LOCAL RATES IN CALIFORNIA
Charging What the Traffic Will Bear
The general policy of the associates in dealing with problems of rate-making in which rival towns were interested, was the same as that which they adopted to meet differences in competitive power between different individuals. The tests applied were simple. What was the market to be reached? Had the community concerned an alternative route? Was there an alternative source of supply which limited the willingness of the community to pay freight? If so, was this second source of supply one served by the Central Pacific, or one which had the benefit of water communication, or possibly one which possessed a rival rail connection? To what extent should concession be made from the highest rate which could be charged, in order to promote the growth of business?[383]
The standard of rate-making just described, which may be summed up as a policy of charging what the traffic would bear, was not peculiar to the Southern Pacific at the time it was adopted, nor was it particularly repugnant to public opinion in California, taken as a whole. The error must not be made of ascribing to the western communities of the seventies and eighties a clear conception of the reasons of public policy which are properly urged today against the unlimited recognition in railway rate schedules of the competitive forces which still have free play in private business. Such ideas have slowly developed only during the last forty years.
Limited Encouragement of Business
Nor was the policy of adapting rates to the ability of shippers to pay inconsistent with the rendering of important service to business men in California and elsewhere who were seeking to expand their sales. Only a few illustrations need be given of the promotion of business by rate adjustments, but they will serve as examples of many more about which information is on record.
One case of this sort, which shows the willingness of the Southern Pacific management to respond to what they considered a reasonable request, had to do with the shipment of beer from a place known as Boca, in the state of Nevada, to San Francisco. It appears that a gentleman named Hess once conceived the idea of establishing a brewery at Boca. This town was 220 miles from San Francisco, and yet all of Mr. Hess’s beer had to find a market in the latter place, in competition with beer from Milwaukee and St. Louis. Mr. Stubbs, general traffic manager of the Central Pacific, welcomed the proposal to build a brewery in the West, and put in special rates to help shut out the eastern product. Every pound of brewery supplies, he reasoned, would have to go over the Central Pacific. It was all clear gain, like so much money picked up out of the ditch. In another case the Southern Pacific quoted special rates on sugar from San Francisco to the Missouri River, to enable the California Sugar Refining Company and the American Sugar Refining Company to sell their sugar at the Missouri River in competition with sugar reaching New York by water and thence moving westward.[384]
Still again, in 1884 an attempt was made to persuade the St. Louis-Kansas City lines to participate in a rate of 75 cents per hundred pounds on cast iron pipe from St. Louis to the Pacific Coast in order to encourage production in the Middle West in competition with that on the Atlantic seaboard. The matter of the 75-cent rate was taken up with J. W. Midgley, Trunk Line commissioner, who declined temporarily on December 24, 1884, on the ground that the rate would be a special one, and that there was an understanding that no special rates should be made prior to January 31 next ensuing, pending an anticipated agreement between the Transcontinental Association and its eastern connections.[385]
In the instances which have been given, the impelling motive of the Southern Pacific was frankly to increase its profit by increasing the movement of freight over its line. Yet the shipper was also benefited because his interests were substantially identical with those of the railroad company, and he warmly welcomed the powerful support of the railroad lines. These cases are not unimportant. The enumeration of such isolated instances, however interesting as they may be, affords no very clear picture of the aggregate of local rate adjustments with which the Southern Pacific interests were concerned. For this purpose a more systematic survey of the rate system administered by the Southern Pacific is necessary, and to this attention is now directed.
Distance the Governing Factor
The foundation of any system of railroad rates is the distance which commodities are carried. Generally speaking, the Southern and Central Pacific railroads, like other companies in the United States and Europe, varied their local charges with the distance between point of origin and point of destination. To illustrate this point briefly, two charts are here presented.
Chart showing rates on second-class freight and on grain in the Sacramento Valley, 1876.
The first chart depicts the rates on second-class freight and those on grain in January, 1876, between Sacramento and points in the Sacramento Valley north of that city. Second-class freight at this time on the Southern Pacific included articles such as coal oil, agricultural implements, machinery, furniture, crated glassware, and wines and liquors. Freight of the description mentioned ordinarily moved north from the city of Sacramento. Grain, on the contrary, moved south. It will be observed that rates on the lines of the Southern Pacific increased with considerable regularity as point of origin or destination proceeded north into the non-competitive territory around Tehama and Redding.
Chart showing rates on miscellaneous commodities in the San Joaquin Valley, 1892.
The second chart displays rates between San Francisco and stations in the San Joaquin Valley as far south as Fowler, 205 miles distant from point of origin. These rates are for the year 1892.
Non-competitive rates in the San Joaquin Valley in 1892 increased as distance grew greater, much as they had increased in the northern territory sixteen years before. The rates given are for a few commodities only, namely, agricultural implements, barbed wire, boots and shoes, coal, and grain; but these are typical of the construction of schedules on a much larger number of articles. The extent of the increase was relatively greater to points beyond Lathrop because of the effect of water competition on San Francisco Bay.
Grades and Traffic Density
These two schedules illustrate a fact which could be readily proved by repeated examples, namely, that local rates in California were and are first based on the element of distance. Possibly such a fact might be assumed; yet in California, as elsewhere, the statement that railroad rates have varied with the distance traversed needs promptly to be qualified in order to be true. For, first of all, it was evident at the beginning that costs of transportation were not solely determined by distance, and that other considerations had to enter in. One of these other considerations was the matter of grades. Because of the conditions under which the Central Pacific was constructed, to say nothing of the extremely mountainous character of certain portions of the Central Pacific lines, differences in the rates per ton per mile between the valley and the mountain sections were introduced by the company at the commencement of its history.
A second characteristic of railway traffic which had a profound effect upon early railroad tariffs was the relative density of business. Mr. Stanford advanced the theory that the railroad should strive to secure a certain average earning per car; and in sections where business was light, as well as upon commodities which were bulky in proportion to their weight, a high average rate per hundred pounds was accordingly charged.
Relative grades and relative density of traffic were not the only conditions relating to cost which influenced the varying level of transportation rates in California, but, apart from distance, they were perhaps the most important, and in any case they may be taken as illustrative of the group of circumstances to which they belong. In addition to the whole class of facts relating to cost, however, the Southern Pacific gave heed to matters of value of service in the fixing of its rates. Nothing will be said here of the principles of classification of freight, principles which have to do in part with the value of the service rendered; nor of individual differences between shippers, which have been alluded to in the preceding chapter in the discussion of personal discrimination. The effect of competition in distorting distance schedules in California will, however, be dealt with at some length.
Water Competition
It has already been pointed out that the presence or absence of water competition has always been a most important factor in determining the relative adjustment of local rates in the state of California. This competition has been extremely pervasive. Although the scarcity of good harbors and the location of the Coast Range of mountains hinders access from the sea into the interior of California, yet, on the other hand, the ports of San Diego, San Pedro, and San Francisco, and the long stretches of navigable water on the Sacramento and San Joaquin rivers have opened the possibilities of water shipment to a multitude of inland towns. Indeed, in 1883 General Manager Towne, of the Central Pacific, submitted to the State Railroad Commission a list of fifty-two points in California at which the Central Pacific and its leased lines met direct water competition. The water routes included San Francisco Bay and the Sacramento River and sloughs, Suisun Bay, Napa River, San Joaquin River, Feather River, the Pacific Ocean, Wilmington Bay, and the Colorado River. In addition, Mr. Towne enumerated eighty-two points where rates were affected by proximity to the competitive points previously mentioned.[386] On the face of things, the extent of the water competition thus indicated was sufficient to warp almost beyond recognition the simple distance scale of tariffs which a railroad completely protected from competition would naturally apply.
Low Rates to Competitive Points
An illustration of the effect of the water routes on local rates is found in the fact that the round trip fare from San Francisco to Sacramento by rail in 1878 was $3, while that to Woodland was $4.25.[387] The San Francisco Chronicle declared in 1879 that, according to a recently published schedule, the movement charge for grain, potatoes, vegetables, and wool from Lathrop to Mojave was exactly the same as to Ravenna, Newhall, or Los Angeles. The first-named distance was 288 miles, making the movement mileage rate 7.2 cents; the second-named distance was 337 miles and the rate per mile was 6.2 cents; the third distance was 356 miles, the rate being only 5.8 cents; and the distance to Los Angeles was 388 miles, or a mileage rate of 5.4 cents. The truth of the statement of the Chronicle is established by data published by the State Commissioners of Transportation in 1877, which show the striking contrast that existed in 1877 between non-competitive rates in the interior valleys and rates to points which enjoyed the advantage of nearness to the water routes.
Low water-compelled rates to Sacramento and to Los Angeles were in force as early as 1877. Yet this was only a beginning, and as time went on and the number of towns in California increased, the practice of recognizing the force of water competition was extended. Moreover, the Southern Pacific began to quote lower instead of merely equal rates to more distant points which enjoyed the advantage of nearness to a water location. Since the ability to make use of a competing railway afforded opportunities similar to those afforded by ability to use a water route, low rates were also extended to towns served by more than one railroad line. All this greatly complicated the rate situation in the state, gave rise to numerous complaints, and renders difficult the task of concise description.
Rates to Intermediate Points
Official confirmation of the general correctness of the complaint of discrimination which reached the public press from time to time is found in a comprehensive investigation of railroad rates in California which the Railroad Commission of that state undertook as late as the year 1916. This inquiry was provoked by an application by the Southern Pacific, Santa Fé, and other railroads in California for relief from the clauses of the amended state constitution and of the California Public Utilities Act prohibiting greater charges to intermediate points than were collected on shipments to more distant points over the same line. Although the legal aspects of the case were therefore the result of modern legislation, the facts brought out were typical of conditions of long standing.[388]
Diagram showing adjustment of freight rates between San Francisco and Stockton, 1916.
Exhibit No. 1 in the case in question referred to class rates in the San Joaquin Valley. It appeared that class rates between San Francisco, San José, Port Costa, Stockton, Sacramento, Marysville, and intermediate points to Los Angeles, were 60 cents per hundred pounds first-class, and corresponding sums less for the lower classes. These rates were shown to be controlled by the class rate of the Pacific Coast Steamship Company, which quoted a through first-class rate of 52 cents, including wharfage and handling, between San Francisco and Los Angeles via San Pedro. On all-rail shipments down the valley, as well as on shipments over the coast rail route, however, water competition was not effective. The rate from San Francisco to Simi, 429 miles from San Francisco, was therefore 80 cents, and that to Acton, 415 miles from San Francisco, was 83 cents, although shipments from San Francisco to Los Angeles passed through Simi and Acton on their way to Los Angeles over the coast and San Joaquin Valley routes, respectively.
A condition similar to that at Los Angeles and at points in the San Joaquin Valley was developed in connection with shipments from San Francisco to Stockton. The diagram on page 266 will show the relative position of these two towns as well as that of an intermediate place named Banta.
The distance between San Francisco and Stockton was 91 miles, and the first-class rate was 10 cents per hundred pounds. This rate was identical with the rate charged by boat lines operating on San Francisco Bay, and on the Sacramento and San Joaquin rivers. But although these boats touched at some intermediate points, their competition was not everywhere effective; so that the first-class rate from San Francisco to Banta, 74 miles, could be and was 17 cents, although freight from San Francisco passed through Banta on its way to Stockton.
Other Instances
Still another illustration of the influence of water competition upon local rates in California may be drawn from the territory immediately north of San Francisco Bay. The towns involved in this adjustment were San Francisco, Sebastopol, and Santa Rosa, as shown in the diagram on page 268. The first-class rate from San Francisco to Sebastopol on the Northwestern Pacific was 23 cents. This rate was shown to be limited by the competition of a rail and water line, including a steamship haul from San Francisco to Petaluma and a haul over an electric railway from Petaluma to Sebastopol. The distance from San Francisco to Sebastopol over the Northwestern Pacific was 58.5 miles. The distances from San Francisco to the towns of Kenilworth and Santa Rosa, on the same railroad, were 45.7 and 52.5 miles, respectively. Shipments to Sebastopol passed through these places, but because neither enjoyed the advantage of an alternative route, the first-class rate to Santa Rosa was 25 cents and that to Kenilworth 28 cents—materially more than was charged for the longer haul to Sebastopol.
Diagram showing adjustment of freight rates between San Francisco, Santa Rosa, and Sebastopol, 1916.
While instances of the extreme discrimination of a greater charge for a shorter than for a longer haul were shown in 1916 to be usually the result of water competition, it has already been suggested that not all cases of discrimination were of this sort. A particularly striking case of unequal rates due to rail competition alone was brought out in the same proceedings from which the preceding illustrations have been drawn, by the application of the Atchison, Topeka and Santa Fé Railway to continue lower rates from Los Angeles to Mojave, California, a distance of 212 miles, and to Lindsay, a distance of 411 miles, than were charged to Kramer, an intermediate point 174 miles from Los Angeles. The relative position of the points is shown in the diagram given above.
Diagram showing adjustment of freight rates between Los Angeles and points north and east of Los Angeles, 1916.
In this case the rate to Mojave at the time application was filed was 52 cents first-class, and that to Lindsay 70 cents, while the rate to Kramer was 78 cents. But at both Mojave and Lindsay, the Santa Fé had to meet the competition of the short Southern Pacific line, while at Kramer this competition was not effective.
Development of State Retarded
The data which have been presented show that, while the system of local rates in California was based originally upon distance, it soon became profoundly modified by conditions of cost, and still more by the presence of competition at strategic points, and by the occasional necessity of reducing rates in order to stimulate the movement of freight. The charges for short hauls in the interior valleys where the Southern or Central Pacific possessed a monopoly were made high, because traffic was scant and because the railroad was able to exact a monopoly return. Rates were also regularly progressive under these conditions. In sharp contrast to the practice which obtained where the Southern Pacific was the only carrier, rates to points located upon the coast, on navigable rivers, or on competing railroad lines were relatively low and were often extremely irregular.
It is generally difficult to criticize a system of rate-making upon a priori grounds because the test of such a system is to be found only in the form which it gives to the industrial life of the community to which it is applied. There is reason to believe, nevertheless, that the local rate structure created by the Southern Pacific gave an advantage to a few shippers and to a few towns which affected unfavorably the development of the state. This is the fundamental objection to any system of rates in which competitive influences are recognized to an unlimited extent.
Without going further into the matter at this point, we will content ourselves with adding to our description of local rates in California some observations upon the attitude of California shippers with respect to railroad charges.
Conflicting Claims of Cities
The rates of the Southern Pacific and of the Central Pacific railroads were unpopular in California because they were believed to be too high. Beyond this, and when it came to questions of relative adjustments, each community looked at the relations of rates which interested it from the narrow viewpoint of its individual advantage. Indeed, when one reviews the course of the controversy between railroad and shipper in the state, it seems very clear that, apart from questions of excessive profit, the objections which California cities entertained toward the irregular and unequal rates charged by the Southern Pacific Company were only slightly based on considerations of general policy, but were, on the contrary, due to the feeling of various towns that their distributing areas were unfairly circumscribed by the manner in which railroad rates were arranged.
One small piece of evidence to show that competition between rival towns or producing districts was the reason for some of the most bitter attacks upon the railroad, may be found in the complaint of the anti-monopolists of Tulare County in 1885 that their fruits, which ought to have found a market in the southern parts of the state and in Arizona, were subjected to higher freight rates than were the fruits of Sacramento and of San José, points more than 200 miles to the north.[389]
A few years earlier the merchants of Stockton insisted that the rates out of Stockton were extortionate as compared with the rates out of San Francisco. The distance from Lathrop to Stockton was said to be 10 miles, and the railroad rate per ton on wheat was $1.20, or 12 cents per mile. The distance from Lathrop to San Francisco was 82 miles, or more than eight times the distance to Stockton, but the price per ton for wheat was only $2.50, or about one quarter the price per ton per mile in the first instance. The price per ton from Lodi to Stockton was $1.40, and to San Francisco $2.50; but whereas the last-named sum was less than twice the former, the distance from Lodi to San Francisco was eight times as great as the distance to Stockton.[390]
In addition to their contention that mileage rates on shipments into Stockton compared unfavorably with rates on shipments into San Francisco, Stockton residents made the general charge that rates up the San Joaquin Valley were generally less than the rates down the valley. The rate from Stockton to Merced was said to be $6.80 per ton, but the rate from Merced to Stockton was $3.40. Stockton objected to forcing of the San Joaquin Valley to make San Francisco its market.[391]
Interstate Commerce Decision
Complaints similar to those voiced by Stockton were registered by the people of Los Angeles. In the eyes of inhabitants of that city, the rates on northbound freight from Los Angeles consigned to the San Joaquin Valley were relatively higher than the rates from San Francisco south into that same valley. Yet, dissatisfied as Los Angeles was with the relation which her rates bore to those out of San Francisco, it seemed to other cities in the south that her position was on the whole more favorable than was that of her neighbors. In 1889 a dealer in the city of San Bernardino protested against being forced to pay a higher rate from eastern points than was charged the city of Los Angeles. He showed that the rate on agricultural implements from the Missouri River to San Bernardino was $1.27 per hundred pounds while to Los Angeles it was $1.07. On stoves the rates were $1.19 and 99 cents, respectively, and on school furniture $1.55 and $1.35. This preference was alleged to be discriminative and illegal.[392]
In a decision approving the discrimination against San Bernardino, the Interstate Commerce Commission in 1890 remarked that originally southern California had been served from San Francisco direct; and that San Francisco jobbers had covered its territory. When the railroads reached Los Angeles they found it to their advantage to grant it low rates, not so much because it lay near the Pacific Ocean as because the interests of the Southern Pacific and especially of the Santa Fé demanded that some point in southern California should be given such a rate that merchandise from the East could be brought there all-rail and from that point be distributed. The fact that water competition was not the only influence which determined the Los Angeles rate from the eastern states was indeed shown later by the fact that the port of Los Angeles, San Pedro, did not receive a terminal rate until 1910, although Los Angeles itself had been given terminal privileges at least twenty years before.[393]
Stockton, Los Angeles, and San Bernardino thus illustrate in their conflicting claims the constant effort of cities in California to extend the area over which they might distribute goods. Among other instances of dispute between California cities may be mentioned the demand of Santa Barbara in 1907 to be made a Pacific Coast terminal,[394] and the angry contentions of Santa Clara, San José, Marysville, Santa Rosa, and Fresno in 1914 over the question of relative railroad rates from eastern points.[395] The characteristics of the system of transcontinental rates which were involved in these complaints will be discussed in the following chapter.
THE TRANSCONTINENTAL TARIFF
Market and Railroad Competition
The chief difference between the local situation in California and the condition of affairs which prevailed in the case of through shipments to eastern points, lay in the fact that the competition of markets and the rivalry of competing carriers played a more important part in the through shipments than they did in local shipments. By market competition we mean the attempt of geographically distinct producing centers, each aided by a separate group of railroad lines, to sell in a common area of consumption. Such competition occurred, for instance, when California oranges sold in the Mississippi Valley in competition with oranges from Florida, or when California lemons sold in the same territory in competition with Sicilian lemons imported at New Orleans or at New York. We have already seen that cities competed with each other within California itself, but this competition was less important within the state than it was in the case of hauls across the continent.
It should be recalled that the Huntington interests possessed a virtual monopoly of local business, while the extent of the competition between carriers on through traffic may be briefly indicated by observing that the Central and Southern Pacific companies had direct relations with no less than six other transcontinental railroads, namely, the Union Pacific, completed in 1869; the Santa Fé, which reached the town of Deming and effected a connection with the Southern Pacific in 1881; the Texas Pacific, built to El Paso in 1882; the Northern Pacific, opened from St. Paul to Portland in 1883; the Canadian Pacific, completed in 1887; and the Great Northern, which was finished in 1893. None of these railroads reached San Francisco except the Santa Fé, which obtained an independent California connection in the late nineties. The Santa Fé entered Los Angeles, however, in 1885, and the Union Pacific enjoyed a connection with Portland through the Oregon Short Line and the Oregon Railway and Navigation Company as early as 1884. From Portland, Los Angeles, and Vancouver, freight could be distributed by water all up and down the Pacific Coast.[396] Moreover, the competitive relations which Pacific Coast cities bore to each other made it necessary to keep their rates from the East on an approximate parity, and caused the Central Pacific to be affected by charges which were not on their face applicable to any point in which that company had an interest. There were combinations in respect to transcontinental railroad business from time to time, but none sufficient to control rates except for short periods.
Transcontinental Rate Adjustment
These differences in conditions between state and interstate traffic doubtless influenced Mr. Huntington and his advisors when they came to establish what is known as the transcontinental rate adjustment. Yet any examination of the through rates charged by the Central Pacific will show that in their relation to each other, at least, these rates were built upon much the same principles as the local rates discussed in the previous chapter. There is no essential difference between a rate schedule which applies a lower rate between New York and San Francisco than it applies between New York and Denver, and one which provides a lower charge between San Francisco and Los Angeles than between San Francisco and Bakersfield.
The tendency in public discussion is to regard the transcontinental rate structure as different from all other structures. It is not different, either from the rate systems in force in some other parts of the country, such as the Southern classification territory, or from the general arrangement of rates in business local to California. The reason why transcontinental rates to Pacific terminals are low is that there is competition at terminal points. The reason why rates to intermediate stations are high is that competition is lacking at such places. The reason why local rates between San Francisco and Los Angeles are low is that shipments must be diverted from the water lines; while the rates from San Francisco to points in the upper San Joaquin Valley are high either because competition is absent or because it is less severe. Similar general causes in both cases produce similar results.
Rate Structure
It is necessary to describe the transcontinental system at this point in order that the reader may have before him the outlines of the rate scheme for which the Huntington-Stanford group were in part responsible; but in view of the very general understanding which the public has of the system, the description will be brief. A summary account is as follows:
The primary fact in transcontinental rate-making is that railroad rates between the Atlantic and the Pacific coasts of the United States were originally made, and have remained relatively low. The lowest rates quoted, however, have never until recently been available at all points in California, Oregon, and Washington, but only at certain selected cities. The towns to which low rates have been quoted under the transcontinental adjustment are called Pacific Coast terminals. Terminals, being mostly located on the seaboard, or within easy reach of it, enjoy rates low enough to induce their residents to patronize the rail lines rather than the water lines around the Horn or the combined rail and water routes across the Isthmus of Panama and the Isthmus of Tehuantepec. This does not mean, of course, that rail rates to terminals have been as low as water rates, but it does mean that, all conditions of shipment, including speed, safety, and regularity, being taken into account, the advantages of shipment have been equalized. The rates to and from all terminals have been uniformly the same.
A characteristic feature of the transcontinental rate system is that the rates to towns and cities in the vicinity of terminals are determined by the absence of water competition. Inasmuch as a shipper located at an inland point is obliged to send his goods to the seaboard before he can avail himself of the advantage of a water haul, it becomes possible to charge him a rate equal to the sum of the terminal rate and the local rate which he will have to pay without causing a diversion of his freight from the rail to the water lines. It is true that there is a certain limit to the total charge which can be demanded from such a shipper, due to the circumstance that at some figure the expense of a direct haul from the local point in question to the final destination of the goods upon a non-competitive mileage basis will be less than the combination upon the terminal, but this limit is effective only in the case of communities located a considerable distance to the east of the seaboard shipping point. One result of the application of this system to local points is that towns situated upon the direct line between eastern cities and Pacific terminals often pay higher rates than are charged upon freight passing through these places and carried possibly several hundred miles beyond to the coast terminals. Local communities so situated are known as “intermediate” towns.
These three features of the transcontinental rate structure, namely, that rates between the Atlantic and the Pacific seaboards are low, that the lowest rates are charged only to selected towns, and that rates to places other than terminals are made by combination upon the terminals, are the elements which have given character to this adjustment, and are therefore the points in it which are best known. To make a statement of the broad outlines of the plan complete, however, two other statements must be added.
Group System in the East
The first additional characteristic of transcontinental rates is that on eastbound business, particularly in the case of the products of California agriculture, the same rates are applied from intermediate as from terminal points. This is to place the shipping communities of the state all upon an equal footing. The second feature has reference to conditions upon the eastern end of the transcontinental haul, rather than upon the western. In the eastern part of the country the system of terminal and intermediate rates is not applied upon transcontinental business. Instead, it has been customary to divide the area east of the Rocky Mountains into a series of great groups, now ten in number, and to quote to each of these groups rates which are either the same in all cases, or which increase as the distance grows greater.
This failure to apply in the East the same principles which govern in the West has been doubtless due to the insistence of cities like Chicago that her rates be at least as low on shipments to and from the Pacific Coast as the rates which New York enjoys, as well as to the desire of railroads which begin at Chicago or the Mississippi-Missouri River to encourage the growth of business in the Middle West. Mr. Huntington was credited with the desire to establish rates from the Missouri River which should be lower than rates from New York, and the reasons which were in his mind may easily be imagined. Such rates were actually in effect between 1887 and 1894, but the principle of graded charges was abandoned as a result of a rate war which broke out in 1894.[397]
Terminal Points
This brief description of a complicated rate adjustment will show that in through as well as in local rate-making the Central Pacific management yielded to the unequal pressure of competition, and particularly of water competition, at different points. Generally speaking, the most important of all the forms of competition which the company had to meet was water competition. Common alike to local and to through transportation, this was important because it was difficult to control, because it operated on a low cost basis, because it offered transportation facilities to a very wide variety of classes of goods, and because its possibilities for expansion were indefinite.
It is a mistake to believe that only low-grade commodities have been shipped by the water routes. While it is true that the principal movements by water are of the coarser freights, such as hardware, rails, pipe, sugar, hardwood lumber, and asphaltum, yet there has always been also a considerable transportation of higher grade articles, including cotton ducks and denims, beans, canned goods, and a large number of kinds of general merchandise. Indeed, all the canned salmon and a very large percentage of the canned goods, together with two-thirds of the beans produced in California, originate near enough to the coast to reach tide-water at an expense not exceeding 20 cents per hundred pounds. The Interstate Commerce Commission has remarked that almost every article which moves from the East to the Pacific Coast has been at times carried by the ocean,[398] and the truth of this statement is generally conceded in discussions on the water business.
It was the pervasive character of water competition, and the fact that such competition was felt upon the Pacific Coast and not at interior points, which originally established the position of the Pacific terminal.[399] A terminal point, be it recalled, was, and is, under the transcontinental system, a place which enjoys rates low enough to attract traffic from the water to the railroad lines—a point also upon whose rates the rates to other points are based after the manner of the “basing point” system. San Francisco was a terminal. So was Stockton, Sacramento, Port Costa, Richmond, Oleum, Antioch, San José, Santa Clara, Los Angeles, and a considerable list of other towns. At the beginning the city of San Francisco received a lower rate than any other town because the competition of the water route between New York and San Francisco was most evident. Mr. Stanford, however, disclaimed responsibility for this limitation. His eastern connections, he said, were to blame. The Central Pacific was willing to be more liberal from the start, but the other lines would not join with it in establishing through rates, and insisted on their locals. For this reason goods originating at interior points were often hauled to San Francisco, and then back east, in part over the same line by which they had come.[400] Such a condition was highly unsatisfactory to California towns other than San Francisco, yet by 1873 Sacramento, Marysville, and San José had been given terminal rates,[401] and still later the list of terminal points was very greatly extended. In 1910 there were 152 terminal cities on the Pacific Coast, of which 97 were in California.[402]
Dissatisfaction with Rate System
Owing to the peculiar intensity of competition at their doors, Pacific terminals therefore enjoyed exceptional advantages in rates as compared with their less favored neighbors. On the other hand, even the terminal cities expressed some dissatisfaction with the transcontinental adjustment. It appears, for instance, that the growth of great distributing centers was difficult under the scheme of rates which was applied. So long as terminals were few in number, a considerable concentration in business was possible. But when the terminals multiplied, the territory controlled by any single city became limited by the low rates accorded to the nearby terminal cities, and expansion in any one spot became difficult. This rendered the volume of business of the Pacific Coast jobbers comparatively small. In the case of the Business Men’s League of St. Louis v. the Atchison, Topeka and Santa Fé, already cited, the two eastern firms of most prominence in the proceedings were the Simmons Hardware Company, of St. Louis, and Hibbard, Spencer, Bartlett and Company, of Chicago. The former of these firms then did business in every part of the United States except New England, while the representatives of the latter testified that the operations of his house were limited only by the confines of the earth. Competition by concerns of this magnitude was difficult for California houses to meet, especially at times when the eastern firms used the Pacific Coast as surplus territory in which they could afford to operate at a low margin of profit.
Another ground for dissatisfaction on the part of the coast cities arose out of their belief that the system as applied, in spite of its recognition of the advantages of the Pacific Coast, still fell short of the real equities of the situation. It was insisted that San Francisco was improperly shut out from Denver, Cheyenne, Salt Lake City, and Ogden. The Southern Pacific was charged with carrying hats from New York by way of the Union and Central Pacific routes and then down the San Joaquin Valley to Yuma at a lower rate of freight than the San Francisco dealer could send the same goods from his city to the Colorado River.[403] This same complaint was repeated by Mr. Leeds, of the San Francisco Traffic Association, in October, 1892, with the observation that if the same rate per mile were applied on eastbound traffic from San Francisco that was charged on westbound business from Chicago to Utah common points, then San Francisco would do the lion’s share of the Utah business instead of a mere 16 per cent.[404]
There is no doubt that a good deal of dissatisfaction with the transcontinental system was felt first and last by shippers to and from the terminal cities. Yet, after all, the situation of these cities as a group was excellent. The communities which were really handicapped were the towns intermediate between the Pacific terminals and the East, towns which paid higher rates for less service than did the terminal cities, and which found that this condition not only increased the cost of living to their consumers, but prevented their merchants from enjoying a profitable distributing trade.
It seems probable that the associates intended from the beginning to charge the mountain towns more on through hauls than was exacted from towns on the coast. Huntington relates a conversation which took place at Carson, Nevada, in 1861, between Stanford, Dr. Strong, Mr. Crocker, and himself, representing the railroad, and some twenty representative men of Nevada. The Nevada people observed that Huntington kept a pretty good hardware store, but that he was likely to leave it in the mountains if he started to build a railroad in Nevada. Huntington replied that he would look out for that, but, he continued, when the road was built he proposed to charge through rates which, while less than the Nevada people were paying for goods which then came to San Francisco by boat and were subsequently teamed across the mountains, would be materially greater than the rates to San Francisco. “We shall charge you for bringing back,” said he, “almost as much as we shall charge from New York.” After the road was built Huntington says he met one of these same men with whom he had talked in 1861. “Said I, ‘You recollect that talk we had in the Curry House in 1861?’ ‘Yes, oh yes.’ Well, we talked about that. He said, ‘You’ve got me there, Huntington.’ ‘Well,’ said I, ‘I said you would grumble. Now,’ said I, ‘you shut up.’”[405]
Objections
It is to be presumed that Mr. Huntington’s rejoinder was effective in the particular discussion which he relates. Yet the grievances of the interior towns found full and repeated expression after 1869, and indeed are still emphatically presented at the present day. The more fundamental criticisms of the transcontinental rate system are the following: The principal objection directed against the whole adjustment is that it leads to charges to intermediate points which are prima facie unreasonable. Speaking of the rates on iron and steel, a representative of the Traffic Bureau of Utah called the attention of the House Committee on Interstate and Foreign Commerce in 1918 to the fact that the rate on iron and steel articles for export from Chicago territory to Pacific Coast terminals was 40 cents per hundred weight or 3.54 mills per ton per mile. He continued:
They take an identical carload of the same commodity, and when it is going to the Pacific Coast for domestic consumption the rate is 65 cents a hundred, or 5.76 mills per ton-mile. If they were to apply that rate at the Utah common points—the same 65-cent rate—it would pay 8.65 mills per ton-mile. But they say, “We cannot afford that; you must pay 10.84. We haul it for a man in Russia for 3.54, but that is only the out-of-pocket cost. We will make you a rate of 10.84, which is a lower rate than you are entitled to.
I think any article, whether it is transportation or anything else, that could be produced at some profit at a price of 3.54, when you pay 5.76 for it you are paying a handsome profit; and if you pay 8.65 for it you are paying an abnormal profit; and if you pay 10.84 for the same thing you are being outrageously imposed upon, which is what we are doing.”[406]
The second objection of the interior cities is that the system of transcontinental rates limits the territory in which intermediate wholesale firms can do a distributing business; and the third ground of complaint, resulting from the other two, is that the policy of permitting low rail rates to the coast cities has the effect of building up large cities on the seaboard at the expense of the whole interior country.
Reply of Railroads
In replying to these objections the coast towns take the position that they are not especially concerned with the rates to intermountain places, nor indeed with the rates which the railroads make from coast to coast, except in the sense that the greater the number of carriers which participate in transcontinental business, the better the service is likely to be. Secure in the possession of adequate water connection, they do not expect to pay higher rates than they have paid in the past, whatever policy the railroads may adopt. They have no controversy with the intermediate territory, and only support the present adjustment because they conceive it to be for the best interests of the country as a whole.
The burden of the defense therefore falls upon the railroads, and the railroads assert that the policy of quoting low rates to meet the force of water competition is necessary if the comparatively moderate rates to intermountain territory are to be continued. Unless—said Mr. Spence of the Southern Pacific, in his recent testimony before the House Committee on Interstate Commerce—the rail lines are permitted to make rates which will hold the through business, the terminal roads will lose all of the net revenue derived from the port rate upon what is a very large volume of traffic. The millions of dollars involved cannot be withdrawn from the net revenues of the railroads without impairing their efficiency and usefulness, while to compel the carriers to apply sea-compelled rates to all traffic would yield an inadequate revenue, because it would mean that the traffic as a whole would be carried at rates which were not sufficient to cover all the elements of cost, including fixed charges and other similar expenses.[407]
Further Comments
The most casual description of any basing system such as the one which the railroads apply to transcontinental freight, suggests at once several matters in respect to which special defense and justification are required. One just cause of complaint arises out of the fact that the through rate to any point except to a basing point is made up by the addition of two rates, each of which includes an allowance for the cost to the carrier of providing terminal facilities, or four terminals in all, whereas no actual shipment makes use of terminal facilities at more than two points, namely, the place of origin and the place of destination.
A second cause for criticism of a basing system is due to the striking disregard of distance which is inherent in it. Shippers are not only apt to feel that for reasons of natural right rates for transportation should vary with the distance moved, but, as we have seen, they are usually quite incapable of being convinced that the costs of shorter hauls are not less than the costs of longer ones, so that for this reason also the nearer places should enjoy the lower rates. Again, and this also has been suggested in the preceding discussion, a basing system is attacked because it is said to centralize business unduly by forcing the distributing business into the control of a few localities such as the Pacific Coast terminals, to the exclusion of outlying cities which could handle it more cheaply and more conveniently under a proper adjustment of rates, by reason of their greater nearness both to centers of supply and of consumption.
There is no question that the rate system upon the Pacific Coast made it difficult for intermediate and local towns to import supplies directly from the East and to distribute them through their own organization. This was not the result of the difference between terminal and local rates alone, but was the combined result of the practice of the transcontinental carriers with respect to rates and their practice with regard to carload shipments. That is to say, the carriers not only quoted generally lower rates, carload against carload, and small consignment against small consignment, to terminal cities than to intermediate or to interior towns, but they also granted many carload ratings to terminals which were altogether denied to their interior competitors. In some cases this occasioned an extraordinary difference in the total charge.
On the other hand, it should not be forgotten that to encourage distribution through Pacific Coast terminals was not necessarily to concentrate the whole business of distribution. The competition between the Pacific terminal and the eastern jobber was just as real as that between the Pacific terminal and the intermediate point. It is sometimes forgotten how active this eastern competition was. That it continually threatened the western distributor is shown by the fact that in spite of the advantages enjoyed by western terminals, 50 per cent of the jobbing business in the hardware trade in southern California was done in 1902 by houses east of the Missouri River, so that the Interstate Commerce Commission expressed the opinion that in the absence of some distinct advantage in the rate it would be very difficult for Pacific Coast dealers to hold their own.[408] In central California the proportion of the jobbing business done by eastern firms ranged from 25 to 40 per cent. Certainly no decentralization in business would have taken place had the California distributors been compelled to withdraw in favor of men in Chicago and St. Louis, nor would the aggregate cost of getting goods from producer to final consumer have been decreased.
Inconsistency
It has been made clear in the discussion of transcontinental rates, that the transcontinental carriers as a group have not been consistent in applying the principles upon which they rely in justification of their charges. Not only have towns like Los Angeles been given terminal rates for reasons of general policy, but cities in the Mississippi Valley, upon the other end of the transcontinental haul, have been granted the same rates as New York on business to and from the Pacific Coast, in order to place them on an equality with points on the Atlantic seaboard. As the Interstate Commerce Commission remarked when the matter was brought to its attention, there is no logical ground for recognizing the desire of Chicago to compete with New York, and for refusing to accord the same privilege to Denver.[409] If market competition is to be recognized in one instance, it should be in another.
It is a striking fact that when the commission was considering the question of transcontinental rates in 1910, it appeared that the great bulk of traffic destined to intermountain cities originated at Chicago or at points west. Thus out of 21,000,000 pounds of carload freight moved from eastern territory to Reno, Nevada, during the year 1908, only 4,500,000 pounds originated east of Chicago, and of approximately 1,000,000 pounds of less than carload freight concerning which data were available, only 10 per cent originated at the Atlantic Coast cities of New York, Boston, and Philadelphia. The commission found in the case in which these facts were brought out that taking traffic to Reno as a whole, 75 per cent of it had its source between Chicago and Denver.[410] On this traffic, at least, the effect of water competition was slight, and yet it is upon the assumed presence of water competition that the transcontinental system primarily rests.
Not Responsive to Changed Conditions
Nor have the transcontinental carriers been quick to recognize changes in conditions which, temporarily at least, have eliminated water competition from coast to coast. When the Panama Canal was opened, considerable apprehension was felt by the carriers lest the new all-water route between the Pacific and the Atlantic seaboards should divert a substantial portion of the transcontinental traffic formerly handled by the railroads. On this ground the railroads applied to the Interstate Commerce Commission, and received permission not only to continue the practice of quoting higher rates to interior towns than were charged between eastern points and the Pacific Coast,[411] but actually to increase the difference upon a selected list of eastbound articles.[412] So much was directly in line with previous action and was to be expected.
The carriers were not, however, so ready to recognize the interruption of canal traffic as they had been prepared to take notice of its beginning, and in spite of slides and war conditions which suspended water competition, it took an order of the Interstate Commerce Commission to secure an equality in the treatment of intermountain and seaboard cities to which the former in accordance with the fundamental theory of transcontinental rates were entitled under the new conditions.[413]
In forming an opinion upon the rate system of the Central Pacific, however, too much weight must not be attached to inconsistencies in application so long as these are not altogether arbitrary, any more than to the demand of competing cities for their “fair share” of the business that is to be done. City ambitions are limitless, and impossible to reconcile. The question is not how to determine the territory within which a given city may be said to have a right to distribute its goods, but whether or not the rate system introduced by the Huntington group, all things considered, promotes the interests of the territory which is served better than some system that may be suggested.
Basing Rate System Necessary
It is the writer’s opinion that the transcontinental rate system has always had evident defects. In the first place, it has generally provided low rates to towns and it has quoted low rates on commodities which have no access to the water routes. In the absence of competition the distance principle should prevail. Second, it has often failed in the past to make concessions to the cost basis of rate-making, which would have removed complaint without altering the plan in principle, such concessions, for example, as the reduction of rates to interior points to something less than the sum of through and local rates to allow for the relatively small amount of terminal service rendered. And, finally, it has increased the amount of transportation incident to the distribution of a given amount of freight. While the assertion of cities without terminal privileges that they have the right to do a specified amount of business is to be received usually with skepticism, it does seem probable that the transcontinental railroads would have reduced the aggregate cost of distributing transcontinental freight had they encouraged more than they did the growth of the interior towns, provided that they had supported these towns both against Chicago and St. Louis and against the Pacific Coast.
This same policy would have had the important advantage, from the railroad’s point of view, of developing industry at points which were not affected by every change in the rates of its competitors. The Central Pacific was not the first railroad in the country confronted with the problem of how to treat the non-competitive points upon its lines. Nor, unfortunately, was it the only railroad which adopted the drifting policy of quoting rates to hold the business, thus favoring the towns served also by its rivals in preference to towns more peculiarly its own, and through the stimulus given to such places, in the end creating a distribution of production which, of all possible alternative distributions, was the one which rendered its hold upon the business of its territory the least secure.
In spite of these defects, it is the writer’s judgment that some basing rate system, in its broad outlines similar to the transcontinental system actually applied, was necessary and desirable for the development of the West. The principal advantages of such an arrangement were that it gave to the Pacific Coast the benefits of competing rail and water routes as no distance system could have done, and that it enabled the railroads to fill their trains with traffic which paid them something over the out-of-pocket costs. It is clear that the interior cities were mistaken in supposing that this practice increased the rates which they had to pay. On the contrary, it reduced them. There is also reason to believe that the transcontinental rate system decentralized the distribution of goods, while it certainly afforded western buyers and producers in most instances the important advantage of access on equal terms to the markets of Chicago and of New York.
There is little evidence that either Huntington, Stanford, Crocker, or Hopkins had an active part in moulding the local or the through rate structures of the Central and the Southern Pacific railroads. The work was probably done by the traffic experts whom they hired, of whom the chief was that very able individual, J. C. Stubbs. The contribution of the associates may be taken to have been a clear appreciation of the advantage of monopoly to railroad revenues, and the consistent support which they gave to the efforts of men who knew more about the subject of railroad rates than they did themselves.