Popular Science Monthly/Volume 28/March 1886/Discrimination in Railway Rates II

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DISCRIMINATION IN RAILWAY RATES.
By GERRIT L. LANSING.
II.

HAVING already considered those discriminations affecting persons and things, there now remains the consideration of rates affecting places.

All discriminations favoring places result from the competition existing at the favored points. This is of several kinds: First, the competition of parallel railroad lines or water-routes; second, the competition of markets; and, third, the efforts of the railroad company to increase its profits by increasing its traffic at lower rates. These operate sometimes singly, sometimes by more than one, sometimes all together. They also exist in different proportions, and so the direct effect of one or the other can not, in most cases, be measured.

I. The competition of parallel lines or water-courses includes those cases where two or more points on a railroad are accessible also by another railroad or water-route. The struggle for the traffic of such a place results in lower rates than to places less favorably situated. If the competition is between railroads alone, the conditions of their service being approximately equal as to cost, agreements are made to abide by established tariffs, and such tariffs may be but little lower than to non-competitive points. There is, then, but little discrimination. but sooner or later the struggle for the traffic leads one road to cut the tariff rates; the other retaliates by a greater cut, and this often ends in a reckless war of rates. After the excitement of such a contest has somewhat passed away, the injuries inflicted become more felt, till at length reason leads to a restoration of the tariffs. During such a contest there is an unreasonable discrimination, as the rates are frequently loss than the cost of the service. The only solution of the problem which has yet been found is to remove the incentive to cut the rates by fairly dividing the traffic between the competing lines. The common method of accomplishing this is to pool the receipts and to redistribute them on percentages based upon experience and decided by an arbitrator. This is the only instance, so far as I am informed, in which the natural principles regulating the rates of transportation lead to an unjust discrimination; and in this case the loss to the railroads, by carrying the traffic for less than cost, is perhaps greater than the injury to the community by the disturbance of values and oversupply which accompanies such contests.

So far, then, as the competition at a given place between railroads alone is concerned, the discrimination is regulated to a great extent by the harmonious working of the roads themselves. In competition with water-routes, however, on account of the inequality of their circumstances as to the cost of the service and the ease of adding new competitive boats, a discrimination must always exist. It is beyond the power of the railroad or any person or other body to prevent it, except by the heroic remedy of interdicting the traffic by rail. The water-route is free to all, its highway is furnished by nature, and the carriage is the only item of cost which must be borne by the traffic. The railroad company, on the other hand, has two existences: it is the owner of a public highway, and is a common carrier. The rate of transportation is thus composed of the toll for the use of the highway, and the charge for the service of carriage. This is a distinction which is not made in the popular mind, though it is always recognized by the law, and is important to bear in mind in the present instance; for it affords a justification of the discrimination made in favor of places having water competition, besides that contained in the necessity of the discrimination to secure the traffic.

We may take first the simple case of those places having no unusual amount of traffic, and located anywhere on the line of road, either local stations or through points; the only peculiarity about them being that they are on a competitive water-route. In those other cases where the favored places are great markets as well as competitive points, the problem becomes more complicated and will be considered afterward. On many large railroads there arc stations of no particular importance in size, which may also be reached by a river or by the sea. As they are not markets for any considerable territory, but have grown from restricted local requirements, they are not to be compared with other important depots on the same water route. Such a place offers no more traffic to the railroad than many other local stations to which the railroad is the only means of transportation. The argument then, that the railroad should reduce its rates on account of an unusually large traffic, is foreign to the fact. The shippers simply demand that rates shall be unusually low, or the traffic will take the route by water. The terms offered to the railroad are, to take the traffic, say for illustration, at one half the rates which are charged to other places on the road of equal distances, or not to take it at all. Now, in considering the discriminations between things, we have seen that in taking traffic thus offered as compared with not taking it, the only items of expense which would be affected are connected with the cost of carriage. In either case the fixed charges must be borne by the remaining traffic. And we have also shown, in illustration, that the fixed charges in the average case may be roughly stated at two thirds of the total cost, so the traffic offered at half rates would afford a small profit above the cost of carriage. To the railroad, then, the case resolves itself into the simple question whether it will take what it can get, or go without. There is no hesitation as to the decision: the rate demanded is given from necessity.

That this is a source of no injustice to the less fortunately located places is shown from their history. Before the construction of the railroad the non-competitive points—or as many as existed at that time—were supplied with transportation solely by the slow and expensive means of animals and wagons. The construction of the railroad reduced the time and the cost of transportation to a fraction of the former amount. Along the line new towns sprang up, and both the old and the new increased in population and prosperity by the impulse to production and industries furnished by cheaper and quicker transportation. By the construction of the railroad the places which existed before increased many times in wealth and population; while to the same cause the numberless other places owe their existence. These facts are among the most prominent of the unprecedented material development of this country during the last half-century. The railroad has been to the inland places of immeasurably more benefit than to any others. It is, in fact, for these that it was constructed. The places on the water-routes were already supplied with a cheap and sufficiently rapid means of transportation; they were but incidentally passed by the railroad in the course of its extension. With the water route the highway is furnished by nature, to the inland place it is supplied by man. The traffic must in each case alike pay the cost of carriage; but, the water-route being free to all, no toll to points on it can be charged on any highway. As the railroad was not built for the traffic of such points, which were, before its construction, provided with transportation facilities, but was for those places to which the highways of nature did not extend, there seems no injustice in charging the expenses of the highway to the places for which it was constructed.

It is sometimes stated that non-competitive points should have rates as low as are made to competitive points; and the reason is repeated that the latter rates, which are voluntarily made by the railroad, being presumably fair, it follows that the former rates, being higher, are unfair. But, if the traffic between all points paid but the cost of carriage, there would remain no provision for the highway and the necessary fixed charges, A rigid rule, then, preventing the discrimination between these places would leave the railroad the alternative of raising the rates at the competitive points, thus losing that traffic altogether; or reducing to a little more than the cost of carriage the rates at the non-competitive points, and so losing the greater portion of its income.

II. The competition in markets is a second cause of discrimination between places. A market, to be such, must be accessible from sources of supply. Its facilities for transportation must then be in proportion to its importance. Now, the great market cities of the world were established before the application of steam to transportation by land. It is a familiar fact that the commercial cities of the world are either on rivers or the sea; so it follows that the markets come in competition with water-routes, and usually also in competition with other railroads. But the competition is more than by parallel routes carrying traffic for equal or nearly equal distances. To reach the market at all with an article produced on the line of a railroad, it must be carried at a low enough rate to enable it to be sold in competition with the same article produced perhaps much nearer the market. Grain carried five hundred miles can sell for no more than grain carried fifty miles, and, if the conditions, of production are the same, the carrier must place them on an equality as to transportation. A long haul has thus to compete with a short haul, or abandon the market. If discriminations in favor of markets were not permitted, no grain could go by rail from Chicago and the West to the Atlantic seaboard and to Europe. But the discrimination would be made as it always has been made by the water-routes through the lakes and the St. Lawrence or Erie Canal, or down the Mississippi to New Orleans. The water-routes, however, have not an equal interest in developing the country that the railroads have; and, without the competition introduced by the latter, the rates by water would be greater than they are, and the countries whose shores they wash would be comparatively undeveloped. The railroad, in developing the resources of the country which it serves, not only secures thereby more traffic, which at the time adds to its net income; it increases as well the value of all its property. The highway being made by the railroad, and representing a large investment, a wise policy leads to the establishment of such rates as will add to its permanent value. A temporary rate at but the cost of carriage, if necessary to establish or develop an infant industry which would in future furnish a profitable traffic, is thus justified by self-interest. To a steamer or vessel on the lakes, on the other hand, the development of the surrounding territories means but additional competition; an increase of traffic is met by an increase of boats. Their policy is to take from the traffic at the time all that can be secured, for to-morrow it will be carried by some one else.

The new supply brought to the market from a distance reduces the selling price of the article in the market, a result unfortunate to those producers nearer the market, who theretofore monopolized the trade, but fortunate for those at a greater distance who would otherwise have no market, or a more restricted one, for their products. The more important result, however, is to the general public, who are benefited through the discrimination by a reduction in the cost of the necessaries and common comforts of life; for the articles carried to the market in the greatest quantities are those which are consumed in the greatest quantities—they are the necessaries and common comforts; and, as has been already shown, it is in favor of these things particularly that discriminations are made.

III. A third cause of discrimination between places is found in the volume of the traffic. The effort of the railroad to increase its profits, by increasing its traffic through the incentive of lower rates, has already been dwelt upon in considering discriminations between things. It affects places as well. It is the principle of development, and so works upon all the traffic of a railroad and between all places. But it affects most those things or places in which there is the possibility of the greatest development. A familiar illustration of the operation of this rule is the suburban passenger traffic which has been already mentioned. The possibility of developing the travel between a great city and its suburbs is practically unlimited; accordingly every incentive is offered as to frequent and rapid trains and low rates. But between two small towns the same service and rates would be a manifest absurdity. No possible inducement, short of a payment to the passenger instead of a charge, could make any material increase in the travel, except that which slowly results from the natural increase of wealth and population. Similar causes affect the rates on freight. As things consumed in the largest quantities, in which the traffic is most capable of development, are the most favored as to rates, so also are places which consume or are markets for the greatest quantities of things. In all cases when discriminations of this nature are made in freight rates, it is where the lower rates will afford a larger net profit than the higher rates, by an increase of traffic in a greater ratio than the increase of expense. Such low rates, then, can not be at the expense of higher rates to other places. Though they may be below the average rate of cost of the entire traffic, they are never knowingly less than the cost of carriage of the particular traffic.

These several causes requiring discrimination between places, viz., parallel roads or water-routes, competition of markets, and the efforts of the railroad to increase its profit by increasing its traffic at lower rates, are, in the popular mind, considered without distinction; the discrimination is as to through or local traffic. This distinction is in accord with the usual result, for through points are, in nearly all cases, the places where the most active competition of all kinds is in force. The usual termini of railroads are large cities; these again are usually on water-courses, and are usually also the chief markets reached by the road. But such is not always the case, and, when it is not, the rates will be found to be modified in accordance with the number of these forms of competition there in force, and the greater or less strength with which they exist.

This general classification of the traffic into through and local suggests a further reason why the competitive rates might fairly be expected to be lower than the local. Through points—the termini of the road—afford the longest haul, and traffic carried a long distance is, like that carried in large quantities, at a lower rate of cost per mile than that carried shorter distances. The traffic between terminal stations is usually much greater than that between any other two stations; cars are therefore loaded to their full capacity. The load at the end of the long haul is discharged, and with a delay of perhaps a day may be loaded again and returned. The local traffic is in small quantities, the car is but partly loaded, or if fully loaded the delay in unloading is as great as though it went through to the terminal station. The way-station, in the large majority of cases, affords no return load, so that the haul to some station where the car is needed, as well as the delay caused thereby, must be added to the expense. Add to these differences the difference in the volume of the traffic, and it will be readily seen that the cost per mile on through can not be but a fraction of what it is on local traffic.

Although the constant play of these competitive forces results in reducing through rates to a very low point, it deserves to be noticed that in local rates there is as well a constant though less rapid tendency to reduction. Wherever no more active forces of competition are in operation, the effort on the part of the railroad to develop the production and resources of the country by stimulating rates, and so increasing the profits and the value of the property of the company, is a cause which works constantly toward reductions. This fact is illustrated by the Railroad Commissioners of Iowa, who, in their report for 1881, occupy forty-six pages with tables and statements showing the reductions in rates in that State, and in which they particularly call attention to the fact that "the reduction is not confined to the through traffic; it applies, in a somewhat smaller ratio, it is true, to the local traffic as well" (p. 7). And they conclude their remarks upon the subject as follows: "We venture to say that this average percentage of reduction for the last fifteen consecutive years will be a matter of no little surprise to everybody who does not make the study of freight tariffs a somewhat regular habit. Although we have made no calculation to demonstrate it, we venture to affirm that an equal average reduction in the cost of any kind of service for which the people pay a money consideration can not be found during the past fifteen years" (p. 35).

It will be seen from the foregoing that discriminations affecting places are made by nature. The distribution of land and water on the face of the earth produces a discrimination against inland places and in favor of those located on water-courses or the sea. The accessibility or inaccessibility of these places on the highway furnished by nature is the basis of the discriminations affecting them on the highway supplied by man. The rapid and cheap communication afforded by railroads has introduced a strong competitor to the water-routes, and has to a great degree reduced the inequality established by nature. But with the water-routes the highway is supplied without cost, its use is free; the carriage only is a charge upon the traffic. The cost of transporting by water is thus cheaper than by land, and this must always prevent the local inland rates by rail from being as low as the rates on the free water-routes.

If rates are not to be based on the principles by which, in compliance with the demands of commerce, they have heretofore been determined; if those discriminations only are to be considered fair which are based on the bulk and destructibility of articles; then the single rule remaining to apply to the discrimination of rates is that of distance—the mileage basis.

The advocates of State interference in the regulation of rates seem to be possessed with the conviction that the true basis of charge is the cost of the service, and they labor under the common error that the mileage basis is a practical method of determining this. It will be found, however, that the rates determined by the operation of commercial requirements will coincide more nearly with the cost of the service than can be the case with any artificial system which does not recognize, as elements fairly affecting rates, the value of the service, the volume of the traffic, and the competition of other routes. If the railroad is not allowed to take traffic, which can not afford to pay the standard rate, at whatever rate it can afford, if it charges more for certain traffic than the value of the transportation to the shipper, that traffic is lost. Now, the traffic that can afford to pay but very low rates is composed of things that are of low price; such, as I have already mentioned, are the necessaries of life. These things form a much greater portion of the company's traffic than any other equal number of articles. Grain, for instance, from the fields of production in the West is carried to Chicago or St. Louis entirely by car-loads, and is forwarded thence by the train-load. Coal, petroleum, and provisions in some cases afford a regular traffic by the train-load. These articles being carried in large quantities are, as has been shown, carried at a much less rate of cost than things shipped in small quantities. The cost of the service thus bears an approximate relation to the rate of charge. Again, the volume of the traffic is a cause of discrimination, if by reducing the rate the traffic can be sufficiently increased to produce a greater net profit. And, again, it follows that the rate of cost decreases with the reduced rate of charge. In the reduction to meet the competition of other lines to the same market, the discrimination is also made to get the traffic which could not otherwise be secured. And the result, again, is a reduction in the rate of cost of the service by the greater traffic usual to those markets or centers of industry which are favored by the discriminating rate.

Indeed, it has sufficiently appeared that all discriminations arc made to increase traffic, and those things and places are favored most which furnish the largest traffic. Now, as a larger traffic is carried at a less rate of cost, it follows that there is a constant and fundamental relation between the cost of the service and the rate of charge. There is, in fact, as close a relation as it is possible to establish between them by any system but one which would be prohibitory to a great portion of the traffic. The mileage basis of rates, however, has and continues to find many advocates, yet its impracticability has been so often illustrated that but brief mention of it seems here to be called for. Where all circumstances of value, cost, competition, and quantity are equal, a mileage rate is now applied by railroads, only reducing the rate per mile gradually as the length of haul increases, thus making the rate conform more nearly to the cost of service than if the same rate per mile were applied for all distances. This is as near as it is practicable to apply the principle, and is the rule so far as my information extends on all American roads, as it is also on European roads, operated both by private corporations and by governments. But where the circumstances of cost, competition, quantity, and value are different, that is, for the greater portion of the traffic, the principle would result in prohibition. From the preceding pages this result appears to me so apparent as to need no further comment. A statement before me, however, of an impartial and informed body (the select Committee of the Parliament of Great Britain on fares and rates of 1882), is so clear and forcible an exposition of this point, and at the same time affords an illustration of much that has herein been said on the subject of discrimination in general, that I am led to make from it the following quotation: "The form which the proposal for a fixed standard of charges has usually taken is equal mileage, i. e., a charge for each class of goods and passengers in proportion to the distance for which they are carried." This point was strongly urged before the Royal Commission, and is so effectually disposed of by their report that it seems scarcely necessary to dwell upon it further. But it reappears in the evidence of some of the witnesses before this committee, and it may therefore be desirable to state shortly why it is impracticable:

"'(a.) It would prevent railway companies from lowering their fares and rates, so as to compete with traffic by sea, by canal, or by a shorter or otherwise cheaper railway, and would thus deprive the public of the benefit of competition, and the company of a legitimate source of profit.

"'(b.) It would prevent railway companies from making perfectly fair arrangements for carrying at a lower rate than usual goods brought in larger and constant quantities, or for carrying for long distances at a lower rate than for short distances.

"'(c.) It would compel a company to carry for the same rate over a line which has been very expensive in construction, or which, from gradients or otherwise, is very expensive in working, at the same rate at which it carries over less expensive lines.

"'In short, to impose equal mileage on the companies would be to deprive the public of the benefit of much of the competition which now exists, or has existed, to raise the charges on the public in many cases where the companies now find it to their interest to lower them, and to perpetuate monopolies in carriage, trade, and manufacture, in favor of those rates and places which are nearest or least expensive, where the varying charges of the companies now create competition. And it will be found that the supporters of equal mileage, when pressed, really mean, not that the rates they pay themselves are too high, but that the rates that others pay are too low. Pressed by these difficulties the proposers of equal mileage have admitted that there must be numerous exceptions, e. g., where there is sea competition (i. e., at about three fifths of the railway-stations of the United Kingdom), where low rates for long distances will bring a profit, or where the article carried at low rates is a necessary, such as coal. It is scarcely necessary to observe that exceptions such as these, while inadequate to meet all the various cases, destroy the value of equal mileage as a principle, or the possibility of applying it as a general rule.'"[1]

Tariffs of rates have, however, been established without discrimination, but their workings have shown that they were established with as little discretion as discernment. An illustration of such a case is afforded by the experience of Germany, the history of which is given in the testimony before the committee on fares and rates of the Parliament of Great Britain above referred to. The Government, in conformity with its military spirit, which admits of only unquestioning obedience to arbitrary orders, enforced on the railways a uniform and unvarying system of charges. Having fixed the tariffs in its own country at rates which to it were satisfactory, it adopted the principle that no through rates should be given except on the basis of these local charges. Thus traffic, for instance, between Belgium, or Holland and Austria, might be brought up to the German frontier at whatever rate those states chose to fix, but, immediately upon entering on German territory, the local tariffs should apply. As a result, the through traffic was driven from the railroad to the rivers, and exports from Austria found their way to the sea on the Elbe and the Rhine. After the enforcement of the policy had "utterly destroyed" this through traffic on the German railways, the administration decided to profit by the experience to abandon their unnatural policy, and attempt to get back the traffic. Accordingly, they issued a tariff, which is instructive as showing how completely they gave up their artificial system and recognized in railway rates the natural forces controlling commerce. The heading of the tariff reads: "Exceptional tariff to and from the German seaports, for goods traffic between Hamburg, Harburg, Bremerhaven, Geestemünde, Bremen, and Regensburg, and Passau stations. To come in force on and from March 1, 1882. This tariff will apply only to goods traversing Germany and passing beyond Regensburg and Passau, and out of the district of the German customs, and in consignments of ten tons per truck and above (wool excepted). Smaller consignments will be charged at usual rates. Articles included in the exceptional tariff." It then continues to enumerate articles under seven "special tariffs." The testimony before the commission on this subject concludes as follows: "Now that shows that the strongest government in the world, I suppose, can not interfere with the course of traffic except at its peril, and, if they attempt to impose upon the commerce of the country an impossible system, they come to grief."[2]

I have attempted to show that the rates on railroads are regulated by natural principles of competition, and that it is from the operation of these principles that discriminations are produced. This is but saying, in other words, that discriminating rates result from competition. An examination of the cases reported by the various State Railroad Commissioners will show that this is true; for it will be found that the discriminations effect a reduction in rates, not an increase. They are concessions made to secure traffic, which at former rates would not be carried. If this were not at least believed to be the result, there would appear no incentive for the company to make the reduction. In brief, the cause of discrimination is competition, the effect is reduction.

  1. Report to the House of Commons, July, 1882, p. ix.
  2. Report to the House of Commons, July, 1882, pp. 170, 171.