CHAPTER XXXIII.
FIXING RATES BY PUBLIC AUTHORITY.
For years the Interstate Commerce Commission has been declaring that when, on complaint and investigation it finds a rate to be unreasonable, it ought to have power to fix a reasonable rate to take the place of the unreasonable one, the order to be binding on the railroad for a moderate period, subject to revision in the courts. For the first ten years after the Interstate Commerce Act was passed no railroad denied the right of the Commission to fix rates, and the Commission says it was supposed that they possess the power. But the Supreme Court finally ejected this impression in 1896, and again in 1897, and the Commission appealed to Congress for the restoration of the authority that was swept away by the interpretation of the majority of the Court. Congress for a long time paid no attention to the Commission’s request for further powers, but President Roosevelt took up the matter and pushed it with the splendid vigor that characterizes all he does. In his message of 1904, already referred to, he said: “Above all else, we must strive to keep the highways of commerce open to all on equal terms; and to do this it is necessary to put a complete stop to all rebates. Whether the shipper or the railroad is to blame makes no difference; the rebate must be stopped, the abuses of the private car and private terminal-track and side-track systems must be stopped, and legislation of the Fifty-eighth Congress, which declares it to be unlawful for any person or corporation to offer, grant, give, solicit, accept, or receive any rebate, concession, or discrimination in respect of the transportation of any property in interstate or foreign commerce whereby such property shall by any device whatever be transported at a less rate than that named in the tariffs published by the carrier, must be enforced.... The Government must in increasing degree supervise and regulate the workings of the railways engaged in interstate commerce; and such increased supervision is the only alternative to an increase of the present evils on the one hand or a still more radical policy on the other. In my judgment the most important legislative act now needed as regards the regulation of corporations is this act to confer on the Interstate Commerce Commission the power to revise rates and regulations, the revised rate to at once go into effect, and to stay in effect unless and until the court of review reverses it.” The President’s message of December, 1905, has already been quoted at sufficient length in Chapter XXXII.
In the last two years the legislatures of 18 States have passed joint resolutions petitioning Congress to enact legislation for the regulation of railroad rates; 12 States took this action last winter, 1905, and asked their representatives and senators to secure the enactment of such a measure. Commercial bodies in various parts of the country have also petitioned for such legislation, while others have protested against it.[397]
The Esch-Townsend Bill (1905) giving the Commission power to fix rates passed the House, but failed to pass the Senate.[398] As stated in the preceding chapter, the House has passed the Hepburn Bill by a very large majority and it has gone to the Senate, where a determined effort will undoubtedly be made to secure at least a provision for judicial review on their merits of all orders of the Commission.
Objections of Railroad Men.
Railroad men object to further regulation till the effectiveness of the present laws has been thoroughly tested. In answer to the question what he would do to stop discrimination, President Tuttle of the Boston and Maine Railroad said to me this morning: “Enforce existing laws. The Interstate Commission can investigate the railroads. It need not wait for complaints. It can act on its own initiative. It can have experts examine the railroad books. It can publish the facts, and publicity is a powerful corrective. It can put the facts it secures in the hands of the Attorney-General, and if the Department of Justice will prosecute promptly discrimination can be stopped. There were no prosecutions even after the Hutchinson salt investigation. The law is ample. The trouble is that no adequate effort has been made to enforce it.”
The Commission says that as a rule it cannot get the facts. In some cases it has succeeded, but usually it is thwarted in respect to personal discriminations (to which President Tuttle’s argument chiefly applies) because they are secret, and neither railroad men nor the favored shippers will ordinarily tell the truth about them, and railroad books do not commonly contain any record of them.[399] Where the Commission has obtained evidence of unlawful discrimination it has turned the facts over to the Department of Justice, which has not prosecuted promptly, in many cases not at all, and has sometimes prevented prosecutions which United States district attorneys were ready to begin.
There seems to be good reason to believe it is true that existing laws have not been fully enforced; that in addition to the difficulty, perhaps impossibility, of getting at the facts in many cases, wrongdoers have escaped punishment even where the facts were fully known; and that a commission to investigate the Department of Justice, and try the effect of publicity there, may be as essential as a commission to investigate the railroads. Some criticism seems to attach also to the Interstate Commission, as it does not appear that they have asked the Department of Justice to prosecute senators and congressmen, legislators, judges, etc., well known to be riding on passes, nor to punish the railroads for giving them.
As long as express companies and water carriers are not within the Interstate Act, and doubt exists as to private cars and terminal railroads, there is room for further legislation. And in respect to excessive rates and tariff discriminations between places and commodities, though the facts can be easily ascertained, the remedy is regarded by the Commission as wholly inadequate under existing laws, because of the emasculation of the long and short haul clause by the interpretation given it by the Supreme Court, and because the railroads are able, whenever they choose, to delay the enforcement of an order for years by litigation, conceding at last perhaps only a small part of what they should concede and so requiring further years of contest to approach another step toward justice. So the Commission asks for power to fix a reasonable rate in place of one found unreasonable, and to put the new rate into effect at once subject to subsequent revision on appeal by the carrier.
The railroads seriously object, first, to the fixing of their rates by anybody but themselves, and second, to the putting of such rates into effect before they are tested in court. The immediate enforcement of a rate order is most strenuously opposed, and with much force of reason. The railroad people say that rate-making is very difficult and many mistakes are likely to be made. Railroad history certainly affords ample ground for this conclusion. But they say, or imply, that the Commission makes more mistakes than they do. They declare that only trained traffic experts can deal successfully with rate questions; that the Commission has made so many errors that almost every one of its decisions that has gone to the courts has been overruled; and that great havoc would have been wrought if these decisions had been put into effect at once without judicial review. “Take for example, the Maximum Rate Case where the Commission ordered the rates from Cincinnati to important Southern points cut down 15 or 20 percent. This change in rates to the basing-points would have affected two or three thousand rates. Some of the railroads didn’t have a margin of more than 15 or 20 percent and they determined to fight the case. It is true that the Commission exercised the power to fix rates a number of times in the first ten years, but the cases were comparatively insignificant and the railroads said, ‘Oh, well, let it go. We’ll take the rate the Commission wants.’ But when it came to the Cincinnati case the situation was serious and the railroads said, ‘These fellows haven’t got the power to make rates. In the debates on the Commerce Bill in Congress it was distinctly declared that no such power was intended to be given. We’ll take the question to the courts.’ And the courts sustained the railroads. Now what would have been the consequence if the Commission could have put its order into effect at once? The railroads would have been subjected to serious losses during all the time that might elapse before they could get a decision reversing the order of the Commission. It often takes years to get a final judgment and there would be no way for the railroads to recover for the losses entailed by erroneous orders.” This is the argument substantially as presented to me by President Tuttle and there is great weight in it.
Alleged Errors of the Commission.
Another railroad president turns the lime-light of mathematical analysis on the errors of the Commission. David Willcox, President of the Delaware and Hudson, says: “About 93 percent of the decisions of the Commission which have been passed upon by the courts have been held to be erroneous. In case, therefore, the Commission had the future rate-fixing power, so far as its decisions were in force until the courts passed upon them, injustice would be accomplished in 93 percent of the cases. For this there would be no remedy, because no recovery could be had from those whose goods had been carried at unjustly low rates.”[400]
We shall see that this statement gives too strong an impression of the capacity of the Commission for mistakes, but there is no doubt that it has made mistakes, that any person or persons attempting to fix rates, even the railroad managers themselves, are liable to make mistakes, and that losses result to the roads from their own mistakes and might naturally result from the mistakes of a commission or court if its erroneous orders were enforced upon them.
It may be said that if the orders of the Commission went into force immediately it would be the interest of the railroads to hasten the proceedings in court instead of prolonging them indefinitely as they are too apt to do, and that with reasonable provisions for prompt adjudication and the stimulus of powerful railroad interests in that direction, the delay of the law, or this branch of it, at least, would vanish. It may also be said that the railroads could recoup themselves for the losses under discussion by curtailing the service they render for the new rates, or by raising other rates not fixed by the Commission. But the Commission might veto the raising of other rates, and the entailment of service would be very undesirable. The question arises whether it would not be fair for the public to stand any loss clearly resulting from an improper order of its Commission, or else require that any order the validity of which is questioned should be passed upon by the court before it is put into effect? The Commission is itself perhaps a sufficient court in respect to questions of fact, and if it were arranged that in case of dispute on a question of law the Commission might call upon the Supreme Court for an immediate interpretation of the law, the rulings of the Commission could be squared with the law at the start, and the danger of loss from an erroneous order would be reduced to a minimum.
As above remarked, the mistakes of the Commission have not been so vast as the reader might infer from the percentage of overruled cases stated by President Willcox.
The work of the Commission may be summarized as follows:
It has received about 3,726 informal complaints relating to overcharges, classification, rates, etc. Most of these, perhaps 3,200, have been disposed of by correspondence or some mild form of arbitration, very many have been settled satisfactorily, some have been abandoned, and some have crystallized into formal complaints. The total number of formal complaints has been about 854, including those that were formal at the start and those that started as informal complaints and grew to be formal through failure of adjustment by conciliatory methods. “From 1887 to October, 1904, the Commission rendered 297 decisions involving 353 cases, two or more cases being heard and decided together in some instances. About 55 percent, or 194, of the decisions were in favor of the complainant and 45 percent in favor of the railroads.[401] Mandatory orders were issued to the number of 170. Of these 94 were complied with by the railroads, 55 were disobeyed, and 21 were partly complied with and partly disregarded. Some 43 suits were instituted to enforce the orders of the Commission; and 34 of these have been finally adjudicated.” The Commission claims that 8 cases of excessive rates and unjust discrimination have been decided in its favor, while President Willcox says that the courts have sustained the Commission on the merits in only 3 cases.[402] Mr. H. T. Newcomb, who appeared before the Senate Committee as the representative of several railroads, gives a table showing that in the circuit courts the Commission has been sustained 7 times and reversed 24 times, the Circuit Court of Appeals has sustained the Commission 4½ times and reversed it 11½ times and the United States Supreme Court has partly sustained the Commission in one case and reversed it in 15.[403]
Several comments are necessary. First, about ⅘ of the Commission’s decisions have been right on the railroad’s own showing. They claim only 32 reversals out of 170 orders—nearly all the rest have been accepted by the railroads or enforced upon them by the courts. Second, the reversals have been based on questions of law in respect to which the courts disagreed among themselves. The Commission has not been overruled in respect to questions of fact, but on the application of what it believed to be law (and what the framers of the law believed to be law) to the removal of economic abuses. Third, the points of law in respect to which it has been overruled are very few. The decisions have gone in bunches. For instance while the Alabama Midland long and short haul case was pending in the courts a number of other long-haul cases were decided by the Commission, and when, after several years, the Supreme Court gave final judgment, a whole block of the Commission’s rulings on this point were discredited and subsequent reversals were simply repetitions involving no new error. So the question of power to fix rates covers a cluster of cases all thrown down in reality by one ruling.[404] And these two questions represent nearly the whole difference between the courts and the Commission. The 15 reversals in the Supreme Court do not mean 15 errors, even in respect to legal points, but only a very few errors if any. Fourth, the higher court reversed the lower in 9 out of the 17 cases that went up from the Circuit Court, and in three of these cases the Supreme Court reversed both the Circuit Court and the Court of Appeals. Fifth, it is by no means certain that the Commission was wrong and the court right. The fact is that the Supreme Court has not interpreted the law according to its manifest and well-known intent, but in a narrow, technical way that has defeated in large part the real purpose of the law. It is an absurdity to rule that the law is valid and then to decide that the railroads may escape from the long-haul section by means of dissimilar circumstances created by themselves. And many believe it to be an equal absurdity to declare that the Commission may order the discontinuance, of an excessive rate or unjust discrimination, but cannot fix a reasonable rate.
Take the Kansas oil rate for example. The railroads at the dictation of the Combine raised the rate, as we have seen, from 10 to 17 cents. Suppose the Commission had ordered the roads to cease charging 17 cents, that being found to be unreasonable. The railroads could appeal and appeal, and if after several years the case went against them they could make a rate of 16½ cents. Then a new investigation could be begun, the Commission could make a new order, and after years in the courts the rate might come down another half cent perhaps. And so on; even if all the decisions went against the railroads it would take 105 years to reduce the rate to 10 cents again, calculating on the basis of the average period of 7½ years required for final litigation. Why not sum up the process in a single order for the 10 cent rate and if objected to by the railroads have one judicial contest and finish the business. By the indirect method of declaring one rate after another to be unreasonable the Commission has now the power at last to fix the rate. The proposition to allow it to name a reasonable rate is only putting in direct, brief, effective form the power it now has in indirect, diffused, and ineffective form. The railroads might not act in the way described, but the point is that they could do so; there is no power in the law as it stands to-day to compel them to adopt a reasonable rate within a reasonable time.
Again, consider the predicament Commissioner Prouty presents.[405] If the Commission, considering all the circumstances including railroad competition, finds that the rates from certain points to W should not be higher than the rates to O and orders the railroads to discontinue the discrimination between the two cities, the court will sustain the order and grant an injunction to enforce it. But if the Commission finds that there should be some difference between the rates to the two places, though not so much difference as there is, and it orders the rates to W down so that they will be fair, the courts will annul the order because the Commission has no power to fix rates in the opinion of the Supreme Court.
The railways contend that a relative order would be sufficient. The Commission could say what percentage of the Omaha rate the advance for Wichita should be, and in the Kansas case the rate on oil could be determined in reference to the rates on other commodities. It is true that a relative order could be made, but it might be more embarrassing to the railroads to have a group of rates tied up by each decision so that they could not vary any of them without changing the rest, than it would be to have one rate definitely fixed; the subtraction from elasticity might be greater, and the difficulty of determining the true relations between various rates might be far more serious than the fixing of a reasonable rate in the particular case. It would be possible to give the Commission the option to make a relative order or to definitely fix a reasonable rate providing that it should carefully consider the preference of the carrier as to the form of order, the reasons for that preference, and the guarantee the carrier may be willing to give as to bona fide compliance with the order, and then make up its judgment in the light of the circumstances in such a way as to accomplish the purpose in view with the greatest certainty and the least friction or interference with the freedom of railroad management.
But the railroads object to the fixing of rates in any manner by a public board,[406] declaring that such a board could not be in sufficiently close touch with traffic conditions all over the country to adapt their rulings to the needs of business, that tariffs would lose the elasticity requisite to keep them in harmony with changing economic conditions. A rate that is reasonable to-day may be unreasonable to-morrow. It is said that it keeps several hundred men, 500 to 700 skilled traffic men, working all the time on the adjustment of rates, and that it is beyond the power of half a dozen men to pass on the rate question of a country like this; that Congress cannot delegate to a commission the power to fix rates; that it would destroy the initiative of railroads and hurt their power of borrowing money for improvements, injure investors, and throw the whole railroad world out of gear; that the centralization of power would be dangerous, the disturbance of business and interference with development disastrous, and the practical confiscation of railroad properties and values unjust; that a flood of litigation would follow, and that discrimination would not be removed, for agents hustling for business would cut under commission-made rates as quickly as they cut railroad-made rates.
There is much force in some of these points, none at all in others. There is no reasonable doubt that Congress can authorize a commission to fix rates. Railway Commissions in 21 States have power to fix rates, either absolute or maximum, and some of them have exercised the power vigorously, and a national commission may be given the same power over interstate commerce that a State commission may have over State commerce.
There is more force in the objection based on the lack of elasticity in commission-made rates. Elasticity, however, may easily be overdone and much of the present elasticity is very undesirable. Many flying tariffs and unfair discriminations lurk under cover of that reputable word elasticity. Moreover the Commission would not interfere with any fair rate-making by the railroads. The bulk of the rates would not be touched but only those that were unjust. So that it would depend entirely on the railroads how much of the flexibility they so much admire should be kept in their own hands. They would keep it all unless they were guilty of dishonest flexibility, in which case the elasticity, which, according to impartial judgment, exceeded the bounds of justice, would be checked.
In reference to the alleged necessity of flexibility in tariffs and the ability of traffic managers to accommodate the rates to fluctuating commercial conditions, Chairman Knapp of the Interstate Commission says that there need not be any tendency to iron-clad rules or undue emphasis of the mileage basis on the part of a Government board, but that the necessity of frequent changes in tariffs is greatly overdrawn. He states that the railroads have kept the same basis of rates since 1887 throughout the most important part of the United States, the “official classification territory” or the section north of the Ohio and Potomac and east of the Mississippi, and that “the class rates which govern most merchandise and articles of manufacture and ordinary household consumption have remained unchanged in all that territory.” The railroads changed the classification of many articles about 1900, “but they did not change the rates or the adjustments between localities.”
“I take it there is no agricultural product the price of which has shown such wide fluctuations in the last few years as cotton. It is one of the great staple articles of the country; the most valuable per pound of anything that grows out of the ground in large volume. More than half of it is exported and you know the price has gone from scarcely above 5 cents to 16 or 17 cents. And if there is any article which would seem to be susceptible to market fluctuations and the changes in commercial conditions, it must be cotton. But an inspection of the tariffs will show you that the rates on cotton have not been changed in ten years.
“There has been no material change, I think, in any cotton rate in more than ten years, except that certain reductions have been made in the State of Texas by the commission of that State.
“Now, when I observe instances of that kind, when the ablest and most experienced traffic officials tell me that there is no sort of reason for 500 to 1,000 changes in interstate tariffs every twenty-four hours, as our files show there are, you must not be surprised if I fail to accept at par value all that is said here about the necessity of adapting rates to commercial conditions. Undoubtedly, when you take a considerable period of time, great influences do operate to an extent which may justly require material modifications in freight charges, but to my mind it is quite unsuitable that the little surface fluctuations in trade should find expression in extended changes in the daily tariffs. I believe that those surface currents should adjust themselves to the tariffs, and not the tariffs to the currents. And I am saying this, gentlemen, not as a result so much from my own observation or from any à priori view of the case as because of the statements made and arguments submitted to me by practical railroad men of the highest distinction.”[407]
To lay stress on the number of men required to arrange the details of tariffs might seem to imply the belief that a very large part of existing railroad rates will be found unreasonable and need the attention of the Commission. It may however imply merely that there is likely to be a very large number of complaints. The fact is that the fixing of rates is a complex business, with a considerable percentage of guesswork, experiment, broad judgment, and arbitrary decision. There are some general principles of cost, distance, what the traffic can pay and move, what shippers demand, what other carriers are charging, what rates are necessary to create new business and fill up the cars both ways, etc., but they are like the principles of law, you can come to any conclusion you wish and then find a principle that will back up your decision. Railroad men do not trouble themselves about consistency. They do not and cannot adjust rates with reference to just relations between places and commodities. They are looking for dividends and they make the best rates they can with that object in view. The chief traffic officer of one of the trunk lines, being pressed by the Commission as to his method of making rates, said: “We make rates very much as the honey bee makes its cells, by a sort of instinct.” When we look at his rates we find that he is not so successful as the honey bee in respect to symmetry and balance. Another traffic manager whose skill brings him a salary of $50,000 a year, testifying as to the reasonableness of his grain rates, was asked question after question as to methods of determination, till finally he said: “To tell you the truth, gentlemen, we get all we can.” Now it is because the railroads know that the Commission would refuse to adopt this time-honored principle and would aim primarily not at profit to the railroads, but at just and impartial rates—it is this knowledge which more than anything else impels the railroads to such strenuous opposition to any proposal for the fixing of rates by a public board. The matter is of such moment that, when I asked one of our leading railroad presidents what would happen if the rate-making power were put in the hands of a commission, he said: “The stake would be so great that the commission would have to be controlled, that’s all.”
The railroads have the Senate, and the Senate must confirm all nominations to the Interstate Commission. Aside from the appointment of Judge Cooley all nominations to the Commission from 1887 down have been due, said this railroad president, not to any special fitness for the work, but to political pull. If a commissioner is appointed from a certain State, the senators from that State regard the place as a part of their patronage, and when the term of his appointment expires they insist on the nomination of another man from their State. They say: “The place belongs to our State,” and it is always their man, a man they want on the board, who is presented by them for nomination. Vermont for example has had three members on the Commission in succession, Walker, Veazie, and Prouty; each time a vacancy has occurred in the Vermont representation it has been filled at the dictation of the senators from that State; “even President Roosevelt did not appoint for fitness. When a vacancy occurred he did not look for the man best fitted to serve on such a Commission, but appointed Senator Cockrell of Missouri, a nice old man of 70 that everybody liked, but without any special qualification for the work. The election went to the Republicans in Missouri, so Cockrell couldn’t go back to the Senate. He has many friends. The senators all like him, Republicans as well as Democrats, and they said to Roosevelt: ‘You must do something for Cockrell; here’s a democratic vacancy on the Interstate Commission, put him in there,’ and Roosevelt put him in.”
This railroad president is a man of the highest character and of very extensive information. Whether or no he is rightly informed in respect to the appointment of commissioners, it is clear that the railroad representation in the Senate could bring tremendous pressure to bear to secure the appointment of men approved by railroad interests, that they could block the appointment of any other sort of men even if nominated, and that the temptation to exert this power to secure men who could be controlled would be practically irresistible if the Commission were given the rate-making power.
The fear of confiscation does not seem to be well founded on the part of the railroads; there is more to justify such a fear on the part of companies and localities unfairly treated by the railroads. The Commission will have no motive to make confiscatory orders, and the courts will protect the roads from everything that is doubtful in the slightest degree as they have done in the past. The real danger of confiscation of values lies in leaving the railroads free to make such orders as those in the San Antonio case or the Kansas oil case which destroyed the business of independent operators. Adding 25 cents a ton to the coal rates from San Antonio practically confiscated the coal mines at that point, and raising the oil rates in Kansas from 10 to 17 cents practically confiscated, during the continuation of the order, the product of the independent oil wells.
That some disturbance of tariffs and business might result from conferring the rate-fixing power on a public board is quite likely. There is a good deal of business that ought to be disturbed; that of the Beef Trust and the Oil Trust for example would be the better for a thorough house-cleaning. And the tariffs need considerable disturbance to bring them into close relations with the principles of justice. But the disturbance might be more than is needful. Our railroads say that Government boards the world over show a tendency to adopt some sort of a mileage basis, in the shape of a zone system or some other form of distance tariff. This would interfere with the equalization of rates, which is one of the best elements in American railroading. The fruits of California are carried all over the country at low blanket rates that enable them to be sold in every hamlet in the country at prices the common people can afford to pay. New England shoes are carried to St. Louis at 1½ cents a pair and to San Francisco for 2 cents a pair. Milk is brought into the cities at the same rate for many miles out. So with the pulp mills in the forests of New York, Vermont, and Maine. The railroads give them all equal rates to the great cities. When the big mill at Millinocket, Me., was being planned the promoters went to the railroads for rates. To make the product cheap they must build on a large scale, and to justify this they must be able to reach many markets; they must be able to supply newspapers in Boston, New York, Philadelphia, and Chicago. So the railroads gave them rates that enabled them to send their paper 1,500 miles to Chicago and sell it to newspapers there at the same price they would have to pay for paper that came only 500 miles.[408] This destroys nature’s discriminations due to distance, and places men on an equality in the market to win by their merits, not by natural advantages or disadvantages of location. This is in many ways a beneficent process and if the railways did not create new artificial discriminations of their own they would be entitled to be placed among the great equalizers of the age.
Years ago there was a vigorous argument about the rates on wire from Worcester, Mass., to Chicago, and from Pittsburg to Chicago. The wire mills of Worcester had a good business, employing some 5,000 men, and marketing mostly in the West. Mills were built in Pittsburg, and being much nearer Chicago got a lower rate to that city. The New York Central at once met the rates so that the Worcester Mills could get to market on a level with the Pittsburg people, who still had the advantage of nearness to the coal and iron mines. Not satisfied with this, however, they carried the question to the Traffic Association, claiming that as they were 500 miles nearer Chicago, they should have a lower freight rate than the Worcester mills. But they didn’t get it. The New York Central said: “Here are 5,000 men at work in Worcester. What are they going to do if we let you crowd them out of Chicago, which is their principal market? We shall stand by them and meet any rate you make from Pittsburg.” That was fine, as good as the raising of a rate to kill the San Antonio mine was bad; the railroads can save industrial life as well as commit industrial murder.
It is said that government rate-fixing would not meet such cases; that the principle of equalization is not recognized, and both justice and business development would suffer thereby.
It is not true that government rate-fixers do not recognize the equalization principle. The national post-office has carried it to the limit, and has based its business upon it to such an extent that it is known as the post-office principle. It is applied in government telegraph and telephone systems much more fully than in our private systems. Even the State railways make considerable use of it. Although the tendency is to adopt some sort of distance system as the main basis of the tariff, there is constant recognition in Germany, Belgium, Denmark, Switzerland, and the Australasian States, and it is announced as a definite policy that so far as reasonably possible rival industries shall be placed on an equality in the market. “We mean to bring the manufacturer who is 100 miles away into the market on a level with the man who is 10 miles away,” said the manager of one of these government systems to me, and there is more or less of the same spirit and purpose in all the government systems I am acquainted with. The fact is that a movement toward the equalization of rates through application of the principle to one commodity after another, or the gradual extension of zone distances in a zone tariff, offers the only hope of attaining a really just and scientific system of rates. Any sudden adoption of such a system would disturb the values of real estate, etc., beyond all reason, but it can be gradually approached, and that is what the railroads in this and other countries are doing.
Our Interstate Commission has, I believe, shown too little appreciation of this fact, too much tendency to insist that a town or city is entitled to the benefit of its geographical position. It is entitled to the benefit of its geographical position to the extent that no place more distant from its market should have lower rates to and from that market, but the right to claim that the rates shall not be equal is very questionable, and frequently it is clear that no such right exists. The Commission has recognized this point in several cases. For example, in the Business Men’s Association of St. Louis v. the Santa Fe, Northern Pacific, Union Pacific, and other roads,[409] the Commission sustained a blanket rate on many commodities from the Pacific Coast to all points east of the Missouri River. And in the Orange Rate Case[410] decided last year, a blanket rate of $1 per hundred on lemons from Southern California to all points east of the Missouri was approved. In the milk case, however, it held that “A blanket rate on milk on all the Delaware, Lackawanna’s lines, New Haven road, Reading, Erie, New York Central, and West Shore and other roads regardless of distance, viz., 32 cents on milk and 50 cents on cream per can of 40 quarts, is unjust to producers and shippers of the nearer points. There should be at least four divisions of stations,—the first extending 40 miles from the terminal in New Jersey, the second covering a distance of 60 miles and ending about 100 miles from such terminal, and the third covering the next 90 miles, and the fourth covering stations more than 190 miles from the terminal. The rates on milk in 40–quart cans should not exceed 23 cents from the first group of stations, 26 cents from the second group, 29 cents from the third, and the present rate of 32 cents from the fourth group.”[411]
It is quite possible that the Commission made a mistake in this case, though it is not easy for any but a railroad man, with a ravenous appetite for tonnage and reckless of the waste of economic power, to see any sense in arranging rates so as to take milk to New York from points near Buffalo while Buffalo gets milk from places east of points shipping to New York; but if the Commission did fall into error in this case, the mistake of refusing to allow the distant man to come into the metropolitan market on equal terms with the nearer man is nothing compared to the mistake the railroads so frequently commit of allowing some Chicago or Kansas City man to come into New York at lower rates than the New York, Ohio, Pennsylvania, and New England producers have to pay.
In respect to the distance tariff question, Chairman Knapp of the Commission says: “I am very far from believing that there should be anything more than the most inconsiderable tendency, if any at all, toward the adjustment of rates on a mileage basis, and I think the prosperity of the railroads, the development of the different sections of the country and their industries, justify the making of rates upon what might be called a commercial basis rather than any distance basis; but do you realize what an enormous power that is putting into the hands of the railroads? That is the power of tearing down and building up. That is the power which might very largely control the distribution of industries. And I want to say in that connection that I think on the whole it is remarkable that that power has been so slightly abused. But it is there.... It comes back to the question which Senator Dolliver asked, are the railroads to be left virtually free to make such rates as they conceive to be in their interests? Undoubtedly their interest in large measure and for the most part is the interest of the communities they serve. Undoubtedly in large measure and for the most part they try as honestly and as conscientiously as men can to make fair adjustments of their charges. But suppose they do not. Is there not to be any redress for those who suffer? That is really the question.... Suppose it were true that a more potent exercise of government authority and the adjustment of rates tended somewhat to increase the recognition of distance with the result of producing a greater diffusion of industry rather than its concentration.... I cannot believe that all those institutions, laws, administrations which operate to the concentration of industries and population are altogether to be commended. I doubt if they result in happier homes, better lives, greater social comfort.”
A public board might not be willing to apply the equalization principle without limitation under competitive conditions. It might put the sash and door makers of Michigan and Vermont on an equality in New York City, and yet not think it best to enable the Vermont manufacturers to send sash to Michigan and Indiana points at the same rates the Michigan manufacturers pay, while the Michigan factories get the same rates to Vermont and Massachusetts points as the Vermont people; nor to arrange matters so that a train-load of bananas from the port of New York to Boston would pass a train-load of bananas going from the port of Boston to New York. It takes a lot of railroads working for profit, regardless of the waste of industrial force, to see the wisdom of such cross-hauling. A public board would be likely to recognize not merely the principles of profit, equalization, and development of traffic, but also the principles of economy from a national standpoint, the adaptation of special localities to special work, the value of diversification of industry, etc., etc.
It is entirely possible to avoid such mistakes as those attributable to the Commission in its geographical cases, and other mistakes that may come from lack of thorough acquaintance with practical transportation problems, by putting on the Commission two or three traffic men of high character and long experience in the business of making rates.
And as the business of the Commission would not be to make rates in the first instance, but only to revise them on complaint, much as the chief officers of railway departments do now, only with a public motive and point of view instead of a private one, there is every reason to believe that the work of revision could be intrusted to a well-selected commission, with great advantage to the public. The very existence of an effective power of revision ought to go a long way toward making the use of the power unnecessary. And it is wholly just and practicable that monopoly charges should be subject to the veto of a public board that is in a position to take a broad, disinterested view of rates and other transportation questions.
How superior the Commission’s methods are in many ways to those in use on our railways can hardly be appreciated by one who is not familiar with the unscientific, chaotic rate-making practices everywhere in vogue in this country, and also with the breadth and system that marks the work of the Commission.
An illustration may help to make the contrast clear. Take the case of Kindel v. Boston & Albany, and other railroads, decided by the Commission, December 28, 1905. The railroads were charging $2.24 per hundred on cotton-piece goods from Boston, New York, and other eastern points to Denver, and $1.50 on the same goods from the East clear through to San Francisco. The local rate from Omaha or Kansas City to Denver was $1.25, the same as the rate on first-class goods, and the rate from the Atlantic to Denver was made by adding the said local rate to the rate from the East to the Missouri River. Kindel complained that the rate to Denver was unreasonable and unjust. The Commission carefully studied the facts, took into consideration the relation between cotton rates and first-class rates on various routes throughout the country, put the data on a chart, a facsimile of which accompanies this description, and came to the conclusion that “the exaction of first-class rates on cotton-piece goods between Missouri River points and Denver, in view of the long prevailing differentials in other parts of the country and other existing conditions, is unjust and unreasonable; and that the result of the excessive rate on cotton-piece goods between the Missouri River and Denver and the application of full locals in making up the through combination rate from New York, Boston and other eastern points taking the same rates to Denver is to make the through rate excessive, and that such through rate to Denver to be reasonable should not exceed $1.50 per hundred pounds.”[412]
If the reader will examine the chart he will see that the cotton figures (which are placed below the route-lines) are less than the first-class rates (which are printed above the route-lines) in every case except between the Missouri River and Denver, and in some cases the cotton rates are only half the first-class rates. In view of the practically universal custom of the railroads in this relation, the deviation in the case of Denver amounted to a practical discrimination against that city and any shippers who desired to lay down cotton goods in Colorado. The railroads carried the goods from Boston to Chicago for 55 cents, while charging $1.25 from Omaha to Denver, more than double the charge for half the distance.
Railroad rate-makers do not base their tariffs on broad considerations of justice, but get what they can out of the traffic for their own lines, while the Commission asks what rate will yield a fair profit, and will be just to the public and to the individuals and localities involved, considering all the circumstances and their relation to transportation conditions throughout the country.
At best, however, it cannot be denied that great inconvenience and some injustice might be inflicted upon the railroads by public rate revision. It seems to come down to the choice of the least of two evils. The President and the people say that if the railroads are left free to make the rates they do not deal fairly; experience shows that they discriminate unjustly between persons and places, and put some rates too high and others too low. The railroads say that if a public board should make the rates the companies might not be treated fairly. Both statements are true. But it is clear that somebody must make the rates. And it is equally clear that there is no system of rate-making that will do perfect justice. I know of no railway minister or traffic manager in Europe or America who even dreams he knows of any method of rate-making that will do justice all round under present industrial conditions. The post-office principle may ultimately be applied to diffuse the burden of distance over the whole community, but it is not practicable at present. If then a certain amount of injustice is unavoidable, and we must choose between injustice to a small group of stockholders or to eighty millions of people, which alternative shall we accept? If there is no way to solve this problem that will not work injustice somewhere, shall it be to the little group of profit-makers or to the great public, the people of the United States?
Besides this quantitative comparison, there is a qualitative comparison that is still more weighty. Such injustice as may be done to the railways is merely a matter of diminished dividends on stocks, a very large part of which is water; while the false rates and unfair discriminations made by the railway managers not only affect property interests many times greater than railway stocks, but deny equal opportunity and undermine morals, manhood, government, civilization, and progress,—values far higher than any financial items whatever. Moreover, it is not unlikely that a board constituted somewhat differently from the present one might eliminate most of the errors of the Interstate Commission as well as those of the railway. What are the causes at work in the case? The reason the Commission has made some injurious rulings is that they lack the thorough acquaintance with traffic conditions that the railway managers possess. And the reason the railway managers make rates that are contrary to public policy is that they are more or less influenced by motives that are antagonistic to the public interest. The Commission is disinterested; it has no wish or personal interest leading to unfairness either to the railroads or the public; its motive is right, but its knowledge is imperfect. The railway traffic managers, on the other hand, have much more perfect understanding of the transportation business, but their interest is not altogether in harmony with justice and the public good. Is it not possible to create a board that shall have the thorough knowledge of first-class railway experts, together with the high motives and unmixed interests of an honorable public commission or court, and so remove the chief causes that have worked injustice in the past?
It is possible that there may be another fair solution,—that the rates may be made neither by the railroads themselves nor by a body representing the public alone. As there are three partners in the railroad business, as in every great industry,—viz., labor, capital, and the public,—it may be regarded as a case for arbitration, or for decision, not by any one partner alone, but by a board representing all three partners. Should there not be a board on which the railways have a right to representation, the workers being represented too, and the public also having fair representation upon the board? Then the decision would represent the co-ordination of thought and interest of the three great parties concerned in the railway problem. Perhaps such a solution would be superior in its justice to decision either by the railways alone or by a body representing the public only.
But it is clear that the final power to pass on transportation rates must rest somewhere. That railways are public highways, and transportation charges in the nature of taxes, are settled principles of law and economics. That governments have a right to regulate railroad rates is everywhere recognized. But how is the right to be effectively exercised? If legislative bodies attempt to exercise it directly, the lack of detailed information as to specific cases and the failure of elasticity and adaptation to the needs of business, urged against Commission work, would be emphasized a hundred fold. There is no way but to delegate the power to an expert board, not with the expectation of perfect justice, but of the greatest attainable justice.
The most important question of all in this connection remains to be considered, viz., would the possession of the rate-fixing power enable a regulative board to stop discriminations? Practically every rate question but one involves the question of discrimination. The exception is the query: “Are the total charges unreasonable?” It is conceivable that the relations of the various rates might be fair but the whole tariff might be pitched too high or too low; then the reasonableness of that tariff would be the only question on which action would be requisite. But in practice there are always some rates that are low enough, some too low, and some too high. And there are always two active questions in reference to any rate: 1. Is it fair in relation to the rates accorded to other persons, places, or commodities? 2. Is it reasonable? In other words, is it such that if other rates stood in true relations with it the total margin of profit would yield a fair return and no more than a fair return on the investment? Both questions are very difficult, especially the latter. The reasonableness of each particular rate depends not only on its own individual circumstances, but on a comparison with all other rates and a consideration of the company’s entire business. Difficult as it is, it would seem necessary to try to answer it in a broad way, at least in respect to the tariff as a whole, for the failure to answer it may mean unjust taxation of industry, inflation of capital values, dividends on watered stock, vast accumulations of wealth in the hands of railway owners, political corruption, and the whole train of evils that follow in the wake of industrial aggression. Yet deeply important as it is to secure reasonable rates, how futile it would appear to attempt to do it by means of a board making orders as to this, that, and the other rate complained of, but without power to revise the tariff as a whole, or to require any particular standard of service in return for the rate decided upon. For every cent cut off the rate by the Commission, the railways, if they are agreed to act in harmony, can easily withdraw two cents’ worth of facilities. Suppose the Commission can fix a reasonable rate, what is the use of it unless it can schedule to its judgment a minute specification of the quantity and quality of service to be rendered in return for that rate? And it would have to schedule also the price level, the crops, and all the conditions of home and foreign markets and adjust the rate on a sliding scale, else the rate that is reasonable now may become very unreasonable in a few weeks or months from now. And if, instead of this patchwork, the public board attempts to revise the tariff as a whole and fix the services to be rendered, it will either get itself captured by the railroads or it will cripple railroad enterprise. Railroad men are not going to work with much spirit if you take the control of rates and service out of their hands, and if you leave them control of either they will have you instead of your having them. It always means a struggle for mastery where a body that does not own seeks to control. The body that owns and has possession will evade, pervert, defy if possible, and if overborne will lose initiative and energy and take on the air of a conquered province.
The case is no better in respect to discrimination. In the first place it is clear that, as railroad managers have testified, it would be just as easy to cut rates made by a commission as to disregard the rates made by the railways and published by them and thereby made obligatory under the law. Mr. J. H. Hiland, head of the traffic department of the Chicago, Milwaukee and St. Paul, says: “I can cut a rate or give a rebate on a rate fixed by a commission just as easily as though I had made the rate myself.”[413] Mr. W. D. Hines, till recently Vice-President of the Louisville and Nashville, says: “The Townsend Bill made no provision whatever which looked to the prevention of rebates. It provided that the Commission should fix rates, but there would have been the same facilities and the same inducements to cut the rates made by the Commission as to cut the rates established by the railroads.”[414] President Tuttle of the Boston and Maine puts the case in this way. “A big shipper says to the managers of the A, B, & C railroads ‘Give me a cut rate.’ They refuse. Pretty soon all P’s business is going by the X line. The A, B, & C folks notice that they are losing traffic and they say ‘Look here, where’s all that business we used to get? The X line is getting it all. P’s got a concession over there!’ Maybe he has and maybe he hasn’t, but you can’t make those fellows on A, B, & C believe that he hasn’t. They go to P and say: ‘What are you giving all your business to the X line for?’ P says, ‘Well, I asked you to give me a lower rate and you wouldn’t do it.’ He don’t say he’s got a lower rate on X, and maybe he hasn’t, but the effect on A, B, & C is the same as if he had. They say, ‘What do you want?’ P says, ‘Give me 2 cents a hundred off the rate and I’ll distribute my business as I did before.’ So they give him 2 cents off and they get the tonnage.”
Mr. E. P. Vining, a former railroad manager, says that the reduction of a rate found unreasonable by the Commission may result in new discriminations unless other rates are reduced in fair proportion.[415] It is also clear that in many cases the reduction of other rates by the railroads may nullify the effect of the Commission’s order in respect to the rate complained of. Take, for example, the railroads leading from the wheat belt to Minneapolis and to Milwaukee. Excepting the Chicago, Milwaukee and St. Paul the roads that lead to Minneapolis are not the same roads that lead to Milwaukee. The Commission found that the rates on grain to Milwaukee and Minneapolis subjected the former to undue prejudice and disadvantage, but if the Milwaukee roads were ordered to reduce their rates to a given level the Minneapolis roads could neutralize the order by reducing their rates below the said level.[416] In other words no mere right to designate a reasonable rate in place of a rate complained of and found unreasonable can prevent unfair discrimination between places.
Nothing short of a general rate-making power can do the work properly. Particular rate-fixing alone means patchwork and inefficiency, easy evasion and new discriminations in place of the old ones. On the other hand, to give a public board general power to revise rates would if effective be tantamount to taking possession of the railroads without compensation, and if ineffective would amount to little in the way of stopping discrimination. If the tariffs were made by or subject to the revision or approval of a public commission and the rates so made were enforced, the most vital element in the ownership of the roads would be made public. And if the rates were disregarded or the power not vigorously and intelligently exercised the evils we are considering would still continue.