BERKELEY LIBRARY UNIVERSITY OF CALIFORNIA RAILWAY ECONOMICS. BY H. T. NEWCOMB, LL M. Chief of the Section of Freight Rates in the Division of Statistics of the United States Department of Agriculture and Instructor in Statistics and Transportation in Columbian University. PHILADELPHIA : RAILWAY WORLD PUBLISHING CO. 1898. REPLACING i&n Copyright, 1898, BY RAILWAY WORLD PUBLISHING Co. PRESS OF PATTERSON & WHITE, PH Us PREFACE. THIS little work, originally prepared for serial pub- lication in the RAILWAY WORLD, was intended to present the principal facts which establish the position of railway transportation in the present organi- zation of industry in the United States, with only so much of comment and discussion as seemed absolutely necessary in order to define the relations among those facts. The present publication is due to the belief that while more extended treatment of some of the subjects than is here given is unquestionably desirable, a concise and untechnical statement may, in view of the necessi- ties of' the present situation, prove more generally ser- viceable than a larger and more ambitious work. H. T. N. U. S. Department of Agriculture. WASHINGTON, October, 1898. RAILWAY ECONOMICS. CHAPTER I. TRANSPORTATION. Beginning approximately with the last quarter of the eighteenth century and continuing throughout that just closing there has been an almost revolutionary change in the organization and methods of productive industry. Among the most characteristic features of this change is the increased importance of the transportation ele- ment in production. At the commencement of the period the necessary articles of subsistence were, with few exceptions, wholly produced within the localities in which they were required for consumption, and ex- changes between distant communities were practically restricted to articles of great value used only by those able to indulge in expensive luxuries. Means of trans- portation by water had improved but little, and those for transportation by land scarcely at all since the dawn of history. The movement of commodities was so costly as to be prohibitive of exchanges of ordinary food or textile products, so slow that perishable articles could traverse but the shortest distances, and accompanied by such excessive risks that at a few hundred miles from the regions of production the prices of even the most costly articles were doubled, trebled, or quadrupled. The contrast offered at the present time is extreme. 8 RAILWAY ECONOMICS. The world is traversed by almost innumerable lines of transportation; there is scarcely a habitable region, however small or scantily peopled, that is not regularly served by railways or steamships, and nearly every community, no matter how backward in civilization and culture, depends upon exchanging some surplus product with other communities for necessary articles of ordinary and constant use. Nations, no longer economically independent, are classified as manufacturing or agri- cultural in accordance with the character of the surplus products with which they enter the world's markets. Especially in the United States the differentiation and localization of industry have gone very far, and to fur- nish the more luxurious articles of clothing and food for the citizens of this country commodities are brought from all points of the globe. The wage-earner in New York city wears clothing made of woolens manufac- tured in Massachusetts from wOol grown in Montana, mixed, too often, with cotton grown in Texas. He drinks coffee from Brazil, Central America or Mexico, and tea from China or Japan, sweetened with sugar from Germany, the Eastern or Western Indies, or Louisiana, and mixed, perhaps, with milk brought two hundred miles from the interior of the state. His bread is made from flour ground in Minneapolis from wheat grown in the Dakotas. He eats beef raised in Texas and killed in Chicago, bacon cured in Kansas City, Omaha, or St. Louis, and, not infrequently, eggs laid in Iowa; oranges and lemons from Bermuda or the shores of the Mediterranean, raisins and preserved fruits from Spain or California, figs and dates from Italy, and spices from India are not too expensive for his table; the holiday TRANSPORTATION. 9 finery worn by his wife is adorned with the products of France, and toys made in Germany amuse his chil- dren. The marine engine, and the locomotive have been the principal instruments in effecting this change, of which merchant fleets and railway trains constitute, to many at least, the most tangible expression. The significance of the change is this: Differences in soil and climate, in mineral resources, in the character and capacity of workmen, render particular regions peculiarly adaptable to certain forms of production. A region of sterile soil which responds grudgingly and meagerly to the arts of the husbandman may abound in mineral wealth or be plentifully supplied with water power. Without mod- ern transportation facilities the latter must remain un- developed, or subsistence for those engaged in exploit- ing them must be obtained in spite of disadvantages and difficulties from the former. In any event, the mineral or water power could not be completely utilized, for the distribution of the products of either would be con- fined within a narrow area and a considerable por- tion of the aggregate energy of the community would necessarily be devoted to the cultivation of the soil. Under modern conditions the entire available energy of the community would be devoted to the exploitation of the mines or water power and the surplus production, distributed widely wherever needed, would purchase those articles of necessity and luxury which could be produced by the community itself, if at all, only with an unnecessary and wasteful expenditure of effort. It is evident therefore that by permitting the specialization of industrial functions and making possible a territorial IO RAILWAY ECONOMICS. division of labor under which only that share in pro- ducing the complex of articles necessary for the satis- faction of the wants of society at large for which it is best adapted is assigned to each locality, the develop- ment of transportation facilities has multiplied the pro- ductive efficiency of both capital and labor. The transportation element had such an insignificant relation to industry, as conducted a century ago, that it is scarcely too much to say that its development has added a new form of production. A quantity of wheat in excess of that demanded by the local population has in North Dakota no value save that which is due to the fact that it can be transported and utilized to feed the inhabitants of distant and less fertile regions; yet it rep- resents an expenditure of productive energy and has gained a part of the total capacity for satisfying desires that it will possess when in the hands of actual con- sumers. This capacity for satisfying desires which will be at its maximum when, transformed into bread, the wheat is in the possession of those who are to consume it, constitutes its utility and is found, on analysis, to have been produced by a series of acts which can be classified as having given it, respectively, form and position. Those who tilled the soil called into operation natural forces which, taking a certain amount of carbon from the atmosphere and of hydrogen, oxygen and nitrogen from the soil, endowed them with the form utility of wheat; it was moved by rail to Minneapolis, and having been placed where it could be made into flour, gained a place utility 2 to which the millers added a utility of form. The railway from Minneapolis to the point of consump- tion contributed an additional utility of place; the baker TRANSPORTATION. II making it into bread and distributing the product, gave both form and place utilities. Nearly all commodities of current use represent the combined productive efforts of those who create, respectively, form utilities and place utilities. The effect of th'e development of modern transportation agencies has been to give relatively greater importance to the production of place utilities. Railway transportation is commonly regarded as cheap transportation, and if the aggregate cost of the transportation performed by railways is compared with the number of units moved, the average obtained is very low; but, on the other hand, so great a portion of the aggregate productive energy of society as at present was never at any other period devoted to transportation. Every successive decrease in the average cost per unit of service has so increased the demand for transporta- tion and has constituted such an impetus to territorial exchanges that it has augmented rather than reduced the total expenditure for transportation. The economic interests of society demand that the satisfaction of human wants be secured with the least practicable ex- penditure of energy, not that either form utilities in par- ticular or place utilities in particular be produced more cheaply. The real gain from the change in transporta- tion methods has been that it has reduced the total social cost of subsistence by permitting form utilities to be given to each commodity under the most favorable conditions which can be discovered. 12 RAILWAY ECONOMICS. CHAPTER II. RAILWAY SERVICE IN THE UNITED STATES. Because of the wide area of the United States, the diverse natural resources of the country, and the extent in which the localization of industry has been permitted by unrestricted domestic trade, facilities for cheap, rapid and safe transportation constitute a most import- ant element in their economic organization. Though there are within the United States lakes vast enough to float the commerce of the world and mighty rivers un- equaled elsewhere within the domain of civilization, these natural waterways are but auxiliaries to the gen- 'eral system of transportation, which partly on account of the topography of the country and the normal trend of commercial shipments is mainly overland. The early contest for supremacy between canals and railways demonstrated the comparative inadequacy of the former for any service other than that of feeders for the more efficient system. The railways speedily gained and have successfully maintained a paramount position in the national transportation system. During the seven decades that comprehend the period of steam railway transportation there have been con- structed throughout the world 445,000 miles of railway, which are capitalized at about $35,000,000,000. Though the United States occupy approximately but six per cent, of the land surface of the earth and contain an even smaller proportion of its total population, they are traversed by 41 per cent, of this mileage, represented by 30 per cent, of the capital. The aggregate length of RAILWAY SERVICE IN THE UNITED STATES. 13 the railways of the United States on June 30, 1897, was 184,428 miles, or six times as great as in any other country, and exceeded the length of the lines serving the whole of Europe by 25,000 miles. It is not sufficient to" measure the transportation facili- ties of a nation in miles ; the true criterion is their rela- tion to the demand for the movement of persons and property. Exact determination of the extent of this demand is practically impossible, but approximately ac- curate conclusions can be reached by comparing mileage with population and area. So measured, the people of the United States are served by a greater length of rail- ways in proportion to their number than those of any other country except Orange Free State and some of the provinces of Australasia. For every 10,000 of in- habitants the United States have 26.0 miles of railway; Great Britian and Ireland, 5.2; Germany, 5.6; France, 6.6; Russia, including Finland, 2.2; Spain, 4.2; Brazil, 4.7; Argentina, 19.6; British North America, 22.4; and Australasia, 31.6. The proportion of railway mileage to area is exceeded only in the most densely populated countries of Europe. With 6.1 miles of railway for every 100 square miles of land area, the United States are surpassed by Great iBritian and Ireland with 17.4; by Belgium with 31.4; by the Netherlands and Luxem- burg with 14.0; by Germany with 14.0; by Switzerland with 13.8; by France with 12.2; by Italy with 8.5; by Denmark with 9.3; and by Austria-Hungary, including Bosnia, with 7.6. The average for the whole of Europe is but 4.2 miles; for Brazil, 0.2; for Argentina, 0.6; for British North America, 0.3; and for Australasia, 0.3. The number of passengers annually carried by the 14 RAILWAY ECONOMICS. railways of the United States is exceeded in but one country, England; it is twice as great as in France, and more than 50 per cent, greater than in the German Em- pire. The freight tonnage annually carried by the rail- ways in this country is greater than the totals for Great Britain and Ireland, France, and Germany combined, and the average distance traversed is much longer. The following statement shows the number of miles of railroad in the United States, at each census year, the increase during each decade, and the relation of mileage to population and area at each date: Years. 1830 Length in miles. 40 Increase in miles. Increase, per cent. Number of 10,000 of population, i o 03 miles per TOO square niles of area. 1840 1850 i860 1870 1880 1890 2,755 8,57i 28,920 49,168 87,724 163,562 2,715 5,816 20,348 20,249 38,556 75,838 6,788 211 237 70 78 86 1.61 3-71 9.20 12.75 1749 26.12 0.13 O.29 0.97 1.66 2-95 5-51 More than half of the present railway mileage has been constructed since 1880. Of this increase 56 per cent, is in the states and territories west of the Missis- sippi, where it is equal to 184 per cent, of the mileage of 1880; 19^ per cent, is east of the Mississippi, and south of the Ohio and Potomac, where the increase is 115 per cent, of the mileage previously constructed in that section; and 25 per cent, is in the region east of the Mis- sissippi and north of the Ohio and the Potomac, where the mileage constructed since 1880 is 53 per cent, of what then existed in that section. The evident conclusion is that in some of the older portions of the country the rail- way system is now practically completed; and this is RAILWAY SERVICE IN THE UNITED STATES. 15 confirmed by the very small percentages of increase dur- ing the last two decades in most of the New England States. The following table shows the railway mileage of the country on June 30 of each year from 1880 to 1897, inclusive, with the annual increase. The figures given for operated mileage include a duplication of physical mileage to the extent of from 3000 to 5000 miles owing to the use of the same tracks by two or more companies. Both physical and operated mileage are shown for those years for which such complete data are available, the figures being all from official sources : Year. 1880 1881 1882 1883 1884 1885 1886 1887 1888 1889 1890 1891 1892 1893 1894 1895 1896 1897 The table shows two periods of heavy railway con- struction since 1880, culminating in 1882 and 1887, each followed by a gradual falling off in the amount of new line built. The annual increase in operated mileage cannot be taken to represent exactly the amount of new construction, but if both figures could be given they Physical mileage. 87,801.00 Operated mileage, includ- ing trackage rights. 89 762 68 Annual increase. 07 868 IQ 8 105.51 108 08^ 70 ii n^.m Il8 7"?4 ^4 Q.7^0 84 124 W* OQ e ccrg. ^ 127 OQQ 42 2 706.^ 1^7 ^60 4O 6 260 08 14^ 40Q QI 12 O4O.^ I 149,901.72 157,758.83 163,597.05 168,402.74 171,563.52 176,461.07 178,708.55 180,657.47 182,776.63 184.428.47 154,730.06 160,835.58 166,841.64 172,221.25 175,509.35 180,581.27 182,894.37 184,94444 187,003.74 9,320.15 7,857.H 5,838.22 4,805.69 3,100.78 4,897.55 2,247.48 1,948.92 2,II9.l6 I.6SI.84 l6 RAILWAY ECONOMICS. would not be far apart. Using round numbers, there- fore, it may be said that the amount of new line an- nually constructed has fluctuated between 12,000 miles in 1886-87, and less tnan 1700 miles in 1896-97. The average annual increase during the period covered by the table was 5684 miles, but for the last five years it was only 2573 miles. It should be understood that these figures represent miles of line, not miles of track. The inclusion of second, third, and fourth tracks, yard tracks, and sidings would swell the present total to nearly 245,000 miles. The equipment of the railways on June 30, 1897, included 35,986 locomotives, of which 10,017 were devoted to passenger, 20,398 to freight, and 5102 to switching service; the balance being unclassified. There were also 33,626 passenger cars, 1,221,730 freight cars, and 42,124 cars in company's service. As these data do not include equipment owned otherwise than by railway corporations, the number of freight cars is probably considerably understated. The operation of the railway system required the ser- vice of 823,476 men during 1897, or about one in every thirty persons in the entire country engaged in gainful pursuits, and they received in wages and salaries $465,- 601,581, or 62 per cent, of the entire expenditure of the railways for operation. These figures by no means adequately represent the labor incident to the operation and maintenance of the railway system. Statistics upon this subject in order to be complete would have to in- clude those engaged in constructing cars and locomo- tives, in mining coal for the latter, in getting out ore and turning it into rails, and in a thousand other occu- pations seemingly independent of railway business. CAPITALIZATION. I/ CHAPTER III. CAPITALIZATION. American ingenuity has provided the railway facili- ties of the United States at a lower average cost per mile than in any other country in which due regard is paid to the requirements of speed and safety. The average capi- talization of the railways of this country amounts to less than $60,000 per mile, and this includes such costly special construction as the sunken tracks of the New York Central and Hudson River Railroad in New York city; the tunnel that carries the Baltimore and Ohio Railroad underneath the city of Baltimore, and that which pierces the Hoosac Mountain for the Fitch- burg Railroad; the elaborate block-signal systems of the Pennsylvania Railroad and other companies; the tri- umphs of engineering skill required to carry the Denver and Rio Grande Railroad and other Pacific lines over the Rocky Mountains; the numerous expensive bridges crossing the Mississippi, the Missouri, the Ohio, and other rivers; and many other extraordinary expendi- tures rendered essential by the development of the standard by which the adequacy of a modern transpor- tation system is measured. Yet in spite of the high standard established by American demands in regard to the quality of service the average capitalization per mile in this country is little more than one-quarter of that in England, less than half that in France and Bel- gium and not more than two-thirds of that of Germany, Austria-Hungary, and Switzerland. The quality of ser- vice in Holland, Denmark, Norway, Sweden and Bui- l8 RAILWAY ECONOMICS. garia the only European countries having a lower average capitalization than the United States is not high enough to invalidate the conclusion. On the latest dates for which data were available railway capital in the United States averaged $156.23 per capita and $3901 per square mile of land surface. For Great Britain and Ireland the corresponding figures were $124.49 and $40,111, respectively; for France $84.45 anc l $ I 5^35; for Germany $53.34 and $13,131. The total outstanding capitalization of the railways of the United States on June 30, 1897, had a par value of $10,635,008,074, of which $4,367,056,657 was com- mon stock, $997>5 8 5>59 8 preferred stock, $4,539>9 II >595 mortgage bonds, $259,847,154 income bonds, $39,888,- 767 equipment trust obligations, and $430,718,303 mis- cellaneous obligations. There were also outstanding unfunded current liabilities amounting to $578,501,635. A great deal of controversy not unmarked by angry vehemence has centered about the relation of the pres- ent aggregate railway capitalization to the actual origi- nal cost of the properties which it represents. The op- portunity for divergent opinion presented by this ques- tion is considerable. What is to be considered actual cost? Is it to be defined as the amount paid for labor and materials by those directly purchasing them; the amount paid to a construction company, which may have had to devise means for securing available funds as well as to provide materials and labor; or is it to in- clude the discounts necessary on bonds and stock be- fore timid capital could be induced to undertake the new enterprise? Some suggestions by Professor Henry C. Adams in his first annual report as Statistician to the CAPITALIZATION. 1 9 Interstate Commerce Commission indicate a few of the difficulties. "Is it, for example, possible to discover the cost and value of the carriers' property, franchises, and equipment? The papers giving evidence .respecting these facts may have been destroyed, or in the fierce struggle of rival managements for control of territory by means of the absorption of lines al- ready built the records of the original companies may have been lost, the consolidated companies caring nothing for records, except such as prove their right to the property ab- sorbed. But of greater significance is the fact that in many instances the books of railway companies do not go beyond settlements with construction companies; that is to say, the investigation demanded by Congress is pushed back into the realm of vest-pocket book-keeping and a conveniently failing memory." One fact which is almost invariably lost sight of in these discussions is that the construction of a railway is usually far from complete when it is opened for opera- tion. The progress from crude, cheap and unsatisfac- tory construction, characterized by light iron rails, sin- gle tracks, heavy grades, and curves of short radii, to well-ballasted, level, multiple-track roadways composed of steel rails weighing often 100 pounds per yard has been accomplished during the working life of most American railways. To assume that the expenditures prior to the commencement of operation represent the total capital actually invested in such a railway is in- adequate and unjust. Charges of stock watering are very frequently based upon the fact that it has seemed proper to railway managers to expend earnings upon improvements rather than to distribute them among investors and to satisfy the latter by issuing to them ad- ditional securities representing the amount of such ex- penditures. In other cases it has been impossible to induce capitalists to undertake the construction of a 2O RAILWAY ECONOMICS. new line without conceding the privilege of purchasing its securities at less than their par value just as a mer- chant desiring to extend his business may secure the additional capital necessary by having his notes dis- counted. It would seem that the expense of such dis- counts on railway capital has been legitimately incurred. It is also to be remembered that whatever amount of se- curities may have been issued independently of actual expenditures has been to an extent, now undiscoverable, offset by the wiping out of securities incident to reor- ganization and foreclosure proceedings. A very similar discussion purporting to be aimed at discovering the present value of railways assumes that this is to be ascertained by calculating the cost of dupli- cating existing lines. Though unsatisfactory from a scientific standpoint there would be little harm in this assumption were it not customary to omit from the supposed cost of duplication all but the bare expense of obtaining a fairly level roadway and placing upon it ties and rails. Expenditures for yards and terminals in large cities where land is costly, for constructing sta- tions, for equipment, for signaling apparatus and for many other necessary purposes are usually omitted. It is difficult to find reasonable justification for the expenditure of time and energy in these discussions. The amount which the public has to pay for transportation by rail is absolutely independent of capitalization except in so far as the securities represent actual investments. Relative par values and different classes of securities serve to determine the distribution of interest and divi- dends among capitalists who have invested under dif- ferent conditions and, having accepted different hazards, CAPITALIZATION. 2 1 are justly entitled to receive varying returns. The ag- gregate amount of these returns will in the long run inevitably be proportional to the investments and their rate will be determined by the rates prevalent in other enterprises, and theMegree of risk assumed in the one in question. Wherever doubt and uncertainty affect their operations the proverbial timidity among capital- ists causes the desertion of the field by the more cau- tious, leaving the business to those who are willing to adventure against great odds if assured of consider- able gains in the event of success. Large profits are the inevitable consequences of large risks, and just as the keeper of a gambling establishment invariably insists that the law of chance shall give him a constant per- centage of advantage in every game which he permits, so the speculator demands that in the long run the total profits of his successes shall be larger by a definite ratio than the total of his losses. Though it is undoubtedly true that the short-sightedness or the recklessness of individual speculators may result in financial ruin to themselves it is equally certain that considering them as a class they are able to make their demand for a balance of profits commensurate with the risks which they assume highly effective. Single railways may prove unprofitable, but that in the long run the railways of a developing nation must be profitable to investors is not open to doubt. The rate of profit will be determined by the conditions attending such investments, and these conditions are in a very large degree created by public sentiment and the legislative attitude which it imposes. 22 RAILWAY ECONOMICS. CHAPTER IV. INCOME AND EXPENDITURE. The annual gross earnings of the railways of the United States have, during recent years, varied within small percentages of twelve thousand millions of dollars, or, expressed comparatively, about one dollar in every ten of the aggregate value of the products of the farms and factories of the country has been devoted to the remuneration of the capital and labor employed in trans- portation. The following statement shows the income of the railways during the year ending with June 30, 1897, and its distribution among the different items of expenditure : INCOME. From passenger service Passenger revenue $251,135,927 Mail revenue 33)754,466 Express revenue 24,901,066 Other revenue 6,629,980 $316,421,439 From freight service Freight revenue $772,849,314 Other revenue 4,209,657 $777,058,971 Other earnings from operation 28,609,363 Total from operation $1,122,089,773 From other sources 125,090,010 Total $1,247,179,783 EXPENDITURE. Operating expenses Wages and salaries $465,601,581 Other expenses 286,923,183 $752,524,764 Taxes 43,137,^44 INCOME AND EXPENDITURE. 23 Fixed charges Interest on funded debt *$247,88o,23O Interest on current liabilities 7,844,336 Rents 87,505,302 Other charges 27,029,801 $370,259,669 Dividends > 87,110,599 Other payments from net income 267,390 Total $1,253,300,266 Deficit, to be deducted 6,120,483 Balance (actual expenditure) $1,247,179,783 *Amount accrued during year. The amount actually paid from the year's income was probably less by about the amount of the deficit shown in the statement. The foregoing statement throws useful light upon the revenue-producing power of the present body of rail- way rates, and may aid the thoughtful in determining whether it is justly charged that the earnings of Ameri- can railways are excessive and extortionate. It shows that 37.3 per cent, of the total railway income, or 41.5 per cent, if that from other sources than operation, which is nearly all a bookkeeping duplication result- ing from financial transactions among railway corpora- tions themselves, is disregarded, was paid directly to employes in exchange for their labor; that 23.0 per cent, on the former and 25.5 per cent, on the latter basis was required to meet other operating expenses, most of which ultimately must have been paid for labor in some form; that more than 3.5 per cent, was paid to the vari- ous state and local governments for taxes, and that only 27.0 per cent., of which more than three-quarters was expended as interest on debt, was available for payments to investors. The total payment to investors amounted therefore to 2.91 per cent, on the aggregate capitaliza- 24 RAILWAY ECONOMICS. tion, including unfunded debt, or, if the latter and its interest are excluded, to 3.09 per cent. The average rate of interest on funded debt was 4.70 per cent., and of dividends on stock 1.62 per cent. Stock having a par value of $3,761,092,277, or 70.1 per cent, of the total amount outstanding, received no dividends. Of the total capitalization, exclusive of equipment trust obligations, stocks and bonds, with a par value of $4,629,043,117, or 43.7 per cent., received neither divi- dends nor interest. Operating expenses may also be classified with regard to the purposes for which they are incurred, as shown in the following statement, which relates to the fiscal year ending with June 30, 1897: Per cent. Expenditures for Amount. of total. Maintenance of way and structures $159,434,403 21.22 Maintenance of equipment 122,762,358 16.34 Conducting transportation 432,525,862 57-58 General expenses 36,481,269 4.86 Total $751,203,892 loo.oo Unclassified (25 roads) 1,320,872 .... Total $752,524,764 Apparently these expenditures should bear a some- what constant relation to each other, and any consider- able reduction of the proportionate allotments for those purposes which tend to protect the lives and property of the traveling and shipping public must be disadvan- tageous to the patrons of the railway system. Experi- ence has shown that a sudden decrease in railway earn- ings will usually result in restricting the amounts avail- able for keeping the means of transportation in good condition. Repairs and renewals can generally be INCOME AND EXPENDITURE. 25 postponed, though not without lessening the safety of travel and increasing the final expenditures for those purposes. Comparisons between the fiscal years 1893 and 1894 illustrate this tendency. The total movement of freight traffic during 1894 was, measured in ton miles, 16.5 per cent, less than during the previous year, and the low rates and heavy traffic caused by the Columbian Exposition barely sufficed to prevent a decline in the total volume of passenger business. Under these circumstances the total income from opera- tion declined to $1,073,361,797, which was $147,390,077, or 12. i per cent., lower than during the previous year; and as taxes and fixed charges remained substantially unchanged, and even dividends yield somewhat slowly to a decline in income, -it became necessary to reduce quite materially the cost of operation. The reduction actually effected amounted to $96,506,977, or 11.7 per cent, of the expenses incurred for operation during 1893. Of this amount 26.6 per cent, was taken from the cost of maintenance of way and structures, which was reduced 15.1 per cent.; 24.9 per cent, from maintenance of equipment, reduced 17.5 per cent.; 42.5 per cent, from conducting transportation, reduced 9.4 per cent., and 6.0 per cent, from general expenses, reduced 6.8 per cent. These percentages should be compared with those in the table showing the relative importance of the several classes of expenditures. The manner in which these reductions were secured, in part at least, is indi- cated by the fact that the number of employes on June 30, 1894, was 93,994, or 10.8 per cent, less than twelve months previously. The reduction affected all classes of employes, but was greatest in the case of those 26 RAILWAY ECONOMICS. engaged in maintaining the character of roadway, struc- tures and equipment. The decrease, per 100 miles of line, in the number of employes assigned to mainten- ance of way and structures was 18.5 per cent.; to main- tenance of equipment, 16.5 per cent.; to general admin- istration, 14.3 per cent., and to conducting transporta- tion, 1 1. 1 per cent. That there must have been a decrease in the safety of travel and traffic is evident from the fact that the number of section foremen and other trackmen per 100 miles of line was reduced from 124 in 1893 to 102 in 1894. THE DECLINE IN CHARGES. 27 CHAPTER V. THE DECLINE IN CHARGES. No other incident of the rapid development of railway facilities in the United States during the period subse- quent to the war for the preservation of the Union is so thoroughly characteristic as the progressive reduction in the charges for the transportation services which they perform. The most reliable statistics that are available indicate that the average rate per passenger per mile collected by the railways during the year 1871 was, re- duced to a gold basis, 2.632 cents. The average during 1881 was 2.446 cents; during 1891, 2.142 cents, and during 1896, 2.019 cents. - Though the reduction in ac- tual charges during a quarter of a century is seen to have been more than 23 per cent., it can by no means be adequately measured by statistics, for the services rendered in exchange for the money paid by passengers have varied in favor of the latter in every important element except that of distance. The dollar which purchases transportation in a train provided with automatic couplers and air brakes, traversing at a modern rate of speed a track of Bessemer steel rails weighing 100 pounds to the yard, and guarded by block signaling apparatus, buys vastly more than did a dollar paid for transportation under the conditions which existed but one or two decades ago. With regard to freight traffic, the substantial identity in the services rendered at different periods which is necessary in order to warrant comparisons among the rates charged is, in spite of much improvement in speed 28 RAILWAY ECONOMICS. and safety, more satisfactorily approximated. The average rate per ton of freight per mile carried measured in gold was 1.925 cents during 1867, 1.286 cents during 1877, 0.984 cent during 1887, and 0.806 cent during 1896, the decline during the three decades amounting to 58 per cent. In consequence of this reduction the average charge per ton of freight during 1896 was but $1.03!, though the average distance carried was 124^ miles, while during 1867 the average payment was $1.69^ for a distance of 101^ miles. As the mere statement of these reductions may not afford an adequate estimate of their importance, it may be well to present a few comparisons. The average payment for railway transportation during 1896 by each man, woman and child in the United States was $14.48. Had it been possible for the railways to collect rates averaging as high per passenger per mile as those paid during 1871 and as high per ton of freight per mile as those of 1867 the railway transportation tax per capita would have been in per cent, greater, or $30.57. At the average rates of 1871 the passenger business of 1896 would have produced $79,990,414 more than it did pro- duce, and at the average rates of 1867 the freight traffic of 1896 would have produced $1,066,724,352 more than was collected. In other words, the aggregate gross revenue from operation, which was $1,150,169,376, would have been nearly doubled. If the comparison is restricted to the charges during the last decade, it is found that at the average rates of 1887 the passenger business of the railways during 1896 would have been worth to them $29,490,756 more and the freight traffic $169,684,481 more than was actually collected, making THE DECLINE IN CHARGES. 29 a total saving to the people, through reduced charges, of $199,175,237, or about $2.79 per capita. It is inter- esting to observe that the latter amount is equal to about six times the annual interest on the national debt and exceeds considerably the customs revenues of the Fed- eral Government for any fiscal year since 1891. It is two and one-quarter times as much as was paid in divi- dends during 1896 to all of the stockholders of the rail- ways of the United States and but 20 per cent, less than the interest paid on their funded debt. Had it been collected and divided among the owners of railway securities it would have added 1.88 per cent, of the entire capitalization of the railways to the returns to investors, but contributed by the latter, as it was, to the people it was sufficient to pay at current rates for mov- ing 9,865,043,933 passengers or 24,711,567,866 tons of freight one mile. It would have paid for carrying 386,- 864,468 passengers 25.5 miles, which was the average distance traveled, or 198,534,328 tons of freight 124.47 miles, which was the average distance traversed by each ton of freight. The obvious fact that no such increase in railway business as has taken place would have been possible unless accompanied by a substantial decrease in rates does not impair the value of this estimate, for the ex- tension in the use of transportation facilities measures the increased efficiency in the organization of productive industry which has been secured through territorial division of labor which, fostered by the elimination of such a large portion of the former cost of exchanging the products of widely separated regions, is a direct consequence of cheapening transportation. 3O RAILWAY ECONOMICS. It is significant that the reductions described have not been confined to any particular locality, but have been distributed with substantial impartiality through- out the entire country. The following table shows the average rates per passenger and per ton of freight per mile charged during 1890 and 1896 in each of the ten groups adopted by the Statistician to the Interstate Commerce Commission for the classification of railway statistics: AVERAGE RATES PER MILE IN CENTS. Group. Per passenger. Per ton of freight. 1890. 1896. 1890. 1896. I I.9I2 1.839 1-373 L2I3 II 2.029 1.834 -828 .672 III 2.199 2.020 .695 .6l8 IV 2.481 2.159 .844 .660 V 2.465 2.173 1-061 .886 VI 2.226 2.181 .961 .917 VII 2.452 2.564 1.360 1. 121 VIII 2.268 2.188 1.152 1.055 IX 2.583 2.298 1.303 1-118 X 2.308 2.131 1.651 1.254 It is thus seen that in every group but one, that in- cluding Arkansas, Kansas, Oklahoma, Indian Territory, a small portion of Northern New Mexico, nearly all of Colorado, and the Southern half of Missouri, passenger rates have declined and that freight rates are consider- ably lower in every group. According to the latest data published by the Interstate Commerce Commis- sion the entire balance over operating expenses of the gross earnings during the fiscal year 1897 of the rail- ways in groups seven, nine and ten was not sufficient to meet their fixed charges had nothing whatever been allotted for dividends. Averages such as those which have been cited, repre- THE DECLINE IN CHARGES. 3! senting respectively the aggregate railway passenger and freight traffic of the entire country, or of extensive districts, constitute the most satisfactory means of measuring the changes in the charges for railway ser- vices because they neither exclude local traffic nor give to rates made under the competition of rival roads the excessive importance sometimes apparent in efforts to represent the reductions by comparisons among charges applied at different times to particular commodities or between particular points. Comparisons of the latter class, however, have their value and may not be neglected. Probably the rates affecting the greatest amount of traffic are those charged between New York and Chicago. This is not merely because these are the most populous of American cities, nor is it attributable solely to their importance as distributing centers or as commercial gateways through which trade seeks access to regions rich in agricultural resources or abounding in manufacturing industries, but principally on account of the arrangement by which rates between them have become the basis of charges on a vast amount of traffic which neither originates at nor passes through either of them. During 1867 the average rates in gold on dry goods, cotton piece goods, boots' and shoes, tea and drugs from New York to Chicago were $1.37 per 100 pounds. During 1897 the average rate on cotton piece goods was 50 cents, and on each of the other articles 75 cents per 100 pounds. The average rate on sugar in carloads between the same places and during the same period declined from 60 to 24, and that on common soap from 93 to 25 cents per 100 pounds. During 1858 it 32 RAILWAY ECONOMICS. cost 38.61 cents per bushel to ship wheat from Chicago to New York; during 1868, 27.09 cents; during 1878, 17.56 cents; during 1888, 14.50 cents, and during 1896, 12.50 cents. From 1872 to 1896 the average rate on dressed beef, Chicago to New York, declined from 81 to 45 cents; that on packed meats from Cincin- nati to New York from 44.59 cents to 26 cents per 100 pounds. The Lehigh Valley Railroad received 1.746 cents per ton per mile for carrying anthracite coal dur- ing 1869, 1.093 cents during 1879, 0.967 cent during 1889, and 0.712 cent during 1897. Compressed cotton, carried from Memphis to Boston during 1880 for 79 cents, was taken during 1897 at rates averaging 55 cents per 100 pounds. The instances of reductions are so numerous that the labor of citing them is entirely one of selection, and it is not too much to say that it is impossible to find any important article of commerce on which the rates charged by railways have remained without substantial reduction during any very considerable period. RATES AND PRICES. 33 CHAPTER VI. RATES AND PRICES. In the preceding chapter it was shown that from 1867 to 1896 the average rate per ton of freight per mile transported charged by the railways of the United States declined not less than 58 per cent., from 1.925 cents to 0.806 cent, the average of the earlier year having been made comparable with that for 1896 by being reduced from 2.678 cents, the amount actually paid in currency, to the equivalent of the latter in gold. It is now pro- posed to compare the decline in railway charges with contemporaneous changes in the prices of the principal articles commonly shipped by rail. The three leading cereal products of the United States constitute a very important portion of the eastward bound traffic of our principal railways. For the pur- pose of the following comparison the average of the farm prices of each of these cereals for the six years from 1867 to 1872, inclusive, has been considered as 100 per cent, and made the basis from which to calculate the percentage of the prices of other years. Similarly the average of the rates per ton per mile of the years from 1867 to 1872 has been made the basis of the percentages in the column headed "freight rates." , Prices- > Freight. Year. Corn Wheat Oats rates. Average 1867 to 1872. 100 100 100 100 1867 117 134 116 105 1872 73 103 78 101 1877 72 98 74 70 1882 loo 81 08 60 1887 9i 63 80 54 1892 81 58 83 49 1896 44 67 49 44 34 RAILWAY ECONOMICS. The foregoing figures show that during every year subsequent to that used as the basis of the calculation the average of the freight rates charged throughout the country has constituted a smaller percentage of the average for the first six years than has the average farm price of either of the products named, with the single exception of corn during 1896, when the unusually abundant production resulted in an abnormally low price. The table also develops an interesting and im- portant difference between the decline in prices and that in freight rates. Though the former has been marked, and may not be attributed solely to temporary causes, the violent fluctuations from year to year show the con- sequences of changes in the quantities harvested and that prices are ultimately effectually controlled by cost of production. The decline in rates, on the other hand, has been without interruption and notably regular. The consequence is that the averages of any series of years which can be selected will show that a greater ad- vantage has accrued to the shipper of farm products than is indicated by a merely superficial examination of the figures in the table. In the following statement the average rates on wheat shipped from Chicago to New York via the all-rail lines are compared with contemporaneous export prices for the purpose of ascertaining how many bushels could be transported between those points at successive periods and the freight paid by the delivery to the carrier of one bushel of the grain or its equivalent in cash : RATES AND PRICES. 35 WHEAT. Year. 1867 Export price per bushel. . $0.02 to New York, per bushel. Cents. 12 ^8 bushels carrie for price of one bushel 2 84 1872 , I "31 ?l i ? A 21 1877 , ..... I.JL I 12 IQ = ;6 e 7-2 1882 I IQ 14 47 822 1887 80 1^ 7$ ^6q 1892 I C3 13 80 7 4.6 I8Q7. . .7* 12. ^O 6.00 The foregoing figures show that during 1867 the carriers were given the equivalent of one bushel out of every 2.84 bushels which they moved from Chicago to the Atlantic seaboard as compensation for their services; that during no subsequent year shown have they re- ceived as .large a proportion of the value of the grain transported, and that during the year 1897 they took but one bushel out of every six transported. As rates, Chicago to New York, are the basis upon which the charges applied to nearly every bushel of the surplus wheat crop of the country are computed, it is evident that this explains in a very large degree the steadily in- creasing proportion of the full export prices of his prod- ucts received by the farmer. Several of the principal anthracite coal carrying rail- ways segregate the tonnage and revenue of the latter from their general business in their accounts, and data are thus available for valuable comparisons. The aver- age rate per ton of coal carried one mile during 1889 by the Lehigh Valley Railroad was 1.746 cents for a ton of 2000 pounds, or 1.956 cents for a ton of 2240 pounds. At the same time the average price of anthracite coal in Philadelphia was $3.92 per long ton. Comparing these averages it is evident that, supposing transportation to 36 RAILWAY ECONOMICS. commence at Philadelphia, the cost of movement would have more than equalled the original value of the coal when the latter passed beyond a radius of 200 miles from the starting-point. During the year 1879 tne re ~ lation between prices and rates permitted a radius of 221 miles before the cost of coal more than doubled; during i88q the radius was 373, and during 1897 it was 439 miles. Comparisons between the average rate of wages and railway rates, made possible by means of the elaborate investigation into the course of prices and wages, con- ducted during 1891 by the Committee on Finance of the United States Senate, show that the power of a definite amount of labor to purchase transportation vastly in- creased during the period studied. According to the report of that investigation the same quantity of labor which, taking an average of the entire country for six years from 1867 to 1872, inclusive, was compensated by the payment of $100 in gold as wages, received during 1877, $101 ; during 1882, $114; during 1887, $117, and during 1891, $126. The course of freight rates fur- nishes a marked contrast. During 1867 to 1872 the workingman's $100 in gold would pay for moving 4333 passengers, or 5470 tons of freight one mile. The wages received for the same amount of labor during 1877 would have paid for moving 4109 passengers or 7854 tons of freight one mile; during 1882, 4768 passen- gers or 10,345 tons of freight; during 1887, 5212 passen- gers or 11,890 tons of freight; and during 1891, 5882 passengers or 14,078 tons of freight might have been moved one mile for an amount equaling the average compensation received by workingmen for the same RATES AND PRICES. 37 quantity of labor for which $100 in gold was received during the years 1867 to 1872, inclusive. It is to be regretted that data for later comparisons are not avail- able. Without adducing further evidence, which would be merely cumulative, it seems legitimate to conclude that the purchasing power of labor when applied to the transportation of either persons or property, and that of products when applied to their own transportation, have materially increased during the last three decades. The most notable economic result of this change in the re- lation between the cost of movement and the primary cost of production is an increase in the average radius of the regions from which particular communities can profitably purchase the products needed for local con- sumption, and as this, by permitting a greater range of selection, not infrequently brings into cultivation land of greater productivity, it has been accompanied in many instances by a rise in the margin of cultivation and a consequent reduction in the average cost of produc- tion of the form utilities required. In other words, the progressive decrease in transportation charges, whether measured in dollars, in labor, or in commodities, has permitted a very desirable specialization of the industrial functions of different regions, the assignment to each particular locality of the share in production for which its capacity is greatest, and has materially increased the productivity of human labor. 3 RAILWAY ECONOMICS. CHAPTER VII. CAUSES OF THE DECLINE IN CHARGES. A thorough and impartial examination of the circum- stances attending the decline in the average charges for railway services which has been illustrated and dis- cussed in the last two chapters of this work will doubtless show that the efficient cause of rate reductions has been the competition of rival commercial centers, markets and producing regions, and that the pseudo- competition among railway routes connecting the same localities, though producing reductions, more or less permanent, in through or competitive charges, has ac- tually tended to prevent a progressive decline in the average rate which represents local as well as through traffic. The distinction between these forms, both of which unquestionably affect railway charges, is of pri- mary importance, particularly as the popular belief that the so-called competition of the second form has sub- stantial regulative effect on railway charges has been the prolific parent of much unwise and positively detri- mental restrictive legislation; but the discussion of com- petition should be preceded by that of certain other factors of the phenomenon of declining charges, and will be deferred for another chapter, because, however efficient it may have been, in either of its forms, in securing to the public the benefits of cheaper transpor- tation, it would have been impotent to produce perma- nent reductions of the magnitude observed had not its operation been accompanied by other circumstances which have permitted the quasi-public corporations en- CAUSES OF THE DECLINE IN CHARGES. 39 gaged in railway transportation to furnish their services at lower cost to themselves. The increasing use of transportation facilities is both a cause and a result of the reduced prices at which those facilities have become available for public use. The cost of a railway which moves 750,000 tons one mile per mile of its length is not necessarily materially greater than that of another road the traffic of which is relatively meager, and the cost of maintenance of way, structures and equipment, of conducting transportation, and of ad- ministration by no means varies in the same ratio as traffic. The obvious consequence is that each incre- ment of traffic permits the distribution of expenses among an increased number of tons and of ton-miles, and thus reduces the average amount of cost assignable to each. This is what is meant by the "law of in- creasing returns," which, as applied to railway business, signifies that without changes in rates increased traffic tends to augment gross earnings faster than expenses and consequently to produce increased profits. The absence of such enhanced profits is due to the fact that the benefits of the savings per unit of service permitted by increasing traffic have accrued to railway patrons through reduced charges instead of the owners of rail- way securities through higher rates of interest and of dividends. During the year 1867 railways having a total length of 15,651 miles, or 42 per cent, of the entire mileage then in operation, carried an aggregate traffic averaging 279,712 tons one mile per mile of line. These roads included those in the most developed sec- tions of the country and having the densest traffic, so that the average for the entire country was probably 4O RAILWAY ECONOMICS. considerably lower. In 1872 the average was 331,958 on 6 1 per cent, of the railway mileage; in 1877, 345,773 on 77 per cent.; in 1882, 457,016 on 80 per cent.; in 1887, 513,513 on 78 per cent, and in 1892 and 1896, 543,365 and 523,832, respectively, on practically the total mileage of the United States. The decrease from 1892 to 1896 is attributable to the general business de- pression, and the fact that it was accompanied by de- creasing rather than increasing charges is due to the severe economies practice 1 and the almost universal impracticability of advancing railway rates. The efficiency of railway service has steadily increased during the last two or three decades through physical improvements of great importance. The substitution of steel for iron as the material from which rails are made, and in later years the use of heavier rails, have been greatly fostered by the progressive reduction in the cost of rails attributable to improvements in steel and rail-making processes. The manufacture of steel rails in commercial quantities in the United States began in 1867, and the average price during that year was $120.12 per ton. In 1880 the price had declined to $67.50, and 29 per cent, of the railway track in the country was composed of steel rails. The price in 1890 was $31.75 and 80 per cent, of all track was of steel; in 1896 the price was $28 and but 12 per cent, of the total trackage remained of iron. Heavier locomotives, larger cars, and faster and larger trains are secondary con- sequences of the reduced cost of steel rails, and these increase the efficiency of the train as a machine for moving commodities. The average number of tons carried one mile per mile run by freight trains was 80.77 CAUSES OF THE DECLINE IN CHARGES. 4! in 1867, 134.83 in 1880, 175.12 in 1890, and 198.81 in 1896, and these figures do much to explain the ability of railways to reduce the average charge per ton from $1.69 to $1.03, and er ton-mile from 1.925 cents to 0.806 cent. It would be impracticable in the space allotted to enumerate even the more important of the administra- tive economies which have been effected, but attention should be directed to the consequences of those tenden- cies toward the unification of the railways which have rendered their services cheaper, and at the same time more satisfactory and valuable. Railway associations, agreements in regard to the establishment and main- tenance of rates or the character and conditions of ser- vices to be performed; the three great freight classifica- tions, each prevailing uniformly with regard to the traffic of extensive sections of the country; the inter- change of cars which permits shipments to traverse many roads without transfer from car to car; through rates, routes and billing arrangements, are all phases of a development which, in spite of 4 unwise and hinder- ing legislation, is making a railway system out of theo- retically independent and rival railway corporations. The processes of this development cannot, with the data which are now available, be shown statistically, but its principal incidents are familiar to every intelligent ob- server. Having shown some of the causes which have per- mitted reductions in rates, it will not be out of place to emphasize the fact that sucH reductions have not been accomplished through any decrease in the average rate of wages paid to employes. According to the latest 42 RAILWAY ECONOMICS. report of the Statistician to the Interstate Commerce Commission, $465,601,581, or 62 per cent, of the aggre- gate operating expenses of the railways of the United States during the year ending with June 30, 1897, was paid to employes, and of this amount less than three per cent, was paid to general officers. The previous re- port gave the average per diem rate of compensation of each class of employes during each year from 1892 to 1896, inclusive, and it is interesting to observe that the business depression which during 1893 and 1894 forced such a large proportion of the railways into insolvency did not result in any material reduction in the rates of wages paid. The following statement shows some of these rates : Year. 1892. . Enginemen. . $3 68 Firemen. $2.07 2.04 2.03 2.05 2.06 Train- Con- men, not Ti ductors conductors, rr $3-07 $1.89 $ 3.08 I.9I 3.04 1.89 3.04 1.90 3.0S 1. 00 Switchmen, flagmen -ack- and en. brakesmen. .22 $1.78 .22 1. 80 .18 1.75 .17 1-75 .17 1.74 . . 366 l8Q4. . T. 61 1806.. ... 3.6s Satisfactory statistics of wages paid during an exten- sive period are not available for the whole country, but the data which have been preserved afford unmistakable evidence of an upward movement in the wages of rail- way labor almost as extensive and quite as distinct as the downward tendency in rates. COMPETITION AMONG RAILWAYS. 43 CHAPTER VIII. COMPETITION AMONG r RAILWAYS AND THE DECLINE IN CHARGES. The substantial savings in the cost of moving traffic indicated in the last chapter of this work, so far as they could have been effected in the absence of the increased traffic resulting from lower charges, would, had they been unaccompanied by decreasing rates, have accrued to the benefit of the owners, managers, and employes of railway properties in the form of enhanced compensa- tion for the capital and labor employed in the business of transportation. That they have not done so, but, to- gether with another sum subtracted through actual re- ductions in the rates of interest and dividends on rail- way capital from the incomes of investors in such properties, have been diverted to the pockets of passen- gers and shippers, has resulted from well-defined com- mercial laws which should be thoroughly understood. As has been suggested, two forms of competition, not at all interdependent, affect and, in some instances, con- trol the charges exacted for railway services. Competi- tion among railways offering to perform identical ser- vices constitutes the form first to attract the notice of superficial investigators, and may operate so as to re- duce charges between localities served by two or more railways, but as it cannot be maintained effectively with- out certain considerable expenditures for operation, which would otherwise be unnecessary, it must, if in- dulged in extensively, impose bankruptcy upon the rail- ways resorting to it unless additional revenue sufficient 44 RAILWAY ECONOMICS. to compensate for the reductions and extraordinary ex- penditures in connection with competitive traffic is col- lected from local traffic. As the community served must eventually pay, in one way or another, for what- ever transportation it receives, such competition actually tends to limit, if not entirely to prevent, any reduction in the average rate collected from all traffic, and also as may be mentioned incidentally to produce unjust dis- criminations against localities served by but one carrier. Although the social consequences of unjust discrimi- nations among the purchasers of transportation are un- questionably much more to be feared than any conjec- tural danger of excessive rates, an apparently plausible defense of legislative attempts, such as. the anti-pooling clause of the Interstate Commerce law, to enforce com- petition among railways is based upon the contention that the decline in charges has resulted from such com- petition. The too frequently undetected assumption that coincidence of time and place establish a relation as between cause and effect thus constitutes the foundation of a structure which under closer scrutiny crumbles to the ground. Careful investigation of the incidents of the decline in charges shows clearly that it has resulted from causes wholly extraneous to the railway system, except in so far as the enlightened perception on the part of the officials having charge of railways that the permanent success of those properties must be based upon the development of the respective territories con- tiguous and tributary to their lines, and that such devel- opment is dependent upon reasonable transportation rates, can be considered an intrinsic cause. Before passing to the consideration of the competition of pro- COMPETITION AMONG RAILWAYS. 45 ducers and markets, it will' be useful to point out some of the wasteful expenditures resulting from that form of competition which is operative only at the relatively few points served by two or more railways. Authentic statistics* of the amounts paid by rival lines as commissions for securing business are very difficult to obtain, as the success of such practices depends very largely upon the degree of secrecy that can be attained. The Interstate Commerce Commission was able, how- ever, to ascertain that nine roads paid out an aggregate sum of more than one million dollars in a single year as commissions on passenger business alone, and it has been stated on reliable authority that as much as $20.70 has been paid to secure a single second-class passenger from Chicago to San Francisco. The multitude of out- side agencies and traveling agents maintained solely for the purpose of securing business for their respective lines that might otherwise traverse those of their com- petitors involves an expenditure so great, even during periods of comparative harmony, that it has been neces- sary to restrict their number by contract. The agree- ment now in force limits to eight the number of passen- ger agencies that may be maintained in New York City by each of the nine roads competing for westward bound traffic. As it is a fact of ordinary observation that such agencies always cluster in particular portions of a city and around particular corners, it is obvious that a sys- tem of joint agencies would afford the public equal accommodation at lower cost. During the periods of unbridled competition, popu- larly known as "rate wars," each participating carrier has its freight and passenger agents in every important 46 RAILWAY ECONOMICS. city in the country at a total expense for rents, clerk hire, advertising, etc. that must be enormous. Four roads operating westward from Chicago are known to have expended $1,283,585 for outside agencies and ad- vertising in a single year, during which rates were fairly maintained, while during an equal period one road ter- minating at New York expended $871,291 for similar purposes. The competition of long, circuitous and commercially illegitimate routes for traffic that would naturally traverse cheaper and more direct lines is an- other gross extravagance too frequently observed. Mr. Firth, president of the Erie and Western Transportation Company, whose wide experience guarantees the accu- racy of any assertion he may make, has recently stated that: ''Illegitimate business is always the pride of the average traffic manager. To secure a share of some competitive busi- ness, not naturally or fairly belonging to a carrying line, always appears to inspire heroic efforts and to be regarded as meriting special commendation." Illustrations are numerous. Between St. Paul and Chicago, with a short line distance of 373 miles, traffic is carried by a line 734 miles in length. From Chicago to New York twenty-one routes ranging from 912 to 1376 miles compete for traffic, while between Omaha and San Francisco there are five, of which the shortest is 1865 and the longest 2724 miles. Besides the numer- ous regular and "tramp" steamships available for ship- ments from New York to New Orleans, more than ninety all-rail lines are each actively seeking a share in the business. The most direct of these is 1340 miles in length or 711 miles shorter than the longest. As an example of the waste of competitive train service, it is COMPETITION AMONG RAILWAYS. 47 not necessary to add to the bare statement that forty- four trains leave Chicago for New York every day, and that similar duplication of service exists wherever the same cities are connected by competing railways. No intelligent student of transportation doubts that when- ever it becomes possible, by means of the adoption of wiser principles as the basis of regulative legislation, to eliminate from the cost of railway operation these eco- nomically useless and wasteful expenditures, now reluct- antly incurred in consequence of vicious laws which are intended to perpetuate competition among railway carriers, the saving thus effected will accrue to the ben- efit of the general public through further reductions in rates which will thus be permitted to result from the action and interaction of commercial forces. The failure of competition among railways is not at- tributable to causes which invalidate the competitive principle as applied to general business and within its proper sphere, but to the fact that modern conditions of land transportation are such that competition, in the or- dinary sense, among the agencies employed is imprac- ticable. Far the greater number of railway stations are dependent upon single railway lines, and the vastly larger portion of railway traffic has no alternative route available. To these stations and this traffic the relation of the railway corporation is that of a monopoly, and from them the latter can and will, within certain limits and with certain qualifications which are not material to the present discussion, recoup all losses that may be sus- tained at the comparatively few points and in carrying the relatively inconsiderable traffic, with regard to which there is actual competition. It is to preserve the latter, 48 RAILWAY ECONOMICS. useless and baneful as it is, that obstacles to the full operation of competition among producers have been interposed by provisions forbidding the consolidation of parallel lines frequently found in state constitutions, acts of state legislatures and corporate charters, by the anti-pooling clause of the Interstate Commerce law, and, accepting the interpretation of the anti-trust law adopted by the United States Supreme Court in the Trans-Missouri case, by the anti-trust law. COMPETITION AMONG PRODUCERS. 49 CHAPTER IX. COMPETITION AMONG PRODUCERS AND THE DECLINE IN CHARGES. The salient facts so far developed in this work are that the charges for railway transportation have, during the last three decades, continuously and materially de- clined; that this decline, though accompanied by a gen- eral lowering of the prices of commodities, has been much greater than that in the prices of most important articles of traffic, and has been contemporaneous with an actual advance in rates of wages; that increased traffic and better methods have resulted in a lowered average cost, per unit of service, of furnishing the public with railway facilities and conducting railway transpor- tation; and that competition among railways serving the same localities not only does not explain the diversion of the sums so saved from the pockets of railway own- ers, managers and employes to those of travelers and shippers, but that there is abundant evidence that it has hindered the reduction of the average rates for the movement of passengers and freight. It has already been suggested that competition among markets and producers does furnish the explana- tion sought, and that the substantial reductions in av- erage rates which have taken place during the preva- lence of competition among carriers, and in spite of the wasteful expenditures and losses incident thereto) are due principally to the fact that these forms of competi- tion have operated contemporaneously and to the more extensive application and superior efficiency of compe- 5O RAILWAY ECONOMICS. tition among railway patrons for the privilege of buying or selling in particular regions. The quantity of any commodity which a particular community will purchase at a particular price during any period is definite and, within certain limits, ascer- tainable. With regard to most commodities, lowering the price will increase the quantity consumed, and raising the price will decrease it, while the price itself equals, in the long run, the cost of the last increment of the supply for which there is an effective demand. Transportation charges are properly regarded as con- stituting a portion of the cost of production of the com- modities moved because production is not an accom- plished fact until products have become available at the points where they are required for consumption. Thus the radius of the region in which the products of a particular locality can be marketed with profit is determined by the cost of production at that place and the rates charged for transportation over the routes available for moving those products. Each producer, desiring to extend his business or increase his income, perceives that in order to secure a wider market or to obtain greater profits in those already reached, it is only necessary to obtain lower rates on his shipments. Any concession of this kind made to one shipper invariably inspires demands for similar reductions not only on the part of competi- tors in the same locality, but others in distant regions whose products meet with those of the locality affected by the initial reduction in a common market. Whether salt from Kansas or from Michigan shall be consumed in certain sections of Iowa and other Western states is *. OMPETITION AMONG PRODUCERS. 51 determined by the relation between the rates imposed, for transportation to the consuming region from the salt-producing sections of the former states. Boots and shoes manufactured in Chicago or St. Louis meet with those from the Atlantic Seaboard on equal terms in every community to which the respective charges for transportation plus cost of production in each related locality produce equal sums, and not infrequently the manufacturer finds the former element more readily controllable than the latter. The commercial rivalry of New York, Boston, Philadelphia and Baltimore, each seeking to add to the volume of its export trade, has been much more effective in inducing the present low rates for moving grain to those ports than the more or less continuous competition among the railways serving them. A curious evidence of this fact is found in the negotiations which resulted in the final adoption of the differential relations among the charges to those ports which have remained unchanged since 1877. These negotiations were preceded by a period of demoralized rates which was forced upon the railways by the com*- mercial organizations of the respective ports, and they culminated in arbitration proceedings in which the ques- tions involved were submitted to Messrs. Allen G. Thur- man, Elihu B. Washburn and Thomas M. Cooley, none of whom had any connection with any railway corpora- tion. The railway companies expressly declined to par- ticipate in any way in the investigations and delibera- tions of this committee, except so far as to furnish it with any information which should be requested, and the numerous arguments heard and the testimony taken were all introduced by the commercial organizations of 52 RAILWAY ECONOMICS. .the interested cities, yet the railways accepted without hesitation the conclusions of the committee and have ever since acted in accordance therewith. This arbitra- tion having restricted the consequences of competition among the Atlantic ports, rates were for many years maintained with fair success, and the next radical reduc- tion in charges applied to grain shipments to those ports was the result of their common desire to prevent the diversion of such shipments to Gulf ports. Competing shippers in the same locality are always endeavoring to obtain more favorable rates than those accorded to their rivals, and though these may be, under present conditions, temporarily secret, they not infre- quently lead to open reductions. The use of particular commodities is often limited territorially by the freight charges from the points of production to those of con- sumption, and, when charges are too high on certain ar- ticles, substitutes produced nearer the points of con- sumption, or carried at lower freight rates, are fre- quently used. The charges for passenger transporta- tion also, by limiting the distance to which agents can be profitably sent and otherwise hindering personal communication, effectively prescribe the limits of profit- able interchange of commodities, and interfere with the territorial division of labor. In consequence of these facts the whole force of com- mercial competition, possibly the most tremendous product of modern industrial and economic organiza- tion, is arrayed in continuous effort to secure ever- cheapening transportation. As a result railway charges tend unceasingly toward the lowest rates that will pro- duce a revenue sufficient in the aggregate to meet. op- COMPETITION AMONG PRODUCERS. 53 crating expenses, including necessary repairs and re- newals, and, in addition, return to capital the lowest recompense for which it can be procured. As the latter is at any time a definite sum, it is evident that expenses of operation constitute the only controllable element. Here is found a barrier which legislative attempts to secure and perpetuate railway competition have erected against further reductions in charges made possible by economies in operation. Competition among producers would not, of course, be as effective as it is were it not supplemented by a con- dition, inseparable from the business of railway trans- portation, which makes the rates charged for railway services extremely vulnerable to demands supported by the commercial necessities of railway patrons. Capital in the form of railway facilities is not transferable to other industries, or even, except with regard to an insig- nificant fraction of the aggregate, to the same industry in other fields. Consequently the permanent prosperity of any railway corporation is dependent upon the devel- opment of the resources of the territory tributary to the lines which it operates, and as this development cannot be secured except through rates which are, both abso- lutely and relatively to charges from and to other re- gions, reasonable, the corporation whose officers at- tempt to impose unreasonable rates is certain to be un- successful. An active and intelligent perception of this fact has been a marked characteristic of American rail- way officials, and the instances in which they have hesi- tated to make rates low enough to permit the inaugura- tion of new industries in suitable localities or the exten- sion of those already in existence within economically profitable limits are few indeed. 54 RAILWAY ECONOMICS. It is, therefore, as a consequence of competition among producers, which affects practically all freight traffic, and not of that among railways, which can be controlling at relatively few points, that railway rates have declined so considerably. The reduction, in spite of the increase in the volume of traffic that has been its accompaniment, has exceeded that in the cost of opera- tion, the latter having been unduly enhanced by the ex- travagant and wasteful expenditures required to main- tain a pseudo-competition, the perpetuation of which has been imposed upon reluctant carriers by unwise and uneconomic legislation. Thus, while rates have pro- gressively declined and traffic per mile of line rapidly increased, the percentage of operating expenses to gross earnings has, in spite of the law of increasing returns, continuously increased. The return to capital invested in railway facilities cannot in fairness be further reduced, and if it could such a course would merely retard the adequate development of those facilities. Railway rates are, under present conditions of operation, too low, and if they are to be maintained on the present level or further reductions asked, the unfavorable conditions which result from unwise legislation should be removed. THE LAW OF INCREASING RETURNS. 55 CHAPTER X. THE LAW OF INCREASING RETURNS. Certain industries, especially those in which the cost of operation is low in comparison with the original cost of the necessary plant, can augment their production within the capacity of the plant already in existence without increasing the amount of capital required or th* cost of production in as large a proportion as the increase in production. The result is a lower average cost per unit of the product and, if prices are maintained at the former level, an increased ratio of profits upon the capital employed. Such industries are subject to the law of increasing returns which is, that, under the con- ditions described, the application of increased capital or labor augments production in a greater proportion than that of the necessary increment of expenditure to that formerly required, or of the added production to the former production. It is especially important not to forget that the accurate statement of the law does not indicate increased rates of profit unless prices remain constant, for in practice each increment of production is usually followed by a reduction in the price obtainable per unit, and it is always possible that this reduction may completely offset the reduction in cost due to the distribution of the expenses incurred for the establish- ment and operation of the plant among a larger number of units. Probably no railway in the United States has ever carried during any considerable period as much traffic as it might have moved if utilized to its full capacity. A 56 RAILWAY ECONOMICS. particular track, train, locomotive, or car will seldom be found to be performing all the transportation services of which it is capable. These facts, which bring the business of railway transportation within the operation of the law of increasing returns, are quite generally un- derstood, but the fact that this law will not secure for the carrier increased or even undiminished returns in the face of indefinitely decreasing rates, is frequently neglected, and it is assumed by a too numerous section of the public and by many legislators that increased traffic is, if not always, at least with very rare excep- tions, accompanied by an increased rate of profit. Un- fortunately for those who have invested in railway prop- erties this is not the case, and the decrease in rates has absorbed more than the decrease in cost of operation which has resulted from increased traffic and the econo- mies referred to in the seventh chapter of this work. In spite of increasing traffic the gross earnings per mile of line operated by the railways of the United States have declined from $8086 in 1871, $7548 in 1881, and $6852 in 1891 to $6223 in 1896; while net earnings which in 1871 amounted to $2842 per mile of line, though in- creasing slightly to $2930 in 1881, had decreased to $2136 in 1891 and to $1837 m 1896. The temporary increase no doubt indicates that the earlier reductions were accompanied by economies in cost of operation per unit of traffic that prevented a decline in net earnings, while the rapid decrease of the last fifteen years shows that it was found impossible permanently to keep down the ratio of operating expenses to gross earnings. The actual relation of the aggregate cost of operation to the total gross earnings was as 65.08 per cent, in 1873 and THE LAW OF INCREASING RETURNS. 57 58.36 per cent, in 1880, the decline to the latter year having been substantially regular. In 1885 the pro- portion had again risen to 65.12 per cent., in 1890 to 65.80 per cent., and in 1896 to 67.20 per cent. Divi- dends on capital stock averaged $1132 per mile of op- erated road in 1871, $1004 in 1881, $542 in 1891, and $450 in 1896; while interest on funded debt was $1242 in 1881, $1362 in 1891, and $1402 in 1896 per mile of line. The total of these payments on capital was in 1881 $2246 per mile of line, in 1891 $1904, and in 1896 $1852. The slight increase in the interest payments per mile of line is attributable to the increased propor- tion of bonded indebtedness in the capitalization of rail- ways ; but that this does not completely account for the great fall in dividends is evident from the actual de- crease in the total of payments per mile of line. The average capitalization per mile of road having slightly increased during the last three decades, it is evident that increased traffic has not brought increased profits to railway owners. One result of the facts just cited is that the financial condition of many railways is not sufficiently stable to carry them through even brief periods of business depression. Doing business upon an exceedingly narrow margin of profit during periods of prosperity, they are unable to accumulate funds to bear the expenses of temporarily unprofitable business, while the commercial conditions in most cases make it impracticable to compensate diminished traffic by in- creased charges per unit of service. Under these cir- cumstances it is scarcely surprising that during the panic years of 1884 and 1885 19,406 miles of railway were placed in charge of receivers, or that during the 58 RAILWAY ECONOMICS. years 1892 and 1893 39,848 miles were similarly trans- ferred to the control of the Federal Courts on account of their, at least temporary, insolvency. The par value of the capital of the railroads thus becoming bankrupt during 1884 and 1885 was $1,100,155,000, and during 1893 and 1894, $2,038,738,000. The foreclosures fol- lowing receiverships are generally distributed more evenly over the years succeeding the periods of acute depression. During the four years from 1894 to 1897, inclusive, 38,879 miles of railway with capital having a par value of $2,748,847,000 were sold in foreclosure pro- ceedings after having become unable to meet the in- terest upon their indebtedness. It is evident from the foregoing that the law of in- creasing returns has not only failed to save railway cor- porations from the consequences of declining rates, but also that the rate of return on investments in railway properties has actually declined. These facts should not be lost sight of by those, not invariably dishonest, who advocate radical reductions in rates, and supple- ment their arguments by the contention that the adop- tion of their proposals will increase, or at least will not decrease, the profits of railway business. The bases of these claims are usually a fallacious application of the law of the increasing returns, in which the importance of constant rates or prices is ignored and an exag- gerated statement of the elasticity of railway traffic. While it is perfectly true that the movement of most articles of traffic can be stimulated by rate reductions, the increases possible are invariably strictly limited by the amounts of the reductions, and in many instances even extreme reductions would but slightly augment THE LAW OF INCREASING RETURNS. 59 the volume of business. Passenger traffic, with the ex- ception of suburban business, is but slightly susceptible of increase, and there are numerous articles of freight traffic which, either on account of the small proportion of freight charges' to the total value or the limited re- quirements of consumers, could not be moved much more extensively than at present. For example, rates on clothing and boots and shoes are probably low enough to move, at the present time, nearly as large quantities of those commodities as would be shipped at the lowest conceivable charges. The same reason, to- gether with the fact that there is no desire on the part of consumers for much greater supplies of those articles would probably render tea, coffee, sugar, salt, and many similar articles unresponsive to even the most radical rate reductions. In a future chapter the desirability, from the standpoint of the general public, of indefinite increases in the volume of traffic, which is so frequently taken for granted, will be discussed and an attempt made to define the cases in which transportation reduces the cost of production, and to show when it increases such cost and is consequently undesirable. 60 RAILWAY ECONOMICG. CHAPTER XI. INCREASING USE OF RAILWAY FACILITIES. Contemporaneous with the decline in the charges exacted for railway services, there has been an increase in the aggregate amount of transportation purchased by the people that is proportionally much greater than the increase of population during the same period. According to the report on Transportation of the Tenth Census, the fifty million persons then inhabiting the United States required of the railway facilities exist- ing during 1880 the performance of services which, in the aggregate, were equivalent to moving 5,740,112,502 passengers and 32,348,848,693 tons of freight one mile. Ten years later, though population had increased to but, approximately, sixty-two and one-half millions, the railways carried 11,992,112,154 passengers and 79,172,- 464,796 tons of freight one mile. Thus a growth of but 25 per cent, in the number of railway patrons was accompanied by an increase of 109 per cent, in the aggregate passenger movement, and of 144 per cent, in the total freight transportation. The following table shows the relation between population and the aggregate railway transportation during the concluding year of each quinquennial period from 1867 to 1892 and during 1896: Number carried one mile per capita of population- Year. Passengers. Tons of freight. 1867 138 285 1872 161 517 1877 118 578 :882 179 949 1887 208 1,266 1892 204 1,349 1896 183 1,338 INCREASING USE OF RAILWAY FACILITIES. 6l From the foregoing table it appears that the average amount of transportation performed by the railways for each man, woman and child in the United States has increased from carrying 138 passengers and 285 tons of freight one mile in 1867 to moving 183 passengers and 1338 tons of freight the same distance in 1896, or about 32 per cent, in the case of passengers and 369 per cent, in that of freight. The averages in question are based upon estimates of population prepared in the Treasury Department by the Government Actuary, and, while the latter are generally reasonably accurate, it is not im- possible that the slight decrease in freight transporta- tion per capita from 1892 to 1896 and a part of that in passenger movement are attributable to an overestimate of the population for the later year. The increased utilization of railway facilities shown is not the result of diversion of traffic from lake, river, canal or ocean carriers, but represents an absolute in- crease in the aggregate transportation demanded by the people, for, while in a few instances river transportation has been rendered unprofitable by the competition of railways, the total movement of commodities over water routes has considerably increased during the period that has witnessed the extraordinary development of railway business which has been noted. Domestic commerce being practically free from legislative interference, except in the few instances in which restraints are imposed in the exercise of the police powers of the several states, consumers have naturally sought to pur- chase their supplies and producers have vended their commodities in the markets, in each particular case, appearing to be most advantageous. Similarly com- 62 RAILWAY ECONOMICS. munities have been led, in seeking to satisfy the desires, as consumers, of their individual members with the least practicable expenditure of effort, to devote increas- ing proportions of their energies to particular industries from the conduct of which especially favorable results might be anticipated, and to depend upon exchanging the surplus products of such industries for necessaries and luxuries which might not be produced locally with approximately equal facility o>r profit. Innumerable illustrations of the practical operation of the tendencies described might be cited. Massachusetts, with a popu- lation which annually consumes the flour obtained from about ten million bushels of wheat, has practically ceased to produce that cereal, and secures its necessary supply of this important breadstuff by exchanging therefor a portion of the surplus products of its factories, the total output of which averages about $400 in annual value for each of the citizens of that commonwealth. The production and manufacture of raw wool and the manufacture and distribution of woolens and woolen goods afford an excellent example of the importance of the transportation factor in the modern industrial sys- tem. During the last census year (1890) the six New England states contributed but 2.67 per cent, of the domestic production of raw wool, while the manufac- tories within their borders required 55.97 per cent, of the entire amount of domestic wool used as raw material in the United States. If to the New England states are added New York, New Jersey and Pennsylvania, the combined percentage of consumption in manufactories was 85.21, while that of production was but 9.64. The manufactories north of the Ohio and Potomac rivers INCREASING USE OF RAILWAY FACILITIES. 63 and east of the Mississippi river required 92.77 per cent, of the domestic wool used as raw material, though they produced but 34.88 per cent, of the total wool clip. The entire consumption of raw wool by manufactories out- side of this territory was not as great a percentage of the total as was the production of the single (State of California of the aggregate domestic pro- duction. The states separately contributing as much as 5 per cent, of the wool clip of 1890 were Ohio, Michigan, Texas, Montana, Utah, Oregon and California, their aggregate production being 56.31 per cent, of the total for the country, against which their percentage of consumption in manu- factures was but 4.45. Practically, therefore, the entire production of raw wool has to be transported from the sheep raising regions west of the Allegheny Mountains to the states adjacent to the Atlantic seaboard and north of Chesapeake bay. After this has been accom- plished, and the raw material has been converted into clothing or other woolen products, transportation facili- ties are again required to distribute the finished goods among those by whom they are to be consumed, includ- ing in many instances the residents of the very regions from which the raw materials were originally shipped. The concentration of agricultural industry is especially remarkable when it is borne in mind that all are dependent upon its results. Twenty-five states, or about one-half of the total, produce 98 per cent, of the cotton, 95 per cent, of the corn, 95 per cent, of the barley, 93 per cent, of the oats and from eight-tenths to nine-tenths of the wheat, rye, buckwheat, tobacco, potatoes and hay produced in the entire country. The concentration in 64 RAILWAY ECONOMICS. particular localities of the business of manufacturing boots and shoes and paper, of refining sugar, of raising and of slaughtering cattle for food are all evidences of the operation of the same tendencies, and whatever benefits have resulted can be shown to have been de- pendent upon cheap transportation. As the term cheap transportation, except when applied to movement between points connected by natural or artificial water- ways, is synonymous with railway transportation, it is clear that whatever socially profitable consequences have accrued from the process illustrated are attributa- ble to railway development. SOCIALLY PROFITABLE TRANSPORTATION. 65 CHAPTER XII. SOCIALLY PROFITABLE TRANSPORTATION. Two extreme social conditions in regard to trans- portation are conceivable' and may aid in determining in what extent it is economically desirable that individuals and commodities should move from community to com- munity. First, a very crude state of society, in which each community produces everything which it con- sumes, and is consequently economically independent. Under such conditions the standard of living is limited by local productive resources, and the difficulty with which the indispensable means of subsistence are pro- cured under frequently unfavorable conditions of soil and climate, confines population to certain localities, preventing the settlement of many regions the resources of which, though bountiful in regard to particular com- modities, are not sufficiently diverse to permit the pro- duction of all of the necessaries of life. These circum- stances, as well as the limit imposed upon possible ag- gregate production, effectually retard the natural growth of population. The second conception is of a society, at the other end of the developmental process, in which each community has been connected with every other community by adequate transportation facilities, the maintenance and operation of which have been provided for by a system. of general taxation, and the use of the facilities placed, free of charge, at the dis- posal of everyone who cares to make use of them. A country subject to such conditions would, as their ulti- mate result, be divided into regions of varying areas, 66 RAILWAY ECONOMICS. each of which could produce a single commodity within a maximum cost established by the cost of the last in- crement of the supply demanded by the whole country, and the industry of each of these regions would be ex- pended in the production of the single commodity so in- dicated. Evidently the social conditions involved in neither of these conceptions are desirable. In the one case cost of production would be higher than were ex- changes of products between different communities pos- sible, while in the other the cost of production would be enhanced by the disregard of the variations in cost of different transportation services. It is possible that this point requires elucidation. For any particular society and at any definite time, under whatever system of pro- duction may be in vogue, the complex of articles re- quired for consumption has a certain, though possibly not an ascertainable, cost of production. The amount of transportation involved in the system of production in use in such a country can be increased, or, assuming that some transportation is used, it can be diminished. Either course will be desirable if it will result in reduc- ing the total cost of production. The diagram on op- posite page will, it is hoped, assist in making clear the point advanced. For the purposes of this discussion let it be assumed that the outer circle is the boundary of a country which is, economically, entirely isolated and independent, and that the inner circle contains a community (A) com- posed entirely of individuals not directly engaged in production, such as lawyers, bankers, railway presidents, ministers, teachers, etc., and includes all such non-pro- ducers in the country. Then, if the other inhabitants of SOCIALLY PROFITABLE TRANSPORTATION. 67 the country desire the services of the residents of A, the former will have to supply the latter with subsistence. Let it be assumed that each of the regions between dif- ferent pairs of circles is capable of producing subsistence for the entire population of the country; that for the pro- ducers with equal expenditures of energy, but when Units of energy for transpor- tation 1.500 Units of energy for production 4-000 Units, or energy for transportdtio 1.000 called upon to furnish a surplus sufficient to supply the requirements of the non-producers in. A, the varying re- sources make varying expenditures of energy necessary. Suppose that for the production of the surplus neces- sary to supply A with subsistence the expenditure requi- 68 RAILWAY ECONOMICS. site in B amounts to 4000 units of energy, in C to 3000, and in D to 2500, and that the number of units of energy required to transport this surplus from B to A is 1000, from C to A 1500, and from D to A 3000. The relative advantages of utilizing each of the three productive re- gions would then be as indicated below: SOCIAL COST. Number of units of energy required If production is For local For in region: production. transportation. Total. 4,OOO I,OOO 5,OOO C 3,000 1,500 4,500 D 2,500 3,000 5,500 Evidently under these conditions it would be most profitable for the society in question to cultivate the re- gion C, which it would certainly do if transportation charges were adjusted in accordance with the variations in the amounts of labor involved in transportation from the several regions. It should be observed that it is not alleged that these variations in the expenditures of en- ergy requisite for different services correspond with those in distance. It is desired merely to affirm that different transportation services do involve different ag- gregates of energy, and that these differences are im- portant in connection with the adjustment of charges. If, in the case assumed, these differences should be dis- regarded by making equal transportation rates for all services, production would be carried on in region D, though at a loss of 1000 units of energy. If, on the other hand, rates were so high that energy expended in transportation was over-remunerated, the result might be to confine production to region B at a social loss of the advantage that might have been gained by culti- vating C. Suppose, for instance, that the compensation SOCIALLY PROFITABLE TRANSPORTATION. 69 for a unit of energy expended in moving commodities was three times that for one expended in local produc- tion. Then only the tract B would be cultivated. Sim- ilarly too low charges might relegate production to re- gion D. From this analysis it appears to be socially de- sirable that energy expended in the business of trans- portation shall receive the same remuneration as a simi- lar amount of energy expended in other lines of produc- tion, and that rates for different transportation services shall vary in accordance with the different amounts of energy required ,to perform them in order that society shall have neither too much nor too little transporta- tion. It is believed that in the United States, at the present time and under current conditions, there is quite as much danger of too low as of too high rates for rail- way services, and that in some sections there has been much transportation that was socially undesirable be- cause it actually enhanced the real cost of production. Readers have no doubt observed that no attempt has been made to apply the principles developed to the rates for moving specific commodities or for any particular services. The facts which make such an application im- practicable, as well as the real utility of these principles, will be discussed in another chapter. 7O RAILWAY ECONOMICS. CHAPTER XIII. HOW SOCIALLY UNDESIRABLE TRANSPORTATION MAY OCCUR. Having in the preceding chapter established the prin- ciple that there can be so much transportation as actu- ally to increase the expenditure of social energy in pro- duction, it will be useful to discover in what manner an industrial system in which the element of transportation is unduly prominent may arise. It is %obvious that the aggregate amount of transportation can be augmented by an absolute increase in the number of tons carried, or by an increase in the average distance traversed by each ton. Though the demand for most commodities in- creases as the price decreases, and the latter is usually determined by the cost of production, including trans- portation charges to the point of consumption, demand cannot be increased indefinitely and the rate of increase is generally diminished by each successive increment until the point is reached beyond which demand cannot go, because the desires of consumers are completely satisfied. At whatever prices may prevail the demand in any market at a definite point of time for each of the arti- cles which constitute the complex of commodities re- quired for the subsistence of the community dependent upon that market establishes the quantity of each arti- cle which will be accepted. Consumers are, however, quite indifferent as to the proportions in which the sums paid by them for subsistence are distributed between those who produce, respectively, what have been termed, UNDESIRABLE TRANSPORTATION. 7! form utilities and place utilities. Consequently while extensive reductions in prices are usually necessary in order considerably to augment the quantity of goods for which there is an effective demand it is quite possible with but insignificant reductions in prices caused by very slight decreases in the rates for moving goods to multiply the aggregate of transportation. Suppose that during a definite period the city of New York requires for consumption and export 25,000 tons of wheat for which it will pay $30 per ton, and that the supply must be obtained from the regions given in the following table, which also gives certain assumed costs of pro- duction in each, and of transportation from each to New York: Distance Cost Freight Total cost of from . of rates to production New York Tons production New York at New York Region. in miles. supplied. per ton.* per ton. per ton. A 200 7,000 $25.00 $4.00 $29.0O B 400 6,000 24.00 5-25 29.25 C 700 5,000 23.00 6.50 29.50 D 1,100 4,000 22.00 7-75 29-75 E 1, 600 3,000 21.00 p.OO 30.00 F 2,200 None. Ip.OO I2.0O 31.00 *Of form utilities only. Obviously such a condition could not exist unless regions A, B, C and D were so cultivated as to produce all the wheat which could be marketed in New York from each respective region without the cost of pro- duction rising above $30 per ton, but it is quite reason- able to suppose, and will be assumed, for the purposes of the present discussion, that the productions of regions E and F are susceptible of considerable increase. Under the conditions shown in the table the total transporta- tion of wheat for the New York market, during the 72 RAILWAY ECONOMICS. period in question, would be equivalent to carrying 16,- 500,000 tons one mile. Whenever such a condition ex- ists, however, there are certain to be many persons who, attracted by the natural resources of region F, will seek to secure rates for transportation from that region to New York which will permit them to produce wheat in F for the market in New York. Suppose they secure a reduction of one dollar per ton from the rate from F shown in the table. Producers in F will then be on an equality with those in E in the common market, and it may be assumed that they will be able to sell half of the total quantity required from the two regions which have the marginal cost of production. If so, the aggregate transportation performed in getting wheat to the New York market becomes equivalent to 17,400,000 ton-miles without any decrease in the price at New York. Produc- ers at E will not see their business lost without a strug- gle, and may in time secure a reduction in transporta- tion charges on their production, say, to $8.10 per ton, which will enable them to market their wheat in New York at $29.10 per ton. If E can produce all but 7000 tons of the quantity which New York will purchase at the latter price, and this amount will of course be some- what larger than at $30, the former price, the price will be reduced to the figure thus established, and produc- tion for the New York market will be confined to re- gions A and E, while the total transportation will have been increased to more than 22,200,000 ton-miles. So- ciety will then have the advantage of cheaper wheat against which to offset the disadvantage, apparent at least, of having to perform more transportation in order to get it, and of having regions B, C, D and F aban- UNDESIRABLE TRANSPORTATION. 73 doned as far as the industry of producing wheat is con- cerned. The balance of social gain or loss must be de- termined, if at all, in accordance with the general princi- ple, advanced in the twelfth chapter. Supposing the 1 " conditions indicated in the table to exist, there is another way in which they might be modi- fied, which does not seem radically dissimilar from some of the legislative attempts at railway regulation that have occasionally received energetic and noisy advo- cacy. Legislation may require that all of the rates in force be reduced one-half. If this is done, region F can market wheat in New York at $25 per ton; E at $25.50; D at $25.88; C at $26.25; B at $26.63, and A at $ 2 7- Under the circumstances the price cannot go above $27 unless more wheat is demanded than can be pro- duced in the six regions named. If F can produce all that is wanted, the price will be $25, and considerably more wheat will be taken than at $30, but the transpor- tation performed in moving the 25,000 tons formerly demanded will have been increased to the equivalent of moving 55,000,000 tons one mile. If the productions of both E and F are required to meet the effective demand, the price in New York will be $25.50, somewhat less wheat will be consumed than at $25 per ton, and there will be a smaller aggregate transportation. In either case the cultivation of wheat in the intermediate regions will have been abandoned. The slightest familiarity with the history of the agricultural industry in the United States will show that such changes in transportation charges have produced exactly such results and have, in many instances, caused the abandonment of once profitable farms and the transfer of food production to 74 RAILWAY ECONOMICS. more remote regions. Doubtless in some instances the social consequences have been good, in others ill. The balance is favorable if wants are satisfied with a smaller expenditure, unfavorable if with a greater expenditure- of energy than would have been required had the former adjustment been maintained. RAILWAY TRANSPORTATION. 75 CHAPTER XIV. SHOULD THE BUSINESS OF RAILWAY TRANSPORTATION v BE REMUNERATIVE? Railway problems are frequently discussed as though there existed a distinct line of demarkation between the interests of the general public, which is assumed for the purpose to consist wholly of purchasers of transporta- tion, and the interests of those by whom it is furnished. That this view is superficial is already evident to those who have seen that too cheap transportation inevitably results in too much transportation. They are aware that the general public not only purchases, but also sup- plies railway transportation, and that if the energy ex- pended in the production of place utilities, that is, in moving commodities to the localities in which they will be most useful, receives relatively lower compensation than that expended in the production of form utilities, an undesirably large aggregate amount of transporta- tion will be demanded in pursuance of the desire of con- sumers to obtain supplies at the lowest practicable money cost, and so large an amount of energy will be diverted from the latter to the former kind of produc- tion that the average return per unit of energy expended in production of all kinds will be materially reduced. The compensation for energy expended in those forms of industry in which there is free competition is so regulated thereby that when the returns from one industry fall below the general level, energy is gradually diverted therefrom until the lessening of the supply pro- duces an increase in the price of the commodity furnished 76 RAILWAY ECONOMICS. or the service rendered which restores the equilibrium. That the opposite effect can be produced in the railway industry is attributable to the fact that capital in the form of railway facilities cannot be withdrawn and ap- plied to other purposes than those of transportation, supplemented, as it unquestionably is in the United States, by the further fact that in many sections of the country railway construction has been artificially stimu- lated, until the means of land transportation are actually in excess not only of present requirements, but also of any that may reasonably be anticipated in the near future. When the owners of a particular railway find themselves in a situation in which it is impossible to secure a return upon their capital equal to that currently paid to other forms of capital in the same community, they cannot transfer their investments to other indus- tries, but must continue to operate the facilities in exist- ence or abandon them entirely. The choice is between a loss of the entire capital or the acceptance of a return so small that, if continued without increase, it amounts to the loss of a portion of the original investment. Nat- urally capitalists so situated accept the lesser evil and continue to operate the property as long as traffic suffi- cient to pay the actual expenses of operation and the smallest return to investors can be secured. Mobility of capital among many industries is effected without the actual withdrawal of investments, through the refusal of capitalists to furnish means for ordinary repairs and renewals and for the development of particular indus- tries in proportion to the growing demands of an in- creasing population, unless their investments are ade- quately rewarded. Lacking these checks, it is possible, RAILWAY TRANSPORTATION. 77 in communities which are industrially retrograding or stagnant, for the remuneration accorded to the energy expended in railway transportation to be progressively reduced until only that portion which is in the form of current labor is Adequately compensated. When this occurs the processes of production become in a social sense unnecessarily costly. The railways of the United States give employment to about 800,000 men, who receive as wages more than 60 per cent, of their annual gross earnings. There are de- pendent upon railway employes not less than 3,000,000 women and children, so that there must be nearly four millions of individuals, or about one in every seventeen of the entire population whose livelihoods come directly from the business of moving passengers and property by rail. It would be difficult to estimate the number of those who produce the necessaries and luxuries de- manded by railway employes and their families, or who perform other services in their behalf; yet it is unques- tionable that any circumstances which should materially reduce the number or the earning capacity of the latter would seriously restrict the market in which millions of industrious individuals dispose of their products and services. In order, therefore, that the adjustment be- tween different occupations be not needlessly destroyed, measures having for their object the reduction of rail- way earnings should be carefully scrutinized. Though there are doubtless portions of the United States in which railway construction has been so ex- travagantly conducted as to be in excess of the probable requirements for many years to come, there are other regions which are inadequately served. The develop- 78 RAILWAY ECONOMICS. ment of these regions requires the creation of railway facilities, but for the last few years, at least, the capital necessary has not been readily available. The explana- tion is not hard to find. Those who examine the op- portunities for new railway enterprises naturally study the results of previous investments, and, finding many unprofitable railways, are told that this condition is at- tributable to over-taxation, unjust legislation, and, above all, to the legal necessity of maintaining a burden- some and wasteful competitive system of operation. They learn also that in many communities, including some of those in which new railways are most needed, th^ attitude of prominent politicians and influential leg- islators is distinctly antagonistic to the owners and man- agers of railway properties. From the standpoint of the capitalist who is considering the advisability of in- vesting in a new railway enterprise, these conditions simply add a new element of risk to those which would naturally attend such an investment. Business opera- tions approach the limit of mere gambling transactions as one extreme when the risk involved is great, and as it diminishes approach the other extreme, in which it is almost absent, of loaning money on ample security. Though capitalists can usually be found who will accept quite hazardous risks, they invariably demand opportu- nities for such considerable gains as seem to them com- mensurate with the chances of loss. Those who under- take railway construction under the conditions de- scribed insist, therefore, upon an at least speculative opportunity to obtain compensation for the extraordi- nary risk imposed by a condition of public sentiment which may eventuate in legislative attacks upon the RAILWAY TRANSPORTATION. 79 property created. Society has found it expedient to delegate to groups of individuals, termed corporations, the business of furnishing and operating railway facili- ties, and it would seem that it should be willing to allow those who accept the task reasonable remuneration for the sacrifices involved. A growing community must do so, or it cannot readily obtain adequate facilities for railway transportation; one already amply provided in that respect must do so, or there will be an excessive and unprofitable use of the transportation, facilities already in existence. 80 RAILWAY ECONOMICS. CHAPTER XV. ENERGY EXPENDED ON JOINT ACCOUNT. If it were possible to apply the principle which has formed the basis of the discussion in the last three chapters of this work to the charge exacted for each spe- cific transportation service performed by a railway, one of the most difficult of railway problems would be much nearer than it is to a satisfactory solution. Unfortu- nately this cannot be done, for much of the energy ex- pended in railway transportation is applied without ref- erence to the movement of any particular traffic. When society, through its ordinary processes, determines to employ a portion of its available resources in the con- struction of an improved highway, the advantages to be gained by increasing the mobility of all of the per- sons and property for which the new route is available form the controlling consideration and energy is ex- pended in behalf of the aggregate traffic which is antici- pated, and not of any mere portion thereof. The tele- graph facilities maintained by every railway are not pro- vided in order that either passengers or freight alone may be satisfactorily moved, but, rather, to insure the safe and rapid transportation of both. Similarly, the coal consumed by the locomotive of a passenger train is not mined, brought to the railway terminal, loaded upon the tender and consumed in the fire-box for the exclusive benefit either of local or of through traffic. It is not sufficient to assert the impracticability of assign- ing these expenditures of energy, or definite portions thereof, to particular services for which they have been ENERGY EXPENDED ON JOINT ACCOUNT. 8l incurred, for it should be clearly understood, not only that this cannot be accomplished, but that the expendi- ture of none of these unassignable portions of the energy devoted to railway transportation is made in behalf of a specific item or kerns in the aggregate traffic. This will be clearly understood by assuming the existence of a railway which is engaged exclusively in carrying an unchanging quantity of a single commodity in but one direction between its terminals only. It would be prac- ticable, with regard to such a ro'acl, to divide the entire energy expended in construction, equipment, mainte- nance and operation among the units of traffic ; but if in the progress of time it should become possible for the railway to obtain a return load for its cars, it is apparent that the additional energy which would have to be ex- pended would be very slight. The new traffic would have to be loaded into the cars which were formerly returned empty and removed therefrom when it had reached its destination, but there would be little addi- tional wear of roadbed or equipment and only slightly greater consumption of coal. If charges on the new traffic were to be based upon the additional energy expended in order to carry it, they would be very slight indeed, while, on the other hand, if they were made proportional to the charges exacted on the traffic for- merly transported the total remuneration received by the railway would be too high. The problem, which is mainly a theoretical one, seems to have been solved in the minds of most individuals in favor of a reduction in the charges for the service formerly performed, so that each shall share in compensating the energy which, though indispensable to both, is directly incurred for neither. 82 RAILWAY ECONOMICS. In practice the traffic of railways consists of a great many different commodities, some of which are carried in all directions and between a very large number of points. With regard to each specific service, it is usually possible to ascertain just what energy would not have been called for had it not been performed; but the total so assignable is insignificant when compared with that which cannot be distributed. All that can then be accomplished by the application of the principle out- lined in the twelfth chapter to the practical opera- tions of railways is to insure the just remuneration, in the aggregate, of the energy expended in railway trans- portation, i.e., that the total revenue derived from all traffic is neither more nor less than the amount neces- sary to compensate each unit of energy equally with units of energy expended in the production of form utilities. The principle cannot be applied to the rela- tions among charges for different services, and every attempt to do so is necessarily unscientific and dan- gerous. It has already been shown that the conditions to which the railway industry is subject make it practically certain that the total revenues collected will not be ex- cessive, and it is equally certain that the enlightened self-interest of those engaged in the business will not permit the total recompense to the capital or labor in- volved permanently to fall below what is reasonable and just. Society, therefore, in order to protect itself against too much and too little transportation, has only to see that the business of the carriers is conducted by those to whom its management has been committed without the latter being hampered by legislative or cus- ENERGY EXPENDED ON JOINT ACCOUNT. 83 ternary restrictions involving wasteful expenditures, and that the speculative element is eliminated, as far as prac- ticable, from railway investments. That the total revenue should reasonably compensate those whose capital or labor is required for the conduct of the railway business is sufficiently evident, but how is the burden of furnishing this revenue to be distrib- uted among the purchasers of railway transportation considered as individuals, as constituting communities or as producers or consumers of special commodities or classes of goods? What proportions, for instance, of the aggregate revenue necessary to recompense the services performed by the railways of the United States may reasonably be collected respectively from passen- gers, from wheat, from cotton, from manufactured prod- ucts, from persons living west of the Mississippi river, from the Standard Oil Company, or from John Doe? Of the various answers which have been given none has been in any degree satisfactory, and it has long been regarded by students as practically impossible to elabo- rate any principle or set of principles which will defi- nitely and clearly meet the various requirements, of the almost innumerable problems which may arise in the adjustment of the relations among the charges for dif- ferent transportation services. These problems are among the most difficult of those which demand the attention of railway managers in the administration of the properties in their charge, and to the constant and seemingly inevitable recourse to methods of solution determined by expediency rather than by principle, may not unjustly be attributed much of the popular discon- tent which has resulted in harsh and unjust railway legislation. 84 RAILWAY ECONOMICS. CHAPTER XVI. RELATIVELY REASONABLE RATES. The aggregate sum which may reasonably be exacted for railway services having been ascertained in accord- ance with the principles already indicated, it becomes necessary to determine upon the respective amounts or proportions of that aggregate which should be contrib- uted thereto by those for whom specific transportation services are performed. As the variations in the aggre- gate revenue which is necessary reasonably to compen- sate the energy devoted to the railway business that are caused by the addition to or subtraction from the total representing all of the services performed of single items are usually so small as to be practically negligible, it is clearly impossible to predicate of any particular charge that it is, considered alone, either reasonable or un- reasonable, extortionate or unduly low. It follows that whether a particular charge is just or unjust must be determined by considering its relation to charges for other services, and that of the revenue which it brings to the railway corporation to the total revenue required for the maintenance and operation of its property and the just compensation of those who have furnished its capital in the light of the circumstances and conditions governing the service for which it was exacted. When a railway makes different charges for carrying different articles, for moving different quantities of the same article, or for moving the same article between different stations, it is properly said to discriminate among the respective services rendered. Such discriminations may RELATIVELY REASONABLE RATES. 85 be reasonable and just, or they may be unreasonable and unjust. They are the former if they accurately measure substantial differences in the circumstances and condi- tions attending the different services, and the latter if they arbitrarily disregard such circumstances and condi- tions. ' Nothing could be more unjust or socially detri- mental than the exaction of equal charges for all trans- portation services. Such rates would have to be fixed so low as to produce insufficient revenue and to result consequently in the performance of more transportation than is desirable, or they would be practically prohibi- tive of many territorial exchanges of articles the value' of which is comparatively low in proportion to their weight and bulk. On the other hand, arbitrary and un- fair discriminations in the charges for railway services are seriously detrimental. If they unduly favor particu- lar individuals at the expense of their commercial rivals, they are incompatible with equality of individual op- portunity; tend to make the friendly patronage of rail- way officials a more important factor in commercial suc- cess than intelligence, industry or integrity, and finally to produce those immense industrial combinations which, whatever may be said of them in general, when founded upon artificial conditions, constitute a very menacing characteristic of the current industrial system. If they give unjust advantage to traffic in particular commodities, they favor unfairly the producers and con- sumers of those commodities, furnish, in many cases, an incentive to those who are willing to resort to adul- teration or substitution, and often compel the extensive use of inferior and less desirable articles which can be made, though unsatisfactorily, to serve the same pur- 86 RAILWAY ECONOMICS. poses. If they unfairly favor particular localities, such regions are given a monopoly privilege, and industry may be diverted to them from regions naturally better adapted to the particular kind of production involved. The development of industry is thus unnaturally stimu- lated in one region, while at the same time it is, in an- other, artificially retarded, thus producing an unsym- metrical organization, which cannot fail to enhance the difficulty of producing the aggregate subsistence re- quired by society. It may be taken for granted, there- fore, that just discriminations in the charges exacted for railway services cannot be based upon the individuals for whom those services are performed, whether con- sidered separately, as constituting industrial or social groups, as members of communities, or as producers or consumers of particular commodities. Such reasonable discriminations will not afford advantages to particular individuals on account of their professional, political, social or commercial standing, the character of the busi- nesses in which they are engaged, the extent or number of their commercial transactions, or, what is almost the same thing, the quantity of transportation which they purchase (except as the latter circumstance constitutes a condition which substantially affects the service ren- dered by the railway), nor unduly on account of the place of their residence or the location of their farms, factories, warehouses or stores. Relatively just rates will not place a locality at a commercial disadvantage on account of the number of its inhabitants, the degree of their geographical concentration, or their political affiliations, nor on account of its economic organization, the character of its productive resources, or the number, RELATIVELY REASONABLE RATES. 87 extent or financial condition of the railway lines by which it is served. On the other hand, it is perfectly legitimate for rail- way officials to base discriminations in charges upon every substantial difference in the circumstances and conditions which affect or control the performance of each specific service, and the economic interests of so- ciety share with the narrower pecuniary interests of those engaged directly in the business of railway trans- portation the benefits which result from such discrimina- tions when they are intelligently based upon a compre- hensive knowledge of actual conditions and a keen ap- preciation of their ultimate consequences. Primarily, it is desirable that existing railway facilities should be utilized to their fullest profitable capacity. Society should not be compelled to continue the production of form utilities with difficulty and under unfavorable local conditions when the same articles might be made avail- able to consumers in the same locality with a lower ag- gregate expenditure of energy by diverting a part of that employed in producing form utilities to the production of place utilities. Society is forced to accept this unneces- sary sacrifice of productive energy whenever a railway refuses or is compelled to refuse any increment of traffic because, though it could be made to pay an amount sufficient to compensate the increment of the total ex- penditure of energy which it actually causes, it cannot be made to contribute what is considered its just pro- portion of fixed charges. Whatever disadvantages may appertain to that view of railway business which so sub- ordinates its public nature as to permit those who hold it to urge that only those considerations which govern 88 RAILWAY ECONOMICS. the vendors of ordinary commodities in fixing their prices, or those who perform ordinary services in charg- ing therefor, should be allowed to control in the ad- justment of railway charges, it has the great advantage that the functions of the railways as carriers are not likely to be limited by any artificial restrictions com- pelling the rejection of traffic which could be moved with profit to the carriers and with beneficial economic results to the community. The nearest approximation to a general rule regard- ing the adjustment of railway charges which it seems safe to base upon the present knowledge of the rela- tions of the transportation business to industry in gen- eral is that an adjustment of rates is desirable under which sufficient revenue will be secured from each par- ticular item of traffic justly to remunerate those expendi- tures of energy which would not have been incurred had not the particular services involved been performed, and which without preventing the movement of any traffic from which this minimum of revenue can be con- tinuously obtained will, in the long run, secure in addi- tion from each item the largest practicable contribution toward reasonable remuneration of those expenditures of energy which are incurred on joint account. UNJUST DISCRIMINATION IN GENERAL. 89 CHAPTER XVII. UNJUST DISCRIMINATION IN GENERAL. Though it is perfectly clear that the relative advan- tages and disadvantages resulting from unjust discrim- inations in railway charges must accrue to the benefit or detriment of individuals or groups of individuals, such discriminations may be classified with regard to their incidence as being in favor of (a) particular purchasers of transportation selected from among the residents. of the same region, (b) all of the members of particular communities, or (c) all of those interested in the move- ment of particular commodities or classes of traffic. There is a second classification of considerable utility, founded upon the manner in which unjust discrimina- tions are effected, whether (a) by means of deviations from a reasonable adjustment provided for in the regu- lar published schedules of charges or (b) by means of the establishment of relatively unreasonable rates which are promulgated in the tariffs and classifications of freight. These classifications coincide in some degree for discriminations which are intended unjustly to favor particular purchasers of transportation to the disad- vantage of competitors in the same locality, from whom higher charges are exacted for identical and contem- poraneous services, are necessarily effected by means of deviations from the schedules of charges regularly made public. Such deviations may be accomplished by the payment of rebates to favored patrons, by accepting shipments at weights that are known to be understated, by permitting traffic to be charged for as though moved 9O RAILWAY ECONOMICS. a shorter distance than that actually traversed, by ex- cessive allowances for terminal or other services per- formed by shippers or consignees, by excessive pay- ments for mileage of shippers' cars, and by many other devices, all of which, when practiced by railways in con- nection with the movement of interstate commerce, are prohibited by the Interstate Commerce law, and render those who perpetrate and those who accept them liable upon detection to punishment by fine and imprisonment. As it is unquestionably unjust to charge differently for identical services performed for different patrons proof of any of the practices enumerated is conclusive evi- dence of unjust discrimination, and it is quite proper and practicable to apply the penalties considered suita- ble for such discriminations to the acts by which they are effected. On the other hand, it is reasonable and just that different rates should be applied to the movement of the same commodity between different points, or to that of different commodities between the same points; and the existence of such discriminations is by no means evidence of injustice. In order to prove the existence of the latter it is necessary to show that the difference in charges is greater or less than that warranted by the difference in the circumstances and conditions attending the performance of the respective services. Similarly, the existence of a relatively unfair adjustment of charges can be demonstrated by showing that substantially dif- ferent services are performed under similar circum- stances for equal compensation, though an examination of the schedules of charges would not only fail to show an unjust discrimination, but would apparently pre- clude the existence of any discrimination whatever. UNJUST DISCRIMINATION IN GENERAL. QI The inquiries necessary in order to establish the fact that the relations among charges for different services place at an unjust disadvantage the residents of a par- ticular locality, or the producers of a particular com- modity are therefore quite extensive and intricate. Such unreasonable discriminations may even result from errors of judgment on the part of those having rate- making authority, and it would be manifestly a misuse of legislative power to apply to them penalties as severe as those attached to practices which cannot be resorted to except in pursuance of a deliberate intention to afford unfair advantage to a particular patron or patrons. An award of damages equivalent to the injury sustained, though by no means an entirely satisfactory means of re- dress, and the correction of the charges so as to make them relatively reasonable in future, appears to be all the relief which legislatures should venture to apply. It is important to observe that no railway can dis- criminate unjustly among its patrons without injury to itself, for in interfering arbitrarily with the natural or- ganization of industry it introduces artificial conditions which cannot fail ultimately to retard the commercial development of the region which it serves, and that this fact is so thoroughly realized by most railway managers that the unreasonable rate purposely and voluntarily made by a railway official is exceedingly rare. Such rates are almost invariably expedients adopted in the face of exigencies in which the sacrifice of valuable traffic ap- pears to be the alternative. There seems but little popu- lar appreciation of the extent in which railways are, un- der current conditions, subject to the dictation of those who ship in large quantities and of large combinations 92 RAILWAY ECONOMICS. of shippers. As long as the relations among railways are such that the corporation owning a particular line can obtain an at least temporary pecuniary profit by diverting traffic from another line, those who are able to control shipments, the revenue from which is of considerable importance, by threatening to take all of their traffic from the line whose rate-making offi- cer obstinately refuses to favor them unjustly, and to bestow upon it a line served by one more complacent, will be able to secure concessions which will place other shippers at a distinct disadvantage. By this means a single shipper or a group of shippers whose combined business operations are of large extent may be able to obtain unfair advantage over competitors doing busi- ness in the same locality, or the entire traffic of a large city may be favored as against that of adjacent towns, or the shipments of an industrial group may be pre- ferred above those of other groups. The demand for the concession desired may be made directly and unre- servedly by the officer of a manufacturing corporation or trust, it may take the form of a representation insist- ing upon the obligation of a particular railway to main- tain the interests of a city with which its historical or financial relations are intimate and peculiar, or public sentiment or legislative enactment may demand that a particular industry be made artificially profitable by charging some part of the cost of transportation which it should bear upon others which are naturallv remu- nerative. UNJUST DISCRIMINATION AMONG INDIVIDUALS. 93 CHAPTER XVIII. UNJUST DISCRIMINATION AMONG INDIVIDUALS. Though it was found convenient at a very early period in the development of railway transportation to print schedules of the charges in force for the numerous ser- vices which such carriers were ready to perform, railway officials did not consider themselves bound by the rates named in these schedules, and lower charges were very frequently, if not invariably, granted for shipments between points connected by two or more routes to those whose traffic was important in quantity. Prior to the enactment of the Interstate Commerce law, in 1887, there appears to .have been, at least so far as traffic passing state or territorial lines was concerned, no legal obligation to treat different patrons equally, for, though at Common Law no carrier could exact more than a reasonable sum for its services, the courts do not appear to have recognized the interdependence of railway rates, and it was not considered illegal to collect less than a reasonable rate from one patron while exacting the full maximum which justice, or what was thus considered to be justice, would permit from another patron for an identical and contemporaneous service. Under such circumstances only unsophisticated shippers, or those whose traffic had but the slightest importance to the railways, paid the rates between competitive points named in the printed schedules; and even at points served by single carriers -concessions from the printed charges were by no means uncommon. It was cus- tomary for a prospective shipper to secure offers from 94 RAILWAY ECONOMICS. the agents of all of the rival lines, and, according to an official statement made by Mr. C. C. McCain, probably the highest authority on the history of railway charges in the United States, the instances prior to 1887 in which the full published rates were charged were excep- tional, and deviations therefrom were the rule. The requirement that charges for like and contem- poraneous services should be equal though such services were performed for different individuals, which was made a basic portion of the Interstate Commerce law, was as revolutionary as it is just and salutary. Had the observance of this provision been secured one of the principal evils which have accompanied the administra- tion of railway properties would have been corrected, but unfortunately Congress not only failed to provide adequately for its enforcement, but in the same law which forbade unjust discriminations prohibited those measures which, when voluntarily adopted by compet- ing railways, had been the most effective in preventing such discriminations. Discrimination among indi- viduals constitutes the ordinary weapon of competitive warfare among parallel routes. In consequence of modern specialization of productive functions the larger commercial interests at what are called competitive points are usually concentrated in a few lines of produc- tion. Considerations relating to the convenience of the carriers as well as to that of their patrons usually impel the former to provide especially for handling and trans- porting the traffic supplied by such interests, and this, together with the magnitude of the business they furnish, renders it the particular object of whatever com- petition may occur. Under ordinary circumstances UNJUST DISCRIMINATION AMONG INDIVIDUALS. 95 competition among sellers finds expression in a series of offers to supply the particular commodity vended at varying prices, this series of offers finally resulting in a practically uniform price which approximates the cost of production of tfre marginal increment of the supply for which there is an effective demand. Such offers are open to all, and do not vary in regard to the individual to whom they are made. Among railways such is not the ordinary course of competition. Particular trans- portation services having no definite and ascertainable cost of production to serve as a natural limit to competi- tion, open offers would ultimately result in uniform, though unreasonably and ruinously low charges, and traffic would seek the lines naturally best adapted to carry each particular, shipment. Each line attempts therefore to keep secret its concessions to shippers, and in order to do so makes them to particular patrons only. Hence arise unjust discriminations, upon which are built up extortionate profits and finally enormous indus- trial combinations, which in time are able effectively to demand favors in the adjustment of railway charges and to dictate the terms upon ' which they will purchase transportation. No one has better expressed these facts than Hon. Martin A. Knapp, the present chairman of the Interstate Commerce Commission. In the course of one of the most satisfactory papers on railway prob- lems ever written, he said: "* * the choice lies between competition on the one hand, with the inevitable outcome of discriminations which favor the few at the expense of the many, or like charges for like service, which can be realized only by permitting and encouraging co- operative action by rival railroads. The power to compete is the power to discriminate, and it is simply out of the question to have at once the absence of discrimination and the presence of competition." 96 RAILWAY ECONOMICS. And in the same article: "The ultimate effect of preferential rates is to concentrate the commerce of the country in a few hands. The favored shipper, who is usually the large shipper, is furnished with a weapon against which skill, energy and experience are alike unavailing. When the natural advantages of capital are augmented by exemptions from charges commonly imposed it becomes powerful enough to force all rivals from the field. If we could unearth the secrets of those modern 'trusts,' whose surprising exploits excite such wide apprehension, we should find an explanation of their menacing growth in the systematic methods by which they have evaded the burdens of transporta- tion. The reduced charges which they have obtained, some- times by favoritism and oftener by force, account in great measure for the colossal gains which they have accumulated. This is the sleight of hand by which the marvel has been pro- duced, the key to the riddle which has amazed and alarmed the nation. If these combinations were deprived of their special and exclusive rates there is little doubt that they would be shorn of their greatest strength and lose their dangerous supremacy. Indeed, I think it scarcely too much to say that no alliance of capital, no aggregation of productive forces would prove of real or at least of permanent disadvantage if rigidly subjected to just and impartial charges for public trans- portation." No one believes that the evil of unjust discrimination has been materially mitigated by the Interstate Com- merce law. The requirements of the law furnish a ready reply to the applicant for a reduced rate who can- not turn his request into an effective demand by demon- strating his ability to divert important traffic to another line. The shipper of unimportant traffic no longer "shops" among rival lines, and it may usually be taken for granted that he pays the full published rates. What- ever concessions are made are granted grudgingly and reluctantly to the few shippers whose favor the railways cannot lose without sacrificing important revenue; but as long as such concessions continue to be made the fact that they are restricted to a favored and powerful UNJUST DISCRIMINATION AMONG INDIVIDUALS. 97 few aggravates their detrimental results. Thus it appears that the Interstate Commerce law, which could by no means perpetuate competition among railways and at the same time abolish the ordinary means by which it is conducted, has conferred upon the favored shippers this inestimable boon they can feel reasonably sure that the illegal favors which they enjoy are not granted to those who ship in smaller quantities. 98 RAILWAY ECONOMICS. CHAPTER XIX. UNJUST DISCRIMINATION AMONG PLACES. If the published rates from different producing re- gions to a common market are relatively reasonable and just, but certain shippers doing business in one of those regions are given more favorable rates than those in the printed schedules which are observed with refer- ence to both their local and non-local competitors, the injustice by which they profit will enable them to draw to the community in which they reside a larger portion of the business of supplying the common market than it would otherwise enjoy. Local competitors may be driven from business and the gains which accrue from the increased trade may be monopolized in greater or less extent by the minority in the community who have been especially favored in transportation charges; but notwithstanding these drawbacks, the community, con- sidered for the time being as an economic unit, will have been given a distinct advantage in rates over competing communities. It is not necessary here to consider whether the unfair distribution within the community apparently favored is so far incompatible with the high- est utilization of its available productive energy as to offset the unjust advantage in rates, for it is the present purpose merely to show that secret concessions to pre- ferred shippers may amount to unjust discriminations in favor of the localities in which they do business. Though the foregoing is a not uncommon type of territorial discrimination, that which may be consid- ered characteristic is not the result of secret deviations UNJUST DISCRIMINATION AMONG PLACES. 99 from fair rates, but of unfair charges openly promul- gated. These are usually the result of competition among railways offering to perform identical services, and the unfairness, having its origin in circumstances for which the railways are in no way responsible, is at- tributable to the public sentiment which has permitted the enactment and continuance of legislation which in- terferes with the mitigation of those circumstances and the reasonable limitation of the competition in which they result rather than to any dereliction on the part of railway owners or managers. The advantage in the adjustment of railway charges enjoyed by the locality served by several railways over that served by but one is so completely recognized by the general public, which however does not usually perceive that it is the conse- quence of unjust discrimination, that it has proved a considerable incentive to the construction of unneces- sary and therefore socially wasteful parallel lines. Competition at terminal points impels most railways to charge relatively high rates at intermediate points, the traffic of which cannot be diverted to other lines and at stations on branch lines which are not served by other carriers. Such discriminations tend artificially to stimulate the concentration of production in the favored localities and may so effectively counteract the possibly superior natural resources enjoyed by the regions which they subject to unjust disadvantage as to divert the industry affected from the region in which it could be conducted with the least expenditure of effort. If a particular community competes with others for the privilege of supplying a common market, and through an unfair adjustment of transportation charges secures IOO RAILWAY ECONOMICS. an advantage amounting to an injustice to the others, it is quite evident that it is of no consequence to the latter or to society, which is ultimately compelled to produce the commodity involved with unnecessary diffi- culty or to use less satisfactory substitutes, whether the injustice is the result of the action of a single railway or of several. A case decided by the Interstate Commerce Commission during 1892 affords an interesting illus- tration of an adjustment of rates for which, though it was resulting in the commercial destruction and de- population of a formerly thriving town, no single rail- way could be held fully responsible. The Board of Trade of Eau Claire, Wisconsin, claimed that the charges exacted for moving the lumber produced in the mills of that city to the important markets located along the Missouri river were so high in comparison with those from other lumber-producing towns as to operate to its serious prejudice and disadvantage. There was no contention that the charges from Eau Claire were excessive, considered separately, and the railway prin- cipally interested manifested a willingness to reduce them, but insisted that it could not by such action es- tablish charges relatively satisfactory to the people of Eau Claire, as any reduction it might make would be, and when experimentally attempted had been, imme- diately neutralized by corresponding reductions from other points made by railways which did not reach Eau Claire. In its decision the Commission said: "As it seems to us, this town (Eau Claire) has been placed at a manifest disadvantage. So far from enjoying equal op- portunity with its rivals, it appears to have been overweighted with a differential which has excluded it, to a great extent, from the field of competition. A number of its establishments UNJUST DISCRIMINATION AMONG PLACES. IOI have gone out of business, its industrial development has been checked and its population seriously diminished. While neigh- boring towns have been prosperous, Eau Claire has not held its own." And in ordering such a substantial reduction as in its opinion would render the, charges from the competitive producing points relatively reasonable, the Commission added : "Nor will any such consequences follow a reduction of the Eau Claire differential as would justify other carriers in lower- ing their rates at competing points for the purpose of preserv- ing the correlation of rates. * * * Undoubtedly those roads have it in their power to continue the present disparity * *" The rates from Eau Claire to the Missouri river points which the Commission had indicated were immediately promulgated by the defendant carrier, but the adjust- ment sought was as promptly nullified by reductions in the rates from the competing lumber towns that were served by railways which, as they did not reach Eau Claire, could not be said to discriminate unjustly against that place. Nor, though accepting the conclu- sions of fact reached by the Commission, does it appear clear that this action on the part of railways the volume of whose traffic was dependent upon their success in competing not merely with the railways serving Eau Claire, but, together with their auxiliaries, the lumber producers at other points, with a combination consist- ing of the producers of lumber at Eau Claire and the railways over which they shipped, deserved to be stig- matized as "inconsiderate and arbitrary." These rail- ways had properly but two objects to attain, first, fully to perform their quasi-public functions as carriers, and, second, to secure for their owners the reasonable return IO2 RAILWAY ECONOMICS. upon their investments tacitly agreed upon by the society whose agents they were. This society had, wisely or unwisely, declared that they should be op- erated independently of and in competition with other railways, and in separating thus sharply the interests of different railways, had made the refusal of traffic that would provide a reasonable revenue inconsistent with the objects named. The only questions to be asked in connection with the rates on lumber from the towns competing with Eau Claire, promulgated before or after the order of the Commission, was whether in comparison with other charges made by the same companies they were reasonable and just. If so, to make them higher, in order that the lumber shipments of Eau Claire might be increased, would have been grossly unjust to the competing towns. Such difficulties are to be solved by a readjustment of the relations among railways and not by placing restrictions upon independent carriers. It is perfectly clear that instances similar to the fore- going, borne frequently without complaint because they are regarded as inevitable, must continue to be numer- ous until some means is provided for treating as a unit all railways which participate in the performance of such closely related transportation services. Unjust discrimination among places will also continue as long as the traffic of certain localities is actively sought by rival railways competing in the only manner in which such competition has ever, been made effective, by means of offers, secret or otherwise, to perform identical services for varying rates of compensation, while the business of other localities is thrown undivided to car- riers, which are thus permitted to recoup the losses UNJUST DISCRIMINATION AMONG PLACES. IO3 sustained in connection with competitive business. Relatively fair rates at competitive points as compared with those charged at non-competitive points can >e maintained only by the substantial elimination of the competitive element. This unquestionably involves agreement in regard to charges among the potentially rival carriers, and experience has shown that such agreements in order to be permanently effective must so far combine the interests of such carriers as to re- move the temptation to violate them which is usually found in the temporary increase of revenue, or at least of tonnage, which can be gained by the secret accept- ^ance of slightly lower rates than those agreed upon. IO4 RAILWAY ECONOMICS. CHAPTER XX. CHARGES FOR LONG AND SHORT HAULS. One of the practices very frequently resulting from competition among railways which to the general public, always prone to assume that each service per- formed by a railway has its separate cost to the operat- ing corporation and that charges should be proportional to such costs, seems least defensible is that of exacting a greater aggregate compensation for a shorter inter- mediate transportation service than for the movement of the same commodity in the same direction over a longer distance, including that for which the greater charge is made. This practice was quite common all over the country prior to the passage of the interstate- commerce law, by which it was made illegal in all cases in which both services are performed subject to "sub- stantially similar circumstances and conditions" but has subsequently become much less frequent though it has not disappeared. It unquestionably constitutes a dis- crimination among localities, but, if the principles so far advanced in this series are sound, cannot be said to be unjust unless the disparity in charges fails to corre- spond with actual differences in the conditions govern- ing the different services. This, though perhaps not yet completely understood by the general public, has become the commonly accepted view among students of transportation, though there remains some diverg- ence of opinion as to what circumstances are adequate to justify the apparently preferential treatment of the longer distance traffic. CHARGES FOR LONG AND SHORT HAULS. IO5 A lower charge for a particular service than for an intermediate one of the same kind is usually the result of conditions which make it appear impossible for the railway to obtain the longer distance traffic at rates which, if applied to>all its business, would adequately or fairly remunerate its employes and owners. For pur- poses of illustration the case of a road carrying coal to a market at X, in which there is a demand for 30,000 tons per month at $4.50 per ton, may be supposed to be as described by the following statement: Mines available. A" Distance from X in miles. 100 Maximum capacity per month in tons. 4,OOO Cost of production at mine per ton. $^.OO Rate to Xper ton. $I.OO Cost of production at X per ton. $4.0O B 130 5,OOO Vt/*Y* 2.80 1.25 4.05 c 150 6,OOO 2.7=5 I.4O 4.15 D .. E 175 . .200 7,000 8,000 * */ *j 2.70 3.2=; 1.50 I.2J5 4-2O 4. SO It is essential to this illustration that the five mines shown be supposed to be all which can supply coal at X within the price per ton which will be paid for 30,000 tons, to be located on the main line of a single railway, and that other particulars are substantially as indicated in the table. It is generally understood that the price of a particu- lar commodity in any market varies inversely to the supply, and that if a certain quantity is called for at a given price a supply in excess of that quantity will reduce the price and one less than demanded will increase it. As none of the mines in question would be continuously operated unless the miners could realize the amount per ton indicated in the fourth column, it is evident that in the case supposed the railway must carry coal from E to X for $1.25 or less per ton or the latter IO6 RAILWAY ECONOMICS. will not have the supply which it requires, and the price will in consequence rise above $4.50. It is true that the railway might reduce the rates, from the intermediate mines to $1.25 or lower, but this could not have the effect of increasing the traffic from those points and it might reduce the aggregate earnings below the point at which they would be reasonably remunerative. Such action would not benefit consumers at X, for the price at that point would continue to be fixed by the cost of that produced under the least advantageous circum- stances, viz, at E. The amounts of the reductions, if made, like the differences between the amounts in the last column and the price at X, would become economic rent, and would accrue not to the labor or capital devoted to mining but as royalties to the owners of the mines. If therefore accepting traffic seeking shipment from E to X at $1.25 per ton leaves the railway in as good a financial condition as it would enjoy were it rejected, i.e., if the revenue received from such ship- ments is sufficient to pay all expenses which would not have been incurred had they not been carried, and if, as has been supposed, it is all that can be collected with- out restricting shipments below 8000 tons per month, the rate from E to X is not only justifiable but any different rate would be unreasonable and unjust. Another possibility might be considered in connec- tion with the table. Let it be assumed that the supply of coal furnished by the mines A, B, C and D has sufficed for X ; that the rates shown in the fifth column have been regularly collected, and that these, as well as all of the rates collected by the railway for other ser- vices, have been absolutely and relatively reasonable CHARGES FOR LONG AND SHORT HAULS. IO/ and just. The price of coal at X under such circum- stances would have been $4.20 per ton. Now, if on account of an increase in population or for any other reason there is an augmentation of the demand for coal at X, the price will" rise; let it be supposed that it rises to $4.50 per ton, and that the railway then commences to accept coal for shipment from E to X at $1.25. Then if the additional expense entailed by the movement of the new traffic is but $6000 per month, or 75 cents per ton, the railway's net earnings will be increased $4000; and, as the railway cannot reasonably be per- mitted to increase its net earnings, which were assumed to be already sufficient, this must be offset by the reduc- tion of rates on other traffic. Those who have followed the discussion in these articles will not need to be reminded that this result will usually be secured by the free action of commercial forces, to struggle against which the railways are practically powerless. Under present conditions, as was intimated in the beginning of this article, the inability to secure as high rates as are secured on intermediate traffic from busi- ness received at the points from which lower charges are made is usually the result of competition in some of its forms. Thus the competition of steamship lines doing business from New York city and other Northern Atlantic seaports to New Orleans is of such controlling force that it appears to justify the railways connecting those cities in the acceptance of much lower rates than are fair and reasonable on intermediate traffic for which the water route is not available. The same form of competition is met with at Galveston, and its effects extend into Texas and limit the rates which can be 108 RAILWAY ECONOMICS. obtained for railway service to many of the inland cities of that state. The Interstate Commerce Commission has consist- ently held, since the first case involving the fourth section of the interstate commerce law which came before it, that the dissimilar circumstances and condi- tions necessary to justify higher rates for intermediate services may result from the competition of railways which are not subject to the laws of the United States, and has quite recently authorized certain of the railways of this country to make exceptions from the general rule on account of the competition of the Canadian Pacific Railway. The Commission also, in a very early case, expressed its opinion that under rare and peculiar circumstances such substantial dissimilarity may result from the competition of railways subject to the law, and has, under the proviso of the fourth section, considered applications for relief from the general rule of that section based upon such grounds. There appears to be no difficulty in justifying the practice in question in the same manner as in the case illustrated in the statement as long as the disparity in rates merely measures with accuracy substantial differ- ences in the conditions governing each shipment. It is quite evident, however, that the lower charges for transportation services which are actually greater do junnecessarily favor particular localities, and that they may offset natural advantages so far as to result in an undesirable adjustment of productive industry. Yet when these charges are justified by railway competition it is society, which through the exercise of its legislative power has imposed the maintenance of competition CHARGES FOR LONG AND SHORT HAULS. IOQ upon reluctant railways, that is at fault and not the car- riers. If the results appear undesirable, the circum- stances which justify them can be readily removed by relieving the railway system. from the burden of com- peting for traffic. v IIO RAILWAY ECONOMICS. CHAPTER XXI. UNJUST DISCRIMINATION AMONG COMMODITIES. It is obvious that every manufacturer is interested in the rates of freight not only on the raw materials which he purchases and the commodities which he pro- duces, but also in those exacted for moving the ma- terials and products of his competitors. As manufac- turers who compete in common markets are quite fre- quently located at very widely separated points it is ap- parent that the amounts charged for services quite dif- ferent from those performed in his own behalf are very often of the greatest importance to a particular manu- facturer. One phase of this interdependence of rates appears in the interest which a manufacturer, doing business at a point located somewhere between the region from which raw materials are obtained and the communities in which the finished products made from them are consumed, has in the charges for moving raw materials similar to those he uses over the routes which are regularly traversed by the commodities which he manufactures. If the rates on the latter are reasonable relatively to the charges exacted for carrying the same commodity from the localities in whica his competitors do business to the common market, it is evident that the interest is not in the aggregate amounts actually paid, but in the relation which the charges on raw materials bear to those on the finished product. An illustration may be useful. A very large portion of the wheat pro- duced in the Northwest is gathered at the mills of Min- neapolis, and after being made into flour is shipped east- UNJUST DISCRIMINATION AMONG COMMODITIES. Ill ward to feed residents of the Eastern states and of Europe. The identical routes traversed by this flour are traversed also by wheat which is ground into flour much nearer the points of consumption than Minne- apolis. It takes four and one-half bushels of wheat weighing, approximately, 270 pounds to make 196 pounds of flour, which with the barrel in which it is usually placed is accepted by the railways at an arbitrar- ily estimated weight of 200 pounds. Now if it be as- sumed that the advantage in cost of milling enjoyed by Minneapolis amounts to ten cents per barrel, and that the rate on flour from Minneapolis to a point on the Atlantic seaboard is seventy-five cents per barrel, it is evident that whenever the rate on wheat from Minne- apolis to the same point falls below twenty-four cents per 100 pounds it becomes more profitable to mill at the Atlantic seaboard point than at Minneapolis. If the rate on wheat is twenty cents per 100 pounds the ad- vantage at the seaboard will amount to eleven cents per barrel, and at fifteen cents it will be twenty-four and one-half cents. Probably even less than the smaller of these advantages, if continued throughout an extended period, would transfer the milling business of the North- west, except in so far as it is conducted to furnish flour for local use, to the Atlantic seaboard. The extensive traffic in dressed meats received by the railways which connect the various cities situated on the banks of the Missouri river, as well as St. Louis and Chicago, with the centers of population in the East furnishes another illustration of the same character. In spite of the magnitude of the interests represented it is unquestionable that if the present adjustment of 112 RAILWAY ECONOMICS. rates was altered so as to be sufficiently unfavorable to shipments of meats the traffic in live cattle and hogs, which has by no means been discontinued, would be rapidly augmented, and in time the slaughtering and packing industries removed to localities much nearer the consumers. Similarly rates on many commodities have an im- portant relation to those applied to others which can be substituted. Thus anthracite coal, though preferred for many purposes over bituminous coal, may be en- tirely excluded from a particular market by an adjust- ment of charges which is relatively sufficiently favorable to the latter. Many other instances of both kinds will readily occur to the reader. Discussion of relative rates appears often to be based upon an assumed obligation of the carriers to favor certain locations for particular industries, or in other cases to neutralize natural advantages so as to establish among those engaged in production at different points, an artificial equality in the competition of a common market. Neither of these assumptions has a reasonable basis. Society requires the production of commodities at the lowest practicable cost, not their production at a particular point or at a number of points. The com- petition to be favored is a natural competition which will discover and take advantage of the localities and methods best adapted for each form of production. If one competitor is artificially favored in order to create a fictitious equality the social cost of the total supply of the commodity he produces is inevitably enhanced. The force of commercial competition will lead manufactur- ers to seek the locations most advantageous from an UNJUST DISCRIMINATION AMONG COMMODITIES. 113 economic standpoint if railway rates are adjusted inde- pendently of any desire to control or affect their loca- tion, and with a purpose merely to secure the most complete utilization of transportation agencies and the movement of all traffic that can recompense adequately the expenditure of energy jequired for its carriage. Though the results of unjust discriminations of the character just described can be much more readily de- tected than those of discriminations among less closely related commodities it is quite possible to conceive an adjustment of charges which would impose upon one or more commodities an unjust share of the aggregate cost of railway transportation, thus giving all other commodities an unfair advantage. Thus as competi- tion among railways connecting the same points, un- questionably, causes lower rates to be applied to traffic shipped between such points, and as. the articles compos- ing the bulk of such traffic are very often peculiar thereto, and do not traverse the same lines between local stations, there is a manifest discrimination that is unfavorable to the articles which make up the traffic to and from the latter points. It is also possible that the present distribution of the total expense of transpor- tation bears with undue severity upon some of the great classes of commodities. Manufactured products may be unjustly favored at the expense of agricultural products, or vice versa. Animals and animal products may pay less than their share, and the balance may be collected from cereals, or from cotton, or from the local traffic in the products of truck farms destined to feed great cities. Whether the present adjustment is the best possible could be determined, if at all, only after the com- 114 RAILWAY ECONOMICS. pletest and most comprehensive investigation, but it may be regarded as reasonably certain that whatever evils of the character indicated now exist are the conse- quences of the lack of unity in the railway system. Separately owned and independently operated railways cannot perform in the highest possible manner the func- tions of a transportation system, because, among other reasons, it is impracticable to apply to them on any broad and comprehensive plan any scheme of relatively reasonable charges. A railway in New England can- not properly be said to discriminate against the cotton producers of Texas and Arkansas, though the entire country might gain, in a manner which would favorably affect the residents and railway owners of New England as well as the planters of the Southwest, by the adoption of a legal system by which the advantages of the more compact traffic of one section might be extended over the lines of a consolidated railway system serving the whole country. THE I RESENT ADJUSTMENT OF RATES. 115 CHAPTER XXII. THE PRESENT ADJUSTMENT OF RATES. Though it will not be claimed that the relations now existing among the charges for railway services are, in all cases, those which are most desirable a spirit of wise conservatism will insist upon full consideration before accepting any plan involving radical modifications. The body of railway charges has not developed hastily nor are many of its inter-relations accidental. The extremely large number of officials having practically independent rate-making authority has given it an elasticity that though almost too free from reasonable limitations, when considered from some standpoints, has made it capable of yielding readily to new conditions, and to respond promptly to the growing demands upon trans- portation facilities of increasing commerce and multi- plying territorial exchanges. The process is never complete, though it has dealt for three-quarters of a century with the rates of many railways, and has not failed to act upon those of the newest road in existence. Classification of freight is now in a large sense the basis of the adjustment of charges for moving commodi- ties, but no classification is so inviolable as to constitute a serious obstacle to necessary readjustments. Very early in the history of railways the increasing multi- plicity of the different articles shipped made it incon- venient to establish separate rates for each commodity, and those of similar value, bulk, weight, etc., were grouped in classes for rate-making purposes. The de- velopment of classifications for this purpose was general Il6 RAILWAY ECONOMICS. and rapid, though without uniformity. At the close of the year 1886 nearly every railway had a freight classifi- cation of its own which it applied to strictly local traffic, and many roads were parties to several joint classifica- tions applicable to traffic between terminals or travers- ing two or more connecting lines. The requirements of the Interstate Commerce law, and particularly of its long and short haul clause, made it almost wholly im- practicable to conduct local and through business in ac- cordance with its provisions under separate and fre- quently conflicting classifications, and as competition had already made uniformity in classification among rival routes indispensable there was a strong movement toward complete uniformity. At the present time three great classifications, each prevailing within an extensive territory, together determine relations among charges on the greater portion of the railway traffic of the country. Each of these great classifications is in charge of a committee composed of representatives of the dif- ferent railways interested, and every alteration or excep- tion must have its approval before rates thereunder are promulgated. The articles excepted from these classifi- cations are usually those of relatively low value, which move in very large quantities, but even with regard to these commodities certain relations established by cus- tom are rarely even temporarily abrogated. Thus throughout the entire North and West wheat and flour move at the same rates per hundred pounds. When a new line is opened, and it becomes necessary to promulgate rates for the different services which it will have to perform, the freight classification applying to traffic within the territory in which it is located is THE PRESENT ADJUSTMENT OF RATES. 1 1/ made the basis of the new rates, -and if there is no rival route available for the traffic which is sought, the rates of which must be considered as controlling those of the new route, the rates applied to each of the several classes will naturally be made progressive, the average per ton per mile declining gradually as the distance in- creases, and the cost of terminals is consequently dis- tributed over a longer carriage. Seldom, however, does this simple adjustment of rates persist during any con- siderable period. Opportunities to increase traffic by lowering rates from or to particular points are present- ing to the rate-making official by interested shippers, and if the former is convinced that the additional reve- nue received will exceed the extra expenses incurred on account of the new increment of traffic the concessions requested are promptly and gladly granted. In another case it may appear that the traffic re- ceived at a particular station is decreasing, and the rail- way officials, always quick to perceive a change of this character, and to seek its cause, may find that the prin- cipal product upon which the community depends in its exchanges with other communities has been marketed in competition with the product of a distant region which has gained an advantage sufficient to give it practical control of the common market by means of cheaper transportation thereto. If, meeting with such a condition, the railway officials are unwilling to lose the traffic of the community so affected the only course open to them is to reduce their charges sufficiently to restore the former equilibrium, not for the purpose of controlling conditions in a particular market, as might too hastily be assumed, but to prevent serious depletion Il8 RAILWAY ECONOMICS. of the railway's revenue, and in order that it may not fail to move all the traffic that is seeking shipment. Obviously such reductions should not go beyond the point at which it is more profitable for the railway to carry the traffic affected than to leave it. In ordinary cases successive modifications of this character, giving increased complexity to the schedule of rates, finally reach the point at which the railway re- ceives and transports, at any particular time, a volume of traffic which approximates very closely the total amount of transportation which is socially desirable in the region which it serves, and receives therefor an aggregate revenue that constitutes a sufficient and rea- sonable remuneration for the energy employed. At this point it may be assumed that an event occurs which has been too characteristic of the development of the railway system. There being no effective restraint on the construction of new railway lines, however ade- quately those in existence are serving the regions which they traverse, speculators are permitted as nearly as possible to parallel the line, and though topographical conditions do not, usually, permit absolute parallelism, and consequently competition at every point is impossi- ble, there is an immediate struggle for traffic at meeting points. Reductions by the new line must be met by its competitor or traffic will be diverted, and in this way lower charges for longer than for intermediate shorter services arise as well as other differences which must operate unfavorably to the towns served by the old line only. Similar readjustments may be caused by the competition of circuitous routes or of water lines. Almost innumerable causes similar to those described THE PRESENT ADJUSTMENT OF RATES. have acted upon the relations among rates for services, many of which though apparently not connected have in reality the closest interdependence, and as their result have produced the present adjustment of charges. The latter is far from perfect, and may operate unjustly upon the interests of particular classes of traffic, communities, and individuals, but it is a part of a commercial system which is at once the most extensive and the most satis- factory that has been anywhere developed. Changes should unquestionably be made, not merely to accom- modate the system to changing conditions, but more satisfactorily to meet the necessities of those now exist- ent. Yet the attempt to alter and modify should be ac- companied by a desire to conserve the commercial fab- ric which is based on transportation, and any change made should be preceded by the most complete and thorough study of all the interests which may be how- ever remotely affected. I2O ' RAILWAY ECONOMICS. CHAPTER XXIII. CONSOLIDATION. In the preceding chapters it has been shown that com- petition among railway carriers results in higher average charges, without, however, gaining greater returns for railway owners; and in unjust discriminations the re- sponsibility for which is popularly attributed to railway managers who are actually powerless to prevent them. It would, indeed, have been possible to go much further, and to demonstrate that it is very largely in consequence of the costly burden of unnecessary and socially unde- sirable competition among railways that, as stated in the latest annual report of the statistician to the Interstate Commerce Commission, dividends are paid upon less than thirty per cent, of the total outstanding railway stock and interest upon but seventeen per cent, of in- come bonds, while even of bonds secured by mortgages thirteen and one-half per cent, are in default. As these facts are necessarily most perceptible to railway owners and managers, it is by no means surprising that as soon as the railway facilities of the United States reached a stage of development which permitted competition on any considerable scale, efforts were made to mitigate its consequences and to secure the benefits of combina- tion. These efforts have assumed many forms, but have produced results the most satisfactory, both to railway owners and to the general public, when they have aimed at the actual consolidation of lines owned by separate corporations. The process of consolidation has pro- ceeded along two fairly distinct lines. The first, chron- CONSOLIDATION. 121 ologically, is the formation of such lines as those op- erated by the New York Central and Hudson River Railroad, the Pennsylvania companies, and many others, by the union of short connecting lines. The main line of the former road jvas constructed and for a time op- erated, by eleven companies, ten of which forming the line from Albany to New York, were consolidated as the New York Central Railroad ia. 1853; the line from New York to Albany, which had been independently operated for eighteen years, being added in 1869. The addition in 1873 of the New York and Harlem Railroad to the properties operated by the same company is an illustra- tion of the second phase of consolidation that of paral- lel lines. Much of the latter has taken the form of leases, the lessor companies sometimes continuing their operating organizations. In other cases the practical merging of parallel railways in a single organization has been accomplished by the purchase of controlling interests by the same individual or group of individuals, and does not find expression in the form of their cor- porate organizations. The following table shows the progress of consolidation as far as it can be traced sta- tistically, but does not include those practical consolida- tions which have not affected the operating organiza- tions. The data for 1892 and 1896 are from the reports of the Statistician to the Interstate Commerce Com- mission and are substantially complete. Those for 1867 represent 46.61 per cent.; for 1872, 68.40 per cent.; for 1877, 87.32 per cent.; for 1882, 89.44 per cent., and for 1887, 87.81 per cent, of the entire railway mileage in operation. It is probable that the inclusion of all roads, had it been practicable, would have increased the pro- 122 RAILWAY ECONOMICS. portions in the classes embracing the shorter lines. In other words, the table does not show the full relative increase of mileage operated by the more important cor- porations : Items. Mileage over 1000. Mileage from 600 to 1000. Mileage from 400 to 600. Mileage from 250 to 400. Mileage under 250. Total. 1867. Number of roads i 2 7 II 7 2 CM Aggregate mileage in class Per cent, of total mileage... 1872. Number of roads . ... 1,152 6.69 6 2,252 13.08 12 3,440 19.98 7 3,189 1852 21 7,i83 4L73 226 94 17,216 IOO.OO 272 Aggregate mileage in class Per cent, of total mileage... 1877. Number of roads .. 6,910 15-97 i 1 9>050 2O.9I 12 3,523 8.14 iy 6,331 14.63 34 17,460 4035 362 43,274 100.00 AT.6 Aggregate mileage in class Per cent, of total mileage... 1882. Number of roads 13,648 20.16 JQ 8,807 13.01 I/I 8,154 12.04 20 10,700 15.81 48 26,388 38.98 400 67,697 IOO.OO CQT Aggregate mileage in class Per cent, of total mileage... 1887. Number of roads 35,950 36.88 28 11,179 11.47 IQ 9,807 10.06 15,720 16.13 53 24,814 2546 A-IA 97,470 IOO.OO c6i Aggregate mileage in class Per cent, of total mileage... 1892. Number of roads 55,447 43.64 43 14,671 ".55 24 13,860 10.91 24 16,694 I3.I4 40 26,373 20.76 871 127,045 100.00 I OO2 Aggregate mileage in class Per cent, of total mileage... 1896. Number of roads 99,232 57.86 44 18,052 10-53 22 12,307 7.17 2 4 12,796 7.46 44 29,U5 16.98 077 171,502 IOO.OO I III Aggregate mileage in class Per cent, of total mileage... 103,346 56.89 17,450 9.60 12,158 6.69 14,226 7.83 34,498 18.99 181,678 IOO.OO By means of these consolidations the public has gained better service than would have been possible had it remained necessary for each shipment over an aver- age distance to traverse several independent lines, and has also been accorded such service at a much lower aggregate cost than would have been required had so many separate operating organizations been maintained. Besides the process of corporate consolidation, there CONSOLIDATION. 123 has gone on another evolutionary change which has also tended toward the practical unification of the rail- way system. Among the characteristics of this change are the arrangements by which travelers having to trav- erse the lines of several independent railways have been enabled usually to purchase tickets and check baggage from starting-point to destination and frequently to make the entire journey without leaving the train, those for the interchange of freight cars which permit ship- ments to traverse independent lines without transfers from car to car, and those for joint classifications, through rates, and bills of lading. That consolidation, though perhaps not always in the legal sense, is a natu- ral and necessary incident of railway development is in- dicated by the fact that the process in one form or an- other has gone on in spite of and scarcely hindered by the numerous artificial obstacles that have had to be overcome. Inspired by public sentiment, which has only lately taken cognizance of the fact that competition in the ordinary sense is both undesirable and impracti- cable among railways, provisions intended to restrict consolidations have been incorporated in state consti- tutions, in acts of state legislatures, and in railway char- ters. The Federal Congress has prohibited agreements for the division of traffic or earnings, and possibly, even agreements to make and maintain reasonable rates. Cities have strenuously opposed arrangements which would prevent the unloading and transfer within their limits of freight passing through them, and railways have been constructed with gauges differing from those of their connections in order that cars should not pass from one to the other. Yet through cars and shipments 124 RAILWAY ECONOMICS. have become the general rule, and the standard gauge has been substituted in nearly every instance where either narrow or broad gauges were originally con- structed. When air industrial tendency strong enough to override laws enacted for its control is discovered, it is reasonable to conclude that it serves some beneficent purpose and wise legislators will aim to take advantage of it rather than to place obstacles in its path. In the case of railway consolidation the presumption of benefi- cence is supported by experience and by the judgment of those most acquainted with the facts concerning the transportation industry. POOLING PRIOR TO 1887. 125 CHAPTER XXIV. POOLING PRIOR TO 1887. The practice, popularly, though somewhat carelessly and incorrectly termed po'oling, is resorted to by rail- ways which compete for traffic between the same points in order to eliminate from the cost of operation the wasteful expenditures incident to the struggle for traffic and incidentally to obviate the necessity of making rates apparently too favorable to the traffic affected by the competition. It is an expedient intended to secure to railway owners and patrons some of the benefits of con- solidation when the complete merging of rival interests is not desired or is for any reason impracticable. Pooling contracts may be defined as those which pro- vide for the division between two or more railways of traffic which might go by either, or all or a portion of the earnings therefrom, in proportions set forth in the con- tract or determined in accordance with its terms. Con- tracts for the division of revenue, whether gross or net, are termed "money pools" and had existed in England for mariy years before being introduced in this country. "Tonnage pools" aim to secure the physical division of common business, diverting traffic from lines in excess to those which have received less than their agreed shares of the aggregate tonnage. Though the pools earliest established in this coun- try were among the New England railways, they were comparatively unimportant, and the system first at- tained considerable development in the region traversed by the so-called "granger" roads. One of the most in- 126 RAILWAY ECONOMICS. teresting, on account of the exceptionally long period of its uninterrupted existence and the simplicity of its machinery, included freight and passenger traffic car- ried between Chicago and Omaha, and continued from 1870 until superseded by a new organization in 1882. For seventeen years prior to the passage of the Inter- state Commerce law there was but one period, and that of less than twelve months' duration, in which the traffic between these points was not subject to a pooling ar- rangement. The principal lines engaged in carrying anthracite coal to the Atlantic seaboard arranged a pool which went into operation on December i, 1872, con- tinuing until August, 1876. A pooling arrangement embracing the four roads connecting Atlanta, Ga., with the seaboard was formed in December, 1873; a money pool applying to both passenger and freight traffic be- tween Chicago or Milwaukee and St. Paul took effect on September i, 1874; the so-called "cattle eveners" pool and the South Western Railway Association, a pooling organization, were organized during 1875; the Southern Railway and Steamship Association pool dur- ing 1876; and the Trunk Line Association pool during 1877. During 1878 it was authoritatively stated that the Illinois Central Railroad participated in more than twenty pools in the two states of Illinois and Iowa, and that the Chicago and Alton Railway was a party to twelve such arrangements. Agreements for the division of competitive traffic or the earnings therefrom constituted a most interesting, conspicuous and characteristic feature of American rail- way administration at the time of the passage of the In- terstate Commerce law. Though that law expressly POOLING PRIOR TO 1887. 127 forbade all such arrangements, the manner in which the prohibitory clause was forced into the measure and the much greater frequency of acknowledgments of the ne- cessity of pooling and of its beneficial results than of objections thereto in the testimony taken during the preliminary investigation of the Committee on Inter- state Commerce of the United States Senate justifies the statement that the familiarity of the public with pool- ing arrangements had not resulted in any preponder- ance of public sentiment in favor of their prohibition. Indeed, whatever public condemnation the pooling system received aside from that inspired by the irre- sponsible utterances of demagogues, who found attacks upon railway corporations just as their prototypes a few decades earlier had found the popular enthusiasm for railway construction, an easy and convenient means of attaining office, was due rather to the fact that those ar- rangements were never permanent, and in consequence never wholly eradicated the evils they should have cor- rected. Though after nearly a decade spent in the study of the social aspects of railroad transportation from the standpoint of a public official, Dr. Joseph Nimmo stated in the annual report of the Bureau of Sta- tistics of the United States Treasury Department for 1879 that railway pooling had come to be favored by the general public because it had proved to be "the means of arresting discriminations"; and the Iowa Rail- road Commission in its report for 1878 expressed the same idea by declaring that it considered "the pool as the only agency that can compel the through traffic to bear, as it should, its proportion of the interest on the cost and the expenses of maintaining and operating the 128 RAILWAY ECONOMICS. roads"; Mr. Albert Fink, the originator, organizer and official head of the most complete pooling association ever established, was at almost the same time complain- ing ot their lack of permanence and stability and conse- quent inadequacy, and urging the necessity of legisla- tion to give them legal sanction and effect. All railway pools in the United States have been extra-legal arrangements, dependent for their execution upon the good faith of the parties, upon the violation of which none of them would venture to appeal to the courts for redress. So lacking were these arrangements in the necessary cohesive qualities that each railway considered their abrogation an inevitable incident, pend- ing which constant vigilance was necessary in order that the day of dissolution should not find it an unready or tardy contestant in the struggle for traffic. The period during which a pooling contract was in operation was consequently one of armed neutrality, and, as in many cases between nations, that relation was regularly dis- turbed by instances of depredations by irresponsible members of the rival forces. As the apportionment of business in any pool which should follow a period of warfare would probably be based upon the proportions offered (if a tonnage pool) and carried (if a money pool) prior to the disruption of such an agreement, there was a strong incentive to take advantage of every opportu- nity to gain traffic by its violation which promised im- munity from detection. Thus there was never an entire abandonment of the baneful practices of competition, there were always discriminations in favor of com- petitive traffic, and there were frequent periods during which all the evils of unjust discrimination operated to POOLING PRIOR TO 1887. I2Q their fullest extent. Nevertheless, as indicated in the quotation from the Iowa Railroad Commission, the evils of excessive competition were in some degree miti- gated, and the pooling arrangements, unstable and un- satisfactory as they, too frequently were, indicated a means of securing in some measure that substantial identity among the interests of the carrying corpora- tions which is a prerequisite to the lowest and most equitably adjusted rates. 130 RAILWAY ECONOMICS. CHAPTER XXV. POOLING UNDER FEDERAL SUPERVISION. Immediately upon the passage of the Interstate Com- merce law all pooling contracts were discontinued, and there is evidence that nearly all railways sought in good faith to observe its provisions. Railway associations were formed which announced as their objects the main- tenance of reasonable rates and the enforcement of the regulative provision of the new law. The co-operation of the weaker lines was in many instances purchased by permission to charge slightly lower rates than those collected by their stronger rivals. Subsequently other efforts were made to effect the satisfactory division of traffic without its actual transfer from one line to an- other after consignment, and without resort to the meth- ods technically characteristic of tonnage pools; but the practical failure of these measures is now generally rec- ognized, and the patrons as well as the owners and managers of railway properties are now urging a modifi- cation of the Interstate Commerce law that will permit agreements for the apportionment of traffic; operations thereunder to be conducted under the strict supervision of Federal authorities. This change has been recom- mended by several annual conventions of national and state railway commissioners by the National Board of Trade, by a conference of representatives of boards of trade and other commercial organizations of the prin- cipal cities of this country, and .has received the approval of individual members of the Interstate Commerce Com- mission and of the author of tlfle anti-pooling section of POOLING UNDER FEDERAL SUPERVISION. 131 the present law. A bill embodying it and including several other very desirable amendments to the Inter- state Commerce law, which had been strongly urged by the Commission, passed the House of Representatives during the last session of the Fifty-third Congress, and would unquestionably have received the support of a large majority of the Senate had not the rules of that body and the early approach of the end of the session, combined with the obstructive tactics of a minority, numerically insignificant, prevented its friends from securing a vote upon its passage. In its eleventh annual report the Interstate Commerce Commission expressed its opinion that: "It is only by destroying competition that the inducement to deviate from the published rate is wholly removed, and it is only to the extent that competition is actually destroyed that beneficial results can be expected," and in the last chapter it was intimated that the weak- ness of the pooling system as formerly conducted arose from the instability and temporary character of the pooling agreements. Attention should be directed to the essential difference in this particular between pool- ing as practiced prior to 1887 and the arrangements that will be permitted, subject to effective Federal super- vision, should the Patterson or Foraker bill, or a similar measure be adopted by Congress. Indeed, whatever provision for pooling may be finally adopted, it is cer- tain to be in a large degree free from the objections cited. The contracts permitted will have the express sanction of a Federal statute, and any railway corpora- tion that may be injured by the failure of another to ob- serve the terms of a pooling agreement to which both are parties may invoke judicial aid in securing the par- 132 RAILWAY ECONOMICS. ticular kind of redress that is found to be adequate and suitable. Such agreements will naturally provide for a definite period of operation, with, possibly, continuance thereafter subject to due notice of the intention of any party to withdraw. The possibility of unjust personal discriminations will, it may reasonably be hoped, be minimized by the discontinuance of separate soliciting for traffic, and the substitution of joint for independent ticket and freight agencies. Whenever the temporarily divergent interests of separate bodies of stock and bond- holders can be sufficiently subordinated to the general interest of all the carriers in the satisfactory adjustment of the railway system to the ends for which it exists, the latter will be found to constitute a powerful agency for the elimination of unjust discriminations, including those among competing localities and communities. When the exact proportion of competitive traffic which will fall to a particular route becomes as certain as that it will receive all of the non-competitive traffic, both will be treated with equity, for there will be no reason for favoring cities served by more than one railway. The selfish interests of carriers will then make powerfully for justice, while such regulative instrumentalities as may be established by the public will have the advantage of dealing with a railway system that has become unified and homogeneous. In addition, the Federal supervision of the operations under pooling arrangements provided for in each of the measures which have recently been advocated in Con- gress is adequate and complete. In all such measures the supervisory functions have, very wisely, been dele- gated to the Interstate Commerce Commission, with POOLING UNDER FEDERAL SUPERVISION. 133 which every contract for the division of traffic or earn- ings must be filed before it may become effective. The Commission is authorized and directed to disapprove any such contract when, in its opinion, it will, if per- mitted to go into effect, operate injuriously to the public by resulting in unreasonable rates, unjust discrimina- tions, inferior service, or otherwise. The Commission is directed also to observe the working of each pooling arrangement and whenever facts appear which if appre- hended would have warranted the disapproval of the contract in the first instance, is authorized to issue an order requiring the rates to be changed, the unjust dis- criminations to be stopped, the facilities to be improved, the improper practices to be corrected, or, in its discre- tion, requiring the entire discontinuance of the contract itself. Appeals to the Federal courts from orders of the Commission disapproving or annulling such con- tracts are allowed, but provision is made for their deter- mination without delay, and while they are pending the operation of the contract is suspended. The recital of these provisions seems to be ample evidence that if pool- ing can be permitted at all, if it is desirable on any grounds, the privilege is likely, when granted, to be sur- rounded by sufficient safeguards. The frequently ex- pressed willingness of railway owners and officials to ac- cept the desired amendment on these terms indicates that they do not desire or expect to impose upon the public unjust or unreasonable charges for transporta- tion services. 134 RAILWAY ECONOMICS. CHAPTER XXVI. POOLING, CONSOLIDATION, OR UNJUST DISCRIMINATION. The lesson most clearly taught by the history of rail- way transportation in the United States during the period subsequent to the passage of the Interstate Com- merce law is the utter impracticability of preventing un- just discriminations in charges for railway services by any method that does not effectually limit competition, and that no such limitation is possible while rates for similar services are independently made by the officers of separate corporations. Experience during the same period has also shown that the rates agreed upon will not be consistently maintained when that course results in serious financial loss. Conflicting interests must be merged or reconciled, or unjust discriminations will continue to interfere injuriously with the conduct of in- dustry. In spite of the requirements of the Interstate Commerce law, the practices recently resorted to in the stress of competition have caused the current year to be described by one railway president as "a year of probably the greatest demoralization of rates that has ever been known," while another has written in the latest annual report to the stockholders of his company : "The evil of rate-cutting seems to have passed from the acute to the chronic stage, and ordinary remedies are no longer effective." The remedies possible have already been indicated, but it remains to consider which is now more expedient. Competition may be checked by general consolidation, and when the salutary results already secured through UNJUST DISCRIMINATION. 135 the process of unification are considered the desirability of its continuance seems proven. To admit that com- plete ultimate unification of the railway system may be desirable is, however, very different from agreeing that a natural process apparently leading to that result should be artificialfy stimulated. The question involves not merely the economic organization of transportation or of industry, but is also one of political adjustment. Nothing is plainer than the historical teaching that vio- lent changes in political organization are seriously detri- mental even when not actually destructive. The cor- poration owning railway property worth ten billions of dollars receiving twelve thousand millions of dollars in annual earnings, and having upon its pay-rolls eight hundred thousand voters, might be a creature of and nominally subordinate to the state, or it might be the state itself. In the former case there would be thrown upon the judicial and other regulative authorities a bur- den of responsibility which they should not be forced to assume suddenly or otherwise than as the result of a steady growth, along with which such institutions would gradually develop capacity adequate to the new tasks. Consolidation under government ownership would in the same way devolve upon the public administrative agencies extensive duties for which they have not had the necessary preliminary training. Public administra- tion in the United States is seriously weak, not because of the incapacity of their citizens, but because the func- tions of the several governments have been so restricted that administrative ability has sought and found its highest rewards in private enterprises. Whatever may be the final verdict in regard to government ownership 136 RAILWAY ECONOMICS. of railways, there can be no controversy in regard to the wisdom of postponing it until it has become practicable to secure reasonably honest and business-like manage- ment of the municipal affairs of American cities. Consolidation, then, as a natural process, is neither to be feared nor hindered, though, if unduly stimulated, it may develop dangers of a serious character. It is un- duly stimulated when, by restricting or withdrawing the privilege of making contracts among themselves, it is made the only means of harmonizing the interests of railway corporations. The last decade has furnished abundant evidence of the truth of this assertion, both in the number pf mergers of corporate identity and of less open attempts to secure the same results by purchases of controlling interests in formerly independent rail- ways by single individuals or compact groups of indi- viduals. The statement of the form in which the privilege of apportioning traffic is proposed to be restored and the restrictions with which it is to be surrounded indicates that no violent or dangerous change is contemplated. The urgent need of provision for such agreements and the harmlessness of pooling were well expressed by the present chairman of the Interstate Commerce Commis- sion in the paper quoted in the fourteenth article. He said: "I am forced to the conclusion that the prohibition of pool- ing, which remains imbedded in the present statute, is irrec- oncilably at variance with its other provisions. To my mind the legislation which decrees that all rates shall be just and rea- sonable and declares unlawful every discrimination between in- dividuals or localities, is plainly inconsistent with competitive charges. I regard the existing law as presenting this singular anomaly that it seeks to enforce competition by the mandate UNJUST DISCRIMINATION. 137 of the statute, and at the same time to punish as criminal misde- meanors the acts and inducements by which competition is ordinarily effected." And in another portion of the same article : "It is entirely plain to me, therefore, that co-operative meth- ods, the general discontinuance of competition in rates between rival railroads would tend strongly to remove the inequalities which now exist, and prove a positive and substantial advan- tage to the great majority of producers and consumers. And I firmly believe that while there is a popular objection to rail- road pooling, founded largely upon ignorance of its purpose and misconception of its effects, the principal opposition to legalized co-operation, the opposition which has thus far pre- vailed, comes from the favored few who are reaping unearned profits by the discriminating practices which they virtually compel, and of which they are the sole beneficiaries." On account of the anomaly in the Interstate Com- merce law alluded to in the foregoing extract, Federal railway regulation has so far proved of little utility. So long as it remains in the statute unjust discrimination will continue and the process of railway consolidation will be unnaturally, perhaps harmfully, stimulated. 138 RAILWAY ECONOMICS. CHAPTER XXVII. ASSOCIATIONS. Though the title of this article might be applied with propriety to many organizations which have been formed to aid in the performance of the special functions of the different classes of labor applied to railway trans- portation, it is necessary to limit the present discussion to that group of associations which is distinguished by the common object of securing agreement among rival lines in regard to charges for the services each can per- form and the continual observance of the schedule adopted. The subject of pooling having been already treated, the present article will be further limited to those associations during the period since the apportion- ment of traffic or earnings was made illegal by the Inter- state Commerce law, and to the efforts which have been made to discover an effective substitute for the pro- hibited practice. Many of the associations which had formerly exer- cised supervision over pooling arrangements were con- tinued after the division of traffic had been abandoned, in obedience to the statute, for the avowed purpose of securing harmonious action in regard to rates on com- petitive business. The method of securing this result ordinarily adopted consists of frequent conferences among rate-making officials or other representatives of the railways interested, the submission of proposed rates to such conferences and their promulgation by joint authority if adopted. The rules of many associations require unanimous agreement in regard to changes in ASSOCIATIONS. 139 rates or regulations, and provide for the arbitration of differences that cannot otherwise be adjusted amicably. Provision is quite generally made for the collection of more or less complete statistics concerning the move- ment of competitive business, and the duties of the prin- cipal executive officer frequently include the investiga- tion of suspected instances of violation of the associa- tion agreement by rate cutting or the manipulation of charges in such a way as to amount to a deviation from the published schedules. In order to secure the permanent adherence of the lines* supposed to be most strongly tempted to violate agreements in regard to rates, the railroads regarded as suffering particular disadvantages in competition for traffic have sometimes been permitted to charge lower rates than those exacted by their more fortunately sit- uated rivals, it being expected that this concession would secure to the roads allowed to name the lower rates sufficient proportions of the aggregate traffic 'to induce them to observe the rates agreed upon and thus prevent general demoralization. It may be remarked in pass- ing that this is a curious development of the commonly accepted theory that the purpose of agreements appor- tioning traffic is to secure to each carrier that portion of the total business which it would receive at equal rates and to which it is therefore assumed to be entitled. The differential system, though it is unquestionably adopted for the same real purpose, that of restricting competition, aims to secure for the carriers certain pro- portions which are avowedly different from those which they would receive were the rates by all routes the same. In other cases the agreements have specified the propor- I4O RAILWAY ECONOMICS. tions to be considered equitable, and have attempted to secure the distribution of traffic in such proportions by requiring the cessation of efforts to secure traffic as soon as the agreed amount for the particular period de- termined upon has been received. Among the disappointments which have come to rail- way managers during the period characterized by the prohibition of pooling, none has been more serious than the almost utter failure of every attempt to secure con- sistent co-operation in rate making. Agreements framed under apparently the most favorable auspices and assented to with the utmost solemnity have proved practically useless. Mutual distrust founded on jeal- ousies of long standing and augmented by rumors, as frequently unfounded as otherwise, industriously circu- lated by interested shippers, has with persistent regu- larity turned harmony into demoralization, and out of the beneficent stability of industrial conditions due to the maintenance of rates brought the evils of rate-cut- ting and discrimination. To those who are familiar with the history of transportation during the last de- cade a list of the railway associations formed from time to time brings to mind a consecutive list of failures un- redeemed by a single instance of substantial success. In spite of these successive disappointments, those having charge of railway properties, seeing no other means by which they might hope to preserve the inter- ests of railway investors from the losses of unrestricted competition and from the reproach of unjust discrimina- tion, attempted again and again to organize new asso- ciations having greater elements of stability. One of the most elaborate of these is the Joint Traffic Associa- ASSOCIATIONS. 14! tion, which includes nearly all of the railways located in the territory north of the Potomac and Ohio rivers and between the Mississippi river and the Atlantic seaboard. The purposes of this association, as stated in the agree- ment for its organization, are : "to aid in fulfilling the purposes of the Interstate Commerce Act, to co-operate with each other and adjacent transporta- tion associations, to establish and maintain reasonable and just rates, fares, rules and regulations on state and interstate traffic, to prevent unjust discrimination and to secure the re- duction and concentration of agencies and the introduction of economies in the conduct of the freight and passenger ser- vice." The novel features of this association lent consid- erable interest to the experiment, which unquestionably had greater promise of success than most of its prede- cessors. The new organization had not fairly started, however, when the United States Supreme Court, re- versing several decisions in the lower Federal Courts, declared that the anti-trust law is applicable to agree- ments among railways and that in prohibiting all con- tracts in restraint of trade Congress had forbidden agreements intended to secure reasonable charges, as well as those aiming to make possible the collection of unreasonable and excessive rates. This conclusion was announced in the decision in the Trans-Missouri Asso- ciation case, and was dissented from by four of the jus- tices. As there were material differences in the agree- ments upon which the associations were formed, the Joint Traffic Association has been continued. An ac- tion intended to secure its discontinuance was imme- diately begun by the Attorney-General of the United States and there can be no doubt that its activity and usefulness have been seriously impaired by the threat of 142 RAILWAY ECONOMICS. unfavorable judicial action that has continually im- pended. The case now awaits decision in the Federal Supreme Court, and, though there have been changes in the Court which may modify its views, it would be use- less to attempt to anticipate it's conclusion. If it is un- favorable to the railways it will merely render the situa- tion less satisfactory from a public standpoint as well as from that of the railways, and accentuate the necessity, already urgent, of a modification in the present law. If the association is permitted to continue there need be no congratulations among those who desire the preven- tion of unjust discrimination or the elimination of com- petitive wastefulness from railway administration. The experiment will still have against its chances of success the elements which have brought about the failure of all its predecessors since pooling became illegal, and though conducted in the territory where railway rates- should be most readily maintained, is not unlikely to share the common fate. In any event, there are exten- sive regions with important industrial and railway in- terests in which, as is evident to those having but the slightest knowledge of current conditions, it would be impracticable successfully to maintain similar associa- tions. TAXATION; 143 CHAPTER XXVIII. TAXATION. During the ten ^years covered by the reports of the statistician to the Interstate Commerce Commission an increase in the aggregate annual railway earnings from operation of 23.2 per cent, and one of 17.1 in the balance of such earnings over operating expenses, have been accompanied by an increase of 69.6 per cent, in the total annual payment toward the expenses of government re- quired from railway corporations. The following state- ment shows for each year the earnings remaining after paying the cost of operation, the total payments for taxes and the relation of the latter to the former amount : TAXES. Year. Net Earnings. Amount. Per cent. 1888 $315,626,564 $25,435,229 8.06 1889 320,109,428 27,590,394 8.62 1890 359,783,661 31,207,469 8.67 1891 364,873,502 33,280,095 9.12 1892 300,409,347 34,053,495 8.72 1893 392,830,575 36,514,689 9-30 1894 341,947,475 38,125,274 11.15 1895 349,651,047 39,832,433 U-39 1896 377,180,332 39-970,791 10.60 1897 369,565,009 43,137,844 11.67 Aside from the large proportions of net earnings which have been regularly required from the railways the most noticeable feature presented by the foregoing statement is that the burden of taxation borne by the railways has increased with a regularity that has been uninterrupted by the fact that business depression, ac- companied by diminished traffic and decreasing rates, has generally depleted the revenues of the carriers. This lack of definite relation between ability to pay and 144 * RAILWAY ECONOMICS. taxation is very clearly illustrated in the following state- ment, which shows net earnings and taxes for each of the groups adopted for the classification of railway sta- tistics by the Interstate Commerce Commission. The facts relate to the year ending with June 30, 1896, the latest for which complete data are no\v available : TAXES. Group. Net Earnings. Amount. Per cent. I $26,538,293 $3,282,819 12.37 II 97,200,773 7,997,873 8.23 III 50,306,072 6,362,005 12.65 IV 14,220,233 1,382,606 9.72 V 26,138,170 2,697,576 10.32 VI 91,641,910 8,868,810 9.68 VII 13,092,366 1,661,917 12.69 VIII 27,707,219 4,151,543 14.98 IX 9,871,324 1,176,188 11.92 X 20,463,972 2,389,454 11.68 It seems almost superfluous to attempt to add to the indications of lack of uniformity presented by the fore- going statement, but it may be observed that if a tax amounting to 12.37 per cent, of net earnings is proper in Gr up I, that is made up of the six New England States in which payments on account of railway capital amount to 4.89 per cent, of its par value, a tax of n.68 per cent, of the net earnings of the railways of Group X (Washington, Oregon, California, Idaho, Nevada, Utah, Arizona and part of New Mexico), in which payments on account of capital constitute but 1.94 per cent, of its par value, must be excessive. In the former group divi- dends were paid during 1896 on 79.14 per cent.; in the latter on but 1.60 per cent, of the total stock outstand- ing. In the former interest was paid on all but 1.54 per cent, of the funded debt; in the latter 25.29 per cent, was portionless. Taxes paid in Group I during 1896 amounted to 23.4 per cent, of the dividends during the TAXATION. 145 same year; in Group X the amount of taxes was 499.1 per cent, of that of dividends. According to a recent report of the president of the Chicago and Alton Railroad, the gross earnings of that company have decreased from $7,687,226 in 1880 to $6,840,284 in 1896, and net earnings from $3,477,985 to $2,801,737; yet during the same years the taxes paid by the company have increased from $147,414, or 4.24 per cent, of net earnings, to $315,745, or 11.27 per cent. The same authority states that the total assessment of all property other than railroads in the State of Illinois was $892,380,972 in 1877 and $753,869,082 in 1895, showing an actual decrease in the valuation for purposes of taxation of about sixteen per cent., though it is a fact of general observation that there has been an actual and considerable increase in the real value of such prop- erty. During the same period the total railway mileage in the state was increased less than fifty per cent., and the net earnings from railway operation about forty per cent., but the assessment of railway property was more than doubled, being increased from $37,141,180, in 1877, to $79,231,164 in 1895, or 113.3 P er cent - The limits of this article will not permit a discussion of the causes which have resulted in levying such heavy taxes upon railway corporations, nor will it be practi- cable to consider the relative merits of the different sys- tems of taxation which have been applied to and pro- posed in connection with railway properties. Some brief consideration of the general policy of railway taxa- tion may, however, be serviceable. Taxes may be clas- sified with regard to whether they are finally paid by the person from whom they are directly collected, and 146 RAILWAY ECONOMICS. this is understood principally to be determined by the conditions governing the production of the thing taxed ; if the latter is so restricted as to give an effective monopoly privilege to the producers they are supposed to exact at all times the particular prices which produce the greatest revenues above expenses and must conse- quently assume any tax that is levied upon them. If, on the other hand, the price of the article taxed is fixed by competition among producers, it will always so closely approximate the cost of producing the mar- ginal increment of the supply that the amount of any tax must be added to the price. As railways are pro- ducers of place utilities, their ability to shift taxes must depend in a large measure upon whether the articles to which such utilities are added are sold at prices fixed by competition. Examination of the articles which make up the traffic of any particular railway will proba- bly show that with regard to some of them it possesses an effective monopoly privilege, while the prices obtain- able for others are fixed by competition of the fiercest character. If, in order to meet this competition, rail- ways are regularly led to carry certain articles at rates which do not more than pay the cost of moving the trains in which they are carried and the other expenses actually and directly incurred in order to transport them, it may be that the entire proceeds of their busi- ness in connection with the monopolized portion of their traffic is necessarily expended in order to meet the reasonable demands of investors and to pay those expenses of operation which are incurred on account either of all traffic or of large classes of traffic, and that the average rate is reduced as rapidly as the cost of TAXATION. 147 operation will permit. The relative importance of these classes of traffic might determine the result, but if it should be as suggested above, any tax collected from the railways would be by them transferred to their patrons. There may be some doubt concerning the advisability of levying any tax at all upon railways, if it is admitted that it will be shifted to their patrons, but it cannot be discussed within the limits of the present article, though it may be remarked that such a tax, by increasing the cost of transportation, must limit the area within which commodities can profitably be marketed, and that, in consequence, any community which taxes the transpor- tation agencies by which it is served more heavily and vigorously than those which serve competing regions are taxed, places itself at a disadvantage in common markets. 148 RAILWAY ECONOMICS. CHAPTER XXIX. CONSTRUCTION. Attention has been called in another chapter to the fact that the railway mileage annually constructed in the United States has varied widely, that of the year of greatest construction since 1880 being more than seven times that of 1897. These fluctuations seem to have had some regularity, the maximum construction having been attained soon after events which, like the high prices of food products during 1881, have resulted, for a time at least, in extraordinary prosperity, the decline having commenced somewhat before the culmination of those periods and continued until the usual reaction from extreme depression, has resulted in renewed in- dustrial activity. This tendency to wave-like fluctua- tions apparently controlled by commercial conditions indicates the extreme sensitiveness of railway develop- ment to circumstances that affect the risk incurred by investors, and also that the consequences of this sensi- tiveness may in turn become causes which themselves operate adversely to industrial stability. A sudden stimulus to railway construction draws men from other occupations into the service of the firms and corpora- tions engaged in building and in supplying material for constructing new lines or extending old ones, and thus rapidly augments the demand for labor throughout the country and in most industries. The same cause may affect immigration, and it is noticeable that the increases and decreases in the number of immigrants annually reaching the United States have been in some degree CONSTRUCTION. 149 synchronous with the fluctuations in the same direction in railway construction. On the other hand, the slight- . est decrease in railway building throws men out of em- ployment who thus cease to be consumers of the prod- ucts of the labor of others and become competitors with them for employment in other occupations. It is quite obvious, therefore, that if by some means the increased railway mileage demanded by developing internal com- merce could be supplied in more regular annual in- crements one serious source of industrial crises would be removed. The desirability of limiting railway construction is also apparent from the standpoint of public interest in securing transportation at low and relatively reasonable rates. It is perfectly evident that society as a whole must pay for whatever transportation facilities it ob- tains, but the fact that it is the purchasers of transporta- tion and not those who furnish the capital necessary for railway construction and equipment who must ulti- mately bear the expense of useless construction is quite frequently overlooked by the general public. Yet there is abundant evidence, not only that railway patrons must, in the long run, pay interest upon a sum equal to the aggregate capital actually invested in railway facili- ties, but that the rate of interest is increased by every circumstance that tends to enhance the risk attending such investments. The general failure to perceive the detrimental consequences of unnecessary construction is attributable to the fact that under a system of trans- portation in which competition among carriers for traffic between points at which several lines are available to shippers is encouraged, the burden of maintaining I5O RAILWAY ECONOMICS. transportation facilities is so unfairly distributed that the communities served by two or more rival routes, find- ing themselves enjoying more favorable rates than those served by single lines and perceiving that the discrimi- nations by which they profit are the result of competi- tion, are led to believe that if there was no competition among railways seeking the same traffic, the relatively high rates charged at non-competitive points would be applied uniformly to all business. The communities discriminated against on account of their more limited facilities naturally regard as desirable the advantages enjoyed at the competitive points, and thus has arisen a strong incentive toward the duplication of facilities through the construction of lines substantially parallel to those already in existence. Much of the unprofit- able railway construction has been due to this cause, though it is to be observed that the supposed remedy is applicable only at a few points, and tends to accentuate the disadvantages already felt by the communities which do not possess alternative routes. Speculative construction has also entailed upon rail- way patrons the burden of paying interest on capital in the form of unnecessary railway facilities. When the railways serving a particular territory have abundant traffic and are earning satisfactory returns on the in- vestments which they represent, it is quite evident that the construction of a new line may demoralize business so seriously as materially to impair, at least temporarily, the value and earning capacity of the lines already in existence. In this fact lies an opportunity which has frequently been turned to the advantage of adventurous speculators. A charter for a new line is unfortunately CONSTRUCTION. 1 51 quite easily procurable in most regions. Sometimes securing such a charter is the only step taken, the fran- chise itself being purchased by the lines with which the new road would compete before the track has been laid, the roadway graded or even accurately surveyed. Poli- ticians of- a certain sort have at times found it very profitable to obtain such charters from complacent legis- latures without at any time intending to make any use of them except to dispose of them to the highest bidders, who are usually those who would suffer most were the project apparently in hand actually executed. In other instances railways have been actually constructed with no other object than to demoralize rates until, choosing between two evils, one of the older lines is compelled to purchase the new one. In such cases the .capital of the purchas- ing corporation is of course increased by the amount paid, and though this may for awhile transform a profit- able line into one scarcely able to keep out of insolv- ency, the new capital must be made eventually to pay adequate dividends and interest, or, if the region served is industrially stagnant or retrograding, the losses will usually be made up from some other portion of the country. The construction of such lines is nothing more than a form of legalized blackmail, the losses of which originally met by capitalists are almost invaria- bly shifted from them to those who purchase railway services. During the last five years speculative and wasteful construction in the United States has practically ceased and many sections of the country have had opportunity to develop up to the facilities created during the years IS2 RAILWAY ECONOMICS. of over-construction. It is most important, however, that, before the inevitable reaction from the recent com- mercial depression results in another period of too- rapid railway building, the states which have not already taken steps to provide suitable checks against the waste- ful duplication of existing lines should do so. No rail- way can be constructed without the aid of government, not only for the creation of the corporation but also in order to secure the right of way by the exercise of the power of eminent domain which is invoked on the ground of the quasi-public purpose for which the railway is to exist. Each community owes to itself the duty of using its powers for these purposes care- fully and intelligently, and to investors that of so limit- ing permission to construct new lines as to provide for no greater aggregate investment than that upon which it can afford and is willing to pay a reasonable return. It is particularly necessary that means for preventing the speculative construction of parallel lines should exist whenever pooling arrangements are permitted, for the existence of a pool considerably enlarges the field for profitable operations of that character by offering op- portunity to blackmail a compact group of railways with unified interests of considerable extent in place of depre- dations confined to single lines. 14 DAY USE RETURN TO DESK FROM WHICH BORROWED LOAN DEPT. This book is due on the last date stamped below, or on the date to which renewed. Renewed books are subject to immediate recall. a -q ?^ 100c\'63SS ' ^ e^- REC'D LD u oM* APR 2 8 '64 -5PM vySE mi i n 1Q65 JUL l u > 3UJ REC'D LD JUL10'65-12Nl LD 21A-50m-9,'58 (6889slO)476B General Library University of California Berkeley