-i^^xjfi'j TV '" '111' ! 'V '"I i ii' i i I ! • ! ! I I liJiiJiill! I 1 'J BANCROFT LIBRARY THE LIBRARY OF THE UNIVERSITY OF CALIFORNIA pva- ^w Digitized by the Internet Archive in 2007 with funding from Microsoft Corporation http://www.archive.org/details/americanrailwaytOOjohnrich applctoufi^* AMERICAN RAILWAY TRANSPORTATION APPLETONS' BUSINESS SERIES. THE WORK OF WALL STREET. By Sereno S. Pratt. Illustrated. i2mo. Cloth, $1.25 net ; postage, 12 cents additional. FUNDS AND THEIR USES. By Frederick A. Cleveland, Ph.D., of the University of Pennsylvania. Illustrated. i2mo. Cloth, $1.25 net ; postage, 12 cents additional. TRUST FINANCE. By Dr. Edward S. Meade, of the Wharton School of Finance, University of Pennsylvania. i2mo. Cloth, $1.25 net; postage, 12 cents additional. AMERICAN RAILWAY TRANSPORTATION. By Emory R. Johnson, of the Wharton School of Finance, University of Pennsylvania. i2mo. Cloth, $1.50 net ; postage, 14 cents additional. THE MODERN BANK. By Amos K. Fiske. Illustrated. i2mo. Cloth, I1.50 net ; postaige, 12 cents additional. MODERN INDUSTRIALISM. By Frank L. McVey. i2mo. Cloth, $1.50 net ; postage, 12 cents additional. MODERN ADVERTISING. By Earnest Elmo Calkins and Ralph Holden. Illustrated. i2mo. Cloth, $1.50 net ; postage, 12 cents additional. THE LIFE INSURANCE COMPANY. By William Alexander. i2mo. Cloth, fi.so net ; postage, 13 cents additional. IN PR EPA R A TION. MODERN ACCOUNTING. By Henry Rand Hatfield, of the University of Chi- cago. (To appear Fall, 1905.) RAILROAD FINANCE. By Frederick A. Cleveland, Ph.D. D. APPLETON AND COMPANY, NEW YORK AMERICAN RAILWAY TRANSPORTATION EMORY Rn9HNS0N, Ph. D. PROFESSOR OF TRANSPORTATION AND COMMERCE IN THE UNIVERSITY OF PENNSYLVANIA MEMBER OF THE ISTHMIAN CANAL COMMISSION 1 899 TO I9O4 REVISED EDITION NEW YORK D. APPLETON AND COMPANY 1905 Copyright, 1903, 1904, by D. APPLETON AND COMPANY Published August, 1903 (^•3 H?o ' '.V CONTENTS CHAPTER I PAGES Introduction—Definition and Scope of Transporta- tion 1-9 Transportation defined, 1. The technics of transportation, 1. The service — The economics of transportation, 3. Transpor- tation economics and the science of political economy, 2. Transportation and the production of wealth, 3. Transporta- tion and the use or consumption of wealth, 3. Relation of transportation to the exchange of wealth or commerce, 4. Relation of transportation to the distribution of wealth, 5. Transportation and political science, 7. The scope of this volume, 9. PART I.— THE AMERICAN RAILWAY SYSTEM CHAPTER n Origin of the American Railway .... 13-23 Antecedents of the railway, 13. Country roads, 13. Canals and improved rivers, 14. Origin of the railway, 18. Early history of the railway in America, 21. References for further reading, 23. CHAPTER III Growth of the American Railway Net . . . 24r-33 Growth in mileage by decades, 24. Importance of the decade 1850-60, 25. Railroad consolidations, 25. Completion of present trunk lines, 26. Land grants and Pacific roads, 27. The decade 1860-'70, 27. Rapid construction from 1880 to 1890, 28. Construction since 1890, 28. Comparison of Amer- ican and European railway mileage, 29. Magnitude of the railway system of the United States, 29. References for further reading, 33. V VI AMERICAN RAILWAY TRANSPORTATION CHAPTER IV PAGES The Mechanism of the Railway— Its Technical Growth 34-51 The track, 35. The locomotive, 38. Evolution of the passen- ger-coach, 46. The freight-car, 48. Terminal facilities, 50. References for further reading, 51. CHAPTER V The Present Railway System of the United States 52-68 Mileage and number of corporations in 1901, 52. System as a whole too vast to be readily comprehended, 52. The three large territorial groups of railroads, 52. Territorial grouping into seven sections, 54. Grouping by ownership and commu- nity of interest, 60. Supply of railway facilities in the United States, 66. References for further reading, 68. CHAPTER VI The Railway Corporation and its Charter . . 69-77 The corporation defined, 69. The corporation and partner- ship distinguished, 70. The railway company is a quasi-pub- lic private corporation, 71. The railway corporation is a " person," 72. Railway charters, 73. Size of railway corpora- tions, 75. Insolvent corporations, 76. References for further reading, 77. CHAPTER VII Railway Capital 78-96 Stocks and bonds, 78. Different classes of bonds, 79. Amount of railway capital in the United States, 80. Stock watering, 82. Motives for stock watering, 86. The promoter and under- writer, 86. Methods of stock watering, 87. Effects of stock watering, 90. Bases of railway capitalization, 91. Govern- ment regulation of capitalization, 94. References for further reading, 96. CHAPTER VIII Earnings, Expenses, and Dividends .... 97-107 Sources of revenue, 97. Expenditures, 99. Net earnings and surplus, 100. Dividends, 102. Relation of earnings and divi- dends to business conditions, 104. Causes of increased earn- ings, 105. Railway earnings and the prices of securities, 106. References for further reading, 107. CONTENTS vil PART II.— THE RAILWAY SERVICE CHAPTER IX PAGES The Freight Service 111-134 The freight business the most important service, 111. Vol- ume of freight traffic, 113. Classification of freight, 113. Extracts from the official classification, 115. Commodity- tariffs, 116. Uniform classification, 117. Through and local freight, 118. Methods of conducting the freight service, 119. The freight bill, 120. The bill of lading, 123. The way-bill, 123. Records of car movements, 124. Straight and mixed cars, 126. Fast freight lines, 127. Cooperative freight lines, 129. The railway clearing-house, 130. Private cars, 131. Car mileage and demurrage, 132. References for further reading, 133. CHAPTER X The Passenger Service 135-157 General characteristics of the passenger service, 135. Passen- ger fares have declined less than freight rates in the United States, 137. Volume of business and earnings, 138. Extent of travel in the United States as compared with Europe, 139. Classification in the passenger traffic — European and Amer- ican practise, 141. The sleeping-, parlor-, and dining-car service, 145. Tickets and baggage checks, 147. Methods employed to increase travel, 148. Opportunities for further increasing travel, 150. Ticket brokerage, 152. Free passes, 153. Electricity and the passenger service, 155. References for further reading, 157. CHAPTER XI The Express Service of the Railways . . . 158-169 What the express service comprises, 158. The kinds of express companies, 160. The history of express companies, 161. The contracts between express and railway companies, 163. The organization by which the express service is per- formed, 164. The amount of business done, 165. The post- office and the express service, 166. Ought the express service to be done by the railway companies ? 167, References for further reading, 169, vm AMERICAN RAILWAY TRANSPORTATION CHAPTER XII P^oEs The Mail Service of the Railways . . . 170-183 The mail service increases with the progress of civilization, 170. Classification of mail-matter, 171. General statistics of mail traffic, 172. The extent of the mail service performed by the railways, 173. The mail service in operation June 30, 1901, 175. The railway post-office, 176. Nature and condi- tions of the railway mail service, 177. Pay received by the railways for carrying the mails, 179. The cost to the Govern- ment of railway mail transportation, 181. References for further reading, 183. CHAPTER XIII The Organization op the Service .... 184-194 The railway company's corporate and special organization, 184 The secretary's department and the law department, 185. The financial department, 185. The operating depart- ment, including the roadway, machinery, and transportation departments, 186. The traffic department, 188. The pur- chasing, real-estate, insurance, and relief departments, 189. The organization of the Erie Railroad Company, 190. The organization of the Illinois Central Railroad Company, 191. The organization of the Pennsylvania Railroad Company, 192. References for further reading, 194. CHAPTER XIV The Accounts and Statistics of the Railway Service 195-210 The usefulness of railway accounts, 195. The materials of railway accounts and statistics, 195. The auditor's monthly report, 196. The annual report, 197. Outline of the contents of a railroad report, 197. The bookkeeping form of the reve- nue account and general balance-sheet, 199. Concerning the accuracy and uniformity of railway accounts, 201. Govern- ment supervision of railway accounts, 203. The present scope of railroad statistics, 204. Suggested extensions of the scope of the Government statistics of transportation, 206. Trans- portation statistics and the Department of Commerce and Labor, 209. References for further reading, 209, \ CONTENTS ix PART III.— THE RAILWAYS AND THE PUBLIC CHAPTER XV INTERRAILWAY RELATIONS PAGES I. Railway Competition and Agreements to main- tain Rates 213-227 The public nature and the unity of the transportation service, 313. Railway companies are cooperators and competitors, 314. Early interrailway relations, 315. Early arrangements for through traffic, 316. Interrailway rivalry — its beginnings, 317. The struggle for the Chicago-Atlantic traffic, 318. The rivalry of the Atlantic ports, 319. Early competition in the West and South, 330. Nature of railway competition, 331. The railway business one of " increasing returns," 333. The restraint of interrailway competition a necessity, 334. Cooperation or consolidation is the alternative, 334. Agree- ments to maintain rates, 335. The Saratoga Conference, 336. CHAPTER XVI INTERRAILWAY RELATIONS (continued) II. Pools and Traffic Associations .... 228-243 Definition of pooling, 338. Description of traffic and money pools, 338. The beginning of railway pooling, 330. Pooling in the West, 331. The traffic association and the pool distin- guished, 333. Pools in the South, 333. Early agreements in trunk-line territory, 334. The trunk-line pool and the Joint Executive Committee, 335. The situation as regards railway pooling in 1887, 338. Pooling prohibited by the Interstate Commerce Act, 339. Pooling contracts were illegal at com- mon law, 339. Reorganization of pooling contracts to elimi- nate the pooling feature, 341. CHAPTER XVII INTERRAILWAY RELATIONS {concluded) III. The Present Situation 244-257 Efforts of trunk lines to regulate competition after the prohi- bition of pooling, 344. Traffic associations decided to be a violation of antitrust law of 1890, 345. Effect of the decision in the traffic association cases, 347, Existing traffic associa- X AMERICAN RAILWAY TRANSPORTATION tions, 248. Causes of the recent railway consolidations, 250. Methods of consolidation, 251. " Community of interest," 253. Inte*railway relations, present and prospective, 254. The present phase of the pooling question, 256. Ref6i-euces for further reading, 256. CHAPTER XVIII Monopoly and Competition in .the Railway Service 258-270 Railway corporations must be large and must cooperate, 258. Scope of railway monopoly must be understood in consider- ing charges and Government regulation, 259. What is meant by monopoly, 259. The Standard Oil Company an example of monopoly, 261. The railroad business has not been a com- plete monopoly, 261. Railway cooperation is of two kinds — The attitude of the law toward each kind, 262. Railway competition is of two kinds, 264. Railway competition is not confined to junction points, 264. The competition of mar- kets, 265. Influence of competition upon local rates, 267. The monopoly of the railroads is only partial, 269. Govern- ment regulation of a partial monopoly may be necessary, 269. The term natural monopoly not strictly accurate, 270. Refer- ences for further reading, 270. CHAPTER XIX Theory of Rates and Fares 271-282 The cost of service theory of rates and fares, 271. Meanings of the term cost, 271. The impossibility of determining exactly the cost of a particular service, 272. Cost an unde- sirable as well as an impracticable basis of railway charges, 274. The value of the service theory of charges, 274. The value of commodity theory, or the taxation principle, of charges, 275. Charging "what the traffic will bear," 277. What constitutes a theoretically just rate"? 277. Discrimina- tions may be just or unjust, 279. The socialization of rates and fares, 280. References for further reading, 282. CHAPTER XX Rate-making in Practise 283-292 The problems of rate-making different for private and State railways, 283. The probleui of rate-making, 284. Classifica,- CONTENTS XI tion the first step in making freight rates, 285. The railroad companies work separately and in cooperation in making rates, 287. How charging ">vhat the traffic will bear" works in practise, 288. Passenger fares, 288. Ideal rate-making, 290. General tariff policy of American and foreign railways, 291. References for further reading, 292. CHAPTER XXI PAGES Railway Charges in the United States and OjHER Countries 293-304 The general index of railway charges, 293. Passenger fares in the United States, 295. Passenger fares in England, 295. Fares in Prussia, 295. Fares in France, 296. Fares in Hun- gary and Austria, 297. Passenger fares are cheaper in Europe than in the United States, 299. Freight rates in the United States, 800. Freight rates in the United Kingdom, 301. Freight rates in Prussia and France, 301. Freight rates in Austria and Hungary, 302. Causes of low freight rates in the United States, 303. References for further reading, 304. PART IV.— THE RAILWAYS AND THE STATE CHAPTER XXII Public Aid to Railway Construction . . . 307-321 The twofold relation of the Government to the railways, 307. Aid given by the States to railroads, 308. Forms of aid given by the States, 309. Amount of aid given by the States, 309. The results of State aid were unsatisfactory, 310. National aid to railway construction, 311. Terms of the land grants, 312. The grants to the Pacific roads, 313. Repeal of the land grants, 315. The loan of public funds to aid railroads, 316. Concerning the policy of loans and land grants, 317. County, municipal, and individual aid to railroad building, 319. Local individual aid, 320. References for further reading, 321. CHAPTER XXIII Relation of the Railways to the State in the United Kingdom and France .... 322-334 Public regulation or control a necessity, 322. The forms which the state's relation to railways may assume, 324. The XU AMERICAN RAILWAY TRANSPORTATION railways of the United Kingdom received no state aid, 325. The United Kingdom has never favored state ownership, 325. Early reliance in England upon competition for the regula- tion of railways, 326. The law of 1854, 327. The acts of 1873 and 1888, 328. Present system of railway regulation in the United Kingdom, 329, The railway clearing-house, 330. The railways and the state in France, 330. State aid to con- struction in France, 331. The extension of the charters, 331. The state guarantees of 1859, 331. The agitation for state pur- chase and construction, 332. The law of 1883 and the present policy of France, 333. References for further reading, 334. CHAPTER XXIV PAGES Relations of the Railways and the State in Italy and Germany 335-348 Private ownership and Government operation, 335. Govern- ment ownership and corporation management, 336. Relation of the railways to the state in Italy, 336. Germany's railway policy is government ownership and operation, 337. Prussian laws of 1838 and 1842, 339. The period from 1848 to 1870— Military influences, 340. The nationalization of the Prussian railroads, 340. The methods followed in the nationalization, 341. Private railways in Prussia, 341. Results of Prussian railway management, 342. Influence of Prussia upon other European countries, 344. Dual ownership by corporations and the Government not advantageous, 345. Causes account- ing for different relations of the state to the railways in different countries, 346. References for further reading, 348. CHAPTER XXV Regulation of Railways by the American State Governments— The State Commissions. . 349-366 Powers of the Federal and State governments over railways, 349. Regulation was slight before 1870, 350. Early regula- tion — Charter limitations on charges and profits, 350. State railway commissions first established by the New England States, 352. Duties assigned to early commissions, 353. Ori- gin and types of existing commissions, 353. The supervisory commission, 354. Railway regulation in the West and South — The mandatory commission, 355. The granger laws and the Illinois commission, 357. The " granger laws " upheld by CONTENTS xm the Supreme Court, 1877, 359. The Wabash decision limiting State authority to intrastate traffic, 359. The modification of the early granger laws, 361. The present tendency is toward the mandatory commission, 362. The regulation of street- railways by State commissions, 363. Conclusions, 364. Ref- erences for further reading, 366. CHAPTER XXVI Railway Regulation by the Federal Govern- ment.— The Interstate Commerce Commis- p-^o^s siON 367-385 The general cause accounting for demand for Federal regula- tion, 367. The Windom report, 1874, 367. Competition brought cheap but discriminating rates, 368. The Cullom report, 1886, 368. The enactment of the Interstate Com- merce Act, 1887, 369. Main provisions of the Interstate Commerce Act, 370. The interstate commerce law in prac- tise, 375. The commission's power to investigate, 376. The power of the commission to adjust rates and fares, 378. The long and short haul clause, 378. Discriminations in favor of imports, 381. Results accomplished by the Interstate Com- merce Commission, 382. Powers required by the commission for the adequate regulation of railways, 383. References for further reading, 385. CHAPTER XXVII The Courts and Railway Regulation . . . 386-407 Laws are partly court made, 386. The Trans-Missouri Freight Association case an illustration of the influence of the courts on laws, 386. Powers of the courts to regulate railways are derived from the constitutions, the statutes, and the common law, 387. History of the assertion by the Fed- eral courts of equity powers over railway charges, 388. The courts may prevent carriers from making unreasonably high charges, 391. Injunctions against raising rates, 391. Injunc- tions to prevent rate wars, 392. Injunctions against secret rebates, 395. Injunctions in labor disputes, 396. The general law regarding strikes, 396. Injunctions to protect property and personal rights, 397. Injunctions compelling railway employees to work, 397. Injunctions to prevent interference with interstate commerce and the mails, 399. The Chicago XIV AMERICAN RAILWAY TRANSPORTATION or Debs strike of 1894, 399. Railway receiverships — Defini- tion and description, 401. Extent to which railways are managed by the courts, 403. Causes of railway insolvency, 403. Not all causes of railway insolvency have been elimi- nated, 404. Objections to the present system of railway receiverships, 405. Changes suggested in the present law of receiverships, 406. References for further reading, 407. CHAPTER XXVIII pages Eailway Taxation 408-419 Railway companies were taxed lightly at first, 408. Local character of early railroad taxation, 408. The modifications of the general property tax, 409. The property tax on rail- ways, 409. Taxes on capitalization, 411. Taxes on receipts, 411. Franchise taxes, 41o, The interstate prorating of rail- way taxes, 414. " Double " taxation, 415. Taxation among the States is not uniform, 416. Federal taxation, 417. Amount of taxes paid by the railroad companies, 417. Sum- mary of the general tendencies in railway taxation, 418. Ref- erences for further reading, 419. CHAPTER XXIX The Problem of Government Eegulation . . 420-427 The problem of government regulation of railways a perma- nent one, 420. The two parts to the problem, 420. Effects of policy of prohibiting railway cooperation, 421. The present obligation of the Government to maintain equitable relations between the carriers and the public, 422. Railway regulation and " trust " regulation are being merged to some extent, 422. The Elkins law of February 17, 1903, 423. Acts of February 11, 1893, March 2, 1893, and March 3, 1901, 425. The deci- sions of the courts, have done more than legislation to change the interstate commerce law, 426. The necessity for further legislation, 426. Public interest in railway regulation has been temporarily lessened by business prosperity, 426. The commission system of regulation is preferable to Government ownership for the United States, 427. Index 429 LIST OF ILLUSTKATIONS AND MAPS ILLUSTRATIONS PAGE The stage-coach used before the introduction of the railway . . 15 The Conestoga wagon, the predecessor of the freight-car ... 15 The Rocket, 1829 20 Advertisement illustrating the transportation sei'vice in 1835 . . 30 Advertisement showing the transportation service of 1837 . . 31 Railway track with wooden stringers surfaced with straps of iron . 34 Track of granite sills plated with straps of iron .... 35 Track of cast-iron rails resting on granite blocks .... 35 Rolled-iron U-rail, 1844 37 Peter Cooper's locomotive, 1830 39 The Old Ironsides, 1832 40 De Witt Clinton engine and train, 1831 41 John Bull engine and train, 1831 ....... 42 Lancaster engine and train, run on Pennsylvania State Railroad, 1834 42 First Campbell locomotive, 1836 43 The mogul compound freight-engine .... ... 44 Consolidation freight-engine 45 Decapod freight-engine 45 A high-speed compound passenger-engine 46 Passenger-coach, 1835. Used on Pennsylvania Portage Railroad . 47 An early passenger-coach with trucks 47 Diagram of railway capitalization, dividends, and funded debt, 1890-1900 83 XV xvi AMERICAN RAILWAY TRANSPORTATION PAGK Diagram of American railway earnings, 1890-1900 .... 103 The freight bill 120 The freight bill, notice of arrival 121 Sample bill of lading 122 Sample card way-bill 123 Sample interline way-bill 125 Chart showing organization of the Erie Railroad in 1900 . facing 190 MAPS Canals and railroads in New York State in 1840 . , , , 17 Canals and railroads in Pennsylvania in 1840 19 The railways in the United States in 1850 . . . facing 24 The railways in the United States in 1870 . . . facing 26 The railways in the United States in 1880 . . . facing 28 The railways in the United States in 1890 . . . facing 30 The Vanderbilt System 53 The Pennsylvania System 55 The Gould System 57 The Harriman System 59 The Hill System 61 The grouping of railways adopted by the Interstate Commerce Commission 85 The location of the dense mail routes .... facing 174 States having advisory and mandatory commissions . , . 360 AMERICAN RAILWAY TRANSPORTATION CHAPTER I INTRODUCTION DEFINITION AND SCOPE OF TRANSPORTATION Transportation has to do with travel, traffic, and com- munication; it is concerned with the movement of persons and things, and with the transmission of ideas. The term is applied both to the instruments by which movement is accomplished and to the service performed by those agen- cies. The several instrumentalities — waterways, high- ways, railroads and the vehicles used upon them, the tele- graph and telephone — are spoken of collectively as the transportation system. In the study of transportation attention may be directed either to the system or to the service. The system is the machine that performs the service, and a study of it is a technical one, covering the engineering problem connected with the construction, maintenance, and operation of the means or mechanism of transportation, and also including the business prin- ciples and methods prevailing in the management of the several parts of the various organizations engaged in per- forming the transportation service. The engineering side of the technics of transportation is studied in the civil and mechanical engineering schools, which give instruc- tion in the principles and methods of building the struc- tures and machinery pertaining to each of the several 3 1 2 AMERICAN RAILWAY TRANSPORTATION transportation agencies — instruction in improving rivers, building canals, highways, and railroads ; in designing and constructing ships, engines, locomotives, and cars; and in the several branches of electrical engineering. The prin- ciples and methods of administration, or the business tech- nics, with the exception of such as may be included in the study of accounting and telegraphy, are as yet but little taught in American schools. They must be mas- tered in the school of experience. In this regard the education facilities in the United States are somewhat inferior to those in some European countries. In studying the transportation service, only incidental regard need be given either to the agencies which per- form the service or to the technics of the administration of those agencies. The purposes of the study are three- fold: (1) To understand the nature and scope of the transportation service both as a whole and with such detail as may be necessary to an intelligent considera- tion of each of the several branches of the service; (2) to analyze the relations of the companies and individuals who perform the services to the users of the service — the relations, actual and desirable, of the carriers and the public; (3) to ascertain the degree and form of supervision or control that the Government should exer- cise over the relations of the carriers and the public. In contrast with the technics of transportation, the study of the service may be called the economics of trans- portation — the study which treats of the characteristics of the transportation service, the business relations of the carriers and the public, and the governmental supervision or control of transpprtation. This study comprises a part of each of two social sciences: political economy or eco- nomics and civics or political science. Political economy, or economics, is the science of busi- ness affairs, or, as it is sometimes defined, the science DEFINITION OF TRANSPORTATION 3 which treats of the efforts of men to satisfy their wants. Among the manifold instrumentalities men have devised to assist them in the business activities which they carry on to create the wealth whereby their wants are satisfied, transportation agencies have come to be indispensable, and a study of the services performed by those agencies constitutes an important part of the science of business affairs. The position of transportation economics in polit- ical economy can be specifically stated by explaining briefly the relation of the transportation service to the production, consumption, exchange, and distribution of wealth. Production consists in making matter more useful for purposes of consumption. It is the creation of utilities. To give matter the ability to satisfy wants, two things must be done: The commodities must be given the form or the qualities which the user desires them to possess, and the articles must be taken to the user. The form and intrinsic qualities that make matter useful result from agriculture, manufacture, and the various industries by which things are grown and shaped. The transporta- tion service puts commodities in the place where they can ^be used. An article that has been grown, mined, or manu- factured has received only a part of the services by which it becomes useful. Only the intrinsic utilities of form or quality have been created; the usefulness which de- pends upon the location of the article — its place utilities — has yet to be given it. Place utilities are created by the transportation services, which are thus a part of the general process of production. The relation of transportation to production may also be shown by considering the general effect which improve- ments in transportation services have h?.d on the use or consumption of wealth. Men produce commodities, be- cause they want the commodities, because they wish to 4: AMERICAN RAILWAY TRANSPORTATION hoard up, or use — i. e., "consume" — them; accordingly, what men produce depends upon the kinds, number, and intensity of their wants. From this it follows that any force or influence that changes men's wants will also affect their productiA^e activities. This truth is illustrated by the fact that the uncivilized man will do but little work, because he wants but a few things. The only way to make him work is to create wants in him. The causes which modify the wants of men, and thus change what they produce and consume, are many, but nothing will do more to create new wants or more intense ones than a decrease in the cost and an increase in the quantity and variety of consumable commodities. The availability of commodities has been multiplied many times by improvements in transportation, and the effect of this upon human wants has unquestionably been great. Indeed, with our present facilities of transportation, there is" practically no limit to the number of wants we can satisfy, and our rapidly increasing demands have spurred us on to an ever-widening range of production. Commerce consists in exchange of commodities be- tween separated localities — it is the agency by means of which the consumer and producer are brought together. The process involves a sale and purchase of goods, their transmission from the seller to the buyer, and the settlement of business accounts. Transportation is one of the mechanisms through which this is accomplished. Among the other agencies of commerce are the stock ex- changes, the bourses, the markets, the banks, the trust companies, and insurance companies; but of these several auxiliaries the transportation service is the least dispen- sable. With the growing subdivision and specialization in productive effort, with the continually increasing tend-' ency to locate industries where they can be carried on most economically, with the constant extension of the^ DEFINITION OF TRANSPORTATION 5 areas from which the materials of industry are drawn and over which the products are marketed, commerce, and particularly that part of commerce which is concerned with the movement of persons and things, becomes of ever greater consequence in all productive enterprises. The production of wealth has been greatly enhanced by the enlargement of commerce, and the extension of com- merce has been possible mainly because of the improve- ments that have been made in the agencies by which the various transportation services are performed. The relation of transportation to the distribution of wealth is somewhat complex. Wealth is the creation or product of three factors: land or the resources of nature, capital, and human effort, physical and mental. ^N^ature is the source of wealth, capital is the tool, and man is the agent by which the source is drawn upon. The income which men derive from the possession of natural agencies and resources is called rent, that secured from the ownership of capital is termed interest, that obtained from effort is named wages. The income or rent received by the owner of " land " depends upon two things : the productivity or intrinsic characteristics of the land or natural resource, and its location. The rent which owners of agricultural land can command depends upon its fer- tility and its location with reference to markets; rents from mines and forests are determined by productivity and location; rents on building sites result mainly from location. As far as rent depends upon location, the de- termining factor is transportation, and every improve- ment or change in the facilities or costs of transportation services must have an influence upon the total amount of " rent " received by the owners of natural agents and must readjust the distribution of that form of income among its recipients. The relation of the transportation service to the 6 AMERICAN RAILWAY TRANSPORTATION income from capital is twofold; the total income from capital has been greatly increased by the modern trans- portation facilities, but the rate of return has been low- ered. Capital is so generally and extensively employed in production to-day, as the result of improved transpor- tation, the use of machinery, and other well-known causes, that we have come to speak of modern productive processes as capitalistic in contrast with those of a hun- dred years ago, when most things were done by manual labor and when land and labor received nearly all of the income from production. But the accumulation of wealth has been so rapid as to make capital abundant and to cause the rate of interest to decline rather than rise. This fall in the rate of interest, however, has beeii slower than it would have been had not the opportunities for investment been greatly multiplied by the extension and improvement of the means of transportation. By wages, the income resulting from human effort, is popularly meant the money payment received by those who toil with hand or brain; but in scientific discussion the word more frequently means the amount of useful commodities received by the workers. The " real " wages of a day's labor are the commodities which a day's labor will secure. Possibly transportation has had no more marked effect than that of inc:^easing the quantity and variety of useful things which come within the range of • the toiler's income. The luxuries of past generations have now become necessities, because of the reductions in the costs of production effected by improved transporta- tion and other forces. Furthermore, as the laborer's real wages have increased, his efficiency has become greater and his impulses to effort have been strength- ened. To have is to want more, to strive harder. We call this raising the standard of living, the progress of civilization. DEFINITION OF TRANSPORTATION 7 As the result of cheap transportation, those who pro- duce have multiplied their wants and their efforts; and with the present highly developed transportation service to aid them, their efforts are far more productive than they would otherwise be. Human effort creates enormously more wealth than was formerly possible. Whether, in the distribution of wealth among the classes who control or contribute to the forces of production, labor or human effort receives an adequate share of the total, is a question concerning which there are differences of opinion. The absolute income of labor is greater than it was when cruder processes of production prevailed, and that income continues to increase; but it is by no means certain that the forces controlling the distribution give labor an equitable share. The relation of the government, local. State, and Federal, to transportation is such an intimate one that a study of the transportation service necessarily involves a consideration of some duties and activities of the state, subjects covered by the study of government or political science. Indeed, some branches of transportation, as the niail service, are everywhere carried on by the govern- ment. The city streets and most country roads are high- ways maintained at public expense; and the commercially important lakes, streams, and harbors are usually im- proved and maintained wholly or partially by the use of public funds. Canals are sometimes private enterprises, but more often are state works. Street-railways, espe- cially in Europe, are frequently owned by the cities, and sometimes are operated by them. In many countries the steam-railroads are owned and managed by the govern- ment, and in all countries where private ownership pre- vails the railroad service is subject to government regula- tion. The telephone service has thus far usually been conducted by private companies. 8 AMERICAN RAILWAY TRANSPORTATION Whether performed by the government, or by com- panies, or by individuals, the transportation service is of a public nature. This is a well-established principle of law, the Supreme Court of the United States having held that " the business of a public carrier is of a public nature, and in performing it the carrier is also perform- ing to a certain extent a function of government which requires him to perform the service upon equal terms to all." The principle applies as much to railroads built and operated by corporations as to other transportation agencies. " Whether the use of a railroad is a private one depends in no measure upon the question who con- structed it or who owns it. It has never been considered a matter of any importance that the road was built by the agency of a private corporation. No matter who is the agent, the function performed is that of the state. Though the ownership is private, the use is public." ^ The general basis of this principle is the vital de- pendence of the social organization upon transportation. A service must be of a public nature that is essential to orderly human relations, to all industrial activities, and the progress and welfare of society. The public nature of the transportation services of railroads and some other carriers is recognized by the state in the granting of franchises giving to such carriers the power to take pos- session of the private property they may need. " The state," to quote the language of the United States Su- preme Court, " would have no power to grant the right of appropriation unless the use to which the land was to be put was a public one. Taking land for railroad pur- poses is a taking for a public purpose, and the fact that it is taken for a public purpose is the sole justification for taking it at all." ^ 1 Olcott vs. The Supervisors, 16 Wallace, 695. ^ United States vs. Joint Traffic Association et al., 171 U. S., 505. DEFINITION OF TRANSPORTATION 9 In studying the transportation service, then, we are dealing with one of the functions of government, and one of the important branches of political science. In considering this service the student is concerned with the government at work either performing the service directly or insuring its proper performance by persons and corporations receiving from the state their authority to act, and subject in their actions to the regulative con- trol of the government. The problems of the Govern- ment ownership, operation, and regulation of the agencies of transportation require the investigator to inquire into some most interesting questions regarding the functions of government and the proper scope of its activities. This volume is concerned with the transportation service performed by steam or trunk-line railroads. It does not discuss the engineering and other technical ques- tions of railroad construction and operation, but describes the American railroad system, gives an account of the service performed by the different branches of the rail- road organization, considers the business relations of the railroads and the public, and discusses the problems of government regulation. The book is a study in railway economics, and is intended to be an introduction to the general subject of railroad transportation, a volume that may profitably precede or accompany a more special study of a particular branch of the railway service. PART I THE AMEEICAN RAILWAY SYSTEM CHAPTEK II ORIGIN OF THE AMERICAN RAILWAY Until the fourth decade of the nineteenth century the inland highways of travel and trade were wagon roads, rivers, and canals. As compared with Europe the United States was poorly equipped with these means of transportation, because the newness of the country, the sparseness of population, and the undeveloped state of our industries had kept both the government and individ- uals from devoting to the building of roads and water- ways the meager volume of capital available for invest- ment. In the construction of railroads the United States was preceded only by Great Britain, but in the building of highways and waterways our country was led by sev- eral European countries, and is even now behind them in that regard. Until near the end of the eighteenth century the country roads constructed in America were built and maintained by the local governments — that is, by the towns in New England, the townships in the Middle At- lantic section, and the counties in the south. With the growth of population and business these highways became so inadequate that corporations of individuals began the construction of roads and charged tolls for their use. These roads were called turnpikes, because at the places where tolls were collected there was placed across the road a gate consisting of a pole armed with pikes and so hung as to turn upon a post. 13 14 AMERICAN RAILWAY TRANSPORTATION The construction of toll roads began soon after 1790, and numerous turnpike companies were chartered by each State, particularly by the Middle and New England States. The greatest mileage was built in Pennsylvania, and what w^as done in that State is typical of what occurred in many other parts of the country. In 1790 a com- pany was chartered to build a turnpike from Philadel- phia to Lancaster, and this road, begun in 1792, was completed in 1794. Later this road became a part of a continuous line of turnpikes extending from Trenton to Steubenville, on the Ohio River, a distance of 343 miles. Before the construction of railroads began in this coun- try, 102 Pennsylvania companies had built 2,380 miles of roads in that State at a cost of nearly $8,500,000. Although these toll roads did not, as a rule, prove to be very profitable to the companies which built them, they were of great benefit to the people of the State. Some of these turnpikes are still operated as toll roads, although most of them have very properly become free public highways. Some turnpike roads were built with funds donated by the States and the Federal Government at the time when public aid was being given to works of " internal improvement.'' The most celebrated turnpike was the Cumberland Road, or the " I^ational Pike,'' constructed by the United States. It was begun in 1806, and was built westward from Cumberland, Md., through Wheel- ing and Columbus, and finally, twenty-one years later, after having been extende"d from time to time, it reached Yandalia, in central Illinois. It was to have gone through to Jefferson City, Mo., but before Illinois had been passed the superiority of the railroad for long-distance traffic had become an accepted fact. Surveys of canal routes were made in Pennsylvania as early as 1762. In 1772 General Washington called ORIGIN OF THE AMERICAN RAILWAY 15 attention to the importance of constructing canals and improving tlie rivers of the country. He was particu- larly desirous that the Atlantic coast section should be connected by a through route with the region west of the Alleghany Mountains. It was, however, not until The Stage-Coach, generally used for Passenger Travel before the Introduction of the Railroad. 1825, twenty-six years after the death of Washington, that this was accomplished by the completion of the Erie Canal, connecting the Hudson River and Lake Erie. Al- though numerous companies were chartered during the decade ending in 1812, little was done to improve inland The Conestooa Wagon, the Predecessor of the Freight-Car in the Middle Atlantic States. navigation until after the War of 1812 to 1815, when several corporations began energetically the work of con- necting the anthracite coal-fields with tide-water by means of canals and canalized rivers. The States aided 16 AMERICAN RAILWAY TRANSPORTATION these and other navigation companies, and attention was directed, especially by New York, Pennsylvania, and Maryland, to the project of securing routes to the West. In this New York was the first to succeed by means of the Erie Canal, which was begun in 1817 and finished in 1825. The transportation system of canals and rail- roads in the States of New York and Pennsylvania in 1840 is shown by the accompanying charts, giving data taken from Tanner's maps of that date. The opening of the Erie Canal roused Pennsylvania to action, and in 1826 she began her system of " public works," the main feature of which was a composite rail and water route, completed in 1834, connecting Phila- delphia with Pittsburg. A railroad ran from Philadel- phia to the Susquehanna Piver at Columbia, then a canal extended up the Susquehanna and Juniata Rivers to Hol- lidaysburg. Between Hollidaysburg and Johnstown the canal-barges were carried over the mountains to a port- age railroad; a canal connected Johnstown and Pittsburg, at which point junction was made with the Ohio River steamboats. A corporation aided by the States of Maryland and Virginia began to construct the Chesapeake and Ohio Canal in the Valley of the Potomac at the same time that Pennsylvania undertook her public works, but it was 1850 when the Chesapeake and Ohio Canal reached Cum- berland. Between 1830 and 1850 Ohio, Indiana, Illi- nois, and numerous other States constructed canals or aided corporations to build them, but the railroad had made its appearance and had begun to make the further construction of small barge canals inadvisable. Canal building rapidly fell ofF after 1840. The panic of 1837 so crippled the financial resources of the States that they were temporarily left without surplus funds to invest in internal improvements; at the same time the railroads 1$ AMERICAN RAILWAY TRANSPORTATTON were being extended rapidly and were taking the traffic that had previously moved by water. The use of rivers and canals did not stop with the spread of the railway system, nor have we yet ceased to find the inland water- ways serviceable; but at the present time only the large lakes and rivers and the most important canals are able to hold their traffic in competition with the railroads. The railroad at the beginning was an improved tram- way equipped with' a track upon which locomotives could be run. The distinctive feature of the railroad was the substitution of mechanical for animal traction (the use of steam instead of muscle as the power by which vehicles were moved), and, although the first locomotives were small and crude, their use as an agent of transportation marks one of the greatest advances the world has ever made. Mechanical traction freed society from the nar- row limitations which muscular force placed upon human development, and gave man possession of an agency capa- ble of indefinite improvement. The construction of tramways for cars drawn by horses was a comparatively simple task, and, from 1801 on, tramway companies were frequently chartered in England. The tracks were used mainly for hauling min- erals. The Quincy tramway, the first road of its kind in America — built in Massachusetts in 1826 and some- times wrongly called the first railroad in America — was used to transport the building-stone of which Bunker Hill monument was erected. It was only three miles in length, and extended from the Quincy quarries to a wharf on the E'eponset River. K'ear the quarry there was a steep incline, up and down which the cars were handled by a stationary engine; for the remainder of the distance horses were used. The rails used on the tramways and on most of the early railroads of America consisted of wooden beams 20 AMERICAN RAILWAY TRANSPORTATION with a strap of iron nailed to the upper surface, the rails being very similar to those most frequently used for street-railways until horse-cars were displaced by the heavier electric cars run at a higher rate of speed. The Rocket, 1829. The successful locomotive dates from 1829, at which time the celebrated English engineer Stephenson brought out the Rocket. The stationary engine had been intro- duced by Watt fifty years before that time, but it was Stephenson who first incorporated in the engine the two features essential to a workable locomotive. One of these two features was the multitubular boiler, by which the heating surface is greatly increased. Stephenson was not the inventor of this, but was the first to make prac- tical use of the invention. The other feature was the exhaust draft, the device whereby the exhaust steam from the cylinder created a stronger draft through the fire- box and the tubes of the boiler. By combining these two ORIGIN OF THE AMERICAN RAILWAY 21 principles in the Rocket, Stephenson became the " father of the locomotive.'^ At the trial test, in October, 1829, on the Liverpool and Manchester Railroad, the Rocket attained a speed of 29 miles an hour and the practicability of mechanical traction became a demonstrated fact. The day of doubtful experiment was past, the tramway be- came the railroad. The first railroad in England, the line between Liver- pool and Manchester, was begun in 1826 — three years before the success of the locomotive was assured. At Mauch Chunk, Pa., in 1827, and between Carbondale and Honesdale, in the same State, in 1826, two coal compa- nies had opened roads for the transportation of their coal from the mines to their canals. These mountain roads were built for private use, and the cars were operated by the force of gravity and by means of station- ary engines. They were not railroads in the present meaning of the term. The pioneer American railroad built for general public use was the Baltimore and Ohio. The company was chartered in 1827 and construction was begun in 1828, but not on a large scale, there being only 13 miles open for traffic in 1830. Five years later the length of the road was 135 miles. The first rail of this historic road was laid on July 4, 1828, by Charles Carroll, the only living signer of the Declaration of Inde- pendence. As Professor Hadley, writing in 1885, stated: " One man's life formed the connecting link between the political revolution of the last century and the industrial revolution of the present." The construction of numerous other roads was begun shortly after work commenced on the Baltimore and Ohio. A South Carolina road, the Charleston and Ham- burg, was chartered in 1829, and in 1834 it had 137 miles in operation. For a short time it was the longest line in the world under one management. The parent company 22 AMERICAN RAILWAY TRANSPORTATION of the New York Central system, the Mohawk and Hud- son, was chartered as early as 1826, and began construc- tion in 1830. The line from Albany to Schenectady, 17 miles, was opened in 1831. Five years later Albany and Utica had been connected by rail. In 1842 Buffalo was reached, and by that time lines had been built from New York and Boston to Albany, so that the East and the West of that period had been joined by easy commu- nication by way of the railroads and the Great Lakes. Between 1830 and 1835 railroad building was pushed more rapidly in Pennsylvania than in any other State, 200 miles being opened. The first division of the pres- ent Pennsylvania Railroad system was the Columbia Rail- road, by which Philadelphia was connected with Colum- bia, on the Susquehanna River, in 1834. The road was built by the State, its construction having been author- ized in 1828. This railroad was a link in the through route above referred to, consisting of canals and rail- roads, by which the State connected Philadelphia with the Ohio River at Pittsburg in 1834. The line to connect Philadelphia with New York, the Camden and Amboy, was chartered in 1830 and completed in 1837. The road from Philadelphia to Baltimore, the Philadelphia, Wil- mington and Baltimore, was chartered in 1831 and fin- ished in 1837. The Reading Railroad, built mainly for the transportation of coal, was chartered in 1833 and opened for traffic five years later. In Massachusetts the chartering of railroad compa- nies began in 1830, and in 1835 three lines radiated from Boston. One ran south to Providence, another north to Lowell, and a third west to Worcester. This third line reached Albany and Western connections just at the close of 1841. Americans began to build locomotives in 1830, or about as soon as they engaged in railroad building. The ORIGIN OF THE AMERICAN RAILWAY 23 English locomotives were expensive, they could not be secured promptly, and when obtained they were not well adapted to the light rails, steep grades, and sharp curves of the American tracks. The traffic conditions caused the engines and cars to be built according to designs different from those followed in Great Britain, and the differences in equipment are quite as pronounced to-day as they were at the beginning. EEFEEENCES FOR FUETHEK EEADING Tanner, H. S. A Description of the Canals and Railroads of the United States, comprehending Notices of all the Works of In- ternal Improvement throughout the Several States. 1840. Hadley, a. T. Railroad Transportation, chapters i and ii. 1885. Adams, Charles Francis. Railroads: Their Origin and Problems. 1878. [The first third of the book gives the story of the 'Agene- sis of the railroad system."] Poor, H. V. Manuals of the Railroads of the United States. The volume for the year 1881 contains a sketch of the Rise and Prog- ress of Internal Improvements. Tenth Census of the United States. Vol. iv contains a history of the canals of the United States. CHAPTEK III GROWTH OF THE AMERICAN RAILWAY NET The accompanying chart shows what the railway mile- age of this country has been at the beginning of each decade since the introduction of the new means of trans- portation. In 1830 there were but 23 miles in use. Dur- ing the succeeding ten years the total mileage reached 2,818. The account just given of the early history of American railroads shows that the roads constructed dur- ing the first ten years radiated from several Atlantic seaports, Philadelphia being the most important center in 1840.^ Xew York was a larger city, but having espe- cially favorable facilities for water transportation, its railway connections were developed somewhat slower than were those of Philadelphia. Chart showing Mileage by Decades of the Hailways of the United States 1830 1840 1850 1860 1870 1880 1890 1900 23 1^818 9,021 30,635 52,914 93,296 163,597 193.346 In the year 1850 the length of the railways in the United States reached 9,021 miles. The growth during ^ Consult map of Pennsylvania's railroad net in 1840. 24 GROWTH OF THE AMERICAN RAILWAY NET 25 the preceding ten years had not been especially rapid outside of the E'ew England States. The decade 1840 to 1850 was not a period of rapid industrial develop- ment. The progress of the country was steady, but com- paratively slow. Kailroad building in the Southern States made little headway, and in the Central West only three important lines were begun. In New Eng- land, where the country was most thickly populated, the progress was greater, so that by 1850 nearly all the present important trunk lines in that section had been completed. The ten years following 1850 were far more impor- tant in railroad history than were those of the preceding decade. The increase between 1850 and 1860 was from 9,021 to 30,635 miles. Several facts combined to give prominence to the years immediately following 1850. The Southern and Central Western States were devel- oping, and thereby creating a demand for greater trans- portation facilities. From the discovery of gold in Cali- fornia in 1848 until 1857 the people of the United States enjoyed highly prosperous times. Business activity in all lines was keen, and railroad building shared with other enterprises in the results of prosperity. The year 1850 marks the beginning of a rapid weld- ing of short connecting railroads into long lines under a single ownership. The early roads were short, largely because the corporations of the third and fourth decades of the last century could not command the capital needed to build long roads or large systems. ]^o enter- prise now seems too great for a private corporation, but sixty years ago that was not so. Some of the short roads were built with reference to their being a part of a through or general system, but many were constructed rather to connect local points. The necessity for pro- viding facilities for uninterrupted travel and shipment 26 AMERICAN RAILWAY TRANSPORTATION became so imperative that railway consolidations were found to be necessary. Tlie 'New York Central and the Pennsylvania Rail- roads are good examples of these consolidations. Origi- nally eleven companies owned and operated the railroads composing the line connecting Albany and Buffalo, and in 1850 there were seven distinct companies between those two cities; but the following year they were united under one management. Two years later the Hudson Eiver Railroad became a part of the Central system, and by 1858 five more lines were added to this property. Thus was built up the powerful New York Central system. The Pennsylvania Railroad Company, partly by con- struction of roads and partly by the purchase and lease of State lines, established through connections between Philadelphia and Pittsburg in 1852. Since then the sys- tem has been extended by absorbing other companies and by building new lines, until it now comprises properties formerly owned by more than 200 companies. During the -decade following 1850 many of the trunk lines of the large railway systems of the present day were completed. The Erie Railroad joined l^ew York and Lake Erie in 1851, and the Baltimore and Ohio reached the Ohio River the same year. The construction of long lines proceeded rapidly in the States east of the Missis- sippi River and north of the Ohio. By 1853 it had be- come possible to travel from the Atlantic seaboard to Chicago by rail. In the following year the Chicago and Rock Island connected Chicago with the Mississippi River. Land grants, State subsidies, and prosperous times combined to foster the rapid spread of the railway net in the Middle West. This lasted until 185Y, when the good times were interrupted by a panic. Railroad build- ing was then so seriously interrupted that it had not GROWTH OF THE AMERICAN RAILWAY NET 27 regained its previous activity when the great civil v^ar stopped nearly all industrial progress for half a decade. The construction of railroads in Illinois and beyond the Mississippi River was greatly stimulated by grants of land from the public domain. In 1850 the first large grant was made, the Illinois Central Railroad being the recipient, but many other gifts of land were made during the next few years. This policy of giving lands to aid in railroad construction was followed by the United States for nearly thirty years, and it caused the railway lines in the Central and far Western States to be built earlier and more rapidly than they otherwise would have been. The States also made large contributions of public funds to induce corporations to construct railways. The United States Government made especially lib- eral gifts to the companies that undertook the great task of building roads across the dry plains and high moun- tains to the Pacific coast. The first line reached the Pacific in 1869 and was constructed mainly by the Union and Central Pacific Railroad Companies. The location of the road is shown on the map of the railways of 1870. These and other Pacific railroad companies received large gifts of public land. The companies that constructed the first line to the Pacific also obtained large loa-ns from the Government in the form of United States bonds. The history and results of the Government aid to railroads are given in Chapter XXII. During the decade 1860-'70 the mileage of the rail- ways in the United States increased from 30,635 to 52,- 914, the rate of growth being slow except during the last two years of the period. From 1868 to the panic of 1873 was a period of intense speculation and of very rapid railway construction; indeed the severe business crisis of 1873 was largely the result of building railways too rap- idly and of overcapitalizing the lines constructed. Dur- 28 AMERICAN RAILWAY TRANSPORTATION ing these five years 28,000 miles were added to the rail- way net of the country, while in the five years following 1873 only 11,500 miles were built. In 1880 there were 93,296 miles of railroad in the United States. In 1890 there were 163,597; 70,000 miles of railroad were built in this country in a single decade! This marvelous achievement is unparalleled in the economic history of any other country of the world. Within ten years the people of the United States built as many miles of railroad as the people of the three lead- ing countries of Europe had constructed in fifty years. The building operations were carried on in all sections of the country, but the largest increases were made in the States of the central and western portions of the country, where settlers were rapidly taking possession of the unoccupied agricultural and grazing sections of the vast public domain, and where the mineral wealth of the Cordilleras was causing cities and States to be established on the great Rocky Mountain plateau. Capitalists, confi- dent of the growth of the country, and assisted by gener- ous aid from the United States and from the local govern- ments and individuals of the sections to be served, con- structed railroads for the purpose of creating the traffic upon which the earnings of the roads must depend. In many cases the railroads built during the twenty years following the civil war were pioneers entering unsettled regions beyond the Mississippi and Missouri Rivers and opening the highways by which immigration was - able rapidly to occupy the prairies and mountain valleys of our great West. Since 1890 railroad construction has not been rapid in this country, the increase for the decade ending in 1900 being something less than 30,000 miles. It seems that by 1890 the most urgent needs for railways had been met, that the country had been so well covered with the GROWTH OF THE AMERICAN RAILWAY NET 29 railroad net that only minor extensions were necessary." Moreover, the financial depression which began in 1893 and lasted for nearly five years compelled the railway companies to practise rigid economies and caused them toV extend their systems slowly. During the, five years from 1894 to 1898 inclusive the annual construction averaged less than 2,000 miles, the yearly increase being only a little more than one per cent. With the return of prosperous times in 1898 the rate of increase rose again, so that there are now being about 5,000 miles, or more than two per cent, added each year to the railroad net of the United States. The railway systems of the United States now com- prise over 200,000 miles of line. In 1900, when there were 193,000 miles in the United States, the railways of the entire world were 490,000 miles long. In other words, two-fifths of the railway mileage of the world was in the United States. The mileage in the United States exceed- ed that in all Europe by ten per cent. The Railway Mileage of Europe, the United States, and the World in 1900 Europe 176,000 . . United. States « The world 193,000 490.000 The magnitude of the railway system of the United States is only partially indicated by the figures as to mileage. The par value of the capital stocks and bonds comprising the capitalization or " securities " of the rail- roads in this country amounted to $11,724,000,000 in 1900. !N^ot all of these securities had a selling value, and it is not possible to say just how much capital was actu- ally invested in our railroads at that time. Poor's Man- ual of Railroads for 1900 states the cost of the railroads 30 AMERICAN RAILWAY TRANSPORTATION » ThePenugutva»ta KaJBKSl Canats ^HaiURoflds rmfiiliiiTit^ T. BORBIDGE & Co's. Transportation and Commission CANJktM BASIN, CO JmVMB UL JSIBBS. I I I ^ggSSgg J Their •rrailReinenls sire such, that theR can at all linjes rturlnfirjlbc BasineM S^iJDlL. forward Uoods. Produte. mid .tiprrliandlze. to and from l»hilndelplila,rittsbor«, WlUiani»» port. Wilksbarre. and all intermediate plac«« on the Pennpylvania Canal* and VaU noaoa With promptness and dc<>tinicta. ALL KINDS OF tltcavd and Sold on C9mmit»ibn,^and liberal adva/ncefmade if reymred ,C0N9TANTLY OR UAND LARGE SUCfUES OF ANTHRACITS AZVTD BITUMtZVOUS COAIi. ALSO. 4LL OF WHICH THEY WILL SELL LOW ^OR CASH OR COtJNTRY PRODCCE.. .p«.M«thi. laii. ,__» An Advertisement illustrating the Transportation Service in 1835. in tlie United States to have been in excess of $10,000,000,- 000, and estimates the value of all railroad assets in that year at about $12,500,000,000.1 Commenting on these figures, the Report of the Industrial Commission says: " Accepting these estimates provisionally, and also * An investigation recently made by the Interstate Commerce Com- GROWTH OF THE AMERICAN RAILWAY NET 31 1 lOluiai'yyiOy'y C3'l=3jc3 C3 t=) C:3 1=3 C3 C3 t=3 Cr:3 1=3 C=3 3j'ar iBiiaiL ;b(daid vfiASis «^sfj) ^CAWjii iFA(t?ta:s^s» rm Philadelphia to Pittsbarfh, TBROUGH IW 3i DA¥S: ^«^I» BfSTE^^V! BO^TS, C^RBVIJTG THE OJriTED STATES' JtAiAf From PIITHBDRCIH to IiOlII$VIIJJ& Starts every morning, from the corner of Broad & Race^t> In latgr ami spfcnjrd nijhi whe.l con. via ilic Lnncaiitr ami l/.irrnburf: Kail Roods. arn»injr oi ihr but r ptacr, ai 4 o riock, m p.->s««ncrr. V.1II i..l.i> the l'jrkrl». «l.if ll Iwvc nil bo n lillril u|i in a very inpriior in»ntnr, having btfn buill apraUiifoT iht a. ■ .>«p».«.Hi. ■i^ I'auengm, uAer lb* m«i apynwrtd modeh. of Boau ii«^ on ih» Eiif Canal, and are DM surpassed by lb* Uoais uwd U|H>ii an) oilifr Line. TW OoaU M« NmwiaM by old nml r»ii«-rirn«d Captains, srvi-ral of » hum have been connected with the Line for the vn laMfMttMfc For spo-d nnd coinrnrt, thii Line is not ocelled by any ixher in the United Stales. Sbsseiigcrs fikr Cincinnati, Louisville, Natchez, Nashville, St. l.oui8» &c* •iB alo^s be certain of being loki-ii on ~ith..iii delay, as this Lin» connects with the Bojis at ruisbiirgh, carrying iIk M«d OFFICE, N. E. CORNER d Street jt. B. ctrMJfaj\rcis, ^aaa. V=.,-K--" IVk ll«, all, J-l.un,J- An Adveetisement showing what the Teansportation Seevicb was IN 1837. 32 AMERICAN RAILWAY TRANSPORTATION the estimate of the total wealth of the United States in 1900 at about $90,000,000,000, it appears that invest- ments ifi railroad property form from one-seventh to one- fifth of the aggregate capital. This is based upon the assumption that railroad securities at par represent the value of the property. Judged by market values at the present time, this amount would be considerably in- creased, approximating perhaps the estimate made by Edward Atkinson before the Cullom Committee in 1886, that the railroads formed about one-fifth of the total wealth of the country. If we accept the estimate recently made in a foreign financial journal of the cost of rail- road • property the world over at $33,000,000,000, it would seem that the American railroads constitute more than one-third of the railroad property of the world." ^ Comparisons with the capital invested in other forms of business are suggestive. The capital stock and surplus of all the 3,732 national banks in the United States in 1900 equaled $878,000,000— less than one-twelfth the estimated value of the American railroads. The total capital and the surplus funds of all the banks — national. State, and private — and of the loan and trust companies in the United States in 1900 amounted to $1,675,000,- 000, about one-sixth the value of the railroads. Indeed, with the exception of agriculture, there is no single class of industry that equals the railroads in the amoimt of invested capital and in the value of the annual business done. Although it now costs but a small fraction of what it once did to transport persons and commodities a given distance, the amount of travel and traffic have so mission would indicate that the market value of railroad securities in 1900 was much less than this sum. See p. 84, Chapter VII. The val- ues of the assets and the securities would not necessarily be the same, but the figures here given must be taken only as an estimate. » Vol. xix, 1902, pp. 261, 262. GROWTH OF THE AMERICAN RAILWAY NET 33 enormously increased, the demand for the service is now so many times what it was before the days of the railroad and other economical agencies for transportation, that the capital employed in transportation is far greater than in the days of the stage-coach and the towboat. The .cheaper the service, the greater its magnitude and the larger the amount of capital devoted to the performance of the service. EEFERENCES FOE FURTHER READIN"G Scribner's Statistical Atlas, Plates 15-17 and text page cvii. Hadley, a. T. Railroad Transpoi-tation. CHAPTEE IV THE MECHANISM OF THE RAILWAY ITS TECHNICAL GROWTH Although this book is concerned with the transporta- tion service, with transportation economics, rather than with the technical or engineering phases of the subject, a brief account of the growth and present efficiency of the mechanism by which the service is now performed will aid in the presentation of the subjects considered in this volume. The railway machine consists of three parts: the track, the locomotive, and the car. Each had crude Track with Wooden Stringers, surfaced with Straps of Iron. beginnings and has reached the present condition of excellence by a long series of improvements. A few only of the most important of these improvements need be referred to in this chapter. 34 THE MECHANISM OF THE RAILWAY 35 At the beginning of railroad construction, tracks of various designs were built, the chief thought of the build- ers being to secure a solid structure that would not permit the rails to spread. In relation to the weight of the Track of Granite Sills plated with Straps of Iron. rolling-stock and volume of traffic the track was relatively heavy and expensive. This was particularly true in Eng- land and on some American railroads begun before 1835, Track of Cast-Iron Rails resting on Granite Blocks. up to which time American practise was more influenced by British methods than it was subsequently. Three kinds of rails were used, the one most employed consisting of strong wooden beams, surfaced with strap 36 AMERICAN RAILWAY TRANSPORTATION iron. The first iron rails used were cast, and, because they were cast iron, their length did not exceed 3^ feet. Rolled rails were soon substituted for cast-iron ones, and the length was increased to 15 feet. The weight per yard of these rolled rails sometimes exceeded 40 pounds. Until 1844 the rolled-iron rails used in the United States were all imported from England. The road-bed of the Columbia Railroad from Phila- delphia to the Susquehanna River, constructed by the State of Pennsylvania between 1828 and 1834, illustrates in an excellent way the various types of construction fol- lowed in the early days of railroad building. This was a double-track road 81.6 miles in length, the entire length of single track being 163.2 miles. For 6 miles of this distance the rails consisted of granite sills plated with flat iron bars. Sixteen miles of track had rails con- sisting of wooden string-pieces plated with thin bars of iron. These wooden string-pieces were laid upon wooden cross-ties, placed 4 feet apart upon a secure foundation of broken stone. On 2 miles of the track rails made of iron were supported upon stone blocks, the precaution being taken against spreading of the rails by placing stone sills across the track at intervals of 15 feet. The remainder of the track was constructed with iron rails resting upon stone blocks, wooden cross-sills being used at intervals of 15 feet. Throughout the entire length of this road there was a horse-path between the rails. The roads constructed in this manner were needlessly expensive, and because of their rigidity were more de- structive to rolling-stock than the railroad-tracks are at the present time. American builders soon adopted the kind of track with which we are now familiar, the rails being placed upon wooden cross-ties, resting either directly upon an earth foundation or upon a thin ballast of gravel or broken rock. THE MECHANISM OF THE RAILWAY 37 Builders tended early to substitute iron for wooden rails, but as late as 1850 there were several railroads in the United States, particularly in the Southern States, still having wooden rails surfaced with thin plates of iron. The earlier iron rails rolled were in the shape of an inverted U. The T-rail now universally employed was not much used during the first twenty years of rail- Eolled-Iron U-rail, 1844. road construction. The use of steel instead of iron was not common until after 1870, when the cost of rolled steel had become low enough to permit of its use in the manufacture of rails. The weight of the rail used has been steadily increased until at the present time the new rails being laid weigh from 85 to 110 pounds to the yard. One hundred pounds to the yard has become the standard upon most tracks where traffic is heaviest. For some time past the standard length of rail has been 30 feet, but at the present time some track is being laid with rails 60 feet in length. A rail 60 feet in length weighing 100 pounds to the yard weighs exactly one ton. The use of these heavy rails has been made necessary by the increased weight of engines and cars and by the increase in speed of passenger-trains and freight traffic. Along with the 38 AMERICAN RAILWAY TRANSPORTATION improvements in the track, the bridges and other struc- tures have been strengthened to meet the necessities of modern transportation methods, so that in spite of the greater cheapness of material as compared with the early days of railway building, the road-bed of to-day is much more expensive than was that of fifty years ago. With few exceptions, the early roads had but a single track, and, indeed, to-day those having a relatively small vol- ume of traffic have only one track. As the business over a line increases a second track usually becomes necessary, and some roads find difficulty in handling their business even with four-track lines. The amount of traffic that can be handled over a rail- road has been greatly increased by the use of the tele- graph for despatching trains, by the adoption of electric and other signals, and by the possibility of running both passenger and freight trains at higher speeds as the result not only of having more powerful locomotives, but also of having power-brakes which are operated from the engines and keep the train under easy control. Even the necessity for stopping to take on water for the engine has been obviated by placing between the rails long, shallow troughs from which the tank of the " tender '' can be filled while the train is in rapid motion. The efforts to economize in time and cost of service have been directed quite as much to the improvement of the track and road-bed as to the development of the other parts of the mechanism by which transportation is accom- plished. The Baltimore and Ohio was the pioneer railroad, but the Charleston and Hamburg road in South Carolina was the first one constructed solely with reference to the immediate use of steam traction. Horses preceded loco- motives on the Baltimore and Ohio, the Philadelphia and Columbia, the Mohawk and Hudson, and other early THE MECHANISM OF THE RAILWAY 39 lines. The first locomotive actually run upon an Amer- ican railroad was the Stourbridge Lion, imported from England in 1829 to be used near Honesdale, Pa., but 'tlic engine proved too heavy for the trestles, and was not put into service. Locomotive building in the United States began in 1830. Indeed, experiments were begun the previous Peter Cooper's Locomotive, 1830. year by Peter Cooper and others. Peter Cooper expected financial gains from the successful completion of the Bal- timore and Ohio, and when it seemed uncertain whether locomotives could be run on a road having grades and sharp curves. Cooper designed a little engine called the Tom Thumb, which weighed barely a ton, but which succeeded, in August, 1830, in hauling 4J tons around curves and up grades at a speed of 12 to 15 miles an 40 AMERICAN RAILWAY TRANSPORTATION hour, and did mucli toward demonstrating the possibility of using steam-locomotives on American railroads. The first locomotives constructed in the United States for actual service on a railroad were built in ISTew York city at the West Point Foundry Works. Locomotive No. 1 was the Best Friend, erected in 1830, and put into service that year on the Charleston and Hamburg Kailroad. The following year the West Point was de- livered to the same company. The third locomotive" to come from the West Point Foundry Works was the De Witt Clinton, also built in 1831, and put into use on the Mohawk and Hudson Railroad between Albany and Schenectady. Machinists in New York, Baltimore, York, Pa., and elsewhere were studying and experimenting, so ^1:27 The Old Ironsides, 1832. that within two years from the time when the first tracks were laid American builders had demonstrated their abil- ity to construct locomotives adapted to the requirements imposed by American conditions. Among the firms which early undertook locomotive construction was the one founded in Philadelphia by Matthias Baldwin, whose first THE MECHANISM OF THE RAILWAY 41 engine, the Old Ironsides, appeared in 1832. During the succeeding seventy years the Baldwin Locomotive "Works constructed 20,000 locomotives, and is now build- ing 1,500 to 1,800 each year. The influence of George Stephenson, of England, and of his celebrated locomotive the Rocket, was felt in the United States, but considering the undeveloped con- mm W(^-' De Witt Clinton Engine and Tkain, 1831. dition of American industries in 1830, a surprisingly small number of English engines were imported. The needs of our railroads were mainly supplied by our own foundries and shops. 'Nov were British models followed to much extent. American designers followed new lines in order to meet novel conditions. They were so success- ful in making engines that would work on curves and climb grades that American locomotives soon began to be sold in England. As compared with the locomotives with which we arc now familiar, those built in 1830 seem tiny and curiously designed. The first locomotives constructed for actual service weighed from 3 to 5 tons; the weight of the De Witt Clinton was 3^ tons. The English engines imported were double that weight and proved too heavy for the tracks with rails of wood surfaced with strap iron. The John Bull engine, shown in the illus- tration, was imported in 1831 for use on the Camden and Amboy line, the line connecting New York and Phila- delphia. It weighed 10 tons, and was the heaviest en- 42 AMERICAN RAILWAY TRANSPORTATION gine run up to that time. Indeed, its great size was a positive disadvantage to the company for some time. The American locomotives and cars, unlike the Eng- lisli and those on the Continent, where English models w^ere generally followed, early adopted a swivel truck. .ioii.N j;iLL Engike Axi) TjiAiN, 1831. After the first few years practically all American locomo- tives had eight wheels, four driving-wheels under the rear part of the engine and a four-wheeled truck carrying the fore part of the boiler, the truck being fastened to the engine by means of a bolt which permitted the truck to swing or swivel through several degrees and enabled the engine to round sharp curves. The swiveling truck seems to have been thought of by several people about the same time. Ross Winans, of Baltimore, used it under a passenger-coach, in 1831. The same year he placed a Lancaster Engike and Train, run on Pennsylvania State Railroad, 1834. truck under the forward part of a locomotive. In 1831, moreover, the truck principle was applied to two locomo- tives built in ^N'ew York. One was designed by Horatio Allen, while chief engineer of the Charleston and Ham- burg Railroad, and the other by John B, Jervis, chief THE MECHANISM OF THE RAILWAY 43 engineer for the Mohawk and Hudson Railroad. The engine planned by Jervis was more in accordance with subsequent designs, and to him the greater credit is due. The American or Campbell type is the name ap- plied to the locomotive having four connected driving- wheels and a four-wheel truck. The first engine of this design was built in 1836 by James Brooks for Henry R. Campbellj both of Philadelphia. This speedily became the prevailing design for the passenger service, and has First Campbell Locomotive, 1836. remained until the present day the approved form of passenger locomotive, except when special conditions re- quire the use of a locomotive of a different type. One essential feature of the locomotive awaited intro- duction until 1837, and that was the use of equalizing- beams by means of which the weight on the driving-wheels ceases to be affected by the inequalities of the elevation in the track. Since 1837 locomotives have been so con- structed that each drivmg-wheel can have a vertical motion independent of the other wheels, and can so move 4A AMERICAN RAILWAY TRANSPORTATION without changing very greatly the pressure imposed by the wheel on the track. Equalizing-beams were first used in the Hercules, designed by Joseph Harrison, Jr., and constructed by the Baldwin Locomotive Works. The differentiation in designs for freight and passen- ger locomotives began to be evident after 1840. The Campbell engine was the model generally followed for the passenger service, but for handling freight traffic heavier and more powerful locomotives, having six, eight, or ten driving-wheels, and all connected, were found necessary. There are now three general classes of heavy engines: the mogul, with six connected drivers; the consolidation, with eight drivers; and the decapod, hav- TuE Mogul Type of Compound Freight-Engine, Baldwin Locomotive Works. ing ten coupled driving-wheels. Ross Winans, of Balti- more, in 1844 constructed a locomotive with eight con- nected wheels, and four years later brought out the first " camel " type of engine, so named because the engine- driver's cab is placed above the middle part of the boiler. The construction of mogul and consolidation locomotives became frequent about thirty years ago. During the past fifty years a great many important improvements have been made in locomotives. Among the most valuable innovations was the introduction of compound locomotives, by means of which the steam, in passing from the boiler to the exhaust, is used in two THE MECHANISM OF THE RAILWAY 45 cylinders in succession. By that means a greater amount of power is derived from a given quantity of fuel. The locomotive in use to-day v^eighs as much as twenty-five of the engines used at the beginning of rail- CoNsuLiDATioN Typk OF Freight-Engine, Baldwin Locomotive Works. reading. A locomotive weighing 200,000 pounds is now not considered notably heavy, and some weighing more than 300,000 pounds are in use. In 1850 a locomo- tive weighing more than 50,000 pounds was considered large. Moreover, the increase in the size of the locomo- tive is but one of many ways by which its development may be indicated. Fifty years since, a train-load of 200 tons would have been considered a heavy one for a loco- Decafou Fueight-Engtne, Baldwin Locomotive Wouks. motive to handle, but now 2,000 to 2,500 tons are regu- larly being handled over long distances by the largest types of freight-engines. The achievements in the in- crease of speed of locomotives have been less wonderful, 4:6 AMERICAN RAILWAY TRANSPORTATION but the schedule speed of 60 to 65 miles an hour for pas- senger-trains, now regularly maintained on many Amer- ican and European roads, is double the maximum rate A High-Speed Compound Passenger-Engine, Baldwin Locomotive Works. possible forty years ago, and the discomforts and risks of the present are incomparably less than those formerly incident to travel. The improvements in travel and traffic have resulted quite as much from the progressive adaptation of the vehicle to the service to be performed as from better- ments in the road-bed and the locomotive. The passen- ger-coaches first used were similar to the stage-coaches, and this was so because carriage-builders in making vehi- cles for the railroad followed the designs with which they were familiar. Indeed, in Europe the passenger-coaches in use to-day, with their small compartments entered from the side, indicate that the stage-coach influenced the style of construction. Coaches of the European type were used on a few of the early American roads. The construction of coaches for American railroads, differing totally in design from those used on highways, began with the opening of the first lines. The first rail- road-coaches were not unlike the four-w^heeled caboose of to-day in appearance, but after 1830 longer vehicles mounted on two four-wheeled trucks began to be used, and the typical American coach soon came to differ from THE MECHANISM OF THE RAILWAY 47 Passenger-Coach, 1835. Usep on the Portage Eailroad over the Alleghany Mountains, Pennsylvania. the European in being longer, in having the doors at the ends, and in having a central aisle. This form of coach was probably adopted because the curves in our tracks required the use of trucks under ^'^^-^" -%^;;^ ~ :^^~ ^^ lE^-.^,'-^ the cars as well as under the engines. Many improve- ments in design were necessary to produce the com- fortable coaches of to-day. Better ven- tilation was se- cured by raising the central half of the roof and inserting " deck-lights." This was first done in 1836, but it was several years before the raised roof became a feature of all passenger-cars. The ventilation thus afforded was by no means perfect, and the problem of maintaining pure air in crowded cars has not yet been fully solved. For thirty years the jolting caused by the loose coupling of cars was a great discomfort to trav- elers, but patent automatic coup- lers, of which there are many kinds in use, have now obviated that trouble. The sleeping-car, as we know it to-day, originated with George M. Pullman, who built the Pioneer A in 1864. Cars had been fitted up with tiers of bunks on each side as early as 1837, but the discomforts of such accommodations were so great that sleeping-cars did not become popular until the Pullman and Wagner services '^7^ An Early Pabsbnger-Coach. 4:8 AMERICAN RAILWAY TRANSPORTATION became available. The sleeping-car was soon followed by the buffet- or hotel-car, and that by drawing-room- and dining-cars. The necessity for passing from one car to another suggested the vestibuling of trains. . The idea is as old as 1852, when a man by the name of Waterbury designed a vestibuled car. Some cars were fitted up with vestibules that year, but the first vestibuled train like those with which we are familiar was designed and built by Pullman and was run on the Pennsylvania Kailroad in 1886. The air-brake, first successfully applied to passenger- trains in 1868, was one of the most valuable of all the inventions by which the improvement of the transporta- .tion service has been brought about. In 1887 the air- brake had been developed so that it was practicable to use it on freight-trains, and at the present time the law requires all trains in the United States to be equipped with air-brakes by w^hich the train can be controlled by tke engineer. The days of the hand-brake are past. The power-brake has greatly lessened the risks to which em- ployees are exposed, has decreased the danger of travel, and has made possible much greater speed for freight- as well as passenger-trains. Many appliances contribute to the comfort and safety of the passenger. The railroad companies are striving to enable the traveler to command the conveniences of living and the facilities for transacting business that he would have at home or at a hotel. That ideal has hardly been reached; but, with the aid of electricity, much prog- ress has been made toward its realization. We have, however, not reached the limits of improvements in com- fort or in speed of travel. Indeed, we have in all prob- ability hardly begun to appropriate the possibilities of electricity. The freight-car is to-day built in many designs for I THE MECHANISM OP THE RAILWAY 49 the better accommodation of the numerous kinds of traffic to be handled. Starting with only open and box cars, crudely constructed, mounted on four wheels and having a loading capacity of 3 to 5 tons, the freight equip- ment of railroads has come to include the large variety of cars with which we are now familiar, provided with many mechanical appliances for saving labor costs and minimizing damages to property in transit, and capable of carrying loads of over 50 tons. Many of the improve- ments in car construction, as, for instance, the swiveling truck having four or more wheels, improved couplings, and air-brakes, were as applicable to the freight-car as to the passenger-coach. Specialization in freight-cars continues with the grow- ing volume of traffic. There are special cars for carry- ing cattle, dressed meats, oil, coal, coke, iron ore, fruit, milk, and many other commodities, a special car being brought into use whenever there develops a new kind of traffic running regularly and in large volume and not capable of being handled advantageously in the ordinary box or flat cars. The invention of the refrigerator- and heater-cars was incidental to this specialization, and has been of great value to producer and consumer. The dis- tribution of perishable commodities throughout the entire country can be carried on during all seasons of the year, to the great advantage both of the producer and con- sumer. The products of the tropical and the cold sections of the world are now available for the people of both regions at all times, and the volume and value of freight transported are greater than they could be when the movement of many kinds of goods was dependent upon the weather. The increase in the capacity of the freight-car, par- ticularly in the United States, has been quite as remark- able as the growth in the size of locomotives. With the 5 60 AMERICAN RAILWAY TRANSPORTATION construction of stronger tracks and witli the use of steel rails tlie railroad companies have taken advantage of the economy resulting from the use of large cars. The larger the cars the less the " tare " or weight of the vehicles as compared with the weight of the cargo. The larger the cars the greater the live load the engine can haul. Twenty-five years ago 20 tons was the standard car- load in this country, and such a weight would to-day be considered a heavy one in most countries of Europe; but for some time past the standard box and open car in the United States has been one built to carry 30 tons. Many cars now used in carrying coal, ore, and other heavy commodities in this country are loaded with 50 to 55 tons of cargo, and it seems probable that it will not be long before the 50-ton car will become the standard for handling most kinds of freight. The construction of cars with a capacity of 50 tons or more has been facilitated by the large use of steel, both in the truck-frames and in the body of the car. In- deed, a large share of the cars now being built for heavy traffic are constructed entirely of steel. Just as the small wooden sailing vessel is giving way to the large steel steamship, so is the wooden freight-car being displaced by steel cars of greater strength and capacity. The facilities for handling freight at stations or ter- minals constitute an important part of the mechanism by which the transportation service is performed; indeed, the economies in time which have been made possible by the improvements in road-bed, locomotives, and cars would be largely destroyed if freight were still loaded and un- loaded by the primitive methods of hand labor that used to prevail. At terminals where large quantities of mixed cargoes are handled, huge warehouses equipped with cranes and elevators are provided. Grain is loaded and unloaded by machinery. Cars are filled with coal, coke, THE MECHANISM OF THE RAILWAY 61 and ore from " pockets '' or chutes, which, discharge their contents into the cars by the force of gravity, and min- eral cars are constructed with sides or bottoms that can be dropped so as to discharge the cargo without its being handled. The facilities for handling iron ore and coal repre- sent the most complete use to which machinery has been put for loading and unloading heavy freight quickly and cheaply. Electrically operated hoists, traveling-cranes, and car dumps accomplish in hours what formerly took days to perform, and at a fraction of the previous cost. Buckets holding from one to five tons of ore are filled automatically, carried several hundred feet, and dumped in a few seconds; and loaded cars are picked up bodily and their contents of coal or ore emptied into the hold of a vessel or upon the storage dump. A trip to one of the ore ports on the Great Lakes or to one of the large sea- board terminals will give the visitor one of the best pos- sible illustrations obtainable of the marvelous adaptation of machinery to the heavy work of the world. REFERENCES FOR FURTHER READING Tanner, H. S. A Description of the Canals and Railroads of the United States. 1840. Pangborn, J. G. The World's Railway. 1894. Brown, William H. The History of the First Locomotives in America, from Original Documents and the Testimony of Living Witnesses. 1871. [A book rich in historical material.] Prout, H. G. Vol. ii of The United States (edited by N. S. Shaler), pp. 163-178, a paper on Railroad Construction and Equipment. The American Railway, its Construction, Development, Management, and Appliances. 1892. [A collection of papers by different au- thors. M. N. Forney has a valuable paper on American Loco- motives and Cars. Pp. 100-148.] History of the Baldwin Locomotive Works, Philadelphia, 1831-1903. CHAPTEK Y THE PRESENT RAILWAY SYSTEM OF THE UNITED STATES At the close of the year 1902 there were 204,000 miles of railroad lines in the United States. Several of these lines have more than one track, and if the total length of track in the various roads and in their freight- yards be taken as the basis of length, there are found to be about 275,000 miles of railroad-track in this country. This vast mileage is owned by over 2,000 corporations. Many of these corporations, it is true, are subsidiary to others, but according to the reports of the Interstate Commerce Commission, there are over 1,000 operating companies at the present time. The railroad system of the United States as a whole is too vast and is composed of too many parts to be readily comprehended. It is impossible for the ordinary mind at least to carry the details of such a large and intricate picture as is presented by a railway net comprising 200,- 000. miles of line and spread over a country 3,000 miles in breadth. By dividing the United States into several natural territorial sections, and by classifying the rail- road lines or systems according to those sections, and by grouping the railroads according to ownership, it is pos- sible to get at least a general picture of what for con- venience' sake we term the American railway system. The most general and most frequent grouping of the railroads of the United States territorially is into three sections; one section being that north of the Ohio and 52 54 AMERICAN RAILWAY TRANSPORTATION James Kivers and east of the Mississippi, another the region south of the Ohio and James and east of the Mis- sissippi, and the third the country west of the Mississippi. A basis for this grouping may be found in well-known differences in production, density of population, and other economic and social conditions prevailing in these three sections of our country. There are also sufficient differ- ences in the freight business of the railroads in these sections to cause distinct classifications of freight to have been Worked out for each of the three regions. While this grouping of the railroads of the United States into three sections has been serviceable for purposes of freight classification, the sections are so large that further sub- division is necessary. Within each of these large groups there are distinct subdivisions, due in part to diversity of physical conditions, and in part to the fact that the rail- roads in different portions of the country have come, in a large degree, to be owned by a limited number of groups of capitalists. The railway system of the United States as a whole may be divided into seven groups, each group occupying a nearly although not completely distinct section of the country. Within some of these sections the railroad sys- tem may be subdivided into two or more parts, dependent upon whether a general or detailed classification is sought for. The first of these territorial groups of railroads comprises the 'New England States. The railroads in this section differ from those of other parts of the country, because they serve the region where population is densest; where the passenger business as compared with the freight is larger than in any of the other States, and where the local freight business as contrasted with the through freight is of relatively greater importance. Bos- ton is the great port of the New England States, and the roads north of Boston are quite distinct from those south 66 AMERICAN RAILWAY TRANSPORTATION of that city. The interchange of traffic between the two sections is comparatively small, and the railroad lines in the two sections are under the control of different man- agements. The region west of ISTew England and the middle At- lantic seaboard, north of the Ohio and James Rivers, and east of the cities of Chicago and St. Louis comprises another section of the country within which there is considerable unity in the operation and ownership of the railroad systems. The railroads in this group have the heaviest freight traffic of any roads in the country. Most of them were built from the East toward the West, for the purpose of bringing the agricultural, forest, and mineral products of the great central "West to the Atlantic sea- board to supply our own and European markets, and for the purpose of giving the manufacturing industries of the northeastern section of the United States a western outlet for the products of the mills and factories. The railroads in this group are often spoken of as the " trunk lines," because the first through or trunk lines in the United States were those built to connect the Atlantic seaboard with the Great Lakes and the Ohio River. The corpora- tions controlling these first trunk lines have extended their systems to Chicago and St. Louis, and the term " trunk lines " has come to be applied to the roads be- tween the Atlantic seaboard and the central West. Comprised within this trunk-line territory is a dis- tinct subdivision of lines whose business consists chiefly of transporting anthracite coal from the Pennsylvania mines to the seaboard. Some of the hard coal mined in Pennsylvania is handled by the trunk lines, but the larger part of this coal is mined and transported by other than the trunk-line companies. The section south of the James and Ohio and east of the Mississippi is usually spoken of as Southern territory. 58 AMERICAN RAILWAY TRANSPORTATION The traffic conditions in Southern territory differ from those in other parts of the country, and it is probable that the railroads in this part of the United States will always remain a fairly distinct group. The Alleghany Mountains separate the Southern territory into two parts, one of which is tributary to the Gulf and the other to the Atlantic seaboard. To some extent the lines in these two parts are operated under separate managements, but there is manifest a marked. tendency toward the unifica- tion of ownership and control of the lines in both parts of the Southern territory. To the west and north of Chicago and St. Louis, and including the chief grain-raising States of the United States, may be found another group of railroads. The roads in this territory are called the " granger '' lines, a term that originated thirty years ago at the time when the farmers of the central West were organizing their so- called "granges," or societies. The granger roads radi- ate from three centers, the chief of which is Chicago. At the head of Lake Superior is another growing center of traffic, while St. Louis has always been an important point for the collection and distribution of the^ traffic from and to the agricultural central West. South and west of St. Louis lies the Southwestern territory, within which there is a large number of rail- way lines, some of them having St. Louis and Memphis connections, and others being more distinctly tributary to Gulf ports. A large part of the roads in this system were formerly controlled by Jay Gould; now they are managed by a group of capitalists headed by George J. Gould, and these lines are often spoken of as the Gould roads. West of the sections occupied by the granger and Southwestern lines lies the territory occupied by the trans- continental or Pacific roads. These transcontinental lines a O o 5 2 5! ^^ K CO %^^ I ^ ^ § ^ fc '^ 5 1 ^ !ti :^ J '^Z^^^- 60 AMERICAN RAILWAY TRANSPORTATION have connections with Chicago and the Mississippi, and consequently the territory occupied by the transcontinental lines overlaps to some extent the granger and South- western sections. The transcontinental lines are divided into two rather distinct groups, the Northern and Southern. Within the Northern section are comprised the Great Northern, the Northern Pacific, the Chicago, Burlington and Quincy. The Southern section includes the Union, Central, and Southern Pacific roads, all under one man- agement, and the Atchison, Topeka and Santa Fe, which up to the present time has remained an independent line. The grouping of the railroads just given into seven sections is based upon physical differences prevailing in different parts of the country, and it is not probable that those differences will very largely change with the growth of the country. We may then expect such a classification to be fairly permanent. The objection to the classification, however, is that it gives very little information regarding the ownership and management of the American rail- roads. A classification based upon ownership and man- agement is much more instructive, and may be made without especial difficulty. This classification, however, is subject to constant change by transfers of ownership from one set of capitalists to another. The student will need to revise the classification year by year, but the tendencies in railway consolidation are such that the amount of revision necessary can hardly be very great. The classi- fication submitted in the following table shows that the largest share of the great railroad mileage in this country is already in the hands of a limited number of large inter- ests. Between these groups of capitalists there is devel- oping a community of interest or harmony of action that is rapidly restraining the competition in rate-making that formerly prevailed among separately managed railway sys- tems. The table on pages 62 and 63 groups the leading 62 AMERICAN RAILWAY TRANSPORTATION Grouping of American Railroads by Ownership and Territory, 1902 Systems and Roads. Mileage. Territory. 1. The Boston and Maine 2. New York, New Haven and Hartford 3. The Vanderbilt roads : Boston and Albany New York Central and Hudson River. . Delaware, Lackawanna and Western . . . Lake Shore and Michigan Southern .... Michigan Central New York, Chicago and St. Louis Cleveland, Cincinnati, Chicago andSt. Louis Lake Erie and Western Pittsburg and Lake Erie Indiana, Illinois and Iowa Chicago and Northwestern Total 4. The Pennsylvania System : Pennsylvania Railroad (east of Pittsburg) Pennsylvania Company (west of Pittsburg) Grand Rapids and Indiana Terre Haute and Indianapolis (Vandalia) . Baltimore and Ohio Norfolk and Western Chesapeake and Ohio Total ' 5. The Philadelphia and Reading System (owned by the Vanderbilt-Pennsylvania interests) 6. Morgan roads : Lehigh Valley Southern Railway Cincinnati, New Orleans and Texas Pacific Mobile and Ohio Central of Georgia Total 7. Morgan and Atlantic Coast Line Co. roads: Atlantic Coast Line Louisville and Nashville Nashville, Chattanooga and St. Louis. . . . Georgia Railroad Total 8. Illinois Central 9. Seaboard Air Line 3,283 2,027 394 3,092 947 1,702 1,658 533 2,355 887 127 295 8,748 20,798 5,422 4,926 584 693 4,340 1,700 1,636 19,301 2,145 1,393 6,779 338 874 1,845 11,229 3,587 4,916 942 626 10.071 5,380 2,611 ) New Eng- \ land. Trunk line. Granger. Trunk ^ line. - Southern. RAILWAY SYSTEM OF THE UNITED STATES 63 Systems and Roads. 10. Gould roads : Wabash Wheeling and Lake Erie Western Maryland West Virginia Central and Pittsburg Missouri Pacific St. Louis, Iron Mountain and Southern . . St. Louis Southwestern Texas and Pacific International and Great Northern Denver and Rio Grande (Southern Trans- continental territory) Total 11. Moore roads : St. Louis and San Francisco Chicago, Rock Island^and Pacific Total .- 12. Chicago, Milwaukee and St, Paul 13. Chicago Great Western 14. Hawley roads : Minneapolis and St, Louis Iowa Central Colorado and Southern (Southern Trans- continental territory) Total 15. Wisconsin Central 16. Harriman roads: Chicago and Alton Union Pacific Southern Pacific Oregon Short Line Oregon Railway and Navigation Company Total 17. Morgan-Hill roads : Great Northern Northern Pacific Chicago, Burlington and Quincy Erie Railroad '. Total 18. Pere Marquette 19. Atchison, Topeka and Santa Fe Grand total of 19 systems listed above Mileage. 3,490 469 258 161 3,877 1,773 1,293 1,710 1,083 2,390 15,504 4,946 8,057 13,003 6,604 956 642 558 1,176 2.376 978 920 3,115 9,621 1,740 1.072 16,468 5,849 5,749 8,353 2,556 22,507 2,204 7,876 I Trunk r line. South- western. Southwestern and North- western. 165,321 Territory. North- western or "granger." Southern \: transcon- tinental. Northern transcon- tinental. Northwest'n. [Trunk I line. Southern transcon- tinental. 64 AMERICAN RAILWAY TRANSPORTATION railroad systems in the United States by ownership and by territorial sections. The mileage of each system at the close of 1902 is given. Such a table as this has much value, because it shows clearly to what extent railway com- bination had progressed up to the close of 1902. The reader will understand that the mileage of nearly every railroad company changes more or less each year, and that there are more or less frequent changes in the ownership of roads; and that consequently the table is not strictly accurate for 1903, and will be less so each succeeding year. The above grouping of the railroads of the United States does not show with entire satisfaction the relations of some of the railroad systems to each other. The Erie is rightly classified as a Morgan-Hill road, although it has not yet been operated in connection with the Western lines of those owners. The Central of 'New Jersey is controlled by the Philadelphia and Reading, which is now owned jointly by the Lake Shore and Michigan Southern and the Baltimore and Ohio. That Mr. J. P. Morgan's relations with the Yanderbilt interests are becoming closer is suggested by his having a place 01:1 the executive committee of the New York Central. The Atlantic Coast line, which is apparently an independent company, owns the Plant System, and has a half-interest in the Louisville and Nashville. The other half of the Louisville and Nashville is owned by the Southern Railway, which is a Morgan road. The Nashville, Chattanooga and St. Louis Railroad and the Georgia Railroad are controlled by the Louisville and Nashville. The roads listed in the foregoing table comprise over four-fifths of the total mileage of the country, and they handle much more than four-fifths of the total traffic moved by rail. There are but 19 groups of owners men- tioned in the table, and of those 19, 8 — the Yanderbilt, RAILWAY SYSTEM OF THE UNITED STATES 65 the Pennsylvania, the Morgan, the Atlantic Coast Line Company, the Gould, the Harriman, the Moore, and the Morgan-Hill — groups own or control two-thirds of the railroad mileage in the United States. Each one of the groups represents a host of individual investors, but the control of the property of each group is centralized in the individual, or, at most, the few men, standing at the head of the " interest/' Some of these systems of roads have a greater mile- age and a larger volume of traffic than the railroads in any of the European states with the exception of Great Britain, France, Germany, and Russia. Indeed, there is probably more freight handled over the group of roads controlled by the Pennsylvania interests than over the railroad system of any European country. The table shows a rather marked parallelism between the territorial grouping and the consolidation of systems by ownership or " community of interests.'' It seems probable that it will not be many years before the rail- roads of the United States as a whole will be divided into a small number of systems, each serving a well-defined territory, and each owned by a distinct group of capital- ists. Our experience promises to result in conditions similar to those which prevail in France and Great Brit- ain. In France a large number of corporations were chartered in the beginning of railroad construction, but after a few years these companies consolidated into six large ones, among which the country was divided. In Great Britain much the same thing occurred, and a few large companies came to occupy each a fairly definite part of the country. This consolidation and territorial grouping of rail- roads has been accomplished earlier in France and Eng- land than in the United States, because our country is much larger, and is less developed industrially. In New 66 AMERICAN RAILWAY TRANSPORTATION England, where conditions as regards density of popula- tion and industrial advancement were somewhat like those of Europe, the process of railroad amalgamation was completed some years since. What has been finished in 'New England is being worked out in other parts of the United States, the progress toward consolidation having been especially rapid since 1898. Although the United States includes a vast stretch of territory, the country is well supplied with railroad facilities. There are two ways by which the supply of railway facilities is most frequently measured. One of the methods is to ascertain the ratio between the rail- road mileage and the number of square miles of territory in the country or in the section being considered — that is, to determine the number of miles of railroad per 100 square miles of territory. Another measure is found in the ratio of mileage to population, or in the number of miles of railroad per 10,000 inhabitants. The number of miles of railroad per 100 square miles is greater in the " trunk-line '' territory — the section between New England and Chicago and St. Louis — than in any other part of the United States, the number being about 19; the New England district comes second, with 12.3 miles per 100 square miles of territory; and the granger terri- tory third, with 11.73; after which comes the Southern district, then the Southwestern, and finally the Western sections served by the transcontinental lines. In the United States as a whole there are 6.51 miles of railroad for each 100 square miles of territory. Of the individual States, N'ew Jersey ranks first in the railway mileage per 100 square miles, having 30 miles for each section of that area; Massachusetts comes second, with a ratio of 26.5; Pennsylvania third, with a ratio of nearly 23; after which come Ohio, Connecticut, and the great agricultural States of Illinois, Indiana, and Iowa. RAILWAY SYSTEM OF THE UNITED STATES 6Y The ratio of railroad mileage to population is very different from the ratio between mileage and territory. The State of I^evada, with only 909 miles of road, has 215 miles per 10,000 inhabitants, while the State of Illi- nois, with over 11,000 miles of railroad — the greatest mileage of any of the States — has less than 23 miles per 10,000 people. Massachusetts, with next to the longest mileage per 100 square miles of territory, is so thickly populated that she has only 7.55 miles of railroad for each 10,000 residents. The people of Massachusetts, however, are especially well supplied with railroad facil- ities. The railroad net is thickly woven and there are no people more than a few miles distant from a well- equipped rail line. The people living in the eastern half of the United States are more adequately supplied with railroad facili- ties than are the people of some of the European coun- tries; but taking Europe as a whole, there are 7.7 miles of railroad for each 100 square miles of territory. In Belgium there are 51.6 miles for each such area, in Great Britaiin and Ireland the number of miles is 30, and in the German Empire 25 per 100 square miles. In European Russia, however, there are only 2.4 miles per 100 square miles, and in Sweden only 1.6 mile. Western Europe is better supplied territorially with railroads than the United States is, even in the Eastern part. Eastern and northern Europe, like the western third of the United States, has a relatively small supply of railroads. Measured by the ratio of railway mileage to popula- tion, the supply of railroad facilities enjoyed by the peo- ple of the United States is greater than that possessed by European. Taking Europe as a whole, there are only 4.4 miles of railroad for each 10,000 people, which is but a little more than one-sixth of the figure for the United States, where the ratio is 25. In Great Britain 68 AMERICAN RAILWAY TRANSPORTATION and Ireland there are 5.3 miles of railroad per 10,000 inhabitants, in the German Empire 5.6 miles, in France 6.9 miles, and in Switzerland 7.1 miles. By comparing these ratios with those for the States of the United States it will be seen that the person living in this country is served by a considerably greater length of railroad. REFERENCES FOR FURTHER READING Newcomb, H. T. The Recent Great Railway Combinations. Review of Reviews, vol. xxiv, July, 1901. Hull, C. H. Railway Alliance and Trade Districts. The Interna- tional Monthly, vol. iii, June, 1901. Report of Industrial Commission. Vol. xix, pp. 304-322. WooDLOCK, T. F. The Railroad Gazette, vol. xxxiii, p. 671, Sep- tember 27, 1901. Statistics of Railways in the United States. Annual Report by the Interstate Commerce Commission. [In preparing the table showing the grouping of American rail- roads, valuable assistance was rendered by Mr. H. T. Newcomb, for- merly Editor of the Railway World.] CHAPTER YI THE RAILWAY CORPORATION AND ITS CHARTER The agency by which the railroad machine is man- aged and the railway system just described is operated is the corporation. The product resulting from the oper- ation of the machine is the transportation service. The executor of the service is the corporation. I^othing has been more characteristic of the develop- ment of industry during the past fifty years than the sub- stitution of the corporation for individual and partner- ship management of business and the development of the corporations thus substituted into great and powerful organizations. In no other line of activity has the cor- poration developed in a more typical manner than in the railroad business, and a brief study of the railroad cor- poration as it exists to-day will be remunerative not only to the student of railway affairs, but to the student of economic activity in general. In his book on the Law of Personal Property, Theo- dore Dwight defined a corporation as " an artificial per- son, created by law, having a continuity of existence, either definite or indefinite, and capacity to do authorized acts, and capable, however numerous the persons that compose it may be, of acting as a single individual." As defined by Elliott in his standard work on Railway Law, a corporation is " a body consisting of one or more per- sons, established by law for certain specific purposes, with the capacity of succession and with special privileges not 69 YO AMERICAN RAILWAY TRANSPORTATION possessed by individuals, yet acting in many respects as an individual." As these definitions state, a corporation is a creation of law, by means of which several individuals may act as one person in the performance of certain acts which they are authorized to execute by the law creating the corporation. This " artificial person " called the corpora- tion has a continuity of existence which may be either for a limited and definite period of years or for an indefi- nite time. A partnership is a business organization consisting of two or more individuals who contract with each other for the transaction of a certain line of business. The organ- ization thus created terminates with the death of either or any member of the partnership, and the obligations contracted by the firm in carrying on its business become the obligations of each partner. In this respect the part- nership differs from the corporation in that the stock- holders of the corporation are usually liable only to the amount of their investment or holdings of stock in the organization. In some cases the stockholder in a cor- poration may be liable to twice the amount of his stock, but that is not usual. The persons composing the corporation are the stock- holders, and in the larger railroad and industrial corpora- tions of to-day they may number thousands. Inasmuch as it is impossible for a large body of stockholders per- sonally to exercise management of the business of the corporation, it is usual for them to have annual meetings at which a limited number of persons are elected direct- ors. The directors thus chosen usually elect a president, vice-president, treasurer, secretary, and various other subordinate officers, whose business it is to carry on the details of the work under the general supervision and control of the directors. The subordinate officers are THE RAILWAY CORPORATION AND ITS CHARTER VI responsible to the president; he is under the control of the directors, and they are held responsible to the stock- holders, to whom they report at the regular meetings. Corporations are of two general kinds: private and public. The ordinary manufacturing concern is an ex- ample of the former kind, while the city or borough gov- ernment is an instance of the latter. The railroad cor- poration partakes of the nature of both kinds. Legally it is to be classed as a private corporation, but the serv- ices it performs are of a public nature. The railroad corporation is created to perform a service which in some countries is in the hands of the government, and which the various States and the National Government in this country would need to perform if the railroad corpora- tions were not created by the Government to carry on the business of transportation. The special characteristics of the railroad corporation and the private and public nature of the services it per- forms are well given by Elliott in. the work just referred to. He says: " A railroad company or corporation is usu- ally regarded as a private corporation, and justly so as contrasted with a strictly public corporation, such as a city, county, township, or the like governmental subdi- visions, but it is not a private corporation in the strict sense that an ordinary business corporation is, for it is charged with duties of a public nature that distinguish it from a purely and strictly private corporation. In many respects a railroad corporation is a private corporation in all that the term implies, but in other respects it differs from a corporation upon which no public duties are imposed. . . . The doctrine of Chief-Justice Hale, that ^ when private property is affected with a public interest it ceases to be juris privati only,' applies to a railroad corporation. It is not to be understood, however, from the fact that the property of a railroad company is de- 72 AMERICAN RAILWAY TRANSPOKTATION voted to a public use or ' affected with a public interest/ that it can be treated as a public corporation ; on the con- trary, a railroad corporation is classed as a private cor- poration, and its strictly private rights are as much beyond legislative control as are the rights of a purely private corporation." The fact that a railroad is a quasi-public corporation is of great consequence because such corporations may be subjected to very detailed regulation by the state. Being created by the state to perform a service which the state would otherwise be obliged to carry on, the corporation may be compelled by the state to perform the service according to rules prescribed by the public authority, whose control may and often does go so far as to fix the prices which the corporation may charge for what it does. It will be found that there are no corporations or indi- viduals engaged in the business of transportation for the public whose charges are not subject to governmental regulation. The railroads are no exception to this, and all railroad corporations, however local the character of their business, must fix their charges subject to the power of the State or United States courts to pass upon the reason- ableness of the exactions required of the public. The United States courts can pass upon the reasonable- ness of all railroad rates and fares fixed by the State legis- latures, and this is true because a railroad corporation is a " person " in the sense in which that term is used in the fourteenth amendment to the United States Constitution, where it is stated that ^^ no person shall be deprived of life, liberty, or property without due process of law." The United States Supreme Court has decided in a number of cases that the word " person," as used in this amendment, applied to railroad and other corporations. It is further- more held that when the Constitution guaranteed to every person a due process of law in defense of his life, liberty. THE RAILWAY CORPORATION AND ITS CHARTER 73 and property, it assured him the right of appealing from the State courts to the United States courts in equity pro- ceedings. 'No State can deprive persons subject to its authority of their property without due process of law, and if a State fixes so low a charge for a service performed by a corporation or an individual as to deprive such " person " of the property to which he is reasonably entitled, the person has the right of having the reasonableness of the charge passed upon by the United States courts. That is to say, under the fourteenth amendment the property of every person is subject to the protection both of the .State and of the United States courts. Such being the case, all transportation companies, whether they are engaged in interstate traffic or in traffic confined entirely within one State or within a small section of a State, may have the reasonableness of the charges they make passed upon by a State or Federal court. Contrariwise, they can exact no charges whose reasonableness may not be tested in one of those courts by the interested shipper or passenger. The railroad company derives its powers from a char- ter granted to it by the State. In our country most railroad and other charters are derived from the State governments, but the United States has the authority to incorporate railroad companies and grant them charters; indeed, in the case of some of the Pacific railroads the charters were derived from the United States. Incor- poration may take place either by a special act of the Legislature of the State, or in accordance with general laws. Formerly nearly all charters were special acts of the legislature, but that practise led to corruption and favoritism, and most States have enacted general incor- poration laws. Indeed the constitutions of many States prohibit the granting of special charters. The railway charters granted to the companies that 74 AMERICAN RAILWAY TRANSPORTATION constructed the first railroads in this country were very similar to the charters that had previously been granted to the companies that had constructed turnpikes and toll- roads; indeed, it was supposed at the beginning of rail- road construction that the railroad was merely an im- proved highway upon which any individual might run his own car. A few years' experience showed that it was not practicable to manage a railroad in that way, and that it was necessary for the business done over the road to be under one centralized management. Railroad char- ters contained carefully drawn provisions in regard to the tolls that were to be charged individual users of the road. Some effort was made to protect the public inter- ests by stipulating that when the earnings received by the railroad companies should exceed a fixed annual per- centage the State might reduce the charges. In general, however, the charters granted in this country afforded very inadequate protection to the public. Our experi- ence in this regard differed from that of European countries, where the state took special pains in granting its charters to provide for the detailed regulation of the service to be performed. In this country the States were so desirous of securing railroads that very few exactions were imposed upon any company that was willing to undertake a work deemed to be of such benefit to the State and to the general public. It will be found that this lax and indiscriminate char- tering of railway companies was responsible in part for numerous abuses in the railway service. In course of time " the railway question '' came to occupy a very prominent place in public discussions, and thirty years ago the States undertook in a vigorous way to assume a degree of regulation of the railroads, for which they should have made, but did not make, provision in the charters they had previously granted. THE RAILWAY CORPORATION AND ITS CHARTER Y5 In most foreign countries the railroads are chartered by the central government, but in our country each one of the States and Territories has and exercises the au- thority of incorporating railway companies. If the laws of the several States regarding incorporation were uni- form, and if the provisions in the charters were alike or nearly so, this practise would not be disadvantageous; but as a matter of fact the laws and practises are not uniform, some States being much stricter than others. This fact has made the problem of the regulation of transportation by the several States a more difficult one than it otherwise would have been, and is one of the rea- sons why it is desirable for the United States Govern- ment to exercise its power to regulate commerce among the several States. The railroad companies to-day are large and powerful organizations. The Pennsylvania system of railroads, for example, comprises many corporations, but they are practically under one management. The people who manage the Pennsylvania interests have more than $1,000,000,000 under their control, and there are other railway systems in the United States nearly as large as the Pennsylvania. The capital stock of each of the large railway corporations is distributed among a large number of owners. According to the report of the Industrial Commission, " the share-owners of the eastern trunk lines are reported to number 99,826. ... It was esti- mated in 1897, by the late George R. Blanchard, that the total number of holders of stocks and bonds of the railroads of the United States was 1,250,000, including 950,000 stockholders and 300,000 bondholders." A me- diunl-sized railroad company, such as the Illinois Central, illustrates in an excellent manner the distribution of ownership among the stockholders. In that corporation there are 5,684 people each owning less than $10,000 of Y6 AMERICAN RAILWAY TRANSPORTATION stock. Fully half of the shares are owned in lots of $50,000 and less, the average of all holdings being $10,- 385. The last report of the Pennsylvania Railroad Com- pany — the one for 1902 — states that there are 29,000 stockholders in the company. Although the railroad corporations are becoming larger every year and the amount of railroad securities is increasing, there is, none the less, a remarkably wide distribution of ownership. The control of railway prop- erties is coming more and more into the hands of a small number of groups of capitalists, but each group of cap- italists comprises a multitude of individual owners, the concentration of control being the result of the delegation of authority to the limited number of financial leaders in whom investors have especial confidence. It is not necessary for an individual to own a majority of the stock in a- corporation to obtain the practical control. As the corporations become larger and the stockholders become more widely distributed, control by the individ- uals or groups of individuals holding a minority of the shares becomes easier. Most of the money used in the construction of rail- roads in this country was obtained by borrowing money. The bondholders furnished most of the capital used in railroad construction. When times are good and busi- ness active, railroad companies have no difficulty in pay- ing the interest on their debts; but when times are bad and business dull, many corporations in the past have found their income insufficient to meet their current obli- gations. When a corporation is unable to make the pay- ments it has agreed to make it is called insolvent, and the people to w^hom the corporation is in debt — that is, the bondholders or those from whom equipment has been purchased — may request a court to take from the officers of the railroad the management of the company THE RAILWAY CORPORATION AND ITS CHARTER YY until the road again becomes solvent. When the court thus takes control of a road in the interests of the. cred- itors, it takes the place of the corporation for the time being. If the court finds that the road can be put upon a paying basis, the court will keep the road running until the financial troubles are past. If, however, the court finds the railroad to be hopelessly insolvent it proceeds to sell out the property and to pay over to the creditors the sum received from the sale. On some occasions rail- road corporations, foreseeing the approach of financial difficulties, have besought the courts to assume the man- agement of their properties in order that the officials of the corporation might shield themselves from the conse- quences of their own acts. Such practises, however, are not justifiable, and in time will probably be made impos- sible by laws regulating the management of insolvent corporations. REFERENCES EOR FURTHER READIiq-Q Meyer, B. H. Railway Regulation under Foreign and Domestic Laws. 1901. [A report prepared for the Industrial Commission and published in the report of that commission, vol. ix, pp. 897- 1004. This contains a good discussion of railroad charters.] Those interested in the study of railroad law will find the subject fully covered in the standard treatises by Elliott, Redfield, and others. CHAPTER YU RAILWAY CAPITAL The shares or certificates of stock issued by a cor- poration represent the investment made by the stock- holders who are the owners of the company, but the property of the railroad company is usually obligated to people who have loaned money to the corporation or who have made temporary advances of material or labor on credit. These temporary advances represent the com- pany's " current liabilities." Persons loaning money to a corporation receive a bond or certificate of the com- pany's indebtedness to them, and these bonds are accom- panied by a mortgage which enables the bondholders to take possession of a part or all of the property of the company, if it does not pay the interest and principal of the loan, according to the terms of the contract speci- fied in the bond. The bonds represent the company's funded debt. Strictly speaking, the capital of a corporation com- prises only the stock that has been issued; but in the case of the railroads of the United States it is customary to include bonds as well as stocks in the capital. The reason for this is that the issue of bonds has been the means by which a large share, indeed the greater portion, of the funds was secured for the construction of the railroads. The bondholders have frequently created the property against which their mortgages lie. The full amount of 78 RAILWAY CAPITAL T9 the investment can be ascertained only by taking account of both the stock and the bonds or funded debt. The current liabilities of the railroad companies are not now counted a part of the capitalization, although they were so included in the statistics compiled by the United States Interstate Commerce Commission until 1896, when it was decided that only regular investments should be consid- ered as capital. Various classes of bonds are issued by railroad compa- nies to secure capital, but they all fall under one or the other of two heads: they are either mortgage bonds or debentures. The holder of the mortgage bond has a lien on some specific and tangible property of which he can take possession if the interest and principal of the loan are not paid. The mortgage may cover rolling- stock, terminals, or the entire physical property of the borrowing company — i. e., the creditor may hold equip- ment bonds, terminal bonds, or a general or. " blanket " bond. Moreover, the payment of these bonds may be secured by a first mortgage or by a second, third, or fourth mortgage — the holders of all but the first mort- gage being called junior lienors. Debenture bonds may represent a claim on the income derived by the borrowing railroad company from speci- fied sources, or they may rest on no other security than the credit of the company. Whatever the class of bond, the claims of the bondholder precede those of the stock- holder. 'No dividend can be declared on the stock until the current interest charges have been met and the prin- cipal of matured bonds has been paid. In England rail- road bonds are of the debenture kind, but in the United States creditors usually prefer the security of a mort- gage. Income bonds are sometimes, but not extensively, issued in our country. On the 30th of June, 1901, the total capital of Amer- 80 AMERICAN RAILWAY TRANSPORTATION ican railroads amounted to $11,688,177,991/ of whicli total about half — $5,806,597,104 — consisted of stocks, and $5,881,580,887 of funded debt. During the decade ending in 1900 there was an increase of 25 per cent in the total of stocks and bonds of American railroads. The growth of mileage was 18 per cent, considerably less than the addition made to capital. Stocks increased more rapidly than bonds. In 1890 stocks comprised 46.73 per cent of the total capital, and in 1900, 50.87 per cent. Until 1895 the amount of bonds issued exceeded the stock, but because of the business depression at that time, many roads had become insolvent and found it necessary to reduce their fixed charges by substituting stock for bonds. It seems probable that railroad companies will in the future make use of stocks more than bonds to secure additional funds, because a strong road having an assured traffic can find a ready market for its stocks. Since 1900, however, bonds have been substituted for stocks in the purchase of one road by another, but this is probably a temporary tendency incidental to the proc- ess of consolidation now in progress. The large compa- nies resulting from combinations will doubtless secure additional capital in the future more largely from the sale of stocks than from the issue of bonds. The capitalization per mile of railroad in the United States averaged $61,528 in 1901. There are great differ- ences in the various roads as. regards the amount of capi- tal per mile of line, some having only $10,000 of capital per mile, while others have from $300,000 to $500,000. A single-track road across a level section of a new por- tion of the country, where the right of way and terminal facilities can be cheaply secured, may be constructed for ^ Of this sum the railroad companies in their corporate capacity- owned $1,796,667,211 of stocks and $468,830,698 of bonds, a total of $2,205,497,909 of stocks and bonds. RAILWAY CAPITAL 81 a small fraction of what it costs to build lines over moun- tains or between large cities in populous regions, like the eastern United States or western Europe, where real- estate values are high. Cost, however, is only one of the causes accounting for differences in capitalization. Varia- tions in capitalization among different companies arise from the fact that some systems, like the Pennsylvania, Illinois Central, and others similarly managed, have is- sued stocks and bonds in a conservative rather than a speculative spirit; whereas, some companies, notably those owning most of the Pacific roads, formerly pur- sued a policy of capitalizing their properties as largely as possible. The average capitalization of the railroads of Great Britain is over $260,000 per mile, or more than four times the average for the United States. This difference is due to several causes. The British companies had larger ex- penses for right of way and terminals, and they built their roads more solidly than was customary in the United States. The British companies, unlike most of those in America, charge practically all improvements to capital and not to revenue. Some American companies expend more of their earnings for betterments and new con- struction than they distribute in dividends. The capital of American railroads is increasing, partly from the fact that new lines are being constructed, but more because existing roads are becoming of greater value with the progress of the country and the growing volume of rail traffic. To some extent this enhancing value of railroad property is being capitalized by the issue of new securities. During the year 1900, for instance, when there was a very large increase in capital, amounting to $457,000,000, there was probably not over $120,000,000 used in building the 4,051 miles of new roads; the remaining $337,000,000 represented a higher 7 82 AMERICAN RAILWAY TRANSPORTATION capitalization of roads previously constructed. The recent increase in capital, however, does not equal the total growth in the value of railroad property. Many stocks formerly issued have become more valuable dur- ing the past few years. In the case of many American railroads built after 1850, particularly in the Western and Southern States, the stock represented very little investment. Most of the money used in construction was secured by the sale of bonds, the stock being sold cheaply or given as a bonus to the purchasers of bonds. The stock thus cheaply secured gave investors the possibility of large gains through an increase in the value of the stocks, should the railroad develop a large traffic. Stock sold by a company for less than its par or face value is called " watered stock," the amount of water in the stock being the difference between its selling value and its par value. The stock of many American railroads has been largely watered. One evidence of this is the fact that in the highly pros- perous year of 1900 less than half the railroad stock of this country received any dividend, and in 1901 only about 51 per cent received dividends. In 1897 only 28 per cent of the stock received dividends. The diagram shows for the decade 1890-1900 the total amount of rail- road stocks and bonds, ^ the amount of stocks receiving dividends, and the capitalization and funded debt per mile of line. Some stocks on which no dividends are received may have a selling value for speculative purposes, and others from which no income is now obtained may represent a real, although unfortunate, investment; but in general, non-dividend stocks stand for water instead of real invest- ment. Moreover, many stocks receive small dividends and are quoted on the market much below par. They also consist largely of water. It is thus evident that 1890 1891 1892 1893 1894 1895 1896 1897 1898 1899 J 900... 11,500 11,000 iond|^ Sflcf ^^^^ -S^ »n^ ^<^^unded Oeb^ ^^ - 10,000 9,500 9,000 (/) 6,000 a: J 5,500 _J .05^ ^^ ^^ ■ 1 ^^ 4,500 li. ° 4,000 CO z o Ij 2,800 _J S 2,600 2,400 2,200 2,000 1,800 1,600 1,400 1,200 Capital ;:iiii . " Bonds 1 / / / / ^rnount of Stock f^s, ■ /' ^ ^l Divide nds. ^ ^ "" ^"^ -^' and — owr»®^ — by Railroad "'^-- ^^oo^^ 1 $70,C00 65,000 60,000 55,000 50,000 45,000 . 40,000 35,000 30 000 Stocks and Bo/ids Per Mile of Li le. Funded Debt per M lie of Line. 25,000 "sVocV per "'Mi|e""of Line. American Eailway Capitalization, Dividends, and Funded Debt, 1890-1900. 84 AMERICAN RAILWAY TRANSPORTATION American railroad stocks have a par value greater than the real capital received by the companies issuing the stocks. This is not true of some railroad companies which have closely restricted the issue of stocks and have sold them at or near or above par. Nor is it equally true of all sections of the United States, there being less fictitious value in the stock of the N^ew England roads than in those of any other part of the country. The Middle Western States, comprised in Groups VI and VII of the Interstate Commerce Commission's report, follow New England, while the railroads in the Pacific and South- western groups have the greatest showing as regards the amount of water in their stock. (See map.) These facts are corroborated by an investigation recently made by the Interstate Commerce Commission. In February, 1901, the United States Senate called upon the Interstate Commerce Commission for a statement comparing the par and market values of all classes of railroad securities during the year ending June 30, 1900. The report, made by the commission February 24, 1903, indicates that the $10,911,968,970 of securities (par value) whose market values could be ascertained, had a total average market value in 1900 of $8,351,103,523; but the commission is careful to point out that the figures are only approximately correct. There were securities with a par value of $812,066,859 whose selling value could not be ascertained. Moreover, the commission calls attention to the fact that the prices paid for the securities bought and sold can not safely be accepted as the measure of the value of the securities not on the market; and also that the values of the securities listed on the stock-markets are not necessarily " a just measure for the valuation of the property." However, in spite of the recognized limitations of the facts presented in the commission's report, the data there presented indi- 86 AMERICAN RAILWAY TRANSPORTATION cate tliat there was in 1900 a considerable difference between the market and par values of railroad securities. Market values, of course, depend mainly on the income obtained from the securities; but if stocks and bonds had uniformly been sold at or near par, the comparison of par and market values in 1900 would have shown the market values to have been greater than the par values. In addition to the motive for stock watering cited above — the distribution of stock among bond purchasers gratis or at a low price — there are three other incentives to the issue of large amounts of stock. In financing corporations it has been found that greater profits can be secured from the sale of large amounts of stocks and bonds at a low figure than from the sale of small issues at a high price. Investors prefer securities affording opportunities for speculative gains. Ten million dollars of 3-per-cent bonds will sell for more than $6,000,000 of 5-per-cent bonds, although the income at the beginning would be the same from each investment. Another motive for stock watering is the desire to capitalize the future growth in the, earnings and value of the property; the large volume of stock is not issued by the company for immediate sale, but to be held by the individuals com- posing the company in order that they may have an ample basis for the distribution of future profits which they anticipate will be large. This plan of large capitali- zation also enables the company to conceal from the general public the real amount of its profits. Large profits are secured from low rates of dividends and from securities having a low valuation, and this is advantageous from the investor's standpoint in a business such as rail- road transportation, where the charges for services are subject to public regulation. The men who " promote " and underwrite new cor- porations or the consolidation of competing companies RAILWAY CAPITAL Si have derived special gains from the device of stock water- ing. The business of the promoter is to organize a cor- poration or a combination of corporations and to induce those affected to agree to the conditions of organization. If several companies are to be united, the promoter first secures from each company an option for purchase at a fixed sum; and then he fixes the capital of the new con- solidated corporation at a sum much in excess — usually about double — the total capital of the constituent con- cerns. The several companies are paid in cash or with preferred stock, and more or less common stock is usually thrown in as a bonus. A large share of the common stock is retained by the promoter to remunerate him for his services. The promoter is usually paid in watered stock, from the sale of which his profits are derived. To insure a sale for the stock, a banking-house is secured to underwrite the stock of the new company. The banker agrees to sell a certain amount of stock at a fixed price, or, failing to do so, to take the stock he does not dispose of. The underwriter sometimes guarantees the bonds of the new company. His services are of great importance to the promoter and the company, and he receives large pay, either in the form of cash or of stock. In many instances the promoter and the underwriter are the same individual or business organization. The methods by which stock watering may be accom- plished are numerous. A generation ago, when the stand- ards of railroad financiering were lower than they now are, the securities of a railroad were sometimes increased at the will of speculators for the purpose of manipulating the market. The history of the Erie Railroad and other transportation corporations, when in the hands of spec- ulators and unscrupulous operators, affords conspicuous examples of fraudulent practises.^ ^ Cf. Chapters in Erie, by Charles Francis Adams, 88 AMERICAN RAILWAY TRANSPORTATION Another fraudulent method of dealing with stocks and bonds much in vogue between 1860 and 1880 con- sisted of awarding large amounts of securities to con- struction companies which were composed of officials of the railroad corporation. One of the most noted construc- tion companies of this kind, though only one of many, was the Credit Mobilier, to which the contracts for build- ing the Union Pacific Railroad were let.^ This method of defrauding the stockholders not in the ring of inter- ested ofiicials has a parallel in the exorbitant payment of securities to the syndicate of bankers that finances the enterprise of constructing a new road or assumes the task of reorganizing an insolvent company. According to the report of the Industrial Commission, " the original South- ern Pacific cost actually only $6,500,000; although it is a matter of record that $15,000,000 was paid to a construction company, and the bankers' syndicate, which financed the road, received $40,000,000 in securities, or an average of $6 in bonds and stock for each dollar of actual cost." These methods of stock watering are not characteristic of railroad construction and financier- ing to-day, but they have not been entirely eliminated. Stock watering is accomplished at the present time in a variety of ways. One method is to distribute a new issue of stocks among the stockholders either as a bonus or to sell it to them below par or for less than the price which could be obtained in the open market. A railroad is sometimes in the fortunate position of having a revenue sufficient to pay large dividends and to add largely to the undistributed surplus. By increasing the stock the rate of profits or dividends can be kept at a lower figure, and any un- needed surplus reserve can be turned over to the stock- holders. ' See histories of the Union Pacific by Davis and by White; also The Credit Mobilier by Crawford, RAILWAY CAPITAL 89 Railroad companies having an undesirably small rev- enue sometimes add to their funded debts, and thus to their capitalization, bj converting current liabilities, such as bills payable, wages and salaries due, into interest- bearing scrip. This kind of financiering is a temptation to which companies are apt to yield during protracted periods of business depression, but it violates the prin- ciple that current expenses should be paid from current earnings. The retirement of bonds by the issue of stocks much in excess of the amount of the bonds canceled is resorted to by some companies. This is done for two reasons. By reducing the funded debt, the fixed charges are lessened, and the difficulties of weathering financial depressions are made lighter. Similarly the large volume of stock is useful in times of prosperity, because it affords an ample basis for the distribution of large profits in divi- dends at a low rate per cent on the capitalization. In the reorganization of insolvent companies, the fixed charges are frequently reduced by the substitution of stocks for bonds. The consolidation of railroad companies is frequently accompanied by a large increase in capitalization. This has been notably the case with the consolidations that have taken place since 1898, and has been even more characteristic of the mergers of street-railways than of trunk-line railroads. In the recent purchase of the Chi- cago, Burlington and Quincy by the Great Northern and ^N^orthern Pacific interests, and in the transfer of the Lake Shore to the New York Central, the stocks of the selling companies were exchanged for bonds of the purchasers, $2 of bonds being given for each dollar of stock. The Northern Securities Company, organized in 1901 to hold the securities of the Great Northern, Northern Pacific, and Burlington systems, exchanged 90 AMERICAN RAILWAY TRANSPORTATION $180 of its stock for $100 of Great Northern stock and $115 of its stock for $100 of Northern Pacific stock. Competing railroads are consolidated for the purpose of stopping the expenses due to competition, and to intro- duce a more economical administration of the properties. These anticipated savings are usually capitalized in ad- vance oj the issue of additional securities. There are differences of opinion as to whether the watering of stock should be practised by railroad compa- nies or permitted by the Government. There is little doubt that the practise gives greater scope for specula- tion, some forms of which are decidedly objectionable. The company with a large capitalization and a conse- quently low rate of dividends has a plausible reason for opposing the payment of higher wages to its employees and for objecting to a reduction of the rates and fares charged the public. The actual relation of capitalization to railway charges is difficult to determine, and the discus- sions of the subject show a difference of views among stu- dents of transportation, but there is no doubt that a rail- road company whose rate of dividends is small is Ifess liable to have its charges reduced by public authority than it would be if its regular dividends showed a high rate of profits. The excessive watering of stock is certainly opposed to conservative railroad financiering. The best managed companies have carefully limited the amount of their securities, both bonds and stocks. The promoter and speculator find their opportunity in the practise of watering stock, but the general investor and the respon- sible managers of railroad properties are safer under a policy of restricted capitalization. The manner and extent to which railroad capital should be limited by public regulation may be understood better after considering the basis which should be accepted in determining whether a railroad is or is not overcapital- RAILWAY CAPITAL 91 ized. Diffetent views obtain as to the proper basis for capitalizing a railroad. Some persons claim that the original cost of the property and the money actually invested at the beginning and subsequently should deter- mine the amount of capital issued. Others hold that the earnings of a railroad afford the true measure of the volume of capital that may safely be adopted, while some persons consider the true basis of capitalization at any given time to be the cost of reproducing the railroad — the sum it would require to obtain the right of way, construct the line, and acquire the terminals. The most natural supposition is that railroad capital should represent the cost of the property, the money actually invested, that stocks and bonds should be issued only for money paid in, and that their par value should approach as closely as practicable their actual value at the time of issue. This theory is not altogether satis- factory, however, because some roads have cost more than they ought on account of inefficient or fraudulent management, or because they were constructed at a time when labor was scarce, materials expensive, and interest rates high. Under such conditions cost gives a capitali- zation higher than would be just to the public at the present time. Likewise, some roads have been very eco- nomically built, and have been managed with such abil- ity and honesty as to have had their value greatly increased. Business ability should have its rewards, and a rule regarding capitalization which would not give men the results of their efforts would be neither just to them nor in harmony with the best interests of the public. The basis for capitalization preferred by the men interested in railroad management is the earning capacity of the property. The selling value of the railroad is de- termined by its earnings, and that its selling value, present 92 AMERICAN RAILWAY TRANSPORTATION and probable, may justly be fully capitalized, is the con- tention of those who accept this theory. This plan of capitalization enables a railroad company to obtain money from investors more readily, since many persons prefer to buy securities at a discount because of the chance of securing profits from the advance in the price of the securities with the growth of the earnings of the rail- road. There are certain objections to this theory of capitalization, one being that the excessive capital conceals real profits, and makes it difficult for the men who serve the company or the public served by the corporation to determine whether the men who own the property are receiving more or less than a just return on their invest- ment, whether the company, the employees, and the public are sharing equitably in the benefits. To permit a railroad company to secure the greatest possible earnings from the public, and to cover up the relation of profits to actual investment by issuing stocks or bonds without limitation, is not in accord with present views as to the public obli- gations of carriers. Does cost of reproduction or duplication afford a sat- isfactory and fair basis for capitalization? This theory has been accepted by some of the State railroad commis- sions, and has been followed by several courts. The Interstate Commerce Commission, however, and the United States Supreme Court have not adopted this rule. In order to determine what rates a railroad company may reasonably charge, the courts and commissions are obliged to decide how much capital is justly entitled to receive profits from the company's earnings — i. e., they are compelled to determine the actual and just value of the property; for it may be assumed that its owners may properly issue capital to the amount of a just valua- tion of the railroad. The amount of money invested in the property does not reveal the true present value for RAILWAY CAPITAL 93 reasons already stated. The earning capacity of the rail- road can not equitably or logically be made the sole criterion of value, because the rates, and hence the earn- ings, should depend to some extent at least upon the amount of capital justly entitled to profits. The solution of this difficult question seems to be found by taking into consideration both the cost of reproduc- tion and the earning capacity in determining the basis of capitalization, and this method has been followed in a general way by numerous courts and commissions. Defi- nite rules for applying this method were worked out by a State Tax Commission, in Michigan, in 1900. In deter- mining the value of the physical properties of the rail- road — its road-bed, rolling-stock, terminals, etc. — the cost of duplication was made the basis of valuation. The railroad company^s franchise, the special concessions granted to it by public authority, and the special com- mercial opportunities upon which its business depended — that is to say, all the non-physical or immaterial ele- ments of its property — were valued in accordance with their earning capacity. To ascertain the value to be attributed to these non-physical properties, a method suggested by Prof. Henry C. Adams was followed. Ac- cording to the method devised by Professor Adams, the value of these immaterial properties " was determined (1) by deducting aggregate expenses of operation from gross earnings and adding the income from corporate investments; (2) by deducting from the total income thus obtained an amount properly chargeable to capital — that is, a certain per cent on the appraised value of the phys- ical properties — rents paid for the lease of property oper- ated, and permanent improvements charged directly to income; (3) by capitalizing the remainder at a certain rate of interest.'' ^ * Report of Industrial Commission, vol. xix, p. 412. 94 AMERICAN RAILWAY TRANSPORTATION This method of valuation gives a basis for capitali- zation that seems to be equitable to all parties in interest — the public, the investor, and the railroad company. The valuation thus determined also affords a fair basis for taxation. The excessive capitalization of their properties by many railroad companies for the purpose of securing the greatest possible amount of money from the investing public, and the speculative — sometimes fraudulent — manipulation of railroad securities, have probably made the cost of securing transportation services greater than it need have been, and have made railroad bonds and stocks a much less reliable form of investment than they might have been. The desirability of careful and intel- ligent public regulation of the issue of stocks and bonds by railroad corporations seems manifest. Some of the States have undertaken to do this. Massachusetts has the most effective laws. The dis- tribution of stock as a bonus to purchasers of bonds has not been permitted, and an anti-stock-watering act, passed in 1894, stipulates that " no railroad corporation or other public service company shall declare any stock or scrip dividend, or divide the proceeds of a sale of stock, or scrip, among its stockholders, or create any additional stock or issue certificates thereof to any person, unless the par value of the sanie shall be paid in cash to the treasurer." The administration of the law as affecting railroads is in charge of the State Railroad Commission, and the statute has accomplished good results. Texas has a law limiting the amount of bonds and other indebtedness to what the State Railroad Commis- sion shall deem a reasonable valuation of the railroad property, and Minnesota has a statute requiring that, all stock issued by a new railroad company must be sold at par, and that there shall be no increase of stock without RAILWAY CAPITAL 95 the conseiit of the State Railroad and Warehouse Com- mission. In Kentucky railroad companies can increase stock only with the consent of the Railroad Commission, and the amount of indebtedness must never exceed the total cash paid in. Several other States have laws by which some control over railroad capitalization is exer- cised, but the Massachusetts statute is the only one that meets the situation adequately. Many persons, including some railroad officials and State commissioners, believe that the Federal Interstate Commerce Commission should be endowed by Congress with powers over the capitalization of interstate railroads similar to the authority possessed by the Massachusetts commission concerning the issue of securities by the cor- porations of that State. There may be some question as to the practicability of the execution of such a na- tional law at the present time, unless it is preceded by much other legislation enlarging the duties and pow- ers of the Interstate Commerce Commission; but there are excellent reasons why the several States should promptly legislate to prevent the evils resulting from stock watering. A law enacted by England in 1900 to enforce pub- licity and responsibility in the organization and manage- ment of corporations promises to restrict the objection- able practises sometimes adopted by the " promoters " of companies and by directors who may desire to manipu- late the affairs of the corporation in their own rather than the stockholders' interests. It is a detailed statute requi- ring much greater publicity in the management of cor- porations than is customary in the United States, but its provisions are worthy of careful consideration by those who may attempt to deal with the question of public regulation of the capitalization of the railroads in the United States. L 96 AMERICAN RAILWAY TRANSPORTATION REFEEElSrCES FOR FURTHER READING Cleveland, F. A. Funds and their Uses. 1902. Meade, E. S. Trust Finance. 1903. Report of the Industrial Commission. Vol. xix, pp. 397-419, 1902. Statistics ot Railways of the United States. [An annual report by the Interstate Commerce Commission.] Senate Document No. 178, Fifty-seventh Congress, SGcond Session. [A report made February 24, 1903, comparing the par and mar- ket value of railroad securities for the year ending June 30, 1900.] CHAPTEK yni EAKmNGS, EXPENSES, AND DIVIDENDS The revenues obtained by tbe railroad companies are derived mainly from the freight and passenger services. The payments received for the transportation of mail and express matter are of considerable amounts, but as the mail and express cars are always attached to passenger- trains, the "receipts which the railroads obtain from the Government and the express companies for running those cars are credited to the passenger service. In connection with both the freight and passenger services there are earnings not derived from the operation of trains, such as receipts for the rental of cars and terminal facilities of various kinds. Moreover, some railroad corporations lease their tracks to other companies and own the stocks or bonds of other companies — both railroad and industrial — and the rentals and the interest or dividends on these investments constitute sources of revenue. A general grouping of railroad revenues may be made into (1) those derived from the operation of trains, and (2) those obtained from interest on loans and invest- ments, and from rentals. In the accounts and reports of railroad companies each of these groups is divided into several subclasses. The annual statistical report pub- lished by the Interstate Commerce Commission summa- rizes the earnings of railroads as is shown by the table on the following page. 8 97 98 AMERICAN RAILWAY TRANSPORTATION O o •si GO I ^ ^ CO (M tH o tH CO OS C5 lO I> 1 $ lO 00 lO CD iO (M t- 00 CO 1— 1 u 00 tH Oi CO 1—1 1-1 1—1 t- 00 -* T-I o CO OS OS CO 00^ o 00 la CD 00 OS CO ?D t' c CQ i T- 00 cc -*" so" od" os' oo" s cc CO 00 t- CO cc ■r- lO 1—1 £- ^^ ■^ 1—1 I-T § 6 o rt 1 1 1 o o o i o to 1 CO fcJD a ^ So 1 1 J p 'S 1 1 o a o i .2 1 a '5 a -1^ H 8 1— 1 H P- S p^ o ^ O o p 1 EARNINGS, EXPENSES, AND DIVIDENDS 99 It will be observed that tbe table gives separately the income from operation and from " other sources/' and that of the total earnings and income of the railroads barely one-fifth is derived from the transportation of passengers, and that about two-thirds is obtained directly from the freight business. One-twenty-fifth of the total receipts comes from the mail and express services, and one-tenth from sources of income distinct from the oper- ation of trains. The " gross " or entire income derived from the operation of the American railroads in 1900 amounted to $1,487,044,814, and in 1901 the total was $1,588,526,037. The table gives the income from " other sources " as having been $162,885,071 in 1900, and $179,746,449 in 1901, but these figures for income from other sources involve duplications, if all the railroads of the United States be considered as one system. To eliminate these duplications it is necessary to subtract the sums received for the lease of roads ($99,429,619 i^ 1900, and $111,- 637,907 in 1901), because they represent merely the transfer of funds from one company to another — from one part of the American railroad system to another. The same is true of sums paid by one company to another as interest on bonds and dividends on stocks, which amounted to $30,929,436 in 1900, and to $34,619,894 in 1901. The subtraction of these sums from the total income from other sources gives " clear income from investments " amounting to $32,526,016 in 1900, and to $33,488,648 in 1901. Considering the railroads of the United States as a single system, the actual income in 1900 and 1901 is shown in page 100. The accompanying figures refer to the " gross " earn- ings and income. An examination of expenditures will show what disposition is made of the revenues. Payments are made to meet three general sources of expense. The 100 AMERICAN RAILWAY TRANbPORTATION first and largest is " operating expenses," of which there are four large subclasses: niaintenance of way and struc- tures, maintenance of equipment, conducting transporta- tion, and general expenses. The second general source of expense is " fixed charges " — the necessary payments for interest on funded and floating debts, for rentals, for taxes, and for the sinking-fund, if provision is made for such a fund. The third expense is for the payment of dividends, first on the preferred stock and then on the common. Comparative Income Account of the Railways of the United States, considered as a System, for the Years ending June 30, 1901 and 1900 AMOUNT. TFKM. 1001. 1900. Increase. Gross earnings from operation. Clear income from 1 n vpQf.m pn 1 4 $1,588,526,037 33,488,648 $1,487,044,814 32,526,016 $101,481,223 $1,622,014,685 962,632 $1,519,570,830 Gross earnings $102,443,855 The surplus remaining after paying the operating expenses and fixed charges is generally called the net earnings. The net earnings represent the profits of the business, and from them are first subtracted the amounts required for dividends on the preferred stock, next such a sum as the company may think best to add to the sur- plus or to the " profit and loss " account, and then the remainder is distributed among the holders of common stock. The statistical report of the Interstate Commerce Commission summarizes in the following tabular form the expenditures of railroad companies for operating expenses and fixed charges: EARNINGS, EXPENSES, AND DIVIDENDS 101 O Oi i 00 i so . OS ^ cc CO 03 t- "^ CO T— 1 05 1 ^ CO oc fe Od la cc OC IC t- 1> t' tH t-" o (2 O tH 1 . TH ^ cc J> o: t- CC '"t ^ 1 oc 5S ^ JC 4 o tr- o; »o t— h'S s l-O o: Oi OC o: oc CO rn" 2 g CO CO »c 00 (M QC eg cc c CO o CO lO oc CO t- o E oc CO rH ■^ ^ CO cc oc o; oc '^ ^ CO CC oT _^ (M t- oc CQ O- IC ■rH CD S Ol tH i^ "^ c -* 03 CJ IC CC rH CO o u: oc ■^ •r- o: T-^ • lO o cc ^ C o »c CD i ^ 5C 03 c> O" CC ->* t- r-l o !/ 1 CO Pi P -M bO ^ tn H O c 2 IT3 1 1 ■(J 1 1 g o \ & g 1 2 o i ■^ '? c I OI bl c '1 II 11 IS i r9 c c c ■^ H .s r og « CO 08 CI 03 «p o a 9 O "J; IS li Is '3 -M P( -43 t2 42 nr -M c p r^ GO O (MOO o QO ttT^" (M'~ CO €^ €^ m coos ^-^ 00 • •1— 1 o J> ^ c^oo ^00 (M s tf TjT (M-^ co" m^ €^ €©= o -*-rH lO n 05 t- 1-1 00 OS -l-HOO co^oo T-H S a^" (M" II OS CO CD CO OS S o«o 'rj^ T-H la 1—1 1—1 os__oo I- § •sf-'^tr T-T (M" €^ €©■ €©= O CO t- iO (M 1 lO 00 50^ 1—1 o o OS^t- t- 1 P4 (^TtJ? ■i-H (M" €©■ €©■ €©■ §^ * CO t- o g CD^^" (M' co" «3. €©■ &> iO O lO CO (X) . ot- CO OS Oi 1 o^o Ti< t- I- OS i5i 5§ ^^ 1—1 €©■ 1—1 fl • ■U b8 fi o • ss f-" O O) CQ ^& §^^ aS S:S a o 1 2 bo 2<= ® o 1 M O EH M »3 o O t« o 53 1— 1 1 will sell at a low figure and its bonds will not be sought after by investors. The price of securities rises with the increase in earnings, but the two movements are not usu- ally parallel. Larger net earnings come during peri- ods of prosperity, and it is then that speculation is very active; so active, indeed, as usually to make the prices of the stocks most dealt in rise much higher than the gain in net earnings would seem to justify. Similarly when net earnings fall oil the speculative demand for the securities affected sud- denly ceases and their prices drop out of proportion to the decline in earnings. The fluctuation in market value is much less for bonds than for stocks, but the bonds even are affected to a con- siderable degree by specula- tion, because speculation in the stock may result in changes of policy as re- gards capitalization or man- agement that will seriously affect the value and market- ability of the bonds. In the case of most rail- EARNINGS, EXPENSES, AND DIVIDENDS 107 road companies the purchase of the bonds as well as the stocks is usually considered a risky venture for those seek- ing a safe and permanent investment. There are several companies whose bonds are in demand from insurance com- panies, savings-banks, trust companies, and other fiduciary organizations having funds to invest. There are also some companies whose stocks are considered fairly safe. In general, there has been a marked improvement in the merits of railroad securities as forms of investment, but speculation in them is still so active and so little restricted by public regulation as to make them less satisfactory and less beneficial socially than they might be as repositories of the savings of masses. EEFEKENCES FOE FURTHEE EEADIN^G Statistics of Railways of the United States. [Annual report by the Interstate Commerce Commission.] Report of the Industrial Commission, vol. xix, pp. 267-273. PART II THE RAILWAY SERVICE CHAPTEK IX THE FREIGHT SERVICE The transportation service performed by tlie railroads includes the movement of freight, the carriage of persons, and the transmission of mail and express matter. Each of these services merits careful consideration. Whether viewed from the standpoint of public bene- fit or considered with regard to the volume of business done and profits received by the company, the transpor- tation of freight is the most important service performed by the railroad. The income from the passenger busi- ness is about one-fifth of the total earnings and income of the railroads in the United States, while the receipts from the freight amount to seven-tenths. Moreover, social welfare is more dependent upon cheap and unfet- tered movement of commodities than upon inexpensive and speedy means of travel; for, however important it may be that the relatively few people who may at any one time desire to take a journey should be able to reach their destination promptly and comfortably, it is of incalculably greater consequence that producers should be able to dispose of the commodities upon the sale of which their livelihood depends and that consumers should have the power of drawing upon distant as well as near sources of supply for the satisfaction of their wants and the gratification of their desires. The volume of freight transported increases rapidly with the progress of civilization and the diversification 111 112 AMERICAN RAILWAY TRANSPORTATION of men's wants. The freight business is carried on to enable men to secure what they want; and the more complex their demands the more goods will be produced and transported. The growing demand for the freight service has furnished a most powerful stimulus to invent- ors and engineers to lessen the obstacles to the move- ment of commodities by improving the tracks, cars, and locomotives, and making other changes in the railroad mechanism whereby the costs of transportation have been reduced to their present small amount. Whether the endeavor of railroad companies to increase the speed of their passenger-trains or their efforts to lessen the costs of freight movement have been the more potent incen- tive to mechanical improvements, it would be impossible to say; but the results accruing to society from those improvements have come more largely from the greater facilities for the shipment of goods. During the year ending June 30, 1901, the railroads in the United States reported a freight traffic of 1,089,- 226,440 tons. This is a greater tonnage than shippers actually turned over to the roads, because the same freight is often handled by more than one road and duplications result from taking the total of all the traffic of all the companies. After making the deductions nec- essary to eliminate the duplications, it is found that the traffic actually received from shippers during that year amounted to 583,692,427 tons. The average dis- tance traveled by each ton of freight was 128.53 miles, and the number of tons carried one mile — or the " ton- mileage ''—was 147,077,136,040. To handle that vast tonnage of traffic required nearly 29,400 freight and switching locomotives and more than 1,600,000 freight- cars. The mines from which the coal, iron ore, and other minerals are taken furnish more than half the tonnage THE FREIGHT SERVICE 113 handled by the railroads, but as this traffic is carried at low rates per ton the receipts from this business amount to much less than half the total freight revenue of the railroads. Manufactures supply nearly one-seventh of the tonnage, the products of the forest nearly one- eighth, and the products of agriculture about one-ninth. The remainder of the traffic, comprising somewhat less than one-seventh of the total, consists of animal products, general merchandise, and miscellaneous unclassified com- modities. There are no figures obtainable regarding the value of the goods which the railroads transport, but if their value does not average more than $25 a ton, their total worth would be nearly $15,000,000,000. The articles comprised under the seven headings men- tioned in the preceding paragraph include many thousand kinds of commodities. It is necessary for the railroad companies to group the goods into a small number of classes as a basis for fixing rates of charges for transpor- tation. To have a separate rate for each of 9,000 or more commodities and the rate on each of them differ- ent between each two termini would be utterly confusing to the freight-agents and to the shippers. Until 1887 nearly every large railroad had a classi- fication of its own, but now most business is handled by one of three classifications. In the section east of the Mississippi River and north of the Ohio and Potomac — that is, in the New England and trunk line territories — a classification called the " Official " is in force. Its con- struction, revision, and supervision are in charge of a committee with headquarters in 'New York. South of the Ohio and east of the Mississippi the " Southern '' classification is in operation under the control of a com- mittee located at Atlanta. In the country west of the Mississippi the " Western " classification prevails, admin^ istered by a committee in Chicago. Some of the through 9 114 AMERICAN RAILWAY TRANSPORTATION business to and from the Pacific coast points is done under a classification issued by the Transcontinental Freight Bureau, whose offices are in San Francisco. In several States — Illinois, Iowa, Georgia, and some others — classi- fications have been prescribed by the State Railroad Com- missions, the classification of each State applying only to the business carried on entirely within its boundaries. The Western and Southern classifications group com- modities into ten classes. The Official nominally has six classes, but the grouping is really into double that number. The class to which an article is assigned in these classifications is determined by a variety of con- siderations. The class given an article affects the rate of freight it must pay, those commodities grouped as first-class paying a higher rate than those catalogued as second-class, and the second-class articles are obliged to pay heavier charges than those given a lower rating. The decision as to the class to which an article shall be assigned is in general determined by v>^hat rate the article under consideration ought to pay to remunerate the railroad for the expenses involved in its transportation, and also by what the article can pay — that is, whether it is a commodity of high value for the transportation of which shippers can afford to pay a relatively high rate. Arti- cles are put into higher classes if their transportation is especially expensive to the railroads and if the value of the service to the shipper is large. The classification of freight is closely connected with the subject of rates, and the factors determining the classification of commodi- ties wall be indicated more clearly in the chapters on rates. In all classifications the majority of commodities is placed in a different class when shipped in car-load quan- tities than when offered to the railroad in less than car- load lots. The class to which the article is assigned, and THE FREIGHT SERVICE 115 consequently the rate it must pay, are made lower for the car-load quantity than for smaller consignments. The reason for this is that business can be done on a large scale more economically than on a small scale. The producer who ships in car-load quantities can usually sup- ply the railroad not only with a large amount of freight, but with a regular volume of business, and can thereby enable the carrier to perform the service at much less cost per ton than business can be handled for the small shipper. To illustrate the manner in which commodities • are actually grouped in freight classifications and to bring out some of the facts influencing the rating of commodi- ties, there have been compiled in the following table a few extracts from a recent issue of the Official classifica- tion. The commodities are taken at random from the detailed classification comprising about 9,000 commod- ities. Extracts from the Official Freight Classification Description op Article. Galvanized-iron cornices in section not set up and crated. Galvanized-iron cornices in section set up and crated Chairs, cane or splint, set up Clothes- wringers, not boxed Fruit-evaporators Clothes-reels, boxed Clothes-wringers, boxed Clothes-wringers stock in the white Clothes- wringer stock, rough Flour in quantities less than 25,000 pounds. . Flour in quantities of 25,000 pounds and over Class for less than car-load lots. Class for carload lots. 4 X 1st class 3 3 X " ' 3 2^ X " ' 2 X " ' n X " ' 4 1st ' 5 2d ' 4 3d ' 5 4th ' 6 5th ' 6 It is evident from the above brief table that the classification of commodities is influenced by the space they occupy, and is also made to depend upon the value 116 AMERICAN RAILWAY TRANSPORTATION of the articles. The expense of transportation to the shipper is made to vary with reference to the value of the commodities, and is in most cases conditioned upon the quantity of shipment. The difference in classification, and consequently in freight charges, between less than car- load and car-load quantities is a wide one, much greater than the variation in classification and rates for the lower groups. It is never practicable to classify all commodities, and every railroad transports many articles — as, for ex- ample, live stock and coal — at special or commodity tariffs. The articles thus treated are invariably handled in car-load lots, and in many cases they are not included in the classification, because special conditions of competi- tion between the railways and the carriers by water require that the articles should be especially favored by the railroads in order to prevent the diversion of the traffic to the lake or ocean vessels. The competition between the railroads engaged in transcontinental traffic and the lines of vessels navigated between our two sea- boards gives rise to a well-known instance of the exemp- tion from classification of a large number of commodi- ties. The reason which most frequently influences a rail- road to exempt a commodity from classification is the desire of the railroad to foster the development of new and special industries. Men who are engaging in new forms of production or are opening up previously unde- veloped resources are constantly beseeching the railroad companies for special or commodity tariffs. The railroad companies thus besought by the shippers frequently have difficulty in deciding what course to follow. The rail- road is always desirous of promoting as far as possible the industrial development of the section of country which it serves, but it is at the same time equally desirous of maintaining a schedule of freight charges high enough THE FREIGHT SERVICE 117 to yield the owners of the railroad a fair profit upon their investments. The shipper desires to secure the lowest possible rate ; the railroad company endeavors to maintain a profitable rate. Generally, however, the shipper suc- ceeds in getting the commodity tariff. Some roads have more than a thousand special or commodity tariffs; the Niew York Central Railroad, for instance, in 1899 had ,1,370 such tariffs in force, and the opposition of many shippers was aroused when at the beginning of 1900 a revision of the classification was made, by which 175 of these special tariffs were terminated. Efforts have been made to unify the several freight classifications now in force and to substitute for them one uniform classification. If this could be done suc- cessfully it would be highly desirable, because it would enable producers of all commodities in different parts of the country to know accurately what would be the cost of getting their commodities to the market and how much freight they would have to pay upon the supplies brought to them by the railroads. The unification of the classification would also make it easier for shippers and for the State to detect discriminations. The enforcement of a published schedule of rates and the equal treatment of all shippers could be much more readily brought about. Many people, including the members of the Interstate Commerce Commission, have favored Federal laws requir- ing the railroads to adopt a uniform classification, and, in the case of their failure to do so, empowering the Interstate Commerce Commission to promulgate such a classification. Such a law came near being enacted in 1889; but Congress, upon the advice of the Interstate Commerce Commission, which thought the time had not then arrived for compulsory action, gave the railroad companies an opportunity to attempt to work out a single classification for the entire country. An earnest 118 AMERICAN RAILWAY TRANSPORTATION effort was made by the railroad companies during the suc- ceeding two years to accomplish this result. The attempt, however, was not successful. The differences in the three main classifications represent such variations in industrial conditions in different parts of the United States that the obstacles in the way of a uniform classi- fication of the productions of different parts of our wide country seem at the present time to be insurmountable. The unification of present classifications would require the complete readjustment of rates and would funda- mentally alter the existing conditions of competition be- tween rival producing and manufacturing centers in dif- ferent parts of the country. It would probably not be an impossibility to rearrange freight charges on the basis of a uniform classification in such a manner as to mini- mize the interference with industrial competition, particu- larly if a large number of articles were omitted from the classification and were given special or commodity tariffs. There are, however, serious objections to increasing the already large number of special tariffs, and on the whole it seems desirable to postpone uniform classification until a time when it can be worked out with less disturbance to business conditions. Freight is usually spoken of as through and local. In a popular sense through freight means that which is transported a long distance, and local freight that which is moved only a short distance. The railroad companies, however, use the words in a more technical sense. By local freight they mean that which originates and termi- nates upon the same line — that is, freight carried between two points on the same road. Through freight is that which comes to the railroad company from some other railroad, or that which, originating at some point on the line, is turned over to some connecting carrier — that is to say, through freight is that in the transportation of THE FREIGHT SERVICE 119 whkh more than one carrying company is employed. In genera], the technical use of the" terms corresponds with their popular meaning, but not always so. Some freight may travel hundreds of miles, pass State boundaries and move between great centers of population, and yet not leave the original line; while through freight may move only a short distance. The distinction between through and local freight is an important one for the railroads, because they are obliged to employ different methods of accounting when the business is handled jointly with another corporation than when it is confined entirely to their own line. The great volume of freight business done by the rail- roads is conducted by the use of only a few business papers. The records kept are complete and are very simple. Upon delivering his goods to the railroad com- pany at one of its freight stations, the shij^per receives from the representative of the company a ^'receipt for freight'' similar in form to a bill of lading (page 122), except that the rate of freight is usually not entered. Large shippers furnish receipts for freight in duplicate or trip- licate form and the freight agent receipts the different forms, marking the second and third forms "duplicate " and " triplicate," or " copy." The shipper may send the original to the consignee or use it to secure a bill of lading. The second copy is retained by the railroad company, the third copy is kept by the shipper for his office records. It is customary for shippers to exchange the receipt for freight for a bill of lading ; but at places where no official is located who can issue a bill of lading the receipt for freight is issued and may be used for obtaining advances from banks, the same as bills of lading are used. The bill of lading is made out in triplicate, the original and one copy are given to the shipper, who keeps the copy and sends the original to the man to 120 AMERICAN RAILWAY TRANSPORTATION whom the goods are shipped — that is, to the consignee. The railroad company retains the other copy of the bill of lading. This bill of lading is in fact a contract which W CTt o m Kt rt Q. .E .S .9- .^ .^ 1^66 5 c a I O 5 CO o £0 • ro < "S I (0 •^ > c >. ° c M a: " o .^ ;! ■ 1 1 1 1 I j ! 1 ! 11 : : 11 S 1 i 1 i 1 1 1 i! 1 j i ji •s i 1 i 1 1 i ::::■•■ Jl i i 1 i i ! ^ i i 1 i i < 1 i 1 1 1 1 li t- 1 1 M I ! 1 s i i i t5 \ \ 11; ui : i 11 i i : 1 i i i o • i i w ! ^ j j j 1 • i i ! i i ! 1 1 } H i i 1 « 1 i ■ ■ i • 1 i i i i 1 • i i i i i 1 i ! i i i i 1 ; > • Z 1 1 1 1 I i 1 1 i 1 I E o O « 3 < i Z X u ^ THE FREIGHT SERVICE 121 the railroad makes for the transportation and delivery of the articles named in the bill to the proper consignee. The bill is usually negotiable, and it is customary for § o " 1 1 i i 1 h • ^ 1 1 s J OS ! : : : ; i "^^ S(2 s o Z J o Z g' 1 1 1 i = II W i 1 ^ 1 i Q <3 E j 1 i < • i 1 I 1 1 : Jl HM i 1 M 1 1 ^~' -N Q. ^ i ig i !j M- «i • i; c O u-g 1 o -$ 6 ■£ J 1 1 i i i-l c! T • 1 1 1 — ■ « o > u. 1 1 2 .9- .5o .5d w o *6 j_ i 1 ^• 1 1 > 4 i ^ (4 t i d o * 1 1 1 1 o 0. i ^ rif M 1 i 1 i o -J s 1 5 Jl " "O &) g '-^ 1 s § ^ CO f ° 1 O 5 § i 5 1 < z ■o i_ t> -5 •= i < CC go' E 1 i 5 oJ 1 j i ^ 2 t CO S ^ -o > -S « g ' Q. ■5 i i ■ C Q. J-Q- s 1 ii: ^ 1 ^ 2 > CL if -i § i j »? ^ "o ^ 1 o s ^ fl i 122 AMERICAN RAILWAY TRANSPORTATION shippers to deposit these bills Avith the banks, which accept them for the value of the property described in the bill and give the shipper credit to that amount. The bills of lading are of two general descriptions: " uniform " and " special." The uniform bill of lading, which is used o-ia-c-A. r. a. [BILL OF LADrNC] Pennsylvania Railroad Company. RECEIVED, lubject to the in efiect on the date of Umie of thii Bill of Lading, ^£/^f^^eri:«H»»l«»Mts.wli«imiim.) Fint Claas,j iint Clan. Received $..... to apply in prepayment of the charges on the property described above. m EHz W% a|3m ell 5 3^*00 c.?gr III sfl n\ in •3 1 in Sample Bill of Lading. for nearly all shipments, releases the carrier from lia- bility for any loss or damage to the goods that may result from causes beyond the control of the carrier. If the shipper wishes to insure himself against all possibil- ity of loss or damage he is charged a rate 20 per cent THE FREIGHT SERVICE 123 own goods To. Via Lading., Combined Weight of Car and) y/ a Lading for Engine rating, ( ._ _...->S^...Net Ton$. o— is-A. r. B. PENNSYLVANIA RAILROAD, Phila., Vilm. & Balto. Railroad, West Jeruy & Seashore lUilroaii, And Roads in later-Line STstem. From Shipper Consignee y^^^.ir... ^- ^i^. — higher, and this charge is purposely made high by the railroad companies in order to induce the shippers to send their goods at their risk. When the ^.M.M.x« h.,.^A.^M.^^ reach their des- tination the consignee presents the bill of la- ding which he has re- ceived by mail, pays whatever freight may be due the railroad com- pany, and receives the goods. The freight agent re- ceipts for the goods and makes out a way-bill such as is shown on page 125. This way-bill either accompanies the freight or is forwarded by mail. In the latter case the agent makes out a ^^ card way-bill,'' which is given to the conductor of the freight train by which the car is moved to the destination shown on the card way-bill. The railroad com- pany keeps account of the shipment by means of the "way-bill." Every shipment of freight is accompanied by a way-bill, stating the number and ini- tials of the car in which the goods are sent, giving the Destination Via Prepaid .. To Collect.. Marked Capacity of Car dj(2....6?.^/^..M. ESTIMATED WEIGHT. Mim. ACTUAL WEIGHT. Gross .MJd^^m, Tare..^^,..^/j:?^..bs. Net d/.Zm ibs. ^^...iQ^y^m/.2)^^.jmQ,K^ Transferred to „ Car No, . -..,-,^ At.._....„ _„ Date .„ __190 Sample Cakd W ay-Bill. 124 AMERICAN RAILWAY TRANSPORTATION • names of the consignor and consignee, the destination of the goods, a description of the articles and their weight, class, rate, amount of freight prepaid, and amount of freight to be collected. A copy of every way-bill made out by a station-agent fmust be sent to the company's auditor of freight receipts. If the shipment made is to be through freight, a " joint " or " interline " way- bill of merchandise is used. The specifications on this way-bill are the same as those upon the ordinary way-bill for local freight, but a copy of the bill must be sent to each of the railroads concerned in the ship- ment and to any freight association of which the car- rier may be a member, as well as to the company's auditor of freight receipts. When through freight is billed to a point that may be reached by two or more routes, the agent must specify the route the goods are to take. The " freight bill " and " notice of arrival " (pages 120 and 121) are used in the delivery of freight at destination. The freight bill is the statement of charges and is receipted by the agent when payment is received. The notice of arrival is the agent's notification to the consignee. To insure rapidity and regularity in the handling of the freight traffic, the railroad companies find a system- atic organization of the service necessary. A detailed record of the daily movement and whereabouts of all the cars in use must be kept. If each road used only its own cars it would be a relatively easy matter to keep this record, but as a matter of fact 'every road uses ^' for- eign " cars (those belonging to other companies as well as its own), and it has been found necessary to do this in order to expedite the movement of freight between distant points. If every company retained all of its own cars on its own lines, much of the freight shipped long %; = i5ll C-'l i i 1 Mill S3 ^1 II II 5 ;: j: 1 1 1 1 1 II 1 1 1 ii 51 1 1 1 1 5 ^ fx 1 i 1 ■^-1 1 5 5 s f 1 1 1 1 s 1 .1 1 liii 1 1 1 ^ " 1 ^ 126 AMERICAN RAILWAY TRANSPORTATION distances would have to be rehandled en route, and the delays caused thereby would be burdensome to the busi- ness world. At every important station commodities in great vari- ety are received for transportation. In shipping articles from one large station to another, the freight can usu- ally be sorted in such a way as to load each car with goods for a single destination. These " straight " cars are sent right through to their destination, whether that be a point on the line of the company receiving the freight or upon the road of some connecting corporation. Theoretically, this car when unloaded will be reladen and returned to some point on the line of the company owning the car. It is not always possible, however, to find a return load, and the car may be sent off to a point on the road of some third company, and may thence pur- sue a circuitous route before finally being returned to the company to which it belongs. It is not always possible even at the large stations to select the freight in such a way as fully to load all cars with goods for a single destination. Oftentimes arti- cles consigned to several places must be placed in the same car. Cars so loaded are called " mixed " cars, and most of the freight shipped from the smaller local sta- tions starts in mixed rather than in straight cars. To reduce the number of mixed cars, and also to lessen delays to which local freight may be subjected, it is customary for the mixed cars sent out from the stations included within different and specified regions to be sent to a junction point or transfer station within the sec- tion. At these junction points, transfer freight-houses are provided, and the freight arriving in the mixed cars from different local points is resorted. It is thus possible to make up a large number of straight cars and to reduce the number of cars required for the performance of the THE FREIGHT SERVICE 127 service, and to decrease the expenses incurred in getting the commodities to their various destinations. At the beginning of the railway business each com- pany endeavored to keep its own cars upon its own lines. That, however, was found impracticable, and to expedite the movement of certain kinds of joint or interline busi- ness, so-called fast freight lines came into existence. The public is now familiar with organizations such as the Union Line, the Empire Line, the Merchants' Despatch, the N^ational Despatch, and many others of a similar character. When these fast freight lines were first organized they were usually managed by a corporation distinct from the railroad companies over whose lines the service was performed. A typical corporation of this kind was the Empire Transportation Company, chartered by the State of Pennsylvania in 1865. This company, which is still in existence, was created to increase the business done over the Philadelphia and Erie Railway, a line connecting Sunbury and Erie, Pa., and forming one of the roads joining 'New York and Philadelphia with the oil regions in western Pennsylvania and the Great Lakes. As stated by the company, its purpose was " to increase conve- nience, promptness, and safety in the transfer of property between inland points west on the line of the Philadel- phia and Erie Railway and points on the Atlantic slope and seaboard and in the foreign countries east thereof, and to do so in such a manner as should popularize with the shipping public the route formed by that railway and its various connections.'' Like other corporations of its kind, the Empire Transportation Company solicited freight, provided patrons with cars, charged such rates for its services as competitive conditions allowed, paid the railroad for hauling its cars, and retained the remainder of its income above expenses for distribution 128 AMERICAN RAILWAY TRANSPORTATION among its stockholders. To increase its business, the Em- pire Transportation Company built pipe-lines within the oil regions, developed terminal facilities on the seaboard and Great Lakes, and established transportation compa- nies on the Great Lakes and railroad lines extending westward from Pittsburg and Ohio to Chicago, Indian- apolis, and other points in the central West. A traffic organization, such as the Empire Transpor- tation Company developed, is in many ways similar to the companies that were organized for freight and pas- senger business over the turnpikes and toll-roads in the days before railroad construction began. The companies owning the road-bed were distinct from those performing the service of transportation over the road. Such a form of organization has certain advantages, particularly for securing traffic free to move over different and competing lines. It is an efficient solicitor for business. By own- ing the cars it relieved the railroad companies of the necessity for providing special lines of business with par- ticular classes of rolling-stock at a time when the rail- road companies were comparatively small organizations. With the progress of the consolidation of railroads, how- ever, the fast freight lines of the class typified by the Empire Transportation Company have ceased to be neces- sary, either to the railroads or to the public. The rail- road systems have reached such proportions and their interline relations have been so developed that the rail- road companies are able now without the assistance of any intervening corporation to take shipments between most distant places. Moreover, independent fast freight lines gave certain individuals an opportunity to divert to themselves a part of the profits which rightfully belonged to the stockholders of the railroad. Some of the inde- pendent fast freight lines were controlled by a limited number of the stockholders of the railroad corporations THE FREIGHT SERVICE 129 over whose roads the fast freight lines did business, and an unduly large part of the receipts for the transportation business went to the fast freight lines. The railroad company received less than its proper share of the total earnings derived from the business done over its lines. To obviate this objection, and also to provide more efficiently for the management of interline business, the " cooperative " freight lines were established. These cooperative freight lines represented merely a joint arrangement between several connecting railroads. Each of the railroad companies forming the cooperative line assigns to the line a number of cars, usually in proportion to the number of miles of road. A general manager is put in charge of the cooperative line, with agents at the principal terminals to solicit business and employees to report the movement of the line cars. The earnings of the cooperative line and all its expenses are divided pro rata among the interested roads. Thus the cooperative freight line is little more than a system for securing an inexpensive and honest administration of interline business. With the recent development of the railway systems and the perfection of their methods of settling accounts, even the cooperative freight lines have lost most of their usefulness. They continue to be used by the railway com- panies, although to a less degree. Indeed, they are regarded by most companies as little else than trade- marks. The shipping public has become accustomed to consigning its goods to certain fast freight lines, and for that reason many railroad companies find it easier to con- trol competitive business through these fast freight lines. The railroads also find these cooperative lines of assist- ance to them in the settlement of accounts in connection with their interline business. The Pennsylvania Rail- road system, for instance, comprises a large number of 130 AMERICAN RAILWAY TRANSPORTATION affiliated corporations; and the business passing between the lines east of Pittsburg and those west of that city is necessarily treated as through traffic. The accounts of the through business handled over the Pennsylvania lines are audited by the auditor of the Union Line, who thus in reality acts as the manager of a clearing-house. This Union Line was organized in 1863 as an independent fast freight line between eastern and western points over the lines of the Pennsylvania Railroad system; but in 18Y3 the Pennsylvania Railroad Company having secured abso- lute control of all the roads over which the Union Line operated, purchased the Union Line and made it a bureau of the Pennsylvania Railroad Company. Since then the Union Line organization has been that of the coopera- tive fast freight line entrusted by the Pennsylvania Rail- road with the duty of auditing the company's interline business. As the foregoing paragraph would indicate, there is no railway clearing-house through which the accounts of all the railroads of the United States are settled. In England the railroad companies are all members of a clearing-house, which was chartered by Parliament in 1850. The British Railway Clearing-House collects all the charges and distributes the earnings of the through business. The railroad companies themselves audit only the local business. If a railway clearing-house for the entire United States were possible, it would be a very desirable institu- tion. It would . not only simplify and economize the accounting of railway business, but would also do away, to a large extent, with the opportunity and the incentive for cutting rates and for granting special favors to indi- vidual shippers by deviating from schedule rates. It seems, however, that the United States is too large a country and its railroad system too vast and intricate THE FREIGHT SERVICE 131 for the successful operation of a clearing-house for the entire country. It is not impossible that different sec- tions of the United States may eventually each have its own clearing-house. Inasmuch as the railroads of the United States are rapidly being divided territorially and according to ownership into a small number of groups, it may be found advantageous to establish a clearing- house in each one of these territorial sections. The railroad companies do not furnish all the cars used by shippers. Many large shippers prefer to own their own cars in order that they may be able to ship their goods whenever they desire to do so and in cars especially adapted to the needs of their business. The large meat-packers in Chicago, Omaha, and other cen- ters of the packing-house business own their own cars, and this is also true to some extent of Western fruit- growers, the shippers of petroleum oil, and the manufac- turers of certain kinds of heavy machinery. The man who uses his own cars for the shipment of his goods pays the railroad company the ordinary freight rate, unless, aa has frequently been the case in the past, he receives a special reduction in the freight charge. The railroad company pays him a fixed amount per mile for the use of the car. In times past this car mileage was as much as a cent a mile. It is now six-tenths of a cent a mile for ordinary cars. For refrigerator-cars the rate is one cent a mile in the West and three-fourths of a cent a mile in the East. There are certain objections to the system of private cars. They have frequently led to unjustifiable discrim- inations between the large and small shippers, the man who owns his own cars and ships in large quantities being able to obtain special favors from the railroad company. The tendency on the part of the railroad companies at present is to limit the use of private cars as much as 132 AMERICAN RAILWAY TRANSPORTATION possible by supplying themselves with all the equipment needed by different classes of shippers, and the use of private cars may eventually be limited to a small number of industries. At the present time, however, the number of private cars in use seems large. Their exact number is not known, but there are about 120,000, or about 7 per cent of the total number of cars owned by the railroad corporation. When a railroad company makes use of a car belong- ing to another company, it pays the owning corporation a rental for the use of the car. Until very recently this rental has consisted entirely of " car mileage," and for many years this car-mileage payment amounted to three- fourths of a gent per mile run by the car; latterly the payment has been six-tenths of a cent per car per mile. This form of payment did not work to entire satisfaction, because a company might retain a foreign car a long time without moving that car more than a short distance. The owner of the car under those conditions received a very small rental. Shippers are frequently desirous of using the cars for storage purposes, and the railroad corporation is apt to favor the shipper by granting the concession, particularly if the cars used for storage do not belong to the company making the concession. Ac- cordingly, the leading railroads of the United States have finally adopted the per diem system of payment for the use of cars. By this system a corporation using a for- eign car pays the owner 20 cents per day for .the time the car is in its possession. Being required to make this per diem payment for the use of the car, it will be to the interest of every railroad to return foreign cars to their owners with as little delay as possible. It is customary to allow the person to whom goods are shipped a certain length of time — generally forty- eight hours — ^within which to unload the goods sent to THE FREIGHT SERVICE 133 him. If he does not take his goods out of the car within this time, he is charged a " demurrage/' which usually amounts to $2 per day. Railroad companies dislike to enforce demurrage charges against their patrons, and under the conditions of competition that prevail in busi- ness affairs many railroad companies have not collected the demurrage when the cars did not belong to them or when the demand for their own cars was not very urgent. To collect demurrage from some patrons and not from others constitutes an unjust discrimination, the prevention of which is desirable both from the standpoint of the public and from the standpoint of the railroads. The per diem method of car rental is causing the railroad cor- porations to return foreign cars more promptly and is giving the companies a reason for collecting without dis- crimination the demurrage charges. EEFEEENCES FOR FURTHER READING The American Railway. Paper on Railway Management, by E. P. Alexander, pp. 149-186; also paper on The Freight-Car Service, by Theodore Voorhees, pp. 267-297. For the classification of freight the following references may be con- sulted : 1. Report of Industrial Commission, vol. ix, pp. Ixxxii-xc and 652- 687. 2. Fourth Annual Report of the Interstate Commerce Commission, pp. 197-239. 3. A copy of a freight classification, which may be secured from any railroad company. For a discussion of fast freight lines consult : 1. Hadley, a. T. Railroad Transportation, pp. 87-90. 2. Report of Industrial Commission, vol. ix, pp. xcv, 613, 724. For information concerning the railway clearing-house: 1. FiNDLAY, G. The Working and Management of an English Rail- way. [Contains an account of the British Railway Clearing- House.] 2. Report of Industrial Commission, vol. ix, pp. xcvii, 718-731. [This 134 AMERICAN RAILWAY TRANSPORTATION is the testimony submitted to the commission by Mr. William Nicholson, manager Central Railway Clearing-House, Buffalo, N. Y.] The subject of private cars is discussed in : 1. MiDGELEY, J. W. Private Cars: An Inquiry into their Growth, Development, and Operations. [A series of papers printed in the Railway Age, Chicago, October 10 and 17, November 7 and 21, December 19, 1902, and January 16, 1903.] 2. Sixteenth Annual Report of Interstate Commerce Commission. 1902. On the per diem plan of payment for the use of cars consult : The Railroad Gazette, February 17, 1899, October 11, 1901, and the indexes of the volumes of the Railroad Gazette for the years 1901 and 1902. CHAPTEK X THE PASSENGER SERVICE The service of transporting persons differs in several particulars from the freight service. Goods are shipped; men travel of their own volition, controlling, in most instances, the time and direction of their movements. This fundamental distinction necessitates an organization of the freight service different from that required by the passenger business. Freight rates and passenger fares are charges levied for dissimilar services, and to a large extent are determined by different consid- erations. One important difference between the two branches of the service is that most freight is moved in car-loads or train-loads, the car or train being started when the car is loaded or the train is made up, while the passenger business is performed by trains that run on fixed sched- ules. This distinction, however, does not apply in all cases. Some commodities, like milk and fresh fruit, are despatched by trains which run strictly according to schedule, and the collection and distribution of the traffic at the local centers of production or consumption are usually accomplished by " way-freight " trains which have a more or less definite time of arrival and depar- ture. Frequently the " milk " trains and way-freight trains have passenger-coaches attached, and thus perform a mixed service ; but the larger share of the freight traffic is handled in trains whose time of departure is arranged 135 136 AMERICAN RAILWAY TRANSPORTATION with reference to the volume of goods offered for ship- ment, while passenger-trains are despatched according to prearranged schedules, whether many, few, or no persons present themselves at the station. The passenger service, moreover, to a far greater de- gree than is required in the freight business, must pro- vide for speed, safety, comfort, and convenience. While speed and regularity of service is demanded by the ship- pers of some classes of commodities, the great demand is for cheap transportation, for low rates, and to meet this demand the railroad companies have constantly striven to reduce the costs of handling and moving goods. On the contrary, in the passenger service railroad officials have striven to give a better service, to increase speed, provide for greater safety, and to minimize the discomforts of travel. Travelers in most countries, and particularly in the United States, seem to prefer a good although ex- pensive service to inferior aqpommodations at low fares. Whether this is true of all classes of American people is open to question; but there is no doubt that excellence rather than economy has been the goal in the develop- ment of the passenger service. Among the results following from the pursuit of these different aims in the two main branches of the railroad business has been an increase in the average freight-train load, but no gain in the average number of persons per passenger-train. In 1890 the number of tons of paying freight per train averaged 175 tons, in 1900 the average was 275 tons. The number of passengers per train was 41 in 1890, and also in 1900; in 1892 the average was 42; and in 1894, 44. There was an increase in the num- ber of people carried and in the distance traveled by them, but the growing demand for frequency of service, speed, and comfort caused more trains to be run to accommodate the traffic. THE PASSENGER SERVICE 137 Another result has been a more rapid decline in freight rates than in passenger fares. The facts regarding rates, fares, and revenue are indicated by the following figures : 1890. 1895. 1900. 1901. Revenue per passenger per mile, cents Revenue per ton of freight per mile, cents. Revenue per train mile, passenger-trains, dollars 2.167 .941 1.086 1.654 2.040 .839 .978 1.612 2.003 .729 1.010 2.000 2.013 .750 1 027 Revenue per train mile, freight-trains, dollars. 2.132 From 1890 to 1900 passenger earnings per passenger mile declined 8 per cent, and from 1895 to 1900 2 per cent. During the decade freight earnings per ton mile fell off 23, and from 1895 to 1900 13 per cent. In the freight service the decrease in rates was more than offset hj the introduction of more economical methods of con- ducting the business, so that there was a large gain in the earnings per mile run by freight-trains; but in the passenger service that was not possible, and the train mile revenue fell off slightly. The figures for 1900 and 1901 reflect the influence of the highly prosperous times then prevailing, and show an arrest in the downward tendency of rates and fares, but it is not probable that railroad charges will continue to rise when business again becomes less active and traffic falls off; indeed, it is probable that freight rates, at least, will again tend to decline. Another difference between the freight and passenger services arises from the fact that freight has to be loaded and unloaded at terminals, and yards and depots have to be provided for storing cars and goods. The terminal costs in the freight service — labor, yardage, and storage — constitute a larger share of the total expenses than 138 AMERICAN RAILWAY TRANSPORTATION is the case in the passenger branch of the business. In the large cities, passenger stations are large structures located where real estate is valuable, but they cost less than do the facilities for handling freight, and passengers not only board and leave the trains without assistance, but do so promptly upon the arrival of the train, so that the railroad company is obliged to provide neither exten- sive yardage for the coaches nor housing accommodations for the traveling public, except for the brief time they must wait for trains. Another fact affecting the cost of the service, the utilization of cars, and the methods of conducting the business, is that passenger travel is practically the same in each direction. People who leave home, return to their homes; but commodities are shipped from the places of production to the localities where they are to be used or consumed; and while every one who produces is also a consumer, those who supply the world with foods and raw materials dispose of much more tonnage than they purchase. In the United States the freight from the Western and Southern States to the seaboard and to the manufacturing centers is much heavier than that toward the interior of the country. If freight traffic were equal in each direction, the average train-load would be heavier and the costs of transportation would be less. In spite of the equilibrium of travel to and fro, the average passenger-train carries only 42 persons, or about three tons of paying load, so strong are the forces compelling frequency, speed, and luxury in the service. If travel, like the movement of commodities, were mainly in one direction, the coaches would contain fewer passen- gers on an average than they now do, and the fares would need to be higher than under existing conditions. The number of passenger trips taken on American railroads in 1900 was 576,865,230, and in 1901 607,278,- THE PASSENGER SERVICE 139 121. The greatest number reported for any previous year was for 1893, when the ^Columbian Exposition at Chicago caused the figures for that year to reach 593,- 560,612. The aggregate length of the trips taken in 1900 was over 16,000,000,000 miles, the average journey per passenger or the average length of a trip being 27.8 miles. The increase in speed of trains and in the com- forts of travel is being accompanied by a greater amount of long-distance travel, the average trip having length- ened nearly 4 miles since 1890. The revenue derived directly from the passenger service was $323,715,639 in 1900, and $351,356,265 in 1901. The income from the carriage of mail and ex- press, and from other earnings attributable to the passen- ger service, was $74,300,000 in 1900 and $77,778,197 in 1901. From the operation of passenger-trains about one- fourth of the total income of the railroad companies is received. In New England the passenger revenues com- prise a much larger share of the total, four-ninths of the earnings from operation being derived from the passen- ger-trains. In general, the passenger receipts as com- pared with those from freight are relatively greater the more thickly the region served by the railroads is settled; but such a district as that occupied by the Kocky Moun- tain and Pacific coast States of the United States is an exception to the general rule. That part of the United States ranks next to 'New England as regards the ratio of passenger revenue to total receipts from railroad traffic. The foregoing figures show that the people of the United States travel frequently; but a comparison of our country with the European countries having the most highly developed means of transportation indicates a greater use of the railroads for travel by some foreign people than by Americans. Although there is a far 140 AMERICAN RAILWAY TRANSPORTATION greater mileage of railroad in the United States than in any other country, the network of lines is spread over a vast extent of territory, and in a large part of the country serves a scattered and sparse population; while in the United Kingdom nearly half as many people as there are in the entire United States dAvell within an area the size of three American States of medium proportions. Long distances deter people from traveling for pleasure, and induce men, when possible, to do business by mail and telegraph. The conditions favoring travel are a dense population living mainly in cities and having an average income large enough to make travel possible. The people of the United Kingdom take nearly twice as many trips as Americans do, although there are nearly twice as many people in our country as there are in theirs — i. e., the average number of trips per year per person taken by the Briton is about 27, while the American's average is about Y.5. In the number of passenger trips taken yearly, the rank of the United States among other countries is approximately as follows: The United King- dom, 27; Belgium, 17; Switzerland, 15; Germany, 12; France, 10; and the United States, 7.5. The significance of these figures is modified by the greater average length of the trip taken by the American, who travels a few more miles each year than does the inhabitant of any other country except the United Kingdom, although the difference between Germany, France, and the United States in this regard is small. The passenger trafiic on European railroads is much denser than on those in the United States. An equal mileage of road accommodates a much greater traffic in Europe than in the United States. This is shown by dividing the total number of miles traveled by all passengers (the " passenger miles ") by the miles of railroad. Such a calculation shows the miles traveled per mile of railroad to be about 400,000 THE PASSENGER SERVICE 141 in the United Kingdom, 343,000 in Germany, 283,000 in France, and 72,000 in the United States.^ In all countries, the United States included, passen- ger accommodations of different degrees of excellence are provided by the railroads, the charge for the best class of service being more than for the lower classes. In Euro- pean countries, from three to five grades or classes of service are offered. In the United Kingdom and most of the Continental countries there are three classes — first, second, and third; but in Germany there are four classes, besides special accommodations for the military, which may be considered a fifth class. In the military and fourth classes the coaches are but little better than box freight-cars, sometimes with and sometimes without benches. The third-class car, or compartment, contains comfortable seats without upholstery, and until recently the third-class hq.d no toilet accommodations. In the sec- ond-class the passenger is given more room, he has an upholstered seat, and his compartment has an adjoining toilet. The first-class compartment has more elegant fittings and appointments than the second-class, but the comforts are practically the same. The traveling public in Europe desires this classifi- cation for two reasons: one economic, and the other purely social. The great majority of the people wish to travel inexpensively, preferring economy to luxury, and their demand for a cheap service is met by the railroads in the third and fourth classes, and in the slow trains upon which lower fares are charged than on the fast trains. The minority of the passengers are able to pay ^ The facts in this paragraph are taken from calculations made by- Walter E, Weyl, Ph. D. The table on page 142, prepared by him, was submitted to the Industrial Commission and is contained in the com- mission's report, vol. iv, p. 758. Further data on this subject may be found in Dr. Weyl's work on The Passenger Traffic of Railways. 142 AMERICAK RAILWAY TRANSPORTATION Freight density. (Ton miles divided by miles of railroad. Net tons.) S : 1 J oo" Passenger density. (Passen- ger miles divided by miles of railroad.) i i ■i Reve- nue per passen- ger train mile, a 1- • Num- ber of passen- gers per train. p OS 00 tH lO OS «0 Re- ceipts per pas- senger per mile. 1! t- w T-l Re- ceipts per passen- ger. Is oc S3 «9.0 52.6 Aver- age length of trip in miles HZ CC oc T- 8 Num- ber of pas- senger miles per head of popula- tion.' o: oc QC tH S Number of pas- sengers per head of popu- lation.! O n (X c 1— O «D^ 00* 5D, Number of pas- senger miles (in millions) c : l> CO 1—1 Number of passen- gers (in millions). lit T-T l> 1—1 i 1 ^ 1 1— ( 1 1 T— 1 i 8 a s o .-§ c c u l-H CO fcX- '^ c3 '^ bn 03 c r« ^ to ^ o rt o3 a o <1 -Si rC -^ ti 03 o 03 l! Ph ^ "^ ^ ^ f5 t* 1^ -M en « CO Ph ,^ +2 G *y CO O CO to "^ -^ C 2 ^ O h5 CO ■§ o f-l CO jj c .£ c _ tf '. (U o s I ^ I .Jiff :^« .2£§.>§-o2 .S.- m Oj3 OX!k: Oi O) h a> ^S (D d B » 5S d ■5,^ d a-o ^ i« t< SH:a eg 0) cS ^ h S t< O O ? ,• « ^ggo-ScS . d_« a tH 5a3.2'S<^ te "Ill flj IB -< bc«S^ d^" ^ dS '^ (D 3 CO o3 ^ 03 d . fill i iiii S Its! o "o ts'S'C ■^ d o d d +-. S li^ * cs w _a^ o o o o •i'S'3'5'5^ S § 3 d d 3 Is ■aiS.1! O O J, o *J*J ^ o 'tc "o: c d oi S v< *j a d 3 d 3 3 0) (U dt^So -ggfcdg *^ CLi2 £f O*^ '=3 t, tw d sri ?^*^ d-; OJ 0) 'S ^ O) _ tit'S a; * 03 •C M c S3 'J ■> d S d ^ oj -tJ ?E -£,53 .2 S » w eg W*^^ a • * S .*^ eg -t^ •C •« ai? aJ-d c d & d .-O tc hC§ . OJ S-'J:; 3 d g Si d d ^. 02 O fe O S3 d^ S3 .be CO '53 "3 oj'S^ Q.-S a .2 I ^ t^§.S2 d.S d 2 ^5** d ;ju8pisajj THE ORGANIZATION OF THE SERVICE 193 Organization of Pennsylvania Railroad. Table showing Organization of the United Railroads of New Jersey Divisions Superintendent motive power. V Assistant engineer. Principal engineer. assistant Superintendent New York division. Superintendent boy division. Superintendent Belvi- dere division. Am- Master and assistant master mechanic. Division operator. Ticket receivers. Train masters. Station masters. Road foreman of en- gines and assistant. General foreman. Lighter, masters. , Assistant engineer. 'Master mechanics. Division operator. Ticket receiver. Train masters. Station masters. Road foreman of en- gines. . Assistant engineer. Master mechanic. Division operator. Train masters. Road foreman of en- gines. Assistant engineer. Master carpenters. Supervisors and assistant super- visors. Master carpenter. Supervisors and assistant super- visors. f Master carpenter. \ Supervisor. Superintendent Jer- ( Superintendent float- sey City ferries. | ing equipment. Superintendent and ] Superintendent steam assistant superin- I ^^^. Delaware tendent Delaware T ^^^ Ua.riis.n Canal, and Raritan Canal. J 14 194 AMERICAN RAILWAY TRANSPORTATION same organization and practically the same distribution of duties among subordinate officials. In the organization of every large railroad system it is necessary to have a territorial division of duties within most departments. This causes a table outlining the organization to appear detailed, but it is, as a matter of fact, very simple. The many parts of the large railroad corporations work together systematically, like the parts of the great locomotives that haul their trains. EEFERENCES FOR FURTHER READING Haines, Henry A. American Railway Management, pp. 128-139. The American Railway. Paper by E. P. Alexander on Railway Man- agement, pp. 149-186. The Railroad Gazette. April 27, 1900, chart of organization of Penn- sylvania Railroad; August 21, 1900, chart of organization of Erie Railroad; December 14, 1900, chart of organization of Lehigh Valley Railroad; September 27, 1901, chart of organization of Illinois Central Railroad. The Official Guide of the Railways and Steam Navigation Lines of the United States gives a list of the principal officers of each company, and thus gives an indication of the organization of each company. CHAPTER XIV THE ACGOUNl'S AND STATISTICS OF THE EADLWAY SERVICE Careful accounting is essential to an efficient per- formance of the railroad service, and a general under- standing of railway accounts is necessary to an intelligent interpretation, by the student or the investor, of the financial and physical condition of a particular railroad coinpany or system. In the administration of every large business enterprises, the directors and officials depend upon the accounts for the information upon which to act ; and in the railway corporation especially, whose activities are scattered over a wide territory and are carried on in distinct departments, each employing a large force of men, it is necessary that those responsible for the policy of the company and for close supervision of the several branches of the service should be kept fully informed regarding the proj)e'rty, the receipts and expenditures, the needs, the deficiencies, and the accomplishments of each department. In the accounts as now kept by many railroad companies is focused a clear picture of the con- dition of the physical property of different kinds, of thfe extent of the several classes of services being performed, of the^ receipts and expenditures connected with the service, and the changes taking place month by month or yeat by year in the property, the services, and the finances of the company. The figures regarding traffic receipts and expenditures are compiled from the way-bills, tickets, reports, vouchers, 195 196 AMERICAN RAILWAY TRANSPORTATION and other papers sent to the offices of the treasurer and comptroller. These papers are all scrutinized and checked up, and the contents carefully recorded by the auditors who are subject to the comptroller. The records of car movements, train and engine mileage, are kept by the car accountants, who are usually subject to the general superintendents in the operating or transportation de- partment. In this general department, likewise, are the engineers in charge of construction, maintenance of way and equipment, whose reports contain the statistics regard- ing the physical property. The statistics of train, car, and locomotive perform- ance are worked up in detail by the several departments having charge of the performance. The auditor gathers these statistics from the different officials, and makes such compilations and tabulations as may be needed. Ordinarily, the auditing department does not verify the traffic and operating statistics, unless some evident erroi* suggests the necessity for a test. The statistics of the cost of handling freight traffic per ton per mile are worked up in the auditor's department by charging to the freight and passenger services respectively such expenses as can be thus classified, and by dividing between the two serv- ices such expenses as are common to both, sometimes according to the earnings and sometimes according to the locomotive or train mileage of the freight and passenger departments. Different companies compute statistics of ton mile cost by dissimilar rules, and such statistics, con- sequently, have little value for purposes of comparison. From the detailed accounts kept by the auditor, con- cise reports are prepared monthly and yearly. About the 25th of each month the books are written up and posted for all classes of transactions carried on during the previous month. Then a summarized account for that month is prepared, covering the earnings from each RAILWAY ACCOUNTS AND STATISTICS 197 source, and the expenditures for operating expenses, taxes, rentals, improvements, construction, and equip- ment. This account contains a large number of entries. The operating expenses are divided into four large classes and fifty-three subclasses. Improvements, construction, and equipment cover thirty-eight entries. From the proof-sheets of this account is prepared the auditor's monthly report, which includes a statement of the gross earnings, operating expenses, net earnings, improve- ments, construction and equipment, and also contains such statistical information as may be desired by the operating and executive departments — earnings and expenses per mile of road, per passenger and freight train mile, etc. The accounts covering the business of the year are summarized and briefly discussed in the annual report,- which, in the case of a large company, necessarily con- tains considerable detail and covers many subjects. The annual report, however, is readily divisible into three general parts: one dealing with income and expenditure, another with the financial affairs of the company, and the third with the traffic and physical condition of the prop- erty — track, structures of all kinds, and equipment. The three general parts of the annual report and the main subdivisions are shown by the following tabular outline, taken, with slight changes, from Thomas F. Woodlock's Anatomy of a Railroad Report: Outline of the Contents of a Railroad Report I. Income or revenue account. 1. Gross earnings. A. From operation. (a) Passenger traffic. (it) Freight traffic. (c) Baggage, mail, express, storage, stock-yards, eleva- toris, steamers, etc, (d) Balance of car mileage, switching charges. (e) Telegraph companies. 198 AMERICAN RAILWAY TRANSPORTATION B. From interest on loans and investments, rentals, and other income. 2. Operating expenses. (a) Maintenance of way and structures. (1) Repairs of roadway. (2) Renewal of rails and ties. (3) Repairs and renewals of bridges, buildings, and all other structures. (b) Maintenance of equipment. , (c) Conducting transportation. (1) Salaries and wages (operating department). (2) Supplies (operating department). (3) Car mileage and switching charges. (4) Damages for injuries. (5) Advertising. (6) Outside agencies and commissions. ' (7) Rents of tracks, yards, and terminals. (d) General expenses. 3. Net income from all sources (gross earnings less operating expenses). 4. Fixed charges (interest on funded and floating debts, rentals, taxes, and sinking-funds). 5. Dividends, surplus, and "profit and loss" account. li. Financial statement or balance-sheet. 1. Capital assets. (a) Property and franchise or plant and equipment or "cost of road and equipment." (b) Investments in real estate and securities. (c) Sinking-funds. 2. Capital liabilities. Stocks and bonds (income, debenture and mortgage bonds). 3. Current assets. (a) Cash on hand. (b) Loans and bills receivable. (c) Amounts receivable. (d) Due from other companies and individuals. (e) Due from the company's agents and officers. (/) Advances to other companies. (^) Sundry assets. 4. Current liabilities (operating liabilities and floating debt). (a) Loans and bills payable. (b) Accounts payable. RAILWAY ACCOUNTS AND STATISTICS 199 (c) Pay-rolls and vouchers. (d) Interest and dividends accrued. (e) Due to other companies (traffic balances). (/) Sundry liabilities. III. Physical statistics. 1. Length and characteristics of road (track, bridges, and struc- tures). 3. Number and description of equipment. 3. Volume and character of business done (in the freight, pas- senger, and other branches of the service). The revenue account is frequently presented under the two headings of income account and profit and loss account. The bookkeeping form of these two accounts and of the general balance-sheet is given as follows in Mr. H. C. Whitehead's pamphlet on the Railway Auditor: Income Dr. Operating expenses : Maintenance of way and struc- tures Maintenance of equipment Transportation and traffic General expenses Taxes Rental of tracks and terminals Interest on bonds Balance, being net income for the year carried to profit and loss account Total Profit and Dr. Dividend No. Amount written off by vote of di- rectors for Sundry adjustments Balance carried down Total Account Cr. Earnings ; Passenger Freight Mail, express, and miscellaneous Interest and discount Income from investments Total Loss Account Balance brought forward from previous year Net income for year Total Balance (surplus) carried to gen- eral balance-sheet 200 AMERICAN RAILWAY TRANSPORTATION General Balance- Sheet Dr. Assets. Cr. Liabilities. Railroad franchises and other Capital stock property Funded debt Expenditures for construction and Replacement and renewal reserves equipment during current fis- Accrued taxes cal year : Interest on funded debt Improvements Accounts payable Extensions Equipment Otlier capital asset accounts Securities in treasury Material and supplies Accounts receivable Other current asset accounts Cash on hand and in bank Profit and loss : Surplus Total Total A part of the annual railroad report is usually devoted to an explanation and discussion by the president of the important changes during the year covered by the report as regards traffic and earnings, construction, improve- ments in track, structures and equipment, the stocks, bonds, dividends and securities of the company, the rela- tion of the corporation to other companies, and such other subjects as are of special interest to the holders of the stocks and bonds. The above tables should be used as an aid to the study of an annual report of some large railroad corporation.^ If the report is a detailed, comprehensive, and systematic one, it will cover all the points contained in the tables; but there are many companies whose reports are incom- plete, especially as regards the information concerning ^ In studying a railroad report — and that is the only satisfactory text for the study of railroad accounts — the stndent will be assisted by the analysis contained in Mr. Woodlock's little book The Anatomy of a Railroad Report. Chapter VI of Corporation Finance, by Thomas L. Crreene, will also be helpful, RAILWAY ACCOUNTS AND STATISTICS 201 the physical condition of the property. The object of some reports is to make the best possible showing for the company rather than to give the most accurate and lucid account possible, but such reports upon critical examina- tion will be seen to be incomplete. As the public nature of the service of transportation becomes more clearly recognized and the difference be- tween the duties of the quasi-public railway corporation and those of the strictly private corporation is being brought into greater prominence by the rapid growth in the size of the railroad systems and in the increasing tendency for the traffic of large sections of the country to pass under the control of a single management, the demand for accuracy, completeness, and uniformity in railway accounts becomes stronger and more general. Public opinion does not justify a railroad corporation in making an inaccurate or otherwise misleading report for speculative purposes, and a company probably does itself more harm than good by putting out an inaccurate report. The demand for uniformity in the accounts of all railroads is not so definite as is the sentiment for accu- racy, but the reasons are hardly less cogent. If all rail- road reports were accurate, complete, and uniform, the directors and officials of each company would be able to compare the results of their administrative policies with the results of those enforced by other companies. There is no stimulus to improvement equal to that which comes from comparison with others in the same calling or busi- ness. The investor, moreover, would be able to act more intelligently if he were able, either personally or by the aid of an expert accountant, to judge of the merits and business efficiency of particular railroads with whose management he may not be familiar by contrasting its accounts with others whose affairs he may have intimate knowledge of or whose management is generally recog- 202 AMERICAN RAILWAY TRANSPORTATION iiized to be sound and conservative. Likewise from the standpoint of public supervision of railroads, uniform accounting is highly desirable. The chief purpose of Government oversight of transportation is to insure equity in charges, and the accounts kept by each company con- tain most of the information upon v^^hich a decision regarding the reasonableness of its charges must be based. Moreover, a charge by one company is frequently ren- dered equitable or inequitable by its relation to the charges exacted by other companies, and whatever facili- tates accurate comparisons of the accounts of one com- pany with those of other companies is an aid to the intel- ligent and effective supervision of railway management. Although the American railroad corporations have by no means made their accounts uniform, the differences in their methods of recording and reporting are much fewer than they formerly were, largely because of the influences exerted by the Association of American Rail- way Accountfng Officers, the Interstate Commerce Com- mission, and the Annual Convention of the E'ational Association of the Railway Commissioners of the States. The fact that the railroad companies are obliged by law to make detailed and elaborate reports to the Interstate Commerce Commission annually and according to a form prescribed by the commission has caused the companies to shape their accounts and reports according to the sta- tistical requirements of the commission. The statistician to the Interstate Commerce Commission worked out the blanks to be filled in annually by the railroad in con- sultation with the accounting officers of the companies, and those conferences as .well as the requirements of the commission have promoted the adoption of uniform meth- ods. Both the Interstate Commerce Commission and the Association of American Railway Accounting Officers are represented in the Annual Convention of State Rail- RAILWAY ACCOUNTS AND STATISTICS 203 road Commissioners, the statistician to the Interstate Commerce Commission and the President of the Ac- countants' Association being members of the Standing Committee on Railroad Statistics. The State commissioners require annual statistical reports from the railroads covering the mileage and busi- ness done within their respective States, and the Annual Convention of the Commissioners has done much to give similarity if not complete uniformity to their annual reports, and thus to exercise some influence upon the railroad companies to adopt uniform methods of keeping their accounts. Uniformity in railroad accounting would be greatly promoted, and probably made obligatory, if Congress were to pass a law providing for the Government super- vision and auditing of railroad accounts. Up to the pres- ent time Congress has not adopted that form of Govern- ment supervision, and it would doubtless be opposed by many railroad companies. There is, however, a precedent for the public inspection of railroad accounts in the ex- amination and auditing of the books of the national banks, and whether the Government should or should not exercise this authority with reference to the affairs of the railway is more a matter of expediency than of principle. The investigations of the Industrial Commission con- vinced that body of the desirability of Government audit- ing of railway accounts, and it recommended to Congress the establishment of a permanent corps of expert auditors who shall have authority, under the supervision of the Interstate Commerce Commission, to examine period- ically the accounts of all railroad companies, whether operating or financial in their character. Provisions for securing publicity in respect of financial and operating facts should be made. Such examinations for detection 204 AMERICAN RAILWAY TRANSPORTATION of violations of law or for statistical returns should be subject to provisions safeguarding confidential informa- tion similar to those which now prevail in the case of the inspection of national banks. By Section 20 of the act of February 4, 1887, " to regulate commerce/' the Interstate Commerce Commis- sion is given discretionary power of prescribing for all interstate railways " a uniform system of accounts and the manner in which such accounts shall be kept/' but the law does not give the commission definite authority to inspect and audit the accounts, and in its present form the law could hardly be enforced. The Interstate Com- mission has never attempted to force the railroacJs to adopt a uniform system of accounts. The statistician to the commission. Prof. Henry C. Adams, thinks that Con- gress should create and place under the administration of the commission " a bureau of statistics and accounts, and establish something of the relation between that bureau and the railways that now exist between the Comptroller of the Currency's office and the banks." Those who are opposed to extending the regulative authority of the Government over the management of railroads do not favor a law requiring the adoption of a uniform system of accounts. In order to make such a law effective, provision would need to be made for an inspection of the accounts by public officials, and that would be of great assistance to the national and State commissioners in performing the duties imposed upon them. Railroad Statistics The statistics compiled in regard to railroads are detailed and voluminous, and necessarily so. Each com- pany depends upon its statistical records and data for the information essential to the administration of its several RAILWAY ACCOUNTS AND STATISTICS 205 departments; the National and State governments must be well informed concerning the railroads in order to legis- late intelligently regarding public supervision and to en- force wisely the laws affecting the railways. There are five general sources (besides many minor sources) whence one may secure statistical information regarding railroads. The annual reports of the compa- nies give the data for each company separately. These reports are annually published, in an abbreviated form, in Poor's Manual of Kailroads, which excellent volume also contains an analytical summary aggregating the sta- tistics for all the roads in the United States, and making comparisons with the figures for past years. Most of the States and Territories annually collect and publish statistics covering the roads within their respective bound- aries; but while these local compilations are of value to the States and Territories in levying taxes and regulating transportation, they are not much consulted by the pub- lic generally, because the comprehensive statistics to be found in Poor's Manual and in the publication of the National Government are more satisfactory for reference. The national censuses of 1880 and 18^0 covered the statistics of railroads and other transportation agencies, but the census of 1900 did not include the data regard- ing steam-railroads. This omission was made because it was thought that the compilation of census statistics of railroads could do little more than duplicate the statis- tical work of the Interstate Commerce Commission. If there were to be no decennial volume to show the rail- road progress from 1890 to 1900, it would be unfortu- nate; but the Interstate Commerce Commission has pre- pared such a volume under the title of the Review of Rail- way Operations and Regulation in the United States. The annual volume published by the Interstate Com- merce Commission, entitled Statistics of Railways in the 206 AMERICAN RAILWAY TRANSPORTATION United States, contains six lengthy tables showing for each road in the United States, and for all the roads in the aggregate, the mileage, capital, earnings and income, general expenditure, charges against income, and a gen- eral balance-sheet for the year with comparisons with the previous year. The elaborate tables are preceded by an analytical report of the statistician to the commission, in which are contained, together with the explanatory text, condensed tabulations summarizing the large tables. In this introductory report by the statistician may usually be found all the figures desired by the general student of railroad transportation. Although the present statistics of transportation seem comprehensive, there are some regrettable omissions of de- sirable and valuable data. The most serious defect is the neglect to collect annual statistics of the business done by carriers by water, by express companies, by telegraph com- panies, and by corporations other than railroads owning rolling-stock engaged in interstate commerce. In addition to collecting the statistics concerning railroads, the Inter- state Commerce Commission should have the power and duty of gathering and publishing the statistics of inland navigation. As the statistician to the commission says in his report for 1900, " the jurisdiction of the commission must be extended to these agencies of transportation, so far at least as annual reports are concerned, before it is possible to render a comprehensive report upon interstate traffic." In order for Congress to act intelligently ' in making appropriations for rivers and harbors, in regula- ting or not regulating the business of express and tele- graph companies, annual statistical compilations are indis- pensable. In some measure the need for information has been supplied by the decennial censuses, but only very partially supplied, not only because of the infrequency of the census compilations, but more because the census RAILWAY ACCOUNTS AND STATISTICS 207 statistics are unavoidably defective and inaccurate. Sys- tematic records and frequent reports on the part of car- riers are the only basis for accurate Government statistics, and it will not be possible for the Government to secure full and reliable statistics of interstate transportation until it requires all carriers engaged in that transporta- tion to keep faithful records and make regular reports. The statistics of railroad capital as now published are not altogether satisfactory, because only the nominal or face values of the stocks and bonds are given. As was explained in the chapter on Capitalization, there is fre- quently a wide discrepancy between real and face values of railroad securities. The capitalization statistics we now have do not inform us how much has been spent on the construction of the roads nor the amounts contributed therefor by individuals and by the IN'ational, State, and local governments, nor the present value of the railroadsJ It would be impossible now to secure the data necessary to make up these deficiencies, but something might be done year by year to give greater value in the future to the statistics of capitalization. The false impression now given by the figures for total capital (face value of stocks and securities) might be corrected to some extent at least by a table showing in parallel columns the market value and par value of such securities as are listed in the market.^ The English reports have a feature worth copying. They show, year by year, the increase in capi- tal account that is real and the increase that is nominal ^ In response to a resolution of the United States Senate, as was stated above in Chapter VII, the Interstate Commerce Commission made a report, February 24, 1908, comparing the par and market val- ues of railroad securities for the year ending June 30, 1900. The report presents clearly the difficulties encountered in securing, even with only approximate accuracy, the market value of all the securities of Amer^ ican railroads. Although the report does not cover all securities, the data contained are instructive. 9 208 AMERICAN RAILWAY TRANSPORTATION or due to conversions and consolidations. These two changes in the present statistical tables would give the public a better measure than it now has of the actual value of railway property, and would indicate more defi- nitely the amount of capital being invested in such property. The value of freight trafiic statistics would be en- hanced by giving separately the figures for intrastate and interstate traffic. Such a classification would be serv- iceable in connection with questions of taxation and State control. The railroad companies have nothing to gain by making the classification into State and interstate busi- ness, and, as it would involve some expense to them, they naturally would not favor going to the necessary labor and cost. It would, however, be comparatively easy for the companies to compile the statistics on this basis from the way-bills. Statistics of the ton mileage of each of the leading commodities shipped by rail would be instructive both to the public and to the companies, but until less ex- pensive methods of railway auditing have come into general use commodity ton-mileage statistics would involve more labor and expense than the Government would be justified in requiring the railroad companies to expend. The publication of such statistics year by year would show the localization of industries in various parts of the country, indicate the trend of traffic from one kind of commodity to another, and show the companies what kinds of traffic were developing slowly and what rapidly. Such information would assist the companies in their efforts to promote traffic, and would furnish the Government with data bearing upon the reasonableness of rates. It is not improbable that electrical computing and tabulating machines may so reduce the expense of statistical work in the ^ear future as to enable the rail- RAILWAY ACCOUNTS AND STATISTICS 209 road companies, without seriously burdening themselves thereby, to enlarge very considerably the present scope of railway statistics. A department of commerce having been established, with a Cabinet officer at its head, it is probable that the collection and compilation of the statistics of transporta- tion and commerce may be somewhat enlarged and sys- tematized. The statistics of ocean trade, which are now confined to our international commerce, will, it is to be hoped, be made to include our coastwise maritime com- merce. Statistics of inland navigation and of the express and telegraph businesses should be compiled either by the Department of Commerce or by the Interstate Commerce Commission. It would probably be best to place the work of securing statistics of express business and of inland carriers by water in the hands of the Interstate Com- merce Commission, because it is probable that by so doing the published statistics of interstate traffic as a whole would be more systematic, more comprehensive, and better correlated than they would be if their collec- tion was put in charge of two independent authorities. « REFERENCES FOR FURTHER READING WooDLOCK, T. F. The Anatomy of a Railroad Report and Ton-Mile Cost. Rev. ed. [This little book should be read in connection with the above chapter.] Greene, T. L. Corporation Finance, chap, vi, 1897. Johnson, E. R., and Weyl, W. E. The Statistics of Transportation. Publication of the American Economic Association. New Series, No. 2, pp. 246-256, March, 1899. [This is one of the papers in a volume on the Federal Census.] Poor, H. V. Manual of Railroads of the United States. Statistics of Railways in the United States. Annual Report of Inter- state Commerce Commission. Eaton, J. S. Railroad Operations and How to Know Them. 1900. Keister, D. a. Corporation Accounting and jiuditing, fifth ed., 1897. [This book is a "treatise on higher accounting designed 15 ^10 AMERICAN RAILWAY TRANSPORTATION for the use of accountants, auditors, bookkeepers, financial ex- perts," etc., and will especially interest those who wish to make a special study of accounting.] Whitehead, H. C. The Railway Auditor: An Outline of the Sys- tem of Railway Accounting. A pamphlet of 42 pages, published by the New York University School of Commerce, Accounts, and Finance, Washington Square, New York, 1902. Senate Document 178, Fifty-seventh Congress, Second Session. [Re- port made, February 24, 1903, to the Senate by the Interstate Commerce Commission comparing the par and market value of railroad securities for the year ending June 30, 1900.] PART III THE RAILWAYS AND THE PUBLIC CHAPTER XV INTEREAILWAY RELATIONS I. Railway Competition and Agreements to maintain Rates Railroad corporations are creatures of the state, instituted to serve the public for the state and under its supervision. The service performed by the railroads has two characteristics of special significance: (1) It is of a public nature, and may be performed directly by the government or by means of an agent authorized by the state. Whether this service shall be conducted by the government or by its creatures is a question of expe- diency which is decided differently in different coun- tries; but in whichever way this question may be deter- mined, the service as a whole, and in its several branches, has close relationship with the government. (2) Within each part of the service — railroad transportation, the mail service, the express business, etc. — there must be unity of action extending over wide areas. The several transportation agencies within a nation's territory must work together if the public is well served; indeed, an international cooperation of carriers has been found ad- vantageous. If the government directly conducts each branch of the service, unity of action within its boundaries is assured, and the question of cooperation becomes one of securing the proper international relations; but if the state delegates a branch of the service, as, for in- stance, railroad transportation, to a number of corpora- 213 5^14 AMERICAN RAILWAY TRANSPORTATION tions, a large measure of cooperation among those compa- nies is necessary. The railroad service within the United States being performed by numerous corporations, these several organ- izations are brought into relationship with each other in two ways: as cooperators and as competitors. They are cooperators because a part at least of the persons and things each company transports moves over a wider ter- ritory than is served by the company's system of lines. All companies have more or less " through traffic " — that which it receives from another railroad or turns over to another connecting line. American railroads are rivals because in most sections of the country much of the traffic has the choice of more than one route. The territorial grouping of systems described in the chapter on the present Railroad System of the United States has not yet been completely worked out; and if it were fully accomplished, there would be much traffic inbound and outbound between the interior and seaboard of the coun- try that could choose between the ports of two or more sections. The east-bound traffic from the Mississippi Val- ley, for instance, can leave by way of the Gulf, the southern Atlantic, the middle Atlantic, the 'New England, or the St. Lawrence ports. Likewise the west-bound traffic from the middle section of the United States has the option of many routes. The nature and scope of interrailway competition will be discussed more fully in a later connection. It assumes many forms, some of which are less obvious than those just cited. Such being the conditions under which the railroad companies perform their transportation services, an under- standing of interrailway arrangements is requisite to a clear knowledge of the relations, actual and ideal, of the railroads to the public they serve, and to the Government from which they receive their authority to engage in COMPETITION AND RATE AGREEMENTS 215 the business of public carriage, and to which they are accountable for a proper performance of the service they have undertaken to render. The extensive railroad systems of the present time are of comparatively recent growth. During the first two decades of railway history the lines controlled by even the larger companies were short, a road 200 miles in length being considered a long one. It was not until after 1850 that a length of 500 miles was reached by any system. The Illinois Central, constructed in the fifties to a length of 700 miles, was one of the longest roads in the world. The Pennsylvania, by construction and purchase, and the ]^ew York Central by consolida- tion, passed the 500-mile limit in the fifties; but it was not until after the civil war that a length exceeding 1,000 miles was attained by any system. Before 1890 a maxi- mum of 5,000 had been reached, and since then the process of consolidation has given each of several com- panies the ownership or control of more than 10,000 miles of road. Interrailway arrangements for handling through pas- senger or freight trafiic were but little developed during the first twenty-five years of railway construction. Each company, as far as possible, kept its rolling-stock on its own lines, and compelled passengers to change and freight to be transferred when the points of junction with other roads were reached. A traveler may now go from the Atlantic seaboard to St. Louis or even to San Fran- cisco without change of cars, but as late as in the fifties he had to make seven changes in getting from the At- lantic to the Mississippi. The conditions under which the through freight and passenger traffic was conducted be- fore interrailway facilities were developed are described in a statement made many years since by the secretary of the New York Central. Speaking with reference to 216 AMERICAN RAILWAY TRANSPORTATION the situation before 1851 on the roads now composing the !N^ew York Central route, he said: " We had the roads between Albany and Buffalo. There was just about as much efficiency in operating ten roads as there would be in ten men trying to do a thing that one ought to do. Every board of directors had its own profit to make and its own schemes to advance. There was no obligation on the part of any one company to do anything for any other. Through lines of cars could be run only by very complicated and embarrassing arrangements. I can remember the time when conduc- tors were changed at the end of each one of the roads of the old line between Buffalo and Albany. In some cases a ticket could not be bought through from Albany to Buffalo. The elements of usefulness and economy were very few. In regard to freight, there was no obli- gation on the part of any one of the roads to take a single pound of it from another. Except so far as they might agree with each other, it involved changing at each ter- minus." ^ Frequent transfers were a deterrent to travel and a much more serious hindrance to freight traffic. The handling of freight several times en route consumed time, increased the liability of damage in transit, and made the costs of transportation so high as to restrict long-distance sliipments mainly to nonperishable commodities of rela- tively high value. These obstacles to travel and freight traffic were removed in part by the consolidation of the short connecting lines, and to a greater extent by means of the express companies, " fast freight lines," and " pal- ace-car " companies that have already been described. The amalgamation of the short lines began in a small way in the first decade of railway development, but was 1 Windom Report of 1874, Evidence, p. 157. Senate Report 307, First Session, Forty-third Congress. COMPETITION AND RATE AGREEMENTS 217 not actively carried on until after 1850, or during tlie third and subsequent decades of the growth of American railways. The express companies date from the forties, the fast freight lines, or freight despatch companies, from the fifties, and the sleeping-, dining-, and parlor-car com- panies from the sixties. These companies were all sepa- rate from the railroad companies at the beginning, and the express and " palace-car " companies have remained inde- pendent, but the freight despatch companies, as has been noted, have with few exceptions become the cooperative fast freight lines, which are in reality a part of the freight- traffic departments of the railroad companies. These facilities for handling through or joint traffic established a greater degree of cooperation among con- necting carriers and enhanced the ability of rival lines to compete for business free to move over more than one route. Indeed, the consolidation and cooperation of con- necting roads so intensified competition as to give to the interrailway relations for the promotion or restriction of competition far greater prominence than those have which are concerned with arrangements for joint traffic. The construction and consolidation of railroads in the fifties by which trunk lines several hundred miles in length were established increased the competition among carriers, especially for the traffic between the central West and the Atlantic seaboard. In the early fifties four lines — the New York Central, the Erie, the Pennsylvania, and the Baltimore and Ohio — were bidding for Western business, the two former lines connecting the seaboard with Lake Erie, the latter two the seaboard with the Ohio Kiver, and the intensity of this competition soon became a matter of concern to the companies. They were able, however, to keep their rivalry under fair con- trol until about 1870. The five years preceding the panic of 1873 were char- 218 AMERICAN RAILWAY TRANSPORTATION acterized bj great activity and much speculation in busi- ness, and this activity was especially manifest in railroad construction. 'New lines were projected both into new sections and into territory served by roads previously built. Some roads were constructed for the speculative purpose of being sold out by their builders to the old companies whose traffic was threatened. Although the subsequent development of the country has been such as to create a need for most of the roads built during this period and during the later periods of active railroad con- struction, the speculation in railroads that preceded the panic of 1873 was excessive and was one cause of the intense rivalry of the railways during the succeeding twenty years. The contest was keenest among the railroads connect- ing the Mississippi Valley with the Atlantic. In 1869 the New York Central and the Pennsylvania secured con- trol of the roads connecting their Western termini — Buf- falo and Pittsburg — with Chicago, and a struggle at once ensued for the possession of the east-bound and west-bound traffic between Chicago and the seaboard. In 1868 the rates from Chicago to ^ew York were $1.88 per hundred pounds, first-class, and 82 cents fourth-class; but in 1869 a " rate war " carried the rates for a time to 25 cents a hundred for all classes. Such a low rate as that could not long be maintained without bankrupting the roads, and the charges were raised to a profitable basis within a few months. But the published rates on the through traffic were seldom the ones actually charged for any length of time. Rates fluctuated greatly and were secretly reduced for individual shippers whenever such action was thought to be necessary to prevent traffic from going by a rival route. The situation in the territory of the " trunk lines " was made still more unsettled and uncontrollable in 1874 COMPETITION AND RATE AGREEMENTS 219 bj the extension of the Baltimore and Ohio to Chicago, and the opening of the Grand Trunk route from Mil' waukee via Detroit and Montreal to Boston. The New York Central and the Pennsylvania tried to maintain rates, but the Grand Trunk, the Erie, and the Baltimore and Ohio each preferred to act independently. As soon as the Baltimore and Ohio reached Chicago it began by open and secret methods to divert traffic from the Penn- sylvania lines. The Grand Trunk and the Erie, whose financial management was highly speculative, charged whatever rates the exigencies of competition suggested. By the latter part of 1875 the through rates on all the trunk lines were well-nigh demoralized. In December of that year a truce was agreed upon, but it proved but temporary. For eight months of 1876 a violent rate war prevailed, and the rates charged were often not sufficient to cover the costs of operating the trains. By the end of the year the finances of the roads had been so depleted that peace was a necessity, and in 1877 they succeeded in reaching an agreement to share the total through traffic according to stipulated percentages. The north Atlantic ports reached by the trunk lines — Baltimore, Philadelphia, New York, and Boston — pros- pered or declined commercially according to the amount of traffic secured by the railroad of which the city was the terminus, and so the contest between the railroads was intensified by the struggles of rival cities. The mer- chants of New York thought the rates to and from the West should be the same for Philadelphia and Baltimore as for New York, and less for New York than for Boston; but the merchants of Boston, Philadelphia, and Baltimore thought otherwise. The unregulated competi- tion of the trunk lines and the protracted rate wars were detrimental to the trade of New York, largely because the traffic that had previously moved by the Erie Canal, 220 AMERICAN RAILWAY TRANSPORTATION and thus to New York, was secured by the railroads and distributed among the other Atlantic ports. As long as the canal rates were considerably lower than the charges by rail the commercial superiority and progress of New York were assured; but the diversion of the canal busi- ness to the railroads threatened to check the advance of the trade of the city. The New York Central tried to hold the trade of New York by meeting the rates of the ambitious and reckless rival lines that were striving to build up the trade of their termini. The situation of 1876 was almost as burdensome to the business interests of the several Atlantic seaports as it was to the railroad companies, and they welcomed the settlement of the rate war. The rival claims of the cities as to the rates were adjusted by a compromise which gave New York and Boston the same rate, Philadelphia a slightly lower one, and Baltimore one somewhat less than Philadelphia received. The " differential " rate, as it was called, that was finally agreed on in favor of Philadelphia as compared with New York was two cents less a hundred pounds on sixth-class freight. The corresponding Baltimore differential was three cents less a hundred, with a proportionately larger differential for the higher classes of traffic. This compro- mise was regarded by New York as a concession. The merchants of that city were not, nor have they since been, satisfied with the adjustment of the rates then made. The competition among the railroads in the West and in the South, though less intense, was similar to that among those in the northeastern part of the United States. In the central West the most important lines converged at Chicago, with which point St. Louis, Kansas City, Omaha, and other cities had each been connected in 1870 or soon thereafter, by two or more rival routes. There were three lines between Chicago and St. Louis in 1870, and later others were constructed. The through traffic COMPETITION AND RATE AGREEMENTS 221 of the Western roads generally was eagerly contested for, and the rates fluctuated violently. In the Southern States the railroads ran from the interior regions of production radially to the ports of the Atlantic and Gulf seaboards and to the markets of the Northern States. There was competition among the railroads to secure as much business as possible for their respective ports, and an active general competition between the railroads and the numerous water-routes. Traffic between the E^orth- eastern and Southern States might be shipped coastwise or by rail; that between the States north of the Ohio Eiver and those of the lower Mississippi Valley by the Mississippi and its tributaries or by the railroads; while the many streams of the South were highways much used in moving traffic to and from the seaboard. Under these conditions the maintenance of published rates on through rail traffic was impracticable until a way was found whereby the railroad and steamship companies could work together in making rates and dividing up the total busi- ness. A plan of united action was developed and inaugu- rated in 1875. In order to understand why the railroad companies find such difficulty in maintaining their rates and why they carry their rivalry to such extremes, one needs to consider the nature of railway competition. The mer- chant or the man who has invested capital in a business from which the invested capital can be withdrawn with- out much loss will suspend his business temporarily or permanently if competition becomes so severe as to pre- vent him from earning profits. As Professor Hadley says : " If Grocer A sells goods below cost, Grocer B need not follow him, but simply stop selling for the time. For (1) 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 goods 222 AMERICAN RAILWAY TRANSPORTATION below cost, lie loses more money the more busitiess lie does. (3) It can not continue indefinitely. 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.'' ^ The situation is very different with competing rail- roads. The railroad company can not suspend business when competition forces down the rates, although the earnings may not yield any profits on the capital invested. And this is so because fully three-fourths of the ex- penses will continue even if the railroad ceases to carry traffic. Very little of the capital invested in a railroad (and the same is true in a large measure of mining en- terprises and the iron and steel industries) can be with- drawn. When put into a railroad, capital must secure an income from that form of investment, or become worthless; so if the company stops doing business, no interest on the investment can be obtained. But more than this, the railroad company's expenses for mainte- nance and repairs, and its losses from deterioration of equipment, road-bed, and structures do not stop when traffic is suspended. About all a railroad company can save by suspending all traffic is the expenses incurred in operating the trains. Such being the case, a railroad will not surrender its traffic to a rival, even though the earnings are so small as to leave no surplus to pay inter- est on capital. As long as the receipts from traffic will cover operating expenses and yield a small amount in excess to apply to the payment of expenses that must be met whether business is being carried on or not, the rail- road will seek to hold its traffic against its competitors, or endeavor to secure the business being handled by its rivals. Unless a railroad is exceptionally strong financially, * Railroad Transportation, p. 73. COMPETITION AND RATE AGREEMENTS 223 it can not carry a large share of its traffic at rates but little above the costs of operating the trains without becoming bankrupt; but the insolvent railway does not cease to do business. It will continue to be operated either by its former owners or those who may purchase it, and while it remains in a condition of insolvency it is apt to seek competitive traffic more eagerly than its solvent rivals can do with safety. While bankrupt, the road is not obliged to pay interest or dividends on the capital invested, and while temporarily freed from that obligation ther^ is a strong temptation to secure new patronage and additional tonnage. Insolvent roads have frequently yielded to this temptation and have made reck- less wars upon their rivals, regardless of their obligations to treat the public without unjust discrimination and their competitors in accordance with business ethics. But whether solvent or bankrupt, every railroad has a strong incentive to enlarge its business, because an increase in traffic does not correspondingly add to the expenses. After a railroad has been constructed, equipped, and put into operation most expenses are inde- pendent of the volume of traffic. Just as the expenses are not much lessened by a decrease in business or a suspension of operations, so are they enhanced to a com- paratively small extent by an increase in the traffic. Until the point is reached when the facilities of a railroad are fully utilized, the greater the volume of business done the less the costs per unit of business (per passenger mile or ton mile), and the higher are the profits. The rail- road business is one of increasing returns. A company with a traffic of 1,000,000 tons annually will much more than double its profits by carrying 2,000,000 tons, pro- vided the extra business can be secured without reducing the rates, and if a considerable reduction in rates should be necessary to secure the additional traffic, the com- 224 AMERICAN RAILWAY TRANSPORTATION pany will probably add to its profits by taking the extra tonnage. Such being the nature of competition in railway affairs, some means for regulating its action are neces- sary if the service of railroad transportation is to be performed with profit to the companies having it in charge, and in accordance with the best interests of the public. If interrailway affairs were controlled by forces similar to those governing the business relations of per- sons engaged in agriculture or merchandising, their regu- lation by unrestrained competition might be satisfactory; but experience has clearly shown the absolute necessity for cooperation among carriers in the management of their competitive as well as their joint business. Un- bridled competition is intolerable alike to the railroad companies and to the public, and must of necessity be checked. Whatever is ruinous to all parties must be stopped, and if the ruinous practises have no natural limits, an artificial one must be established. If the competition among rival railways is to be restrained, they must either cooperate or consolidate. If they can not agree upon, and work in accordance with, business methods that will effectually restrain the forces which lead to ruinous conipetition, they must consoli- date under a single ownership or a common control. There is no other alternative. An agreement for the restraint of competition may be for the accomplishment of one or more of four pur- poses: (1) The agreement may be to maintain rates, each party to the agreement being free to secure as much business and as large earnings as can be obtained at the rates sanctioned by the compact. (2) The agreement may divide the competitive traffic among the interested roads, according to stipulated percentages. (3) The agreement may allow each road to secure as much as possible of the COMPETITION AND RATE AGREEMENTS 225 competitive business, but require the total earnings of all the lines from that traffic to be divided according to agreed ratios. (4) The company may decide to divide up the field, each company receiving a section of country within which it is to conduct its business unmolested by the other parties to the agreement. The first form of agreement is the easiest one to adopt, and was the one first employed by the railroads to regulate their competition. The second and third forms of agreements are called pooling, and for many years pooling arrangements were a part of all the cooperative agreements of rival railroads. A division of the field can scarcely be accomplished to much extent by formal agree- ments, but must come about mainly as the result of the growth of large systems of roads. As was noted in Chap- ter Y, a grouping of the railroads of the United States is in progress that promises eventually to divide the country into a limited number of sections, the railroads in each section being under a single control. When competition for long-distance traffic became active in the early fifties, the necessity for agreements to prevent the cutting of rates secretly and to secure sta- bility in charges became apparent. In the report of the Pennsylvania Kailroad in 1855, the president, J. Edgar Thompson, stated that "with a view to agreeing upon general principles which should govern railroad compa- nies in competing for the same traffic and preventing ruinous competition, a free interchange of opinions took place during the past year between the officers of the four leading East and West lines, and also with those of their Western connections." The traffic for which this ^' ruin- ous competition " was then being indulged in was quite as much the west-bound passenger business as the east- bound freight tonnage. Later the freight business be- came the main object of competition. 16 226 AMERICAN RAILWAY TRANSPORTATION This conference did not secure harmonious action. In 1857 the New York Central and the Erie engaged in a severe struggle for control of the passenger travel be- tween N^ew York and Lake Erie. This struggle was fol- lowed by an agreement signed by the presidents of the four trunk lines " for the purpose," as President Thomp- son stated in his report of 1858, " of agreeing upon remimerative rates, abolishing injudicious practises, and effecting a harmony of purpose conducive to the mutual advantage of the railway interest and the public." The agreement, among other things, named a person to act as umpire for the adjustment of differences among the par- ties to the compact. Agreements similar to this were entered into fre- quently and openly by the railroad companies in differ- ent parts of the United States during the fifties and six- ties, the officers which convened to make the agreements usually being the general freight-agents. However, these pledges of the officers of the competing lines failed to secure stable rates. Sudden and extreme fluctuation characterized competitive charges, and it was evident that some more effective arrangement was needed. In the summer of 1874 Commodore Yanderbilt, the president of the I^ew York Central, conferred with rep- resentatives of the Pennsylvania and Erie Railroads at Saratoga, and they agreed upon a board of arbitration to settle disputes among their roads. Their idea was to agree upon rates as formerly and also to establish a cen- tral board with power " to establish rules and tariffs which should be binding upon the various companies, and this central board it was intended should be clothed with sufficient powers to hold the companies firmly. It was an attempt to substitute arbitration among railroads for a condition of perpetual warfare." ^ * Charles Francis Adams, Railroads: Their Origin and Problems, p. 153. COMPETITION AND RATE AGREEMENTS 227 Whether this plan of cooperation would have suc- ceeded had it been given a trial is doubtful; but it was not given a trial because it was not acceptable to the Baltimore and Ohio and the Grand Trunk, the two trunk lines that had just secured Chicago connections and were desirous of securing the maximum amount of competitive traiSc. The Saratoga Conference raised a great storm of popular opposition to the railroads, because the public thought the railroad presidents had conspired to create an oppressive monopoly; but it had no effect in checking interrailway contests. The disastrous rate wars of 1875 and 1876 followed. The agreements to maintain rates failed, because there was no authority to enforce their observance, and the incentives to break the contract were always strong. The rates were decided upon by the higher officials of the companies, and they or their representatives agreed to maintain the rates thus established; but as soon as any company suspected another of violating the agreement, it would authorize its subordinate officials or the soliciting agents " to do as others are doing or supposed to be doing.'' Railway managers saw clearly that the only way to maintain rates upon traffic for which several inde- pendent railroads were competing was to remove the inducement to cut the rates. They sought to accomplish this by means of pooling. CHAPTER XVI INTERR AIL W A Y RELATIONS ( CONTINUED) II. Pools and Traffic Associations The main purpose of pooling was to prevent the cut- ting of rates and fares — the establishment of conditions that would enable the railroads to enforce their agree- ments as to charges. The pools were agreements among railroads whereby their competitive traffic or the receipts from that traffic were divided among the companies according to stipulated ratios. Arrangements for the divi- sion of the business were called traffic pools, those for the distribution of the receipts money pools. The arrangement effected by a freight-traffic pool is theoretically simple. The roads that have been com- peting for some time for traffic free to choose its route observe what share of the total traffic, under normal and peaceful conditions of rivalry, is carried by each line, and make an agreement guaranteeing that each road shall carry during the period of the contract the percentage of the total tonnage to which past experience has shown the road to be entitled. If a road while a member of the pool does not receive its stipulated share of the total tonnage, the organization having the management of the pool in charge sees that tonnage is diverted from the roads receiving more than their allotted percentage to the line having a tonnage deficit. In order to make a traffic pool effective, the railroad companies, instead of 228 POOLS AND TRAFFIC ASSOCIATIONS 229 the shippers, must determine the route by which a part of the traffic shall move. Usually shippers object to sur- rendering their right to determine the route by which their goods shall be taken, and, although the companies always receive a considerable tonnage of unrouted ship- ments, the railroads have more often preferred to allow each road in the pool to accept and forward the tonnage offered to it, and to divide among each other the receipts from the traffic rather than the tonnage — i. e., to estab- lish a money pool. The money pool, furthermore, is ap- plicable to the passenger business as well as to freight traffic. In pooling their earnings from competitive business, it is customary for each road to retain a third or a half of the revenue it derives from that traffic, and to turn the remaining two-thirds or half into the pool (or joint purse, as it is called in England), to be distributed peri- odically among the pooling lines in accordance with the percentages stipulated in the agreement. Each road is allowed to retain a part of the earnings to cover the actual expense* of conducting the transportation affected by the pool, and the percentage withheld from the joint purse must be small enough to remove the inducement to attempt to capture traffic from competitors. At one time the pooling agreement of the Southern Railway and Steamship Association required 80 per cent of the receipts to be paid into the pool. A railroad company naturally dislikes to surrender any of its receipts, because to do so seems like giving a part of its earnings to a rival; consequently the enforce- ment of the pooling agreement has not always been easy. This difficulty has been in some degree obviated by the practise of requiring each member of the agreeijient to leave on deposit in the pool at the time of each periodical distribution of the pooled earnings a balance sufficient to 230 AMERICAN RAILWAY TRANSPORTATION cover any payments that will probably need to be made to its competitors. By arrangements such as may be established by the pooling of traffic or earnings it is possible to prevent a railroad from deriving immediate profit from secretly cutting rates or openly engaging in a rate war; but the temptation for a road to increase its percentage of the total traffic carried by all lines is not wholly removed. The pooling contracts are for a short period of a year, or, at most, a few years, and every road desires to secure as large a tonnage as possible in order that it may share more largely in the subsequent allotment of percentages. The pool does not altogether destroy competition. Even if published rates are fully maintained, there is bound to be a rivalry in service, each road endeavoring to secure the largest possible volume of business. Professor Hadley states in his Railroad Transporta- tion that " the earliest railroad pools were probably de- veloped in 'New England, but they were on a small scale, and the whole thing was often so quietly done that their very existence was almost unsuspected." So little is known of the history of these New England pools it is probable that they were not important. The fir^t pooling arrangement of much consequence was established in 1870 by the railroads connecting Chicago and Omaha — the ^^Torthwestern, the Rock Island, and the Burlington roads. These three lines, having about equal facilities for handling the traffic between Chicago and Omaha, agreed that each route should have a third of the business. The charges by all lines were to be the same, and the traffic, without solicitation by the companies, was to take whichever route the shippers might decide to patronize. According to the first agreement, each road was to retain 45 per cent of the receipts from the through passenger business and 60 per cent of the earnings from the through POOLS AND TRAFFIC ASSOCIATIONS 231 freight traffic; the remainder of the revenues from this competitive business was to be shared equally by the three companies. This agreement was maintained successfully for fourteen years, with the exception of a few months in the summer and early autumn of 1882, when a con- troversy regarding the distribution of freight brought on a rate war of a few months' duration. In 1884 the Chicago-Omaha pool gave way to a larger organization — the Western Freight Association. Six years after the establishment of the Chicago- Omaha pool the Southwestern Railway Rate Association was formed to adjust the rates on traffic between Mis- souri River points and Chicago and St. Louis, and to dis- tribute the earnings from that traffic among the several competing lines. One purpose of the association was to protect the grain-trade interests of Chicago and St. Louis from the consequences of unrestrained competition. The pooling agreement was similar to that of the Chicago- Omaha pool, except that there were more roads parties to the arrangement; but the operation of the larger asso- ciation was not so successful. For a time the association acted as a clearing-house for the settlement of balances among the roads. In addition to these two pooling agreements, numer- ous others were entered into by the railroads of the Central and Western States in the seventies and eighties, some of the agreements being in force only for a short time, others for several years. The traffic between Chi- cago and Milwaukee on the east, and St. Paul and Min- neapolis on the west, was regulated by the ^Northwestern Traffic Association; the field between Chicago, Milwau- kee, and St. Louis on the east, and Omaha and Council Bluffs on the west, was occupied by the Western Freight Association; to the south of this was the Southwestern Railway Rate Association just referred to. Among the 232 AMERICAN RAILWAY TRANSPORTATION organizations having authority in the territory west of the Missouri KiA^er were the Colorado Eailway Associa- tion, the Colorado-Utah Association, the Pacific Coast Association, and the Transcontinental Association. The Chicago-Omaha agreement entered into by the Northwestern, Rock Island, and Burlington Railroads in 1870 was simply to establish a pooling agreement; but the organizations or " associations " subsequently formed by competing railways in the West and other sections of the country had other purposes and activities, although the pooling of traffic or earnings was their main object. In the traffic associations the railways attempted to regu- late all their interrelations. They fixed the rates on joint and competitive business, laid down rules regarding the solicitation of traffic, took measures to prevent fraud, determined the speed at which the fast passenger-trains should be run, decided what kinds of tickets should be issued, and what privileges should be afforded or denied shippers. Until 1887 a pooling agreement was a regular feature of the organization of all traffic associations ; since then pooling has been illegal, but the traffic associations have continued to exercise their other functions. The traffic association was developed earliest in the States south of the Ohio and Potomac, where, in 1875, the Southern Railway and Steamship Association was formed under the masterful guidance of Albert Fink. This association grew out of pooling agreements, the first of which was entered into in December, 1873, by the four roads connecting Atlanta, Ga., with the sea- board. The pool covered only the cotton business of the roads. The membership of the association comprised the railroads in Virginia, North and South Carolina, Georgia, Tennessee, and Alabama, and the steamship lines con- necting those roads with Baltimore and the other north Atlantic seaports. This was one of the best organized POOLS AND TRAFFIC ASSOCIATIONS 233 and most effective traffic associations, and came later to include most of the territory east of the Mississippi River and south of the Ohio and Potomac. In its plan of organization provision was made for an annual conven- tion composed of one delegate from each constituent company. This body had legislative powers; the admin- istrative functions were exercised by a general commis- sioner, an executive committee which after 1883 con- sisted of the managers of the principal lines, and a board of arbitrators. The general commissioner was given large powers, and this was one reason why the organization proved effective. The questions the commissioner could not settle were referred to the Executive Committee, which had jurisdiction over the joint and competitive traffic. Its action had to be unanimous, and in case of a disagreement on any subject, that question was referred to the Board of Arbitrators for adjustment. The rates on competitive traffic were determined by the Executive Committee, which also apportioned the traffic among the competing roads. Each road carried the traffic coming to its lines, but paid a large part of its gross earnings from the competitive traffic (at one time 80 per cent) into the pool for distribution, according to the stipulated per- centages. One useful feature of the association's organ- ization was the clearing-house for the settlement of the accounts of the joint traffic. Naturally the most difficult problems the association had to deal with were the allotments of traffic among competitors. These allotments covered different kinds of traffic, and affected several groups of roads and steam- ship lines, which were frequently changing their relative efficiency as carriers. Allotments were made annually, and usually were accepted by the interested companies, but not always, and local rate wars occurred from time to time. The local troubles, however, did not disrupt the 234 AMERICAN RAILWAY TRANSPORTATION association, because the withdrawal of a member did not terminate the agreement among the others, and because the commissioner was given such power to discipline a recalcitrant line that he was usually able to bring it into subordination. Competition was active among the pooled roads, and between. the carriers in the pool and those out- side. Each mernber strove to increase its traffic in order to make as large a showing as possible when the annual allotments were made. The rates fixed by the associa- tion on most of the business into and out of the territory served by its members were influenced by outside competi- tion. The rates between the north Atlantic ports and the South were affected by the charges made by sailing ves- sels. At that time the Mississippi River had a consider- able regulative influence on rail rates. Furthermore, then, as now, every city was zealous in securing as liberal rates as possible as compared with its rivals. If any indus- trial or commercial center within the territory of the pooled lines were charged higher rates than its rivals without that territory, the city and the ' roads serving it were liable to lose their business, and care was taken to guard against such a result. The competition among the railroads was heaviest in the territory between the central West and the North Atlantic seaboard, and greater difficulty was experienced there than in the West or South in making effective pool- ing agreements. The first agreement affecting competi- tive traffic in this field was one between the railroads mining and carrying most of the anthracite coal. In 1872 they entered into a contract restricting the amount of coal to be mined, and dividing up the production and traffic according to fixed ratios. This agreement lasted for four years, and was followed by others from 1878 on, which did something to steady the prices and output of coal, but which never fully accomplished the purpose. POOLS AND TRAFFIC ASSOCIATIONS 235 Another, and a decidedly objectionable plan for regu- lating the competitive relations of the trunk lines was to make certain large shippers the " eveners " of the traffic of the rival roads. In applying this method of distributing business, the railroads first decided what share of the total tonnage should go to each line, and then arranged with large shippers to allot their freight from time to time among the several roads in such a way as to enable each route to secure its stipulated share of the total of all competitive traffic. The first eveners were the shippers of live stock from Chicago to the East, with whom the railroad companies made an agreement in 1875. The Standard Oil Company was another evener. These "eveners" were remunerated for their trouble by being given better rates than other shippers. The large ship- per was favored at the expense of the smaller ones, and the discrimination was most unjust. The large shippers who acted as eveners were quick to take advantage of the situation. The railroad companies being unable to restrain competition, were willing to pay a large price for a peaceful division of traffic, and the concessions in rates demanded and received by the large shippers were excessive and ruinous to other shippers. In 1879 — that is, when the trunk lines succeeded in pooling their east- bound business — the evener plan of distributing traffic was terminated. That, however, did not end the large shipper's opportunity to secure special favors. The prob- lem of discrimination remained, and unfortunately is still present. Three years of strife, much of which consisted of violent rate wars, followed the failure of the Saratoga Conference, then, in 1877, the necessitous condition of the trunk lines and the pressure of the commercial inter- ests affected by the struggle caused the roads serving the north Atlantic ports to unite upon a pooling arrange- 236 AMERICAN RAILWAY TRANSPORTATION ment. Albert Fink was called to their assistance, and in July an organization of the four trunk lines from the seaboard to Lake Erie and the Ohio River was effected. In December the roads between Pittsburg, Erie, and Buffalo on the east, and Chicago and St. Louis on the west (what is now called Central Traffic Territory) estab- lished a like organization. The organization in both cases consisted merely of an " executive committee,'' in which each road subject to the agreement was represented. Albert Fink was chairman of the Executive Committee of the Trunk Line Association. Pooling was the main purpose of each organization. The apportionment of the west-bound traffic from 'New York was made in 1877; the New York Central and Erie were each to have 33 per cent, the Pennsylvania 25 per cent, and the Baltimore and Ohio 9 per cent. The pooling of the traffic eastward from Chicago was a more difficult task, and was not accomplished until 1879. In that year Albert Fink further developed the organization of the railroads between the central West and the sea- board by securing the establishment of the Joint Execu- tive Committee, composed of representatives of the "Trunk Lines," from the seaboard to the Ohio and Lake Erie, and of their Chicago connections. This Joint Ex- ecutive Committee was an organization similar to the Southern Railway and Steamship Association, but it did not give its chairman, Mr. Fink, as much author- ity as he had had as commissioner of the Southern Asso- ciation. The Joint Executive Committee endeavored to ac- complish three things: (1) To fix the rates (or the "dif- ferentials ") which Philadelphia and Baltimore should have as compared with E^ew York and Boston on the Western business; (2) to apportion the total competitive traffic among the interested roads; (3) to have supervision POOLS AND TRAFFIC ASSOCIATIONS 237 over the joint traffic shared by the roads east and west of Buffalo, Erie, and Pittsburg. The first of these problems proved a most difficult one, and was never settled to the satisfaction of all par- ties. The compromise arrangement, described on page 220, probably dealt with the question as fairly as it is possible. Indeed, Albert Fink's report on Adjustment of Railroad Transportation Rates, made in 1882, showed clearly that the rates from the central West to each of the north Atlantic ports were at that time, and must be a part of the through rates from the central West to Liverpool and 'Europe, and that the rail charges to Phil- adelphia and Baltimore were as much less than those to 'New York as the ocean rates from Philadelphia and Baltimore to Europe were greater than from New York to Europe. The Legislature of New York State mani- fested its disapproval of the formation of the Joint Ex- ecutive Committee, and of its settlement of the question of differential rates, by the appointment of a committee of investigation — the Hepburn Committee — whose inves- tigations and report added much to public information regarding the railway problem in general, although it threw little light on the question of the effect of railway pooling on the business of ISTew York State and city. The New York Central Railroad felt dissatisfied with the differential rates, and carried on a rate war in 1881, and another in 1884. The second duty assigned the Joint Executive Com- mittee — the pooling of east-bound traffic — was performed in 1879. To enforce the pooling agreements, and to super- vise the business arrangements and rates affecting the joint business of the Eastern lines and their Western connec- tions, a progressively efficient organization was developed. As reconstructed in 1885, the organization of the Eastern or " trunk lines " was a money pool governed by a com- 238 AMERICAN RAILWAY TRANSPORTATION mittee of the presidents of the roads, to which appeal might be taken from the Executive Committee. A final appeal might be made to a permanent arbitrator appoint- ed by the president's committee. The chief administra- tive officer of the organization was the chairman of the Executive Committee. As thus constituted, the organi- zation gave promise of being able to maintain orderly relations among the carriers competing for the vast traffic moving east and w^est through the north Atlantic ports; but in 1887 the vitality of the organization was largely impaired by the law making illegal the pooling of freight traffic. In the foregoing paragraphs an account has been given of the more important but not of all the railway pools that were organized in the seventies and eighties. In 1887 practically all the roads having a large volume of competitive traffic were members of some pooling organ- ization. The interrailway relations were not altogether satisfactory, but the conditions, at least as far as the car- riers were concerned, were improving. Progress was being made in regulating rate fluctuations and the conse- quent discriminations. It does not seem, moreover, that the pools were a detriment to the public. Although the rival railroads made their rates by joint action, and united to maintain the charges thus agreed upon, they were not able to control the industrial forces to which trans- portation charges are in a large measure subject. E^or was it possible for the railroads by means of rate agreements and pools to prevent the ocean, the large rivers, and the Great Lakes from exercising a wide" and effective influence on rail rates. Erom 1870, when pooling began, to 1887, when it was prohibited by law, the average receipts of the railroads of the United States for hauling a ton of freight one mile declined from nearly two cents (in gold) to about one cent; in other words, the average ton-mile POOLS AND TRAFFIC ASSOCIATIONS 239 earnings in 1887 were only a little more than half those of 1870. Charges did not decrease because of pools, but the pools did not prevent their decline. Nevertheless, the public was strongly opposed to pools. The people generally thought that pooling enabled the railroads to establish monopoly conditions in transporta- tion; indeed, the public opposition to railway practises (some of which were not objectionable) during the sev- enties and eighties centered against pooling. It can not be shown, however, that pooling enabled the railroads to fix their charges at will, and it is clear enough that dis- crimination in rates and fares rather than the coopera- tion of competing railroads was the central abuse. Section 5 of the Interstate Commerce Act, passed by Congress in 1887, declares: " That it shall be unlawful for any common carrier subject to this act to enter into any contract, agreement, or combination with any other common carrier or car- riers for the pooling of freights of different competing railroads, or to divide between them the aggregate or net proceeds of the earnings of such railroads *or any portion thereof; and in any case of an agreement for the pooling of freights as aforesaid, each day of its continuance shall be deemed a separate offense.'' Previous to the passage of this law, similar action had been taken by several of the States, particularly by those in the central West, where the necessity for re- forming the methods of railway management was most keenly felt, and this antipooling section of the national act was demanded by the members of the House of Rep- resentatives from the South and West. The Senate was not in favor of prohibiting pooling, but the House of Representatives insisted upon its being done. In a certain sense pooling contracts had never been legal. The railroad companies did not commit an offense 2^0 AMERICAN RAILWAY TRANSPORTATION by entering into a pooling agreement, but the contracts thus made could not be enforced by legal action, because the courts regarded them as being in restraint of trade. It is a general principle of common law that contracts in restraint of trade are void because they are in con- flict with public policy. The sense in which pooling agree-' ments were illegal before 1887 was clearly stated by Judge Cooley. " A contract/^ he says, " may be illegal in the sense that it is forbidden by a law which imposes some penalty for entering into it; or it may be illegal because, though not forbidden, it is considered to be of an injurious and demoralizing tendency, and therefore the law will not favor it, but will refuse to lend its aid in its enforcement. If a contract is only illegal in this last sense, parties are at perfect liberty to enter into it if they please, but performance of its conditions must be entirely voluntary.'' Xot being enforceable by legal procedure, the strength of the pooling agreement depended upon the honor of the members to the contract and upon the successful imposition of fines for a violation of its terms. Large use was made of fines to enforce the agreements, the collec- tion of the fines being secured by requiring members to keep a considerable deposit in the pool. It is thought by many persons that railway pooling has never been given a thorough test in this country, because of the extra legal character of the contracts; but whether the pooling agreements would really have been more effective had they been sanctioned by law is uncertain. The pool was an agency by which the railroads sought to cooper- ate; indeed, it was in many respects the medium by which the rival companies sought to arbitrate their con- flicting interests, and it is doubtful whether contracts for the promotion of those ends would have gained much strength from the sanctions and penalties of the law. POOLS AND TRAFFIC ASSOCIATIONS 241 The prohibition of pooling in 1887 compelled a reor- ganization of traffic associations, but the necessity for cooperation required the continuance of the associations. The trunk lines signed new articles of agreement a few days after the interstate commerce law went into effect " for the purpose of facilitating the transaction and inter- change of business with each other and with their con- necting lines/' The Grand Trunk was not a party to this agreement, and a serious rate war followed, the re- sult of which was a new agreement in 1889, at which time the Grand Trunk became a member of the Trunk Line Association. The Southern Railway and Steamship Association eliminated the pooling part of its organization, and con- tinued to exist. By means of fines it was able to prevent serious rate disturbances until the business depression of 1893 came, when the struggle for traffic became so intense that the association was unable to control the action of its members, and the organization was ter- minated. Two years later the Southern States Freight Association was formed. Rate wars prevailed generally west of Chicago in 1887 and 1888, and the railroad companies had great difficulty in forming organizations strong enough to pre- vent rate cutting and retaliation. The various associa- tions that had existed previous to the prohibition of pool- ing were reorganized, and, in addition to the. local bodies, the presidents of the interested roads, early in 1889, organized " the Interstate Commerce Railway Associa- tion," with the hope of exercising an effective control throughout the entire territory west of Chicago, with the exception of that served only by the Pacific roads and the international lines. This organization was a failure, as was also one which succeeded it, and it was not until Janu- ary, 1891, when the Western Traffic Association was 17 242 AMERICAN RAILWAY TRANSPORTATION formed, that the railroads composing the several traffic organizations west and southwest of Chicago were able to cooperate with any degree of success. The Western Traffic Association did not supplant the smaller organiza- tions, but federated them by being a court of appeal in matters of rates and in other controversies. One of the most vigorous of the subordinate bodies was the Trans- Missouri 'Freight Association, whose history will be referred to in the next chapter. The Pacific roads, including the Canadian line, organ- ized the Transcontinental Association in 1888. The chief problem that body had to solve was the competition of the Canadian Pacific with the American lines. Dif- ferential and lower rates via the Canadian road were agreed to, but as this was not satisfactory to the Southern Pacific, the Transcontinental Association came to an end in 1892. The following year the three California lines established a Transcontinental Freight Rate Committee, which was in existence until 1897, when it gave place to the Transcontinental Freight Bureau, of which all the Pacific lines in the United States are members. This organization is still in existence. The traffic associations thus reorganized endeavored to regulate the interrelations of rival carriers, but with- out much success. When the business depression of 1893 and the following four years caused railway traffic to fall off many roads became bankrupt and others were threat- ened with insolvency. The struggle for business became intense and ruthless, and discriminations were general. The regulation of competition by pooling was not per- missible, but under the stress of circumstances the rail- roads sought to do secretly or indirectly what the law prevented them from doing openly. In justification of their action the railroad companies asserted that the law imposed impossible conditions upon them. However POOLS AND TRAFFIC ASSOCIATIONS 243 that may have been, it is certain that the financial con- dition of the railways was most unsatisfactory from 1893 to 1897; that condition, however, was mainly the result of the speculative financiering of the preceding twenty years. The antipooling law was only one and a minor cause of their discomfiture. CHAPTEK XVII INTEERAILWAY RELATIONS {CONTINUED) III. The Present Situation The methods by which the railroads attempted to regulate their competitive relations after pooling had been prohibited are shown in the agreements entered into by the members of the Trunk Line Association and by the roads which formed the Trans-Missouri Freight Asso- ciation. Article YIII of the Trunk Line Association's agreement stipulated that "if the maintenance of uni- form tariffs by all lines reduces the traffic of any party below a fair proportion of the traffic in competition, the tariffs may be so adjusted from time to time as to protect such lines from an unjust depletion of traffic, such ad- justment to be made under the rules of this association." Likewise the articles of agreement of 1893 of the Cen- tral Traffic Association, of which also the trunk lines were members, contained the proviso that " whenever any party hereto feels that its traffic is being unjustly depleted, it shall represent the facts in writing to the commissioner, who shall promptly endeavor to secure to the parties hereto their fair shares of traffic.'' What was to be considered each road's " fair proportion " of traffic was not stated in the agreements, but in all prob- ability there was a tacit understanding on that question. The Trunk Line and Central Traffic Associations did not succeed in federating in an efficient common organi- 244 PRESENT INTERRAILWAY RELATIONS 245 zation until the close of 1895. They had a joint commit- tee before that date, but, unlike the Joint Executive Com- mittee that had existed from 1879 to 1887, it had very little power. After making unsuccessful efforts to fed- erate in 1892 and in 1894, they were brought together in 1895 by the stress of circumstances. Traffic was light, competition ruthless, rates were not maintained, and the securities of their companies were at a low ebb. The Joint Traffic Association, which took charge of the joint and competitive business of 32 roads in the Trunk Line and Central Traffic Associations January 1, 1896, was managed by a board of nine men representing the nine largest systems of roads. This board was responsible to the council of the presidents of the roads, and there was a permanent board of three arbitrators. The Board of Managers did not prescribe the rates to be charged by the several companies, but recommended the rates to be fixed by each road; but as the articles of association stip- ulated that " the failure to observe such recommendations shall be deemed a violation of this agreement," and as a violation of the contract was punishable by a fine of $5,000, or an amount equal to the gross receipts of the transaction concerned in the violation, the rates were in reality determined by the association. Likewise the traffic was apportioned among the competing roads by the organization. There was nothing specific in the arti- cles of agreement regarding the allotment of percentages, but in 1896 an award of the arbitrators apportioned the traffic east-bound from Chicago among the ten interested roads. The Joint Traffic Association lasted less than three years, and was brought to an end by a decision of the Supreme Court. Indeed, the United States commenced proceedings against the association immediately after its activity began, on the grounds that the organization 246 AMERICAN RAILWAY TRANSPORTATION accomplished pooling, and was a violation of the Inter- state Commerce Act, and that it was a combination in restraint of trade, and therefore contravened the Anti- trust Act of July 2, 1890. In the lower courts the asso- ciation won, but it lost in the Supreme Court, which based its decision mainly on the antitrust law, the court in 1897 having held that law to apply to railroad agree- ments to ^ and maintain rates. The decision of 1897 was in the case of the United States against the Trans-Missouri Freight Association. This association began April 30, 1889, and had super- vision over the competitive traffic of 18 roads west of the Missouri River and the ninety-fifth meridian. The pur- pose of the organization was " mutual protection by estab- lishing and maintaining reasonable rates, rules, and regu- lations on all freight traffic, both through and local." In 1892 action was begun . in the United States Circuit Court to have the association dissolved on the plea that it violated the Antitrust Act. The Circuit Court and the Circuit Court of Appeals decided that this act did not apply to railroads, but the Supreme Court, on the 22d of March, 1897, held to the opposite opinion. By the act of July 2, 1890, " every contract, combination in the form of a trust or otherwise, or conspiracy, in restraint of trade or commerce, among the several States, or with foreign nations, is hereby declared to be illegal." Congress did not have railroads in mind in passing this law, but as railway combinations were not exempted by the terms of the law, the Supreme Court held that they came under the act if they effected a restraint of trade or commerce. The court also took the ground that an agreement among competing railways to maintain rates — although the rates in question were reasonable and law- ful^ — was a restraint of trade, was contrary to public policy, and was a violation of the antitrust law. PRESENT INTERRAILWAY RELATIONS 247 The decision of the Supreme Court in the cases against the Joint Traffic and Trans-Missouri Freight Asso- ciations restricted the possibilities of lawful cooperation among independent railroads within very narrow limits. Before 1887 competing railways had been permitted to agree upon and to unite in efforts to maintain rates and fares on interstate traffic and to pool their business or its earnings; after 1887 freight pooling contracts were ille- gal, but rate agreements were considered lawful until 1897, when the Supreme Court held the law of July 2, 1890, to apply to railroads. Since then concerted action either in fixing or maintaining charges has been unlawful. The traffic associations lost their efficiency as regu- lators of interrailway competition in 1897 and 1898, and the railroads were obliged, if they observed the letter and spirit of the law, either to permit the return of unre- strained rivalry or to seek some other method than asso- ciation for the control of their interrelations. One thing done by the railroads was to consolidate much more ^ rapidly than they had ever done previously. The large systems became larger by the absorption of the smaller ones, and the systems thus enlarged further strengthened their power to act harmoniously by the " community of interest '' principle of ownership and management. The traffic associations were not abandoned. Their articles of agreement were so changed as to make them conform to the law — i. e., the functions of making and maintaining charges were left with the individual compa- nies — at least theoretically and technically that was done. As a matter of fact, however, the railways must cooperate in a large measure in classifying traffic, in working out their schedules of rates, and in fixing the joint and com- petitive charges exacted for the performance of the vast and intricate service of transportation. Were each com- pany to act solely for itself and without regard to the 2tt8 AMERICAN RAILWAY TRANSPORTATION classifications being followed and the charges being made bj the railroads serving other centers of population and regions of production, the result would be intolerable discriminations and business conditions little less than chaotic. Indeed, it would be impossible for the rail- roads to observe the Interstate Commerce Act or any other law requiring them to exact of all persons and all places only reasonable and just fares and rates. And so to-day, while nominally each railroad must prescribe its own charges, its officials must confer with those of other lines regarding joint and competitive business and cooperate with them in making classifications and adjust- ing rates. The meetings of the traffic associations afford- ed the opportunity for such cooperation. These associa- tions, moreover, now as formerly, concern themselves with numerous matters other than pooling and rate agree- ments, affecting the interrelations of railways. Indeed, the informal rate agreements decided upon at the meet- ings of these traffic associations have been so generally accepted by the constituent companies as to cause the Interstate Commerce Commission to assert in its report for 1901 " that the decision of the United States Supreme Court in the Trans-Missouri case and the Joint Traffic Association case has produced ho practical effect upon the railway operations of the country. Such associations, in fact, exist now as they did before those decisions, and with the same general effect." It should be added, how- ever, that the associations have been able to produce " the same general effect '' during a period of business prosperity. It is not at all certain that the recommenda- tions of the associations as to rates would have had much effect had every road been struggling to the uttermost to increase its tonnage. The list of railway associations published monthly in the Official Guide of the Railways of the United States PRESENT INTERRAILWAY RELATIONS 249 contains the names of nearly 150 organizations. Some of these are associations of technical officials, like sur- geons, master mechanics, engineers of maintenance of Avay, and accounting officers. In other organizations the membership is made up of administrative officers, such as general baggage agents, general passenger and ticket agents, railroad superintendents, etc. Most of the organ- izations are traffic associations. There are the three clas- sification committees, the official, Southern, and Western, and a large number of passenger and freight associations. Some of the bodies, like the Chicago Freight Committee, have strictly local jurisdiction. Boston, Cincinnati, Cleve- land, St. Louis, and other cities have such committees. The most important organizations are the passenger and freight associations, some of which include the railroad systems serving large sections of the country. In the main, the existing freight and passenger asso- ciations are reorganized forms of those that were estab- lished in the seventies and eighties, and the larger organ- izations may readily be grouped according to the terri- torial classification of railroads already presented. (1) The ^ew England roads have a passenger association, but no corresponding freight organization. (2) The Trunk Line Association has the same membership it has had in the past. West from Buffalo and Pittsburg to Chicago is the territory of the Central Freight and Cen- tral Passenger Associations. Besides the Trunk Line Association in the East, there is the Middle States Freight Association, which is concerned with the joint business of the Central Atlantic States. (3) South of the Poto- mac and Ohio and east of the Mississippi the most influ- ential bodies are the Associated Railways of Virginia and the Carolinas, the Southeastern Freight, and the Southeastern Passenger Associations, the Southeastern Mississippi Valley Association, and the Southern Freight 250 AMERICAN RAILWAY TRANSPORTATION Association. These organizations cover the field once occupied by the Southern Railway and Steamship Asso- ciation. (4) In the Southwest are the Southwestern Pas- senger Bureau and the Southwestern Tariff Committee. (5) The Middle West has the Western Trunk Line Com- mittee, the Western Passenger Association, and the Trans-Missouri Freight Bureau. (6) The traffic to and from the Pacific coast is supervised by the Transconti- nental Freight Bureau and the Transcontinental Passen- ger Association. In each of these six sections there are several other traffic associations less influential than those just noted; only the more important ones are included in this list. During and since 1898 the consolidation of railroads has proceeded with unprecedented rapidity. That this must have greatly changed interrailway relations is obvi- ous. The causes of this rapid consolidation have been in part those which have operated generally throughout the business world during the past few years. In production, even more strikingly than in transportation, the large organization has been supplanting the small one in order that business might be expanded, expenses reduced, and profits increased. There has, moreover, been a close con- nection between the rapidity of consolidation during recent years and the great prosperity that has prevailed since 1898. Prosperity called for expansion in all lines of business, and supplied the surplus capital needed for the enlargement of plants and equipment, and for finan- ciering the consolidations that have accompanied indus- trial expansion. Prosperity was not a cause of consolida- tion, but was a favoring condition. In the case of railroads, certain special causes have operated to hasten consolidation. The foregoing discus- sion of the nature of interrailway competition and of the provisions and effects of the laws passed to restrict rail- PRESENT INTERRAILWAY RELATIONS 251 way cooperation has indicated what these special causes are. Since the rivalry of railroads to secure competi- tive business tends, unless artificially restrained, to carry the rates in that business down nearly to the extra costs incurred in carrying that traffic, a large measure of unity of action becomes necessary if the railway companies are to keep their properties on a solvent and profitable basis, and are to protect the public interests by keeping their rates stable and relatively reasonable as between different persons, competing localities, and the various kinds of commodities. For many years the rival companies sought to prevent competition from producing its Undesirable results by rate and traffic agreements; but when it became imprac- ticable for the railroads, either directly or indirectly, to effect such agreements, the only available course of action was to secure unity of management by such consolidations as would tend to divide the field. Undoubtedly railway consolidations would have taken place and the strong system would have continued to become larger had the interstate commerce law permitted pooling and had the courts not held the antitrust law to apply to rate agree- ments; but the incentives to consolidation would have been less urgent and the process would probably have been slower. The consolidations are being brought about in four ways : by purchase, by lease, by means of stock holdings, and by " community of interest " in the management of distinct companies. Among the conspicuous instances of purchases are the sale of the Mobile and Ohio to the Southern, the Lake Shore to the 'New York Central, the Central Kailroad of New Jersey to the Eeading, the Burlington to the Northern Pacific and Great Northern, and the Western Maryland to the Wabash interests. In some cases the purchases have been made because of the 252 AMERICAN RAILWAY TRANSPORTATION previous competition with the line bought, and sometimes because the acquisition of the line would alter the condi- tions of competition with some other rival system. The purchase is sometimes effected by exchanging stocks of the purchasing company for the securities of road bought, but more often bonds have been used to make the pay- ments. In either case there has been a large increase in capitalization. In some States the laws do not permit a railroad to buy out a competing line. In those States, however, con- solidation by lease is usually possible. Most consolida- tions in 'New England (notably the absorption of the Bos- ton and Albany by the ISTew York Central, and of the Fitchburg by the Boston and Maine) have been by lease. The Great Northern system and many others have been built up by lease. The tendency of late with several systems has been to change leases into ownership, where the law permits such action. The advantages of securing control by lease are that no new securities need to be issued, and that if the period of the lease is not made unduly long, there is an opportunity from time to time to readjust the financial relations of the two companies. The advantages of purchase of the acquired road are that absolute control for all time is secured, and that the several parts of the system built up by purchase are more firmly united. The system becomes more of a unit. An easier method than purchase in fee, or than leas- ing, of securing control of an independent company is by the purchase of enough of its capital stock to be able to control the policy of its management. A bare majority of the stock is all that need be purchased, and often a minority share will suffice, because of the voting efficiency of a compact holding. The Pennsylvania had virtual control of the Baltimore and Ohio when $40,000,000 of PRESENT INTERRAILWAY RELATIONS 253 the $105,000,000 of the stock had been acquired. The Union Pacific could dictate the policy of the Southern Pacific by buying $85,000,000 of $192,000,000 of stock. The plan of consolidating railway interests by stock hold- ings has long been followed. In 1892 nearly 25 per cent of the railroad stock was owned by the railway compa- nies themselves; the financial depression following 1893 reduced the corporate holdings to less than one-fifth of the total in 1897, but in the three succeeding years they rose over $400,000,000, and again became about one- fourth of the entire amount of stocks. In other words, in the recent consolidations of railroads much use has been made of the old method of stock purchases. The fourth method of securing unity of control is a device of recent invention. It is called " community of interest," by which is meant making some of the directors or officials of one company members of the boards of directors of other companies. Usually, but not always, there is also a community of ownership, the principal owners of one company becoming financially interested in other and rival roads — i. e., the " community of interest " usually involves community both in ownership and in management. This plan of securing harmonious action among rival interests was well illustrated in the con- struction of the Board of Directors of the E'orthern Pacific in 1901. The Great Northern and Union Pacific were each trying to secure control of the l^orthern Pa- cific. The struggle also involved the control of the Bur- lington system, and thus concerned the interests of the Chicago and ITorthwestern system, a competitor of the Burlington having close traffic relations with the Yan- derbilt or New York Central system. The Chicago, Mil- waukee and St. Paul, another competitor of the Burling- ton, and a road closely connected with the Pennsylvania system, was also interested in the outcome of the contest. 254 AMERICAN RAILWAY TRANSPORTATION The rival parties placed their interests in the hands of J. P. Morgan, who settled the struggle by placing on the directorate of the Northern Pacific the president of the Great Northern, the chairman of the Executive Com- mittee of the Union Pacific, a director of the Chicago, Milwaukee and St. Paul, a director of the Chicago and Northwestern, and a vice-president of the Pennsylvania Railroad. When the Pennsylvania purchased a controlling inter- est in the Chesapeake and Ohio, the board of directors was so changed as to make place not only for certain officials of the Pennsylvania road, but also for representa- tives of the New York Central system, which was invited to share in the new management of the Chesapeake and Ohio. This community of interest policy has been so gen- erally followed since the beginning of 1898 that most of the prominent railroad directors and capitalists are mem- bers of several boards and financially interested in nu- merous companies, the purpose of this being to secure more harmonious relations among rival companies with- in each of the territorial groups of roads described in Chapter Y. The interrailway relations since the close of 1898 have been unusually harmonious. There have been, however, several instances of rate-cutting. In the autumn of 1900 the cutting of rates was largely indulged in to secure west- bound business from the north Atlantic section. In 1901 the competition of the lake lines with the trunk lines for the grain trade led to rate-cutting; a war over passenger fares from the Missouri River to California was threatened, freight rates between the Missouri River and the Southwest were said to " have been very much demoralized" during the early summer; in the section north of the Ohio River concessions to shippers and devia- tions from rates prevailed on traffic from the South; and PRESENT INTERRAILWAY RELATIONS 255 doubtless there were many other instances of discrimina- tions and rate-cutting. The investigations of the Inter- state Commerce Commission in 1901 brought to light the fact that packing-house products from the central West to the Atlantic seaboard were habitually charged from five to ten cents per hundred pounds less than the pub- lished tariffs. The commission also ascertained that " grain and grain products move from points of origin to the seaboard generally upon secret rates." Among the rate disturbances of 1902 may be mentioned the one in July among the roads competing for the traffic of Louis- ville, Memphis, and New Orleans. For over five years, beginning in the summer of 1893, the variations from published rates were frequent and discriminations were general. The report of the Inter- state Commerce Commission for 1898 declared that " a large part of the business at the present time is trans- acted upon illegal (other than the published) rates. In- deed, so general has this rule become that in certain quarters the exaction of the published rate is the ex- ception." The condition of affairs prevailing in 1898 was changed by the return of highly prosperous times, which greatly increased the traffic of all the roads, and by the influence for stability exerted by the community of inter- est in railway management. This latter force may be expected to continue and become stronger as time goes on, for the process of consolidation will certainly proceed, and the policy of community in ownership and manage- ment has probably come to stay. During the seasons and years of abundant traffic, the railway companies, by vir- tue of their closer relationship, will probably be able to prevent serious rate w^ars; but, judging from what has occurred since 1899, their control over rates will not be sufficient to prevent either open or secret discriminations. 256 AMERICAN RAILWAY TRANSPORTATION The recent situation as regards rate-cutting among rival roads gives no assurance that charges can be kept alto- gether stable when the present prosperity shall give wslj (as it must sooner or later) to a period of business depres- sion. As consolidation proceeds, and the community of interest becomes more general, the stronger will be the forces which make for harmony in interrailway relation; but the conditions of 1898 are not yet remote enough in time to warrant the assumption that they can not be repeated. The foregoing analysis of the present and probable interrelations of railways suggests that pooling is not so necessary for the control of railway rivalry as it formerly was. If consolidation had reached the stage of a complete division of the field, or territorial grouping of the rail- roads of the United States, there would be no occasion for pooling of traffic to secure stable rates; but consolidation will not reach that point for some considerable time. It IS, moreover, desirable that nothing should be done to quicken the process of consolidation. The public will doubtless be confronted with the accomplished grouping of railroads territorially quite as soon as it is able to cope with the problem of Government regulation which that situation will present. EEFERENCES FOR FURTHER READII^G Report of the Industrial Commission, vol. xix, pp. 304-348. Langstroth, C. S., and Sttlz, W. Railway Cooperation, 1899. This volume is No. 15 of the Series in Political Economy and Public Law, publications of the University of Pennsylvania. Hadley, a. T. Railroad Transportation. Chapter VI, Competition and Combination in Practise. CooLEY, T. M. Popular and Legal View of Traffic Pooling. This paper appeared in the Railway Review, January 8, 1887, and is republished in the volume entitled Compendium of Transporta- tion Theories, edited by C. C. McCain. PRESENT INTERRAILWA? RELATIONS 257 Knapp, M. a. Some Observations on Railroad Pooling, 1896. A paper in vol. viii of the Annals of the American Academy of Political and Social Science. Newcomb, H. T. Railway Economics, 1898, pp. 130-142. The literature on railway combinations and pooling is voluminous, a brief but good bibliography of which is contained in the volume by Langstroth and Stilz on Railway Cooperation. The six references above cited present the history and theory of the subject very satis- factorily. 18 CHAPTEK XVIII MONOPOLY AND COMPETITION IN THE RAILWAY SERVICE The railroad service of the present and future is one that must be performed by large corporations, among which cooperation is necessary. Not only in the man- agement of their joint traffic, but quite as much in the regulation of their competitive business, experience shows that the railroad companies must work together if the property invested in railroads is to be protected against " ruinous competition," and if the public is to receive an adequate service at rates that do not unjustly discrim- inate between persons, places, or classes of traffic. In spite of State and Federal laws to enforce competition among railroads, and possibly to some extent because of those laws, the companies have sought unceasingly to increase the efficiency of their cooperation. The forces which control industrial organization, whether in transportation or in manufacturing, are bring- ing about consolidation with unprecedented rapidity, and the method of regulating interrailway rivalry now most favored is that of community of interest in the ownership or the management of competing lines. The consolida- tions in process are working out a territorial grouping of the railroads of the United States that will eventually accomplish a fairly distinct division of the field. How soon this grouping will be fully completed, and to what extent the legalization of pooling would retard the move- 258 MONOPOLY AND COMPETITION 259 ment, is conjectural; but there can be little doubt as to the final outcome of the present tendencies. To what extent will the extension of community of interest and the progress of territorial grouping estab- lish monopoly conditions in the transportation service? This is a question to which a clear answer is desired bj* every thoughtful person. Private monopoly is abhorrent to our sense of right. It runs counter both to our feel- ings of what is just and to the legal principles in which those feelings find expression. If the cooperation of inde- pendent railroads by pooling or otherwise or the consolida- tion of their management by means of a community of interest or by the absorption of the weaker lines by the stronger systems confers monopoly powers of an oppressive character upon the corporations which thus unite, the protection of the public interests demands either that the cooperation or consolidations should be prevented, or, if their prohibition is not possible, that the relations of the railroad companies with each other and with the pub- lic should be so regulated as to limit the exercise of monopoly powers. The scope and limitations of monop- oly and competition in railway management must be un- derstood and kept in mind in considering railroad charges and the questions of Government regulation. It is customary for those who have not studied the subject carefully to associate monopoly with large cor- porations or combinations of capital, and to assume that the consolidation of independent companies is brought about mainly to establish a monopoly. As a matter of fact, the concentration of the control either of capital or of productive forces may create a monopoly or it may not; and if monopoly powers are secured, they may be either complete or only partial. The two leading motives for the substitution of the large railroad or industrial corporations for the smaller 260 AMERICAN RAILWAY TRANSPORTATION ones are (1) to reduce the expenses by means of the greater economy of doing business on a large scale; and (2) to secure, if possible, the power, either absolute or partial, of fixing the prices paid by the purchasing public. The first of the two purposes is always alleged to be the one sought for by those concerned in any particular con- solidation, and usually expenses can* be cut down by placing several small concerns under one control, although this is not always possible, because thef supervision of the affairs of a large business can not be so close and so per- sonal as can those of a small undertaking. Any producer or carrier, whether an individual, a corporation, or a combination of corporations, who has the power to ^x the price which the buyer must pay possesses a monopoly. The monopoly power is the power to fix the price. An individual or a combination having full power to fix the purchaser's price possesses a complete monopoly. In some businesses the producer's power is absolute only in- parts of his business; in other parts the forces which fix prices are beyond his control; such a producer has a partial monopoly. But whether the mon- opoly is partial or complete, the essence of monopoly is the power to control the price; and a business enterprise, whether large or small, is monopolistic to the extent that those who manage it have control over the prices which "the buyer must pay. In a certain sense the producer never has the sole power to fix the price, even though he may be the only person from whom the commodity or service in his con- trol can be secured, because he must always consult the nature of the purchasers' wants and their ability to pay. If the possessor of a monopoly charges more than any buyer is willing to pay, no sales will be made ; if the prices are fixed higher than any considerable percentage of possible buyers can afford to give, the market will be MONOPOLY AND COMPETITION 261 largely restricted. This is equivalent to saying that the consumers or users are the ones who fix the limit beyond which charges can not go; but if all or the larger share of the supply required by purchasers can be obtained only from one person or combination of producers, those who sell can compel those who buy to pay all they are willing to give rather than go without the commodity or service desired. The price fixed under such conditions is a mon- opoly price pure and simple. Those who sell charge what they think will yield them the maximum profits on their total business. A familiar example of a monopoly is the Standard Oil Company. It does not own or control all the oil-wells in the United States, but by having possession of four- fifths or more of the supply, it effectually controls the oil market of the country. The price which consumers must pay for petroleum is determined by the Standard Oil Company, and the prices are presumably those that will yield largest profits. In fixing the price of oil, how- ever, the market has to be carefully studied. The amount of oil used is largely affected by the price, and this is so not only because if prices are made unduly high men will forego in part the advantages and pleasure of artificial light, but also because the people who live in towns and cities usually have the option of using gas or electricity instead of petroleum oil. This explains why the price of illuminating oil steadily declined for many years^ when at the same time the Standard Oil Company was increasing its control of the production and sale of pe- troleum. To determine whether a railroad corporation, large or small, possesses a monopoly, and if so whether its mon- opoly is absolute or partial, it is necessary to ascertain whether and to what extent the railway companies act- ing singly or in combination can fix the rates and fares 262 AMERICAN RAILWAY TRANSPORTATION paid by the public. If those who manage our railroads can fix the charges to be paid for their services, subject only to the ability and willingness of the public to pay the charges, then the railway service is a complete mon- opoly. If, however, the rates and fares are subject to forces which the railroad companies can not control, even when they act in harmony — forces which keep the charges much below the ability of the purchaser to pay, and in many instances below what he would pay rather than go without the service desired — then the railroad business is not a complete monopoly; it is subject to competitive forces which prevent it from becoming more than a par- tial monopoly. One purpose of the discussion of inter- railway relations in the three preceding chapters was to show that the railways have never been able in the past to do more than restrain or regulate competition; they have never succeeded in eliminating competition among themselves. Their monopoly has never been more than partial. In considering the extent to which the railroad serv- ice is a monopoly and to what extent it is and will con- tinue to be competitive, attention must be given to the effect of competition upon the charges fixed on the rail- roads which are separately owned but whose owners co- operate by pooling or otherwise, and also the effect upon the charges fixed on the roads that have been consolidated into a large system or a group of systems serving a con- siderable section of the country. The two questions to be answered are: How does competition affect the charges of cooperating roads, and to what extent can the terri- torial grouping of railroads eradicate the competition which formerly prevailed among associated or coopera- ting but not consolidated systems? There are two kinds of cooperations: that of connect- ing roads, and that of competing lines. The necessity MONOPOLY AND COMPETITION 263 and desirability of the joint arrangements for expediting through traffic are recognized by everybody, and the in- terstate commerce law requires the railroad companies to " afford all reasonable, proper, and equal facilities for the interchange of traffic between their respective lines," and the same law prohibits all devices intended to pre- vent the " carriage of freights from being continuous from the place of shipment to the place of destination." But whether the law did or did not require this, the con- necting railroads would usually find it to their advantage to facilitate through traffic as much as possible. The other kind of cooperation is that among com- peting roads. Thus far, the laws of the States and the Federal Government have endeavored to prevent unity of action among competing carriers. The laws against pooling and against associated action in the making and maintenance of rates and fares have been stringent, and the courts have held that pooling and associated rate- making, whether prohibited by statute or not, are illegal at common law because they are " in restraint of trade." The theory underlying these statutes and this inter- pretation of the common law is that the cooperation of rival railroads enables them to eliminate competition in the matter of rates and fares, and thus to deprive the public of its safeguard against monopoly and ex- tortion. It is obvious that the chief purpose of the railroad companies in associating is to agree upon the rates they will charge and to stop bidding against each other to secure traffic; in other words, the object of cooperation is to stop competition, if possible, and if that is impossible, to restrain competition; and, as a matter of fact, cooper- ation does enable the railroads in a large measure, and consolidation enables them to a greater degree, to remove the incentive of the managers of the different lines serv- 264 AMERICAN RAILWAY TRANSPORTATION ing the same termini or common territory or rival regions of production to cut rates to secure business. To what extent do rates and fares remain subject to competitive forces ? To what extent do railroad charges become mon- opolistic ? Competition among railroads is carried on to secure an increased traffic. Most kinds of traffic can be attracted in either one of two ways: by a reduction in charges or by an improvement in the service rendered. Theoretic- ally, these two kinds of competition are the same; for in each case the carrier gives more for what he gets and the purchaser of the service receives more for what he pays ; but in practise these two ways of competing operate differently. Experience has shown that agreements as to charges and as to divisions of traffic or earnings have not kept railroad managers from seeking to attract business by improvements in service. In the days when pooling was general, the traffic allotments were usually made annually, and each company a member to the agreement sought by improving the service offered to increase its business, and thus to be able to establish a claim to a larger share of the pooled business. But quite independ- ent of pooling arrangements, every railroad management has a powerful incentive to increase the traffic of its road or system of lines, because the railroad business is one in which the profits increase more than proportion- ately to the enlargement of the traffic. It is a business of rapidly " increasing returns," and agreements as to rates do not stop the operation of that law, nor indeed can it be done by the consolidation of competing roads. The interrailway competition that attracts most atten- tion is that which occurs in places served by two or more roads. Some cities or junctions are called competitive points. In them the several carriers may bid more or less keenly for the same traffic, In fact^ however^ the MONOPOLY AND COMPETITION 265 great majority of cities and localities are served by only one railroad, and if competition were limited to junction points it would have comparatively limited scope. Rate and pooling agreements have dealt mainly with the traffic of " competitive points/' and consequently have not directly concerned the business of the great majority of places, ndr have the agreements ever covered more than a minor share of the total traffic of the railroad compa- nies making them. If the competitive forces affecting railway charges were only, those operating at junction points, the greater portion of the railway business would be non-competitive. The rivalry of railways at competi- tive points has been only one of the safeguards of the public against high charges. A -more far-reaching influence on rates is exerted by what is termed " the competition of markets," by which is meant the competition in the same markets of produ- cers in different sections of the country and different parts of the world. Since the costs of transportation have been so reduced by the railroad and the steamship that practically every producer has the world for his market, the commodities of many sections compete in the same centers of distribution. Every railroad is a joint producer with the farmers, the manufacturers, the miners, and the lumbermen of the section served by th6 railroad, the carrier having a common interest with the man who grows or makes commodities in getting those commodities into the world's markets, and at a cost that will permit the articles to be sold in large quantities. The " competition of the markets " is not depend- ent upon the relations of the railroads to each other. AVhether the carriers act singly or in association or are consolidated into territorial groups, each group having a single management, the struggle for the market goes on. The rivalry is international as well as interregional within 266 AMERICAN RAILWAY TRANSPORTATION a single country; it is the struggle which causes and accompanies the territorial division of production. The instances of industrial competition are so numer- ous and well known that only a few need be mentioned. The coal from Nova Scotia competes in New England with that from Pennsylvania and West Virginia; the bituminous coal-fields west of the Alleghanies compete with each other and wdth the anthracite fields east of the mountains. Alabama iron competes with that from Michigan and Pennsylvania in the American trade, and the iron and steel and other manufactures of these and other States are sold the world over in competition with European products. A striking illustration of the effect of the competi- tion of markets was alluded to in the second paragraph of Chapter XY. The first long railroad trunk lines to be established in the United States were those running east and west north of the Potomac and Ohio Rivers. During recent years numerous north and south trunk lines have connected the Gulf with the central West, and now that great and developing region uses both the Atlantic and Gulf ports as gateways for its export and import trade. Rates between the Atlantic seaboard and the central West can not much exceed those between the central West and Galveston, New Orleans, Mobile, and other Gulf cities. For the trade of the Southern States there is a strong competition between the States of the upper Mississippi Valley and those adjacent to our north Atlantic sea- board. The manufacturers and others shipping south from the north Atlantic States have the option of send- ing their goods by water or by rail, and are thus able to secure more favorable rates from the railroads than could otherwise be obtained. The railways leading south from Illinois and the surrounding States are obliged to give MONOPOLY AND COMPETITION 267 their patrons as low rates as the Eastern shippers receive, otherwise the Western producers would lose their South- ern markets. The industrial competition illustrated in the prece- ding paragraphs applies to some extent to the traffic of the small local or " non-competitive " points as well as to the shipments to and from the large centers of production or distribution. Although the local shipper is served by only one carrier, he usually has some measure of pro- tection against high rates. The carrier's monopoly is not absolute for several reasons. In the first place, it is to the interest of the railroad company to give the local producer a rate that will enable him to market his com- modities with a profit sufficient to cause the business to expand and the railroad's tonnage to increase. Further- more, the local rates are not permitted by the interstate commerce law and the laws of several States to exceed the through rates when the local and shorter distance traffic is hauled over the same route and in the same direction as the longer distance through business. The competitive forces which bear down charges at the places served by several roads indirectly affect the rates at local points having only one carrier. Again, no railroad can safely keep its local rates much higher than other companies charge on their local business, because if this is done those persons having industrial' establishments along the line of that road will (if their business is such that it can be moved) transfer their plants to the lines of railroad companies offering more favorable rates. If the industry is one from which the invested capital can not be withdrawn, it must remain; but the business will decline in competition with the regions receiving more favorable rates, and the railroad's tonnage will fall off. Every railroad management is eager to have capitalists invest along its line of road, and 268 AMERICAN RAILWAY TRANSPORTATION frequently the special inducement of a low local rate is offered. Other things being equal, that road will secure the greater number of industries and have the more rapid development of local traffic whose local rates are the lowest. Railroad companies are fully aware of this fact, and many of them have officials, usually called industrial agents, whose business it is to ascertain what new indus- tries can be developed along the company's lines, and to find the men who are able and willing to devote their capital and energy to those industries. Railroad companies classify their freight by putting like kinds of commodities into the same class, and they are forbidden by law to discriminate unjustly against particular classes of freight; they are likewise forbidden to make unreasonable discriminations between different shippers and between different localities; and while it has not been possible for the law to prevent all unfair discriminations, it is possible that the ability of some of the local industries to command favorable treatment has been of indirect benefit to the other industrial enter- prises — those from which capital can not readily be with- drawn and those wnose owners have not obtained the assurance of favorable rates as a condition of locating along the line of a particular railroad. Industrial compe- tition, through the influence it has upon the mobility of capital and upon the direction taken by capital seeking investment, has probably affected to some extent the rates on nearly all kinds of local traffic. This competitive or regulating factor is one whose operation is only partially stopped by the consolidation of roads into territorial groups. By combining all the railroads within a large section of the country under one control, the local rates on all the roads would probably be equally favorable or unfavorable; but still each road would have the same reasons it formerly had for keeping its industries in a MONOPOLY AND COMPETITION 269 flourishing condition and for striving to secure new in- dustries. Moreover, if there were several groups of roads the management of each group would take care to make local rates that would hold and attract capital. The conclusion warranted by the foregoing analysis of the influences affecting railway charges is that the railroad company possesses only a partial monopoly. If the railroad company were able to compel its patrons to pay all they would pay rather than forego receiving the transportation services desired, the company would pos- sess a complete monopoly. On the other hand, if the railroads were obliged to accept only such rates and fares as the shippers and travelers might choose to pay, the carriers would have no monopoly power whatever. As a matter of fact, neither the carriers nor their patrons possess absolutely the power of determining the charges for transportation. Rates and fares are neither the low- est the railroads will accept nor the highest the public will pay; and this is so because the monopoly possessed by the carrier is only a partial one. Railroad charges are affected by numerous competitive forces which are be- yond the control of the railway managers, and which prevent transportation charges, in most instances, from being fixed at the point of maximum profits. These competitive forces prevail not only among carriers, but quite as much in the industrial world. The effect of railway consolidations and of the ulti- mate division of the country among a small number of powerful railroad corporations will unquestionably in- crease the power of those corporations to restrain the operation of the competitive forces just described. The present partial monopoly of the companies will become a more effective one; but the nature of the competitive forces is such that the railroads can not secure a com- plete monopoly. Whether the monopoly power possessed 270 AMERICAN RAILWAY TRANSPORTATION by the railroad companies at the present time, or at any future time, is a greater one than is consistent with the welfare of the public, is a question for the public to de- cide. The railroad companies are engaged in a service of a public nature; if they possess great power in deter- mining transportation charges, it is the right and the duty of the Government to limit that power by regulative legislation. It does not disprove the necessity for the Government regulation of railway charges to prove that the monopoly possessed by the railroads is only partial and not absolute. The railroad business is very frequently spoken of as a "natural monopoly.'' While the term expresses a par- tial truth, it is apt to suggest the idea of a complete monopoly, and thus to convey a wrong meaning. Indeed, those who call railroads natural monopolies also apply the term to industrial enterprises whose managers have the power to fix prices at the point of maximum profits — i. e., to charge all the public will pay rather than forego purchasing. It is better to call railroads partial monopo- lies, and to apply the term complete monopolies to those businesses in which the seller has the power of dictating prices to the buyer. REFERENCES FOR FURTHER READII^^G Hadley, a. T. Railroad Transportation, chap. iv. Report of Industrial Commission, vol. xix, pp. 355-364. Newcomb, H. T. Railway Economics, chaps, viii and ix. CHAPTEE XIX THEORY OF RATES AND FARES The foregoing analysis of interrailway relations and of the scope of competition and monopoly in the railroad service indicates the conditions under which carriers act in fixing their rates and fares. It is the purpose of this chapter to inquire what railway charges theoretically are, to consider what principles are followed in fixing the amount which the shipper or the traveler shall pay the carrier. The charge for transportation, or any other service, may in theory be fixed either with reference to the cost of the service to the agent who performs the work or with regard to the value of the service to the recipient, or the charge may be affected by both the cost and the value of the service. Abstractly considered, it seems most natural to assume that the payment for the service should be in proportion to the cost — that the carrier's charges for services of different kinds should vary according to the differences in the costs of performing the several tasks. In reality, however, it is practically impossible to base railroad charges upon the costs of the services. In discussing the cost theory of railway rates, it is necessary to keep clearly in mind what is meant by cost, because the word is used with several meanings. In the preceding paragraph the word is used to include all the expenses chargeable against the service — interest on the capital employed, deterioration of plant, insurance, wages, 271 272 AMERICAN RAILWAY TRANSPORTATION outlay for operating expenses, ordinary business profits, etc. The word cost is, however, frequently used to mean only operating expenses, or the expenses incurred in using the plant to perform a service. The railroad is thought of as being in existence and in use, and the costs of the services are considered to be expenses of operation. In this sense the cost of each of the several services is its ap- propriate share of the aggregate operating expenses caused by the performance of a multitude of services. The cost of a single service is such a part of the total operating expenses as may be properly charged against that service. Again, the cost of any particular service is often thought of as only the additional or extra expense incurred in per- forming that service — i. e., the outlay that would^ not have been made had not the freight or passenger been carried. This is the sense in which the traffic manager is most apt to use the term when he is considering whether he will accept or reject an offer of freight or an oppor- tunity to run an additional passenger coach or train. The traffic manager seeks to ascertain how much addi- tional it will cost to do this service, and if the increase in expenses is appreciably less than the additional receipts to be secured, he will perform the service rather than let it be done by a rival carrier. In whichever sense the term cost is used, it is practi- cally impossible for the railroad official to ascertain what are the costs of a particular transportation service. Every railroad engaged in general traffic carries thousands of different commodities ; the cargo of a freight-train is usu- ally made up of a large variety of articles, and frequently several kinds of goods are sent in the same car. To enable the company to run a train or haul a car, the road- way, depots, yards, and all the different parts of the service have to be provided. Out of the gross receipts obtained from the shippers and passengers, the various THEORY OF RATES AND FARES 273 expenses of the company are met; but no company is able to determine just what part of the expense incurred by the several branches of the service should be charged against the man who has sent a ton or a car-load of goods a certain distance over the company^s road, or against the man who has traveled a given number of miles on the line. Most of the expenditures of a railroad company are "joint costs" — i. e., they are paid out for the main- tenance of the service as a whole, and have little direct connection with any particular act of transportation. The tracks, stations, yards, offices, and administrative depart- ments all assist in performing every one of the activi- ties of the company. The revenue obtained from each freight and passenger service performed should, if pos- sible, be made to contribute something, but no one can say just how much, toward the joint or aggregate costs of maintaining and operating the transportation organi- zation. About as far as the traffic official can go in measur- ing cost is to calculate the expenses of running a train. The outlay for wages of .train crew, for fuel, oil, repairs, and maintenance of cars and locomotives, can be calcu- lated rather closely, and thus the expense of moving a particular train a mile — the " train mile costs " — can be got at with some degree of certainty; but unless the train is loaded with only one commodity this does not enable the statistician to calculate what movement ex- penses are incurred in connection with each or any of the articles of freight of which the train's cargo is composed. Besides meeting the expenses due to moving the train, the receipts from the traffic carried by the train should contribute a greater or less amount toward defraying the company's " joint costs," but how much of the joint ex- penses to charge against any particular train no one can determine, much less can one decide how much of the 19 274 AMERICAN RAILWAY TRANSPORTATION " joint costs '' are incurred by each commodity in the cargo. If it were possible to ascertain the cost of performing a particular service, and thus to base rates and fares upon the cost, it would not be to the advantage either of the public or the carrier to adopt the cost basis of charges. If charges were portioned among commodities according to the cost of transportation, the revenues derived from articles of small bulk but of high value — such as laces, silks, shoes, etc. — would be much less than present re- ceipts, and such commodities as coal, iron ore, lumber, grain, salt, and fertilizers would have to pay higher rates than they are now charged. To raise the rates largely on the bulky materials of industry would so restrict the amounts transported as greatly to limit industry, to re- duce the volume of manufactures to be carried by the railroads, and to impose serious restraints upon social progress. The phenomenal industrial advance of the last twenty-five years has been made possible by the low trans- portation rates on food products and the materials of in- dustry; and these low charges would not have been pos- sible had not the articles of higher value per bulk paid more than their proportionate share of the total expenses of railroad transportation. If the value of the service received by the shipper or traveler were made the basis of railway charges, rates would be fixed with reference to the value added to an article by being transported from one place to another, and fares would depend on the values which passengers placed upon being carried certain distances by rail. If a bushel of wheat is worth 60 cents in Minnesota and 80 cents in 'New York, the railroad can add 20 cents to the value of the wheat by carrying it from Minnesota to New York; and if the transportation charge were made equal to the entire value of the service of carriage the THEORY OF RATES AND FARES 275 rate could be made nearly 20 cents a bushel. Likewise, if the people desiring to travel between Philadelphia and 'New York place an average estimate of $2.50 on the value of riding by rail between the two cities, the fare can be made $2.50. It is evident, however, that the value of the service in the passenger business is not easy to ascertain. One man may prefer to pay several hun- dred dollars rather than forego a quick trip by rail from New York to Philadelphia, while another person desirous of making the trip may not consider the service worth as much as $2.50. Commodities have market values in all places where they are bought and sold, and the excess in the price of an article in one market over the price in another place indicates how much value transportation can add to the article, but there is no general measure of the values that can be created by transporting persons. All the railroad company can do to ascertain the value of its passenger services is to watch the effects of fares on the volume of travel. If an increase in fares considerably reduces the number of journeys taken, the fares are pre- sumably above the average value of the service. Like- wise, if a large increase in travel results from a reduction of charges, the inference would be that fares had been in excess of the average of the value of the service. If the charges are based on the value of the service they may be fixed so as to absorb all or only a part of the values created by changing the places of persons and things, but in either case the charges are made with reference to the values created, and not with regard to the costs or expenses incurred in doing the work of transportation. Another basis for freight transportation charges may be found in the value of the commodities to the shipper. It would be theoretically possible to construct a schedule of rates by fixing the charges with only incidental refer- ence either to the cost or to the value of service, but with 276 AMERICAN RAILWAY TRANSPORTATION ' regard primarily to the absolute and relative values of the articles carried, and there are some reasons why this would be desirable. The absolute increase in the value which cheap and bulky goods, like coal, lumber, iron, grain, etc., obtain by transportation is small per ton of weight, as compared with the addition to the value gained by a like quantity of high-priced commodities, such as shoes and dry-goods. A ton of coal worth $2 on the car at the mine may sell for $3 at the ocean pier, trans- portation having added 50 per cent to its value; whereas, a ton of silk goods may be worth only 1 or 2 per cent more in Chicago than in Paterson, N^. J. If the freight rates are based on the value created by the transportation, the shipper of coal will probably pay 30 or 40 per cent of the value of the coal for getting it carried to market, while the shipper of silks and other costly articles will possibly pay the carrier 1 or 2 per cent of their value. Measured in percentages of the values of the commodities, the value of the service is low for costly articles, and high for cheap and bulky commodities. To ^x railway charges somewhat as taxes are levied — i. e., on the value of the articles carried — would be an equitable method. The carrier would secure his gross receipts, according to this principle, by taxing the pro- ducers of grain a certain per cent of its value, and the various manufacturers and other shippers certain percent- ages of the values of their goods. The rate of assessment on the producers of bulky articles would necessarily be higher than the rates imposed on shippers of costly goods, but the effect of the application of this principle would be to make the freight charge on high-priced goods more than they would be if made according to the cost or value of the service, and to make rates on bulky commodities lower. Whether the rates of assessment imposed upon different classes of commodities were relatively just would THEORY OF RATES AND FARES 2T7 be a question to be determined in the first instance by the carriers and shippers, but also a question upon which the state. would have the last word, because the state is the final judge of the reasonableness of all transportation charges. The railway ofiicials who make the rates and fares do not consciously endeavor to follow any of these ab- stract theories of railroad charges; they study the trafiic and the conditions of competition under which it must be carried on, and seek to " charge what the traffic v/ill bear." They could not make the cost of service their guiding principle if they wished; and, indeed, they have no desire to do so. They are in reality concerned with two things: what the one who receives the service can pay, and what rate the rival carrier, if there is or may be a competitor, is giving or is likely to give. In determining what the buyer of transportation can pay, the chief consideration is the value of the service to the shipper or passenger, and the intelligent determination of that question requires the exercise of sound judgment. Charging " what the traffic will bear " seldom justifies the carrier in exacting all the traffic will bear at the time the charges are made, because such rates and fares would prevent the traffic from growing in volume and variety, and would thus interfere with the future prosperity of the railroad. How traffic managers actually make rates and fares in seeking to charge what the traffic will bear is considered in the next chapter. The chief aims of the traffic manager in fixing rates and fares are to obtain a profitable revenue and to seciire an increasing volume of business. What he seeks most of all to avoid is a charge that will interfere with the growth of traffic. He realizes that railroad transportation is a business of rapidly increasing returns, and he always wants more business, because that means more profits. 278 AMERICAN RAILWAY TRANSPORTATION The traffic officials are not especially concerned with the absolute or relative " reasonableness or justice '^ of the charges paid by different persons or levied upon different classes of goods, except in so far as an unjust or unrea- sonable charge may interfere with the profits or the growth of traffic. With the state, however, the primary consideration is the absolute and relative justness or reasonableness of rates and fares. It is the duty of the state to secure to each person just treatment by public carriers. Moreover, this duty must be performed in such a way as to do justice to the carriers and to further the progress of society. The state is, therefore, compelled to seek an answer to the question. What is a just and reasonable rate? Unfortunately, the question can not be answered with mathematical precision. There is no gen- eral formula or rule by which the justice of a rate or fare can be determined ; the state officials must content themselves with analyzing and giving due influence to the considerations that should have weight in rate-making. If the railroads were owned and operated by the Govern- ment, the state's duty of insuring to its citizens justice in transportation charges would be a somewhat less diffi- cult one, but even then it would not be an easy matter to find and follow the sure path of justice. As long as the railways are owned by private cor- porations, a rate for any particular service can hardly be just to the carrier unless it equals or somewhat exceeds the additional costs incurred in performing that service — the expenses that would have been avoided had that serv- ice not been rendered. While it is neither possible nor desirable to adjust rates and fares proportionately to costs of service, the demands of justice seem clearly to require that total costs, including a fair profit on invested capital, shall be covered by total receipts, and that the minimum rate or fare shall cover the additional oper- THEORY OF RATES AND FARES 279 ating expenses incurred by the carrier in performing tlie particular service for which the charge is made. There would be no theoretical objection, from the standpoint of justice, to an adjustment of charges by which certain kinds of commodities or certain classes of travel should be required to contribute little or nothing toward, the joint costs or fixed charges, provided the articles of high value and the persons who travel luxuriously can be and are assessed rates and fares that will yield enough to pay the fixed charges and joint costs; but charges that did not cover the " additional '^ costs of operation would be un- just to the railroads and would work a detriment to the public by checking the growth of the railway mileage and the development of traffic. No railway charge can be greater than the value the shipper or traveler can gain by securing the transportation service desired. A charge greater than the value of the service would be objectionable not so much because of its injustice as because it would prevent the performance of the service. No onq desiring a service will pay more than the service is worth to him, and traffic managers are, of course, careful to keep the charges below this maxi- mum point; but between this upper limit, set by the value of the service, and the minimum charges, fixed by the extra costs incurred by performing a particular service, there is a wide range through which rates and fares can and do vary. Where within this range the line of jus- tice is to be drawn, where charges shall be fixed so as to prevent or minimize unjust discriminations, constitutes the difficult problem of Government regulation. Expe- rience has shown that discriminations of a most detri- mental character will be made unless prevented by Gov- ernment authority. Not every discrimination is unjust. If such were the case, justice among shippers would consist in charging 280 AMERICAN RAILWAY TRANSPORTATION every person a like sum for the same or essentially simi- lar services. No two carriers perform their services under identical circumstances. One railroad may have easy grades, few curves, a traffic of about equal volume in each direction, and may be free from competition with a water- route. Another company's road may have steep grades and sharp curves, and its traffic may be carried mainly in one direction and in competition with a line of vessels. It is reasonable that the charges over the second of these roads should be higher than over the first. Indeed, so various are the factors affecting the reasonableness of railroad charges that the state can formulate no general rule by which to test the reasonableness of all rates and fares. In deciding upon the justice of charges, each com- pany and each class of traffic must be considered with reference to the conditions peculiar to the company and to the class of traffic in question. In legislation, to secure relative justice among those served by the railroads, the state can prohibit only what is embodied in the third section of the Interstate Commerce Act and make it un- lawful for a carrier to give " any undue or unreasonable preference or advantage to any particular person, com- pany, firm, corporation, or locality, or any particular de- scription of traffic." The determination of what consti- tutes an undue or unreasonable preference must be left to the judgment of the courts and expert officials of the Government. In reaching a decision as to the reasonableness of railway charges, the officers of the state are in duty bound to consider the interests of the carrier, the indi- vidual shipper, and the general public. The carrier's minimum charge is fixed by the " extra " cost due to performing the service in question; the shipper's maxi- mum payment is the value of the service; to locate the just charge lying intermediate between these two ex- THEORY OF RATES AND FARES 281 tremes, consideration must be given to the cost of the service to the carrier and the conditions of competition under which the service is performed, the value of the service to the one who receives it, the value of the arti- cle, and its importance to the industrial progress of society. As the state endeavors more consciously and intelligently to realize justice in transportation charges, greater atten- tion will be given to the relation of rates and fares to the interests of society. The carrier is entitled to ade- quate remuneration for his labor, his capital, and his risks; the shipper and passenger are entitled to charges that are absolutely and relatively reasonable; the public as a whole may justly insist on such a distribution of those charges among different kinds of commodities and classes of passengers as will be most advantageous to society. One way, and probably the best way, to accomplish this " socialization " of rates and fares, is to extend the taxa- tion principle of railway charges — to fix rates more largely with reference to the value of the commodities, and to fix fares so that they will more nearly correspond with the abilities of different classes of travelers. The socialization of rates and fares — the collection of the total revenue to which the carriers are entitled by fixing charges primarily with reference to the needs of society, and only secondarily with regard to the cost or value of each particular service — is the goal toward which the public will be led in its efforts to secure and enforce justice in transportation charges. However, jus- tice is not to be had by discovering and applying any infallible rule or theory. Justice is a question of judg- ment, and the factors affecting judgment must be differ- ent for each case decided, and must change from time to time as society alters its ethical standards. The purpose of this chapter has been to analyze briefly the factors which do and properly may influence the judgments of 282 AMERICAN RAILWAY TRANSPORTATION the carrier, the shipper and passenger, and the general public as regards railway charges. KEFEEENCES FOE FUETHEE BEADING Wetl, W. E. The Passenger TraflBc of Railways, chap. v. Hadley, a. T. Railroad Transportation, chap. vi. Seligman, E. R. a. Railway Tariffs and the Interstate Commerce Law. Political Science Quarterly, vol. ii. No. 2, 1887. Newcomb, H. T. Railway Economics, chaps, x-xvi. Taussig, F. W. A Contribution to the Theory of Railway Rates. Quarterly Journal of Economics, July, 1891. AcwoRTH, W. M. The Railways and the Traders, 1891, London. CHAPTER XX RATE-MAKING IN PRACTISE The problem of making rates and fares for the rail- roads in the United States and other countries where the roads are owned and operated by private corporations dif- fers from the task of fixing the charges in countries where the government is the owner and manager. The sole aim of the corporation is to secure business profits; the pur- poses of the state are fiscal and social. The corporation will presumably seek to discover and enforce such charges as will in the long run yield maximum net profits to the owners of its property ; the state will be inclined to adopt rates and fares no higher than are required to secure a small net revenue after meeting the expenses of operation and maintenance and paying the interest on the invested capital. In a few instances, as in the case of Prussia, state railroads have been managed with a view to making them bear a considerable share of the fiscal burdens; but even then the charges levied on the public have been adjusted also with reference to the accomplishment of military, in- dustrial, or other social aims. The Government usually has the advantage of a greater degree of monopoly in fixing its charges than is possessed by the corporation. However, this general rule has exceptions, and state systems as well as private ones are subject to the interregional competition, both do- mestic and international. Exceptions to the rule are found in countries where the state owns only a part of the 283 28tl: AMERICAN RAILWAY TRANSPORTATION railroads and competes with the corporations controlling the private lines; also in France, where each railroad corporation has been granted by the state a monopoly within the section of country served by the company's lines. The tendency is to change partial into complete state ownership, because the accomplishment of the pur- poses of government management can best be secured under the conditions of monopoly resulting from the elimination of interline competition. So, in general, it may be said that, although the competition among private railroads has many degrees of intensity and the power of the governments owning railways to fix charges is more or less limited, the corporations have competitive condi- tions and the state has monopoly conditions to deal with in adjusting rates and fares. When the traffic officials of a corporation set about fixing the rates and fares to be charged by their company they must ascertain as nearly as possible what the charges for various services ought to be and what they may be. The decision of what ought to be charged is affected by the theory held in regard- to railroad charges — whether the principle of cost should be given as much weight as possible, whether the value of the service should be the chief consideration, or whether the value of the article and the wealth of the passenger should be the determining factor. The traffic manager probably does not endeavor to apply any one of these theories strictly, but he is ver}^ careful to inform himself as to the ability of each arti- cle or each class of travelers to pay the charges he may decide upon. To estimate the ability of an article to pay freight a thorough knowledge must be had of the costs of production, of the market prices at different points, and of the nature of the demand for the article — whether the article is considered a necessity or whether some other commodity can readily be substituted for it. RATE-MAKING IN PRACTISE 285 The service of freight transportation consists of taking goods from the producer or maker to the user, and the person who fixes the rates for that service must study the conditions of production and the nature of the consumer's market. Transportation charges must be such as will produce a net revenue for the carrier and will stimulate the development of his traffic. In addition to ascertaining what the shipper or trav- eler is able to pay, the rate-maker must know the condi- tions of competition to be met. There may be rival carriers bidding for the same traffic; or, if not, probably the producers and carriers of other sections of the country or of other parts of the world are trying to get the trade of the markets reached by the rate-maker's road. The traffic manager will seek to charge " what the traffic will bear " and continue to increase, and he will study all factors affecting that problem. It is necessary to simplify the task of rate-making by grouping as many as possible of the several thousand kinds of commodities carried by the railroad into ten or twelve classes, and charging like rates on all articles in the same class. The necessity for classification becomes greater with the increase in the quantity and variety of traffic han- dled. In 1886 the classification most used by the rail- roads north of the Ohio and Potomac enumerated 1,000 commodities. The following year it was superseded by Official Classification !N'o. 1 with 2,800 listed articles, and the number has now grown to three times that figure. The Western and Southern classifications have expanded nearly as much as the official. This is due not only to the addition of new articles to the traffic carried by the rail- roads, but also to the more detailed classification of com- modities, necessitated by the growing specialization in manufacturing and mercantile business. The technical knowledge required in classifying com- 286 AMERICAN RAILWAY TRANSPORTATION modities and the considerations which determine how articles of freight shall be grouped were well stated in the eleventh Annual Report of the Interstate Commerce Commission. The officials entrusted with the work of making classifications " take into account whether com- modities are crude, rough, or finished; liquid or dry; knocked down or set up; loose or in bulk; nested or in boxes, or otherwise packed; if vegetables, whether green or dry, desiccated or evaporated; the market value and shippers' representations as to their character; the cost of service, length and direction of haul; the season and manner of shipment; the space .occupied and weight; whether in car-load or less than car-load lots; the volume of annual shipments to be calculated on; the sort of car required, whether flat, gondola, box, tank, or special; whether ice or heat must be furnished; the speed of trains necessary for perishable or otherwise rush goods; the risk of handling, either to the goods themselves or other property; the weights, actual and estimated; the carrier's risk or owner's release from damage or loss. All these circumstances, bewildering as they appear to a layman, are comparatively simple to the expert." Since 1886 the railroad companies have entrusted the classification of freight to the classification committee in which they are represented — the Official, Southern, or Western. Each company reserves the right to ^x the rates charged on each class of freight, and in theory does independently determine the rates; although there is necessarily a large degree of cooperation among com- peting companies in the making of rates. Each company also reserves the right to keep certain articles out of the classification, and each important company carries a large number of articles at "commodity tariffs." (Consult Chapter IX.) It has never been possible to include all articles within the classification, but the railroads are RATE-MAKING IN PRACTISE 28Y trying to reduce the number of exceptions, and as the conditions of interrailway competition become increas- ingly stable, the majority of the commodities now having a special tariff can doubtless be brought within the classi- fication, although it is probable that some commodities — petroleum, live stock, fresh fruit, etc. — will always re- quire such a specialized transportation service as to neces- sitate their exemption from classification. Before the days of pooling and traffic associations each railroad company acted independently in making rates and fares. The schedule of charges was worked out by the officials of the traffic department and accepted with or without amendment by the executive officers of the company; but on competitive business the rate-making was in reality placed by the company in the hands of the local agents and the solicitors of freight, by giving those officials the power to deviate from the scheduled charges if such action was necessary to secure or hold traffic. Every freight-agent was made to feel that he must get business, and the methods he was permitted or expected to employ were often objectionable. Discriminations of many kinds were practised. With the progress of rail- way cooperation more responsible methods of making and maintaining rates were followed. Through their pool- ing arrangements and traffic associations the companies sought to unite in fixing and maintaining such charges as seemed reasonable to the several roads concerned. Pooling became unlawful in 1887, and all rate agree- ment illegal ten years later. Then, in theory at least, it again became necessary for each company to act inde- pendently. To secure the maintenance of rates most of the companies sought to place the power of fixing or altering rates strictly and solely in the hands of their higher officers. This had a steadying influence, but did not make deviations from published rates impossible or 288 AMERICAN RAILWAY TRANSPORTATION improbable. A vice-president or a general freight-agent can discriminate quite as effectually as a station agent. Charging what the traffic will bear means that no single or fixed theory or principle of rate-making is fol- lowed, but that the determination and maintenance of charges are turned over to certain traffic officials, of high or low rank in the service, who are permitted to exercise their judgment as to what will be for the best interest of their company. The interest of the public is of course consulted, but only to the extent that the effect of the charges on the welfare of the public limits or increases the prosperity of the railroad. Whether or not it is practicable to adopt some other rule of action in fixing railroad charges than that of charging what the traffic will bear is open to question ; but it is certain that the rule as followed up to the present has not produced altogether satisfactory results. Although discriminations are much less prevalent than they were during years of business depression preceding 1899, they still exist in many forms. This fact was shown clearly by the inves- tigations of the Industrial Commission, and is also proved by the more specific and searching inquiries made by the Interstate Commerce Commission during the past few years. The causes for unreasonable discriminations are by no means simple, and it is probable that the present laws against railway cooperation are in part the cause of the wrong they are intended to prevent; but the fact remains, whatever the causes, that charging what the traffic will bear does not automatically secure justice to all parties. The problem of fixing passenger charges differs in several particulars from the task of making freight rates. In the first place, classification in the passenger service is a simple matter, and when once decided upon presents no further difficulty, as does the classification of freight, RATE-MAKINiS IN PRACTISE 289 which is a perennial question requiring daily considera- tion. Competition in the passenger service is less keen than in the freight service, and of a different nature. In the freight business it is the rivalry of producers and shippers that does most to force down rates; whereas, in the passenger service no such pressure is exerted. Travel- ers do not singly, nor collectively, to much extent, bar- gain for low fares. The ordinary ticket represents a small purchase — averaging barely 50 cents in the United States and much less in other countries — and there is but little incentive for the passenger to endeavor to secure a spe- cial fare. Moreover, the struggle among railroad compa- nies to secure the competitive passenger business is far less intense than is their effort to attract freight traffic. The gross revenue derived by the railroads of the United States from their freight business is two and one-third times the receipts from the passenger traffic, and if it were possible to ascertain the net. profits attributable to each branch of the service, it would be found that the profits assignable to freight transportation are more than two and one-third times the net profits secured from carrying passengers. Another reason why the railroads are less eager to secure passenger business than freight traffic, is that re- ductions in charges — the most usual way of increasing traffic — are less effective in stimulating ordinary travel than they are in increasing freight movement. With the exception of the short-trip excursion travel, the cost of the railroad ticket is but a part, and usually the minor portion, of the expenses of the passenger. Most persons travel for business purposes, and the cost of the railroad ticket has but little weight with them. There is, however, a large and growing amount of traveling for pleasure, and that is capable of stimulation by reduction in rates. Indeed, as was said in the chapter on the passenger serv- 20 290 AMERICAN RAILWAY TRANSPORTATION ice, the American railroads have done much less than European experience has shown to be possible in the development of low-fare travel. Though the struggle of rival lines for the passenger business is less intense -and unintermittent than is true of the freight traffic, the railways have always sought to develop their competitive and non-competitive passenger traffic; but the intercompetition of American roads has done more to increase the speed, comfort, safety, and frequency of the passenger service than to lower the fares. Passenger charges have declined somewhat, but relatively little as compared with freight rates. The average earnings per passenger per mile for the railroads of the United States as a whole were but 6 per cent less in 1901 than they were in 1891; whereas, the decline in ton mile earnings had been over 16 per cent. On some systems the passenger mile revenue has risen slightly dur- ing the past ten years. The general effect of interrailway competition in the United States during the past twenty years has been to give the shipper a less expensive as well as a better service, and to give the passenger a higher grade of service without much change in fares. The traffic officials are usually under less pressure in fixing fares than in deciding on rates. There have been w^ars over competitive passenger traffic, some of which have been violent; but their effects have been slight as compared with those resulting from wars involving freight rates. Discriminations in passenger charges have been and are fewer and of less consequence than those con- nected with freight rates. It has been easier for the rail- ways to cooperate in making fares than in making rates. Transportation charges must be fixed by the exercise of human judgment rather than by the application of precise rules. They should not be subject to change by any one individual, but they should be flexible enough RATE-MAKING IN PRACTISE 291 to meet the requirements of industrial progress. Intelli- gent and conservative action in fixing and changing the charges would be promoted if each company were to en- trust all decisions to a rate committee of three or more men. When the charges relate to joint or competitive business, the rate committee should contain representa- tives from all interested companies. This the law does not now permit. The charges thus agreed upon should be reviewable by public officials, as most rates and fares now are, at least in theory. When thus determined and published, the charges should be enforced as strictly and honestly as are the fees collected by the state for the public services it performs. 'No single traffic official should have the power, or be permitted, to deviate from the established rate, whatever may be the competitive conditions with which he is confronted. The committee that makes the rate should alone have the power to change the rate; its action should be made public, and no change should go. into effect until the business inter- ests affected have had time to adjust themselves to the proposed change. The ideal. adjustment and enforcement of railway charges can not be secured by means of legal penalties alone, although they may be helpful. Custom and ethics are more potent than law. The maintenance of published rates will be easy when, and only when, the ethical feelings of the public condemn the giving or acceptance of a secret rate for a transportation service. The tariff policy of the railways of the United States has been determined almost entirely by commer- cial considerations. This has been so both because the roads are owned by private corporations, and for the reason that the Government has as yet done little to require the companies to construct their tariffs with ref- erence to the accomplishment of political or social aims. The same is true of the railroads of Great Britain; but 292 AMERICAN RAILWAY TRANSPORTATION in France, altliougli the lines are owned and operated by corporations, the Government has aided the companies largely, and has influenced their tariff policy very con- siderably. In Austria and Hungary the Governments have nationalized most of the railroads, and have put in force a system of charges intended to increase travel, and to bring the political and commercial cities of the country into closer touch with the outlying portions of their national domain. In the German states, where most railroads are owned and managed by the Govern- ment, rates and fares have been fixed with a view to securing a surplus or net revenue, to protecting German industries against foreign competition, to aid in the ex- portation of German productions, to strengthen the effi- ciency of the military forces of the state, and to further numerous philanthropic and educational aims. In Aus- tralia and India the governments have built roads mainly to promote the industrial development of the countries. Different policies have prevailed in different coun- tries as regards the state's policy concerning railway tar- iffs. In all countries, whether the railroads are owned by the state or by corporations, there is a tendency to give increasing weight to social considerations in deciding upon railroad tariff policies. This is true even in the United States, where, until within a few years, the Gov- ernment permitted the railroad corporations, without state interference, to make such rates and fares as they thought would promote their traffic or revenue. REFERENCES FOR FURTHER READING Report of Industrial Commission, vol. xix, pp. 349-397. Weyl, W. E. Causes affecting Rates and Fares. Annals of the American Academy of Political and Social Science, vol. xi, 1898. Consult also the references to Hadley and Seligman and Weyl at the close of the preceding chapter. CHAPTEK XXI RAILWAY CHARGES IN THE UNITED STATES AND OTHER COUNTRIES A STATEMENT of what railwaj charges now are and what they have been, and a comparison of rates and fares in the United States with those in other countries, might seem to be merely a matter of compilation, but the task is not quite so simple as that. In order to state what the charges now are and to compare those of the present with those of the past, and those of one country with those prevailing in another, two things are neces- sary: there must be some simple and reliable measure or index of average charges and the charges compared must be for similar services. There must be a unit for the measurement of charges and the things compared must be alike. Freight charges are made for the transportation of thousands of commodities; to study each of these charges separately would be impracticable, and to deal with any considerable number of commodities individu- ally seriously complicates the work of making compari- sons between the present and the past, and between differ- ent sections of the world. The unit of distance in railway charges is the mile in English-speaking countries, and the index or measure of general freight rates is the average receipt per ton per mile. For the passenger service the index is the earn- ing or receipt per passenger per mile. Although the " ton mile " and " passenger mile " earnings are the best 393 294 AMERICAN RAILWAY TRANSPORTATION measure of what railway charges are or have been, they are only a very general index showing the average of all charges and can not safely be used for making close comparisons. The average earnings per ton per mile are determined by the nature of the traffic as well as by the rate charged. An increase in the tonnage of bulky low- rate traffic would lower the average ton mile earnings, although the charges remained the same. Indeed, it would be possible for a large expansion of the mineral and other low-class freight to more than offset the effect of a slight rise in rates on all classes of traffic. This fact should be borne in mind in comparing the ton mile earn- ings 'of the present with those of the past. At the present time mineral products, on which the rates are low, make up over half the total rail tonnage in the United States, and minerals and other low-class traffic comprise an in- creasingly large percentage of the total traffic of the rail- roads. This means that the decline which has taken place in the average ton mile earnings has been due to changes in the character of the business as well as to a fall in charges. Likewise, the average ton mile earnings in one coun- try as contrasted with the ton mile earnings in another may be for the transportation of such different kinds of commodities as to make comparisons of little value. Moreover, the services performed by the railroads in different sections of a country and in different countries may be dissimilar. In the United Kingdom, for instance, the freight charges usually include the service of col- lecting and delivering the goods — a service which the shipper performs in most countries. On some railroad systems freight moves in about equal volumes each way, while on other roads the cars can be loaded only one way. Again, in the United States a passenger may check 150 pounds of baggage free of charge, whereas in some countries nothing but hand-baggage is taken without extra AMERICAN AND BLTROPBAN RAILWAY CHARGES 295 payment. In some sections of the country the passenger- trains have luxurious appointments and are run at high speed, while in other sections neither comfort nor speed is secured by the traveler. These, and numerous other points that might be cited, indicate the necessity of con- sidering all railroad charges with reference to the service performed, and show that the comparison of the rates and fares of different times and places can suggest, but not definitely measure, the temporal and local variations in transportation charges. Passenger fares in the United States range from about a cent a mile for some kinds of " commutation " tickets up to 4 and 5 cents a mile in the sparsely settled and mountainous sections of the country. The average rev- enue per passenger per mile for all the railroads in the United States during the year ended June 30, 1901, was 2.013 cents, which was 5 per cent more than it was two years before, and was but 6 per cent less than in 1891. The average for 1904 promises to be as high as the average was ten years earlier. Fares in European Countries The standard passenger fares in England since 1897 have been 2 pence per mile for the first-class, li penny for the second-class, and 1 penny for the third — about 4, 2^, and 2 cents per mile for the respective classes. There are numerous special kinds of tickets sold — return- trip, tourist, season, and military and working men's tick- ets — at a reduction of from 20 to 50 per cent from the standard charges. The sale of special and commutation tickets to stimulate travel is a favored policy of the English railroads. There are no statistics showing the average receipts per passenger mile in England, but the amount is probably less than a penny or 2 cents. The standard fares in Prussia are 3.06 cents per 296 AMERICAN RAILWAY TRANSPORTATION mile first-class, 2.3 cents second-class, 1.53 cents third- class, and 0.77 cent fourth-class (8, 6, 4, and 2 pfennigs per kilometer) for ordinary trains, and on fast trains 3.45 cents per mile first-class, 2.55 cents second-class, and 1.79 cents (9, 6f, and 4f pfennigs per kilometer). Fourth-class cars are not run on express-trains. Return- tickets are sold for one and one-half times the one-way charge. Reduced rates are charged for Sunday tickets, season tickets for workmen traveling fourth-class, for soldiers, and for school-children. Baggage to the weight of 55 pounds may be taken free in the first three classes. The average receipts per passenger mile in Prussia are only 1^ cents. This low average is due to several facts, one being that nine-tenths of the travel is confined to the classes below the second; another reason is that a large percentage of the tickets are sold at special rates; while a third cause is that the railroads of Prussia do a large suburban business that is handled by trolley companies in the United States. Passenger fares in France are appreciably higher than in Prussia, but much lower than those in the United States. There are six systems of roads operated by pri- vate companies and one operated by the state, and the fares and average receipts vary with each system. The standard fares are a'bout 4.7, 2.5, and 1.6 cents per mile for the first, second, and third classes. There is no fourth- class, and the rates are the same on local and express trains. The average earnings per passenger per mile in 1900 varied from 1.12 cents on the Northern Railway to 1.32 cents on the Paris, Lyons and Mediterranean road. The average passenger mile receipts for the railways of the country as a whole are about 1.2 cents. Over 90 per cent of the travel is in the third-class, and there is a vari- ety of reduced-rate tickets to stimulate trafiic. Sixty-six pounds of free baggage is allowed. AMERICAN AND EUROPEAN RAILWAY CHARGES 297 In Hungary and Austria the so-called zone-tariff sys- tem of passenger fares is in force. The zone tariff bases its charges on a longer unit of distance than the mile or kilometer. By Hungary's plan of 1889 the charge on local traffic is the same for all distances up to 10 kilometers (6.2 miles) ; another and larger charge is made for all distances of more than 10 and not exceeding 20 kilometers. A differ- ent rate is paid for a ride from 20 to 30 kilometers long. For the through traffic the charges are based on " zones " of different lengths. The first zone or distance is 25 kilo- meters, the second and third each 15 kilometers. The first 13 zones comprise a distance of 140 miles. All places more than 140 miles from the place where the passenger starts — and the starting-point may be any station— is in the four- The Original Hungarian Zone Tariff. Fares for Local and Through Traffic, 1889 Fares (including Government duty). Local traffic: Zone 1 (0-6.2 miles) " 3(6.2-12.4) " 3(12.4-18.6) Through traffic : Zone I (0-15.6 miles). 11(15.6-24.9).... 111(24.9-34.2).... IV (34.2-43.5).... V (43.5-52.8).... VI (52.8-62.2).... VII (56.2-71.5).... VIII (71.5-80.8).... IX (80.8-90.1).... X (90.1-99.4).... XI (99.4-108.7)... XII (108.7-124.4).. Xni (124.4-140).... XIV (over 140) Express-Trains. Cents. 48.3 96.6 144.9 193.2 241.5 289.8 338.1 386.4 434.0 483.0 531.3 579.6 676.2 32.2 64.4 96.6 128.6 161.0 193.2 225.4 257.6 289.8 322.0 354.2 386.4 450.8 .^»\") 9. in. 19.3 38.6 58.0 77.3 96.6 116.0 135.3 154.6 174.0 193.2 212.5 231.9 274.4 3^0.1 Accommodation Trains. Cents. 19.3 25.7 32.2 38.6 77.3 116.0 154.6 193.2 232.5 270.6 309.2 348.0 386.4 425.0 464.0 521.6 5.9.6 9.7 14.2 19.3 25.7 51.5 77.2 103.0 128.8 154.5 180.3 206.0 231.8 257.6 283.3 309.1 347.7 88G.4 in. 6.4 9.7 12.9 16.1 32.2 48.3 64.4 80.5 96.6 112.7 128.8 144.9 161.0 177.1 193.2 225 4 257.6 298 AMERICAN RAILWAY TRANSPORTATION teenth zone, and the fare is the same for all trips over 140 miles long. If the trip taken is over a route that takes the traveler through Budapest, the capital of the country, the zones are counted from the starting-point only to Budapest, where the counting of zones begins again. This tariff was modified in 1903 by adding two zones, reducing the width of the first five zones to 10, 5, 5, 7, and 13 kilometers, and by disregarding distance only beyond 400 kilometers. The charges on express-trains are 20 per cent higher in the third-class and 25 i^r cent higher in the second and first classes than on accommodation trains. The fares by this system are low, the average earnings per passenger mile being a little over one cent (1.08 cents in 1900). There is no free baggage, nor are any special reduced-rate tickets sold. When the Hungarian Government adopted the zone system of fares in 1889 the charges were high and the amount of travel small. The change was made to stimulate both local and long-distance travel, and both objects were accomplished. Austria adopted a zone-tariff system in 1890 similar to the one in Hungary. The first five zones are each 10 kilometers long, the sixth and seventh zones are 15 kilo- meters each, the eighth is 20 kilometers, the ninth to twelfth inclusive each 25 kilometers, the thirteenth and succeeding zones are each 50 kilometers. The Austrian system is often called the kreutzer tariff, because the rates are based on a charge of 1 kreutzer (0.406 cent) per kilometer for the third-class. The fares change with each 10 kilometers. In the first zone of 10 kilometers, for instance, the charges are 10, 20, and 30 kreutzers for the third, second, and first classes on slow trains, and 15, 30, and 45 kreutzers for the three classes on express- trains. The fares for single tickets are shown by the following table; AMERICAN AND EUROPEAN RAILWAY CHARGES 299 Austrian Zone Tariff of 1890 Kilometers. ACCOMMODATION AND MIXED TRAINS. EXPRESS-TRAINS. Zones. Third Class. Second Class. First Class. Third Class. Second Class. First Class. 1 1- 10 11- 20 21- 30 31- 40 41- 50 51- 65 66- 80 81-100 101-125 126-150 151-175 176-200 201-250 251-300 Kreutzer. 10 20 30 40 50 65 80 100 125 150 175 200 250 300 Kreutzer. 20 40 60 80 100 130 160 200 250 300 350 400 500 600 Kreutzer. 30 60 90 120 150 195 240 300 375 450 525 600 750 900 Kreutzer. 15 30 45 60 75 98 120 150 188 225 263 300 375 450 Kreutzer. 30 60 90 120 150 195 240 300 375 450 525 600 750 900 Kreutzer, 45 2 . 90 3 135 4 180 5 6 225 293 7... C60 8 450 9 10 11 12 .. 563 675 788 900 13.. 1,125 1,350 14 ]N'o baggage may be checked free in Austria, and this is a fact that should be kept in mind in comparing the rates of such countries as Hungary and Austria with the United States or England. Special rates made to parties, to school-children, and to officials reduce the average earnings per person per mile on the Austrian railroad considerably below the standard fares — the receipt per passenger mile in 1900 was 0.95 cent. Eates rose 6 to 12 per cent in 1903. Without going further into details regarding other European countries, each of which has a system of pas- senger charges peculiar to itself, the general statement may be made that the average passenger fares in the leading countries of Europe are much lower than in the United States ; are indeed but one-half to three-fifths those prevailing in our country. In Russia the average re- ceipts per mile are only .75 cent. There are several reasons why fares are cheaper in Europe than with us, but the main reasons are the density of the population and 300 AMERICAN RAILWAY TRANSPORTATION the large volume of travel in most parts of Europe, and the fact that several different grades or classes of service are rendered by the railroads. The roads meet the large demand existing in Europe for a cheap service by run- ning slow trains made up of inexpensive coaches. About nine-tenths of the people travel in the third, or a lower, class, and most of the traffic is handled by the slow trains. The European trains are lighter than the American, and the seating capacity of the cars is better utilized. The cheapest fares in the world seem to be in India, where the average receipts per passenger mile are less than one- half a cent, and this is because the people are willing to travel slowly, do not mind waiting at the stations, and are willing to be crowded into coaches without the com- forts demanded by the people of most countries. Passenger fares have declined much more rapidly in Europe than in the United States. The European rail- roads have developed the lower classes of traffic very successfully. The trend of traffic there has been from the higher and more expensive classes to the third and fourth classes. At the same time there has been a rapid increase in the volume of travel. In the United States the conditions have been less favorable than in Europe for the development of the passenger traffic, but it seems probable that much more can be done than has yet been accomplished. When the railroad companies make it pos- sible for the masses of people in the United States to travel inexpensively, the volume of business will grow rapidly. ^ . ^ ^ Freight Rates As regards freight rates, the facts are quite the oppo^- site of those concerning passenger fares. The charges for freight are much lower in the United States than in Europe, and the decline has been more rapid. The aver- age revenue per ton per mile received by the railroads AMERICAN AND EUROPEAN RAILWAY CHARGES 30i in the United States as a whole in 1901 was but three- fourths of a cent. Ten years earlier the average was 0.895, the decline during the decade having been 16 per cent. From 1881 to 1891 the decrease was nearly 25 per cent. From 1871 to 1881 the average fell fully one- third. The average ton mile earning in 1901 was barely 40 per cent that of thirty years earlier. The lowest average was reached in 1899, when the figures were 0.724 cent. Since then the prosperity of the country has been such that the chief problem with many American rail- roads has not been how to secure business, but how to handle the traffic offered to them. Instead of lowering rates to increase shipments, charges have in some in- stances been maintained or advanced to discourage ship- ments. This situation, however, can be only temporary; times will soon be normal or dull again, and a renewal of the downward trend of rates may be expected. The British statistics do not show what the railroads of the United Kingdom earn per ton per mile for their freight service. It is estimated to be somewhat more than 2 cents. The conclusion is not to be drawn from this, however, that the average freights are two and two- thirds those in the United States, because the English com- panies, unlike those in the United States, frequently in- clude in their service the collection and delivery of goods at the terminals. Freight rates in the United Kingdom are unquestionably considerably higher than in this coun- try, but how much higher can not be stated. The average earnings per metric ton (2,204 pounds) per mile on the German railroads in 1899 was about 1.42 cents, and on the railroads of France about 1.55 cents. The European freight rates seem very high in comparison with American charges. In Prussia the standard rates per metric ton per mile (not including terminal charges) for shipments of less than 10 tons are from 4.21 cents to 302 AMERICAN RAILWAY TRANSPORTATION 2.30 cents, according to the length of haul. For car-load lots of more than 10 tons the rate is 2.30 cents. The charges are double these for the fast freight, which in general includes both our express traffic and our fast freight service. The standard charges in reality apply to only one-fifth of the railroad traffic of Prussia. About 17 per cent of the total traffic is handled at what are called special rates — corresponding closely to our com- modity tariffs. The remaining 63 per cent of the traffic receives the so-called " preferential " tariffs, which are described officially to be " applicable to agricultural and industrial products, and intended to assist and facilitate import and export, and increase the traffic of the coun- try." These preferential tariffs are employed as a bounty to enable certain sections of Germany to export their products; as an export bounty on the trade of Germany with the countries about the eastern Mediterranean; as an aid to ship-building; as an aid to manufactures by cheap rates on fuel; and as a means of relieving the dis- tress of any portion of the country that may suffer from floods or bad harvests. In France the normal tariffs of the several railroad systems are different, and there are special rates in force on each system. The standard or normal charges are particularly high, but their effect upon the average ton mile earnings of the companies is largely overcome by the special tariffs which apply to the larger share of the traffic. Shortly after the passenger zone-tariff system was adopted, Hungary and Austria applied the zone principle to the freight business. Charges are based on a unit dis- tance of 10 kilometers (6.2 miles), the rate being per 10 kilometers instead of per single kilometer. The charges for long distances are proportionately less than for short ones, and the rates vary with the class and quantity of goods shipped. The classification, however, is a simple AMERICAN AND EUROPEAN RAIL\7AY CHARGES 303 one, and there are but few exceptions to the classification. The receipts per ton mile for ordinary freight in 1900 were 1.16 cents on the Hungarian state roads, and 1.30 cents on the Austrian state roads. If the express freight receipts be included, the average will be raised to about 1.40 cents. Some of the causes accounting for high passenger fares in the United States serve to explain why freight charges can be low. Long distances deter travel and make the passenger service expensive for the carrier. In a country where the population is relatively sparse there will be a comparatively small amount of passenger travel; but if that population is engaged in raising great quanti- ties of live stock, grain, and cotton, in cutting lumber and mining coal and iron and other minerals, as is true of the American people, there will be a heavy tonnage of freight to be moved long distances in large shipments. The economic conditions favor as well as require low freight costs in the United States. The average distance traveled by a ton of freight in the United States in 1901 was about 252 miles. In Germany the average haul is 64 miles, in France about 80 miles, on the Austrian state railroads 80 miles, in Italy about 70 miles. The figures for the United Kingdom are not given in the statistics of that country. The freight rates on the bulky traffic carried by the American railroads must be low, and can be low, because such a large share of the tonnage is shipped in car-load and train-load lots hundreds of miles. Wages are higher in the United States than in Europe, but the American laborers are more efficient and there are fewer employees per mile of road in the United States than in Europe. Fuel is generally cheaper here than abroad. However, the most important causes of low rates have been influences which have resulted in the superior technical efficiency of the American freight 304 AMERICAN RAILWAY TRANSPORTATION service as compared with that in European countries. In order to develop tonnage in this country the railroad companies were compelled to reduce movement costs to the lowest possible level. They were also spurred to economy by the severity of competition which in a vari- ety of forms has affected their policy at all times. Com- petition has not been absent from any European country, and its effects on freight charges in such countries as Ger- many and Austria are particularly noticeable, but the stress of rivalry has been far greater in America than in Europe. The facts presented in this chapter fully warrant the general deduction that passenger fares are relatively high and freight rates are relatively low in the United States as compared with Europe; but the figures presented for different countries in the above paragraphs, as was stated at the beginning of the chapter, do not cover identical services. The comparisons must be general and can not be made closely accurate. REFERENCES FOR FURTHER READING Statistics of Railways in the United States. Annual Report by the Interstate Commerce Commission. Report on Prussian Railways. British Diplomatic and Consular Re- ports, No. 574, Miscellaneous Series, London, 1902. Weyl, W. E, The Passenger Traffic of Railways. Publications of the University of Pennsylvania. Hole, J. National Railways, London, 1893, ch. viii. Report of Industrial Commission, vol. iv, p. 758; vol. ix, pp. 137-139. Archiv ftlr Eisenbahnwesen. [This journal is the most satisfactory source of information regarding railway earnings.] PAET IV THE RAILWAYS AND THE STATE 21 CHAPTER XXII PUBLIC AID TO RAILWAY CONSTRUCTION The government's relation to the railroads is neces- sarily twofold: that of aiding and of regulating or con- trolling. The extent and form of the assistance given by the state to railroad building and operation varies with different countries. The people of some nations prefer to have their railroads built and managed directly by the government; in other nations the preference is for the construction and control by corporations chartered by the state ; but even in the latter case the aid of the state is necessary. The state must grant to the corporation " the right of eminent domain" in order to enable the cor- poration to secure the real estate required for its road- way and structures. Besides aiding the corporation in this manner, the government — local, state, and national — has frequently contributed or advanced a part of the capital required by the company for construction pur- poses, and in some foreign countries the state has guar- anteed to private investors a stipulated minimum rate of interest or dividend on their investments. Regulation, likewise, is slight in some countries and complete in others. Sometimes the railroads are con- trolled by corporations that are allowed by the state to manage their affairs with but little interference; some countries supervise and regulate the companies in a de- tailed and thorough manner; and some governments oper- ate the railroad as a state enterprise, and thus have abso- 307 308 AMERICAN RAILWAY TRANSPORTATION lute control OA^er them. The tendency, as we shall see later, is everywhere either toward a more careful public regulation of private roads or toward the nationalization of the railroads and their management by the gov- ernment. Aid Given by the American States to Railroads The railroads in the United States, though built mainly with private capital, were aided by many of the States, by the J^ational Government, and to a large ex- tent by county and city governments and by individuals. The States began actively to construct or aid in building railroads in 1837, although a few of the States had given assistance prior to that date. State aid to railroad build- ing was a part of the policy of Government aid to works of internal improvement. The construction of canals and turnpikes, as has been noted in a previous chapter, had been assisted by the States after 1815. When the rail- road had shown itself to be an efficient transportation agent, there at once arose a demand which was especially strong in the States whose industrial development was least advanced for a rapid construction of railways. The States responded to this popular demand not only be- cause there was a demand for transportation facilities for the development of the resources of the country, but also because it was supposed that the Government could raise the funds for the construction of the railroads with very little effort. During the years which preceded and fol- lowed the panic of 1837 it was supposed by many of the States that banking institutions could create capital. The banks were regarded as institutions by means of which credit could be extended, and the faith of the people in the development of the resources of the country was such that they thought the credit created by the banks could, without difficulty, be made actual capital. At the PUBLIC AID TO RAILWAY CONSTRUCTION 309 time this fallacy was prevalent the national revenue from the sale of public lands was especially large, and the United States Government accumulated between 1830 and 1837 a considerable surplus, which it unwisely de- cided in 1837 to distribute among the States. This dis- tribution of the surplus revenue by the National Govern- ment stimulated the establishment of unsound banking institutions, and caused the States to go further and faster with their policy of aiding railroads than they otherwise would have gone. The assistance given by the States to railroad con- struction most often took the form of the purchase of the stocks of railway corporations. Sometimes bonds were purchased, and sometimes there was a donation of State funds, either as cash or State securities. The aid given by the State was regarded more as loans than as gifts, but, as a matter of fact, the investments or advances made by the States were only partly paid back. Several of the States engaged directly in the construction of railroads. Other commonwealths, particularly after 1850, made large grants of public lands to the railroad cor- porations, the lands thus granted having been received by the States from the National Government. The amount of aid given by the States to railroads can not be stated precisely, but the figures available indicate that the total donations were large. The entire debts of the States in 1841 exceeded $231,000,000. These debts had been contracted partly for the purpose of assisting banking institutions, which had received not less than $50,000,000, and partly for the construction of works of internal improvement. Of the State funds used in pro- moting internal improvements, the amount paid out on canals and turnpikes much exceeded the amount expended on railroads. But the sum contributed by the States for railroads in the West, and more especially in the South, 310 AMERICAN RAILWAY TRANSPORTATION after 1841 was greater than the amount given before that date. The State of Missouri, for instance, which spent nearly $32,000,000 on railroad construction, of which sum only a little over $6,000,000 was ever again obtained by the State, granted very little aid before 1850. Ten- nessee incurred a debt of $29,234,000 by aiding railroads; of this sum over half was contracted after 1860. Korth Carolina had a similar experience. Of the New England States, Massachusetts was the only one that aided rail- road building, her assistance amounting to $6,044,000. There were nineteen States in all which gave or advanced public funds for the construction of railroads, Illinois, Indiana, Michigan, Georgia, Tennessee, [N'orth and South Carolina, Missouri, Virginia, and Louisiana being those which contracted the largest debts to help the building of railroads. The aid given by the American States to railroad building accomplished small results. In most of the States concerned there was little appreciation of the necessity for adhering to conservative fiscal methods. Many of the enterprises aided by the States were of rela- tively small importance. The States granted their credit lavishly, with little concern for the method by which the securities issued were to be paid. In due time it was dis- covered that banks could not create capital, and that railroads could not immediately develop the resources of the sections through which they were built, and that the ability of the States to raise funds by taxation did not increase so rapidly as the debts of the States were en- larged. In nearly all cases the railroads constructed by the States were sold out to corporations for but a small fraction of what had been expended upon the roads. Sev- eral of the States, moreover, decided to repudiate the debts, and on the whole the connection of the States with banking institutions and with works of internal im- PUBLIC AID TO RAILWAY CONSTRUCTION 311 provement constitutes a regrettable chapter in the history of American finance. The funds expended, however, were by no means altogether wasted. Railroads were con- structed earlier and more rapidly than they could have been built by private capital, and the resources in many parts of the country became available sooner than would otherwise have been the case. The corporations which ac- quired the roads obtained the larger share of the benefits, but the general public was assisted to some extent by the lavishness of the States in aid of railroad building. National Aid to Railroad Construction The E^ational Government began assisting railroad construction later than the States, but it has contrib- uted even more than they have given. Most of the aid given by Congress to the railroads has consisted of grants of land from the public domain, although a few compa- nies received large loans from the Federal Treasury. The first extensive grant of land to further railroad building was made in 1850, when Congress gave to Illinois, - Ala- bama, and Mississippi about 4,000,000 acres of land to be used by those States in aiding the construction of the Illinois Central and the Mobile and Ohio lines, by which Chicago was to be connected with ^N'ew Orleans and Mo- bile. During the next twenty years about eighty such grants were made to the States in the Mississippi Valley. In aiding the construction of roads built within the boundaries of the States, Congress for some years did not donate land directly to corporations, but gave the land to States as trustees, which were to turn the land over to the railway companies. The tendency in the fifties was to interpret the Constitution more narrowly than it has been interpreted since the civil war, and many persons questioned whether Congress had the power to donate land located within a State to a railroad corporation. 312 AMERICAN RAILWAY TRANSPORTATION When, in 1862 and later, the occasion arose for aiding companies to huild lines through the Territories, Congress did not hesitate to make grants directly to the corpora- tions; and after the civil war grants were made to com- panies from lands within the States. The first direct grants to corporations were made in 1862 to secure a road from the Missouri River to the Pa- cific Ocean. For a score of years Congress had been urged to aid in constructing a road to the Pacific, but action was delayed from time to time, mainly because of the rivalry of the Southern and Northern States as to the route to be chosen. After the Southern States seceded Congress was able to act, and the civil war greatly increased the need of rail connection between the western part of the country and the section east of the Eocky Mountains. Military and political as well as economic reasons then impelled Congress to act. In making these grants to railroads the United States sought, among other purposes, to increase the accessi- bility and value of the public lands not given away. The grant to Illinois for the Illinois Central Railroad — the first large one — was the model followed in all the subse- quent donations; some companies received more land per mile of road than others did, but all the grants had the same general terms. According to the Illinois grant, the railroad company was given a right of way 200 feet wide through the public lands, and was also given alternate (the even-numbered) sections of land on each side of the line for a distance of 6 miles from the road. The com- pany thus secured half the land within a strip 12 miles wide, or 6 square miles of land, for each mile of track built. If any of the land within this 12-mile strip had previously been disposed of by the Government, the rail- road might select an equal area within 15 miles of the railroad. The alternate (odd-numbered) sections retained PUBLIC AID TO RAILWAY CONSTRUCTION 313 by the Government within the 12-mile strip were not to be sold for less than $2.50 an acre. In the grants made at a later date a wider strip of land was donated, and in some cases the Government did not agree to charge $2.50 or more an acre for the sections it retained within the land-grant strip. The grants made from 1862 to 1871 to aid the build- ing of roads from the Mississippi and Missouri Rivers to the Pacific Ocean were for several reasons larger than those previously made. The lands given away were less valuable than those located within the States near the Mississippi River, while the cost and difficulties of build- ing the roads over the Rocky Mountains would necessarily be greater than they had been in the Mississippi Valley. Congress, moreover, had grown more liberal than it was during the fifties. By the act of 1862, as amended in 1864, the Union, Kansas, and Central Pacific Companies, and the three other corporations which undertook to build the first tracks from the Missouri River to the Pacific Ocean, were given 10 square miles of land for each mile of line. The grant to the Union Pacific, the company which built the road from Omaha to Ogden, amounted to 12,000,000 acres. The grant to the Central Pacific Com- pany, which constructed the track betAveen Sacramento, CaL, and Ogden, was 8,000,000 acres. The company which later came to have the name of the Kansas Pacific Company was granted 6,000,000 acres, and the other companies concerned in building this first Pacific con- nection were to receive nearly 7,000,000 acres. Thus 33,000,000 acres, a gift of an area considerably larger than the State of Pennsylvania, was offered by Congress to induce corporations to build the first railroad across the Western plains and mountains. In addition to this gift these corporations received a large loan of funds from the United States. 314 AMERICAN RAILWAY TRANSPORTATION The Atchison, Topeka and Santa Fe received a grant of 3,000,000 acres in 1863, and three years later the Atlantic and Pacific Railroad, which is now a part of the Atchison system, received a grant of 42,000,000 acres — a grant of enormous area but of relatively small value. Much of this grant reverted to the United States by for- feiture. In 1864 a grant of about as great area and of much greater value was made to the ITorthern Pacific. The roads now comprised in the Texas and Pacific re- ceived nearly 23,000,000 acres, and the Southern Pacific obtained 14,000,000 acres. The grants made to each of the last four companies mentioned comprised 20 sections of land per mile of road in the States and 40 sections per mile in the Territories. During the ten years ending in 1871 Congress made grants to 23 companies. The grants made between 1850 and 1871 have placed at the disposal of the railway com- panies about 155,000,000 acres of the public domain — an area exceeding five States like Pennsylvania. The original grants made available for sale by the railroad companies a larger area than this, but parts of the grants reverted to the United States, and less than 155,000,000 acres will actually pass to the railroads, because in many instances the companies have not been able to comply with the conditions imposed in the grants. The companies were granted a certain number of sections of land per mile of line constructed, but could claim the land or receive a " patent " from the United States only after completing a designated mileage of track — 20, 25, or 40 miles — i. e., as each stretch of track of designated length was com- pleted the land corresponding to that mileage might be claimed. The companies have not received all the land to which their work of road construction entitles them. The United States now annually gives the companies patents to large amounts of land. Most of the companies PUBLIC AID TO RAILWAY CONSTRUCTION 315 failed to complete their lines within the time fixed by the grants, and some of the contemplated roads were never built. However, a failure to finish a road within the time set by law was held by the Supreme Court not to work a forfeiture of the grant without an act of Congress declaring the grants forfeited; indeed, only about half of the mileage to which the donations of land applied were completed within the legal time limit, and many companies were allowed to continue construction and to secure the land corresponding to the new mileage after the period set by law for securing the benefit of the grants had expired. The total amount of land secured by the railroads from the Federal Government up to June 30, 1902, was 97,976,637 acres; and the companies are en- titled under their grants to receive several million acres more. The General Land Ofiice of the United States is unable to state just how many acres will be patented in adjusting all the grants. The original grants applied to about 15,000 miles of railroad. During the seventies there developed a strong popu- lar sentiment against the granting of public land to rail- road corporations, and an agitation was started to influ- ence Congress to declare all the land forfeited that had not been earned by the construction of lines within the time stipulated in the grants. Congress acted regarding a few grants during the eighties, and in 1890 passed a law providing for the forfeiture of all lands " opposite to and coterminous with the portions of any such railroad not now completed and in operation." The lands now being claimed by the companies are for mileage finished prior to the passage of that law. This agitation for the repeal of the land grants was due in part to the popular feeling against railroads that developed in connection with the effort to subject railroad corporations to public control; but the demand for the repeal of the land grants 316 AMERICAN RAILWAY TRANSPORTATION came mainly because of the conviction that the public domain should be disposed of only to settlers or " home- steaders," and in small tracts of 160 acres. The companies which built the first Pacific road were aided by a loan of United States funds as well as by donations of public lands. By the act of 1862, as amend- ed in 1864, the United States Government permitted the Union Pacific and Central Pacific and certain other smaller companies to sell United States thirty-year 6-per- cent bonds to secure a part of the capital to be used in building the roads. As each section of 20 miles was com- pleted the railroad companies received these bonds to the amount of "$16,000 for each mile east of the eastern base of the Rocky Mountains and west of the western base of the Sierra Nevada, $48,000 for each of the 150 miles west of the eastern base of the Rocky Mountains and 150 miles east of the western base of the Sierra IN^evada, and $32,000 for each mile intervening between the two mountain sections." As security for the repay- ment of the loan, the United States, by the act of 1864, took a second mortgage on the roads aided. The compa- nies were allowed to sell their own bonds and to issue a first mortgage equal to the amount of the Government's second mortgage. The United States expected the com- panies to pay the interest and the principal of the Govern- ment loan by applying 5 per cent of their net earnings to that purpose, and by carrying the Government's mails, troops, and military supplies. The Government bonds received by the Union Pacific Company amounted to $27,236,512, those obtained by the Central and Western Pacific Companies to $27,855,- 680, and those by the company now called the Kansas Pacific to $6,300,000. Two other companies received bonds to the value of $3,228,320, making the total sum originally advanced by the Government to the 6 com- PUBLIC AID TO RAILWAY CONSTRUCTION 317 panies $64,623,512. The incomes from the operation of these roads were much less than had been expected, and the net earnings were either non-existent or so small that the companies were unable to pay interest on the Government bonds they had received, and the debts of the roads to the United States rapidly grew larger. In 1878 Congress passed the Thurman act providing for a sinking-fund to be managed by the Government and requiring larger payments from the companies; but the debts to the United States continued to increase. The United States effected a settlement with the owners of the Union Pacific in 1897, and was fortunate in obtain- ing the full amount advanced as principal and interest, thus losing only the interest on the interest payments. The settlement with the Kansas Pacific, which was made in 1898, was less advantageous; the United States secured the return of the principal of the bonds and about one- eighth of the amount paid as interest. The indebtedness of the Central Pacific Company, principal and accumu- lated interest, amounted to $58,812,715 at the beginning of 1899, at which time an arrangement was made whereby this sum was funded into 20 promissory notes bearing 3 per cent interest, one note being payable each six months for ten years. For many years it seemed certain that the United States must lose the greater share of the large sum it had loaned to these companies, and such would have been the result had the Government not had the good fortime of bringing about a settlement at the beginning of a period of business prosperity. This ex- perience of the Government in aiding private corporations was so unsatisfactory that Congress will probably not soon care to repeat the experiment. In granting the public lands and loaning its bonds to corporations to further railroad construction, the 'Nsl- tional Government sought to accomplish several pur- 318 AMERICAN RAILWAY TRANSPORTATION poses: one was to secure better transportation facilities for tlie mails and troops of the Government; another ob- ject was to connect the Mississippi Valley with the States beyond the Rocky Mountains; another reason was the desire of the Government to promote the settlement of the country, and thus to increase the wealth and strength of the people of the United States. The Government, moreover, acted as a landlord with an immense tract of land having very little value. A part of this large tract of land was given away in order that the land retained might possess a greater value. The policy of giving away the public domain to corporations has been much criti- cized. Unquestionably the United States was more lib- eral than it need have been, and if the public had chosen to wait twenty years the railroads in the central West and between the Mississippi Valley and the Pacific Ocean would have been constructed by private capital. The liberal donations of public land caused the railroads in that section of the country to be built earlier than they would otherwise have been constructed, the West was settled up more quickly, and' the Government has been able to dispose of many parts of the domain it did not give away at an earlier date, and possibly more ad- vantageously than they could have been sold had none of the land been given to the railroad corporations. As we now view the matter in retrospect, it seems that Congress was too eager to dispose of the public lands. The existence of an unoccupied public domain upon which those may draw who are seeking homes and an inde- pendent position industrially and socially is an advantage to society which we are coming to appreciate more fully as the new lands available for settlement are rapidly decreasing in area, accessibility, and fertility. As the question appeared to Congress from 1850 to 1870, the necessity for greater transportation facilities than un- PUBLIC AID TO RAILWAY COKSTRUCTION 319 aided private capital was disposed to provide seemed im- perative. The United States had a vast unoccupied domain that would be of little value to the country until settled; and Congress decided to hasten the occupation of the West by aiding railroad companies. Had the pol- icy of land grants been carried out in a more conserva- tive manner, the results obtained might probably have been secured at less cost to the public. County, Municipaly and Individual Aid to Railroad Building The contributions made by municipalities and coun- ties can not be stated exactly, but enough figures are available to show that the total amount must have been large. According to the census of 1870, there were then outstanding $185,000,000 of county ^nd municipal bonds which had been issued to aid railroads. What additional amount of bonds had been paid off and canceled prior to 1870 is not known, but probably the sum was consid- erable. In the State of 'New York the county and mu- nicipal subscriptions amounted to about $30,000,000, and in Massachusetts the towns voted $2,350,000 toward rail- road construction. In 1873 the Eailroad and Warehouse Commission of Illinois addressed a circular letter to each of the county clerks in the State requesting them to re- port how much aid had been voted and issued by the counties and towns to railroads. Replies were received from 86 of the 102 counties of the State, and it was reported that in those 86 counties the bonds and money voted and issued equaled $16,087,027. This would indi- cate that nearly $20,000,000 of aid had been given to the railroads by the local governments in Illinois. Local aid to railroads was general in all parts of the United States, and in view of the fact that the counties and towns of Illinois and 'New York gave nearly $50,000,000, the total 320 AMERICAN RAILWAY TRANSPORTATION county and town aid given in the entire country probably amounted to several hundred million dollars. These large sums were voted by the counties and towns in the new sections of the country because their material progress depended entirely upon their securing access to markets. People thought themselves justified in making large sacrifices to secure good transportation facilities at an earlier date than they could be obtained by depending on unaided private capital. Generally speaking, the thought was a correct one, but the corpora- tions in some instances secured larger amounts than the public need have given to have secured the railway desired. A favored method by which companies secured a large bonus was that of surveying two alternative routes — a route through each of two rival towns— r-for the purpose of getting the towns to bid against each other for the railroad. The companies secured capital from individuals as well as from the counties and municipalities. The farmers and merchants living along the line of a proposed road, particularly in the central West, were persuaded to pur- chase stock of the corporations proposing to build. In some cases the stocks thus purchased were good invest- ments, but in other instances the companies were so financiered during the period of construction that bank- ruptcy and reorganization followed close after the com- pletion of the road, and partially or wholly destroyed the value of the stocks held by the local purchasers. The persons who benefited by these reorganizations consisted largely of Eastern capitalists, against whom the farmers, merchants, and business men in the towns of the central West came to feel very bitter. Moreover, having thus lost a large part of their investments, the local contribu- tors felt that they were entitled to favorable rates, but they presently found that they were charged higher rates PUBLIC AID TO RAILWAY CONSTRUCTION 321 • and fares than were the shippers living in the large cities where the carriers were subject to competition. This discrimination against the local shipper intensified the antagonism of the public to the management of the rail- ways, and brought about the enactment of laws regulating rates and fares and the other relations of the railways to the public. The fact that the public had aided the companies to build their roads accentuated the demand for public regulation. REFERENCES FOR FURTHER READING Million, J. W. State Aid to Railways in Missouri. University of Chicago Press, 1896. [This scholarly volume also contains a brief account of the aid given by the Southern States, pp. 196-301.] Scriljner's Statistical Atlas. [Consult map and text regarding land grants.] Sanborn, J. B. Congressional Grants of Land in Aid of Railways. Bulletin of the University of Wisconsin, No. 30, Madison, Wis., 1899. Davis, J. P. The Union Pacific Railway, 1894. [A detailed and valuable work.] Crawford. CrMit Mobilier of America. Donaldson, Thomas. The Public Domain, 1884. [In this bulky volume, published as a Government document, are collected most documents relating to the public domain.] Annual Report of the Commissioner of Railroads. [Especially the re- port for 1899.] CHAPTEE XXIII RELATION OF THE RAILWAYS TO THE STATE IN THE UNITED KINGDOM AND FRANCE Transportation being a service of a public nature, it is the duty of the government to regulate its perform- ance. This regulation may be accomplished by state ownership of transportation agencies or by the govern- mental supervision of those agencies in the ownership and under the management of private persons or cor- porations to whom the state may have entrusted the business of transportation. Some transportation agen- cies are invariably owned by the government; in regard to the others the practise of the different states varies. The postal service, for instance, is everywhere a state monopoly, the highways are usually supplied by the gov- ernment; but the telegraphs and railroads are owned and operated sometimes by the state and sometimes by chartered corporations. State ownership gives the government complete power of control; and the question of regulating transportation becomes one of defining and adhering to the proper policy which the government should follow in managing the agen- cies which it owns. However, when one comes to analyze closely the principles which should prevail in the relations of the government to railroads and other transportation fa- cilities, it becomes evident that whether the transportation service is performed directly by the state or its execution is entrusted by the state to individuals and to corporations. STATE REGULATION IN ENGLAND AND FRANCE 323 it is equally the duty of the state to make sure that the service shall be so performed that the greatest possible measure of justice may be secured by each citizen. The ideal of the greatest good to the greatest number must everywhere pervade the service ; if the state performs the service it must follow that ideal in its management; if corporations act for the state, they must be required by the state to adhere to that general principle. Unrestrained individualism in railway management is a principle which corporations can not be permitted to follow. The history of the relations of the railways with each other in our country, an account of which was given in preceding chapters, shows very clearly that the state can not safely rely upon the competition of privately owned railroads with each other to regulate transporta- tion by rail. The general adherence of the American public to that fallacy during the first four decades of our railroad history resulted in the origin and develop- ment of most of the objectionable practises which to-day constitute the so-called " railway problem.'' Moreover, experience also shows that the public must give heed to the manner in which the state performs its service when the railroads are owned and operated by the Govern- ment. When a state owns a part of the railway net of a country and competes with private companies, it is tempted to resort to the practises commonly adopted by competing companies. If the state manages all the rail- way lines, its railway policy may be determined with regard to the fiscal needs of the government, or may be made a part of a system of protecting home industries, or the railroads may be built and operated so as to fur- ther the military power of the country. These may all be worthy purposes, but they prevent the development of the transportation system best adapted to general economic needs of the country. In other words, the 324 AMERICAN RAILWAY TRANSPORTATION state may not make the technical development of its railroads and the increase of the mileage and the facili- ties the first considerations, as corporations would. Although some form of governmental control of rail- roads is now universally recognized to be a necessity, it is by no means easy to decide what form of control will most conduce to the public benefit. Whether the regu- lation of railway transportation by our Federal Govern- ment and the States should take the form of the pur- chase and operation of the railroads under their juris- diction is a question that has been much discussed. It is, indeed, a difiicult question, and, before considering it, we will do well to review the relation of the railways to the state in some of the larger foreign countries, and study our own experiences as regards railway regulation. The state's relation to railroads may take one of four different forms: (1) Private ownership and private opera- tion of railroads, the state chartering corporations to act as its agents for the performance of railroad transporta- tion; (2) private ownership and government operation, the state leasing the lines from the corporations which have invested the capital in building the roads; (3) gov- ernment ownership and operation ; (4) government owner- ship and corporate operation, the state leasing its roads to corporations. The workings of each of these four forms of relationship have been illustrated by the experiences of one or more important countries. Among the foreign countries that have followed the policy of private ownership and operation are the United Kingdom and France. They have carried out the princi- ple in different ways, and the results of their experience seem especially worthy of study by those who wish to understand and pass judgment on the American policy of railroad regulation. The system of regulation pre- vailing in the United Kingdom rs more instructive for us STATE REGULATION IN ENGLAND AND FRANCE 325 than that of any other foreign country, because our laws concerning railroads have been modeled in large measure after those of England. Unlike most countries, Great Britain did not aid pri- vate corporations in the construction of railroads. The country was so thickly settled and the volume, of busi- ness available for rail transportation was so large that it was practically certain that the railroads when built would secure a remunerative traffic. Private capital was more than willing to provide all the funds needed. In- deed, the British Government felt that the country was so well supplied with transportation facilities by its close network of canals and improved highways that a com- pany proposing to build a railroad was required to con- vince Parliament of the public necessity for the new road. One of the large items of expense to the railway companies has been the cost of getting a charter from Parliament. The money thus spent went mainly as fees to attorneys who were employed to inform the parliamen- tary committees as to the desirability of the proposed work. The people of Great Britain have never seriously thought of nationalizing the railway system of their country. The only act of Parliament in which that pol- icy found expression was passed in 1844, w^hen the Gov- ernment inserted in an act affecting railroads a clause reserving to itself the right to purchase the railroads after a period of twenty-one years. This idea never found expression in subsequent legislation, and thus did not become a part of English policy. In 1844 there was a tendency on the part of certain foreign countries, par- ticularly Belgium, to provide for the future government ownership of railroads. The British act of that year was merely an indication of the general tendency of the times. At the time of the introduction of railroads into the 326 AMERICAN RAILWAY TRANSPORTATION United Kingdom there was general adherence to the doctrine of non-interference on the part of the state with economic activities. It w^as thought that the state should leave industry and transportation alone, and that competition among rival producers and carriers would regulate prices and charges in a satisfactory manner. Parliament thought it might be possible for the owners of the railroads to charge those who used the lines more than would be just, and so in the first charters the maxi- mum " tolls " that might be charged were stated. The charters were drawn in that manner because they were copied, with little modification, from the charters that Parliament had for many years been granting to turn- pike companies. The railroad was thought to be only an improved highway, and it was expected that those wha used the railroad would, in part at least, furnish their own vehicles. The railroad company, it was expected, would furnish the track, would supply a part of the trac- tion power, and possibly act to some extent as a carrier, using its own vehicles. It was expected, however, that shippers would usually prefer to provide their own cars and wagons. Although the charters contained a schedule of maximum tolls. Parliament thought that the competi- tion of railroads with each other and of different carriers over the same line would be the chief force for the regu- lation of transportation charges. Before a decade had passed, it was seen clearly that the railroad and tram-road were very dissimilar, and that the maximum tolls inserted in the original charter had exerted no influence whatever upon railway charges. The railroad companies became the exclusive carriers over their own lines. In the earlier years competition among the roads was active, but the rival companies soon began to amalgamate or consolidate their properties so as to limit this rivalry STATE REGULATION IN ENGLAND AND FRANCE 327 for business. The rapid progress of these consolidations alarmed Parliament, and before 1850 it was clearly un- derstood that the shippers and the traveling public could not safely rely on competition among rival companies for protection either against exorbitant charges or unjust discriminations. I^umerous laws were passed by Parliament to check the consolidation of roads, but these laws were of practi- cally no avail. The Government then decided upon the legal regulation of the relation of the carriers and the public. In 1840 and 1842 the Board of Trade was given general supervision over the railroads, and in 1844 and in 1846 a commission was appointed to assist in the enforce- ment of the laws applying to railroads. The commission of 1846 was in existence for five years, but it possessed so few powers that it accomplished very little, and it was not continued after 1851. After making an elaborate investigation in 1852-'53, Parliament passed a general law in 1854 for the regulation of railroads. This law prohibited the railroads from exacting exorbitant charges, required them to afford all reasonable facilities, and pro- hibited them from giving " any undue or unreasonable preference or advantage to or in favor of any particular person or company or any particular description of traffic in any respect whatsoever." The enforcement of this law was left to the general machinery of the courts, to whom any one having com- plaint to make was obliged to apply. There was no pro- vision made for a Government commission to assist in the enforcement of the law. For this reason, principally, the law was of comparatively little effect. The process of securing justice or reparation through the courts was such a slow and expensive one that shippers having grievances did not attempt to compel the railroads to observe the law. This act of 1854 has influenced subsequent legisla- 328 AMERICAN RAILWAY TRANSPORTATION tion in England and the United States. The first three sections of the interstate commerce law of the United States are taken, with bnt little change, from the British act of 1854. Finding that the public was not appealing to the courts for enforcement of the provisions of the law of 1854, and also observing the continued tendency of the railroads to consolidate and to cooperate in the making of rates. Parliament in 1873 passed a law establishing a board of three railway commissioners. It was stipulated that one of the members should be a lawyer and another should be a man who had had practical experience in the railway business. The primary purpose of establishing this commission' was to provide a board to whom any one who had a complaint against the railroads might, without expense to himself, appeal for aid in enforcing the act of 1854. Complaints were made in large number to the commission, and although the board had originally been established for a period of only five years, its life was continued from time to time until the passage of the act of 1888, when the commission was made a permanent body with enlarged powers. Under the act of 1888 the commission consists of the two men appointed upon rec- ommendation of the president of the Board of Trade. One of these two appointed members must have had ex- perience in the railway business. There are also three ex-officio commissioners — one for England, one for Scot- land, and one for Ireland — consisting in the case of each country of a judge of a superior court. When the com- mission sits in England it consists of the two appointed members and the English judge; when in Scotland, of the two appointed members and the Scotch judge; and like- wise in Ireland the third member is the Irish judge. The decisions of the commission are final as regards questions of fact, and the orders issued by the commission must STATE REGULATION IN ENGLAND AND FRANCE 329 be observed by the carriers, unless the orders are set aside by appeal to a superior court. It was further pro- vided in the act of 1888 that every railroad company must submit to the Board of Trade, within six months after the passage of the act, a revised classification of its freight business and a revised schedule of maximum rates. The classifications and schedules thus submitted were to be scrutinized by the Board of Trade, and after having been put into form satisfactory to the board, were to be submitted to Parliament, accompanied by such observa- tions as the board might think fit to make. If any rail- road company failed to submit a classification and sched- ule of charges, the board was empowered to make such provisional classifications and ^x such provisional rates as it deemed best, and submit them with its recommenda- tions to Parliament. It was provided in the act that Parliament should, if it approved of the recommendations of the Board of Trade, enact the classifications and sched- ules into statutes binding upon the carriers until changed by subsequent legislation. The law of 1888, now in force in Great Britain, seems to have worked satisfactorily. The relations of the car- riers and the public are harmonious, and there are but few complaints either of exorbitant charges or unreason- able discriminations. The commission has apparently had little work to do. Possibly the law has worked so successfully because the railways of the country before the enactment of the law had been consolidated into a small number of systems, each system having the traffic of a fairly distinct part of the country without much rivalry from other companies. The law^ permits the rail- ways to pool their traffic whenever they may think it necessary to do so. As a matter of fact, pooling has not been much resorted to, because the division of the field among the railroad systems has made pooling unnecessary. 330 AMERICAN RAILWAY TRANSPORTATION The relations of the railways with each other have been made more harmonious, and the prevention of un- reasonable discriminations has been made easier by the railway clearing-house. In 1842 the railways of Great Britain decided to establish a clearing-house for the col- lection of the charges on joint business and for the dis- tribution of those receipts among the railroads concerned in through shipments. In 1850 Parliament incorporated the clearing-house, and since then it has been a very prominent feature of the British railway system. Relation of the Railroads and the State in France The French railway system has some unique features. The result of railway evolution in France has been the development of 7 large railway systems, of which 6 are controlled by private corporations. The other is owned and operated by the Government. Five of the private systems radiate from Paris, and one has its lines in the south. Each system possesses a monopoly of the rail- road transportation service of a definite portion of the country. The tendency of the French people to be systematic is well illustrated by their legislation regarding railroads. As soon as the significance of the railroad as a transporta- tion agent was realized (as early as 1833), a general law was passed stipulating that concessions to railways should be made only by legislative enactment, that the charter period should not exceed ninety-nine years, that the state should reserve the option of managing the railroads, that the state should have the right of passing upon maximum charges, and that the state should become the owner of the railroads at the expiration of the charters. These prin- ciples have been maintained in all subsequent laws. The policy of state const^-uction and operation was carefully considered by two special commissions in 1837 STATE REGULATION IN ENGLAND AND FRANCE 331 and 1840, and the decision was reached that the lines should be built and run by companies subsidized and con- trolled by the Government. This policy was embodied in the detailed law of 1842, which provided for several roads radiating from Paris. The central and local governments furnished the lands, road-bed, and stations, the companies provided the superstructures and rolling-stock, the con- tributions of the Government averaging about $50,000 a mile. The state owned the road-bed and leased the lines to the companies. The charters of the companies were limited to forty years; the average length of the leases was thirty-six years. Progress under this plan was satisfactory until the panic of 1848, when work on the new lines was tem- porarily stopped. The state decided to buy one road, that from Paris to Lyons. The rest of the mileage was divided among 27 companies. The second important phase of the railway history of France was inaugurated by Napoleon III. He became Emperor in 1851, and soon proceeded, as a measure of conciliation to the money interests, to group the railway companies into the present six large sys- tems, each system having a monopoly within the section served by it. The railroads were not to revert to the state until ninety-nine years from the date of the change. As the time of the leases has not since been altered, they will expire from 1950 to 1960. The companies, however, did not construct new lines so rapidly as was desired, and a financial crisis in 1857 brought all railroad building to a stop. In consequence, France entered upon a third phase of her railway experi- ence in 1859 by guaranteeing the bonds which the compa- nies might issue to secure funds to construct new lines. The state guaranteed 4 per cent interest on the bonds, and that enough should be contributed to a sinking-fund to make certain the amortization of the bonds. Indeed, this 332 AMERICAN RAILWAY TRANSPORTATION guarantee of the interest on the bonds comprehended more than the obligations incurred in constructing new lines. There were certain existing roads whose operation was not profitable, and they were classified with the new lines and their obligations were given the same guarantee of interest as was given the bonds of new lines. There was no change made in the provision of the charters that the roads should revert to the state at the end of ninety- nine years; but the state added a proviso giving it the right to buy any road after fifteen years. The six companies built a large number of new lines, and the state's obligations were made heavy; but de- mands for local lines were not all met. So in 1865 the state decided to authorize the construction of local roads by companies aided by the local communities and by the Central Government, which granted these companies the same interest guarantees that had been granted to the large companies for new lines in 1859. The state attempted, however, to preserve to the six large companies the monop- oly powers they possessed, by providing that the local roads should be branches and feeders of the existing lines, and not be so built as to be capable of being developed into through lines that might compete with the large systems. The local lines, however, were built with the standard gage, and a railway speculator named Phillippart tried to weld the local roads into competing lines. He was de- feated in his attempt in 1876; but his failure threw the local roads into bankruptcy and led the state to enter upon the fifth phase of its railway policy — ^the purchase and operation of railways by the Government. The local roads were principally in the north and in the southwest. Those in the north were absorbed by the IN'orthern Railroad; but an agitation for state rail- roads prevented the purchase of the local roads in the southwest by a private corporation. In 1877 the state STATE REGULATION IN ENGLAND AND FRANCE 333 decided to buy these southern local lines, and two years later, under the leadership of Freycinet, Gambetta, and others, who were doubtless influenced by what was trans- piring in Germany, the French ministry decided to begin the construction of a large system of state railways. The legislature, however, gave the ministry only moderate financial support in the execution of its plans. The state roads did not prove a success. The new lines built by the state were located with reference to political as well as business claims, and were local disconnected lines that could not be operated profitably as independent roads. The state leased them for short terms to the six private companies. The local roads which the state had bought in the southwest were united into a Government system, but as it had no Paris connection it could not exercise much power in comparison with the six large private companies. In 1883 France adopted the railway policy to which she has since adhered. The construction of roads by the state was abandoned. The state retained its system of roads in the southwest, but gave those which it owned in other parts of the country to one or another of the six companies, receiving from some companies certain lines which might have competed with the state roads in the southwest. The new lines to be constructed in the future were to be built by the companies with capital advanced by them. The money thus advanced is being repaid by the state in annual instalments. By the time the charters expire the annual payments of the state will equal the capital advanced by the companies, together with interest on the advances. France in 1883 returned to the plan of granting a complete monopoly of transportation to subsidized private companies, and increased the subsidies to the companies by guaranteeing to their stockholders minimum annual 334 AMERICAi^ RAILWAY TRANSPORTATION dividends equal to those which they had been receiving for the past few years. The companies are required to turn over to the state two-thirds of such dividends as they may earn in excess of certain stipulated percentages, but the limit is put so high that the state will hardly receive any considerable share. France affords an example of a country that has ad- hered pretty closely to a policy of granting monopoly privileges to private railways. The results are not alto- gether satisfactory. The state has been able to maintain a strict regulation of railway management; discrimina- tions have been prevented, the waste due to competition has been avoided, and the state has the prospect of com- ing into the possession of the railroads in the future. But the railway companies have made good use of their opportunities to force the public to aid them. In 1842 they received construction subsidies, in 1852 an exten- sion of their charters from forty years to ninety-nine years from the date of change. In 1857 the state guar- anteed the interest and repayment of a large portion of their bonds, and in 1883 the state assured to all investors liberal dividends on their advances. The public has cer- tainly given liberal aid to the railroads, but it has not enjoyed especially low rates; indeed, railway charges in France as contrasted with those in other countries have been relatively high. REFEREN-CES FOR FURTHER READITTG Hadlet, a. T. Railroad Transportation, chs. viii, ix, and x. Hendrick, F. Railway Control by Commissions, 1900, chs. ii and vii. AcwoRTH, W. M. The Railways of England, London, fifth ed., 1899. Meter, B. H. Report of Industrial Commission, vol. ix, pp. 946- 949, and 955-957. FrNDLAY, G. The Working and Management of an English Railway. Sterne, Simon, Railway Systems in Europe, Sen. Misc. Doc. No. 66, vol. ii, 1886-'87. CHAPTEK XXiy RELATIONS OF THE RAILWAYS AND THE STATE IN ITALY AND GERMANY In contrast with the policy of the private ownership of railroads exemplified by the United Kingdom and France is the plan of government ownership typified in different ways by the railway history of Italy and Ger- many. Government ownership prevails in many countries both in Europe and in the other parts of the world that are under the control of European nations. During the past twenty-five years there has been a rather marked tendency outside of America and the United Kingdom to substitute state control for private management. In some instances the transition from private to state control has included a short period during which a part of the lines taken over by the Government were leased to the state by their private owners. In Prussia, Austria, and Hungary, for instance, the Government built some lines, purchased others, and leased still others of their owners until the Government could more readily purchase the lines thus leased. This change, by means of a lease, from private control to complete nationalization applied to only a few lines in Prussia, and was made in a few years; but in Austria and Hungary more use was made of the plan of leasing, and the purchase of the private lines proceeded more slowly. Switzerland is passing directly from private to Government ownership without leasing the lines. 835 336 AMERICAN RAILWAY TRANSPORTATION Some countries have built or purchased railway sys- tems and then entrusted the operation of the roads to leasing corporations. Holland, for example, constructed both of the two railroad systems in the country, but the Government operates only one of the systems, the other one being leased to a corporation. In India the Govern- ment has leased several lines to companies, and some other countries have taken similar action. The plan of Government ownership and private management has been carried out more fully by Italy than any other country. The history of the relation of the railway to the Gov- ernment in Italy is peculiarly interesting. The principal roads were started while Italy was still split up into a number of petty states. These states gave charters to private companies to construct lines, and assisted them with advances of capital, interest guarantees, and subsi- dies for building lines and for running trains. Each state had its own little isolated railway system. The political unification of the country was followed by railway consolidation, and the roads were united into four systems. Though advantageous to the railway com- panies, consolidation did not make them prosperous, and the Italian Government found itself heavily burdened by the financial aid it had undertaken to give the railroads. In the later seventies Italy decided to purchase the roads and to construct much new mileage. The motive was partly the political one of desiring to take the railroads of upper Italy out of the hands of an Austrian company. The ministers who had inaugurated the policy of state purchase were in favor of the state operating its roads, but they were displaced by men who favored a lease of the lines to private companies. In 1878 the Italian Parliament appointed a commission to investigate the en- tire question of state and private management of railroads. STATE CONTROL IN ITALY AND GERMANY 337 The commission made an exhaustive study of the subject and submitted a comprehensive report in 1881, in which it opposed the operation of railways by the state. The conclusions of the commission were that state operation and management would be more expensive than private, and that it would be accompanied by grave political dan- gers. In 1885 Italy leased the railroads on the mainland to two companies, the Adriatic and the Mediterranean, of nearly equal strength, each having a trunk line extend- ing the long way of the country. The Sicilian roads are leased to another company. The contracts are for a period of sixty years, each party having the right to terminate the contract at the end of twenty or forty years by giving two years' notice. The rolling-stock was sold to the com- panies, and the lines and structures leased to them. The railway history of Italy covers nearly every phase of the relation of the railways to the states, but though instruct- ive, is less so than it would have been had Italy been a politically united and industrially strong country during the past sixty years. [See note, page 348.] The plan of government ownership of railroads and their lease to private companies has an analogy in the municipal ownership and corporate management of street- railways. Several foreign cities own the street-car lines, and lease them to corporations which conduct the service under the regulation of the city government. The plan has some advantages, and its adoption by American cities has been strongly, though as yet unsuccessfully, urged by influential advocates. Relation of the Railways and the State in Prussia Though there are several countries in which the rail- roads are owned by the state, Germany furnishes the most prominent and successful illustration of state owner- 338 AMERICAN RAILWAY TRANSPORTATION ship and operation. Each state composing the enipire now owns most of the railroads within its borders. The Imperial Government is also a railroad owner, having acquired the lines in Alsace-Lorraine when that section was taken over from France in 1871. However, these lines owned by the empire are leased to Prussia and oper- ated as a part of the system belonging to that state. As compared with England, the industrial condition of Germany at the time of the beginning of railway history was very backward. Germany had hardly be- gun her industrial advance; indeed, the great develop- ment of her industries and her natural resources did not much antedate 1870. These facts go far to explain the difference between the railway policy of the United King- dom and that of Germany. Had the industries of Ger- many been as fully developed as those of England in 1830, and had the political unification of the country been accomplished before that time, it can not be doubted that the demands for railroad transportation would have been so much greater than they were that private capital would have undertaken, without the support of the state, the work of supplying the country with a railway net. The state, moreover, would not have had the military reasons which she had urging her to engage in the con- struction of railroads and the purchase of those built by private capital. Prior to the establishment of the German Empire in 1871, German railway legislation was that of the several states only; but since 1871 the empire has shared with the states in legislation for the control and development of railways. Prussia being the largest and most typical German state, her railway policy exemplifies that of the smaller states. In general, the policy of Prussia was to aid private capitalists in the construction of roads, and to subject the roads thus constructed and operated by cor- STATE CONTROL IN ITALY AND GERMANY 339 porations to a detailed regulation. This has finally cul- minated in a nearly complete nationalization of the railway system. The first general law regulating railway affairs was passed by Prussia in 1838. This initial law was detailed and comprehensive, and provided for a thorough control of the railroads by the state. The law has been added to by much subsequent legislation, but has never been sup- planted. It contained the essential principles of the pres- ent system of governmental control of private railroads. Among the minor provisions of the law was one stipulating that the companies building railroads in Prussia were to be protected for thirty years against the construction of com- peting lines. This guarantee of protection against compe- tition did not, however, prove a sufficient inducement to private capital, and in 1842 a law was passed providing for state aid in the form of interest guarantees, the state assur- ing to those investing capital in railways a minimum inter- est on their investments. In guaranteeing the interest re- turn on invested capital, the Government reserved the right of taking the roads under its own management, should the private companies prove to be unable so to manage their lines as to secure net earnings large enough to pay the minimum interest guaranteed by the state. Several of the companies were unable to earn enough to meet these interest payments, and their lines were taken over and managed by the Government. The history of rail- way legislation in other countries as well as in Prussia shows that state subsidies and interest guarantees have had not a little to do in bringing about the nationalization of railroads. The German Government is founded upon a military basis. The efforts of Bismarck and the other statesmen who wrought so successfully for the unification of Germany were directed toward strengthening the military power of 34:0 AMERICAN RAILWAY TRANSPORTATION the German states, and of Prussia in particular. These statesmen saw that the railway system of Prussia and the other German states might be made to assist greatly in furthering the military aims they had in view. Conse- quently in 1848 Prussia began the construction of a railroad from Berlin toward the Russian frontier. The primary purpose was military, and the same purpose con- trolled the railway policy of Prussia for more than twenty years. From 1848 to 1862 Prussia added slowly to the state railway net, making such appropriations therefor as her limited resources would permit. The stocks of pri- vate railroad companies were also purchased by the state from time to time. From 1862 to 1870 Bismarck gave less attention than he had given during the preceding decade to the development of the state railway system. His every energy was devoted to preparing Prussia for the great struggle with Austria and with France which he foresaw must precede the unification of the empire. There was no pronounced change in Bismarck's railway policy during this decade; the lines controlled by the state were operated with a view to securing a maximum amount of business. The state managed its roads in much the same way as the companies did theirs. The roads having been acquired for military purposes were operated with a view to securing as favorable fiscal results as possible. After the Franco-Prussian War Bismarck tried to bring about the purchase by the empire of all the rail- roads, those belonging to the several German states and those owned by companies. Bismarck desired to strength- en the newly founded empire, and, by making it relatively much stronger than any of the component state govern- ments, insure the permanency of German unity. This, how- ever, was not the reason advanced. The military advan- tage of the ownership of the railroads by the empire, the elimination of railway discriminations by means of state STATE CONTROL IN ITALY AND GERMANY 341 ownership, and the ability of the state to use the rail- roads for the promotion of industrial and social welfare, were the arguments upon which chief stress was laid. Bismarck's scheme for the purchase of the railways by the empire was not adopted, because of the jealousies of the smaller states, but in 1878 he induced Prussia to proceed with the acquisition of the private railroads within its limits, and thus practically to complete the work of nationalizing German railways. The ownership of the railroads by the Government in Germany and other states has come about in various ways. When Prussia decided to nationalize the railways of the country, the Government did not at once take pos- session of all the lines, but purchased one system after another as satisfactory arrangements could be made with the corporations. When the policy of state purchase was inaugurated, the Government owned more miles of road than any single corporation within the state. In April, 1880, the state possessed 3,760 miles of road. During the next few years the state purchases were made with considerable rapidity, so that in April, 1886, the Govern- ment was managing 13,000 miles of lines. The present mileage owned and operated by Prussia is about 20,000. The Government has experienced but little difficulty in securing possession of the private lines. It has not been necessary in any case to resort to expropriation. By offering the companies a liberal sum for their properties and by exchanging Government bonds for the securities of the companies, the state has been able to purchase the lines without serious opposition on the part of their for- mer owners. It should be noted that there are still some railroads in Prussia owned and operated by private companies. In 1900 there were about 600 miles of main line and about 1,400 miles of auxiliary lines in the hands of the 342 AMERICAN RAILWAY TRANSPORTATION private companies. These private roads consist of rela- tively unimportant lines, and are operated by their pri- vate owners in accordance with detailed regulations laid down by the state. They are in no sense com^^etitors with the state system, and they will probably soon be acquired by the Government. The results of the nationalization of the railroads in Prussia have been highly satisfactory. This is particularly true of the financial results. According to a law passed in 1882, the first charge on the net profits of the state railways is the payment of the interest on the debt in- curred in the purchase of the roads. The railway man- agement is also required to pay off at least three-fourths of one per cent of the total debt each year, provided, of course, the net profits are large enough to enable such payments to be made. If these interest and amortization payments do not take all the net profits, the surplus may be used in purchasing railways or may be turned into the general budget of the state. The state has succeeded in operating the railroads economically and with surprisingly large net profits. Dur- ing the first ten years following the passage of the act of 1882 the average net profits equaled 5J per cent per annum on the capitalization. During the ^yq years end- ing in 1900 the net profits have averaged 7.16 per cent. These large net earnings have enabled the state to pay the interest charge of 3^ per cent on the debt, to pay off over f per cent annually of the debt, and to turn over a large amount annually to the general budget. During the eighteen years ending with and including 1899 the total net profits amoimted to nearly $1,500,000,000. Of this sum about $770,000,000 were required to meet the inter- est charges. The debt has been reduced $220,000,000, and nearly $350,000,000 have been turned over to the Government to meet the ordinary expenses of other de- STATE CONTROL IN ITALY AND GERMANY 343 partments. Over $15,000,000 have been devoted to extraordinary expenses for general improvements and for rolling-stock, and large sums have been taken from earn- ings for the construction of new lines. As was stated in Chapter XXI, railway charges in Prussia are low for the passenger traffic and high for the freight service as compared with the United States, the average earnings per passenger per mile being now but a little over one cent — barely one-half the average earn- ings per passenger per mile secured by the railroads of the United States. This low passenger earning is the result of the low fares in the third and fourth classes, the ones used by nine-tenths of the people of the country. The ordinary fare — fourth-class — is about four-fifths of a cent a mile; for third-class, a little over a cent and a half a mile. The fares for the second and first classes are relatively high, but as comparatively few people travel by those classes, the high charges in those classes do not greatly affect the average passenger mile earnings of the roads. Freight rates in Prussia are nearly double those in the United States, the average earnings per ton per mile in Prussia being about 1.45 cents — nearly double the ton mile earnings for the railroads of the United States as a whole. In making these comparisons it should be borne in mind that the charges must necessarily be considered in connection with the conditions under which the services are performed. Prussia is a country with a small area and a large population, where passenger travel is highly developed and where low fares may be profit- able. On the other hand, the freight business of Prussia is very small as compared with the freight transportation carried on by the American railways. We move great masses of commodities long distances, and can do so at a very low rate per ton per mile. It is difficult to decide what effects state management S4A AMERICAN RAILWAY TRANSPORTATION has had upon the character of the service performed by the railroads of Prussia. Most impartial critics consider the passenger service to be satisfactory, and believe it to be well adapted to the needs of the country. The freight service, on the other hand, is usually considered to be inadequately developed. The technical develop- ment of the freight service in the United States is far in advance of that of Germany. The reasons for this are partly economic, but they must also be in part admin- istrative. Under the stress of competition among rival lines in this country, and under the incentive w^hich pri- vate management has to reduce expenses to the lowest point, the freight carriers in the United States have built up a system of freight transportation that is better and more economical than can be found in any other country. Whether the more conservative administration of the railways by state officials in time will or can bring the German freight service to the high degree of technical development attained in the United States is doubtful; but technical progress is being made year by year by the German states, with the result that the pres- ent high cost of the freight service will be largely reduced within a comparatively few years. The success which the Prussian Government has had in the management of its railroads has largely influenced other European countries, notably Belgium, Austria- Hungary, and Switzerland. Until a few years ago the Belgian state operated a part of the railway net of the country, the remainder being in the hands of corpora- tions. At the present time the railway system is fully nationalized. Austria and Hungary have continued to increase the mileage of the lines owued by the Govern- ment until in each country the state has secured posses- sion of most of the important roads. A complete national- ization of the railway systems of those countries is a mat- STATE CONTROL IN ITALY AND GERMANY 345 ter of a comparatively short time. Switzerland is the Jast European country that has changed from private to na- tional roads. In 1898 the people authorized the Federal Government to purchase all the roads in Switzerland, the right to do so having been reserved by the state when it granted the charters to the companies. The plan of nationalization provided that three of the rail- way systems of the country should be taken over by the Federal Government in 1903, and that the fourth system, the St. Gothard, should be acquired in 1909. Switzer- land is nationalizing her railroads by purchasing them in accordance with provisions contained in the railway charters. Thirty years ago many persons were advocates of a system of dual ownership of railroads, the state owning and operating a few systems, and private companies the other lines. It was thought that the competition of state with private lines would compel the latter to charge such rates and adopt such regulations and practises as the state chose to institute, and that the abuses which had arisen under unregulated private management would be avoided. Belgium and other countries tried the plan of dual ownership, but the results were not satisfactory. It was discovered that the transportation abuses were mainly the result of competition, and that the rivalry of state and private roads led to discriminations and other objectionable practises. The chief advantages to be de- rived from state ownership of railroads can be secured only when the state possesses a monopoly of railway trans- portation and is able so to manage the railroads as to promote industrial progress and social changes. In all countries where dual ownership has been tried the state has either proceeded with the nationalization of the rail- ways of the country or has surrendered her own lines to the management of corporations. 346 AMERICAN RAILWAY TRANSPORTATION This survey of tlje relation of the railways to the state in our own and foreign countries shows that the governmental control of railways has assumed a variety of forms. The causes for this variation are social, polit- ical, and economic. In some countries the individual expects the state to exercise many functions which the citizens of other coun- tries do not desire their government to perform. The Government of England presents a striking contrast to those of France and Germany in this regard. The Eng- lish political ideal has been to minimize the industrial functions of the Government; whereas, the Continental ideal has rather been to develop a bureaucratic state capable of exercising as many functions as possible. The continental governments have unhesitatingly assumed a degree of railway aid and control that the English and American Governments would not have been expected nor allowed to undertake. In each country, furthermore, the railway history has been influenced by the political history. Witness Italy, Germany, France, and the United States. In Italy and Germany, national unity not having been achieved until long after the railway construction began, the early lines were chartered by petty rival states, and the coordina- tion and consolidation of the railways in those states had hardly begun when the English railroads had been amalgamated into large systems. The unstable political conditions of Germany and Italy made it necessary for the states to give greater aid to railroads than would otherwise have been necessary. Among the political events in France which have affected the relations of the railways and the Government may be mentioned the overthrow of the republic by ISTapoleon III and the Franco-Prussian War. The fact that the United States is a federal state composed of a large number of States STATE CONTROL IN ITALY AND GERMANY 347 which have the power to charter and regulate railways has colored the history of railway policy in America. The railway policy of every government has been influenced by its financial condition. The Continental states which adopted the policy of state railways at the beginning were Belgium and other small states with good credit. The larger countries did not venture to assume the financial burdens of owning and operating railroads on a large scale until many years later. The strong agitation for the complete nationalization of railways in Prussia, Austria, Italy, and other Continental countries came in the seventies. Prussia and Italy bought theirs then. Several European countries have during recent years been proceeding in the direction of state owner- ship as rapidly as their financial condition will permit. The variations in the railway policies of different countries are in part due to economic causes which are quite independent of the political or financial conditions just referred to. In Egypt, India, South Africa, 'New Zealand, the Australian colonies, and other states which the English have recently occupied for industrial and com- mercial reasons, the railways have been built and operated by the governments of these dependencies for the sake of developing the economic resources of the countries as rapidly as possible. These colonial governments have an industrial character which well consists with the owner- ship and managernent of railways. Each country has a railway history of its own, which has been determined by the social, political, and eco- nomic conditions peculiar to it. This being so, there can manifestly be no one policy of governmental con- trol of railways that it could be advantageous for all countries to adopt. The relation of the railways to the state is a problem which each country must solve for itself. The adjustment to be made depends upon the 348 AMERICAN RAILWAY TRANSPORTATION conditions which are peculiar to its own national, social, and industrial evolution. REFERENCES FOR FURTHER READING Hadley, a. T. Railroad Transportation, chs, xi-xiii. Hendrick, F. Railway Control by Commissions, chs. iii and vi. Sterne, S. Railway Systems in Europe. Sen. Misc. Doc. No. 66, vol. ii, 1886-1887. Meyer, B. H. Report of Industrial Commission, vol. ix, pp. 962- 983. Administration of Prussian Railroads, Annals American Academy of Political and Social Science, vol. x, pp. 389-423, 1897. CoHN, G. Results of State Railway Administration in Prussia, Jour- nal of Political Economy, vol. i, pp. 172-192. Note. — ^The contracts between the Italian Government and the rail- way companies date from July 1, 1885, and are terminable after twenty years upon two years' notice. On the 28th of April, 1903, both parties gave notice of the abrogation of the contracts July 1, 1905. According to Professor B. H. Meyer, " Dissatisfaction with present conditions is uni- versal. Passengers complain of vexatious delays and general irregularity. Shippers chafe under rates alleged to exceed those of surrounding coun- tries by 25 to 30 per cent, not to mention lack of cars and intolerable slowness in speed. Railway employees are discontented because the com- panies have failed to live up to the terms of their contracts with respect to hours, wages, and holidays. Lastly, the Government is dissatisfied be- cause, contrary to the anticipations of 1885, the State has not only received no financial benefits, but it has been compelled to make up deficits which, since 1895, have exceeded $40,000,000 annually." — Annals of the Ameri- can Academy of Political and Social Science, vol. xxiii, p. 139. CHAPTEK XXV REGULATION OF RAILWAYS BY THE AMERICAN STATE GOVERNMENTS THE STATE COMMISSIONS In the United States as in the United Kingdom the Government has sought to supervise or regulate rather than to monopolize the business of rail transportation. By our Constitution the power " to regulate commerce with foreign nations, and among the several States and with the Indian tribes " is vested in Congress, while each State has authority over the commerce that does not pass its boundaries. The regulation of international and interstate commerce is vested in Congress; the control of intrastate commerce is exercised by the several States and Territories. There are 49 governments in the United States possessing authority over railroads. The problem of railway regulation is unavoidably a large and com- plicated one in a country so extensive as ours, and the division of political authority resulting from our federal plan of government has made the problem a more com- plex one than it would be were there only one controlling authority, as is the case in the United Kingdom, France, Austria, and most other European countries. The States preceded the Federal Government with legislation for the regulation of railways. The State alone could charter a corporation to construct and oper- ate a railroad within its borders, and, as the corporation derived its powers from its charter, the States were in a position to exercise such control over the railroads as 849 350 AMERICAN RAILWAY TRANSPORTATION they chose to exert. The control which was actually exercised was slight — much less thorough in many particu- lars than the public welfare demanded. The tendency in this country has been to minimize Government inter- ference with railways as much as we have thought it possible to do without jeopardizing public interests, but the minimum of interference which we have considered safe has not always been the same. During the period from 1840 to 1870 many States gave aid to railroad construction, and from 1850 to 1870 the National Gov- ernment assisted the Western lines. The States also, showed some tendency to regulate the railway compa- nies, but Government interference was rather for super- vision than for regulation. From 1850 to 1870 there was but little effort made, outside of New England, even to supervise the railway business. This was the period of the dominance of the laissez faire or let-alone doc- trine of government. Our experience during this period, however, taught us that we had placed too much confi- dence in the efficiency of unrestrained interrailway com- petition as a regulator of railway business; consequently during the past thirty years most States as well as Con- gress have endeavored to control the relations of the railroads to each other and to the public, and the pres- ent tendency in the States is toward an increasingly stringent regulation. In the beginning an effort was made to subject the railroads to the kind of regulation that had been exercised over the turnpike roads and canals. It was supposed that the railway was only an improved road, and that shippers and travelers would use their own vehicles for more or less of the traffic. The early railway charters, being modeled after the canal and turnpike charters that had preceded them, not only contained provisions regard- ing the organization of the corporation and the exer- STATE REGULATION OP RAILWAYS 351 cise of the State's power of eminent domain to secure a right of way, but also included sections regarding the erection of toll-gates and the regulation of the tolls or charges which might be made. In many cases the char- ters fixed the maximum charges, and in other instances — especially in the ISTew England States — the railway com- panies were permitted to fix their own charges, subject to periodical revision by the States in case the net earn- ings should exceed a stated per cent of the capital. Charter and statute provisions regarding toll-gates on railroads soon disappeared; but the policy of fixing maximum rates and fares for trafiic by railroad was con- tinued to some extent. However, the charter stipulations and other early legislative enactments fixing maximum rates or maximum profits exerted very little influence upon the actual charges of the railways, because the limits set were placed so high. The maximum rates fixed by the charters were considerably higher than the rail- roads actually charged. Furthermore, it was, and has always been, easy for a company to keep its net earnings from exceeding a fixed per cent of its capital as long as it has the power of increasing its capitalization by the issue of new stock. Although the charter limitations on charges and profits proved ineffective, there was no disposition on the part of the State governments before 1870 to pass laws fixing rates and fares. The public thought it might safely depend on interline competition for protection against exorbitant charges. Indeed, the railroads proved to be of such great assistance to the development of the coun- try that the chief concern of the public, particularly in the Western States, was to secure as many lines as possi- ble. There was little disposition to impose restrictions on a company proposing to build a new road. In many States general laws were passed under which railroad 352 AMERICAN RAILWAY TRANSPORTATION companies might be chartered without securing a special act of the Legislature. The public did not think it neces- sary for the Government to regulate the location, capital- ization, construction, and operation of the roads. Com- petition and " the laws of trade '' it was thought would attend to those matters. In this regard we acted differ- ently from most European countries. The agency now employed by two-thirds of the States for the supervision or regulation of railways is a com- mission. The first railroad commissions were created in New England, where they were appointed for two pur- poses: (1) to appraise the value of the land which the railroad companies might need to take from private per- sons with whom satisfactory terms of purchase could not be made; (2) to apportion the receipts and expenditures of an interstate road among the States in which the road conducted its business. The States considered this ap- portionment necessary, because they had placed in the railway charters limitations on the charges and profits of the companies. The commissions established for these two purposes were given other duties of a supervisory character. To quote the Khode Island law of 1839, they were to examine and report on " the state, condition, and proceedings of the several railroad companies, so far as the public interest may require the same." The commis- sioners were to inform the Legislature regarding the financial affairs of the companies, and, as the New Hamp- shire law of 1844 provided, to report whether the com- panies were observing the provisions of their charters and of the laws of the State. Probably the strongest motive of the States in the early supervision of railroads was the desire to lessen the number of accidents. For this reason mainly a commission was established by Con- necticut in 1853, by Vermont in 1855, and by Maine in 1858. STATE REGULATION OF RAILWAYS 353 The attempts of the States to supervise railways, whether bj commissions or by other executive officers of the Government, suggested the need of systematic statistics regarding the financial and traffic operations of the companies. In several States — e. g., Ohio, ISTew York, and New Jersey — the officers appointed to collect these statistics were forerunners of the railway commis- sions. They performed one of the most important serv- ices for which commissions are created. Prior to the civil war several States had begun in a small way to supervise railroad transportation, and in each of the New England States, except Massachusetts, a commission assisted in this work. Briefly stated, the functions exercised by the early commissions were the appraisement of the value of private property taken by the railroads, the apportionment of the receipts and ex- penditures of interstate roads among the States con- cerned, the inspection of roads and the enforcement of laws to prevent accidents, the investigation of the affairs of railway corporations to determine whether the com- panies were violating their charters or the State laws, or whether the corporations were giving the citizens or cor- porations of other States greater advantages than they were giving those of the State which had incorporated the companies, and to collect statistical data concerning the financial affairs and business operations of the rail- road corporations. With the exception of the appraisal of the value of private property taken for railway uses, all these functions are now exercised by the existing State commissions. Numerous other duties have been assigned to those bodies as the States have attempted to deal with new phases of the problem of railway regulation. Shortly before 1870 there arose a public demand for a more effective regulation of railway transportation. The main cause of the demand was the growing preva- 24 354 AMERICAN RAILWAY TRANSPORTATION lence of gross discriminations in rates and fares. Unre- strained competition led to such abuses that the people, both of the Eastern and Western States, passed more stringent laws to regulate the relations of the railways with each other and with the public. In the Eastern States, where the principal railway lines now in that section had already been constructed, and where the industries had been diversified and developed to a considerable degree, the laws enacted were more conservative than were the laws passed by the Western and Southern States. The Eastern States in dealing with " the railway problem " depended on publicity and the force of public opinion to correct the abuses; they authorized their governments to supervise the railways first of all, and to regulate by force only when absolutely necessary. In the West and South, how- ever, the feeling against the railroads was much more intense; the people did not believe publicity and public opinion would bring about satisfactory relations between the carriers and the public; they preferred rather to depend on publicity and penalties. The Eastern States established commissions, with power to investigate rail- way practises and to report the facts to the Legislature and the people, and to suggest what laws should be passed. The Western and Southern States established commis- sions with power to issue orders and to enforce the orders by legal procedure. The Eastern commissions could supervise and advise, the others could supervise and regu- late; one had advisory powers, the other mandatory au- thority. The Massachusetts commission, established in 1869, may be taken as a type of the supervisory-advisory class., The commission consists of three men appointed by the Governor with the consent of the Council. The term of office is three years, one person being appointed each year. The board has power: STATE REGULATION OF RAILWAYS 355 1. To examine railway corporations and determine whether they are fulfilling the terms of their charters and are obeying the laws. 2. To supervise the railroads "with reference to the security and accommodation of the public.'^ 3. To investigate complaints against the railroads. It has the power to summon witnesses and examine them under oath. It may also institute investigations on its own motion. 4. To prescribe a uniform system of keeping railway accounts, and to inspect the books and accounts of railway corporations. 5. To act as a board of arbitration for the settlement of disputes between railroad corporations and the public. 6. To make an annual report to the Legislature dis- cussing " the actual working of the system of railroad transportation in its bearing upon the business and pros- perity of the commonwealth," and suggesting such legis- lation as may seem appropriate. From this list of the chief powers possessed by the Massachusetts commission it will be seen that the enforce- ment of the decisions of the commission is left to public opinion. In the case of Massachusetts the commission has enjoyed the confidence of the public, and has been very successful in regulating the railways. When legis- lation has been needed, the recommendations of the com- mission have usually been accepted. The problem of railway regulation in the "West dif- fered very much from the problem in the Eastern States. In the West the construction of railroads began later, and the public was concerned mainly with securing the needed lines. The public aid, State and local, though large in the East, was much greater in the West. There was little thought given to railway regulation in the West until after the civil war; indeed, such was the confidence 356 AMERICAN RAILWAY TRANSPORTATION in the efficiency of competition to regulate the business of railway transportation that the necessity for State regulation was not realized. Public opinion in the Western States underwent a very sudden and complete change during the five years succeeding 1867. The fierce competition of recently formed through lines connecting Western cities with Chicago, and of the trunk lines joining Chicago with the Atlantic seaboard, led to personal discrimination and to a great reduction in through competitive rates. Rates at local non-competitive points being left unchanged or changed but slightly, the result was excessive discrimina- tions between places. The farmers and people of the smaller towns, who had aided the railway corporations liberally in constructing the roads, were paying high rates, while the shippers in the large cities were favored with low rates. At the same time Eastern capitalists were constructing new lines of railroads in the West with great rapidity. These railroad corporations, com- posed largely of non-resident men, seemed to be prosper- ing greatly. Prices meanwhile were falling from the high level which they had been given by the inflation of the currency during the war. Falling prices for agri- cultural products, due to the contraction of the currency and to the great increase in the area devoted to farming, were bringing down the farmer's profits and making him discontented. The farmers and townsmen of the Western States saw no reason why the companies should not give local points as low rates as had been accorded to the large cities. They did not suppose the railroads were doing the competitive business merely for pleasure, nor that the roads were carrying any traffic at a loss. The rail- roads must be making money on their competitive busi- ness, and ought to lower their local rates to the level of STATE REGULATION OF RAILWAYS 357 competitive charges. This reasoning was not altogether sound, and the people of the West did not fully under- stand the railway problem; but they knew that the rail- roads were unjustly .discriminating, and they were con- vinced that local rates were disproportionately high. They believed also that the railroad corporations were public carriers, performing a service of a public nature, the charges for which could be regulated by public au- thority. The companies, however, at first ignored the public, and then defied them. The public accepted the gage of battle, the railroad companies were defeated, and the so-called " granger laws " and " granger decisions " were the result. The laws which the Western States enacted between 1870 and 1880 for the regulation of railways, including the laws establishing State railroad commissions, are com- monly called granger legislation, because of the support which the granger societies gave to the struggle to secure the legislation. The name is not altogether accurate, because the agitation for State control of railways in the West became strong before the Patrons of Husbandry or the grangers had been fully organized. In the begin- ning the agitation for State control was due to a farmers' movement to which the people of the towns gave their support. Later — that is, from 1872 on — the granger societies actively aided the movement, and became its strongest supporter. Hence the name granger legis- lation. The State regulation of railroads in the West was first undertaken by Hlinois, and the Hlinois commission may be taken as a type of the commission with power, the supervisory-mandatory commission. In 1870 the people of Illinois revised their Constitution, and included in the new document a clause enjoining upon the Legis- lature the enactment of laws for the regulation of rail- 358 AMERICAN RAILWAY TRANSPORTATION ways. To carry out this provision of the Constitution, a law was approved April 7, 1871, prescribing maximum rates and fares, and prohibiting discriminations. Another act, approved a few days later, established a railroad and warehouse commission to supervise the railways and to assist in enforcing the laws for their regulation. The law approved April 7, 1871, was displaced in 1873 by a law making it the duty of the commission to prescribe " a schedule of reasonable maximum rates of charges for the transportation of passengers and freight." The Illinois commission, like the one for Massachu- setts, has power to investigate the railroads as to their physical condition and management, and to prescribe the form of reports to be made by the companies. In addi- tion to possessing most of the powers held by the Massa- chusetts commission, the Illinois board can prescribe schedules of maximum charges, and can prosecute the railway companies either to compel them to obey the com- mission's decisions or to force theni to obey the laws regu- lating railway transportation. Furthermore, if an Illi- nois company charges a rate higher than that which the commission has declared reasonable, the company is com- pelled to prove that the rate which it has charged is rea- sonable. The State is right until proved wrong; the burden of proof is thrown upon the carrier. This was an important modification of the common law, which compelled the State to prove its case when it questioned the reasonableness of a rate charged by a common carrier. Other States in the West and South passed laws simi- lar to the Illinois statutes just described. In 1874 Iowa and Wisconsin passed laws prescribing maximum railway charges. The same year Minnesota established a com- mission endowed with power to fix rate schedules. In 1879 Georgia instituted a commission with power to pre- scribe rates. In 1879 California did what no other State STATE REGULATION OF RAILWAYS 359 has done by adopting a Constitution in which the State Legislature was required to establish a railroad commis- sion with power to fix " rates of charges for the trans- portation of passengers and freight by railroad or other transportation companies." Such a commission was es- tablished the following year. Since then several other States have established mandatory commissions. The map on page 360 shows what States have commissions now, and indicates the type of each commission. The enforcement of the " granger laws " was vigor- ously opposed by the railroad companies, who maintained that their business was a private one, and that the State had no power to fix the rates which they should charge for their services. The railroads claimed, moreover, that the States which had granted a charter to a company giving it power to make reasonable charges for its serv- ices could not prescribe the rates to be charged by the company without the violation of a contract. It had been decided by the United States Supreme Court in 1819, in the famous Dartmouth College case, that in granting a charter a State entered into a contract rela- tion. The courts, however, did not uphold the contention of the railway companies, and in 1877 the Supreme Court of the United States, in the noted granger cases, declared valid the State legislation fixing railway charges. The railway corporations were compelled to recognize the public nature of the service they were performing, and to acknowledge the authority of the States to regulate the railway business, even to fixing the charges for the same. The Supreme Court gave the States, in 1877, greater authority over railroads than they now possess. The granger laws fixed rates on all the traffic by rail with- in the State. Though commodities might be shipped beyond the State or enter the State from outside, and thus become interstate commerce, the railroads must STATE REGULATION OF RAILWAYS 361 carry the goods while within the State at such rates as the State had fixed. Although the Constitution of the United States vests in Congress the power to regulate commerce among the States, the Supreme Court held in the case of Peik vs. Chicago and E'orth- western Railway Company that " until Congress acts in reference to the relations of this company to interstate commerce, it is certainly within the power of Wisconsin to regulate its fares, etc., so far as they are of domestic concern." The language of the court apparently gave the States power to regulate not only intrastate but also interstate traffic until Congress should decide to exercise the power over interstate commerce conferred upon it by the Constitution. The States so interpreted their pow- ers until 1886, when the court in the case of the Wabash, St. Louis and Pacific Railway Company vs. Illinois re- viewed its language and decided that the States had no right to regulate interstate commerce, but must confine themselves to intrastate traffic. This Wabash decision greatly limited the authority of the States over railroads, and was one of the influences that led Congress to pass the existing Interstate Commerce Act. The early granger laws were the first efforts of a thoroughly aroused public to apply vigorous remedies to a severe social malady, and it is possible that the States attempted to proceed too rapidly. Minnesota repealed her law of 1874 the year after its passage, and put in its place a law providing for only one commissioner with little more than supervisory powers. This law remained in force for ten years, when a stronger statute was again enacted. In 1878 Iowa repealed her law of 1874, by which a schedule of rates had been fixed, and established a commission without the tariff-making function. Ten years of experience under this resulted in the establish- ment of a mandatory commission with the power to pre- 362 AMERICAN RAILWAY TRANSPORTATION scribe rates. "Wisconsin abandoned her granger law after giving it only a two years' trial. This so-called Potter law of Wisconsin was tlie most stringent of the granger statutes, and was in force from 1874 to 1876, at a time of severe financial depression. Unfortunately, the Wis- consin law, instead of being modified, was discarded in 1876, and replaced by a statute providing for one rail- road commissioner with very limited functions. The Illinois commission was kept a board with mandatory powers ; it was successful, and exerted a strong influence upon the form of organization adopted by the other States in establishing railway commissions. The trend of English and American legislation for the regulation of railways is toward commissions with power to execute the laws, to enforce their decisions, and to prescribe railway rates. In 1888 the State of Iowa changed from an advisory to a regulative commission with rate-making power, and the Iowa law has strongly influenced the legislation of other States. In 1897 South Dakota reorganized its commission by a statute which follows the Iowa law very closely. This same year also Florida and Tennessee reestablished their railroad commissions and endowed them with mandatory rate- fixing functions. These facts, however, do not prove that the advisory commission may not be successful under certain conditions. The Massachusetts and other Eastern commissions have succeeded quite as well as have those of the West and South. Where the economic and trans- portation conditions are fairly stable and the friction between the railways and the public is not great, and where public sentiment is readily crystallized into legis- lation, a railway commission whose functions are to edu- cate the people and teach the legislatures what to do, can succeed, as is shown by the experience of the 'New England commissions, in securing the regulation of rail- STATE REGULATION OF RAILWAYS 363 way transportation. Whether a State in establishing a railway copimission should adopt the supervisory or the mandatory, type depends upon social and economic con- ditions. Under our system of government the street-railway companies are amenable to two authorities: the city in which they operate their lines, and the State from which they derive their charters. The States possess the au- thority to regulate street-railway transportation, and the six New England States and New York have exercised their powers to some extent. In Massachusetts the State railway commission must approve of the location of a proposed street-railway before the line can be constructed, and the commission may refuse to permit the road to be constructed if it does not consider that there is a " suffi- cient public demand or necessity to require or justify the building of the railway upon the proposed route." The State railway commission of Massachusetts can also control the capitalization of the street-railway companies. By the law passed in 1894, the companies can issue " only such amounts of stocks and bonds as may from time to time, upon investigation by the Board of Railroad Com- missioners, be deemed and be voted by them to be rea- sonably requisite for the purposes for which such issue of stocks or bonds has been authorized." In 1895 New Hampshire passed a law giving its rail- road commission a like control over street-railway capital- ization. This New Hampshire law gives the Supreme Court of the State power to decide whether the public good requires the proposed road. Before deciding the question the court is required to refer it to the railroad commission or a board of referees for a finding of facts. The power of the railroad commissions of Massachusetts and New Hampshire to control the increases in capitalization ap- plies to both steam-railroad companies and street-railway 364 AMERICAN RAILWAY TRANSPORTATION corporations. In Texas, also, by a law passed in 1893, the commission is vested with authority to control the amount of stocks and bonds which a steam-railroad com- pany may issue. Connecticut now limits the amount of bonds that a street-railway company, chartered after 1893, may issue, to 50 per cent of the actual cost of construction and equipment of the road bonded, and com- pels a company which proposes to build a street-railway paralleling an existing street-railway or steam-railroad to satisfy a judge of the superior court that " the public convenience and necessity require the construction of such street-railway." Unlike Massachusetts and ]^ew Hampshire, Connecticut has not conferred on her rail- road commission the function of regulating the location and capitalization of her street-railways. Maine gives her railroad commission power to pass upon the public necessity of a proposed street-railway. The same is true of New York State. In Vermont the railroad commis- sioners have no control over the location of a street-rail- way unless the street-railway corporation and the local authorities fail to agree. In case of a failure to agree, either party can appeal to the railroad commissioners. In Rhode Island the railroad commissioner is given the same authority over street-railways as over other rail- roads. He has general supervisory powers, but has no power to decide whether a road shall be constructed or what its capitalization shall be. In all these seven States the railroad commission col- lects statistics of the street-railways as well as of the steam-railroads. In Pennsylvania also the Superintend- ent of the Bureau of Railways includes the statistics of street-railways in his annual report. The foregoing account of the origin of the State rail- way commissions, and of the general powers with which those boards have been vested, shows that while progress STATE REGULATION OF RAILWAYS 365 has been made by the States in legislation for the regula- tion of railroad transportation, much has yet to be accom- plished before the States will have done all they can and ought toward solving the problem of railway regulation. There are seventeen States and Territories which have no railway commission whatever, and there are several other States whose commissions have been endowed with powers entirely inadequate to the performance of the functions they should exercise. There is also urgent need for greater uniformity in the laws and practises of the several States concerning railway supervision and regula- tion. The laws at present are very diverse. Though each State can supervise and regulate only its domestic traffic, it deals in nearly all cases with corporations which do business in several States. These corporations, finding that each State imposes a different set of requirements upon them and attempts to control their business in a manner different from every other State, are often dis- posed to disregard the laws of the States. If all the State commissions were attempting to do the same thing by uniform methods, they would be able to accomplish much more. Of the various powers of the commissions which de- mand revision and enlargement in order to render them uniform and adequate, there are none so important as those concerned with railway accounting. It is funda- mental to the regulation of the railways by the States that there should be one uniform system of accounts obtaining in all the States, and that each State should have those accounts publicly audited by expert railway accountants. Each State must possess full and accurate knowledge of the business and finances of its railway cor- porations; there must be public inspection of uniform accounts. The State railway commissions have performed useful 366 AMERICAN RAILWAY TRANSPORTATION work. Although they have not accomplished all that was hoped for, yet when the difficulties of the task assigned them and the limitations under which the commissions have worked are considered, they can not be said to have been a failure. The retention and statutory development of the State commissions, by giving them uniform and, in the case of several commissions, more adequate powers, seem justified by what has thus far been accomplished. EEFEEENCES FOE FUETHEE EEADIIS^G Clabk, F. C. State Railroad Commissions, and how they may be made Effective. Publications American Economic Association, vol. vi, No. 6, 1891. Meyer, B. H. Railway Regulation under Foreign and Domestic Laws. Report of Industrial Commission, vol. ix, pp. 901-1004. Dixon, F. H. State Railroad Control, with a History of its Develop- ment in Iowa, 1896. Railroad Control in Nebraska, Political Science Quarterly, vol. xiii, 1898. Martin. History of the Grange Movement. Adams, C. F. Railroads: Their Origin and Problems. 1878. Report of the New York Legislative Committee of 1879. [This is usually styled the Hepburn report. It is a most valuable docu- ment.] Hendrick, F. Railway Control by Commissions, 1900, ch. ix. Decisions of the United States Supreme Court : Munn vs. Illinois and Peik vs. Chicago and Northwestern Railway Company, 94 U. S., lis etseq.; Wabash vs. Illinois, 118 U. S., 557. Annual Reports of Proceedings of National Association of Railway Commissioners, published by Interstate Commerce Commission, Washington, D. C. Annual Reports of the State Railroad Commissions, particularly of the Massachusetts, New York, Illinois, Iowa, and Texas Com- missions. Railways in the United States in 1902. Part IV. " State Regulation of Railways," published by the Interstate Commerce Commis- sion, Washington, D. C. CHAPTER XXYI EAILWAY EEGULATION BY THE FEDERAL GOVERNMENT THE INTERSTATE COMMERCE COMMISSION Shortly after the establishment of the first State rail- way commissions an agitation was begun for the Federal regulation of railroads. The demand was pressed most urgently by the people of the middle West, who were producing great quantities of grain and other food prod- ucts which they wished to market in the eastern part of the United States and in Europe. After the close of the civil war the industrial development of the upper Missis- sippi Valley was especially rapid, and the need for cheaper transportation facilities was keenly felt. An appeal was made to Congress for legislation, and in 1872 President Grant recommended Congress to ap- point a committee to investigate the question of securing " cheaper transportation of the constantly increasing Western and Southern products to the Atlantic sea- board." Such a committee was appointed by the Senate. Its chairman was William Windom, of Minnesota, and the report made in 1874 contained a full discussion of the regulation of railway transportation. The Windom report (Sen. Rep. 307, 43d Cong., 1st Sess.) argued at length to prove that Congress had the constitutional power not only to regulate railroads, but to construct and operate them. The committee did not recommend that Congress fix the rates to be charged by, the companies, but suggested that Congress should improve and extend the 367 368 AMERICAN RAILWAY TRANSPORTATION natural waterways and should build a freight railroad frorri the Mississippi Eiver to the Atlantic. This recommenda- tion was made because the committee thought that the surest way to secure cheap rates was by means of competi- tion, and believing that the railroad companies would com- bine and thus avoid competition in rate-making, the com- mittee advocated " the State ownership or control of one or more lines which, being unable to enter into combina- tion, will serve as regulators of other lines." The recommendations of the Windom committee over- estimated the necessity of enforcing competition in rate- making and undervalued the ability of the railroads to cheapen the costs of moving bulky freight. During the ten years following the submission of the Windom report the efficiency of the railroads as freight carriers was so increased that only the Great Lakes, the largest rivers, and a few specially well located canals could carry even heavy articles as cheaply as they could be moved by rail. Competition in its various forms reduced rates on long-distance traffic between rival cities to a lower figure than the public had supposed possible; but the charges on local traffic to and from the stations served by only one railroad were not correspondingly reduced, and gross discriminations resulted. The public demand for cheap transportation was changed to a demand for the abolition of unreasonable discriminations. This is clearly shown by the second important Federal report on railway regulation — the one made in 1886 by a committee of the Senate and called the Cullom report (Sen. Rep. No. 46, 49th Cong., 1st Sess.), from the chair- man of the committee, Shelby M. Cullom, of Illinois. " The paramount evil," said the Cullom committee, " chargeable against the operation of the transportation system of the United States as now conducted is unjust discrimination between persons, places, commodities, or FEDERAL REGULATION OF RAILWAYS 369 particular descriptions of traffic.'' The main object of Government regulation was no longer considered to be to secure cheap transportation, but to insure to all persons and to different places relatively equitable charges. A year after the Cullom report was made the pres- ent Interstate Commerce Act became a law. Prior to this time numerous attempts had been made to secure legislation. January 20, 1874, the House of Representa- tives passed the McCreary bill (so named from the chair- man of the Committee on Railways and Canals) with provisions similar to the ^^ granger laws " which several States had enacted. The country as a whole was not in favor of applying the granger legislation to the Federal regulation of railroads, but in December, 1878, the House passed the Reagan bill, which had been championed by Representative (later Senator) John H. Reagan, of Texas. This was a conservative measure that prohibited pooling and discriminations, required rates to be published, and placed the enforcement of the law in the hands of the courts instead of a commission. The bill applied only to freight traffic and to that carried in car-load lots. The Senate did not act on the Reagan bill of 1878. In 1885 the Senate and the House each passed a bill, but legisla- tion was prevented by the differences of the two houses as to the provisions to be included in the law. It took two years for the House and Senate to agree, and then, February 4, 1887, they compromised on the law which, with few changes, is the one now in force. As the States endeavored to regulate the railroads they realized more and more that the problems to be dealt with were closely connected with interstate commerce and could not be handled successfully without the cooper- ation of the E'ational Government. The demand for Federal action was made by the Eastern as well as the Western and Southern sections of the country as soon 25 3T0 AMERICAN RAILWAY TRANSPORTATION as the fact was clearly ascertained that the authority of each State over railway charges was limited strictly to the traffic that did not pass the boundaries of the State. Before 1886 several of the States regulated charges on all the traffic originating at or destined to points within their respective boundaries. In 1886 the Supreme Court in the Wabash decision, referred to in the previous chapter, limited the authority of the State strictly to the intra- state traffic and excluded that moving from one State to another. This decision of the Supreme Court greatly nar- rowed the jurisdiction of each State over railway charges, and increased the need for congressional action. The interstate commerce law as it now stands con- tains twenty-two sections, and applies to such passenger and freight traffic, carried by railroad or by railroad and water, as does not terminate in the State or Territory of its origin. It does not apply to intrastate business or to interstate traffic carried by an all-water route, or to express companies. The first section prohibits unreasonable or extortion- ate charges, section two declares unlawful all unjust per- sonal discriminations, and section three forbids unreason- able discriminations between localities and different kinds of traffic. These three sections contain the essential prin- ciples of the statute, and were taken, with minor changes, from the English act of 1854. Extortionate charges for transportation had long been illegal at common law. Section four of the statute makes it " unlawful for any common carrier subject to the provisions of this act to charge or receive any greater compensation in the aggre- gate for the transportation of passengers or of like kinds of property, under substantially similar circumstances and conditions, for a shorter than for a longer distance over the same line, in the same direction, the shorter being included within the longer distance." This " long FEDERAL REGULATION OF RAILWAYS 371 and short haul clause " of the act was inserted in the law because of the prominence in this country of the particular form of discrimination against which it was directed. The large volume of long-distance traffic com- peted for by rival railroads brought about such reduc- tions in the charges for through traffic as to make the local rates for shorter distances much higher than those on competitive business. There was much difference of opinion regarding the advisability of including this sec- tion in the law. The House of Representatives favored its inclusion in the law and its enforcement under all cir- cumstances, but the Senate foresaw that unless the pro- visions of the law were made less rigid, carriers might frequently lose their traffic at competitive points and be obliged because of the law to depend even more largely for their income upon the receipts from the local traffic. The enforcement of a long and short haul clause under those conditions would injure both the local shipper and the carrier. For this reason the Interstate Commerce Commission established by the act was given power to suspend the operation of section four for certain carriers in special cases after an investigation of the conditions of competition. The commission has exercised this power in several instances. Section five prohibits competing railroads from pool- ing their freights or their aggregate or net earnings. No provision of the law has been more debated than this antipooling clause. It was insisted upon by the House against the judgment of the Senate. The House believed that enforced competition in rate-making by rival car- riers would be better for the public than freedom of interrailway cooperation. It now seems clear that the prohibition of pooling was a mistake, and that the na- tional regulation of railroads would have been more suc- cessful had pooling been permitted. 372 AMERICAN RAILWAY TRANSPORTATION The sixth section of the law stipulates that all rates and fares shall be printed and kept open to public inspec- tion. No advance shall be made in these printed charges, except upon a ten days' notice, nor a reduction without giving notice three days prior to making the change. All rates and fares and joint tariffs and notices of rate changes must be filed with the commission. Section seven makes it unlawful for any carrier sub- ject to the act to interrupt unnecessarily the continuous passage of freights from the point of shipment to the place of destination. The law was not to be made to interfere with through shipments by any effort to change an interstate shipment into two or more intrastate ship- ments. Sections eight, nine, and ten of the statute provided penalties for violations of the law. Certain violations of the law were made punishable by fine, others by fine or imprisonment. If the common carrier disobeying the law was a corporation, only the officer or agent who violated the law was punished. This was a defect in the act. The officers who disregard the law usually do so with the knowl- edge of the corporation they are serving, and the corpora- tion should share penalties with them. This defect in the law of 1887 was remedied by the Elkins law of February 17, 1903, by which the corporation as well as its agents or officers may be punished for violations of the law. The imprisonment penalty was done away with, and fines ranging from $1,000 to $20,000 were provided for. The Elkins law also stipulates that the recipient of the rebate or discrimination as well as the giver shall be guilty of a misdemeanor. Persons claiming damages may make complaint to the Interstate Commerce Commission or may bring suit in any district or circuit court of the United States, but no one may pursue both remedies. The eleventh section established an Interstate Com- FEDERAL REGULATION OP RAILWAYS 373 merce Commission of five members, to be appointed by the President of the United States with the consent of the Senate. Not more than three commissioners shall be of the same political party. The commissioners are not allowed to own railway securities, and are not permitted to " engage in any business, vocation, or employment " while in office. The term of office is six years, and by section eighteen of the law the salary is placed at $7,500 a year. The principal office of the commission (section nineteen) is fixed in the city of Washington. Sections twelve to twenty-one inclusive outline in de- tail the powers and duties of the commission. In general, the powers which Congress undertook to bestow on the commission were those possessed by the Illinois commis- sion over State traffic, minus the power of preparing and prescribing schedules of maximum rates. It was to be a mandatory commission without general rate-making func- tions. The commission is given full power to make investiga- tions, can compel carriers to produce their books and papers, and to give testimony. No witness may refuse to testify even though his testimony may tend to crim- inate himself, " but such evidence or testimony shall not be used against such person on the trial of any crim- inal proceeding.'' These investigations of the commis- sion may be begun upon the complaint of some party seeking redress, or they may be instituted by the commis- sion upon its own motion. Whenever the commission makes an investigation it must report its decision in writing, and include in the report a statement of the facts upon which the conclusion is based. If the com- mission finds that the law is being violated it can order the violators to desist from their illegal acts, and may award damages to be paid to those who may have suffered by those illegal doings. 374 AMERICAN RAILWAY TRANSPORTATION The orders of the commission, however, do not have the binding force of a decree by a court. The carrier against whom the commission's order is directed may ignore the order, if he choose, and he can be forced to obey only by equity proceedings in the courts. When an order of the commission is disobeyed the commission may appeal to a United States circuit court to enforce the order. In the trial to decide whether the order shall be enforced, the commission's findings of facts must be ac- cepted by the court as " prima facie evidence as to each and every fact found." It was supposed by the framers of the law that this clause in the act placed in the hands of the commission the entire work of investigating and deciding upon the facts, and that the court would exercise only its power of reviewing any questions of law which might be involved in enforcing the commission's orders. Such, however, has not been the practise of the courts, which have allowed the defendants to introduce evidence into the trial which had not been submitted to and passed upon by the com- mission. This ruling of the courts, which was first made in 1889,^ has been a detriment to the commission as an investigating body. The parties complained against have shown a tendency to regard the commission's investiga- tion as merely a preliminary one, and instead of answer- ing the charges fully before the commission, have reserved their principal testimony for presentation at the trial before the court, provided the proceeding should reach that stage. It is not to be inferred from the foregoing statement regarding the power of the commission to institute judi- cial proceedings to enforce its own orders that the com- 1 By Associate-Justice Jackson in Kentucky and Indiana Bridge Company vs. Louisville and Nashville Railroad Company, decided Jan- uary 7, 1889. FEDERAL REGULATION OP RAILWAYS 3Y5 mission is made a public prosecutor charged with the duty of bringing before the courts all violations of the interstate commerce law. The offenses made criminal by that law are punishable through and by the ordinary machinery of the Federal courts, and it is the function of the courts to punish crimes arising under the inter- state commerce law the same as under any other stat- ute. The purpose of the commission is to aid the courts in securing an observance of law. Each carrier subject to the act is obliged to make an annual report to the commission containing detailed sta- tistical information concerning capitalization, equipment, labor staff, business done, receipts, operating and other expenses, etc., and also " a complete exhibit of the finan- cial operations of the carrier each year, including an annual balance-sheet." The commission is also given the power to prescribe a uniform system of keeping accounts to be adopted by all carriers, subject to the act, but as the law did not give the commission the power to inspect and audit the accounts of railway companies, it has not attempted to prescribe uniform accounts; however, the annual reports required by the Federal commission and those of the State commissions, most of which have adopted the form of report sent out by the national board, have done much to harmonize the systems of accounts fol- lowed by the railroad companies. The operation of the interstate commerce law in prac- tise has been different from what its framers expected, because the courts have so interpreted the main pro- visions of the law as greatly to limit its scope. The act of 1887 was initial legislation by Congress upon a prob- lem of great magnitude, and it was hardly possible for Congress to foresee and meet all the economic and legal questions involved. The enforcement of the decisions of the commission being vested in the courts, the commis- 376 AMERICAN RAILWAY TRANSPORTATION sion's interpretations of the law have been reviewed by numerous decisions of the courts. The judges of the Federal courts have in fact not only assisted in adminis- tering the law by enforcing or setting aside the rulings of the commission, but they have also virtually been fel- low commissioners. Suits instituted by the commission for the enforcement of its decisions have been turned by the courts into investigations of the various economic problems of railway regulation — inquiries which Congress intended to entrust solely to the commission — and the courts have rendered decisions based quite as much on their own as on the commission's interpretation of the facts. It was the intention of Congress to give the com- mission the final decision as to the economic questions, and to confine the courts' activities to questions of law; but in practise it has been found that the legal and eco- nomic questions could not be kept entirely distinct, be- cause in many cases the legal points involved were con- cerned with the reasonableness of rates, questions in equity that must be determined by considering economic data. The history of the operation of the interstate com- merce law centers in the work of the commission as an investigating body, and as a board for the equitable ad- justment of transportation charges. These are the two main purposes for which the law was passed and the com- mission was created. Although the law gives the commission extensive power to investigate, and although the findings of the commission as to facts are to be taken by the courts as prima facie correct, the practise of the courts in receiv- ing new evidence (not previously presented to the com- mission), and of basing their decisions on this new evi- dence as well as upon the commission's finding of facts, has lessened the efiiciency of the commission. Further- FEDERAL REGULATION OF RAILWAYS 377 more, for six years — from 1890 to 1896 — the power of the commission was seriously restricted by a refusal on the part of the Federal courts to compel witnesses to give testimony of an incriminating nature. The law as en- acted in 1887 stipulated that no witness might refuse to testify on the ground that his testimony might tend to criminate him, but protected the witness from criminal prosecution based on the testimony he might give as a witness. The courts maintained that the witness must be " afforded absolute immunity against future prosecu- tion " (Counselman vs, Hitchcock, 142 U. S., 547), in order to enjoy the protection guaranteed to him by the fifth amendment of the Constitution, which contains the clause " nor shall he be compelled, in any criminal case, to be a witness against himself." In 1893 Congress passed a law which gave a witness protection against any prosecution, civil or criminal, on account of any testimony or evidence submitted. This law did not, however, imme- diately settle the question, because certain inferior Federal courts still maintained that the witness was not afforded the protection guaranteed him by the fifth amendment. The matter was finally disposed of by the United States Supreme Court in the Brown case, decided March 23, 1896 (Brown vs. Walker, 161 U. S., 591). One Theodore F. Brown, auditor of the Alleghany Valley Railroad, refused to testify before the Federal Grand Jury of the Western District of Pennsylvania regarding rebates alleged to have been given by two fellow officers. The district judge held him guilty of contempt of court, and when the case reached the Supreme Court on appeal it was decided that the full immunity from prosecution afforded by the interstate commerce law as amended in 1893 was all the protection a witness could claim under the Constitu- tion. Thus, in 1896, the commission definitely obtained compulsory power of investigation, but for much of the 378 AMERICAN RAILWAY TRANSPORTATION time for six years it had been able to secure only sucb facts as witnesses might choose voluntarily to give. The interstate commerce law, as was stated above, forbids unreasonably high and unjustly discriminating charges, establishes a commission to decide whether the rates and fares are reasonable and just, and provides that upon the complaint of any shipper or passenger, or upon its own motion, the commission may investigate specific charges and practises of the carriers to determine whether the law is being observed. If the commission finds that carriers are charging unreasonable or unjust rates, or are engaging in practises prohibited by law, it may order the carrier to desist from making such charges or en- gaging in such practises, and may award damages to the complaining parties who have suffered losses. For ten years it was the practise of the commission, when order- ing a carrier to desist from charging an unreasonable rate, to name the rate that would be reasonable, and to order the carrier to put in force a rate not exceeding the one named by the commission; but in 1897 the Su- preme Court in the Maximum Rate Case (Interstate Com- merce Commission vs. Cincinnati, 'New Orleans and Texas Pacific Railway Company, 167 U. S., 479) decided " that the power to prescribe rates or fix any tariff is not among the powers granted to the commission." By this decision the commission's power over rates was limited to the negative function of deciding what ought not to have been in the past. The extent of the power which the commission has or ought to have over rates is chiefly significant from »the standpoint of its influence upon relative rates rather than upon absolute charges. It is in the adjustment of rates among different commodities, and what is still more vital, among competing localities and among rival carriers — that is, in the enforcement of sections three and four of FEDERAL REGULATION OF RAILWAYS 379 the law — that the most important work of the commission is done. The fourth section, which contains the prohibition against charging more for the shorter than for a longer haul " over the same line " when the shorter haul is included within the longer and is in the same direction, makes a specific application of the general principle enunciated in the third section — the principle that no " undue or unreasonable preference or advantage " shall be given " to any particular person, firm, corporation, or locality, or any particular description of traffic." The importance of section four, however, is not lessened by the fact that it is but a specific application of section three. Of the transportation abuses in the United States due to competition and demanding governmental regula- tion, none was so great in 1887 as that of local discrimina- tions whereby the smaller non-competitive points were made to pay higher rates than those places having several rival carriers. These local points were not very often charged rates which were exorbitant per se. It was in the relation between local and competitive rates that the evil lay. In most instances this abuse involved a greater charge for a shorter than for a longer haul; hence, the fourth section was placed in the act of 1887. If the In- terstate Commerce Commission under the present law, or under any one which may take its place, is to accomplish an effective regulation of interstate, commerce, it must be done by giving force and vitality to the provisions of these two sections of the act of February 4, 1887. The restriction in section four that the charge for the short haul shall not exceed that for the longer one ap- plies to '^ the transportation of passengers or of like kinds of property, under substantially similar circumstances and conditions/" and ^' over the same line/" The scope of this section depends upon what is meant by the same 380 AMERICAN RAILWAY TRANSPORTATION line and by similar circumstances and conditions. For a while it was held by some courts that a joint line com- posed of two or more roads formed an individual line distinct from those formed by the roads which together made up the joint line, and, accordingly, that shipments over the joint line and over the component roads were not shipments " over the same line." On this ground it was contended that the through or joint-line charges might be less than the charges for a shipment over one of the roads forming the joint line.^ Since a large part of interstate railway traffic consists of joint-line business, this definition of the word line threatened to rob the fourth section of much of its validity; but in 1896 the Supreme Court in the Social Circle case (Cincinnati, New Orleans and Texas Pacific Eailway vs. Interstate Com- merce Commission, 162 U. S., 184) refused to accept the narrow technical definition of the word line, and held that the charges on one of the component roads must not ex- ceed the joint-line charge. The interpretation which the Supreme Court has put upon the phrase " under substantially similar circum- stances and conditions " has not been so fortunate for the commission and for its work of railway regulation. One of the first questions which the commission was called upon to decide in the administration of the law was what constituted such dissimilarity of circumstances and con- ditions as to justify a railway company in charging more for a shorter than a longer haul. The reason why the railroads made such discriminations in favor of the longer haul was competition. The competition of the railroad was sometimes with rival waterw^ays not subject to the Interstate Commerce Act, and sometimes with other rail- ways regulated by that law. As it was not the intention of Congress in passing the act of 1887 to do away with competition among the carriers subject to that law, the FEDERAL REGULATION OF RAILWAYS 381 commission ruled that the competition of rival railways, each subject to the regulation provided for by the act of Congress, did not constitute the dissimilarity of cir- cumstances and conditions to which the fourth section of the law referred. The competition of railways with waterways — a different kind of a transportation agency, the traffic upon which was not subject to governmental regulation — was, however, held to create circumstances and conditions which were dissimilar and which might justify a less charge for the longer distance. Such was uniformly the ruling of the commission until November, 1897, when the Supreme Court in the Troy case (Inter- state Commerce Commission vs. the Alabama Midland Eailway Company and Others, 168 U. S., 144) decided that competition between rival railways may create dis- similarity of circumstances and warrant a disregard of the fourth section. This ruling of the Supreme Court deprives the fourth section of the interstate commerce law of most of its vitality. It was included in the law to prevent a very prominent kind of discrimination that was caused by competition. The law did not remove the cause, but sought to limit the operation of the cause by declaring the resulting practises illegal. The court virtually held in the Troy case that the result is justified by the pres- ence of the cause. Goods imported into this country are frequently shipped on through bills of lading from the foreign port to the interior American city of destination, and the rail- road charge from the American port to the point of des- tination is a part of a through rate. This through rate fluctuates with the frequent variations in ocean freight rates, and the portion received by the American railroad is usually much less than the rate charged for carrying domestic goods between the seaboard and interior cities. 382 AMERICAN RAILWAY TRANSPORTATION The importer is favored more than the domestic shipper. Indeed, the through rate from the foreign port to the interior point in this country is sometimes less than the charge from the American seaboard to the same inland city. In the Import Rate case the Interstate Commerce Commission took the ground that the interstate commerce law did not apply to traffic from a foreign country not adjacent to the United States, that the commission could not properly consider the circumstances and conditions of competition affecting such traffic, and that a higher railroad charge on domestic traffic than on goods im- ported was an unjust discrimination. This decision of the commission, however, was overruled by the Supreme Court March 30, 1896 (Texas and Pacific Railway Com- pany vs. Interstate Commerce Commission, 162 U. S., 107). By so deciding the Supreme Court opened the door to many discriminations. Although the ability of the commission to accomplish its main purpose — the adjustment of rates and fares — has been greatly restricted by the narrow scope given by the Supreme Court to the act of 1887, the commission has nevertheless brought about several important results: (1) Publicity of rates has been secured, and the public knowledge of railway affairs has been increased by the excellent statistics collected and published; (2) the inter- state commerce law has been of service in reducing the number of freight classifications of the country; (3) by its informal as well as its formal investigations the com- mission has done much to bring about a better adjustment of railway charges, as between different localities, differ- ent commodities, and different shippers; (4) the work of the commission has been of great educational value. Its reports have considered in a clear and comprehensive manner the important phases of the railway question as they have presented themselves year by year, and its FEDERAL REGULATION OP RAILWAYS 383 decisions, which now comprise over eight volumes, have developed a serviceable and valuable administrative code regarding railway regulation. The experience the Interstate Commerce Commission has had under the act of 1887 indicates clearly the powers with which that body must be vested in order to perform adequately the work of regulating railway transportation. These powers may be summarized under four heads: 1. The commission should possess the power, under such restrictions as will safeguard the business of the carriers, to inspect and audit the accounts of interstate railways. The railroads should be required to keep their accounts according to a uniform system acceptable to the Government. By giving the commission these powers, the detection of discriminations would be made easier and the value of the statistics of railways would be somewhat increased. 2. The commission should be the sole and final judge as to the facts in controversies between the carriers and the public. Whenever the courts in reviewing the de- cisions of the commission think a further investigation into the facts to be necessary, the courts should be required to refer the case to the commission for reconsideration. 3. In order to perform its chief task — that of adjust- ing railway charges — the commission must have the power to decide what is a reasonable and lawful rate. After the commission has determined by means of a full and careful investigation instituted upon the complaint of some interested party that a particular rate being charged by a carrier is unreasonable, the commission should have the power to name the rate that under the existing cir- cumstances is reasonable and lawful. 4. The decisions and orders of the commission as to rates and other matters should be binding upon the car- rier, unless the enforcement of the order is suspended by 384: AMERICAN RAILWAY TRANSPORTATION an injunction of a Federal Court acting upon the appeal of the carrier. At present the carrier may ignore an order of the commission, and the commission must take the carrier into court. The carrier should be required either to obey the commission or to take it into court. In order to avoid delays in securing the enforcement of the commission's orders and in securing a final adjudica- tion of the points of law arising in reviewing the orders of the commission, the carrier's appeal for relief from the orders of the commission should be made to the United States Circuit Court of Appeals, the court next below the Supreme Court, which should, and naturally would, be the final judge of questions of law. A grant of these powers would not confer upon the commission the general authority to prescribe rates and fares, nor would such a grant of authority be wise. The changes proposed in the present law would simply enable the commission, after a full investigation of all the facts, to correct such particular charges as might be found un- reasonable or unfair, and to correct them promptly with- out the delays which have in the past so seriously impaired the efficiency of the commission as a body for the regula- tion of railway transportation. The ideal sought in the government regulation of railways is to establish and maintain equitable relations between the carriers and the people whom they serve, and the fact must be kept in mind that this ideal can not be attained solely by statutory prohibitions. Laws neces- sarily deal mainly with effects rather than with causes. Unreasonable discriminations have been made illegal, but the violators of the law are not condemned at the bar of public opinion. In America only those laws can be enforced that give expression to public opinion, and in order to make unjust discriminations impossible in the railway business, the public must come to feel that it is FEDERAL REGULATION OF RAILWAYS 385 as mucli a crime for public carriers, chartered by the state to perform its function of providing transporta- tion, to deny to one individual or community advantages to which they are as justly entitled as are other persons and communities receiving the advantages as it would be for the Government to favor some citizens and sections and discriminate against others. REFERENCES FOR FURTHER READING Report of the Windom Committee, 1874, Senate Report 307, Forty- third Congress, First Session. Report of the Cullom Committee, 1886, Senate Report 46, Forty-ninth Congress, First Session. Annual Reports of the Interstate Commerce Commission. [The first and eleventh contain particularly good discussions of the prob- lems of Federal regulation.] Report of the Industrial Commission, vol. xix, pp. 419-444. Meyer, B. H. The Interstate Commerce Commission, Political Sci- ence Quarterly, vol. xvii, September, 1902. Dabney, W. D. The Public Regulation of Railways. 1889. Dos Passos, J. R. The Interstate Commerce Act : An Analysis of its Provisions. 1887. Seligman, E. R. a. Railway Tariffs and the Interstate Commerce Law, Political Science Quarterly, vol. ii, 1887. Hendrick, F. Railway Control by Commissions, ch. viii. Compendium of Transportation Theories, edited by C. C. McCain. [A collection of thirty-four papers by different authors. Many papers are valuable.] KiRKMAN, M. M. Railway Rates and Government Control. 1892. Stickney, a. State Control of Trade and Commerce by National or State Authority. 1897. Year-Book of Railway Literature, vol. i, 1897. [A series of papers compiled by H. P. Robinson and published by the Railway Age, Chicago. The volume contains, among other papers, the opinions of the Supreme Court and of the dissenting justices in the Trans- Missouri case. United States vs. The Trans-Missouri Freight Asso- ciation, 169 U. S., 290; also the opinion of the Supreme Court in the Maximum Rate case, Interstate Commerce Commission m. Cin- cinnati, New Orleans and Texas Pacific Railway, 167 U. S., 479.] CHAPTER XXYII THE COURTS AND RAILWAY REGULATION The function of regulating railways is shared jointly by all three branches of the Government — the executive, legislative, and judicial. The scope and limits of the legislative powers of railway regulation have been fixed by the courts, and the courts have so modified both State and national legislation as virtually to have shared with the law-making branch of the State legislatures and with Congress the exercise of legislative functions. Much law is accurately styled court-made, and this is particularly true of the laws regulating railways. This influence of the courts upon the laws regulating railways is strikingly illustrated by the decision of the Su- preme Court in United States vs. Trans-Missouri Freight Association (166 U. S., 290), in which the court decided that the antitrust law of July 2, 1890, applied to railway companies, and made illegal the agreements of competing railway companies for the maintenance of reasonable rates. This law declared illegal " every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with for- eign nations," but was not generally supposed to apply to railway companies nor to rate agreements between such carriers. Indeed, this view of the law was entertained by the United States Circuit Court and the Circuit Court of Appeals in the Trans-Missouri Freight Association case; but the Supreme Court by a close decision — Rve THE COURTS AND RAILWAY REGULATION 387 judges approving, four dissenting — decided that the law of 1890 did apply to railroads, and made unlawful all agreements between rival roads for the maintenance of reasonable rates. The interpretation thus put upon the " antitrust " law by the Supreme Court compelled the reorganization of railway traffic associations, modified the methods of railway management, and gave a new phase to the governmental regulation of railroads. The division of the functions of our Government among its three branches — the legislative, executive, and judicial — while sharply drawn, is not complete. The Legislature exercises executive functions,- the executive participates in legislation, and the judiciary by interpreting and ap- plying the laws validates or invalidates and restricts or widens the scope of legislation. The courts also cooper- ate with the executive in the enforcement of laws. The powers of the judiciary as regards transportation and all other subjects are derived from three sources: the or- ganic law of the constitutions, the statutory laws, and the common law. The national and State constitutions confer upon the judiciary the general power of inter- preting and applying the law, and enumerate the sub- jects over which the courts shall have jurisdiction. The powers over railways conferred upon the courts by State and Federal statutes are given in the two preceding chap- ters. The courts are required to assist the commissions, State and Federal, by compelling recalcitrant witnesses to appear and testify before those bodies; the State's attorneys are the officers charged with the duty of prose- cuting the violators of laws for the regulation of rail- ways, and for prosecuting those who disobey or ignore the orders of the commissions; the Federal statute makes the validity of the national commission's orders depend- ent upon the decrees of the courts, and by doing this it has made the courts what Congress had no intention of AMERICAN RAILWAY TRANSPORTATION making them — joint investigators with the commission of the facts concerning transportation questions arising under the law. The power of railway regulation which the judiciary has in its equity powers derived from the common law is far greater than its statutory powers, and of much more significance to the public welfare. The authority which the courts have been given by statutes is definite and fixed, but the scope of equity jurisdiction, except where determined at certain points by law, may be ex- tended at the will of the judiciary. Indeed, the rapid extension of the equity powers of the courts is the most characteristic fact of the past century's legal history. It has been in the exercise of their equity powers over three subjects that the courts have exerted their strongest influence upon governmental regulation of rail- ways. Those three subjects are (1) the fixing of rates and fares by State authority; (2) the intervention of the Government in railway labor disputes; and (3) rail- way receiverships or the management of insolvent rail- roads by the courts. A court has no authority to make railway rates, but it has the power to unmake them if they are unreasonable or unjust. When the rates and fares are fixed by a State government for a railroad company, the reasonableness of any charge involves a question of equity of which the courts -are the final judges. Indeed, in the United States the reasonableness of any State-named tariff, whether for. interstate business or for local traffic carried on by a company whose activities are confined entirely within a single State, may be determined by the Federal courts. The fixing of rates by governmental authority is a legis- lative function. When the American States began to exer- cise this function the railroad companies sought to prove that the railway companies alone, and not the State legis- THE COURTS AND RAILWAY REGULATION 389 latures, had the power to fix charges, and that if a shipper or passenger considered himself to have been overcharged his recourse must be to the courts and not to the Legisla- ture. The Supreme Court of the United States settled this question in favor of the State legislatures in the " granger decisions " in 1877, and even went so far as to say that if the rate " has been improperly fixed, the Legis- lature, not the courts, must be appealed to for the change.'' It is not probable, however, that the Supreme Court intended by this language to renounce its equity power of passing on the reasonableness of railway rates. Indeed, in 1885, in upholding a Mississippi law, the court was careful to state that " the power [of a Legisla- ture] to regulate is not the power to destroy," and five years later the statute of Minnesota giving the Kailroad and Warehouse Commission of that State the power to prescribe rates and making the commission's decision final as to what were reasonable charges was held by the Supreme Court to be unconstitutional, because " the rea- sonableness of a rate of charge for transportation by a railroad company ... is eminently a question for judi- cial investigation." Another important assertion of its equity powers over railway charges was made by the Supreme Court in 1898. A Nebraska statute, passed in 1893, fixing " reasonable maximum rates to be charged for the transportation of freights," gave the railroad companies of the State the right to bring action in the Supreme Court of the State to test the reasonableness of the rates fixed by the Legis- lature. If the court considered the rates to be unrea- sonably low and unjust, it could order the State Board of Transportation to raise the rates. The constitutionality of the law was soon tested. The railway' companies took the ground that the rates fixed by the l^ebraska statute were unreasonably low, and certain of their stockholders 390 AMERICAN RAILWAY TRANSPORTATION not citizens of Nebraska sued in the United States Cir- cuit Court for an injunction prohibiting the enforcement of the rates fixed by the State law, and such an injunc- tion was granted. It was claimed by the attorneys for the State of Nebraska that the Federal Court had no equity jurisdiction in the suit, because the statute had given the railroad companies an adequate remedy at law by granting them the right to appeal to the Supreme. / Court of the State for an order on the Board of Trans- portation to correct any unreasonable rate. The Federal courts, however, did not accept that view, and the Su- preme Court held that "one who is entitled to sue in the Federal Circuit Court may invoke its jurisdiction in equity whenever the established principles and rules of equity permit such a suit in that court; and he can not be deprived of that right by reason of his being allowed to sue at law in a State court on the same cause of action." (Smyth vs. Ames, 169 U. S., 466). By this decision, rendered March Y, 1898, the Federal judiciary has included within its equity jurisdiction the prerogative of passing upon the reasonableness of any and every railway rate that is established by State legisla- tures in the United States. That the possession of this power by the Federal courts gives them an important place as a governmental regulator of railways is well illustrated by this decision in the Nebraska Freight-Rate case. The Supreme Court confirmed the injunction issued by the Circuit Court, and the Nebraska law of 1893 was declared unconstitutional, because the court believed that the legislature of that State had reduced the rates so much as to violate the fourteenth amendment to the United States Constitution, which declares that no " State shall deprive any person of life, liberty, or property without due process of law.'' The courts have now fully established their right to THE COURTS AND RAILWAY REGULATION 391 validate or invalidate the rates prescribed by the State legislatures or by Congress. Every rate fixed by law is now recognized to be subject to review by the Federal courts. To what extent and in what manner, it may now be asked, are the rates and fares fixed by the railroad companies subject to the authority of the courts ? The rates fixed by the companies on intrastate traffic are reviewable by the State courts; interstate rates by the Federal courts. If any carrier charges an extortionate rate or one that unjustly discriminates, the aggrieved shipper or passenger may sue the carrier for the recovery of damages. Indeed, this right of prosecution was possessed under the common law before the passage of laws prohibiting unrea- sonable railway charges. Theoretically this privilege gives each individual protection against losses from excessive or unjust charges for railroad transportation; but in practise this protection is very inadequate, because most persons will prefer to bear a slight injustice rather than to under- go the trouble, expense, and business risks that a law- suit may involve. Furthermore, the business losses result^ ing from an unreasonable rate are seldom covered by the excessive amount of the charge; the chief losses are those caused by the injury done to the complainant's business. A discriminating rate may seriously cripple or ruin a shipper by diverting his business to a more fortunate competitor whose railroad charges are lower. One rea- son for the establishment of the State railroad commis- sions and the Interstate Commerce Commission was to provide a public agency whereby the aggrieved shipper or passenger might secure legal redress without expense. Sometimes the courts have prevented the railroads from ' advancing rates. An instance of this occurred in E'ovem- ber, 1898, when the United States Circuit Court at Denver, Col., issued a temporary injunction restraining the South- ern Pacific and other railroads from putting into effect a 392 AMERICAN RAILWAY TRANSPORTATION proposed advance of 33 per cent in the rates on iron and steel from Colorado points to the Pacific coast. The appli- cation for this injunction was made by the Colorado Fuel and Iron Company, whose products were in part marketed on the Pacific coast. The reasoning of the court in this case states very clearly the inadequacy of legal processes for the recovery of damages resulting from unreasonable rates. Among other things the court said : " If the rate shall be raised as proposed and complainant shall be ex- cluded from the market, as stated in the bill will be the case, in case this notice is carried out, no compensa- tion which can be obtained in damages would be ade- quate. It would be impracticable to show in an action at law what the losses resulting from such a procedure might be, and so it would seem that equity can afford the only adequate relief under such circumstances." The courts have used their powers of injunction not only to prevent the railroads from charging excessive rates, but also to enjoin them from cutting rates. In preventing advances the courts have acted in the interests of shippers ; in stopping rate reductions action was taken for the relief of the owners of the railway securities and of the ship- pers whose business might suffer. There is at least one instance of a rate war having been checked by injunc- tions of the courts. In July, 1896, a controversy arose between the Seaboard Air Line and the Southern Rail- way Company, two corporations controlling a large part of the traffic of the Southeastern section of the United States. The Seaboard Air Line began the rate-cutting by taking one-third off its rates on traffic to those points south of Baltimore where it had to meet the competition of its rival. The Southern Railway Company met this cut, whereupon the Seaboard extended the cut to its traffic from Boston, Providence, New York, and Phila- delphia to Southern cities, and announced that if the THE COURTS AND RAILWAY REGULATION 393 Southern Railway should meet the cut a further reduction would be made in the Seaboard's charges. The reply of the Southern Railway to this challenge was the announce- ment of a cut of 80 per cent, to go into effect ten days later, August 1, 1898. At this stage of the war the United States District Court of l!^orth Carolina, Judge Simonton, was asked to enjoin the contending roads from carrying out the rate reductions that had been announced. The prayer for this injunction was made by the receiver of the Port Royal and Augusta Railway, an insolvent company form- ing one of the connections of the Seaboard Air Line. The prayer was based on the plea that the threatened rate war would result in " the certain destruction of the railroad property in the hands of the receiver." The court appealed to granted a temporary injunction until the 15th of August, but on that date the injunction was not made permanent, because some of the companies affected by the injunction were outside of the jurisdic- tion of the District Court of North Carolina. With the removal of Judge Simonton's injunction the rate war broke out afresh, but the Federal courts were again successfully appealed to. This time an asso- ciation of merchants, the Wholesale Grocers' Association of Augusta, appealed to Judge Speer of the United States District Court of Southern Georgia, sitting in Augusta, for an injunction against the railroads, on the ground that the low rates to Atlanta constituted an unjust dis- crimination against Augusta, Macon, and other cities, and violated section three of the interstate commerce law. The last section of the law, section twenty-two, gives the district and circuit courts power to issue such an injunc- tion as was asked for by the Augusta merchants, and on September 10th Judge Speer granted a temporary injunc- tion, enjoining the railroad companies to restore the rate 394 AMERICAN RAILWAY TRANSPORTATION that had been in force September 5th. The date for the hearing was fixed for the 24th. The Southern Eailway Company restored its rates according to the order of the court, and the Seaboard did the same with its charges to some places. The Seaboard, however, had no line enter- ing Atlanta, and there was some doubt as to the extent of the jurisdiction of the court that had issued the injunc- tion; consequently, it did not restore its rates to all points. This difficulty as regards jurisdiction was settled by the issue of an injunction by Judge Hughes of the United States Circuit Court for the Eastern District of Virginia, sitting at Richmond. This injunction of the Circuit Court is the most sig- nificant of the three that have been mentioned, because it was issued to protect the owners of railway bonds. The comJDlainants were the Baltimore Trust and Guarantee Company and other financial institutions holding railroad bonds, who sued for an injunction on the ground that the rate war was destroying their property, and that they had no means of prevetiting that destruction by an action at law. Before the 1st of October all rates were restored and the war was brought to an end. The courts did actually terminate a rate warj and did so by enjoining the railroads against charging rates that were unjustly low. One injunction was issued to prohibit illegal dis- crimination; the other two were to prevent the destruc- tion of property. Inasmuch as the questions at issue in these cases did not reach the Supreme Court for adjudi- cation, it was not finally settled that the Federal courts actually possess the power to declare rates unreasona- bly low as well as unreasonably high, but that the courts do have this power is rendered very probable by the is- sues of the above injunctions by three diiferent Federal courts. . THE COURTS AND RAILWAY REGULATION 395 The latest use of the equity power of the courts to con- trol railway charges has been to enjoin railroad companies from secretly cutting rates. It was found by the Interstate Commerce Commission at the close of 1901 that the rates on grain, grain products, and packing-house products were being secretly cut, and that the published rates were not being observed. The giving of secret rates was a criminal offense, and the United States Department of Justice was informed by the commission that the inter- state commerce law was being violated, but in this case, as in former instances, the Government was unable to enforce the criminal provisions of that law, because the persons who have knowledge of secret cuttings of rates are loath to give to the State evidence that may cause those who give the special rates (often their own busi- ness acquaintances) to be sent to prison. Idealizing that the reliance upon criminal prosecutions for the preven- tion of rate discriminations would not secure the ob- servance of the law, the Interstate Commerce Commis- sion applied to the Federal Circuit Court at Kansas City and Chicago in March, 1902, to enjoin the leading rail- way companies of the central West to observe their pub- lished schedules of rates. Temporary injunctions were granted as requested; indeed, most of the railroad com- panies concerned were said to have welcomed the injunc- tions, because the restraining orders of the courts would enable the companies to enforce their published rates. Railroads do not usually cut rates because they wish to, but because they think they must in order to secure or hold traffic. Arguments as to making the temporary injunctions permanent were not heard in Chicago until December, 1902. The injunctions were allowed to stand, and the Elkins law of February 17, 1903, has now given the courts definite power to issue such writs of in- junction. 396 AMERICAN RAILWAY TRANSPORTATION Injunctions in Labor Disputes In connection with the disputes between labor and cap- ital, the equity powers of the courts have frequently been employed to protect the interests of one or the other of the contending parties or of the general public. By their intervention in railway labor controversies the Federal courts have exercised a regulative authority of consider- able importance over the railroad service. As the law in regard to striking has been interpreted by the American courts, railroad employees and other workmen have a right either singly or in a body to quit their employment at any time, provided they do not vio- late a contract in doing so, and provided they quit peace- ably without violence and without concerted actions in- tended to injure their employer or his business. It is permissible for laborers to refrain from working, and to advise and encourage others, by peaceable argument and persuasion, to quit their employment. A strike may be legal, but in many, if not most cases, the strikers are led to resort to illegal acts, because the success of the strike depends upon their preventing their employer from securing other men to fill the places of the strikers. To accomplish this, intimidation and violence are frequently necessary. In the case of railroad employees several exceptions have been made by State and Federal statutes to this general law of strikes. In order to prevent the loss of life and the destruction of property, laws have been passed making it a penal offense for a locomotive engineer, con- ductor, brakeman, baggage-master, or other railroad em- ployee to abandon his engine, car, or train when it is en route to its regular destination, or to injure or dis- able any engine or car so that it will not be fit for imme- diate use. The courts have also held it to be unlawful THE COURTS AND RAILWAY REGULATION 397 for an engineer on one road to aid a strike against some other road by refusing to haul the cars of such connect- ing company. In numerous instances railroad companies and other employers have appealed successfully to the courts for the issue of mandatory writs enjoining strikers from destroy- ing the property of the companies, from intimidating men to prevent their taking the places vacated by the strikers, and from doing such other acts as will render it impossible for the railroad company to perform its serv- ices to the public. During the past decade the courts have come to make these injunctions very comprehensive, and have prevented persons not only from destroying property and using threats, intimidation, or force to in- duce men to quit the service of a railroad or not to engage in its employment, but also " from in any manner inter- fering with " the movement of the trains. Moreover, and, what is more important, these injunctions, instead of being directed against only those persons named in the bills, have included " all persons combining and conspir- ing with them, and all other persons whomsoever/' Be- cause of their wide scope, these writs have been popu- larly called blanket injunctions, and their purpose and effect have been to substitute for the punishments pro- vided by the statutes against crimes the surer and speedier remedy of the mandatory processes of the courts sitting in the exercise of their equity powers. The courts may in some instances order railway em- ployees — while they remain in the service of their em- ployer — to perform their regular services. Such an order was issued in 1893 by a Federal court in connection with a strike on the Toledo, Ann Arbor and Northern Michi- gan Railroad. This railroad connects with the Lake Shore road at Toledo, and the engineers on the Lake Shore were ordered by their brotherhood not to haul 398 AMERICAN RAILWAY TRANSPORTATION the cars received from the Ann Arbor line. The Ann Arbor company, acting in accordance with the provisions of sections ten and twenty-two of the interstate com- merce law, appealed to the courts for a mandamus to compel the Lake Shore to receive and haul the freight offered. The court granted the writ, and enjoined both the officers and employees of the roads connecting with the Ann Arbor to receive and forward its freight. The court admitted the right of the engineers to leave the employment of the roads connecting with the Ann Arbor, but declared that while the engineers continued in their employment a refusal to handle the freight received from the Ann Arbor company would be a contempt of court. This ruling of the lower court was upheld by the Su- preme Court. In refusing to haul the freight received from the Ann Arbor company the engineers of the Lake Shore and other roads were obeying a by-law of the Brotherhood of Locomotive Engineers requiring its mem- bers to refuse to handle the traffic from roads where an authorized strike was in progress. The Federal courts held this rule to be a violation of the antitrust law of July 2, 1890, and the brotherhood was ordered to aban- don the rule, which was done. In 1894 an order was made by Judge Jenkins of the United States Circuit Court, sitting in Milwaukee, en- joining the employees of the Northern Pacific (which road was then insolvent and was being managed by receiv- ers appointed by Judge Jenkins) "from combining and conspiring to quit, with or without notice, the service of said receivers." The purpose of the order was to prevent a threatened strike. This order was, however, overruled by the Circuit Court of Appeals, as was also an injunc- tion, issued the same year, enjoining the employees of the Union Pacific Railway (then insolvent and in charge of receivers) from striking when the receivers should put THE COURTS AND RAILWAY REGULATION 399 into force an announced reduction of wages. There was much popular opposition to these injunctions, and it is doubtless fortunate for the public that the lower court was not upheld in its endeavors to prevent men from striking or to compel them to work. A conspiracy in restraint of trade or commerce among the several States is made illegal by the antitrust law of 1890, and the obstruction of the mails is forbidden by Section 3995 of the United States Revised Statutes. The enforcement of these and similar laws is ordinarily accomplished by indicting and punishing those persons who may break the laws; but in extraordinary times, when a disregard of law is causing or threatening to cause loss of life, destruction of property, or serious public inconvenience, the courts may temporarily exercise their mandatory power of injunction to preserve order and insure the observance of the laws. This power was ex- ercised by the Federal courts in a forcible and effective manner during the strike inaugurated at Chicago by the American Railway Union in July, 1894, the so-called " Debs Strike.'^ On the 11th of May, 1894, the employees of the Pull- man Palace-Car Company, at the town of Pullman, near Chicago, .went on a strike. These Pullman employees were members of a large organization of railway men, the Amer- ican Railway Union, whose president was Eugene Y. Debs. On the 26th of June the Railway Union inaugurated a boycott against the Pullman Company by voting that no member of the union should handle Pullman cars. ■ The purpose of this " sympathetic strike " was to tie up the railway business of the country, and thus to force the Pullman Company either to grant the demands of its striking employees or to agree to an arbitration of the grievances. The boycott had the effect of stopping the movement of passenger-trains, and consequently the mails. 400 am:prican railway transportation into and out of Chicago, and at other places in the United States. At Chicago, violence, disorder, the destruction of property, and the loss of life followed soon after the strike began, and on July 2d the United States Circuit Court, Chief Justice Fuller presiding, issued an order enjoining Debs and the other officers of the American Railway Union, " and all other persons combining and conspiring with them," and " all other persons whomso- ever," from in any way interfering with the movement of trains or the transportation of the mails over the 23 railroads that enter Chicago. This injunction was disre- garded, and in accordance with President Cleveland's ' orders nearly 2,000 of the United States regular troops were sent iilto Chicago between the 3d and 10th of July to assist the courts in enforcing their orders. The United States Marshal also employed about 5,000 deputy mar- shals. There were in addition to these the police force of the city of Chicago and the 4,000 Illinois State mili- tia ordered on duty between July 6th and 11th. Presi- dent Cleveland ordered the Federal troops to Chicago without being requested to do so by the Governor of Illinois, the troops being sent "to protect Federal prop- erty, to prevent obstruction in the carrying of the mails, to prevent interference with the interstate commerce, and to enforce the decrees and mandates of the Federal courts." The strike was broken by the exercise of mili- tary force and by the arrest and imprisonment of the leaders of the strikers, particularly the officers of the American Railway Union. These officers were attached and imprisoned on the 13th of July for contempt of court in disobeying the injunction issued July 2d. This action of the Federal Circuit Court was sustained by the Supreme Court, to which appeal was made by Mr. Debs and the other officers of the American Railway Union. THE COURTS AND RAILWAY REGULATION 401 The courts have made such large use of their power of injunction to intervene in controversies which railway companies may have with each other and with their em- ployees that much has been said in favor of legislation narrowing the scope of equity jurisdiction in these mat- ters. The tendency at the present time, however, seems rather to be against such laws, and in favor of leaving the courts free to take such action in cases of emergency as in their judgment seems best. The Federal judges are men who represent the conservative judgment of the thoughtful classes of society. As the conservative opinion of society as a whole changes and advances, there will be a corresponding change in the nature and scope of the equity powers exercised by the courts. Railway Receiverships When a railroad company becomes insolvent — i. e., when it can not pay the interest on its debt or meet its other financial obligations — the creditors of the road may ask a court to take possession of the property. If the court grants the request of the creditors, the property is taken from the management of the directors and offi- cers of the company and put in charge of an officer of the court called the receiver. If the company is not hope- lessly insolvent the road will be operated by the receiver, who will cooperate with the creditors and the owners of the road in reorganizing the company and placing it on a solvent financial basis. If, however, the liabilities of the company are found to be so great as to make impos- sible a return to solvency by means of reorganization, the court will instruct the receiver to sell the property for the benefit of the creditors; but whether the property is sold or not every effort will be made to keep the rail- road in operation, because the value of the property in- vested in a railroad depends almost entirely upon what 27 402 AMERICAN RAILWAY TRANSPORTATION it can earn as a railroad. It can not be used for other purposes. The foreclosure suit which the creditors institute against an insolvent railroad is seldom instituted to com- pel a sale of the property; indeed, the owners of the junior liens and the stock of the company are usually willing to make considerable present sacrifice to prevent the dis- ruption of the property, because a reorganization of the company makes it possible for the subordinate liens and the stock to become valuable in the future. In order to secure the funds temporarily required to operate the road and to rehabilitate the property, the receiver bor- rows money by the sale of certificates which constitute a first claim on the property, outranking even the first- mortgage bonds. While the receiver is improving the property with the capital thus obtained, and is increasing the earning capacity of the road, committees representing the financial interests concerned are at work on a plan of reorganization. This plan usually involves an assessment on the stock, and sometimes on the holders of the junior mortgages, and frequently requires the exchange of some of the bonds for stock and the displacement of some of the old bonds with a new issue bearing a lower rate of interest. The purpose of the changes is to reduce the capital charges so that the earnings of the road will be able to meet the fixed charges. "When the court having control of the insolvent road is satisfied that a plan of reorgani- zation has been worked out that will insure the solvency of the company he accepts the plan and restores the property to the management of the stockholders. If the receivership has been successfully managed, the court has not only avoided selling the property under the hammer, but has put the road in a better condition for handling trafiic. The total capitalization of the company may have been reduced, but that does not always occur; it THE COURTS AND RAILWAY REGULATION 403 has sometimes been found possible to reduce the interest and other fixed charges while actually increasing not only the stocks but the indebtedness of the company. In prosperous times most railroad companies are solvent, and the courts have charge of but a short mile- age; but in times of severe business depression the courts have operated a surprisingly large part of the railway systems of the country. On the 30th of June, 1901, only 45 roads in the United States, with a total mileage of 2,497 miles of line, Avere being operated by receivers; but on June 30, 1894, there were in the hands of receiv- ers 192 companies, with a capitalization comprising near- ly one-fourth of the railway capital of the entire country. During the eighteen months ending July 1, 1894, 43,000 miles of railroads — 24 per cent of the total mileage of the country — were taken charge of by the courts. In some instances the duration of the receivership was only for a few months, but in other cases the roads were under the control of the courts for several years. From Novem- ber, 1893, until November, 1896, the number of miles of railroad in charge of receivers was at no time less than 20,000 miles, the maximum number of miles at any one time being 36,619. It was not until the spring of 1899 that the total mileage in the hands of receivers became less than 10,000. The experience of the railroads in regard to receiverships during the business depressions of 1873 to 1880, and from 1885 to 1887, was similar to their expe- rience during the panic beginning in 1893. The large number of railroad receiverships in the Uni- ted States has been the result of several causes, of which the first and most potent has been overcapitalization. In many instances the actual investment for the construction and equipment of the railroad represented but little more than the amount of first-mortgage bonds. The junior liens were frequently sold at a great discount, and the stocks 404 AMERICAN RAILWAY TRANSPORTATION were distributed as a bonus to the purchasers of the bonds. The securities other than the first-mortgage bonds were used as the inducement by which men were influenced to invest in the enterprise. The value of the stock and to a large ex- tent of the junior liens depended on the growth of the traf- fic of the railroad. Many roads were highly prosperous almost from the start, and rapidly gave actual value to the fictitious capital. Other companies were not so fortu- nate. They found that their system of roads had been extended more rapidly than the growth of the country demanded, or that the completion of their lines was fol- lowed by a business depression which cut down their an- ticipated traffic and increased the difficulty of financing their enterprise, or they found that some other company followed them closely with a new and rival line. During the years from 1868 to 1873, and from 1880 to 1885, railways were constructed with great rapidity, particularly in the central and far Western sections of the country, and the tendency toward overcapitalization and specula- tion was excessive. Many companies found they had overestimated the future increase in their traffic, that competition became keener and rates declined faster than had been expected. The result was insolvency and the temporary management of the roads by the courts. Some railroads were built almost entirely for specu- lative purposes by persons whose object was to profit from the construction of the road. Such speculators built the line entirely with borrowed capital, made large sums from the construction contracts, and then permitted the insolvent road to pass into the hands of ' the security holders. ^N'ow that the country has been generally supplied with railways and the great systems are being grouped by means of communities of interests into a limited number of managements, some of the causes of rail- THE COUflTS AND RAILWAY REGULATION 405 way insolvency have become inoperative. * Railways are not now likely to be projected ahead of business needs; nor is it now easy (although it is usually possible) for a new company to enter a field already occupied. Con- solidation and community of interest in ownership and management have done much to restrain direct com- petition in rate-making. There is also noticeable an in- crease of conservatism in railway financiering as the cor- porations become older and larger. The opportunity of the irresponsible speculator has been greatly narrowed, although he has not been driven entirely from the field. The tendency toward overcapitalization, moreover, is not so general as it was twenty-five years since, but it is still practised to a large degree. Indeed, the next business depression will doubtless find a number of railroad com- panies with greater capital obligations than can be met. It is not probable that railway insolvencies and receiver- ships are altogether a matter of history. It has been urged against the present system of rail- road receiverships that they impose on the courts du- ties with which the judges are ordinarily not prepared to deal; that they confer on the judges too great power and too much patronage; that our present methods of reorganization of an insolvent company do not cure the evil of stock watering; and that reorganizations under the present plan are unduly expensive. Much, moreover, is made of the fact that the proceedings for receiverships are frequently instituted by the directors of the compa- nies, or those friendly to them, for the purpose of pro- tecting themselves against the real creditors of the com- pany. It frequently occurs that when the directors or officers of a road see that the company is threatened with insolvency they will apply to a court for the appoint- ment of a receiver. In making the application the offi- cials usually suggest one of their own number, often the 406 AMERICAN RAILWAY TRANSPORTATION president of the company, as the person they would like the court to select for the receiver, and as the judge knows he must secure the services of some one who is familiar with the affairs of the road, he is usually dis- posed to appoint the person recommended by the appli- cants. The term " friendly receiverships " has been ap- plied to such a proceeding, and the practise is open to the objection of continuing in virtual control of the road the very person or persons under whose management the company has become insolvent. While the company is in the hands of the receivers it does not have to pay interest on the bonds, and money for the improvement of the road can be borrowed by the sale of certificates. As Prof. Henry C. Adams has said, " the law of receivership was originally intended for the protection of the creditor; but it has been used ... as a means of carrying the management of large properties through a period of gen- eral commercial depression without fear of interference from creditors or from interested parties ambitious of control." To prevent the objectionable results of friendly re- ceiverships it has been suggested that a law should be enacted stipulating that the first receiver appointed by the court should be a temporary appointee, and that the permanent receiver should not be selected until after the creditors of the company have had an opportunity to be heard. Some persons have advocated the establishment of a special Federal court for the management and reor- ganization of insolvent railroads. The judges in a special court would become experts, and as there would be but one court there would be no conflict of jurisdiction be- tween different courts. It would be to the advantage of the existing courts to relieve them of the management of railroads. In times of prosperity the need for a special court is not especially urgent, although previous to 1903 THE COURTS AND RAILWAY REGULATION 407 there had been no time for thirty years when there were less than 2,000 miles of line in charge of the courts. For half of the time during that period over 10,000 miles have been managed by the courts, and for several years there have been over 20,000 miles so controlled. The mileage of insolvent railroads during the next period of business depression will hardly be as great as the mileage was from 1893 to 1895, but the mileage will be several times that of the present prosperous times. REFERENCES FOR FURTHER READING On the power of the Federal courts over railway rates consult: 1. The "granger" decisions, 1877, particularly Munn vs. Illinois, 94 U. S., and Peik vs. Chicago and Northwestern Railway, 94 U. S. 3. The commission cases, 1886, Stone et al. vs. Farmers* Loan and Trust Company, 116 U. S., 307. 3. The Minnesota case, Chicago, Milwaukee, and St. Paul Railway Company vs. Minnesota, 1890, 134 U. S., 418. 4. The Nebraska Maximum Freight Rate case, 1898, Smyth vs. Ames, 169 U. S., 466. On the employment of injunctions in labor disputes read : Dunbar, W. H. Government by Injunction, American Economic Association, Economic Studies, vol. iii, 1898. Stimson, J. F. Labor in its Relation to Law. 1895. On railway receiverships consult : Swain, H. H. Economic Aspects of Railroad Receiverships, Amer- ican Economic Association, Economic Studies, vol. iii, pp. 53-161, 1898. [A concise discussion of the nature and functions of re- ceivers, the history and statistics, the effects, and the future of receiverships. The appendix contains a critical bibliography of sources of information.] CHAPTEK XXYIII RAILWAY TAXATION During the earlier decades of railroad construction the need of transportation facilities was so urgent that the tendency of the public was to aid rather than to tax rail- way companies. The state assisted the companies by making the tax rate especially light or by exempting them from all tax levies for a period of years. This practise of exempting railroad property from taxation was very general, though never universal, before the civil war. Since then public sentiment and legislative practise have favored the taxation of railroads as heavily as other forms of investment, although there are even now a few survi- vals of the former policy of exemption and of the policy of favoring particular companies with special and excep- tionally light taxes. It will probably not be many years before all the railroad systems in each State will be sub- ject to a general State tax law. It will be a long time, however, before the laws of the several States will be uni- form or even approximately alike. The first taxes imposed on railroad companies were the local general property taxes such as were paid by individ- uals. With the exception of Pennsylvania, where the traf- fic was subjected to a State tax, the practise in all the States was for the local tax ofiicial to assess the real and personal property of the railroads in the same manner as private persons were assessed. The plan of taxation was a natural one for the States to adopt, and was partially justified by 406 RAILWAY TAXATION *«'^^ 409 the shortness and local character of the early railroad sys- tems; but the local method of assessment and collection made the tax burdens of the companies different in each locality, and gave the companies an incentive as well as an opportunity to evade taxes. The plan of local valua- tion levies took no account of the relative abilities of the various companies to pay taxes; and as the railroad sys- tems grew from local lines to those hundreds of miles in length and interstate in character, the necessity for a different method of taxation became apparent. In 1850 the application of the local general property taxes to railroads was the general rule in the United States, but in 1880 that method was followed in less than one- fourth of the States. The property basis for taxing rail- roads was seldom abandoned, but in many States instead of allowing local assessors to make the valuation. State officials were charged with that duty, and in most in- stances the law prescribed the general rules to be followed by the State authorities in determining the cash value of the railroads. Those rules were usually complex and were seldom the same in any two States. In some States the capitalization of the railroads as well as (or instead of) their cash valuation was made the basis of taxation. An- other basis of taxing favored by several States was the gross receipts of the companies. All three of these modi- fications in the original system of a general property tax locally assessed had been introduced into various States before 1880, and since then each plan has been consider- ably developed and improved. It will be best to describe each of the three plans in turn. With but few exceptions the property tax is levied on a valuation fixed by a board of State oflftcers, to whom the railroad companies are obliged to make annual reports cov- ering all the details required by the State board. Theoret- ically the duty of the board is to ascertain the full cash 410 AMERICAN RAILWAY TRANSPORTATION value of the property owned by each company, and to make that value the basis of the levy. In practise, however, the State board can seldom determine the actual value with strict accuracy. This is shown by the fact that the assessed valuations of different roads frequently bear very different ratios to the net earnings of the roads. The valuations, moreover, are not apt to be changed often enough to make them correspond even approximately with the variations in the profitableness of the railway business. The property tax may be a heavy burden one year when times are bad, and be a relatively light load to carry the next year, when times are prosperous. In spite of its defects, however, the property tax will prob- ably be maintained, because of the popular feeling that the property of railroad companies should be taxed in the same way that the property of individuals is taxed. The property tax, moreover, has the advantages of being capable of yielding the State a large revenue and of being constant in its returns from year to year. In some States the valuations are fixed and the taxes are assessed by the State authorities, but more frequently the local governments compute and collect the taxes within their respective jurisdictions. The State board fixes the valuation of the entire railroad property within the State, and then apportions the total value among the counties. When the taxes are assessed by the State ofii- cials the proceeds, in part at least, of the taxes are divided among the local districts. In most States the local govern- ments still have the power of taxing railroad property situated outside of the company's right of way. It would simplify the tax administration for the States to take over all power of taxing railroad companies, but to do so would deprive the local governments of a needed source of rev- enue, unless a considerable portion of the amount col- lected by the State were distributed amon^ the counties RAILWAY TAXATION 411 and towns. This plan of State collection and local appor- tionment has been adopted by a few States, but the plan is not an altogether safe one, because the collection and distribution of large sums by the State governments may lead to waste and misappropriation of funds. Connecticut and Pennsylvania tax the stocks and bonds of railway companies, and in Massachusetts and 'New York the stocks are taxed. The par value of the stack is assessed in New York if the dividends equal or exceed 6 per cent. If the dividends declared are less than 6 per cent the " actual " value of the stock is assessed. In Pennsylvania the actual value is assessed, but in other States the basis taken is the market value. These taxes have the merits of being inexpensive to collect and of yielding a nearly con- stant amount of revenue. They may also be easily and accurately assessed, and those who pay them may know in advance just what their taxes are to be. There is some doubt as to the constitutional authority of a State to tax the railway bonds owned by non-residents of the State. In 1872 the Supreme Court of the United States held that bonds so owned could not be taxed, but in 1900 the Supreme Court upheld an Oregon statute imposing a tax on real-estate mortgages held by non-residents. This re- cent decision probably overrules the one of 1872. In several of the States a tax is imposed on the gross re- ceipts of the railroad companies. In Wisconsin, Maine, and Maryland this is the only tax laid upon the railroads. The same was true of Michigan before the tax laws were changed in 1901. In the other States that make earnings a basis of assessment this tax is but a part of the railroad levies. In Wisconsin the railroad companies are grouped into four classes, according to their gross annual earnings per mile of line, and the tax rate is made higher for the groups having the larger earnings. Until recently the Michigan and Wis- consin laws were popular, but latterly they have not been 412 AMERICAN RAILWAY TRANSPORTATION so. Michigan has repealed her law and put in force a system of taxing the value of the property of railroads as assessed by a State board, and for some years there has been an agitation in Wisconsin for a change. The prin- cipal reason for this dissatisfaction was that the States having the property tax system were deriving a larger revenue from the railroads. It was also urged against the tax on receipts that the amount yielded by the tax fluc- tuates from year to year, and falls off very largely in times of business depression. This is fortunate for the railroads, but, as the State's fiscal requirements are as large in such periods as in prosperous times, the tax burdens borne by real estate and other forms of property are necessarily made heavier. Earnings are given much weight in the States where railroads are taxed as property and assessed by a State board. In those States where the railroads are required to pay an annual franchise tax, the value of their fran- chise is determined to a large degree by the earnings received by the corporations having the franchise. Thus, although the tendency in some States is away from the plan of taxing gross earnings directly and toward the plan of taxing railroads as property, more rather than less consideration is being given to earnings as the basis upon which the State's levies shall rest. In taxing directly the earnings of railroads it has been necessary for each State to confine itself to the earnings derived from the business carried on entirely within the State. The Supreme Court has held that a tax on gross receipts as such derived from interstate business is a tax on interstate commerce which the States have no power to tax. This constitutional objection is got around by the device adopted in some States of levying an an- nual license fee or franchise tax upon each company. In Wisconsin, for instance, the tax on earnings is a " license RAILWAY TAXATION 413 fee." The Supreme Court has upheld the validity of such State taxes, although the value of the franchise taxed re- sults from interstate as well as State traffic. A tax on the net receipts of railroads has frequently been advocated as one possessing great merits, but the system has not yet been adopted by any of the American States. In England, Prussia, and France the net receipts of the railroads is one of the bases upon which tax levies are made. This method of taxing railroads is theoretic- ally attractive for several reasons. A tax on net receipts would not be open to the objection sometimes urged against one on gross income, viz., that it would discour- age expenditures for improvements of the service and the equipment. The distribution of burdens among the sev- eral companies affected would be equitable if net earnings were made the basis of assessment, and the administration of the tax law would be a simple task, provided each State before passing the tax law should require the rail- roads under its jurisdiction to adopt a uniform and cor- rect system of accounting whereby the State might be able to determine whether the companies actually re- ported their real net earnings. This, however, suggests the practical objection to making the net income the basis of taxation in the American States. The States generally do not insist upon a system of railroad accounts and reports that would enable the Government to admin- ister successfully a tax on net receipts. When the admin- istrative machinery has been sufficiently developed the incorporation of a tax on net receipts of railroad compa- nies into the general system of railroad taxation will be advantageous, l^et receipts should not be made the sole basis of railroad taxation, because the returns from the tax would fluctuate largely and would be especially small in periods of business depression. In theory a tax on the franchise of a corporation is a fee, 414 AMERICAN RAILWAY TRANSPORTATION or a payment, which the State exacts in return for some- thing of value that has been given to the corporation. In many instances, and this is particularly true of street-rail- ways, the franchise given by the State is a very valuable part of the company's property. In over half the States the railroad companies are required to pay a franchise tax. The value of the franchise is determined for purposes of taxation in various ways in different States. ' The receipts, profits, dividends, value of the capital stock, the amount of bonds, and numerous other criteria of value are adopted in fixing the worth of the franchise. Indeed, the franchise tax does not represent any specific kind of assessment, but is rather an indirect tax upon some one or more things that give value to the company's franchise. From the legal standpoint the franchise tax has great importance, because it enables the States to avoid several difficulties. The constitutions of some States require the taxes on property to be uniform, but by means of a franchise tax the levy on railroad property may be very different from that on other forms of wealth; the inability of the States to tax interstate commerce directly is overcome by imposing a tax on the franchises of companies engaged in that commerce; again, the company may own prop- erty located outside the State, and thus not be subject to taxation by the State, but, by taxing the company's franchise, that property can be levied on; and, although; a State may legally tax directly only that portion of the capital stock that is employed by the company in con- ducting its business within the State, the entire capitali- zation may in effect. be reached by means of an assess- ment against the value of the franchise. The elasticity of the franchise tax is making it a popular method of taxing railroad and other large corporations. Whether the basis of the tax levy be made the property of the railroad company, or its capitalization or its earn- RAILWAY TAXATION 415 ings, it is necessary for each State, in theory at least, to confine its taxes to the property within its boundaries. As most railroads are interstate in extent, some method of dividing the company's property or taxable elements among the several States in which its lines are located becomes necessary. The plan generally followed is for each State to tax that share of the total rolling-stock, capitalization, or earnings of the company that is repre- sented by the ratio which the mileage of line within the State bears to the company's total mileage. This method of interstate prorating of taxes has been upheld by the United States Supreme Court. The methods of taxing railroads are varied, and the same corporation is usually taxed by several States. From this it frequently results that railway property is subjected to more than one tax. This is called double taxation. Property that pays more than one tax may or may not be excessively taxed. Double taxation is not necessarily un- just taxation. The imposition of more than one tax upon a railway or other property may be caused in three ways: A State may place more than one tax on the same property; two States may tax the same object; and, third, the taxa- tion of different persons or owners may involve double taxation of the same property. In taxing railroads it is not the practise of the States to assess both the property of the company and the bonds or indebtedness of the company. Nor do any of the States tax the stock of the company without first deduct- ing from the value of the stock the amount of the prop- erty that has been taxed. To tax both the securities and the property would be double taxation, and this has usu- ally been avoided. Double taxation resulting from levies made by sepa- rate States has not been altogether prevented. The rail- road company, however, seldom pays taxes on the same 416 AMERICAN RAILWAY TRANSPORTATION property to more than one State, because property is assessed and taxed only by the State in which it is located. In the case of rolling-stock or floating equipment there is usually a prorating among the States on the basis of proportionate mileage. Each of the States now taxing- railroad securities endeavors to assess only that part of the total capital employed in the business conducted within the State. It is legal for each State to tax all the stock of the railroad companies having their home in the State, but this power is not exercised. Double taxation is most apt to result from taxing receipts, usually by means of franchise taxes. Each State may tax its rail- road corporations upon their entire gross receipts derived from traffic carried on without as w^ell as within the State, provided the form of the tax is that of a franchise tax or fee. These franchise taxes are usually not high, and if double taxation results from them the burden, if any, is not large. Double taxation is sometimes caused by laws which tax a corporation on the basis of its capital stock, and also tax the individual holders of the shares. Such laws are not to be commended, however, not so much because the double taxation is inadvisable as because securities held by individuals are easily concealed from the assessor. Tax laws that can not be enforced are unwise, and there is a growing tendency to exempt the individual holdings of corporate securities, when the corporation itself is taxed either on its capitalization or by other methods. The lack of uniformity among the States in the taxation of railroads results in the unequal distribution of the tax burdens among the railway systems. In some sections of the country the taxes in 1899 equaled 17 per cent of the net earnings of the railroads, and in other sections only 8.4 per cent. It would be somewhat better for the railroad companies were the systems of taxation simplified, re- RAILWAY TAXATION 417 duced in number, and made uniform in principle (not in rate or amount of taxes) in different parts of the country. There is manifest a tendency for each State to centralize the administration of its tax laws, and as time goes on the better systems of taxation will gradually be adopted by all the States. Complete uniformity in the practises of so many States can hardly be expected. One method of securing a uniform system would be the substitution of Federal taxes on railroads in place of those now imposed by the States. The United States could tax only interstate transportation, but by so doing it could reach practically all the railroads. In order to administer a system of taxes on interstate commerce, the United States Government would be obliged to secure certain information that it does not now possess regard- ing the finances and the traffic of railroads. The pos- session of that information and the exercise of the tax- ing power would assist in making more effective the governmental regulation of transportation. It seems log- ical that the development of great systems of interstate railways and the consolidation of those systems into a small number of groups should lead to the change from State to Federal taxes on railroads, just as local taxa- tion has given place to State levies. But the States will hardly agree to give up the taxation of railroads. They need the revenue to be obtained from that source, and if the United States should deprive the States of the proceeds from railroad taxation, the funds (or a large share of them) thus obtained by the ]N"ational Gov- ernment would need to be distributed among the States. Such a system of taxation, involving the collection of a large Federal surplus to be distributed among the States, is hardly to be recommended, at least at the present time. During the fiscal year 1901 the total amount of taxes paid by the railroads in the United States was $50,944,- 28 418 AMERICAN RAILWAY TRANSPORTATION 372. In each of three States, Illinois, New York, and Pennsylvania, the payments exceeded $4,000,000. The heaviest taxes per mile of road v^^ere paid in Massachu- setts, which received $1,366 per mile. Connecticut came second, with taxes of $1,006 per mile of road. Although the total railroad taxes paid in Illinois amounted to $4,655,000, the sum per mile was only $420. Several States were ahead of Illinois in the sum received per mile of line. ]!^early seven-tenths of the total amount received came from taxes levied directly on property — a fact showing that property is still the favored basis of levies. In addi- tion to the property tax, the receipts from property valua- tions fixed with reference to the value of stocks and bonds and with reference to earnings and dividends slightly exceeded $5,000,000. Specific taxes on stocks and bonds yielded less than $1,000,000, and direct or specific taxes on gross earnings and dividends produced about $7,000,000. This last figure is of especial signifi- cance, because it shows that although writers have for some time been urging a change from levies based on valuations to those placed on gross or net earnings, the States have been slow to make the substitution. The tax on gross receipts is probably growing in favor, but not rapidly. Taking the railroads of the United States as a whole, the sum paid by them for taxes is not excessive. In 1901 the tax payment equaled less than one-half per cent of the total amount of stocks and bonds, and but a little more than 3 per cent of the gross earnings from operation. The general tendencies manifest in the legislation of the States regarding railroad taxation may be summarized as follows: 1. Railroads are being taxed by a system different from that applied to individuals, and the tendency is to RAILWAY TAXATION 419 centralize the administration of railroad taxes by placing them in charge of State boards. 2. Taxes on property are being supplemented by levies on capitalization, profits, and earnings. 3. The property tax locally assessed on railroads is coming to include only real estate. 4. Corporation taxes in the form of organization fees and annual franchise taxes are growing in favor. 5. The tendency is to exempt from taxation the indi- vidual holdings of securities and to tax the corporation itself. 6. The States are endeavoring as far as possible to tax in the same manner all railroad corporations, whether chartered by the State levying the tax or by some other State. REFERENCES FOR FURTHER READING McCkea, R. C. 1. Taxation of Transportation Companies, Report of Industrial Commission, vol. ix, pp. 1005-1091. [This mono- graph by Dr. McCrea covers the subject in detail and contains a good bibliography of the literature of the subject.] 2. Tendencies in Taxation of Transportation Companies in the United States, Annals of the American Academy of Political and Social Science, vol. xv, pp. 355-380, 1900. Report of the Industrial Commission, vol. iv, pp. 599-610, testimony of Prof. E. R. A. Seligman; vol. ix, pp. clxxxix-cxciii and 373- 384, testimony of Prof. Henry C. Adams. Railways in the United States in 1902. Part V. "State Taxation of Railways and other Transportation Agencies." A report pre- pared for the Interstate Commerce Commission by its Statis- tician. • CHAPTEK XXIX THE PROBLEM OF GOVERNMENT REGULATION The problem of the government regulation of railways varies in its concrete manifestation from time to time, but the general problem is a permanent one. The aim sought by the carriers is an increasing business at rates that will yield as large profits as can be obtained without interfering with the growth of traffic; the interests of the public served by the railroads require that the service shall be progressively efficient, that the charges shall be as stable as general business conditions warrant, and shall be neither unreasonably high nor unjustly discriminatory as between persons, places, or kinds of traffic. It was hoped for a time that the interplay of competitive forces and the struggles of rival interests would result in an equitable and satisfactory adjustment of the relations of the carriers with each other and with the public, but the entire history of railroad transportation in every country is an illustration of the inadequacy of the theory of non- interference on the part of the government. There are two parts to the permanent problem of government regulation of railroad transportation, two duties devolving on the state. One is to adjust the rela- tions of the carriers with each other ; the other is to main- tain an equitable relationship between the public and the carriers. The theory concerning the interrelations of the carriers that has generally been adhered to in the laws of the United States and the several American States has 420 THE PROBLEM OP GOVERNMENT REGULATION 421 been that the several railroad companies should act inde- pendently and should actively compete with each other as regards traffic and rates. Neither pooling arrange- ments nor agreements concerning the making and mainte- nance of reasonable rates have been sanctioned by law. Just what effects have resulted from the adherence to this unsound policy can hardly be determined, but two facts are certain: (1) The policy made the prevention of unreasonable discriminations more difficult. Whether they could have been eliminated even by allowing the rival railways to cooperate under governmental supervision may possibly be somewhat doubtful; but that the effect of attempts to compel competition has been to increase discriminations there can be no question. (2) The laws against pooling and cooperation of rival carriers have not kept the carriers apart. Since 1898 the railroad companies have been developing larger systems and greater unity of management at a rate few people would have dared to predict. Cooperation among rail- roads in rate-making and in the division of traffic free to' move by more than one route is being accomplished by methods that are highly efficient. Indeed, that part of the problem of government regulation of carriers which has to do with the maintenance of the proper interrela- tions among the railroad companies has assumed a new phase. To the extent that the laws against cooperation of rival carriers were effective, it became the duty of the Govern- ment to endeavor to enforce such interrailway relations as would protect the carriers as well as the public against the harmful effects of unbridled competition. ]^ow that the carriers are able to cooperate with great efficiency it has become the duty of the Government to scrutinize closely the methods and results of that cooperation to make sure that the railway companies do not exercise, in 422 AMERICAN RAILWAY TRANSPORTATION such a way as to do injustice, their monopoly powers, which, though partial, are yet strong enough to demand public supervision. The Government's obligation to maintain an equitable relationship between the carriers and the public is as great to-day as it ever has been. The problem has a different form than it has had in the past or may have in the future, but in essence the question is a permanent one, and consists in harmonizing as far as possible the interests of the pri- vate corporations of a quasi-public character engaged for profit in the performance of a service of a public nature, with the interests of the individuals, the localities, and the general public served by the carriers. This general prob- lem is a continuing one, but the specific reason for Govern- ment regulation will vary from time to time, and may be, as it was in 1870, to secure cheaper rates to the seaboard for the agricultural products of the Central States* or may be, as was particularly the case during the period from 1870 to 1890, to adjust the rates charged at the small local towns and at the large cities; or the reasons may be, as at the present time, to secure relatively reasonable rates for rival areas of production and for rival economic inter- ests in the same area of production. The progress of rail- way consolidation may again give prominence to the ques- tion of extortionate rates, for although the railway serv- ice is not a complete monopoly, there is no doubt as to the ability of a consolidated control unrestrained by public regulation to exact higher charges than justice would war- rant. The problem of railway regulation is being merged to some extent with the general and larger problem of the public control of corporations. This has come about mainly in two ways: by the application of the Sherman antitrust law of 1890 to railroads and by the passage of the Elkins law in 1903. In enacting the Sherman anti- THE PROBLEM OF GOVERNMENT REGULATION 423 trust law Congress had only industrial combinations in mind; but the rulings of the Supreme Court have made the law an important part of our legislation for the regula- tion of railroads. Indeed, the interpretation of the law thus far has been to give it a wide application to inter- railway relations and a very limited influence upon the relations of industrial corporations with each other. As a measure for the control of interrailway relations the law is faulty in that it makes illegal practically all coop- erative action on the part of rival carriers. The public interest requires the joint action of carriers in making and maintaining rates, and the problem of preventing railway discriminations has been complicated instead of simplified by the Sherman Antitrust Act. There are un- doubtedly various kinds of combinations among railroads that are opposed to the public welfare, and it is quite pos- sible that such deleterious combinations may be reached by the law of 1890. The necessity seems to be for the modification rather than for the repeal of the law. The recent demand for Federal legislation for the regu- lation of the " trusts " led to the passage of the Elkins law, which is intended to prevent unjust discriminations in railway charges. Instead of amending and developing the Sherman act of 1890, Congress chose to give the new Department of Commerce and Labor certain inquisitorial powers over corporations, and, by the Elkins law, to make it more dangerous and more difficult for the large ship- pers to secure special and discriminating rates. The theory of the Elkins law is that the greatest advantage over the independent producer which the " trust " can secure is a special rate from the railroads, and the framers of the law believe that the elimination of unjust discrimi- nations will do much to prevent large corporations from oppressing the public. The thought back of the Elkins law, as an antitrust measure, is that with equality of ad- 42^1: AMERICAN RAILWAY TRANSPORTATION vantage as regards transportation, the small producer can prevent the large producer from monopolizing the field of production and exacting extortionate charges from the con- sumer. The law has not heen in force long enough to in- dicate what results will be accomplished, but the theory upon which the law is based has much to commend it. The Elkins law has appreciably strengthened the legis- lation for the regulation of railroads. The corporation, as well as the officer or agent, is now liable to prosecution for a violation of the law ; the imprisonment clause of the interstate commerce law has been repealed, and all mis- demeanors are made punishable by fines. The penalty for deviating from the published and lawful rates is a heavy fine of not less than $1,000 or more than $20,000 for each offense, and the acceptance as well as the offer of a rebate or discrimination is made a misdemeanor. The Elkins law also gives statutory authority for the issue by the United States circuit courts of writs of injunction order- ing carriers not to charge less than the published rates and not to make any discrimination forbidden by law. Al- though this authority had been exercised by the Federal courts in 1902, there was some doubt as to the power of the courts to take such action. The Elkins law empowers the Interstate Commerce Commission to petition for such an injunction whenever it has reasonable ground for be- lief that discriminations are being practised, and the law makes it " the duty of the several district attorneys of the United States, whenever the Attorney-General shall di- rect, either of his own motion or upon the request of the Interstate Commerce Commission,' to institute and prose- cute the proceedings provided for by this act." The law further provided for the expeditious and speedy deter- mination by the Circuit Court of all cases brought for the enforcement of the law. " An appeal from the final de- cree of the Circuit Court will lie only to the Supreme THE PROBLEM OF GOVERNMENT REGULATION 425 Court and must be taken within sixty days from the entry thereof." While legislation has fixed the general , scope of the governmental regulation of transportation, the efficiency of governmental control has been determined mainly by the actions of the courts in interpreting the law and in exer- cising their equity powers. There have been few changes made by Congress in the act to regulate commerce passed in 1887, but the activities of the Federal courts during the past sixteen years have resulted in an important organic growth in the laws and public obligations to which public carriers are amenable. With the exception of the act approved February 11, 1893,. strengthening the power of the Interstate Commerce Commission to compel witnesses to testify and produce documentary evidence, the changes made in the law of 1887 before the passage of the Elkins act related to rela- tively minor details. Two supplementary laws of impor- tance to the public welfare were enacted. One act was the safety appliance law^ of March 2, 1893, requiring the rail- road companies to equip their cars with automatic couplers and their engines and cars with power-brakes. The other act was approved March 3, 1901, and requires all railroad companies engaged in interstate commerce to make full monthly reports to the Interstate Commerce Commission of all accidents. These supplementary acts, while con- stituting a valuable addition to our laws, do not deal with the main problem of government control of transportation, the regulation of rates and the prevention of discrimina- tions. Though annually urged by the Interstate Commis- sion to recast and strengthen the main provisions of the act of 1887, so that the commission might at least possess the powers which that law was intended to confer on that body. Congress deemed wise to delay action until 1903, when the agitation for the regulation of trusts and large 426 AMERICAN RAILWAY TRANSPORTATION corporations resulted in the Elkins law to restrict discrim- inations in railroad charges. Although Congress has done little to change the act of 1887, the courts have done much, and the result has been that since 1897 the Interstate Commerce Commission has possessed no effective power to adjust railway charges. In an increasing measure the work of regulating trans- portation charges has been taken up by. the Federal courts ; but although the enlargement of the activity of the courts has been beneficial and may be even more so in the future, the necessity for the further development of legislation regarding railway regulation and the desirability of keep- ing the Interstate Commerce Commission equipped with effective powers have in no wise lessened. However active and intelligent the courts may be in dealing with transpor- tation questions, they can not adequately cope with the economic problem of rate adjustment. The actions of the courts must be mainly negative and preventive; their methods of procedure are such that the courts are not so well adapted as a commission is to deal constructively with such a complicated and varying economic problem as the supervision of transportation charges and their equitable adjustment among the rival social and economic interests. This fact seems now to be generally recognized in the United States, but there are differences of opinion as to the nature of the powers that should be vested in the Interstate Commerce Commission. There has been a vir- tual deadlock in legislation for some years because the powerful interests that would be affected by the legislation can not agree as to what shall be done. The interest of the public in the problem of railway regulation has been temporarily lessened by the prosperity which all classes are enjoying and by the fact that railway discriminations have been much less frequent during the past five years than they previously were. When over- THE PROBLEM OF GOVERNMENT REGULATION 427 run with traffic a railroad company may be expected to observe its published rates in its dealings with all people except possibly a few of the largest shippers who are in a position to offer traffic in train-load lots to two or more railroad companies. But if personal discrimination due to unlawful deviations from the published rates were eliminated, the necessity for Government regulation would not have ended. A proper adjustment of rates means, first, that the published rates shall be what they ought to be, and second, that the published rates shall be maintained until they become unreasonable and others are substituted for them according to methods prescribed by law. Inasmuch as past experience has clearly demonstrated that the inter- play of rival private interests can not be expected to secure the equitable adjustment of railroad charges, we must in the future, as we have in the past, endeavor by effective public regulation to minimize the inequities certain to arise in the charges imposed by the carriers engaged in perform- ing the transportation service for a country so large as the United States. The regulation of railroads in the United States is ap- parently not to be accomplished by means of Government ownership. The commission system has been on trial in the States for thirty years and in the National Govern- ment for sixteen years, and while the results accomplished are not fully satisfactory, the system has not been a fail- ure. The success of the Federal commission has been far less than it might have been had the demonstrated de- fects in the law of 1887 been corrected ; but the wisest plan for the United States to follow, at least in the immediate future, is to improve the methods and agencies of regula- tion now being employed, rather than to attempt the enor- mous task of purchasing and operating two-fifths of the railway mileage of the world. INDEX Accounts, railway, 195; necessity for uniformity in, 365. Adams, Alvin, organizes express com- pany, 162. Adams, Prof. Henry C, method of valuing railroad property, 92 ; on railway mail service, 183. Advertising, railway, 148. Agents, industrial, 268. Agreements, inter-railway, 213. Aid, government, to railways, 307, 308 ; in France, 331. Air brake, first used, 48. Allen, Horatio, engineer, 42. Anthracite coal roads, 56. Atchison, Topeka, and Santa Fe Rail- way, 60 ; government aid to, 314. Atlantic and Pacific Railway, govern- ment aid to, 314. Auditing, railway, 195. Australia, railways of, 292, 347. Austria, railways of , 292, 335, 344, 349 ; fares in, 297 ; freight rates in, 302. Baggage, system of checking, 147. Baldwin, Matthias, locomotive builder, 40. Baltimore and Ohio Railway, 21, 26, 38, 217, 219, 227. Belgium, railways of, 67, 325, 344; passenger traffic in, 140. Best Friend, locomotive, 40. Bill of lading, 119, 122. Bismarck, policy in regard to railways, 339. Bonds, railroad, 76, 78, 89. Boston and Albany Railway, 22. Bridges, railway, 38. British Railway Clearing-House, 130, 330. Brooks, James, locomotive builder, 43. Camden and Amboy Railway, 22. Campbell, Henry R., locomotive de- signer, 43. Canadian Pacific Railway, 145. Canal building in the United* States, 14, 308, 350. Capital, defined, 5. Capitalization, railroad, 76, 78, 207. Cars, first American passenger, 42. Census, United States, railr^^ad statis- tics, 205. Central Pacific Railway, 60; Central Railroad of New Jersey, 64 ; govern- ment aid to, 313, 316. Central Traffic Association, 244. Charters, railway, whence derived, 73. Charleston and Hamburg Railway, 21, 38, 40, 42. Chesapeake and Ohio Canal, 16. Chicago, Burlington, and Quincy Rail- way, 60, 89. Chicago, Milwaukee, and St. Paul Rail- way, 145. Chicago-Omaha Pool, 230. Chicago, Rock Island, and Pacific Railway, 26. City governments, aid given by, in railway building, 308, 319. Civil war, effect on railway building, 26. Classification of freight, 113, 285; of railways, 52, 60. Clearing-House, British Railway, 130, 330. 430 AMERICAN RAILWAY TRANSPORTATION Coaches, railway, European and American, 46. Coal, agreements of railroads in regard to mining and carrying, 234. Coal roads, the anthracite, 56. Columbia Railway, 22, 86. Commerce, relation of transportation to, 4 ; value of freight service to. 111. Commission, British Railway, 328 ; Interstate Commerce, 367, 369. Commissions, State Railway, 202, 349, 352. Commodity tariffs, 1 16, 286. Community of interest, consolidation by, 251, 253, 259, 405. Commutation service, 148. Competition, results of, 217; in the railway service, 258. Competition of markets, 265. Conestoga wagon, the, 15. Consolidation, of railway and business interests, 2.58 ; causes of, 247, 250 ; effects of, 405 ; necessity for, 224 ; principles influencing, 259 ; railway in Great Britain, 329. Consumption of wealth, relation of transportation to, 3. Control, government. See Regulation, Government. Control, stock, consolidation by, 2.51. Cooper, Peter, locomotive designed by, 39. Corporations, defined, 69 ; private and public, 71 ; railway, 69 ; number of, in the United States, 52. Cost of service, 271. Costs, joint, 273. County governments, aid given by, in railway building, 308, 319. Courts, relation of the, to railroad reg- ulation, 386, 426. Credit MobUier, 88. CuUom report, the, 368. Demurrage, 133. Departments of railway administra- tion, 184. De Witt Clinton, locomotive, 40. Distribution of wealth, relation of transportation to, 5. Dividends, 82, 97, 103. D wight, Theodore, on corporations, Earnings, 97, 137; net, 100; relation to capitalization, 91. Economics of transportation, 2. Egypt, railways of, 347. Electric railways, advantages, 155. Elkins law, the, 422. Elliott on corporations, 69, 71. Empire Transportation Company, 127. v Engineering schools, province of, 1. Erie Canal, opened, 16 ; effect on trade of New York City, 219. Erie Railway, 26, 64, 87, 190, 217, 219, 226. Europe, railway building in, 28 ; rail- ways of, 65, 67, 74 ; mileage, 29. «' Eveners," plan of, for regulating competition, 235. Excursion rates, 289 ; trains, 144. Expenses, 97. Express service, 158 ; charges, 164, 167; companies, 97, 160 ; earnings from, 163 ; and fast freight, 159 ; and the mails, 158, 165; statistics, 165; for- eign, 158. Extra-fare trains, 144. Fares, passenger, 135, 137, 149 ; in Eu- ropean countries, 291, 293 ; legisla- tion in regard to, 351 ; relation to monopoly, 26^ ; theory of, 271 ; de- termination of, in practice, 283. Fast-freight service, 127, 159. Financial department, 185. Fink, Albert, railway organizer, 232, 236, 237. France, railways of, 65, 68, 284, 292, 322, 330, 346, 349 ; railway fares in, 296 ; passenger traffic in, 140 ; freight rates in, 301. Freight bill, 119, 120. INDEX 431 Freight cars, improvement in, 49 ; rates, methods of determining, 271, 284. Freight service, 111 ; business papers, 119; commodity tariffs, 116, 286; classification of, 113, 285 ; co-oper- ative lines, 129 ; earnings, 97, 111 ; compared with express, 159 ; fast freight service, 127 ; car mileage, 131, 132; car rental, pe7' diem, 132; demurrage, 133 ; income, 97, 111 ; milk trains, 135 ; private cars, 131 ; rates, 113, 271, 284; straight and mixed cars, 126 ; through and local, 118; way -freight trains, 135. Germany, railways of, 67, 283, 292, 335, 346 ; railway fares in, 295 ; pas- senger traffic, 140; freight rates in, 301. Gould roads, the, 158. Government, relation to transporta- tion, 7; relations to the railways, 307 ; aid given in railway building, 311 ; ownership of transportation facilities, 7, 71, 283; regulation of rates, 72, 202, 259, 270, 279, 291, 321, 367, 420. Grand Trunk Railway, 219, 227, 241. Granger laws, the so-called, 357, 369. Granger lines, .58. Grants, public, as an aid to railroad construction, 27,311,31.5. Great Britain, railways of, 65, 67, 291, 322, 338, 346, 349 ; capitalization of railways in, 81 ; fares in, 294, 295; freight rates in, 301 ; passenger traffic of, 140. Great Northern Railway, 60, 89, 145. Groupings, territorial, of railways, 52, 258. Harnden, William, organizes express company, 161. Hepburn Committee, investigation by the, 237. Holland, railways of, 336. Hospitals, company, 189. Hungary, railways of, 292, 335, 344; railway fares in, 297 ; freight rates in, 302. Illinois Central Railway, 27, 19C, 191, 215; government aid to, 311, 312; ownership, 75. Illinois State Railway Commission, 357. Immigrant trains, 144. Indebtedness, 76, 78. India, railways of, 292, 336, 347. Individual aid in railway building, 320. Industrial agents, 268. Injunctions, restraining charges, 392 ; in labor disputes, 396. Insurance, company, 189; department, 189. Interest, defined, 5 ; relation of trans- portation to, 5. Inter-railway relations, 213. Interstate Commerce Act, 239, 828, 369; CommerceCommission, 95, 117, 202, 205, 367, 372. Iowa, State Railway Jommission, 362. Ironsides, Old, locomotive, 40. Italy, railways of, 335, 346. Jervis, John B., engineer, 42. Joh7i Bull, locomotive, 41. Joint costs, 273. Joint Traffic Association, 245. Kansas Pacific Railway, government aid to, 313, 317. Kentucky, laws governing railroads in, 95. Labor disputes, 388; injunctions in, 396. Lading, bill of, 119, 122. Lake Shore Railway, 89. Land grants, public, an aid to railroad construction, 27, 311 ; repeal of, 315. Lease, consolidation by, 251. Liverpool and Manchester Railway, 21. Loans, national railway, 316. 432 AMERICAN RAILWAY TRANSPORTATION Locomotive, beginnings of the, 20 ; first American, 22, 39 ; modern im- provements in, 44. Machinery department, 187. Mailcars, 97, 173, 176. Mail service, cost of, 179 ; classification of mail matter, 171, 181 ; com- pared with express, 158 ; railway, 97, 170 ; part performed by the rail- way, 177 ; right of way, 178 ; statis- tics, 172; strikes and the, 399. Manufacturing interests, consolidation of, 258. Markets, competition of, 265. Massachusetts, laws governing rail- roads in, 94 ; State Railway Com- mission, 354. Michigan, method of valuing railroad })roperty in, 93. Mileage, railway, in the United States, 24, 29, 53 ; relation to area of terri- tory, 66 ; relation to population, 66. Milk trains, 135. Minnesota, laws governing railroads in, 94. Mobile and Ohio Railway, government aid to, 311. Mohawk and Hudson Railway built, 22, 38, 40. Monopoly, extent of, in railway ser- vice, 258 ; fear of, from pooling, 239 ; French railway, 330. National pipe, the, 14. Net earnings, 100. New York, canals and railroads of, in 1840, 17. New York Central Railway, 22, 26, 215, 217, 219, 226. New York, New Haven, and Hartford Railway, 145. New Zealand, railways of, 847. Northern Pacific Railway, 60, 89 ; gov- ernment aid to, 314. Northern Securities Company, 89. Officers, railway, 184. Operating department, 186; expenses, 100. Organization of railway companies, 184. Ownership, classification of railways by, 60, 75, 78 ; government, 307, 322, 427 ; in Germany, 335, 337 ; in Italy, 335, 346 ; in other European coun- tries, 335, 344. Pacific railways, 58 ; charters of the, 73. Panic of 1857, effect on railway build- ing, 26 ; of 1873, effect of, 27. Parcels post, in Great Britain, 166. Partnership, contrasted with the cor- poration, 69. Passenger-coaches, first, 46. Passenger mile, 293. Passenger service, 135 ; advertising, 148 ; baggage, 147 ; class service, 141, 150; commutation business, 148; earnings, 97, 111 ; effect of, on, 155; electric railways, European, 140; excursion trains, 144 ; fares, deter- mination of, in practice, 289 ; immi- grant service, 144 ; income, 97, 111 ; mileage, 152 ; passes, 153 ; Pullman and extra-fare trains, 144 ; tickets, 147 ; ticket scalpers, 152. Passes, issuance of, 153. Pennsylvania, canals, and railroads of, in 1840, 19. Pennsylvania Railway, 22, 26, 75, 76, 130, 190, 192, 193, 215, 217, 219, 226. Philadelphia, Wilmington, and Balti- more Railway, built, 22. Political economy, defined, 2. Pooling. 225, 228, 258, 287, 329 ; oppo- sition to, 239 ; laws against, 263. Poor's Manual of Railroads, 205. Production, relation of transportation to, 3. Promoting, corporation, 87. Prussia, railways of, 335,337; railway fares in, 295; freight rates in, 301. INDEX 433 Public lands, income from, 309 ; grant- ed to railways, 811, Public nature of transportation, 8. Public, railroads and the, 21 1. Pullman, George M., sleeping-car designer, 47, 144. Pullman Palace Car Company, 145. Purchase, consolidation by, 251. Purchasing department, 189. Rails, early forms of, 18, 34 ; standard, 37. Railways, the first, 18 ; American, beginning of, 18 ; growth of, 24 in 1840, 17, 19 ; in 1850, in 1902, 52 group system classification, 52 European, 28, 29 ; stock, value of, in United States, 29. Rate wars, causes of, 218 ; recent, 254, 392. Rates, agreements to maintain, 212 ; power of the courts to determine equity of, 388; government regula- tion of, 72 ; legislation in regard to, 351 ; local, laws limiting, 267 ; mak- ing, in practice, 283 ; relation to monopoly, 262 ; theory of, 271 ; in- fluence of watering stock upon, 90 ; in European countries, 291, 298, 300. Reading Railroad, built, 22. Real estate, conveyancer of, 189. Receiverships, 76, 388, 401. Refrigerator cars, 49. Regulation, government, 307, 321, 323, 367, 386, 420 ; by the State govern- ments, 349 ; in France, 330 ; in Great Britain, 327. Relief department, 189. Rent, defined, 5 ; relations of transpor- tation to, 5. Reports, railroad, 196; incomplete, 201 ; demand for uniformity, 201. Roads, early American, 13. Roadway department, 187. " Rocket,'" Stephenson's, 20, 41. Russia, railways of, 67 ; railway fares in, 299. 29 Scalpers, ticket, 153. Schools, engineering, 1. Secretary's department, 185. Signals, railway, 38. Sleeping-cars, 47. Society, relation of transportation to, 8. South Africa, railways of, 347. Southern Pacific Railway," 60, 88; government aid to, 314 Southern Railway and Steamship Asso- ciation, 241. Speed, railway, means of increasing, 38. Stage-coach, the, 15. Standard Oil Company, 261. " Star" mail routes, 175. State Railway Commission, 202. States, aid given by the, in railway building, 308 ; regulation by the, in the United States, 349. Statistics, railroad, where compiled, 186, 195, 204. Stephenson, George, the Rocket, 20, 41. Stocks, railroad, 78; consolidation by control of, 251 ; watered, 82, 103. Stourbridge Lion, locomotive, 39. Street railways, regulation of, 363. Strikes, rulings of the courts in regard to, 896. Suburban service, 148. Supreme Court, decisions in railway cases, 359, 377, 378, 380, 381, 382, 386. 389. Sweden, railways of, 67. Switzerland, railways of, 68, 335, 344 ; passenger traffic in, 140. Swivel truck, the, 42. Taxation, methods of, 408. Technics of transportation, 1 . Telegraph, service to railroading, 38. Terminals, railway, 50. Texas, laws governing railroads in, 94. Texas and Pacific, government aid to, 314. Thurman Act, 317. 434 AMERICAN RAILWAY TRANSPORTATION Tickets, cut-rate, 152 ; passenger, 147. Toll-roads, first, 13, 74, 128. Tolls, of early railways, 326, 351. Tom Thumb, locomotive, 39. Ton-mile, 293. Tonnage, annual freight, 112. Tracks, early railway, 34. Traffic Associations, 228, 232, 242, 247, 249, 287. Traffic department, 186, 188. Tramways, the first, 18. Transportation, defined, 1 ; economics of, 2 ; public nature of, 8 ; technics of, 1. Transportation department, 187. Trolley, effect of the, on passenger business, 149. Trunk Line Association, 236, 241, 244, 249. " Trunk lines," meaning of the term, 56. Turnpikes, 13, 74, 128, 808, 326, 350. Union Pacific Railway, 27, 60, 88; government aid to, 313, 316. United States, railway mileage, 24, 29, 52 ; groupings of the railways of the, 52. Value of commodities, rates in relation to, 275; of railway stocks in the United States, 29. Value of service, rates and fares in relation to, 274. Valuation, methods of determining, 92. Vestibuled cars, 48. Wages, defined, 5, 6 ; relation of trans- portation to, 6; relations of stock watering to, 90. Wagner Palace-car Company, 145. Watered stock, 82, 103. Way-bill, freight, 123, 125 ; express, 165. Way-freight trains, 135. Wealth, defined, 5. 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