Chapter 19
Taking up the monopolies which by their use of natural agents or their exercise of a franchise granted by the public, are already acknowledged to be subject to the public control, let us consider first the railway system. The two years in which the Interstate Commerce law has been in force have seen a great progress toward the final solution of this problem, even though railway affairs are at present in so unsatisfactory a condition. The important features of our future policy which now seem to be quite generally understood are: full State and national control over both tariff rates and facilities; the abolition of competition, either by consolidation or by legalized agreements to that end; and strict prohibition of the construction of parallel lines not warranted by the traffic.
That we are working very rapidly in this direction, no one will deny who is familiar with the progress of legislation affecting railway interests and with the opinions of railway men. Evidently, however, government cannot justly take so prominent a part in railway management without becoming in some degree responsible to railway stock- and bond-holders for the protection of their interests; and it is a difficult question to say in what manner this responsibility should be met. It has been the intention of the author in devising the following plan for the control of our railway system to make this responsibility a definite one, and not leave it as now, a vague constitutional right. For according to the law at present, State and national legislators may make laws to vary the receipts and expenditures of the railway companies as much as they please, and the only redress of the railway owner is an appeal to the courts, the judges of which must decide whether the company's revenue is so injured that its legal rights are infringed.
Space will not permit here a full statement of the many serious evils and abuses with which our present system of railway management is burdened. The study which the author has made of them has convinced him of their importance and magnitude. The following plan is designed to permit their remedy as well as to remedy the special evils of monopoly with which our present investigation is concerned:
Let the government acquire the title to the franchise, permanent way, and real estate of all the railway lines in the country. Let a few corporations be organized under government auspices; and let each, by the terms of its charter, receive a perpetual lease of all the railway lines built or to be built within a given territory. Let the territory of each of these corporations be so large and so planned with regard to its neighbors that there shall be, so far as possible, no competition between them. For instance, one corporation would operate all lines south of the Ohio and east of the Mississippi rivers; another all lines east of the Hudson and of Lake Champlain, etc. Let the terms of rental of these lines be about 3¼ per cent. on the road's actual "present cost" (the sum of money it would cost to rebuild it entirely at present prices of material and labor) less a due allowance for depreciation. The corporations would be obliged to keep the property in as good condition as when received, and would own absolutely all their rolling stock, machinery, etc.
It is not proposed, however, that the government shall own any interest in the railways save the legal title. Bonds would be issued to the full amount of the appraised valuation, running twenty-five years and bearing interest at 3 per cent., principal and interest guaranteed by the government, and these would be sold to the highest bidder. Thus the real ownership of the roads would be vested in the bondholders. As is well known, there is a great and fast increasing need for investments of absolute safety, even though they bear very low rates of interest. This is especially desirable for the continuance of our national banking system, in order to insure us a safe, stable, and ample currency. Such bonds would find a market at a premium as fast as offered.
It would not even be necessary that the money to pay the interest coupons should pass through the government's hands. The operating company would pay it directly to the bond-holder and at the same time the ¼ of 1 per cent. would be paid into the government treasury.
The object in making the bonds run for no longer time than twenty-five years, when it is intended that the whole value of the road shall be perpetually held in the form of bonds, is that at proper intervals a revaluation may be made of the improvements to the road and the interest charges may be readjusted to correspond with the general change in the income from capital. When the bonds fall due, a new block would be issued and sold to the highest bidder. The interest rate should be set at such a point that the bonds could be sold at a premium. These premiums, with the ¼ of 1 per cent. on the bonds, paid by the operating company to the government, (which we may regard as a legitimate fee to the government for its guaranty) should form a government railway fund. This should be used, first, to defray the expenses of the government department of railways, and second, to pay the deficit when on any line the net receipts after operating expenses are paid are insufficient to pay the rental. The remainder should be expended in making improvements and additions to the railway system, such as building new bridges and stations, and improving the line, the cost of which, however, should be represented by additional bonds at the end of the twenty-five-year term. The amount of income should be so regulated, by varying the rate of interest on new bonds, that the sum remaining for the last purpose may be about sufficient for usual needs. The whole administration of the receipt and expenditure of this fund should be vested in the government department of railways. In this way the danger that the whole work of this government department might be blocked through the neglect of Congress to make necessary appropriations, would be avoided.
The readjustment of existing stocks and bonds presents difficulties which will be considered in very different ways by different classes of persons. The "granger" element, for instance, would cut off the holder of "watered stock" with a shilling. Fortunately, if we take time enough, we can arrange this matter with no shadow of injustice. To illustrate: The government can purchase the A. B. & C. road outright at its market value, which, owing to inflated prices and watered securities, is perhaps $3,000,000. It is desired to wipe out $1,000,000 of this to place the road upon its proper basis. The government issues 3 per cent. guaranteed ten-year bonds upon the road and leases it at an annual rental of 6 per cent. on what it has paid. At the time the bonds are due, the accumulation of rentals over interest is more than sufficient to pay off $1,000,000 of the bonds, while the remainder are renewed on the permanent basis.
The author is well aware that a very strong prejudice exists against the lending by the government of its credit to private corporations. This prejudice--which has perhaps already been sufficient to condemn the plan, as thus far presented, in the mind of the reader--he believes to be a very wise and well founded one. The assumption by the government of any risk in connection with corporate enterprise is highly undesirable. It is now to be noted that this objection is wholly overcome; for, notwithstanding the fact that the government guarantees the bonds of the railways, it is not proposed that it shall really assume any risk, as will be seen from the further description of the powers and obligations of the operating corporations.
These should be essentially private companies, but there should be two or three representatives of the government on the Board of Directors. They should be required to operate the roads in a safe, efficient, and economical manner, and to keep accurate and simple records, open to the inspection of the Government Commissioners, of the receipts and expenditures on every separate line of road. The rates of fare and freight should be, first of all, stable. When once fixed they should neither be raised nor lowered except by the direction of the Government Railway Commissioners. Next--and this is the cardinal feature of the whole plan--it should be the endeavor to fix the rates of fare and freight at such a point that the total receipts would be sufficient, first, to pay the whole expense of operating and maintaining the road; second, to pay the annual rental of 3¼ per cent. interest on the cost of the road; and, third, an annual dividend to the stockholders of the operating company of from 4 to 8 per cent. The capital stock of the operating company should be fixed by law at about 1¼ times the actual cost of rolling stock and machinery. The operating company should be allowed to issue only one class of securities, and these should represent at par the actual cash capital invested by the operating company.
Under this plan it is evident that every community would pay its equitable share of the cost of transportation, since the rates would be based on the cost of service.[6] Instead of roads running along, bankrupt for years, as now, we would have every community paying for its transportation facilities just what it cost to furnish them. But if, on any road, such a rule would raise the rates above a certain prescribed maximum point, then the rate could be lowered, if necessary, to a point where it was only great enough to pay the operating expenses; and part or all the bond interest would be paid out of the government railway fund.
[6] It should be explained that it is only proposed to base the _rates as a whole_ upon the cost of service. As regards the relative rates on different commodities, the author, in common with all who have given careful study to the question, recognizes that the only equitable principle for proportioning rates is the much maligned one of "charging [in proportion to] what the traffic will bear." The argument against this principle is so very plausible that, until he had given the subject thorough study he held a diametrically opposite opinion.
To make plain to the reader that this is really the only equitable principle, the following illustration may serve: A coal-mine operator and a sewing-machine manufacturer build together a railroad to carry their respective products to a market. They will fix the total rates of freight at such a point as to just pay the cost of service; but it is required to find what relative rates each should be equitably charged on the shipments from his works. Evidently, to have the rates perfectly equitable, they must be in exact proportion to the _benefit_ which each party derives from the use of the road. But this benefit which each derives is _measured_ by the profits which each makes from his business; and this profit, in turn, is the measure of the amount each can afford to pay for the use of the road,--that is to say, "what the traffic will bear." _Q. E. D._
"But," the objector says, "is it not true that when you limit the profits of the companies and base rates on cost of service you take away all incentive to economy and careful operation? The public, and not the company, gain if the cost of service is reduced; so why should the manager exert himself to economize? This very same principle has been tried. Many States have chartered railway corporations, and provided that fares and freight rates should be reduced when dividends exceeded a certain per cent., or else that a percentage of the surplus earnings, above the amount necessary to earn, say 10 per cent. dividends, should be paid into the State treasury. Of course the railway corporations who have been able to earn surplus dividends which they were not permitted to pay, have been sharp enough to spend their surplus on their own property instead of turning it over to the State treasury. How is it possible, then, to base rates on cost of service and still leave the incentive to economy, frugality, and efficiency which exists, when the corporation is permitted to make all the profits it can?"
To discover a means of overcoming this difficulty, let us see how it is overcome under competition. A man invents a new machine, for instance, which effects a saving in the cost of some manufacturing process of 50 per cent. One manufacturer adopts it because it greatly increases his profits, and one by one his competitors follow suit. The competition between them cuts the prices lower and lower, till finally the consumers of the goods get all the benefit from the saving effected by the new machine, and the manufacturers' profits are no greater than they were originally. But the important point to be noted is this, that the benefit to the manufacturer continued long enough to repay him for introducing the machine. So in our attempts to base railway rates upon cost of service, we must permit the profit from the introduction of economies, the use of improved appliances, etc., to be gathered by the railway company long enough to induce it to work toward that end.
All we need to do to effect this end is to _somewhat delay_ the change in rates to correspond to change in cost of service. As already stated, it is most necessary that rates should be _stable_, and it is proposed to make any change, either advance or reduction, only through the action of a Government Commission. Now, suppose that some such clause as this forms a part of our railway law: "upon the petition of any railway corporation, or of not less than twenty-five patrons of any single 'railway district,' it shall be the duty of the Railway Commission to investigate regarding a readjustment of rates to correspond more closely to the cost of service. If it shall be found that in the given 'railway district' the net receipts over the operating expenses and fixed charges have been for one year not less than 9 per cent. on the capital of the operating company invested in the given railway district; and that for two successive years they have been not less than 8 per cent.; or, if they have been for one year 8 per cent., and for two years 7 per cent., and it shall be proven to the satisfaction of the Commission, that any due and proper measure of economy, to which the attention of the officers was called in writing has been wilfully neglected, or that any uncalled for and manifestly extravagant expenditures have been entered into during that time, then it shall be the duty of the Commission to lower the rates. If it shall be found that for one year the net earnings have been less than 3½ per cent., and for two years less than 4½ per cent., unless it shall be proven that this deficit has been fostered by neglect of due economy, or by extravagant expenditure as aforesaid, the rates shall be raised. In all cases where rates are readjusted, it shall be the endeavor of the Commission to set them at such a point that the net earnings will equal 6 per cent. on the capital stock."
The provision requiring two years of excess or deficiency before a change, would be necessary to avoid the fluctuations which occur in single seasons. Every piece of economy is so much gain to the stockholders, and its benefit is received for at least two years. It must be remembered that in any railway corporation, as at present conducted, none but the highest of the managing officials have any personal interest in the profit from operations. It may well be believed, therefore, that the measure of economy and efficiency effected would be at least as great as now. As this plan also contemplates government representation on the Board of Directors, any action by the higher officials to evade the law would be unlikely to occur.
The receipts of a company operating say 30,000 miles of railway and carrying its traffic at fixed rates would vary but little from year to year; and its stock would be so largely held by investors and would vary so little in price that there would be very little speculation in it. To bankrupt the company would be an impossibility, since its receipts would always be regulated to preserve its revenue, although not so strictly but that the company would still have every incentive to cultivate traffic by offering good facilities, and to economize at the same time by the introduction of improved methods.
No doubt it can be shown where every detail of the foregoing plan leaves loop-holes for abuses to creep in. It will be much the same with any plan whatever. The questions to be asked are, would abuses, waste and stealing be any more likely to occur than under any other plan? Could they be any more prevalent than they are now,--bearable only because we are calloused to them? Of course, the foregoing is a mere outline of the general principles of the plan. Details which readily suggest themselves would, of course, be necessary to carry out the principle successfully.
That some attempt should be made in this connection to solve the perplexing problem of strikes on railway lines is proven by the memorable engineers' strike on the Chicago, Burlington, & Quincy system. Perhaps a provision requiring every employé and officer to hold at least a certain number of shares in the operating company in proportion to his salary would help to solve the labor problem; and it might give the higher officers a greater interest in their work than they always show.
The author has deemed it worth while to outline the foregoing plan for the equitable control of railway monopolies with considerable fulness, because, to a very great extent, the principles followed in the design of this plan are applicable to a great number of other monopolies. These important principles are: (1) Government protection to the owners of fixed capital so that the public may obtain the use of it at the lowest possible rate of interest. (2) The operation of monopolies by corporations rather than by the government, thus securing the increased efficiency of private over official management. (3) Securing to the people at large the benefit of the monopoly by basing the prices for its product on cost of service. (4) But leaving a suitable incentive for the company's managers to maintain economy and efficiency in its operations. (5) Government representation in the directorate controlling the ordinary affairs of the company.
It is evident that the plan just outlined for railways would be especially well adapted, with but slight changes, for the control of the telegraph lines of the country.
* * * * *
We will next consider the monopolies discussed in Chapter III. It seems too plain to need proof that our mines and quarries are certain to have a steady increase in value as we use up the easily worked surface deposits and have to dig deeper shafts and develop the poorer deposits to supply the demand. In the case of any metals or minerals of which the deposits are so abundant, easily worked, and widely scattered, that the number of evenly matched competitors is great enough to ensure steady competition, the public will get the benefit of the especial gift of Nature, and its owner can receive little more than an ordinary return for his labor and capital. But, as we have already amply shown, in the production of a great number of minerals and metals competition has been killed, or is heavily handicapped by the vast advantages of a few bonanza mines, and the public is being taxed millions of dollars for that which belongs to it by right.
How long is this condition to continue? Must all succeeding generations pay for coal, copper, zinc, lead, nickel, marble, oil, gas, and various other products of our mother-earth just what those who control the chief deposits choose to ask? Because a pioneer stumbles upon a valuable mine, shall the sole right to use the product of that mine be secured "to him, his heirs and assigns" forever?
Suppose, now, that each of the several States were to acquire the title to all the productive mines, quarries, and mineral wealth within its borders, and enact laws providing that future discoverers of minerals on land where they are not now known to exist should be liberally rewarded, if the discovery proved valuable, but the minerals should belong to the State and not to the owner of the land. The same principle which we found to apply in the case of the railways would serve here in readjusting values, viz.: the difference in the rates of interest on safe investments and on risky ones. When acquired, the mines should be leased to private parties for operation. In the case of coal-mines and perhaps of iron, it would be well to copy largely from the scheme proposed for railway operation, viz.: place all the business in the hands of a single company, which should thus be enabled to carry on its business on the largest possible scale; do away with wasteful competition, and aim to regulate prices to provide a certain reasonable steady income on its capital to the mining company.
For mines of copper, zinc, lead, and similar metals, it would be best to pursue a different plan, and simply provide by statute that such mines should be leased for short terms of years to the bidder who would offer to sell his product at the lowest price per ton at the mines, all lettings and relettings to be publicly advertised, and the successful bidder to give bonds for the faithful performance of his contract. It is difficult to see how, under these conditions, a combination to defeat competition could be formed. Relettings of expired leases would be frequent; and bidding by the _selling price_, a single competitor would be sufficient to break any combination. Of course the lease should specify a minimum product which the mine should furnish.
It would be advisable, too, that a manifest duty of the government, which should be undertaken even under present conditions, should be observed. It should be required to work the mine with due attention to saving the greatest possible amount of ore or mineral contained in the seam or vein.
The third class of monopolies, whose legal subjection to public control is acknowledged, are those connected with our municipal public works. There is already a widespread movement toward taking the control and operation of these out of the hands of private corporations, and placing it directly with the city government, and progress in this direction is very rapid. The author believes, however, that the general law already stated is applicable here. If the public works of States and of the nation are more economically and efficiently managed when in the hands of private parties, it is surely unwise, as a general rule, to entrust the operation of municipal works to the average city official. While it is in the highest degree desirable that water-works, gas, and electric-lighting plants, street railways, and the other municipal enterprises, discussed in Chapter V., should be _owned_ by the municipality, their operation, in cases where the employment of considerable labor and the carrying on of intricate business and mechanical operations is involved, should in general be entrusted to private companies. In every case where the financial condition of the municipality obliges it to rely at first upon private corporations for the construction and ownership of its public works, the franchise should expire at the end of a short term of years, and the city should then have the privilege of purchasing the works at their actual cost.