Chapter 17

The history of the construction of American railroads covers a period of seventy years. The greater part of our mileage has been built since 1870. The following table and diagram illustrate the growth of our railway net during each decade:

Year | Miles ------|-------- 1830 | 23 1840 | 2,800 1850 | 9,000 1860 | 30,600 1870 | 53,000 1880 | 90,300 1890 | 163,600 1898 | 184,000

It will be noted that the decades of most rapid railway development were the one from 1850 to 1860, following the discovery of gold in California, and the two between 1870 and 1890. We added 70,000 miles to our railway net between 1880 and 1890--a record that no other country has equalled. By 1892 we seem to have met the more urgent demands for new lines, and we are now annually building less than 2000 miles of new roads. The face value of the capital now invested in American railroads is $11,000,000,000. The number of persons employed in the railway service is 850,000.

THE RAILWAY CORPORATION

The agents that do the work of transportation by rail are the railway corporations. These "artificial persons" are created by the several States and intrusted with the performance of services of a public nature. In all the German states and to a large degree in many other European states, the governments themselves provide the means of transportation by rail; but in the United States the ownership and management of the railroads is rightly regarded to be a task of greater magnitude than the administrative department of our government is as yet able to cope with.

The growth of the railway corporations of the United States has been typical of the evolution of industrial organisation in this country. The early railway corporations were small. The Philadelphia, Wilmington and Baltimore Railroad, for instance, comprised the lines of four companies. In 1850 the road connecting Albany and Buffalo included the lines of seven companies. During the last fifty years most of the small companies have united to form the corporations which now operate our large railway systems. Though the last statistical report of the Interstate Commerce Commission--the one for the year ended June 30, 1896--contains financial reports from 1985 companies, there were only 782 "independent operating roads," the remainder of the companies being subsidiary organisations. This report shows that forty-four of these operating companies have an aggregate mileage that equals nearly six tenths of the total railway mileage of the United States. Indeed, the statistician to the Interstate Commerce Commission declared in 1894 that "over 83 per cent. of the business of the railways and 82 per cent. of their earnings fall under the control of less than forty associations of business men."

The Pennsylvania system affords a good concrete illustration of railway consolidation. That corporation, with its 9000 miles of road, was built up by the union of over 200 railroad companies, and it now comprises within its organisation 177 corporations--most, though not all, of which are subsidiary railroad companies. This one railway system does one seventh of the entire freight business performed by all the railroads of the United States and handles one eighth of all the passenger traffic.

THE FREIGHT SERVICE OF RAILROADS

The freight business of the railroads of the United States is much larger than their passenger service, the earnings from freight being nearly three times that from the passenger traffic. It is only in some of the New England States, the most densely populated parts of the United States, that the passenger receipts equal the freight earnings. The industrial conditions of the United States necessitate the movement of great quantities of bulky freight long distances. Our principal grain-fields are from 1000 to 1500 miles from the manufacturing districts and seaboard cities. Our richest iron deposits are in the States adjacent to Lake Superior hundreds of miles from the coal-beds of Illinois, Ohio, and Pennsylvania. Most of the cotton crop is moved long distances to reach the mills of New England and Great Britain. In fact, most of the products of our fields, forests, mines, and factories are marketed over wide areas. The average distance travelled by each ton of freight moved during the year ended June 30, 1896, was 124.47 miles; and, as the railroads carried 765,891,385 tons that year, the number of tons carried one mile was 95,328,360,278.

A comparison of the revenues received from the freight and passenger services by the American, German, French, and British railways is instructive. For each dollar received from the passenger traffic the American railroads earn $2.95 from their freight business, the German roads $2.40, the French $1.31 and the British railways $1.17. The United Kingdom has the greatest volume of passenger traffic per population of any country in the world.

AMERICAN PASSENGER TRAFFIC ON RAILROADS RELATIVELY UNDEVELOPED

The long distances of the United States necessitate a large freight traffic but act as a hindrance to travel. It is a generally accepted but erroneous supposition that Americans travel more than any other people. A comparison of the passenger traffic in the United States with that in the United Kingdom, Germany, and France reveals some surprising facts. The figures are for 1896. The number of passengers carried one mile per mile of road upon the railroads of the United States was 71,705, in France the number was 273,315, in Germany 315,399, and in the United Kingdom 440,000. The average distance which the Briton travels per year by rail is 244 miles; for the American the distance is 209 miles, for the Frenchman 176 miles, and for the German 165 miles. The Englishman takes 24.4 trips per year on an average, the German 11.3, the Frenchman 9.6, and the American 8.2. Americans travel extensively, but it is evident from the foregoing comparisons that the possibility of developing the passenger service in this country has by no means reached its limit.

RELATION OF TRANSPORTATION ON RAILROADS TO ECONOMIC ORGANISATION

The economic changes which have accompanied the great development of transportation that has taken place during the last fifty years have revolutionised our industrial and social life. Among the effects of developed transportation upon the economic organisation may be noted: First, that relations of producers and consumers have been fundamentally changed by placing a larger market at the service of both. Many classes of commodities are now bought and sold in a world market that were formerly restricted to local trade. Second, improved transportation has made the prices of commodities more uniform for different producers and consumers. The variations due to situation have been lessened. In a like manner there has been a decrease in those time variations in prices that result from changes in the supply of commodities. Improved transportation also makes prices lower--not only because it reduces the costs of moving the raw materials of manufacture and the finished products of industry, but also because it enables the merchant to turn his stock oftener and thus do business with less expenses for capital.

As a third effect of improved transportation may be mentioned the acceleration which it has given to the growth of cities. Cheap and efficient transportation has led manufacturers to locate their plants where they can command a large supply of labour and where they have the greatest advantages for the distribution of their products. The great manufacturing establishments are now located in Chicago, New York, Philadelphia, Pittsburg, and the other large cities. Conditions of transportation have become a stronger factor than even the location of the sources of raw materials in determining where an industry shall be established. The effect of the railroad upon the location of agriculture has been no less potent. The railroad has brought new agricultural regions into cultivation and destroyed the profits of cereal agriculture in many parts of the Eastern States.

Another important consequence of improved transportation and communication has been that of bringing the nations of the world into closer economic and social relations. With the growing solidarity of the economic interests of the countries of the world, with the multiplication of the intellectual and other social ties that unite the nations, their political relations inevitably change, and for the better. Nothing is doing more to advance the attainments of the cherished ideal of international amity than is the development of transportation.

XI. FREIGHT TRANSPORTATION BY RAIL

THE ORIGIN OF RAILROAD TRAFFIC ASSOCIATIONS

The performance of the transportation services necessitates the co-operation of carriers. When the government owns and operates the railroads of a country they are managed by a single authority, and the different parts of the railway system are fully co-ordinated; but when the railroads are operated by a large number of independent corporations, co-operation can be secured only by means of traffic associations composed of representatives of the railway companies, and intrusted with the power of making arrangements affecting joint traffic, and settling questions involving the interests of two or more companies.

Two distinct causes brought about the establishment of railway traffic associations. The first cause was the necessity of co-operation to facilitate the joint business of connecting lines. Through tickets, joint fares and rates, through bills of lading, the interchange of cars between connecting roads, and the settlement of joint accounts led to the establishment of co-operative freight lines, car-service associations, claim associations, and various other general and local organisations for the promotion of the joint transportation business.

The other cause of co-operation among the railways was the necessity of regulating competition. This cause first became potent after the process of consolidation had brought about the formation of numerous large railway systems, and had inaugurated the violent competition which led to discriminations in transportation charges, rate wars, and the other evils which have combined to produce "the railway question." The competitive struggles of rival railway systems began to be violent shortly after 1867, and soon led to the formation of railway traffic associations, with enlarged powers. The classification of freight, the determination of rates on competitive traffic, and the apportionment of that traffic, or of the earnings from it, among the competitors became functions of the associations.

THE WORK OF ALBERT FINK

The man who did more than any other person to develop traffic associations and to promote the co-operation of competing railroads was the late Albert Fink. It was his master mind that organised and put into successful operation in 1876 the Southern Railway and Steamship Association. The following year Albert Fink succeeded in organising the great trunk lines connecting the North Atlantic seaboard and the States north of the Ohio River. Though smaller traffic associations similar to these two organisations had been previously established where but few obstacles had to be overcome, it was Fink who first organised traffic associations including all the competing railroads serving large sections of the country.

In discussing the work of traffic associations, which are to-day concerns of really enormous magnitude, railway pooling and the classification of freight especially demand consideration.

RAILROAD POOLING

Railroad pools are agreements entered into by competing carriers, by which the railroads provide for the division with each other of their competitive traffic, or of the earnings from that traffic in accordance with stipulated ratios. Thus there are traffic pools and money pools. During the decade preceding 1887, the year when the present interstate commerce law was enacted, most traffic associations had the pooling feature, and most of the competitive railway traffic was pooled, thus eliminating all competition in rates.

Pooling agreements have never been legal in this country. Being illegal by the common law, they could not be enforced in the courts. Section 4 of the interstate commerce law made it unlawful for the carriers subject to the act to pool their freights or the earnings from their freight traffic, and made it necessary for the traffic associations to reorganise without the pooling agreements. Until March 22, 1897, it was supposed that the associations, without pooling agreements, were legal; but, on that date, in the case of the United States _vs._ the Trans-Missouri Freight Association, the United States Supreme Court held that the law of July 2, 1890, popularly known as the Sherman anti-trust law, applied to railways, and made it illegal for railway companies to contract with each other to maintain rates. Thus at the present time traffic associations are permitted neither to contain a pooling feature nor to provide arrangements for the enforcement or maintenance of rates, although the charges may be reasonable and be sanctioned by all the carriers interested. The associations may now legally exercise those functions which are connected with the joint business of their members, and they may act as bureaus of information regarding the competitive traffic. They have no power to make or to maintain rates.

TRAFFIC ASSOCIATIONS INCLUDING POOLING SHOULD BE LEGALISED

The best performance of the service of transportation by rail requires the fullest possible co-ordination of the different parts of our transportation system and the largest attainable measure of co-operation among the agents who perform the service. Section 4 of the act of 1887 and the law of July, 1890, as far as the latter relates to railways, are based on an unsound theory. Provision having been made for that kind and measure of governmental regulation of railway rates that will insure reasonable charges, the railways should be permitted to co-operate in rate-making and be given power to pool their competitive business.

CLASSIFICATION OF RAILROAD FREIGHT

There are thousands of varieties of freight offered to the railroads for transportation. If each class of commodities were charged the same freight rate per ton per mile, the charges upon many articles of prime necessity, such as coal, lumber, and grain, would be so high as to prevent their being moved, while the rates on goods of high value per bulk would be much lower than they could readily pay. Classification must precede the fixing of rate schedules. The railroads are interested in adjusting their charges to services performed in such a manner as to insure the greatest possible amount of traffic at rates that are properly remunerative. The public is interested in having the necessary revenues of the railroads so levied as to make the burdens as light as possible. To accomplish this a careful grouping of commodities is necessary.

The goods are usually classified in five or six large divisions. The official classification referred to below has six classes. The first class consists of articles of high value, the sixth class of bulky commodities of low value, such as iron ore, lumber, grain in bulk, etc. In practice, however, the number of classes is at least doubled. Goods of especially high value are made to pay once and a half, double, treble or quadruple the regular first-class rate. A commodity is also frequently placed in more than one class, the rating of classification being lower for car-load lots than for less than car-load shipments. The classification is further extended by omitting certain articles from the list of those classified. Live stock and coal are illustrations of articles to which so-called "commodity," as distinct from "classification," rates are given. The individual shippers are constantly endeavouring to have their goods given commodity rates, and the effort of the railroad companies is to reduce the number of articles excepted from classification. Commodity tariffs have been a fruitful source of unjust discrimination.

From this description of freight classifications it will be perceived that the main basis upon which the grouping of commodities rests is the relative value of the goods. The gradations cannot, however, be made strictly according to value. The goods are frequently put into a lower class than their value would warrant in order to stimulate their production and shipment or to develop the industries depending upon those articles.

At first each railroad worked out a classification of its own, and there were practically as many classifications as there were railway systems. The disadvantages of this soon became apparent with the development of long-distance traffic. The multiplicity of classifications made it difficult for shippers or purchasers to ascertain in advance what the charges on consignments would be; there was a constant tendency to increase the number of commodity tariffs, and unjust personal and local discriminations were in consequence made more numerous. It became evident that there would be great advantages in having one uniform classification for the whole United States. This ideal has not been reached yet, but the number of classifications has been practically reduced to three--the official, applying to the traffic north of the Potomac and Ohio and west of the Mississippi; the southern, in force among the railroads in the Southern States, and the western, which obtains in the territory west of the Mississippi River. This amalgamation of the classifications has been brought about chiefly by the traffic associations and as the result of the enactment of the interstate commerce law. In order to avoid the discriminations prohibited by that law it was necessary to abandon the system of a separate classification for each railway. It is to be hoped that the attainment of the ideal of uniform classification will not be long delayed.

THE CONDUCT OF THE FREIGHT BUSINESS OF RAILROADS--TRANSPORTATION PAPERS

The manner in which the freight business is conducted affords a good illustration of the high degree of development to which modern business methods have attained. Freight is accepted by each railroad for shipment not only to all points on its own system, but also practically to every railway station in the country, and even to many foreign cities.

A waybill containing the initials of the number of the car used, the name of the consignor, the name and address of the consignee, the description and weight of the articles sent, the freight class and rate of the goods, and the total amount of freight charges, accompanies each shipment and is delivered to the agent at the place to which the goods are shipped.

For the goods thus accepted for transportation, manifests, or "bills of lading," are issued to the consignor, which, like other representatives of property, may be transferred by the owner or may be deposited in a bank subject to draft. Bills of lading are of two general kinds--"straight consignment bills" and "order bills." When a straight consignment bill of lading is issued the goods must be delivered to the consignee or to the person to whom he may order them delivered. An order bill of lading is one that may be transferred upon indorsement. The following concise description of an order bill of lading is taken from the "Book of General Instructions to Freight Agents," issued by the Pennsylvania Railroad Company:

When freight is consigned to "Order" it is, as a rule, for the purpose of securing the payment at destination of a draft for the value of the property. The draft is usually attached to the bill of lading and sent through a bank for collection from the party at destination, who is to be notified of the arrival of the freight. The payment of the draft secures to the payer the possession of the bill of lading, which must be indorsed by the party to whose order the property is consigned.

XII. RAILROAD RATES

Transportation charges have such a general and vital relation to industrial and social welfare that the problem of the just and equitable distribution of their assessment is one of paramount economic and political consequence. A consideration of the main factors which influence the railway companies in fixing charges should precede a discussion of the regulation of transportation by the government.

GENERAL FACTORS WHICH DETERMINE RAILROAD RATES AND FARES

The factors which have most weight in fixing schedules of rates and fares are what it will cost to perform the several services, what the services are worth to those for whom they are to be rendered, and the extent to which there is competition among rival carriers to secure the traffic concerned. Though on the face of things it would seem that the railways should fix the charges for their various services in accordance with the costs of performing those services, it is neither practicable for them to do so nor is it desirable from the standpoint of public welfare that such a criterion should be adopted. It is impracticable for the railroads to base their charges upon cost of service, because it is impossible to determine accurately the elements which enter into the cost of performing the particular transportation service. The modern railroad is a very complex mechanism, employed in the performance of a multitude of different services. No railroad official is able to say just how much of the company's total expenses are to be charged against any one particular freight or passenger service.

The cost of service would be an undesirable basis of rates, because the railroads would derive such a small part of their total necessary revenues from the carriage of goods having a high value in proportion to bulk and weight, that they would be obliged to charge much higher rates than they now do upon the cruder products of the farm, forest, and mine. These products are the basic materials of industry, and the lowest possible rate for their transportation is essential to social and economic progress.

VALUE OF SERVICE AND VALUE OF COMMODITIES

Value of service is a more desirable basis for rates and fares than cost of service. By charging according to value of service is meant that the shippers of commodities and the passengers who travel shall contribute to the railroad's aggregate expenses in proportion to the value which they derive from the transportation service. The rates and fares may cover a part or all of the value of the service obtained. In either case they are fixed with reference to that value and not with regard to the cost involved in performing the work of transportation. The levy of rates and fares in accordance with this theory, which is usually called "charging what the traffic will bear," is considered by most people to distribute transportation charges properly, because it is claimed that the true measure of a shipper's or a passenger's ability to pay for a desired service is the value which he will thereby derive. That this theory, nevertheless, does not afford an altogether satisfactory basis of charges, particularly in the freight traffic, may be readily shown.