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 LIBRARY 
 
 
 OF THE 
 
 
 University of California. 
 
 
 GIFT OF 
 
 
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THE 
 
 CONSTRUCTION OF FREIGHT RATES 
 
 IN THE SOUTH. 
 
 LECTURE DELIVERED BEFORE THE STUDENTS OF 
 
 THE GRADUATE SCHOOL OF BUSINESS 
 
 ADMINISTRATION, HARVARD 
 
 UNIVERSITY. 
 
 -J, 
 
 Mr. J. M. GULP, 
 Vice-President, Southern Railway Company. 
 
 CAMBRIDGE, MASS 
 January 29th, 1909. 
 
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 THE CONSTRUCTION OF FREIGHT RATES IN THE SOUTH. 
 
 It is a well recognized principle of economics that prices of 
 all kinds, including not only commodity prices, but the compen- 
 sation of laborers, professional men, and those who work in 
 every field of human activity, are regulated, to a greater or 
 less degree, by economic forces beyond the control of the seller. 
 They are subject to the law of supply and demand and to the 
 competition of those offering for sale like commodities or like 
 services. 
 
 It seems to be believed by many that charges for transporta- 
 tion are an exception to this rule, and that, except in so far as 
 they are regulated by public authority they can be fixed at any 
 level desired by the carrier. Every man who has had practical 
 experience in the transportation business, and especially in the 
 department having to do with the fixing of rates, knows that 
 this is not true. If it were otherwise, all common carriers 
 would prosper and such a thing as a bankrupt railway would 
 be unknown. 
 
 As it is, every traffic official knows that on every hand he is 
 confronted by the working of economic forces which are as 
 inexorable as is the law of gravitation, and that the limit within 
 which he can exercise discretion in the fixing of any rate is 
 very narrow. On the one hand he has the proper desire to 
 perform his duty of so adjusting his charges that in the aggre- 
 gate they will yield sufficient gross earnings to pay operating 
 expenses, taxes, and fixed charges, and a fair margin of profit 
 for the owners of the property. On the other hand his discre- 
 tion is limited by the fact that, if his company is to prosper, its 
 charges must be such as to attract traffic and encourage the 
 development of resources and the location of industries along 
 its lines. It is his aim so to adjust rates that they will yield 
 the necessary revenue to the road, but will at the same time 
 enable producers along his line to sell their products under 
 competitive conditions on such terms as will permit them to 
 extend their production, and as will attract other producers 
 to his territory. In his effort to keep rates up to a net-revenue- 
 
 197972 
 
producing level he is confronted by exceedingly complex con- 
 ditions. These may be grouped under four heads: The com- 
 petition of other carriers by land and by water, the competition 
 of rival markets, the competition of rival producing localities, 
 and the competition of commodities which may be put to like 
 uses. 
 
 As an example of the competition of carriers I may cite the 
 rates from Chicago to New York, where the all-rail lines come 
 into competition, not only with each other, but also with the 
 all-water route by way of the lakes and the Erie Canal, and 
 with the water and rail route by way of the lakes to Buffalo, 
 and thence by rail to New York. The cost of transportation 
 by water being cheaper than by rail, the all-water route con- 
 trols the charges from Chicago to New York on all except 
 perishable commodities or such traffic as requires such dispatch 
 as the water routes cannot furnish. I shall show, in due 
 course, the far-reaching effect of the water route between 
 Chicago and New York in controlling rates between the West 
 and inland points as far south as the Carolinas, and even Geor- 
 gia, and as controlling export rates not only to all North 
 Atlantic ports, but down the coast as far as Charleston, and 
 from the interior to the Gulf ports as well. 
 
 Competition of rival markets may be illustrated by the rates 
 from Chicago to the Ohio River cities of Cincmnati, Louis- 
 ville, New Albany, Evansville, and Cairo. These are reached 
 by different lines of roads, each interested in securing a fair 
 amount of traffic to the river city which it serves, with the 
 result that difference in distance has been ignored and the 
 rates to these river cities made on practically the same level. 
 
 This competition of rival markets is one of the factors in 
 the very complicated competitive conditions which control the 
 relative adjustment of rates from Ohio River points to rival 
 markets, such as Atlanta and Augusta, to which rates from 
 Ohio River points are relatively adjusted and practically the 
 same. This condition is more forcefully illustrated by the 
 adjustment of rates from Cincinnati, Louisville, and other Ohio 
 River points, to New Orleans, La., and Mobile, Ala. Origi- 
 nally the rates to Mobile were higher than to New Orleans, 
 but both points being Gulf ports serving a common territory, 
 
it became necessary for the Mobile lines to make the rates 
 from the Ohio River crossings not higher than to New Orleans 
 in order that Mobile might compete with New Orleans, and 
 also in order that the western producing points might meet at 
 Mobile the competition resulting from all-water transportation 
 from eastern points, the water rates from the East to New 
 Orleans and Mobile being practically the same to both points. 
 
 This adjustment was also made necessary to place the rail 
 lines in a position to successfully compete for the Mobile trade 
 as against actual or potential competition via river to New 
 Orleans and water thence or even via rail to New Orleans 
 and thence by water. 
 
 Competition of rival producing localities may be illustrated 
 by the rates on cotton goods from the New England mills and 
 from the Southern mills to Chicago and other Western mar- 
 kets. With the development of the cotton mill industry of the 
 South, the roads leading from that section were under the 
 necessity of putting in such rates as would enable Southern 
 mills to compete for this Western trade, and they did so. It 
 is interesting to observe that in the determination of the rate 
 on the manufactures of the South that would enable the South 
 to sell in Western markets in competition with the other sec- 
 tions not served by the roads of the South, rates were adjusted 
 with the single view of the competition to be met. 
 
 Competition of similar commodities may be illustrated by 
 the necessity which a road from a coal-producing locality is 
 mider of making rates which will enable its coal to meet the 
 competition of wood from another locality abounding in tim- 
 ber, or by the rates which enable marble from one locality to 
 compete as a building material with granite from another 
 locality, or by rates on marble or granite from distant quarries 
 to enable competition with brick produced by local or near-by 
 kilns, and frequently by rates on paving brick or paving com- 
 position to enable competition with macadam, crushed stone, 
 or gravel. 
 
 In addition to the natural or normal effect of these competi- 
 tive forces upon rates, frequent rate wars, arbitrations, and 
 litigation have been working to bring about a better economic 
 relation of rates, with the tendency to a lower average level. 
 
The limits within which discretion can be exercised in the 
 making of rates are fixed by three principles. The first is that 
 a charge for transportation cannot exceed the value of the 
 service to the shipper; if it does, the traffic will not move. 
 The second is that no charge for transportation can properly 
 be less than the cost to the carrier of performing that particular 
 service. The third is of equal importance in that it requires 
 the proper correlation ; that is to say, a given rate should bear 
 a proper relation to other rates on the same or competing com- 
 modities, in the same territory. Within these limits the entire 
 schedule of rates should be so adjusted as to yield a margin 
 over the costs of operation approximately equal to the rate 
 of profit earned by investments in other lines of business. 
 Unless such a margin can be earned the provision of additional 
 and improved rail facilities requiring the investment of new 
 capital must be affected, for it is an invariable economic law 
 that capital is attracted to those enterprises promising the 
 safety of the principal involved, together with a reasonable 
 assurance of a rate of profit commensurate with what might 
 be earned if it were put to other uses. 
 
 If all classes of traffic between all points could pay a uniform 
 rate per mile the problem of rate-making would be very simple. 
 It is obvious, however, that there is a wide difference between 
 the value of transporting a carload of coal and a carload of 
 silk goods, and that if rates on all traffic should be fixed at the 
 rate on silk goods very little coal would move, while if all 
 traffic should be carried at the rate on coal the railways w^ould 
 be bankrupt. It is to the interest of society generally that coal 
 should move as well as silk goods, and the carrier is, therefore, 
 justified in hauling coal at a rate that pays, in addition to the 
 movement expenses on that particular traffic, revenue contribu- 
 ting relatively less to the payment of general expenses. To 
 whatever degree this low-class traffic contributes to general 
 expenses over the movement expenses of that particular traffic, 
 it reduces the amount that must be obtained from the higher- 
 class traffic capable of bearing a higher rate. The same prin- 
 ciple governs competitive rates and non-competitive rates. The 
 carrier may properly accept rates on highly competitive traffic, 
 when necessary to secure a share of such traffic, that would 
 
be ruinous to the carrier if applied to all its traffic, even though 
 such rates, after the expense of moving such competitive 
 traffic, yield relatively a smaller margin to be applied to 
 general expenses. The non-competitive point does not suffer 
 from this, but benefits to the extent that the competitive traffic 
 contributes to general expenses, and it also benefits by the fact 
 that its rates cannot exceed the rates to the competitive point 
 plus the local rate from that point, and that where its standard 
 rates are in excess of this combination, the rate to the non-com- 
 petitive point must be reduced. 
 
 While it is inevitable that in the vast number of railway 
 rates between all the stations in the United States there should 
 be some cases of unjust relation, it can be said of the rates as 
 a whole that differences which on their face may seem to be 
 arbitrary and unjust, if analyzed, will be found to be the logical 
 and inevitable result of the working of the competitive forces 
 to which I have referred. All of these forces play a part in 
 controlling rates in the section of the country which we now 
 have especially under discussion. 
 
 The freight-rate structure of the South as it exists today is 
 the result of a natural and inevitable evolution growing out 
 of the physical geography of the section and the operation of 
 the com.petitive forces to which I have referred. A distin- 
 guishing characteristic is what is known as the basing-point 
 system. This is a system by which through rates to certain 
 points are the basis for rates to other points — the through rates 
 to a point which is not a basing point being a combination of 
 the rate to the nearest basing point plus the rate from the 
 basing point to the point to which the through rate is made, or 
 plus a differential over this rate to the basing point. This re- 
 sults, in many cases, in a lower rate for a long haul than for a 
 shorter haul, when the shorter distance is included in the longer. 
 It has given rise to some criticism and litigation on account of 
 the alleged discriminations involved. We shall see, however, 
 that the basing points have not been established by the rail- 
 ways arbitrarily, or even voluntarily, and that their abolition 
 would involve a commercial upheaval in the Southeastern 
 States that would bankrupt its carriers and give a serious set- 
 back to the development of the entire section. 
 
First among the factors that have influenced rate evolution 
 in the Southeastern States must be placed the physical geog- 
 raphy of the section and the consequent influence of water 
 transportation — the eastern and southern boundaries of this 
 section are the Atlantic Ocean and the Gulf of Mexico. Its 
 western boundary is the Mississippi River. On the north, 
 from the Atlantic Ocean to Cairo, it is bounded by the Ohio 
 and the Potomac Rivers. Numerous streams, navigable across 
 the coastal plains to the foothills, flow into the Atlantic and 
 the Gulf. Tributaries of the Ohio and the Mississippi are navi- 
 gable for long distances in the western and northwestern parts 
 of the section. It differs from the territory west of the Missis- 
 sippi River in that, owing largely to its facilities of water 
 transportation and to the world demand for its characteristic 
 products — cotton and tobacco — it was comparatively well set- 
 tled, and had a considerable commerce before the era of rail- 
 way construction. When the railways were built they found 
 certain commercial and transportation conditions already well 
 established. They were powerless to disregard those condi- 
 tions, and it was well for the best interests of the entire section 
 that they were. 
 
 As a result of the conditions which existed prior to the build- 
 ing of the railways and of subsequent developments, there are 
 several classes of basing points in the South. First, there are 
 the seaports from Norfolk to New Orleans. Through these 
 ports the products of the interior Southeast were shipped, and 
 from them the products of other countries and of the North- 
 eastern States were distributed to the interior South. Then 
 came the development of distributing centers along the Ohio 
 and Mississippi from Cincinnati to New Orleans, and of a 
 secondary series of distributing points at the head of naviga- 
 tion, or at the fall line of the principal rivers flowing into the 
 Atlantic and the Gulf. As examples of these interior trade 
 centers at the head of navigation I may mention Richmond, 
 Va. ; Columbia, S. C. ; Augusta, Macon, Columbus, Ga., and 
 Montgomery, Ala., all of which and others were in existence 
 before the building of the railways, and were points at which 
 the products of the surrounding territory were collected and 
 from which goods were distributed by wagon or pack animals. 
 
When the railways were built they found these trade centers 
 already in existence, and they simply accepted the situation as 
 they found it, and adjusted their business to existing and con- 
 trolling trade conditions. Still another class of trade centers 
 or basing points grew up with the development of the railway 
 system. These were at gateways, such as Atlanta, and at 
 strategic railway centers, such as Birmingham, where intensive 
 railway competition without water transportation had the effect 
 of creating distributing points. When the roads were first 
 built there were few, if any, towns of any importance on their 
 lines except these trade centers that had already become estab- 
 lished. The only practicable means of distribution was to ship 
 to these centers as distributing points. 
 
 As other towns at railway junctions have grown in commer- 
 cial importance, there has been brought about, in some cases, 
 a readjustment of their rates to a level between those of the 
 purely local points and those of the more highly competitive 
 points; in fact, in a few instances the readjustment has been 
 on the basis of highly competitive adjacent points. 
 
 Economic conditions in the South aided in the perpetuation 
 of this system. It was essentially an agricultural region, prac- 
 tically without industrial centers, and consequently without a 
 large percentage of urban population. The system by which 
 planters bought their supplies in bulk to be issued to their 
 labor, and the practice which early grew up of merchants giv- 
 ing credit to planters until their crops were marketed, also 
 tended to concentrate trade in the hands of dealers at the 
 larger and financially stronger centers. 
 
 If we are clearly to understand the relation of the basing- 
 point rates to those to and from other points and the economic 
 necessity for the differences that exist, we must consider first 
 how the basing-point rates are made. We will find that actual 
 or potential water competition is the most important controll- 
 ing factor. 
 
 On account of its long coast line and its numerous rivers 
 there is scarcely a locality in the South the rates to which from 
 other sections do not feel the influence of water rates to a 
 greater or less degree. This influence, exerted either directly 
 or indirectly, at times produces results that are surprising to 
 
those who have not studied the matter closely. It is very ap- 
 parent, of course, that rail rates between the cities on the 
 Atlantic and Gulf coasts are controlled by the water rates, and 
 that the rail lines can secure on this traffic only what the trans- 
 portation is worth, which is not in excess of what the water 
 lines will accept for the service, plus the value to the shipper 
 or consignee of prompt transportation and the absence of ma- 
 rine risk. It is equally evident that rail rates between points 
 on the Mississippi River and its tributaries are controlled in 
 the same way by actual or potential steamboat competition. 
 
 Going a step farther, we find that rail rates between the 
 North Atlantic ports and the towns at the head of navigation 
 on the Southern rivers are controlled by the ocean rates to the 
 ports at the mouths of these rivers, plus the steamboat rates 
 up the rivers. An example of this is the rail rate from New 
 York to Augusta, which is controlled by the ocean rate from 
 New York to Savannah, plus the river rate from Savannah 
 to Augusta. Rates between river points are controlled in the 
 same way, as is illustrated by the rates between St. Louis and 
 Memphis and New Orleans, also between Savannah and Au- 
 gusta, which are controlled by the steamboats' rates. 
 
 The influence of all-water rates on all-rail rates is very ap- 
 parent. This matter becomes more complicated when we take 
 up combinations of water and rail rates and trace their influ- 
 ence through their various ramifications. We may have water 
 rates combined with rail rates at one or both ends, with a result 
 that they control the all-rail rates between the points involved. 
 As an example of the simplest form of water and rail rates, 
 we may take the rates from the North Atlantic ports by water 
 to the South Atlantic ports and thence by rail to an inland 
 point, such as Atlanta. Here the combined water and rail rate 
 controls the all-rail rate. It is easy to see that this must be 
 so, but it is not so apparent that rates by the Atlantic Ocean 
 exert an influence on traffic as far inland as that moving be- 
 tween Cincinnati, Chicago, and St. Louis, and points in the 
 Southeast, yet such is the case. Here we have an illustration 
 of the competition of rival producing or selling localities. The 
 merchants of these middle Western cities are competitors in 
 the Southeastern section with the merchants of Boston, New 
 
York, Philadelphia, and Baltimore. The merchants of the 
 Northeastern cities have the advantage of rates controlled by 
 the Atlantic Ocean, and if the merchants of the middle West- 
 ern cities are to meet them in these common markets, the influ- 
 ence of the ocean rates must be recognized in the rates from 
 the Western cities. It was largely this competition between 
 the East and the West which resulted in Atlanta being made 
 a basing point. 
 
 To a certain extent the possibility of the middle Western 
 merchant taking advantage of the ocean rates himself must 
 be taken into account. To a large extent Pittsburg, Chicago, 
 etc., have for years at times shipped via Eastern ports to South- 
 eastern points. An extreme illustration of this competition is 
 found in the rail rate from Cincinnati to Augusta, Ga., which 
 is influenced to some extent by the ability of the Cincinnati 
 merchant to ship to Baltimore by rail, thence by ocean to Sa- 
 vannah, and by river to Augusta. Partly as a result of this 
 and partly as a result of the influence of the all-water rates 
 to Augusta from Eastern cities, the rail rates from Cincinnati 
 and other Western points to Atlanta and Augusta are, as pre- 
 viously stated, relatively adjusted, rates to Augusta being only 
 slightly higher, although the route to Augusta through Atlanta 
 is 171 miles longer than to Atlanta. That this low combination 
 of rail and water rates from the West to Augusta is possible 
 is due to the fact that the rail routes from Cincinnati and other 
 Western points to Eastern ports, with their dense traffic and 
 subject to the influence of the lake and canal route on rates 
 to all the trunk line ports, are able to make relatively low rates 
 as measured by distance. Here we have the influence of the 
 lakes shown as far south as Augusta. 
 
 As is well known, rates from all points north of the Ohio 
 and East of the Mississippi to the ports of Boston, New York, 
 Philadelphia, Baltimore, Norfolk, and Newport News are 
 based on the rates from Chicago to New York, which, as we 
 have seen, are controlled by the lakes and the Erie Canal. 
 But ports south of Norfolk wish to do an export business, 
 and Mobile and New Orleans are active competitors with the 
 North Atlantic ports for the export grain business of the 
 
10 
 
 West. As they have a longer ocean voyage to the European 
 ports, it is necessary for the roads serving them to make rates 
 even below the rates to the North Atlantic ports. Favored 
 by a prevailing down grade and no mountain barriers, they 
 have been able to do this. Mr. James J. Hill expressed this 
 advantage of the gulf ports very graphically when he said, on 
 one occasion, **You can kick a barrel of flour at Minneapolis 
 and it will roll to New Orleans." 
 
 The trunk line rates to the North Atlantic ports have an 
 absolutely controlling influence on what is one of the most 
 difficult rate situations in the Southeastern States. That is the 
 relation of rates from the West and to a certain extent from 
 the South to the Virginia cities, embracing Lynchburg, Rich- 
 mond, and Norfolk, as compared with rates from the West 
 and South to points south of Lynchburg as far as northern 
 South Carolina. 
 
 Section 4 of the Interstate Commerce Law provides that 
 "It shall be unlawful for any common carrier subject to the 
 provisions of this act to charge or receive any greater compen- 
 sation in the aggregate for the transportation of passengers 
 or of like kind of property, under substantially similar circum- 
 stances and conditions, for a shorter than for a longer distance 
 over the same line, in the same direction, the shorter being 
 included within the longer distance." In advance of its inter- 
 pretation by the courts there were radical differences of opinion 
 as to the proper construction of this provision. The railways 
 in that territory east of the Mississippi, north of the Ohio and 
 Potomac rivers, commonly known as Central Freight Associ- 
 ation and Trunk Line Territory, construed it as prohibiting 
 practically all higher charges for a shorter than for a longer 
 distance, when the shorter distance was included in the longer. 
 It followed, therefore, that wherever in Trunk Line territory 
 or Central Traffic Association territory higher rates for the 
 shorter intermediate hauls had been charged than for the longer 
 hauls, the rates were so readjusted that the rate for the shorter 
 intermediate haul did not exceed the rate for the longer haul. 
 In the West it resulted in blanket rates covering large areas. 
 The adoption of this system in the South would have over- 
 
turned existing commercial conditions, and would have been 
 ruinous alike to prosperous communities and to railways. 
 
 With a few exceptions the Southern roads construed the 
 law as meaning just what it said; that is, permitting a lower 
 charge for the longer haul where it could be demonstrated that 
 a substantial dissimilarity of circumstances and conditions 
 existed. 
 
 As a result of the construction of the law adopted in Central 
 Freight Association and Trunk Line territory, the Chesapeake 
 & Ohio Railway, to a degree parallel with the Trunk lines, re- 
 adjusted its rates so that on shipments from the West no point 
 west of Norfolk took a higher rate than the through rate to 
 Norfolk, the rates to Norfolk being controlled by the Chicago- 
 New York rates. The Norfolk & Western Railway, to a large 
 portion of its line, parallel to the Chesapeake & Ohio, adopted 
 the same principle of rate making. This gave to the Virginia 
 cities very low rates based on the necessity that the Chesapeake 
 & Ohio and Norfolk & Western were under of meeting the ex- 
 port rates to Baltimore and other North Atlantic ports, and on 
 the construction of the 4th section of the commerce law by the 
 Chesapeake & Ohio Railway and Norfolk & Western Railway. 
 
 There were also lines from the West which are now em- 
 braced in the Southern Railway system and its connections 
 which competed, not only for export business by way of Nor- 
 folk, but also for business from the West to Lynchburg and 
 Richmond. They were confronted with the alternative of 
 either going out of this business or accepting it at the same 
 rates charged by the Chesapeake & Ohio and the Norfolk & 
 Western. As these rates were sufficient to pay the movement 
 expense on the traffic, and contributed something to the general 
 expenses and fixed charges, they decided to continue to com- 
 pete for this traffic. To have at the same time adopted the 
 Trunk line construction of the long and short-haul provision 
 of the law would, however, have meant bankruptcy. Accord- 
 ingly, on the theory that rates to the Virginia cities were fixed 
 by conditions beyond their control, and that the circumstances 
 and conditions under which the service was performed were 
 substantially dissimilar, rates from the West to intermediate 
 
12 
 
 points south of Lynchburg remained higher than rates to 
 Lynchburg, being based on the sum of the through rate to 
 Lynchburg and the rate south from Lynchburg. This action,- 
 which was subsequently sustained by the courts, imposed no 
 injustice on the points South. On the contrary, they received 
 the benefit of lower rates made by the combination with the 
 highly competitive Lynchburg rate. Thus Lynchburg is used 
 in basing through rates from the West to points in the Caro- 
 linas as far South as the South Carolina-Georgia State line, 
 where the combination on Atlanta and Augusta begins to be 
 the determining factor. 
 
 In considering this adjustment the fact must not be lost sight 
 of that points in the Carolinas to the south of Lynchburg have 
 two alternative routes from the West, one by way of Knox- 
 ville and Asheville, by which the haul to Lynchburg is the 
 longer haul, and the other by way of Lynchburg, by which the 
 haul to that point is the shorter. It is evident, therefore, that 
 the long and short-haul clause could not be operative in both 
 directions, and that over one route the charge for the short 
 haul would have to be higher than that for the long haul, un- 
 less the rates from the West to points south of Lynchburg were 
 made same as to Lynchburg. The Northern routes from the 
 West to Lynchburg being shorter than the Southern route, it 
 is reasonable that the points south of Lynchburg should have 
 higher rates than those of Lynchburg. The only alternative 
 of applying the Lynchburg rates to the points south of that 
 city would affect such a large volume of traffic as to be ruinous 
 to the carrier should they be adopted. Rates to points south 
 of Lynchburg are reasonably low. In fact, they have the ben- 
 efit of the exceedingly low rates made to Lynchburg plus the 
 reasonably low rates from that point. This adjustment is not 
 only made inevitable by the working of economic forces, but 
 it has stood the test of litigation and has the approval of the 
 courts. It is also interesting to note that while originally 
 State Railroad Commissions in Southern States did not adopt 
 this character of rate adjustment, at least one State Commis- 
 sion has recognized the necessity of it, and has recently under- 
 taken to establish special rates, not on the basis of distance, as 
 
13 
 
 formerly used, but arbitrarily making lower rates to more dis- 
 tant points than to less distant and intermediate points. 
 
 Similarly, rates from New Orleans to the Virginia cities on 
 what are known as Louisiana products, including sugar, rice, 
 and molasses, are lower than to points south of Lynchburg 
 and nearer New Orleans. This is due to the water route by 
 the gulf and ocean to Norfolk and Baltimore, and to the fact 
 that as some of these products reach the Virginia cities inter- 
 mediate to the ports by way of the Western routes, (the rates 
 to them being in no case higher than the rates to Norfolk), if 
 a rail route from the South to the Virginia cities is to partici- 
 pate in this traffic, it must accept the rates at which it can move 
 by other routes. Here again there is no unjust discrimination 
 against the points south of Lynchburg, for they have the ad- 
 vantage of the combination of the low rates to Lynchburg, with 
 reasonable rates from that point. As to this traffic, also, the 
 question of which are shorter-haul points depends on the direc- 
 tion in which it moves, and measures a movement to the points 
 south of Lynchburg not only by the direct rail route from New 
 Orleans, but also by rail from Norfolk and by water and rail 
 from Baltimore. 
 
 The operation of the basing-point system may be further 
 illustrated by cases which have been through the courts and 
 have been found to be justified by competitive conditions. 
 
 One of the most recent decisions of this character is that 
 in what may be called the LaGrange case, in the matter of 
 rates from New Orleans to LaGrange, Ga. LaGrange was, 
 at the time of the complaint, reached by the Atlanta & 
 West Point Railroad and the Macon & Birmingham Railway, 
 being 71 miles southwest of Atlanta, 38 miles northeast of 
 Opelika, and 105 miles west of Macon. I have previously 
 shown how the competition of water and rail and all-rail routes 
 control the rates to Atlanta, but the same conditions do not 
 exist to the same extent at LaGrange. It was not an established 
 jobbing point before the construction of railroads, it is not 
 reached by water, competition is less forceful and marked at 
 that point than at Atlanta, and LaGrange's demand for the 
 same rates from New Orleans as from New Orleans to Atlanta 
 
14 
 
 was not sustained by the Supreme Court of the United States. 
 The lower rates to Atlanta, however, have their effect upon 
 the rates to LaGrange, which would be higher but for the 
 combination of competitive rates to Atlanta and locals from 
 that point back to LaGrange. Illustrations of the way in 
 which geographical conditions and competitive forces have re- 
 sulted in the development of basing points might be continued 
 indefinitely, and in every case we would find that they have 
 not been made by the arbitrary action of railway managers. 
 
 Assuming that it would be in the power of the railways 
 to abandon this system, and to base rates on distance to the 
 extent which prevails in the more densely populated trunk 
 line territory, the question arises as to whether it would be to 
 the advantage of the Southeastern States as a whole to do so 
 I have no hesitation in answering this question in the negative. 
 The effect would not be to multiply distributing centers in the 
 South, but to curtail the volume of business now being dis- 
 tributed within that section. The merchant in the small town 
 would purchase to a greater extent in primary markets. Deal- 
 ing at points further from home, he could not replenish his 
 stock so often, and would have to invest more capital in goods, 
 adjusting his prices at a higher level to earn interest on his 
 large investment. The freight charges on these goods, in the 
 aggregate, would not be materially less. 
 
 Thus far we have been considering the freight rate structure 
 of the Southern States, principally, as it affects shipments from 
 other localities for consumption in the South. Of more eco- 
 nomic importance, however, is its relation to shipments of the 
 products of that section to the markets of the world. In this 
 relation the dominant competitive forces which control are the 
 competition of rival producing localities and of transportation 
 lines from those localities to common markets, and of rival 
 markets. The rates on this traffic must be such as will place 
 the products of Southern farms, forests, mines, factories, in 
 competitive markets on the most favorable terms possible. 
 They are of far greater importance to the section as a whole 
 and to its individual inhabitants than are the rates on the prod- 
 ucts of other localities for consumption in the Southeast. A 
 
15 
 
 difference of five cents in the freight on the clothes that he 
 wears is of small importance to the cotton mill employee when 
 compared with the necessity for a rate that will give the mill 
 an outlet for its product, enabling it to run and give him 
 employment. In like manner the difference of a few cents in 
 the freight on a plow is of much less importance to the farmer 
 than the rate on his cotton or corn. Even the merchant has 
 a larger interest in many cases in these outbound rates than in 
 the rates on his stock of goods, for the volume of his trade 
 is directly dependent upon the prosperity of the community. 
 
 The necessity for placing the products of the Southeast in 
 nearby and distant markets has controlled the rates at which 
 they move. On cotton, for instance, these rates are such as 
 to move cotton to the Southern mill, to New England, or to 
 the ports for export, thus permitting competition in the buying 
 of cotton. On cotton goods they move the products of South- 
 ern mills to the ports, not only of the Atlantic but of the 
 Pacific, and place them in competition with New England and 
 throughout the Western States, and even in New England. 
 On iron and steel and their manufactures they enable the prod- 
 ucts of Southern furnaces, mills, and factories to be sold in 
 competition with Pittsburg and other iron and steel centers. 
 On fruits and vegetables they are so low as to permit the early 
 products of Southern orchards and gardens to move even to 
 Canada. So we might go through the list of Southern prod- 
 ucts and show that the railways have not been able to adjust 
 their charges on a distance basis or with a view to making 
 each rate bear its full proportion of all railway expenditures, 
 but have been compelled to accept those rates that would move 
 the traffic under highly competitive trade conditions. 
 
 It is also important to observe that the competitive rates on 
 the products of the South apply from points located locally — 
 that is, on one line of railway as well as from points located 
 on two or more roads — it being a recognized necessity that 
 local producing points must be given rates to enable them to 
 compete with points producing like products, whether they be 
 local stations on one line or competitive points on two or more 
 lines. 
 
i6 
 
 What I have said to you this evening can hardly be termed 
 a history of the construction of Freight Rates in the South, 
 because it has been impossible to give a history in so brief a 
 time, but I have outlined the principles and related briefly the 
 conditions, and in concluding I will say that, as in all other 
 sections and in all other lines of business, the charges of the 
 railways of the Southeastern States are subject to the laws of 
 economics, and such peculiarities as exist in their rate adjust- 
 ments have not been made arbitrarily, but are the inevitable 
 result of geographical and economic conditions. 
 
 UNIVERSITY 
 
 CF 
 
LIBRARY 
 
 This is the date on which this 
 book was charged out. 
 
 JUL e.ww 
 
 [30m-6,'ll]