Railroads: Rates and Regulations

A valuable instance of the play of opposing considerations of cost and value of service in the classification of freight rates is afforded by the complaint in 1908 of the pulp paper makers in Wisconsin, already cited in another connection.[159] It appeared that for similar service over the same roads, the rates per carload on saw logs for lumber were only about one-half those charged for carriage of logs to be ground into paper pulp. Judged on the basis of commercial value, hemlock and spruce bolts, too short and often otherwise unfit for lumber, were worth much less than saw logs; and yet they paid double the freight rates. This was not because the pulp wood was less desirable as traffic. In many ways it was more so. The haul was twice as long as for saw logs. The paper mills brought relatively more supplementary tonnage in the form of coal, food stuffs and supplies for workmen and their families. Fully as much of the finished product to be reshipped to consumers resulted. While smaller in volume, the pulp wood business was far more permanent. It was growing rapidly while the lumber business was declining. Moreover, the actual cost of service in hauling pulp wood was fully as low as for lumber logs. Carloads were much heavier, and were more regular in movement. In practice they involved no milling-in-transit obligation, that is to say, no obligation to re-ship the finished paper out over the same road; while all the saw log rates carried this obligation—a matter of some moment to the railways. And finally the value of the service to shippers of pulp wood was less than to mere lumbermen; in other words, the paper makers were operating under closer margins of profit; their plants were more costly, and depreciated more rapidly. The defence of the carriers in this case was not that the rates on pulp wood were too high in themselves, but that the rate on saw logs was perhaps unduly low—the latter having been crowded down to a minimum figure by competition in the early days of the business by the lumber raftsmen who floated the saw logs downstream from the forest to the saw mills. But of equal importance probably in perpetuating the higher rates on pulp logs, was the assumption that while the value of the bolts themselves was perhaps even less than that of saw logs, the value of the resultant product, paper, was much greater than that of lumber. But the Wisconsin Railroad Commission, in entire harmony with the principle repeatedly laid down by the Federal commission, held that the carriers must be guided by real distinctions of cost from a transportation standpoint and not by gradations of value. If the goods were bulky, awkward, or risky to handle, perhaps requiring special appliances or equipment, relatively high classification was permissible. But if they were substantially similar for purposes of carriage, no gradation in rates based upon differences in the ultimate uses to which the commodity might be put would be upheld. Such was the reasoning of the Interstate Commerce Commission in a decision, holding that fire, building and paving brick must be accorded equal rates, regardless of their differing values.[160] That the element of value is, however, not negligible is brought out in a later Federal case,[161] wherein it was recommended that cheap china, to be given away as premiums in the tea trade, be rated nearer ordinary crockery or earthenware, even though shipped in the same manner as high grade china ware. Under the official classification, chinaware is rated first class if in boxes, and second class in casks. Earthenware or crockery is carried at twenty per cent, less than third class, in small packages (L. C. L.). On the basis of mere cost of service, it would seem as if boxes of chinaware should have a lower rating than casks. Boxes stow better than casks, with less risk of breakage. But the commercial practice being to ship the finer grades of chinaware in boxes, such shipments are graded higher because the traffic will usually bear a higher rate. Thus considerations of cost of service yield to those of value. The Interstate Commerce Commission, however, noting the exceptional circumstances under which the tea company distributed its cheap chinaware, recommended a revision of the classification to meet the needs of the case; in other words ordering a greater emphasis upon the elements of the value of the service, even at the expense of relative cost of operation.

Our final conclusion, then, must be this: That both principles are of equal importance; and that both must be continually invoked as a check upon each other. The tendency to the elevation of cost of service to a position of priority—rather characteristic of regulative bodies and of legislators—is no less erroneous than the marked disposition of railway managers to insist upon the universal applicability of the principle of charging what the traffic will bear. Neither will stand the test of reasonableness alone. Whether the one or the other should take precedence can only be determined by a careful study of the circumstance and conditions in each case; and in practice, the instances where either principle becomes of binding effect to the entire exclusion of the other, are extremely rare.