THE RATE SYSTEM OF THE CENTRAL PACIFIC

City and Country in California

For more than forty years the Southern Pacific interests sought with varying success to modify the intensity of water competition by agreement with or by purchase of competing lines. During all this period the existence of alternative water routes was probably the principal influence determining the relative adjustment of rates between different towns upon the Pacific Coast. In deciding upon the rates which they should charge, the Southern Pacific interests had other factors to consider, however, besides the presence of water competition—factors which can be understood only after a careful study of local conditions in the Far West.

The state of California is characteristically a country of great distances, occupied by a relatively sparse and unequally distributed population. Its industry is primarily agricultural and mining. Although some manufactures have developed since 1870, such as foundries, woolen and sugar mills, glass, paper, cordage, powder, tobacco, tin, and hardware manufacturing concerns, yet even today the absence of adequate supplies of good coal, the smallness of the local market, and the distance from the great centers of population in the East hold manufactures within narrow limits. As explained in the previous chapter, the state is best fitted to produce and export products of the soil, and raw materials such as grain, fruit, wool, hides, and later wines, lumber, and oil. To this list should also be added salmon.

In such an economy, the cities of California play the part of distributing agencies rather than that of centers of industry. Such was the first function of Stockton, Sacramento, Los Angeles, and indeed of San Francisco itself, and the work of distribution still remains these cities’ principal means of support. Originally the chief profit of the northern towns came from supplying the mining population of the Sierras with supplies brought by sea from Europe or from the Atlantic Coast of the United States. The nature of California imports has somewhat changed since the early days; a larger commerce with the Orient and with the west coast of South America has developed, and a large part of the freight handled on the Pacific Coast now comes in by rail. This has multiplied the number of distributing points, and has to some degree built up the interior of the state. The character of the cities has not, however, changed and they remain as before—trading and consuming rather than producing centers.

Conflict of Interest

It follows from this division of labor between town and country on the Pacific Coast, and from the rivalry of different cities in the distribution of finished goods, that striking divergencies in point of view have arisen, both between individual cities, and also between the city communities as a whole and the farming and manufacturing interests of the state. These differences have received free expression in the discussion of railroad rates. Inasmuch as the articles distributed by the towns are in large part imported goods, the cities as a group have demanded low westbound carload rates from eastern sources of supply. The larger centers of population, however, have opposed low rates on small consignments, because that tends to deprive them of a rehandling profit by promoting direct relations between the consumer and the eastern wholesale house. As compared with the cities, on the other hand, the farming interests have been relatively indifferent to the level of westbound rates, so long as they have enjoyed low eastbound rates on the product of the farm and field; while the struggling manufacturers have resisted low rates westbound, because these have exposed them to the competition of eastern factories. The interests of the consumer have not until quite recent years been represented.

No Settled Rate Policy

Owing to these persistent conflicts between various classes of shippers, public opinion in California has not been easily enlisted as a whole in support of any concrete proposals for the readjustment of railroad rates, although complaints from all sections have been numerous. There has been, on the contrary, a persistent series of appeals to the railroad, now to favor one set of interests, now to favor another—appeals which, when granted, often have resulted in gross discrimination, and which, when refused, have swelled the tide of protest against the transportation lines. The serious side of this situation in California is that the conflict of interest between buyers of transportation has exposed the railroad to temptations which it has had neither will nor ability to withstand. Where there is constant demand for favors there is likely to be discrimination unless the person or institution to which demand is made is fortified by a clear view of public policy and a sense of morality more than ordinarily acute.

It is no secret that the Southern Pacific has had neither the one nor the other of these qualifications. For its part, it has acknowledged no duties other than those generally incumbent upon private business. It has insisted upon complete freedom to follow its own advantage. In a speech to the men in the railroad shops at Sacramento in September, 1873, Stanford explained his position by asking: “Does Governor Booth sell at the same per cent of profit his sugar, pork, beans, bacon, lard, candles, soap, spice, coffee, whiskey, brandy, and other articles? So with the mechanic, the manufacturer, the farmer, and others. The market price governs. A farmer takes two and one-half cents for his grain as justly and as cheerfully as one and one-half cents, the cost of producing being the same.”[359] “The Southern Pacific,” said Mr. William B. Curtis, of that company, in 1894, in the same strain, “sells transportation precisely as a merchant disposes of his wares, adjusting its tariff to conform to the situation with the object in view of inducing the largest amount of transportation at fair rates.”[360]

This announced willingness to differentiate led in the course of time to the greatest variety of railroad rates in California, some rates being low, some high, some public, some secret. Generally speaking, indeed, rates were low where competition was present, and high where it was absent. The big man was favored over the little man, the shipper with an alternative route over the shipper confined to one railroad line. Some of the details of this interesting system will now be presented.

Separate Rate Classifications

In discussing the adjustment of local charges in California, attention will be first directed to the absolute level of local railroad rates. Separate mention must be made of the local classifications and of the local rates.

As late as 1877, each of the principal railroads in California had its own classification. These were far from being the same. Baled hops moved at one and one-half times first-class on the Central Pacific. On the Southern Pacific compressed hops took third-class. On the California Pacific pressed hops took double first-class. Liquors took one and one-half times first-class on the Central Pacific (in jars, owner’s risk); second-class on the Southern Pacific (in glass, packed, owner’s risk); double first-class on the California Pacific (in jars or glass); first-class on the North Pacific Coast (in glass, packed, owner’s risk); and double first-class on the San Francisco and North Pacific (in glass or demijohns, owner’s risk). Window glass took first-class on the Central Pacific, one and one-half times first-class on the California Pacific, and fourth-class on the Southern Pacific if not over three feet long. Boiler flues moved first-class on the Central Pacific, third-class on the North Pacific Coast, and fourth-or fifth-class according as made of copper or brass, or of iron, on the Southern Pacific.[361]

Generally speaking, however, the classifications were much less elaborate than they later became. A committee of the California Senate observed in 1893 that the theory of the local classification of the Southern Pacific was to simplify so far as possible. Hence that classification started out with the announcement, in effect, that all articles not named specifically therein would be charged for at merchandise rates. It then continued to indicate the exceptions, enumerating articles that were light, bulky, of excessive value, liable to damage, etc., proceeding in this way along the same lines as the Western classification.[362]

When the Santa FÉ later built into southern California it brought in the Western classification, tariffs, rules, and conditions that governed its lines elsewhere, and applied the Southern Pacific schedules of merchandise rates to this classification. Since, however, the Southern Pacific had only one merchandise class, the Santa FÉ applied the same rates to each of the first four classes of the Western classification in California. The result of this adjustment of tariff to the Western classification was to produce practically the same revenue as would have resulted from the local classification and merchandise rates of the Southern Pacific Company. In 1893 the Southern Pacific itself substituted the Western classification for the one which it had been using.[363]

Local Rates

Under the law the maximum rate which any California railroad could charge for the transportation of freight, was 15 cents per ton per mile. In spite of the statement of Mr. Stanford to the contrary,[364] the evidence is to the effect that this maximum was generally applied on short-haul local business as late as 1877 and perhaps afterwards. In some cases, the published rate was even greater than the maximum, though a note to the schedule provided that when the calculated rate exceeded the legal maximum, the latter would apply. The rates on the Central Pacific main line in 1866 were almost exactly 15 cents per ton per mile.

The report of the California Board of Transportation Commissioners in 1877 showed that generally throughout the state first-class rates for short hauls ranged from 14 to 30 cents per ton per mile. For the 10 miles from Lathrop to Stockton the tariff charge was $1.60 per ton, and for the 6 miles from Pleasanton to Livermore, the rate was $1. The charge from Roseville Junction to Truckee, 102 miles, was $15.20. When river competition entered in, rates were markedly reduced. The charge from San Francisco to Stockton, 92 miles, was $3.20 per ton, or 3½ cents per ton per mile; that from San Francisco to Sacramento, 140 miles, was $3.60, or 2? cents per ton per mile. On the other hand, the rates of the California Pacific were somewhat higher than those of the other lines, except at competitive points.[365]

In later years the charges of the Southern Pacific naturally declined. Yet the rate on brick from San Francisco to Soledad in 1892 was 5½ cents per ton per mile on a haul of 143 miles, and that to San Miguel, 64 miles farther on, was almost 5 cents per ton per mile.[366] The average receipts per ton per mile upon the Southern Pacific system were 2.04 cents per ton per mile for all freight as late as 1885, in spite of the large quantity of long distance through traffic. Plainly the average receipts on local business were much greater. There seems little doubt but that the local rates in California were always distinctly higher than in the eastern states, although they have been lowered in recent years. The reason was in the main the relatively slight density of traffic upon all except the trunk routes, as well as the higher cost of coal, and the successful control of competition to which the Southern Pacific attained.

Rate Discrimination

Turning now from the absolute level of local rates to the question of the relations which those rates bore to each other, we come to the question of discrimination in California. Railroad discrimination may be personal, in which case it involves the quoting of different rates to different persons for the same or a similar service, or it may be local, as in instances where the interests of competing localities are concerned. Either kind of discrimination is of profound social importance, for, after all, it must be remembered that the significant question for the producing and distributing interests of a state is not how much they pay for transportation, but whether this amount, be it much or little, is less than is paid by their competitors. The remainder of the present chapter will be devoted to the discussion of personal discrimination; in the next chapter the topic of local discrimination will be considered.

The policy of granting special concessions in rates to special shippers was one which the Southern Pacific followed freely whenever it seemed likely to increase the profits of the company. There was never any disposition to apologize for this—it was known to be the practice of other roads as well, and the Southern Pacific accepted the system as a matter of course. The methods employed were various. One method was that of granting passes. Mr. Stubbs explained that passes were commonly issued in cases where shippers came to the Central Pacific and represented that they were offered transportation by the company’s competitors over such competitors’ lines. “They were our patrons,” said Mr. Stubbs, “shipping our way, and I may say that wherever we were satisfied that the statement was true, we generally met the case by giving a pass!”[367]

Sudden Tariff Changes

In addition to granting passes, the Southern Pacific discriminated by changing open rates suddenly for the benefit of persons fortunate enough to be advised in advance. Mr. Stanford once explained that individual items in the company’s tariff were changed whenever by so doing the company could encourage business in any direction.[368] Indeed, a tariff would scarcely be in force ten days before the necessity for changes would be apparent.[369]

How this might work was shown in 1892, when complaint was made of discrimination in favor of the Standard Oil Company. It was then alleged that the Central Pacific was lowering oil rates from $1.25 per hundred pounds to 82½ or 90 cents, when the Standard Oil desired to make shipments from eastern refining points to the Pacific Coast, the rates being subsequently raised when the shipments had been completed. A letter to the vice-president of the Standard Oil Company, bearing upon an episode of this sort, written under date of December 4, 1888, got into the public press, and seems to establish the fact that transactions of this nature were going on. The letter follows and is self-explanatory.[370]

Relations with Standard Oil

The fact that relations between the Southern Pacific and the Standard Oil Company were very close during the late eighties and early nineties is well established, not only by the correspondence just referred to, but also by other available evidence. In June, 1892, to cite a small but interesting episode, the Union Pacific issued a circular applying a rate of 78½ cents per hundred pounds on oil from Colorado points to the Pacific Coast. This rate had been in effect some years before, previous to the organization of the Western Traffic Association, under a rule which made Missouri River commodity rates a maximum on business originating west of the 97th meridian. The rule in question had never been withdrawn, although it developed that the Southern Pacific had forgotten it, and believed that a rate of $1.60 applied.

At this time the independent firm of Whittier, Fuller and Company was endeavoring to find a market for the products of its Colorado plant upon the Pacific Coast. In order to head off this anticipated competition, the Standard Oil representative in San Francisco took the matter up with the general traffic manager of the Southern Pacific, Mr. Gray. The latter at once wired to Mr. Munroe of the Union Pacific as follows:

San Francisco, June 10, 1892

J. A. Munroe,

Omaha, Nebraska

It is reported you are antagonizing Standard Oil Company in Colorado. I hope you will do nothing to affect our joint relation with that company with regard to Pacific Coast business. Have you observed the large tonnage you have lately been handling for them? I think it is so great you should be careful how you jeopardize your own interest in this direction.

R. Gray

Under pressure from the Standard Oil, the Southern Pacific followed up this telegram by refusing to prorate on any basis lower than $1.60. As a result the objectionable circular was withdrawn.[371]

Rate Rebates

A third method of granting concessions to shippers whom the Central Pacific desired to favor, was that of the rebate. Rebates were usually granted in exchange for an undertaking by the shipper to send all his freight over the lines of the railroads by which the rebate was paid. Mr. Stubbs once explained to the United States Pacific Railway Commission that the granting of rebates was a regular practice, not only of the Central Pacific, but of all its connecting lines. He explained the mechanism of the operation as follows:

Suppose that you were a merchant, and I should go to you to make a contract for the rail lines—because all the lines were parties to it between New York and San Francisco. It was not a Central Pacific affair. You understand that all the lines between San Francisco and New York, probably embracing all the roads in the East, shared in this reduced rate that was given to the merchant in consideration of his exclusive patronage—I should go to you and make a contract, and should say that it is impossible for us, in billing, to bill this to you at the net rates. We will bill it at the full rates, and when you receive your goods at the depot you pay the full rates, and we will refund to you the difference between the agreed rate under the contract and the rates which you have paid. Of course that is an overcharge. We overcharged those goods above the price that you had previously agreed to pay for the transportation of them.[372]

In the single year of 1884 the Central Pacific paid out $1,060,275.92 as refunds in behalf of itself and its connections.

Extent of Practice

Evidence showing how radically published rates were reduced by the practice of rebating is to be found in the following testimony by G. W. Luce, now freight traffic manager of the Southern Pacific, and long connected with the traffic department of that company. Speaking before the Interstate Commerce Commission of the period about 1887, Mr. Luce said:

Concrete Instances

The practice of quoting a lower rate to one person than to another in order to secure a specific shipment, or in consideration of an agreement for exclusive patronage of the railroad which granted the rebate, was clearly a case of personal discrimination. A concrete case which is illustrative of the general policy with which we are concerned was brought to public notice in California in the year 1886, when the Central Pacific was charged with rebating large sums to two favored shippers named Friedlander and Reed. It appeared in fact that the railroad had paid $6,000 at one time to Friedlander for rent of a wharf at Vallejo, and 25 cents a ton on a shipment to a certain Mr. Reed at Knight’s, on business destined to Vallejo. These payments were explained by the company as follows:

The Friedlander wharf vouchers were explained by showing that, in consideration of the rental of said wharf, Friedlander agreed to, and did, send the whole of his immense grain purchases on the Sacramento River, and at other competing points on the California Pacific, by rail instead of by steamer and sail; and when one remembers the enormous quantities of wheat and barley purchased by him, the “grain king of California,” there is no doubt that the contract was a source of much profit to the company. The Reed voucher for 25 cents per ton for loading wheat from his warehouse at Knight’s Landing, was fully explained by Reed himself. He had a warehouse at that point on the bank of the river, and water craft would take his grain at the same rate charged by the railroad company, loading and unloading the same at their own expense, while the railroad company required the shipper to do the loading. When asked to patronize the railroad, Reed told Mr. Towne, general manager, that he could have the grain carried by water at the same price that the Southern Pacific demanded, and that the steamers and schooners would do the loading without charge. In order to secure the business, Mr. Towne told Reed that if he would ship by rail, the company would allow him 25 cents per ton for loading, thus securing business for the road that would have been otherwise lost.

“Special” Contract System

In all probability the Reed and Friedlander cases were but two of a great many instances of similar favors granted to large shippers, and to shippers strategically placed on water lines in California. This is certainly implied in the testimony of Mr. Stubbs before the United States Pacific Railway Commission. Moreover, there is good independent evidence to the same effect in the available data concerning the “seasonal” or “special” contract system which became notorious in California in the late seventies and early eighties. The outlines of this last-named arrangement were as follows:

As early as May, 1878, the Central Pacific Railroad offered to guarantee a maximum rate of $2 per hundred pounds upon all grease wool, eastbound, moving over its lines from San Francisco to New York. In consideration of this guaranty it required shippers to undertake to ship all wool which they sent to destinations east of the meridian of Omaha by way of the Central Pacific and such connecting lines as the Central Pacific Railroad Company might elect. In case of failure to live up to the agreement, the shipper bound himself to pay an additional rate of 75 cents per hundred pounds upon all shipments made or which might have been made by rail during the time of the contract. Before this arrangement was insisted on, shippers were accustomed to forward their finer wools by rail at the $2 rate, but to send their low-grade wool by sea at a rate of 50 cents per hundred pounds.[374]

The system of special rates and exclusive contracts was not at first applied to westbound freight, nor to general merchandise, whether moving east or west. Late in July, 1878, however, notice was given of advances in westbound merchandise rates which in many instances amounted to as much as 100 per cent, and at the same time a tender was made of rates below the published tariff to shippers who entered into special contracts with the railroad for exclusive handling of their freight. The Central Pacific management placed the responsibility for the rate advance upon the Union Pacific, and gave publicity to a telegram of protest signed by Mr. Stanford.[375] There is reason to believe, nevertheless, that the Central Pacific management was cognizant of the matter from the first, and it is certain that Mr. Stubbs, general traffic manager of the Central Pacific, warmly defended the system.

Terms of Contract

Under the special contract plan, the railroad company agreed to charge not more than certain specified rates on articles named in the agreement shipped from New York, Pittsburgh, Cincinnati, and Chicago, and other points taking the same rates to the Pacific Coast. Rates on freight not specifically provided for were not to exceed those published in the general tariff. In case rival railroads cut rates, or in case competition by the Pacific Mail should become active, the shipper was to be protected. That is to say, it was declared to be the intent and purpose of the agreement to guarantee to the contracting merchant rates which should be as low as those charged and collected upon the same articles, between the same points, by any other all-rail route which might compete for the traffic of California at any time during the term of the contract.

The carrier also agreed that in the event of active competition with the Pacific Mail for the traffic between New York and San Francisco, the rates charged by rail during the period of competition should not exceed those current on Pacific Mail vessels by more than certain named amounts, ranging from 50 cents on goods taken at rates not exceeding $3.50, to $3 on goods taken at rates exceeding $6. This guaranty was not to be enforced at times when the rates of the Pacific Mail were subject to the control of the railroads.

In consideration of these assurances the shipper agreed to forward “by way of the railroads owned or operated by the contracting carriers and such other connecting railroads as might be designated from time to time, all goods, wares, and merchandise handled by the merchants entering into the agreement which might or should be purchased in or obtained from any point in the United States or Canada east of the meridian of Omaha, during the term of this contract, for sale or use on the Pacific Coast.”[376]

Rates under System

It appears that at the beginning the same rates were quoted to all shippers signing the contract. That is to say, two rate sheets were published, one known as the “white list,” and the other as the “pink list.” The white list contained the open, or public rate; the pink list contained the contract rate. Contracts were made with individual shippers that if they would give to the railroad line all of their traffic for a year to the exclusion of ocean carriers, they would have a rebate down to the figure fixed in the pink list. Somewhat later, however, jobbers on the Pacific Coast were individually dealt with, and the rates began to vary.

Mr. Stubbs says in describing this phase of the matter:

We tramped the streets here for a couple of months, explaining our ideas to the principal importers. By some we were met with cordiality and approval. Others were a little indifferent. Where a merchant liked the scheme, we would sit down with him, and, by examining his bills of lading by Cape Horn and his insurance policies, we would get an idea of the quantity he would ship by the several routes and the cost to him by the use of the several routes. We would then aim to make the rate so that upon the whole it would average about the same. We would average the rate while he was using the three routes.

Still later the railroads returned to the one-rate policy. To arrive at this rate they adopted a plan of “harmonization”; they averaged the rates upon various commodities which had been charged to various shippers and made a new schedule of rates, from which they varied as emergency might require or expediency advise, by the current method of rebating.[377]

Administration of Contracts

The railroad company reserved from the beginning the option of way-billing the goods and collecting freights according to the printed rates, agreeing to return the difference on presentation of vouchers to the general freight agent of the Central Pacific at San Francisco after the lapse of a reasonable time for auditing and adjusting the bills. The carrier also always insisted on the privilege of examining the shipper’s books in case it suspected a violation of the agreement. In some respects, the wording and administration of the contracts became more stringent in the later years. J. T. Doyle, a well-informed San Francisco attorney, asserts that at the beginning merchants were merely forbidden to import goods otherwise than by rail. Following this the prohibition was extended to the handling or buying of goods imported by sea by other parties. Finally the boycott reached to the offending importers themselves, and firms signing the contracts were bound not to sell or deliver goods to anyone who was in the habit of importing otherwise than by rail.[378]

Probably there was some difference in the treatment of different shippers in these matters. Mr. Hawley, a large importer of hardware, told a committee of the California legislature in 1884 that he was at liberty to buy a great many things “to sort up with,” even goods sent via the Horn. On the other hand, there were a good many cancellations of contracts for alleged violations, and shippers lived in continual apprehension.

Taken as a whole, the special contract system was an exchange of a rebate by the railroad for an agreement for exclusive patronage on the part of the shipper. Prior to 1878, bulky, low-grade articles moving between the Atlantic and the Pacific coasts usually went by sea. Rates were lower and saving in time not important. High-grade goods and freight requiring quick transportation went by rail. It was the idea of the railroad that if compelled to choose, Pacific Coast business men would prefer to import all their freight by rail rather than to bring it all in by water, and that this would substantially increase railroad revenues even though incidental concessions in rates had to be made.

Objections to Contract Plan

This special contract plan was objectionable to shippers for three reasons. In the first place, it seemed likely to increase the rates which they would have to pay. Although the railroad undertook at the inception of the scheme to meet existing rates by water, at least to such an extent that the total expense to shippers who made special contracts with the railroads would not be increased, it needed no great prescience to foresee that the exclusion of water carriers from the business of the Pacific Coast would sooner or later bring about an increase in transcontinental rates. When special contracts were offered to merchants in Stockton, Los Angeles, Marysville, and Sacramento, San Francisco importers made the additional complaint that their natural advantages as residents in a seaport town were neutralized.

In the second place, the administration of the plan required a supervision over the business of individual dealers which was extremely distasteful. It was asserted that the railroads placed men on the wharves to take the marks of goods brought in by sea, that they followed up the drays to see where the goods went, and that they inspected the books of merchants to make sure that importers who had signed contracts had no dealings with firms who still patronized the shipping lines. Nor was this a casual abuse, but a necessary feature in the plan.

Again, the system lent itself to discrimination. Mr. Stubbs insisted that contract rates were open to all shippers, large or small, who would sign the necessary papers, but it was not denied that the first arrangements were made with large dealers only,[379] nor that during at least one period the whole scheme involved the abandonment of a published and open tariff in favor of a system of bargains in which each shipper’s rate was individually and secretly determined. Under such a plan it was inconceivable that discrimination should not develop.

Ostensibly the offer of a special contract was one which shippers were free to accept or to reject as they saw fit. Practically, this was not so. If A took a contract and B did not, the latter’s ability to compete was seriously impaired. For B had to import some things by rail in any case, while the fact that less business in the aggregate reached the Pacific Coast by sea reduced the shipping facilities which B otherwise would have had at his command.[380]

Transcontinental Traffic Stimulated

Special contracts seem to have been a distinct success from the point of view of the western carriers. When they were introduced the percentage of transcontinental freight carried by the rail lines was small, probably not over 25 per cent of the whole. At the end of six years under the new system this percentage had risen to between 60 and 75 per cent.[381] The change was certainly not entirely due to the policy of special contracts, but part of the change may be attributed to the plan.

The policy was nevertheless given up in 1884 owing to the refusal of the eastern trunk lines to take any further part in it. According to Mr. Stubbs, the eastern companies believed that the advantage of the system hardly paid them for the confusion in their accounts incident to this method of conducting business. Moreover, there was legitimate apprehension lest the contracts provoke antagonistic legislation at Washington. Mr. Stubbs tried to argue the question, but without success.[382]