The Relations of the Railroads to the Public Interests—No 2.
COSTofTRANSPORTATION
—AND—
FREIGHT CHARGES
—ON—
RAILROADS.
^3^ JOSEIE'IS: Tr.
hroni " The Manufactm'er' of January i6th, i88g.
HUNTINGTON
'ITIK "LONG-islander" PRINT.
1889.
COST OF TRANSPORTATION AND FREIGHT
CHARGES ON RAILROADS.
The present disturbed condition of the railroad system of
the Uidted States arises from the' fact that the forces of com¬
petition which constitute its environment have become so
powerful and so strenuous that the railroad companies alone,
or even through such combinations as they are now permitted
to enter into, are unable to resist the constant downward
tendency of rates, which if unchecked, must culminate in
widespread railroad bankruptcy. Attention is here invited
merely to certain economic aspects of the case.
The instinct of justice, which is at all times the controlling
impulse of the American mind, demands that the railroad
companies shall be allowed to charge rates which will yield a
fair margin of profit above the actual cost of transportation.
This is fundamental and axiomatic. The practical application
of the idea, however, leads into a complex and apparently
interminable problem. The cost of transportation by rail in¬
volves two things. First, the cost of the railroad, with all its
equipment ready for work, and second, the cost of conducting
transportion, i. e., doing the work. A fair margin of profit to
the railroad company embraces therefore, a margin of profit
on the cost of operating the road, and a proper rate of interest
on the investment in the road. The cost of railroads differ
widely. The mere cost of preparing-the graded roadbed, irre¬
spective of ballast, varies from about one thousand dollars to
over half a million dollars a mile. But the cost, of moving
freight is subject to a much greater range of circumstances
and conditions, and exhibits wide variations on different roads.
The chief circumstances and conditions which affect cost of
railroad freight traffic are magnitude of traffic ; kind of traffic,
having reference to carriage in open cars or in box cars, cost
of handling, risk and liability to decay or deterioration, also
wages of labor, cost of fuel and other material, the effects of
frost, snow and floods upon the cost of maintaining the rail¬
way, speed of trains, quantity carried for individual shippers,
alignment and grade of road, and regularity or irregularity of
freight movement. If the traffic of a railroad is nearly all in
one direction the cost of transportation will, of course, be
much greater than if about equal in both directions. In the
latter case only about half the equipment required in the
former case would-be necessary. As terminal expenses con¬
stitute a large proportion of the cost of conducting the freight
2
traffic of a railroad, the average cost per mile will depend
largely upon the average length of haul.
From all this it goes without saying that the problem of
cost of transportation must be a pretty difficult one to figure
out. The foregoing, however, constitutes merely an introduc¬
tion to the study of the economy of transportation by rail.
Certain variable and complex questions of policv arise as to
the advisability of taking freights at rates below the average
rates which the foregoing circumstances and conditions may
warrant. Tírese lead into computations whicli might turn the
head of any mathematician on earth. A few typical exam¬
ples will be presented. It was ascertained by the traffic man¬
ager of a leading trunk line, a civil engineer by profession—
as the result of an elaborate computation—that the average
cost of transportation over his road was r6 mills per ton per
mile, but that better results wonld be realized by transporting
freights in the opposite direction to the principal movement at
the rate of 6 mills per ton per mile than to haul back empty
cars. Another manager, also a civil engineer, found that
while the average cost of freight movement was 15.8 mills per
ton per mile, it would be more profitable to haid goods in the
direction opposite to the principal movement for 3 mills per
ton per mile than to haul empty cars ; and another proved
that under similar circumstances a rate of one-tenth the aver¬
age cost of transportation might yield better results than haul¬
ing empty cars. In practice it has been found that on branch
lines the cost of transporting certain goods in small quantities
is fully five hundred times the cost of transporting similar
goods in large quantities, on the main lines of the same com¬
pany. Then, again, the question frecjuenth" arises as to the
carriage of freights of low value, or which, for other reasons,
will not \ ield enough to pay their full projiortion of all the
expenses of the road, including interest on its cost, but which
will vield something in excess of the mere cost of their
carriage, and therefore will justify the purchase of additional
equipment.
The neophyte exclaims, How is it possible for the traffic
managers of ra'lroads ever to construct freight tariffs from
computations based upon all these vari;d)le elements of cost?
I answer it is impracticable, and it is never done. There is, how¬
ever, always an open door of escape from this dih.-mma. In
practice the whole pi'oblem of freight rates is lifted from the
field of computation and is remitted to the arbitrament of
competition, or rather it may be said to the results of the inter¬
action of competitix'e torces.
Competition may be classed under thi'ee heads : the compe¬
tition of water lines, the competition of rival railroads, and the
3
indirect though potential influence of the competition of com¬
mercial forces. The competition of water lines is limited as to
its extent, but wherever it is felt it efl'ectually determines the
maximum rate which can be charged on all the heavier and
cheaper classes of freight, since the actual cost of transporta¬
tion by water varies from one-third to only one-tenth the cost
of transportation by rail. The competition of rival railroads
imposes restraints immeasurable in number and in character.
But the most subtle, far reaching and [tersistent of all the ele¬
ments which determine rates is the restraining influence of
commercial forces. Every new connecting line and railroad
extension adds to the complexity of the situation. Besides new
centers of trade and of industry are continually springing into
existence, and demanding the advantages of distributive com¬
merce enjoyed by the older and larger trade centers. This com¬
petition of commercial forces reacts strongl}^ upon the railroads.
The whole tendency of the American railroad system is
toward a parity of values, as well as toward a parity of freight
charges. A few months ago the rate on tea was made the same
from San Francisco to St. Louis, St. Paul, Chicago, Cincinnati,
Detroit, Buffalo, Boston, New York, Philadelphia and Balti¬
more, and "common points" respectively. This the tariff
makers denominated a "postage stamp rate." The establish¬
ment of this common rate was due to the competition of ves¬
sels on the ocean via. the Suez Canal route, the competition of
rival railroads, the competition of rival markets, and the
narrow margin of profits on tea.
Small wonder is it that the Inter-State Commerce Commis¬
sioners have been so cautious in deciding upon the various
questions which have come before them touching relative rates
and discriminations which are the result of the interaction of
forces beyond the control of the railroad companies, and
therefore aitside the range of the function of the Commission.
Notwithstanding the enormous development of commerce,
consequent upon railroad construction in this country, the
pressure of ail these direct and indirect elements of competi¬
tion, has forced rates down even below the standard necessary,
in order to meet e.xpenses and to secure a resonabie margin of
lirolit for the com[)anies. In a word, the railroad manager
finds himself struggling against an environment which is a
little too much for him.
The construction of railroads in this country has developed
an amount of wealth more than an hundred fold the entire
cost or present value of our railroad system, and it is estimated
that the value of goods annually transported by rail is more
tlian twice the cost of all the railroads, and more than twenty
times tiie amount annually received for the transportation of
4
freight. And yet the instrumentality by which this vast wealth
and commerce has been developed, seems to have wdthin itself
the elements of its otvn financial destruction. Railroad mana¬
gers and owners are now apprehending with alarm a threaten¬
ing disaster in railroad securities.
It is a strange and unexpected result that the extension
of railroads should have created forces greater than can
under existing laws and conditions be exercised by the
railroad companies, either singly or when acting conjointly.
If this state of things long continues the only possible out¬
come is a combination of railroad interests which shall elimi¬
nate the fierce competition of railroads, and be strong enough
to cope with the competition of commercial forces. But that
would obviously be inimical to the public interests. Faith
in the intelligence of the American people inspires the belief
that this threatening danger may be averted.
The inherent and manifest weakness of our railroad system,
undoubtedly due to a constitutional infirmity which marks its
structural features, naturally suggests the necessity for some
prop or restraint, protective and enabling in its character,
which shall fairly preserve the equilibrium of forces. The
adoption of expedients of this sort marks the progress of our
civilization.
The physical disability of the railroad which has forbidden
that it shall be a free highway of commerce—viz. : its pathway
no wider than the wheel of the vehicle which moves upon it,
has also decreed that traffic which is competitive as oetween
railroads must be divided either by the apporfionment of
traffic or by partitioning out the country among a few great
corporations, the plan adopted in France at the beginning.
This latter plan involves a degree of governmental interference
and restraint, which would be intolerable to the people of this
country, so long accustomed to the privileges of an untram-
meled internal commerce which in the absence of any such
restraint has had such a phenomenal development. The
plan of apportionment is more in harmony with American
ideas and interests. If it is maintained by force of law it will
avert political difficulties against which the country ought to
be protected. In this view it is held that the provision of the
Inter-State Commerce Act forbidding the pooling or apportion¬
ment of traffic was unwise and detrimentiil to the interests of
the public generally, as well as of the railroad companies.
Pooling presents no intrinsic qualities for good other than
its developed remedial properties. In this regard it appears
to operate as a specific. The alternative now presented to the
people of this country, appears to be the pooling or the conges¬
tion of our railroad system. The apportionment of traffic
between competing lines is one of the most conservative of all
5
the forms of combination which this age of associated effort
has begotten. To taboo pooling as a combination against the
public interests would be as absurd as to proscribe all partner¬
ships and all corporations and all trades union.
No careful observer of the course of events in this country
during the last twenty-five years can have failed to see that
the interaction of forces has steadily and irresistibly tended in
the direction of equalizing the opportunities for commercial
and industrial enterprise throughtout this broad land of ours ;
and the statistics, showing our railroad development and the
constant reduction and equalization of freight charges, prove
beyond all question that the American railroad system has
been the most potent of all influences in bringing about this
result. The genius and force of our political institutions also
tend strongly in this direction.
In an imperfect and very general way the foregoing presents
a few of the salient features of the American railroad problem.
A careful study of the whole situation clearly shows that the
only practical value of a knowledge of the economies of trans¬
port by rail, in so far as relates to rate-making, is that it serves
to afford a larger and more just view of the merits of the whole
subject. The impracticability of basing freight charges upon
cost of service is evident from the fact that of several com¬
peting lines, the one which could carry goods at least cost,
would secure all the traffic ; in other words, there would be no
actual competition.
This general review also serves to show that the railroad
rate-maker is not a computer and arbitrary determiner of rates,
but rather a student of forces beyond his control, the relative
influences of which forces he must assiduously investigate and
carefully obey. This is his function. He must also learn how
to discriminate so as not to discriminate unjustlv, but accord¬
ing to the leadings of the circumstances and conditions which
constitute his environment. At the same time within the
range of his discretionary powers he must deal justly and
equitably with all men.
The Inter-State Commerce Commission has the correspond¬
ing function of seeing to it that in the exercise of this discre¬
tion, the railroad manager does not discriminate unjustly or
impose unreasonable rates. This defines the proper limit of
the function of the Commission, beyond which lies the field of
useless, unwise and mischievous interference with the freedom
of commerce. The task of working to this line is a delicate
and difficult one, but mj more so than the duty of observing
those innumerable nice distinctions upon which our peace and
happiness depend, in a world in which we are all debating.
JOSEPH NIMMO,
Hun iunîcion, L. 1., N. Y., Jan. loth, 1889.