Railroads: Rates and Regulations

No canal could meet the fierce slashing of rates which suddenly supervened on the rail lines. Since 1855, when the canal carried twice the traffic of all the trunk lines, until 1861-1862 when the rail and water lines were about even, the railroads had steadily gained in tonnage.[16] The turning point was reached in 1872 when the canal traffic actually began to decline. Between 1871 and 1876 the aggregate tonnage (both ways) on the New York canals fell away about half, spasmodically recovered during the great expansion of exports in 1879-1880, held constant for five years, and thereafter steadily dwindled away. As the accompanying diagram shows, the rise of railroad tonnage was rapid up to 1873. Thereafter for several years during the actual panic, despite the railroad wars and low rates, no great change occurred. But by 1876, eighty-three per cent. of all-grain receipts at Atlantic ports came by rail; and over nine-tenths of all the commerce between East and West had left the water routes. At New York the three main railroads carried six times the traffic of all the state canals in 1880. After that time the canal barges were loaded only with coal, lime, sand, cement, and similar low-grade traffic. So that in the rapid expansion of business, which, as our diagram shows, occurred after 1878, the canal shared not at all. The disparity between east-and westbound tonnage was notably great. In 1870 this eastbound traffic was about three times as great as the tonnage west bound. In 1881 it was seven and one-half times as great, declining thereafter to a proportion of about 6.5 to 1 during the late nineties. This inequality, of course, whetted the appetite of the carriers for back loads to fill the westbound trains, and undoubtedly gave an impetus to rate disturbance. The rate wars led by the New York Central during 1881 were largely due to this fact.

As for water carriage elsewhere, the rivers soon followed the canals in steady decline of relative importance. On the southern streams, such as the Cumberland and Tennessee, the principal diversion to the railroads of traffic in foodstuffs south bound from the West, took place in the five years subsequent to 1866.[17] High-water mark in the Mississippi trade was reached in 1879, the year of the completion of the jetties for the improvement of navigation at the mouth of the river. A steady decline thereafter has ensued down to the present day. New Orleans had then only recently engaged in foreign trade in grain. Exports of wheat and flour (equivalent) had suddenly risen from less than 1,000,000 bushels in 1875 to over 12,000,000 bushels in 1880. At this time this came principally by river. It was nearly ten years later before the Illinois Central actively engaged in such export business. But when the railroads finally seized upon it, the river trade was doomed. The only exception to this decrease of inland water transportation occurred on the Great Lakes. The carriage of coal, iron ore, and lumber rapidly increased. Through the Detroit river, the tonnage grew from 9,000,000 in 1873 to 20,000,000 tons in 1880; and through the St. Mary's Canal from 403,000 in 1860 to 1,734,000 tons in 1880. Inasmuch as a fair proportion of this rapidly growing business was ultimately destined to reach the seaboard either as raw material or in the form of manufactures, this water traffic contributed to, rather than lessened the prosperity of the trunk lines operating east of the lakes.

The growing importance of railroads during the seventies was accompanied by collateral developments, which deserve mention in a general preliminary survey. The abuses of personal discrimination and favoritism, constantly recurring rate wars and disturbances, the financial scandals of construction companies and subsidiary corporations, the frauds perpetrated by unscrupulous financiers like Gould and Fiske, coupled with the arrogance of railroad managements, aroused widespread public hostility. This led to an insistent demand for public regulation and control. The Granger movement formed its open expression in the western states. The searching inquiries of the famous Hepburn Committee of the New York legislature in 1879 voiced it in the East. The Windom report of 1874 was called forth on behalf of the Federal government. The first railroad commission, that of Massachusetts in 1869, was soon followed by others all over the country. And a campaign of education was set under way which finally led to the Federal inquiries of the Cullom Committee of 1886 and the Federal Act to Regulate Commerce of the following year.

The decade of the eighties, so far as common carriers are concerned, was primarily characterized by new railroad construction. Over 70,000 miles of line were built in ten years,—a mileage just about equal to the total new construction for both the ten preceding and the ten following years combined. The movement culminated in 1882, and again in 1887, in two veritable crazes of promotion and speculative activity, unequalled before or since in our railroad history. The first was suddenly stopped by a short, sharp railroad panic in 1884. Jay Gould's operations in Union and Kansas Pacific set a pace for manipulation and fraud, which could have no other sequel. The second craze was doubtless in part restrained by the moral effect of the passage in 1887 of the Act to Regulate Commerce; although, viewed in a larger way, it was more directly due to the exhaustion both of the supply of capital and of confidence among investors. These two outbreaks of railroad promotion are deserving of further comment, both by reason of their extent and character. Prior to 1880, new railroads constructed had averaged a little over two thousand miles annually. The figures for 1881-1882, respectively, were 6,711 and 9,846 miles, rising finally to a total of 11,569 miles in 1882. This record has never been surpassed but once: when, four years later at the height of the second "boom," 12,983 miles of new line were laid down. A large part of this building was in the Far West and Southwest, these regions being now opened up as the upper Mississippi valley had been developed between 1868 and the panic of 1873. A second transcontinental route was opened in 1881, through the joining of the Southern Pacific and Atchison Topeka and Santa Fe roads at Deming and El Paso. Within two years thereafter two direct routes to connect the Southern Pacific system with New Orleans were completed. The Pacific Northwest was admitted to rail connection with the rest of the country in 1883-1884, by two significant events. The Northern Pacific road was then opened, and the Oregon Short line to connect the Columbia river basin with the Union Pacific system. The Great Northern road reached the Pacific slope in the year 1893, accompanied by the Canadian Pacific, constructed just over the border. This activity in far western railroad building was mainly due to the growth of the Pacific slope; but it was also favored by the successful competition of railways with the water routes round Cape Horn. It was estimated that as late as 1878, not over one quarter of the total tonnage moved into California went by rail. But the railroads then inaugurated a system of special contracts by which shippers who agreed to use the railroads exclusively, were given considerably reduced rates. By 1884 when the plan was discontinued, the percentage of tonnage carried to California by rail rose from twenty-five to between sixty and seventy-five percent. In the eastern states, the eighties was the period of speculative "parallelling" of existing lines of road, in order to dragoon the older lines into purchasing the new ones at extortionate prices. This was done under the guise of affording satisfaction to the popular outcry for competition as a means of reducing rates. Two notable instances were the building of the West Shore road, paralleling the New York Central; and of the Nickel Plate line which similarly ran for miles within a few rods of the Lake Shore across northern Ohio. The fact was that the prolonged period of depression during the seventies had brought about an accumulation of surplus capital awaiting investment. The rapid repayment of its debt by the United States government, also released a large supply of funds. General prosperity prevailed and prices were everywhere rising. This increase of prices, extending from commodities to all issues of stocks and bonds, reduced the rate of return upon investment for these new supplies of capital in all the older enterprises. The only alternative, in seeking for a liberal return on investments, was to risk it in new ventures. Speculation ran riot. All sorts of projects were eagerly taken up, and among these, new railroads were most important. They were freely built, far in advance of population in the West or of prospective needs for enlargement in the East, not so much sometimes to develop the country, as to enrich the promoters. That they ultimately served the public interest was not the main concern in too many instances. This was also the heyday of the fraudulent construction company, already so ably utilized by the builders of the Pacific roads.[18]

In short, speculation in every conceivable form ran riot in a way not repeated thereafter for nearly twenty years.

Aside from rampant speculation, American railroad history during the eighties must record various other economic events of importance. The city of New York and the New York Central Railroad were at the culmination of their relative importance in the export trade of the country. The volume of eastbound tonnage was enormous in the early eighties. In 1881, 2,500,000 tons of freight east bound were carried by the New York Central alone, a figure surpassed in only two years until 1896. Another event of importance was the general westward drift of population and agriculture. This was accompanied by a corresponding migration of manufactures inland from the Atlantic seaboard. The lines from the Central West to the South, such as the Illinois Central and the Cincinnati, New Orleans & Texas Pacific road, had formerly relied almost entirely upon the carriage of grain or flour and packing-house products from the farms of Ohio, Indiana, and Illinois to the cotton-raising South. During the latter half of the eighties they carried an ever increasing proportion of manufactured goods, such as boots and shoes, clothing, wooden ware, harnesses and groceries,—in fact everything denoted by the words general merchandise. More and more the supplies of grain, flour and packing-house products were being produced in Iowa, Nebraska, and Kansas, while larger quantities of general merchandise originated in the Middle West. The result was a need for new diagonal trunk lines from such points as Kansas City and Omaha into the lower Mississippi valley. The decline of Cincinnati as a great pork-packing centre dates from this time. Memphis and Vicksburg derived a new importance at the junction of such lines as the Kansas City, Memphis & Birmingham with the older Mississippi river roads. At about this time, in 1889, also, occurred the opening of the Gulf ports for the export of the surplus grain products of the territory west of the Mississippi. The significance of this for the eastern trunk lines did not appear until later; but the occurrence forms a part of that westward trend of population above mentioned. These years were all characterized by the increasing importance of long-distance through business, as distinguished from mere local trade. The markets of the country as a whole, the areas of commercial competition, were steadily expanding. Viewed in a large way, it was doubtless this economic phenomenon which at this time emphasized the need of centralized Federal control, instead of state regulation, if control there were to be. This found its expression in the passage by Congress of the Interstate Commerce Act of 1887.

A phenomenon of national importance was the rapid expansion of export trade in staple commodities, through New Orleans, Galveston and other Gulf ports. This began in 1889 when the Illinois Central first engaged in export business in grain. It soon assumed considerable proportions, with the growth of population and agriculture in the southwestern part of the United States; and, with the completion of the Panama Canal in 1913, will doubtless be even more notable in future. The opening of new railway connections with these Gulf ports about 1896 led to still further expansion of this trade. An immediate result was of course a decline in the relative importance of the great Atlantic seaports, particularly New York. A growing appreciation of this fact is accountable for the great interest in New York state in projects for enlarging the Erie Canal. A few figures, together with the diagram on the next page, illustrate the situation. A generation ago about nine-tenths of our exports of wheat and about seven-tenths of our exports of flour, went out through the port of New York. In 1899 less than one-half of our wheat and less than one-third of our flour was exported through the same city. The larger part of this loss ensued after 1896, with the opening of new lines to the Gulf ports as above mentioned. The New York Commerce Commission in its report for 1900 found that for 1899, while the nation's total foreign shipments of wheat was larger than at any time since 1892, New York actually exported twenty million bushels less than seven years earlier. Exports in 1900 were the smallest in her history, forming, that is to say, the lowest proportion of the total exports of the United States. They were actually about a million bushels of wheat less than went out through the two principal Gulf ports. An indirect result of this growth of New Orleans and Galveston was an intense competition between all the Atlantic trunk lines interested in the eastern seaports and the railroads tributary to the Gulf of Mexico. The part of the country most affected by this competition, of course, was that portion about equidistant from the two sea coasts. This rivalry led to rate wars on a scale not witnessed before since the trunk line struggles during the seventies. St. Louis, Kansas City and all the region thereabouts, enjoyed the benefit of ruinously low rates as a consequence,—an advantage not accorded to other parts of the country. One cannot doubt that this factor was most influential in encouraging the growth of their population and trade.

The development of the Gulf ports more recently, together with the situation respecting rate wars on export grain, is still further indicated by the chart. When New Orleans in 1891 considerably increased its business through the activities of the Illinois Central Railroad, it speedily developed that climatic conditions led to saturation of the grain with moisture in the vessels' holds. This fact, together with other difficulties, discouraged progress. But, for a time, with the revival of foreign commerce in 1897, both the Gulf and Atlantic ports shared in the greatly increased business. Galveston had now come into the field; and at times surpassed New Orleans in importance by virtue of the development of wheat fields in the Southwest. But the overweening ambition of these Gulf ports, threatening as they did the supremacy of New York, led to intense rivalry. All the lines to the Gulf became finally pitted against all the trunk lines serving the Atlantic seaboard. The advantage for two or three years seemed to lie with the southern lines; and, as the chart indicates, in 1903-1904 grain exports through New Orleans and Galveston actually exceeded those of any other ports. After the utter collapse of export business in 1905, trouble once more threatened to break out; but it was fortunately averted by a compromise effected in 1906. The Gulf lines on through freight demanded a substantial differential to offset certain disabilities, such as the longer haul, poorer service and climatic damage to which they were exposed. The trunk lines successfully met this contention in part, and finally brought about a peaceful settlement of the difficulty. Under this arrangement of a small differential in favor of the Gulf, New York, as the chart shows, has once more resumed its preëminence as compared with the rest of the country. But of late the ever-lessening volume of surplus American grain for export to Europe[19] has rendered the question of far less importance than at one time it threatened to assume.

The rapid growth and development of the Canadian railroads and ports has also been notable in recent years. The Grand Trunk Railway was a factor in Chicago business from the very first; and had to be reckoned with in all trunk line rate adjustments. The dressed beef rate war of 1887 proved this fact. But a new era of Canadian competition was inaugurated with the opening by the Canadian Pacific of the so-called "Soo" route in 1890, across the straits of Mackinac, thus opening a short line from St. Paul and Minneapolis to the East. Persistent rate wars during the next few years, particularly 1892-1893, finally led to recognition of the claims of this lien by the trunk lines. Much business was undoubtedly diverted from Chicago. Between 1884 and 1891 the flour shipped from Minneapolis increased over fifty per cent., yet the proportion going by way of Chicago largely declined. Much of this business, of course, ultimately reaches the seaboard by the combined Lake and rail routes; but a large part goes out through Canada during the open season. Yet, on the other hand, it is equally true that the wonderful development of the Canadian Northwest since 1905, contributes in many ways to the prosperity of American carriers and seaports.

As for new railroad construction since 1890, as shown by the statistical chart on page 78, it has been proportionately much slower than during the eighties. From about five thousand miles laid down in 1890, a drop ensued to less than two thousand miles in each of the four years of depression after 1893. And the former rate was not resumed until 1901, since which time construction has ranged about six thousand miles annually. This slackened rate of growth during the last fifteen years is an indication of a fact of great importance. The country as a whole with almost 250,000 miles of line in 1911 seems to be fairly well supplied with transportation routes. It seems as if the main trunk lines and systems had now been provided, leaving for the future the problem of constructing branches and feeders and of increasing facilities upon the main lines already built by duplication of tracks and enlargement of terminals. A comparison of the rates of growth of mileage and traffic, or of density of traffic, shows how new construction is lagging behind the development of business. Present conditions may best be shown by a few figures. The total mileage of the United States is nearly equal to a ten track railroad completely encircling the globe. The United States had already in 1900 about forty per cent. of the aggregate mileage of the world, considerably exceeding the total mileage of all the countries of Europe combined. The situation may be illustrated in another way, by reference to the relation of mileage to population and area. Europe in 1902 had about 7.4 kilometres of line to every 10,000 inhabitants, as compared with 41.4 kilometres (twenty-six miles) for the United States. This shows that proportionately to population the United States is about six times as well equipped with railroads as Europe. Similar results appear with reference to superficial area. As compared with Europe alone, we have about two-thirds as much mileage to every square mile of territory, despite the fact that our density of population is only about one-seventh of that of Austria Hungary—one of the most sparsely populated countries in Europe. These figures show conclusively that our railroad problems for the future will be mainly concerned with accommodating the huge volume of existing traffic along the routes already built, rather than in seeking to develop new ones to parallel the old.

Several essential peculiarities of American railroad development stand out in sharp relief by comparison with the experience of Europe. The most significant, perhaps, is the large amount of public participation in construction, evinced through liberal grants of aid in lands, credit and cash by both the state and Federal governments. The huge aggregate of these state subventions is not generally appreciated. Because our railroads are now private concerns, so far at least as legal title is concerned, it is too often assumed in public discussion that they owe their existence solely to private initiative and enterprise. With all credit to their sturdy builders, to whose vision and courage so much is due, the plain historical fact remains that the people of the United States have had a large share in the great task of creating our present railway net,—not indirectly alone, through settlement of the virgin territory, but immediately and directly through land grants and subventions.[20]

The total of land grants by state and Federal governments in aid of railroads, according to the most careful estimates, is approximately, 155,000,000 acres,—that is to say, about 242,000 square miles. The United States alone is believed to have given about 26,000,000 acres or 40,000 square miles. For purposes of comparison, the following table of present-day areas is useful.

It thus appears that a gift of territory greater by about one-fifth than the entire area either of the German Empire or France, almost equal in size to the state of Texas or four times the New England states, has, at one time or another, been made in aid of railroad construction. The Federal grants equal about two-thirds of the area of the New England states, or, in other words, are about five times the size of the state of Massachusetts. A large proportion of the area of the newer commonwealths was offered as a bonus to railroads. Seven western states—including, for example, Minnesota, Iowa, and Wisconsin—gave away from a fifth to a quarter of their birthrights. Nebraska donated one-seventh, and California one-eighth. The Lone Star state discovered in 1882 that in her youthful ardor she had given away some 8,000,000 acres more than she possessed.[21] Shall it ever be said, in the face of such evidence, that these common carriers are private concerns, to be administered solely in the interest of holders of their securities?

As concerns aid in the form of funds or credit, that is to say, through subscription to railroad stocks or bonds, it is hazardous to venture statistics, particularly for the separate states and municipalities. But the statement[22] of direct appropriations and subscriptions to securities on the next page is as reliable as any. The amount of municipal and local aid can only be a matter of guess work, even nominally, to say nothing of its real cash value. Including everything from the heavy investments of such cities as Baltimore ($3,500,000) or Cincinnati ($10,000,000) down to those of little places like Watertown, Wisconsin,[23] with its railroad debt of $750,000 on a population of 7,553 souls ($100 per capita), the total for local aid as above stated seems conservative enough. For Massachusetts alone no fewer than 171 town and city bond issues for railroad construction were authorized in the forty years to 1871. The municipalities in Wisconsin by 1874, despite its later settlement, issued about seven million dollars in bonds for similar purposes. As long as the state legislatures were free to appropriate moneys, they did so with a lavish hand; but when, as in Illinois in 1848, they were constitutionally prohibited from doing so, the enthusiasm shifted to the lesser governmental units. Forty-three counties in Nebraska, between 1869 and 1892, voted subsidy bonds to railroads to the amount of $4,918,000. In the case of towns and cities, also, it was possible to play off one against another. No ambitious community could stand idly by and see a new railroad go to a rival place. There was no option but to vote bonds. And farmers, as in Illinois, who had no cash, simply mortgaged their farms. It is clear that in the aggregate these local contributions greatly exceeded in amount those of the state and National governments.

Amounts granted to railroads

A true estimate of the proportions of this public aid recognizes, of course, that many of these grants possessed only a nominal value. The eighty-mile line in Texas, cited by Potts as the recipient of 588,000 acres of land, was glad enough to dispose of them for sixteen cents an acre. Stickney mentions a Minnesota half-breed member of the legislature who took ten dollars in cash for his vote on a railroad bond subsidy, rather than $100,000 in capital stock. But, on the other hand, if the land or bonds had little value, the roads themselves were actually laid down at a very low cost. It was the proportion of public aid to total real investment which was significant. Wisconsin to 1874 had officially subsidized its roads to the amount of over $21,000,000, including lands at three dollars per acre. This sum was sufficient to have met one-half the legitimate cost of construction of the properties then existent. Reliable evidence[24] tends to show that the state and National governments, up to 1870, had pledged themselves one way or another for a sum equivalent to one-fifth of the cost of construction of the 47,000 miles of line then in the United States. And approximately another fifth, at the very least, must have been contributed from local and municipal sources.

In point of time, public aid by the states was quite unevenly distributed.[25] Massachusetts and Maryland, about 1826, were the first to take notice. But in the northern states most of the activity was confined to the period of 1837-1840; whereas, in the South, governmental subsidies did not become frequent until 1850. The whole movement, so far as the separate states were concerned, came to an end about 1870; after which time, with the exception of Massachusetts and Texas, little more financial encouragement of the sort is recorded. In many instances the hands of legislators were tied by constitutional prohibitions; and in other cases the railway net had been so far completed as to lessen the zeal of the public in the work. The centre of interest after the Civil War, in fact, is to be found in the activities of the Federal government.

More than a broad-line sketch of the land grants and subsidies to railroads by the United States would be out of proportion.[26] Sporadic grants in the South were made directly as early as 1835; but the first considerable transfer was made by act of Congress in 1850. This statute ceded to the state of Illinois the alternate, even-numbered sections of land for six sections in width on each side of the projected Illinois Central Railroad and its branches. The state then promptly turned over these lands to the promoters of the line. The Federal government lost nothing by the transaction. Rather did it gain,—the lands having been long in the market,—through the sale of the odd sections at a more than doubled price. Similar extensions of this grant soon followed down through Alabama and Mississippi. Then other states demanded recognition. Missouri, Arkansas, Iowa, Louisiana, Wisconsin and Minnesota were in turn appeased. The last direct grant to a state was made to Michigan in 1872. With the rise of interest in the Far West, the Federal government during the Civil War period inaugurated a new policy of direct charter and subsidy. Under this plan most of the transcontinental lines were built.

The Union Pacific Railroad was the most notable beneficiary of the Federal government. Its experience may be offered as typical. By an act of 1864, twenty alternate sections of land per mile were granted, together with a subscription to junior bonds to the amount of $27,600,000. With this substantial encouragement the road was soon completed. The following table gives details concerning the succeeding grants to other companies.[27]

Federal Aid to Railroads

The primary investment of the United States in this pioneer road was thus considerable. Despite elaborate sinking-fund provisions, the combination of speculation, fraud and mismanagement in its affairs, rendered even the payment of current interest charges impossible. Matters went from bad to worse, especially after 1883 when several new competitive routes were opened—the Southern and Northern Pacific roads, the Atchison and the Burlington. Bankruptcy ensued in 1893, a state of affairs which, as it soon appeared, could not be bettered until provision should be made for settlement of the government's claim.[28] Various proposals for partial payment proved unsuccessful. Until at last, in 1897, under threat of foreclosure proceedings, the banking interests in charge of reorganization agreed to a settlement in full—$27,200,000 principal and $31,200,000 interest. The outcome a year later on the Kansas Pacific, was less fortunate. The United States received payment of the principal of its lien, $6,300,000; but was obliged to forego the interest, amounting to about as much more. Then, in turn, in 1899, the Central Pacific claim, amounting to $27,855,000 principal and $30,957,000 interest was disposed of by being refunded in notes payable semi-annually over a period of ten years. Thus, with unexpected ease and despatch, was the direct interest of the United States in railroad affairs brought to a brilliant conclusion.

A striking characteristic of American transportation history, emphasized by the foregoing account of land grants and subsidies, is its essentially speculative character. Railroads were more often constructed in advance of population and settlement than to accommodate traffic already in existence. Speculation, as will appear in another volume, has permeated all of our railroad finance. In the early days the most extravagant visions of development were indulged in on all sides. In the words of a Wisconsin legislative committee in 1854 protesting against the passage of further laws for the encouragement of railroad construction: "In imagination every acre of land from Walker's Point to Snake Hollow has been plowed, sowed, fenced, and is bearing forty bushels of wheat.—Such estimates are quite delusive.—It takes money to make railroads. It takes money to make the mare go; much more the iron horse." True indeed, then and now! But a review of our transportation history makes it plain that without this national note of optimism and adventure, the vast capital creation in railroads of the present time could never have been called into being. Public aid and private enterprise and sagacity were alike needed to accomplish the great work in hand.

The dominating events in our later economic history, so far as railroads are concerned, have been the period of severe distress and prostration following the panic of 1893; a subsequent revival of prosperity, with unprecedented demands for transportation during the ten years thereafter until 1907; and a movement toward consolidation of the railroad net into great territorial systems, notably during the two years after 1898, as a result of which competition was practically eliminated from all railroad business. The long decline in freight rates was succeeded after 1900 by a steady rise of charges; the phenomenal prosperity and consolidations led to wild speculative outbreaks on the stock exchanges, especially in 1901 and 1906; and the spread of industrial consolidation enormously emphasized the evils and abuses of personal discrimination and favoritism. As a result of these influences there arose in turn, after 1900, an irresistible demand for greater governmental supervision, both of rates and of finance. Taken all in all, these later years have witnessed both a public and private interest in railroads, greater perhaps than at any earlier period of our history. But these later events, aside from being set in their proper relation to the whole in this preliminary general survey, require detailed analysis each one by itself. Where not considered within these covers, they will be treated in a second volume dealing primarily with matters of finance and corporate organization.