We have already alluded to the fact that the concentration of manufacturing in large mills at great commercial centres has been made possible by the development of railway transportation, and that the rapid settlement of our Western prairies is due to the same agency; but it is worth while to note more fully the difference between ancient and modern conditions in the business of transportation.

In the first place, it is plain that no more than a century ago the world had comparatively very little need for railways. Each community produced from its farms and shops most of the things which it needed; and the interchange of goods between different sections, while considerable in the aggregate, was as nothing in comparison with modern domestic commerce. The king's highways were open to every one, and though monopolies for coach lines were sometimes granted and toll roads were quite common, there was no possibility for any really harmful monopoly in transportation to arise, because the necessity of transportation was so small. Some writer has ascribed all the evils of modern railway monopolies to the fact that in their establishment the old principle of English common law that the king's highway is open to every man, was disregarded. But if we sift down this ancient maxim of law to its essential principle, we find it to be, there must be no monopoly in transportation; and the problem of obtaining the advantages of modern railway transportation and keeping up, at the same time, the free competition that exists in transportation on a highway is seen to be as far from solution as before.

The importance of our railway traffic is proven by statistics. Of the total wealth annually produced in this country, it is probably a fair estimate to say that ten per cent. is paid for transportation of the raw material and finished goods in their various journeys between producers, dealers, and consumers, and for transportation of passengers whose journeys directly or indirectly contribute to the nation's industry. That is to say, the gross yearly earnings of all the railroads and transportation lines of the country is about one tenth of the total value of all the year's products. The average is brought down by the amount of sustenance still consumed in the locality where it is produced, and by the amount of valuable merchandise. But of the bulky products like coal and grain, the greater part of the cost to the remote consumer is due to the cost of carriage.

It is also necessary to a proper appreciation of the problem, that we understand that railway transportation is now as absolutely necessary as is the production of food and clothing. Annihilate the railway communications of any of our great cities, and thousands would perish by starvation before they could scatter to agricultural regions. There was great suffering in many small communities in Minnesota and Dakota in the severe winter of 1887-8, because the heavy storms blockaded the railroads and prevented them from bringing in a supply of coal and provisions. But it is not taking the question in its broadest sense to consider whether we could eke out an existence without railway communication. The fact is that under modern conditions every man obtains all the things which he desires, not by producing them himself, but by producing some one thing which others desire. The interchange between each producer and each consumer must, broadly speaking, be all made by means of the railway; and without that, stores, factories, mills, mines, and farms, would have to cease operation.

Remembering now the importance and necessity of transportation, let us inquire how the price at which it is sold to the public, the rate of fare and freight, is fixed. Is it or can it be generally fixed by competition?

There are now in the United States about 37,000 railway stations where freight and passengers are received for transportation. Now, from the nature of the case, not more than ten per cent. of these are or can be at the junction of two or more lines of railway. (By actual count, on January 1, 1887, eight per cent. of existing stations were junction points.) Therefore the shippers and buyers of goods at nine-tenths of the shipping points of the country must always be dependent on the facilities and rates offered by a single railway. Such rates of transportation as are fixed, be they high or low, must be paid, if business is carried on at all. And when we consider the ten per cent. of railway stations which are, or may be, junction points, we find that at least three-fourths of them are merely the junction of two lines owned by the same company. Consolidation of railway lines has gone on very rapidly within the past few years and is undoubtedly destined to go much further. Of the 158,000 miles of railway in the country, about eighty per cent. is included in systems 500 miles or more in extent; and a dozen corporations control nearly half of the total mileage. The benefits which the public receive from this consolidation are so vast and so necessary that no one who is familiar with railway affairs would dream of making the suggestion that further consolidations be stopped or that past ones be undone.

There is a great tendency on the part of the public, however, to look with fear and disfavor on further railway consolidation. And because this is so, it is greatly to be desired that the beneficial effects of consolidation should be better understood. The most important benefits are included under one head, the saving in expense and the avoidance of waste, and this is effected in very many different ways. Suppose a great system like the Pennsylvania or the Chicago & Northwestern were cut up into fifty or sixty independent roads, each with its own complete staff of officers. Each road would have to pay its president, directors, and heads of operating departments, would have to maintain its own repair-shops, general offices, etc., and conduct in general all the business necessary to the profitable operation of a railway corporation. A car of wheat or a passenger in going from Chicago to New York would have to be transferred from one road to another at perhaps twenty different points, and the freight or fare paid would be divided among twenty different companies, with corresponding clerical labor. The modern conveniences of through tickets, through baggage-checks, and through freight shipments, would be difficult, if not impossible. Further, consolidation tends to produce vastly better service and greater safety. The large systems can and do employ the highest grade of talent to direct their work. Every thing is systematized and managed with a view to producing the best results in efficiency and safety with the least waste of material and labor. And while the improvement in safety and convenience is all for the benefit of the public, a large part of the saving in expense effected by consolidation has likewise come back to the patrons of the roads in the form of reduced rates of fare and freight.

It is difficult, however, for any one not familiar with the technical details of the railway business to fully appreciate the importance and necessity of the consolidations which have been effected, and the grave results that would follow the realization of the mad proposition to set us back a half century by cutting up our railroad systems into short local lines. It must be plain to every one, however, that while the loss of all the benefits of consolidation would be certain, the gain in competition could affect only the few junction points; and as we shall now see, the effect even on them would be small.

Assuming that the total number of railway junction points in the United States is 3,000, we find, on examination, that at about two-thirds only two lines meet, and at more than half the remainder only three lines meet. It is plain that in the vast majority of cases where two roads intersect, and in many cases where three or four come together, the lines meet perhaps at right angles and diverge to entirely different localities. The shipper bringing goods to the station, then, may choose whether he will send his goods north or east perhaps; but only in the few cases where two lines run to the same point does he really have the choice of two rates for getting his produce to market. Practically, then, there are not, and never can be, more than a few hundred places in the country where shippers will be able to choose different routes for sending their goods to market. We say there never can be, because the building of a line of railway to parallel an existing line able to carry all the traffic is an absolute loss to the world of the capital spent in its construction, and a constant drain after it is built in the cost of its operation. This fact is now, fortunately, generally appreciated.

But what of the competitive traffic which exists between commercial centres, like the trunk-line traffic between Chicago and the cities on the seaboard, or between the former city and the collecting centres farther west like St. Paul, Omaha, and Kansas City? Here, indeed, there is competition; and it is of great importance because of the enormous bulk of the traffic which traverses these few routes.

It is a peculiar feature of the railway business which we have now to consider, and one which is not generally understood. We have already perceived the principle that competition cannot permanently exceed a certain intensity; and the proof of this principle in the case of the railway is remarkably plain. Suppose two roads are competing for the traffic between Omaha and Chicago. A shipper at the former city who wishes to send a few tons of freight to Chicago may go to one company and ask their rates, then to the other and induce them to give him a lower rate, and then back to the first again, until he secures rates low enough to suit him. Now it is a fact that either company can afford to carry this especial freight for less than the actual cost of carrying it better than it can afford to lose the shipment. This is because it costs the company practically no more to carry the goods than if they were not shipped by its line; and hence whatever is received for the freight is so much profit. Stated in the form of a principle, this fact is expressed thus: Receipts from additional traffic are almost clear profit. Nor is this all. The practical impossibility of distinguishing additional traffic from other traffic, and the enactment of State and National laws requiring uniform rates to be charged, places all traffic on a common basis; and the same cause which makes it more profitable to carry additional traffic for a song than to lose it, makes it better for a railroad to carry traffic, temporarily at least, for less than the actual running expenses of the road, rather than to lose it. The train and station service, the general office and shop expenses, must all be kept up, though the freight and passengers carried dwindle to almost nothing; and the capital invested in the road is a total loss, unless the line is kept in operation and earns some income, even though it be small. This last influence, as we shall see later, is a most important and far-reaching one in its effect on industrial competition.

The cause of the intensity of competition in railway traffic is now evident. And from what we have seen, it follows that two railway lines competing freely with each other cannot possibly do business at a profit. Let us see what are the actual results of this law of practical railway management. Evidently the managers of two competing railway lines have but two possible courses open. They may, by tacit or formal agreement, unite in fixing common rates on both the roads, or they may attempt to do business with free competition. But we have already proven that the latter course must result in reducing the income of the road certainly below the amount necessary to pay the operating expenses and the interest on the bonds, and probably it will be insufficient to pay the running expenses alone. The inevitable result, then, is the bankruptcy of the weaker road, the appointment of a receiver, and its sale, in all probability to its stronger competitor. This is the chain of cause and effect which has wrought the consolidation of competing parallel roads in scores of cases, and which, if free competition is allowed to act, is sure to do so.

We can now appreciate the necessity which managers of competing lines are under to agree upon uniform rates for traffic over their roads, and at the same time the difficulty of doing this. The strange paradox is true that while it is necessary to the continued solvent existence of the competing corporations that such an agreement be made, it is also greatly to their advantage to break it secretly and secure additional traffic. It is necessary, therefore, that the parties to the agreement be strongly bound to maintain it inviolate; and to effect this, "pools" were established. In pooling traffic, each company paid either the whole or a percentage of their traffic receipts into a common fund, which was divided among the companies forming the pool, according to an agreed ratio. Under this method it is evident that all incentive to secret cutting of rates and dishonest methods for stealing additional traffic from another road was taken away.

How widespread and universal is the restraint of competition by railway corporations may be seen by the following pithy words, penned by Charles Francis Adams, President of the Union Pacific Railway:

"Irresponsive and secret combinations among railways always have existed, and, so long as the railroad system continues as it now is, they unquestionably always will exist. No law can make two corporations, any more than two individuals, actively undersell each other in any market, if they do not wish to do so. But they can only cease doing so by agreeing, in public or private, on a price below which neither will sell. If they cannot do this publicly, they will assuredly do it secretly. This is what, with alternations of conflict, the railroad companies have done in one way or another; and this is what they are now doing and must always continue to do, until complete change of conditions is brought about. Against this practice, the moment it begins to assume any character of responsibility or permanence, statutes innumerable have been aimed, and clauses strictly interdicting it have of late been incorporated into several State constitutions. The experience of the last few years, if it has proved nothing else, has conclusively demonstrated how utterly impotent and futile such enactments and provisions necessarily are."

Disregarding for the present the latter part of the above quotation, consider the statement that during the whole history of railway corporations, agreements to restrain competition have been the rule. This the slightest research proves to be an historical fact, and it is in perfect accord with our preceding statement, that such agreements were necessary to the solvent existence of railway corporations. The records also show that invariably when these agreements have been broken and competition has been allowed to have full play, the revenues of the roads have been rapidly reduced to a point where, unless a peace was effected, bankruptcy ensued.

Mr. Adams said, with truth, that no law had proven of any effect in preventing these competition-killing agreements between railways; but since the above extract was written, the Interstate Commerce law has been enacted. Let us pay some attention to its working and results. It is a curious fact that the framers of railway legislation in this country, almost down to the present time, have concentrated all their energies on the endeavor to keep up free competition; and the Interstate law is no exception to this rule. The plan of the Interstate law was about as follows: "Here are a few dozen great commercial centres where the railway lines of different systems meet. We will first prohibit the pooling by which they have restricted competition at these points. Then, in order that the thousands of other shipping points shall receive an equal benefit, we will enact a 'long and short haul clause,' obliging the rates charged to be in some degree proportionate to the distance. Thus competition at the great centres will bring rates down everywhere, and the public will be benefited."

For a year after the enactment of the law its effects were not prominent. Pooling was abolished, but the agreements to maintain rates were still kept up and were fairly observed. But in 1888, the second year of the law's working, it came to be realized that the pool was the vital strength of the agreement to maintain rates, and that this agreement might now be easily broken. Then ensued a remarkable season of rate cutting, which, at the present writing, has reduced many strong companies to the verge of bankruptcy. It is plain enough that if this is allowed to go on, the various stages of receivership, sale, and consolidation will follow in regular order. To avoid this too sudden revolution and the general financial disaster which all sudden revolutions entail, the principal companies in the West are now striving to combine in an association for the maintenance of rates by a plan which will bind them more closely together than any other ever before adopted. Thus to quote Mr. Adams again: "The Interstate Commerce law has given a new impetus to the process of gravitation and consolidation, and it is now going on much more rapidly than ever before. It is at this moment rapidly driving us forward toward some grand railroad-trust scheme."

It is a fact which we shall do well to ponder over, that this legislation intended to stimulate competition has finally had just the opposite effect from that which its makers desired. They did increase the intensity of the competition, and have thereby nearly brought about a permanent end to all competition in railway traffic.

It must now be clear that the railway is essentially a monopoly, not, be it noted, because of any especial wickedness of its managers or owners, but because competition is impossible as regards the greater part of its business, and because wherever competition is possible, its effect, as the managers well know, would be to annihilate all profits from the operation of the road.

Let us consider now some of the evils with which this monopoly is charged. The first of these is discrimination between persons and between places. A favored shipper has been enabled to ruin his competitors because he could obtain special rates, while they, perhaps, were charged an extra amount. The strong monopolies have in this way been able to strengthen their hands for the purpose of throttling their weak competitors. Passenger rates, too, have been low to one class and high to another; and the system of free passes has led to great abuses. Discrimination between towns and cities and States has been hardly less serious; and while the railways were permitted to make high local rates and low through rates, a great stimulus was given to the city at the expense of the country. The second class of evils is that rates in themselves have been too high. The railways have been wastefully built and then capitalized at double their actual cost, and it has been attempted to pay dividends of 6 to 10 per cent. on these securities. In some cases the principle of charging "what the traffic will bear" has been so applied that industries have been ruined through the absorption of their profits by unjust transportation charges. But our space will not permit a comprehensive review of the many abuses of railway management. They are already familiar to the public. We needed only to refer to them sufficiently to carry on our argument by showing that the railroad monopoly is not by any means a harmless monopoly if left to work its own pleasure.

There are two evils of our present railway system, however, which are not chargeable to monopoly, but to the attempt to defeat monopoly, and which are important to our discussion. The first is the waste of competition in railway traffic; the second, the waste of competition by the construction and threatened construction of competing lines where present facilities are ample for the traffic. Of the first it need only be said that in advertising, "drumming," and soliciting patronage the railways spend many millions of dollars every year, which comes out of the pockets of the public. The second is most serious, for it involves a far greater waste. It is a conservative estimate to say that 5 per cent. of the railways of the country were only built to divide the profits of older roads, and that their owners would be delighted to-day to have their money back in their possession and the railroad wiped out. The millions these roads have cost, the millions required every year to maintain and operate them, the millions spent on proposed roads that never reached completion, and the millions squandered in fighting proposed roads by every means short of actual bloodshed,—these are some of the wastes which we have made in our endeavor to create competition in railway transportation. And with all our efforts, and notwithstanding the fact that until within a short time the public sentiment and the railway managers have been united in the belief that free competition was the only mode of regulating railroad rates, we are farther removed from free competition now than ever before.

And now consider in addition to all this the fact that every railway company must first of all secure from the State a right to exercise the sovereign power of Eminent Domain, and that it may and does choose and take every advantage of the favorable locations where its road can be built most cheaply; which natural highways, mountain passes, and the like, are gifts of Nature, the right to whose use equitably belongs to the general public, and not to private parties exclusively. Taking these facts also into consideration, it seems needless to offer further proof of the fact that the business of railway transportation is essentially a monopoly, and that the attempt to regulate it by competition must always prove a failure in the future, as it always has in the past.

Necessarily we have limited our discussion to the most salient points, and have not touched at all many of the complicated details of the railway problem. In a later chapter we can study farther the evils due to railway monopolies, and the proper remedies therefor. At present we have accomplished our purpose in finding out the fact that railways are monopolies, and that they are so by their inherent nature.

Of monopolies in other forms of internal transportation, but little need be said. Our once busy canals and great rivers seem destined, with the constant rapid improvement and cheapening in the carriage of goods by rail, to lose all their former importance. The monopolies small and great that once held sway there have all vanished before their strong rival, the railway.

The use of steam in the vessels that navigate the ocean has had an effect very similar to the replacing of stage-coaches and freight wagons by the locomotive. Where hundreds of sailing vessels plied their slow and uncertain trade, steamer lines now make trips only less regular than the railway itself. The only cause for the existence of a monopoly in ocean traffic by steam is the greatly increased capital required for a rival steamship line as compared with that needed for the old sailing vessels. We find this, the requirement of a large capital, to be a feature of more or less importance in nearly every monopoly of the present day. In this case, however, unless there is an artificial monopoly in the shape of government aid or authorization, the strength of its capital is the only power the monopoly has.

We may reach a clear idea of the essential nature of all the monopolies considered in this chapter by considering an especial class of monopolies of communication, namely, mountain passes, bridges, and ship canals. If a person or a railway corporation could secure sole control of the only pass through a high mountain range separating two wealthy and populous districts producing goods of different sorts, they might exact a princely yearly revenue for its use, equal to the interest on the capital required to secure an equally favorable passage by tunnelling, or the annual cost of sending goods over some longer and more expensive route. But under the law no private person would be allowed to do this; and if the pass were a very important and necessary one, probably no one railway company would be allowed to do so. The law recognizes to some extent, and should recognize much more than it does, the fact that the benefit of this natural pathway is not the property of any one man or set of men, but equitably belongs equally to every person who needs to use it directly or remotely.

A very large and expensive bridge is like an important mountain pass, differing only in that one is the gift of Nature, while the other is wholly the work of man. But because the latter is the work of man, it does not follow that it is not a monopoly. The great bridge across the Mississippi River at St. Louis is owned by a private company which levies tolls for the teams and trains passing over it. These are deemed excessive, as they are sufficient to pay an exorbitant interest on the cost of the bridge. Yet for many years no one has cared to invest money in the erection of a new bridge, for they saw that there was no more traffic than one bridge could readily carry, and they knew that if a new bridge were erected, in the rivalry in tolls which would ensue, the old-established company would probably bankrupt its rival. It is thus plainly seen how an important bridge may become a monopoly, and a most powerful and onerous one.

We have still one important monopoly of communication to describe, the telegraph. Viewed from a narrow standpoint it may be thought that there should be no monopoly in the telegraph. A telegraph line is not expensive to erect and maintain, and it gets no monopoly from taking advantage of the most favorable route through difficult country as a railway does. But the economy effected by combination and the effect of sharp competition in bringing about bankruptcy and then consolidation are exactly similar to the case of the railway, which we have just described. In the early history of telegraph companies, many short competing lines struggled and fought for supremacy. In 1859 the Western Union Telegraph Company was formed with the avowed intention of combining these warring companies and making the telegraph business profitable. It has exceeded the most sanguine dreams of its promoters by swallowing up its rivals until the entire system of telegraph communication of the country is practically in its hands. The effects of this consolidation have been of two sorts. On the one hand we have the telegraph service of the country performed with the least possible work; there is nothing wasted in the maintenance of two or more rival offices in small towns where one is sufficient, nor in operating two lines of wire where a single one would serve as well. All expense of "drumming up" business in various ways is avoided, and also the cost of keeping the complicated books necessary when the receipts of a single message must be divided among several companies. On the other hand it is plain that the public is wholly at the mercy of the monopoly in the matter of rates, and must pay for the use of the telegraph exactly what the corporation asks. There is a weak and foolish argument which is often used in an attempt to show that this particular monopoly is not hurtful. It is that the telegraph is a luxury which only wealthy people use, and hence whether its rates are high or low is of little account. The fallacy of this statement is easily seen. A principal use of the telegraph is to aid the prosecution of business; hence to unduly raise rates is to cause an additional tax on business,—on the carrying on of the processes of production. This tax will certainly have its effect, either in decreased profits, decreased wages, or an increased price for the product. Another large class of telegrams are those which are sent with little thought of the cost, in time of sickness, death, or sudden emergency, yet by people whose purse feels severely the tax.

What to do with this vast monopoly is one of the questions of the day, but we will content ourselves at present with this investigation of its character, reserving its proper treatment for later consideration.