CHAPTER XIII

WATER COMPETITION

Rate Policy

We may now pass from the question of the relation of the Central Pacific-Southern Pacific system to legislative bodies in California and in Washington, to another matter of general importance in respect to which Southern Pacific policies profoundly affected the development of the West—the matter of railroad rates. Just as the associates were compelled to face the possibility of government regulation soon after they were fairly launched in their careers as railroad men, so they had to consider and determine the rate policies which they should adopt, independent of regulation, with respect to the shipping and traveling interests of the territory which they served. Their decisions in rate matters were certainly of no less significance than their attitude toward political control, and deserve the same broad consideration.

We shall attempt in the following chapters to describe the conditions which affected the ability of the associates to set rates in California and on business to and from that state, and to consider the attitude of the Southern Pacific with regard to the more important questions of rates and of competition which arose. For reasons which will become apparent as the discussion proceeds, the scope and importance of water competition in the West will first be set forth.

Water Transportation

One of the most important conditions affecting railroad business in California is the ease with which freight and passengers may take advantage of the water routes. The long coast line of California affords relatively few good harbors, but it is broken in the center by the splendid bay of San Francisco, and in the south by the less commodious but still adequate ports of San Pedro and San Diego. Between these termini a considerable commerce has long been carried on.

Still more important than the coastwise trade, however, has always been the deep sea commerce of San Francisco, and to a less extent that of the other ports. San Francisco is a focus for ocean lines connecting the Pacific Coast of the United States with the Atlantic seaboard, with Europe, with South America, and with the Orient. Likewise from San Francisco steamers ply up the Sacramento and San Joaquin rivers, carrying traffic well into the interior of the state. A mere mention of these facilities is sufficient to suggest the part which water transportation has played in the commercial and industrial life of the Far West.

River Traffic

The local river traffic which helps to distribute the cargoes brought by ocean boats to San Francisco attained some importance as early as 1847. In that year a small side-wheel steamer seems to have plied between San Francisco and Sacramento. In 1849 and 1850 larger boats were put on, the Sacramento was navigated to Colusa, and steamers ascended the San Joaquin to 150 miles above Stockton. In 1856 two steamers usually left San Francisco for Sacramento each afternoon at 4 P.M., arriving between 12 and 3 A.M. of the following morning. Corresponding boats left Sacramento at 2 P.M., arriving between 9 and 11 P.M. Often as many as four boats left San Francisco loaded in one day.[339]

The total tonnage of steam vessels plying on California rivers and bays was estimated by the State Transportation Commission in 1878 at 30,704. The bay vessels were all ferry-boats and tugs, but river vessels with a total tonnage of 10,990 tons made trips of considerable length. Most of these were small craft, but the larger river steamers ranged between 400 and 520 tons each, while the ferry-boats sometimes reached a size of 1,600 or 1,700 tons. Vallejo, Benicia, Napa, Knight’s Landing, Colusa, Chico, Red Bluff, Antioch, and Pacheco were among those able to take advantage of the water service.[340]

Generally speaking, the importance of the river traffic was diminished by the fact that after 1853 most of it fell under the control of one company, the California Steam Navigation Company,[341] and that in 1869 this company sold its steamships to the Central Pacific. The volume of river traffic also fell off because of railroad competition. In spite of these drawbacks competition on the river was lively at times and rates were low, to the disgust of some merchants in the interior cities. The California Steam Navigation Company charged $8 and $6 per ton for freight, and $10 and $8 for cabin fares from San Francisco to Sacramento and Stockton. Meals were a dollar apiece. These were, however, the rates in the absence of competition. When the steamer “Willamette” was brought from Oregon to Stockton, rates were fixed at $3 for freight, $3 for cabin fare, and $1 for deck passage. In December, 1860, the fare from Sacramento was $1 in a cabin and 25 cents for deck accommodation. People traveled because it was as cheap to go as to remain at home.[342]

Ocean Commerce

The first regular water connection between the eastern and western coasts of the United States was provided by the clipper ships on the route around Cape Horn. These swift sailing vessels supplied the gold miners with the tools and manufactured goods necessary for their enterprises, and took back such commodities as California was able to export. Oil, soap, cement, coal, iron, nails, paper, glass, tobacco, liquors, dry goods, and the like moved west—hides, wool, canned fruits, salmon, sugar, wine, and grain went east. The business was for the most part handled by ships chartered for single voyages, not by lines of ships operating on regular schedules.[343]

As early as October, 1848, however, at least one regular line, the Pacific Mail Steamship Company, entered the field. The establishment of the Pacific Mail service was made possible by the grant of a government contract for the carriage of mails—its profits during the early years were largely derived from business arising out of the gold discoveries in California. The business of the Pacific Mail grew rapidly. In 1851 it operated eleven steamers varying in size from 600 to 1,300 tons, and had a capital stock of $2,000,000. Thirty years later it operated fourteen ships, large and small,[344] reported gross earnings of $3,762,083 (1882) and had $20,000,000 in stock outstanding. At first the Pacific Mail operated steamships between Panama and San Francisco. Later it extended its service to Astoria; and still later it established a line across the Pacific to China and Australia. Among its competitors by sea at one time or another, besides the clipper ships, were Mr. Vanderbilt’s Atlantic and Pacific Company, the Mexican Coast Steamship Company, and Messrs. Goodall and Perkins. At one time Jay Gould, at another Trenor W. Park, of the Panama Railroad, were dominant in its affairs.

Problem of Water Competition

There is much of romance in the history of ocean transportation into and out of San Francisco, and in its proper place the story should be told at length. Some aspects of the water service, indeed, will be touched on later in this book. Attention is directed to the matter at present, however, not for its own sake, but because the fact of water competition raised one of the problems with which the Southern Pacific had to deal. It seems clear that the associates were compelled to define their attitude toward water competition as soon as their through line was completed in 1869.

Broadly speaking, the alternatives were competition or agreement. In respect to the Pacific Mail, however, the situation was complicated by the fact that the relations between the railroads and the shipping lines were of two sorts: In the first place, the Pacific Mail served as a valuable connection for the transcontinental railroads on business originating in or destined to China and Japan. Tea and silk eastbound were usually delivered by the steamships to the rail lines at San Francisco. Westbound the higher classes of manufactured goods likewise moved part way by rail and part way by water haul. During the ten years ending in February, 1881, the Pacific roads carried 177,278,505 pounds of tea and other Asiatic goods, secured to them by the co-operation of the Pacific Mail Steamship Company, resulting in earnings of $3,264,456.44.[345] On the other hand, the rail and water lines were competitors in important respects.

Steamship Company Organized

In 1874 the Huntington interests organized the Occidental and Oriental Steamship Company and chartered three steamships to ply between San Francisco and the Far East. This was said to be the result of a decision of the Pacific Mail to make Panama the terminus of its transpacific route, relegating San Francisco to the secondary position of a port of call.[346]

Huntington wrote to Colton, on November 9, 1874:

I am surprised to learn that anyone should think it was for our interest to put on the China line seven steamers to start with. I think three is plenty, and we shall, no doubt, have such an opposition on the start that we shall have to run them at a loss, but with those three we can make the prices for the old line, and I think there is enough to break them with, unless the managers of that company are changed, and then we most likely can get their steamers.[347]

Huntington intended to develop the Occidental and Oriental Steamship Company as a permanent connection of the Central Pacific for Oriental business in competition with the Pacific Mail. At the time his decision was made he discussed with his associates the advisability of asking enough eastern lines to join with the Central Pacific to form a single transcontinental route from the Pacific to the Atlantic coasts for export and import traffic, but decided against this project because it would make enemies of the railroads which were not included, and because also the admission of partners would make it impossible for the Central Pacific to control by itself a majority of the shares of the Occidental and Oriental Company. Huntington’s letter to Colton on this matter is a model of sound reasoning on a large question of policy:

I think very likely we could make out a through line. Very likely the Baltimore and Ohio would come in, and make up a line that would run to Omaha or Fort Kearney, passing through St. Louis and Chicago. But if this was done, very likely it would be difficult for us to control the steamship Company, and if we make up this line, leaving out the roads above mentioned, of course they would not expect any of the China business coming over our road, and then would they not be likely to work against us by allowing the Pacific Mail Steamship Company and any other companies to give bills of lading from China and Japan to Chicago, St. Louis, etc., over their roads, and to bring freight from those points to the sea coast here, to go by steamer and sail to California?... We cannot be too careful in starting this steamship line, for it is one of the things that if we go into, I have little doubt we shall hold it for years, and therefore the more reason why we should hold a majority of the stock of the company, as almost every road here is controlled by those that are always short or long of stock and endeavor to render everything bend to their particular wants. If short, they want to put the stock down, and if long they work for the reverse and we cannot afford to be in their power.[348]

Ownership of Shares

Doubtless for financial reasons the policy here laid down was departed from sufficiently to allow the Union Pacific a half-interest in the new company. For their part, Stanford, Huntington, Hopkins, Crocker and Colton subscribed each to 10,000 shares of the stock of the Occidental and Oriental Steamship Company. The account was charged to the Western Development Company and was held by that company as an asset. The remaining 50,000 shares were owned by the Union Pacific, and Mr. Gould shared with the associates the management of the enterprise.[349] It may be added that the Occidental and Oriental owned no steamers, but chartered the “Oceanic,” the “Belgic,” and the “Gaelic.” The “Oceanic” was a boat of 3,800 tons; the other ships were of 2,600 tons each.[350] The first dividend was declared in July, 1878, and by 1881 the rate had been raised to 4 per cent. Mr. Stanford has testified that the company expected to lose $100,000 a year, but that its owners were pleasantly disappointed.[351]

Agreement with Pacific Mail

There is evidence that as early as 1870 some agreement was entered into between the Huntington interests and the Pacific Mail Steamship Company, and that in 1871 a formal contract was concluded by these companies, defining their relation to each other. The terms of the contract of 1871 are not available, but a subsequent agreement, dated October 1, 1872, contained the following principal provisions:

The Pacific Mail Steamship Company agreed to provide every month three first-class steamers to sail from the port of New York for the Isthmus of Panama, with connecting steamers on the Pacific Ocean for the port of San Francisco. The company undertook to supply space in these steamers for an amount of freight not exceeding 14,700 tons annually.

The steamship company accorded to the railroad company the exclusive right to fix the rates on freight of every description, moving from New York to San Francisco during the period of the agreement, provided that the rates should not exceed the rates then in force, nor in any event $160 first-class, $140 second-class, $90 third-class, and $60 fourth-class and special.

Out of the gross receipts on the freight westbound the steamship company was first to draw $735,000, or at the rate of $50 per ton on 14,700 tons. If the amount of the freight handled should not equal 14,700 tons, or if that quantity of freight should be handled but the receipts therefrom should not amount to $50 per ton, the railroad agreed to make up the difference, so that the receipts on the first 14,700 tons should always amount to $735,000. If, on the other hand, the steamship should collect thereon an average rate exceeding $50, the railroad was to be entitled to the surplus.

In the event that through westbound freight exceeded in volume 14,700 tons, the gross earnings on the excess quantity were to be divided between steamship company and railroad company as follows: first, $30 per ton was to be taken by the steamship company; additional receipts up to $50 a ton were to be divided equally between steamship and railroad; and earnings over $50 were to go to the railroad.[352]

The essential facts in this agreement were that the steamship company surrendered the power of fixing the westbound rates in return for a guarantee of $735,000 a year.

Later Contracts

This feature was also characteristic of later agreements between the same parties, different as the details of the subsequent arrangements sometimes were. In 1879 the Union Pacific, Central Pacific, and Pacific Mail companies agreed that the last-named should set aside space for 600 tons of railroad freight in each of its steamers moving monthly between New York and San Francisco. The railroads were to exercise full authority over the through rates of the steamship company, and for their part were to guarantee that the earnings on the railroad freight shipped were not to be less than $48,000 monthly westbound, and $35,000 monthly eastbound. In case the earnings on the 600 tons or less of railroad freight which might be sent in each vessel exceeded the guaranteed minimum, the balance of freight money was to be paid over to the railroad, while the moneys received on all freight between New York and San Francisco and between San Francisco and New York in excess of 600 tons for each vessel were to be equally divided between the railroad and the steamship company.[353] An additional clause in this agreement bound the railroads to pay to the steamship company $5 for each passenger carried whose ticket was purchased at a point east of Ogdensburg, Suspension Bridge, Buffalo, Pittsburgh, and Wheeling, to a point west of Sacramento, and vice versa.

An agreement dated June 1, 1885, between the Transcontinental Association and the Pacific Mail does not differ strikingly from that of 1879 just summarized, except that the payments per month were to be $85,000 for a two-way service, instead of $83,000, and that there was no passenger subsidy. Moreover, the right of the steamship company to fix rates for the use of its capacity above the 600 tons mentioned in the agreement was specifically reserved. The $85,000 payment in this year represented a reduction from the figure of $110,000 contained in a contract dated March 4, 1880, and from one of $95,000 concluded in 1882. In 1887 the subsidy was set at $65,000, and in 1889, when still another arrangement between the Transcontinental Association and the Pacific Mail was signed, it was put at $75,000.[354]

From a statement made to the United States Pacific Railway Commission, it appears that the aggregate earnings guaranteed by the railroads to the Pacific Mail Steamship Company from September 30, 1871, to March 21, 1886, were $11,227,939.27. This did not include Central or South American business. Of the guaranteed sum the steamship company earned $5,854,113.06, leaving $5,373,826.21 to be made up by the guarantors. The distribution of the burden among the railroads interested may be suggested by the fact that out of $146,170.29 which had to be paid during the three months from January to March, 1886, the Union Pacific paid $34,652.94, the Central Pacific $31,927.57, the Southern Pacific $30,172.79, the Santa Fé $15,086.11, the Galveston, Harrisburg and San Antonio $11,536.82, and seven other companies smaller sums.[355]

Change in Ocean Traffic

The change which took place in the volume of water-borne commerce in and out of San Francisco coincident with the arrangements between the railroads and the Pacific Mail which have been described, is clearly indicated in the following table:[356]

Value of Commodities Shipped from New York to San Francisco and from San Francisco to New York via Panama each year from 1869 to 1884

Year ended June 30	Shipped from New York to San Francisco	Shipped from San Francisco to New York	Total
1869	$50,015,994	$20,186,035	$70,202,029
1870	15,334,945	3,259,310	18,594,255
1871	9,391,607	2,161,106	11,552,713
1872	6,739,563	3,086,874	9,826,437
1873	3,042,617	3,667,107	6,709,724
1874	7,049,821	1,752,653	8,802,474
1875	6,057,202	2,382,928	8,440,130
1876	4,470,594	1,983,261	6,453,855
1877	3,398,864	2,205,979	5,604,843
1878	3,976,358	3,211,245	7,187,603
1879	2,781,065	2,166,690	4,947,755
1880	2,963,065	2,865,237	5,828,302
1881	815,893	2,598,868	3,414,761
1882	1,270,900	3,153,902	4,424,802
1883	1,192,912	2,394,430	3,587,342
1884	1,040,495	1,264,682	2,305,177

If we compare the year 1869—probably the last in which the Pacific Mail and the Huntington interests were in active competition—with the year 1884, it appears that the value of commodities shipped in and out of San Francisco via Panama during these years declined from about seventy to about two million dollars. Doubtless this falling off was not all due to agreements between rail and water carriers. For instance the sudden decline between 1869 and 1870 was occasioned in large part by the sudden diversion of bullion shipments from the water routes when the rail lines were opened, while passengers also rapidly deserted the water for the more speedy and comfortable rail service. Moreover, at a slightly later date the special contract system played its part in limiting shipments by sea. Yet it is not unfair to credit the arrangements between the Huntington group and the Pacific Mail with a considerable share of the reduction in water tonnage so desirable from the point of view of the land carriers.

Pacific Mail and Panama Railroad

The difficulty in bringing about a substantial lessening of competition by agreement with a water carrier is found in the fact that the sea is free, so that new ships and new shipping companies can readily take the place of those that are withdrawn. The peculiar strength of the Pacific Mail in negotiating with the railroad company lay in the fact that it enjoyed for many years the exclusive privilege of through-billing freight between San Francisco and New York, including the privilege of quoting a through rate. From all other steamship companies the Panama Railroad exacted a local rate for hauling freight across the Isthmus.[357] Inasmuch as this local rate was very high, it was impossible for a competing steamship company to handle through business at a profit. It was thus the railroad which determined whether competition by way of the Isthmus of Panama should succeed or fail. It may be added that after the year 1893 the Panama Railroad assumed the responsibility not only of the rail haul across the Isthmus, but of the water connection between Colon and New York as well, thus becoming the preponderant partner in respect to length of route, as well as in respect to strategic position.

In return for the exclusive right of through-billing, and of quoting through rates, as well as for its agreements not to operate vessels in the Pacific, the Panama Railroad was promised a certain division of the through rate, which was not to be less monthly than a stipulated minimum. The minimum varied, but always was a substantial part of the payment which the transcontinental railroads were making to the Pacific Mail. In 1878 the railroads guaranteed the Pacific Mail $90,000 a month, out of which the Panama Railroad received $75,000. When the Pacific Mail subsidy was lowered from $90,000 to $75,000, the amount guaranteed to the Panama Railroad fell off from $75,000 to $55,000.

It is a matter of history also that during the years 1876 to 1878, the Panama Railroad not only was a party to the elaborate traffic agreement with the Pacific Mail which has been described, but that it exercised for a time direct control of the steamship company by domination of its president and board of directors. This control was the outcome of a conflict between Jay Gould, then president of the Pacific Mail, and Trenor W. Park, of the Panama Railroad, which in 1875 resulted in the election of a board of directors satisfactory to the latter and in the choice of a new president.

The lever which the railroad used at this time was the cancellation of its contract with the Pacific Mail, the organization of a company known as the Pacific Transit Company, the purchase of three old refitted warships, and the threat to engage in active competition. Mr. Park was asked if he would desist from his attack on the Pacific Mail if a neutral board of directors were elected. He consented to this, and was satisfied by a board composed for the most part of Panama Railroad men. This was followed by the consolidation of the Pacific Mail and the Panama Transit Company, by the renewal of contracts between railroad and steamship, and finally in 1878, by the execution of a bill of sale by the steamship to the railroad company for twenty-two steamers to secure a loan of $1,000,000 in Panama Railroad bonds for four years.[358]

Railroads’ Main Reliance

It thus appears that during the first ten years after the completion of the Central Pacific, the interests of the Panama Railroad and those of the Pacific Mail were closely bound together, so that during this period an agreement with the former was sufficient to control the route over which both were operating. It was upon this fact that the transcontinental railroads chiefly relied. Nor was there any important change in the relations between the Panama Railroad and the Pacific Mail, or in those between the Pacific Mail and the transcontinental railroads during the following twelve years. Mr. Park’s control of the Pacific Mail proved only temporary, it is true, and the terms of the contracts between the parties changed from time to time; yet the principle of a guaranty of earnings to the Pacific Mail in return for the maintenance of rates was always adhered to, and the Panama Railroad always received the lion’s share of this guaranty for a division. The amount of the subsidy paid by the railroad has already been given. When in 1885 the Pacific Mail received $85,000 per month from the transcontinental lines, it paid over $70,000 to the Panama Railroad. When the Pacific Mail subsidy was reduced to $65,000 in 1887, the payment to the Isthmian railroad likewise fell to $55,000. In 1881 the Panama Canal Company, a French corporation under the direction of De Lesseps, purchased the Panama Railroad for $20,000,000; but this does not seem to have affected the relations between the last-named railroad and the Pacific Mail.

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CHAPTER XIV

THE RATE SYSTEM OF THE CENTRAL PACIFIC

City and Country in California

For more than forty years the Southern Pacific interests sought with varying success to modify the intensity of water competition by agreement with or by purchase of competing lines. During all this period the existence of alternative water routes was probably the principal influence determining the relative adjustment of rates between different towns upon the Pacific Coast. In deciding upon the rates which they should charge, the Southern Pacific interests had other factors to consider, however, besides the presence of water competition—factors which can be understood only after a careful study of local conditions in the Far West.

The state of California is characteristically a country of great distances, occupied by a relatively sparse and unequally distributed population. Its industry is primarily agricultural and mining. Although some manufactures have developed since 1870, such as foundries, woolen and sugar mills, glass, paper, cordage, powder, tobacco, tin, and hardware manufacturing concerns, yet even today the absence of adequate supplies of good coal, the smallness of the local market, and the distance from the great centers of population in the East hold manufactures within narrow limits. As explained in the previous chapter, the state is best fitted to produce and export products of the soil, and raw materials such as grain, fruit, wool, hides, and later wines, lumber, and oil. To this list should also be added salmon.

In such an economy, the cities of California play the part of distributing agencies rather than that of centers of industry. Such was the first function of Stockton, Sacramento, Los Angeles, and indeed of San Francisco itself, and the work of distribution still remains these cities’ principal means of support. Originally the chief profit of the northern towns came from supplying the mining population of the Sierras with supplies brought by sea from Europe or from the Atlantic Coast of the United States. The nature of California imports has somewhat changed since the early days; a larger commerce with the Orient and with the west coast of South America has developed, and a large part of the freight handled on the Pacific Coast now comes in by rail. This has multiplied the number of distributing points, and has to some degree built up the interior of the state. The character of the cities has not, however, changed and they remain as before—trading and consuming rather than producing centers.

Conflict of Interest

It follows from this division of labor between town and country on the Pacific Coast, and from the rivalry of different cities in the distribution of finished goods, that striking divergencies in point of view have arisen, both between individual cities, and also between the city communities as a whole and the farming and manufacturing interests of the state. These differences have received free expression in the discussion of railroad rates. Inasmuch as the articles distributed by the towns are in large part imported goods, the cities as a group have demanded low westbound carload rates from eastern sources of supply. The larger centers of population, however, have opposed low rates on small consignments, because that tends to deprive them of a rehandling profit by promoting direct relations between the consumer and the eastern wholesale house. As compared with the cities, on the other hand, the farming interests have been relatively indifferent to the level of westbound rates, so long as they have enjoyed low eastbound rates on the product of the farm and field; while the struggling manufacturers have resisted low rates westbound, because these have exposed them to the competition of eastern factories. The interests of the consumer have not until quite recent years been represented.

No Settled Rate Policy

Owing to these persistent conflicts between various classes of shippers, public opinion in California has not been easily enlisted as a whole in support of any concrete proposals for the readjustment of railroad rates, although complaints from all sections have been numerous. There has been, on the contrary, a persistent series of appeals to the railroad, now to favor one set of interests, now to favor another—appeals which, when granted, often have resulted in gross discrimination, and which, when refused, have swelled the tide of protest against the transportation lines. The serious side of this situation in California is that the conflict of interest between buyers of transportation has exposed the railroad to temptations which it has had neither will nor ability to withstand. Where there is constant demand for favors there is likely to be discrimination unless the person or institution to which demand is made is fortified by a clear view of public policy and a sense of morality more than ordinarily acute.

It is no secret that the Southern Pacific has had neither the one nor the other of these qualifications. For its part, it has acknowledged no duties other than those generally incumbent upon private business. It has insisted upon complete freedom to follow its own advantage. In a speech to the men in the railroad shops at Sacramento in September, 1873, Stanford explained his position by asking: “Does Governor Booth sell at the same per cent of profit his sugar, pork, beans, bacon, lard, candles, soap, spice, coffee, whiskey, brandy, and other articles? So with the mechanic, the manufacturer, the farmer, and others. The market price governs. A farmer takes two and one-half cents for his grain as justly and as cheerfully as one and one-half cents, the cost of producing being the same.”[359] “The Southern Pacific,” said Mr. William B. Curtis, of that company, in 1894, in the same strain, “sells transportation precisely as a merchant disposes of his wares, adjusting its tariff to conform to the situation with the object in view of inducing the largest amount of transportation at fair rates.”[360]

This announced willingness to differentiate led in the course of time to the greatest variety of railroad rates in California, some rates being low, some high, some public, some secret. Generally speaking, indeed, rates were low where competition was present, and high where it was absent. The big man was favored over the little man, the shipper with an alternative route over the shipper confined to one railroad line. Some of the details of this interesting system will now be presented.

Separate Rate Classifications

In discussing the adjustment of local charges in California, attention will be first directed to the absolute level of local railroad rates. Separate mention must be made of the local classifications and of the local rates.

As late as 1877, each of the principal railroads in California had its own classification. These were far from being the same. Baled hops moved at one and one-half times first-class on the Central Pacific. On the Southern Pacific compressed hops took third-class. On the California Pacific pressed hops took double first-class. Liquors took one and one-half times first-class on the Central Pacific (in jars, owner’s risk); second-class on the Southern Pacific (in glass, packed, owner’s risk); double first-class on the California Pacific (in jars or glass); first-class on the North Pacific Coast (in glass, packed, owner’s risk); and double first-class on the San Francisco and North Pacific (in glass or demijohns, owner’s risk). Window glass took first-class on the Central Pacific, one and one-half times first-class on the California Pacific, and fourth-class on the Southern Pacific if not over three feet long. Boiler flues moved first-class on the Central Pacific, third-class on the North Pacific Coast, and fourth-or fifth-class according as made of copper or brass, or of iron, on the Southern Pacific.[361]

Generally speaking, however, the classifications were much less elaborate than they later became. A committee of the California Senate observed in 1893 that the theory of the local classification of the Southern Pacific was to simplify so far as possible. Hence that classification started out with the announcement, in effect, that all articles not named specifically therein would be charged for at merchandise rates. It then continued to indicate the exceptions, enumerating articles that were light, bulky, of excessive value, liable to damage, etc., proceeding in this way along the same lines as the Western classification.[362]

When the Santa Fé later built into southern California it brought in the Western classification, tariffs, rules, and conditions that governed its lines elsewhere, and applied the Southern Pacific schedules of merchandise rates to this classification. Since, however, the Southern Pacific had only one merchandise class, the Santa Fé applied the same rates to each of the first four classes of the Western classification in California. The result of this adjustment of tariff to the Western classification was to produce practically the same revenue as would have resulted from the local classification and merchandise rates of the Southern Pacific Company. In 1893 the Southern Pacific itself substituted the Western classification for the one which it had been using.[363]

Local Rates

Under the law the maximum rate which any California railroad could charge for the transportation of freight, was 15 cents per ton per mile. In spite of the statement of Mr. Stanford to the contrary,[364] the evidence is to the effect that this maximum was generally applied on short-haul local business as late as 1877 and perhaps afterwards. In some cases, the published rate was even greater than the maximum, though a note to the schedule provided that when the calculated rate exceeded the legal maximum, the latter would apply. The rates on the Central Pacific main line in 1866 were almost exactly 15 cents per ton per mile.

The report of the California Board of Transportation Commissioners in 1877 showed that generally throughout the state first-class rates for short hauls ranged from 14 to 30 cents per ton per mile. For the 10 miles from Lathrop to Stockton the tariff charge was $1.60 per ton, and for the 6 miles from Pleasanton to Livermore, the rate was $1. The charge from Roseville Junction to Truckee, 102 miles, was $15.20. When river competition entered in, rates were markedly reduced. The charge from San Francisco to Stockton, 92 miles, was $3.20 per ton, or 3½ cents per ton per mile; that from San Francisco to Sacramento, 140 miles, was $3.60, or 2⅗ cents per ton per mile. On the other hand, the rates of the California Pacific were somewhat higher than those of the other lines, except at competitive points.[365]

In later years the charges of the Southern Pacific naturally declined. Yet the rate on brick from San Francisco to Soledad in 1892 was 5½ cents per ton per mile on a haul of 143 miles, and that to San Miguel, 64 miles farther on, was almost 5 cents per ton per mile.[366] The average receipts per ton per mile upon the Southern Pacific system were 2.04 cents per ton per mile for all freight as late as 1885, in spite of the large quantity of long distance through traffic. Plainly the average receipts on local business were much greater. There seems little doubt but that the local rates in California were always distinctly higher than in the eastern states, although they have been lowered in recent years. The reason was in the main the relatively slight density of traffic upon all except the trunk routes, as well as the higher cost of coal, and the successful control of competition to which the Southern Pacific attained.

Rate Discrimination

Turning now from the absolute level of local rates to the question of the relations which those rates bore to each other, we come to the question of discrimination in California. Railroad discrimination may be personal, in which case it involves the quoting of different rates to different persons for the same or a similar service, or it may be local, as in instances where the interests of competing localities are concerned. Either kind of discrimination is of profound social importance, for, after all, it must be remembered that the significant question for the producing and distributing interests of a state is not how much they pay for transportation, but whether this amount, be it much or little, is less than is paid by their competitors. The remainder of the present chapter will be devoted to the discussion of personal discrimination; in the next chapter the topic of local discrimination will be considered.

The policy of granting special concessions in rates to special shippers was one which the Southern Pacific followed freely whenever it seemed likely to increase the profits of the company. There was never any disposition to apologize for this—it was known to be the practice of other roads as well, and the Southern Pacific accepted the system as a matter of course. The methods employed were various. One method was that of granting passes. Mr. Stubbs explained that passes were commonly issued in cases where shippers came to the Central Pacific and represented that they were offered transportation by the company’s competitors over such competitors’ lines. “They were our patrons,” said Mr. Stubbs, “shipping our way, and I may say that wherever we were satisfied that the statement was true, we generally met the case by giving a pass!”[367]

Sudden Tariff Changes

In addition to granting passes, the Southern Pacific discriminated by changing open rates suddenly for the benefit of persons fortunate enough to be advised in advance. Mr. Stanford once explained that individual items in the company’s tariff were changed whenever by so doing the company could encourage business in any direction.[368] Indeed, a tariff would scarcely be in force ten days before the necessity for changes would be apparent.[369]

How this might work was shown in 1892, when complaint was made of discrimination in favor of the Standard Oil Company. It was then alleged that the Central Pacific was lowering oil rates from $1.25 per hundred pounds to 82½ or 90 cents, when the Standard Oil desired to make shipments from eastern refining points to the Pacific Coast, the rates being subsequently raised when the shipments had been completed. A letter to the vice-president of the Standard Oil Company, bearing upon an episode of this sort, written under date of December 4, 1888, got into the public press, and seems to establish the fact that transactions of this nature were going on. The letter follows and is self-explanatory.[370]

Relations with Standard Oil

The fact that relations between the Southern Pacific and the Standard Oil Company were very close during the late eighties and early nineties is well established, not only by the correspondence just referred to, but also by other available evidence. In June, 1892, to cite a small but interesting episode, the Union Pacific issued a circular applying a rate of 78½ cents per hundred pounds on oil from Colorado points to the Pacific Coast. This rate had been in effect some years before, previous to the organization of the Western Traffic Association, under a rule which made Missouri River commodity rates a maximum on business originating west of the 97th meridian. The rule in question had never been withdrawn, although it developed that the Southern Pacific had forgotten it, and believed that a rate of $1.60 applied.

At this time the independent firm of Whittier, Fuller and Company was endeavoring to find a market for the products of its Colorado plant upon the Pacific Coast. In order to head off this anticipated competition, the Standard Oil representative in San Francisco took the matter up with the general traffic manager of the Southern Pacific, Mr. Gray. The latter at once wired to Mr. Munroe of the Union Pacific as follows:

San Francisco, June 10, 1892

J. A. Munroe,

Omaha, Nebraska

It is reported you are antagonizing Standard Oil Company in Colorado. I hope you will do nothing to affect our joint relation with that company with regard to Pacific Coast business. Have you observed the large tonnage you have lately been handling for them? I think it is so great you should be careful how you jeopardize your own interest in this direction.

R. Gray

Under pressure from the Standard Oil, the Southern Pacific followed up this telegram by refusing to prorate on any basis lower than $1.60. As a result the objectionable circular was withdrawn.[371]

Rate Rebates

A third method of granting concessions to shippers whom the Central Pacific desired to favor, was that of the rebate. Rebates were usually granted in exchange for an undertaking by the shipper to send all his freight over the lines of the railroads by which the rebate was paid. Mr. Stubbs once explained to the United States Pacific Railway Commission that the granting of rebates was a regular practice, not only of the Central Pacific, but of all its connecting lines. He explained the mechanism of the operation as follows:

Suppose that you were a merchant, and I should go to you to make a contract for the rail lines—because all the lines were parties to it between New York and San Francisco. It was not a Central Pacific affair. You understand that all the lines between San Francisco and New York, probably embracing all the roads in the East, shared in this reduced rate that was given to the merchant in consideration of his exclusive patronage—I should go to you and make a contract, and should say that it is impossible for us, in billing, to bill this to you at the net rates. We will bill it at the full rates, and when you receive your goods at the depot you pay the full rates, and we will refund to you the difference between the agreed rate under the contract and the rates which you have paid. Of course that is an overcharge. We overcharged those goods above the price that you had previously agreed to pay for the transportation of them.[372]

In the single year of 1884 the Central Pacific paid out $1,060,275.92 as refunds in behalf of itself and its connections.

Extent of Practice

Evidence showing how radically published rates were reduced by the practice of rebating is to be found in the following testimony by G. W. Luce, now freight traffic manager of the Southern Pacific, and long connected with the traffic department of that company. Speaking before the Interstate Commerce Commission of the period about 1887, Mr. Luce said:

Concrete Instances

The practice of quoting a lower rate to one person than to another in order to secure a specific shipment, or in consideration of an agreement for exclusive patronage of the railroad which granted the rebate, was clearly a case of personal discrimination. A concrete case which is illustrative of the general policy with which we are concerned was brought to public notice in California in the year 1886, when the Central Pacific was charged with rebating large sums to two favored shippers named Friedlander and Reed. It appeared in fact that the railroad had paid $6,000 at one time to Friedlander for rent of a wharf at Vallejo, and 25 cents a ton on a shipment to a certain Mr. Reed at Knight’s, on business destined to Vallejo. These payments were explained by the company as follows:

The Friedlander wharf vouchers were explained by showing that, in consideration of the rental of said wharf, Friedlander agreed to, and did, send the whole of his immense grain purchases on the Sacramento River, and at other competing points on the California Pacific, by rail instead of by steamer and sail; and when one remembers the enormous quantities of wheat and barley purchased by him, the “grain king of California,” there is no doubt that the contract was a source of much profit to the company. The Reed voucher for 25 cents per ton for loading wheat from his warehouse at Knight’s Landing, was fully explained by Reed himself. He had a warehouse at that point on the bank of the river, and water craft would take his grain at the same rate charged by the railroad company, loading and unloading the same at their own expense, while the railroad company required the shipper to do the loading. When asked to patronize the railroad, Reed told Mr. Towne, general manager, that he could have the grain carried by water at the same price that the Southern Pacific demanded, and that the steamers and schooners would do the loading without charge. In order to secure the business, Mr. Towne told Reed that if he would ship by rail, the company would allow him 25 cents per ton for loading, thus securing business for the road that would have been otherwise lost.

“Special” Contract System

In all probability the Reed and Friedlander cases were but two of a great many instances of similar favors granted to large shippers, and to shippers strategically placed on water lines in California. This is certainly implied in the testimony of Mr. Stubbs before the United States Pacific Railway Commission. Moreover, there is good independent evidence to the same effect in the available data concerning the “seasonal” or “special” contract system which became notorious in California in the late seventies and early eighties. The outlines of this last-named arrangement were as follows:

As early as May, 1878, the Central Pacific Railroad offered to guarantee a maximum rate of $2 per hundred pounds upon all grease wool, eastbound, moving over its lines from San Francisco to New York. In consideration of this guaranty it required shippers to undertake to ship all wool which they sent to destinations east of the meridian of Omaha by way of the Central Pacific and such connecting lines as the Central Pacific Railroad Company might elect. In case of failure to live up to the agreement, the shipper bound himself to pay an additional rate of 75 cents per hundred pounds upon all shipments made or which might have been made by rail during the time of the contract. Before this arrangement was insisted on, shippers were accustomed to forward their finer wools by rail at the $2 rate, but to send their low-grade wool by sea at a rate of 50 cents per hundred pounds.[374]

The system of special rates and exclusive contracts was not at first applied to westbound freight, nor to general merchandise, whether moving east or west. Late in July, 1878, however, notice was given of advances in westbound merchandise rates which in many instances amounted to as much as 100 per cent, and at the same time a tender was made of rates below the published tariff to shippers who entered into special contracts with the railroad for exclusive handling of their freight. The Central Pacific management placed the responsibility for the rate advance upon the Union Pacific, and gave publicity to a telegram of protest signed by Mr. Stanford.[375] There is reason to believe, nevertheless, that the Central Pacific management was cognizant of the matter from the first, and it is certain that Mr. Stubbs, general traffic manager of the Central Pacific, warmly defended the system.

Terms of Contract

Under the special contract plan, the railroad company agreed to charge not more than certain specified rates on articles named in the agreement shipped from New York, Pittsburgh, Cincinnati, and Chicago, and other points taking the same rates to the Pacific Coast. Rates on freight not specifically provided for were not to exceed those published in the general tariff. In case rival railroads cut rates, or in case competition by the Pacific Mail should become active, the shipper was to be protected. That is to say, it was declared to be the intent and purpose of the agreement to guarantee to the contracting merchant rates which should be as low as those charged and collected upon the same articles, between the same points, by any other all-rail route which might compete for the traffic of California at any time during the term of the contract.

The carrier also agreed that in the event of active competition with the Pacific Mail for the traffic between New York and San Francisco, the rates charged by rail during the period of competition should not exceed those current on Pacific Mail vessels by more than certain named amounts, ranging from 50 cents on goods taken at rates not exceeding $3.50, to $3 on goods taken at rates exceeding $6. This guaranty was not to be enforced at times when the rates of the Pacific Mail were subject to the control of the railroads.

In consideration of these assurances the shipper agreed to forward “by way of the railroads owned or operated by the contracting carriers and such other connecting railroads as might be designated from time to time, all goods, wares, and merchandise handled by the merchants entering into the agreement which might or should be purchased in or obtained from any point in the United States or Canada east of the meridian of Omaha, during the term of this contract, for sale or use on the Pacific Coast.”[376]

Rates under System

It appears that at the beginning the same rates were quoted to all shippers signing the contract. That is to say, two rate sheets were published, one known as the “white list,” and the other as the “pink list.” The white list contained the open, or public rate; the pink list contained the contract rate. Contracts were made with individual shippers that if they would give to the railroad line all of their traffic for a year to the exclusion of ocean carriers, they would have a rebate down to the figure fixed in the pink list. Somewhat later, however, jobbers on the Pacific Coast were individually dealt with, and the rates began to vary.

Mr. Stubbs says in describing this phase of the matter:

We tramped the streets here for a couple of months, explaining our ideas to the principal importers. By some we were met with cordiality and approval. Others were a little indifferent. Where a merchant liked the scheme, we would sit down with him, and, by examining his bills of lading by Cape Horn and his insurance policies, we would get an idea of the quantity he would ship by the several routes and the cost to him by the use of the several routes. We would then aim to make the rate so that upon the whole it would average about the same. We would average the rate while he was using the three routes.

Still later the railroads returned to the one-rate policy. To arrive at this rate they adopted a plan of “harmonization”; they averaged the rates upon various commodities which had been charged to various shippers and made a new schedule of rates, from which they varied as emergency might require or expediency advise, by the current method of rebating.[377]

Administration of Contracts

The railroad company reserved from the beginning the option of way-billing the goods and collecting freights according to the printed rates, agreeing to return the difference on presentation of vouchers to the general freight agent of the Central Pacific at San Francisco after the lapse of a reasonable time for auditing and adjusting the bills. The carrier also always insisted on the privilege of examining the shipper’s books in case it suspected a violation of the agreement. In some respects, the wording and administration of the contracts became more stringent in the later years. J. T. Doyle, a well-informed San Francisco attorney, asserts that at the beginning merchants were merely forbidden to import goods otherwise than by rail. Following this the prohibition was extended to the handling or buying of goods imported by sea by other parties. Finally the boycott reached to the offending importers themselves, and firms signing the contracts were bound not to sell or deliver goods to anyone who was in the habit of importing otherwise than by rail.[378]

Probably there was some difference in the treatment of different shippers in these matters. Mr. Hawley, a large importer of hardware, told a committee of the California legislature in 1884 that he was at liberty to buy a great many things “to sort up with,” even goods sent via the Horn. On the other hand, there were a good many cancellations of contracts for alleged violations, and shippers lived in continual apprehension.

Taken as a whole, the special contract system was an exchange of a rebate by the railroad for an agreement for exclusive patronage on the part of the shipper. Prior to 1878, bulky, low-grade articles moving between the Atlantic and the Pacific coasts usually went by sea. Rates were lower and saving in time not important. High-grade goods and freight requiring quick transportation went by rail. It was the idea of the railroad that if compelled to choose, Pacific Coast business men would prefer to import all their freight by rail rather than to bring it all in by water, and that this would substantially increase railroad revenues even though incidental concessions in rates had to be made.

Objections to Contract Plan

This special contract plan was objectionable to shippers for three reasons. In the first place, it seemed likely to increase the rates which they would have to pay. Although the railroad undertook at the inception of the scheme to meet existing rates by water, at least to such an extent that the total expense to shippers who made special contracts with the railroads would not be increased, it needed no great prescience to foresee that the exclusion of water carriers from the business of the Pacific Coast would sooner or later bring about an increase in transcontinental rates. When special contracts were offered to merchants in Stockton, Los Angeles, Marysville, and Sacramento, San Francisco importers made the additional complaint that their natural advantages as residents in a seaport town were neutralized.

In the second place, the administration of the plan required a supervision over the business of individual dealers which was extremely distasteful. It was asserted that the railroads placed men on the wharves to take the marks of goods brought in by sea, that they followed up the drays to see where the goods went, and that they inspected the books of merchants to make sure that importers who had signed contracts had no dealings with firms who still patronized the shipping lines. Nor was this a casual abuse, but a necessary feature in the plan.

Again, the system lent itself to discrimination. Mr. Stubbs insisted that contract rates were open to all shippers, large or small, who would sign the necessary papers, but it was not denied that the first arrangements were made with large dealers only,[379] nor that during at least one period the whole scheme involved the abandonment of a published and open tariff in favor of a system of bargains in which each shipper’s rate was individually and secretly determined. Under such a plan it was inconceivable that discrimination should not develop.

Ostensibly the offer of a special contract was one which shippers were free to accept or to reject as they saw fit. Practically, this was not so. If A took a contract and B did not, the latter’s ability to compete was seriously impaired. For B had to import some things by rail in any case, while the fact that less business in the aggregate reached the Pacific Coast by sea reduced the shipping facilities which B otherwise would have had at his command.[380]

Transcontinental Traffic Stimulated

Special contracts seem to have been a distinct success from the point of view of the western carriers. When they were introduced the percentage of transcontinental freight carried by the rail lines was small, probably not over 25 per cent of the whole. At the end of six years under the new system this percentage had risen to between 60 and 75 per cent.[381] The change was certainly not entirely due to the policy of special contracts, but part of the change may be attributed to the plan.

The policy was nevertheless given up in 1884 owing to the refusal of the eastern trunk lines to take any further part in it. According to Mr. Stubbs, the eastern companies believed that the advantage of the system hardly paid them for the confusion in their accounts incident to this method of conducting business. Moreover, there was legitimate apprehension lest the contracts provoke antagonistic legislation at Washington. Mr. Stubbs tried to argue the question, but without success.[382]

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