LOCAL RATES IN CALIFORNIA

Charging What the Traffic Will Bear

The general policy of the associates in dealing with problems of rate-making in which rival towns were interested, was the same as that which they adopted to meet differences in competitive power between different individuals. The tests applied were simple. What was the market to be reached? Had the community concerned an alternative route? Was there an alternative source of supply which limited the willingness of the community to pay freight? If so, was this second source of supply one served by the Central Pacific, or one which had the benefit of water communication, or possibly one which possessed a rival rail connection? To what extent should concession be made from the highest rate which could be charged, in order to promote the growth of business?[383]

The standard of rate-making just described, which may be summed up as a policy of charging what the traffic would bear, was not peculiar to the Southern Pacific at the time it was adopted, nor was it particularly repugnant to public opinion in California, taken as a whole. The error must not be made of ascribing to the western communities of the seventies and eighties a clear conception of the reasons of public policy which are properly urged today against the unlimited recognition in railway rate schedules of the competitive forces which still have free play in private business. Such ideas have slowly developed only during the last forty years.

Limited Encouragement of Business

Nor was the policy of adapting rates to the ability of shippers to pay inconsistent with the rendering of important service to business men in California and elsewhere who were seeking to expand their sales. Only a few illustrations need be given of the promotion of business by rate adjustments, but they will serve as examples of many more about which information is on record.

One case of this sort, which shows the willingness of the Southern Pacific management to respond to what they considered a reasonable request, had to do with the shipment of beer from a place known as Boca, in the state of Nevada, to San Francisco. It appears that a gentleman named Hess once conceived the idea of establishing a brewery at Boca. This town was 220 miles from San Francisco, and yet all of Mr. Hess’s beer had to find a market in the latter place, in competition with beer from Milwaukee and St. Louis. Mr. Stubbs, general traffic manager of the Central Pacific, welcomed the proposal to build a brewery in the West, and put in special rates to help shut out the eastern product. Every pound of brewery supplies, he reasoned, would have to go over the Central Pacific. It was all clear gain, like so much money picked up out of the ditch. In another case the Southern Pacific quoted special rates on sugar from San Francisco to the Missouri River, to enable the California Sugar Refining Company and the American Sugar Refining Company to sell their sugar at the Missouri River in competition with sugar reaching New York by water and thence moving westward.[384]

Still again, in 1884 an attempt was made to persuade the St. Louis-Kansas City lines to participate in a rate of 75 cents per hundred pounds on cast iron pipe from St. Louis to the Pacific Coast in order to encourage production in the Middle West in competition with that on the Atlantic seaboard. The matter of the 75-cent rate was taken up with J. W. Midgley, Trunk Line commissioner, who declined temporarily on December 24, 1884, on the ground that the rate would be a special one, and that there was an understanding that no special rates should be made prior to January 31 next ensuing, pending an anticipated agreement between the Transcontinental Association and its eastern connections.[385]

In the instances which have been given, the impelling motive of the Southern Pacific was frankly to increase its profit by increasing the movement of freight over its line. Yet the shipper was also benefited because his interests were substantially identical with those of the railroad company, and he warmly welcomed the powerful support of the railroad lines. These cases are not unimportant. The enumeration of such isolated instances, however interesting as they may be, affords no very clear picture of the aggregate of local rate adjustments with which the Southern Pacific interests were concerned. For this purpose a more systematic survey of the rate system administered by the Southern Pacific is necessary, and to this attention is now directed.

Distance the Governing Factor

The foundation of any system of railroad rates is the distance which commodities are carried. Generally speaking, the Southern and Central Pacific railroads, like other companies in the United States and Europe, varied their local charges with the distance between point of origin and point of destination. To illustrate this point briefly, two charts are here presented.

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The first chart depicts the rates on second-class freight and those on grain in January, 1876, between Sacramento and points in the Sacramento Valley north of that city. Second-class freight at this time on the Southern Pacific included articles such as coal oil, agricultural implements, machinery, furniture, crated glassware, and wines and liquors. Freight of the description mentioned ordinarily moved north from the city of Sacramento. Grain, on the contrary, moved south. It will be observed that rates on the lines of the Southern Pacific increased with considerable regularity as point of origin or destination proceeded north into the non-competitive territory around Tehama and Redding.

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The second chart displays rates between San Francisco and stations in the San Joaquin Valley as far south as Fowler, 205 miles distant from point of origin. These rates are for the year 1892.

Non-competitive rates in the San Joaquin Valley in 1892 increased as distance grew greater, much as they had increased in the northern territory sixteen years before. The rates given are for a few commodities only, namely, agricultural implements, barbed wire, boots and shoes, coal, and grain; but these are typical of the construction of schedules on a much larger number of articles. The extent of the increase was relatively greater to points beyond Lathrop because of the effect of water competition on San Francisco Bay.

Grades and Traffic Density

These two schedules illustrate a fact which could be readily proved by repeated examples, namely, that local rates in California were and are first based on the element of distance. Possibly such a fact might be assumed; yet in California, as elsewhere, the statement that railroad rates have varied with the distance traversed needs promptly to be qualified in order to be true. For, first of all, it was evident at the beginning that costs of transportation were not solely determined by distance, and that other considerations had to enter in. One of these other considerations was the matter of grades. Because of the conditions under which the Central Pacific was constructed, to say nothing of the extremely mountainous character of certain portions of the Central Pacific lines, differences in the rates per ton per mile between the valley and the mountain sections were introduced by the company at the commencement of its history.

A second characteristic of railway traffic which had a profound effect upon early railroad tariffs was the relative density of business. Mr. Stanford advanced the theory that the railroad should strive to secure a certain average earning per car; and in sections where business was light, as well as upon commodities which were bulky in proportion to their weight, a high average rate per hundred pounds was accordingly charged.

Relative grades and relative density of traffic were not the only conditions relating to cost which influenced the varying level of transportation rates in California, but, apart from distance, they were perhaps the most important, and in any case they may be taken as illustrative of the group of circumstances to which they belong. In addition to the whole class of facts relating to cost, however, the Southern Pacific gave heed to matters of value of service in the fixing of its rates. Nothing will be said here of the principles of classification of freight, principles which have to do in part with the value of the service rendered; nor of individual differences between shippers, which have been alluded to in the preceding chapter in the discussion of personal discrimination. The effect of competition in distorting distance schedules in California will, however, be dealt with at some length.

Water Competition

It has already been pointed out that the presence or absence of water competition has always been a most important factor in determining the relative adjustment of local rates in the state of California. This competition has been extremely pervasive. Although the scarcity of good harbors and the location of the Coast Range of mountains hinders access from the sea into the interior of California, yet, on the other hand, the ports of San Diego, San Pedro, and San Francisco, and the long stretches of navigable water on the Sacramento and San Joaquin rivers have opened the possibilities of water shipment to a multitude of inland towns. Indeed, in 1883 General Manager Towne, of the Central Pacific, submitted to the State Railroad Commission a list of fifty-two points in California at which the Central Pacific and its leased lines met direct water competition. The water routes included San Francisco Bay and the Sacramento River and sloughs, Suisun Bay, Napa River, San Joaquin River, Feather River, the Pacific Ocean, Wilmington Bay, and the Colorado River. In addition, Mr. Towne enumerated eighty-two points where rates were affected by proximity to the competitive points previously mentioned.[386] On the face of things, the extent of the water competition thus indicated was sufficient to warp almost beyond recognition the simple distance scale of tariffs which a railroad completely protected from competition would naturally apply.

Low Rates to Competitive Points

An illustration of the effect of the water routes on local rates is found in the fact that the round trip fare from San Francisco to Sacramento by rail in 1878 was $3, while that to Woodland was $4.25.[387] The San Francisco Chronicle declared in 1879 that, according to a recently published schedule, the movement charge for grain, potatoes, vegetables, and wool from Lathrop to Mojave was exactly the same as to Ravenna, Newhall, or Los Angeles. The first-named distance was 288 miles, making the movement mileage rate 7.2 cents; the second-named distance was 337 miles and the rate per mile was 6.2 cents; the third distance was 356 miles, the rate being only 5.8 cents; and the distance to Los Angeles was 388 miles, or a mileage rate of 5.4 cents. The truth of the statement of the Chronicle is established by data published by the State Commissioners of Transportation in 1877, which show the striking contrast that existed in 1877 between non-competitive rates in the interior valleys and rates to points which enjoyed the advantage of nearness to the water routes.

Low water-compelled rates to Sacramento and to Los Angeles were in force as early as 1877. Yet this was only a beginning, and as time went on and the number of towns in California increased, the practice of recognizing the force of water competition was extended. Moreover, the Southern Pacific began to quote lower instead of merely equal rates to more distant points which enjoyed the advantage of nearness to a water location. Since the ability to make use of a competing railway afforded opportunities similar to those afforded by ability to use a water route, low rates were also extended to towns served by more than one railroad line. All this greatly complicated the rate situation in the state, gave rise to numerous complaints, and renders difficult the task of concise description.

Rates to Intermediate Points

Official confirmation of the general correctness of the complaint of discrimination which reached the public press from time to time is found in a comprehensive investigation of railroad rates in California which the Railroad Commission of that state undertook as late as the year 1916. This inquiry was provoked by an application by the Southern Pacific, Santa FÉ, and other railroads in California for relief from the clauses of the amended state constitution and of the California Public Utilities Act prohibiting greater charges to intermediate points than were collected on shipments to more distant points over the same line. Although the legal aspects of the case were therefore the result of modern legislation, the facts brought out were typical of conditions of long standing.[388]

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Exhibit No. 1 in the case in question referred to class rates in the San Joaquin Valley. It appeared that class rates between San Francisco, San JosÉ, Port Costa, Stockton, Sacramento, Marysville, and intermediate points to Los Angeles, were 60 cents per hundred pounds first-class, and corresponding sums less for the lower classes. These rates were shown to be controlled by the class rate of the Pacific Coast Steamship Company, which quoted a through first-class rate of 52 cents, including wharfage and handling, between San Francisco and Los Angeles via San Pedro. On all-rail shipments down the valley, as well as on shipments over the coast rail route, however, water competition was not effective. The rate from San Francisco to Simi, 429 miles from San Francisco, was therefore 80 cents, and that to Acton, 415 miles from San Francisco, was 83 cents, although shipments from San Francisco to Los Angeles passed through Simi and Acton on their way to Los Angeles over the coast and San Joaquin Valley routes, respectively.

A condition similar to that at Los Angeles and at points in the San Joaquin Valley was developed in connection with shipments from San Francisco to Stockton. The diagram on page 266 will show the relative position of these two towns as well as that of an intermediate place named Banta.

The distance between San Francisco and Stockton was 91 miles, and the first-class rate was 10 cents per hundred pounds. This rate was identical with the rate charged by boat lines operating on San Francisco Bay, and on the Sacramento and San Joaquin rivers. But although these boats touched at some intermediate points, their competition was not everywhere effective; so that the first-class rate from San Francisco to Banta, 74 miles, could be and was 17 cents, although freight from San Francisco passed through Banta on its way to Stockton.

Other Instances

Still another illustration of the influence of water competition upon local rates in California may be drawn from the territory immediately north of San Francisco Bay. The towns involved in this adjustment were San Francisco, Sebastopol, and Santa Rosa, as shown in the diagram on page 268. The first-class rate from San Francisco to Sebastopol on the Northwestern Pacific was 23 cents. This rate was shown to be limited by the competition of a rail and water line, including a steamship haul from San Francisco to Petaluma and a haul over an electric railway from Petaluma to Sebastopol. The distance from San Francisco to Sebastopol over the Northwestern Pacific was 58.5 miles. The distances from San Francisco to the towns of Kenilworth and Santa Rosa, on the same railroad, were 45.7 and 52.5 miles, respectively. Shipments to Sebastopol passed through these places, but because neither enjoyed the advantage of an alternative route, the first-class rate to Santa Rosa was 25 cents and that to Kenilworth 28 cents—materially more than was charged for the longer haul to Sebastopol.

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While instances of the extreme discrimination of a greater charge for a shorter than for a longer haul were shown in 1916 to be usually the result of water competition, it has already been suggested that not all cases of discrimination were of this sort. A particularly striking case of unequal rates due to rail competition alone was brought out in the same proceedings from which the preceding illustrations have been drawn, by the application of the Atchison, Topeka and Santa FÉ Railway to continue lower rates from Los Angeles to Mojave, California, a distance of 212 miles, and to Lindsay, a distance of 411 miles, than were charged to Kramer, an intermediate point 174 miles from Los Angeles. The relative position of the points is shown in the diagram given above.

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In this case the rate to Mojave at the time application was filed was 52 cents first-class, and that to Lindsay 70 cents, while the rate to Kramer was 78 cents. But at both Mojave and Lindsay, the Santa FÉ had to meet the competition of the short Southern Pacific line, while at Kramer this competition was not effective.

Development of State Retarded

The data which have been presented show that, while the system of local rates in California was based originally upon distance, it soon became profoundly modified by conditions of cost, and still more by the presence of competition at strategic points, and by the occasional necessity of reducing rates in order to stimulate the movement of freight. The charges for short hauls in the interior valleys where the Southern or Central Pacific possessed a monopoly were made high, because traffic was scant and because the railroad was able to exact a monopoly return. Rates were also regularly progressive under these conditions. In sharp contrast to the practice which obtained where the Southern Pacific was the only carrier, rates to points located upon the coast, on navigable rivers, or on competing railroad lines were relatively low and were often extremely irregular.

It is generally difficult to criticize a system of rate-making upon a priori grounds because the test of such a system is to be found only in the form which it gives to the industrial life of the community to which it is applied. There is reason to believe, nevertheless, that the local rate structure created by the Southern Pacific gave an advantage to a few shippers and to a few towns which affected unfavorably the development of the state. This is the fundamental objection to any system of rates in which competitive influences are recognized to an unlimited extent.

Without going further into the matter at this point, we will content ourselves with adding to our description of local rates in California some observations upon the attitude of California shippers with respect to railroad charges.

Conflicting Claims of Cities

The rates of the Southern Pacific and of the Central Pacific railroads were unpopular in California because they were believed to be too high. Beyond this, and when it came to questions of relative adjustments, each community looked at the relations of rates which interested it from the narrow viewpoint of its individual advantage. Indeed, when one reviews the course of the controversy between railroad and shipper in the state, it seems very clear that, apart from questions of excessive profit, the objections which California cities entertained toward the irregular and unequal rates charged by the Southern Pacific Company were only slightly based on considerations of general policy, but were, on the contrary, due to the feeling of various towns that their distributing areas were unfairly circumscribed by the manner in which railroad rates were arranged.

One small piece of evidence to show that competition between rival towns or producing districts was the reason for some of the most bitter attacks upon the railroad, may be found in the complaint of the anti-monopolists of Tulare County in 1885 that their fruits, which ought to have found a market in the southern parts of the state and in Arizona, were subjected to higher freight rates than were the fruits of Sacramento and of San JosÉ, points more than 200 miles to the north.[389]

A few years earlier the merchants of Stockton insisted that the rates out of Stockton were extortionate as compared with the rates out of San Francisco. The distance from Lathrop to Stockton was said to be 10 miles, and the railroad rate per ton on wheat was $1.20, or 12 cents per mile. The distance from Lathrop to San Francisco was 82 miles, or more than eight times the distance to Stockton, but the price per ton for wheat was only $2.50, or about one quarter the price per ton per mile in the first instance. The price per ton from Lodi to Stockton was $1.40, and to San Francisco $2.50; but whereas the last-named sum was less than twice the former, the distance from Lodi to San Francisco was eight times as great as the distance to Stockton.[390]

In addition to their contention that mileage rates on shipments into Stockton compared unfavorably with rates on shipments into San Francisco, Stockton residents made the general charge that rates up the San Joaquin Valley were generally less than the rates down the valley. The rate from Stockton to Merced was said to be $6.80 per ton, but the rate from Merced to Stockton was $3.40. Stockton objected to forcing of the San Joaquin Valley to make San Francisco its market.[391]

Interstate Commerce Decision

Complaints similar to those voiced by Stockton were registered by the people of Los Angeles. In the eyes of inhabitants of that city, the rates on northbound freight from Los Angeles consigned to the San Joaquin Valley were relatively higher than the rates from San Francisco south into that same valley. Yet, dissatisfied as Los Angeles was with the relation which her rates bore to those out of San Francisco, it seemed to other cities in the south that her position was on the whole more favorable than was that of her neighbors. In 1889 a dealer in the city of San Bernardino protested against being forced to pay a higher rate from eastern points than was charged the city of Los Angeles. He showed that the rate on agricultural implements from the Missouri River to San Bernardino was $1.27 per hundred pounds while to Los Angeles it was $1.07. On stoves the rates were $1.19 and 99 cents, respectively, and on school furniture $1.55 and $1.35. This preference was alleged to be discriminative and illegal.[392]

In a decision approving the discrimination against San Bernardino, the Interstate Commerce Commission in 1890 remarked that originally southern California had been served from San Francisco direct; and that San Francisco jobbers had covered its territory. When the railroads reached Los Angeles they found it to their advantage to grant it low rates, not so much because it lay near the Pacific Ocean as because the interests of the Southern Pacific and especially of the Santa FÉ demanded that some point in southern California should be given such a rate that merchandise from the East could be brought there all-rail and from that point be distributed. The fact that water competition was not the only influence which determined the Los Angeles rate from the eastern states was indeed shown later by the fact that the port of Los Angeles, San Pedro, did not receive a terminal rate until 1910, although Los Angeles itself had been given terminal privileges at least twenty years before.[393]

Stockton, Los Angeles, and San Bernardino thus illustrate in their conflicting claims the constant effort of cities in California to extend the area over which they might distribute goods. Among other instances of dispute between California cities may be mentioned the demand of Santa Barbara in 1907 to be made a Pacific Coast terminal,[394] and the angry contentions of Santa Clara, San JosÉ, Marysville, Santa Rosa, and Fresno in 1914 over the question of relative railroad rates from eastern points.[395] The characteristics of the system of transcontinental rates which were involved in these complaints will be discussed in the following chapter.