Railroads: Rates and Regulations

CHAPTER IV
RATE MAKING IN PRACTICE

The task of constructing a freight or passenger tariff is an eminently practical one. The process must be tentative and experimental. Little can be calculated in advance. Tariffs are not made out of hand; they grow. Not until a rate has been put into effect, can its results be known. The lower limit of charges, however, is more or less fixed. Obviously the rate must not be less than that portion of the variable expenses incident to each particular unit of business. This variable expense is divisible into two parts, one for loading and unloading, and the other for actual movement. The first step in constructing a tariff, therefore, is to separate these two portions of the variable outgo. General experience fixes the terminal outlay for loading and unloading at an average figure of about twenty or twenty-five cents per ton at each end of the line; that is to say, at an average of about two and one-half cents per hundred pounds as the total terminal cost.[64] Just where, above or below this average, the figure for any particular tariff will lie, depends upon a multitude of details.

This terminal expense is obviously quite independent of the length of the haul. It costs no more to load for a carriage of 3,000 miles than for one between two adjoining stations. It is the second portion of the specific costs, namely, the movement expense, which varies with the distance. This movement cost is more difficult of determination, as affected by a multitude of variable factors, such as the grades, curvature, number of stops, the size of train load, and above all, the volume of the traffic. Assuming the simplest physical conditions, one would expect the movement expense, aside from the initial cost of getting up steam in order to move at all, to rise proportionately to the distance traversed. Graphically represented, the tariff would appear somewhat as follows:

In this diagram the distances of carriage are represented along the horizontal line, A B; while the rate charged is laid off vertically. The distances A C and E B represent the constant terminal cost; while the steadily rising rates with increasing distance, due to movement expenses, are shown by the sloping dotted line C D. This chart at once demonstrates why under the very simplest physical conditions a straight mileage tariff is unscientific and unreasonable. For the constant terminal expense, spread evenly over the mileage traversed as the movement expenses grow, becomes progressively less and less in proportion to the total of the two, which constitutes the real rate. The longer the haul, the lower the ton-mile cost as a matter of necessity. As Chanute calculated on the New York Central a generation ago,[65] while the average cost per mile of hauling a ton ten miles was 4.062 cents, it descended progressively to less than one cent per mile for distances over five hundred miles. A common rule is that the rate rises as the square root of the distance, rather than in proportion to it. A hundred-mile haul represents a cost approximately only twice as great as one of twenty-five miles, instead of being four times as much. For thrice a given cost the haul may be increased nine times. The course of such a tariff with increasing distance would be represented by the parabolic curved lines on the preceding diagram.[66] The particular curve would depend upon the commodity and local physical conditions. In territory where movement expenses were heavy or operation difficult, the curve would obviously rise more rapidly. Such a mathematical tariff does not depart widely from the one traced by the heavy dotted line C D first described. The progressive decline of the per mile rate with increasing distance may be illustrated by the rough estimate of allowing two and one-half cents per hundred weight or fifty cents per ton for terminal cost, with one-half cent additional per mile for movement expenses. For a ten-mile haul this would cost fifty-five cents, or an average of 5.5 cents per mile. Were the distance 500 miles, the average cost would be only (50+250)/500 cents or 0.6 cents per ton mile.

Thus far the problem has been seemingly simple. The next step introduces new complications. Our hypothetical railway line at a point one hundred miles out, may cross a navigable river or canal, or may intersect another railway. Engineering considerations of absolute cost of operation now no longer predominate. Relative costs by rival lines enter into the case. Water lines or more direct railways compete for the traffic. One cannot even fall back upon the cost of carriage by any of these lines, either the weaker or the stronger. An entirely new principle comes into play. The alternative is presented of taking the business at a rate lower than, and out of line with, rates on general traffic, rather than to lose it to another line. At first sight it would appear that it were better to abandon the traffic than to take it for less than a fair average return or profit. This is a serious matter. The tonnage offered is large. The existence of active competition for it, is proof of its importance. Railways meet at large towns, and large towns become larger because the roads meet there. The main reason for not abandoning the traffic, however, arises from that primary fact, to which one constantly recurs, that all expenses are not alike in their nature. A concrete example will make this plain.

Suppose, for instance, the normal rate to yield a fair average return, all expenses considered, be thirty cents per hundredweight. Two-thirds of the cost of this, or twenty cents, would not cease as outgo, were this business abandoned. The rails would rust, the ties would rot, and trains would move but with lighter loads, and the fixed charges would still go on inexorably night and day. Ten cents per hundredweight will meet the variable and extra cost incident to this particular business. A fifteen-cent rate would at least repay these extra outlays. It would do more. It would contribute five cents per hundred pounds to the twenty cents outgo per hundredweight, which, without the traffic, would have to be borne in toto. Even a rate of eleven cents would contribute something to this end. For it would leave a surplus of one cent per hundredweight to lighten the other burden. Adopting Hadley's phraseology,[67] if you take at eleven cents, freight that costs you thirty cents to handle, you lose nineteen cents on every hundredweight. If you refuse to take it at that rate, you lose twenty cents on every hundredweight you do not carry. For your constant expenses go on, while the other road gets the business. There is only one course open. The rate at the competitive point must be cut; if not to make a profit, at least to stop a greater loss. And one comfort may be uncovered in so doing. The lowered rate may so stimulate new business and enlarge the volume of traffic, that it may be handled at much lower cost. In fact, this consideration alone in absence of all competition, may induce a lowering of rates at certain points out of line with the general schedule. This incentive, conditioned by the fact of increasing returns, is always in the background. The destiny of many places is manifested in terms beyond the control of the carrier. Soil may be poor, climate or population adverse to progress. But some particular places enjoy peculiar advantages for growth. Not to stimulate new business at these points where traffic might be cultivated, even without rivals in the field, is little better than allowing it to escape over a competitor's line of rails, were they present.

Cutting the normal rate at competitive points or at important points in order to stimulate traffic, in conformity with the principle above stated, transforms our tariff diagram as shown herewith. The rate rises steadily with the increasing distance from A, except at E and F. At these points it is fixed at a lower point, determined not primarily by the cost of service at all, but by the available demand for it. Traffic at these points is charged what it will bear; not as much but as little as it will bear: which, being translated, means that the charge is set as high as possible, still holding the volume of business constant, or even increasing it if that can be accomplished. The total profit is constituted of the profit per unit of freight multiplied into its volume. The centre of interest is here shifted from the average profit per unit considered alone, to the total profit thus obtained. At this point another difficulty presents itself. Although, as set forth elsewhere, local discrimination,—charging a lower rate for a more distant point,—may sometimes not only be not injurious but actually beneficial to all parties concerned, it is the exception, not the rule.[68] Ordinarily to accord a remote point a lower rate without patent cause, is an economic anomaly, and, moreover, a political blunder. It violates the democratic principle of cost of service as underlying rate schedules. Most legislative bodies have prohibited it by law. The United States and most of the American commonwealths do not permit it, other than in exceptional cases. The result is that on our hypothetical tariff, the rates from A to points intermediate between A and B and B and D must be cut to the levels, E and F, fixed for those latter places. Such was the action taken by the trunk lines in 1887 in conformity with the requirements of the long and short haul clause of the Federal Act to Regulate Commerce. An original progressively rising tariff is thus at once transformed to a series of level grades or platforms, the shifts of level corresponding to the location of large towns or competitive centres; and the grade of each platform being fixed by the rate determined under competition at those points.[69] This ascending series of grades may be most irregular, as conditioned by local circumstances. The general steepness of the gradation is low on eastern roads like the New York Central, with a large volume of traffic and easy operating conditions. On western lines like the Denver and Rio Grande, in rugged territory, with a sparse population and light tonnage, the per mile rate rises rapidly and the gradation of the general tariff is steep. But always it will be found that the changes in rates occur at competitive points, with transition to a new level of rates determined by the conditions at the next competitive point beyond.

An important fact concerning this tariff thus far developed, is that, of course, the height of the upper level at the most remote point must never exceed what the particular traffic will bear. In other words, supposing that the traffic consist of grain or coal, not more than a certain amount could ever be charged, no matter how great the distance, without so far diminishing the profit in the transaction as to render the business impossible. This is shown by the diagram opposite the next page, whereon it appears that each commodity, coal, wheat, cement, lumber, or oil, having attained a certain level of rates, never rises thereafter, no matter what the distance. Each attains the maximum of what it will bear. That level it can never exceed. This immediately leads to another consideration. No single tariff is applicable to any large number of commodities. Each one must be regarded as a law unto itself. Not only does the ultimate amount which each is able to bear depend upon the value of that commodity, but also the conditions determining competition with respect to it must be different all along the line.[70]

Thus it appears that the height of the extreme upper level in our diagrammatic series of rates is fixed by the highest charge which that particular traffic will bear.[71] Beyond a certain point, no matter how great the distance, the rate cannot be increased above this level. This maximum varies, of course, with each commodity. On cotton it may be fifty-five cents per one hundred pounds; on grain or coal it will be much lower, and on sand or cement lower still. The problem of the traffic manager is to attain this highest rate as speedily as possible with increasing distance, and to grade his rates with distance up to this level as quickly as possible, consistent, of course, with maintenance of a full volume of business. But not only may the final limit of what the traffic will bear be different for each commodity; the steps or stages by which the rate progresses up to this maximum, are quite independently determined. The actual tariffs of local class rates in general are much simpler than the commercial conditions of rate making often warrant. Probably the major portion of tonnage on American railways moves under special or commodity rates. Even in Prussia over three-fifths of the traffic is of this exceptional sort. These special rates are made with a view to particular circumstances prevalent at the time. Bids from a quarryman in Vermont on stone for a public building in Chicago, may be dependent upon the grant of a low rate on his marble in competition with a quarry in North Carolina, also able to supply the particular stone required. The various ascending series of rates are thus rendered bewilderingly complex. This is also shown by the foregoing diagram of rates between St. Paul and Chicago.[72] The rate on a cheap, heavy commodity like coal, probably rises rapidly at first, and soon attains a maximum beyond which it can never go. On this diagram, for instance, the freight rate on soft coal for points up to 180 miles out is lower than that on flour. Beyond that point the coal rate in turn exceeds that on flour. Cement is higher than lumber for the first 150 miles; but after that point the relatively greater value of lumber holds it steadily above cement. On heavy cheap commodities the relatively high cost of cartage in competition enables the railway to reap the full measure of its advantage and to charge well up to the maximum of what the traffic will bear, within a comfortably short distance. Furthermore, variable costs for terminal charges have to be considered. Wherever they are high the rate must rise at once sufficiently to cover these, no matter how short the distance; but thereafter the rate may not need to be increased greatly for some time. On light higher-grade goods the wagon is an effective competitor for longer distances.[73] Moreover, the competitive points at which rates rise from stage to stage are seldom the same for all classes of goods. A river crossing brings competition for coal, lime, or cement, but does not affect the rates chargeable on high-class freight which seldom goes by water in any event. A railway specially interested in the development of some particular industry, wherever it crosses our hypothetical line, effectively holds down the rate on the product of that business. Junction points with other railways having no such interest may have no influence upon that rate, but may cause modifications in other directions. Another railway being in need of back loads over its line, as the result of a predominant movement, let us say, of beef cattle at certain seasons of the year, may introduce competition in all the tonnage capable of being carried on cattle cars. Such a road holds down the rates on this traffic wherever it happens to cross, but has no effect upon any other rate. Thus it comes about in practice, as the last diagram well illustrates, that the tariff lines cross and recross one another, generally rising with increasing distance, but at all sorts of different times and places.

Few generalizations are possible in this connection. Rate making must in a growing country ever be a matter of infinite detail. It is generally true, however, that beyond a certain point the tariff on different grades of commodities will separate more and more widely with increasing distance. For, obviously, after the low-grade goods have reached the maximum which they can bear—and this they tend to do speedily—they must remain practically constant; while those of higher grade continue progressively rising. And for very short distances the rate on the low-grade goods may even exceed that imposed upon higher-class tonnage. The coal rate for a ten-mile haul may exceed that upon some commodity worth twice as much; but for a 200-mile haul the coal rate may be only one-eighth of the rate on the other goods. Long experience on the part of the carriers has, however, enabled them to arrange their tonnage in classes; for each of which the conditions are more or less uniform. By reserving the exceptional traffic for special treatment under commodity rates, a fairly consistent scheme of charges, rising by stages with increasing distance may be evolved.

Few standard railway tariffs in the United States develop beyond the point covered by the preceding paragraph. Many of them are unable even to reach this stage of logical growth. In the South, for instance, they have never got beyond the stage of progressively rising local rates, with independent and often radically reduced charges at all large towns or competitive points.[74] Each traffic manager, particularly since the effective prohibition of working agreements between competing lines by the Trans-Missouri Freight Association decision of the Supreme Court in 1896, has been left to work out his own salvation, not aided by, but in spite of, the efforts of his rivals. There is, nevertheless, one example of further development in the so-called trunk line territory, lying east of the Mississippi and north of the Ohio and Potomac rivers. Conditions here, in general, are most favorable by comparison with the West and South. Both population and traffic are dense, and the state legislatures are conservative in making grants for the construction of new lines. The companies are historically mature. The good fruits of coöperation had already appeared in the evolution of a scientific and logical scheme, long before such coöperative action had been frowned upon by the law and the courts. All the railways in trunk line territory have worked in harmony, so far as general classified local tariffs are concerned—however much they may have fought one another over differentials to seaboard cities, or export and import rates. Their system is comparatively simple in principle, although it has required the experience of many years to work out in detail. Fully described elsewhere,[75] it will suffice for present purposes to say that all rates from intermediate points between Chicago and New York, are fixed at a definite proportion of the Chicago-New York rate both for east-and westbound shipments. Thus, for instance, as shown by the map of trunk line rate distribution, at page 365, the rate from Detroit to New York is seventy-two per cent. of the Chicago-New York rate. The percentages from the following points are as indicated, namely: Cincinnati, eighty-seven per cent.; Indianapolis, ninety-three per cent.; Grand Rapids, ninety-six per cent.; Peoria, Ill., one hundred and ten per cent.; Louisville, Ky., one hundred per cent.; Milwaukee, one hundred per cent.; and even points in Canada, such as Toronto, seventy-eight per cent., etc. Every place, no matter how small, has a certain percentage of the New York-Chicago rate assigned to it. This rate changes with any variation of the standard or basic charge. Thus when the Chicago-New York rate, first-class, is seventy-five cents, the rate from Indianapolis is ninety-three per cent. of that figure. Any change of Chicago-New York first-class rates modifies every intermediate rate in exactly the same proportion. This was well exemplified in the rate wars of 1893. These percentages have been fixed after a long process of compromise among conflicting interests. Another point of special interest is that these rates are adjusted on the basis strictly of the long and short haul principle, namely, that all intermediate points enjoy a somewhat lower rate than the terminal points, although the percentage may not be exactly upon a mileage basis. Consideration of the distribution of these percentages points to many apparent inequalities in the adjustment; but, as a matter of fact, it will be found that the existence of competing routes, of water transportation or of other factors, offers a partial explanation in most instances.

Such being the general character of this comprehensive trunk line system, the relation of it to the tariffs described heretofore is not difficult to demonstrate. Each separate railway having developed a well-ordered rate schedule, they have all met and agreed upon a unified scheme; which as far as possible harmonizes all conflicting interests. The gradation of rates rising with increasing distance from New York on each separate road, is adjusted to the corresponding gradation of rates of its neighbors on either side. The result is a series of rate zones, lying more or less concentrically about the terminal point. These zones are highly irregular in width and area, but possess one feature in common. Each remoter zone is one stage higher in rates than its predecessor. This relationship is indicated by the cross section diagram herewith. This cross section, of course, differs from the diagrams heretofore shown. It is purely geographical, being taken, not along one single railway but as the crow flies—straight across the whole trunk line territory. But in order to appreciate the significance of this elaborate scheme, one should imagine a whole series of such progressively rising rates, radiating out along the different lines of railway. Connecting the corresponding levels or stages upon each one with those of its neighbors, the concentric zones are immediately outlined. The advantage of such a broad scheme is that it generalizes the single line tariff; taking into view every place, no matter how small and irrespective of its location whether upon a through line or merely a local transverse one. Every town, no matter how insignificant, is assigned a place in a logically evolved plan. Such would seem to be the ideal of rate construction, toward which all traffic managers should strive.

The foregoing description of the development of a mileage tariff is applicable to only a part of the traffic. A very large volume of tonnage,—said to be not less than seventy-five per cent. in America, sixty-three per cent. in Prussia and fifty per cent. in the United Kingdom,—moves under special rates made in quite another way in response to the exigencies of commercial competition. The making of these freight rates in practice is an extremely complicated matter. No single road is independent of rates made by its rivals—rates applicable not only to competing commodities and markets, but also as affected by apparently the most remote and disconnected contingencies. Thus railway rates, as has well been said, are not a set of independent threads; they form a fabric. They are so interwoven everywhere that if one thread be shortened, it will cause a kink in the fabric that may run almost anywhere. In order to understand this it will be necessary to describe somewhat in detail the nature of competition as applied to transportation; and then to show by a few concrete illustrations, the various factors which actively enter into the determination of specific rates. Laymen and legislators do not sufficiently appreciate the extremely delicate nature of the work. Much discussion relative to railway competition seems to be based upon the assumption that it consists in the main of the competition of railway lines more or less parallel or else operating under substantially like conditions. As a matter of fact competition in transportation is to a large degree far more complex.

Railway competition is of three entirely distinct sorts. These may be denominated, respectively, competition of routes, competition in facilities and competition of markets.[76] The first of these, competition of routes, as the name suggests, is limited to the activities of the carriers alone. It occurs whenever two railways are exposed to identical commercial conditions both at the point of origin and of destination. The rivalry is direct and physical. The only competition possible is that concerning the route by which traffic may move between those two points. Such competition is most likely to arise between more or less parallel lines, as for instance between the various trunk roads from New York to Chicago. The classic instances in our history are of the rate wars due to the West Shore and the Nickel Plate, which were built for the express purpose of engendering competition with the then existing lines,—the New York Central and the Lake Shore, respectively. The same sort of simple competition prevails, of course, between a railway and a parallel canal or other waterway, as, for instance, between the Erie canal and the trunk lines, or the Illinois Central and the Mississippi river. Such simple competition as this, where confined to railways alone, almost inevitably leads to one of two results: the roads may remain independent, preventing ruinous rate wars by pooling; or else, as a result of long continued cut-throat competition, the bankrupt road may be bought up and merged with the solvent one. This was the fate of the old New York and New England railway, finally purchased by the New Haven system; of the West Shore and Nickel Plate lines; and of the Kansas Pacific, unloaded on the Union Pacific by Jay Gould. The nature of railway competition is indeed such that no other result than consolidation or pooling can ensue. Weyl is right in his observation that,—"Strictly speaking, permanent competition can exist, not between railroads struggling for the same traffic; but solely between those railroads which have no territory in common."

This first form of competition of routes or, as it has been called, of alternative routes, often obtains where conditions of competition are more obscure than in these simple instances above named. In the rivalry for the imported plate glass or crockery traffic between the trunk lines and the Gulf roads, the competition is none the less of routes between Liverpool and Chicago, although the water carriage by way of New Orleans or Galveston is so much more roundabout. Freight actually moves from Boston to Chicago by a line 1786 miles long, via Asheville, N. C., while the direct distance is only 1004 miles.[77] From St. Louis to Meridian, Miss., is 512 miles by direct rail line; yet traffic may move over 2000 miles going to New York and then around.[78] The map on p. 271, showing the various rail and water lines concerned in traffic between New York and the little town of Troy, Ala., shows how widespread are the ramifications of competition of this sort. Manifold instances of such roundabout carriage have been elsewhere described in full.[79] They differ from the competition of parallel routes, however, in the important regard that absorption of the long lines by the short ones becomes both physically and financially impossible. Whenever a large area like the Pacific slope is devoid of manufactures, and wherever the source of supplies is sufficiently concentrated, as, for instance, in the manufacture of agricultural implements which are almost exclusively made in or about Chicago, we still have to do with a clear case of competition of routes, although a great number of carriers may participate in the business. When molasses or rice are only to be had from New Orleans, the centre of such business, the carriers to all tributary consuming points compete for the routing of it over their own respective lines. These carriers may operate either by land or sea or by a combination of both; and they may transport commodities by the most roundabout ways.[80] The determinant feature, however, distinguishing this class of competition is neither the mode or carriage nor its length; but is found in the fact that the commercial conditions at both ends of the line, points of origin and destination, are identical for each participant in the business. Direct competition of routes, therefore, has to do with pure transportation,—the creation of place values,—and this being the case, the relative cost of service is always a factor of moment.

Competition of facilities, the second of the three phases of railway competition above mentioned, deals, as its name implies, not at all with the rates charged but with the facilities or conveniences afforded. Such competition is confined solely to rivalry for business at the established rates. Immediately on the appearance of any departure from these conditions the question becomes one of competition of either of the other two sorts. An instance of competition of facilities would be the introduction of reclining chairs or of a superior service in passenger business. When the Rock Island system offered such facilities without an extra charge, it became necessary at once for others to meet this competition in the same way that they would meet a reduction of rates. Any reduction in time of transit for freight business between two given points without extra charge, would in the same manner give rise to competition of facilities. Such facilities, however, as might have a distinct money value, as, for instance, free storage, cartage, demurrage or milling-in-transit, any one of which practically amounts to giving value without charge, are, of course, equivalent to a reduction of the rate; and do not belong in this class of considerations at all. Only those conveniences or facilities, which, while attempting to secure business may not be compounded for money, should be classified in this group. It should also be observed that competition of facilities may as readily arise between parts of the same railway system or under pooling agreements to maintain rates, as between distinct and independent companies.[81] And such competition between parent and child often arises. Thus, for instance, business was as actively solicited as ever by the Pennsylvania and the Baltimore & Ohio in competition during the several years of financial control of one by the other prior to 1907. The New Haven railway may compete with its own water lines around Cape Cod or on Long Island Sound. But in all of these instances the cardinal feature to note is that the competition is always at the established rate. For New England, although the New Haven system and the Boston and Maine do not compete on rates at their points of contact, there is constant rivalry in respect of facilities or service. The same thing is undoubtedly true of the Atchison and the Southern Pacific in the carriage of California fruits. Although operated under pooling agreements, yet they were competitors in the matter of the service offered. Each sought an enlarged volume of tonnage, but not by cutting the agreed rate.

The third form of competition in transportation is dependent upon the competition of markets; and is not in reality direct competition between carriers at all. This is the most difficult of all forms to understand.[82] It is certainly in many cases more than a "euphemism for railway policy."[83] Yet although indirect and often obscure, it is of fundamental and conclusive importance in the determination of freight rates. Commercial competition deals not with a mere choice of routes, but with alternative markets. The carriers act, not independently and of their own volition, but only as agents or representatives for their constituents, the shippers. They may become tools or weapons in the hands of merchants or manufacturers who are the real contestants. It is largely in this sense that it is so often alleged, and rightfully, that railway traffic managers oftentimes do not make rates at all. Their energies are bent to the analysis of those circumstances by which their rates are made for them.

The production or preparation of commodities for final consumption falls naturally into two distinct parts; the creation of form value, succeeded by the conferring of place value. Transportation is concerned alone with the latter process. Of these two operations, the latter, the creation of place values, is by far the more elastic and adaptable process. The grower, the miner or the manufacturer has his first costs more or less rigidly fixed by natural or human conditions; such as the fertility of the soil, the grade of ore, the prevailing scale of wages, and so on. His proximity to the status of a marginal producer depends upon his relative position in these respects. With the carrier, matters are more contingent. Including within its reach, as it does, many grades of producers and consumers, each more or less rigidly held bound by his own circumstances and conditions, as above said, the carrier is able to exercise a wide range of choice in fixing that margin of value created which it reserves for itself. And at all times, by reason of the factors set forth elsewhere, primarily its subjection to the law of increasing returns, this intermediate share of the carrier tends to adjust or accommodate itself to the end that it may discover or produce a wider margin between values in the hands of producer and consumer, respectively. This may be best accomplished by a progressive widening of its field of activities, that is to say, by an enlargement of its physical reach and scope. It is always striving to lower the cost of production made by the marginal producer. Its motto must ever be, to get more business, if not right at home by search for it abroad—and this always with the chance that the greater the distance between the producer and the consumer, the greater the possible margin of place value remaining as its individual share.

This ever-present incentive to widen the market carries with it a direct consequence. A market is a commercial area characterized by a prevalent equality of prices. Phenomenal development in this respect is characteristic of the United States. For many commodities the market is coextensive with the national domain. It is the chosen function of transportation agents, by rail and water, to ensure this result; to preserve an equality of prices, despite the variety of producing and consuming conditions. The railway is the agent by which the market is thus widened and rivalries are thus equalized. In railway parlance this is what is known as "keeping everyone in business." The following quotation from the Senate Committee Hearings of 1905 adequately describes the process: "I am interested in the erection of a mill that has just been completed, and sometime since I was figuring on the question of a smokestack. I wanted to have that stack built out of brick that is burned in New Jersey, and that is several hundred miles away. It is a long way to ship freight from New Jersey to North Carolina. A quotation was made me by the stack builder, whose office is in New York, and I remarked to him, 'That price is prohibitive; I cannot pay that price for that stack.' He said, 'That is the best I can do; but if you will tell me what you can afford to pay for that stack, in competition with home-burned brick, I will see what I can do with the railway people.' He said, 'All right; I will take it up with the railway people.' His quotation included the delivery of the brick and the erection of the stack at my plant. It would require something like about fifty carloads of brick to build that stack. Within a week he had his price revised, and gave me a satisfactory quotation and took my contract for the stack. Of course he had to get a special rate from the railway people, because there is no regular tariff on brick from New Jersey to North Carolina." In this instance the railways actually created this new business by so adjusting the margin between the minimum cost of making brick in New York and in North Carolina, as to make it possible for the traffic to move. The special rate here mentioned, however, should be carefully distinguished from a secret rebate offered to one contractor as against another in the same place. This commodity rate, while special to meet a particular contingency, was open to any other shipper similarly circumstanced. The student cannot too carefully discriminate between these two sorts of special rates. They are constantly confused in the public mind. The effect of these open commodity rates, is not to create difference of opportunity between individuals, but to generalize economic conditions and equalize prices throughout wide areas.

The most satisfactory way to describe commercial competition as applied to carriers is by concrete illustrations. There are two distinct varieties or degrees of it, which may be denominated primary and secondary. These might as properly, perhaps, be called simple and complex, or direct and indirect. Of these, the first concerns those cases wherein a commodity undergoes no physical transformation between producer and consumer. Shipments are usually direct. Only one rate is involved. Shall St. Louis and the South, for example, be supplied with salt from the Kansas or Michigan fields?[84] This is a case of pure transportation,—the creation of place value, alone. The Aroostook farmers of Maine compete in prices with the potato growers of Michigan in the New York market. Each district is usually represented by a railway, dependent upon the prosperity of its particular constituency. Competition of markets is usually more keen where a number of carriers are concerned, each representing its own clients; but it may conceivably arise as between several markets served by the same company, especially with the growth of great railway systems. The Southern Pacific must insure a rate from California on oranges to eastern markets, as compared with the rates over the southern roads from Florida, sufficiently low to warrant the venture of capital in the industry.[85] Marble from the quarries of Vermont and North Carolina, and paving blocks from the Lithonia district in Georgia and from Wisconsin or South Dakota, must meet in Chicago on even terms. Such competition, although simple and direct, recognizes no national bounds. Copper from Montana must be laid down in Liverpool at rates to permit of meeting the price on Chili bars from South America. Our entire grain and cotton crops must be transported at rates which will enable them to hold their own in European markets. The California raisin has, in this manner, had to make its way into Eastern markets in the United States against the pressure of importations from Spain, as described in another place.[86] The cotton mills in New England and in the South must have their output carried to China under conditions which will enable them to meet the price made by the British manufacturer. This last instance, however, introduces us to the second form of competition; inasmuch as a double transportation is involved first from the fields to the mill, and thereafter from the mill to the consumer.

Secondary or indirect forms of commercial competition in transportation, concerning, as has been said, not one but two distinct carriages of entirely different goods, needs to be in turn subdivided still further. The products of agriculture and mines afford the best instances. The lumber business is peculiarly suggestive in this connection, owing to the fact that in the United States a vast treeless area in the Middle West is surrounded with forest tracts available for development. The market again in this case is limited only by our national frontier. Omaha is supplied with yellow pine and cypress from Louisiana after a 1,200-mile haul; Oregon fir brought 1,800 miles in each instance for fifty cents per hundred pounds; and with Michigan hemlock and pine transported less than 500 miles for eleven and a half cents. These various sorts of lumber are all more or less competitive. And in each case the final cost of laying down the product in Omaha is determined; first, by the rate from the stump to the mill, and then, as sawed lumber, thence on to destination. The Eau Claire, Wisconsin, lumber case[87] before the Interstate Commerce Commission, fully describes the intricacies of adjustment needed to hold a number of such producers on a parity. In this instance Eau Claire, "next the stump," as an important lumbering centre was shown to be declining in importance relatively to Mississippi river towns, which received their logs by raft down stream. A differential of a few cents was threatening the welfare of a considerable population. The Wichita, Kansas, cases are suggestive in a similar way.[88] Sugar is laid down at this market from every point of the compass. From Hawaii it is shipped in the raw state to San Francisco, and then brought East, like the Oregon lumber, cheaply, as a back-load to counter-balance westbound shipments of grain and manufactures. From New Orleans refineries comes the Louisiana product, and from the Atlantic sea ports the Cuban sugar; but in each case the carriage is broken at an intermediate point, at which manufacture or jobbing ensues. A large class of operations analogous to this, known as "milling in transit" and "floating cotton," elsewhere described in detail, involve the same complexity and interrelation of rates.[89] The point to carry forward is that commercial competition demands that in every case not single rates but the sums of all the connecting rates for each competing person or region shall be properly adjusted. If this be not done, some one will be excluded from the market and "put out of business."

By this time in our ascending scale of complexities, it will be observed that manufacture now begins to outweigh mere transportation in importance. With low-grade products, like salt or sugar, the increment of value due to transportation is relatively high as compared with manufacturing costs. As the grade of product rises, however, the differences in value and in form between the raw and the finished product, render the problem of location of the manufacture more difficult as affected by the relative adjustment of rates of transportation for the two. According to the data of the Federal Bureau of Corporations, the cost of refining crude petroleum, worth three to four cents a gallon at the wells in Pennsylvania, should not exceed one-half cent a gallon. This sum would barely pay for the first hundred miles of its carriage by rail, as ordinarily shipped. The market is, of course, extraordinarily extensive; hence the persistent flagrancy of the practices of secret rebating by the Standard Oil Co.[90] To obtain such special favors in transportation outweighed in importance the incentive to introduce economies in production. In this industry, where little waste occurs in manufacture, the refineries may well be located at the consumers' door. The manufacture of furniture for the Pacific states, on the other hand, must be located "next the stump," in North Carolina or New England. The long carriage must be applied, not to the bulky lumber but to the finished product. The freight rate on lumber from Oregon to Pittsburg is just about equal to the value of the logs at the mill. Obviously, the large proportion of waste or common lumber will not bear a high addition to its cost by carriage to any distance. In the manufacture of fur hats a shrinkage of weight occurs of one-half between the fur scraps and the finished product. In such a case it is imperative, either that the factory be near the source of supply or that the rate on the two distinct commodities be nicely adjusted. The decision of the United States Steel Corporation to build a large plant at Duluth for supplying the northwestern market is the outcome of such considerations. The main point is that the adjustment of a number of rates may determine, not only the general welfare of the industry but even its specific geographical location with reference to the raw material on the one side and the market on the other.

The jobbing or wholesale business of the United States exemplifies the most highly involved and complex details of commercial competition.[91] In this field it appears most clearly that, as is so often alleged, railway traffic managers hold the welfare of entire communities, as it were, in the palms of their hands. In all the cases heretofore cited, great natural forces outweighed the purely personal and human ones. Soil, climate and mineral resources more or less completely determined the final outcome of commercial competition. But the distributive business of a country is more largely artificial. It is more subject to human control, and may be influenced by personal considerations. Shall the economically dependent southern planter be supplied with manufactures of all sorts,—from harnesses to tin dippers—from mid-western cities like Cincinnati and Chicago or from eastern centres, such as New York and Baltimore? This is the underlying economic issue raised in the notable Cincinnati Freight Bureau Case in 1894; in the course of whose determination the Supreme Court of the United States raised the more immediate and pressing question of the authority of the Interstate Commerce Commission to regulate rates at all. In the dust raised by the controversy over this purely legal question, the basic economic dispute was lost to view.[92] Shall the people of the Pacific slope be supplied with hardware and analogous products from their own large cities which buy at wholesale from the East, break bulk at San Francisco or Seattle and ship out to smaller towns in less than carload lots; or shall the distribution take place at the hands of jobbing houses located several thousand miles away at Chicago or St. Louis? This is the economic dispute raised in the St. Louis Business Men's League case.[93] The very existence of San Francisco as a commercial centre may depend upon it. For the primary and secondary operations of commerce are often complementary. At the large cities, concentration of raw staples moving inward naturally entails back loads outward at low rates for manufactured goods distributed by jobbers. Or, taking the smaller places, the farmer will of necessity buy his cotton cloth, sugar and coal in the town to which he drives by wagon to deliver his cotton, corn or wheat.[94]

The entire puzzling class of cases dealing with the southern basing point system are primarily concerned with such issues as these.[95] Three distinct classes of cases arise. There is, first, the competition between cities of equal size, be they large or small, such as Memphis, Tenn., and Little Rock, Ark.; Danville, Va., and Lynchburg; or Cleveland, and Cincinnati, Ohio: secondly, the rivalries between large cities and what may be called secondary local centres in the same part of the country,—such as Seattle, Wash., v. Spokane; Chicago v. Burlington or Dubuque, Iowa; or Atlanta, Ga., v. Macon: and thirdly, the intense rivalries between the great first-class cities, like New York, Philadelphia, and Chicago, and the rest of the field, big and little.[96] The mail order houses, the express business and the parcels post intervene at this point. But in all of these issues, series of no less than three separate transportation costs have to be totalized and kept more or less on a parity. The intricacy is increased by reason of the fact that shipments must be made, first at wholesale to the jobbers, and thereafter usually in less-than-carload lots to retailers. If the carload rate be relatively too low, with reference to the rate on small lots, the jobbers near the market will be upbuilt and the jobbers at a distance cannot compete. If the opposite relation obtains, the jobber in a distant great city will be able to ship out small orders cheaper than the local dealer can obtain them by carload and, breaking bulk, peddle them from his own town. So narrow is the margin of profit on staple goods that a difference of a fraction of a cent per pound may exclude a dealer from the field entirely. This question of carload ratings is, however, treated elsewhere; impinging, as it does upon matters of freight classifications.[97]

The rivalries of jobbers and middlemen in different cities are inevitably borne into the offices of traffic managers. Were all railways equally interested in all cities alike, the matter need not go further, engendering railway rivalries. But such is seldom the case. Hardly a road can be named, whose interests are not more or less identified with some particular city. Commercial rivalry thus at once leads to railway competition. Four or five railways, like the Chicago and Northwestern, radiate out to the west from Chicago, and have no interest in St. Louis. Almost as many, like the Missouri Pacific, go out from St. Louis without entering Chicago. Others, like the old Union Pacific and, formerly, the Atchison system, only come to the Missouri river, and consequently wish to upbuild their eastern termini, Omaha or Kansas City. Only a few, like the Illinois Central, reach them all. Such a road is usually called upon to act as a mediator in all disputes. "It is a continual struggle between the line from Kansas City to St. Louis with no interest in Chicago, and the line from Kansas City to Chicago with no interest in St. Louis," as one witness before the Industrial Commission phrases it. Compromise is the only outcome. And in this manner an involved structure of differentials is built up, oftentimes top heavy and always susceptible of collapse on the defection of any party to the agreement. When a truce was patched up between the trunk lines and the Gulf roads after the sugar rate war of 1905, it is said to have taken twenty experts three entire days merely to "line up" rates on a parity between the competing jobbing centres.