Popular Science Monthly/Volume 22/March 1883/The Growth and Effect of Railway Consolidation
By GERRIT L. LANSING.
IT is charged by the politician, it is spread by the press, and it is believed by the people, that railroads, being operated in the interest of the corporations themselves, are operated against the interest of the communities; that by consolidations and combinations all competition is removed, and monopolies are formed which levy extortionate tolls, with no regard to the rights or interests of their patrons. And so dangerous, it is believed, has this arbitrary exercise of power become, that the people of the whole country are invited to bind them-selves together into an "anti-monopoly" league, to be able to strike for their liberties, and punish the destroying avarice of these giant corporations.
There is an increasing number of inquiring minds who have come to look with distrust upon the statements of politicians, the opinions of the press, and that popular judgment which is based upon the misinformation furnished by these. It is the purpose of this paper to inquire into these charges and beliefs and endeavor to disclose what truth or error they may contain.
The word monopoly is associated in the mind with the legal and artificial monopolies of the last three centuries. Such, for instance, as the Dutch East India Company, which, having the entire product of the Spice Islands, would destroy a portion of the crop rather than lower the price by bringing the whole to market. The workings of all these old monopolies were opposed to the public good, as they were operated in the maintenance of high prices. In England, under the successors of Henry VIII, they had become so numerous and grievous, that by an act of James I, all monopolies were abolished excepting the right of patents. To this has since been added, in England and America, the government monopoly of the postal service.
Yet, all railroads are monopolies in a certain sense and to a certain extent; that is to say, they are without practical competition between certain points. The use of the word monopoly, however, as applied to railroads, should be qualified by the word natural. Natural monopolies are such because, under the free and equal operation of the laws of nature and of the nation, they monopolize the business by doing it more satisfactorily, more economically, and more expeditiously, than it can be done by any other means. Insomuch as they fail in this, they are not monopolies. There should not, then, be associated with the idea of natural monopolies the old and well-grounded hatred that existed against legal monopolies. The latter, under the operation of special laws, were operated for the benefit of the few; the former, under the operation of general laws, are operated for the greatest good of the greatest number. There seems no better illustration of the change which has taken place in the meaning of this term in the popular mind than its present application to free competing corporations; and that one, among the prominent measures of reform proposed by the "anti-monopolists," is the absolute destruction of all competition through the operation of the entire railroad system of the country by a great government monopoly.
Combination and consolidation being the spirit of monopoly, are supposed, in the public mind, to be opposed to the common good. But they contain the actual substance of natural monopoly, which is such from its merits and benefits, and not from privilege.
Consolidations produce responsibility and uniformity in their service, economy in their operations, and tariffs at minimum rates. These are the essential requirements of the public good, and these the public constantly receive from the great corporations. By the consolidation of several branch lines under a central management, an economy is effected in all those expenses of general supervision, and of junction and terminal stations, which, under the individual operation of the roads, each has to stand by itself. This is, in fact, a reduction of the ratio of expenses to the amount of business done, as it reduces to a minimum those fixed expenses which have little relation to the increase or decrease of traffic; and, as the consolidated company has a much larger traffic over which to distribute these fixed expenses than the short line, it becomes possible for the former to make lower rates and still have the same profit earned by the latter on higher rates.
Again, consolidations are continually being effected between short lines and roads without any through connections. On these the highest rates have always prevailed, because their traffic has been always limited. By a combination with other lines having a common interest, and perhaps by building a short line to connect them, they become part of a through route; and the addition of the through to the former local traffic reduces still further the ratio of the cost of service.
This reduction in the ratio of the cost to the amount of traffic, which results more or less from all consolidations, secures an increase of profits even with no change in the rates or traffic. Thus far there is an injury to no one, and a benefit to the stockholder. But the advantages of the consolidation do not stop here. It has made possible lower rates with the same profit that formerly was earned with higher rates. Without risk of injury the new company is now able to make greater reductions in the rates on those local products of nature and of man, which will allow them to reach more distant markets, or will stimulate their development by enabling them to sell in their former markets with greater profit. By this means, more than by any other, is the railroad enabled to secure an increase of traffic; and, as an increase of traffic can be carried with only a fraction of the relative increase of cost, the decrease of rates increases the net income.
The extension of the same policy leads to the highest development, both of the resources of the country and the earning power of the corporation. To effect the increase of traffic is the constant study and aim of the railroad manager; and it is a self-evident fact that the increase of traffic can only be secured by furthering the interests of the shippers. It is true that all railroads, both great and small, have the same necessary interest in the prosperity and development of the territory served by them, and they all alike endeavor to increase their traffic. But the large corporation, supported by the traffic of the various products of many districts, is in a better condition to experiment in the development of new districts and industries. It frequently affords thus a rate or service beyond the point warranted by the present traffic, and is able to operate portions of its system at a temporary loss, in the hope of a future gain. With a small road, on the other hand, depending upon the present traffic of a limited area, its rates must be immediately remunerative, and to meet the current expenses there is frequently required the practice of every temporary economy, even at the expense of the future value of the property. The small roads, unless the circumstances are exceptional, maintain the highest rates, and afford the poorest service. The interest of the great companies in the development of the districts from which they derive their revenue is in proportion to their size; while their more economical management and extended resources free them from the bonds that confine the small local corporations.
That the advantages accruing from consolidation lead toward the adoption of that policy throughout the world is a conspicuous feature of railroad development; and the facts overwhelmingly demonstrate that the results as constantly lead to a reduction of the tariffs.
The Massachusetts Railroad Commissioners, in their report for 1873 (page 80), draw the following conclusions, after an examination of the experience of Great Britain upon this subject, which may fairly be taken as an illustration of the general law: "The evidence," they tell us, "published at great length in the 'blue-books,' seems to be almost conclusive that positive benefit rather than injury has there resulted from amalgamation, so far as it has gone. Not only have the evils anticipated not resulted, but it would seem that the public has invariably been better and more economically served by the consolidated than by the independent companies. The larger companies employ abler officers, and seem to be managed more on the system of great departments of commerce, and less on that of lines of stagecoaches; the time and attention of the officers are not mainly absorbed in questions of corporate hostility, and the money of the companies is wasted in a somewhat less degree in warfare with each other; there is, in fact, far less of friction in the work of transportation, and far more of system. Finally, as regards the community at large, it is found that large companies can be held to a closer responsibility than small ones. Their prominence enables public opinion to concentrate upon them—they are more closely watched and held to a stricter account."
In 1872 a committee was appointed by the Parliament of Great Britain to investigate and report upon the supposed evil of railroad amalgamation. From their report Mr. Charles Francis Adams, Jr., in his valuable and interesting work upon "The Railroad Problem," makes the following quotation: "The Northeastern Railway was composed of thirty-seven once independent lines, several of which had formerly competed with each other. Prior to their consolidation these lines had, generally speaking, charged high rates, and they had been able to pay but small dividends. Now, the Northeastern is the most complete monopoly in the United Kingdom; from the Tyne to the Humber it holds the whole country to itself, and it charges the lowest rates and pays the highest dividends of all the great English companies. It was not vexed by litigation; and while numerous complaints were heard from Lancashire and Yorkshire, where railroad competition exists, no one has appeared before the committee to prefer any complaint against the Northeastern."
Mr. Adams, in his comments upon the views and statements of this and other parliamentary committees appointed for similar purposes, concludes as follows: "The clearer political observers have come to realize at last that concentration brings with it an increased sense of responsibility. The larger the railroad corporation, the more cautious is its policy. As a result, therefore, of forty years of experiment and agitation, Great Britain has on this head come back very nearly to its point of commencement. It has settled down on the doctrine of laissez faire" (page 94).
If the facts were noticed, the American public could not long resist the same conclusion upon this subject that has been reached in England. In commenting upon the favorable result of railway consolidation in Great Britain, the chief of the Bureau of Statistics, in his report upon the "Internal Commerce of the United States for 1881" (page 35), says: "A similar result has followed railroad consolidations in the United States. It has heretofore been shown that the average of all the rates charged on fifteen leading railroads of the country, including those of the great East and West trunk-lines, and the principal railroads west of the Alleghany Mountains, engaged in traffic between the Western and Northwestern States and the Atlantic sea-board, has decreased 39·45 per cent since 1870, this reduction in railroad freight charges having been more than three times as great as the average reduction during the same period in the prices of twenty-two of the leading articles of commerce."
This refers to those great trunk-lines against which there is the most frequent charge of monopoly, and upon which, singularly enough, there are the lowest average rates charged by any railroad on the earth.
Yet the objection to using these lines as an illustration of low rates voluntarily made by the companies with the object of increasing their traffic may be made with some appearance of fairness, as they are largely employed in moving the enormous products of the Western States to the sea-board, and the rates upon this portion of their traffic are controlled by the Great Lakes and the Erie Canal, and in part also, perhaps, by competition with one another. We may find an illustration, to which no objection of this kind can be raised, in the great California corporation.
The Central Pacific Railroad Company owns, or controls, with a few exceptions, all the railroads in California, and the western termini of three transcontinental lines. In an address to the people, by the National Anti-Monopoly League (page 15), the condition of railroad competition is stated here as follows: "Monopoly is growing in all the States. It has completely subjugated only one. In California it has ripened its fruit. There, Monopoly is king. There, a few men control steam-transportation. They have annihilated competition." This language has certainly the merit of being vigorous, and is well calculated to influence its hearers by its sound. "Subjugated," "king," and "monopoly," are words which in themselves excite a feeling of rebellion in the breast of a freeman; but, like many other sounding things, they are empty. This great system of roads, having crossed the trackless wastes and pierced the mountain-ranges, has brought a thriving population to thousands of square miles of land which theretofore were uninhabitable and without benefit to humanity. Since the first mile of track was operated by the owners of this company, the surplus earnings have been reinvested in extending its lines, and so increasing its benefits to the community.
Now let us see the effect of this absence of competition by other roads. Let us see if, as the consolidations and extensions have progressed, the rates have been raised, so that "there is not a producer that does not pay heavier tribute than conquered people ever paid their conquerors." This is the common expectation and belief. I think there are many who will be disappointed to find that it is not true.
The Central Pacific charged, on its freight traffic in 1872, the average rate of 2·96 cents; in 1881 this had been reduced to 2·16 cents; an average decrease in the past ten years of eight tenths of a cent on each ton hauled one mile. This is a reduction upon that local traffic which is commonly supposed to be beyond the control of any competition, as well as upon through traffic. This is shown by the fact that the increase of local tonnage for the period was 216 per cent, while the increase of receipts from the same source was but 162 per cent. Had the average rate of 1872 been maintained by the company on its freight traffic for 1881, the receipts would have been $5,866,287 more in the latter year than they actually were. During this period of ten years, in which there has been a continuous reduction of rates, the competition by water has remained without change, and competition by rail has not existed; yet, under the control of the natural laws of trade there has been such a reduction in the rates on that it now amounts to the annual sum of over five and three quarter million dollars. This additional amount of earnings would have enabled the railroad company to pay a dividend, in 1881, of sixteen per cent, instead of the six per cent which was paid.
It should be observed, also, that the miles of road operated during the period under consideration have been increased from 1,158 in 1872 to 2,707 in 1881, a greater portion of which increase has been upon roads built through places almost entirely without inhabitants, and which, as a consequence, for the first few years could furnish but a limited traffic. It will at once be seen that the rates necessary, under such conditions, to pay the cost of service, must have been much higher than in districts where a population and trade already existed. The traffic on these newer portions of the road having been carried at rates which were justly, because necessarily, higher than over the older portion of the line, has had the effect of making the average rate of the whole, in 1881, much higher than it would have been had no new roads been built.
A fair consideration of these facts must, it seems to me, lead to the conclusion that there has been as great a reduction in the rates of this Western system of roads as has taken place in the same time upon any of the Eastern lines.
It is difficult to make any comparison between the operations of two systems having so few items of resemblance as the California company and the Eastern lines. Yet, if such comparisons are made, with the aim only of discovering the truth, and both systems are placed upon terms as nearly equal as circumstances will admit, there will appear as a result no contrast between the lines where there is the most complete competition and those which are popularly supposed to be controlled only by their own will.
The rates charged by the Pacific coast roads are, on the average, considerably higher than those of the great trunk-lines on the older and more thickly populated side of the continent. This statement presents a natural condition, for the circumstances are necessarily so different in regard to the volume of traffic that almost as great a difference is necessary in rates. The necessity of the difference compels the acknowledgment of its justice. It is obvious that, where a stated traffic will pay the expenses of operating the road and a fair rate of interest on the property, half of the amount of traffic must pay nearly twice the rates in order to produce the same result. Yet, if the popular belief is echoed by the press of California, the rates charged by the Central Pacific system are considered unreasonably high, because they are higher than the charges of the Eastern trunk-lines. The inequality and injustice of this basis of comparison are demonstrated by its application.
The lowest average rate in the United States has been reached upon those lines running between New York and Philadelphia and the West. The charges by these lines average less than one cent upon each ton of freight hauled one mile. Poor's "Manual" for 1881 (pp. 41-47) gives tables of the rates and cost of service of the New York Central, the Erie, the Pennsylvania, and the Pittsburg, Fort Wayne and Chicago Railroads, from which I have made the following comparative statement:
Comparative Statement of Freight Earnings, Expenses, and Traffic for the Year 1880.
The most conspicuous difference here shown is that between the tonnage of the Central Pacific and the Eastern roads. This must be considered in noticing the rates charged; for the revenue depends not so much upon what rate is charged as what it is charged upon. The average rate of these Eastern roads is 100 of a cent, while the Central Pacific charge is 2 100 cents. But, on the other hand, the Eastern lines hauled upon an average, to each mile of road, 1,989,851 tons; which is a rather strong contrast to the 229,050 tons hauled by the Central Pacific. While the average rate of the Western company is two and a half times greater, the tonnage is eight and a half times less than on the Eastern lines. The difference in the rates thus seems to be more than counterbalanced by the great disparity shown in the traffic.
Among other inequalities which command consideration in any comparison of the rates of different roads is, in addition to the amount of traffic, the miles of road on which the traffic is carried. There must clearly be a great difference between the expenses of two lines, the one having 100 miles of road with a traffic of 10,000,000 tons, the other having 1,000 miles of road with the same amount of tonnage—supposing, of course, that the average distance each ton is hauled to be the same in either case. Many of the expenses, in connection with stations, etc., are nearly ten times as great in the latter as in the former case, while all the expenses of maintenance and operation are much greater with the longer than with the shorter line.
There is, of course, added to this, the consideration of the value of the property. A line, for instance, of 100 miles, representing $5,000,000 of value, would make, other things being equal, ten times the profit of a road of 1,000 miles, representing $50,000,000 of value. An equal amount of traffic upon roads between which such disparity exists places the shorter road at a great advantage in any comparison—it would make a larger net profit, though having a smaller capital.
Any approximation to an equality of conditions must thus recognize, in addition to the amount of traffic, the miles of road operated. Taking this into consideration, we find further that the average net earnings per mile of road operated, from the freight traffic on the above Eastern lines, is $7,285; and upon the Central Pacific it is but $2,949. We should consider, on the other hand, that, although the Central Pacific system of roads twice crosses the Sierra Nevadas, has many expensive tunnels and snow galleries that cost $40,000 a mile, yet the Eastern lines represent more value, as a portion of each road has double tracks, and the New York Central, for a distance of 286 miles, has even four parallel tracks. Fully considering these differences, however, there still appears no such difference in the values as exists in the net earnings. The conclusion, therefore, seems fully justified, that, although the rates on the Central Pacific are greater, the net receipts are less, than on the Eastern lines; and the difference in rates is a necessary and natural result of the difference in the length of lines and the amount of traffic.
The differences, which appear in the above figures, between the lines mentioned, in the net earnings per mile of road operated, and in the tons of freight carried over each mile of road, will be more clearly realized with the aid of the following graphic method of comparative lines, which has been so well employed by Mr. Edward Atkinson:
Net Earnings from Freight, per Mile of Road.
Tons of Freight carried over each Mile of Road.
It would be easy to continue the comparison further, and show that the rates charged on the Eastern lines—whether fair or not upon them—would be unfair if applied to the Central Pacific; for, applied to the traffic of the latter, they would fall far short of paying the necessary expense of the service, while on the former roads they pay not only the expenses, but afford also a profit. But the foregoing facts, it seems to me, sufficiently show that there can be no satisfactory nor fair comparison between the rates on different roads, unless the amount of traffic and the length of line have in each case some approximation. Perhaps the most equitable test, by any comparison which it is possible to furnish of the charge of high rates made against the Central Pacific Company, is supplied by the railroads of Massachusetts.
Here, from the first railroad built in the United States, in 1826, to the present time, there has been a continuous extension of lines by various companies in all directions, till now, according to Mr. Atkinson, the Commonwealth has more miles of railroad in proportion to its territory than exists in any other State or country in the world. These roads represent sixty-four independent corporations. Here, then, is the greatest contrast to be found between any two systems in regard to consolidation and that competition of parallel roads which is supposed to be the chief regulator of rates. There ought, therefore, according to the popular belief in these matters, to be a contrast equally as great between the rates of the different systems. Here, again, we shall find the popular belief to be in error.
The following table shows the freight earnings, traffic, and rates, and also the miles of road operated, by the Central Pacific system, compared with the Massachusetts roads:
To arrive at the latest results the figures taken are for the last four years of the Central Pacific, but, in order to make an equitable comparison in the volume of the tonnage, it is necessary to take the Massachusetts roads for a few years previously. In any corresponding year the Massachusetts roads have a considerably larger tonnage than the Central Pacific; thus, as has been shown, making any fair comparison impossible. Even in the years given they have an annual average of thirteen per cent more tonnage than the Central Pacific, placing the latter system to that amount of disadvantage in the comparison.
On the other hand, however, is the consideration that the prices of material and labor necessary in the operation of railroads have been considerably reduced during the periods shown in the above table, but, in California, they have always been much higher than in the Atlantic States, and were probably higher in the former State in 1881 than they were in Massachusetts in 1876. The relative conditions seem, upon the whole, as fair as it is possible to make them between any two systems.
As a result, the following more important comparisons may be noticed: The average mileage of road operated is about the same in each case. While, on the Massachusetts roads, the average annual tonnage is thirteen per cent more, the earnings are nineteen per cent more, and the average difference in rates is 100 of a cent more than on the Central Pacific system.
This brings us to the unexpected conclusion that, had the rates charged by the Central Pacific prevailed with the Massachusetts roads, it would have effected an annual saving to that State of $786,923, and this, notwithstanding the fact that the through, freight, upon which the lowest rates always prevail, was fifty-eight per cent of the whole traffic in Massachusetts, while upon the Central Pacific it was but thirty-nine per cent.
It may be of interest to bring the affairs of this great corporation home to its own State, and see how it compares there with other roads which are independent of it.
In California, in 1878 (the last year for which statistics have been published), there were 1,170 miles of road, of which 844 miles were controlled by the Central Pacific, and 326 miles were of small roads, none of which were of sufficient magnitude to create envy or gain the appellation of monopoly. The average rates of eleven of these shorter roads, representing 248 miles, are stated by the State Commissioner of Transportation, from whose report I take the following figures:
Table of Rates on Railroads not controlled by the Central Pacific Railroad Company, reported by the Commissioner of Transportation of California, for the Year 1878.
As these short lines are supported entirely by local traffic, a proper comparison of their rates with those of the Central Pacific should consider only the local rates of the latter. The commissioner, in the same table, furnishes us with these, so that we are enabled to make the following comparison:
The average charge per passenger per mile was, on the short lines, 6100 cents; on the Central Pacific (for local only), 2100 cents. The average charge per ton of freight per mile was, on the short lines 12100 cents; and on the Central Pacific—for local only—3100 cents.
Here, again, the facts show that this great California corporation, which is charged by the Anti-Monopoly League with constant and destroying extortion, has much lower average rates than these smaller companies which are not conspicuous enough in size or wealth to draw the attention of the press or the attacks of politicians.
The tendency of railroad ownership and management has from the beginning been toward amalgamation. This is apparent to all, and is popularly termed the growth of monopoly. The facts that have herein been presented all tend to illustrate the truth that this amalgamation has been accompanied by as constant a reduction of rates. The so-called "monopoly" is thus shown to be exactly the opposite of those privileged corporations which, in the past centuries, have given the word its evil significance: for, without any special or exclusive privilege, the railroad is in itself an institution which naturally secures whatever monopoly it has of the business of transportation by the superior advantages and cheapness which it affords. With the reduction of rates, therefore, the "monopoly" must increase; for the reduction of rates means an increase of traffic.
The reduction of rates, however much it may be influenced by the competition of parallel lines, is absolutely controlled by the operation of those great natural laws which govern all commercial transactions. These laws are summed up in the statement, made some years since by the President of the Central Pacific Railroad Company, that "the interests of the railroad and the community are identical." The prosperity of the former is absolutely dependent upon the prosperity of the latter; and the development of the industries and the increase of the products of the communities depend upon cheap transportation, perhaps more than upon any single thing. It becomes, therefore, not only the interest of the railroads to furnish cheap transportation, but they are led also to the same action in their efforts to increase their net income. As the ratio of expenses decreases with the increase of traffic, a reduction of rates which secures an increase of traffic thus produces an increase of net profit. Consolidations, by reducing the ratio of expenses, make possible the greater reduction of rates; and great corporations, having their interest connected with wider and more extended territory, have broader views in their management, and are guided by policies which tend more to the healthful and permanent development of their properties and the territories which they depend upon for their revenue. The facts, in America as well as in Europe, fully confirm the statement of the Parliamentary Committee of Great Britain, that amalgamations result in furnishing better service, lower rates, and higher dividends—a benefit to all alike.
In the popular mind, the solution of the railroad problem is based upon the fundamental misconception that the so-called railroad "monopolies" raise the tariffs at their pleasure, are controlled only by their own wills, and so, influenced alone by selfish interests, they maintain unreasonably high or extortionate rates. Yet, it will always be found that, in seeking to advance their own interests, they are absolutely controlled by those general economic laws through the operation of which every one is seeking his own good, under terms as nearly equal as is allowed by nature itself; and their interests can only be advanced by advancing also the interests of their patrons. Freight will only be shipped when its transportation results in a profit to the shipper. The greater this profit, or the more it is extended to all articles of trade, the greater is the traffic; and the greater the traffic of the railroads, the greater is their profit. Under the operation of natural laws, each, in seeking its own interests, must advance also the interests of the other; this result can only be changed when the laws of nature are suspended by the legislation of man.
The railroad, heretofore generally untrammeled by restrictive legislation, has been productive of more beneficent results to the country at large than the most sanguine enthusiast of a generation ago would have dreamed. As it is a human institution, it has contained also the faults common to humanity. These, experience and interest will in time reduce to a minimum; and, guided by the same laws which in the past have produced so favorable results, its future operations must constantly work toward the greatest good of the greatest number.