Railroads: Rates and Regulations

CHAPTER IX
FREIGHT CLASSIFICATION[315]

EXCERPTS FROM THE FREIGHT CLASSIFICATIONS

Imagine the Encyclopædia Britannica, a Chicago mail-order catalogue and a United States protective tariff law blended in a single volume, and you have a freight classification as it exists in the United States at the present time! A few selections from the first and last items of such a document are reproduced on the preceding pages. They give some idea of the amazing scope of trade. Such a classification is, first of all, a list of every possible commodity which may move by rail, from Academy or Artist's Board and Accoutrements to Xylophones and Zylonite. In this list one finds Algarovilla, Bagasse, "Pie Crust, Prepared"; Artificial Hams, Cattle Tails and Wombat Skins; Wings, Crutches, Cradles, Baby Jumpers and all; together with Shoo Flies and Grave Vaults. Every thing above, on, or under the earth will be found listed in such a volume. To grade justly all these commodities is obviously a task of the utmost nicety. A few of the delicate questions which have puzzled the Interstate Commerce Commission may give some idea of the complexity of the problem.[316] Shall cow peas pay freight as "vegetables, N. O. S., dried or evaporated," or as "fertilizer"—being an active agent in soil regeneration? Are "iron-handled bristle shoe-blacking daubers" machinery or toilet appliances? Are patent medicines distinguishable, for purposes of transportation, from other alcoholic beverages used as tonics? What is the difference, as regards rail carriage, between a percolator and an everyday coffee pot? Are Grandpa's Wonder Soap and Pearline—in the light of the claims put forth by manufacturers, suitable either for laundry or toilet purposes—to be put in different classes according to their uses or their market price? When is a boiler not a boiler? If it be used for heating purposes rather than steam generation, why is it not a stove? What is the difference between raisins and other dried fruits, unless perchance the carrier has not yet established one industry while another is already firmly rooted and safe against competition?

The classification of all these articles is a factor of primary importance in the making of freight rates both from a public and private point of view. Attention has been directed of late to its significance and importance to the private shipper, by reason of the use made of it in the advances of freight rates which have taken place throughout the country within the past decade. Its public importance has not been fully appreciated until recently as affecting the general level of railway charges. So little was its significance understood, that supervision and control of classification were not apparently contemplated by the original Act to Regulate Commerce of 1887. The anomaly existed for many years, therefore, of a grant of power intended to regulate freight rates, which, at the same time, omitted provision for control over a fundamentally important element in their make-up. The Interstate Commerce Commission, however, assumed jurisdiction over the matter: and for more than twenty years, despite doubts expressed by the Department of Justice as to its legality, passed upon complaints as to unreasonable classification without protest even from the carriers themselves. Control over it has now been assured beyond possibility of dispute by the specific provisions of the Hepburn Act of 1910.

The freight rate upon a particular commodity between any given points is compounded of two separate and distinct factors: one having to do with the nature of the haul, the other with the nature of the goods themselves. Two distinct publications must be consulted in order to determine the actual charge. Although both of them usually bear the name of a railway and are issued over its signature, they emanate, nevertheless, from entirely different sources. The first of these is known as the Freight Tariff. It specifies rates in cents per hundred pounds for a number of different classes of freight, numerically designated, between all the places upon each line or its connections. Thus the tariff of the New York Central & Hudson River Railroad gives rates per hundred pounds from New York to several hundred stations, for first, second, third, etc., classes. This freight tariff, however, contains no mention whatever of commodities by name. The second publication which must be consulted supplies this defect. This is known as the Classification. Its function is to group all articles more or less alike in character, so far as they affect transportation cost, or are affected in value by carriage from place to place. These groups correspond to the several numerical classes already named in the freight tariff. Thus dry goods or boots and shoes are designated as first class. Turning back to the freight tariff, the rate from New York, for example, to any particular place desired, for such first-class freight, is then found in cents per hundred pounds. It thus appears, as has been said, that a freight rate is made up of two distinct elements equal in importance. The first is the charge corresponding to the distance; the other is the charge as determined by the character of the goods. Consequently, a variation in either one of the two would result in changing the final rate as compounded.[317]

A concrete illustration or two may emphasize the commercial importance of classification. So far as it may be used to effect an increase of rates, the following case is typical, as given by a Boston manufacturer, in evidence before the Senate Committee on Interstate Commerce in 1905:

"From July 15, 1889, to January 1, of this year, the classification (of carbon black, basis of printers' ink) continued to be once and a half first class in less-than-carload lots, third class in carload lots, approximately twice the freight required between 1887 and 1889. Meanwhile, the price had declined.... On January 1 the classification was again raised, to class 2, rule 25, an increase of about ten per cent, in carload lots. Numerous efforts have been made by myself and others to have this commodity classified where it belongs, as dry color, but the only result has been the reverse of what we desired; and the industry has been and is in a somewhat precarious condition, as we have contracted for millions of pounds of black at prices fixed at the point of delivery, and had no notice of the raise in freight rate until subsequent to its going into operation."[318]

The Spokane Chamber of Commerce, in these same Senate Committee hearings, gave an illustration of the use of classification to bring about a change of rates without modifying the individual railway tariff. "The Pacific Coast Pipe Company started to make wired wooden pipe in the spring of 1900.... There was at that time but one factory of the kind on the North Pacific coast, located at Seattle.... The Seattle factory, backed by the big lumber firms on the coast, finding a serious competitor in the Spokane field, got the railways to put manufactured pipe under the lumber classification, thus reducing the rate from Seattle to Spokane from forty-six to twenty cents per 100 pounds.... The Spokane factory at once filed a vigorous protest, with the result that the railways put back the rate from Seattle to Spokane to forty-six cents, but established a maximum rate of fifty cents for Seattle pipe, which, of course, shut off all territory east of Spokane from the Spokane factory.... The remnant of the Spokane factory ... has been compelled to shut down, and the entire plant is being removed to Ballard." Whether these facts are exactly as thus informally stated or not, is by the way. If not done at this time, it is certain that similar manipulation of classification rules often enters into commercial competition.[319]

Freight tariffs and classifications are as distinct and independent in source as they are in nature. Tariffs are issued by each railway, by and for itself alone and upon its sole authority. Classifications, on the other hand, do not originate with particular railways at all; but are issued for them by coöperative bodies, known as classification committees. These committees are composed of representatives from all the carriers operating within certain designated territories. In other words, the United States is apportioned among a number of committees, to each of which is delegated by the carriers concerned, the power over classification; that is to say, the right to assign every commodity which may be shipped or received to any particular group of freight ratings. This delegation of authority is always subject, however, to the right of filing whatever exceptions to the classification any railway may choose independently to put in force. These exception sheets contain the so-called commodity tariffs, to be subsequently described, which stand out in sharp relief against the so-called class rates. Such exceptions are independently filed by each railway at Washington and do not generally form integral parts of the volume issued by the classification committee, except in the southern states. New editions of these classifications are published from time to time as called for by additions or amendments, the latest, of course, superseding all earlier ones. Thirty-seven such issues have already appeared in series in trunk line and southern territory, while fifty have been put forth in western territory, since the practice was standardized in 1888. At the present time freight classification for all the railways of the United States is performed mainly by three committees, known as the Official, the Southern and the Western, with headquarters, respectively, in New York, Atlanta and Chicago. Each of these three committees has jurisdiction over a particular territory. Thus the Official Classification prevails east of Chicago and north of the Ohio and the Potomac; the Southern, over the remaining part of the country east of the Mississippi; and the Western, throughout the rest of the United States. In addition to these three primary classifications there is also another, issued by the Transcontinental Freight Bureau, with headquarters at Chicago. This committee has supervision over classification upon the Pacific coast business. A number of the states also, notably Illinois, Iowa and most of the southwestern commonwealths, promulgate state classifications having relation, however, only to local business within their several jurisdictions. These are prescribed by law and represent modifications to suit peculiar exigencies or to foster local trade ambitions. There are also a number of other coöperative local railway committees, each dealing with the special concerns of its own territory, and representing the joint interests of the railways therein included to all the world outside. Thus, for instance, Southern Classification territory is subdivided into local units, known, respectively, as the Southeastern Mississippi Valley Association, the Southeastern Freight Association, and the Associated Railways of Virginia and the Carolinas.[320] But for all practical purposes, so far as the larger problems of classification are concerned, our attention may be concentrated upon the three principal committees above mentioned.

Some impression of the wide differences between these three main classifications in different parts of the country may be derived from the set of excerpts at the head of this chapter. In three parallel columns the alpha and omega of each are reproduced, together with bits of one of the most complicated schedules, viz., that dealing with agricultural implements. Even where the same commodities occur in each classification, the diversity in description, mode of packing, carload and other requirements, renders any direct comparison almost impossible. The mere fact that the class assignment, as shown at the right in each column, happens to be the same, as in the case of acetic acid in barrels or drums which moves both in Official and Southern Classification territory, third class in less-than-carload lots (L. C. L.) and fifth class in carloads (C. L.), shows nothing at all as far as equality of charges is concerned. For, as has been said, this is only half the statement of the rate. The spread between charges for different classes yet remains to be determined. The actual relativity between third-class and fifth-class rates, moreover, may be very different in the two places. In the New York Board of Trade case[321] this point was well exemplified. Comparative conditions as to rates in the three main sections of the country, as they then existed, were as follows:

Rates in Cents per Hundredweight

On the trunk lines fourth-class rates were thus less than half those charged for the first class; in the West they were even lower, relatively; while in the South fourth-class rates were about two-thirds as high as the first-class rates. These differences in the spread between classes, as will be seen, interlocking as they do with a multitude of other considerations, are a serious bar to any partial modification in the direction of uniformity for the United States as a whole. Only by consideration of every factor entering into any given rate may comparisons safely be entertained.

Historically considered, the development of freight classification has been much the same in England and the United States. Early railway practice was an outgrowth of the tariffs in force upon canals and toll roads.[322] In America, freight charges were at the outset often arbitrarily fixed by the state legislatures, as conditions precedent to the grant of charter. In many instances they were based upon the customary performance by wagon, distinguishing between light-weight articles paying by the cubic foot, and heavy ones for which the tariff was based upon weight. Thus in 1827 the charter of the South Carolina Railroad established its tolls at one half the usual wagon charge. The Southern Pacific in local rates on ore into San Francisco followed along just below the charges by ox cart. The freight was proportioned also according to the length of haul by an arbitrary mileage rate. It soon developed, however, that railway rates were unique in the fact that not only was there a great increase in the volume of trade, but also in the diversity of articles offered for transportations as well. Far more elaborate classifications were soon seen to be necessary.

The South Carolina Railroad tariff of 1855, described by McPherson,[323] exemplified the primitive traffic conditions then prevalent. Goods were divided into four classes. The first consisted of articles of light weight or high value, including, for example, such incongruities as bonnets, tea, and pianos. The remaining three classes paid by weight with a descending scale of charges. It is difficult to explain why coffee and sugar should be rated lower than stoves and feathers; or why dry hides and rice should be charged a higher rate than cotton yarn and bacon; but it is evident that a rough classification according to weight, value, use and cost of service was being attempted. There was in addition a considerable collection of special rates on chosen commodities according to the method of packing them, whether by barrel, bale or case. And there were also what corresponded to modern commodity rates upon cordwood, lumber, bricks, and similar goods. This tariff, though primitive, including no less than three hundred items, was far more elaborate than those commonly used at the time. The Louisville & Nashville originally distinguished but three classes: one by bulk, another by weight and a third applicable to live stock. Poultry was rated by the dozen long after the Civil War, with a higher charge for Muscovy than for ordinary ducks. The traffic manager of the Chicago, Milwaukee & St. Paul testified before the Elkins committee in 1905, that the classification in Illinois in his youth was printed on the back of a bill of lading no greater than the size of an ordinary sheet of letter paper, and the page was not full.

From these modest beginnings the development of classification in the United States was rapid, responding to the ever-increasing intensity of competition and the spread of markets, particularly after 1875. By the middle of the eighties most of the large railways were working under six or eight different classifications. It began to be apparent that some check must be placed upon such increasing complexity. For conditions were wellnigh intolerable, with one set of rules for Illinois, and yet another west of Buffalo, divided into eastbound and westbound sections, with still a third on westward shipments local to territory between Chicago and the Missouri river. The first attempt at a systematic scheme was made in 1882, but the agreements then made proved unstable. By 1887 conditions had become insupportable, so great was the number and the diversity of the classifications throughout the country.[324] Some applied to local business only, and were peculiar to each road. Some applied only to westbound business, others to eastbound traffic. The traffic manager of the New York Central & Hudson River testified before the Interstate Commerce Commission that there were at one time 138 distinct classifications in trunk line territory alone. The case of the Wabash in 1883 was typical. A shipper desiring to determine freight rates over that road might be compelled to consult a classification for the middle and western states in six classes; one for the Southern Railway & Steamship Association territory in eighteen classes; one for Mississippi valley business in five classes; one known as the Revised Western in nine classes; the Trunk Line East in thirteen classes; the Trunk Line West in five classes; a classification for Texas points in eight classes; and two for the Pacific coast, according to direction, in eight and nine classes, respectively. This situation, rendering it almost impossible for any shipper to determine in advance what his freight rates were going to be, as well as what his competitor was paying, early impressed itself upon the Interstate Commerce Commission. And it was doubtless due in part to its initiative that classifications were shaken down into substantially their present general form in 1888.

Number of Ratings in 1909[325]

The natural growth of classification in a rapidly developing country like the United States, has manifested itself in three distinct ways: there has been a steady increase in the number of items of freight separately enumerated; a growing distinction in rates between carload and less-than-carload shipments; and a steadily enlarging volume of the most elaborate special rules and descriptions. As for the mere increase in distinct commodities enumerated, in the East in 1886 there had come to be about 1,000. The first Official Classification in the following year increased to 2,800 items; and by 1893, in the eleventh issue, there were twice that number. The latest Official Classification, No. 34 in 1909, contained approximately 6,000 separate enumerations—not many more, in fact, than fifteen years earlier. The point of saturation, or else the limit of human ingenuity, seems to have been about reached some years ago. The same thing was true of the Western Classification. In 1893 this contained 3,658 items, representing an increase of about 2,000 over the number of commodities classified by name in 1886. By 1909, as the above figures show, it comprehended 5,729, almost as many separate items, in fact, for less-than-carload lots as were recognized in trunk line territory. Only in carload ratings is the Western Classification less extensive. The Southern Classification reflected somewhat simpler trade conditions prevalent south of the Ohio river, by the relatively smaller number of articles enumerated; but it should be added that the number of exceptions—filling no less than 160 pages in the latest issue—is indicative throughout of a lesser degree of standardization than is found elsewhere. Perhaps the most striking feature of the southern system is the very small proportion of carload rates. But it should be noted in this connection that the basing point system afforded preference to market towns in any event; so that jobbers in such places did not need wholesale rates to the same degree. This phase of the matter will be elsewhere discussed.[326]

The second natural tendency in the development of classification above mentioned, is an increase in the number of separate ratings for large and small shipments. The normal growth of trade ought to make possible a steady increase in shipments by the carload, rather than by the box, barrel, or case; and the increase in the number of separate carload ratings—always, of course, at a reduced rate by comparison with less-than-carload lots—conforms territorially to the growth in the volume of trade. In 1877, even in trunk line territory, only twenty-four commodities were accorded a special carload rate.[327] By 1880 the number had increased to 50, and seven years later to 160. Just before the passage of the Act to Regulate Commerce there was no distinction between carload and small lots in eighty-five per cent. of the articles enumerated. A sudden change supervened in the first Official Classification issued after the Federal Act. The number of carload ratings was suddenly raised to 900, provoking a storm of protest from eastern shippers who resented this advantage accorded to jobbers in the West and South, because it enabled the latter to buy their supplies directly at wholesale.

The dispute between dealers in the older and newer commercial centres came to a head in the so-called New York Board of Trade and Transportation case of 1888, elsewhere discussed. Yet notwithstanding this protest of jobbers and manufacturers in eastern trade centres, who insisted that they should be permitted to compete on even terms with provincial jobbers by making their shipments direct from New York or Boston in small lots as cheaply as the local jobber could buy them by the carload, the number of separate carload ratings steadily augmented year after year. By 1893 more than half of the articles enumerated in the Official Classification were allowed a lower rate for large shipments. Present conditions are set forth by the statistics in the preceding paragraph. From these it appears that in trunk line territory nearly three-fourths of the commodities now enjoy carload ratings; while in the South, on the other hand, only about one-fifth of them make such distinction between carload and less-than-carload lots.[328] One reason is evident; namely, that throughout a large part of the South few jobbers command a business of sufficient magnitude to make use of carload shipments. It is but recently, to take a specific illustration, that business has developed in volume sufficient to permit of the shipment of fly paper in carload lots. Until such time no distinction between large and small shipments could well be made.

Conditions in the West, according to these figures, are intermediate between those in the East and the South. On the other hand, transcontinental business, as carried on in competition with ocean steamers, is almost entirely confined to shipment by the carload. The Transcontinental Classification is unique, therefore, in offering but very few opportunities for shipment by package, except under specially onerous conditions.

The spread, in other words, between the two sorts of carriage operates most unfavorably by contrast upon the intermountain centres. Denver, for example, under the Western Classification enjoys no carload rates, while competitors at San Francisco have a large number.[329]

A much more elaborate code of rules and regulations having reference to local practices and conditions is the third accompaniment of the growth of trade.[330] Prior to 1887, and again before the recent revival of interest in uniform classification, conditions had become intolerable in this regard. All sorts of details, covering relatively unimportant differences in conditions of carriage, bill of lading contracts, marking and packing, led to constant confusion and annoyance, especially in cases of shipment from one classification territory to another. An eastern shipper of iron bolts, having in mind that a gunny sack is equivalent to a box or barrel in the East, orders a small shipment in a bag to a far western point. He finds that bolts in bags under the rules of the Western Classification, are specially enumerated only for carload lots, and that he must pay a rate one class higher for such shipment than if contained in a barrel, box or keg. This difference in classification may more than absorb his profit. Recent evidence before the Interstate Commerce Commission,[331] contained a striking illustration of such local diversity in rules and descriptions as applied to furniture.

Only in a customs tariff of the United States would one expect to find any such complexity as is discoverable in railway documents of this sort.

The mere interpretation of such classification rules is often difficult; especially with reference to the mode of packing. Suppose a tariff provides a certain rate on stamped metal ware in boxes, barrels or crates and, furthermore, fixes the charge fifty per cent, higher for shipment in bales, bags or bundles. If the consignment is encased in corrugated straw-board, which of the two rates applies? The difference in rates being so great, it becomes quite an item on a shipment of fifteen carloads from Buffalo to the Pacific coast.[332] Or it may be a question as to whether a crate for Colorado cantaloupes is actually of such dimensions as to come in under a specially favorable commodity rate.[333]

The growing diversification of manufactures and trade is, of course, responsible for all three of the developments above indicated. Not only the increasing refinement of commerce, but the technical nomenclature or trade jargon, necessary for the specific and accurate description of so many thousands of articles, have conspired to render these documents extremely cumbersome in the absence of a general revision and simplification. It is but natural that one item after another should be added, each bearing a particular name or being classified upon some new basis. A striking example of this increase of complexity was afforded by the cotton goods schedule in the Southern Classification. By 1900 there were upwards of thirty different names under which cotton cloth might be shipped. Great complaint was occasioned, as well as the possibility of fraud, by underclassification, etc. Most of these thirty names did not represent different values of goods, but in many instances were merely trade-marks of particular manufacturers. At the urgent request of the shippers this complicated schedule was superseded in 1900 by one comprehensive title of "cotton goods in the piece" irrespective of color, particular method of weaving or other subordinate details.

From the point of view of economic theory, the warrant for a differentiation of charges between various classes of commodities offered for transportation, may be considered primarily from two distinct points of view. The first is that of operation, which determines cost. The second is from the standpoint of traffic whereby the value of service, so-called, is measured. The reasonableness of making a distinction in freight rates according to the character of goods is easily apparent, as judged on the basis of cost of service. A multitude of factors enter into consideration at this point. The railway ought in self-protection to charge more for hauling a thing, if it actually costs it more in the long run to perform that service. Some of the factors which enter into this cost were well put by the Interstate Commerce Commission in 1897.[334]