This pamphlet is intended merely for circulation among 
 railroad counsel and traffic managers. It originally took the 
 form of a letter dictated to several traffic men for the purpose 
 of getting their ideas of the principles which govern the fix- 
 ing of freight rates. The form has been changed from a 
 letter to a pamphlet in order that the difficulties might be 
 stated more fully, but the purpose remains the same, namely, 
 to secure information, suggestions and criticisms. 
 
 EDGAR J. RICH, 
 Attorney Boston <&- Maine Railroad . 
 
 North Station, Boston, October, 1903. 
 

 
CERTAIN PROBLEMS RELATING TO RAILROAD 
 
 RATES. 
 
 By Edgar J. Rich, Attorney , Boston & Maine Railroad . 
 
 Since the Supreme Court of the United States decided in 
 carefully considered opinions that the Interstate Commerce 
 Commission has no power to fix the rates of transportation of 
 passengers and freight, there has been considerable agitation by 
 the Commission, and in the press, to induce Congress to give 
 to the Commission the power to determine rates. The Cullom 
 Bill, which has been pending in two congresses, was drawn for 
 this purpose, and other bills with the same object in view have 
 been introduced. The strenuous efforts of the Commission to 
 secure the passage of some such law have aroused on the part 
 of the railroads a keen sense of the results which would follow 
 the placing of such stupendous power in the hands of any body 
 of men. The Commission on several occasions has drawn atten- 
 tion to the fact that, whereas formerly competition was effective 
 in keeping rates within reasonable limits, now, the elimination 
 of competition through numerous consolidations, and the effect- 
 ing of community of interests, make necessary some form of 
 governmental control. The Commission claims that these 
 decisions of the Supreme Court have shorn it of all power, and 
 that its opinions are not treated with respect by the railroads. 
 
 Powers of the Interstate Commerce Commission. 
 
 It is not true, however, that the Commission has no powers, 
 for in addition to the power to compel publicity, which is of 
 great importance, it has the power to declare rates unreasona- 
 ble, and, through the United States courts, to compel the rail- 
 roads to desist from charging such rates as are found by the 
 court to be unreasonable. In other words, if at a trial in the 
 United States Court, the court is of opinion that the Interstate 
 
 
Commerce Commission was correct in declaring certain rates to* 
 be unjust and unreasonable, that court can issue a decree coih- 
 pelling the railroads to desist from charging such rates. Thi^ 
 is a great power and a salutary one, and undoubtedly is ever x 
 present in the mind of any railroad which may have an inclina- 
 tion to charge all that the traffic will bear. The Commission 
 seeks the power not merely to declare a rate unreasonable, but 
 to determine what is reasonable. It may be conceded that 
 there should be some disinterested body which should have the 
 power to determine whether a rate is reasonable or not, but to 
 give to that body power to fix a rate is an entirely different 
 matter. 
 
 The Commission, furthermore, has power to prevent unjust 
 discrimination, which unquestionably has been in the past one 
 of the great evils ; and to the exercise of this power there is no 
 limitation. In a word, it has the power to compel the railroads 
 to treat all persons and localities equally, with due allowance 
 for dissimilar circumstances. 
 
 Pending Legislation to Increase the Powers of the 
 
 Commission. 
 
 There are now pending before Congress, several bills which 
 have for their object increasing the powers of the Commission. 
 The principal changes contemplated are the following : — 
 
 (i.) The absolute power to fix rates by determining what 
 shall be the maximum and minimum rates, and as a corollary of 
 this, the power to make changes in classification. 
 
 (2.) The power to determine upon what terms and conditions 
 business shall be interchanged between connecting carriers, and 
 also to determine how the joint rate shall be divided. 
 
 (3.) Another change of far-reaching consequence is the mod- 
 ification proposed in the long and short haul clause. At the 
 present time carriers are justified in making a lower rate for the 
 longer distance when compelled either by competition of water 
 carriers or of railroads. Under the proposed law it will be 
 impossible for railroads to charge less for the longer distance 
 unless the Commission authorizes it. Such a law would tend to 
 
^ n \e- 
 
 3 
 
 deprive railroads of a considerable amount of traffic wherever 
 there was water competition, for although the Commission 
 might authorize a less rate if convinced that railroads would 
 lose traffic in consequence of such competition, nevertheless, 
 the railroads would never be able to know whether or not the 
 Commission would regard the competition as a sufficient justi- 
 fication for such difference in rate. 
 
 In asking for the rate-making power, the Commission is seek- 
 ing a power which affects the prosperity of our country in a way 
 which can hardly be grasped ; but more than that, it would have 
 a task which no body of men, however able and fair-minded, can 
 perform. Every traffic manager in the country has his powers 
 taxed to the utmost to solve the various problems which arise on 
 the comparatively small traffic under his jurisdiction. In order 
 to solve the problems correctly, he must be thoroughly familiar 
 with local conditions, with the population of places along the 
 line, with their industries, with crops, with competition by water 
 and by rail, and with a hundred and one things which must go to 
 determine what ought to be the rate on a particular commodity 
 to a particular place. If you should select the five most experi- 
 enced railroad traffic men in the country, and give to them a 
 desire to serve, equally and impartially, the public and the 
 railroads, they nevertheless could not solve the various problems 
 which continually arise, as well as could the men on the spot. 
 It is unfortunately a fact, in many instances, that the local 
 traffic man in fixing rates fails to recognize that he is a quasi- 
 public servant, and not an employee of a private concern 
 whose primary object is to make the largest possible income. 
 Traffic men must be educated up to a point where they 
 appreciate the public functions of the properties entrusted to 
 their charge. If, however, these men have a proper appre- 
 ciation of these responsibilities, there can be no question that 
 the traffic manager of a railroad is in an infinitely better posi- 
 tion to determine what rates should be charged than any body 
 of men, no matter how able, who may be sitting in Washing- 
 ton and whose opinion must be formed by the unsatisfactory 
 method of listening to testimony. Judge Cooley, when Chair- 
 
\ 
 
 4 
 
 man of the Interstate Commerce Commission, spoke of this 
 herculean task in these words : 
 
 “ In those sections of the country in which the reasons, or sup- 
 posed reasons, for exceptional rates are most prevalent, the 
 Commission would, in effect, be required to act as rate makers 
 for all the roads. . . . This in any considerable state would 
 be an enormous task. In a country so large as ours, with so 
 vast a mileage of roads, it would be superhuman. A construc- 
 tion of the law which would require the performance would ren- 
 der the due administration of the law altogether impractical, 
 and that fact tends strongly to show that such a construction 
 could not have been intended.” 
 
 Walker D. Hines, Esq., First Vice-President of the Louisville 
 & Nashville Railway Company, in his able address before the 
 American Economic Association, at Philadelphia, on December 
 27, 1902, very cogently stated the difficulties. He said : 
 
 “The regulation of railroads is eminently and exclusively 
 a practical question, because no business is more severely practi- 
 cal or more intricably interwoven with all the special and 
 peculiar conditions of every phase of the commercial and indus- 
 trial life of the country. The practical difficulties incident to 
 the construction of railroad rates cannot be overestimated. 
 Every article of commerce has its peculiar characteristics and 
 develops its own peculiar conditions. Every source of supply 
 for raw materials has its local peculiarities, and many of them 
 must look to constantly shifting markets. Every plant for the 
 manufacture of anything has its individual requirements. Every 
 commercial centre has its own individuality, made up of a variety 
 of conditions affecting the sources of supply, markets of disposi- 
 tion, methods of transportation, and its own physical aspects. 
 Every railroad has its own problems to meet, its own phenomena 
 of supply and demand of cars and locomotives, its own difficulties 
 as to grade and curvature, its own varying conditions as to the 
 direction in which cars move empty and trains are lightest ; 
 its own problems of congestion, its own duties to industries and 
 communities dependent upon it ; and the whole of this differs 
 for every railroad and for every season of the year, and on each 
 railroad these conditions may vary on every division and at every 
 terminal. Conceive, if possible, of the continued but constantly 
 varied interaction of all of these commercial, industrial and 
 transportation conditions and problems, and of numerous others 
 
5 
 
 impossible to enumerate, and some idea may be obtained of the 
 forces which make railroad rates and of the complexities and 
 difficulties of the subject.” 
 
 It is hard to appreciate the number of changes in rate which 
 is rendered necessary by commercial conditions. The Commis- 
 sion has found that the daily changes are more than 260, on the 
 average. Assuming that many of these changes are unneces- 
 sary, yet the fact remains that in all probability a large propor- 
 tion of them are changes which are advantageous to the public 
 as well as to the railroads. If the Commission be given power 
 to fix rates, and if in the course of time the rates throughout 
 the country have been passed upon, in one form or another, by the 
 Commission, it is easily seen how impossible it would be for the 
 Commission to give proper consideration to an hundredth part 
 of the cases which might come before it, for each case under the 
 terms of the act would involve a public hearing. 
 
 It is not my intention, however, to discuss in detail this great 
 problem which is now before the railroads and the country. I 
 have merely outlined the question and suggested some difficul- 
 ties. My purpose is, raV^er, to attempt some analysis of the 
 great question of the standard by which the reasonableness of 
 rates is to be tested. 
 
 What is the Test of the Reasonableness of Rates ? 
 
 A railroad can charge only such rates for the transportation 
 of passengers and freight as are reasonable. The Interstate 
 Commerce Act forbids the imposition of unreasonable rates, but 
 in so doing has added nothing to the common law obligation of 
 the carrier. 
 
 There always has been, and probably there always will be, 
 controversy between the railroads and the public, — the one 
 claiming that their rates are reasonable, the other that they 
 are unreasonable. Suits are brought in the courts, proceedings 
 are instituted before the Interstate Commerce Commission, and 
 legislatures are being continually agitated, to compel the rail- 
 roads to comply with their common law and statutory obliga- 
 
6 
 
 tions, and yet throughout all the decisions of the courts and the 
 Commission and in the discussions in the legislatures, there is 
 little said about the standard by which rates are to be tested. 
 The consequences are that the railroads and the public are 
 unable to meet upon a common ground. The railroads are 
 often accused by the public of extortion and disregard for the 
 public interest when the whole trouble comes from an honest 
 difference of opinion in regard to the standard by which rates 
 are to be tested. The railroad asks if less than a cent a ton per 
 mile can, under any circumstances, be declared unreasonable, 
 and the public answers that the railroad is earning from 6 to 
 10 per cent, dividends upon its capital stock, which in itself 
 shows that the public is not receiving the rates which it ought 
 to receive. My attempt now is to arrive, if possible, at some 
 common understanding, and to discuss certain elements which 
 enter into any consideration of the standard of reasonable rates. 
 By such an analysis it will at least be possible to arrive at an 
 understanding in reference to certain elements and to know 
 wherein the public and the railroads differ as to others. 
 
 The Public Service Functions of a Railroad. 
 
 The public has no concern, broadly speaking, with the profits 
 which an individual or a corporation may make in the manufac- 
 ture of hats, or in the making of lead pencils, or in the production 
 of cotton cloth. Has the public any more to say about what shall 
 be the profits of a railroad ? It certainly has a great deal more to 
 say. In the first place, a railroad cannot be constructed without 
 the granting to the corporation of certain vast powers, which pow- 
 ers belong to the people and which are given to the corporation 
 through the people’s representatives, the legislatures. Without 
 the power to take land against the will of the owner no railroad 
 could be laid out at any but an exorbitant expense, if at all. 
 The corporation therefore receives from the people a great 
 power, of which the people are the sole repositories. Again, in 
 the present state of civilization, the people are as absolutely 
 dependent upon the railroad as upon food and clothing. In 
 
7 
 
 fact, should the railroads suddenly cease to operate, the peo- 
 ple in many sections of the country would starve. Again, in 
 the very nature of the undertaking, the railroad is to a greater 
 or less extent a monopoly ; in short, the people cannot exist 
 without railroads, and that highest law of nature, self-preserva- 
 tion, is a sufficient justification for public supervision. 
 
 The railroads, therefore, are public service corporations, and 
 as such must serve the public, and the public has a right to 
 demand that it shall be served faithfully and well. It is true, 
 also, that the managers of great railroad properties, as a rule, 
 recognize that they are not free agents to exploit the property 
 submitted to their charge in any way they may see fit. But, on 
 I the other hand, there are many railroad officials who fail utterly 
 to recognize the proper functions of the railroad, and are inclined 
 to hold that all restraints on the part of the people are unjustifi- 
 able and simply a demonstration of the ignorant power of the 
 people or the stupidity of their representatives. Such men have 
 done more to disturb the relations between the public and the 
 railroads than any other influence. By their arrogant attitude 
 they have alienated all public sympathy and support, and find 
 themselves at war with the powers which made them and to 
 which they are responsible. This attitude on the part of a few 
 has redounded to the everlasting harm of those railroads which 
 are endeavoring to serve the public according to the measure of 
 their obligations. These men have been one of the chief causes 
 of the growth of the socialistic element in the community, and 
 have been instrumental in arraigning against the railroad the 
 public sentiment of a great body of intelligent people. No 
 socialistic movement has ever done, or will ever do, as much 
 injury to the railroad corporate interests as has been done, 
 within the last few years, by men in direct charge of these prop- 
 erties, who by their unreasonable attitude before Commissions 
 and other public bodies have shown to the great mass of the 
 thinking public that they utterly fail to comprehend the depend- 
 ence of the properties submitted to their control on the public 
 which created them. The reason why this attitude is assumed 
 by some railroad managers is due to two causes. First, because 
 
8 
 
 in many instances the stockholders and directors demand that 
 the officials of the road shall earn all the money possible for 
 the stockholders, and the attention of the managers is simply 
 directed towards receiving from the public as much as possible 
 and giving out to it as little as possible ; and secondly, in many 
 instances, the railroad managers, although competent to run a 
 railroad, as a railroad, are too narrow-minded and too ignorant 
 of the great problems to be able to grasp the fundamental prop- 
 osition that a railroad must be faithful to the people from whom 
 it derives its rights and powers. 
 
 If there is a disregard of the rights of the people on the part of 
 many railroad managers, there is on the part of the people a dis- 
 regard of the rights of the railroad. The people have the right 
 and the power to operate the railroads themselves if they see fit. 
 But from the inception of railroad building the public has felt that 
 the interests of all concerned would be best served if the build- 
 ing and operation of railroads were left to private enterprise. 
 It is, unquestionably, fortunate for this country that this was so, 
 for it is only through the enterprise and daring of private 
 individuals that anything great in industrial lines can ever be 
 accomplished. Having left, therefore, the building and manage- 
 ment of railroads to private enterprise, it is in the interests of 
 all concerned that that enterprise shall be left as unfettered and 
 untrammelled as possible, and that it shall have the incentive of 
 gain and power to urge it on to still greater efforts. One of the 
 principal obstacles in the successful operation of railroads is 
 that they are continually fettered by unnecessary and minute 
 exactions which are forced upon them by the legislative power, 
 and that at every turn they are encountered by some prohibi- 
 tion or command which emanates from the fertile brain of some 
 representative of the people. This attitude of the public is due 
 in considerable measure to the ignorance and selfishness of the 
 representatives of the people ; but it is also due, in no small 
 degree, to the stubbornness and ignorance of the railroad man- 
 agers themselves. If a railroad refuses to favor the public in 
 reasonable matters, and, instead of recognizing the rights of the 
 public, persistently ignores them, it is not unnatural that the 
 
9 
 
 people will demand that the railroads shall serve them according 
 to their ideas. 
 
 If a servant fails to recognize and provide for the needs of 
 his master, the servant is likely to be harassed by minute and 
 explicit details as to how he shall perform his duties ; but if a 
 servant serves his master faithfully and well, it is a wise master 
 who leaves to his servant the working out of the details. It encour- 
 ages the servant and makes him ambitious to do better if he is 
 put upon his mettle ; it relieves the master of annoyance and 
 vexation, and the result is the establishment of harmony between 
 the master and the servant. Therefore, the railroad should, 
 first and foremost, recognize the authority of its master and try 
 to serve it faithfully, and then the master will place greater 
 responsibilities upon its servant and leave to it the working out 
 of the details. 
 
 Analysis of the Earnings of a Railroad. 
 
 Roughly, the gross earnings of a railroad may be divided into 
 three parts. First, the amount necessary to pay wages and 
 salaries of employees and officers ; secondly, the amount neces- 
 sary to keep the railroad and its equipment in safe and proper 
 condition ; and thirdly, the return to the capital invested in the 
 railroad. 
 
 We seldom if ever hear complaint on the part of the public 
 that the employees or officials of a railroad are paid too much. 
 The salaries of the managing officers are not as high as the sal- 
 aries of officers in charge of private enterprises of much less 
 magnitude, and the wages of the railroad employees are certainly 
 not greater in proportion to the labor and the intelligence of 
 the employees than in any other business. 
 
 In regard to the second part, namely, the amount necessary 
 to keep the railroad in safe and proper condition, the public 
 directly benefits by every dollar which is wisely expended. The 
 building of a secure road-bed makes travel safe ; the building of 
 stations accommodates the public, and if money is spent in 
 ornamentation it appeals to the pride of the community and of 
 
IO 
 
 the travelling public ; the use of powerful and expensive loco- 
 motives enables the public to travel with greater speed, and, in 
 short, every dollar expended in construction and equipment is 
 for the benefit, direct or indirect, of the public. 
 
 There is, therefore, then, left only the third element, namely, 
 the return to the bondholders and stockholders, about which 
 the public has any reasonable ground for complaint. If, there- 
 fore, it is possible to arrive at what is a just return to the 
 capitalists in the form of interest or dividends, we ought to 
 be able to arrive at a common standard, whereby reasonable- 
 ness of rates may be determined. If the earnings of a railroad 
 are no greater than to make reasonable compensation to the 
 employees, to provide reasonable facilities for the public, and 
 to pay reasonable return to the capitalists, then there can be no 
 cause for complaint on the part of anyone ; and if, at the pre- 
 vailing rates of fare and freight, more than this sum is earned, 
 the surplus should either go back to the public in some form or 
 other, or else the rates should be lower. All this is axiomatic. 
 It is intended for nothing more than an analysis, and we 
 certainly have not progressed far in solving the question of the 
 reasonableness of rates. But we have got this far, if we can 
 determine what is a fair return to the capitalists, it must be 
 conceded that everything over and above that must be returned 
 to the public in some form or other. 
 
 What has been done by the Public towards fixing 
 the Rate of Return for Capital? 
 
 If, at the inception of railroad building, the public had said to 
 the railroad promoters, we will give you these large powers on 
 condition that if the return to your capital is more than so much 
 per cent., the balance shall be turned over to us, and capital had 
 been invested on the faith and strength of such an understand- 
 ing, it would seem to be right that the investors should receive 
 a return equal to the amount fixed as the limit by the legis- 
 latures. This is an aspect of the question which appears to 
 have been utterly ignored by those who are the most strenuous 
 exponents of the people’s rights, and yet it is hard to see just 
 
I 
 
 how this argument is to be met. Now, as a matter of fact, in 
 many railroad charters a limit is fixed beyond which return to 
 capital cannot go ; and when not fixed by the charter, it is often 
 fixed by general laws of the Legislature. An examination of 
 railroad charters will show that the limit on dividends varies 
 from 8 per cent, to 20 per cent. Under the general laws in 
 many States, the maximum rate of dividend is not often placed 
 at less than 10 per cent. In New York, for instance, Legisla- 
 ture cannot reduce rates so that the net profits shall be less 
 than 10 per cent., and in Arkansas the limit is 15 per cent.; in 
 New Hampshire the public statutes provide that “ When the 
 net income of any railroad shall exceed 10 per cent, upon its 
 stock, the Legislature may alter and revise the rates of toll for 
 freight and passengers as it deems just.” In Virginia the limit 
 is 10 per cent., and the North Carolina general laws provide that 
 the rates shall not be reduced so as to make the profits less 
 than 6 per cent. 
 
 It is true that in all States there is no general law regulating 
 the profits of a railroad. Nevertheless, whenever the public has 
 fixed a rate beyond which railroads cannot pay dividends, they 
 have always set the limit beyond anything which has been 
 earned by railroads affected by these laws. 
 
 The territory east of the Mississippi and north of the Ohio is 
 the most densely populated of any portion of the United States, 
 and the amount of traffic is undoubtedly the greatest. It is a 
 territory which includes such great railroad systems as the 
 Pennsylvania, New York Central & Hudson River, Lake Shore 
 & Michigan Southern, Big Four, Wabash, and Boston & Maine, 
 and yet it is a surprising fact, that of the thirty railroads in the 
 official classification territory, during the year 1900, sixteen 
 paid no dividends on the common stock ; one paid a dividend of 
 1 per cent., one of 3^ per cent., two of 4 per cent., three of 5 per 
 cent., two of 6 per cent., three of 7 per cent., one of 8 per cent., 
 and one of 8f per cent. A further analysis of the dividends 
 paid by these railroads shows that the average dividend upon 
 the capital stock, including both the common and the preferred, 
 was less than 2J per cent. 
 
12 
 
 This is an extraordinary showing for the railroads in the most 
 populous part of the United States in a year of the greatest 
 prosperity. Certainly, railroads as a whole have not prospered 
 as have other industries, and the stockholders have not profited 
 at the expense of the public. Is it not pertinent to ask why the 
 public should enter into an agreement with its servants, whereby 
 they are entitled to earn a certain recompense, and then seek in 
 every possible way to deter them from ever being able to get 
 the return which they in law are entitled to ? It looks almost 
 like a breach of faith. 
 
 The importance of the limitation of dividend in determining 
 the question of reasonableness of rates has been recognized by 
 the Interstate Commerce Commission in the remarkably able 
 opinion “In the Matter of Proposed Advances in Freight 
 Rates,” decided April i, 1903. It says : 
 
 “ It is plain that until there be fixed, either by legislative 
 enactment or judicial interpretation, some definite basis for the 
 valuation of railroad property, and some limit up to which that 
 property shall be allowed to earn on that valuation, there can be 
 no exact determination of these questions. In the absence of 
 such a standard, the tribunal, whether court or commission, 
 which is called upon to consider this matter, can only upon the 
 whole exercise its best judgment.” 
 
 The important point, however, is ignored, that in many States 
 a limitation has been fixed, and that in only a few instances 
 have railroads even approximated to this limit. Certainly, if 
 more than half the railroads in the most populous portion of 
 the country are unable to earn anything on their common stock, 
 and if, taking the railroads as a whole, they earn less than 2J per 
 cent, on both common and preferred stock, there ought not to 
 be complaint because a railroad so fortunately situated as the 
 Lake Shore & Michigan Southern Railroad earns 7 per cent, 
 on its common stock. 
 
 Furthermore, it is always well to bear in mind that the present 
 stockholders of the railroads paying large dividends have, in 
 most instances, bought their stock on a 4 or 5 per cent, basis or 
 less, and that any reduction in dividends would be a gross injus- 
 
13 
 
 tice to them. Again, in some States, like Massachusetts, new 
 stock sold for permanent improvements has to be sold at the 
 market price, and recently, Boston & Maine stock paying 7 per 
 cent, dividends was sold at 190, thus netting the purchaser only 
 3 A P er cent. 
 
 What is the Proper Basis of Capitalization ? 
 
 Assuming that it is possible to arrive at the rate of interest 
 which capital is justified in receiving, upon what basis of cap- 
 italization should such rate be reckoned ? It is clear that any 
 capitalization which is based upon a fictitious value is wrong ; 
 for, as has happened in the cases of many railroads, the stock 
 and bonds were largely watered. The capitalization to be used 
 as a basis must have eliminated every element which went to 
 make up the false capitalization. But we still are confronted 
 by another problem. Shall the basis of capitalization be the 
 original cost of the railroad plus the amount of capital which 
 has been put in for permanent improvements, or shall there 
 be taken as a basis of capitalization the amount which would 
 be required to build a new railroad of similar extent and 
 kind ? This latter basis is the one which appears to have been 
 approved by the Supreme Court of the United States without 
 any careful consideration or analysis. But is it the proper basis ? 
 If the Government, at the inception of railroading, had itself 
 undertaken the building and operating of railroads, a certain 
 amount of capital would have been required, and this capital 
 would have to be borrowed by the Government, and interest 
 would have to be paid upon it. Under private ownership, capital 
 is advanced by private individuals, and they look to the produc- 
 tiveness of the property, whereas those who loan money to the 
 Government for the building of a railroad, would look to the 
 Government for its security and reimbursement. In the case of 
 Government ownership, the whole people of the country are taxed, 
 largely for their own benefit, but, nevertheless, in a measure, for 
 the benefit of those making the greater use of transportation 
 facilities. Under Government ownership, the people, as a whole, 
 would be obliged to pay interest on the original investment, and 
 
M 
 
 upon all subsequent investment for extension or improvement of 
 the property. What reason is there, therefore, why private 
 individuals who have invested in railroads should not be entitled 
 to receive return on all that they have put in, even though 
 at any particular time, the plant could be duplicated for less than 
 the amount expended ? Perhaps, however, the difference is not 
 important, as a railroad which is properly financed endeavors 
 to take from the earnings a sufficient amount to keep up the 
 plant so that at any particular time it is fair to assume that the 
 cost of duplicating a plant would not be much less than 
 the original cost plus the cost of improvements. This, too, 
 affords a justification for a railroad accumulating a surplus — if 
 surplus it be called — and turning it into the property to increase 
 its efficiency. In fact, it is impossible from the examination of 
 the accounts of railroads to determine whether or not any particu- 
 lar railroad is accumulating a surplus in the sense that there is a 
 profit over and above operating expenses, for it is a well-known 
 fact that the best railroads, those which are most soundly financed, 
 charge to operating expenses a large amount which goes into the 
 bettering of the property. If money has been honestly expended 
 in original construction and in improvements, the difference 
 between the cost and the present value would probably not be 
 very material ; for, with the lapse of time, some things have 
 greatly increased in value, and particularly that element which 
 is one of the largest elements of cost, namely, land. Neverthe- 
 less, in' all fairness, it would still seem that the basis to be used, 
 if there is a difference between these two bases, is that of the 
 honest original cost plus honest expenditure for keeping the 
 property up to a high standard. 
 
 Conclusions as to Rate of Dividend. 
 
 Given, then, a capitalization which represents honest expendi- 
 ture, there certainly can be no complaint upon the part of the 
 public if stockholders receive a return not greater than that set 
 forth in the original contract, which, in few if any cases, has 
 been fixed by the public at less than 6 per cent.; and, if by 
 reason of commercial and competitive conditions, more than 
 
15 
 
 one half of the railroads in the most densely populated portion 
 of the country are unable to pay anything, and the best situated 
 railroads only pay 7 or 8 per cent., it would seem as if it were 
 hard to establish the proposition that railroad rates were unrea- 
 sonably high. It is not possible for all railroads to pay the same 
 rate of per cent., due to commercial and competitive conditions ; 
 and furthermore, if, through want of foresight of the promoters, 
 a railroad is built through a country which furnishes little traffic, 
 the railroad ought not to expect to pay to the stockholders the 
 same returns which are paid by a railroad operating through a 
 thickly settled and prosperous country. And yet, such railroads 
 ought not to be expected to bear the whole burden, and to trans- 
 port freight and passengers from local points at the same rate 
 that they are transported on other lines. If it had not been for 
 the railroad, the community would not have developed even as 
 far as it has, for the community is as much dependent upon the 
 railroad, as the railroad is upon the community. That commu- 
 nity, therefore, ought to expect to pay more for its transportation 
 than other more favorably situated communities, and the railroad 
 thus situated ought to be able to pay to its stockholders a mod- 
 erate rate upon the capital invested, although in doing so it may 
 charge the community much higher rates than are charged else- 
 where. Therefore, any legislature which seeks to place all 
 railroads upon a dead level of rates, based upon so much per 
 passenger per mile, or per ton per mile, is unjust to the railroads. 
 Under such circumstances, a railroad can be safely trusted to 
 keep its rates at as low a point as possible, for only in this way 
 can travel and traffic be stimulated. Such a railroad cannot 
 expect and ought not to place its rates so high that it can pay 
 unreasonably large dividends to its stockholders, but it ought to 
 be able to make a moderate return to capital which built the 
 railroad and, in building the railroad, increased the prosperity 
 of the communities through which it runs. 
 
 The more fortunately situated railroad ought to be allowed 
 to share in the general prosperity of the community, which, 
 undoubtedly, it has been largely instrumental in building up, and 
 to attempt to reduce such a railroad to the low level of less 
 
i6 
 
 fortunate railroads would be an injustice to those who had risked 
 their capital in originally building a railroad. It would, there- 
 fore, seem to be true that it is impossible to say what is the 
 proper rate of return upon capital invested in railroads, because 
 a rate which would be fair to one would not be fair to another. 
 It would be manifestly a burden upon the public, and an unjust 
 burden, if a railroad running through a sparsely settled section 
 of New Hampshire should be allowed to pay ten per cent, divi- 
 dends. But it would be equally unjust if a railroad running 
 through the populous portions of New York and Ohio should not 
 be allowed to share in the general prosperity of the community ; 
 and ten per cent, upon an honest capitalization under such cir- 
 cumstances might not be unreasonable. 
 
 It seems to be an unavoidable conclusion that it is impossible 
 to fix upon any uniform basis of return to a railroad, except that 
 the most favorably situated shall not pay more than the people 
 have set as a maximum, but it is contrary to justice, contrary to 
 the instincts of a progressive people, that a railroad fortunately 
 situated and ably managed should not be allowed to pay divi- 
 dends in excess of the average return for capital invested in 
 railroad enterprises. 
 
 We have not reached any very accurate standard of rates, but 
 two or three propositions seem reasonably clear. The first is, 
 that the basis of capitalization ought to be honest expenditure ; 
 and secondly, that few, if any, railroads probably pay upon an 
 honest expenditure a rate in excess of the rate which they may 
 legally pay; and thirdly, that under commercial and competitive 
 conditions it is impossible for many railroads to pay even the 
 rate which they may lawfully. There very well might be a con- 
 sensus of opinion that a certain railroad would be justified in 
 earning a net return of five million dollars, which we would say 
 might be four per cent, on an honest expenditure ; but the con- 
 ditions are such in the case of the majority of railroads that they 
 never have earned this return, and it is doubtful if they ever 
 will. 
 
i7 
 
 Should the Standard be determined by the Cost on the 
 
 Best Lines ? 
 
 Before passing to the important and intricate question of how 
 the burden of the cost of transportation should be apportioned 
 among the numerous articles of traffic, it will be of value to discuss 
 for a moment the opinion of the Interstate Commerce Commission 
 “ In the Matter of Proposed Advances in Freight Rates,” given 
 April i, 1903. This opinion is an extremely valuable contribu 
 tion to the literature of railroad economics. In reading this 
 opinion, which was written by Mr. Commissioner Prouty, one 
 cannot help being impressed with the keenness of its logic and 
 with the remarkable clearness of statement, until the final con- 
 clusion is reached as to the proper basis for fixing rates, when, it 
 is respectfully submitted, a conclusion is drawn which is not 
 warranted by the remarkably clear analysis and discussion which 
 precede it. The Commission in this opinion is endeavoring to 
 arrive at the cost of transportation, and although it says that it 
 would hardly be just to compel the fixing of a rate which was 
 reasonable with respect to the best equipped line alone, never- 
 theless it goes on and makes its comparisons with the cost of 
 transporting grain on the Lake Shore & Michigan Southern 
 Railroad, which unquestionably is so situated and equipped that 
 it can carry traffic at a less cost than any other great railroad in 
 the country ; and the Commission, after analyzing the profitable- 
 ness of the grain traffic on this road, draws a conclusion that 
 the proposed advance in rates is unwarranted. This conclusion 
 may be right, but the danger lies in reaching the conclusion by 
 a comparision which would lead to most disastrous results if 
 used as the general basis for determining the reasonableness of 
 rates. 
 
 The opinion suggests a problem and a difficulty. Assuming 
 that the rates prevailing enable the Lake Shore &f Michigan South- 
 ern to earn on its stock an unreasonably large dividend, and yet 
 such rates, when applied to other railroads, when tested by the 
 net return to capital, cannot be said in any way to be unreasona- 
 ble, what is the situation ? Of course, it is absurd to say that 
 
i8 
 
 other competitive lines may be allowed to exact a higher rate 
 than the Lake Shore & Michigan Southern. Each competitive 
 road must make practically the same rates. The Commission 
 has said that it would be obviously unfair to take as a standard 
 the least favorably situated railroad, but it has seemed to think 
 that there is no alternative between taking the least favorably 
 and the most favorably situated. 
 
 Assume for the moment that the prevailing rates leave to the 
 Lake Shore an unreasonably large margin, judged by the cost 
 of transportation. Now, the road pays only such dividends as 
 the law — that is, the people — has said that it can pay. Who 
 then can complain if the railroad is earning what by law it has 
 a right to earn ? How can the rates be said to be unreasonable 
 when the only possible test of reasonableness is the surplus 
 which is left after paying operating expenses and when the 
 people have said that that surplus belongs to the stockholders ? 
 
 Probably the answer of the Commission on this point would 
 be, that this railroad has expended its enormous surplus in per- 
 manent improvements and in other expenditures which are not 
 absolutely necessary for proper operation of the railroad. It is 
 not and cannot be claimed that this surplus is foolishly wasted, 
 but that it is charged up in large part to operating expenses. 
 In other words, the contention is that rates should not be so 
 high as to enable so large a surplus to be accumulated, but that 
 the public ought to profit by the railroad’s favorable circum- 
 stances to secure lower rates. If this were the case of a single 
 railroad, whose action in the fixing of rates would not affect one 
 way or another other railroads and communities, this argument 
 would perhaps be sound. But let us see what would be the 
 result upon other railroads and other communities if the rates 
 on the Lake Shore & Michigan Southern were reduced to such 
 a point as to make it barely possible to declare the dividends to 
 which its stockholders are entitled. It is admitted that the 
 rates on competitive traffic, which would yield this railroad 
 merely a fair return, would yield to many of the competitive 
 lines a rate which would be unreasonably low, and might, in 
 some cases, result in the carrying of traffic at a rate not much 
 
19 
 
 more than the actual cost of operating. Whom would it affect ? 
 In the first place, it is clear that these competitive railroads 
 would find a great shrinkage in revenue from this particular 
 class of traffic. Now, these railroads are entitled to pay divi- 
 dends, and if their managers are competent officers they will 
 endeavor to increase their earnings from other non-competitive 
 traffic. The inevitable result would be that the local traffic 
 along the line of these railroads would have to bear more than 
 ,its fair share of the transportation burden. Shippers in Chicago 
 would be able to avail themselves of the low rates, but shippers 
 along the lines of the less favorably situated railroad would find 
 that they were paying much higher rates than people in 
 Chicago, although the distance traversed was much less. The 
 inevitable result would be that communities along the lines of 
 these railroads would be put at a distinct disadvantage as com- 
 pared to the communities which could avail themselves of the 
 competitive conditions. The Supreme Court of the United 
 States has held, in numerous cases, that there is nothing in the 
 Interstate Commerce Act to prevent the imposition of higher 
 rates for a shorter haul, when the rates for the longer haul are 
 fixed by competition. 
 
 Would it not be better that the Lake Shore & Michigan 
 Southern Railroad be allowed to pay large dividends, rather 
 than that all non-competitive communities off of its line should 
 be allowed to suffer? And if this railroad, instead of paying 
 still larger dividends, sees fit to take its surplus earnings and 
 put them into permanent improvements, what harm results ? 
 Who is the beneficiary of this accumulated surplus ? Not the 
 stockholders, if the limit of dividends authorized by law has 
 been reached. Not the employees or the officials, whose 
 stipends are fixed largely by competitive reasons. Those who 
 benefit are those who live along the line of the railroad and 
 those who patronize the railroad. And why should not the 
 communities whose natural advantages are such as to enable 
 the transportation of freight to be accomplished at the lowest 
 possible figure be the ones to profit by their own natural 
 advantages ? The logical conclusion, therefore, is that the cost 
 
20 
 
 of transportation on the most favorably situated line ought not 
 to determine the reasonableness of rates. 
 
 Principles Governing Rates and Classification. 
 
 Let us now assume that we have been able to determine how 
 much net income a railroad is justified in earning ; the next 
 problem, and the most intricate and difficult, is to determine by 
 what standard, or according to what principles, this ought to be 
 apportioned among the various articles of traffic ; or, in other 
 words, to determine how many cents per hundred pounds should 
 be charged on the various articles of transportation for the 
 innumerable distances each article may have to travel. It is at 
 once seen that with eight or nine thousand different articles of 
 commerce offered for transportation, for distances ranging from 
 two or three miles to several thousand miles, the problem is of 
 the greatest practical difficulty, if even approximately proper 
 results are to be accomplished. 
 
 The railroads have greatly simplified the problem in two 
 ways. In the first place, they have attempted to divide, approxi- 
 mately, all of the traffic into six different classes, and then have 
 fixed the same rate for all articles in any particular class. There 
 are, of course, numerous exceptions, but, on the whole, these 
 distinct classes contain the great bulk of the articles of com- 
 merce. Then, as is well known, the rate on a class is deter- 
 mined by fixing rates for some standard distance, as, for 
 instance, between Chicago and New York, and then dividing up 
 the rest of the territory on a percentage basis. For example, 
 certain territory south of Chicago may be i io per cent, territory ; 
 that is, the rate from points within this territory to New York 
 will be no per cent, of the Chicago rate ; ora point east of 
 Chicago may be within the 90 per cent, territory, and the rate 
 would then be 90 per cent, of the Chicago to New York rate. 
 
 If a practical traffic man is asked upon what principles he 
 determines classification, he too often answers that he studies 
 the situation and makes a classification and a rate as high as the 
 traffic will bear. Some of our most prominent traffic officials 
 have made statements substantially like this in hearings before 
 
21 
 
 the Interstate Commerce Commission, and nothing has been 
 more prejudicial to the cause of the railroads than such state- 
 ments. It is probable that these railroad men do not mean quite 
 what they say, and it is certain that the results of their efforts 
 in classifying are much fairer to the public than such a method 
 would, on its face, indicate. If this is the method commonly 
 prevailing, it can be justified only on the ground that the results 
 are not unfair to the public. That this is not a proper standard 
 is apparent. There might, for instance, be a great scarcity of hay 
 in New England and a great abundance in the West ; the own- 
 ers of horses and cattle in the East must have hay, at almost 
 any price, and hay would move from the West to the East, even 
 if rates were double what all may regard as reasonable rates. 
 The traffic would bear a higher rate and the traffic would move 
 more or less freely under such higher rate. 
 
 Some railroad officials take the position that freight should be 
 classified and rates fixed according to the actual cost of trans- 
 portation, taking into consideration, of course, the volume of 
 traffic, the risks of loss, and similar elements. Here is sug- 
 gested a basis which is not unreasonable, but at the same time, 
 these principles do not govern railroads in their present methods 
 of fixing rates. For instance, the rate- on a carload of cloth 
 from Chicago to New York is four times the rate on a carload 
 of grain, but this large difference is not made up by the addi- 
 tional element of risk, for although the loss of a carload of cloth 
 would be much greater than the loss of a carload of grain, never- 
 theless, as there would so rarely be any loss, the element of risk 
 is very trifling. An examination of the classification will show 
 that in the case of very few articles does the railroad fix its 
 rates purely on the basis of cost of transportation. 
 
 Consideration is always given to the value of the commodity 
 on the theory that articles of great value in small bulk can bear 
 a larger proportion of the cost of transportation than articles of 
 low value. It is probable that the railroads have worked largely 
 on the theory that high value traffic will better stand the 
 increased rate, but whatever the theory may be, it is submitted 
 that the results are correct. 
 
22 
 
 The rates of transportation are in the nature of a tax upon the 
 community, and may not the principles governing the imposi- 
 tion of taxes have some bearing upon the taxes levied by trans- 
 portation companies? It is a fundamental principle of taxation 
 that the necessities of life should bear as little of the burden as 
 possible, and that those individuals who are best able to pay 
 shall pay the larger amounts. No one has suggested that the 
 proper basis of taxation should be according to the benefits 
 received ; that the man with five children should pay a larger 
 proportion of the school tax than the man with one, or that the 
 owner of a jewelry store should pay more of the police tax than 
 the occupant of a boarding house. As a public service corpora- 
 tion, therefore, ought not the railroad to take into consideration, 
 in fixing its rates, the persons upon whom the burden of the 
 charges must fall ? 
 
 An examination of rates and classifications will show that rail- 
 roads, consciously or unconsciously, are governed by all the 
 principles suggested above. Let us now bring to a focus the 
 various elements. 
 
 r. Cost of transportation. While it is not true that railroads 
 do or ought to determine their rates solely by the cost of trans- 
 portation, there can be no doubt that this is the principal element 
 entering into the fixing of rates. The cost of service depends 
 upon various factors, chief among which are, (i) volume of 
 traffic ; (2) distance ; (3) risk of loss ; (4) space. 
 
 The volume of traffic is one of the principal elements enter- 
 ing into the cost, which decreases as the volume increases. A 
 carload can be moved much more cheaply per hundred pounds 
 than a quarter of a carload, and a train load likewise much 
 more cheaply relatively than a carload. This element is given 
 practical consideration daily by traffic managers. In seeking a 
 rate, a shipper is asked, first of all, how many carloads he will 
 ship daily or weekly. Furthermore, the railroads in all cases give 
 a carload rate at a figure much less than less than carload rates. 
 
 The question of distance is likewise an important factor. Of 
 course, the cost of carrying traffic a thousand miles is greater 
 than carrying it a hundred miles, but the cost is not by any 
 
23 
 
 means in proportion to the distance. A way freight picks up 
 traffic at numerous stations, which service involves a greater 
 wear and tear on rolling stock, and a greater loss of time, neces- 
 sitating higher wages per mile of service. For example, on some 
 railroads train men on through trains are paid upon the basis 
 of a hundred miles travel, whereas men on a local train are paid 
 the same wages on a seventy-five mile basis. The greater cost 
 of a pick-up traffic is fully appreciated by railroad men, but the 
 importance is not realized by theorists. 
 
 The element of risk of loss by breakage, theft or fire is not of 
 great importance, except in the case of a comparatively few 
 articles of transportation. Show-cases are liable to breakage 
 even by the ordinary movement of freight trains ; boots and 
 shoes are especially attractive to the ordinary railroad thief, 
 and all inflammable material has to be guarded with great care 
 and at large expense. In such cases the element of risk may be 
 very considerable in determining the cost of service, but it does 
 not play an important part in fixing the rate in the great 
 majority of cases. 
 
 The most important element, under a system of fixing rates 
 determined by weight, is density. A carload of uncompressed 
 feathers may not weigh a thousand pounds, and yet it will be 
 necessary to haul 30,000 pounds of dead weight. The revenue 
 yielded on a rate of so many cents per hundred pounds would 
 be very slight unless the rate per hundred pounds was very 
 high, whereas a carload of wheat weighing 60,000 pounds would 
 only require the same amount of dead weight to be hauled as 
 a carload of very light traffic. In other words, the loading 
 capacity of any commodity is an element which enters very 
 largely into the consideration of the rate. It unquestionably 
 costs a little more to haul a car loaded with 50,000 pounds 
 than a car loaded with 20,000 pounds, but the difference in 
 cost does not for a moment compare with the difference in 
 amount. 
 
 The above are the principal elements which ordinarily enter 
 into the cost of service, but in some cases there are other ele- 
 ments which are of the most importance. For instance, in the 
 
24 
 
 transportation of meat, it is necessary to have refrigerator cars, 
 for which a high mileage is paid, and which have to be hauled 
 one way empty. The same is true of transportation of live ani- 
 mals, and of some commodities. The detention of cars in 
 loading and unloading, as in the case of hay, is an important 
 element. In fact, there is probably hardly a commodity which 
 has not some other element which is an important one to be 
 considered in the cost of transportation. 
 
 2. The value relative to bulk. At hearings before courts and 
 commissions, traffic men often say that value cuts no figure in 
 making a rate. This statement is not true, as I have indicated 
 above. If it were true, it would be ignoring an important ele- 
 ment in determining the distribution of the burden of trans- 
 portation. Commodities valued at a thousand dollars per 
 hundred weight, ought to and do have a higher rate than com- 
 modities valued at one dollar per hundred pounds. Why any 
 traffic man should make a statement that the value is of no 
 importance in fixing a rate is hard to conceive. What these 
 men mean is, probably, that where the differences in value are 
 not marked, no difference is made in the rate ; that no higher 
 charge is made for wheat when it is a dollar a bushel than when 
 fifty cents a bushel. This, of course, is true, and with only six 
 classifications, it would be absolutely impossible to figure this 
 element to a nicety. To make a classification on a strictly 
 theoretical basis is impracticable and the only results which we 
 can hope for are approximate. 
 
 3. Incidence of the burden. Whether or not a railroad can 
 be compelled to make a lower rate on an article simply because 
 it is an article of common necessity is doubtful, but the more 
 clearly railroads recognize their public service functions, the 
 more likely they are to give consideration to this element. Peo- 
 ple who spend a hundred thousand dollars a year on their living 
 expenses will consume less flour than a man earning $1.25 a 
 day, and the burden of transportation on flour ought to be as low 
 as possible. The same is true of meats. There is, however, no 
 special reason why a low rate should be made upon champagne. 
 
25 
 
 Consideration, therefore, ought to be paid, it is respectfully sub- 
 mitted, to the persons upon whom the burdens will fall. 
 
 4. Competition and commercial conditions. The foregoing may 
 be regarded as the basic elements entering into the determina- 
 tion of rates, or the fundamental principles of a scientific adjust- 
 ment. But often the scientific theory does not fit the facts, or 
 rather the theorist has predicated his proposition upon facts 
 which are not wholly true, or he has left out some important 
 disturbing factor. In the fixing of rates the factors which play 
 the most important part are not cost of transportation, nor the 
 value of the commodity, nor the incidence of the burden, but 
 competition of other carriers and commercial conditions. 
 
 Competition may be by other railroads, by water carriers, by 
 electric street railways, or even by wagon transportation, as in 
 the case of local express companies. The steam railroad may 
 have to cut its rates to a point which pays little above the bare 
 cost of transportation in order to get any business at all. This 
 is true generally in local business affected by electric railway 
 competition and by local expresses. It is also true of long haul 
 business which can be secured often only by making the rate 
 less than that to which the railroad is equitably entitled. Long 
 haul and very short haul business is ordinarily affected by com- 
 petition, and the rates are fixed regardless of almost any other 
 factor. Our Supreme Court has recognized to the fullest extent 
 the effect of competition in fixing rates lower for long distance 
 competitive points than for short distance non-competitive 
 points. The Interstate Commerce Commission in its decisions 
 has attempted to enforce with great strictness the prohibition 
 against charging a higher rate for a shorter haul than for a 
 longer haul, but the Supreme Court has in every instance over- 
 ruled the Commission and given the fullest weight to competi- 
 tive conditions as often justifying a less rate for a greater 
 service. 
 
 The skill of the traffic manager depends, first, upon his hand- 
 ling non-competitive traffic in a manner to avoid the least pos- 
 sible friction with the public ; secondly, upon his ability to 
 secure competitive traffic by methods which do not unneces- 
 
2 6 
 
 sarily antagonize his competitors or connections ; and, thirdly, 
 by studying commercial and industrial conditions, so as, by an 
 adjustment of rates, to move traffic which otherwise would not 
 move. The importance of this consideration in fixing rates has 
 been forcibly stated by President Lucius Tuttle of the Boston & 
 Maine Railroad in his testimony before the Interstate Commerce 
 Commission in reference to import and domestic rates. Among 
 other things, he said : 
 
 “ It is a duty of transportation companies to so adjust their 
 freight tariffs that, regardless of distance, producers and con- 
 sumers in every part of this country shall, to the fullest extent 
 possible, have equal access to the markets of all parts of this 
 country and of the world ; a result wholly impossible of attain- 
 ment if freight rates must be constructed upon the scientific 
 principle of tons and miles; — and this is the principle that 
 must control in the successful conduct of all import as well as 
 export business. . . . It is an unalterable law of trade that 
 
 transportation tariffs must be so adjusted that salable goods 
 may be moved, at the lowest practical cost, to the most distant 
 as well as the nearby markets, and obedience to this law is the 
 actuating spirit that governs in the making of freight rates by 
 all of the great railroad systems and trans-Atlantic lines of the 
 present day. . . . 
 
 “If all freight tariffs could be constructed upon the scientific 
 principle that so many tons of each kind of merchandise shall, 
 always and everywhere, be transported just so many miles for 
 just so much money, and that the performance of each item of 
 transportation shall always bear its exact proportion of cost, and 
 produce its equally exact proportion of profit, the making of 
 tariffs, and the conduct of public transportation would be 
 greatly simplified ; but the first result would be the restriction 
 of all commercial intercourse within narrow circles or zones, 
 beyond the average width of which it would be impossible, 
 except in the most limited way, to carry on those indispensable 
 commercial processes of purchase, sale and interchange of the 
 world’s natural and manufactured products, which are inherently 
 necessary to all general business prosperity.” 
 
 This is a lucid exposition of the bald statement so often made 
 by traffic managers that rates are determined by what the traffic 
 will bear. If they mean all that the traffic will bear (and this is 
 the sense in which they are understood by the public), they are 
 
27 
 
 maintaining an indefensible position ; but if they mean only 
 what the traffic will bear in order to bring about a free move- 
 ment, which is at once beneficial to the railroad and to the 
 public, they are stating one of the most important principles in 
 the fixing of rates. 
 
 Any rate on competitive traffic and other traffic, which would 
 not move but for a low rate, and which yields a profit over and 
 above the bare cost of hauling, is justifiable from the point of 
 view of railroad finance. It is also justifiable from the point of 
 view of the public, although this conclusion is not commonly 
 agreed to. It is assumed that a greater share of the burden of 
 transportation is thrown upon non-competitive and local traffic 
 if a very low rate is made upon other traffic. Any traffic which 
 could not be secured but for the low rates will yield to the rail- 
 road an increased net income, assuming of course that the rate 
 pays something more than the bare cost of hauling. This gives 
 a larger net fund and in the long run will either give the public 
 the benefit of improvements or non-competitive traffic the ben- 
 efit of reduced rates. The successful traffic man is the one who 
 studies commercial conditions and fixes his rates so that traffic 
 is moved which otherwise would not move. The effect of the 
 regulation of rates by law is to deprive railroads of such traffic. 
 The legislation pending in Congress to give the Interstate Com- 
 merce Commission absolute power to enforce the long and short 
 haul clause is most dangerous and far-reaching in its effects. 
 
 This discussion, whether or not profitable in arriving at some 
 proper understanding whereby to test the reasonableness of 
 rates, at least indicates the difficulties not only of fixing a 
 standard, but the greater and almost unsurmountable difficulties 
 in putting the principles in practical operation. Ought such a 
 herculean task to be entrusted to any body of men ? Ought not 
 the railroads, for their own protection, to do everything in their 
 power to prevent the enactment of such a calamitous law ? 
 Ought they not to do everything in their power to appease the 
 public, and thus put an end to the agitation ? They can do this 
 in two ways. First, by recognizing to the fullest extent their 
 
28 
 
 public obligations, and secondly, by treating with all respect 
 the representatives of the public who have been entrusted with 
 the supervision of transportation matters. The Interstate Com- 
 merce Commission, even with its limited powers, serves a most 
 salutary purpose, and every railroad which is governed by proper 
 principles ought to be thankful that there exists such a body, 
 which can, to a considerable extent, control its more or less 
 unscrupulous competitors. Railroad managers when called upon 
 to testify before that body ought to show greater frankness and 
 courtesy, and ought to recognize the fact that they are appearing 
 before the representatives of the people from whom come the 
 great powers which enable the owners of railroad properties to 
 build and operate them.