LIBRARY UNIVERSITY OF CALIFORNIA. Received, ^.t.Sjs!lSCfl^---., Accessions No^C&.'/.& Shelf No. RAILWAY TARIFFS AND THE INTERSTATE COMMERCE LAW BY EDWIN R. A. SELIGMAN, PH.D. SCHOOL OF POLITICAL SCIENCE, COLUMBIA COLLEGE Reprinted from Political Science Quarterly ', Vol. //., Nos. 2 and 3. GINN & COMPANY BOSTON, NEW YORK, AND CHICAGO 1887 RAILWAY TARIFFS AND THE INTERSTATE COMMERCE LAW BY EDWIN R. A. SELIGMAN, PH.D. SCHOOL OF POLITICAL SCIENCE, COLUMBIA COLLEGE Reprinted from Political Science Quarterly ', Vol. //., Nos. 2 and 3. ' : GINN & COMPANY BOSTON, NEW YORK, AND CHICAGO 1887 TABLE OF CONTENTS, PAGE Nature of the railway i The principle of tariffs 2 Fixed charges versus operating expenses 3 Cost of service theory -4 Charging what the traffic will bear 8 Classification 9 Its legitimacy .11 The abuses 12 Advisory boards . . . . . . . . . 13 Discrimination 14 Personal discrimination >. 15 Allowance for quantity .".*'. 16 Wholesale principle . . . i? Local discrimination 19 Its legitimacy 20 Pro rata charges .21 Value of service principle ......... 23 Not new 23 Analogy to principles of taxation 25 Doctrine of compensation 28 Preferential versus differential rates 29 The three forms of differential rates 30 New rates below additional movement expenses . . . .30 Other differential rates 31 Geographical advantages 31 Interests of consumers 32 Distinction between personal and local discriminations . . . 32 The abuses 33 The short haul system . 34 Limitations on the principle ........ 35 Short haul laws in the commonwealths 36 Short haul laws in Europe 38 TABLE OF CONTENTS. PAGE The short haul clause in the interstate commerce law . . . .41 Dangers of strict interpretation . 42 II. The anti-pooling clause of the interstate commerce law . .43 The doctrine of free competition 43 Economic or industrial monopolies 45 Are combinations an evil? ......... 46 Competition in railways illusory 48 Seven forms of combination 49 Agreement to make equal rates 50 Working arrangement ......... 50 Division of the field or territorialization 50 Division of the traffic 52 Division of the earnings 52 Advantages of pools .......... Stability of charges 52 Lessening of personal discriminations 53 Money pools and traffic pools in the United States . . . -55 Net money versus gross money pools 56 Pools in Europe . . -57 England. Joint purse arrangements 57 Germany. Kartellen ......... 59 Austria and Belgium 60 France. Division du traffic ........ 61 Other European countries 61 Dangers of pools . . . . . . ... . . .62 Pooling does not prevent healthy competition 63 Abolition of pools would result in final consolidation . . . . 63 Differential pools 65 Mistake of the interstate commerce law 65 Senate select committee 67 Competition of carriers on the line 68 History of the system . .68 Objections to the project 70 TABLE OF CONTENTS. PAGE Separation of traction and carrier 72 Running powers or compulsory competition . . . . -74 Water competition 75 The interstate commerce commission 77 English Commissions 78 Railway commission of 1873 79 Its defects . . 80 Railway legislation in the United States . . . . . .81 The granger movement 82 Compulsory commissions ........ 83 Advisory commissions ......... 83 The federal commission 84 Conclusion 85 Good features of the law . . 85 Error of anti-pooling clause 86 Dangers of the short haul clause 86 Probable results 87 , RAILWAY TARIFFS AND THE INTERSTATE COMMERCE LAW. WHEN Solomon de Cause first advanced the idea of em- ploying steam as a propelling power, in 1615, he was shut up in the mad-house as a hopeless maniac. Two centuries later, in 1812, when Colonel Stevens of Hoboken proposed to build a steam railway at far less cost than the projected Erie canal, he was regarded as absurdly visionary and somewhat de- mented. And yet to-day, within the short span of a human life, we have the vast network of over three hundred thousand miles of iron roads covering the civilized world. It is the cen- tral factor of recent economic development. Little wonder, then, that the weighty problems of railway management in its relations to the owners, the employees, and the public, should engross the earnest attention of legislators and publicists throughout the world. The Interstate Commerce law of 1887 is the first serious attempt at governmental regulation for the whole of the United States. It may be well, therefore, to discuss the pro- visions of the act in the light of general principles. We shall confine ourselves primarily to a consideration of the railway tariffs, and attempt to ascertain the underlying doctrines and their limitations. Railway tariffs may be regarded from two essentially different standpoints, the private and the public. In so far as a rail- way is a business corporation, it is a private matter. It may fix its prices in accordance with general business principles. It will endeavor to subserve primarily the interests of its owners. It will strive for the greatest possible profits. Its course is legitimate and praiseworthy. But in so far as the railway forms our public highway, it is a public matter. The objective point now is the general welfare, the interests of the community. It 2 POLITICAL SCIENCE QUARTERLY. [VOL. II. aims not at the greatest possible profits, but at the greatest possible benefits. It looks not at the interests of its owners, but at the interests of the public. The one point of view is individual, the other is social. The modern railway corporation shares both these characteristics. Its nature is hybrid. To subordinate the public to the private element is plainly inadmis- sible. To entirely engulf the private in the public element is equally unfair, as long as the railway is not owned by the state. Given the private corporation, the question is : How shall the two elements be reconciled ? It is the problem of railway legis- lation and corporate regulation. The inequality of railroad charges forms the pith of the com- plaints usually made. It is the crucial point of corporate management. On the one hand we have the anti-monopolists, who liken the common carriers to the feudal barons of old, using the mediaeval weapons of unjust privilege and ill-gotten power to carry out their ends of rapacity and favoritism. On the other side we have the railway managers, who exultingly exclaim, in so far as charges are concerned : All that is, is just. Where now is the truth of the matter ? The principle commonly advanced by the antagonists of the railways, as well as by the would-be reformers, is that of cost of service. Charges should be regulated in accordance with the cost of the particular transaction to the company. This is cer- tainly not the actual method. Is it the correct method ? Let us see. Railway expenses are divided into two great classes, fixed charges and operating expenses. By fixed charges is simply meant the interest account, the sum necessary to meet the periodically recurring interest on the mortgage debt. 1 1 In Europe, not only the interest on the funded debt, but also the dividends on the capital stock are sometimes included in the " fixed charges." This is manifestly fallacious, as it is not legitimate to class as expenses what are really profits. Rates are nowhere determined by the prospective profits, but vice versa. Cf. Ndrdling, Die Selbstkosten des Eisenbahntransports und die Wasserstrassenfrage, (Vienna, 1885,) S. 206-210. The matter is, however, of less importance from the fact that with us railways are generally constructed on the proceeds of the mortgage bonds, not of the capital stock, as in Europe. The interest, hence, far exceeds the dividends. In 1885, No. 2.] THE INTERSTATE COMMERCE LAW. 3 The proportion of fixed charges to operating expenses varies, of course, with each line. A careful calculation on the different branches of a single road found the interest charges to vary from 26 per cent to 59 per cent of the total expenses. 1 But in a rough way it may be said that fixed charges amount to from forty to fifty per cent of the entire expenditures, not alone with us, but also in Europe. 2 In other words, well-nigh half the expenses are constant or invariable. They do not change with the amount of business transacted, but are independent of the traffic. They remain the same whether there be much, little, or no additional traffic. On the other hand, the operating expenses may be divided into several categories. No uniformity has as yet been at- tained in the classification of expenses, although the national commission has been empowered to prescribe a uniform system. One method is to divide the expenses into : (a) maintenance of road, buildings, and general expenses ; (b) station expenses ; and (c) movement expenses. Class a will in general be but very slightly affected by the amount of business transacted. Considerable variations in the traffic may take place without a proportionate, if any, increase in the expense involved. They may therefore likewise be set down as constant or invariable ex- penses. Class b will vary, but only in part, with the business transacted. A certain organization must always be maintained, whether the traffic be heavy or light ; but after a definite limit is passed, more men must be employed to do more business. These expenses are thus only partially constant. Class c, finally, fluctuates almost in proportion to the business trans- acted. The less trains, the less expense. The proportion of each of these three classes to the whole will eg., 1 86 million dollars were paid in interest, 77 millions in dividends. Cf. Poor's Manual for 1886, p. i. For European figures, see Loisel, Annuaire special des chemins de fer beiges, 1886, pp. 246 et seq. 1 Fink, Cost of Railroad Transportation (1882), table A, p. 4, for the Louisville and Nashville Railroad. 2 See the tables in Sax, Die Verkehrsmittel in Stats- und Volkswirthschaft, (1879), Bd. II, S. 368. For France in particular, Baum, Annales des ponts et chaussees, Memoires, 5 me serie, t. i, p. 422, 4 POLITICAL SCIENCE QUARTERLY. [VOL. II. of course vary with the widely different characteristics of each line ; but in general it may be affirmed that about one-half of the operating expenses are constant or invariable. 1 The total constant expenditures of a railway are thus the fixed charges plus one-half the operating expenses. In other words, a large majority of railway expenses are irrespective of the amount of business. They remain the same, notwithstand- ing an increase or decrease of the traffic. This distinction between constant and fluctuating expenses is of vital importance to a correct understanding of the principle of railway rates. It leads to certain conclusions which form the fundamental explanations of actual tariffs. It is unnecessary to explain the wide disparity of cost of car- riage on different lines, or for individual transactions. Certain characteristics affect the roads themselves, such as the grades, the curves, the weight, and speed of the trains, the cost of con- struction, the quality of the supplies, the changing conditions under which the service is performed at different seasons, etc. These alone would show how difficult is the task of accurately determining the cost of carriage for any one service. But the task is complicated by other difficulties. It is apparent that the cost of transportation per ton-mile must vary with the tons and the miles, i.e., with the quantity of the freight and the length of the haul. But these differ widely in each case. On one line the greater portion of the freight is carried over its whole length ; on another the local business far outweighs the through 1 Manager Haines, of the Savan. Fla. & W. R. R., divides operating expenses into five classes, and makes a careful calculation that 53 per cent of such expenses do not increase with additional business. Report of Senate Select Committee on Interstate Commerce (1886), App., p. 138. We shall hereafter speak of this as the Cullom report. 2 Mr. Fink's calculation varies but slightly from the above. He asserts that upon an average of $1 earned in the roads of the United States, 40 cents are required to pay 4^ per cent interest on bonds and stock, 35 cents to pay the movement expenses, and 25 cents to pay maintenance and general expenses. Cullom Committee, Test., p. 95. The New York commission divide operating expenses into maintenance, general and transportation (including station) expenses. But the result is the same. For Europe, see Ulrich, Das Eisenbahn-Tarifwesen (1886), S. 40, but corrected as to Ger many in Archiv fur Eisenbahnwesen, 1887, S. 253. No. 2.] THE INTERSTATE COMMERCE LAW. 5 traffic, so that the capacity of the rolling stock is not fully utilized. On one line the traffic moves in great part in one direction, and the number of empty cars returned is abnor- mally large ; on another there is far more back-loading and a more even distribution of the traffic. On one line the trains are started with full loads, on another they are half empty. The proportion of paying to dead weight, or the amount of the tare,, is of paramount importance. 1 All these causes influence both the tons and the miles, and thus affect the cost per ton-mile. Logically, the cost per ton-mile is resolvable into two portions, that which corresponds to the constant or fixed expenses, and that which corresponds to the fluctuating or variable expenses. The former portion is ascertained simply by dividing the con- stant expenses by the total ton-miles. It will therefore vary inversely to the traffic. 2 But as the constant expenses form by far the larger portion of the whole, the rate per ton-mile will be determined by this corresponding portion. We conclude then that the cost tends to vary almost inversely to the traffic the more traffic, the less the cost per ton-mile ; the less traffic, the greater the cost per ton-mile. That is to say, even if it were feasible to construct a tariff based on the cost of service of each particular transaction, in itself a work of gigantic magnitude and infinite difficulty, such a tariff would be of very slight avail unless the amount of freight remained an unalterable quantity. So soon as the vol- ume of traffic changes, the cost of service is necessarily altered. The rate would no longer be based on cost of service. 1 The average gross weight of freight cars of all classes in the United States is eight tons per car. The average load they carry is five tons. Hence, 59 per cent of the weight hauled in freight traffic is non-paying or dead weight. In passenger traffic the non-paying load is almost 90 per cent, because the cars are not so fully packed. In Germany, in 1880, the dead weight was: for freight cars, 53 per cent (or taking only the loaded cars, 27 per cent) ; for passenger cars, 76 per cent; for baggage cars, 97 per cent. 2 Suppose the constant expenditures for transporting seven and a half million ton- miles amount to $75,000. Then if there are 7,500,000 ton-miles, cost = 7$$$-Jhr = I c. per ton-mile; if there are 10,000,000 ton-miles, cost = T ^> o (Welsh) p. 460, (Wood) pp. 478-480, etc. No. 2.] THE INTERSTATE COMMERCE LAW. 37 Granger movement of 1870-1875 resulted in the passage of very stringent laws in the Western States, some of them being virtu- ally pro rata laws. Many of the specifically short-haul laws, as that of 1873 in Ohio, remained dead letters, while the more stringent laws, which absolutely fixed rates or empowered the commissioners to fix rates, were enforced so literally as to pro- duce a revulsion in public feeling and a speedy repeal of the laws. 1 The same is true of the more recent short-haul laws in the North-west, as, e.g., the Doane law of 1881 in Nebraska. The railways enforced it so strictly by raising local rates that the public began to regard it as a burden, not a relief. As a result, the law is now practically a dead letter. 2 Several of these laws were, however, something more than mere short-haul laws. They provided, in general, that a shorter distance should not be charged more than a longer distance on the same line, while according to a true short-haul law the shorter distance must be included within the longer distance. This distinction was well expressed in the Massachusetts law of 1874, which reads as follows : No railroad corporation shall charge or receive for the transportation of freight to any station on its road a greater sum than is at the time charged or received for the transportation of the like class and quantity of freight from the same original point of departure to a station at a greater distance on its road in the same direction? But this law, as the phraseology denotes, applies only to hauls from a terminus to the way-stations. It does not apply in the other direction, i.e., from the way-stations to the terminus. Possibly on this account, but probably because of the smaller degree of competitive traffic in the state, it has been found pos- sible to enforce the law strictly. 4 The New York commission made a careful study of the prin- ciple in 1884. Their conclusion is expressed in these words : 5 1 So in Wisconsin, Iowa, Michigan, Minnesota. 2 Cullom Committee Report, Test. (Rosewater), pp. 1133-34. 8 Public Statutes, chap. 112, 190. 4 Railroad Commissioners' Report, 1885, and 1886, p. 35, in re Housatonic Rail- road Co. See also Cullom Rep., Test. (Russell), p. 305. 6 Report on the/r0 rata bill (1884), P I2 * 38 POLITICAL SCIENCE QUARTERLY. [VOL. II. Railroads should not as a general rule charge more between a ter- minal and an intermediate point, for a like class and quantity of freight, than is charged between such terminal and a more distant point, even though at such more distant point there may be railroad or water com- petition, unless railroads can affirmatively establish such circumstances governing such competition as justify the higher charge for the shorter distance. This is a conservative and judicious conclusion, which shuts out oh the one hand the extravagant claims of the railway offi- cials, and on the other the short-sighted demands of the profes- sional reformers. Each case must be judged on its own merits. Thus in Moon vs. The New York, Ontario and Western, 1 compe- tition with a rival railway was held not sufficient to justify the infraction of the principle. In Foot et al. vs. The Utica and Black River, 2 it was held that higher charges might sometimes be made to intermediate points, but that the peculiar circum- stances were not sufficient in this case. In Harding and Hollis vs. Rome, Watertown, and Oswego, 3 water competition, which would have given the business to foreign companies, was held to be a valid reason for the infraction of the rule. The short- haul principle as administered in New York is thus no hard and fast rule. European experience all tends to the same result. In France the short-haul principle is known as the clause des stations non denommees, and has been in force since 1864. The rail- way tariffs must be submitted to the administration, and in virtue of this power of approval or homologation, the govern- ment has procured the insertion and maintenance of the short- haul principle. 4 But this is applicable only to the general tariffs, and is perfectly enforceable there because of the almost utter absence of interior competition a fact due to the existence of territorial ization or division of the field among the separate companies. The principle is not applicable to any case where 1 N. Y. Railroad Commissioners' Report (1885), pp. 73-76. 2 Report (1884), pp. 94-131, especially pp. 106 and 119. 3 Report (1884), p. 1 60. 4 Aucoc, Conferences sur le droit administratif (2 me ed., 1882), III. 748. Cf. Picard, Chemins de fer fran9ais (1885), II, 444; III, 587. No. 2.] THE INTERSTATE COMMERCE LAW. 39 there is any danger of foreign competition. The tarifs de transit, or through tariffs for goods passing through France on the way to another state, and the tarifs cT exportation, or through rates for goods destined for exportation, are exempted from the application of the principle, so that greater charges are per- mitted to intermediate points. This, it must be remembered, is allowed by public authority and in the public interest. 1 In Germany, where the railways are almost exclusively owned by the state governments, and interior competition thus mini- mized, there is likewise no hard and fast rule. The short-haul principle, or Princip dcr hintergelegenen Stationen, is accepted as a general rule in Prussia, but exceptions may be admitted by the minister of public works. 2 The Bundesrath of the empire also enunciated the same principle, but expressly inserted the proviso that particular circumstances might justify an infrac- tion of the rule. 3 These exceptions are of frequent occurrence. 4 The short-haul principle does not apply to through-transit rates, to import or export tariffs, or to any competitive centres where the competition is caused by waterways or foreign railways. After the purchase of the Prussian railways by the state a few years ago, the attempt was made to enforce the short-haul rule strictly, but it ignominiously failed. 5 The Scehafen-Ausnahme- Tarif y and a large number of other special rates permit charges in derogation of the short-haul principle. Even the earnest de- fenders of state railways confess that numerous exceptions are indispensable. 6 In Switzerland the short-haul principle is maintained in a recent report of the Diet, but exceptions are permitted in the 1 The accounts of European practice in the New York Commission Report on the pro rata bill are inexact and untrustworthy. 2 Cf. the ministerial rescripts in Kronig, Die Differentialtarife der Eisenbahnen. 3 Bundesrath, Sitzung vom 6. April, 1877. 4 " Ziemlich haufig " is the phrase used by a prominent German official in a letter to me. The matter is decided in every case " auf Grund der jedesmal vorliegenden thatsachlichen Verhaltnisse." 5 Cf. especially the test, of Forbes in English Select Committee Rep. (1882). Evid. 169 et seq. 6 Ulrich, Eisenbahn-Tarifwesen (1886), pp. 150-152. 40 POLITICAL SCIENCE QUARTERLY. [VOL. II. case of foreign competition. 1 In Austria the short-haul clause is inserted in many of the railway charters, but both in the state and in the private lines the exceptions are exceedingly numerous. 2 In Belgium and Holland, where the laws literally interpreted enjoin mileage rates, the vast majority of actual charges are arranged according to special rates, many of which permit greater charges for the shorter distances. 3 In Italy similar special rates may be approved by the government. 4 Thus in no country where the tariffs are fixed by the state or subject to public control is the short-haul principle an absolute rule. In England, indeed, the short-haul principle has been affirmed by the courts, 5 and the railway commission has of late gone even further in its opposition to differential rates. In the cele- brated Broughton and Plas Power Coal Company case it was held that the charge for the longer distance must not only be greater than for the shorter distance, but must actually more than suffice to cover the total cost of the extra service. 6 But these decisions have had very little influence on the actual arrangements of tariffs in Great Britain, and have been se- verely criticised in the parliamentary commissions. 7 The decis- ions, moreover, are by no means uniform, and in a very recent case it was held by the court that differential rates are perfectly legitimate if in the one case the rate is a local rate, and in the other simply a portion of a through rate. 8 It is not " under sub- 1 Bericht des Bundesrathes an die Bundesversammlung, Nov. 23, 1883; in Hurlimann, Die eidgenossische Eisenbahngesetzgebung (1887). 2 Schreiber, Das Tarifwesen der Eisenbahnen (1884), S. 181, 191, 199. Cf. NSrd- ling, Die Selbstkosten des Eisenbahntransports (1885), S. 219. 3 Jacqmin, Etude sur les chemins de fer des Pays-bas (1882), p. 87; Nicolai, Les chemins de fer de PEtat en Belgique (1885), p. 29. 4 Agreements of 1885 with the Mediterranean lines, cap. 4, 39, 44. 5 Cf. Budd vs. London and Northwestern Railway Co., 36 L. T. N. S. 802. This was a case of sea competition. The decision was opposed to the principle of the older decisions under CardwelFs act. 6 Railway Commission, Tenth Report (1883). 7 Select Com. (1882), Evidence, pp. 71, 89; especially the celebrated cases of Evershed and the Denaby main. 8 Hull, Barnaby and West Riding Junction Railway vs. Yorkshire and Derbyshire Coal Co. No. 2.] THE INTERSTATE COMMERCE LAW. 41 stantially similar circumstances." Lord Stanley's bill of 1887 in fact expressly provides that the justice of differential rates should be measured by the necessity of securing the traffic. 1 We are thus prepared to pass an opinion on the Interstate Commerce law. The short-haul clause reads as follows : That it shall be unlawful for any common carrier subject to the pro- visions of this act to charge or receive any greater compensation in the aggregate for the transportation of passengers or of like kind of prop- erty, under substantially similar circumstances and conditions, for a shorter than for a longer distance over the same line, in the same direc- tion, the shorter being included within the longer distance. . . . Pro- vided, however, that upon application to the commission appointed under the provisions of this act, such common carrier may in special cases, after investigation by the commission, be authorized to charge less for longer than for shorter distances for the transportation of pas- sengers or property ; and the commission may, from time to time, pre- scribe the extent to which such designated common carrier may be relieved from the operation of this section of this act. It is improbable that the commission will interpret the act in the sense that the words "under substantially similar circum- stances and conditions" justify all existing differential rates due to competition. This would practically emasculate the law. But on the other hand an analysis of the principles of rates and the results of European experience have shown us that any attempt to apply the law in all cases would be ruinous. A strict enforcement of the short-haul clause would most certainly result in general discontent and a speedy repeal. The safety- valve consists in the discretion afforded to the commissioners, and upon them the success or failure of the law depends. The act is an expression of a correct principle, but the limitations of the principle are no less obvious. The country is to be congratulated on the legislative recognition of the rule; let us trust that there may be equal cause for congratulation on the official recognition of its limitations. Our preliminary conclusion may now be formulated. Under a system of free competition among private railways the 1 Railway and Canal Traffic bill, 25, sec. 2. 42 POLITICAL SCIENCE QUARTERLY. principle of value of service or charging what the traffic will bear is the only rational method, calculated to give the most efficient service and the greatest profits. But the existence or {possibility of the abuse of power requires the restriction of this unlimited liberty in the public interest. The reconciliation of the railways and the public can take place only through the \interposition of public authority. The public authority must lay down the rule of equal treatment as the fundamental doc- trine, but must recognize the principle of value as a reason for departing from the doctrine in any individual case. Omission of either duty necessarily entails injustice or inefficiency. The short-haul clause is a partial recognition of the demand for equal treatment ; the discretion given the commission is im- plicitly a partial recognition of the theory of value. The Inter- state Commerce act thus accepts the principle and concedes its limitations ; in this respect at least it is a wise and judicious measure. For the commission to ignore the limitations in the attempt to realize the principle would be an act of consummate folly. EDWIN R. A. SELIGMAN. RAILWAY TARIFFS AND THE INTERSTATE COMMERCE LAW. II. SCARCELY second in importance to the short-haul clause of the national law, which has been discussed in the pre- ceding essay, 1 is the section which prohibits pooling. What is the true significance of pooling ? What will be the effect of the law ? To give a correct answer we must enter upon a consid- eration of competition in general. And here we are immediately confronted by the two funda- mental questions : Is free competition universally beneficent ? Is free competition universally existent ? The doctrine of free competition is essentially a modern idea. 1 POLITICAL SCIENCE QUARTERLY, June, 1887, p. 223. It has been a source of great satisfaction to me that the Interstate Commerce commission in its recent weighty decision has taken substantially the same ground as that occupied in my first article. The chief points are as follows : " First. That the prohibition in the fourth section against a greater charge for a shorter than for a longer distance ... is limited to cases in which the circumstances and conditions are substantially similar. " Third. That ... in case of complaint for violating the fourth section the bur- den of proof is on the carrier. " Fifth. That the existence of actual competition . . . may make out the dissimi- lar circumstances and conditions ... in the following cases : 1. When the competition is with carriers by water which are not subject to the provisions of the statute. 2. When the competition is with foreign or other railroads which are not subject to the provisions of the statute. 3. In rare and peculiar cases of competition between railroads which are subject to the statute, where a strict application of the general rule of the statute would be destructive of legitimate competition. " Sixth. . . . The fact that long-haul traffic will only bear certain rates is no rea- son for carrying it for less than cost at the expense of other traffic." In re The Louisville & Nashville R.R. Co. et a!., pp. 27-29. 44 POLITICAL SCIENCE QUARTERLY. [VOL. II. As the basis of nineteenth century economics it was first for- mulated by the Physiocrats and Adam Smith. It is entirely foreign to ancient and mediaeval conceptions. The economy of the middle ages was founded on the idea of reasonable, custom- ary price the justum pretium of the legists, theologians, and statesmen. The institutions were based on restrictions, privi- leges, and enforced monopolies, while the legislative prohibitions were not entirely the product of class selfishness but in part the recognized expression of an attempt to secure distributive justice. That the legislators finally overreached themselves and stifled all liberty by their multifarious restrictions is a well- known fact. The necessary and salutary reaction found its theoretic justification in the "natural law" tenets of the eigh- teenth century, and a partial realization of those tenets followed in the first half of the nineteenth century. The idea now be- came current that a reign of free competition and its logical correlative, absolute laissez faire, would bring about a harmony of interests, a state of universal bliss. The enthusiasm of Bas- tiat and McCulloch was natural in seeing the world break away from the shackles of mediaeval restraint. But recent experience has demonstrated the falsity of their anticipations and has dis- closed serious defects in the regime of free competition. It does not always work evenly ; it often secures undue advantages to the unscrupulous ; it has given birth to great abuses in the fac- tory system and the fraudulent speculation of modern society. The law of competition is not always beneficent. Furthermore, it does not exist universally. The doctrine de- \ pends on the postulates of absolute transferability of labor and I capital. But this assumption is approximately true in only a few instances, absolutely untrue in many instances. In the in- dustrial undertakings of the present day the capital invested is often fixed, not circulating, capital, and cannot easily be trans- ferred to a more lucrative business. It is difficult to gauge even approximately the superior profitableness of some competitive enterprise ; and even when it has been gauged, it is still more difficult at once to transfer the capital. In fact, in only one department of business life does the doctrine of the absolute No. 3.] THE INTERSTATE COMMERCE LAW. 45 play of free competition hold good in the stock exchange of modern times. 1 John Stuart Mill long ago called attention to what we may term economic or industrial monopolies, where competition is neither illegal nor absolutely shut out by nature, but where it is shown to be practically undesirable and utterly inefficient, thus of itself giving place to some form of monopoly. 2 Other writers, and especially Farrer, 3 have attempted to analyze these phenomena and show why the law of competition is not applica- ble. Certain characteristics are common to them all. The industry demands a large amount of capital ; it supplies a neces- sary of life ; the article furnished is local ; the industry occupies a peculiarly favored situation ; the method of operation requires unity and harmony of management ; the production can be largely increased without a proportionate increase of capital. This is true not only of docks, waterworks, and gasworks, but of all media of transportation turnpikes, canals, telegraph, post, and railways. In some of these competition has never been attempted ; in most cases it has been tried, but has miser- ably failed. The disappearance of competition has benefited the companies and in many instances also the public. But at all events, whether beneficial or not, competition has disappeared, and combination and monopoly have resulted. The chief consideration is the possibility of increased pro- duction without proportionate increase of plant or capital. To use a happy phrase, the business is subject to the law of in- creasing returns. 4 The traffic on a railroad may be doubled without the necessity of duplicating roadbed, track, terminals, and general expenses. Ten lines between New York and Albany would not benefit the public, and would certainly ruin 1 This explains, as Cohn pointed out, why Ricardo, who was a stock-exchange broker, first successfully elaborated the theory of free competition. Untersuchungen liber die englische Eisenbahnpolitik, Bd. II (1875), s - 3^4- 2 Book v, ch. xi, ii; Appleton's ed. 1880, vol. ii, p. 584. 8 Cf. Industrial Monopolies, Quarterly Review, October, 1870. Also Sax, Die Verkehrsmittel, Bd. I, S. 66 et seq., and Simon Sterne, Monopolies, Lalor's Cyclopae- dia of Political Science, vol. ii. 4 H. C. Adams, Relation of the State to Industrial Action, Publications of the American Economic Association, vol. I (1887), p. 523. 46 POLITICAL SCIENCE QUARTERLY. [VOL. II. each other. One line judiciously managed can perform all the work at far less cost. The railway is an economic monopoly ; the inevitable tendency is toward fusion and single-headed management. . ^ In addition to these economic monopolies proper, we find almost every department of wholesale trade at present taking the form of industrial combination. To maintain that prices are everywhere regulated by the free play of competition is no longer permissible. We cannot ignore the fact that producers find it to their interest to combine and agree on certain prices less than which it shall be unlawful to ask or take. Adam Smith already said : " People of the same trade hardly meet together even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." Even then the movement had begun ; to-day it has become well-nigh universal. There is scarcely a trade throughout the land without its combinations, many of which in the last few months have taken the impalpable form of trusts, in the endeavor to attain corporate advantages without assum- ing corporate responsibilities. There are really four classes : combinations to limit production, to regulate prices, to regulate distribution, to divide the field. Some comprise all four charac- teristics. To describe or enumerate them is needless in view of the recent discussions to which they have been subjected. 1 But the facts exist. Prices are no longer determined by the action of free competition, but by the artificial manipulation of these industrial combinations or partial monopolies. Are these combinations now a necessary evil ? Are they an evil at all ? Here it will be necessary to revise our natural opinion that monopoly is always injurious. This is as great a mistake as to affirm that competition is always beneficent. The characteristic feature of modern economy is that articles are produced not to satisfy any particular demand, but for the world 1 Cf. J. B. Clark, Limits of Competition, and F. H. Giddings, Persistence of Com- petition, POLITICAL SCIENCE QUARTERLY, March, 1887, pp. 45, 62. Also the arti- cles of H. D. Lloyd, North American Review, 1884 and 1885. For Europe, see Kleinwachter, Die Kartelle (1883). For England, Select Committee on Railways (1882), Evid. qu. 3893; (1881), Evid. qu. 16,376. No. 3.] THE INTERSTATE COMMERCE LAW. 47 market. Unregulated production, production uncontrolled by the state of the market, overproduction or mistaken production have brought about the modern commercial crises. A period of large profits alternating with a period of large losses, extremely low prices alternating with extremely high prices, this has been the history of modern industry. It is a period of industrial anarchy. Combinations are designed to put an end to this anarchy. They do away with the excessive fluctuations of prices, per- forming much the same function as legitimate speculation. Of course, in most cases, they have only their own profits in view ; but is it true, as Adam Smith thought, that they are always a conspiracy against the public ? A careful analysis must lead us to answer no. They better their own condition, but in so doing they often better the public condition. Steadiness of price is better than fitful fluctuations in price ; regulation of production is better than the underproduction or overproduction which re- sults in crises ; combination is preferable to "cut-throat" compe- tition which ruins the producer without benefiting the public. It is of course undeniable that there are possible or actual abuses connected with these combinations. But from this simply results the necessity of public control. We have the alternative : Leave the combinations alone or regulate them. There is no third method. We may prohibit them, but we cannot prevent them. If we make them illegal, we shall simply make them secret. We cannot prevent two men from agreeing not to compete with each other. Robert Stephenson truly said, in 1853: "Where combination is possible, competition is im- possible." l The whole trend of modern development is to substitute the large for the small, to put combination in the place of competition. We cannot stop the progress ; we must recognize it. The question thus arises : Shall we allow these associations 1 This phrase was not coined by George Stephenson, as Hadley, Railroad Trans- portation, p. 66, erroneously asserts, but by his son Robert. Cf. Report Select Com- mittee on Railway and Canal Bills (1853), Evid. qu. 885, 886, p. 92. This is a mistake almost universally made. 48 POLITICAL SCIENCE QUARTERLY. [VOL. II. to develop as they will, or is it the duty of the public to inter- pose its authority and to regulate what it cannot prevent ? Put . in these words, the answer seems plain. We must recognize the monopolies as existing facts but hold them under control. We have in general gone on the opposite theory. We have believed in the universal existence and beneficence of free com- petion ; we have wilfully blinded our eyes to what was taking place about us ; and to-day we wake up only to recognize the existence of these gigantic combinations. To legislate against them and fall back again on the specific of free competition would be absolutely futile. Competition has had its day and has proved ineffective. Let us be bold enough to look the facts straight in the face and not shrink from the logical conclusions of our premises. Recognize the combinations but regulate s them. The application of all this to railways is plain. As a regu- lator of charges, competition between railways is even less effective than in other large occupations. The doctrine of transferability of capital, partially true elsewhere, is absolutely false here. The railway possesses all the elements of a prac- tical monopoly. So obvious are the advantages of agreement and fusion, that whenever a railway system has started out with competition of independent lines it has inevitably resulted in some form of combination. The public has profited no less than the companies. The curse of free trade in railways has been the system of parallel and often needless lines. An additional road between two terminal points frequently rep- resents so much wasted capital, and the necessity of earning profits on this swollen' capital simply aggravates the burden on the public. No more serious blunder has been made than to suppose that increased competition means increased facilities and lower charges. The competition, while it lasts, is of a desperate character, and each line strains itself to the utmost to obtain the business which is only sufficient for one. Charges indeed may be lowered temporarily, but the strenuous attempt to procure the traffic gives birth to the very worst abuses of railway management secret personal discriminations and im- No. 3.] THE INTERSTATE COMMERCE LAW. 49 > S . '^ ' o" moderate local discriminations. The changes are violent, the con- ditions unstable. Reduction of rates is sometimes carried to such a point that not even operating expenses are met, for the reckless and bankrupt roads feel no need of earning any fixed charges. The railway wars, which are the logical and extreme manifesta- tions of railway competition, thus exhaust the companies and afford but a dubious relief to the public. Lowness of charges is outweighed by the instability of charges. And the reduction itself is necessarily of an ephemeral character. Continuance of the rates means universal bankruptcy ; escape from ruin is pos- sible only through combination. The combination which results again raises rates, and the charges must now be sufficient to earn profits on the often increased capital of the two lines. If competition be beneficial to the public, it is a very temporary benefit ; if railway wars, on the other hand, throw all trade into confusion and engender the most aggravated abuses, then the cessation of the competition is a boon to the public, even though the combination results in a relative increase of charges. And if this be true, then a railway policy which obviates the danger of railway wars and "cut-throat" competition can give the public not only stability of rates but also the additional ad- vantage of relatively lower charges. However the railways start out, they are sure to end in com- bination. It is the same development as in all other economic monopolies, with the sole difference that the railway monopoly is more pronounced and the railway combinations more wide- spread. In no business are the effects of spasmodic competi- tion more pernicious. It needs but slight acquaintance with the practical construction of railway rates to perceive the abso- lute interdependence of tariffs. A war between two important lines necessarily involves the interests of distant roads through- out the country. The only escape from ruin is the replacement of competition by some form of combination. No less than seven possible forms of arrangement have been successively tried : i. Agreement to make equal rates or give equal facilities as to speed, accommodation, etc. 2. Agreement to forward traffic over each other's lines by working arrangements or traffic facili- 50 POLITICAL SCIENCE QUARTERLY. [VOL. II. ties. 3. Agreement to divide the field. 4. Agreement to divide the earnings. 5. Agreement to divide the traffic. 6. Agree- ment to lease. 7. Agreement to consolidate. Each successive arrangement presents more chances of stability and permanence than its predecessor. The first two methods have their home principally in England, although they are characteristic of all early attempts to avert competition. Not only do the railways agree as to the charges, but also as to the speed and accommodations. Contracts to run an equal number of trains at the same speed and with similar facilities are extremely common. For a long time reliance was placed on the existence of competition, but at present both rail- way officials and railway antagonists have definitely abandoned all faith in its efficacy. 1 Agreements as to rates, speed, and accommodation are to-day the well-nigh universal rule. It is plain, however, that new agreements to maintain rates or afford facilities are difficult to enforce in the face of serious temptation to cut rates or underbid a rival company. The difficulty grows in proportion to the number of originally com- petitive lines. Hence in the United States, where the facility of constructing new competitive roads is practically unlimited, these methods, although often tried, 2 have proved ineffectual to prevent railway wars with the consequent abuses of fluctuations and injustice to the public. It was necessary to devise some other escape from competition. The third method, that of division of the field, was naturally impracticable as long as any such plan might immediately be frustrated by the construction of a new line to invade the field. Some countries indeed, which foresaw the weakness of compe- tition from the very outset, adopted this method, technically 1 Report Select Committee on Railways (1882), Evid. qu. 2964 (Brown) : "The days of competition are gone with railway companies." Ibid., qu. 3896: "It can- not be to the interest of [the railways or] the public to carry on such competitive traffic, as they must either agree or stop ultimately." Cf. as to non-competition in accomodations, etc., Joint Select Committee of 1872, Evid. (Farrer) qu. 7623, (Tyler) qu. 6893, 6914, (Wright) qu. 2548, (Scott) qu. 5384, etc. 2 The arrangement made by the Saratoga conference of 1 874 is the first example of such an agreement between the trunk lines. As to Western agreements between " honorable " roads at present, cf. Cullom Committee Rep., Test., p. 728. No. 3.] THE INTERSTATE COMMERCE LAW. 51 called the principle of territorialization. Thus France parcelled out her territory among a small number of railways, principally radiating from Paris as a centre. The six "great companies" which control the transportation facilities are the direct product of the governmental policy. To use Mr. Chadwick's phrase, it is a system of competition for the field, not of competition in the field, 1 i.e. the stage of competition is removed to the period anterior to construction. In other words, the charters were granted to the highest bidders, to those companies which agreed to the conditions most favorable for the state. But this system proved defective in a double manner. In the first place, the rivalry between the corporations to obtain the coveted charters resulted in the assumption, by the successful competitors, of such unduly heavy burdens that after a short time they were confronted by the prospect of speedy ruin, until the state was compelled to interfere and lighten the burdens, thus abandon- ing the advantages that had been secured. In the second place, the almost absolute immunity from competition by new lines rendered the railways careless and averse to undertake improve- ments. While the French system, therefore, avoided in great measure railway wars and personal discriminations, it gave rise to serious complaints of extortionate charges and insufficient facilities complaints which the recent agreements between the railways and the state are attempting to remedy. 2 In those countries, however, where the original policy was that of unrestricted competition, the trend toward combination has also taken this form of territorialization. In England it is known as the districting system or district amalgamation, the chief examples being those of the North Eastern and Great Eastern railway companies. 3 The project has often been broached of enforcing a more systematic districting in the future; but the select committee of 1872 showed that such 1 Chadwick, Results of different Principles of Legislation and Administration in Europe, Journal of the Statistical Society, vol. 22 (1859), pp. 381-420, esp. p. 385. 2 Thoviste, Etude sur les conventions financieres conclues entre 1'Etat et les com- pagnies de chemins de fer (1886), pp. 121-124, 164-170. 3 Joint Select Committee of 1872 on Railway Companies' Amalgamation, Evid. qu. 3660 et seq. 52 POLITICAL SCIENCE QUARTERLY. [ VOL. II. a plan was still impracticable, and enlarged on the inexpediency of conceding a full legal monopoly to the " districted " combina- tions. 1 In the United States there have been sporadic ex- amples of the division of the field, where the separate parties to the combination agreed not to trench upon each other's terri- tory ; but the immense number of competitive lines has ren- dered arrangements of this kind for the most part illusory. The next and most common step in the development of com- bination is the growth of the fourth and fifth forms division of the traffic or the earnings. These are technically known as pools, traffic pools and money pools, 2 and it is against them that the fulminations of the Interstate Commerce law are di- rected. There is, perhaps, no single institution more commonly or more grievously misunderstood. For the odium that it has incurred the name itself is in part responsible. " Pooling" savors of a gambling transaction, of a wager or speculation ; it immediately recalls to mind the " blind pools " of Wall Street notoriety, the accompaniments of games of chance. But rail- way pools are of an entirely different nature. 3 They are simply an attempt to escape the evils of an unrestricted competition while retaining all its essential advantages. The first great benefit of all pooling machinery is a greater stability of charges. Continual and sudden fluctuations in rates are regarded by shippers as even worse than extortion- ate rates. Momentary and unexpected changes throw all busi- ness into confusion. Yet before the formation of pools these fluctuations were enormous. Let us take as an example the traffic between Chicago and New York, which received an im- mense impetus several years after the close of the war and the formation of the trunk lines. In 1869 the through tariffs from New York to Chicago changed twenty times during the year; in 1870, eleven times; in 1871, nine times; in 1875, five 1 Report, pp. xl-xlii. Cf. Evid. (Farrer) qu. 7679, (Price) qu. 3815, etc. 2 Or " cash " pools. 3 Cf. in general, Cooley, Popular and Legal Aspects of Traffic-pooling (1884); Simon Sterne, Railroad Poolings and Discriminations (1879); Blanchard, Traffic Unity (1884); Pierson, The Passenger Pool (1884); Fink, The Railroad Problem and its Solution (1880). No. 3.] THE INTERSTATE COMMERCE LAW. 53 times. 1 Not a year passed without frequent and often enormous fluctuations; e. g. t sudden changes from $1.88 to 40 cents per hundred and then back again. Yet after the formation of the trunk line pools of 1877-8, which were subsequently strength- ened by the joint executive committee of 1879, there were for more than three and a half years no changes at all. 2 The mani- fest gain to the public in this increased steadiness of rates needs no further elucidation. Without the machinery devised for the Southern Railway and Steamship association in 1875 by Mr. Albert Fink, and extended by him to the trunk lines in 1877, this stability of rates would have been infinitely more difficult , of accomplishment. Secondly, not only do the pools succeed in obtaining a greater stability of the published tariffs, but they also tend to maintain actual charges to the level of the published tariffs by abating " rate-cutting," whether secret or open. It is conceded that per- sonal discriminations or preferential rates form the chief abuse of our railway management. These special favors may indeed be cloaked under a variety of disguises, such as underweighing or underbilling, Christmas gifts, and other arrangements whose exact tenor is known only to the freight manager and the individual shipper, for the forms of personal preferences are limited only by the ingenuity of the railway officials. But secret rebates of this kind cannot be entirely prevented by any method, whether legal prohibition or voluntary agreement, as long as they remain secret. The sole remedy lies in absolute publicity and in removing as much as possible the temptation to cut rates. This the pooling system accomplishes with a fair degree of success, since the earnings of the railways are divided in fixed proportions irrespective of the traffic actually carried. The more effectual the pool and the more stringent the penalties 1 Fink, Statistics regarding the Movement of Eastbound and Westbound Traffic over the Trunk Lines and connecting roads (1884), p. 39, comprising all changes from 1862 to 1884. 2 From Feb. 15, 1878, to Aug. 6, 1881. Hudson, The Railways and the Public, p. 218, does not allude to these facts. His exposition is worse than inaccurate. It is so misleading as to be positively mischievous. 54 POLITICAL SCIENCE QUARTERLY. [VOL. II. for infraction of the agreement, the greater the chances for maintenance of rates. To object to pools because they have not completely attained their object that of maintaining rates is an argument of but little cogency. The most candid observers, even among those who at the outset opposed all forms of monopoly, admit that the situation has been materially improved since the exist- ence of railway pools. 1 Such gross and palpable discriminations as those which built up the Standard Oil company would have been impossible under the late system of complete trunk line pools. 2 Preferential rates to-day in the district covered by the pooling systems are immeasurably less, both in number and extent, than ten years ago. The pressure exerted upon recalci- trant members is always stronger in a pool than in a mere agree- ment to maintain rates. If pools have not been entirely successful in preventing discriminations and railway wars, it is owing solely to lack of sufficiently coercive powers in the execu- tive as well as to the fact that the pools are to a great extent beyond the law. The non-maintenance of rates is a violation of the pool, not a result of the pool. But if it be granted that pools do exert a beneficial influence in preventing preferential rates, then the surest method of augmenting this influence lies in strengthening the pools with their compulsory powers, not in abrogating them. The railway officials themselves have finally become conscious of this truth, and during the past few years we have had the singular spectacle of railway magnates demand- ing governmental interference with the railways in order to legalize, enforce, and regulate the pooling contracts. That such a step would be advantageous to the corporations is now sub- stantially admitted ; that it would be no less advantageous to the public is a fact which is only beginning to dawn on the public mind. 3 1 Cf. Simon Sterne, The Railway Question (1885), pp. 22-27, and m Cullom Re- port Test., pp. 71-77, as compared with his views in Report on the Internal Com- merce of the United States (1879). 2 United States Senate Committee on Labor and Education (1883), Test, vol. ii, P- 5*7- 8 A fact obscured by such thoroughly partisan and unscientific works as that of Mr. Hudson. No. 3.] THE INTERSTATE COMMERCE LAW. 55 The early pools were mainly "money pools." Thus the Chicago and Omaha pool of 1870 was based simply on the principle of a division of the total earnings after the deduction of a fixed percentage retained by each of the three roads as representing its expenses. But this arrangement was a manifest temptation to the individual lines to cut rates, increase the com- petitive business, and thus deduct a larger share to cover the increased expenses. Hence in 1874 the arrangement was modified so as to no longer allow deductions for expenses. The combination thus became, with a few minor exceptions, a "gross money" pool instead of a "net money" pool. 1 In the Southern Railway and Steamship association of 1875 the pooling policy was only one of the features of the combination, it being in other respects a forerunner of the " traffic associations," whose object is to facilitate the transaction of business, to provide proper means of amicably adjusting all differences, and to col- lectively and promptly enforce all agreements. Pools and traffic associations are of course entirely independent of each other ; a pooling arrangement may be, and frequently is, one of the features of the traffic association, but there is no necessary con- nection between them. The one may and does exist without the other. In the association devised by Mr. Fink, with its elaborate machinery of executive officers, general commissioner, board of arbitration, etc., the word pool is not mentioned at all. It was simply an attempt to substitute organized and harmonious action for the chaotic confusion and internecine rivalry between the southern railways. 2 Pooling arrangements were subsequently adopted, but only as a subordinate and entirely incidental feature of the general project. The contract provided for a net money pool, but with a comparatively small deduction for expenses. 3 The supplementary agreement of 1877 sought to increase the cohesiveness of the pool by providing for a penalty fund 4 1 Report on the Internal Commerce of the United States (1879). 2 Proceedings of the Convention of the Southern Railway and Steamship Assoc. at Atlanta, Ga., Sept. 16, 17, 1875, PP- 11-17 (letter of Fink), 1-9 (agreement). 8 Report on Internal Commerce of the United States (1876). Part II contains a reprint of the agreements. 4 20 per cent of the amount received on all joint business transacted. 56 POLITICAL SCIENCE QUARTERLY. [VOL. II. deposited by each road with the commissioner as a pledge of good faith, and forfeitable upon proven infraction of the agree- ment. When the Westbound Trunk Line pool was formed by Mr. Fink in 1877 after a protracted and desperate war. the policy of dividing the business instead of the earnings was carried into effect. It was a " traffic pool " instead of a money pool, and was further developed in the joint executive agreement of 1879. The joint agent was invested with the duty of making the weekly accounts and of specifying the roads which had carried less than their agreed percentage ; and such roads were bound to promptly restore the balance by removing from the other companies their excess. 1 This was known as the " equal- izing of freight" or "diversion of traffic." In the new agree- ment of 1882 the payment of money balances or settlements in net earnings was introduced, and for two years no transfers of tonnage were made. 2 But to some extent the practice re-ap- peared, and caused so much dissatisfaction among the shippers that in the agreement of 1885 it was definitely discarded and pro- vision made for the prompt payment of money balances by preliminary deposits to the credit of certain trustees. 3 Since October, 1884, settlements moreover were made in gross, not net earnings. In the division of the eastbound dead freight and live stock traffic, as well as among the other associations throughout the country, this method of settlement had be- come the general rule. So accurately were the percentages allotted, that the amount of money balances was phenom- enally small, in some cases amounting to less than one per mill of the gross revenue. 4 This is a fact commonly over- looked, but which reflects the greatest possible credit on the organizers of the traffic arrangements. 1 Cf. the contract in Hepburn Committee Report, Exhibits, p. 63. 2 Cf. statistics in Fink, Letter in relation to the Diversion of P'reight, Exhibit No. 3, Third Report of Board of Railroad Commissioners of New York (1885), p. 120. 8 Contract between the trunk lines, Nov. 6, 1885, arts, x-xiii ; reprinted in Cullom Com. Rep., App., pp. 237-244. 4 In the Southern Railway and Steamship Association from 1876 to 1886, gross earnings were $82,000,000 j total money balances, $461,295, or 0.56 per cent. The No. 3.] THE INTERSTATE COMMERCE LAW. 57 The idea that pools are a product of American ingenuity is most erroneous. The present form of railway federation or traffic association is indeed peculiar to America, and repre- sents the life-long work of Albert Fink, but the pooling arrangements are only ancillary features. Pools are not new. Europe learned the futility and inexpediency of opposing pools many years ago. They have been found to be the surest means of preventing unjust discriminations. In England they are known as "joint purse" arrangements, and generally take the form of money pools because of the greater consolidation of the lines. Agreements to charge equal rates for competitive traffic have been much more uniformly observed in Great Britain than with us, and hence the more advanced arrange- ments for the division of traffic have not been so necessary. following interesting figures relative to the trunk lines have never been published, but rest on official authority, and have been inspected by me. The details for each road are for obvious reasons omitted. TONNAGE CARRIED. GROSS REVENUE. REVENUE BALANCES. PER CENT. Westbound, 1877 to l886 8,984,294 $36,356,163 #482,537 1.32 Eastbound, 1882 to 1885 ... 30,423,749 65,133,997 272,015 0.41 Boston and New England, Live Stock, 1882 to 1886 . 1,347,407 3,377487 23,072 0.68 All divisions, 1877 to 1886 . 49,792,626 129,530,377 1,200,729 0.9 I add a few examples, without mentioning the exact date or species of traffic : RAILROAD. TOTAL RECEIPTS. BALANCES. PER CENT. Baltimore and Ohio $QI 133 &IOC rec'd O I New York Central and Hudson River . . . 3,861,364 1 8 ~\ co 020 612 paid 47 6c.7 r>aid 0.016 0.21; The balances paid by the different companies which carried in excess of their allotments were on the total traffic : New York Central Pennsylvania Grand Trunk Lackawanna of I cent per 100 pounds. 58 POLITICAL SCIENCE QUARTERLY. [VOL. II. But joint purse agreements are not at all uncommon. 1 Many of them have been made under the express sanction of Parlia- ment or the commission to which the power of approval has been delegated. The apportionments of traffic are moreover made for much longer periods than in the United States, a fact ascribable to the comparative constancy of business and the settled character of. commercial relations. Thus Glad- stone allotted pooling percentages for a term of five years in 1851 and made a further award for fourteen years in 1857.2 In 1853 the manager of a single railway called attention to twenty-seven such pooling arrangements made by his own line within a very limited period, dividing the traffic in all salient points. The railways among themselves and the railways and canals are shown to form a "happy family." 3 It is simply an additional proof of Gladstone's statement that competition between railways is like a lovers' quarrel : breves inimicitiae, amicitiae scmpiternae^ The joint fund arrangements are found in large numbers to-day, and the clearing house acts as the agent of the interested parties, in this respect very much like the general commissioners of our traffic associations. 5 In England, while Parliament may still disclose a certain jealousy of the working arrangements of this kind, it does not think of pro- 1 As an example at present cf, the lines at Preston, Select Com. (1881), qu. 12,050. 2 The first pool was between the Great Northern, the London and North West- ern, and the Midland railways ; the second between the same and the Manchester, Sheffield and Lincolnshire. Parliament has sanctioned pools between the South Eastern and the London, Chatham and Dover railways ; and also between the London, Brighton and South Coast and the South Eastern companies. 8 Rep. Sel. Com. on Railway and Canal Bills (1853), Evid. (Huish) qu. 120-310. 4 Speech on bill of 1844 (Hansard, vol. 76, pp 480-509). Gladstone adds: " I would no more trust the railway proprietors on railway matters than I would Grac- chus speaking of sedition. I know of nothing more chilling than the hope which railway directors hold out from competition." The whole speech may be found in full in Gait, Railway Reform, its importance and practicability considered (1864), App 254-266. Gait's book itself is a highly fanciful plea for uniform cheap charges, based on Rowland Hill's postal reform. The first edition was published in 1843, and demands state purchase. 5 Rep. Joint Select Committee on Railway Companies' Amalgamation (1872). Evid. (Dawson) qu. 5571-2. The clearing house does not fix the percentages as did our pool commissioners. No. 3.] THE INTERSTATE COMMERCE LAW. 59 hibiting them ; it simply makes them subject to governmen- tal regulation. The wisest thinkers, even among those who cannot be deemed by any means apologists of the railways, confess that some of the present abuses may be obviated by a more intimate fusion of interests in this direction. 1 On the continent pooling arrangements are carried out to a much greater extent, and personal discriminations are hence correspondingly less frequent. In Germany they are known as Kartellen or Instradirungs-v enrage? Owing to the greater complexity of the lines and the lesser degree of con- solidation, they generally take the form of traffic pools. One important example of a money pool was the great German Austrian union (Deutsch-oesterreichischer Verband}, an interna- tional association from 1868 to 1873. But this was finally abandoned on account of the difficulty of making the exact allot- ments, it being not a gross money pool as in England or with us, but a net money pool with deduction for expenses. 3 Since the railways have been almost entirely purchased by the state in Prussia, the necessity for pools has diminished, but the rivalry between the various state systems is so intense that a series of interstate pools has sprung up. In order to facili- tate the execution of these agreements it has even been pro- vided that the shipper shall no longer have the right to select the route by which his goods are to be transported.* The railways ship the goods as they please, the sole condition being that the freight is to be carried by the cheapest or otherwise most favorable line. Not only are the pools effectu- ally enforced between the state railways themselves but also, 1 Sir B. Samuelson, Report on Railway Goods Tariffs (1886), p. 22. That the railway men favor this plan is of course obvious; cf. Grierson, Railway Rates (1886), sec. xvi. 2 Or Instradirungs-vereinbarungen. 8 Reitzenstein, Ueber einige Verwaltungseinrichtungen und das Tarifwesen auf den Eisenbahnen Englands, pp. 152 et seq. This contains a comparison of the English and German pools. For other cases, see Ulrich, Das Eisenbahntarifwe- sen, 63. 4 The sole exception is in case of goods subject to customs duties; Beschluss des Bundesraths, March 12, 1885, which changes 50 of the Betriebsreglement. Cf. also Endemann, Das Recht der Eisenbahnen (1886), FUnfter Abschnitt. 60 POLITICAL SCIENCE QUARTERLY. [VOL. II. when there is any danger of serious competition, between the railways and the waterways, including both canal and river traf- fic. In the allotment of percentage, moreover, the shortest line is not taken as the basis, but the shorter road is deemed equal to the longer road only up to twenty per cent of the longer dis- tance. 1 The pooling arrangements in Germany have been of signal service in simplifying and equalizing the charges, which prior to their introduction were of the most complicated and often outrageously unjust character; and to-day they still per- form the most valuable services in international traffic. No one any longer thinks of opposing them in principle. 2 In Austria, where the state and private railways exist side by side, money and traffic pools are of daily occurrence. No sooner is a new route opened than it receives its share of the competitive traffic, and is thus deprived of any pretext to under- take a railway war. It may be declared that all competitive traffic in Austria is strictly pooled. 3 The state railways them- selves divide earnings or traffic with the water routes, and are thus able to avoid crying discriminations. In Belgium, where one large private company, the Grand Central Beige, has been the most formidable potential competitor of the state railways, the government has concluded a pooling agreement for the strict division of all competitive traffic. The line over which the shipment is made receives all the frais fixes, or terminal charges, as well as one-half of the frais variables, or movement charges. The remainder is pooled in fixed per- centages. 4 The sad experience of railway wars and exorbitant 1 This is known as the doctrine of "virtual " or " computed" distances. Schrei- ber, Das Tarifwesen der Eisenbahnen, S. 245-249. It is somewhat similar to our " constructive mileage." 2 Cf. von der Leyen, Die nordamerikanischen Eisenbahnen (1885), S. 296 : "The European expert finds these arrangements entirely unobjectionable" ("findet in solchen Verbanden nichts Verwerfliches "). Cf. also Obermayer, Ueber Tarifver- ba'nde und Eisenbahnkartelle (1879). 3 Sax, Die Verkehrsmittel, Bd. II, S. 102. For full details as to a late instance (the Arlberg line), see The Railroad Gazette, 1884, p. 636. 4 According to the doctrine of " virfual distances." But if the longer line's mile- age exceeds the other by more than 25 per cent, it receives nothing beyond the terminals and one-half of the movement charges. No. 3.] THE INTERSTATE COMMERCE LAW. 6 1 discriminations in the past has long since convinced the gov- ernment of the absolute necessity of some agreements with its private competitors. Just as competition in general pulls the best men down to the level of the most unscrupulous, so in the competition between the state and the private railways the government itself was compelled to descend to the methods of private companies and practise discriminations of the most flagrant nature, in some cases going so far as to discriminate against its own property in the shape of canals. Until the state owns all the railways, such pools will be necessary and beneficial to all parties concerned. In France the principle of territorialization from the very outset has materially lessened the need of pooling arrange- ments. If. the division of the field were absolute, the division of traffic or earnings could not exist, for the same result would be attained in either way. In some few cases, however, the chief lines partially overlap each other and thus give rise to competitive centres, but the dangers of competition are imme- diately obviated by the formation of pools, which are recognized as perfectly legitimate. 1 The state line itself has made such a compact with the Orleans company, in which the percent- ages depend to a certain extent on the differences of grade. 2 France has no faith in railway competition. In Italy the railways are sharply divided into two networks, and there is no competition and hence no necessity for pools. All inter- national traffic, however, is effectively pooled. In Holland, where the pooling policy is far less developed, the results of the competition between the railways, and especially the railways and waterways, have been so unsatisfactory and the discrim- inations so crying that the parliamentary commission of 1 88 1-2 desired to seek refuge from the railway wars in universal con- solidation, and would have advocated state purchase had it not 1 A prominent French official writes to me as to the existence of money pools between railways, and even between railways and canals : " II en existe plusieurs exemples. C'est chose parfaitement admise." So, e.g., the Chemins de fer d'Ouest et d'Orleans. 2 Convention de 1883 avec la Compagnie d'Orleans, art. 16, in Picard, Chemins de fer francais, t. 6 (1885), p. 396. 62 POLITICAL SCIENCE QUARTERLY. [VOL. II. been for financial difficulties. Mere legislative prohibition of discriminations they confessed to be futile, and therefore pro- posed to hasten on the process of combination by furthering the consolidation of certain smaller lines, and by refusing charters to any new competing lines. 1 All the European countries, therefore, inculcate the same lesson. Unjust discriminations and especially preferential rates are found in inverse ratio to the pools. Where the pools are legalized and most effective, as in Germany and Belgium, the abuses are least ; where the pools are less frequent, as in England, the abuses are greater ; where the pools are rare and ineffective, as in Holland, the abuses are scandalous. Expe- rience is no less convincing than theory. As long as there is no complete consolidation we cannot prevent both pools and discriminations. We must choose between them. The full development of the one means the disappearance of the other. With an universal pool, we can stop all unjust discriminations produced by the stress of competition ; with partial pools we can pro tanto abate the discriminations. Nothing will be gained by the attempt to stop pools. We may prohibit them, but cannot prevent them. And if they could be prevented, they would simply disappear for a time ; the causes which rendered their existence necessary would reassert themselves, and in the long run prove invincible, with the only result that in the mean time the country would have been exposed to an intensification of the very evils which it was desired to suppress. That there is a possible danger in pools is indeed not to be denied. The inference, however, is simply the necessity of effective public regulation. What the public fears is the temptation to impose exorbitant charges. The policy of avoiding competition from the outset on the continent of Europe has certainly had some influence in preventing so quick a reduction of charges as with us. But rates in this country are perhaps as low as can be reasonably desired. 1 Cf. the report itself (October, 1882). For an abstract, see Archiv filr Eisenbahn- wesen, 1883, S. 587-590. Cf. Jacqmin, Chemins de fer des Pays-bas, 2 me ed., p. 87. / / JD o - No. 3.] 77/ INTERSTATE COMMERCE LAW. 63 There is no serious complaint of extortion, and there is far less probability of extortionate charges here than in European countries, because of the exceptionally large amount of water competition in the United States. The gravamen of the com- plaints is discrimination, not extortion. There is no need of conjuring up phantom dangers. We are actually confronted by certain specific abuses, and it is a superficial policy to abolish the means of preventing these abuses because of the dim possi- bility of other abuses which do not exist. One misconception more fatal than any yet discussed still remains. It is commonly supposed that pooling entirely pre- vents competition. This is a mistake. Pooling maintains the advantages of a healthy competition and at the same time prevents the dangers of an utterly unrestricted or " cut-throat " competition. The mere agreement to divide traffic or earnings in certain percentages does not put a stop to all competition. Each of the various roads will still attempt to procure as much business as can possibly be obtained in a fair and open manner. If any line while maintaining the published rates is yet enabled to run above its allotted percentage, this surplus will justify the railway in demanding an increased percentage in the new allot- ment that is to be made at the expiration of the monthly or yearly pooling arrangement. The incentive to fair and healthy competition is not removed ; each line will endeavor to vie with its rival in accommodations and facilities. But the temptation to take unfair advantages of its rivals is diminished, for an increase of traffic due to rebates or violations of the pooling agreement manifestly cannot justify a claim for increased per- centages. A successful pool prevents railway wars with the accompanying discriminations, but does not prevent healthy emulation to attract business. It simply raises the plane of competition to a higher level. 1 The abolition of pooling would in fact hasten the very result which it is desired to avoid. Division of the traffic and the earnings form, as we have seen, the fourth and fifth step in the 1 This is another of the points entirely overlooked by Hudson, The Railways and the Republic, p. 229. 64 POLITICAL SCIENCE QUARTERLY. [VOL. II. progress of combination. The final steps are lease and absolute consolidation. The tendency to combination is irresistible ; all endeavors to stem the current have been and will be futile. 1 If therefore pools, which still permit competition to a limited degree, be abolished, the process of complete consolidation, which utterly precludes competition, will be accelerated. Un- der the system of division of earnings, the weaker roads are still enabled to procure a share of the business and thus main- tain a limited competition ; remove the guarantee of allotted percentages, and it is simply a question of time before the weaker roads are driven to the wall and then bought out by their more sturdy competitors. No clause in the Interstate Commerce act prohibits the stronger line from lowering its charges and thus inaugurating a war of rates, provided it be done publicly. The enforced publicity of charges is undoubtedly an immense step in advance ; but while no increase of charges can be made until after ten days' public notice, reductions in the charges may take place without previous public notice. 2 Railway wars are hence by no means prevented. Pools are indeed a make- shift, but the disappearance of this modified and partial form of combination would most assuredly lead to a more complete and absolute form of combination. The logical outcome will be a concentration of the railways in the hands of an exceedingly small number of corporations, and the development may even be carried to a stage which the telegraph lines have already reached a practical monopoly of one huge corporation. The federal law is thus unwittingly hastening the very result which it intended to frustrate. It defeats the very purpose which it was designed to accomplish. Our legislators imagined that 1 Cf. English Select Committee (1872), p. xxvi: "While it is extremely doubtful to what extent the less complete forms of combination admit of competition, and what is the value of such competition, there can be little doubt, judging from the past, that they cannot be maintained as the ultimate forms, and are sure, whatever princi- ples may be laid down by committees or commissions, to end in complete fusion. So much stronger is the power of wealth, self-interest, and united action on the part of the companies, acting each in its own case with clearness and decision, than that of any general principles by which committees and commissions have supposed that the public interest might be protected." 2 Sec. 6 of act. v Vft^ ^ 'Vr- <. No. 3.] THE INTERSTATE COMMERCE LAW. 65 they could prevent combination by prohibiting pooling ; in reality they have destroyed that which still preserves partial competition and by prohibiting pools have made ultimate con- solidation less remote. In their anxiety to prevent monopoly they have taken the surest step to create monopoly ; in their ignorance of economic laws, while hoping to raise an impassable barrier to combination they have in reality levelled the course. The result will be the exact opposite of their anticipations. The progress of this consolidation may indeed be arrested for a time. Railway wars cannot of course be the normal con- dition, and the short-haul clause of the law will have some slight effect in preventing the inordinately low war-rates to centres of competition. It is therefore possible, nay, almost certain, that the results of the pooling policy will be attained in another way through the medium of "differentials." Rather than enter upon a war of rates, the stronger roads, which through their better facilities would tend to carry the larger portion of the traffic, will consent to give the weaker lines a "differential," i.e., allow them to charge so much less per ton, and to attract in consequence more business. The limit of the " differential " l will depend naturally on the desire or ability of the weaker line to declare war rather than to accept less than the demanded differential. This system, however, is virtually, although not nominally, tantamount to pooling, in so far as it is a form of combination which still retains a certain amount of competition. But if successful, it is open to the same objections as pooling ; while the absence of any vigorous executive authority to enforce the agreements will be felt still more strongly than has hitherto been the case in the traffic associations and pools. This policy of what we may call "differential pools " cannot possibly be stopped by any law. The anti-pooling clause 2 of the federal law thus sins in 1 This technical phrase is used in an entirely different manner from that described in my first essay, POLITICAL SCIENCE QUARTERLY, June, 1887, pp. 236, 237. 2 Sec. 5 : " That it shall be unlawful for any common carrier ... to enter into any contract, agreement, or combination with any other common carrier or carriers, for the pooling of freights of different and competing railroads, or to divide between them the aggregate or net proceeds of the earnings of such railroads, or any portions thereof." 66 POLITICAL SCIENCE QUARTERLY. [VOL. II. a double manner. It weakens the government in its attempt to prevent discriminations, and it is destined to produce a state of affairs precisely the contrary of what was intended. The first three sections of the act, which define and forbid unjust dis- criminations, 1 are in effect simply declarative of the common law, although based almost literally on Cardwell's Traffic act of 1854. It may well be doubted whether this mere legislative enunciation and prohibition will suffice to abolish the evils com- plained of. The definition is so utterly vague as to be suscepti- ble of varied interpretations ; and whatever interpretation be adopted, it must, as we have shown in the previous essay, be so essentially elastic as to preclude any hard and fast application. Whether the prohibition of unjust discrimination will be any- thing more than the expression of a pious wish, depends largely on the commission ; but the law imposes on the commission an unnecessarily severe burden, and by prohibiting pools removes what would have been a most serviceable crutch with which the better to support the burden. If self-help, or at least private co-operation, be a fundamental feature of the American polity, then this law violates the American idea, for it voluntarily re- signs the advantages that would accrue from the self-help of the railways. I do not object to state interference, but I do object to the hasty abandonment of an institution which tends to decrease the necessity of state interference. And when the abolition of the institution results, as is assuredly the case with pools, in hastening the advent of the very monopoly which it was designed to avoid, then the prohibition becomes not only unwise but absolutely absurd. The anti-pooling clause is a sad 1 Sec. I declares that "all charges . . . shall be reasonable and just; and every unjust and unreasonable charge ... is prohibited and declared to be unlawful." Sec. 2 defines an unjust discrimination as the charging any persons different amounts for a " like and contemporaneous service in the transportation of a like kind of traffic under substantially similar circumstances and conditions." Sec. 3 declares it unlaw- ful " to make or give any undue or unreasonable preference or advantage to any par- ticular person, company, firm, corporation, or locality, or any particular description of traffic, in any respect whatsoever, or to subject any particular person, company, firm, corporation, or locality, or any particular description of traffic to any undue or unrea- sonable prejudice or disadvantage in any respect whatsoever." These three clauses are virtual repetitions, and afford no basis for a definite decision. No. 3.] THE INTERSTATE COMMERCE LAW. 67 evidence of the results of demagogic ignorance in producing hasty and ill-advised legislation. The Philistines of the daily press exaggerate the dangers of the short-haul section, because these lie on the surface ; but for the far more important fifth section of the federal law they have neither eye nor ear. Fortu- nately pooling will practically continue in another form which Congress will be powerless to prevent. The Senate select committee of 1886 has at least this claim to respectful attention, that it opposed the prohibition of pools. The abandonment of its position was an inexcusable concession to popular clamor. A careful analysis of the testimony discloses the fact that not only all the railway officials, but also a large majority of the intelligent shippers, had become convinced of the break-down of competition and the necessity of pooling. The railway men opposed unrestricted competition because it curtailed profits ; the intelligent shippers opposed competition because it produced discrimination. 1 Both were correct. The Senate committee therefore, swayed by the unanimous opinion of the railway men and the preponderant weight of testimony on the part of the public, decided that " the evils to be attrib- uted to pooling are not those which most need correction," and that "it would seem wiser to permit such agreements rather than by prohibiting them ... to endanger the success of the methods of regulation proposed for the prevention of unjust discrimination." 2 That the members of the committee, with a few honorable exceptions, should have seen fit to abdicate their strong position is sincerely to be regretted. The clause as it stands is in defiance of the teachings of experience and the laws of political economy. 3 1 Among the shippers who uphold pooling may be mentioned (yid. Report, Testimony) Bacon (707), Burrows (1170), Chapin (684), Dunnell (1330), Elliott (695), Field (655), Francis (919), Goodman (1104), Cue (1070), Herrick (217), Joseph (1030), Lowry (721), Meek (1012), Miller (269), Murch (941), Noble (988), Phelps (1410), Reynolds (1185), Root (1198), Speare (347),Tredway (841), Welch (1445), Wicke (766), and Williams (1059). The number of shippers who oppose pools is far smaller, and of these the great majority base their opposition on their belief in " free, open competition in railways, as in other things " ! 2 Report, p. 201. 8 Even European experts who are by no means admirers of the American rail- ^ , 68 POLITICAL SCIENCE QUARTERLY. [VOL. II. Free competition between railways, as a regulator of trans- portation charges, is thus a mere chimera. 1 But "competition" has become such a shibboleth with a certain class of reformers that it may be well to devote a few words to other forms which are advocated as panaceas for existing abuses. Perhaps the most common recommendation is that of compe- tition of carriers on the line. Divorce entirely the business of the common carrier from that of the highway ; let the corpora- tion indeed own the railway, but let every one have the right to run his own trains and use his own locomotives on this rail- way. This indeed would be perfect competition, but of a very different kind from the competition between the railways that we have been considering. Alluring as is this plan at first blush, it is open to three vital objections. I. It is impracti- cable, or, if practicable, would be far more costly. 2. It would not cure the great evils of the present system. 3. It would produce abuses far worse than any which now exist. First, the plan is impracticable, or, if practicable, would be far more costly. The project is not new. Competition between carriers was the original theory. The early railway acts were based on the canal and turnpike acts. When the system of turnpike trusts was inaugurated in England in I7o6, 2 the original public character of the king's highway disappeared, and the control fell into semi-private hands. But the highway of course remained free to all on payment of the tolls. With the advent of canals the private speculative element was intro- duced into transportation ; for although a very few of the canals were put into the hands of canal trusts, the first canal 3 and most of the others were built by private individuals and corporations. The early canal acts, however, invariably contained the clause way system concur in this opinion. See Archiv fur Eisenbahnwesen, 1887, S. 333. Cf. also Jeans, Railway Problems (1887), p. 518. 1 Cf. Bontoux, Die Concurrent im Eisenbahnwesen (1873). 2 The old Watling road. The first turnpike act empowering the raising of tolls Was passed 1663, but the power was given to overseers, not trusts. It is only in the last few decades that the turnpike trusts are giving way to the highway boards and that the public character is being restored. 8 Duke of Bridgewater's canal from Liverpool to Manchester. Acts of 1758, 1759, and 1762. No. 3.] THE INTERSTATE COMMERCE LAW. 69 that all persons without distinction should have free liberty to use the canal on payment of tolls. When the first tramway bill was enacted in iSoi, 1 it adopted this idea, and provided, among other sections borrowed verbatim from the canal acts, that all persons should have the right to use the tramway with their own horses and wagons. In the charter of the first railway built with the avowed purpose of using steam locomotives a similar clause was introduced, modified so as to meet the exigencies of the new methods of transportation. 2 For many years the identical provision is found in all the railway acts. In the United States analogous provisions were inserted in the early charters. So, e.g., in the charter of the Ithaca and Oswego railroad. 3 In the general railroad law of Prussia com- petition between the carriers is likewise legalized, after the expiration of three years from the opening of the railway. 4 In France the principle was carried so far as actually to distinguish between the charge for the use of the track, or the toll (droit de peage), and the charge for the transportation itself (prix de transport). To this day even, the concessions of the railways contain the legal distinction. 5 Everywhere, in fact, a sharp line was drawn between the two functions of the railway company that of providing the public highway free to all and that of furnishing the means of transportation on the highway. The railway company was not excluded from the latter function, but it was thought that its activity in this direction would be very slight. The experience of a very few years totally destroyed all these 1 The Surrey railway from Wordsworth to Croydon. Cf. Francis, History of the English Railway (1851), vol. i. 2 Liverpool and Manchester Railway act, 7 Geo. IV, cap. 49, cl. 165: "All per- sons shall have free liberty to use with carriages all roads, ways, and passages for the purpose of conveying goods or passengers or cattle." 8 Sec. 12: "All persons paying the toll aforesaid may, with suitable and proper carriages, use and travel upon the said railroad, subject to such rules and regulations as the said corporators are authorized to make by the ninth section of this act. Laws of New York, 1828, p. 17. The "proper carriages" of course included the steam-carriages. * Eisenbahngesetz, 1838, 27. 6 Picard, Chemins de fer fransais, t. v, p. 184 ; Jacqmin, De 1'exploitation des chemins de fer, t. i, p. 20. 70 POLITICAL SCIENCE QUARTERLY. [VOL. II. anticipations. As a matter of fact the transportation was con- ducted solely by the railway company. Even in those countries which earnestly endeavored to enforce the provisions, legisla- tion was impotent to check the natural tendency. There were weighty reasons which did and always must militate against the success of any such scheme. The most obvious objection, of course, is the technical one. The technical character of the railway undertaking renders it imperative to have unity of administration. If every shipper could run his own trains, it would be almost impossible to pre- serve order or avoid serious accidents. The private trains would have no means of enjoying terminal or other conveniences, and if the railway company were compelled to afford these con- veniences, it, would soon display such power of annoying the private shippers as to render the plan nugatory. At a time when the engineers were grappling with the problem and devis- ing schemes for allowing two trains to pass each other on a single track, the project of competition between private loco- motives might be plausible ; to-day it is unintelligible and absurd. Entirely apart, moreover, from the objection of tech- nical impracticability, is the vital difficulty of increased expense. The cost of service would be so enormously increased as to result in higher, not in lower, charges. All shippers would not be large shippers. The number of those who could despatch a train with forty cars would be exceedingly limited. The result would be the necessity of ten engines for small trains where one now suffices, as well as a vast increase in the extent and facilities of the terminals and a proportionate increase in oper- ating expenses. The control of transportation is indissolubly bound up with the control of the roadbed. But secondly, the scheme would not cure the great evils of the present system. What is sought is the abolition of unjust discrimination. It is difficult to see how free competi- tion of the carriers would effect this. The railway would still be empowered to charge tolls, but it is impossible, as has been shown in the preceding essay, that these tolls should be alike for all classes or distances. The expenses of the pri- No. 3.] THE INTERSTATE COMMERCE LAW. 71 vate trains would of course be proportional to cost of ser- vice ; the cheap goods would be more expensive to transport than the dear goods. In order, therefore, to render the trans- portation of cheap or distant articles at all possible, the tolls would have to vary in a large degree in their favor. 1 According to the principle of value of service it would be requisite to have classification and local discrimination in tolls, as in the turnpike and canal tolls, but in a necessarily increased proportion. The private shippers of coal, e.g., would have to defray not only the operating expenses proper but also the fixed charges represent- ing the capital invested in the rolling stock ; the railway com- pany, on the other hand, could afford to transport this coal at lower rates, because it could compensate by charging higher rates on other traffic which is better able to pay. Under a regime of competition of carriers, therefore, it will be necessary to differentiate the tolls correspondingly unless the present traffic in cheap or distant goods is to be entirely stopped. The discriminations represented by the tolls would be precisely equal to the present discriminations in the total rates. To fix the tolls by law would not mend matters, for if the law can suc- cessfully fix tolls, it can equally well fix the total charges as imposed at present. The principle involved is the same. But if the extent of tolls is left to the discretion of the railway com- panies, then the condition of affairs is not improved a whit. The difficulties of regulation according to a well-digested sys- tem would not be diminished. But thirdly, it is very probable that abuses would be engen- dered far worse than any which exist. There would be such an evident gain in the larger shippers combining to lessen running expenses that before long competition would again forcedly result in combination. This would practically intensify per- sonal discriminations. The large shippers might through com- bination reduce the charges to a minimum, and, not being common carriers, would refuse to take the goods of the smaller shippers. The latter would thus be put at an immense disad- 1 Mr. Hudson proposes equal mileage tolls (Railways and the Republic, p. 397). But the impracticability and inadvisability of this have already been shown. 72 POLITICAL SCIENCE QUARTERLY. [VOL. IL vantage, while now they have at least an equal right to insist on transportation. If it be objected that the small shippers might also combine, the answer is that the practical difficulties in the way would be well-nigh insuperable; and that even if they were overcome we should no longer have the condition of free competition between the carriers. The very basis of the argument would fall away. The legitimacy of such a conclusion is emphasized by the history of the English railways. For there, as in other coun- tries, we find vestiges of an arrangement which is only a slight variation of the scheme proposed. That is, although we do not find cases of competition between carriers who own their locomotives, there have been instances of competition between shippers who own their own cars. This is technically known as the principle of separation of traction and carrier! The most striking example of the inadequacy of the remedy suggested is seen in the case of the coal companies. Each of these as a rule owned its own cars. Yet the result of the competition has been the building up of a few gigantic monopolies to the ex- clusion of the smaller shippers. The agglomerated companies always succeeded in procuring better facilities in the way of storage of coal, etc., in the depots than the isolated small ship- pers, and the inevitable tendency has reasserted itself. So far has this process been carried as to practically preclude small shippers from sending coal without the consent of the larger companies. 2 Separation between motor and carrier would ag- gravate, not diminish, the abuses. So incisive are the arguments against free competition of carriers that every careful scientific investigation of the question has abundantly proved the fruitlessness of the scheme. Already in 1839 an English committee reported, after an extensive re- view of the facts, that such a plan was no less undesirable than impracticable. 3 In 1844 Gladstone's committee repeated the 1 Or of " motor " and carrier. 2 Cf. Royal Commission (1866), Evid. qu. 12,502-12,519; ibid. (1865), qu. 9772 et seg., 9853 et seq. Already in 1853 we find the same tendency. Cf. Joint Select Committee (1853), Fifth Report, pp. 201-206. 3 Select Committee on Railways (1839), Second Report. No. 3.] THE INTERSTATE COMMERCE LAW. 73 elaborate refutation. 1 But the attempt to enforce this competi- tion was nevertheless found in the charters. Cardwell's com- mittee of 1853 still discussed the project. 2 But from that time the clauses in the charter were regarded as mere archaic curiosi- ties. The Duke of Devonshire's commission abandoned the fiction once and for all. 3 In Chichester Fortescue's committee the efforts of the early legislation are reviewed with a grim sar- casm; 4 and, finally, in Mr. Ashley's recent committee the whole matter is not even deemed worthy of separate mention. 5 But although England had been radically cured of her early misconceptions, ignorance of English experience led to a re- vamping of the old doctrines on the continent. The matter was taken up at the close of the sixties in Germany, and for several years would-be reformers and even economic con- gresses sounded the praises of the new panacea. 6 It became, as has been wittily remarked, the enfant terrible of the railway question in Germany and Austria. Thrown out of one window, it came bobbing in at the next. 7 Book after book was written to explain the advantages of the system, but science and common- sense again triumphed, 8 and to-day the project is considered as definitely laid to rest. Yet scarcely has the matter been finally decided on the continent when we are called upon to go over the same tedious ground in the United States. Here too the plan is elaborately set forth 9 with a naive confidence in its 1 Select Committee (1844), p. 19, Appendix to Evidence. 2 Joint Select Committee (1853), Fifth Report, p. 8: "In theory the railway is like a common highway ; in practice, no one can carry upon a railway but the owners of the line." 3 Royal Commission (1867), Report, 7. 4 " Committees and commissioners, carefully chosen, have for the last thirty years clung to one form of competition after another," etc. Select Committee (1873), Report, p. xviii. 8 Select Committee on Railways (Rates and Fares), 1882. 6 Technically known as " Die Freiheit der Schiene." 7 Sax, Die Verkehrsmittel, Bd. II, S. 112. 8 Cf. the discussions in Reitzenstein, Die Gutertarife der Eisenbahnen (1874), S. 42-59; Perrot, Die Eisenbahnreform (1871), S. 34-47; G. Cohn, Streitfragen der Eisenbahnpolitik (1874), S. 17-32: Bilinski, Die Eisenbahntarife (1875), S. i^etseq. 9 Hudson, The Railways and the Republic (1886), ch. x, esp. p. 400. Mr. Hud- son is just about twenty years behind the times. His arguments are almost word for word those of Dorn, Aufgaben der Eisenbahnpolitik (1874). 3-U de/u^*^e) 0^ MKO. i e^ 'M>v^ 4* 74 d ( POLITICAL SCIENCE QUARTERLY, [VOL. II, novelty and efficacy a confidence that can be excused only on the assumption of woful ignorance of the literature or absolute incapacity to learn from experience. But it plainly cannot be the duty of a scientist to refute in detail what has been dis- proved time and time again. The practical character of the American public, moreover, is so well assured as to render the necessity of any such refutation extremely improbable. Another variation of this form of competition deserves a pass- ing notice, viz., the demand for the enforcement of running pow- ers. This theory is supposed to uphold competition by allowing the trains of any one railway to pass over the tracks of the other. The English Parliament, after having abandoned all the other theories of competition, still clung to this ; and one of the main features of Cardwell's act of 1854 was an attempt to real- ize this idea. In the United States also it is advanced as a panacea. But Robert Stephenson already in 1853 emphatically condemned such running powers as incompatible with safety and practical administration. 1 The committee of 1872 finally forsook the old position and came to the conclusion that in all cases where running powers existed they were the result of vol- untary agreements. 2 It is practically impossible to compel the railways to grant such powers against their will, and if it were possible it would not be wise. 3 It would be far more expensive and dangerous, and it would put a check to all railway building by powerful capitalists, for it would render the quantity of traf- fic carried by any one line absolutely uncertain and subject to the discretion of the government. In France, likewise, there have been repeated attempts to enforce these running powers, but the only case in which they have not ignominiously failed has been that of branch, not competing, lines. 4 1 Select Committee on Railway and Canal Bills (1853), Evid., pp. 115, 1 1 6. 2 Select Committee on Railway Cos. Amalgamation (1872), Rep., pp. xlv, xlvi. 8 Hudson, Railways and the Republic, p. 382, gives a few familiar examples of one track being used jointly by two railways. But that is quite another thing from allow- ing one track to be used by all the other lines, especially if the first one does not consent. Voluntary arrangements are not enforceable running powers. 4 Thus in the revision of the cahiers de charge imposed on all the " great compa- nies " in 1857-59 these running powers were reserved to all branch lines and prolonga- tions on payment of a fixed droit de peage. Cf. the documents themselves, litre vi, No. 3.] 77/ INTERSTATE COMMERCE LAW. 75 But the most amusing error remains to be noticed. Running powers or "working arrangements " when voluntary are just the opposite of what they are supposed to be. In lieu of being a form of competition, they are a form of combination the fore- runner of pools and frequently their concomitant. The railways agree to forward traffic over each other's lines, or to divide the traffic in cases where they use the same line, not in order to maintain competition but in order to avoid competition. And if enforceable running powers were universal, they would simply result again in private agreements. It would not be an advance of competition but a check to competition. Even if it were prac- ticable, it would simply accelerate the process which it was de- signed to arrest. Compulsory competition is an absurdity. For- tunately the Interstate Commerce law expressly disclaims all intention of enforcing such working arrangements, 1 although it may well be doubted whether the legislators were actuated by the reasons just recounted. The prohibition of pools militates against the acceptance of any such flattering imputation. There remains finally the subject of water competition. In so far as we have to deal with artificial waterways the same unmis- takable tendency to combination is apparent. The competition of canals is virtually of no importance as the regulator of rail- way charges. In the first quarter of this century the charges on the English canals were so extortionate and the abuses so extravagant that great hopes were staked on the competition of the railways. The railways indeed did compete with the canals, but so effectually as to silence all competition. They bought up the canals or amalgamated with them, and before long the condition of affairs was reversed. New canals were now built to compete with the railways in place of new railways being built to compete with the canals. The conditions had shifted. But all was in vain. Already at an early period the rivalry of the canals had been overcome; 2 by 1872 the influence of the art. 61, in Picard, Chemins de fer francais, t. iv, p. 71. As to the difficulties to which even this has given rise, see Aucoc, Droit admiuistratif, t. iii, pp. 779 et seq. 1 Cf. sec. 3. 2 In 1865, of the four thousand miles of water and river communication in Eng- land and Scotland, about one-third had been amalgamated with the railways. Royal Commission (1867), Rep. App. qu. 9899 et seq. 76 POLITICAL SCIENCE QUARTERLY. [VOL. II. canals as competing factors was infinitesimal. 1 The railways were the victors ; competition had again failed. On the continent the condition is the same. Everywhere the canals have been losing their traffic. Even when owned by the state, their efficacy is a thing of the past, although in such cases there can naturally be no consolidation with the private railways. 2 Isolated efforts are yet made to further the con- struction of new canals, but the better opinion now recognizes the ultimate uselessness of such attempts. Although the movement has not progressed quite so far in the United States, the tendency is the same. From 1830 to 1850 the canals were formidable competitors of the railways, but from that time on the private canals were gradually bought up, while the state canals were either abandoned, sold, or re- duced to a state of utter decrepitude. The efforts of the Clinton league in New York were unable to arrest the move- ment. In 1886 an expert witness stated to the Senate com- mittee : "I do not think that there is a canal in the United States, except the Erie, that is not more or less controlled by the railroads." 3 The competition of artificial waterways can no longer be relied on. In respect to natural waterways the matter is slightly differ- ent. The sea and navigable rivers cannot be subjected to a monopoly. 4 In such cases the competition is real and active, although only spasmodic in the case of internal navigation. The importance of the Erie canal, and the extent to which it really regulates the charges by rail, is due solely to the fact that 1 Select Committee (1872), Rep., p. xxix. Also pp. xx-xxiv, with full references to the evidence. Cf, in general the admirable work of Freiherr von Weber, Die Was- serstrassen Nord-Europas (1881), S. 92-111. Also de Franqueville, Du regime des travaux publics en Angleterre, 2me ed. (1875), t. ii, pp. 274-306. 2 Cf. Nordling, Die Wasserstrassenfrage in Frankreich, Preussen und Oesterreich (1885), esp. S. 28, 128, 158, 171-176. A French translation of this work has just been published. 3 Cullom Committee Report, Test. (Wistar) 507. For a careful investigation of the whole question, cf. Mosler, Die Wasserstrassen in den Vereinigten Staaten (1877). Much valuable material may be found in Kupka, Die Verkehrsmittel in den Vereinig- ten Staaten (1883), S. 41-126. 4 Yet in England there are instances even of this. Cf. Select Committee (1872), Rep., pp. xix, xx. Select Committee (1881), Evid. qu. 8133. 3~* No. 3.] THE INTERSTATE COMMERCE LAW. 77 it is a link in the chain of natural waterways. But the influ- ence of internal navigation is apt to be seriously exaggerated, and the exuberantly enthusiastic expressions of the Cullom report savor, it must be confessed, slightly of rhodomontade. 1 Finally, it must not be overlooked that water competition, in so far as it is an important factor in internal transportation, is precisely the chief cause of local discriminations. Differential rates are due in great part, as we have seen, to the existence of competing centres. As long as the competition exists the dis- criminations must continue. Hence those who clamor for the construction of new waterways or the improvement of the old may indeed succeed in effecting a reduction of charges, but for- get that they are only strengthening the causes of whose results they complain. To maintain competition and avoid discrimina- / tion is impossible. The chief provisions of the federal law have now been dis- cussed. There remains to be considered only the machinery to enforce the law, i.e., the Interstate Commerce commission. The commission idea is essentially a product of the Anglo- Saxon mind. On the continent of Europe direct administrative control has always been comparatively stringent, and the extent of state interference has been conditioned only by considerations of a political nature. 2 Almost every possible system has been tried ; and if entire immunity from abuses has not been attained, ^-jpr it is not for lack of serious endeavors on the part of the govern- 1 " The manifest destiny of our country points unerringly to this emancipation of the waters as its next great work, a fitting sequel to the emancipation of the slave, a a destiny not of war, but of beneficence and peace, to which the heart of the nation turns as spontaneously and resistlessly as the waters of its great river flow to the Gulf." Report, p. 175. Cf. with this "manifest destiny " the figures as to the decadence of the Erie canal in Statistics regarding the Movement of Eastbound and Westbound Traffic over the Trunk Lines, etc. (1885), pp. 16, 17 ; also Report on the Internal Com- merce of the United States (1885), pp. 408-414. The Windom Committee likewise favored government canals. But the value of their suggestions may be inferred from the fact that they also recommended one or two government railways to regulate the private lines. Senate Select Committee on Transportation Routes to the Seaboard, Report (1874), pp. 187-242. 2 Weber, Nationalitat und Eisenbahnpolitik (1876). Audiganne, Les Chemins de fer d'aujourd'hui et dans cent ans (1858-1862). 78 POLITICAL SCIENCE QUARTERLY. [VOL. II. ments. In no country was the public nature of the railway business lost sight of. Even where financial reasons led to the construction of railroads by private companies, the fostering and restraining action of the public authorities was never absent. The corporations were not able to dictate terms to the state. In England the history was quite different. The railways, indeed, started out as humble suppliants for favors, but govern- mental action confined itself to seemingly guarded restrictions in the charters, such as maximum clauses and limitations of dividends, all of which were soon shown to be utterly powerless to prevent abuses. The railways increased so rapidly that their position soon became that of dictators, in place of suppliants. Warnings of able men like Morrison went unheeded. 1 Praise- worthy attempts were still made by far-sighted statesmen, but the railway opposition was sufficiently powerful to crush all interference. Lord Seymour's bill of 1840 provided for the appointment, by the Board of Trade, of railway inspectors, who should have the right to " remonstrate " with the companies. 2 But the law remained a dead letter, and in 1842 Gladstone brought in another bill giving the Board of Trade inspectors certain compulsory powers. 3 This law was not more successful than its predecessor, and finally, as the outcome of the great investigation of 1844, a commission was appointed within the Board of Trade and put in activity in 1845. It was known as Lord Dalhousie's Railway board, and was invested with extensive duties of examining all new projects. But although it worked hard, it discountenanced parallel roads and thus incurred the hostility of the railways and ultimately the jealousy of Parlia- ment itself. 4 As a facetious member said, it attempted to do what five angels could not accomplish ; and public opinion not coming to its rescue, it was abolished ingloriously the same year. Nothing daunted, however, the government brought in 1 Cf. James Morrison, Speech in House of Commons, May 17, 1836; id., The Influence of English Railway Legislation on Trade and Industry (1848), p. 86, and App., pp. 107, 158. 2 3 and 4 Viet. c. 97, An act for regulating railways. 8 5 and 6 Viet. c. 55, An act for the better regulation of railways, etc. * Cf. Report on Railway Companies' Amalgamation (1872), p. vii. t t No. 3.] THE INTERSTATE COMMERCE LAW. 79 a new bill constituting the Board of Railway Commissioners, in 1846, with moderately extensive powers. 1 But the railway interest again succeeded in robbing the bill of all its vitality, so that the only function left to the new commission was " inquiry and publicity." It vegetated for five years, accomplishing prac- tically nothing, and was quietly abolished in 1851, while ail its "extensive powers" were re-transferred to the Board of Trade. For over twenty years the commission idea slumbered. Card- well's act of 1854, the only serious attempt at governmental regulation during the interim, left the enforcement of its pro- visions to the common courts, and with the customary results. It was not until 1873 that the present railway commission was finally constituted. But although its activity has been inces- sant and the number of cases disposed of far greater than those previously adjudged by the purely legal tribunals, it has by no means achieved an unqualified success. The manifold com- plaints in the late investigation of 1881-82 and the proposals now pending to reconstitute and strengthen the commission bear ample testimony to this fact. The commission is practi- cally a court for railway cases, 2 but its efficiency has been checked in three ways. Its jurisdiction is limited, its procedure is cumbrous and expensive, and its powers of enforcing judg- ment are restricted. Its jurisdiction is limited, with a few unimportant exceptions, 3 to eases arising under Cardwell's act of 1854, which forbids undue preferences and requires proper facilities. The commission has endeavored to widen its powers by interpretation, as, e.g., in the case of transgression of the 1 Accounts and Papers, 1846, vol. iii, p. 277 ; and the bill as passed May 21, in Accounts and Papers, 1847, vo ^ "* ' 2 Of the three members and two assistants, one must be a jurist. In questions of fact their decision is nominally final ; if they think it a question of law, then they are to " state a case " in writing, and the matter goes up to the higher court, who are either to decide it, or to give their opinion as to the law and send the case back to the commission. But as the appellate court can issue a writ of mandamus compel- ling the commission to " state a case," the decisive power does not rest with the com- missioners. Cf. Seventh Report Railway Commission, p. 3. 3 Such as reasonableness of terminals, enforcement of through rates, agreements with canals, etc. 36 and 37 Viet. c. 48, 8-n, 14-17. For list of cases decided up to 1882, cf. Select Committee (1881), Rep., App. no. 17, pp. 68-79. 80 POLITICAL SCIENCE QUARTERLY. [VOL. II. charter maxima, but in this it has ignominiously failed. 1 Hence it cannot dispose of all complaints. Secondly, the procedure is unsatisfactory. The power of the railways is so great that the private shippers refrain from complaints for fear of reprisals. The weapons of retaliation in the hands of the companies have been ruthlessly employed. 2 But even if the shipper determines to brave the opposition of the railway, the expense is so enor- mous as to induce him in many cases to let the litigation drop. 3 The usefulness of the commission is thus greatly impaired. Finally, the means of enforcing judgment are sadly insufficient. The decisions of the commission refer only to the future, not to the past. Its "injunction" does not enable the complainant to recover damages. Furthermore, the companies sometimes flatly refuse to obey the decisions until finally ratified by the appellate courts, and even then they frequently contrive to evade the judgment. 4 The English corporations are far less amenable to the force of public opinion than the American. In short, although arbitrary personal discriminations are comparatively 1 Brown vs. Great Western, Eighth Report Railway Commission, p. 4 ; App., 74-77. The high court of judicature issued a writ of prohibition against the com- mission. Select Committee on Railways (1882), p. 201. In Scotland it was differ- ent. Fifth Report, p. 8. 2 " A man must be very chary in bringing an action against a railway company." Select Committee (1881), Evid. qu. 3745. A colliery company complained of over- charges, and the railway refused to transport the coal at all. Evid. (1881), pp. 138- 142. A similar case arose with an iron company, and when the railway was com- pelled to take the goods, it sent them at such inconvenient times and added so many other vexations that the iron company was compelled to compromise. Ibid., pp. 2OO, 237, 238. A firm in Bedford complained of exorbitant terminals, and the railway retaliated by raising the rates to Bedford more than one hundred per cent, and not to other parts of the line. Ibid., p. 26. A brick and tile manufacturer complained of the rates, and the railway compelled him to prepay the charges, which were imme- diately raised fifty per cent. Evid. (1882), p. 220. 3 A local board spent in one case ^"2500, and then abandoned the contest for lack of funds. Evid. (1881), p. 447. 4 In a case against the Great North of Scotland the railway company was de- feated after a stubborn fight, but reduced its rates only to the particular station in question and continued to make illegal charges to all the other stations. A sepa- rate suit would have been necessary in each case. Evid. (1881), p. 207. In the Neston case the overcharges were continued notwithstanding a decision by the appellate court. "There is no power to enforce obedience to the law." Evid. (1881), qu. 3094, and pp. 140 et seq. No. 3.] THE INTERSTATE COMMERCE LAW. 8 1 rare, 1 owing to the greater development of combination, it may well be doubted whether the railway commission has produced a state of affairs much, if at all, better than that which existed prior to its inception. The new bill of 1887 emphasizes the feeling of necessity for a much more thoroughgoing reform. In the United States the commission idea has two independ- ent sources the Granger movement and the public sentiment of Massachusetts. The policy of the American commonwealths has gone through three phases : the period of state aid and partial regulation, to 1845 or 1850; the period of laissez faire, to 1870; the period of active governmental interference, to the present. The moderate state regulation of the first period was due to the supposed analogy between railways and canals or highways. This varied naturally with the different sections of the country from the railways owned and managed by the state, as in Georgia and Pennsylvania, to the charter regulations of charges in New York, and the limitations of dividends in New England. When the rates were fixed, they were based on the canal and turnpike tolls. The immoderate state aid to railways, again, was due to the mania for internal improvements during the thirties and forties. The scanty legislation of this period remained in great part unenforced because of the desire and necessity of more extended means of communication, and thus the commonwealth gradually ushered in the second phase of the development, that of laissez faire and unlimited com- petition. The system of special charters was succeeded by that of general railroad laws which exacted only a few formal- ities. 2 Not only were the railways left to themselves, but the belief in the absolute efficacy of unalloyed competition was so strong as to lead to a logical carrying out of the theory. No parallel or competing companies were authorized to consolidate. 3 1 But they still occur. Cf. Evidence (1881), qu. 1730-1737, where one shipper was compelled to abandon business. As to allowance for quantity, see qu. 1 1,804 et seq. 2 So in New York the law of 1848, and finally that of 1850, which permits any twenty-five persons to form a company and file its articles when $1000 per mile is subscribed and $100 actually paid in. So in Illinois in 1849, an< ^ U1 the other states in the following decade. 3 The railways of course avoided these provisions through the instrumentality of leases fur long periods. 82 POLITICAL SCIENCE QUARTERLY. [VOL. II. The more lines, the more competition ; the more competition, the more benefits to the public that was the theory. The results of this policy soon became apparent. The crisis of 1857 brought disaster on the country ; but other causes, like the wild-cat banks, were at work, besides the railways. Then came the war, which silenced all discussion for a time. But with the close of the war and the advent of wild railway con- struction in 1867, coupled with the prodigious development of the agricultural interests, the fruits of this unlimited freedom were seen. A system of the most reckless swindling and the most outrageous discriminations arose, such as has never existed before or since in any civilized society. The corpora- tions regarded themselves as purely private money-making enterprises, and seemed not to have the faintest conception of any duties to the public. In the West the abuses were further intensified by the fact of absentee ownership, 1 so that the situation became intolerable. In response to repeated demands for redress, the railways flatly denied the right of the state to interfere with them at all. Things went from bad to worse. It was as a protest against this attitude that the Granger movement arose. The National Grange, established in 1867 purely as a means of mutual improvement and protection for the farmers, 2 was soon drawn into the political warfare against the railroads. At first moderate in their demands, they now became extravagantly violent in word and action. 3 But while the Grangers demanded strict regulation they still believed in the saving force of competition. Failing to see that the bad results of which they complained were due to prohibition of combination, they made the prohibition still stronger. They allowed free competition between the roads, and then hoped to 1 "The whole story is told in these two words absentee ownership. While the Western patron was plundered, the Eastern proprietor was robbed." Report of Illinois Railroad Commission (1874), p. 17. 2 Cf. Report of New Jersey Bureau of Statistics of Labor (1886), part vi; and Cloud, Monopolies and the People (1873). 3 At the general convention at Springfield, 1873, it was resolved that the railways " have proved themselves of as arbitrary extortion and opposed to free institutions as the feudal barons of the Middle Ages." Other favorite phrases were " money-sharks " and " bloated bondholders." No. 3.] THE INTERSTATE COMMERCE LAW. 83 legislate away the results of free competition. Competition was still the panacea. That the railroads did not act justly was their fault ; ergo, said the Grangers, enforce free competition and prevent by legislation the perversion of the principle. That is, they attacked the problem in just the wrong way ; they permitted the cause to remain, and hoped to remove the results ; and in this they necessarily failed. The hot-bed of the movement was in Illinois, where the con- stitution of 1870 adopted provisions of a stringent nature. The law of 1871 forbade any discriminations at all, and after its un- constitutionally had been proved, was followed by the law of 1873 which gave the commissioners power to fix rates. Iowa, Minnesota, Michigan, Ohio, Wisconsin, followed with maximum, pro rata, and short-haul laws, often fixing the rates or giving the commissions absolute and mandatory powers. 1 But the crudity of the laws was shown by the haste with which they were repealed. 2 The political results of the Granger movement indeed were of inestimable importance in putting an end to the arrogant pretensions of the corporations and in producing the sweeping decisions which finally settled the power of the states to regulate its creatures. 3 But the legal question was one thing ; the economic question was another. The Granger movement was economically as unwise as it was politically important and successful. The compulsory commissions were an avowed failure. Far better results were achieved by the advisory or super- visory commissions, of which Massachusetts afforded the first and most successful example. As Charles Francis Adams him- self declares, it hit upon the correct method of legislative con- trol by what was at the time nothing but a "happy guess." 4 1 For these various laws (Iowa 1874, Minn. 1871, Mich. 1871, Ohio 1873, Wis. 1874), see Cullom Rep., pp. 71-74, 98-102, 109-111, 119, 135-137. 2 Minn. 1875, Wis. 1876, Iowa 1878. In Michigan and Ohio the laws were not enforced. In Illinois the powers of the commission were not used after the decision of the Granger cases. Cf. my preceding article, POLITICAL SCIENCE QUARTERLY, June, 1887, pp. 245, 259 ; or this essay, pp. 23, 27. 3 Mun vs. Illinois, etc., 4 Otto, 113-187. Decided in 1876. 4 Cullom Committee Rep., Test. p. 1202. Cf. State Railroad Commissions, pub- lished by The Railroad Gazette, 1883. 84 POLITICAL SCIENCE QUARTERLY. [VOL. II. Instituted in 1869 without extensive powers, it gradually con- centrated the force of public opinion upon each particular abuse, and by its admirable reports, lucid explanations, and impartial decisions succeeded in producing a hitherto unheard-of harmony between the railways and the public. 1 Massachusetts still re- mains the chief type of advisory commissions. Many other states, and notably New York and Iowa, possess commissions of this nature, and the commissioners themselves object to any undue extension of their powers. 2 Their lack of authority and the support of a vigorous public sentiment have been the secret of their success. Even the Illinois commission, which possesses the authority to fix rates, has voluntarily adopted the Massa- chusetts principle of arbitration as more efficacious, 3 and the Kansas commission has made use of its discretionary power to place a very liberal interpretation on some rather stringent laws. 4 The chief instances of compulsory commissions to-day are to be found in the South. The Georgia commission pro- mulgates from time to time a standard tariff, but it uses the authority with such wide discretion as to preserve the interests of the railways. 6 The Alabama commission possesses what is virtually the French power of homologation. New Hampshire is the only northern state with a compulsory commission ; but the complaints were so few that the rates actually in force were accepted as the standard rates. 6 The Interstate Commerce commission is thus in accord with the better experience of the American commonwealths, in that 1 By ch. 338 of laws of 1885, the board was given powers to fix rates in a partic- ular case ; but it was a case of interstate commerce, and thus beyond their purview. 2 As to New York, cf. Report of Railroad Com. (1884), p. 65; (1885), p. xxxiv et seq. As to Iowa, see Report Com. (1884), p. 43; (1885), P- $& As to Illinois, see Report Com. (1884), Moore vs. 111. Central. 3 Cf. Report of its chief commissioner in Cullom Test., 734. 4 Report Kansas Com. 1883, p. 28. 6 Eleventh Rep. Ga. Com. (1885), p. 12; Twelfth, Thirteenth, and Fourteenth Reports (1886), p. 5. 6 The compulsory commissions to-day are: Ga., S.C., Ala., Tenn., Miss., Cal., N.H. The advisory commissions are : Mass., N.Y., la., Wis., Minn., Mich., Col., Dak., Neb., Va. In Kan., 111., Mo., and Ky., the powers are somewhat broader, but not rigidly exercised. In Conn., Me., Vt., R.I., O., the duties are mainly those of inspection. No. 3.] THE INTERSTATE COMMERCE LAW. 85 it is invested with only moderate powers. It may investigate any matter falling within the purview of the act, whether the complaint be made by private individual, railway, or state com- mission, or it may institute inquiries on its own motion without any complaint whatever. If its recommendations are not ac- cepted by the common carrier, the circuit court, and ultimately the supreme court, is to give the final decision, the report of the commission being prima facie evidence of the facts. The com- mission thus has only discretionary, not absolute, powers ; and its success will depend largely upon the character of its decis- ions and the possibility of concentrating public sentiment on the question at issue. Whether it will attempt, like the Eng- lish commission of 1845, to do "what five angels could not accomplish," is perhaps not an entirely settled point. But it is safe to say that not even five demigods could satisfactorily adjust all the complaints arising on 150,000 miles of railroad. Our conclusions may now be summarized. The federal law contains provisions of undoubted value. Among these the en- forced publicity of tariffs and projected uniformity of accounts deserve the heartiest commendation. Nothing is more con- ducive to strict impartiality toward the shippers and to perfect integrity toward the owners than the consciousness of public accountability. Secrecy has ever been the father of duplicity and favoritism. No one indeed can be legislated into righteous- ness, but the noonday glare of open responsibility is the strongest possible preventive of gross injustice. All those sections, therefore, which demand publication of the tariffs, submission of agreements, and eventual uniformity of accounts, must be acknowledged eminently wise provisions. In like manner the institution of a commission with moderate powers to serve as a medium of this responsibility and as an interpreter of the public demands must be unqualifiedly commended. Mere legislation is impotent without a proper machinery to enforce the decrees, and reliance on the judicial branch of the government has always been found inadequate. Of more doubtful value, however, are the clauses which 86 POLITICAL SCIENCE QUARTERLY. [VOL. II. attempt to ensure equitable charges. The definition of unjust discrimination is necessarily so vague as to be susceptible of varied interpretations. In itself it settles nothing. In so far as preferential rates are concerned, the law is guilty of a grave mistake in prohibiting pools. The crying evil of railway man- agement to-day is personal discrimination. No mere legislative penalties will successfully abolish this. Pools are perhaps not a completely satisfactory solution of the problem ; although as adjuncts to our traffic associations, they have accomplished incalculable good. They must rather be regarded as a tem- porary palliative, as a step in the onward march to final consoli- dation. But their prohibition at the present time is premature and unwise, and unnecessarily jeopardizes the success of the law. The underlying principle of pools that of checking undue competition and ensuring uniformity of rates will undoubtedly reappear in another form, most probably in agree- ments to give adequate " differentials." But these new agree- ments will be still more deficient in stability and coercive power than were the pools, and the ultimate outcome prom- ises to be a more complete combination, a more thoroughgoing frustration of the competition which the law seeks to establish. Competition is the handmaid of personal discrimination. Finally, the curtailment of local discriminations through the short-haul clause is a double-edged sword. It is intended to benefit the public, but if strictly enforced it would in many cases injure the public. . As a check to arbitrary management and the systematic disregard of less favored localities, it is indeed defensible. But the important factors of water and foreign competition and long distance traffic must not be over- looked. As long as these exist, local discriminations will be absolutely necessary. The mere claim that existing business relations have been built up through the medium of differential rates and that their abolition would throw all trade into confu- sion, is not a sufficiently valid reason to oppose the law. For if these differential rates are unjust, even temporary distress can- not be pleaded as an excuse for continued injustice. But it has been shown that certain local discriminations are not unjust. No. 3.] THE INTERSTATE COMMERCE LAW. 87 Value of service as a subordinate principle justifies carefully guarded infractions of the short-haul clause. Without these infractions we would soon attain the double result of ruin- ing the railways in favor of their water competitors and of voluntarily abdicating the advanced position which improved means of transportation have given us. Each section of the country would be separated from the rest by the strongest of mutually protective tariffs. Either the commission must fre- quently relax the rule, or it must so liberally construe the clause as to permit wide local discriminations in specific cases. The latter policy has fortunately been already initiated by the opinion in the Louisville and Nashville case. Otherwise it would have needed but little foresight to predict grave incon- venience to the public and a speedy repeal of the law. The Interstate Commerce act thus contains some serious blunders in the midst of many wise provisions. But on the whole, it is a cheering sign of the determination to grapple with evident evils. To conclude that it will at once remove the chief abuses would be far too optimistic. The condition of affairs will in most respects remain very much as it was. Personal discriminations at this moment are little, if at all, less frequent than before the passage of the law, and they will not be stopped by legislative authority. The main hope for the future lies in the further elaboration of the railway federations or traffic associations, to which most of the advance thus far made is ascribable, and whose complete history, never yet told, I must reserve for another time and place. Their importance, both past and present, has been phenomenally neglected. But the value of the Interstate Commerce law lies in the fact that it for the first time in our history subjects the railways to national supervision, and that it is designed to enforce a publicity and responsibility which are the prerequisites to all healthy reform. The federal law is a tentative step, but a step in the right direction. It embodies the expression of a principle which is destined to remain and which is capable of a fruitful development. On this account it deserves a hearty welcome. EDWIN R. A. 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