents on every ton 
 you carry. If you refuse to take it at that rate, you lose 
 15 cents on every ton you do not carry. For your 
 charges for interest and repairs run on, while the other 
 road gets the business. 
 
 If it be objected that such a case could not occur in 
 actual practice, the answer is that it does occur constantly, 
 and almost as a matter of course when the competing 
 road is bankrupt. " Business at any price rather than no 
 business at all," is the motto of such a road. It has long 
 ceased to pay interest ; it can pay for repairs by receiver's 
 certificates ; and it will take freight at almost any price 
 which will pay for the men to load the goods and the 
 coal to burn in the engine. And be it observed that when 
 a competing road does not carry the war to this point, it 
 is not a competitive rate. They may agree upon a 25- 
 cent rate, thinking that it will be a reasonable and at the 
 same time a paying one ; but such a rate is actually de- 
 termined by combination, even though they take cost of
 
 72 RAILROAD TRANSPORTATION. 
 
 service into account. Ricardo's theory was based upon 
 the assumption that when payment fell below cost of 
 service active competition would cease. His theory fails, 
 because, far below the point where it pays to do your own 
 business, it pays to steal business from another man. The 
 influx of new capital will cease ; but the fight will go on, 
 either until the old investment and machinery are worn 
 out, or until a pool of some sort is arranged. 
 
 The railroad may serve as a type of modern business. 
 Wherever there are large permanent investments of cap- 
 ital we see the same causes at work in the same way. 
 
 In the year 1870 the Philadelphia price of No. i pig- 
 iron averaged $33.25 a ton, which probably represented 
 just about the cost of production, including a fair return 
 on the investment. The American product for that year 
 and the next was about 1,900,000 tons each. But through 
 1 87 1 and the greater part of 1872 prices were rising; the 
 average for September, 1872, was $53.87. Large profits 
 like this attracted capital into the business; the product 
 for 1872 was 2,855,000 tons, and for 1873, 2,868,000 tons. 
 So far, Ricardo's theory worked well. Then prices 
 dropped faster than they had risen. December, 1873, 
 they were $32.50 a ton ; December, 1874, they were 
 $24.00. For the year 1878 they averaged but $17.62.' But 
 the iron men could not restrict their production as fast as 
 they had increased it. To allow their furnaces to go out 
 of blast was to allow their business to go to ruin. They 
 continued to produce at a great loss, and to fight more 
 desperately the greater the loss became. Some concerns 
 succumbed, some pulled through to see more prosperous 
 times. But for a period of six years millions of tons of 
 
 ' Reports of James M. Swank, Sec'y of the Amertcan Iron and Steel 
 Association.
 
 COMPETITION AND COMBINATION. 73 
 
 iron were produced and sold below cost, their owners 
 being thankful if the price paid would cover raw materials 
 and wages, without any regard to interest or renewal. 
 The same thing is probably true of the steel-rail business 
 to-day. 
 
 There is a marked difference of principle between 
 mercantile competition, such as Ricardo had in mind, and 
 the competition of railroads or factories, such as we have 
 been considering. In the former case its action is prompt 
 and healthful, and does not go to extremes. If Grocer A 
 sells goods below cost, Grocer B need not follow him, but 
 simply stop selling for the time. For: i. This involves no 
 great present loss to B. When his receipts stop, most of 
 his expenses stop also. 2. It does involve a present loss 
 to A. If he is selling below cost, he loses more money 
 the more business he does. 3. It cannot continue in- 
 definitely. If A returns to paying prices, B can again 
 compete. If A continues to do business at a loss he will 
 become bankrupt, and B will find the field clear again. 
 
 But if Railroad A reduces charges on competitive busi- 
 ness, Railroad B must follow, i. It involves a great 
 present loss to stop. If a railroad's business shrinks to 
 almost nothing, a large part of its expenses run on just 
 the same. Interest charges accumulate ; office expenses 
 cannot be suddenly contracted ; repairs do not stop when 
 traffic shrinks ; for they are rendered necessary by weather 
 as well as by wear. 2. If B abandons the business, A's 
 reduction of rates will prove no loss. The expense of a 
 large business is proportionately less than that of a small 
 one. A rate which was below cost on 100,000 tons may 
 be a paying one on 200,000. 3. Profitable or not, A's 
 competition may be kept up indefinitely. The property 
 may go into bankruptcy, but the railroad stays where it
 
 74 RAILROAD TRANSPORTATION. 
 
 is. It only becomes a more reckless and irresponsible 
 competitor.' 
 
 The competition of different stores finds a natural limit. 
 It brings rates down near to cost of service, and then 
 stops. The competition of railroads or factories finds no 
 such natural limit. Wherever there is a large permanent 
 investment, and large fixed charges, competition brings 
 rates down below cost of service. The competitive 
 business gives no money to pay repairs or interest. 
 Sometimes the money to pay for these things comes out 
 of the pockets of other customers, who do not enjoy the 
 benefit of the competition, and are charged much higher 
 rates. Then we have the worst forms of discrimination. 
 Sometimes the money cannot be obtained from any 
 customers at all. Then we have bankruptcy, ruin to the 
 investor, and — when these things happen on a large scale 
 — a commercial crisis. 
 
 There is but one way to prevent these results. If 
 competition is ruinous to all parties, all parties must stop 
 competing. If it finds no natural limit, it must be arti- 
 ficially limited; it must end in combination. And the 
 moment you have established an effective combination, 
 you have introduced the principle of monopoly. You 
 have determined prices not in open market, but by an 
 agreement among all the sellers. 
 
 This agreement may take any one of four forms, i. 
 Agreement to maintain rates. 2. To divide the field. 
 3. To divide the traffic. 4. To divide the earnings. The 
 last three are commonly known as pools. 
 
 The first is the simplest, but least effective. There is 
 
 * -Vdims, pp. 148, ff. Testimony of E. D. Worcester before the Hep- 
 bun ( omn.ittee, p. 1074 ; of Albert Fink, p. 564. The counter-argument 
 of Mr. Blanchard, pp. 3033-34, does not hold generally, because in a fight 
 of this kind recklessness is the most important element of strength.
 
 COMPETITION AND COMBINATION. 75 
 
 scarcely an organized industry where the dealers do not 
 meet and settle upon a schedule of rates and discounts, 
 agreeing that no one shall sell below these prices. Such 
 agreements are rarely kept. It is for the interest of all 
 that rates in general should be maintained ; but it is for 
 the interest of each concern to secure business for itself 
 by not quite maintaining them. This constitutes a great 
 temptation to depart from schedule prices ; a temptation 
 all the stronger because it is so easy to violate the agree- 
 ment indirectly, and so hard to detect any such violation. 
 The result is apt to be a system of underhand competi- 
 tion, worse in many respects than the open competition 
 which existed before there was any agreement at all. 
 
 This is why it is found necessary to divide the business 
 among the different competitors, by a pooling agreement. 
 Such agreements are hard to arrange. There is almost 
 always a dispute about their terms. But as long as they 
 are in force, it is hard to violate them without actual 
 fraud, and it is comparatively easy to detect such viola- 
 tions and deal with them severely. 
 
 When it is possible to "divide the field" this course is 
 usually the simplest. We see it illustrated where differ- 
 ent gas or water companies parcel off the different dis- 
 tricts of a city to one another ; or where manufacturers 
 in different cities agree to leave one another in undis- 
 turbed possession of the home market. We see it not 
 infrequently in agreements between railroads. But in the 
 majority of cases this arrangement is impracticable, and 
 the rival concerns agree upon the proportion of business 
 which each is to do. The companies in the Anthracite 
 Coal Combination have arranged how much coal each 
 company may mine.. Factory combinations determine 
 how much each concern may manufacture. Railroads
 
 76 RAILROAD TRANSPORTATION. 
 
 agree just what percentage of competitive traffic each road 
 shall carr}^ 
 
 When one railroad receives more than its agreed share 
 of business, it is generally inconvenient to send the goods 
 by a rival route, and easier to arrange matters by a money 
 payment,' This brings us to the fourth and closest form 
 of combination, where there is a division of earnings. 
 The machinery for securing this division may have any 
 degree of organization up to the point of actual consolida- 
 tion of the competing interests. 
 
 The dangers of a pool lie in the arbitrary power which 
 it places in the hands of a few men to deal as they will 
 with the business of the country. Even granting that the 
 actual abuses of combination are less than those of com- 
 petition, it seems like taking refuge from the excesses of 
 democracy in an enlightened despotism. There is some 
 slight truth in the analogy, but we are likely to carry it 
 too far. Combination does not produce arbitrary results 
 any more than competition produces uniformly beneficent 
 ones. We hear a great deal said about charging " what 
 the traffic will bear " ; and the man who avows this as his 
 principle is compared by anti-monopolists with the robber 
 barons of the middle ages. He is represented as fleecing 
 a helpless public out of all its hard- won earnings. In the 
 proper meaning of the principle the case is just the oppo- 
 site. Charging what the traffic will bear is a very differ- 
 ent thing from charging what the traffic will not bear. It 
 is a hard principle to apply intelligently ; but when it is 
 thus applied it adjusts the burdens where they can be best 
 borne, and develops a vast amount of business which could 
 not otherwise exist. Our railroad management has many 
 
 ' For the question of traffic vs. money pools, see Fink : Argument 
 before the Select Committee of the U. S. Senate, May 21, 1885., pp. 33-35.
 
 COMPETITION AND COMBINATION. 77 
 
 faults and abuses in detail ; but, taking its work as a 
 whole, it has brought down rates to a cheapness which is 
 unequalled elsewhere, and has developed the business of the 
 country on a scale which would have been impossible under 
 any system of rates based on cost of service. Nor does it 
 leave the door open for inordinate profits. The moment 
 a combination places its figures so high as to do this, 
 other capital will seek investment in the same line ; and 
 though these new investments are apt, before long, to 
 come into the pool at the old rates, yet they have cut 
 down the profits by their entrance. An amount of busi- 
 ness which would richly support one railroad or factory, 
 yields but a scant income to two railroads or factories at 
 the same rates. Witness what the " Nickel Plate " Rail- 
 road has done for the Lake Shore, or the West Shore Rail- 
 road for the New York Central. Parallel roads do not lower 
 rates permanently, but they make havoc with profits. It 
 is usually far-sighted policy for a combination to put its 
 rates so low as not to tempt new capital too rapidly into 
 the field'. If that lesson is learned, the public gets the 
 benefits of competition without its disadvantages. Un- 
 luckily, we place these combinations outside of the pro- 
 tection of the law, and by giving them this precarious and 
 almost illegal character we tempt them to seek present 
 gain even at the sacrifice of their own future interests. 
 We regard them, and we let them regard themselves, as a 
 means of momentary profit and speculation, instead of 
 recognizing them as responsible public agencies of lasting 
 influence and importance.' 
 
 There is another aspect of our subject, still more serious 
 than any we have yet treated, which we can do little more 
 than touch upon, — the competition and combination of 
 
 ' See chap. vii. Grosvenor : " American Securities," pp. 200-214.
 
 78' RAILROAD TRANSPORTATION. 
 
 labor. Labor is in the market, like any commodity ; its 
 price is largely determined by competition, and this too 
 often takes the form of cut-throat competition. A work- 
 man working for starvation wages is like a factory or a 
 railroad running for operating expenses. In flush times 
 the workman gets comparatively good wages ; he marries, 
 and is able to support a family in reasonable comfort. 
 This family becomes a fixed charge upon him ; and it is 
 of the utmost importance to society that he should be 
 able to meet his fixed charges in this respect. But a 
 commercial crisis comes, and the demand for labor dimin- 
 ishes. Men who have no family to support come into 
 direct competition with him. He can better afford to 
 work for what will keep body and soul together than not 
 to work at all, even though his wages are brought so low 
 that his children perish for lack of the food which should 
 give them strength to resist disease. And so wages are 
 brought down to the starvation minimum, only to rise 
 above it after long years of waiting and misery. The 
 workman seeks relief in combination ; but combination 
 is far harder for him than for the capitalist. Where there 
 are ten factories to combine, there may be ten thousand 
 workmen to be held together, — not to speak of the almost 
 unlimited floating labor supply which may be brought in 
 at any point. The law will not help him. If the law re- 
 gards the pool with disfavor, it regards most of the mani- 
 festations of trades-unionism with absolute hostility.' No 
 wonder that our workmen try to change the law ; no 
 wonder they call for special statutes against labor impor- 
 tation ; no wonder that they seek to limit the supply 
 in tlie market by a universal eight-hour law. Whether 
 
 ' W. S. Jevons: "The State in Relation to Labor," London, 1882, 
 chapters iv., v. J. E. Thorold Rogers : " Six Centuries of Work and Wages," 
 London (and New York), 1884, pp. 398^ 390.
 
 COMPETITION AND COMBINATION. 79 
 
 rightly or wrongly, we do not here inquire ; it is beyond 
 our purpose to discuss what general impovement is prac- 
 ticable in this field. We only call attention to the close 
 relation between the two problems of starvation wages 
 and bankrupt competition. If capitalists and workingmen 
 can but see this analogy, it may help them to an under- 
 standing of one another's position. 
 
 The socialists, in spite of their unpractical proposals, 
 have the merit of seeing the close relation between these 
 two problems. They would solve them by organizing the 
 whole world into a vast system of pools and trades-unions, 
 under the charge of the State. This is not a rhetorical 
 figure ; it is a statement of what the proposals of 
 many of them distinctly mean.' But they ignore two 
 overwhelming arguments against their position. One is 
 that government action has many bad effects, even in the 
 narrow sphere of duties which it to-day performs ; the 
 second is, that an approach to the system proposed by 
 the socialist has already been tried and found wanting, 
 under conditions far simpler than exist to-day. The or- 
 ganization of business in semi-political guilds was tried in 
 the middle ages in a great variety of places and forms. 
 It developed the gravest abuses, and fell with its own rot- 
 tenness. And yet the socialism of the mediaeval guilds 
 had a limited object, which was far easier to attain than 
 any general amelioration of the working-classes. The 
 guilds cared only for those who were engaged in handi- 
 craft. They wanted to keep craftsmen's wages high. 
 The great land-owners wanted to keep agricultural wages 
 low. Towns and lords, between them, did all they could 
 to prevent any one from entering a craft, and to keep him 
 
 ' Gronlund : "The Co-operative Commonwealth," Boston, 18S4, pp. 129, 
 145, and elsewhere.
 
 So RAILROAD TRANSPORTATION. 
 
 in agriculture. The effects of this legislation upon the 
 rural laborer were outrageous, and he could do nothing 
 to help himself. The guilds were organized ; for any one 
 else, the least attempt at organization was a crime.* 
 The English combination laws, which, down to the pres- 
 ent century, were so infamous, were made to prevent agri- 
 cultural laborers from enjoying the benefits which were 
 granted to their oppressors. In France and Germany, 
 under the old regime, the case was worse than in England. 
 It can hardly be too much to say that ninety-nine hun- 
 dredths of all the state interference of this kind hasbeen class 
 legislation, and that any apparent prosperity at one point, 
 which it has induced, has been dearly purchased at another. 
 
 While the experiments in state socialism have been so 
 often bad, there has been a tendency in a great many 
 cases to go too far to the opposite extreme, and to call 
 every thing bad which restricted competition in any way. 
 Courts and legislators have tried to stop the growth of 
 industrial monopoly by shutting their eyes to industrial 
 facts. They have tried to prohibit such combinations 
 altogether, the courts saying that they Vv'ould not enforce 
 contracts in restraint of trade, the legislators trying to 
 render it illegal to make such contracts. 
 
 They could not stop such combinations, because they 
 were a necessity of business. The result of trying to pro- 
 hibit them was what always happens when you try to 
 prohibit a necessity ; the worse features of the system 
 were intensified. Secret combination was substituted for 
 open ; short-sighted and arbitrary policy was encouraged. 
 By prohibiting the whole system, the courts deprived 
 themselves of the power of dealing with specific evils, such 
 as secret favors, or arbitrary discriminations. 
 
 ' Jevons, pp. 33, 34.
 
 COMPETITION AND COMBINATION. 8 1 
 
 In Europe, and especially Continental Europe, the case 
 is different. They prohibit most of the specific evils 
 strictly and effectively. But they do not prohibit pools. 
 They recognize them as a necessity. The railroads owned 
 and managed by government themselves enter into pool- 
 ing arrangements with those of private companies with 
 which they come into competition. With all the police 
 power which the German Government controls — a power 
 a hundred-fold greater than any thing we have in this 
 country — and with all its dread of irresponsible combina- 
 tions, it sees that pools are not a thing which can be pre- 
 vented, and that the only way to control them is to 
 recognize them as legal, and then hold them responsible 
 for any evils which may arise under their management.' 
 
 The sooner we reach the same conclusion in America, 
 the better for all parties concerned. The attempt to bury 
 the difficulties by thrusting our own heads into the sand 
 has already lasted too long. We must face the inevitable 
 as inevitable, and do the best we can to regulate it. Ta 
 meet the difficulties successfully will be a hard problem. 
 But to evade them has proved an impossible one.^ 
 
 ' vSee chap. xiii. See also R. R. Gazette, 1884, p. 636. 
 
 * T. M. Cooley : " Popular and Legal Views of Traffic Pooling." Chicago, 
 1884. This pamphlet, originally published as an article in the Railway 
 Review, is a work of great value. 
 
 In the case of The Central Trust Co. vs. The Ohio Central Railroad Co., 
 the U. S. Circuit Court has just rendered a decision enforcing pooling con- 
 tracts under certain circumstances. Both the decision itself, and the argu- 
 ment of Mr. Stevenson Burke, are worthv of careful attention.
 
 CHAPTER V. 
 
 COMPETITION AND COMBINATION IN PRACTICE. 
 
 Early railroad consolidation — Scott — Vanderbilt — The trunk-line systems- 
 Railroad geography of the United States — Means of handling through 
 traffic — Fast freight lines — Advantages and disadvantages — Struggles for 
 competitive traffic — Railroad pools in the West ; in the South — Trunk- 
 line Vicars — Contests between cities — Arrangements made in 1S77-79 — 
 Effect upon water routes — Railroad war of 1881 — Principles involved — 
 Present state of affairs. 
 
 Charles Francis Adams, Jr. : "Railroads and Railroad Questions," New 
 York, 1878, pp. 148-213. (Also issued under the title " Railroads, their 
 Origin and Problems.'") 
 
 Reports of Joseph Nimmo, Jr., Chief of the Bureau of Statistics, on the 
 Internal Commerce of the United States — especially that for 1879. 
 
 Report of the Special Committee on Railroads, appointed under a resolu- 
 tion of the N. Y. Assembly, Feb. 28, 1879. 
 
 This is commonly known as the Hepburn Committee Report. The 5,000 
 pages of testimony form by far the best authority on certain matters of rail- 
 road management which has ever appeared in print. The most valuable part 
 is the testimony of G. R. Blanchard, who represented the management of the 
 Erie Railway. Mr Blanchard's other utterances on the subject are also im- 
 portant. 
 
 Albert Fink's successive reports and arguments before legislative committees 
 furnish material of the highest value. For many other authorities dealing 
 more or less directly with this subject, see next chapter. 
 
 The principles dealt with in the last chapter have been 
 developed at some length, because they are necessary to 
 any true understanding of recent railroad history, or to 
 any intelligent judgment on matters of railroad legislation. 
 
 It is only in the last few years that they have become 
 thus important. The earlier railroad combinations could 
 
 82
 
 COMPETITION AND COMBINATION. 83 
 
 be easily understood without them. These earlier com- 
 binations were for the most part mere consolidations of 
 different links into one connecting line. Take, for in- 
 stance, the growth of the Vanderbilt system. In 1853 the 
 New York Central was formed by the consolidation of 
 what had been originally eleven railroads : Albany and 
 Schenectady, Schenectady and Troy, Utica and Schenec- 
 tady, Syracuse and Utica, Auburn and Syracuse, Auburn 
 and Rochester, Rochester and Syracuse direct, Rochester, 
 Lockport, and Niagara Falls, Buffalo and Lockport, Tona- 
 wanda, Attica, and Buffalo. From 1855 to 1858, the 
 system thus formed gained control of five more roads : 
 Rochester and Lake Ontario, Buffalo and Niagara Falls, 
 Lewiston, Athens Branch, Niagara Bridge and Canan- 
 daigua. Then came Vanderbilt's achievements : the union 
 with the Hudson River Railroad and the Harlem on the 
 the east ; and (in some sense) with the Lake Shore and 
 Michigan Southern, the Canada Southern, the Michigan 
 Central, the New York, Chicago and St. Louis, on the 
 west ; the whole system including more than four thousand 
 miles of line. 
 
 This is simply one instance among many. If we trace 
 back the history of almost any of our large railroads we 
 find that they were formed by the consolidation of many 
 smaller ones. Such a course of events was a necessity. 
 As long as railroads were purely local affairs, each locality 
 might charter and run its own. The moment any large 
 through trafific grew up, this was found to be a wasteful 
 way of doing business. If they changed cars at every 
 point of junction, the expenses were vastly increased. If 
 they did not change cars, there was still the awkwardness 
 of dividing responsibility, and the evil of having two sep- 
 arate organizations where one would do the work better.
 
 84 RAILROAD TRANSPORTATION. 
 
 It required no special training to see the necessity of such 
 consohdation, and no extraordinary business talent to 
 carry it through. 
 
 But there was a point beyond which these matters did 
 not take care of themselves, and could only be managed 
 by great leaders. The trunk lines of the country reached 
 this point about twenty years ago. At that time the 
 main routes were pretty well consolidated as far as the 
 Ohio River or the eastern end of Lake Erie; for their 
 through connections to Chicago or St. Louis, they made 
 use of independent roads. The men who did most to 
 change this state of things were Cornelius Vanderbilt and 
 Thomas Alexander Scott. Scott began earlier and went 
 farther; but there was a dashing quality about Vander- 
 bilt's doings which make him the central figure in this 
 movement. 
 
 Scott entered the service of the Pennsylvania Rail- 
 road in 1850. He was rapidly promoted and soon made 
 his influence felt in the policy of the road. In i860 he 
 became Vice-President chiefly through the exertions of J. 
 Edgar Thomson, who gave him active support in all his 
 projects. They had already secured possession of the 
 Philadelphia and Erie, and were busy with other schemes 
 of the same sort, when the war interrupted all these plans. 
 At the close of the war they were pushed on with 
 renewed activity ; the system was extended westward to 
 Chicago, St. Louis, and Cincinnati, southward to Balti- 
 more, eastward all over New Jersey, and northward as far 
 as Lake Ontario. Scott himself went far beyond these 
 limits, and was personally brought into financial trouble 
 in 1873 in connection with the Texas Pacific. These 
 things did not, however, involve the company, nor did 
 they interfere with his position at its head. On the death
 
 COMPETITION AND COMBINATION. 85 
 
 of Thomson in 1874, Scott was elected president and held 
 this position till 1880, a year before his death. As a 
 result of his policy, the Pennsylvania Railroad and its 
 alter ego the Pennsylvania Company, together control 
 nearly seven thousand miles of the most valuable railroad 
 property in the United States. 
 
 Vanderbilt was thirty years older than Scott, but he did 
 not go into railroad business until several years later than 
 his rival. Through his early life he had been a steamboat 
 captain, and in the years 1 850-1 860 he was one of the 
 foremost steamboat owners in the world. But his busi- 
 ness sagacity led him to foresee the future of the railroad 
 system ; and about the beginning of the war he gradually 
 withdrew from the sea, to invest his capital on land. In 
 1863 he began buying Harlem as an investment. He 
 bought some of it at .03 ; thanks to the operations of 
 those who tried to break him down by selling it short, he 
 carried it up to 285. He went into Hudson River in 
 1864; in 1867, after some opposition, he secured control 
 of the New York Central, and consolidated it with the 
 Hudson River Railroad in 1869. In a desperate attempt 
 to gain control of Erie he was foiled ; but he and his 
 friends were more successful in their efforts further west, 
 on the Lake Shore and the Canadian roads. There were 
 thus finally united under one general management (though 
 not under one concern as in the Pennsylvania system) 
 some four thousand miles of railroad between New York 
 and Chicago. 
 
 Parallel to these, but more slowly, were developed three 
 other trunk-line systems — the Grand Trunk on the north, 
 the Erie in the middle, and the Baltimore and Ohio on 
 the south. The early development of these systems had 
 been to a certain extent retarded — in the case of the
 
 86 RAILROAD TRANSPORTATION. 
 
 Grand Trunk by disadvantages of situation, in the case of 
 the Erie by speculative management, in the case of the 
 Baltimore and Ohio by the war. But though not equal 
 in strength to the systems first named, each of these 
 controls from two thousand to three thousand miles of 
 line between the seaboard and the Mississippi valley. 
 The tendency toward consolidation on parallel lines is 
 the distinctive feature of railroad geography in this part 
 of the country. The West Shore, the Lackawanna, the 
 Chesapeake and Ohio, are instances of this which have 
 come up within the last few years. Certain systems 
 between the Lakes and the Ohio River, like the Cleve- 
 land, Columbus, Cincinnati, and Lidianapolis, resist the 
 tendency, but find it hard work to do so. West of 
 Chicago and St. Louis the rival lines do not run parallel, 
 but radiate from common centres. They reach out in all 
 directions to collect grain for the great western markets. 
 From Chicago we have, beginning on the north, first the 
 St. Paul, and then the Northwestern system, each with 
 about five thousand miles of line, then the Rock Island 
 with fifteen hundred, the Chicago, Burlington, and Quincy 
 with four thousand, the Chicago and Alton with about 
 one thousand, and the Illinois Central with two thousand. 
 These systems have grown and consolidated even more 
 rapidly than the trunk lines. From St. Louis we have 
 the same sort of radiation, only here one company, the 
 Missouri Pacific, has become overwhelmingly strong, and 
 controls six thousand miles, or, with the closely allied 
 Wabash system, ninety-five hundred miles. Farther to 
 the west, beyond the Missouri River, parallel lines of trans-, 
 continental traffic again take the place of radiating ones. 
 It is, however, too soon to tell what shape these systems 
 in the extreme West will finally take, and whether we may 
 not have a gigantic general consolidation of all lines.
 
 COMPETITION AND COMBINATION. 8/ 
 
 In the States south of the Potomac and east of the 
 Ohio, the western form of railroad geography is reversed. 
 Instead of railroads radiating from the central markets 
 toward the points of production, the points of production 
 are in the centre and the markets lie all around the edge 
 of the district — on the seaboard, the Gulf, the Mississippi, 
 or the Ohio. There is an inward radiation instead of an 
 outward one.' In the Northeastern States consolidation 
 has not taken place on nearly so large a scale as in other 
 parts of the country, and especially not on as long lines. 
 There has been consolidation by districts, rather than con- 
 solidation into extended systems. 
 
 The efforts to secure unity of management in certain 
 details went far beyond the limits of actual consolidation. 
 This unity was most necessary in the handling of through 
 passengers and freight. To transship frequently, in- 
 volved great trouble and expense. On the other hand, 
 for a road to let its own cars pass on to other lines without 
 any one to look after them, involved the danger of serious 
 loss. The first solution tried on a large scale was to ac- 
 commodate the through traffic by special cars, owned and 
 looked after by a company which was, at least nominally, 
 quite distinct from any of the railroads over which the 
 cars were run. Thus there grew up sleeping-car companies, 
 express companies, or freight-transportation companies. 
 
 In the passenger and express business, the system has 
 continued till the present day. The express company owns 
 the cars and assumes the responsibility to the public ; it 
 runs its cars under a contract with each railroad.'' The 
 
 ' The strongest individual system in this district is the Louisville and Nash- 
 ville, which with its affiliated lines includes over three thousand miles of 
 road. 
 
 ' These contracts take the most varied forms. U. S. Census, l88o, vol. 
 iv., pp. 594-612 (bottom figures).
 
 88 RAILROAD TRANSPORTATION. 
 
 sleeping-car arrangements have the same general form ; on 
 their face they are usually more unfavorable to the rail- 
 road. But the through-freight business has gradually 
 taken a different shape. The earliest form of fast-freight 
 line was organized like an express company — it owned the 
 cars, assumed the responsibility, collected all it could from 
 the public, and paid the railroads a car-load rate very much 
 smaller than what it charged the public. Some of these 
 lines still exist — the Merchants Despatch Transportation 
 Company is an important instance. But it was found that 
 these lines afforded great opportunities for corruption. 
 The directors of railroads would buy stock in the trans- 
 portation company, and then give this company a contract 
 Avhich enriched it (and them) at the expense of the stock- 
 holders whose interests were entrusted to their charge. 
 An effort was made to avoid these abuses, by paying the 
 freight charges to the railroads, and giving the transporta- 
 tion company a certain percentage as its commission. 
 This was only partially successful.' 
 
 A much more useful device was the co-operative fast- 
 freight line,"* which avoids the abuses of the old system, 
 and now prevails all but universally. It avoids all steal- 
 ing, because there is nothing to steal. A co-operative 
 freight line has very few expenses, and no earnings at all. 
 It is nothing more than a system of looking after cars and 
 keeping accounts. The principle is this : Each road con- 
 nected with the line sets apart a certain number of cars for 
 line freight. It marks them with some distinguishing 
 
 ' Hepburn Committee Report, p. 9, testimony (Blanchard), pp. 2959-62. 
 
 ' Hepijurn Committee Report, p. 8, testimony, p. 2963 ff. 
 
 Testimony before U. S. Senate Com. on Transp. Routes to the Seaboard, 
 43d Cong., I Sess., 307, part 2, pp. 360-65. 
 
 J. D. Hayes in U. S. Internal Commerce Report, 1876-77, Appendix, 
 pp. 49-60.
 
 COMPETITION AND COMBINATION. 89 
 
 color or mark, but continues to own them. Each road 
 lets the line cars of other roads pass freely over its own 
 track without transshipment. It collects the transporta- 
 tion charges on its own part of the route, no matter whose 
 the cars may be. It reports the movements of the cars to 
 the central office of the line. In the accounts of this 
 office, a certain sum ' (say f cts. per mile run) is charged 
 against the road for the use of the cars of other roads on 
 its own line ; and it is credited with a like amount for 
 every mile that its cars have been used on other roads. 
 The fast-freight line thus acts as a car-clearing house to 
 settle debits and credits for the use of the cars of other 
 roads.'' It cannot be made a means of fraud, any more 
 than a clearing-house can be made a means of fraud. It 
 has no receipts of its own. The sum of the debit balances 
 for one set of roads must equal the sum of the credit 
 balances for the rest, leaving the line itself neither the 
 gainer nor the loser. Only in case of loss or damage 
 does the freight line receive money not due to some other 
 road or roads ; and the money thus received is, of course, 
 paid out to the shipper. The only real payments to the 
 line as such, are paid to be spent for salaries and office ex- 
 penses. As for the line itself, it is neither a corporation 
 nor a partnership. It is simply a set of arrangements for 
 carrying out certain contracts between several railroads. 
 The very agents of the line, in their dealings with the 
 public, are responsible only for some specific road or 
 roads, and not for the line as such. 
 
 This total absence of all possibility of cheating caused 
 the cooperative freight line to grow rapidly in favor. The 
 
 ' Varying according to the condition of the track — largest in the South, 
 smallest on the trunk lines. 
 
 ' The New England Car Clearing-House in Boston does the same sort of 
 work under more complicated conditions.
 
 90 RAILROAD TRANSPORTATION. 
 
 Erie road reduced the expense of looking after through 
 freight from about nine per cent of the earnings on such 
 freight (its previous figure) to three per cent. This was 
 done by simply changing from the old form of freight line 
 to the cooperative form.' 
 
 This is the great advantage of the cooperative freight 
 line system. It also has the advantage that it causes the 
 rolling stock to be rapidly utilized. The disadvantages of 
 the system lie in the lack of responsibility, due to the ex- 
 tremely loose character of the agreements under which 
 the freight line is managed. The absence of any power 
 which can steal involves the absence of any power which 
 can be held responsible for damages or abuses. The 
 shippers feel this evil quite constantly.^ The railroads 
 themselves feel it occasionally. The through freight of a 
 railroad may be dependent upon the discretion of the 
 soliciting agents of a fast-freight line, — agents living per- 
 haps a thousand miles away. These agents are responsi- 
 ble to no authority except that of their own roads. Yet 
 on their uncontrolled discretion — or indiscretion — the 
 policy and the prosperity of distant lines may become ab- 
 solutely dependent. This is strongly felt in the case of 
 great railroad wars ; it is perhaps the most fruitful cause 
 of such wars.^ 
 
 Thus the very means which bound connecting roads 
 more closely together only caused a sharper rivalry be- 
 tween different systems which were not thus bound. 
 Railroad wars became more and more severe. As long as 
 the competitive strife was merely local, it was of but 
 
 ' Blanchard : Test, before Sen. Com. on Transp. Routes (1873), p. 364. 
 
 ' Proceedings of the New York Board of Trade and Transportation, 1884, 
 pp. 32-42. 
 
 ' For the effect of irresponsible freight agents in causing railroad wars, see 
 Hepburn Com. Testimony, pp. 520, 522 (Fink), 3007 ff. (Blanchard).
 
 COMPETITION AND COMBINATION. 9 1 
 
 trifling importance. When it extended over thousands of 
 miles, and involved millions of tons of freight movement 
 — not to say millions of dollars loss to stockholders — it 
 became a matter of national concern. Such wars could 
 only end in consolidation or pooling ; and as the railroad 
 systems themselves became larger, public interest in rail- 
 road pools rapidly increased. 
 
 The earliest railroad pools were probably developed in 
 New England, but they were on a small scale, and the 
 whole thing was often so quietly done that their very ex- 
 istence was almost unsuspected. The first railroad pool 
 which has had an important public history was the Chi- 
 cago-Omaha pool, established in 1870.' Chicago and 
 Omaha were connected by three roads, almost exactly 
 equal in length, and not far different from one another in 
 financial resources. Their through business was so im- 
 portant that they could not afford to reduce rates to a 
 cut-throat point. An equal division was so obviously 
 fair that it was maintained for many years without much 
 bickering. As long as the original conditions remained 
 the same, there was little trouble. The pool went through 
 the Granger movement unshaken. It was subsequently 
 joined by other roads. Its original form was broken up in 
 1884, because the systems which composed it had out- 
 grown the limits to which the old framework could be 
 stretched. But the principle was by no means abandoned. 
 Each year had seen it more and more widely extended. 
 A Southwestern Association, dealing with the traffic of 
 St. Louis as well as of Chicago, was established in 1876, and 
 had an important though somewhat checkered career.^ 
 Pools were established from Chicago to the Ohio River on 
 
 ' U. S. Internal Commerce Report, 1879, pp. 175 ff. 
 
 ^ Intern. Com. Rep., 1879, p. 174 ; Appendix, pp. 51, 52.
 
 92 RAILROAD TRANSPORTATION. 
 
 the southeast, and to Minnesota on the northwest, while 
 beyond the Missouri they were extended to include the 
 traffic of Colorado and other southwestern points, and 
 finally the trans-continental traffic as far as the Pacific 
 coast itself. 
 
 Not quite so extensive, but far more completely devel- 
 oped, were the pooling arrangements in the country south 
 of the Potomac and the Ohio.' The competition in cer- 
 tain districts of the South had been even more reckless 
 and ruinous than elsewhere. A few railroads in Georgia 
 attempted (1873) to avoid these evils by combination. 
 Out of this attempt grew the Southern Railway and 
 Steamship Association. It was well managed from the 
 first, and within three years from its organization it had 
 come to include nearly the whole railroad system of the 
 South and a large number of connecting or competing 
 steamship lines. It was nominally a " net money pool," 
 that is to say, any road carrying more than its share of 
 the through traffic paid its rivals the excess receipts, less 
 a certain allowance for expenses of carrying ; but this 
 allowance for expenses was purposely made too small, in 
 order to take away from the roads all inducements to run 
 ahead of their percentages. But the Southern Associa- 
 tion was something more than a mere system of pooling 
 contracts. Its object was not simply to settle what shares 
 of competitive traffic each line should carry, but also to 
 facilitate the handling of through traffic. This it did by 
 establishing bases of classification, rates, etc. ; but above 
 all by the establishment (1875) of a clearing house to settle 
 the through-traffic accounts. All these things were done 
 after discussion by an advisory board consisting of one 
 delegate from each railroad ; but the executive officer was 
 
 ' Fink, in U. S. Internal Commerce Report, 1876, Appendix, pp. 12-24.
 
 COMPETITION AND COMBINATION. 93 
 
 not bound by the opinion of the majority. The man who 
 organized the association, and acted as its executive officer 
 until called to a wider field of activity, was Albert Fink. 
 
 The necessity for trunk-line pools did not arise until the 
 heavy trunk-line traffic was developed. For a long time 
 this was relatively unimportant, because so much was car- 
 ried by water. The Lakes, the Erie Canal, and the Hud- 
 son River formed an unrivalled line of transportation to 
 the east. The Mississippi River on the south was almost 
 equally efficient. When it cost the railroads two cents a 
 mile to transport a ton of freight, the long-distance freight 
 went by water as a matter of course. Only on the higher 
 class of goods, where speed was quite as important as 
 economy, could the railroads compete with decided advan- 
 tage when the canals were open. 
 
 But a series of changes ' made it possible for the rail- 
 roads to compete for this through traffic ; and the moment 
 they undertook to do so they found it a prize worth 
 fighting for. These wars on a large scale began in 1869, 
 when the New York Central and the Pennsylvania each 
 had obtained virtual control of its Chicago connection.' 
 In 1868 rates from Chicago to New York stood at $1.88 
 per 100 pounds for first-class goods, and $0.82 for fourth- 
 class. In the summer o^ 1869 they fell, under the stress 
 of competition, to a common rate of $0.25 per lOO pounds 
 on all classes. With railroad methods as they existed at 
 the time, such a reduction could not be maintained, and 
 in the following years (1870-74) they were at least nominally 
 kept at figures of $i.oo-$i.50 for first-class, and $o.6o-$0.8o 
 for fourth. But in the year 1874 a new element of dis- 
 
 ' See chap. vi. 
 
 " "Statistics Concerning the Movement of East-bound and West-bound 
 Traffic over the Trunk Lines and Connecting Roads." New York, 1884.
 
 94 RAILROAD TRANSPORTATION. 
 
 turbance appeared.* The Baltimore and Ohio secured its 
 Chicago connection, and almost immediately afterward 
 the Grand Trunk began operations as a competitor on a 
 line connecting Milwaukee and Detroit with the northern 
 Atlantic ports. The efforts of the New York Central and 
 Pennsylvania systems to maintain rates were rendered of 
 no effect by the recklessness of the Grand Trunk and the 
 offishness of the Baltimore and Ohio ; while the bank- 
 rupt condition of the Erie made it almost impossible for 
 it to pursue a conservative policy in these matters. The 
 year 1875 was passed in feverish excitement; 1876 saw 
 the beginning of a wild railroad war. First-class rates 
 were quoted at 25 cts. per hundred, fourth class at i6cts. ; 
 actual rates went much lower. 
 
 It is needless to say that railroad profits fell rapidly. 
 But the effects went far outside the circle of railroad stock- 
 holders. The canal lost business, and the reduction of 
 tolls which was hurriedly made could not prevent this 
 loss.^ The canal was no longer the dominant power which 
 it once had been. And this loss of importance of the 
 canal was a relative loss of importance to New York City. 
 As long as the canal was distinctly the best route, the port 
 of New York had a kind of monopoly ; and the owners 
 of the various monopoly rights used them remorselessly. 
 High charges were imposed, vexatious and uneconomical 
 ways of doing business were enforced. When Baltimore, 
 Philadelphia, and Boston became competitors, trailfic at 
 those points was burdened with no such restrictions.^ 
 Every facility was afforded for handling the through trade 
 
 'Adams, " Railroads," pp. 154 ff. 
 
 'Compare Fink: Rep. on Adjustment of R. R. Transp. Rates (N. Y. , 
 1882), p. 40. 
 
 ' Hepburn Com. Rep., pp. 22-26. Compare W. N. Black : " Storage and 
 Transportation in the Port of New York," 1884.
 
 COMPETITION AND COMBINATION. 95 
 
 cheaply. Under these circumstances their commerce 
 grew rapidly, while that of New York did not. To the 
 fight between railroads was thus added a fight between 
 cities, which gave new intensity to the contest. 
 
 The fight ended in 1877, ^"^^t because any thing was 
 settled, but because all parties were exhausted. As be- 
 tween the different cities it resulted in a compromise. 
 Philadelphia was given a small advantage over New York 
 in the matter of rates from the West, Baltimore a still 
 smaller advantage over Philadelphia. That any difference 
 at all should be allowed was a concession on the part of 
 the New York roads ; but the differences were much less 
 than those for which Baltimore and Philadelphia had been 
 contending. 
 
 On the part of the railroads the results were more 
 definite. They not only stopped fighting, but they made 
 arrangements to prevent such fighting in future by pools. 
 Trunk-line pools had not been quite unknown * ; but they 
 had generally been managed by outside parties '' (eveners), 
 in such a way as to intensify the abuses to which the sys- 
 tem was liable. Now the roads took the matter in hand 
 themselves. The division of west-bound traffic was ar- 
 ranged in 1877. The east-bound pooling arrangements 
 were more complicated, owing to the number of initial 
 points of shipment ; and it was two years before they 
 could arrange any division at all. Meantime, an associa- 
 
 ^ The Anthracite Coal Combination was the earliest instance. It was 
 undertaken by the roads as mine-owners rather than as carriers. It was 
 strongest in the years 1872-76. It aimed to limit production, not merely to 
 divide it. The combination owned about 75 per cent, of the anthracite coal 
 fields. Its measures against independent mine-owners were extremely op- 
 pressive. For dates etc., see Int. Com. Rep., 1879, PP- 179-182. 
 
 " Hepburn Com. Test. (Blanchard), pp. 3315 ff. Int. Com. Rep., 1879, p. 
 177. The Standard Oil Co. was the worst instance. The system of cattle even- 
 ers was as bad in principle, but was never carried out with the same power.
 
 96 RAILROAD transportation: 
 
 tion, something like that of the southern roads, had been 
 formed by the trunk Hnes and their connections, under the 
 title of the Joint Executive Committee. Albert Fink was 
 at its head. It never attained the thoroughness of or- 
 ganization which there has been in the South. There was 
 no clearing-house system, and no means of forming pool- 
 ing contracts by any central authority — only by the volun- 
 tary action of the roads in each individual case.' We 
 thus had three distinct sets of arrangements, i. As to 
 differentials between cities. 2. As to percentages of 
 trafific between trunk-lines. 3. As to general business ar- 
 rangements, rates, etc., under the Joint Executive Com- 
 mittee. 
 
 One result of this settlement was an increase of trafific 
 by water. The business of the Mississippi River, stimu- 
 lated as it was by the construction of the jetties at its 
 mouth, grew enormously.^ Even the traffic of the Erie 
 Canal revived for the time being. The advantage during 
 these years was in favor of New York as compared with 
 Baltimore, or as compared with any other port except 
 New Orleans. But the people of New York were not satis- 
 fied. They were displeased at what seemed to increase 
 the arbitrary power of the railroads ; and the result of 
 their dissatisfaction was the appointment of a Committee 
 of the New York Assembly— commonly known as the 
 Hepburn Committee — ** to investigate alleged abuses in 
 railroad management." They brought to light abuses 
 enough ; but the general drift of the evidence showed un- 
 mistakably that the pooling system, under the administra- 
 
 * Hepburn Com. Testimony, pp. 3120 ff. (Blanchard). 
 Fink : " The Railroad Problem and its Solution," 1880. 
 
 * Internal Commerce Report, 18S1, pp. 48 ff. The exports of grain and 
 flour at New Orleans increased from less than one million bushels in 1875 to 
 over twelve million in iSSo.
 
 COMPETITION AND COMBINATION. 9/ 
 
 tion of Mr. Fink, had lessened rather than increased those 
 abuses/ 
 
 Still the New York merchants believed that the exist- 
 ing arrangements as to differential rates did not do them 
 justice ; and the railroads leading to New York appear to 
 have shared this belief. At any rate, the agreement was 
 terrr.inated in the year i88i, by action of the New York 
 Central "^ ; and a fierce railroad war raged for eight months 
 afterward. It did not involve as great a reduction of divi- 
 dends as has sometimes been the case, because general 
 business was prosperous and prices were high ; but the re- 
 duction in rates was very great. The railroad organiza- 
 tion was quite powerless to stop this fight. An effort was 
 made to have recourse to arbitration ; and Messrs. Thur- 
 man, Washburne, and Cooley were appointed an advisory 
 committee on the subject. Their report was interesting, 
 but it settled nothing. They showed clearly enough how 
 Baltimore claimed that rates ought to be based on dis- 
 tance, while New York based her claims for equality on the 
 advantage of the New York Central in matter of grades. 
 The committee sliowed the fallacy of some of these points, 
 but they could not show any principle on which the matter 
 should be decided.^ Meantime Mr. Fink had been study- 
 ing the subject, with more definite results. If he did not 
 solve the question, he at any rate did a great deal toward 
 clearing it up." He showed that the violence of the com- 
 
 ' This is candidly admitted by Simon Sterne himself, although he was pro- 
 fessionally employed by the complainants before the committee. 
 
 "^ Fink : " Report on Adjustment of R. R. Transp. Rates," 1882, pp. 6, 7. 
 
 ' Report of Messrs. Thurman, Washburne, and Cooley, an Advisory Com- 
 mission on Differential Rates, etc. N. Y., 1882. 
 
 * The " Report on the Adjustment of Transportation Rates to the Sea- 
 board," already cited, is one of the most successful applications ever made of 
 mathematical methods to social phenomena. It ought to give Mr. Fink as
 
 98 RAILROAD TRANSPORTATION. 
 
 petition between the seaboard cities, was due to the fact 
 that they were simply intermediate points on the route 
 between Chicago and Liverpool, or some other European 
 port. Of this whole route the railroad formed one part, 
 the water route across the Atlantic the other. He further 
 showed how ocean rates adapted themselves to rail rates, 
 so that the rate Chicago — New Yox\>i plus New York — Liv- 
 erpool was almost exactly equal to the rate Chicago — Lalti- 
 more plus Baltimore — Liverpool.' This being the case, the 
 amount of traffic at each port was regulated by the harbor 
 and warehouse facilities in each case ; and as long as the 
 differentials were not grossly unfair, matters would adjust 
 themselves.^ 
 
 Matters finally settled back on the same general arrange- 
 ment as before. But one thing became clear. The water 
 routes could not compete with the railroads at the rail- 
 roads' war rates. The railroad war of 1 881-2 had checked 
 the development of Mississippi River traffic, and had rapidly 
 cut into that of the Erie Canal. The complete abolition of 
 tolls on the latter was almost a matter of neeessity ; and, 
 when it came, it did not suffice to protect the canal 
 business in the face of a renewed railroad war. 
 
 For the peace of 1882 was of shorter duration than its 
 predecessor; and the war which began in 1884 was, in 
 many respects, a more serious one. It was no longer a 
 
 high a rank among scientific investigators, as he holds among practical men. 
 Unfortunately, it is so abstruse that very few people take the time to do it 
 justice. 
 
 ' If the goods transported by the Central or Erie alone were considered. 
 New York suffers a very slight disadvantage as compared with Baltimore. But 
 if we take into account the canal rates, New York has a slight advantage. 
 
 " The legitimate inference from Fink's arguments is, that the differential 
 rate ought exactly to counterbalance the difference in cost of ocean carriage, 
 if things are to be adjusted on a theoretically correct basis ; but that, practi- 
 cally, things will quickly adjust themselves to any basis whatever.
 
 COMPETITION AND COMBINATION. 99 
 
 conflict between cities, but between railroads — and an 
 aggravated one at that, because some of the roads had 
 been built for speculative purposes. In some respects it 
 was a repetition of the events of ten years before ; only 
 now the West Shore, the Lackawanna, and the Chesa- 
 peake and Ohio had taken the place occupied ten years 
 before by the Grand Trunk, the Erie, and the Baltimore 
 and Ohio. It is too early [July i, 1885] to predict the 
 outcome of the existing war. But it is a mere truism to 
 say that it must end in combination in some form. It is 
 all very well to talk of free competition and survival of the 
 fittest. But permanent competition is virtually out of the 
 question. And survival of the fittest is only possible 
 when the unfittest can be physically removed — a thing 
 which is impossible in the case of an unfit trunk line. 
 The lion and the lamb must lie down together. The 
 only questions are, first, how long before this state of 
 things is to come about ; and second, whether the lion is 
 to lie down outside of the lamb.* 
 
 ' As we go to press these questions seem to be rapidly settling themselves..
 
 CHAPTER VI. 
 
 RAILROAD CHARGES AND DISCRIMINATIONS. 
 
 Profits of railroads in the United States — General scale of freight charges — 
 Reduction in the past fifteen years — Effect of steel rails — Improvements 
 in railroad economy — Back-loading — How discrimination arises — Charg- 
 ing what the traffic will bear — Different views regarding the system — 
 Classification — Local discriminations — Cases where they are a necessary 
 evil — Personal discrimination — Evil results of the system — Short-sighted 
 policy on the part of certain railroads — Effect of the financial condition 
 of different companies — General conclusions. 
 
 Edward Atkinson : " The Railway, the Farmer, and the Public." Issued 
 in book form in "The Distribution of Products," New York, 1S85, pp. 
 229-303. 
 
 E. Lavoinne and E. Pontzen : " Les Chemins de Fer en Amerique," 
 Paris, 1882 ; vol. ii., pp. 334-382. 
 
 See also references at the beginning of the preceding chapter, especially 
 the Hepburn Committee Report and Testimony. 
 
 The number of pamphlets on the subject is enormous. The works of 
 Albert Fink on the one hand, and of Simon Sterne on the other, are good 
 representatives of the intelligent argument on either side. In some respects 
 the best thing which has been written on the subject is by E. P. Vining: 
   " The Necessity for a Classification of Freight, and the Principles on Which 
 it is Based," which originally appeared in the Railway Review (Chicago), 
 Oct. 18, 1884. 
 
 For works regarding European practice and principles, see chap. xiii. 
 
 The average man troubles himself very little about the 
 speculative management of corporations, or about their 
 character as industrial monopolies. What he wants to 
 know is whether they are charging him too high a price 
 for their services. Nine tenths of the complaint and of 
 the proposed legislation deals with this point. Some say 
 
 100
 
 RAILROAD CHARGES AND DISCRIMINATIONS. lOI 
 
 that corporations are making too much money. Others 
 say that their charges in general are too high. A still 
 more frequent ground of complaint is that the charges 
 are irregular, and involve discrimination — that is, that 
 some charges are made higher than others without any 
 good reason for the difference, and that such discrimi- 
 nation is ruinous to the less favored customers, and dan- 
 gerous to the interests of the public. 
 
 The first two complaints, of high profits and high 
 charges, are generally false. The third, concerning dis- 
 crimination, is, unfortunately, true. 
 
 I. — The statement that corporations make too much 
 money is scarcely borne out by the facts. The average re- 
 turn of the railroads in this country is under four per 
 cent., the bondholders receiving an average of four and a 
 half per cent., the stockholders of two and a half per 
 cent. True, much of the stock is " water," not represent- 
 ing any capital actually expended ; but even making allow- 
 ance for this, it is hardly probable that the roads are 
 earning more than five per cent, on the total investment. 
 This assumes an average cost of $45,000 per mile, imply- 
 ing that about half the stock and one sixth of the bonds 
 are " water." Some authorities ' of deservedly high repute 
 place the true cost lower ; but their methods are not above 
 criticism. 
 
 ^ For instance, Poor (" Manual of Railroads of the United States," 1884) 
 is disposed to take the position that about half of the nominal capital is 
 water. The whole question is an extremely difHcult one. There are three 
 ways of estimating the probable cost of a railroad. The first is to take the 
 account of stock and debt, and make deductions for amount not paid in cash. 
 The second is to estimate directly the probable cost of duplication of such 
 road. The third is to take another road as nearly like it as possible, which 
 is admitted to have been honestly managed, and see what has been the cost 
 in that case. This is by far the best method, where we can apply it. The 
 two first methods give results much too small : the first, because we can rarely
 
 102 RAILROAD TRANSPORTATION. 
 
 But it is objected that, even if the average profit below, 
 the profit of certain concerns is extremely high. Granted. 
 But so it is in other lines of business, and so it must be in 
 any business. If there is much risk of complete failure, 
 there must be chance of large gain to offset it. The effort 
 to prevent exorbitant profits, by limiting the amount 
 which a company may divide among its stockholders, is 
 of little use. It is generally evaded by " stock-watering " 
 — that is, by a distribution among the stockholders of 
 new stock, which costs them little or nothing, and on 
 which they can receive dividends. But even if the law is 
 obeyed, and there is no attempt at stock-watering, the 
 public rarely gains any advantage from it. If a company 
 is not allowed to divide its whole net income, the man- 
 agers will not reduce rates. They will find it easier to in- 
 crease expenses. Or they may choose to do a small 
 business at high rates, instead of a large business at 
 moderate rates. To forbid a corporation to increase its 
 profits is to encourage waste and discourage enterprise. 
 The principle of limitation of dividend, though fondly 
 clung to by many of our legislators, cannot be considered 
 
 make allowance for earnings which have been spent in construction ; the 
 second, because it takes no proper account of " incidentals," an enormous 
 item of expense in any large undertaking. It is often said, on the basis of 
 the first or second of these methods, that any thing above $30,000 per mile 
 for the United States is water. But if we try to make any comparison with 
 Other countries, we shall find these figures too low. The only country whose 
 railroads have cost any thing like as low a figure per mile is Sweden (see 
 Appendix). The cost there is given at $30,000. But the Swedish roads are 
 built for very light traffic at slow rates of speed ; the country is an easy one 
 for railroad engineering ; land, labor, and materials are all exceedingly cheap. 
 It is not fair to our roads to make this the standard of comparison. 
 
 The explanation of the discrepancy probaljly is that it is imposssible to 
 adapt roads in advance to the exact use which is afterward made of them ; 
 and that the changes thus rendered necessary form an item of incidental ex- 
 pense so universal that it is fair to reckon it as part of the cost.
 
 RAILROAD CHARGES AND DISCRIMINATIONS. IO3 
 
 a good one/. A judiciously arranged tax system will 
 answer the purpose better. 
 
 Where there is not a natural monopoly — that is, in the 
 vast mass of cases — competition will generally do this 
 part of the work. Where the profits of an existing con- 
 cern are high enough to tempt it, a competitor will come 
 into the field. There will ultimately be combination, and 
 no reduction of prices ; but there will be a reduction of 
 profits, and a large one. The business which would sup- 
 port one concern richly, will not do the same for two, no 
 matter how much they combine, or what rates they try to 
 make.' 
 
 II. — If railroad profits are not too high, the charge that 
 railroad prices in general are too high loses all its plausi- 
 bility. 
 
 If it is said that railroad rates in general are too high, 
 any one of three things may be meant : either that the 
 rates give too high a profit ; or that they prevent the de- 
 velopment of business ; or that they are higher than in 
 other countries. The first of these points we have already 
 considered. As to the second ; — nowhere have railroads 
 done so much to develop business as in the United States, 
 and nowhere has the actual development been more rapid. 
 Mr. Atkinson ^ has shown how the transportation charges 
 have become an insignificant element in the price of prod- 
 ucts. The cost of delivering bread from the baker to his 
 
 1 See pp. 55, 126. T. H. Farrer : " The State in its Relation to Trade," 
 pp. 88-go. 
 
 " It is fair to say that the existence of roads like the West Shore is due to 
 the effort of the managers of the Central to earn dividends on watered stock. 
 But it is not fair to infer that, if tlie dividends of the Central had been lim- 
 ited by law, and the stock-watering prevented, the policy of the road would 
 have been so changed as to remove the inducements to build a parallel line. 
 
 • " The Distribution of Products," pp. 292-295.
 
 104 RAILROAD TRANSPORTATION. 
 
 customers is a larger element in the price of bread than 
 the cost of getting wheat from the farmer to the miller, 
 and flour from the miller to the baker — though the one is 
 but a few hundreds of yards, and the other as many hun- 
 dreds of miles. 
 
 As to the comparison with other countries : — Railroad 
 charges in the United States average but a cent and a 
 quarter per ton per mile. In 1884 they fell to a cent and 
 one eighth. This is lower than they are anywhere else in 
 the world,' and lower than would have been deemed pos- 
 sible a few years since. It is hard to compare our present 
 average rates with those of fifteen years ago, because at 
 that time no general statistics were collected. But it is 
 safe to say that they have been reduced 50 per cent, 
 nominal, or, making allowance for the gold premium in 
 1870, 35 per cent, actual.'^ In 1870 the average rates per 
 ton per mile on the roads of New York State were i.7cts.; 
 now they are about 0.8 cts. Then the average rates in 
 Ohio were 2.4 cts.; now they are less than 0.9 cts. In the 
 year 1869 the earnings, expenses, and profits of the N. Y. 
 Central per ton per mile were 2.4, 1.4, i.o cts. respectively ; 
 for the last five years they have averaged about 0.8, 
 0.6, and 0.2 cts. 
 
 Any full statement of the means by which this reduc- 
 tion was brought about would belong to a more technical 
 treatise than this book is intended to be. When it is said 
 that it was due to competition, it is in a certain sense 
 true ; only it requires further explanation to show how 
 the whole rate now should be so much less than the mere 
 
 ^ This is only true of freight rates. Our average passenger charge is 
 2.35 cts. per mile, while that of most European countries varies from 1.3 to 2 
 cts. But passenger charges are a much less important matter than freight 
 charges. 
 
 " " The Distribution of Products," pp. 240 fl.
 
 RAILROAD CHARGES AND DISCRIMINATIONS. 10$ 
 
 cost a few years ago. The reduction in cost is more re- 
 markable than the reduction in rates. A part of this re- 
 duction is due to the mere growth of the country, offering 
 a larger traffic, and enabling the railroad to utilize its 
 facilities more fully. A part is due to consolidation, 
 whether partial or complete, by which connecting roads 
 have been enabled to administer their affairs more eco- 
 nomically. But the most remarkable part of the change 
 has been due to a system of improved methods of hand- 
 ling the traffic itself.' 
 
 The history of these changes begins about 1867. At 
 that time matters seemed to be approaching a stationary 
 state as far as any reduction in railroad charges was con- 
 cerned. Reductions in rates are usually made by the desire 
 of railroads to develop business. But at existing rates, 
 many roads then had little inducement to develop their 
 business very much. They already had all that their track 
 would carry. Iron rails had been deteriorating in quality 
 — under heavy traffic they required constant renewal in 
 order to avoid the most serious dangers of accident. 
 
 It was at this juncture that Bessemer steel came into 
 use. It was not a sudden invention. Bessemer was sim- 
 ply one among several others (Siemens, Mushet, HoUey) 
 who steadily improved the methods of producing steel 
 cheaply.'' The result of the employment of steel was little 
 short of a revolution in railroad business methods. This 
 was, however, an indirect result rather than a direct one. 
 This fact is often misunderstood. At the worst the per- 
 
 * See an excellent paper by Wm. P. Shinn, in U. S. Internal Commerce 
 Rep., 1882, Appendix, pp. 294-305. 
 
 2 
 
 The result of their labors will be seen by the following table : 
 
 Price of rails per ton 
 
 186S 
 
 1872 
 
 1876 
 
 1880 
 
 1884 
 
 Bessemer steel . 
 
 $158 
 
 $112 
 
 $59 
 
 $67 
 
 $31 
 
 Iron 
 
 79 
 
 85 
 
 41 
 
 49 
 
 —
 
 lo6 RAILROAD TRANSPORTATION. 
 
 centage of expense due to repairs of iron rails was 6 ^. 
 The saving in cost has been many times this amount. 
 What the introduction of steel rails did was to give the 
 initial impulse in this movement. It made itself felt in a 
 variety of ways. 
 
 1. The laying of steel rails and the desire to use them 
 to something like their full capacity led to many improve- 
 ments in the road-bed itself. These resulted in great 
 economy ; but they would hardly have been made under 
 iron rails, because it would not ^have paid to develop the 
 road-bed far beyond the standard of quality of the track. 
 
 2. They found that the steel rails would bear much 
 heavier loads without danger, and this led to the construc- 
 tion of heavier cars. The load could be increased in 
 weight faster than the cars, and thus the " paying " weight 
 constituted a larger percentage of the total weight hauled. 
 Fifteen years ago, the normal freight car weighed i8,000 
 pounds, and carried a load of 20,000. It was found that 
 by increasing the weight of the car to 21,000 it could 
 safely carry a load of 30,000 ; and a further increase 
 of weight to 22,000 or 24,000 made it possible to carry a 
 load of 40,000, or even a trifle more.' Of the total weight 
 of a loaded freight train nearly two thirds might now be 
 paying weight, instead of only one half.' 
 
 3. Along with this economy of load they secured econ- 
 omy of motive power. This was obtained partly by an 
 increase in the size of locomotives, which, while it in- 
 
 ' There is no exact standard of relation between weight and carrying 
 capacity. The figures in the text are taken somewhat at random. It is im- 
 possible to tell where the movement will end. Cars are now not infrequently 
 built to carry 50,000 pounds. 
 
 " These figures represent possible results rather than actual ones. An 
 average car-load of ten tons represents extremely good railroad economy. A 
 ratio of 50 % paying weight both ways is still more unusual.
 
 RAILROAD CHARGES AND DISCRIMINATIONS. lO/ 
 
 creased their cost of building and running, increased their 
 efficiency still faster ; partly by increased care in making 
 up trains, so that the existing power was used to the best 
 advantage. Hundreds of devices, of which we have no 
 room to speak in detail, were made to contribute to the 
 desired result. 
 
 4. But what contributed more than all else to the 
 diminution of cost was that they adapted the business 
 methods of the roads to the new conditions of traffic. 
 The improvements in track and cars had increased the 
 capacity for doing a large business, at the same time that 
 it enabled them to do it more cheaply. They arranged 
 their rates to secure this business and to utilize their 
 capacity to the utmost. One of the most effective de- 
 vices in this matter was the system of "■ back-loading." To 
 return a car empty is a great waste of power. In some 
 cases it is a necessity — cattle cars and oil cars, for instance, 
 can, as a rule, carry a load but one way. In those cases 
 the rate must cover the cost of moving the cars full one 
 way and empty the other, before the rate begins to be 
 a paying one. For a long time it was so with nearly 
 all cars employed in the carriage of grain. Gradually 
 our railroad managers awoke to the fact that for obtain- 
 ing goods to fill such cars any rate was a paying rate, 
 when it would cover the difference between hauling them 
 empty and hauling them full — provided, that is, that such 
 rates developed additional business which could be ob- 
 tained on no other terms. 
 
 For instance, suppose the cost of loading a car with 
 wheat at St. Louis and hauling it to Philadelphia was $40, 
 and the cost of getting it back empty was $15. To give 
 any profit the rate would have to be over $55 — say $60. 
 The company sees that by offering a $30 rate it can fill its
 
 I08 RAILROAD TRANSPORTATION. 
 
 car with a return load of coal, and it does so. What is the 
 result? In the former instance the expenses were $40 -|- 
 $15 = $55; the receipts, $60; the profit, $5. In the 
 latter the expenses were $40 -\- $40 = $80; the re- 
 cepts, $60 + $30 = $90; the profit, $10. Yet the aver- 
 age rate which secures this profit of $10 is now ($60 -f- $30) 
 -^ 2 = $45. An increase of 100 per cent, in the profits of 
 the round trip has been accompanied by a reduction of 
 25 per cent, in the average rates charged. 
 
 This is an extreme case, but it illustrates one of the 
 means by which railroad charges have been so much 
 reduced during the past fifteen years. It also explains 
 how some goods can be profitably carried at rates which 
 seem utterly unprofitable. 
 
 III. — But the fact that the charges are so low does not 
 make differences in charge bear any less severely upon busi- 
 ness. A difference of five cents per bushel in the charge 
 for transporting wheat a thousand miles is a small matter, 
 taken by itself. It would be weeks before it would make 
 a difference of one cent to the individual consumer of 
 bread. But if a railroad makes this reduction for one 
 miller, and not for another, it will be enough to drive the 
 latter out of business. Competition is carried on with 
 such a narrow margin of profit that the railroad has it in 
 its power to ruin either competitor. The fact that charges 
 in general are so low only puts men more completely 
 at the mercy of the railroad authorities, because it is 
 impossible to find any other means of transportation 
 equally good and cheap. 
 
 A difference in rates not based upon any corresponding 
 difference in cost, constitutes a case of discrimination.' 
 
 ' In what follows, we shall confine our attention to discrimination in 
 freight rates. There is the same discrimination in the passenger business,
 
 RAILROAD CHARGES AND DISCRIMINATIONS. IO9 
 
 Even when a railroad tariff was originally based on dif- 
 ferences of cost of service, it does not continue so. It 
 never remains long unchanged. Every day special circum- 
 stances arise which were not foreseen, and which seem to 
 demand a change. The question in every such case is : 
 what will be the effect of the change ? If rates are re- 
 duced on certain lines of business, gross earnings will prob- 
 ably increase on account of increased volume of business 
 obtained. But will net earnings increase? That is to say, 
 will gross earnings increase faster than operating ex- 
 penses ? 
 
 This is the real question ; and its answer involves two 
 elements. One is, the expense of hauling each additional 
 
 but it is not so much felt or so much complained of. First, the business 
 itself is less important. The receipts from passengers are little over two- 
 fifths of those from freight. Second, it is a business on which railroads in 
 general make very little money at best, except in thickly populated dis- 
 tricts. That being the case, there is more disposition on the part of the 
 public to allow radroads to run it as they please. They carry passengers in 
 order to attract freight. Every now and then they amuse themselves by a 
 passenger-rate war ; but this does not involve either the same loss to the 
 railroads or the same disturbance to general business which is felt in a war of 
 freight rates. 
 
 The really serious form of passenger discrimination is the free-pass sys- 
 tem. It is a serious thing, not so much on account of the money involved, 
 as on account of the state of public morals which it indicates. When 
 passes are given as a matter of mere favoritism, it is bad enough. When 
 they are given as a means of influencing legislation, it is far worse. Yet 
 this last form of corruption has become so universal that people cease to re- 
 gard it as corrupt. Public officials and other men of influence are ready to 
 expect and claim free transportation as a right. To all intents and pur- 
 poses they use their position to levy blackmail against the railroad com- 
 panies. 
 
 The question should be kept on moral grounds. It is a mistake to sup- 
 pose that the free-pass system makes any great difference with passenger 
 rates in general, or that they would be reduced if passes were abolished. 
 They would probably remain the same as before.
 
 no RAILROAD TRANSPORTATION. 
 
 car-load ; in so far, rates are based upon cost of service.' 
 The other is the increased development of business by 
 lower rates ; this is quite independent of cost of service.' 
 
 Suppose that the expense of loading and hauling each 
 additional car-load of wheat from A to B is $io. Present 
 rates are $15, and at that rate the road obtains 1,000 car- 
 loads a week — gross earnings, $15,000, profit above opera- 
 ting expenses, $5,000. The question comes up whether 
 they shall reduce to $13. If by so doing they can double 
 their traffic and get 2,000 car-loads, it will be good policy ; 
 they will make gross earnings $26,000 ; expenses $20,000 ; 
 profit $6,000. If it only increased the traffic one half it 
 would be bad policy — giving gross earnings, $19,500; 
 operating expenses, $15,000 ; profit, $4,500. But, to show 
 how cost of service comes in, if the operating expenses 
 had been $12 per car-load, the reduction would be bad 
 policy in both cases ; while if they were only $8 per car- 
 load it would be good policy in both cases. 
 
 To a certain extent both these elements have acted in 
 combination to secure the great permanent reduction in 
 rates.^ But in each particular case of reduction, cost of ser- 
 vice has played but a minor part, and possibility of develop- 
 
 ' An analysis of the elements which enter into cost of railroad service would 
 carry us too far out of our way. The chief considerations are speed, bulk, 
 risk, quantity, and regularity of shipment. The question whether a return 
 load can be secured is also of great importance. For more detailed analyses 
 see L. E. Morehouse: "Cost of Transportation on Railroads," N. Y., 1874. 
 A. Fink : "Cost of R. R. Transportation " (1874), N. Y., 1882. O. Chan- 
 ute: " Elements of Cost of R. R. Freight Traffic," 1874, 1885. Jos. Nim- 
 mo, Jr. : U. S. Internal Com. Rep., 1876. F. B. Herzog : " The Trans- 
 portation Question," New York, 18S3. Kirkman : " Railway Expenditures," 
 I., 291-327. 
 
 ". See Appendix, for a more exact mathematical statement of these rela- 
 tions. 
 
 ' Hepburn Com. Test., p. 47 (joint letter of Vanderbilt and Jewett). 
 Vining on " Classification of Freight."
 
 RAILROAD CHARGES AND DISCRIMINA TIONS. 1 1 1 
 
 ing traffic has been the main question considered. Thus 
 there has gradually grown up a system of rates favor- 
 ing certain classes of goods, certain localities, or certain 
 individuals. It was found that by lowering the rates for 
 cheap goods a large traffic was developed. It was found 
 that by lowering the rates at competitive points a large 
 traffic might be secured which would otherwise go by 
 other routes. It was found — or at any rate, it appeared — 
 that by lowering rates to certain individuals, a road in- 
 creased its returns better than by a general lowering of 
 rates. 
 
 This constitutes the system of charging " what the traffic 
 will bear." The ordinary objections to it are obvious at 
 once. It is generally believed that the less-favored ship- 
 pers are taxed in order that the railroad may do business 
 for others at unreasonably low rates ' ; that in any other 
 business the loss of competition would prevent such abuses ; 
 and that in the absence of any effective competition, laws 
 should be passed forbidding the railroad to make a great 
 deal more profit on one part of its business than it does 
 on another. This is the aim of anti-discrimination bills. 
 
 On the other side, it is maintained by railroad men that 
 this idea of a tax is not warranted ; and that any such at- 
 tempt to enforce equality, whether between classes, locali- 
 ties, or individuals, will diminish the profit and efficiency 
 of the railroads, and not bring the expected advantage to 
 the shippers, still less to the general public. 
 
 The effects of the three forms of discrimination — be- 
 tween classes of business, localities, or individuals — must 
 be discussed separately. 
 
 ' Too often, especially in purely legal discussion, this is assumed without 
 argument. Compare R. P. Harlow : " Inter-State Railroads and Their Regu- 
 lation by Congress " (N. Y. Bar Association Prize Essay, i88o), p. 8.
 
 112 RAILROAD TRANSPORTATION. 
 
 I. Classification of business. Railroads divide their 
 freight into four or more classes, the division being mainly 
 based on the value of the goods. Thus, dry goods are 
 placed in the first class, and lumber in the fourth ; and 
 the charges on the former are made two or three times 
 as high as on the latter. There is a difference of cost of 
 handling, and of risk ; but nothing like as great as the 
 difference in charge. The railroad does not base its classi- 
 fication upon cost of service, but upon what the trafific will 
 bear. A ton of lumber has so little value that, if they 
 attempted to charge the same rates for it which they 
 charge for the dry goods, they would get none of it to 
 carry ; the trafific would not bear the higher rate. 
 
 A great deal of freight of small value is carried not 
 merely at less than the average rates, but at less than the 
 average cost ; that is, at rates which, if applied to the 
 whole business of the road, would not pay expenses. 
 Many people assume that such business is an actual loss to 
 the road, and that other business is taxed to make up for 
 it. This is a fallacy. Any rate which will more than 
 cover the expense of moving the cars and handling the 
 goods is a paying rate, provided the business can be had on 
 no other terms. ^ If it is a question of filling cars that must 
 otherwise be returned empty, any rate which more than 
 covers the mere difference in expense between running 
 them full and running them empty, is a paying rate." If 
 a manager should reject such business because it did not 
 pay its share of the fixed charges (as distinct from train 
 
 ' Vining : " Classification of Freight," etc. 
 
 ' See some striking figures in L. E. Morehouse " Concerning the Cost of 
 Transportation on Railroads," New York, 1874, p. 15. These figures are 
 better arranged for our present purpose than are tlie more comprehensive 
 statistics collected by Mr. Octave Chanute (1874, 18S5), or than those of 
 Albert Fink in his report on " Cost of R. R. Transportation," 1874.
 
 RAILROAD CHARGES AND DISCRIMINA TIONS. 1 1 3 
 
 expenses) he would make a great mistake. • He would re- 
 duce his business, and leave those charges the same. The 
 fixed charges must mainly be borne by the lines of busi- 
 ness that can best afford to pay them — that is, by the valu- 
 able goods.' 
 
 The earliest freight tariffs involved little or no classifica- 
 tion. Each step toward our present system has been 
 accompanied by increased efificiency. It has made the 
 cheap trafific possible, and has helped the high-class trafific 
 more than it has hurt it. To do away with this would be 
 
 ' Take a parallel case from manufacturing industry. A wire manufac- 
 turer imports the rods which he intends to draw out into wire. He finds 
 them covered with rust. As the first step in his process he washes ofT that 
 iron rust with sulphuric acid. The washings are often allowed to run to 
 waste. But if a manufacturer will put up the necessary sheds for collecting 
 them and boiling them down, he can obtain a quantity of crystallized sul- 
 phate of iron, or copperas. The commercial value of this copperas is very 
 small. It is probably not worth as much as the acid which it contains. Cer- 
 tainly no one would think of deliberately dissolving iron in sulphuric acid, 
 and selling the copperas thus made. But the wire manufacturer has the 
 material on his hands in the form of washings. It is better for him to sell 
 for the merest trifle rather than let it run to waste. 
 
 Now suppose a legislator says : " Here is this man making arbitrary dis- 
 criminations. He has the only wire mill in the region, and so makes a 
 large profit on his wire, while he allows the consumers of copperas to have 
 it at prices which hardly pay expenses. In fact, he sells it at a less sum 
 than the materials cost him. Let us enact a law which shall prevent him 
 from making more money on one part of his business than another." What 
 would be the result of such a law ? Would he reduce his price on wire so as 
 to make no more profit than on his copperas ? Obviously not. Would he 
 reduce his prices for wire and raise them for copperas ? No. He could not 
 sell his copperas at the higher prices, or he would have charged them to 
 begin with. The only result will be that he will stop making copperas. 
 His prices for wire will remain the same. If any thing, they will tend to 
 run higher, because one slight source of advantage is cut off, so that com- 
 petitors are not so likely to be tempted to come into the business. It would 
 be nonsense for the man who buys wire to say that he is " taxed" to fur- 
 nish another man with copperas below cost.
 
 114 RAILROAD TRANSPORTATION. 
 
 a long step backward. If our railroads made it a rule to 
 carry nothing at less than the average cost of doing the 
 whole business, they would give up nearly all the coal 
 trade and a great deal of the grain trade. It would give 
 us dear food and dear fuel, and would injure both the 
 railroads and the districts which they serve. 
 
 2. Local discriminations. Where a railroad is the only 
 means of conveyance, it can charge what the trafific will 
 bear, without restraint. But where it comes into com- 
 petition with a water-route, or with another railroad, its 
 charges are brought down to the lowest possible figure. 
 The points where there is no competition are made to pay 
 the fixed charges, while the rates for competitive business 
 will little more than pay train and station expenses. It is 
 better to have business on those terms than to have it eo 
 by the rival route. In a railroad war this competition is 
 carried beyond the bounds of reason. There was a time 
 when cattle were carried from Chicago to New York at one 
 dollar a car-load,' These low rates develop the competi- 
 tive point rapidly, while the higher rates retard the growth 
 of the places where there is no such competition. When 
 the competition is simply between railroads, a pool may 
 do away with these local differences by raising rates at the 
 competitive point. Where one place has the benefit of 
 water competition, and another has not, it is hard to 
 devise any effective means of getting rid of the differ- 
 ences. 
 
 We arc apt to think that because these local discrimina- 
 tions are an evil, it must be the fault of somebody. In 
 our anxiety to get rid of the evil, we are apt to overlook 
 the natural causes which led to it, and which sometimes 
 must lead to it almost of necessity. That local discrimina- 
 
 ' Hepburn Com. Test. (Vanderbilt), p. 1659.
 
 RAILROAD CHARGES AND DISCRIMINA TIONS. I I 5 
 
 tions are a most serious evil, no one can doubt. That they 
 are exaggerated, and in many instances flagrantly exagger- 
 ated, by the short-sighted policy of the railroad managers, 
 is equally certain.' But there are many instances where 
 the railroads are not responsible for them,^ and where it is 
 worse than useless to try to prohibit them by law. We 
 are not arguing in favor of this system, but against the 
 popular remedy — a statute. 
 
 Suppose it is a question whether a road can be built 
 through a country district, lying between two large cities, 
 which have the benefit of water communication, while the 
 intervening district has not. The rate between these 
 points must be made low, to meet water competition ; so 
 low, that if it were applied to the whole business of the 
 road it would make it quite unprofitable. On the other 
 hand the local business at intermediate points is so small 
 that this alone cannot support the road, no matter how low 
 or how high the rates are made. In other words, in order 
 to live at all, the road must secure two different things — 
 the high rates for its local traf^c, and the large traf^c of 
 the through points which can only be attracted by low 
 rates. If they are to have the road, they must have dis- 
 crimination.^ 
 
 ' Hepburn Com. Exhibits, p. 313. Joint letter of Vanderbilt and Jewett, 
 Testimony, p. 56. Argument of John Norris before Penna. Senate Judi- 
 ciary Com., Apr. 9, 1885. The general management of a railroad rarely 
 appreciates local needs at their full importance. The plan of having advisory 
 boards to represent such interests has frequently been suggested. The plan 
 has been carried out in some parts of Europe. Mr. H. S. Haines has shown 
 strong reasons for trying it in America. 
 
 ' E. P. Alexander : " Reply to Questions of the N. Y. Chamber of Com- 
 merce," p. 7. 
 
 ' Or else give a subsidy. The evils of this alternative have been very clearly 
 seen in American railroad history. Of course this reasoning does not apply 
 to roads which are earning high profits. But it is almost impossible to pass 
 a law which shall apply to profitable roads, and exempt unprofitable ones.
 
 Il6 RAILROAD TRANSPORTATION. 
 
 This point is so important and at the same time so hard 
 to grasp,' that it is worth while to take a detailed illustra- 
 tion. On the coast of Delaware, a few years ago, there 
 was a place which we shall call X, well suited for oyster- 
 growing, but which sent very few oysters to market, be- 
 cause the railroad rates were so high as to leave no margin 
 of profit. The local oyster-growers represented to the 
 railroad that if the rates were brought down to one dollar 
 per hundred pounds, the business would become profitable 
 and the railroad could be sure of regular shipments at that 
 price. The railroad men looked into the matter. They 
 found that the price of oysters in the Philadelphia market 
 was such that the local oystermen could pay $i per hun- 
 dred pounds to the railroad and still have a fair profit left. 
 If the road tried to charge more, it would so cut down the 
 profit as to leave men no inducement to enter the busi- 
 ness. That is, those oysters would bear a rate of $i per 
 hundred, and no more. Further, the railroad men found 
 that if they could get every day a car-load, or nearly a car 
 load, at this rate, it would more than cover the expense 
 of hauling an extra car by quick train back and forth 
 every day, with the incidental expenses of interest and re- 
 pairs. So they put the car on, and were disappointed to 
 find that the local oyster-growers could only furnish 
 oysters enough to fill the car about half full. The expense 
 to the road of running it half full was almost as great as 
 of running it full ; the income was reduced one half. 
 They could not make up by raising the rates, for these 
 were as high as the trafific would bear. They could not 
 increase their business much by lowering rates. The 
 difficulty was not with the price charged, but with the 
 
 ' So able a critic as Dr. v. d. Leyen quite fails to appreciate its force. 
 {" Die nordamerikanischen Eisenbahnen," Leipzig, 1S85.)
 
 RAILROAD CHARGES AND DISCRIMINATIONS. WJ 
 
 capacity of the local business. It seemed as if this special 
 service must be abandoned. 
 
 One possibility suggested itself. At some distance be- 
 yond X, the terminus of this railroad, was another oyster- 
 growing place, Y, which sent its oysters to market by 
 another route. The supply at Y was very much greater 
 than at X. The people at Y were paying a dollar a hun- 
 dred to send their oysters to market. It would hardly 
 cost twenty-five cents to send them from Y to X. If, 
 then, the railroad from X to Philadelphia charged but 
 seventy-five cents a hundred on oysters which came from 
 Y, it could easily fill its car full. This was what they did. 
 They then had half a car-load of oysters grown at X, on 
 which they charged a dollar, and half a car-load from Y on 
 which they charged seventy-five cents for exactly the same 
 service. 
 
 Of course their was a grand outcry at X. Their trade 
 was discriminated against in the worst possible way — so 
 they said, — and they complained to the railroad. But the 
 railroad men fell back on the logic of facts. The points 
 were as follows: i. A whole car-load at seventy-five cents 
 would not pay expenses of handling and moving. 2, At 
 higher rates than seventy-five cents they could not get a 
 whole car-load, but only half a car-load ; and half a car- 
 load at a dollar rate (the highest charge the article would 
 bear) would not pay expenses. Therefore, 3. On any uni- 
 form rate for everybody, the road must lose money, and, 
 4. They would either be compelled to take the oyster car 
 away altogether, or else get what they could at a dollar, 
 and fill up at seventy-five cents. There was no escape 
 from this reasoning ; and the oystermen of X chose to 
 pay the higher rate rather than lose the service alto- 
 gether.
 
 Il8 RAILROAD TRANSPORTATION, 
 
 This is a typical case. The business of a railroad is of 
 two kinds. Some of its business, like the oysters of X, 
 must be done over this railroad or not at all. Of such 
 business it is sure, even at rather high rates. The only 
 limit is the value of the service ; the excess of the selling 
 price at market above cost of production at X. But a 
 railroad may also do business like that of the oysters from 
 Y, which can be sent to market by other routes. To do 
 this it must make special concessions and lower rates. 
 
 Now many of the railroad expenses are the same, 
 whether it does both kinds of business or only one. Re- 
 pairs, salaries, and interest charges are mostly inde- 
 pendent of the volume of business done. These must be 
 paid somehow, just as the expense of the oyster car must 
 be paid somehow. At the higher rate the road cannot 
 get sufficient volume of business. At the lower rate it 
 cannot get sufficient profit. It must do as the oyster car 
 did, get what it can at high rates, and fill up at the lower 
 ones. If you prohibit this by law you quickly cut away 
 the margin of profit. And if by so doing you make it im- 
 possible to run the road, who is most hurt ? Not the 
 oyster-growers of Y, who had the low rates. They still 
 have the other route. It is the oyster-growers of X, and 
 men in like situations, who now cannot do business at all. 
 
 There is one difference. The oyster car will be taken 
 off as soon as it is unprofitable. The bankrupt road may 
 run on almost indefinitely. But the indirect effect is the 
 same. Witness the history of Granger legislation.' The 
 farmers had moved so far west that they were wholly de- 
 pendent upon the railroads. Where there was but one road 
 it charged what it pleased. Where there were two, they 
 fought for the traffic, and brought rates down very low. A 
 
 ' For details see pp. 130-136.
 
 RAILROAD CHARGES AND DISCRIMINA TIONS. 1 19 
 
 distant competing point paid much less than a near local 
 one. The Potter law attempted to make the rates per 
 mile for local points nearly the same as they had been for 
 competing points. The result was disastrous. The old 
 roads struggled on as best they might, losing money all 
 the time. But no new ones were built, and the local 
 points could not get the service they needed. They suf- 
 fered severely ; and after two years' trial the law was re- 
 pealed. 
 
 3. Far worse are the discriminations made between 
 individuals. The system of carrying under special con- 
 tracts, below schedule rates, is the most serious evil con- 
 nected with our present methods of railroad management. 
 Trade adjusts itself to almost any system of classification, 
 and sometimes even to local discriminations. But where 
 two individuals, under like circumstances, receive differ- 
 ent treatment, no such adjustment is possible.' 
 
 A mere " allowance for quantity," if granted to all with- 
 out partiality, hardly comes under this head. If a man 
 receives a reduced rate because he ships in large quanti- 
 ties, or at stated times, there is good ground for making a 
 certain difference in his favor. But such allowances are 
 not always given impartially ; they are frequently kept 
 secret,* and are often quite unreasonably large in amount. 
 
 * The old theory that a rate should be reasonable in itself, and that, if 
 that is the case, it makes no difference to A what B may be paying, can no 
 longer be held. The chief thing which A has a right to demand is that he 
 should not be unfairly handicapped in competition with B. Any such in- 
 equality is a real grievance. Hepburn Com. Test. (Fink), p. 5 13. 
 
 "^ Hepburn Com. Rep., p. 48. Even where the railroads themselves 
 would like to do away with them it is not always easy. The diversion of 
 freight (by pools) from one line to another, so bitterly complained of by 
 shippers, is resorted to to prevent secret rebates or drawbacks. One of the 
 worst abuses is the practice of " underweighing " ; where full rates are 
 charged, but the shipper is allowed to send more goods than he pays for.
 
 120 RAILROAD TRANSPORTATION. 
 
 If the object of a special rate is to develop business 
 which could not otherwise exist, it may possibly be justi- 
 fiable. Much good is often done in this way. But there 
 is always a presumption against special rates of this kind. 
 They establish one shipper ; but they handicap others. 
 The good they do is seen and felt. The evil they do is 
 unseen, and, for a time, unfelt. This makes the tempta- 
 tion to grant such rates all the more insidious, and their 
 actual effects all the more dangerous. 
 
 A special contract, for instance, is given to millers at 
 Niagara. It produces new business at that point. But 
 if it discriminates unfairly against the millers at Rochester 
 or Buffalo, the gain of business at one place is made up 
 by a loss at the other. Not a direct loss, be it observed ; 
 the mills will not shut down ; but the natural growth of 
 business will be checked. The railroad manager sees the mill 
 at Niagara with its new traffic ; he does not see how he may 
 have prevented the growth of the old traffic at Rochester. 
 
 What makes matters worse is that, where the system of 
 granting special rates becomes deeply rooted, a great 
 many are given without any principle at all, through the 
 caprice or favoritism of the railroad companies and their 
 agents.' The revelations made before the Hepburn Com- 
 mittee,' as to the practice of railroads in the matter of se- 
 cret rates were simply appalling. The fact that railroads 
 had responsibilities to the public seemed to be completely 
 lost sight of. There was, in many instances, scarcely a pre- 
 tence of regular charges.' Everybody received favors as 
 
 ' This is the most indefensible part of the whole system of railroad man- 
 agement. It is characteristic that Bismarck, who always chooses his fighting- 
 ground with skill, made this a main base of operations in his contest against 
 private railroad policy in Prussia. See chap. xiii. 
 
 ' Hepburn Com. Rep., pp. 49 iT. 
 
 * Hepburn Cora. Test. (Goodman), pp. 120 fl. It was estimated that
 
 RAILROAD CHARGES AND DISCRIMINATIONS. 121 
 
 a matter of course ' ; the only question was how many 
 such favors he could obtain. 
 
 An unfortunate result of the system is that special rates 
 are granted to the very persons who need them least. 
 Any concern which does not charge fixed prices — from 
 the largest railroad down to the pettiest shop, — gives 
 lower rates to two quite distinct sets of people, and for 
 two quite distinct reasons. Some people get low rates 
 because they are too poor to pay the high ones ; others, 
 because they are too shrewd to pay the high ones. The 
 very poor man perhaps gets the low rate, because he 
 otherwise cannot buy at all ; the rich man gets the low 
 rate, because he can go somewhere else, and his large cus- 
 tom is worth making special efforts to secure. The more 
 justifiable forms of discrimination are those in favor of the 
 weak. Classification, giving low rates to low-priced arti- 
 cles of prime necessity, like fuel, lumber, or provisions, 
 comes under this head. On the other hand, the great 
 majority of local and personal discriminations are in favor 
 of the strong." As such, they do great harm to the com- 
 munity by increasing inequalities of power ; and in the end 
 they are apt to do harm to the roads themselves. The 
 Standard Oil Company was fostered by a system of special 
 rates until it became strong enough to dictate its own terms.^ 
 
 This was an extreme case ; but there is almost always a 
 
 ninety per cent, of the Syracuse business and fifty per cent, of the whole 
 business of the New York Central Railroad was done at special rates. 
 
 'Goodman, Testimony, p. 159. "Question: 'Then the condition of 
 getting the special rate is making the application ? ' Answer : ' Yes, sir.' " 
 
 "^ The more plausible arguments in favor of personal discrimination are 
 made by selecting special instances, where they were given in favor of the 
 weak. For the distinction between justifiable and unjustifiable rebates, see 
 E. P. Alexander : " Reply to Questions of Cham, of Com.," p. 9. 
 
 ' Hepburn Con. Rep., 40-46. Exhibits, p. 182. Testimony (Rutter), 
 p. 2,549. See references in previous chapter.
 
 122 RAILROAD TRANSPORTATION. 
 
 certain opposition between the present and future inter- 
 ests of a railroad. If a company's object simply is to 
 make as good a dividend as possible for the current year, 
 that object is best obtained by squeezing the local busi- 
 ness of which it is sure, and securing competitive business 
 on almost any terms, however low. But for the perma- 
 nent interests of the road this is bad policy. The local 
 business may bear the squeezing for a year or two, but it 
 will gradually die under the effects. Such a policy de- 
 stroys a road's best customers, and strengthens the hands 
 of those who are in a position to dictate their own terms. 
 A special rate to a favored customer means temporary 
 gain. To make the low rate general means temporary 
 loss. Yet, where there is any doubt felt, the latter policy 
 is almost always the wise one. 
 
 In so far as stock-watering makes railroads pursue a 
 short-sighted policy, it tends to prevent general reductions 
 of charge. It is only in this indirect way that it has very 
 much effect upon rates.' Its influence -in this matter is 
 very much exaggerated in the popular belief. A railroad, 
 as we shall see when we come to consider the attempts to 
 base rates on cost of service,' does not take its fixed 
 charges into account in making its rates.^ It tries to 
 
 * The railroads which have high capitalization on the whole do business 
 at lower rates than the cheaply built ones. During the last twenty years, 
 while rates have been falling so rapidly, the average capital account of rail- 
 roads per mile has been increasing. The railroad men often try to make 
 their capital correspond to their profits ; but they do not try to make their 
 rates correspond to their capital. 
 
 ' Chap. xiii. 
 
 • This is putting the matter pretty strongly, stronger than many railroad 
 men would be willing to state it. But if the statements on p. no be correct, 
 it is unquestionably true. See joint letter of Vanderbilt and Jewett, pp. 
 70 ff. Testimony (Rutter), p. 414. See, also, testimony of E. D. Worces- 
 ter before the United States Senate Committee on Transportation Routes to 
 the Seaboard, pp. 141 ff.
 
 RAILROAD CHARGES AND DISCRIMINATIONS. 1 23 
 
 arrancfe matters so that on each class of business it shall 
 make as much money as it can above operating expenses. 
 If it makes a mistake in one place it is so much loss to 
 the stockholders. It is not a thing which it can try to 
 make up at some other place ; because, by supposition 
 it would in any event try to make all it could at 
 that other place, and to raise rates there would do more 
 harm than good. To make the most at all points put 
 together, it tries to make the most at each point. 
 
 They thus try to get all they can above operating 
 expenses.' If their fixed charges are but small, it leaves 
 them a good profit. If the nominal amount of stock is 
 small they can pay a good percentage in dividends. If 
 the fiixed charges are large, or the stock watered, the profit 
 or the percentage will not seem so good. But if they at- 
 tempt to raise their charges (or refuse to reduce them) on 
 this account, the general effect would be to lower profits 
 rather than increase them. The only thing is, that if a 
 company is trying to pay a dividend which it has not 
 really earned, it is more likely to pursue a short-sighted 
 policy in regard to rates.^ 
 
 This temptation to sacrifice the future to the present 
 is felt far more strongly in the case of a bankrupt road. 
 A set of officials who are straining every nerve to avoid a 
 change of management, will tax heavily the traffic which 
 they have, and tempt new business by discriminations of 
 every kind. The present to them is every thing; the 
 future, nothing; and public interests of necessity suffer. 
 
 The principle of charging what the traffic will bear, 
 
 ' Railroad profits are to a large extent of the nature of rent rather than 
 interest. They represent excess of market value above operating expenses. 
 
 " They are far more apt to manipulate their accounts for this purpose, or 
 even to make unwise reductions in operating expenses, than to make any 
 changes with regard to rates.
 
 124 RAILROAD TRANSPORTATION. 
 
 gives the railroads a dangerous power, and one which 
 is often abused ; a power against which competition 
 furnishes no remedy.' Yet if our analysis of the practice 
 of railroads with regard to freight charges be correct, and 
 if our illustrations mean any thing at all, it is unquestion- 
 ably the principle which enables railroads to render most 
 efficient service to the community. Still clearer is it that 
 the high rates are not to be regarded as a tax which could 
 be removed if the low rates were abandoned. When we 
 come to examine the practice of European countries," 
 where the attempt has been made to base rates upon 
 cost of service, we shall find these views confirmed ; and 
 we shall further find that the effort to prevent discrimina- 
 tion as a system results in levelling up rather than levelling 
 down. 
 
 Wherever there is an industrial monopoly of any kind, 
 there is a liability to discriminations. They have become 
 most prominent in the case of railroads, because the 
 monopoly of railroads has been in some respects most 
 complete, their activity most extensive, and the investiga- 
 tion of their doings most searching; in short, because 
 the railroad has attained a fuller development than other 
 forms of industrial monopoly. It is for this reason that 
 the problem of government control of corporations cen- 
 tres in the question of government control of railroads. 
 
 ' The abuses are never so severe as in a railroad war. 
 ' Chap. xiii.
 
 CHAPTER VIL 
 
 RAILROAD LEGISLATION IN THE UNITED STATES. 
 
 Early efforts — Railroad taxation — Railroad liability — Regulation of rates — 
 Pro-rata laws — Origin and history of the Granger movement — Its results 
 in Illinois ; in other States — Railroad regulation in the South — The 
 Massachusetts commission — Causes of its success — Results achieved in 
 Iowa — Regulation of inter-state commerce — Bills now before Congress 
 — The short-haul principle — Pools — Maximum and minimum rates — 
 Functions of a national commission. 
 
 E. Lavoinne and E. Pontzen : " Les Chemins de Fer en Amerique," 
 Paris, 1882, ii., pp. 467-500. 
 
 Adams : " Railroads and Railroad Questions," pp. 1 16-148. 
 
 " State Railroad Commissions," The Railroad Gazette, New York, 1883. 
 
 The Report of the Special Committee of the U. S. Senate on the Regula- 
 tion of Inter-State Commerce (1885), with the accompanying testimony, will 
 furnish matter of great importance on these subjects. 
 
 The early railroad legislation in the United States was 
 devised for the object of securing railroad construction. 
 The only fear was that railroads would not be built as fast 
 as they were needed. Obstacles to railroad enterprise were 
 removed as fast as possible. General railroad laws were 
 passed ' which did away with the necessity of securing any 
 special act of the Legislature and made it possible for per- 
 sons with the requisite capital — or even without it — to 
 build railroads wherever they chose. This negative en- 
 couragement was not all. Most communities were only 
 too ready to give positive encouragement in the form of 
 
 ' In New York 1848, 1850; Illinois 1849 ; Ohio 1854; Michigan 1855 ; 
 somewhat later in most of the other Slates. 
 
 125
 
 126 RAILROAD TRANSPORTATION. 
 
 subsidies. The results of this pohcy we have seen in a 
 previous chapter. 
 
 During this period very few people were far-sighted 
 enough to foresee the abuses of railroad power as they 
 have since developed. Some feared that rates would be 
 made too high, and strove to provide against it, in a cum- 
 brous and ineffective way. The great majority of those 
 legislators who thought about the matter at all, simply 
 feared that railroad profits would be too high, and sought 
 to limit the amount which might be divided.* This has 
 little or no effect in protecting the shipper. If a railroad 
 is earning more money than it is allowed to divide, it 
 is much easier to spend the surplus in extra ornament or 
 extra salaries, than to reduce rates. Such limitation of 
 dividend may sometimes z.z\.\!i^y prevent reduction of rates 
 by taking away from a road the inducement to increase its 
 volume of business. The road may prefer to do a small 
 business at high rates, rather than a much larger one at 
 rates somewhat lower. 
 
 The early attempts at railroad taxation were equally ill- 
 judged. There was a combined effort to tax the road and 
 equipment by local assessment like any other real estate, 
 and to tax the securities as personal property in the 
 hands of the holders. The difificulty about the latter 
 plan, was the fact that such securities were habitually 
 concealed, and practically paid no tax at all. The at- 
 tempt at local assessment of the road was almost equally 
 unfortunate. No one knew on what basis it was to be as- 
 sessed. Some assessors valued it as trunk line — i. e., on 
 the basis of its supposed earning power. Others valued it 
 as cow pasture — i. e., on the basis of the value of adjoin- 
 
 ' Compare pp. 102, 103. On the legal aspects of State Regulation of Cor- 
 porate I'rolits, see T. M. Cooley, in North Amcr. Rev., Sept. 1883.
 
 RAILROAD LEGISLATION. 12/ 
 
 ing land. " The difference in the assessment of the New- 
 York Central and Hudson River Railroad, where for all the 
 purposes that the road can be used, it is of the same value 
 to the company, is twenty-four thousand dollars per mile." * 
 The absurdity of this system, if it can indeed be called a 
 system, is obvious enough. It has gradually become clear 
 that the tax must be derived not so much from an assess- 
 ment of individual pieces of property on the one hand, or 
 against individual holders of stock on the other, as from an 
 assessment of the property as a whole. The best method 
 for doing this is not yet clear ; there is a growing belief 
 that the tax valuation should be based on earnings or 
 earning capacity.^ 
 
 Equally crude were the early attempts to enforce rail- 
 road liability ; whether in the matter of accidents, or for 
 the performance of their duties as carriers. In the former 
 
 ' N. Y. State Assessors' Report, 1873. 
 
 ' R. Foster : " The Taxation of the Elevated Railroads in the City of New 
 York," 1883. 
 
 In the majority of States the assessment is based on a direct valuation of 
 the property, either made by the State assessors in the first instance, or made 
 by local assessors, and then perhaps corrected by a board of equalization. 
 In Massachusetts and two or three other States, it is based on the market 
 value of the stock or securities — i. e., on net earnings, present or prospec- 
 tive ; since it is on this that the market value depends. In Michigan and 
 one or two other States, the tax is based on gross earnings. Real estate not 
 used for railroad purposes is everywhere assessed locally, just as if it were the 
 property of an individual ; and an attempt is often made, without much 
 success, to tax stock as personal property in the hands of the holders. See 
 the Report of Messrs. Adams, Williams, and Oberly (Committee of the 
 Convention of State Railroad Commissioners) on Taxation of Railroads and 
 Railroad Securities. New York, 1880. 
 
 The question, what constitutes the taxable value of a railroad franchise, 
 has been pretty constantly evaded. But a clause in the California constitu- 
 tion has rendered it necessary for the United States courts to meet the 
 question more squarely ; and a similar result seems likely to be reached in 
 New Jersey in the questions arising under the tax laws of 1884.
 
 1-8 RAILROAD TRANSPORTATION. 
 
 much real progress has been made ; more by the action of 
 the railroads themselves than by any scheme of legisla- 
 tion." In the latter the progress has been but slight. It 
 is astonishing that a country whose business is so far car- 
 ried on by bills of lading should have left the question of 
 responsibility upon bills of lading at such loose ends. It 
 is still more astonishing that a country whose business is 
 liable to be interrupted by strikes like those of recent 
 years should have feared to fix the responsibility for these 
 interruptions.' Perhaps it is because the question of rail- 
 
 ' C. F. Adams, Jr. : " Notes on Railroad Accidents." New York, 1879. 
 Compare T. H. Farrer : "The State in its Relation to Trade," London, 1S83, 
 pp. 141, 142. The travelling public is now pretty well protected against 
 accidents ; this cannot be said of the railroad employees themselves, who are 
 subjected to a great deal of avoidable danger, and find it very hard to get 
 damages in case of accident. 
 
 "^ Public notice was first attracted to these questions on a large scale in the 
 railroad strikes of 1S77 ; and again in the telegraph strike of 1883. The 
 double question was involved, first, whether the railroads could evade per- 
 formance of a work of public necessity, and, second, whether the strikers 
 could be allowed to take advantage of this public necessity to enforce their 
 demands against the railroads. It is impossible to answer either of these 
 questions in the affirmative. An effort to give an affirmative answer to the 
 first question was finally rejected by the courts of New York in connection 
 with the freight-handlers' strike of 1882. (See Rep. of Sp. Com. of N. Y. 
 Board of Trade and Transp. on Railway Freight Grievances, 1883.) Yet 
 if we say that the railroads are under special necessity, and at the same time 
 forbid the employees to take advantage of it, we are brought into difficulty 
 at once. Carl Schurz, in an able article in the North Ameiican Ktview, 
 February, 1884, makes this a ground for urging that arbitration should be 
 employed in all these cases as a matter of public necessity and public right. 
 
 Each year brings into greater prominence the necessity of a spirit of com- 
 mon action between the company and its employees. We have not space to 
 enter upon the various means adopted with this end in view. See Charles 
 Paine: "Elements of Railroading," New York, 1885, chap. xiii. M. M. 
 Kirkman : " Railway Expenditures," Chicago, 1880, chap. viii. It is 
 part and parcel of the same question which presses itself more and more 
 forcibly upon all business men as the organization of industry becomes more
 
 RAILROAD LEGISLATION. 1 29 
 
 road regulation has centred around a problem more press- 
 ing, and in some respects more difficult than any of these 
 — the control of railroad charges, and especially of railroad 
 discriminations. 
 
 The first attempts to control railroad charges had been 
 as crude as the legislation concerning liability or taxation. 
 The courts began with a blind reliance on free competi- 
 tion. This may do very well as a regulator of railroad 
 profits ; as a regulator of rates it is a failure. Yet our 
 courts have been extremely slow to see thai: it is a failure ; 
 and where they have seen it, they have gone to another 
 extreme which is quite as bad. They have in these latter 
 cases tried to base rates forcibly upon cost of service ; but 
 this has been done with so little understanding of the rail- 
 road business as to make their standards either useless or 
 impracticable. 
 
 There have been many efforts to supplement the action 
 of the courts by legislation. The earliest laws of this 
 kind attempted to prescribe maximum rates like the old- 
 fashioned tolls on roads or canals. This was carried 
 through systematically in England. There have been 
 occasional instances in America.' But in general even the 
 stricter sort of American laws have simply prescribed that 
 charges shall be based upon the distance without actually 
 prescribing the unit of charge. This is known as di pro-rata 
 law ; rates arranged on this principle are termed equal- 
 mileage rates. 
 
 A pro-rata law, in its crudest form, prescribes that 
 charges shall be proportional to the distance. This is 
 obviously unfair, even under the " cost-of-service " prin- 
 
 and more complicated, and personal contact between the capitalist and work- 
 man ceases. 
 
 ' The most important instance was probably the provision limiting the 
 passenger fares of the New York Central to two cents per mile.
 
 I30 RAILROAD TRANSPORTATION. 
 
 ciple, because it does not cost a railroad any thing like 
 twice as much to carry goods two hundred miles as to 
 carry them one hundred miles. Once load them in your 
 cars, and the mere expense of hauling is comparatively 
 small. Seeing this, attempts have been made so to modify 
 i\\Q pro-rata bill as to introduce the principle that the rail- 
 road shall not make more profit upon one set of shipments 
 than upon another. This fails, for the same reason that 
 the attempt of the courts to base rates on cost of service 
 fails, — there are practical difificulties in the way of its 
 enforcement. Furthermore, in the attempt to carry out 
 pro-rata laws, the indirect effect, in crippling the railroads 
 and frightening away capital, has often been so bad that 
 the laws have had to be repealed, or remain, for the most 
 part, unenforced.* 
 
 Until after the war, the efforts at legislation of this kind 
 were scattered. All were on a small scale. It was in con- 
 nection with the Granger movement ^ (1870-77) that this 
 problem first assumed its true importance. While the 
 detailed attempts of the Grangers in large measure failed, 
 this general result was accomplished, that people realized 
 the national importance of these questions. The move- 
 ment thus has an importance quite out of proportion to 
 the results achieved. 
 
 Nowhere had the policy of railroad subsidies been more 
 
 ' See pp. 135, 136. 
 
 ' An adequate history of the Granger movement yet remains to be written. 
 C. F. Adams', Jr., ("Railroads, "pp. 123-132; North Amer. Rev., h^xW, 1S75) 
 is admirable as far as it goes, but does not profess logo into details. Compare 
 W. M. Gxosv&x\ox,AtlatiticMo7ithly, Nov., 1873 ; P. F. Kupka, "Verkehrs- 
 mittel in den Ver. Staaten,"pp. 290-297 ; E. W. Martin, " History of the 
 Grange Movement," Chicago, 1874 ; D. C. Cloud, " Monopolies and the 
 People," Davenport, 1873. The two works last cited are valuable chiefly as 
 reflecting the state of feeling in the communities where the movement was 
 strongest.
 
 RAILROAD LEGISLATION. I3I 
 
 recklessly 'carried out than in the Upper Mississippi val- 
 ley. The spirit of enterprise at the close of the war 
 found full play here. There was no lack either of national 
 land-grants or municipal subscriptions. Each community 
 wanted railroads at any price. Each railroad offered 
 glowing inducements to settlers. The result was that 
 railroads and settlers both moved too far west ; and ran 
 heavily into debt to do it. 
 
 In the years 1865-71, five hundred million dollars had 
 been invested in Western railroads. These roads were 
 dependent upon the wheat crop for their revenue. The 
 price of wheat, which for some years had been high, was 
 at last affected by the extension of production and the 
 change of conditions. With transportation charges at 
 their previous figure, the farmers could no longer pay 
 their debts. With transportation charges reduced, the 
 railroads could not pay theirs. There was a loss to be 
 divided, instead of a profit. It was beyond the power of 
 any law to divide this loss in such a way as to give a 
 profit to both parties.' It was the result of general indus- 
 trial conditions. 
 
 ' The same difficulty exists to-day, and renders it impossible in many in- 
 stances to make rates which shall be reasonable " in themselves" for either 
 party. This is a fallacy in the plausible ground taken by the Iowa Commis- 
 sion, perhaps the ablest body of the kind in the country. They say (Rep., 
 1882, p. 556, carse of Township Trustees of Red Oak vs. C. , B., and Q.), 
 "from the standpoint of the carriers' interest it is needless to make a rate 
 less than what is fair and reasonable," and "from the shippers' standpoint 
 the rate should not be more than fair and reasonable," and, again (Rep., 
 1884, p. 13), "the Commissioners still believe the position [above quoted] 
 to be correct. . . . The Commissioners will labor for reasonable rates, 
 insisting as against the carrier that it shall not be more than reasonable, 
 and as against shipper that it shall not be less than reasonable." 
 
 Unfortunately these principles fail where they are most needed. If the 
 parts of the conclusion mean any thing, the whole is often useless. A reason- 
 able rate "from the standppint of the carrier" is one which gives a reason-
 
 132 RAILROAD TRANSPORTATION. 
 
 Unfortunately the railroads were managed in such a 
 way that it seemed as if they were directly responsible for 
 pretty much all these evils. In the first place, they were 
 run recklessly, with a most short-sighted view to present 
 interests only. Outrageous favors were given in the way 
 of special rates. Where there was but one railroad, it 
 charged all that it could extort. When the farmer had 
 once settled so far from any market, he was at the mercy 
 of the railroad, which furnished his sole means of trans- 
 portation. 
 
 But where there wpre two competing roads they brought 
 rates down to a point where they only paid operating ex- 
 penses, and not any share of the fixed charges. The 
 resulting discriminations were enormous ; and these dis- 
 able profit above operating expenses. A reasonable rate " from the shipper's 
 standpoint " is one which leaves the shipper a fair margin of profit above 
 cost of production of the goods. The trouble at the present time is that the 
 price of wheat is so low that it is impossible to get a reasonable profit for 
 either party. A rate which is low enough to be reasonable for the shipper 
 will be utterly unreasonable to the railroad, and vice versa. The commis- 
 sioners wish to apply two independent standards which cannot be made to 
 meet. The only practical solution of the difficulty is a compromise, based 
 upon a careful consideration of what the traffic 7vill bear, the necessities and 
 interests of the shippers as well as of the railroads being taken into account. 
 But any such compromise is far from meeting the demand of the commis- 
 sioners, that it should be reasonable for each party. On the contrary, from 
 the standpoint of either party separately, it will be utterly unreasonable. 
 
 "We have no doubt that the sagacity of the Iowa Commission would pre- 
 vent them from making serious trouble by undertaking to apply their prin- 
 ciple to specific cases which it did not fit. Even in the decision quoted, 
 they recognized the necessity of considering value of service. But it is none 
 the less a pity tliat they should enunciate a theory of railroad rates which 
 breaks down at the critical point when you attempt to apply it. And the 
 evil is all the more serious because nine tenths of the people who read the 
 Iowa report will accept this theory as self-evident truth, and thereby justify 
 themselves in the use of it from their own standpoint, without reference to 
 that of any one else. — See Railroad Gazette, 1885, p. 91.
 
 RAILROAD LEGISLATION. 133 
 
 criminations seemed to be the reason why farming did not 
 pay. The farmer reasoned, first, that if he could get the 
 rates which competitive points enjoyed, he could sell his 
 wheat in Chicago and have some profit left ; and, second, 
 if the roads could afford to carry for the competing points 
 at these rates, they could afford to do the same for him.' 
 The additional charge on the part of the road seemed to 
 him to be just so much taken out of his pocket for the 
 benefit of the capitalists. What made matters worse was 
 that these capitalists were living in the Eastern States or 
 in Europe, and were regarded by the farmer as the ab- 
 sentee landlord is regarded by the Irish tenantry. What- 
 ever was paid to the railroad owner seemed like so much 
 direct drain on the resources of the community. There 
 was thus a conflict of local interests, which added a politi- 
 cal strain to the industrial one already existing. But the 
 railroad owners did not perceive the danger ; still less did 
 they take any measures to avert it. They were managed 
 with a view to the supposed interests of Eastern capital- 
 ists without much real regard for the needs of the country 
 which they served. Too often, in the treatment of the 
 farmers, the railroad agents added insult to injury. A 
 state of feeling was developed through the community 
 which only wanted organization to become all powerful. 
 It found this organization in the Granges. 
 
 That the movement against the railroads should come, 
 was inevitable. That it took this particular instrument 
 to make itself felt, was in some sense an accident. When 
 the first Granges were formed,'' the purposes of the or- 
 ganization were, first, to render farmers' homes attractive, 
 
 * We can hardly blame him for this, when the editor of the London Econo- 
 mist, the highest authority of the kind in the world, fifteen years later, falls 
 into precisely the same fallacy. — Ecoii., 1885, pp. 66, 316. 
 
 " 1867-70.
 
 134 RAILROAD TRANSPORTATION. 
 
 and, second, to make farming more productive. As a 
 means to this second end, they sought to diminish the 
 expenses ; and one of the most important elements of 
 expense was the cost of getting goods to market. It was 
 thus that they became interested, as an organization, in 
 questions of transportation and of railroad control. Their 
 first utterances on this matter were moderate ; it was but 
 gradually that they became the instrument of popular 
 agitation. 
 
 The first tangible results were reached in Illinois.^ The 
 constitutional convention of 1870 made an important 
 declaration concerning State control of rates, on the basis 
 of which a law was passed in 1871, establishing a system 
 of maxima. This law was pronounced unconstitutional 
 by Judge Lawrence. The result was that he immediately 
 afterward failed of re-election, solely on this ground. The 
 defeat of Judge Lawrence showed the true significance of 
 the farmers' movement. They were concerned in secur- 
 ing what they felt to be their rights, and they were 
 unwilling that any constitutional barriers should be made 
 to defeat the popular will. They had reached the point 
 where they regarded many of the forms of law as mere 
 technicalities. They were dangerously near the point 
 where revolutions begin. 
 
 But they did not pass the point. The law of 1873 
 avoided the issue raised by Judge Lawrence against that 
 of 1871. Instead of directly fixing maxima, it provided 
 that rates must be reasonable, and then further provided 
 for a commission to fix reasonable rates. Similar laws 
 were passed by Iowa and Minnesota almost immediately 
 afterward. The Legislature of Wisconsin went even 
 
 ' A partial exception should be made in the case of Ohio, where a law 
 regulating freight charges was passed in 1870, but does not seem to have 
 been enforced.
 
 RAILROAD LEGISLATION. 135 
 
 farther, fixing, by the so-called Potter Law,* the rates on 
 different classes of roads at figures which proved quite un- 
 remunerative. The railroads made vain attempts to con- 
 test these regulations in the courts. They were defeated 
 again and again, and finally, in 1877, the Supreme Court 
 of the United States sustained the constitutionality of the 
 Granger laws. 
 
 But a more powerful force than the authority of the 
 courts was working against the Granger system of regu- 
 lation. The laws of trade could not be violated with im- 
 punity. The effects were most sharply felt in Wisconsin. 
 The law reducing railroad rates to the basis which com- 
 petitive points enjoyed, left nothing to pay fixed charges. 
 In the second year of its operation, no Wisconsin road 
 paid a dividend ; only four paid interest on their bonds. 
 Railroad construction had come to a standstill. Even 
 the facilities on existing roads could not be kept up. 
 Foreign capital refused to invest in Wisconsin ; the 
 development of the State was sharply checked ; the very 
 men who had most favored the law found themselves 
 heavy losers. These points were plain to every one. They 
 formed the theme of the Governor's message at the be- 
 ginning of 1876. The very men who passed the law in 
 1874, hurriedly repealed it after two years' trial. In other 
 States the laws either were repealed, as in Iowa, or were 
 sparingly and cautiously enforced," By the time the 
 
 ' The original bill had been much like that of Illinois ; but the railroads, 
 who were not strong enough to defeat such a bill, hoped that they might be 
 able to defeat a worse one. They accordingly allowed a series of changes 
 which made the provisions much more stringent. They might have defeated 
 these changes had they tried. They did not try, because they thought the 
 amendments would kill the bill. In this they were deceived. (See N, Y. 
 Nation, xx., iSg.) 
 
 * See Repoitsof Commissioners of Illinois, Missouri, (recently) Kansas,etc.
 
 13^ RAILROAD TRANSPORTATION: 
 
 Supreme Court published the Granger decisions, the fight 
 had been settled, not by constitutional limitations, but 
 by industrial ones. 
 
 Similar efforts to establish rates by commissions for the 
 purpose, have been tried in other parts of the country/ 
 It is in the Southern States that such commissions have 
 been most successful in exercising their powers. Georgia 
 has been the centre of this movement, though other 
 commissions of the same sort have been established in 
 adjoining States. It is a little hard to say just what has 
 enabled them to succeed. One thing is, that the rates in 
 general are so high as to leave them a wide margin above 
 operating expenses in which to make their changes. An- 
 other thing is, that the competitive business is so well 
 pooled that the railroads have their hands free to brine 
 through and local charges into proportion.^ 
 
 There is another class of commissions of quite different 
 character ; commissions with little or no power to act, 
 and simply established for the sake of securing publicity. 
 The success of such commissions has been, in some 
 instances, surprisingly great. This was especially the 
 case with Massachusetts, under the leadership of Charles 
 Francis Adams, Jr. The Massachusetts commission was 
 established in 1869. At first a great many people were 
 
 ' The California Commission has had an interesting history, too long to 
 be detailed. It undertook far more than could possibly be carried out ; and 
 the Central Pacific was able to defy or evade its authority completely. — 
 See H. D. Lloyd: "California Cornered," Chicago Tribune, Oct. S and 
 13, 1883. 
 
 ' The South Carolina legislation of 1883 was fully as stringent as that of 
 Georgia ; but some of its strictest provisions were repealed after one year's 
 trial. The legislation of Alabama has never gone quite so far as that of 
 Georgia. In Tennessee, a recent adverse decision of the courts has deprived 
 the enactment of much of its force. In Georgia itself a reaction against ex- 
 cessive regulation seems to be in progress.
 
 RAILROAD LEGISLATION. 137 
 
 disposed to treat it with good-natured ridicule. It had 
 really no power except the power to report. But its 
 reports were strong enough to command respect, and even 
 obedience. The commissioners were by no means in- 
 fallible. Some of their theories were wrong. They were 
 in favor of a partial State ownership of railroads, which 
 could not have done what they expected of it, and would 
 probably have proved a great misfortune. But the com- 
 missioners had something better than correct theories : 
 they had practical business sagacity. They abandoned 
 courses which proved wrong ; they followed up with suc- 
 cessful persistence those which proved right. Gradually, 
 but surely, they introduced improvements in accounting, 
 which since 1878 have been further extended by the com- 
 missioners of other States. In the same way they virtually 
 compelled the roads to adopt safety appliances, by edu- 
 cating public opinion to a point where it demanded such 
 action. And in the same way they exercised a decisive 
 influence on the policy of the railroads with regard to 
 rates ; leading them to develop their local business, in- 
 stead of confining attention to the through business. 
 
 Two things aided them in this matter : In the first 
 place, in spite of the prevailing impression to the contrary, 
 corporations are sensitive to public opinion. Even when 
 their managers are not, their owners are. For corporate 
 property is so new a thing that it has not acquired the 
 immunity from interference which long usage gives, and 
 its owners know, or are forced to learn, that they must 
 keep the public in good humor if they would not have 
 their rights curtailed. 
 
 Another fact which helps an intelligent commission is 
 that the permanent interests of the corporations and the 
 public are almost always closely allied, however much
 
 138 RAILROAD TRANSPORTATION. 
 
 their tempory interests may seem to differ. If the object 
 of a railroad manager is simply to pay as large a dividend 
 as possible for the current year, he can best do it by 
 squeezing his local traffic, of which he is sure, and secur- 
 ing through traffic at the expense of other roads by 
 specially low rates — that is, by a policy of heavy discrim- 
 ination. But the permanent effect of such a policy is to 
 destroy the local trade, which gives a road its best and 
 surest custom, and to build up a trade which can go by 
 another route whenever it pleases. The permanent ef- 
 fect of such a policy is thus ruinous to the railroad as well 
 as the local shipper.' 
 
 By securing publicity of management you do much to 
 prevent the permanent interests of the railroads from 
 being sacrificed to temporary ones. By protecting the 
 permanent interests of the railroads you go far toward 
 securing the permanent interests of the public ; you en- 
 list the stockholders and the best class of railroad man- 
 agers on the side of sound policy. This is practically 
 what the Massachusetts Commission did ; and never was 
 work more fully justified by its fruits.' 
 
 It would be a mistake to suppose that because the sys- 
 tem worked so well in Massachusetts, it must work equal- 
 ly well elsewhere. We are apt to lay too much stress on 
 the effects of a mere law or form. It succeeded in Mas- 
 sachusetts, partly because it was in the hands of able men, 
 partly because the Massachusetts railroad system was so 
 old that it had acquired a certain stability. Many abuses 
 
 ' Germany and Austria have recognized this fact, by establishing the ad- 
 visory board (Eisenbahnrath), through which representatives of different 
 locaHties and industries can bring their influence to bear on railroad manage- 
 ment. 
 
 ' W. A. Crafts : Ten Years' Working of the Mass. R. R. Commission. 
 Railroad Gazette, N. Y., 18 S3.
 
 RAILROAD LEGISLATION. 1 39 
 
 incident to a period of rapid growth had passed away, or 
 were in a fair way to regulate themselves. These same 
 abuses, in newer sections of the country, might baffle all 
 attempts at regulation. It is impossible to apply one sys- 
 tem to all conditions. You could no more have applied 
 European methods to our Western railroads than you 
 could regulate the growth of an oak by tying tape meas- 
 ures around its branches. 
 
 For this reason the success of the Iowa Commission is 
 in some respects more remarkable than that of Massachu- 
 setts. The ground was larger, the country newer, the busi- 
 ness less stable. Above all there were the difificulties of 
 absentee ownership, already alluded to. But there were 
 certain counterbalancing advantages, which the commis- 
 sioners knew how to make the most of. The commission 
 was organized in 1878, just after the failure of the Granger 
 movement. Both parties, the railroads and the public, saw 
 that they could not act independently of one another. Both 
 looked to the commissioners to help them to come to an 
 understanding. As in Georgia, the through business was 
 pooled in such a way that the roads had their hands com- 
 paratively free to serve local interests. The commission 
 under these circumstances acted as the representative of 
 both parties, and seems to have commanded the con- 
 fidence of both.' 
 
 The really efficient State regulation is now almost en- 
 tirely under the somewhat discretionary power of commis- 
 sioners, whether these powers be wide or limited.' A 
 
 ' Of late, its powers have been increased. The commissioners themselves 
 regard this change as a dangerous experiment. — Rep. Iowa Com., 18S4, 
 p. 42. 
 
 ' Commissions more or less closely resembling that of Massachusetts exist 
 in Connecticut, Iowa, Maine, Michigan, Minnesota, New Hampshire, New 
 York, Ohio, Rhode Island, Vermont, Virginia, and Wisconsin. Somewhat
 
 I40 RAILROAD TRANSPORTATION. 
 
 hard and fast law cannot be enforced. Many States have 
 on their statute-books the so-called short-haul law, which 
 says that a road shall not charge more for part of a given 
 route than for the whole. Yet even where there is a pre- 
 tence of enforcing this law, a great many violations of it 
 are quietly overlooked. Each individual State suffers 
 from want of jurisdiction. State commerce and inter- 
 State commerce are so mixed that it becomes all but im- 
 possible to adjust the relations between the two. 
 
 This is what gives force to the demand for congressional 
 regulation of inter-State commerce. Of the right of Con- 
 gress to take such action there can be no question. Little 
 use has thus far been made of that right. A purely per- 
 missive act (1865) authorizes roads to make through con- 
 nections, etc. ; an act of 1873 provides certain regula- 
 tions for the treatment of cattle. The general question 
 of regulating railroad charges was not discussed until the 
 influence of the Granger movement began to make itself 
 felt. Since 1873 ^^''^ matter has constantly been before 
 Congress. The House has passed bills on the subject two 
 or three times, and the Senate once ; but they have never 
 been able to agree. In 1878 the Reagan bill was first in- 
 troduced to the notice of the House. Since that time it 
 has been almost constantly under discussion. Various 
 substitutes have been proposed ; the bill itself has been 
 modified in some of its essential features. In its most 
 recent shape it strictly forbids discrimination, local as well 
 as personal ; prohibits pools ; and provides for the estab- 
 lishment of a commission with somewhat active powers. 
 The House Committee in the last session (1884-5) substi- 
 tuted a much less stringent bill. The House itself reversed 
 
 wider powers are enjoyed by the commissioners in Illinois, Kansas, Ken- 
 tucky, and Missouri — also in the States referred to on p. 136.
 
 RAILROAD LEGISLATION. I4I 
 
 the action of the committee, and passed the Reagan bill. 
 The Senate substituted a more moderate bill of its own, 
 Ultimately no agreement was reached, and nothing was 
 done. 
 
 All the bills agree in trying to stop purely personal dis- 
 criminations, and in providing for a commission of some 
 sort. They also agree, for the most part, in trying to 
 secure publicity of rates. The points at issue are: i. 
 Whether local as well as personal discriminations shall be 
 prohibited ; that is, whether the bill shall contain a " short- 
 haul clause." 2. Whether pools shall be prohibited as 
 well as discriminations. 3. Whether the commissioners 
 shall try to determine what constitutes a reasonable rate, 
 and to fix maximum or minimum limits for railroad rates. 
 4. Whether the commission shall have administrative 
 powers, or only advisory ones. 
 
 The difficulties under the first head are chiefly of a 
 practical character. The short-haul principle is right 
 enough in most cases. As a statement of what is gener- 
 ally best for the community, or as a general line of railroad 
 policy, it is undeniably right." Apart from the temporary 
 disturbance of business there would be no great objection 
 to enforcing it by law, provided tJiat lazv can be made 
 to reach all the rival routes. If it cannot, you cripple one 
 set of routes to the advantage of another. Consider what 
 would be the probable effect if Congress should pass a 
 short-haul bill, and it should be found possible to enforce 
 it. Our roads would then be forbidden to make their 
 through rates lower than their local ones. They could not 
 
 ' It is also undeniable that our railroad managers have violated it to an 
 extent which is unjustifiable even from the point of view of the railroad 
 owners themselves. Compare the statements of Pres. Devereux of the C, C, 
 C. , & I., before the special committee of the U. S. Senate, 1885, and else- 
 where.
 
 142 RAILROAD TRANSPORTATION. 
 
 reduce their local rates to the standard of their through 
 rates without destroying their profits. They would have 
 to raise their through rates. This would have the effect 
 of sending through shipments of grain via Canada, where 
 the roads would be subject to no such restriction. The 
 chief gainers from the passage of any such bill, and almost 
 the only ones, would be the Englishmen who own the 
 Grand Trunk Railway of Canada. Similar attempts in 
 Europe, backed by far greater power and opposed by less 
 obstacles, have failed from precisely the same difficulties — 
 either international competition, or the competition of 
 water routes. 
 
 The problem is comparatively new in the United States. 
 It is old in Europe ; and the result of European experi- 
 ence has been to give up trying to prohibit pools and dis- 
 criminations at the same time. It is probably not too 
 much to say that no law has ever seriously discour- 
 aged either of these things without at the same time en- 
 couraging the other. That this is so, is plain matter of 
 history. It is not hard to explain why it must almost of 
 necessity be so. 
 
 We have seen that railroad expenses are of two kinds, 
 fixed charges and movement expenses. The latter vary 
 with the amount of business done, the former do not, 
 except to a comparatively slight extent. We have further 
 seen that competition tends to bring rates down to the 
 basis of movement expenses. Now railroad competition 
 may exist everywhere, somewhere, or nowhere. If it 
 exists everywhere, rates are everywhere reduced to the 
 level of movement expenses, and there is nothing to pay 
 fixed charges, as with the West Shore to-day. If there is 
 competition somewhere, the competitive points will have 
 rates based on movement expenses, and the others will
 
 RAILROAD LEGISLATION. 143 
 
 have to pay the fixed charges. This constitutes discrim- 
 ination. If we have competition nowhere, this either in- 
 volves a pool, or amounts to the same thing. We are 
 thus face to face with the choice between ruin, discrimina- 
 tion, or pools. The first is out of the question, the second 
 is the very evil which we are trying to avoid. 
 
 Unfortunately the third alternative is not altogether 
 satisfactory. The history of pools has been a checkered 
 one. The men who are trying to stop arbitrary abuses of 
 the railroad power do not like to adopt a means which 
 shall render that power itself all the stronger. They are 
 disposed to believe that legal enactments if made stringent 
 enough can do directly what pools can do indirectly. 
 There is much reason to doubt whether they can. At 
 best such enactments bear most heavily on the good roads. 
 A road whose management is above board is exposed to 
 the penalty of the law, which a trickily managed road can 
 evade. We have elsewhere ' shown reason to believe that 
 the danger of pools was exaggerated. We have never in 
 the past given them a fair chance. By regarding them as 
 illegal from the outset, and refusing to give them the 
 sanction of the law, we have made it almost necessary for 
 them to pursue a short-sighted policy. Countries which 
 have not forbidden pools have found it possible to regu- 
 late them far more easily than they could regulate roads 
 which were outside of such combinations. 
 
 If discrimination, and especially personal discrimination, 
 is the main evil, it seems best to strike squarely at that 
 with all our might, and not waste our power by pursuing 
 other more or less conflicting aims, or by fighting other 
 less serious abuses. 
 
 The effort to establish maximum and minimum rates 
 
 * Pages 76, 77. . .
 
 144 RAILROAD TRANSPORTATION. 
 
 seems unlikely to be successful. It would hardly do to 
 place the minimum rate very far above the competitive 
 rate.* On the other hand, it will not do to place the maxi- 
 mum rate too low to cover its share of the fixed charges 
 if the road should lose its competitive business. These 
 limits are so wide apart that they would be almost inopera- 
 tive. The same indefiniteness attaches to the idea of a 
 "reasonable rate." On what basis are we to compute it ? 
 It has been recognized under the common law that rates 
 should be reasonable ; the whole difificulty has lain in de- 
 fining what constitutes a reasonable rate. Such a clause 
 might be useful in extending the jurisdiction of the com- 
 missioners to cases not otherwise provided for ; it is hard to 
 see how it could furnish any definite guide for their action. 
 This brings us face to face with the question how far it 
 is desirable that the commission should have judicial or 
 administrative powers at all. The general opinion seems 
 to be that some such powers ought to be given. But 
 there are important reasons on the other side. First, the 
 really successful commissions in the United States have 
 been established with the purpose of securing publicity 
 rather than with the purpose of executing judgment. 
 Now, strange as it may seem, the possession of active 
 general powers is a hindrance in this respect. A railroad 
 may be ready to give information to an outside party, 
 which it would not give to a judge who might some time 
 use that information against it. For the sake of enforcing 
 the law in a few cases we might readily sacrifice the power 
 of influencing public opinion rightly in a great many cases. 
 Again, a commission with judicial powers is almost cer- 
 tain to magnify its own ofifice. This danger made itself 
 strongly felt in England, where the English Commission 
 
 ^ Chiefly because it would prevent the development of low-grade traffic.
 
 RAILROAD LEGISLATION. 145 
 
 constantly undertakes more than it can accomplish.' The 
 United States Commission might decide a few cases ; 
 but its authority would be evaded in a hundred times as 
 many more. The worst evil which could possibly befall 
 us, would be the attempt to apply a great deal of regula- 
 tion somewhere, by an agency which was not strong 
 enough to enforce such regulation everywhere. 
 
 ' Chap. ix.
 
 CHAPTER VIII. 
 
 THE ENGLISH RAILROAD SYSTEM. 
 
 Contrast between the railroad systems of England and the United States — 
 Relations of railroads to the investors ; to the shippers ; to one another ; 
 to the law — Capital and earnings — Rates for passengers and freight — 
 Organization of railroad service — The Clearing-House.* 
 
 For references to books see chapter ix. 
 
 The feature of the English railroad system which most 
 forcibly strikes an American observer, is its stability. 
 This is the fundamental difference between their railroads 
 and ours. It shows itself in their construction, their man- 
 agement, and their legal relations. The mere traveller sees 
 it in the massive stone bridges, the tunnels and viaducts, the 
 station accommodations, and a thousand details of less 
 importance which combine to produce an impression of 
 solidity and finish, entirely wanting in the majority of 
 American railroads. The statistician sees it in the figures 
 showing the cost per mile of road, which in America is little 
 over $60,000, and in England is more than $200,000. The 
 railroad man sees it still more strongly when he compares 
 the permanent traffic agreements, and smooth workings of 
 the Railway Clearing-House in England, with the alter- 
 nation of free fights and hollow truces which has marked 
 the history of the Joint Executive Committee in America. 
 The historian feels it most strongly of all, when he sees 
 the vigor, often obstinate and sometimes blustering, with 
 
 ' Much of the material in this and the following chapters has appeared ia 
 the Railroad Gazette, in the course of the years 1884 and 1885. 
 
 146
 
 THE ENGLISH RAILROAD SYSTEM. 147 
 
 which the EngHsh railroads or the EngHsh shippers defend 
 what they deem to be their vested rights, and when he con- 
 trasts with it the painful helplessness of American Legisla- 
 tures against the railroads at one point, or of American 
 railroads against the Legislature at another. 
 
 Many writers on both sides of the Atlantic assume that 
 the differences in railroad management between England 
 and the United States are in large measure the result of 
 differences in legislation. This is a mistake. It would be 
 nearer the truth to say that the differences in legislation 
 were the result of differences in management. The fact 
 probably is that the different systems, of management 
 and legislation both, are an almost inevitable outgrowth 
 of the different industrial conditions of the two countries; 
 and that any scheme of government policy has counted 
 for little in either case. 
 
 The English railroads were mainly built to accommo- 
 date and extend existing business. As the facilities were 
 increased, the business grew enormously ; but for the most 
 part, on lines which already existed before railroads were 
 thoug-ht of. On the other hand, the American railroads 
 have been mainly built with a view to the development 
 of new lines of traffic, new establishments, or even new 
 cities. The Englishman built for the present and future 
 both ; the American chiefly, and sometimes entirely, for 
 the future. 
 
 This hope of future gains, out of all proportion to pres- 
 ent traffic, of necessity gave railroad business in America 
 a more speculative character than in England. It did more 
 than that. This original difference of purpose laid the 
 foundation for almost every other prominent difference 
 between the two systems. It was an all-important factor 
 in determining the relations of a railroad to its investors, 
 to its patrons, to other railroads, and to the law.
 
 148 RAILROAD TRANSPORTATION. 
 
 I. Railroads and Investors. — The English railroads 
 were originally built to meet the demands of a commun- 
 ity which already enjoyed good roads and canals, and 
 insisted on having good and secure railroad service. 
 Capital was abundant ; it was spent freely and sometimes 
 lavishly. Double track was habitually laid, grade crossings 
 were avoided, and every effort was made to construct the 
 road under a high standard of engineering art. The re- 
 sult was that the original line required but slight changes. 
 There were many improvements made, but there was 
 comparatively little actual reconstruction. 
 
 American railroads, on the other hand, were frequently 
 built where existing business and existing means of com- 
 munication amounted to little or nothing ; where capital 
 was scarce, and where speedy and economical construction 
 was more desired than solidity or safety. The question 
 was not what kind of a railroad they were to have, but 
 whether they were to have any at all. To avoid the ex- 
 pense of cuttings and embankments the line was adapted as 
 far as possible to the natural inequalities of the ground. 
 There were heavy grades and sharp curves. Sleepers were 
 laid directly upon the ground without ballast. The station 
 accommodations were insufificient to afford protection from 
 the weather. 
 
 As traffic grew, many of these things had to be changed. 
 But the changes were not mere improvements, as in 
 England ; they involved total reconstruction. Their cost 
 was often out of all proportion to the original investment. 
 The easiest way to provide the money for such changes 
 was by an issue of bonds. Where the improvements cost 
 more than the road, the bondholders' investment amounted 
 to more than the stockholders'. The managers of these 
 roads were chiefly dealing with borrowed capital, to which
 
 THE ENGLISH RAILROAD SYSTEM. 149 
 
 they were not directly accountable. From this it was but 
 a step to the system of building roads by the proceeds of 
 the bonds, where the actual investment on the part of the 
 stockholders amounted to little or nothing — a practice 
 which has at times been wellnigh universal in America. 
 
 From this abuse of the borrowing power of corporations 
 and the worst forms of stock-watering, England has been 
 free. The proportion of bonds or " debentures " to stock 
 has been kept down to a low figure. Directors have been 
 held to their responsibility far better than in America. 
 They are not allowed to make lucrative contracts with 
 concerns in which they are themselves interested. It is 
 true that there have been abuses of trust, and serious 
 losses of capital. The railroad mania of 1845' in England 
 was even wilder than that of 1871 or 1882 in America. 
 But the speculation was at the peril of the shareholders 
 themselves, and was not done with borrowed capital 
 obtained from bondholders under false pretences. 
 
 2. Railroads and their Patrons. Railroad Service. — The 
 English roads were organized at the outset with the inten- 
 tion of performing whatever service might be required of 
 them as carriers. They did not delegate one part of their 
 business to a sleeping-car company, and another part to 
 an express company. The English freight service does a 
 great deal of business which in America would go by ex- 
 press. The railroads themselves do the work of collection 
 and delivery ; and, in the cities at any rate, it is done with 
 great promptitude. Goods received by the companies at 
 Liverpool in the afternoon, and destined for London, are 
 forwarded the same night, and delivered at the door of 
 the consignee on the morning following. The force em- 
 ployed by the railroad companies for cartage is enormous ; 
 
 ' See J. Francis : " History of the English Railway," London, 1851.
 
 150 RAILROAD TRANSPORTATION. 
 
 its organization, for collection as well as delivery, is 
 thorough ; and the terminal expenses due to this work 
 form a main item in the freight charges for the higher 
 classes of goods. 
 
 Thus the English system is free from most of the abuses 
 which have arisen in America in connection with subsidiary 
 corporations, whether for express service, car service, or 
 terminal facilities. 
 
 On the other hand, when English railroads were first 
 chartered, the shippers desired and expected to furnish 
 their own cars. In the low-class freight traffic they have 
 generally done so. It is characteristic of English con- 
 servatism that this custom has been retained so long. It 
 is inconvenient to both railroads and shippers. The ship- 
 pers complain of damage and detention of cars ; the rail- 
 roads complain of waste of space and power. Both 
 parties have good ground for their complaints.' Besides 
 these more serious evils, the custom gives to English 
 freight trains a disreputable appearance which contrasts 
 almost ludicrously with the solid excellence of the line 
 and buildings. An uninstructed observer might readily 
 suppose that the companies had spent all their money on 
 the permanent way, and, having nothing left for equipment, 
 were tottering on the verge of hopeless bankruptcy. Yet 
 such is the inertia of English business habits-, that, except 
 in the Northeast, the efforts of the railroads have been 
 powerless to overcome it. 
 
 3. Relations of Railroads to one another. — The stability 
 of English business has made it possible to bring railroad 
 competition under control. It was said by a member of 
 Parliament in 1872: " I do not think that there is at this 
 moment a competitive rate existing in the kingdom." As 
 
 ' Gustav Cohn : " Engli^che Eisenbahnpolitik," ii , 112-120.
 
 THE ENGLISH RAILROAD SYSTEM. 151 
 
 regards direct competition between parallel lines of rail- 
 road, the statement was not far from the truth. 
 
 A railroad in England can calculate its probable busi- 
 ness in advance. So also if one railway builds a branch 
 to compete with another for traffic of which the latter has 
 hitherto had a monopoly, it can guess with some degree 
 of accuracy what share of the traffic it is likely to control. 
 The competition, as long as it exists, is less speculative. 
 And, at any rate, one railroad war will generally settle the 
 matter. With us a railroad war settles nothing. A truce 
 is patched up for a time ; but after a few years, or even 
 months, pass, the conditions of traffic are so changed that 
 the roads must fight it out over again. But in England 
 the relative strength is settled once for all. A division of 
 traffic which is right now is likely to be right ten years 
 hence. There is no probability that new connections will be 
 built or new districts developed in such a way as to seriously 
 alter the relative strength of the competing parties. Still 
 less likely is it that completely new through-lines will be 
 built to contend for their share in a new division. There 
 has been no important case of the kind for more than 
 thirty years. 
 
 A division of traffic for fourteen years or more has not 
 been infrequent in England. In most parts of America, it 
 would be impossible. Our traffic agreements have to pro- 
 vide for constant revision of percentages ; each revision 
 offers the opportunity for a new quarrel. Arrangements 
 of long standing, like the Chicago-Omaha pool, may be 
 completely unsettled by a new system of connecting lines. 
 Steady maintenance of schedule rates is equally impossi- 
 ble. Competition in America is only held in abeyance 
 for short periods. In England it is really brought under 
 control.
 
 152 RAILROAD TRANSPORTATION. 
 
 4. Railroads and Legislation. — All these facts have an 
 important bearing on the position of the railroads before 
 the law. It may fairly be said that the railroads and 
 the public are more independent of one another in Eng- 
 land than in America ; not because there is less conflict, 
 but because the community feels the results of any such 
 conflict less in England than with us. 
 
 In the first place, the English companies have less to 
 fear from sudden changes in legislation, or sudden move- 
 ments of public opinion. They can behave in an exas- 
 perating manner without endangering any of their well- 
 recognized rights. Such impudence as was displayed by 
 the companies in the face of the early decisions of the 
 Railway Commissioners would be all but impossible in 
 America. An American road which should thus openly 
 defy a regularly constituted public authority would raise 
 a wave of public sentiment against it, which would over- 
 bear all vested rights and privileges. There is always 
 danger of a kind of public lynch law. In order to disobey 
 the law in America, it would be necessary to make a show 
 of complying with it. But in the majority of cases it may 
 fairly be said that honestly managed American corpora- 
 tions have really tried to conform to the requirements of 
 commissioners, even before the courts have taken the 
 steps to render such compliance necessary. This has not 
 been the case in England.' 
 
 Even when a law regulating charges is enforced, it 
 affects railroad earnings in England much less seriously 
 than in America. If competition is done away with, you 
 can apply almost any scheme you please with compara- 
 
 ' For a striking instance, take the conduct of the Great North of Scotland 
 in the Aberdeen manure case. Evidence before the Select Committee on 
 Railways, 1881, qu. 639, 4687. Compare the refusal of the L. & N. W. to 
 act as carriers of coal, qu. 2993.
 
 THE ENGLISH RAILROAD SYSTEM. 153 
 
 tively little harm ; if competition is active, you cannot 
 with justice or success do what will cripple one competitor 
 against another. In America we have to deal with rail 
 and water competition both. In England water competi- 
 tion still exists, and seriously interferes with some of the 
 schemes of regulation ; but as far as a railroad competition, 
 pure and simple, is concerned, the authorities have the 
 field almost clear, and can arrange matters to suit their 
 own notions of vested rights. Decisions which would 
 create a panic in America scarcely call forth a public 
 protest in England. 
 
 But the effect is not all one-sided. These facts cut both 
 ways. They make the public authorities in America more 
 powerful, but less independent. If legislation is to have 
 such a serious effect it must be framed with the utmost care, 
 or it will react against the men who designed it. The very 
 weakness of American railroads is thus a source of strength. 
 
 Any legislation which seriously affects railroad profits 
 will check the increase of railroad facilities. Such increase 
 of facilities is essential to the development of any growing 
 American community. If such a community passes laws 
 hostile to the railroad interest, it soon feels the evil effects. 
 The Potter law in Wisconsin ' is an instance in point. The 
 reduction in charges caused a reduction in profits ; this 
 stopped the growth of railroads ; the growth of the com- 
 munity was thereby brought almost to a standstill. The 
 very interests which were most clamorous for the law in 
 1874 were most clamorous for its repeal in 1876. The 
 English public is not affected by restraints of this kind, 
 because the English railroad system is so fully developed 
 that its extension is not a matter of vital concern to the 
 business interests of the nation. 
 
 'See p. 135.
 
 154 
 
 RAILROAD TRANSPORTATION. 
 
 To sum up : England can afford to make a great many 
 laws which America cannot, for three reasons : First, the 
 English railroads have more power to resist the enforce- 
 ment of laws which injure them. Second, even when the 
 laws are enforced their profits are not so much affected. 
 Third, the business interests of England are not dependent 
 upon increased railroad facilities, nor obliged to encourage 
 new railroad construction. 
 
 The following table ' will give some idea of the extent 
 and financial condition of the English railroad system in 
 the year 1883 : 
 
 Mileage 
 
 Capital (and debt) 
 
 Per mile 
 
 Gross earnings 
 
 Per mile 
 
 Operating expenses 
 
 Per cent, of earnings 
 
 Net earnings 
 
 Per mile 
 
 Per cent, of capital 
 
 The United Kingdom possesses about one mile of rail- 
 road to every six and one half miles of territory ; a little 
 less than the proportion prevailing in the States of Penn- 
 sylvania, Ohio, Indiana, or Illinois. But if England alone 
 be considered, apart from Scotland and Ireland, the pro- 
 portion is of course much greater — nearly the same as in 
 Massachusetts. 
 
 The cost per mile is remarkably high, not merely in 
 comparison with the United States, but with other Euro- 
 
 ' The English figures are from the "Board of Trade Returns"; the 
 American figures are based on those of Poor's " Manual." 
 
 ' This figure is based on the total mileage return ; the others on the return 
 of miles £« operation. Hence the apparent discrepancy. 
 
 Great Britain 
 
 United 
 
 and Ireland. 
 
 States. 
 
 18,681 
 
 110,414 
 
 $3,815,000,000 
 
 $7,478,000,000 
 
 204,500 
 
 61,800' 
 
 345,000,000 
 
 824,000,000 
 
 18,500 
 
 7.500 
 
 182,000,000 
 
 531,000,000 
 
 53 
 
 64| 
 
 163,000,000 
 
 293,000,000 
 
 8,750 
 
 2,650 
 
 4.29 
 
 3-92
 
 THE ENGLISH RAILROAD SYSTEM. 155 
 
 pean countries, the average for the whole of Europe being 
 only about $115,000 per mile. In the first place, the 
 original investments of capital were made with a thor- 
 oughness and lavishness not tempered by any regard to 
 the immediate wants of trade — the same lavishness which 
 proved so unfortunate in the case of the Grand Trunk 
 Railway of Canada, and which English builders have 
 until recently insisted upon manifesting all over the world. 
 Secondly, there have been large additions to the capital 
 account in recent years. The cost per mile of lines open 
 in 1863 was^32,8o4, or $160,000. It increased slowly until 
 1872, when it was ^36,000, or $176,000. Then began a 
 period of rapid increase ; in 1 874 it reached ;i^37,ooo, in 1 876 
 £39,000, in 1878 £40,000, in 1 88 1 £41,000, in 1883 £42,000. 
 The cost per mile of British railroads at the end of the year 
 1883 showed an increase of 16 per cent, in eleven years. 
 
 To be sure, the United States cost per mile, running up 
 from $50,000 to $62,000, shows an even greater percentage 
 of increase — a great deal of it mere water. But it is not 
 half as great an actual increase for each mile ; and we 
 almost certainly have more to show for it in the way of 
 improvement of road and equipment. There was in the 
 United States a great deal more room for such improve- 
 ment, and necessity for new capital expenditure on roads 
 which had been at first badly built and lightly equipped. 
 
 It is impossible to avoid a suspicion, which the secrecy 
 of English railroad accounts prevents us from proving or 
 disproving, that certain leading English railway companies 
 have been in past years paying dividends out of capital ; 
 dividing as large a proportion of the gross earnings as 
 possible, swelling the construction account unfairly, and 
 borrowing money for expenses which should have been 
 paid out of revenue.
 
 156 RAILROAD TRANSPORTATION. 
 
 The worst form of stock-watering, unhappily so com- 
 mon in America, by which the construction account is 
 loaded down, not with capital borrowed for investment, 
 but with purely fictitious capital, representing no actual 
 investment whatever, is practically unknown in England. , 
 There is no temptation for an honestly managed road to 
 water its stock in this way, because there is no legal limi- 
 tation of dividend. The attempt to do it with dishonest 
 purposes would be not merely unsuccessful, but dangerous 
 to those who should undertake it. 
 
 From the load of bonded debt with which our railroads 
 are burdened, the English companies are, to a considerable 
 extent, free. The issue of such obligations has been 
 practically limited to one third of the paid-up capital.^ 
 It thus happens that while the proportion of net 
 earnings to capital is essentially the same in the two 
 countries, the English dividend average is much higher 
 and steadier. 
 
 When it comes to a comparison, not of earnings, but of 
 rates and services, the matter is much more difificult. It 
 is almost impossible to compare the amount of work 
 done, or the cost of doing a given amount of work. 
 Train-mile figures we have in abundance ; but as long as 
 we do not know the average weight of freight or number 
 of passengers carried, we cannot even guess at what these 
 figures indicate concerning matters of public service. The 
 English companies do not furnish or even compile ton- 
 mileage statistics. This is no mere accident of practice ; 
 it is characteristic of the principle on which English rail- 
 ways are managed. There is a fundamental difference of 
 
 ' Instead of the distinction between stock and bonds, the English railroad 
 capital is divided into ordinary, preference, guaranteed, and debenture 
 stocks, forming, respectively, 37, 26, 12, and 25 percent, of the whole. The 
 debentures correspond most nearly to bonds in their character.
 
 THE ENGLISH RAILROAD SYSTEM. 1 57 
 
 purpose between train-mile and ton-mile statistics. The 
 train-mile is, in a rough way, the unit of railroad service — 
 so much work done by the railroad. The ton-mile (or 
 passenger-mile) is, in the same rough way, the unit of 
 public service — work done for the public. Now, the whole 
 theory of the English railroad system starts from the 
 principle that railroads are to be managed as business 
 enterprises, not as matters of public service; hence, their 
 impatient rejection of the idea that they should compile 
 a set of statistics arranged from an outside point of view, 
 with but little inside interest. 
 
 We thus actually have no figures which we can compare 
 in the aggregate. A comparison of charges in detail is 
 almost equally difHcult, owing to differences in the kind 
 of service rendered in the two countries, and to the multi- 
 tude of special rates. In general, it may be said that 
 passenger rates are lower in England, low-class freight 
 rates higher ; and that for the charges on the more valu- 
 able freight, no comparison between the two countries is 
 practicable. 
 
 The passenger traffic in its three classes is conducted at 
 prevailing rates of four, three, and two cents per mile 
 respectively. Practically, the bulk of the traffic is done at 
 a two-cent rate. The change in this respect in the last 
 fifteen years is quite noticeable. Fifteen years ago the 
 fast trains did not generally carry third-class passengers ; 
 now they almost always do. At the same time the com- 
 fort of the third-class carriages has been greatly increased. 
 The result has been an enormous development of third- 
 class travel. Comparing the figures of i88o with those of 
 1870, we find that the number of third-class passengers 
 carried had much more than doubled, while the first-class 
 had increased but slightly, and the second had diminished
 
 158 RAILROAD TRANSPORTATION. 
 
 considerably. In the year 1880/ out of the immense 
 total of 541 milHons of passengers carried in England alone 
 (more than double the American figures for the same 
 year), five sixths were third-class ; so that the third-class 
 traflfic produced more than twice the gross revenue of the 
 two other classes combined. There is, therefore, but 
 slight error in regarding two cents per mile as the normal 
 passenger rate in England, while that in America is nearly 
 2.35 cents per mile, although the average American pas- 
 senger journey is three or four times as long as in 
 England, 
 
 Any attempt at comparison of freight charges would be 
 long, technical, and unsatisfactory. On high-class freight 
 it is altogether impossible, because the English rates for 
 such goods include collection and delivery. No one can 
 tell how much we should allow for cartage, or whether we 
 should take American freight rates or express rates as our 
 standard of comparison. An extremely rough estimate, 
 not making allowance for any of the disadvantages to 
 which English railroads are subject, would indicate that 
 their charges per ton-mile on all traffic average are from 
 fifty to seventy-five per cent, higher than ours. 
 
 The means of handling this traffic are in some respects 
 far better than those in the United States. Especially is 
 this true as regards organization. 
 
 In the first place, the lines of consolidation have become 
 so definitely settled that we can speak of the English rail- 
 road system as something in a certain sense complete. 
 The lines of railroad construction were for the most part 
 laid down it 1845. The railroad mania of that year was 
 never repeated. Ten years more indicated the forms of 
 
 ' The same proportion has since held good. The figures for the United 
 Kingdom for 1883 were : Class I., 36,000,000 ; Class II., 66,000,000 ; Class 
 III., 581,000,000.
 
 THE ENGLISH RAILROAD SYSTEM. 1 59 
 
 arrangement or consolidation. Another ten years indi- 
 cated the details. Since that time there has been a period 
 of comparative quiet. The consolidation has taken place, 
 not on parallel lines, but on radiating ones. Besides three 
 northern companies, there are nine systems radiating from 
 London as a centre. This arrangement increases the com- 
 mon interests and lessens the conflicting ones. 
 
 Secondly, the agreements between rival routes have 
 been so permanent that they are sometimes no longer felt 
 as a restraint, so thoroughly has traffic adapted itself to 
 their conditions. This is the case with many pooling 
 arrangements. The early history of English railway pools 
 is obscure. They first assumed importance some thirty 
 years ago. The London and Northwestern seems to 
 have taken the lead in this policy ; its great rival, the 
 Midland, while maintaining rates, has been less inclined to 
 divide traffic. English railroads have had great advantages 
 over ours in enforcing these agreements. The courts have 
 looked upon them with less disfavor, and statesmen with 
 much more favor than has been the case in the United 
 States.' At present they seem to be losing some of their 
 importance ; not because they are powerless, but, as 
 already indicated, because traffic has become so stable that 
 they are less necessary than they were. 
 
 Third, in place of our joint executive committee, they 
 have the far more efficient and highly organized Railway 
 Clearing-House.' This is not a judicial, nor, in the ordinary 
 sense of the word, an executive body. It decides no dis- 
 puted questions ; it makes no rates. It is an incorporated 
 
 ' One of the most important agreements of this kind is said to have been 
 arranged by Mr. Gladstone himself. 
 
 ^ The best account of the workings of the English Railway Clearing- House 
 is to be found in the evidence before the Joint Select Committee of 1872, 
 Appendix, pp. 839-945.
 
 l6o RAILROAD TRANSPORTATION. 
 
 body ; but this is only to give greater responsibility to its 
 work. It is simply a highly organized machine for keeping 
 and settling traffic accounts. It does the work of our fast- 
 freight lines plus a great deal more. 
 
 One part of its work corresponds exactly to that of 
 our fast-freight lines — namely, the superintendence of 
 car-mileage accounts. But it can do that work better 
 than an American line or car clearing-house, because it 
 has at every junction employees of its own, "number- 
 men," to check and report the car movement. It is 
 not, therefore, obliged to depend solely upon reports 
 furnished by the companies themselves. 
 
 Its much more important department of work is to 
 settle the receipts of different companies from through 
 freight by accounts and balances, instead of by actual col- 
 lection in every instance. It was with this purpose that 
 it was organized in 1842. It grew slowly till 1850, then 
 rapidly, and has for many years included practically all the 
 railroads in England.' 
 
 It is governed by a committee consisting of one dele- 
 gate from each railroad. A two-thirds majority is required 
 for action. Its permanent officers are a secretary and a 
 treasurer. The accounts are made up, not between each 
 company and the clearing-house as a whole, but between 
 each separate group of two or more companies. There 
 are two reasons for this — first, in order that a special disa- 
 greement between two companies may not interfere with 
 the whole system of accounts, and second, in order that 
 special expenses may be charged where they belong. 
 
 For instance, in the matter of classification : there is a 
 
 ' The clerical force employed is over 2,000 ; the number of transactions 
 settled is 7,000,000 annually, with an aggregate value of well on toward 
 $100,000,000. The car-mileage settlements amount to 500,000,000 miles. 
 F. S. Williams, " Our Iron Roads," 3d ed., London, 1884, pp. 313, 314.
 
 THE ENGLISH RAILROAD SYSTEM. l6l 
 
 system generally adopted throughout England known as 
 the Clearing-House classification. It has been formed by 
 the Clearing-House, and is but slightly changed from year 
 to year. Each railroad had originally quite a different 
 classification of its own, but they have all found it conven- 
 ient to adopt this general system. But there are certain 
 districts where a different classification is found more 
 available, and this difference may affect the billing of the 
 through business. Unless the companies handling such 
 consignments object, the Clearing-House does not ; it only 
 makes an extra charge for the greater trouble in making 
 up the accounts. So of special rates: any two or more 
 companies are at liberty to make what rates they please 
 and divide them as they please, and the Clearing-House 
 will carry out their wishes. But if one company makes a 
 through rate and another company is dissatisfied with its 
 portion of that through rate, and insists upon charging its 
 own local rate — which it has a right to do when there is 
 no agreement to the contrary — the Clearing-House takes 
 no responsibility in the premises. It simply leaves that 
 account open till the matter is settled.' 
 
 ' The general method of operation is as follows : Cars carrying any 
 considerable amount of through freight may all pass from one railway to 
 another without transshipment. No " paid-ons " are collected by one 
 company from another. The way-bill, an abstract of which is sent to the 
 Clearing-House, furnishes a claim which is as good as the money. Only in 
 case of undercharge the road collects the deficiency. 
 
 The gross sum received for a consignment of freight, whether paid by 
 the sender or the consignee, is debited to the road that collects the money. 
 The credits for this sum are distributed among the different companies as 
 follows : First a fixed sum of is. 6d. per ton is set apart for station expen- 
 ses at each end (except in the lowest class of traffic, which pays half this 
 amount). Then in the case of all carted goods an arbitrary credit is made at 
 each end for expenses of collection and delivery — ys. per ton in London, 2s. 
 6d. in other places. This is unfair in a great many instances, but it is 
 claimed that the inequalities balance each other for the whole work of a
 
 l62 RAILROAD TRANSPORTATION. 
 
 The Clearing-House is an institution of unquestionable 
 benefit to all parties concerned — railroads and shippers 
 alike. Similar experiments are being tried in various 
 parts of continental Europe, with a fair measure of suc- 
 cess. The Southern Railway and Steamship Association 
 does the same sort of work — though less completely — in 
 our own country. But all attempts to apply a general 
 system of the same sort throughout the United States, 
 have been brought face to face with such difificulties that 
 they have never been put into actual practice. Neverthe- 
 less the possibility of finally establishing some such 
 system is constantly in the minds of many of our most 
 thoughtful railroad men. It is not impossible that the 
 right sort of a national railroad commission might do 
 much toward securing the establishment of a clearing- 
 house ; and it is certain that the right sort of a clearing- 
 house, once well established, would do much toward 
 making the work of a national commission easier and 
 more effective. 
 
 railway company. The sum remaining after these deductions for terminals 
 is pro-rated among the roads over which the goods have been carried, usually 
 upon the basis of miles actually traversed. But a company cannot, in 
 general, claim credit for more than its shortest possible route between the 
 points where the goods entered and left its lines. And on the other hand 
 constructive mileage agreements are not uncommon. In fact, any two or 
 more roads may make any sort of agreements they please about through 
 traffic, or may even for the time being " agree to disagree," and the Clearing- 
 House will not interfere ; it will hardly consent to arbitrate when requested 
 to do so by both parties. Its arbitration committees are for quite another 
 purpose — not to make rules, but to decide questions of liability under existing 
 rules. The separate roads must make their own agreements. But all extra 
 expenses to the Clearing-House in these agreements or disagreements axe 
 carefully charged to the companies in question.
 
 CHAPTER IX. 
 
 ENGLISH RAILROAD LEGISLATION. 
 
 The early charters — Competition and combination — Acts of 1854 and 1873 
 — Work of the Railway Commissioners — Want of jurisdiction — Lack of 
 power to enforce decrees — Principles "applied in the regulation of rates 
 — Charter maxima and station terminals — Differential rates — Personal 
 discriminations forbidden — Questions concerning local discriminations 
 — Efforts of the Railway Commissioners to base rates upon cost of ser- 
 vice — Results of the investigation of 1881-82. 
 
 Report from the Select Committee on Railways : Minutes of Evidence, 
 and Appendix. 1881 and 1882.' 
 
 Gustav Cohn : " Untersuchungen iiber die Englische Eisenbahnpolitik." 
 Vol. i : " Die Entwickelungder Eisenbahngesetzgebung in England." Vol. 
 ii : " Zur Beurtheilung der Englischen Eisenbahnpolitik." Vol. iii : " Die 
 Englische Eisenbahnpolitik der letzten zehn Jahre." Leipzig : 1874, 1875, 
 1883.* 
 
 The history of the general questions of railroad policy 
 and legislation may be pretty sharply divided into two 
 periods. Railroad construction formed the subject of dis- 
 cussion and action in the first period, railroad combination 
 in the second. The dividing line between the two periods 
 falls in the years 1845-48. 
 
 ' Equally good in its day — in some respects even better — was the evidence 
 collected by the Royal Commission of 1865-1867. The investigations of the 
 Joint Select Committee of 1872 were less thorough, though their report was 
 an able document. The work of the Committee of 1853, good in its time, 
 is too old to have much present interest. 
 
 ' An admirable book — probably the most careful investigation of railroad 
 problems, from the standpoint of political science, which has anywhere been 
 made. Its value must be admitted even by those who differ from many of 
 its conclusions. 
 
 163
 
 164 RAILROAD TRANSPORTATION. 
 
 The first railroad charters were in almost all respects 
 modelled upon canal charters. Of such models there was 
 an abundance. England's system of internal navigation 
 was far beyond that of any other country in completeness. 
 It is said in a recent parliamentary paper that three fifths 
 of the railway stations in the United Kingdom are sub- 
 ject to water competition. It was the strength of this 
 canal interest that formed the chief obstacle with which 
 the promoters of the earliest railroads had to contend. 
 The canals had a monopoly, and they were naturally un- 
 willing to let it go. But they carried their monopoly 
 power too far. Had they simply attempted to obstruct 
 the railways, they might have delayed their constrnction 
 for years. But they squeezed the public too hard at the 
 same time ; and this extortion created a sentiment against 
 the canals, which enabled a railway charter of importance 
 to slip through in the year 1826. This was for the rail- 
 way between Liverpool and Manchester. There were two 
 canals connecting these cities ; they had a monopoly of 
 the available water supply, and therefore feared no further 
 canal competition. They acted in harmony, charged 
 what rates they pleased, and made annually cent, per 
 cent, on the capital invested in them. They could afford 
 to oppose the railway.' It needed a politician like Huskis- 
 son to carry the charter through in the face of such ob- 
 stacles ; and he had to spend $350,000 to do it. But the 
 victory was won, once for all. No sooner was the Liver- 
 pool and Manchester line opened than the public enthusi- 
 asm in its behalf was so strong that the canal interests 
 were unable to make a similar fight against other roads 
 proposed. 
 
 ' By a curious reversal of history, the railroads between Liverpool and 
 Manchester are now engaged in opposing a ship canal which threatens to 
 interfere with their monopoly
 
 ENGLISH RAILROAD LEGISLATION. 1 65 
 
 A recent writer has said of the English canals : " Ex- 
 cessive charges and monopoly rates were as to them un- 
 known." The facts will by no means warrant such a 
 statement. The evils of which people now complain as 
 peculiar to railroads had already shown themselves in canal 
 charges. 
 
 It was at first supposed that a railroad would be used 
 like a canal, individuals furnishing their own cars and 
 motive power. The clauses in the charter with reference 
 to facilities and rates were drawn up with this idea. 
 It was soon seen to be false. Competition between 
 different carriers on the same railroad was impossible. 
 Could competition between different railroads be secured 
 instead ? 
 
 It is to the credit of English statesmen that they did 
 not deceive themselves in this respect. They learned 
 more in a few years from the workings of a few miles of 
 railroad than the general public has learned from all the 
 railroads of the world in half a century. They recognized 
 that competition could not be relied upon or aimed at 
 with any hope of success. As early as 1836 Mr. Morrison 
 of Inverness delivered a remarkable speech/ in which he 
 made the points, that railroads must naturally be a mon- 
 opoly ; that competing roads will combine ; that parallel 
 roads are a waste of capital ; and that fixed maximum 
 rates are useless. These were good principles ; but they 
 were not acted upon. There were not men enough in 
 Parliament who took the matter really to heart. There 
 were a few violent anti-railroad men, a few energetic rail- 
 road men, and a great body of men who vaguely felt that 
 something ought to be done, but shrank from doing any 
 thing in particular. Speeches like those of Mr. Morrison 
 
 ' Hansard : 3d series, vol. 33, pp. 977-993.
 
 i66 
 
 RAILROAD TRANSPORTATION. 
 
 were unsatisfactory to extremists of both sides, and did 
 not rouse the moderate men to action.' 
 
 In the years 1 839-1 845, several attempts were made to 
 secure railroad legislation, Mr. Gladstone taking an active 
 part in these matters. Beyond a declaration of the right 
 to revise rates, and even to purchase the railroads for 
 State management in the remote future, nothing was 
 actually accomplished. It is needless to say that this has 
 remained a mere declaration and nothing more. One or 
 two experiments in the way of railroad commissions made 
 during these years had worse than no result. 
 
 Free railroad competition was meantime being tried and 
 found wanting. It was not tried on purpose, or because 
 Parliament believed in the principle. It was because so 
 many speculators wanted to build railroads, and Parlia- 
 ment had not the moral courage to refuse them charters. 
 
 The early experience of England was different from 
 that of most other countries in this respect, that people 
 were readier then than afterward to invest their money in 
 railways. The question of subsidies never came up, be- 
 cause people needed to be discouraged rather than encour- 
 aged. It is not quite true to say that England was 
 opposed to railroad subsidies on principle, for in Ireland, 
 
 ^ From this point on, the views advanced in this chapter are so different 
 from those held by Mr. Adams (Railroads, pp. 82-94) that a word of ex- 
 planation is necessary. The points at issue are in large measure questions 
 of fact rather than of opinion. At the time when Mr. Adams wrote, the in- 
 vestigation of 1881-82 had not begun. In the light of the new evidence 
 then brought forward, he must have changed his opinion on many points. 
 On the other hand, at the time when he wrote, the results of the work of the 
 Committee of 1872 were generally overestimated ; and he had not the means 
 of correcting this overestimate. Finally— to hazard a personal opinion— Mr. 
 Adams is too active and rational a man to be quite ready to accept some of 
 the facts of modern English history. He insists on trying to find intelligible 
 theories to account for actions which were simply the result of ualhinking 
 vis inertia.
 
 ENGLISH RAILROAD LEGISLATION. 1 6/ 
 
 where help was needed by the railroads, they were subsi- 
 dized. In England they did not need any such help, and 
 did not ask for it. 
 
 For the time being the competition was utterly reckless. 
 Up to the end of 1843 there were 71 separate roads aver- 
 aging a little less than 30 miles in length. In 1844 they 
 came down to a 15-mile average; and in the four years 
 t8/|/i-/|7 there were chartered 637 separate roads with a 
 total authorized length of about 9,400 miles. No less 
 than eleven projects were laid before Parliament for lines 
 of railway through a single valley where only one could 
 possibly go. These were not attempted under any general 
 railroad law, but each road required a special act of Par- 
 liament. What was more, each special act of Parliament 
 was drawn up by itself, and contained hundreds of pro- 
 visions, mostly useless trash, as to what the railroad might 
 do under all conceivable circumstances. The volume of 
 work thus created threatened to take up the whole time 
 of Parliament and leave no room for other business. 
 They tried to delegate the work to a commission ; but then 
 they insisted on reviewing all the decisions of the commis- 
 sion and reversing some of them, so that there was no 
 saving here. Some relief was obtained by the " Clauses Con- 
 solidation Act " of 1845, which prescribed a form for railway 
 charters, and rendered it unnecessary to go through all the 
 350 separate clauses for each of 600 different railways. 
 But the first real relief to the legislators was obtained 
 in the crisis of 1847, which cured the English public of all 
 belief in reckless competition in railroad building. This 
 crisis was much more distinctly due to railroad speculation 
 than any other ever has been, not even excepting the 
 present crisis in the United States, with which it has many 
 points in common. It was a hard lesson ; but it was
 
 / 
 
 l68 RAILROAD TRANSPORTATION. 
 
 thoroughly learned, and did not need to be repeated. It 
 marked the transition to a new phase of railroad policy ; 
 the transition from a policy of competition to a policy of 
 combination. 
 
 Railroad combinations of importance may be said to 
 have begun in 1844; at any rate, they then first attracted 
 much public attention. In 1845 ^^ Board of Trade made 
 a report to Parliament on the subject of amalgamation, 
 taking the ground that it was right for continuous but not 
 for competing lines. In 1846 a special committee of Par- 
 liament considered this subject, and took what was for 
 that time advanced ground. Their conclusions were that 
 companies, by pooling arrangements, can produce all the 
 evils of amalgamation with none of its advantages ; that 
 by obtaining concessions from the companies in return for 
 allowing them to amalgamate, the public interest can best 
 be served ; and that even the amalgamation of railways 
 and canals may be allowable, provided the railways engage 
 to keep the canals in repair. No distinct action was taken 
 by Parliament on this report. 
 
 Another committee on the same subject was appointed 
 in 1853 ; Cardwell and Gladstone were its leading mem- 
 bers. They made a strong effort to do something, but 
 found it easier to explain the troubles than to find rem- 
 edies. They hoped to encourage " running powers " by 
 which one company should have the right to run its trains 
 over the lines of other companies. Serious obstacles met 
 them in the attempt. Nevertheless, if any thing at all 
 was to be done, it must be done in this way. A railroad 
 which had a London connection must not be allowed to 
 freeze out one which had no such connection ; otherwise 
 the London roads could compel the country roads to 
 unite with them on their own terms. This was the one
 
 ENGLISH RAILROAD LEGISLATION. 169 
 
 point which the committee seized most clearly ; and the 
 bill which they brought in and which became a law under 
 the title of the " Railway and Canal Traffic Act, 1854," 
 was conceived with this view — to protect the local roads 
 in their through business. It provided, first, that every 
 company should afford proper facilities for forwarding 
 traffic ; and, second, that no preferences should be given. 
 
 This law had a wide and, on the whole, beneficial effect. 
 It became the basis for numerous decisions on the subject 
 of railroad rates ; the details of its application to these we 
 shall discuss subsequently. But it did not have any 
 appreciable effect in preventing amalgamation. 
 
 From 1853 to 1872, Parliament suggested a great many 
 things, and accomplished nothing. Least of all did they 
 check the tendency of the roads to consolidate. Much 
 was expected of the Royal Commission of 1865-67. But 
 nothing came of it. They collected a mass of valuable 
 material, and wrote a tolerably good report ; but when 
 they came to draw their inferences, they could only say, 
 in general, that the existing state of things seemed likely 
 to continue, and that they saw very few means of 
 helping it. 
 
 Another committee was appointed in 1872, and this 
 time, for a wonder, something was actually accomplished. 
 In principle they did not depart from the lines laid down 
 by their predecessors. They brought forward no new 
 views, and, in one sense, no new laws. They simply pro- 
 vided means for carrying out the old laws and the old 
 views. The outcome of their work was an act for carry- 
 ing into effect the provisions of the act of 1854. 
 
 The act of 1854 had never had a fair chance. The 
 Committee of 1853 originally intended that questions 
 under it should be decided by the Board of Trade.
 
 170 RAILROAD TRANSPORTATION. 
 
 Through the influence of the railways this had been so 
 amended in the House that such questions came under 
 the jurisdiction of the Court of Common Pleas. As many 
 of these questions were of a technical character, the court 
 declined to take cognizance of many things which Card- 
 well had intended should come within the scope of the act. 
 Here was a real difficulty. The Commission of 1867 had 
 made a feeble effort to meet it ; the Committee of 1872 
 grappled with it boldly. They recommended the appoint- 
 ment of a special Railway Commission, provisionally es- 
 tablished for five years, to take cognizance of a variety of 
 cases under the act of 1854, whose decisions were to have 
 a judicial force. They were further to decide many cases 
 where the interest of different railways conflicted. It was 
 thought that before such a commission the public and 
 the railways could meet on even terms. Their bill was 
 passed in 1873. 
 
 With the act of 1873 the general railroad legislation 
 may be said to have closed. The movements which the 
 public had feared for thirty years had now pretty much 
 expended their force. Amalgamations which were confi- 
 dently expected in 1872 did not take place, after all. 
 Joint-purse arrangements became less important instead 
 of more important, because railroads found that they 
 could maintain rates without them. 
 
 It is not exactly true to say that " in Great Britain the 
 discussion of the railroad problem may be considered as 
 over for the time being." The railroad problem has 
 ceased to be a bugbear ; but it has become all the more a 
 question for practical discussion. Vague fears wuth regard 
 to the growth of the railway power have given place to 
 pointed complaints as to its abuse in individual instances. 
 The period of general legislation has passed. Mr. Adams
 
 ENGLISH RAILROAD LEGISLATION. 1 71 
 
 is right in saying : " As a result of forty years of experi- 
 ment and agitation Great Britain has on this head come 
 back very nearly to its point of commencement." He is 
 not quite right in adding : " It has settled down on the 
 doctrine of laissez faired It might better be said that 
 it has settled down on the policy of specific laws for 
 specific troubles. 
 
 The idea of a railway commission was by no means new. 
 As long ago as 1840 it was felt that some such authority 
 was necessary. In that year powers were given to the 
 Board of Trade not unlike those now exercised by the 
 Massachusetts Railroad Commission. These powers were 
 further defined in 1842. The Board of Trade was as well 
 adapted to the work as any body then existing. It had for 
 years past performed similar functions in connection with 
 shipping. It failed where the Massachusetts Commission 
 succeeded, not because of a difference in the law, but be- 
 cause the English public sentiment with regard to railroads 
 was not sufficiently active to give such a body the neces- 
 sary moral support to make up for lack of legal authority. 
 In 1844 another commission was appointed with more 
 specific powers. Their special duty was to make prelimi- 
 nary reports to Parliament on applications for railroad char- 
 ters. They tried to do their work well, but were beset by 
 difficulties on all sides. Railroad projectors hated them ; 
 Parliament itself was jealous of them. After a luckless 
 existence of about a year, this board was abolished. It 
 really died of too much work and too little pay. In 1846 
 Parliament tried the experiment of a railroad commission 
 of another kind. It offered first-rate salaries, and secured 
 well-known men ; then it avoided all causes of offence by 
 not giving them any powers. This lasted five years. Its 
 fate was the reverse of that of its predecessors ; it died of
 
 1/2 RAILROAD TRANSPORTATION. 
 
 too much pay and too little work. Thus ended the first 
 series of experiments in railway commissions. 
 
 We have seen what were the events which led to the 
 passage of the Regulation of Railways Act in 1873. The 
 commission appointed under that act was to consist of 
 three members ; one of them a railroad man, one a lawyer. 
 They received a salary of ^3000 each. They were to decide 
 all questions arising under the act of 1854 and subsequent 
 acts connected with it. They were further empowered to 
 arbitrate between railroads in a variety of cases ; to com- 
 pel companies to make through rates which should conform 
 to the intention of the act of 1854; to secure publicity of 
 rates ; to decide what constitutes a proper terminal charge ; 
 and some other less important matters. On questions of 
 fact their decision was to be final ; on questions of law it 
 was subject to appeal. The Railway Commissioners them- 
 selves were to determine what were questions of fact 
 and what were questions of law. Subsequent acts have 
 made but slight changes in these powers. 
 
 The commission consisted of able men — Sir Frederick 
 Peel, Mr. Price, formerly of the Midland Railway, and Mr. 
 Macnamara ; the last-named died in 1877, and was suc- 
 ceeded by Mr. A. E. Miller. They went to M^ork with 
 energy, and in a spirit which promised to make the experi- 
 ment a signal success. And it was at first supposed to be 
 such a success. People judged by the reports of the com- 
 mission itself. And they were the more prone to believe 
 these reports, because it was so desirable to find an easy 
 solution of perplexing questions of railroad policy. Mr. 
 Adams, writing in 1878, said: "The mere fact that the 
 tribunal is there, that a machinery does exist for the 
 prompt and final decision of that class of questions, puts 
 an end to them. They no longer exist." That repre-
 
 ENGLISH RAILROAD LEGISLATION. IJl 
 
 sented the general public opinion on the subject at the 
 time ; it represents the general impression in America 
 down to the present time. 
 
 In 1878, the very year when Mr. Adams wrote, the 
 original term of the commission expired. People sup- 
 posed that it would be made permanent. Instead of that, 
 the renewals have been for much shorter periods, leaving 
 the commissioners a precarious tenure, and showing dis- 
 satisfaction somewhere. 
 
 A parliamentary investigation on railroad rates in 1 88 1-2 
 showed the grounds of dissatisfaction only too clearly. 
 The testimony revealed a state of things almost unsus- 
 pected by the general public, and giving an entirely 
 different explanation of the fact that the commissioners 
 had so few cases to deal with. The substance is, that the 
 power of the commission satisfies nobody. It has power 
 enough to annoy the railroads, and not power enough to 
 help the public efficiently. 
 
 The Railway Commission was a court. Not an execu- 
 tive body, but to all intents and purposes a court of law. 
 And in establishing this new court, in addition to those 
 already existing. Parliament had two ends in view : i. 
 To have a tribunal which would and could act, when others 
 would or could not. 2. To avoid the expense, delay, and 
 vexation incident to litigation under the old system. 
 Neither end was well fulfilled. 
 
 I. The commission could not act, partly from want of 
 jurisdiction, partly from want of executive power. Its 
 jurisdiction did not cover by any means the whole ground. 
 The provisions about terminals, arbitration, working 
 agreements, etc., amounted to very little. Its real 
 power was under the act of 1854. It could under this 
 act require companies to furnish " proper facilities," and
 
 174 RAILROAD TRANSPORTATION. 
 
 it could prevent their giving " preferences." But it 
 could not compel a company to comply with special acts 
 or special provisions of its charter. This was a serious 
 difficulty, because the question of proper facilities was 
 closely connected with charter requirements, and the rail- 
 road could almost anywhere raise the point of want of 
 jurisdiction. 
 
 Nor could it enforce its decrees. Passive resistance of 
 the railroads and jealousy on the part of the old estab- 
 lished courts, combined to produce this effect. For 
 instance: under the act of 1854, if the railways refused 
 to comply with the decisions of the Court of Common 
 Pleas, they were liable to a fine of $1,000 for eveiy day's 
 delay. The London, Chatham, & Dover Railway refused 
 to comply with one of the commission's decisions, and 
 claimed that they were not liable to any such fine, 
 although all the powers of the Court of Common Pleas, 
 under the act of 1854, had been transferred to the Rail- 
 way Commission by the act of 1873. The Court of 
 Exchequer actually sustained the railroad ; and it was 
 not until 1878 that by a decision of the Queen's Bench 
 the Railway Commission really had the power to do any- 
 thing if a company chose to disregard its orders. 
 
 The injunctions of the commission at best only affect 
 the future ; for any remedy for the past there must be a 
 new complaint and trial before a regular court. And so 
 it often happens that a railroad, after exhausting all its 
 means of resistance, obeys the decision of the commission 
 in reference to one particular station, without taking any 
 notice of it at other stations where the same principle is 
 involved. Thus, in the case of the manure traffic of 
 Aberdeen, after long litigation the rate was decided to be 
 illegal. The railroad then reduced its Aberdeen rates,
 
 ENGLISH RAILROAD LEGISLATION. 175 
 
 but continued its old schedule of charges at other points 
 on its route where there were not organized interests 
 strong enough to make a fight. 
 
 On the face of the act of 1873 the decisions of the 
 commission, as to what were questions of fact or ques- 
 tions of law, appeared to be final. But by writ of man- 
 damus from a court of appeal, the decision on this point 
 could be at once taken out of the hands of the commis- 
 sion by compelling them "to state a case," which could 
 then be made the subject of action in the higher court. 
 So this important power was made of no effect. 
 
 2. Complaints before the commission are not quite so 
 slow or costly as they were before the courts, but they 
 are bad enough to prevent most men from undertaking 
 them. Sir Frederick Peel himself admits that the 
 expense frightens people away from making complaints. 
 But this is by no means the worst. The testimony before 
 the Parliamentary Committee of 1881-82 is full of matter 
 to startle those who argue that because there are few 
 complaints before the commission there are few men that 
 have grievances. Men have good reason to think twice 
 before they enter a complaint. In the Aberdeen manure 
 case, already referred to, the Aberdeen men, successful at 
 every point, lost more money than they gained. Every 
 important case is so persistently appealed that the origi- 
 nal promptness or cheapness of Railway Commission 
 practice counts for nothing. But the indirect results 
 are yet worse. A complainant is a marked man and the 
 commission cannot protect him against the vengeance of 
 the railroads. A town fares no better.- It complains of 
 high terminal charges, and the company retorts by raising 
 the local tariff for that place 100 per cent.' A coal mine 
 
 ' Evidence, 18S1, qu, 420, 421.
 
 1/6 RAILROAD TRANSPORTATION. 
 
 complains of freight rates, and the company refuses to 
 carry for it on any terms ; it has ceased, it says, to be a 
 common carrier for coal. Even the War Department is 
 afraid. It has its grievances, but it dares not make them 
 public for fear of reprisals.' '' It is quite clear," says the 
 Secretary of the Board of Trade, '' that it is a very for- 
 midable thing to fight a railway company." 
 
 It is not easy to see what can be done in the face of 
 these difficulties, so different from any thing which we see 
 in most American States. Our commissioners, with fewer 
 powers, have infinitely more power. The reason is, that 
 in America to defy such an authority involves untold 
 dangers, public sentiment being irritable and unrestrained ; 
 whereas in England it involves no danger at all, public 
 sentiment being long-suffering and conservative. 
 
 The lawyers say, Strengthen the legal element in the 
 commission. Some of the railroad men say so too, be- 
 cause they think that a commission formed on the model 
 of the old courts would interfere no more than the old 
 courts. On the other hand, many men desire the appoint- 
 ment of a public prosecutor to relieve individuals of the 
 danger and odium of bringing complaints ; or that cham- 
 bers of commerce may be allowed to undertake such prose- 
 cutions. Others go still further, and urge that the powers 
 of the commission be increased, and that they be allowed 
 to determine, on general grounds, what constitutes a 
 reasonable rate. The commission itself would be glad to 
 do that. But such a thing, however cautiously carried 
 out, would involve the Granger principle of fixing rates. 
 It seems quite unlikely that Parliament will make any of 
 these proposed changes, except to give chambers of com- 
 merce the right to prefer charges. 
 
   Evidence, 1881, qu. 5965.
 
 ENGLISH RAILROAD LEGISLATION. I// 
 
 We have dwelt on the dark side of the picture, because 
 there is a general impression in this country that the Eng- 
 lish Railway Commission is a complete success. It must 
 not be inferred that it is a complete failure. It has in the 
 first nine years of its existence passed judgment on no 
 cases. Only 17 of these have been appealed, and in 1 1 of 
 them the commissioners have been sustained. The deci- 
 sions have, as a rule,' been marked by good sense and 
 impartiality. The direct good to the complainants may 
 have been very small, but the indirect good to the public 
 was doubtless great. The commission has made serious 
 and generally successful efforts to enforce a law in cases 
 where it would otherwise have been a dead letter. These 
 particular cases may have given more trouble than they 
 were worth. But the very existence of such a power con- 
 stitutes a check upon arbitrary action in general. We 
 cannot assume, as many do, that the few complaints pre- 
 ferred before the commission represent any thing like the 
 amount of well-founded grievances. But we can assume 
 that the chance for such complaints to be made and 
 heeded makes the railroad managers more cautious in 
 giving occasion for them. Although no one is fully satis- 
 fied with what the commission has done, the great majority 
 of shippers are obviously of the opinion that it has pre- 
 vented much evil which would otherwise have gone on 
 unchecked. 
 
 Passing from the means of dealing with the complaint 
 to the substance of the complaints themselves, we find, in 
 England as everywhere else, two distinct sets of griev- 
 ances, involving totally different treatment. Some charges 
 are complained of as exorbitant in themselves, involving 
 extortion. Others are complained of as unequal, involv- 
 
 ' With exceptions to be hereafter noted.
 
 178 RAILROAD TRANSPORTATION. 
 
 ing discrimination. When railroads were first chartered, 
 people feared the first evil and hardly thought of the 
 second. They tried to prevent extortion by a very definite 
 system of maximum rates and fares. For almost every 
 conceivable sort of goods the charter prescribed how much 
 toll the railroad might take for use of the way, how much 
 for furnishing the motive power, and how much for fur- 
 nishing the cars; also what rates it might charge for all 
 these services combined.' 
 
 It is hardly necessary to say that these provisions were 
 of little effect. There were several reasons for this. 
 First, the railroads could carry much cheaper than was at 
 first expected ; so that most of the maxima were too high 
 to be of any practical effect. Second, the whole system 
 of provisions concerning equal mileage rates, terminals, 
 classification, etc., is quite inapplicable to the new condi- 
 tions of railroad service which have grown up since the 
 original charters. Every careful student of the question, 
 from Morrison, in 1836, down to the committees of 1872 
 and 1882, has come to the conclusion that fixed maxima 
 are of next to no use in preventing extortion. 
 
 Still, the system of charter maxima is not absolutely 
 without effect. A few articles have risen greatly in value 
 since the time of the charters. The charter maxima for 
 manure were very low ; and an Aberdeen Company 
 brought suit to compel the railroad to carry highly valua- 
 ble artificial fertilizers under the old manure rates per ton. 
 The railroad tried to take refuge under the inconsistencies 
 
 ' It is worthy of notice that these rates were not based upon cost of 
 service, but mainly upon the value of the goods, and that certain articles 
 when destined for export were allowed a much lower maximum rate than the 
 same article when destined for home consumption. In the charter of the 
 Stockton & Darlington Railway the maximum for coal in general was \d, 
 per ton per mile, but for export coal only \d.
 
 ENGLISH RAILROAD LEGISLATION. 1/9 
 
 of the charter itself, but was not allowed to, and the 
 Aberdeen company won their case. But instances like 
 these are infrequent. 
 
 A more important case is that of certain short-distance 
 rates, especially on agricultural produce, where the rail- 
 roads make heavy terminal charges of questionable legality. 
 The number of instances of this kind is very large. The 
 source of the trouble is this : while the train expenses per 
 ton moved have decreased enormously, the station ex- 
 penses have, on the whole, risen ; in some cases they have 
 risen enormously. Not only is the old schedule relatively 
 unfair, it is, in some instances, absolutely unfair to the 
 roads, because it does not enable them to meet increased 
 station expenses on short-distance freight. There is a 
 sharp conflict now ^oing on, in the courts and in Parlia- 
 ment, concerning the right of the railroads to indemnify 
 themselves for these expenses.* The law, as it stands, 
 seems to favor the shipper ; but it also seems likely that 
 the railroads can justify their action on equitable business 
 principles. If so, business principles are likely to prove 
 mightier than a half-obsolete regulation in a charter. 
 
 The plan of trying to keep down rates by a limitation 
 of dividends has been often proposed, but they have had 
 too much sense to believe in it. Government revision of 
 rates has been tried to a slight extent, but the authorities 
 abstained from putting the new maxima very low, and the 
 revision really amounted to nothing. The right to revise 
 rates, quite independently of any charter provisions, has 
 always been insisted upon by Parliament, but even Prof. 
 Hunter, the Simon Sterne of English investigations, 
 admits that " it would require an extremely strong case 
 to justify interference." There is no present likelihood 
 of this right being exercised. 
 
 * The much- vexed question of " station terminals."
 
 l8o RAILROAD TRANSPORTATION. 
 
 The subject of exorbitant rates is really a subordinate 
 one. It is the question of differential rates that most 
 agitates the public mind ; and it comes up in almost 
 exactly the same forms which it takes in America. One 
 set of low rates arises from competition of different 
 routes, another from special contracts to develop busi- 
 ness. 
 
 As we have already seen, the low differentials for com- 
 peting points do not arise from the competition of rail- 
 roads with one another ; at least not to any great extent. 
 They arise from the competition of water routes. The 
 long line of sea-coast and the great number of navigable 
 rivers and canals make this a more important element in 
 England than anywhere else. The committee of 1872 
 say that there is a sea competition at about three fifths of 
 the stations in the United Kingdom. And thus it hap- 
 pens that while there is every year less and less compe- 
 tition between railroads, there is every year more and 
 more complaint of discrimination. 
 
 The railroads have tried hard enough to control the 
 water routes. They have gotten possession of competing 
 canals, sometimes by methods whose legality was doubtful. 
 In the case of natural waters they have tried to get con- 
 trol of the shipping or of the harbor facilities ; and it is 
 said that one railway, the North-Eastern, running to all 
 points on the Yorkshire coast and on the Tyne, has so far 
 succeeded as to control competition by routes on the open 
 sea. The water is free, but the railroad controls the land- 
 ing-places. 
 
 But there is one large and constantly increasing set of 
 water routes which the railroad cannot control — the routes 
 of trade between London and foreign countries. The 
 western and northern railroads want their share of the
 
 ENGLISH RAILROAD LEGISLATION: l8l 
 
 traffic between America and London ; the southern and 
 eastern roads want their share of the traffic between Con- 
 tinental Europe and London. The railroads enter this 
 contest under some decided disadvantages. It is the 
 case of a combined water and rail route competing with 
 an all-water route which is not essentially longer in dis- 
 tance. The distance from New York to London via Glas- 
 gow or Liverpool is about the same as via the Thames. 
 The distance from Boulogne to London by Folkestone 
 is not much shorter than from Boulogne to London by 
 direct steamer. And the rail route involves one extra 
 handling of the goods. The direct water rates are al- 
 ready so low that the railroad's share of a combined rate 
 must be very small indeed ; much smaller than that they 
 charge on their inland business for the same service. 
 
 Thus, the rate from Glasgow to London on the beef of 
 American cattle slaughtered at the wharf is A^^s. per ton, 
 while for Scotch meat the rate for the same service is 'jjs. 
 Foreign hops are charged ijs. 6d. per ton from Boulogne 
 to London ; English hops are charged 35^'. per ton from in- 
 termediate points. Norway lumber is conveyed at about 
 half the rates charged for English lumber of the same 
 quality. There are hundreds of such examples which 
 might be given. Of course English producers feel very 
 indignant at such discriminations ; and they feel worse 
 because it all seems to be for the benefit of foreigners. 
 The same sort of feeling was shown here before the Hep- 
 burn Committee by the New York men, who complained 
 that the railroads carried cheaper for citizens of other 
 States ; but in England, where it is a case involving other 
 nations, matters seem far worse. These competitive 
 through rates appear to the English public like a premium 
 on imports against home production.
 
 1 82 RAILROAD TRANSPORTATION. 
 
 Special rates to develop business have grown up in the 
 same way as in America; it is hardly necessary to cite in- 
 stances. The Midland Railway alone has thirty million 
 such rates. They are rarely based on personal favor- 
 itism in any open or outrageous way. It is certain 
 localities or certain lines of business which the railroads 
 favor, as against other localities or trades. 
 
 The attempt at state control of differential rates began 
 about the time when railroad consolidation became im- 
 portant. By act of 1845 the companies were allowed to 
 vary their charges at will within the maxima, but must 
 charge all persons the same rate for the same service. 
 This position was reaffirmed in the act of 1854, by which 
 the railroads were forbidden to grant undue and unrea- 
 sonable preferences. But this act left it to the Court of 
 Common Pleas to determine what constitutes an undue 
 preference. This jurisdiction was transferred to the Rail- 
 way Commissioners in 1873. The Court of Common 
 Pleas took up the matter most unwillingly. In every 
 possible case it tried to shift the responsibility upon other 
 courts. One of the great difficulties about obtaining re- 
 dress under the act of 1854 was that the complainant 
 would be sent from one court to another, and each would 
 be unwilling to do any thing. In the years 1854-73 there 
 were only twenty-nine cases under* the act, and many of 
 these were not under the section deahng with discriminat- 
 ing rates. 
 
 From the outset the court enforced the point that there 
 should be no personal preferences ; that under exactly 
 similar circumstances all shippers should be treated alike. 
 The railroads could make as many special rates as they 
 pleased, but they must be given to everybody under the 
 same conditions. They took this position so decidedly
 
 ENGLISH RAILROAD LEGISLATION. 1 83 
 
 that they stopped the practice of personal favoritism 
 almost entirely. Previous to 1854 there had been many 
 complaints of this kind ; afterward we find very few. 
 Rebates, such as there were, were given secretly ; when 
 they were discovered the companies made private settle- 
 ment for back differences with the parties aggrieved. 
 The fact that a rate was kept secret was considered prima- 
 facie evidence of personal preference. 
 
 On other points the decisions conflicted, until the ad- 
 vent of the Railway Commissioners. Since then they 
 have all tended in one direction. It was held in the case 
 of Evershed vs. L. and N. W./ that the mere existence of 
 competition in one case and not in another, did not 
 justify any difference of treatment, Two years later in 
 the case of Budd vs. L. and N. W. Railway Co.,^ the 
 Court of Exchequer asserted as law what is known in 
 America as the " short-haul " principle, namely, that the 
 whole distance between any two points must not be 
 charged less than a part of it. Two years later, in the 
 very important case of The Denaby Main Colliery Co. vs. 
 M., S., and L. Railway,* it was held that the greater dis- 
 tance must be charged actually more. A year later, in 
 the case of Richardson and others vs. Midland,^ these 
 principles were applied in comparing rates not on the 
 same route, but on different branches of the same road. 
 And, finally, in the case of The Broughton and Plas 
 Power Coal Co. vs. Great Western,^ it was held that the 
 
 ^ Third Rep. Railway Commissioners (1875-6), p. 3. These references 
 are to the series of parliamentary reports, not to the law reports covering 
 the same ground. 
 
 * 36 L. T., N. S., p. 802. Not a Railway Commissioners* case. 
 ' 7 R. Com. (1880), p. 5. 
 
 * 8 R. Com. (1881), p. 6. 
 " 10 R. Com. (1883). p. I
 
 1 84 RAILROAD TRANSPORTATION, 
 
 differences in charge must be greater than the difference 
 in cost ; that is, that the railroad must make more profit 
 on through shipments than on local ones.' 
 
 These cases, and others involving the same principles, 
 show: I. That the commissioners are acting upon the 
 theory that rates should be based upon cost of service." 
 2. That they propose to apply it to an extent which has 
 proved impracticable wherever tried, whether by Bismarck 
 or by the Grangers. 3. That they intend to use it as a 
 protection to vested rights, against the levelling tendencies 
 of the railroad system. American courts generally con- 
 tent themselves with trying to use the cost-of-service 
 principle to prevent the creation of inequalities. The 
 English courts use the same principle to prevent their 
 abolition. This is the explicit intent of the Denaby 
 Main Colliery decision. 
 
 The Commissioners' lack of power has prevented them 
 from doing the harm that any general application of these 
 principles would produce. It has also prevented the 
 proof that the principles were impracticable, which would 
 so soon make itself felt if they were rigidly applied. But 
 they have caused things to be looked at in a wrong light. 
 The railroads, finding it of no avail to plead value of ser- 
 vice or necessities of competition as the reason for in- 
 equality, attempt to prove a difference in the cost of 
 service, where it does not really exist. And so we have 
 the spectacle of shippers, courts, and railroads attempting 
 to stretch a wrong principle to cover cases to which it 
 does not apply. 
 
 But there were a great many cases where the standard 
 
 ' Not more in proportion, but more on each consignment of a given 
 quantity. 
 
 'The Caledonian Railway was forbidden to charge more on cannel coal 
 than on less valuable kinds. — 2 R. Com., p. i.
 
 ENGLISH RAILROAD LEGISLATION. 1 85 
 
 was not elastic enough to suit the facts, and the facts too 
 stubborn to be squeezed down to the standard ; and this 
 led to the appointment of the parliamentary committee 
 of 1881-82 to consider the subject of discriminating rates. 
 The twenty-seven members of the committee represented 
 a great variety of conflicting interests ; four of them were 
 railroad men. After hearing a vast mass of testimony, 
 this committee came to a different conclusion from the 
 commission, and a more sensible one. When the commit- 
 tee came to make up their report two drafts were pre- 
 sented, one decidedly favorable to the railroads, the other 
 criticising them moderately. The first was rejected by a 
 vote of 12 to 10; but the second was so amended as to 
 bring in many of the ideas of the first ; and the final 
 report as it stands defends differential rates, and does not 
 regard cost of service as the sole standard. The report is 
 negatively rather than positively good ; but as compared 
 with recent English decisions, it is a great advance. No 
 action was taken by Parliament upon it ; in fact, as far as 
 concerns our present subject, it calls for no action. It 
 simply declared that there were no general grounds for 
 interference. 
 
 The present state of things may be summed up as fol- 
 lows : 
 
 1. The roads may make what special rates they please; 
 but if they make a rate for one man they must extend 
 the same privilege to all others in like circumstances. If 
 they have been secretly paying rebates to one shipper, 
 they may be compelled to refund to any other shipper 
 similarly placed, the same rebates on all his shipments 
 since the special contract with the one shipper began. 
 
 2. It is held by the Railway Commissioners that two 
 shippers are similarly placed and must be similarly treated
 
 1 86 RAILROAD TRANSPORTATION. 
 
 when the cost to the railroad of handling the goods for 
 one is the same as for the other ; and, conversely, unless 
 some special reason can be shown, the railroad has no right 
 to put a less favorably situated shipper on an equality with 
 a more favorably situated one. 
 
 3. But the last parliamentary committee has refused to 
 indorse these principles, and has said that " a preference is 
 not unjust so long as it is the natural result of fair compe- 
 tition."
 
 CHAPTER X. 
 
 RAILROAD POLICY* IN FRANCE. 
 
 Traditions of government activity — General scheme adopted in 1842 — 
 Gradual consolidation under six companies — Legislation of 1859 — Gov- 
 ernment guarantees of interest — Local roads — Attempt to combine them 
 for speculative purposes — Movement in favor of state ownership — De- 
 cree of 1879 — Financial difficulties— Failure of the project— Contracts 
 with the companies, 1884— Mileage and dividends — Effects of the 
 French system upon construction, traffic, and rates. ' 
 
 The traditions of Continental Europe all pointed toward 
 government monopoly of the means of transportation. 
 
 There is one respect in which England and America are 
 like one another, but sharply different from France, Ger- 
 many, or other European countries. It is in the way in which 
 people in general are disposed to regard government inter- 
 ference. The English and American maxim is that what- 
 ever can be done witJiout government, should be thus done. 
 The continental principle is that whatever can be done by 
 government, should be. It has become a commonplace say- 
 ing that our Anglo-American idea of liberty isnot developed 
 in Continental Europe. When a Frenchman speaks of lib- 
 
 ' French railroad literature is full and valuable, but unfortunately not 
 easy of access to American readers. The great authority is A. Picard : 
 " Les Chemins de Fer Fran9ais," 5 vols., Paris, 1884. This is nothing less 
 than a well-digested collection of all important public acts and utterances of 
 French railroad policy — as nearly as possible in their original form. The 
 works of Duverdy and Jacqmin are also of great value. 
 
 Much use has been made of the Annales des Fonts et Chaussies. The 
 Revue Generate des Chemins de Fer is more purely technical in its character. 
 
 187
 
 1 88 RAILROAD TRANSPORTATION. 
 
 erty, it is not so much freedom from interference with his 
 own movements that he seeks, as the right and power to 
 interfere with other people's movements. What he really 
 wants is political power. A party may call itself liberal 
 or republican ; but when it gets into power it governs 
 about as strictly as its predecessors. Sometimes there is 
 a monarchy, sometimes a democracy ; but there is always 
 a bureaucracy — a government by office-holders. 
 
 This habit of governing and being governed has resulted 
 in much better state work, and much worse individual work. 
 On the continent of Europe private enterprise at best was 
 timid. In many countries it seemed hardly possible to have 
 railroads at all unless the state took the initiative. The 
 state controlled the roads and canals. It had managed 
 the post-office for centuries. In due time, it took up the 
 telegraph as a branch of the post-office. People had looked 
 to it to take up the railroad system as a branch of the road 
 and canal system, in exactly the same way that it after- 
 ward took the telegraph. 
 
 This was not done ; there were financial reasons in the 
 way. To build a system of railroads involved a somewhat 
 speculative expenditure of capital, on a scale sufficient to 
 frighten conservative statesmen. Small states with good 
 credit might undertake something of the kind. Large 
 states, like France, Austria, or Prussia, did not venture to 
 do so. They adopted a policy of subsidies to encourage 
 private companies, for without such subsidies much neces- 
 sary work could not be done at all. In return for 
 these subsidies, they reserved more or less important 
 rights of state control. 
 
 Thus the early history of European legislation was deter- 
 mined not so much by the character or wishes of the dif- 
 ferent governments, as by their financial condition. The
 
 RAILROAD POLICY IN FRANCE. 1 89 
 
 small states adopted a policy of at least partial govern- 
 ment ownership, best typified in Belgium. The large 
 states adopted a policy of support and control without 
 actual ownership. This was most consistently carried out 
 in France. Austria (and afterward Italy) for a long time 
 stood somewhat near to France in their general policy ; 
 Prussia inclined more toward the Belgian system. Since 
 1870 there has been an almost general movement away 
 from the policy of state support and control, and toward 
 that of actual ownership. The difificulties of control have 
 been found greater, the financial risks of ownership less. 
 Above all, the governments have been roused to the idea 
 of the supreme importance of a railroad policy as an ele- 
 ment in the industrial and even in the political life of 
 nations, and have felt that nothing short of complete 
 ownership and direct management of railroads would give 
 them the power to which they aspired. 
 
 So much for the general influences which have acted 
 everywhere. It is hardly necessary to say that each sep- 
 arate nation had a railroad history of its own, in which 
 the traits of its national character were reflected. 
 
 This was strikingly the case in France. A Frenchman 
 cares very much more for systematic arrangement than an 
 Englishman, and very much less for original and untram- 
 melled business activity. The system of roads and water- 
 ways existing in 1830 suited the French nation exactly. 
 They were so arranged that they looked well on the map ; 
 so classified that each bore its exact proportion of import- 
 ance, whether national, departmental, or local. They were 
 regulated from Paris with ease, and yet with military pre- 
 cision. Never was there so good a corps of engineers for 
 carrying out government programmes as that which was 
 trained at the Ecole des Ponts et Chauss6es in Paris.
 
 190 RAILROAD TRANSPORTATION. 
 
 They were men of first-rate training and high general 
 standard of talent. Few of them were men of genius or 
 originality in the highest sense of the word. Yet this 
 very absence of rule-breaking genius probably rendered 
 them all more efificient as a body of trained public ser- 
 vants." 
 
 France was slower than some of her neighbors in taking 
 up railroad construction, probably because her roads were 
 so good and her engineers so well drilled. Nor was the 
 nation at all inclined to let a railroad system grow up 
 piecemeal. They wanted a comprehensive scheme or 
 none at all. The very first thing done (except to charter 
 a few horse-railroads in 1826-32) was to appropriate money 
 to pay the government engineers for laying out a general 
 system of railroad lines. When this survey was completed, 
 they next took up the question of principles of ownership 
 and management. While other countries were acting and 
 experimenting, France was reasoning. There was a long 
 series of debates in the years 1837-1840. Nothing was 
 settled until 1842. The author of the plan finally adopted 
 was Thiers. The state was to contribute about $50,000 
 per mile, and own the road-bed. Private enterprise was 
 to be called upon for whatever was necessary (about 
 $40,000 per mile) for track, equipment, buildings, etc. 
 After some forty years the whole was to revert to the 
 state. 
 
 If the French had delayed a long time, they had at any 
 rate succeeded in maturing plans, both of engineering and 
 of legislation, which they have since carried out pretty 
 consistently. Both in the arrangement of the lines and 
 in their relation to the government, they have maintained, 
 with variations of detail, the form contemplated from the 
 
 ' M. M. V. Weber . " Nationalitat und Eisenbahnpolitik," pp. 30, 31.
 
 RAILROAD POLICY IN FRANCE. 191 
 
 first.' This is more than can be said of any other 
 country. 
 
 Under this plan thirty-three different companies were 
 chartered with about twenty-five hundred miles of author- 
 ized line. Railroad building went on rapidly until the 
 revolution of 1848 ; it was then checked so suddenly that 
 the next three years show an actual decrease in the mile- 
 age in operation. With the accession of Napoleon III. in 
 185 1, there came a new era of railroad activity, which 
 lasted until the crisis of 1857. This activity was stimu- 
 lated by a change in the charters, extending their duration 
 in general to ninety-nine years from date of alteration. 
 Had the original plan been followed out, the lines would 
 now be reverting to the government. As it is, they will 
 remain in private hands till the middle of the twentieth 
 century. 
 
 The crisis of 1857 produced so complete a stoppage of 
 railroad building that new legislation was resorted to. 
 This stoppage and this supplementary legislation were an 
 almost necessary consequence of the French system. The 
 lines had been laid out with the idea of avoiding all waste 
 of capital. They were traced by government engineers; 
 each part stood in its proper relation to the whole. 
 Parallel roads were forbidden as a matter of course. At 
 first this worked extremely well. It forced the numerous 
 independent companies to work in harmony with one 
 another. But it rendered the process of consolidation all 
 the easier. Soon after the accession of Napoleon there 
 were but eleven independent companies. In a few years 
 more the eleven were reduced to six — five radiating from 
 
 ' Leon Aucoc : "Conferences sur I'Administration et le Droit Adminis- 
 tratif," vol. iii. A resume of the part bearing on railroad policy has been 
 published in the jfournal of ike Staiistical Society (London), vol, xlv,, pp. 
 496-504,
 
 192 RAILROAD TRANSPORTATION. 
 
 Paris in different directions, the sixth in the extreme 
 south. Each had a monopoly in its own district. For 
 the through traffic between the great centres there was 
 very httle competition, either actual or possible. This 
 was a state of things which has not prevailed to the same 
 extent in any other actively industrial country. Its effects 
 were distinctly bad. It had the effect of making the roads 
 neglect the development of local business by branch lines. 
 The through business brought a greater rate of profit 
 than the local or branch-line business was likely to. Not 
 being afraid of interference in the former, they felt no 
 necessity for securing the latter. This is why the stop- 
 page of railroad construction in 1857 was so complete. 
 
 New railroad construction was necessary for the devel- 
 opment of the country. In order to secure it the govern- 
 ment had recourse to a system of guarantees of interest. 
 The general scheme for this purpose was devised by De 
 Francqueville in 1859. The roads under profitable opera- 
 tion were set apart under the title of " old net-work " 
 (ancien reseau). The lines which were unprofitable, and 
 the far greater number of lines not yet constructed, were 
 together classed as the " new net-work." Each of the six 
 companies undertook the construction of a large number 
 of new lines in its own district. Money for their con- 
 struction was raised by bonds on which the government 
 guaranteed four per cent, interest plus a contribution to 
 a sinking fund which should be sufficient to pay off the 
 bonds at maturity. These interest charges did not con- 
 stitute a first lien on the income of the companies. They 
 were not called upon to pay any of this interest unless 
 the surplus on the old net-work was sufficient to pay such 
 dividends as they had been paying in the past, plus certain 
 other fixed charges. The amount of this " reserved rev-
 
 RAILROAD POLICY IN FRANCE. 1 93 
 
 enue " was fixed by special agreement with each company. 
 Any thing in excess of this went to pay interest on the 
 new bonds or to repay the government for such interest 
 previously advanced. When the companies were no 
 longer indebted to the government, or forced to have 
 recourse to its guarantees, they were then allowed to 
 increase their dividends beyond the percentage fixed by 
 agreement. 
 
 The provision that every thing should revert to the 
 state after ninety-nine years, or thereabouts, remained 
 unchanged. There was an additional provision giving the 
 state, after fifteen years, the right to buy up any or all of 
 the roads, on terms favorable to the stockholders. 
 
 The legislation of 1859, ^^ ^^^ main provisions, remained 
 unaltered until 1884. The changes of 1863 and of 1868-9 
 were of minor importance. The system as a whole was 
 more advantageous to the railroads themselves than to 
 the government or the country. The guarantees of in- 
 terest made the securities extremely valuable, and lessened 
 the necessity for enterprising management. Some roads 
 payed off their obligations to the government, and got the 
 full profit from lines which they had themselves run no 
 risk in constructing. Others found it hopeless to try to 
 meet these obligations at all ; they then pocketed their 
 guaranteed dividends, and let the government pay interest 
 without any prospect of repayment. The companies were 
 literally in the position " heads I win, tails you lose." 
 
 No scheme arranged at Paris could meet all local de- 
 mands ; and it was to satisfy such demands that a measure 
 foreign to the general tenor of French legislation was put 
 in operation in 1865. It provided for the construction of 
 local roads, not belonging to the great companies. The 
 local authorities were given the right to subsidize such
 
 194 RAILROAD TRANSPORTATION. 
 
 roads largely. It was provided that they were to be inex- 
 pensively built, and that they should be so arranged as to 
 form mere branches ; not to be combined into through 
 routes which might interfere with the monopoly of the six 
 companies. 
 
 Unfortunately they did one thing which rendered it 
 doubtful whether the last provision would be carried out. 
 They had these local roads built with standard gauge. 
 The result was what might have been expected. After 
 the downfall of the empire, when the central authority 
 was weaker, the prohibition to combine was practically 
 abandoned. The scattered local roads now became possi- 
 ble competitors of the main systems, in case connecting 
 links should ever be built. The cheapness of these local 
 roads made the danger all the greater. In 1875 a Belgian 
 named Phillippart tried the experiment. He was an able 
 operator, and had succeeded in a similar attempt in his 
 own country a few years before ; but in France the powers 
 opposed to him were too strong, and in 1876 he was 
 completely beaten. He had succeeded in distorting the 
 local roads from their true purpose, and extending them 
 into combined insolvency, without making them suffi- 
 ciently effective competitors against the old roads for him 
 to be able to levy the blackmail which he had hoped. 
 His failure left his railroads in a condition worse, in some 
 respects, than is that of the West Shore to-day. 
 
 These railroads lay in two main groups — one in the 
 north, the other in the southwest. The former was almost 
 immediately absorbed by the Northern Railroad, finan- 
 cially the most powerful of the French companies. The 
 southern group, after a year or so of the most helpless 
 misery, seemed likely to pass in the same way into the 
 hands of the Orleans Railroad, when an agitation in favor
 
 RAILROAD POLICY IN FRANCE. I95 
 
 of direct state management made itself strongly felt, and 
 the proposition to allow the consolidation was overwhelm- 
 ingly defeated in the French Chamber of Deputies. 
 
 The movement in 1877 in favor of state ownership was 
 probably due to patriotism more than to any other one 
 cause. Some desired the government to have more civil 
 power, others desired it to have more military power. 
 They had seen the advantage accruing to Germany in the 
 war of 1870 from its control over railroad administration. 
 Bismarck was now engaged in still further extending gov- 
 ernment ownership in Prussia. Why should not France 
 do the same, now that such an opportunity offered ? 
 These reasons, vigorously urged, met with all but unani- 
 mous approval. The railroads of the southwest were 
 taken under direct state management. 
 
 This was but the beginning. France had fallen behind 
 her neighbors in railroad building. She had but thirteen 
 thousand miles of railroad, while Germany, with not many 
 million more inhabitants, had eighteen thousand miles. 
 Ten thousand miles more were needed. The companies 
 were unwilling to build them. With perhaps two excep- 
 tions, they had reached a condition like that which existed 
 in 1859. -^f t^"^^ companies would not build them, said 
 the ministers, then the state must do so. De Freycinet, 
 the Premier, was a sanguine man, who never did things by 
 halves. He boldly proclaimed the need of a loan of six 
 hundred million dollars ; and then, without waiting to 
 know whether he could get it, he proceeded to lay down 
 the detailed plan of the work. By a decree of July, 1879, 
 the lines were determined upon, on the very grandest 
 scale, without detailed estimates of cost. 
 
 It was easy to draw the plans ; it was not so easy 
 to secure the money. Even the French Chambers felt
 
 196 RAILROAD TRANSPORTATION. 
 
 serious doubts concerning the project of public expendi- 
 ture on a scale like this. A little was built each year, 
 with special credits voted for the purpose ; but the lines 
 were disconnected. The question which should be built 
 first, was determined by the political claims of rival local- 
 ities, rather than on any broad business principles. Scat- 
 tered as they were throughout the country, there was 
 nothing to do except to lease them for short terms to one 
 or another of the six great companies, according to the 
 district in which they happened to be situated. Nor was 
 the state much more successful in the management of its 
 roads in the southwest, which it had taken up in their 
 distress. Instead of becoming a power in the railroad 
 world by the management of these lines, it was brought 
 into a position of weakness. They were not well situ- 
 ated, and did not reach Paris at all. Attempts were made 
 to secure a Paris connection for the state by the purchase 
 of the Orleans system ; but they were futile. 
 
 Meantime financial affairs were taking a turn which was 
 likely to put a stop to all magnificent schemes of railroad 
 construction or purchase. The power of the French Gov- 
 ernment to raise money, whether by taxing or by borrow- 
 ing, for a longtime seemed unlimited, but the limit began 
 to make itself felt as early as 188 1. The mighty maker 
 of projects and spender of money — Dc Freycinet — had 
 been forced to resign in the autumn of 1880. After 
 his departure, and under the more strained financial 
 conditions, France no longer had the power to carry out 
 his projects. At the same time it could not definitely 
 resolve to abandon them. The counter-propositions of 
 Leon Say, an able financier, were rejected. Committee 
 after committee was appointed to consider these ques- 
 tions ; but with no result whatever until the death of 
 Gambetta, at the beginning of 1883.
 
 RAILROAD POLICY IN FRANCE. 19/ 
 
 In some respects Gambetta was to France what Bis- 
 marck was to Prussia. He had not the same political 
 power, but he had the same kind of moral influence. This 
 was more evident after his death than it had been during 
 his lifetime. Though not the nominal leader, he was the 
 real mainstay of the movement in favor of state railroads ; 
 when he died the movement lost its strength. The very 
 men, like Raynal, who under Gambetta's influence had 
 been strong supporters of state management, now found 
 themselves more ready to yield to financial necessity and 
 leave the railroad system to be developed by private com- 
 panies.' A series of agreements to this effect was negoti- 
 ated in 1883. They were resolutely but unsuccessfully 
 opposed by the more faithful adherents of state manage- 
 ment. By the beginning of 1884, the whole scheme was 
 definitely settled ; apparently fixing the railroad policy of 
 France for some time to come. 
 
 The leading bases of settlement are as follows : 
 I. The state confines its system to a rather small district 
 in the southwest. The isolated lines which it owns in 
 other parts of the country it gives up to the companies in 
 whose district they are situated, making their monopoly all 
 the more complete. By way of compensation it receives 
 a few outlying lines of other companies which might com- 
 pete with the state in its own southwestern district. It 
 abandons all idea of a Parisian line of its own, merely 
 stipulating for a permanent connection over the lines of 
 the Western Railroad. In giving up the idea of reaching 
 Paris, it gives up all prospect of becoming a controlling 
 power in the French railroad world. 
 
 ' On the most recent phases of French railroad history there is an excel- 
 lent article by Dr. v. d. Leyen, in the yahrbuch fiir Gesetzgebung (Leipzig), 
 N. F., viii., 4.
 
 198 
 
 A' A ILROAD TRA NSPOR TA TION. 
 
 2. The additional lines needed are to be constructed by 
 the companies in whose districts they belong. The state 
 will pay for them all ; not at once (except, of course, in its 
 own district), but by annual instalments of about thirteen 
 million dollars each, for seventy-four years ; at the end of 
 which time the companies' charters expire, as arranged in 
 1859, '^"^ ^^ whole reverts to the state. What the com- 
 panies actually do in this matter is to advance the capital, 
 make what they can out of the roads, and receive their pay 
 in instalments ; so calculated that at the time when the 
 charters expire they will have recovered their original ad- 
 vances with interest. 
 
 The length of the line now in operation and of new line 
 to be constructed under the conventions of 1883, is as 
 follows : 
 
 
 Vliles now 
 
 To be 
 
 
 in operation. 
 
 constructed. 
 
 Total. 
 
 Mediterranean 
 
 4,500 
 
 1,500 
 
 6,000 
 
 Orleans . 
 
 3,100 
 
 1,500 
 
 4,600 
 
 Western , 
 
 2,500 
 
 1,000 
 
 3.500 
 
 Eastern . 
 
 2,200 
 
 800 
 
 3.000 
 
 Southern 
 
 1,500 
 
 1,100 
 
 2,600 
 
 Northern 
 
 2,000 
 
 300 
 
 2,300 
 
 State 
 
 1,300 
 
 700 
 
 2,000 
 
 Total 
 
 17,100 
 
 6,900 
 
 24,000 
 
 3. The distinction of old and new net-work is given up. 
 The state guarantees each company a minimum dividend 
 equal to that which it has paid in recent years. If the 
 amount available for dividends increases beyond a certain 
 fixed percentage, two thirds of the excess goes to the 
 state. This last provision is not new in France ; but 
 previous conventions have only allowed the state one 
 half of such excess. The limits are placed so high as to be 
 almost inoperative. A glance at them will show what 
 profitable investments French railroad stocks have been :
 
 RAILROAD POLICY IN FRANCE. 
 
 igt. 
 
 
 Guaranteed 
 
 Point beyond 
 
 
 minimum 
 
 which state 
 
 
 per cent. 
 
 shares excess. 
 
 Northern 
 
   . 13-5 
 
 22.1 
 
 Mediterranean 
 
 II 
 
 15 
 
 Orleans 
 
 II. I 
 
 14.4 
 
 Southern 
 
 lO 
 
 12 
 
 Western 
 
 7-7 
 
 10 
 
 Eastern 
 
 7-1 
 
 10 
 
 It is not easy to pass judgment on the effects of the 
 French system. One thing the figures just given show 
 plainly enough : that it gives the high profits to the rail- 
 roads.' In so far as this result is reached by preventing 
 waste of capital it is good. In so far as it is reached by 
 not building new lines to develop new business, it is bad. 
 In France both these effects are so mixed that it is im- 
 possible to separate them. 
 
 Up to a certain point, extension of railroad enterprise, 
 whether in the way of construction, facilities, or general 
 policy, is good for the railroads and the community both. 
 For a long distance beyond this point, it on the whole 
 continues to benefit the community, but on the whole 
 does not increase railroad profits, tending rather to dimin- 
 ish them. Finally, we reach a point beyond which any 
 additional construction does the community little good 
 and some harm, while to many of the railroads it means 
 absolute ruin. 
 
 The system of free competition in the United States 
 tends to keep railroad enterprise near the last point. The 
 system of non-competition in France tends to keep it 
 from advancing much beyond the first point. And as the 
 abuse of insolvent competition in the United States oc- 
 casionally carries us beyond the last point, so the abuse 
 
 * Or at any rate to their stockholders. By far the greater part of the 
 capital invested was furnished by bondholders at a comparatively low rate of 
 interest.
 
 200 RAILROAD TRANSPORTATION. 
 
 of monopoly privileges in France occasionally prevents rail- 
 roads from reaching the first point. In spite of all that can 
 be done in the way of state control, the recognition of 
 monopoly rights puts the railroads at an unfair advantage 
 in dealing with the public. They can refuse to do what 
 does not suit their own convenience, and persist in their 
 refusal until the public makes favorable terms with them. 
 Such settlements cannot be made once for all. New con- 
 ditions arise requiring new measures. What was good in 
 i860 was inadequate in 1880. What is good in 1885 will 
 probably be quite inadequate in 1900. Each new settle- 
 ment gives the railroads opportunity for new advantages. 
 In 1842 it was a subsidy ; in 1852, an extension of charter 
 privileges; in 1859, ^ guarantee on bonds; in 1883, a 
 guarantee of dividends. The French monopolist has at 
 least as much inducement to underdo the matter of rail- 
 road enterprise as the American speculator has to overdo 
 it. 
 
 Considering the strong position of the French railroad 
 monopolies, the wonder is that the French Government 
 is able to exercise such ef^cient control as it does. 
 In certain respects this control is really admirable. No 
 other country has in its civil service such a body of 
 trained engineers and inspectors. But even at best there 
 is a certain lack of elasticity in all these matters. Indi- 
 vidual needs are sacrificed to general rules, individual 
 enterprise to general schemes. It is an interesting fact 
 that a railroad which is owned and managed by the state, 
 in its general policy is much more like our own railroads 
 than is a road which is owned by a private company, but 
 strictly controlled by state regulations. In the latter case, 
 the state has no direct interest in making exceptions to 
 its own rules. In the former case, it has. The rules
 
 RAILROAD POLICY IIV FRANCE. 20I 
 
 which a state will make for itself are therefore less rigid 
 than those which it will make for other people. This 
 difference is strikingly seen in comparing the development 
 of railroads in Belgium or Germany, where the state 
 actually owned the leading roads, with that in France, 
 where it merely controlled them. The former was much 
 more untrammelled. 
 
 Concerning railroad charges in France, there has been 
 less discussion than in some other countries.* The gen- 
 eral questions of railroad legislation have been treated 
 from the financial or political standpoint rather than from 
 the industrial one. There can be little doubt that the 
 general effect of the system has been to prevent reduction 
 in rates. If we take figures recently published by Charles 
 Baum,'' a friendly critic, we find that the average charges 
 per ton-mile or passenger-mile have remained virtually 
 unchanged for many years. In the freight rate there was 
 actually a slight increase from 1872 to 1881. The rates 
 in the latter year were 1.55 cents per passenger-mile and 
 1.63 cents per ton-mile. These rates are on the whole 
 much higher than those of Belgium, probably somewhat 
 higher than those of Germany, and somewhat lower than 
 those of Austria. Compared with the United States, they 
 are, of course, much lower for passengers, and much 
 higher for freight. 
 
 There seems to be no reason to doubt that in a country 
 with such natural resources and such industrial develop- 
 ment as France, the railroads might have done much 
 better than this. But it will not do to draw our conclu- 
 sions too strongly ; least of all when they involve a com- 
 
 ' One of the best documents on this subject — Waddington's Report of 
 1880 — is reproduced in full in the English Parliamentary Committee Report 
 of 1882, Appendix, No. 31. 
 
 ' See Railroad Gazette, March 6, 18S5.
 
 202 RAILROAD TRANSPORTATION. 
 
 parison between different nations. The failure to lower 
 average rates is probably due largely to the failure to de- 
 velop long-distance traffic, as other nations have developed 
 it. Now, this lack of long-distance traffic is doubtless in 
 large measure a result of the railroad policy ; but in 
 another sense, it is an independent fact by itself, and the 
 cause of the railroad policy instead of its result. Of all 
 nations on the highest industrial plane, France probably 
 depends least upon her long-distance traffic. By a series 
 of causes, chiefly natural, her industry has been so diversi- 
 fied that she can, to a large extent, live within herself. In 
 some respects she pays dearly for the privilege ; in other 
 respects she has a great advantage. The slowness in 
 certain matters of railroad development is but one mani- 
 festation of this general character of French industry. 
 We have perhaps done quite as badly in going to the 
 opposite extreme. We have done wonders in the way of 
 reducing rates, but the through freight has had the lion's 
 share of this benefit. Even when the local shipper gets 
 an actual reduction, he may be relatively worse off than 
 before. What the competition for through freight is 
 doing for our railroad interests we know only too well. 
 The average rates per ton-mile are any thing but an in- 
 fallible sign concerning a railroad's wisdom or a state's 
 prosperity.
 
 CHAPTER XL 
 
 THE RAILROAD SYSTEMS OF CENTRAL EUROPE. 
 
 Lack of system in Germany at the outset — Gradual acquisition of railroad 
 property by Prussia — Growth of private lines, 1866-73 — Failure to 
 establish an imperial railroad system — Purchase of private roads by the 
 Prussian Government — Austrian history — Mistaken lines of policy — The 
 crisis of 1873 — Extension of state ownersliip in recent years — Early 
 enterprise of the Belgian Government — Period of active competition of 
 private railroads — Their absorption by the state system — Results of 
 Belgian railroad management. 
 
 M. M. V. Weber. Nationalitat und Eisenbahnpolitik, Vienna, 1876. 
 
 E. Sax. Die Eisenbahnen, Vienna, 1879, pp. 491-526. 
 
 In this chapter, as in chap, x., much of the material vi^as inaccessible in 
 its original form, and had to be taken at second-hand from journals like the 
 Archiv fur Eisenbahnwesen {2>Qx\m), Zeitung des Vereins Deutscher Eisen- 
 bahn- Verwaltungen (Berlin) Oesferreischische Eisenbahn-Zeitung (Vienna), 
 Moniieur des Intdrets Materiels (Brussels). 
 
 The contrast between Germany and France, so manifest 
 in almost every department of history, could not fail to 
 show itself in the railroad systems of the two countries. 
 That of France was planned under a carefully devised 
 scheme. It radiated from Paris as a centre. It formed a 
 national net-work, where each part was subordinated to 
 the whole. That of Germany, on the other hand, grew 
 up without any comprehensive plan. The first lines did 
 not even come into communication with Berlin. They 
 were built as local lines to subserve local interests. This 
 was largely due to the political constitution of the coun- 
 try. The smaller states pursued their own way, each for 
 
 203
 
 204 RAILROAD TRANSPORTATION. 
 
 itself, without regard to national development. They 
 were strong enough financially to adopt the policy of state 
 ownership and carry it out consistently. They actually 
 succeeded in doing what so many of our country towns 
 tried to do a few years ago by municipal subscriptions ; 
 that is, they secured railroad construction for the sake of 
 local interests, where mere business considerations would 
 not have caused railroads to be built. They thus obtained 
 a remarkably uniform development of lines all over the 
 country. 
 
 But it was not from these small states that a national 
 railroad policy was to come. The political ties which 
 bound them were too loose to admit of common action in 
 this matter. There was, it is true, a sort of federation of 
 railroads established, the " Verein Deutscher Eisenbahn- 
 Verwaltungen." This did extremely good work ; but it 
 dealt with matters of railroad administration rather than 
 railroad policy in the wider sense. There was but one 
 source whence a national railroad policy could arise, just 
 as there was but one source whence political unity could 
 come. The two movements centred in Prussia. 
 
 The original idea of the Prussian legislators seems to 
 have been a combination of the French scheme of regu- 
 lated monopoly with the exploded English notion of com- 
 petition of different owners of rolling stock on the same 
 line of rails. The law of 1838 explicitly recognized rail- 
 road monopoly rights, protecting them for thirty years 
 against parallel railroad construction. But the scheme 
 was never consistently carried out as it was in France. 
 
 About 1842 the policy of subsidies came into vogue ; 
 not on the French system, but in the form of guarantees 
 of interest. With these guarantees there was a further 
 proviso, that if the state was compelled to advance money
 
 RAILROAD SYSTEMS OF CENTRAL EUROPE. 20$ 
 
 in this way, it might, after a certain length of time, under- 
 take running the road itself. Other roads were indirectly- 
 countenanced by the purchase of stock on the part of the 
 state, which was thus gradually carried on in the direction 
 of railroad ownership. The first absolutely state-built 
 and state-managed road was one from Berlin toward the 
 Russian frontier, begun in 1848. This was built on mili- 
 tary grounds, without much regard to business considera- 
 tions. Down to i860 the government continued building 
 a few roads, and at the same time quietly purchased a 
 good deal of railroad stock, devoting to that purpose the 
 proceeds of a special railroad tax. 
 
 With the advent of Bismarck to power in 1861, military 
 matters thrust industrial ones into the background. Even 
 the railroad tax was diverted to political purposes. The 
 consolidation of Germany into one nation by the wars of 
 1866 and 1870 created new lines of trafific, and a demand 
 for new railroads. These were largely built by private 
 companies. The Prussian administration was too much 
 occupied with other social and political questions to give 
 the railroad problem its final solution, or even to decide 
 upon its own ultimate policy in the matter. The time 
 preceding the crisis of 1873 was a period of active railroad 
 speculation, in which the state itself was a participant. 
 In Prussia, as in Belgium, state railroads were simply 
 roads owned by the state, but managed on the same prin- 
 ciples, and with the same abuses, as competing private 
 roads. 
 
 This was the condition of things down to 1874. At that 
 time the German railroad system was a " mixed " one in 
 the fullest sense of the term. The small states had owned 
 their own roads, in large measure, from the outset. Pri- 
 vate enterprise had improvised connections and built
 
 2o6 RAILROAD TRANSPORTATION. 
 
 through lines. Prussia owned about one third of the rail- 
 roads within her borders. Some she had built for military 
 or political necessity, some she had acquired in the way of 
 business, some she had assumed when she annexed the 
 states that owned them. 
 
 Bismarck was far from satisfied. He wanted to see a 
 consistent state railroad system, and that not in the hands 
 of the individual governments, large or small, but in the 
 hands of the imperial power itself. He seems to have had 
 this idea in mind from the first. The power of the empire 
 to regulate railroads was established and defined in a 
 series of articles (§ 41-47) of the imperial constitution. 
 This was in 187 1. In 1873 a railroad commission (or 
 rather " Railroad Department," Eisenbahnainf) was estab- 
 lished, consisting of seven members, having power to carry 
 out the provisions of the constitution — among which was 
 one providing for the regulation of rates, — to secure pub- 
 licity, and to do away with abuses. By this authority a 
 great deal has been done to secure unity in matters of 
 construction, signals, liability, etc. In the matter of rates 
 it has done comparatively little. This is practically not 
 under the control of the empire, but of the individual 
 states.' 
 
 The imperial authorities wanted to do more than control 
 the railroads ; they wanted to own and manage them. 
 The first step in that direction was taken in the years 1870 
 and 1 87 1. When Alsace and Lorraine passed under 
 German sovereignty, the German Empire, as such, was 
 
 'We must not confuse the Prussian Government with that of the German 
 Empire, merely because the King of Prussia is ex-officio Emperor of 
 Germany. If the Governor of New York were ex-ojjicio President of the 
 United States, the administrations, National and State, might still remain 
 entirely distinct, with distinct spheres and rights. Such is actually the case 
 in Germany.
 
 RAILROAD SYSTEMS OF CENTRAL EUROPE. 20y 
 
 the only authority to take charge of the railroads of those 
 provinces, which could no longer remain under the man- 
 agement of the French company to which they had 
 hitherto belonged. This was but a beginning. Four 
 years afterward there was a strong agitation in favor of 
 transferring all railroads in all parts of Germany into the 
 hands of the empire. The project met with favor in 
 Prussia ; but in other parts of Germany, especially in 
 Bavaria and Saxony, the states-rights feeling was too 
 strong, and the plan was after a time abandoned. 
 
 Foiled in his purpose of a German state system of roads, 
 Bismarck attempted to widen the Prussian state system ; 
 and here he succeeded completely.' In 1878 there were 
 only about three thousand miles of state-owned roads; 
 two thousand miles more were owned by private com- 
 panies but managed by the state, while six thousand 
 miles, or more than half, were under private ownership 
 and management both. The state roads themselves were 
 rendered less powerful than the mere figures would indi- 
 cate, because they were divided into two practically 
 unconnected systems, the Eastern and the Western. 
 This defect was remedied in the autumn of 1879, when 
 the government, by a series of purchases, obtained control 
 of two important east-and-west trunk lines connecting 
 Berlin with Cologne. At the same time a number of 
 other roads passed into government hands. The tendency 
 was too strong to be resisted by the private companies. 
 By the close of the year 1881 the government virtually 
 owned seven thousand miles of road, besides managing 
 two thousand miles more ; while there were little more 
 than three thousand miles left in the hands of private 
 
 ' A. V. d. Leyen : Die Durchfiihrung des Staatsbahnsystems in Preussen. 
 Jahrb. f. Gesetzgebung (1883), vii., 2, 89-139.
 
 208 RAILROAD TRANSPORTATION. 
 
 companies. Two of these companies were financially very 
 strong — the " Anhalt " Hne connecting Berlin with the 
 south, and the Hamburg line toward the northwest. But the 
 government was resolved not to leave its work incomplete. 
 The Anhalt road was purchased in 1882, the Hamburg 
 road in 1884. There are now in Prussia about 13,000 
 miles of state roads and only 1,000 miles of private roads. 
 
 The prices paid were liberal, and sometimes extremely 
 high. The stockholders of the Berlin-Hamburg Company 
 secured an income of over 16 per cent.' on the investment ; 
 this was decidedly the highest price paid for any road. 
 The purchase was generally made by exchanging for the 
 securities of the roads Prussian 4-per-cent bonds in such 
 amounts as should give the holders about the same in- 
 come that they would presumably have received had the 
 roads remained in private hands. There was no com- 
 pulsion exercised. The government offered prices which 
 made it worth while for the companies to sell. The 
 government had a technical right to take the property at 
 a valuation, but it seemed better to make a slight 
 pecuniary sacrifice rather than incur the odium of enfor-, 
 cing this right. 
 
 Prussia is now the typical example of state railroad 
 ownership. Of Prussian railroad employes, nearly 80,000 
 are regularly appointed members of the civil service, with 
 special rights and duties as such. The railroads are made 
 to subserve political and military purposes quite as much 
 as commercial ones. To examine and pass judgment 
 upon Prussian management or Prussian rates, is virtually 
 to pass judgment on state railroad ownership as a system. 
 
 Railroad development in Austria^ has been more or less 
 
 * In conjunction with a cash payment, which makes the actual return 
 about 17 per cent. 
 
 " Th. Haberer : " Geschichte des Eischb.ihnwesens," Vienna, 1884.
 
 RAILROAD SYSTEMS OF CENTRAL EUROPE. 209 
 
 closely connected with that in Germany ; but the changes in 
 Austria's political history, and the weakness of her treasury, 
 have made her policy much less consistent. When rail- 
 roads were first invented, Austria was the home of bigoted 
 conservatism. The Austrian court and statesmen looked 
 upon the new contrivance with a distrust which was from 
 their point of view well founded. Such rapid movement 
 seemed to savor of dangerous radicalism, not to say revo- 
 lution. The Emperor in 1836 made up his mind to sign a 
 railroad charter only on the somewhat dubious ground 
 that " the thing can't maintain itself, anyhow." * 
 
 Railroads insisted on coming whether monarchical 
 governments liked them or not ; and they did so much 
 good when they came that the government soon decided 
 that they were a good thing, and gave them paternal 
 assistance, either in the form of guarantees of interest or 
 of direct state construction. This period in Austria lasted 
 from about 1840 to 1848 ; it was a time of active railroad 
 building. The revolution of 1848 and the Hungarian war 
 threw all industry into confusion. Under these circum- 
 stances Austria pursued exactly the opposite policy to 
 that of Prussia. The Prussian Government tried to help 
 railroads by buying them at low prices ; the Austrian 
 Government, by selling them at low prices. There can be 
 little doubt that the Austrian Government during this 
 period was greatly influenced by the example of France, 
 and desired not to own its roads, but to have them owned 
 
 ' We must, however, give Austria the credit of being the first country to 
 enact a general railroad law. It provided for a detailed form of previous 
 application ; for the time limits of the charter ; for publicity of rates ; and 
 for reduction in rates in case profits exceeded fifteen per cent. It guaranteed 
 the company against the construction of parallel lines. This law was passed 
 in 1838. Prussia passed a somewhat similar law a few months later. Eng- 
 land had nothing of the kind till 1845.
 
 2IO RAILROAD TRANSPORTATION. 
 
 and built by private companies, in systems radiating from 
 Vienna, as the French Hnes radiated from Paris. 
 
 The system was one which did not bear transplanting. 
 It had grown up, and had been found serviceable in 
 France, because France was so closely knit together, and 
 centred around Paris so completely. In Austria it was 
 quite different. The country consists of many distinct 
 states, not even bound together by ties of language or of 
 race. That Vienna is the seat of government for them 
 all, is scarcely more than a political accident. The condi- 
 tions of trade are in many respects like those of the 
 United States. They have their international cattle 
 trade and grain trade ; their combined rail and water 
 routes on export business ; their inter-state commerce 
 troubles, and their Granger troubles. They have a water 
 route of dominant importance — the Danube — competing 
 with their east and west trunk lines. With these and 
 many other through-business complications, it is easy to 
 see that the example of France could only prove mislead- 
 ing. They succeeded in appropriating some of its evil 
 results with none of its good ones. The state sold many 
 lines in 1853 at about half their cost of construction. So 
 far was this from stimulating the enterprise of private 
 companies, that in 1859 some of the most important con- 
 necting links in Austria's trunk-line system were but half 
 built. Her decisive defeat by France in that year was 
 largely due to the unreadiness of her railroad system ; and 
 the same thing made itself felt to a less extent in the war 
 with Prussia in 1866. 
 
 The period of listlessness, which ended about the time 
 of the war with Prussia, was followed by a period of wild 
 speculation, which did not end until the crisis of 1873. 
 In spite of stringent legal provisions, the same abuses
 
 RAILROAD SYSTEMS OF CENTRAL EUROPE. 211 
 
 manifested themselves in Austria that had been found in 
 other countries with fewer laws. Construction companies 
 were numerous, and left such a bad name that to call 
 a man " a constructor" is in Germany far more oppro- 
 brious than to call him a liar. One example will suffice 
 to show the recklessness, or rather light-headedness, of 
 Austrian speculation at this time. It is all the more 
 noticeable because Haberer, in his " Railroad History," 
 relates it as if it were the most natural thing in the 
 world. 
 
 "The crisis of 1873 brought to light a serious defect in 
 Austrian law. While one concern after another went 
 under, the holders of bonds or debentures were resting 
 quietly in the belief that their interests were secured. 
 But when one and another of these roads became unable 
 to pay their interest, the matter was looked into thor- 
 oughly, and it was found that the whole debt was unse- 
 cured ; for although there were nominal mortgages on the 
 property, these mortgages had no legal authority, because 
 they were not recorded in the manner prescribed bylaw." ' 
 
 The prostration which followed the crisis of 1873 al- 
 most forced Austria into a policy of active state interfer- 
 ence. This soon took the direction of extension of state 
 ownership. In Hungary this policy had never been com- 
 pletely abandoned. In Austria itself it had been out of 
 favor for twenty years ; and this fact, combined with the 
 not over-prosperous condition of the Austrian treasury, 
 made it impossible to move rapidly. Three quarters of 
 
 ' Haberer : " Geschichte des Eisenbahnwesens, " p. 123. Inasmuch as the 
 whole railroad indebtedness of Austria seems to have suffered from this law, 
 it might be regarded as a discovery of some importance. To be sure, there 
 was a paternal government at hand to set it all right. But if this repre- 
 sents Austrian ways of doing business, Vienna ought to offer a good field for 
 some enterprising American lawyers.
 
 212 RAILROAD TRANSPORTATION. 
 
 the lines are still in the hands of private companies ; and 
 although matters unquestionably tend in the direction of 
 state management, it is as yet impossible to say how far 
 this tendency will go. Still less is it possible to pass any 
 judgment on the results of the policy upon rates, or upon 
 national development. It is all, or nearly all, a matter of 
 the future. Even in Prussia the results are yet far from 
 definite. If we wish to see a state railroad system which 
 has a past as well as a present and future, we must turn 
 from Germany to Belgium. 
 
 Of all countries in the world Belgium probably offered 
 the best advantages for a state railroad system. The 
 industry of the country was active and varied. Of a 
 large body of local traffic its railroads were thus sure ; and 
 they lay in a position to secure a large share of the tran- 
 sit trade between England and Germany. There was 
 almost no possibility of mistake in locating the main rail- 
 roads. The centres of industry were well defined ; the 
 main lines of trade almost equally well defined. The 
 construction of railroads was easy, a large part of the 
 country being nearly level ; almost too easy, in fact, for the 
 very facility of construction offered an inducement to 
 competing or parallel railroads. The government was 
 admirably suited for railroad supervision and manage- 
 ment. It was enlightened and progressive, sufficiently 
 centralized to be strong, yet popular enough to feel popu- 
 lar demands. The country was large enough to have an 
 independent policy, not so large that local interests 
 would be sacrificed to that policy. Its credit was excel- 
 lent, so that it had no difficulty in raising whatever 
 money was needed for public works. 
 
 Although Belgium was on the direct line between 
 Germany and London, a large part of the traffic had gone
 
 RAILROAD SYSTEMS OF CENTRAL EUROPE. 213 
 
 via Holland, because of the easy navigation of the Rhine 
 to its very mouth. The substitution of rail for water as a 
 means of communication, gave Belgium the opportunity 
 to compete for this traf^c. The Belgian Government was 
 quick to avail itself of this opportunity.' King Leopold 
 was familiar with England and English business; he fore- 
 saw the probable future of the railroad, and he was all the 
 more in a hurry to act, from the fear that certain hated 
 Dutch capitalists might get the start of him. Railroad 
 work was actively begun as early as 1833. The govern- 
 ment chose the main lines of traf^c, and built its roads 
 there ; from Antwerp on the north to the iron and coal 
 regions on the south ; from Liege, near the German fron- 
 tier, to Ostend, the most available point for shipment for 
 England. Private companies were allowed to build lines 
 whenever the state did not choose to undertake the 
 work ; they thus furnished a system of branches and con- 
 nections. In the crisis of 1848 the government went so 
 far as to subsidize some of these private lines. The sys- 
 tem as originally designed was virtually complete in 1850. 
 The early arrangements were admirable for the time in 
 which they were devised. But they were not changed to 
 keep pace with progress elsewhere. The Belgian system 
 of reports and statistics when first adopted was the best 
 in the world ; a generation later it was one of the worst. 
 In their engineering arrangements, machine shops, etc., 
 what was at first admirable precision soon became intoler- 
 able old-fogyism." The same conservatism for a time 
 showed itself in the matter of rates.^ Down to 1853 there 
 
 ' Adams : Railroads, pp. 94 ff. 
 
 "^ Report of le Hardy de Beaulieu, Section Centrale, iSSo. 
 
 * Charles Baum {Atmalcs dcs Fonts et Chaussees, March, I SS2) furnishes 
 strong testimony as to the facts, though he is far from holding the system of 
 state management responsible.
 
 214 RAILROAD TRANSPORTATION. 
 
 was no system of charges adapted to the wants of busi- 
 ness ; only the crudest kind of pro-rata tariff, with little 
 or no classification. 
 
 A radical change in this respect was made at the time 
 when the competition of private companies began to make 
 itself felt. The state stopped building railroads in 1850. 
 Private companies began building faster than ever. For 
 nearly twenty years the government system remained all 
 but stationary, with a length of about 350 miles. The 
 private railroads increased from less than 200 miles in 
 1850 to 700 in i860, and 1,400 in 1870. This growth of 
 private railroads was accompanied by their consolidation 
 into powerful systems. Instead of being mere local 
 branches or feeders to the state lines, they had now 
 become rivals for the same through traffic ; not quite so 
 well situated, but strong enough to compete actively. 
 With the year 1856 began a period ©f railroad wars. So 
 far from exercising a dominant influence in railroad 
 tariffs, the state was for the time being completely power- 
 less against the current of events. It abandoned schedule 
 rates, and had recourse to personal discrimination and to 
 special contracts of every kind.' It is probable that in 
 these respects the state was a worse offender than the 
 private companies themselves. 
 
 It is a curious fact that in any such competition the 
 state is not stronger than private companies, but weaker. 
 Theoretically, it may have the power to forbid private 
 companies engaging in such competition. Practically, 
 public opinion will not allow it to exercise that power. 
 Nor can the state railroads exercise a dignified reserve. If 
 
 ' The government railroads themselves granted special rates to prevent 
 people from using the government's own canals. See Rep. of Joint Select 
 (Parliamentary) Committee of 1872, App., p. 787.
 
 RAILROAD SYSTEMS OF CENTRAL EUROPE. 21 5 
 
 private railroads are run to make money, and succeed in 
 doing it, tlie state railroads must be run to make money 
 too, or else the authorities will have to face the criticism 
 of an indignant public. And in this money-making race 
 it is impossible for the government to have the same quick 
 elasticity of action as a private company. Thus it hap- 
 pened that the competition in Belgium was quite even. 
 The state had somewhat better routes ; but the advan- 
 tages possessed by private companies in a business fight 
 just about offset this difference. 
 
 During the times of active railroad war, the lowering of 
 rates, especially for long distances and for low-class goods, 
 was astonishingly rapid. The results obtained in Belgium 
 in the years 1861-65 were even more remarkable than 
 those reached in the United States some years later. The 
 average freight charge per ton-mile was reduced to about 
 1.3 cents ; the average rate per passenger-mile was even 
 lower. The stress of competition developed such active 
 business management among the railroads that they were 
 able to work with profit at these rates. 
 
 Yet this state of things, while seemingly good, was in- 
 tolerable to the government. The competition of private 
 companies gave it no chance for an independent policy. 
 The political success was not what was generally sup- 
 posed by the outside world. To Americans, the condition 
 of the Belgian system at that time was known chiefly 
 through the reports of the Massachusetts Commission, 
 and this commission, without the least intentional unfair- 
 ness, was disposed to look at all these matters in a rose- 
 colored light, because they were desirous that Massachu- 
 setts should follow the example of Belgium.' They 
 
 ' Massachusetts Reports ii., 52, 53 ; iv., 67-70, 80, 81. Six years later, 
 Mr. Adams (" Railroads," p. 99) very candidly qualifies the views expressed 
 in those reports.
 
 2l6 RAILROAD TRANSPORTATION. 
 
 therefore accepted the Belgian authorities' reports of their 
 own work, without subjecting them to criticism — a dan- 
 gerous thing to do. The fact is that the Belgian state 
 railroad system, during the time of active competition, 
 was occupied with something else than questions of pub- 
 lic policy. It was occupied with making money. It was 
 a responsible and well-conducted company, managed on 
 business principles. It differed from other companies 
 only in the fact that its revenues accrued to the state, and 
 its officials held their appointments from the state. 
 
 When the government wanted to obtain real influence 
 as a railroad owner, it bought up most of the competing 
 lines, and made long pooling arrangements with the re- 
 mainder. This began in 1870; the largest purchases were 
 made about 1873. In 1874 the government owned more 
 than half the mileage of the country ; in 1880 it owned 
 two thirds ; now it owns about three quarters. The Bel- 
 gian system of 1885 is a totally different thing from the 
 Belgian system of 1869. 
 
 In judging the railroad policy of Belgium by its results, 
 all must unite in admitting that they are in many respects 
 extraordinarily good. What their average rates are, we 
 have already seen. The passenger rates are lower than 
 anywhere else in the world, except, perhaps, on some East 
 Indian railroads. The freight rates are much lower than 
 anywhere else in Europe. Nominally they are about the 
 same as in the United States. Practically they are lower 
 for almost any given service, because Belgium does not 
 have the enormous long-distance traffic which brings 
 down the average in the United States. 
 
 Their classification is also excellent. They have now 
 got matters into such shape that the schedules themselves 
 (which go quite into details) furnish a system of rates
 
 RAILROAD SYSTEMS OF CENTRAL EUROPE. 21/ 
 
 adapted to the wants of different lines of business and of 
 different localities. What their rates have done for the 
 development of business is strikingly seen in the history 
 of the port of Antwerp, which is rapidly outstripping the 
 somewhat similarly situated French port of Havre — a dif- 
 ference which is thought to be largely due to the different 
 railroad policy of the two countries. 
 
 It is also true that they make a great deal of use of 
 their investment. The average car-load is higher than in 
 either Germany or France, though the construction is the 
 same. The high percentage of expenses to earnings, 
 which is often quoted against them, is really, prima facie, 
 in their favor. If a country where the state has a virtual 
 monopoly of railroads shows too small a percentage of 
 operating expenses, it gives good ground for the belief 
 that rates are unnecessarily high, and that industrial inter- 
 ests are being sacrificed to financial ones. 
 
 On the other hand, it would be a mistake to use these re- 
 sults as a strong argument in favor of state management. 
 The progress was made during a period of active competi- 
 tion, when private companies took the lead. The founda- 
 tions were laid in 1853, when conipetition was beginning. 
 The system developed itself most rapidly in 1861-65, 
 when competition was at its height. Since the state has 
 purchased rival lines, and has had a virtual monopoly, 
 there seems to have been a diminution of activity, and a 
 tendency toward slackness of management. There has 
 been a lowering of profits without corresponding change 
 of rates. Great complaints are made of the lack of cars 
 where they are wanted. Much more serious charges are 
 made by certain high authorities like Le Hardy de Beau- 
 lieu.' He asserts that the connection between railroads 
 
 ' Reports, Section Centrale, 1880, iSSi.
 
 2l8 RAILROAD TRANSPORTATION. 
 
 and politics has produced distinctly bad results; that 
 there has been a multiplication of forms and ofifices of no 
 use in actual business, and that there have been serious 
 manipulations of accounts to make an unduly favorable 
 showing for the government. At this distance it is im- 
 possible to investigate these charges ; but they have been 
 made in official form by one of the best authorities in 
 Belgium. 
 
 While not withholding the freest praise from the Bel- 
 gian system, we may fairly ascribe much of its success to 
 other causes than enlightened state management or delib- 
 erate public policy. 
 
 The railroad history of other European countries is 
 for the most part of much less importance.' Some— like 
 Denmark, Norway, or Sweden — show a tolerably well-de- 
 fined policy, but not an extensive or important system of 
 railroads. Others — like Russia, Spain, or, in some senses, 
 Switzerland, — have important lines, but no well-defined 
 principles of management.' 
 
 The case of Italy stands by itself, and must be treated 
 separately. The Italian railroads, regarded simply as rail- 
 roads, will not compare in importance with those of Ger- 
 many or France. Nor has railroad economy and adminis- 
 tration been developed in Italy as in Northern Europe. 
 But from the political and social standpoint the Italian 
 railroad history is of the very highest interest, and may 
 well be made the subject of a separate chapter. 
 
 ' An exception should be made in the case of Holland, whose railroad 
 history, though less important than that of Belgium, presents points of great 
 interest. 
 
 ' One important principle has prevailed all but universally. The railroad 
 
 charters of Continental Europe are granted only for a term of years not 
 
 indefinitely.
 
 CHAPTER XII. 
 
 RAILROAD LEGISLATION IN ITALY. 
 
 Reasons for its importance — Mistaken policy at the outset — Necessity for 
 governnaent action — Purchase of the railroads by the state — Questions 
 regarding their operation — The commission of 1878 and its work — Con- 
 clusions unfavorable to state railroad management — Necessity for im- 
 mediate action — Lease of the railroads to private companies — Details 
 of the contract — Probable result. 
 
 " Atti della Commissione d'lnchiesta sull' Esercizio delle Ferrovie 
 Italiane." 7 volumes, 1881. 
 
 Cucheval-Clarigny : Les Chemins de Fer Italiens. Revue des Deux 
 Mondes, July i and 15, 1884. 
 
 It seems like going far out of our way to look to Italy 
 for lessons in railroad policy. One might think that the 
 system and the problems connected with it are so different 
 from our own that only mere curiosity could lead us to 
 study its workings. As far as practical usefulness is con- 
 cerned, we might suppose it to be a waste of time. 
 
 We should make a great mistake. Events have oc- 
 curred in Italy in the last few years which have an import- 
 ant bearing on railroad legislation everywhere. A par- 
 liamentary commission in Italy a few years ago held the 
 most thorough railroad investigation ever made in the 
 world. As a result of their investigation they concluded 
 that the state ought not to run railroads ; that although 
 Italy owned its railroads, it ought at once to charter large 
 private companies to manage them. And they have since 
 been occupied with legislation which is to give effect to 
 
 219
 
 220 RAILROAD TRANSPORTATION. 
 
 these ideas. It is the most decided set-back which the 
 growing tendency toward state railroad management has 
 anywhere received. 
 
 Nothing in all this is done at haphazard. When peo- 
 ple in England or America talk about state railroads, 
 it is generally mere guesswork. But in Italy it is the 
 result of hard-won experience. They have tried state 
 railroads and private railroads both, and they know what 
 they are talking about. In fact, they have tried almost 
 every possible relation between the state and the railroads. 
 Each of three or four main systems received its original 
 charter from a different government. One derived its 
 being from the Emperor of Austria, another from the 
 Pope. Each charter has been amended over and over 
 again. There has been state assistance of every kind — 
 guarantees of interest, advances of capital, subsidies for 
 building, subsidies for running. The state has built 
 some of the roads. Others it has bought and paid for. 
 Others it has bought and not paid for. It has tried 
 various forms of management — direct state action, lease, 
 and participation in profits. When an Italian Commis- 
 sion speaks of the relation between the state and the 
 railroads, it speaks from experience. 
 
 The conclusions of the Italian Commission are the 
 work of cautious and responsible men, who are busy car- 
 rying them out in the face of great difficulties. There is 
 no room for experiments. The Italian Government finds 
 it hard work to make both ends meet, and has no money 
 to spend on mistakes. The railroads are not very profita- 
 ble at best, and any unwise legislation is liable to bring 
 them to the point where they cannot be run at all. 
 
 To understand the present state of things we must look 
 back at Italian railroad history. Up to 1859 Italy was
 
 RAILROAD LEGISLATION IN ITALY. 221 
 
 divided into a number of very small states. As far as 
 there were any railroads at all, each state had its own 
 separate system. The systems were not merely inde- 
 pendent but isolated ; the railroads of Tuscany did not 
 reach those of Rome, those of Rome did not reach those 
 of Naples. They were all local roads in the narrowest 
 sense. The wars from 1859 ^^ 1870 put an end to this 
 state of things. Connecting links were built, and with 
 them came the inevitable tendency to consolidation. 
 But this was not allowed to take its natural course. 
 The through traffic of Italy runs from northwest to 
 southeast ; that is, it runs lengthwise of the peninsula, or 
 parallel to the central mountain chain. But the old politi- 
 cal divisions ran crosswise. They did not want to see 
 their railroads become intermediate links in a line of 
 through communication ; they wanted them to be inde- 
 pendent. And besides this local pride, an element of 
 national pride came in also. The men who were planning 
 through routes were foreigners. Italy was herself too 
 poor to go into such enterprises on a large scale ; but she 
 was sensitive, and was afraid to see foreign capital gain a 
 strong foothold within her borders. If Rothschild and Tala- 
 bot had been allowed to carry out their plans, Italy would 
 probably have had a strong and progressive railroad sys- 
 tem. At any rate it would have been organized on the 
 natural lines. But the Italians sacrificed commercial 
 advantage to sentiment — most of it false sentiment at 
 that. 
 
 Without going into details, the final result was the con- 
 solidation of most of the Italian railroads into four systems 
 — the Upper Italian, the Roman, the so-called Southern 
 (Eastern would be a truer title), and — somewhat later — 
 the system of Calabria and Sicily. The main lines of this
 
 222 RAILROAD TRANSPORTATION. 
 
 division were marked out as early as 1864, and have con- 
 tinued without much change ever since. The principles 
 of consolidation favored by the state have been entirely 
 different from those of other countries. They have con- 
 solidated the competing lines and not the connecting 
 ones. It is almost as if New York had one united system 
 of railroads, Pennsylvania a second, and Ohio a third, 
 absolutely distinct from the other two, and with only 
 cumbersome means for interchange of traffic. 
 
 Of course this was a wasteful way of doing things. In 
 the first place, the handling of the through business was 
 bad ; and, secondly, since each road was officered by men 
 from one locality, they could not judge when it was worth 
 while to lower through rates to develop business. But if 
 ever the railroads of any country needed to handle and de- 
 velop their business with the utmost care, it was the railroads 
 of Italy. It spite of large subsidies from government, they 
 found it extremely difficult to meet their obligations. In 
 times of commercial distress the conditions of the charters 
 had to be altered ; sometimes the government had to 
 come to the rescue with its credit or money. 
 
 The lines of Calabria and Sicily were the worst off. 
 They were built but slowly, and could not pay expenses. 
 The government saw themselves forced to choose between 
 giving up the development of this part of the country 
 altogether, or taking the railroads into their own hands. In 
 1870 they chose the latter alternative ; owning or building 
 the roads themselves, but running them through the me- 
 dium of a company which receives its pay in the form of a 
 percentage of the gross receipts, all expenses being paid 
 by the state. The average annual gross receipts are in the 
 neighborhood of $2,000 per mile ; the operating expenses, 
 some $3,000 per mile. Thus the government loses a
 
 RAILROAD LEGISLATION IN ITALY. 223 
 
 thousand dollars a mile annually, besides receiving no 
 interest on the capital invested. And these things seem 
 to improve but slowly. 
 
 The Roman railroads did scarcely better, and after 
 many unsuccessful attempts to prop them up by pecuniary 
 assistance, the state in 1873 entered upon a contract to 
 purchase them. But the financial difficulties of the gov- 
 ernment itself were such that it was not until 1880 that 
 arrangements could be made to fulfil the contract, nor did 
 government take possession till the year 1882. 
 
 The Southern railroad formed a rather surprising excep- 
 tion to the general lack of prosperity. It ran along the 
 coast of the Adriatic, through the poorer districts of 
 Italy; it had no towns of first-rate importance on its 
 main route. It was regarded as the most unpromising 
 line in the kingdom. But it had a tolerably long line in 
 the natural direction of through traffic, having formed an 
 important part in the system proposed by Talabot and 
 Rothschild in 1863 ; and it was managed by men who 
 knew how to make the most of its advantages. They had 
 dared to take the lead in the matter of tariff reduction, 
 even when violently opposed by the government ; and 
 they were rewarded by a growth of business which far ex- 
 ceeded their expectations, and which finally threatened to 
 become a means of pecuniary loss to them. For their 
 subsidy contract was a somewhat peculiar one. When it 
 was made, the company had no idea of ever earning 
 $5,000 per mile annually; and the contract, as a mere 
 matter of form, provided that after the gross earnings had 
 reached $5,000 a mile the subsidy should diminish as fast 
 as the gross earnings increased. But the net earnings 
 never would increase by quite as large a sum as the gross 
 earnings ; the subsidy would diminish faster than the net
 
 224 RAILROAD TRANSPORTATION. 
 
 earnings would increase. Thus, every bit of traffic beyond 
 $5,000 per mile lessened the amount available for the pay- 
 ment of dividends. Such a state of things was bad for 
 business in everyway, and could not last. But the govern- 
 ment was not willing, at the time, to make any changes in 
 the subsidy contract which should ever render it liable to 
 pay more, and the company was equally set against any 
 changes which might render it liable to receive less. The 
 only way open was for the government to buy out the 
 company, and in 1874 and 1876 contracts to that end 
 were agreed upon, though subsequent events hindered 
 their full execution. 
 
 Meantime the government was being drawn into ar- 
 rangements for the purchase of the railroads in Upper 
 Italy. Here it was not on account of business complica- 
 tions, good or bad, but for political reasons. The countries 
 of North Italy, while still under Austrian rule, had been 
 provided with a tolerably complete system of railroads, 
 These were in the hands of an Austrian company which 
 owned other lines farther to the north and east. When 
 part of its lines passed under the Italian Government, the 
 company arranged two separate organizations, one for its 
 Austrian lines, the other for its Italian lines. But of 
 course the same stockholders controlled both organiza- 
 tions ; and the two nations, which might at any moment 
 become enemies, disliked to have their territories connected 
 by such intimate financial interests. The company must 
 become Austrian or Italian — one or the other ; whichever 
 it was to be, the other part must be bought out and 
 separated from the company. Austria felt that she could 
 not buy up her part of the lines and leave the company 
 Italian. Italy was perhaps no better able than Austria, 
 but she was more enterprising ; she undertook to buy up
 
 RAILROAD LEGISLATION IN ITALY. 22$ 
 
 her part, and leave the company Austrian. Matters be- 
 gan to take that direction in 1873. At the end of 1875 
 the arrangements were practically complete. 
 
 At that time the triumph of the state railroad principle 
 in Italy seemed as thorough as it was in Belgium or in 
 Germany. For one reason or another each important 
 company had been led to abandon its chartered rights. 
 The purchases had not been effected, but there were 
 contracts which must soon lead to purchase. After pur- 
 chase there must apparently come more immediate state 
 interest and control. Few men could suspect what a 
 different turn the practical management of things was 
 soon to take. 
 
 It was a conservative ministry that had purchased or 
 arranged to purchase the railroads ; and the ministers who 
 took the lead in this matter, Minghetti and Spaventa, un- 
 doubtedly intended that the state should run the railroads 
 as well as own them. But political changes prevented 
 their carrying out this part of the programme. They 
 were forced to resign in 1876, and were succeeded by 
 moderate Radicals. In the course of the same year, after 
 a long debate, the Italian Parliament decided that it was 
 unwise for the state at that time to attempt to manage 
 its own railroads directly, and Depretis, the Minister, was 
 requested to prepare a plan under which the state rail- 
 roads might be given over to private companies for man- 
 agement. 
 
 On what terms should this be done ? This was a central 
 point in the whole question, and might be answered in 
 two quite distinct ways. Either the state might pay the 
 companies for doing the work, and take what was left 
 itself ; or the companies might pay the state for the use 
 of its lines, and take what was left themselves. In the
 
 226 RAILROAD TRANSPORTATION. 
 
 first case the state would take the risk, in the second case 
 the companies. In the first case the company would be 
 a mere agent or employe, in the second case a leaseholder. 
 In the second case the state ownership would be little 
 more than a form, as far as concerns its influence on the 
 practical management of affairs. The partisans of a state 
 railroad system would not be satisfied with it. 
 
 The Conservative ministers in their provisional arrange- 
 ments had made contracts of the first form. The com- 
 panies were to be mere agents to manage roads at the 
 risk of the government. A contract in this sense was 
 arranged with the Southern railroad, though the ministry 
 fell before it could be approved by Parliament. It pro- 
 vided that the working company should be liable for 
 operating expenses, including ordinary repairs, but not for 
 extraordinary repairs or new construction. For repairs 
 and maintenance it was to receive a fixed allowance per 
 mile operated ; for train expenses (and profits) it received 
 an allowance for each passenger and each ton of freight, 
 for every mile carried. Further, to stimulate its activity, 
 the company was to be allowed a moderate share in any 
 increase of the gross receipts above a certain sum men- 
 tioned in the contract. 
 
 This system was never carried out. The new Minister, 
 Depretis, preferred the plan of leases. He proposed that 
 there should be two lessee companies, one running the 
 roads on the east coast and their connections, the other 
 those on the west coast ; that the lessees should own the 
 rolling stock, buying at a valuation what the state had 
 now in its possession ; that they should pay the state 
 (together) a fixed minimum rent of about nine million 
 dollars : with a variety of minor details. This rental 
 represented about two per cent, on the cost of the 
 roads. It amounted to thirty per cent, of the estimated
 
 RAILROAD LEGISLATION IN ITALY. 22/ 
 
 minimum gross receipts. The state was to have a con- 
 siderable interest in any excess of gross receipts above 
 this minimum. 
 
 All things considered, this was a good plan. Many of 
 its ideas are incorporated in the bill recently passed by 
 Parliament. But, for the time being, Depretis had no 
 better luck than his predecessor. The extreme Radicals 
 turned out the moderate Radicals at this stage of events, 
 just as two years before the moderate Radicals had turned 
 out the Conservatives. And the extreme Radicals were 
 so far under the influence of socialistic ideas that the prin- 
 ciple of state railroad management found favor with many 
 of them. But they were not quite ready for any action, 
 and in July, 1878, referred the whole matter to a special 
 commission. 
 
 The Commission of 1878 went to work systematically. 
 It began by circulating throughout Italy, among all classes 
 of men who had any thing to do with railroads, a series of 
 nearly two hundred printed questions, to any or all of 
 which they invited answers, oral or written. Every effort 
 was made to set people thinking on the subject, and to 
 receive answers from all quarters. The questions were 
 made so precise that a man who had one piece of special 
 information might send an answer to one question and let 
 the rest go. An enormous mass of material was thus col- 
 lected ; and it was not until the year 1881 that the com- 
 mission was able to finish its work. The result of its 
 labors is embodied in seven quarto volumes. Three 
 contain the oral testimony ; three more give a digest of 
 the written answers and other material used ; the seventh 
 is the report itself. In connection with this immense 
 work, lasting between two and three years, it is interest- 
 ing to know that the total expense involved was about 
 $27,000.
 
 228 RAILROAD TRANSPORTATION. 
 
 The three volumes of oral testimony are of no great 
 interest outside of Italy. It is not so with the digest of 
 materials. This takes up railroad problems in their more 
 general aspects, making use of documents and information 
 from almost every country in Europe. There are detailed 
 studies of the working of state railroad management ; of 
 the different forms of government interference ; of varia- 
 tions in operating expenses ; of the theory of railroad 
 rates, and the probable effect of any changes ; with num- 
 berless other points of general interest. It is a pity that 
 the fact of its being written in Italian makes it unavailable 
 for so many who might otherwise be glad to use it.' 
 
 The outcome of these studies was the rejection by the 
 commission of the idea that it was a proper function of 
 the state to run railroads. 
 
 There had been no lack of argument brought before the 
 commission in favor of a state railroad system. There 
 were the general arguments about monopoly, speculation, 
 arbitrary power, with which we are all familiar. There 
 were special arguments which applied to Italy alone. 
 There were strong men to back them ; but both the men 
 and the arguments on the other side were stronger. It is 
 a noticeable fact that the majority of the chambers of 
 commerce were opposed to government management ; 
 especially strong was this opposition from the Chamber 
 of Commerce of Milan, probably the place where both 
 systems had been tried most fully. 
 
 The more interesting points in the report may be 
 summed up as follows : 
 
 I. Most of the pleas for state management are based 
 upon the idea that the state would perform many services 
 much cheaper than they are performed by private compa- 
 
 ' A French translation of part of it has been published.
 
 RAILROAD LEGISLATION IN ITALY. 229 
 
 nies. This is a mistake. The tendency is decidedly the 
 other way. Private companies can do for their patrons 
 many things which the state cannot ; but it is doubtful 
 whether the state would be justified in doing any thing 
 of the sort, which private companies cannot. The state is 
 much more likely to attempt to tax industry than to foster 
 it. And when it attempts to tax industry it is more om- 
 nipotent and less responsible than a private corporation. 
 
 2. State management is more costly than private man- 
 agement. Such at least was the conclusion of the com- 
 mission, on comparing the results of the two systems. 
 The differences which they bring out are quite marked, 
 though it is fairly open to question just how much they 
 prove. Comparing state and private railroads in different 
 countries, they find that the ratio of operating expenses 
 to gross earnings is always greater on state railroads — 
 averaging 1 1 per cent, more in all the countries compared. 
 In their more detailed comparisons, the commission take 
 carefully into account the various elements which involve 
 cost of handling ; but unfortunately they do not take up 
 the question whether the rates charged on the state rail- 
 roads considered may not be lower than on the private 
 railroads — a thing which would make the percentage look 
 unfavorable, and yet be rather a credit to the manage- 
 ment than otherwise. We cannot, therefore, accept this 
 point without reserve. 
 
 3. The political dangers would be very great. Politics 
 would corrupt the railroad management, and the railroad 
 management would corrupt politics. These effects have 
 already been seen in actual working. Changes of rates 
 are made for the sake of influencing elections. A ques- 
 tionable experiment was recently made in Belgium in the 
 matter of railroad tariffs ; it had been adopted by the
 
 230 RAILROAD TRANSPORTATION. 
 
 government as a means of currying popular favor — a kind 
 of bribery to which there is great temptation. It would 
 not be hard to find similar instances in other countries 
 on both sides of the Atlantic. 
 
 If then the state railroads are to be operated by private 
 companies,' we come back to the question, on what terms ? 
 Lease, or salaried management at the risk of the state ? 
 As between the two, the commission preferred the idea 
 of lease, but it did not commit itself to either ; it chose a 
 middle ground, devising an elaborate scheme of participa- 
 tion of earnings. The leading ideas of this scheme are 
 embodied in the contracts ultimately approved by the 
 Italian Parliament. 
 
 While the commission was studying the question, mat- 
 ters were coming to the point where practical solution was 
 growing every hour more necessary. 
 
 1. Where the companies were still managing, the rolling 
 stock began to give out. The companies whose roads had 
 been purchased by the state were still in part operating 
 them provisionally from year to year ; but they never 
 knew what turn Italian railroad policy might take, so that 
 no one was ready to spend any money now for the sake 
 of the future interests of the roads. The rolling stock had 
 not kept pace with the growth of business ; on many 
 lines they were not even attending to renewals. As a re- 
 sult, cars and engines were wearing out very fast ; they 
 were already inadequate to the public service, and were 
 growing worse each year. 
 
 2. Where the state tried to manage its own roads, it was 
 making a bad failure. This was specially noticeable in 
 the railroads of North Italy. For two or three years after 
 
 ' The commission would have been glad to have the state get rid of its 
 railroads altogether ; but this was, under the circumstances, impossible.
 
 RAILROAD LEGISLATION IN ITALY. 23 I 
 
 the purchase by the state, the company had continued pro- 
 visionally to run the roads. But in July, 1878, just the 
 time when the commission was appointed, the road was 
 taken out of their hands altogether, and run by the state 
 directly. The ministry were going to show people how to 
 run a railroad, and prove that the state could do it better 
 than anybody else. Unfortunately the event proved Just 
 the opposite. The road began to go to pieces. Before 
 the change, the personnel of the railroad ofificials had been 
 first-rate, and animated by a vigorous spirit of activity ; 
 after the change their character went down, their activity 
 slackened. With the same resources they were no longer 
 able to handle the same business. There was a time 
 when the freight service of Lombardy was suspended for 
 every thing but perishable goods, simply because the road 
 could not manage the freight that was offered. 
 
 3. There were important financial reasons for a change. 
 The public treasury was in trouble, as is apt to be the case 
 in Italy. In the hard-won resumption of specie payments, 
 it had exhausted all its power. There were no reserve 
 resources. Every thing was taxed as high as it would 
 bear ; most things rather higher. The government bonds 
 were so depreciated that it could not borrow money 
 except at a great disadvantage. We have seen how many 
 years it took them to find the means of carrying out their 
 contract to purchase the Roman railroad. The Southern 
 railroad was still unpaid for. Some 3,000 miles of new 
 railroad construction, in addition to the 5,000 miles already 
 existing, had been voted in 1879; t>ut the work was lan- 
 guishing for lack of funds. It was found almost impossible 
 to make the necessary additions to the rolling stock of 
 the existing railroads. Such were the financial elements 
 of the problem — apparently rather a hopeless one ; the
 
 232 RAILROAD TRANSPORTATION. 
 
 state could get no money, the railroads were not par- 
 ticularly profitable : required, an arrangement by which 
 the state should get the money it needed for improve- 
 ments and extensions, and at the same time make arrange- 
 ments for the running of the railroads which should be 
 satisfactory to both parties. 
 
 The Minister of Public Works tried to gain time by 
 delay,, but only made matters worse. The Southern rail- 
 road declared that it could not allow the state to defer 
 payment any longer, and that the state had forfeited its 
 right to buy the road on the terms agreed. The result 
 has been that in order to control the road without owning 
 it, the state will have to pay the stockholders a larger 
 sum annually than the interest on the purchase money at 
 the agreed price. 
 
 While matters were in this state, about a year ago, the 
 office of Minister of Public Works was offered to the man 
 who had been Secretary of the Commission of 1878. He 
 went to work vigorously ; conferred again and again with 
 railroad men and financiers, and, as a result, came forward 
 in the spring of 1884, with a bill which, after a year's dis- 
 cussion, passed the Italian Parliament unaltered in its 
 general features. By contracts which went into effect 
 July I, 1885, the following principles were established: 
 
 I. The roads are to be operated, presumably ' for sixty 
 years, by two companies, nearly equal in strength, each 
 controlling a trunk-line system running northwest and 
 southeast.'' They are to buy at a valuation (at a minimum 
 of about $50,000,000) the rolling stock now owned by the 
 state. They will keep it in repair at their own charge as 
 
 ' The contract may be terminated by either party at the expiration of 
 twenty or forty years. 
 
 'A third company operates the railroads of Sicily, under a contract similar 
 in general form but differing slightly in details.
 
 RAILROAD LEGISLA TION IN ITAL Y. 233 
 
 part of ordinary operating expenses, but will be entitled 
 to receive interest from the state on the sum paid for it. 
 By this sale the state will have a sum of money imme- 
 diately available for the necessary improvements and 
 extensions it has so long wanted to make. There are 
 provisions by which the operating companies are to aid 
 in this construction, borrowing money for that purpose. 
 
 2. The companies then are to pay for ordinary repairs 
 of rolling stock ; but what about repairs of line, or about 
 extraordinary expenditures ? It is hard enough for any 
 railroad to decide what should be charged to mainten- 
 ance, and what to construction account, even when the 
 two must ultimately come out of the same pocket ; but if 
 the railroad had to pay the maintenance and the govern- 
 ment the construction, the case would be infinitely worse. 
 The attempt to decide what should be charged to con- 
 struction account would give rise to contest and litigation 
 at every step. Powerless to meet the difficulty directly, 
 the Italians try to evade it ; and their provisions for that 
 purpose form the most interesting feature in the whole 
 bill. 
 
 All the system of division is based upon gross and not 
 net receipts. From the gross receipts deductions are to 
 be made in every instance for a series of reserve funds : 
 (i) $64 per mile for extraordinary repairs ; (2) $48 per mile 
 single track, or $80 per mile double track, for renewal of 
 rails ; (3) i;^ per cent, for renewals of rolling stock. Actual 
 increase of material or accommodations is to be provided 
 for in a manner analogous to our car trusts ; and the 
 means of meeting these obligations is to be provided by a 
 fourth fund " for property increase," derived from the 
 gross receipts in a more complicated manner. 
 
 3. It is estimated that the annual gross receipts will be
 
 234 RAILROAD TRANSPORTATION. 
 
 at least $19,000,000 for one company and $22,000,000 for 
 the other. In that case 62^ per cent, will go to the com- 
 panies for ordinary expenses and for profits, 27|- per cent, 
 to the state for the use of its lines, while the remaining 10 
 per cent, will more than cover the assessments for the 
 three first funds and the interest paid the companies on 
 the value of their rolling stock ; the balance, whatever it 
 is, goes to the fund for property increase. Any excess of 
 gross receipts above the minimum shall be divided as 
 follows: Property increase fund, 15 per cent.; renewal of 
 rails and rolling stock, ^ per cent, each ; state, 28 per 
 cent. ; company, 56 per cent. But as soon as the gross 
 return of either company shall be $10,000,000 above the 
 assumed minimum, the company shall receive but 50 per 
 cent, of any further increase, while 6 per cent, shall be 
 applied to such reductions of rates as the government 
 may indicate. And it is further provided that if either 
 company shall find itself in position to declare a dividend 
 of more than 7|- per cent., half of any such excess shall go 
 to the government. 
 
 At this distance it is almost impossible to pass judg- 
 ment on proposals of this kind. The great danger in 
 any arrangement by which the operating company obtains 
 a determined share of the gross receipts is that the com- 
 pany has a great deal more interest in limiting expendi- 
 ture than in developing tralTfic. It gets the whole benefit 
 of any reduction in expenses and only a part of the benefit 
 of any increase in trafific. It is therefore under constant 
 temptation to do two things, both of which are bad for 
 the public : 1, to prefer a small trafific at high rates to a 
 large traffic at low rates ; 2, to limit as much as possible 
 the expenditure for renewals and permanent improve- 
 ments or to shift the burden of all such improvements on
 
 RAILROAD LEGISLATION IN ITALY. 235 
 
 the owner. The first of these dangers is not provided 
 against by the proposed law. Perhaps it is thought that 
 the Italian Government exercises sufficient power over the 
 tariffs to prevent any such danger. This seems like a 
 mistake. It can prevent any increase in rates, but cannot 
 ordinarily enforce any diminution. But in a growing and 
 active railroad system, the charges ought naturally to 
 diminish. With regard to the second point, the safeguards 
 are carefully planned. The only possible questions are 
 whether the income of the companies will keep the prop- 
 erty-increase fund at a, proper level, and whether the 
 assessments have been placed at the right figures. If any 
 mistakes have been made here, it certainly is not for want 
 of care or study, and we shall look with interest to see 
 how far the event justifies the expectation of the framers 
 of the bill. For if it should be possible to evade the most 
 dif^cult questions of construction account by a closely 
 calculated system of reserve fund, the example of Italy 
 would probably be followed elsewhere. But in a matter 
 which is liable to so many disturbing causes as the con- 
 struction account, any very brilliant success seems too 
 much to hope for.
 
 CHAPTER XIII. 
 
 RESULTS OF STATE RAILROAD MANAGEMENT. 
 
 Extension of government activity — Motives which have led to it — Principles 
 upon which government enterprises may be managed — Tolls vs. Profits 
 — German attempts to base rates upon cost of service — Failure to carry 
 out the principle completely — Local discriminations — The sliding scale 
 — International conflicts — Pools — Rates based on cost of service are 
 almost necessarily high — General arguments for and against government 
 management — The telegraph question in the United States to-day — The 
 railroad question in the future. 
 
 Adolph Wagner : " Finanzwissenschaft." FUnfter Hauptabschnitt : Com- 
 munications- und Transportwesen, etc. 3d ed., Leipzig, 1883, pp. 640-792 
 (2d ed., pp. 525-675, also published separately). 
 
 Emil Sax : " Die Eisenbahnen," Vienna, 1879, pp. 139-264 ; 404-464. 
 
 W. S. Jevons: " The Railways and the State." (" Essays and Addresses," 
 1874 ; " Methods of Social Reform," London, 1S83.) 
 
 There can be no question that the sphere of government 
 activity has in the last fifty years been rapidly widening. 
 The postal service has increased twenty-fold, and has 
 absorbed no small part of the express business. Outside 
 of the United States, governments have generally taken 
 charge of the telegraph. The tendency toward govern- 
 ment railroad management has been less universal, but 
 scarcely less noticeable. Twenty years ago, government 
 ownership of railroads was the exception, even in Central 
 Europe. To-day, it is far difTerent. The movement which 
 carried Prussia and Belgium into a virtually complete 
 system of state ownership, was not without its effects 
 elsewhere. We have seen how it was to a certain extent 
 
 236
 
 RESULTS OF STATE MANAGEMENT. 237 
 
 felt in France, in Austria, and in Italy. It was a necessary- 
 part of the general movement in European history by 
 which national life and national unity were intensified ; a 
 movement which showed itself on an entirely different 
 side, in the almost universal attempt to extend the pro- 
 tective tariff system. Both these movements, and others 
 like them, were the outgrowth of the spirit which had de- 
 veloped in the great national wars between Italy and 
 Austria, Germany and France, Russia and Turkey. Eng- 
 land alone among the great powers remained unmoved 
 either to war, to protection, or to state railroads. 
 
 It is not generally known how nearly alone England 
 and the United States stand in depending upon private 
 enterprise for their railroads. Other countries have either 
 gone to the extreme of state ownership, or have at any 
 rate adopted a well-marked system of state support and 
 control. The smaller or less populous states have, as a 
 rule, adopted the former policy, the large states the latter. 
 This is not merely true of Europe (where Switzerland 
 forms the only well-defined exception), but of the world 
 as a whole. In general, the South American states own 
 their railroads ; Brazil owns but a small part of hers, sub- 
 sidizing most of the remainder. State ownership is uni- 
 versal in Australia ; in India and in British America, it is 
 the exception ; but state subsidy is the rule in India, and is 
 not infrequent in Canada. In Europe, besides the states 
 whose history has been given in detail, state ownership is 
 exemplified in Denmark, Sweden, Norway, and, to a con- 
 siderable extent, in Holland — not to speak of the smaller 
 states of Germany. The policy of support and control is 
 seen in Spain and Portugal, and, above all, in Russia ; for 
 in Russia the state has furnished a large part of the capital 
 actually invested, and yet has very little actual ownership 
 to show for it.
 
 238 RAILROAD TRANSPORTATION. 
 
 The motives which have led governments to extend the 
 sphere of their business activity, have been three : 
 
 1. To increase their own poHtical influence. 
 
 2. To make up for the lack of private enterprise. 
 
 3. To avoid the abuses incident to private management. 
 The last consideration, which is the main point in the 
 
 United States to-day, has played but a subordinate part 
 elsewhere. 
 
 The desire to extend political influence — military, civil, 
 or financial — has usually been the chief motive. Military 
 power has been the leading aim of most government 
 transportation systems, from the Appian Way of Rome to 
 the Trans-Caspian Railroad which Russia is building out 
 into the deserts of Central Asia. It is the desire for cen- 
 tralized power that underlies Bismarck's railroad schemes. 
 It was with this aim that Louis XL, of France, estab- 
 lished the first national post-office four hundred years ago ; 
 it was as a means of taxation that his successors and their 
 imitators in other countries chiefly used it for more than 
 three centuries after him. 
 
 The wish to make up for the lack of private enterprise 
 has often been the motive which induced government to 
 take up an industry in its early stages. This was the case 
 with canals ; it was the case with telegraphs. It was, 
 perhaps, still more noticeably the case with railroads 
 which were felt to be necessary to national development. 
 Sometimes recourse was had to subsidies or guarantees of 
 interest ; sometimes the state undertook to construct rail- 
 roads on its own account. Every civilized country, with 
 the possible exception of England,' has felt this necessity, 
 and has had recourse either to subsidies or to state owner- 
 ship. Even in the United States we have had our periods 
 
 ' England has given subsidies to Irish lines.
 
 RESULTS OF STATE MANAGEMENT. 239 
 
 of reckless land-grants and equally reckless municipal 
 subscriptions, not to speak of the experiments made at 
 the very outset by the individual States in railroad man- 
 agement, and by the National Government in telegraphy. 
 
 To-day we do not feel the force of these motives. 
 Private enterprise in investing capital is too great, rather 
 than too small. The political influence of our administra- 
 tion needs to be checked rather than extended. What 
 we do feel is the set of abuses involved in the present 
 system of private management ; and those who desire 
 government management of telegraphs or railroads, do so 
 in the hope that it would be a means to check those abuses. 
 
 There is no inherent reason why the rates of govern- 
 ment railroads should be differently arranged from those of 
 private railroads. It is not only perfectly conceivable that 
 the two should be managed upon the same principles, but 
 in a great many instances it actually happens. Where a 
 " mixed system" of competing state and private lines 
 really flourishes, this is almost always the case. The 
 state railroads of Belgium and Germany fifteen or twenty 
 years ago were simply ordinary roads whose revenue 
 accrued to the state. As far as their relations to the 
 shippers were concerned, they were run to make money; 
 not with a view to any general considerations of public 
 policy. This was inevitable. The tax-payers will not 
 allow a government to lose money or make small profits 
 on its lines when a competing private road is making 
 larger profits. If the latter is run to make as much 
 money as possible, the former must also necessarily follow 
 its example, and — perhaps in a somewhat disguised form 
 — charge what traffic will bear. This constitutes at once 
 the advantage and the disadvantage of the mixed system. 
 It insures that the state roads will be managed on busi-
 
 240 RAILROAD TRANSPORTATION. 
 
 ness principles. But it does not leave the government 
 free to manage them with a view to broader principles of 
 public policy, right or wrong. This was probably the 
 great reason why the governments of Belgium and 
 Prussia found the competition of private roads intoler- 
 able. It did not interfere with their profits ; it did in- 
 terfere with the freedom of government action. 
 
 When the state has its hands free, it has its choice of 
 several aims, instead of being restricted to the mere 
 attempt to make good business profits. A government 
 enterprise may be managed on any one of four principles : 
 1. As a tax. 2. For business profits. 3. To pay ex- 
 penses. 4. For public service, without much regard to 
 the question of expense. 
 
 Under the first principle, a government enterprise 
 charges more than would be charged by private business. 
 We have few examples of the sort in America. In 
 Europe they are common enough, in the form of govern- 
 ment monopolies of tobacco, salt, etc. ; taken up, not on 
 account of any business needs, but as a convenient means 
 of taxing the people heavily. 
 
 Under the second principle, a government undertaking 
 is managed on the same system as any private enterprise 
 — to make all the money it can. As already indicated, 
 this is regularly the case in those branches of industry 
 where government comes into competition with private 
 concerns ; for instance, in the mixed system of railroads, 
 or in the parcels post as a competitor with the express 
 companies. If there is no such competition, but a gov- 
 ernment monopoly, this second principle cannot, in the 
 nature of things, be applied. When a government mo- 
 nopoly undertakes to make all the money it can, what it 
 gets is not business profit but a tax.
 
 RESULTS OF STATE MANAGEMENT. 24I 
 
 The third principle is the system of tolls, or rates based 
 upon cost of service. On the whole, it is the general prin- 
 ciple upon which the industrial enterprises of government 
 are run. The aim may be to cover expenses either with 
 or without counting interest. The interest account is not 
 usually included in considering the cost of the post office; 
 the item is so small that it is possible to neglect it. In 
 most European postal services, and especially in that of 
 England, they aim to do something more than cover 
 operating expenses. In the United States they regularly 
 do somewhat less. In enterprises involving a larger capi- 
 tal expenditure, they aim to cover interest also. This is 
 the case in government telegraph and railroad service, in 
 light-house and hospital taxes on shipping, and in a variety 
 of other cases. 
 
 The great mass of government activity is not industrial, 
 and does not seek to pay expenses. It is organized for 
 public service without regard to strictly business con- 
 siderations. Under this head come the administration of 
 justice, and police service, with the activity of the govern- 
 ment in matters of education and health. They cannot 
 pay for themselves, and have to be paid for by taxation. 
 
 It is obvious that neither the first nor the last of these 
 principles is a fit guide for state railroad management. 
 We cannot make them either a means of taxation or a 
 means of gratuitous service. The former would constitute 
 a tax on commerce as such — a thing to be avoided. The 
 latter would constitute a tax on the community for the 
 sake of commerce — a thing also to be avoided if possible.' 
 
 ' The laltcr alternative is not always avoided. A subsidy in almost any 
 possible form is a tax on the general community for the sake of commerce 
 which could otherwise not exist. If repaid at all, it is repaid indirectly. 
 Another instance of the same kind occurs frequently in the United States 
 postal service. There are a great many mail routes which are necessarily
 
 242 RAILROAD TRANSPORTATION. 
 
 The choice then lies between the second and third of 
 these principles. It is a question of profits vs. tolls. And 
 the two different answers to this question mark two differ- 
 ent phases of the state railroad system. The first answer 
 — management for profit — was the earlier one. It was 
 given, in general, whenever there was competition on 
 tolerably equal terms between state and private roads. It 
 prevailed in Belgium till 1870, in Prussia till 1875 ; in 
 Austria it still prevails to a great extent. When roads are 
 managed on this principle, we usually have the same sys- 
 tem of rates which we find on private roads ; a system of 
 classification, differential rates, and special contracts. In 
 other words, there is no serious pretence of basing differ- 
 ences in charge upon differences in cost of service. 
 
 Under the system of tolls, on the other hand, this is 
 made the fundamental principle. The very first schedules 
 of rates in some countries — Belgium, for instance — were 
 constructed with this idea in view. But these early efforts 
 were extremely crude, and were abandoned about 1850. 
 It was not until 1867 that there were signs of a return to 
 this idea. In that year the railroads of the Duchy of 
 Nassau adopted a tariff avowedly based on cost of service. 
 Four years later the same attempt was carried out upon a 
 much larger scale in Alsace-Lorraine, and from those 
 provinces it spread eastward and northward, and has had 
 a very considerable influence upon the system of charges 
 throughout Germany.' 
 
 In these provinces it was started without any fixed pur- 
 pose. During the war of 1870, when Alsace and Lorraine 
 were occupied by the German armies, the railroads of 
 
 unprofitable. To maintain them involves a tax upon somebody — either on 
 the letter-writers on more frequented routes, or on the general funds of the 
 community. The latter alternative is the one usually chosen. 
 
 ' Schrciber : " Tarifwesen dor Eisenbahncn," Vienna, 1884, pp. 121-171.
 
 RESULTS OF STATE MANAGEMENT. 243 
 
 this district were run provisionally by German mili- 
 tary authorities — the French officials having, of course, 
 disappeared. Amid the variety of more pressing con- 
 cerns, the Germans made no attempt to apply a com- 
 plicated system of rates. They simply established one 
 mileage unit of charge per hundred pounds ; another per 
 car-load ; and a third per platform car-load. It was a 
 crude pro-rata system, with no attempt at classification, 
 except as, incidentally, the most valuable goods would ba 
 shipped at parcels rates and the less valuable ones at the 
 car-load rates. 
 
 When peace returned the roads remained under the 
 direct management of the empire. What was to be the 
 system of charges? The business of the country had 
 grown up under French classification, and would be 
 thrown into confusion by applying that of Germany. On 
 the other hand, the German officials had been trained in the 
 classification of Germany, and could not successfully 
 apply that of France. There was a conflict between the 
 classification suited to the business and the classification 
 suited to the officials. They compromised by applying 
 no classification at all — just what they had provisionally 
 been doing in war time. What had been adopted as 
 a makeshift now became a settled principle.' 
 
 This is the so-called " natural system." It was adopted 
 in Alsace-Lorraine in 1871 ; by the connecting roads, on 
 through business to or from these provinces, in 1872 ; by 
 Baden in 1873; by Hungary in 1874. The rate on any 
 class of goods consisted of a fixed charge to cover ter- 
 minal expenses, independent of distance, plus a rate 
 per mile to cover movement expenses. For instance, the 
 tariff of Southwestern Germany, reduced to American 
 
 ' Schreiber, pp. 153, 154.
 
 244 
 
 RAILROAD TRANSPORTATION. 
 
 units, was approximately as follows, per ton of each class 
 
 of goods : 
 
 
 
 
 Terminal. 
 
 Mileage rates 
 
 
 cents. 
 
 cents. 
 
 Express .... 
 
 55 
 
 9.00 
 
 Parcels .... 
 
 44 
 
 3.60 
 
 Box car : 
 
 
 
 Half car-load per ton 
 
 33 
 
 2.70 
 
 Whole " 
 
 22 
 
 2.25 
 
 Platform car : 
 
 
 
 Half car-load per ton 
 
 33 
 
 I. So 
 
 Whole " 
 
 22 
 
 1-35 
 
 Coal . . 
 
 33 
 
 o.go 
 
 This system in its complete form did not extend itself 
 widely. But it had a decided influence on the rates and 
 schedules in other parts of Germany. In 1874 Bavaria 
 adopted a "compromise tariff." In the years 1875-76 
 the same change was urged in Prussia ; and in the year 
 1877 the so-called "reform tariff " of the German Empire 
 came into being. It differs from the natural system 
 chiefly in the existence of a slight amount of classifica- 
 tion, which, in practice, amounts to a good deal. The 
 classification and mileage rates (exclusive of terminals) 
 are as follows: 
 
 Class. 
 
 Express ....... 
 
 Parcels ....... 
 
 Ai (general rate for half car-loads) . 
 
 B (general rate for whole car-loads) . 
 
 A2 (grain, lumber, coal, etc., half car-loads) 
 
 Special I. (grain, etc., car-loads) 
 
 Special II. (lumber, etc., car-loads) . 
 
 Special III. (coal, etc., car-loads) 
 
 Cents. 
 
 9.0 
 
 4-5 
 3-0 
 
 2.5 
 2.0 
 1.8 
 1.4 
 
 1.04-0.88 
 
 Austria adopted a similar system, but did not go quite 
 so far toward the cost-of-service principle. The chief 
 difference was that the German system had equal mileage 
 rates (except for the terminal), while the Austrian system 
 was constructed on a sliding scale, the mileage rates for
 
 RESULTS OF STATE MANAGEMENT. 245 
 
 long distances being less than for short ones. It should 
 be understood that both in Germany and Austria there 
 are special rates which deviate from the general schedule. 
 In Germany they are rather infrequent, in Austria quite 
 common. 
 
 Such is the system of rates which is on the whole most 
 characteristic of state railroad management. It was 
 adopted on two quite distinct grounds, one theoretical, 
 the other practical. As a matter of theory it was thought 
 that rates ought to be based on differences in cost of ser- 
 vice ' — or rather, to put it more accurately, that differ- 
 ences in rates ought to be based upon differences in cost 
 of service. As a matter of practice, it was thought that 
 it would result in good both to the railroads and the pub- 
 lic. We thus have to consider two distinct questions at 
 the same time : first, how far the theory was actually 
 carried out ; and, second, whether the results were good or 
 bad. 
 
 First, then, were differences in rates actually based 
 upon differences in cost of service } 
 
 As regards classification — differences in charge on 
 different kinds of freight — the theory was never com- 
 
 ' The theory is by no means universally accepted, even by those who 
 favor state management. Gu.stav Cohn (Engl. Eisenbahnpolitik, iii., 65-S4) 
 takes the position that rates can not properly be based upon cost of service ; 
 and that, therefoi-e, the state should own the railroads, because private 
 agencies can not be trusted to apply the inevitable principle of charging 
 what the traffic will bear. 
 
 Cohn's reasoning is abstruse, but extremely able. As long as we stand on 
 purely econoiitic ground, it confirms the conclusions reached in chap. vi. We 
 are at issue only when it comes to the question, Can the state be trusted to 
 do better than private agencies ? A German naturally answers. Yes. An 
 American naturally answers, No. 
 
 A few of the best thinkers agree more or less fully wiih Colin. The argu- 
 ment of the text is directed against the cruder view which generally prevails.
 
 246 RAILROAD TRANSPORTATION. 
 
 pletely carried out. Even in Alsace itself, an exception 
 had to be made in the matter of coal — an exception which, 
 by special provision, was sometimes extended to other 
 cheap and necessary articles. A system of rates by which 
 each article pays its share of the fixed charges would 
 virtually prohibit the movement of coal. Yet the moment 
 you abandon this principle you abandon the system of 
 basing rates upon cost of service. 
 
 As regards local discriminations, they carried the prin- 
 ciple out systematically. Yet even in Germany, where 
 the results were most complete, they overdid the matter 
 in such a way as to prevent the theory from being strictly 
 followed. The theory is this : Each consignment ought 
 to pay a fixed charge, independent of distance, to cover 
 terminal expenses,////^ a rate per mile to pay for move- 
 ment expenses. But if they carried this theory out, it 
 would injure both the very-short-distance traf^c and the 
 very-long-distance traffic. For the long-distance traflfic 
 the mileage rate heaps up so high as to prevent the sale 
 of goods in distant markets. For the short-distance traf^c 
 the terminal charge amounts to so much as to make men 
 and goods either go by horse-power or not go at all. It 
 prevents the development of a vast and in some respects 
 easily handled traffic. 
 
 The authorities felt the force of these last points, and 
 in order not to check local business, they made their ter- 
 minal charges very low — lower than the theory demanded. 
 But, according to the principle of tolls, if they made one 
 element of the charge too low, they had to make up else- 
 where.' This led to a still further increase of the mileage 
 
 ' This constitutes a distinction between rates based upon cost of service 
 and rates based upon what the traffic will bear. In the latter case, they 
 cannot and do not try to make up for any such losses (see pages 122, 123). 
 For the evil effects of thus trying to make up deficits, see page 250.
 
 RESULTS OF STATE MANAGEMENT. 247 
 
 rates, and matters all the worse for the long-distance 
 traffic. 
 
 Belgium and Austria felt this difficulty, and adopted 
 the sliding scale of charges. This was probably good 
 policy, but it was an abandonment of the principle on 
 which they pretended to act. It made the middle-distance 
 traffic pay relatively more profit than the long- or short- 
 distance. In other words they based rates on what the 
 traffic would bear, and then adopted an elaborate system of 
 pulling wool over their own eyes, in order that the schedules 
 might look as though they were based upon cost of service. 
 
 Prussia did not adopt the sliding scale as a principle.* 
 But down to the year 1880 she did virtually the same 
 thing in another way. The long-distance traffic 
 was favored by an elaborate system of special rates for 
 export, import, or transit trade. They were not, in gen- 
 eral, contracts with individual shippers ; but each line of 
 goods had a special tariff of its own, applied equally to all 
 who engaged in international business. A decided change 
 was made in 1879-80. Bismarck at that time took up a 
 more distinctly protective tariff policy. To allow these 
 favors to foreign trade was virtually to counteract all such 
 attempts at protection ; for in many cases the increased 
 import duties were followed by a lowering of railroad 
 charges which counterbalanced it. To prevent this, the 
 policy of special rates for international trade was abandoned. 
 
 Austria was the nation which suffered most directly 
 from this change, because so much of her export trade 
 went into Prussia, or through Prussia to other countries. 
 This trade could not bear the increase of rates. Some of 
 the traffic, instead of going northward via Prussia, went 
 southward via Trieste and the Mediterranean. But there 
 
 ' Except on special class III. (coal).
 
 248 RAILROAD TRANSPORTATION. 
 
 was a more direct way of evading the trouble. The river 
 Elbe runs from the Austrian frontier right through the 
 heart of Prussia to Hamburg. By putting steamers on 
 the Elbe, Austria obtained a through rail-and-water route 
 independent of Prussian rail connections. By making 
 use of the Bavarian railroads (which were not under the 
 control of Prussia) Austria was also enabled to carry 
 her products to the Rhine, and thus ship them to Holland, 
 Belgium, or England. The Prussian roads felt the loss of 
 their through traffic. The government withdrew from its 
 extreme position, and attempted a partial compromise 
 with Austria. This was rejected. They then tried retalia- 
 tion. They made connections with Danube steamers to 
 prevent the Austrian roads from getting Prussian traffic. 
 And thus we had the curious spectacle of a fight of Aus- 
 trian railroads and Prussian waterways on the one hand, 
 against Prussian railroads and Austrian waterways on the 
 other. Each party succeeded in causing the other a good 
 deal of inconvenience ; but neither party was able to make 
 foreign traffic pay domestic rates. The question has but 
 just come to a settlement. 
 
 It is clear that even with the whole power of the Euro- 
 pean governments, the laws of trade have proved too 
 strong for any arbitrary attempt at railroad regulation to 
 succeed. The effort to base rates upon cost of service has 
 only resulted in a compromise. It must be confessed, on 
 the other hand, that important results have been achieved. 
 They have done away with the most dangerous forms of 
 special contract and secret discrimination. The worst 
 abuses under which we suffer in America have been 
 avoided ; at the sacrifice, however, of many advantages 
 which we enjoy." 
 
 ' In the way of rapid development and low through rates.
 
 RESULTS OF STATE MANAGEMENT. 249 
 
 The real principle on which the Prussian system of 
 railroad charges is based was clearly stated by the govern- 
 ment in 1879.' I. The tariff should be clear. 2. It 
 should be equable. 3. It should not produce bad indi- 
 rect effects. 4. It should not give opportunities for 
 official corruption and corrupt favors. This is not basing 
 rates upon cost of service (unless by a somewhat strained 
 interpretation of the second heading). It bases them 
 upon intelligible practical grounds, of which any railroad 
 man will see the force, even though he may not deem it 
 possible to apply them to the tariff of his own road. 
 
 This effect upon rates can only be secured at the sacri- 
 fice of every thing like railroad competition, and of any 
 good which railroad competition may bring in the way of 
 rapid development or of efficient use. 
 
 The governments of Central Europe have given up 
 trying to procure obedience to these principles by simple 
 prohibitory laws, such as are occasionally proposed in 
 Congress. They have a hundred times more police power 
 than we have, but they do not undertake to do this. To 
 secure obedience to this system, they must take away the 
 temptation to violate it. This can only be done by a 
 system of pooling contracts. These are accordingly legal- 
 ized and enforced. They are carried on to an extent 
 undreamed of in America."" They have both traffic pools 
 and money pools. There are pools between state roads 
 and private roads, between railroads and water routes. It 
 is regarded as a perfectly legal thing that one road should 
 pay another a stated sum of money in consideration of 
 the fact that the latter abstains from competing for the 
 through traffic of the former. 
 
 ' Schreiber, p. 144. 
 
 * Sax, pp. 84-96. Schreiber, pp. 235-242.
 
 250 RAILROAD TRANSPORTATION. 
 
 These principles, applied by these means, tend to keep 
 rates up. The roads do not lower the local rates to any 
 extent, but rather raise the through ones. They level up 
 instead of levelling down. They are not occupied with 
 the question how to lower rates, but how to keep the right 
 proportion between existing rates. In trying to decide 
 that matter fairly, they are tempted to put every thing high 
 enough to leave themselves elbow-room. In their anxiety 
 to decide what is a fair rate in proportion to other rates, un- 
 der existing circumstances, they neglect the question, How 
 can we change circumstances so as to make lower rates ? ' 
 
 This is an evil inherent in the very nature of tolls. 
 There was never a more mistaken idea than the idea that 
 rates would be reduced if they were based upon cost of 
 service. The principle keeps rates up. If it is strictly 
 applied, it makes it necessary that each item of business 
 should pay its share of the fixed charges. A great deal of 
 business which would pay much less than its share of the 
 fixed charges (though still giving a slight profit above 
 train and station expenses) is thus lost. This is bad for 
 the railroads, bad for the shipper, and bad for the prospect 
 of low average rates. It makes the business of the roads 
 so much smaller that the share of fixed charges which 
 each piece of business has to pay (under this system) be- 
 comes higher, while the profit does not increase, and the 
 inducement to new construction is lessened. These things 
 are not mere theory, but arc matters of history. The 
 great reductions of rates, whether in the United States, 
 Belgium, or elsewhere, have taken place under the stim- 
 ulus of competition, even if it was only temporary. They 
 have been made at the very periods when the principle of 
 basing rates upon cost of service was most systematically 
 violated. It is the countries which have passed through 
 
 ^Railroad Gazette, 1885, p. 119.
 
 RESULTS OF STATE MANAGEMENT. 25 1 
 
 such periods that enjoy the lowest rates. The average 
 rates on all shipments in Ohio to-day are probably lower 
 than the German rates for coal for the same average 
 distance. And, finally, the refusal to allow railroads to be 
 run for profits prevents the construction of new roads 
 when they are really needed. If a road with its hands 
 free could just make a profit, a road forced to base rates 
 upon cost of service, and thus check the development of 
 certain lines of trade, could not do so. It would thus 
 have to go unbuilt, or else receive a subsidy — a dangerous 
 policy. The effort to base rates on cost of service goes 
 hand in hand with the policy of subsidies. The money 
 ultimately comes, or is supposed to come, out of the 
 pockets of local tax-payers. Nobody else is enough 
 interested to have the road built. If they are charged 
 what the traf^c will bear, they pay it to the railroad direct. 
 If they furnish a subsidy, they pay it via the public 
 treasury. Neither way is very satisfactory, but in the 
 United States at any rate we have found the second the 
 worse evil of the two. 
 
 To offset these arguments it is urged that the rolling 
 stock is more fully utilized under the Prussian system, and 
 that there is less waste of capital, because the new con- 
 struction is intelligently adapted to the needs of the 
 country ; and that both of these causes greatly reduce the 
 cost of railroad service. Neither point is fully made out. 
 The state roads undoubtedly manage to use a large per- 
 centage of available car space. It is by no means clear 
 that they secure the same economy in time. They load 
 cars quite fully, but they seem to keep them idle a long 
 time to do it.' In the second point, concerning new con^ 
 
 ' In Belgium the complaints under this head are very serious. Cars lie 
 waiting for a load at one point, and are not to be had at other points where 
 they are wanted.
 
 252 RAILROAD TRANSPORTATION. 
 
 struction, there is much more force ; a force which is never- 
 theless weakened by two considerations : First, the state is 
 of necessity slow in appreciating the business importance 
 (as distinct from the political importance) of new lines, 
 and thus makes financial mistakes. Second, it is rare that 
 the state does not have to pay more for a given piece of 
 work than would be paid by a well-managed private 
 company. 
 
 This brings us to the political dangers of the state rail- 
 road system. These have been most forcibly felt in Italy, 
 as detailed in the report of the Investigating Commission. 
 If we may believe M. le Hardy de Beaulieu, an excellent 
 authority, the same troubles are making themselves felt in 
 Belgium. In Prussia there is little or no complaint. This 
 is chiefly due to the superb organization of the Prussian 
 civil service. But the possible dangers — dangers which 
 would be realized under a less stable government than 
 that of Prussia — may be inferred from the number of 
 officials employed in railroad service. Not counting mere 
 laborers, incidentally employed, the number of Prussian 
 railroad officials is about 80,000. There is little need 
 of dwelling upon the evils which would arise from this 
 cause, were such a system applied in the United States. 
 
 To sum up : The arguments advanced by the advocates 
 of government ownership start from the idea that govern- 
 ment means of transportation will -be managed, not with 
 a view to high profits, but for the good of the community. 
 They will thus, it is said, offer low rates, based upon cost 
 of service, and equal facilities without discrimination. 
 The evils of speculation will be avoided. There will be 
 no waste of capital, no construction of two lines where 
 but one is needed. Capital will be put where it will do 
 the most good for the development of the country.
 
 RESULTS OF STATE MANAGEMENT. 253 
 
 Finally, we shall no longer be at the mercy of combina- 
 tions of capitalists who manipulate and tax us for their 
 own interests. It is further urged that the post-office 
 shows how government secures to all men low rates, 
 equal facilities, and security against extortion ; and it is 
 claimed that the same result might be secured with a gov- 
 ernment telegraph, or perhaps with government railroads. 
 
 On the other hand, the Italian Commission sums up 
 the arguments on the other side by saying, first, that it is 
 a mistake to expect lower rates or better facilities from 
 government than from private companies. The actual 
 results are just the reverse. The state is more apt to tax 
 industry than to foster it ; and when it attempts to tax 
 industry, it is even less responsible than a private com- 
 pany. Second, state management is more costly than 
 private management, and a great deal of capital is thus 
 wasted. Third, political considerations are brought into 
 a system of state management in a way which is disastrous 
 to legitimate business and demoralizing to politics. 
 
 These conclusions are of the highest importance ; but 
 they apply to some forms of industry far more than to 
 others. Where uniform rates are vastly more important 
 than low ones, the evils of taxation are lessened. Where 
 there is no large investment of capital, there is less dan- 
 ger of waste. Where the business is largely a matter of 
 routine, the opportunities for political manipulation are 
 reduced to a minimum. 
 
 The conditions which favor state ownership and man- 
 agement of transportation agencies are thus stated by 
 Adolph Wagner,' of Berlin, the leader of the German pro- 
 fessorial socialists: I. When the efficiency of the ser- 
 
 1 " Finanzwissenschaft," section 15. See Lalor : " Cyclopasclia of Pol. 
 Economy," article " Transportation," p. 931.
 
 254 RAILROAD TRANSPORTATION. 
 
 vice requires uniform and wide extension over the whole 
 country and international communications (post-office, 
 telegraph ; somewhat less so in the case of railroads). 2. 
 When the service involves any thing like a monopoly, 
 legal or actual (railroads, telegraphs). 3. When it requires 
 constant repetition of the same services, according to fixed 
 schedules, in such numbers as to involve the existence of 
 a large body of officials. 4. When the cost may be less- 
 ened by combining a variety of services at small stations 
 (letter and parcels post, railroad stations, and telegraph 
 offices). 5. When the service in private management can 
 only be secured by subsidies on a large scale. 6. When it 
 is necessary on grounds of public policy that the service 
 should inure uniformly to the benefit of the whole people. 
 These principles, he concludes, enable us to speak de- 
 cisively in favor of state management in the case of letter 
 post and telegraph ; more reservedly in the case of parcels 
 post and railways ; in the matter of navigation they justify 
 it only in exceptional cases. 
 
 On the other hand, W. Stanley Jevons,' writing an im- 
 partial opinion, but, as an Englishman, averse to great 
 extension of government activity, states the conditions 
 favorable to state management as follows : " i. When 
 numberless widespread operations can only be efficiently 
 connected, united, and co-ordinated in a single, all-exten- 
 sive government .system. 2. When the operations possess 
 an invariable routine-like character. 3. When they are 
 performed under the public eye or for the service of indi- 
 viduals who will immediately detect or expose any failure 
 or laxity. 4. Where there is but little capital expendi- 
 ture, so that each year's revenue and expense account 
 
 > "On Government Control of Telegraphs," etc., 1867. In "Methods 
 of Social Reform," p. 279.
 
 RESULTS OF STATE MANAGEMENT. 255 
 
 shall represent, with sufficient accuracy, the real commer- 
 cial conditions of the department." Of these principles 
 the fourth is one of the highest practical importance, 
 which must be considered in discussing any schemes of 
 state management ; and one which, under a government 
 like that of the United States at present, must generally 
 be decisive. 
 
 The question is not to be settled on general theories. 
 Each case must be decided by itself. The postal service 
 obviously fulfils the conditions for successful government 
 management better than other forms of industry. Rail- 
 roads obviously do not. The telegraph stands midway 
 between the two. It involves far more capital investment 
 than the postal service, and far less than railroads. Its 
 management is less a matter of routine than the postal 
 service, and more so than railroad service. 
 
 If we compare the telegraph service of the United 
 States, with that of Great Britain or Switzerland — the 
 two countries of Europe which show the best results from 
 government telegraphy — there is no doubt that the aver- 
 age rates with us, length and distance being taken into 
 account, are less than with them. But for moderate dis- 
 tances the cost, to a private individual, of sending an 
 ordinary message is, on the whole, decidedly less in 
 the more advanced European countries than with us. 
 Concerning the amount of use which is made of the 
 telegraph, we find that the number of messages a year, 
 per 100 inhabitants, with us, is slightly less than with 
 them ; the amount of matter sent probably somewhat 
 greater with us, and the total telegraph service, taking 
 distance as well as matter into account, very much greater. 
 We make more use of the telegraph ; but they make more 
 general use. The results would have been much more de-
 
 256 RAILROAD TRANSPORTATION. 
 
 cidedly in our favor had we made the comparison with 
 other countries than Great Britain or Switzerland. 
 
 In promptness and efficiency of service we probably 
 have a slight advantage, though this point can hardly 
 be established by argument, and must remain, to some 
 extent, a matter of individual opinion. In utilizing new 
 methods we have a distinct advantage. Witness the ob- 
 stacles to the introduction of the telephone in Great 
 Britain. On the other hand, any such interruption to 
 the service as was occasioned by our telegraphers' strike 
 in 1883 would have been impossible in Europe. 
 
 The industrial results balance so closely that the ques- 
 tion must be decided on political grounds. Government 
 ownership of the telegraph would have one great advan- 
 tage : it would emancipate us from the control of an 
 organization which now has dangerous power, and whose 
 methods have not been in all respects above suspicion. 
 On the other hand, we should increase government 
 patronage, in itself a great evil ; we should have a demor- 
 alizing item of expense in our budgets, compared with 
 which star routes or river and harbor improvements 
 might sink into insignificance; we should run the risk of 
 having facilities granted and capital invested, not because 
 business needed them, but because they were demanded 
 by doubtful states or influential members of Congress. 
 We should place in the hands of our government an agency 
 which, especially in the present critical conditionof our civil 
 service, might readily be used to control political action. 
 Some of the evils which have recently turned men's minds 
 to the thought of a government telegraph, would probably 
 be increased rather than lessened by the change.' 
 
 ' In the discussions on the subject twelve years ago, the best arguments 
 were tliose of Wm. Orton and D. A. Wells against government ownership
 
 RESULTS OF STATE MANAGEMENT. 257 
 
 Government ownership of the telegraph prevailed in 
 Continental Europe, because each country was more or 
 less of a bureaucracy ; that is, the civil service governed 
 the country, and was so well organized that it extended 
 itself as a matter of course. In America the civil service 
 is not so well organized, does not govern the country, and 
 is not allowed to extend itself as a matter of course. 
 Political reasons decided the question in favor of a govern- 
 ment telegraph in Europe. Political reasons form the 
 main ground against a government telegraph in the 
 United States. 
 
 The present importance of the telegraph question in 
 America has thrust the question of state railroad owner- 
 ship into the background. Every now and then some one 
 demands that the government should have a means of 
 controlling railroad charges, either by a system of water 
 routes or by the ownership of a few among many com- 
 peting railroads. Neither of these would meet the real 
 evils. It is not general charges that need regulating, but 
 special differences. If you have a water route or compet- 
 ing railroad, you will protect those whose doors it passes, 
 and create differences in their favor against those who are 
 not thus situated. 
 
 The idea of government ownership of one among sev- 
 eral competing lines attracted undue attention, owing to 
 its supposed success in Belgium. The earlier reports of 
 the Massachusetts Commission — deservedly high authori- 
 
 (Proc. of the Com. on Approp. on the Postal Telegraph, 42 Cong. 3., II. R. 
 Mis. Doc. 73). Of the more recent discussion, some of the most important 
 articles are: Hubbard (for government telegraph), N'orth Amer. Rev., 137, 
 pp. 521-535 ; Green (against government telegraph), North Amer. Rev., 137, 
 pp. 422-434 ; Means (against government telegraph on broader grounds). 
 North Amer. Rev., 139, pp. 51-66. The best comparative statistics are in 
 United States Census, 1880, vol. iv., gen. folios 805-849.
 
 258 RAILROAD TRANSPORTATION. 
 
 ty — favored the idea. But it was never carried to a suc- 
 cessful conclusion in Massachusetts ; and it was aban- 
 doned in Belgium, the government purchasing a large part 
 of the private railroads. The competition with private 
 lines had been too onerous for the Belgian Government, 
 and had left it too little independence of action. The pri- 
 vate lines regulated those of the government rather more 
 than the government regulated the private lines. Experi- 
 ence is against the probability of success in the attempt 
 on the part of government to regulate either railroads or 
 telegraphs in this way. To do anything efficient, it must 
 control not a few lines, but the whole system. 
 
 There is a strong popular feeling, to a large extent 
 unsuspected by those in authority, in favor of government 
 ownership of railroads as a system. No one can have 
 much to do with the more thoughtful workingmen with- 
 out finding how strong that feeling is, and what hopes are 
 based upon it. The fact that the question is not now 
 under discussion must not blind us to the fact that forces 
 are at work which may prove all but revolutionary when 
 the question actually does come under discussion. If 
 it be true that government railroad ownership would be a 
 most serious political misfortune for the United States, 
 we must be prepared to meet the danger with our eyes 
 open. Unless we are able to face it intelligently, and to 
 show reason for our action, the widespread feeling in its 
 favor will prove too strong for us. It may not come 
 for many years ; but the lessons of the Granger move- 
 ment show plainly enough what forces will lie behind it 
 when it does come.
 
 APPENDIX I. 
 
 RAILROADS OF THE WORLD, JANUARY I, 1884. 
 
 
 Miles. 
 
 Capital invested. 
 
 Per mile. 
 
 America 
 
 Europe 
 
 Asia .... 
 
 Africa .... 
 
 Australia 
 
 140,000 
 
 114,000 
 
 11,600 
 
 3.400 
 
 6,500 
 
 $8,400,000,000 
 
 13,110,000,000 
 
 775,000,000 
 
 240,000,000 
 
 325,000,000 
 
 $60,000 
 
 115,000 
 
 66,000 
 
 70,000 
 
 50,000 
 
 
 275,500 
 
 $22,850,000,000 
 
 $83,000 
 
 The figures of cost commonly quoted are those of the French 
 Bulletin des Travaux Publics. They are in ahtiost every case 
 too high. Neumann-Spallart " Uebersichten 1881-2," (1884) 
 pp. 437, 438, makes the necessary corrections for Europe, 
 but has not done the same for Asia and Australia. The figures 
 for Africa are very uncertain. 
 
 The special tables are based partly on the Archiv fiir Eisen- 
 bahnwesen, Jan., 1885, and partly on the investigations of Neu- 
 mann-Spallart ; but neither authority has been followed in 
 every detail. 
 
 It has been almost impossible to obtain train-mileage and 
 ton-mileage statistics with the completeness which is necessary 
 for detailed comparison. 
 
 In comparing the figures for the United States with those 
 for other countries, it should be remembered that our rolling 
 stock is much heavier and larger than theirs, so that a direct 
 comparison of the equipment figures does us injustice. It 
 must also be borne in mind that the average distance over 
 
 259
 
 26o 
 
 HA ILR OA D TRA NSPOR TA TION. 
 
 which each passenger or ton is moved is far greater in the 
 United States than in Europe. 
 
 
 
 
 
 Miles of 
 
 
 
 Length, 
 Jan. I, 1884. 
 
 Per cent. 
 
 Miles of 
 
 road to 
 
 Cost per 
 
 
 increase in 
 
 road to 100 
 
 10,000 
 
 mile. 
 
 
 
 5 years. 
 
 sq. miles. 
 
 inhab. 
 
 Dollars. 
 
 Germany 
 
 22,300 
 
 8 
 
 10.6 
 
 4.9 
 
 105,000 
 
 Gi". Britain and Ireland 
 
 18,600 
 
 5 
 
 15,2 
 
 5 
 
 3 
 
 204,000 
 
 France 
 
 18,500 
 
 18 
 
 9- 
 
 4 
 
 9 
 
 128,000 
 
 Russia 
 
 15,700 
 
 7 
 
 0.8 
 
 I 
 
 9 
 
 So, 000 
 
 Austria and Hungary . 
 
 12,800 
 
 12 
 
 5-3 
 
 3 
 
 4 
 
 105,000 
 
 Italy 
 
 5,900 
 
 13 
 
 5.T 
 
 2 
 
 
 92,000 
 
 Spain .... 
 
 5, J 00 
 
 16 
 
 2.6 
 
 3 
 
 
 78,000 
 
 Sweden 
 
 4,000 
 
 14 
 
 2.3 
 
 8 
 
 7 
 
 30,000 
 
 Belgium 
 
 2,600 
 
 6 
 
 23.2 
 
 4 
 
 8 
 
 132,000 
 
 British India 
 
 10,500 
 
 20 
 
 0.7 
 
 
 
 4 
 
 66,000 
 
 United States 
 
 120,000 
 
 •43 
 
 3-4 
 
 22 
 
 5 
 
 61,000 
 
 
 
 Equipment per 100 miles. 
 
 Pass. 
 
 Tons 
 
 
 
 
 
 
 
 
 
 Locom. 
 
 Pass. cars. 
 
 Freight. 
 
 (millions). 
 
 (millions). 
 
 Germany . 
 
 1882 
 
 51 
 
 95 
 
 1,081 
 
 224 
 
 198 
 
 Great Britain 
 
 
 1882 
 
 76 
 
 232 
 
 2,298 
 
 655 
 
 291 
 
 France 
 
 
 1881 
 
 46 
 
 105 
 
 1,207 
 
 180 
 
 93 
 
 Russia 
 
 
 
 1881 
 
 40 
 
 50 
 
 775 
 
 33 
 
 14 
 
 Austria 
 
 
 
 1882 
 
 30 
 
 62 
 
 716 
 
 47 
 
 70 
 
 Italy 
 
 
 
 1882 
 
 29 
 
 88 
 
 510 
 
 34 
 
 11 
 
 Spain 
 
 
 
 1880 
 
 26 
 
 77 
 
 468 
 
 15 
 
 9 
 
 Sweden 
 
 
 
 1881 
 
 16 
 
 36 
 
 401 
 
 7 
 
 5 
 
 Belgium 
 
 
 
 1881 
 
 72 
 
 139 
 
 1,840 
 
 57 
 
 37 
 
 British In 
 
 lia 
 
 
 1S83 
 
 24 
 
 65 
 
 436 
 
 65 
 
 19 
 
 United St 
 
 ates 
 
 
 1883 
 
 22 
 
 21 
 
 663 
 
 313 
 
 400
 
 APPENDIX II. 
 
 THEORY OF RAILROAD RATES.' 
 
 The difficulty with most theories of railroad rates is that 
 they are not based on actual practice, but upon somebody's 
 preconceived notions of what that practice ought to be. 
 
 The practical railroad manager has one general principle in 
 this matter. He lowers rates whenever he thinks it will in- 
 crease net earnings — in other words, as long as it will increase 
 gross earnings faster than it increases operating expenses. 
 Any theory which shall correctly represent American railroad 
 practice, must be based on this principle. 
 
 The first thing to be noticed is that it has the form of a dif- 
 ferential equation. The manager lowers rates until the differ- 
 ential of the gross earnings on a particular line of traffic 
 ceases to be greater than (/. c, becomes equal to) the differen- 
 tial of the operating expenses. Let us analyze this equation 
 into its elements. 
 
 The rate is the independent variable. The volume of traffic 
 is a function of the rate ; as the rate diminishes, the volume 
 usually increases and never diminishes. Let x = the rate per 
 car-load for a particular class of goods between two given 
 points, and y = the number of car-loads obtained at that rate. 
 The successive values of y corresponding to successive reduc- 
 tions of X will form a traffic curve whose general form is shown 
 on the following page. 
 
 ' This is simply carrying out in detail the principles laid down on pages 
 log, no. It difTers in form from the analysis of Lardner, of De La Gour- 
 nerie, or of the Italian Commission. 
 
 261
 
 262 
 
 RAILROAD TRANSPOR TA TION. 
 
 {tPF't' is the traffic curve. A rate Ox gives a volume of 
 traffic of xP car-loads ; a reduction of the car-load rate to 
 Ox' increases the number of car-loads to x' P' . The special 
 circumstances which affect the form of the curve for different 
 lines of traffic will be discussed later.) 
 
 The rectangle OP = xy = the rate per car-load multiplied by 
 the number of car-loads obtained, obviously represents the 
 gross earnings from this particular branch of traffic. 
 
 Now let c = the expense of hauling each additional car-load. 
 In the long run this will vary a good deal, but for a particular 
 branch of business at a particular time, it will have a tolerably 
 determined average value, which may be treated as constant. 
 What constitutes this additional expense is not easy to de- 
 termine on general principles. In the long run it would in- 
 clude a full share of train and station service accounts, a large 
 share of car maintenance, and a moderate share of track main- 
 tenance and general expenses. It is the special expense of each 
 particular piece of work as distinct from the general expenses 
 of running the railroad as a whole. 
 
 Then cy, (the rectangle OC), will represent the special ex- 
 pense of handling j; car-loads ; and {x — c)}>, (the rectangle cP), 
 will represent the profit in the widest sense ; /. e., the share 
 which this particular line of business can contribute toward
 
 APPENDIX. 263 
 
 the general expenses and dividends. It is this rectangle 
 which the manager tries to make as large as possible in each 
 particular case. The question is, How will a reduction in rates 
 affect this rectangle ? Let a reduction be made to x\ increas- 
 ing the volume of traffic to y\ the gross earnings to OP' and 
 the expenses to OC . The increase in gross earnings = yF' — 
 x'F = x' h.y — y A x. The increase in operating expenses = yC 
 = cAy. At the point where the former ceases to exceed the 
 latter, the differentials must be equal. Then xdy — ydx = cdy j 
 or [x — . c) dy =. ydx} The same result might have been ob- 
 tained in another way. The rectangle cP ^^ {x — c) y. The 
 railroad manager wishes to make this a maximum. Its first 
 differential must therefore equal zero. Then {x — c) dy — ydx 
 = o ; or {x — r) dy = ydx. 
 
 We thus have an exact mathematical statement of the 
 principle from which we started ; and more than that, we have 
 it in a form which shows the relation of the different elements 
 involved. We have a general theory based on a recognized 
 practice ; it only remains to consider how this theory works in 
 special cases. 
 
 I. Rates as affected by conditions of traffic. The traffic curve 
 is to a large extent independent of the action of the railroad 
 manager. It depends upon general business conditions ; the 
 railroad manager tries to put his rates at such a point as to 
 make the most under those conditions. 
 
 Each class of articles has a curve of its own. The form of 
 the lower (right hand) end of the curve depends mainly upon 
 the value of the article. On cheap articles a high rate would 
 stop nearly all shipments ; that is, this end of the curve soon 
 approaches the axis of X. On articles of high value, on the 
 other hand, the rates may be placed quite high without stop- 
 ping shipments ; the curve for these extends far to the right. 
 
 ' For convenience of illustration, the differentials themselves are all 
 treated as positive. Due allowance for this is made in the signs of the 
 terms.
 
 264 RAILROAD TRANSPORTATION. 
 
 For competitive business the curve is very much hke that for 
 cheap articles ; a rate much above cost is sure to destroy the 
 business, because it will go by some other route. 
 
 The upper end of the curve does not depend so much upon 
 value as upon expansivencss of supply and demand. Where 
 either of these is limited, the curve soon approaches the axis 
 of Y. Where they both expand readily, the curve runs up al- 
 most perpendicularly. An inspection of the figure is sufficient 
 to show wky such traffic best lends itself to reduction in rates. 
 The traffic in food, fuel, and other articles of common use fur- 
 nishes the best examples of this ; but it is generally true of the 
 long-distance traffic, by which new sources of supply are de- 
 veloped. 
 
 Thus the possibility of charging high rates depends mainly 
 on the value of the articles ; but the profitableness of making 
 large reductions depends on the expansivencss of the traffic. 
 If reductions are made on traffic which does not expand, some- 
 body else besides the railroad gets the whole benefit. Where 
 the supply can expand, but the demand does not, the benefit 
 goes to the consumers. This is the case in general reductions 
 of rates on manufactured articles where there is no pool. If 
 the demand can expand more readily than the supply, the re- 
 duction in rates goes into the pocket of the producers or mid- 
 dlemen. This is the case in the milk traffic. 
 
 2. Jiaies as affected by cost of service. Any thing which 
 diminishes the expense of handling additional traffic makes 
 it advantageous to reduce rates lower than would otherwise 
 be the case. For if, previously, xdy — ydx =z cdy, any thing 
 which diminishes c without changing general business condi- 
 tions will make xdy — ydx > cdy ; that is, it will place us at a 
 point where further reductions in rates increase gross earnings 
 faster than they increase operating expenses. It is for this 
 reason that rates based upon what the traffic will bear, in inany 
 instances seem to be based upon cost of service. 
 
 We have thus far confined our consideration of cost of ser-
 
 APPENDIX. 265 
 
 vice to operating expenses in the narrowest sense of the word. 
 It is now pretty well understood that fixed charges do not 
 directly affect rates ; nor do dividends affect them, except in so 
 far as a road which is paying very high dividends may reduce 
 rates lower than it otherwise would, in order not to tempt new 
 capital into the field. But while fixed charges are not taken 
 into account in making rates, the prospective traffic and rates 
 are (or ought to be) taken into account before incurring fixed 
 charges. The practical question of chief importance is, 
 How far is it worthwhile to increase fixed charges for the 
 sake of reducing operating expenses ? To the formulation of 
 this problem our mathematical analysis readily lends itself ; 
 but as it is simply a restatement of old and well-recognized 
 results, it is unnecessary to carry the matter out in detail.
 
 INDEX. 
 
 Absentee ownership, 21, 133 
 
 Accidents, 128 
 
 Accounts, 56-62 
 
 Adams, C. F., Jr., 82, 136, 166 
 
 Alsace, 206, 207, 243 
 
 Austria, 18, 208-212, 244-248 
 
 Back-loading, 107, 108 
 
 Balance-sheet, 57-60 
 
 Baltimore and Ohio R. R., i, 32-34, 
 
 94 
 Bankrupt competition, 53, 71-74, 
 
 123 
 Belgium, 212-218, 247 
 Blanchard, G. R., 82 
 Bonds, 52, 53, 148, 156 
 Borrowing power, 54, 149 
 
 Canals, 29-32, 164, 165 (see Erie 
 
 Canal) 
 Capital investment, 40-43, loi, 148, 
 
 149. 259. 260 
 
 Cars, 106 ; English, 150 
 
 Charters, English, II, 12, 46, 164- 
 167 ; for limited periods, 218 
 
 Chicago roads, 86, 91 
 
 Classification, 112-114, 245 ; Bel- 
 gian, 216 ; German, 244 
 
 Clearing-house, 89; English, 159-162 
 
 Coal combination, 68 
 
 Combination, 65, 68, 74-81, 82-99 '< 
 in England, 151, 158, 159, 168 
 
 Commercial crises, 48-56, 167, 168 
 
 Commissions, State, 1 35-140 ; Na- 
 tional, 141-145; English, 170-177, 
 182-184 
 
 Competition, 40, 63-69, 129, 166, 
 167, 214-217 
 
 Competitive rates, 71, 142, 143 
 
 Congressional legislation, 140-145 
 
 Consolidation, 12, 13,83-87, 158,168 
 
 Construction account, 60-62, 233- 
 
 235 
 Construction companies, 52, 211 
 Cooley, T. M., 81, 97 
 Cooperative freight lines, 88-90 
 Corporate ownership, 42-48 
 Cost of railroads, loi, 102 ; English, 
 
 155 ; comparative statistics, 260 
 Cost of service, 1 10, 112, 129, 130, 
 
 184, 240-246, 249-251 
 Crisis of 1884, 50-56 
 
 Differentials, 95-98 
 Discrimination, 20, 21, lOI, I02, I08- 
 
 125, 132, 133, 142, 143. 242, 247; 
 
 in England, 180-186; in Germany, 
 
 246-248 
 Diversion of freight, 76 
 Dividends, sum available for, 58, 61 ; 
 
 limitation of, 101-103, 126, 179 
 
 England, 3, 4, 146-186 
 
 Equipment, statistics of, 260 
 
 Erie Canal, 12, 29-32, 98 
 
 Erie Railway, 35, 85, 86, 86, 90, 94 
 
 European railroad statistics, 260 
 
 Eveners, 95 
 
 Expenses, 56-61, 105-108, IIO, 142, 
 
 143, 217, 233, 234 
 Express companies, 87, 149, 150 
 
 Fast-freight lines, 87-90 
 Fink, Albert, 82, 93, 96, TOO 
 Fixed charges, 70-74, 265 
 Floating debt, 57, 6i 
 Foreclosure, 53 
 France, 3, 187-202 
 Free passes, 109 
 
 General railroad law, 125 
 Germany, 203-208, 239-252 
 
 267
 
 268 
 
 RAILROAD TRANSPORTATION. 
 
 Government control, 22, 125-145, 
 200, 201 ; ownership, 189, 195, 
 196, 205-208, 211-220, 225-231, 
 236-255, 258 ; ownership of tele- 
 graph, 255-257 
 
 Granger cases, 42 ; movement, 130- 
 136 
 
 Hepburn Committee, 82, 96 
 
 Insolvent roads, 53, 71, 74 
 Internal improvements, 27 
 Inter-Slate commerce, 140-145 
 Iowa Commission, 131, 132, 139 
 Italy, 219-235 
 
 Joint executive committee, 96 
 Joint-stock ownership, 44-48 
 
 Labor combinations, 78, 128 
 Land grants, 37, 38 
 Liability, 43, 127, 128 
 Limitation of construction, 54 ; of 
 
 profits, 55, 102, 126, 156, 179 
 Local discrimination, II4-I19, 122, 
 
 132, 137. 138, 141. 142, 246-248 
 Locomotives, 10, 33, 107 
 
 Massachusetts railroads, 35 ; Com- 
 mission, 56, 62, 136-139, 215 
 
 Maximum rates, 129, 134, 17S, I79 
 
 Military railroads, 15 
 
 Mississippi River, 28, 2g, 93, 96, 
 98 ; valley, railroads in, 36, 38 
 
 Monopoly, 63-69, 77, 191, 192, 200, 
 204, 240 
 
 National commission, 141-145 
 New York Central, 35. 83, 93-99. 
 
 103, 121, 129 
 New York, commerce of, 94 
 New York Slate, Assembly Com. 
 (1879), 82, 96 ; early railroad his- 
 tory, 35 
 
 Pacific railroads, 38, 39 
 Parallel roads, 53, 54 
 Passenger business, 109 
 Passes, 109 
 
 Pennsylvania, canals, 31 ; early rail- 
 roads, 32, 34 
 Pennsylvania R. R., 84, 85, 93 
 
 Personal discrimination, 20, in, 
 
 119-123, 182, 183 
 Political influence, 229, 238, 252, 256 
 Pools, causes and forms of, 74-76 ; 
 in America, 91-97. 143. ^44 ; in 
 Europe, 81, 151, 159, 216, 249 
 Post-office, 3, 5, 6, 241, 254, 255 
 Profits, 77, 101-104 ; in France, 199 
 Pro-rata law, 129, 131 
 Prussia, 204-208, 247-249, 251, 252 
 Publicity of m.i.uagement, 138 
 
 Rails, 17, 33. 105. 106 
 
 Rates, Chicago-N. Y., 93 ; Chica- 
 go-Liverpool, 98 ; competitive, 
 71, 239; in Belgium, 215, 216; 
 in England, 157, 158; in France, 
 201, 202 ; in Germany, 242-251 ; 
 on government railroads, 229, 
 241, 245, 253 ; in the U. S., 
 reduction in, 1 04-108 ; to develop 
 busines, 16, 17 ; reasonable, 131- 
 134; theory of, 109, in, 245, 
 246, 250, 261-265 
 
 Reagan bill, 140, 141 
 
 "Reasonable" rates, 119, 131, I34. 
 
 144 
 
 Rebates, 1 19, 120, 185 
 Receivers, 53, 71 
 Regulation, right of, 41, 42, 140 
 Roads, 2, 3, 24-28 
 Russia, 218, 237 
 
 Scott, Thomas A, 84, 85 
 
 Seaboard cities, 94-98 
 
 Secrecy of rates, 119, 120, 1S3 
 
 Shipping, 4, 7, 45 
 
 Short-haul principle, 140-142, 1S3 
 
 Sleeping cars, 87 
 
 Socialism, 79, 80, 258 
 
 Soutliern railroads, 34, 35, 87; 
 Railway & S. S. Association, 92, 
 93 ; State legislation, 136 
 
 Special rates, iig, 121, 182, 214 
 
 Speculation, 19,48-56, 99, 149. ^^7. 
 194, 205, 211 
 
 Standard Oil Co., 67, 95, 121 
 
 State control, 22, 129-145, 200, 201 ; 
 ownership, 34. 189, 195, 196, 205, 
 208, 211, 218, 219, 225-231, 236- 
 258 ; ownership of telegraph, 255- 
 257
 
 INDEX. 
 
 269 
 
 Statistics, comparative, 154, 259, 260 
 Steamships, 8, 9, 64, 68, 6g 
 Steel rails, 105, 106 
 Stephenson, George, 10, 66 
 Sterne, Simon, 97, 100 
 Stock-watering, 54, 55, 102, 122, 155 
 Strikes, 128 
 
 Sulisidies, 26, 31, 34-38, 188, 190, 
 204, 20g, 220, 241, 251 
 
 Taxation, 126, 127, 241 
 
 Telegraph, 6, 7, 236, 254-258 
 Through business, 87, 93, 202 
 Transcontinental railroads, 39, 86 
 Transportation companies, 87, 88 
 
 Trunk-line systems, 84, 85 ; pools, 
 
 93-97 
 Turnpikes, 25-28 
 
 Vanderbilt system, 83-85 
 
 Wars of rates, 93-99, IT4, 214, 248 
 Water in stock, 54, 55, loi, 102, 
 Water routes, 2S-32 ; competition 
 
 with, 93-98, 180, 181, 214, 243 
 " West Shore," 86, 99, 103 
 What the traffic will bear, 17, 76, 
 
 III, 123, 124, 245-247. 263, 264 
 Wisconsin legislation, 135
 
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