Railroad rate

“ It is always considered desirable to have a long haul, and the rates on a long haul should be much less, in proportion to distance, than on a short haul. This is a principle of rate-making which has grown up as one of the factors in the evolution of the railroad business in this country, and it has greatly stimulated the movement of freight for long distances, has brought the great manufacturing centres in closer touch with the consumer at a distance and the producer in closer touch with centres of trade. ”

“ When the agricultural and manufacturing population in the great States between the Alleghanies and the Rocky Mountains realize—as they will sooner or later—what a set of rates based on distance will mean to them and to their children, there will be a real rate agitation compared with which the present stimulated demand will be as nothing.
Far better the difficulties existing under the present system of commercial freedom than to turn to a rigid governmental plan for fixing railroad rates. ”

“ The aim of all rate adjustment should be, and in fact, so far as possible in American railway practice, is to equalize conditions, so that the widest possible market shall result. Producers or traders in each city demand access on even terms to all territory naturally tributary to them by reason of their geographical location. Each particular railroad sees to it that its own patrons and cities are "held" in all parts of these markets, as against the efforts of competing railways to promote the welfare of their own constituencies. ”

“ It not infrequently happens that the initial railroad may entirely control a roundabout route, whereas shipments by the most direct line necessitate a division of the joint rate with other companies. In such a case the initial line will naturally favor the indirect route, at the risk of economic loss to the community and even to its own shippers. An interesting [Pg 286] illustration is afforded by a complaint of wheat growers at Ritzville in the state of Washington concerning rates to Portland, Oregon. ”

“ Railroads are continually importuned to make rates that will "move the business," as in the case of the Western road just cited, and those parts of the United States which have the highest railroad capitalization have the lowest average freight rate. If you will look at the American Review of Reviews for the month of June, 1908, you will find a very interesting article by Interstate Commerce Commissioner Lane on "Railroad Capitalization and Federal Regulation." ”

“ It is obvious that the growth of transportation in any country is bound to be more rapid than the increase either in population or in wealth. It appears, indeed, almost as if the volume of transportation in the United States increased more nearly as the square of population than in direct proportion. It has been estimated that we forward two and a half times as much freight per capita as some of the leading European countries like France. Our domestic population from 1890 to 1910 increased about fifty per cent. The railroad mileage grew at about the same rate. ”

“ On the whole, railroad rates in the United States are the lowest in the world. But they cannot continue to grow less forever.
Rates must be such as will bring in, above operating expenses, a reasonable return on the investment as measured by the value of the property. So much the courts will uphold. ”

“ Whatever fuel and labor-saving causes operate on one must necessarily operate upon the other. When we, therefore, find that the ocean rates are only from one-third to one-fourth of what they were thirty years ago, we are justly surprised to see railroad rates maintained as high as they are. Operating expenses have been greatly reduced and passenger travel has largely increased during the past twenty years, but reductions corresponding in the passenger rates of the United States have not been made. ”

“ Analysis of the theory of railroad rates begins naturally with a study of railroad expenditures. The examination of earnings is not feasible until a later time. For neither a railroad nor a factory can earn money until it has first liberally expended it. A physical plant must be provided, in the first place, which means the guarantee of interest on a large capital; and, secondly, it must often be operated unprofitably at the outset. This is especially true in a new and undeveloped country like the United States ”

“ For proof that we are not mistaken in our estimated cost of these roads, and that the companies have received from the government a sum more than sufficient to defray the entire expense of their construction, we turn to reports of the cost of railroads generally, in the country, made by men who are in sympathy with our present railroad system. These men say that the cost of railroads in this country, from their first introduction, is about $50,000 per mile, and that those constructed recently will average about $30,000 per mile. ”

“ The first of these economizes the fixed expenses for roadway and line which respond but slowly to enlargement of traffic, by distributing them thinly over a large tonnage; the second economizes the mere movement expenses which tend to grow less rapidly than the size of the trains. For neither fuel consumption nor wages of train crews expands pari passu with the paying load. Fortunate the lot of the railroad which enjoys both these advantages, of density of traffic per mile of line and of tonnage capable of such concentration in heavy train units. ”

“ The discussion of the nature of railroad expenditure may be concluded by a comparison of the net effects of the developments of the last few years; that is to say, of steadily expanding costs of operation and of slowly and tardily rising rates chargeable for service on the one hand, as over against the results obtained by mechanical improvements and increasing economy of operation coupled with growth of tonnage, on the other. The average cost of transportation has greatly increased. ”

“ Between 1889, when the Interstate Commerce Commission's statistics first became a valuable index of railway operation, and 1909, the average rate per ton mile has fallen from 9.22 to 7.55 mills. On the freight tonnage of 1909 this meant a reduction of over $372,000,000 in the yearly revenues of the railways. The railways suffered that loss from their income when they needed every cent of it to maintain the people's highway in a condition to transport the people's ever-growing traffic. ”

“ A river crossing brings competition for coal, lime, or cement, but does not affect the rates chargeable on high-class freight which seldom goes by water in any event. A railway specially interested in the development of some particular industry, wherever it crosses our hypothetical line, effectively holds down the rate on the product of that business. ”

“ In 1899 the average car held twelve tons and twenty-nine of them carried a train-load. Sixty-six is the average number of passengers per train to-day; thirty-three was the average number in 1899. And so the increased business has not occasioned a proportionate growth in cost. It takes but little more than three times the outlay in conducting transportation to do over four times the work, and other railroad expenses have varied even less. ”

“ In 1870, when the government took over the few short lines then operated and began its railroad-construction programme, it was faced with the problem of building through a rough and mountainous country with as little expense as possible. So the narrow gauge was adopted. Nevertheless, the cost has been enormous. The total capital invested in railways is now almost a quarter of a billion dollars, or an average, including all equipment and buildings, of upward of sixty thousand dollars per mile. Exceptionally steep grades have had to be overcome. ”

“ Each district is usually represented by a railway, dependent upon the prosperity of its particular constituency. Competition of markets is usually more keen where a number of carriers are concerned, each representing its own clients; but it may conceivably arise as between several markets served by the same company, especially with the growth of great railway systems. The Southern Pacific must insure a rate from California on oranges to eastern markets, as compared with the rates over the southern roads from Florida, sufficiently low to warrant the venture of capital in the industry. ”

“ Only by separation of local from through business can we adequately appreciate the enormous advances which have taken place in railroad operation in the United States, with corresponding reductions in the cost of transportation. While the New York Central at one time reported an average trainload of 322 tons, the average load of its through trains on the main line rose as high as 750 tons. More than twice this figure is attained upon the Pittsburg, Bessemer & Lake Erie road in hauling ore from the lakes to the furnaces at Pittsburg. ”

“ It is over three times the annual gross revenue of the railroads, and it amounts to nearly one half of the existing railway capital represented by stocks and bonds. The question of obtaining the $8,500,000,000 necessary to make railroad facilities equal to the expanding traffic of the country during the next five years, therefore, constitutes the most important problem now confronting business men. ”

“ Whether the great increase in prices in 1912 over preceding years, operating indirectly through insistent pressure for wage increases to enhance costs of operation, will necessitate a reopening of this issue in a large way, seems likely to depend upon the rate at which the volume of traffic augments in the immediate future. It is clear, in any event, that a sufficient surplus earning power must be permitted to insure a continuance in favor of railway securities as compared with other forms of investment. ”

“ They have not, as would be but fair, taken a large group of articles, and noted how insignificant is the cost of transport as compared with other charges, how small is the rate of profit of the railways as compared with the charges of the manufacturers and distributors. ”

“ The most important single factor in the production of increasing returns upon a railroad is the density of traffic; that is to say, the amount of business which can be conducted with a given set of rails, terminals and rolling stock. In other words, it is the degree of effective utilization of the plant and equipment. It is too obvious to need demonstration, after what has been set forth concerning the nature of railroad expenditures, that economy of operation and, consequently, profits are more or less directly dependent upon this fact. ”

“ While from $25,000 to $30,000 a mile is a very liberal estimate of the average cost of American roads, the average cost of European railroads, owing to their expensive rights of way, substantial road-beds and heavy grades, is probably not less than $75,000 per mile. British railway companies have laid out for the purchase of land, for right of way and depot accommodations an amount about equal to the entire average cost of American roads for the same number of miles. ”

“ If you take at eleven cents freight that cost you twenty-five cents to handle, you lose fourteen cents on every ton you carry. If you refuse to take it at that rate, you lose fifteen cents on every ton you do not carry. For your charges for interest and repairs run on, while the other road gets the business." [138]
Another peculiarity of railway competition, distinguishing it from competition in trade, is that there is no such thing as abandonment of the field. ”

“ The original function of commodity rates, which are generally lower than class rates, was to encourage the movement of bulk commodities, such as coal and grain. With the onset and rapid growth of intermodal competition, the railroads increasingly turned to commodity rates in an effort to prevent diversion of traffic to other modes of transportation. Since 1932, numerous all-commodity or all-freight rail rates have been established between various points throughout the country. ”

“ This average cost must fix the average rates charged by the railroads to intermediate points, such as to Ogden, in Utah. So the railroad must either charge less for the long haul to San Francisco, or leave that business to be done solely by water. Yet it may be profitable to the railroad to accept the business at such rates as it can obtain; for, as in all business ventures, manufacturing or mercantile, new business can be profitably added at less than the average cost. ”

“ Certain expenses, to be sure, such as train wages, coal consumption and the maintenance of rolling stock, are readily divisible; but with respect to the maintenance of way and structures—about forty per cent. of the total outgo—all guides fail. Even in respect of the cost of rails, due to wear and tear of train movement, we are quite at sea in the allocation of expenses. Freight trains may indeed be four times as heavy as passenger trains; but, on the other hand, they move at far slower speeds. ”

“ The economic justification lies in the fact that the railway can afford to make a low rate, leaving a bare margin of profit above the extra cost of adding this traffic to that which is already in motion. Such rates cannot exceed a definite figure based upon what the traffic will bear. A higher rate than this would kill the business. Something is contributed toward fixed charges by the new traffic, so far as the railway is concerned ”

“ Then again, there were the discriminations in rates, so vehemently denounced, against the small towns and local business, in favor of the large cities mainly interested in long distance traffic. Such jealousies and rivalries of course antedate the railroad. They are almost as old as trade. And yet the course of affairs since the panic of 1873, had lent peculiar force to them by the middle of the eighties. It had been a period of ruinous railroad competition all over the land, but especially in trunk line territory. Through rates had fallen tremendously ”