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   Chapter 44 RAILROAD RATES

Up To Date Business By Various Characters: 10435

Updated: 2017-12-06 00:03

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.


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 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.

While it is true that the amount of value added by transportation to goods of low value is less for each unit of weight or bulk than the amount of value which is acquired by an equal weight or bulk of high-priced commodities, yet the percentage increase in value is greater in the case of the goods of low cost. Expensive articles can be carried long distances without adding very much to their cost to the consumers. Measured in their percentages, then, the value of the service of transportation is relatively much lower in the case of the higher-priced commodities. The freight charges on wheat range from twenty to forty per cent. of its farm value, while the rate on shoes is possibly two per cent. of their factory price. That these charges are levied in accordance with the real ability of the articles to pay would be hard to establish.


Without attempting in this connection to formulate a complete theory of freight rates, it may be said that there are three factors to which weight should be given in fixing charges: First, the cost of service. The total costs of transportation, including a fair return on invested capital, must be covered by total receipts. Furthermore, the minimum rate charged any particular class of commodities ought to be sufficient to pay the operating expenses incurred in transporting the goods. Second, the value of the service. This fixes the maximum rate that may be charged. Were the railroads to charge more than the service is worth to the shipper the service would not be desired. Third, the value of the commodities. Between the minimum rate fixed by the operating expenses and the maximum charge determined by the value of the service actual rates may vary through a wide possible range. In determining what rates within this range will be theoretically most just and least discriminatory, consideration should be given both to the value of the service and-more than is the case at present-to the value of the articles transpor

ted. By doing this rates will be paid by the various articles of freight more nearly in proportion to their ability to pay.


Whatever theory of rates may be accepted as ideally best, it cannot be strictly adhered to under the existing conditions of active competition obtaining in the United States. Actual charges have to be fixed and revised to meet the varying circumstances under which railway traffic is conducted. This competition takes several distinct forms. One is that between railways and waterways. A large part of the domestic traffic of the United States has the choice of transportation by rail or by water on the great lakes and the tributary canals, by the navigable rivers, or by one of the many ocean routes followed by our coastwise commerce. There is also the competition of rival railways connecting common termini or serving the same cities. These forms of competition are the ones most frequently noted; but they perhaps exercise a less potent influence over rates than what is known as competition through the markets or through the channels of trade. The competition between rival centres of commerce and industry-between the Atlantic cities and the gulf ports, for instance, or between the manufactures of New York and Philadelphia and those of Chicago or Cincinnati for the markets of the Southern States, to cite another example-is a force that must be considered in making rates and fares. Even towns served by only one railway and by no waterway enjoy the benefits of this industrial competition. Unless the railroad can give the industries in these local towns rates that will enable them to market their products, the industries will decline and the railway will lose its traffic.

An interesting result of the competition of roads connecting common termini or joining a common industrial region with seaboard points is that the road whose line is the longest and whose expenses of transportation are greatest is obliged to charge the lowest rate. The short lines can charge more because they compete for traffic under more favourable circumstances. The lower charge of the longer line is called a differential rate, and it is customary for the shorter or "standard" lines to agree to allow the "differential" line a stipulated differential rate. This is the concession which the standard lines are obliged to make to temper competition and to prevent rate wars. The Grand Trunk, running from Chicago to Boston by way of Montreal, is a good example of a differential line, and the New York Central is a good instance of a standard line.


It is a maxim of common law that transportation charges must be reasonable, and the exaction of an unreasonable rate by a public carrier is a common-law misdemeanour punishable by the courts. But when, as the result of severe competition of railroads with waterways and with each other, unjust discriminations between persons, between places, and as regards classes of traffic-the abuses which constitute the railway question-became prevalent, the common-law provisions applying to railway charges were given statutory form and were supplemented and extended by such legislation as the circumstances peculiar to the situation seemed to demand. The comprehensive railway- and canal-traffic act passed by Great Britain in 1854 has been the model adopted for much of the railway legislation in the United States.

The Constitution of the United States gives Congress power to regulate commerce "among the several States," but the jurisdiction over intrastate traffic lies with the State governments. The States began to pass general laws for the regulation of railroads fully twenty years before Congress acted, and two thirds of the States have established commissions to administer those laws.


After fifteen years of agitation and investigation the existing interstate commerce law was enacted in 1887. The law prohibits unreasonable rates and unjust discriminations between persons, places, and classes of traffic, prohibits pooling agreements, provides penalties for the violation of the law, and establishes a commission of five men to administer and enforce the statute. Fortunately for the commission and for the country the first chairman of that body was the eminent jurist, Thomas M. Cooley, whose master mind did much to give vitality to the law.

During the first five years after the law was passed it secured a fairly efficient regulation of interstate railway commerce, but recent decisions of the United States Supreme Court have so weakened the law that at present the commission has very little power. The commission can investigate complaints and make reports, it can collect statistical information, it can and does informally adjust many differences between shippers and carriers; but, to quote from the last report of the commission, "it has ceased to be a body for the regulation of interstate carriers." Legislation to amend and strengthen the interstate commerce law is urgently needed.

Judge Thomas M. Cooley. (First chairman of the interstate commerce commission.)

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