THE TRANSCONTINENTAL TARIFF

Market and Railroad Competition

The chief difference between the local situation in California and the condition of affairs which prevailed in the case of through shipments to eastern points, lay in the fact that the competition of markets and the rivalry of competing carriers played a more important part in the through shipments than they did in local shipments. By market competition we mean the attempt of geographically distinct producing centers, each aided by a separate group of railroad lines, to sell in a common area of consumption. Such competition occurred, for instance, when California oranges sold in the Mississippi Valley in competition with oranges from Florida, or when California lemons sold in the same territory in competition with Sicilian lemons imported at New Orleans or at New York. We have already seen that cities competed with each other within California itself, but this competition was less important within the state than it was in the case of hauls across the continent.

It should be recalled that the Huntington interests possessed a virtual monopoly of local business, while the extent of the competition between carriers on through traffic may be briefly indicated by observing that the Central and Southern Pacific companies had direct relations with no less than six other transcontinental railroads, namely, the Union Pacific, completed in 1869; the Santa FÉ, which reached the town of Deming and effected a connection with the Southern Pacific in 1881; the Texas Pacific, built to El Paso in 1882; the Northern Pacific, opened from St. Paul to Portland in 1883; the Canadian Pacific, completed in 1887; and the Great Northern, which was finished in 1893. None of these railroads reached San Francisco except the Santa FÉ, which obtained an independent California connection in the late nineties. The Santa FÉ entered Los Angeles, however, in 1885, and the Union Pacific enjoyed a connection with Portland through the Oregon Short Line and the Oregon Railway and Navigation Company as early as 1884. From Portland, Los Angeles, and Vancouver, freight could be distributed by water all up and down the Pacific Coast.[396] Moreover, the competitive relations which Pacific Coast cities bore to each other made it necessary to keep their rates from the East on an approximate parity, and caused the Central Pacific to be affected by charges which were not on their face applicable to any point in which that company had an interest. There were combinations in respect to transcontinental railroad business from time to time, but none sufficient to control rates except for short periods.

Transcontinental Rate Adjustment

These differences in conditions between state and interstate traffic doubtless influenced Mr. Huntington and his advisors when they came to establish what is known as the transcontinental rate adjustment. Yet any examination of the through rates charged by the Central Pacific will show that in their relation to each other, at least, these rates were built upon much the same principles as the local rates discussed in the previous chapter. There is no essential difference between a rate schedule which applies a lower rate between New York and San Francisco than it applies between New York and Denver, and one which provides a lower charge between San Francisco and Los Angeles than between San Francisco and Bakersfield.

The tendency in public discussion is to regard the transcontinental rate structure as different from all other structures. It is not different, either from the rate systems in force in some other parts of the country, such as the Southern classification territory, or from the general arrangement of rates in business local to California. The reason why transcontinental rates to Pacific terminals are low is that there is competition at terminal points. The reason why rates to intermediate stations are high is that competition is lacking at such places. The reason why local rates between San Francisco and Los Angeles are low is that shipments must be diverted from the water lines; while the rates from San Francisco to points in the upper San Joaquin Valley are high either because competition is absent or because it is less severe. Similar general causes in both cases produce similar results.

Rate Structure

It is necessary to describe the transcontinental system at this point in order that the reader may have before him the outlines of the rate scheme for which the Huntington-Stanford group were in part responsible; but in view of the very general understanding which the public has of the system, the description will be brief. A summary account is as follows:

The primary fact in transcontinental rate-making is that railroad rates between the Atlantic and the Pacific coasts of the United States were originally made, and have remained relatively low. The lowest rates quoted, however, have never until recently been available at all points in California, Oregon, and Washington, but only at certain selected cities. The towns to which low rates have been quoted under the transcontinental adjustment are called Pacific Coast terminals. Terminals, being mostly located on the seaboard, or within easy reach of it, enjoy rates low enough to induce their residents to patronize the rail lines rather than the water lines around the Horn or the combined rail and water routes across the Isthmus of Panama and the Isthmus of Tehuantepec. This does not mean, of course, that rail rates to terminals have been as low as water rates, but it does mean that, all conditions of shipment, including speed, safety, and regularity, being taken into account, the advantages of shipment have been equalized. The rates to and from all terminals have been uniformly the same.

A characteristic feature of the transcontinental rate system is that the rates to towns and cities in the vicinity of terminals are determined by the absence of water competition. Inasmuch as a shipper located at an inland point is obliged to send his goods to the seaboard before he can avail himself of the advantage of a water haul, it becomes possible to charge him a rate equal to the sum of the terminal rate and the local rate which he will have to pay without causing a diversion of his freight from the rail to the water lines. It is true that there is a certain limit to the total charge which can be demanded from such a shipper, due to the circumstance that at some figure the expense of a direct haul from the local point in question to the final destination of the goods upon a non-competitive mileage basis will be less than the combination upon the terminal, but this limit is effective only in the case of communities located a considerable distance to the east of the seaboard shipping point. One result of the application of this system to local points is that towns situated upon the direct line between eastern cities and Pacific terminals often pay higher rates than are charged upon freight passing through these places and carried possibly several hundred miles beyond to the coast terminals. Local communities so situated are known as “intermediate” towns.

These three features of the transcontinental rate structure, namely, that rates between the Atlantic and the Pacific seaboards are low, that the lowest rates are charged only to selected towns, and that rates to places other than terminals are made by combination upon the terminals, are the elements which have given character to this adjustment, and are therefore the points in it which are best known. To make a statement of the broad outlines of the plan complete, however, two other statements must be added.

Group System in the East

The first additional characteristic of transcontinental rates is that on eastbound business, particularly in the case of the products of California agriculture, the same rates are applied from intermediate as from terminal points. This is to place the shipping communities of the state all upon an equal footing. The second feature has reference to conditions upon the eastern end of the transcontinental haul, rather than upon the western. In the eastern part of the country the system of terminal and intermediate rates is not applied upon transcontinental business. Instead, it has been customary to divide the area east of the Rocky Mountains into a series of great groups, now ten in number, and to quote to each of these groups rates which are either the same in all cases, or which increase as the distance grows greater.

This failure to apply in the East the same principles which govern in the West has been doubtless due to the insistence of cities like Chicago that her rates be at least as low on shipments to and from the Pacific Coast as the rates which New York enjoys, as well as to the desire of railroads which begin at Chicago or the Mississippi-Missouri River to encourage the growth of business in the Middle West. Mr. Huntington was credited with the desire to establish rates from the Missouri River which should be lower than rates from New York, and the reasons which were in his mind may easily be imagined. Such rates were actually in effect between 1887 and 1894, but the principle of graded charges was abandoned as a result of a rate war which broke out in 1894.[397]

Terminal Points

This brief description of a complicated rate adjustment will show that in through as well as in local rate-making the Central Pacific management yielded to the unequal pressure of competition, and particularly of water competition, at different points. Generally speaking, the most important of all the forms of competition which the company had to meet was water competition. Common alike to local and to through transportation, this was important because it was difficult to control, because it operated on a low cost basis, because it offered transportation facilities to a very wide variety of classes of goods, and because its possibilities for expansion were indefinite.

It is a mistake to believe that only low-grade commodities have been shipped by the water routes. While it is true that the principal movements by water are of the coarser freights, such as hardware, rails, pipe, sugar, hardwood lumber, and asphaltum, yet there has always been also a considerable transportation of higher grade articles, including cotton ducks and denims, beans, canned goods, and a large number of kinds of general merchandise. Indeed, all the canned salmon and a very large percentage of the canned goods, together with two-thirds of the beans produced in California, originate near enough to the coast to reach tide-water at an expense not exceeding 20 cents per hundred pounds. The Interstate Commerce Commission has remarked that almost every article which moves from the East to the Pacific Coast has been at times carried by the ocean,[398] and the truth of this statement is generally conceded in discussions on the water business.

It was the pervasive character of water competition, and the fact that such competition was felt upon the Pacific Coast and not at interior points, which originally established the position of the Pacific terminal.[399] A terminal point, be it recalled, was, and is, under the transcontinental system, a place which enjoys rates low enough to attract traffic from the water to the railroad lines—a point also upon whose rates the rates to other points are based after the manner of the “basing point” system. San Francisco was a terminal. So was Stockton, Sacramento, Port Costa, Richmond, Oleum, Antioch, San JosÉ, Santa Clara, Los Angeles, and a considerable list of other towns. At the beginning the city of San Francisco received a lower rate than any other town because the competition of the water route between New York and San Francisco was most evident. Mr. Stanford, however, disclaimed responsibility for this limitation. His eastern connections, he said, were to blame. The Central Pacific was willing to be more liberal from the start, but the other lines would not join with it in establishing through rates, and insisted on their locals. For this reason goods originating at interior points were often hauled to San Francisco, and then back east, in part over the same line by which they had come.[400] Such a condition was highly unsatisfactory to California towns other than San Francisco, yet by 1873 Sacramento, Marysville, and San JosÉ had been given terminal rates,[401] and still later the list of terminal points was very greatly extended. In 1910 there were 152 terminal cities on the Pacific Coast, of which 97 were in California.[402]

Dissatisfaction with Rate System

Owing to the peculiar intensity of competition at their doors, Pacific terminals therefore enjoyed exceptional advantages in rates as compared with their less favored neighbors. On the other hand, even the terminal cities expressed some dissatisfaction with the transcontinental adjustment. It appears, for instance, that the growth of great distributing centers was difficult under the scheme of rates which was applied. So long as terminals were few in number, a considerable concentration in business was possible. But when the terminals multiplied, the territory controlled by any single city became limited by the low rates accorded to the nearby terminal cities, and expansion in any one spot became difficult. This rendered the volume of business of the Pacific Coast jobbers comparatively small. In the case of the Business Men’s League of St. Louis v. the Atchison, Topeka and Santa FÉ, already cited, the two eastern firms of most prominence in the proceedings were the Simmons Hardware Company, of St. Louis, and Hibbard, Spencer, Bartlett and Company, of Chicago. The former of these firms then did business in every part of the United States except New England, while the representatives of the latter testified that the operations of his house were limited only by the confines of the earth. Competition by concerns of this magnitude was difficult for California houses to meet, especially at times when the eastern firms used the Pacific Coast as surplus territory in which they could afford to operate at a low margin of profit.

Another ground for dissatisfaction on the part of the coast cities arose out of their belief that the system as applied, in spite of its recognition of the advantages of the Pacific Coast, still fell short of the real equities of the situation. It was insisted that San Francisco was improperly shut out from Denver, Cheyenne, Salt Lake City, and Ogden. The Southern Pacific was charged with carrying hats from New York by way of the Union and Central Pacific routes and then down the San Joaquin Valley to Yuma at a lower rate of freight than the San Francisco dealer could send the same goods from his city to the Colorado River.[403] This same complaint was repeated by Mr. Leeds, of the San Francisco Traffic Association, in October, 1892, with the observation that if the same rate per mile were applied on eastbound traffic from San Francisco that was charged on westbound business from Chicago to Utah common points, then San Francisco would do the lion’s share of the Utah business instead of a mere 16 per cent.[404]

There is no doubt that a good deal of dissatisfaction with the transcontinental system was felt first and last by shippers to and from the terminal cities. Yet, after all, the situation of these cities as a group was excellent. The communities which were really handicapped were the towns intermediate between the Pacific terminals and the East, towns which paid higher rates for less service than did the terminal cities, and which found that this condition not only increased the cost of living to their consumers, but prevented their merchants from enjoying a profitable distributing trade.

It seems probable that the associates intended from the beginning to charge the mountain towns more on through hauls than was exacted from towns on the coast. Huntington relates a conversation which took place at Carson, Nevada, in 1861, between Stanford, Dr. Strong, Mr. Crocker, and himself, representing the railroad, and some twenty representative men of Nevada. The Nevada people observed that Huntington kept a pretty good hardware store, but that he was likely to leave it in the mountains if he started to build a railroad in Nevada. Huntington replied that he would look out for that, but, he continued, when the road was built he proposed to charge through rates which, while less than the Nevada people were paying for goods which then came to San Francisco by boat and were subsequently teamed across the mountains, would be materially greater than the rates to San Francisco. “We shall charge you for bringing back,” said he, “almost as much as we shall charge from New York.” After the road was built Huntington says he met one of these same men with whom he had talked in 1861. “Said I, ‘You recollect that talk we had in the Curry House in 1861?’ ‘Yes, oh yes.’ Well, we talked about that. He said, ‘You’ve got me there, Huntington.’ ‘Well,’ said I, ‘I said you would grumble. Now,’ said I, ‘you shut up.’”[405]

Objections

It is to be presumed that Mr. Huntington’s rejoinder was effective in the particular discussion which he relates. Yet the grievances of the interior towns found full and repeated expression after 1869, and indeed are still emphatically presented at the present day. The more fundamental criticisms of the transcontinental rate system are the following: The principal objection directed against the whole adjustment is that it leads to charges to intermediate points which are prima facie unreasonable. Speaking of the rates on iron and steel, a representative of the Traffic Bureau of Utah called the attention of the House Committee on Interstate and Foreign Commerce in 1918 to the fact that the rate on iron and steel articles for export from Chicago territory to Pacific Coast terminals was 40 cents per hundred weight or 3.54 mills per ton per mile. He continued:

They take an identical carload of the same commodity, and when it is going to the Pacific Coast for domestic consumption the rate is 65 cents a hundred, or 5.76 mills per ton-mile. If they were to apply that rate at the Utah common points—the same 65-cent rate—it would pay 8.65 mills per ton-mile. But they say, “We cannot afford that; you must pay 10.84. We haul it for a man in Russia for 3.54, but that is only the out-of-pocket cost. We will make you a rate of 10.84, which is a lower rate than you are entitled to.

I think any article, whether it is transportation or anything else, that could be produced at some profit at a price of 3.54, when you pay 5.76 for it you are paying a handsome profit; and if you pay 8.65 for it you are paying an abnormal profit; and if you pay 10.84 for the same thing you are being outrageously imposed upon, which is what we are doing.”[406]

The second objection of the interior cities is that the system of transcontinental rates limits the territory in which intermediate wholesale firms can do a distributing business; and the third ground of complaint, resulting from the other two, is that the policy of permitting low rail rates to the coast cities has the effect of building up large cities on the seaboard at the expense of the whole interior country.

Reply of Railroads

In replying to these objections the coast towns take the position that they are not especially concerned with the rates to intermountain places, nor indeed with the rates which the railroads make from coast to coast, except in the sense that the greater the number of carriers which participate in transcontinental business, the better the service is likely to be. Secure in the possession of adequate water connection, they do not expect to pay higher rates than they have paid in the past, whatever policy the railroads may adopt. They have no controversy with the intermediate territory, and only support the present adjustment because they conceive it to be for the best interests of the country as a whole.

The burden of the defense therefore falls upon the railroads, and the railroads assert that the policy of quoting low rates to meet the force of water competition is necessary if the comparatively moderate rates to intermountain territory are to be continued. Unless—said Mr. Spence of the Southern Pacific, in his recent testimony before the House Committee on Interstate Commerce—the rail lines are permitted to make rates which will hold the through business, the terminal roads will lose all of the net revenue derived from the port rate upon what is a very large volume of traffic. The millions of dollars involved cannot be withdrawn from the net revenues of the railroads without impairing their efficiency and usefulness, while to compel the carriers to apply sea-compelled rates to all traffic would yield an inadequate revenue, because it would mean that the traffic as a whole would be carried at rates which were not sufficient to cover all the elements of cost, including fixed charges and other similar expenses.[407]

Further Comments

The most casual description of any basing system such as the one which the railroads apply to transcontinental freight, suggests at once several matters in respect to which special defense and justification are required. One just cause of complaint arises out of the fact that the through rate to any point except to a basing point is made up by the addition of two rates, each of which includes an allowance for the cost to the carrier of providing terminal facilities, or four terminals in all, whereas no actual shipment makes use of terminal facilities at more than two points, namely, the place of origin and the place of destination.

A second cause for criticism of a basing system is due to the striking disregard of distance which is inherent in it. Shippers are not only apt to feel that for reasons of natural right rates for transportation should vary with the distance moved, but, as we have seen, they are usually quite incapable of being convinced that the costs of shorter hauls are not less than the costs of longer ones, so that for this reason also the nearer places should enjoy the lower rates. Again, and this also has been suggested in the preceding discussion, a basing system is attacked because it is said to centralize business unduly by forcing the distributing business into the control of a few localities such as the Pacific Coast terminals, to the exclusion of outlying cities which could handle it more cheaply and more conveniently under a proper adjustment of rates, by reason of their greater nearness both to centers of supply and of consumption.

There is no question that the rate system upon the Pacific Coast made it difficult for intermediate and local towns to import supplies directly from the East and to distribute them through their own organization. This was not the result of the difference between terminal and local rates alone, but was the combined result of the practice of the transcontinental carriers with respect to rates and their practice with regard to carload shipments. That is to say, the carriers not only quoted generally lower rates, carload against carload, and small consignment against small consignment, to terminal cities than to intermediate or to interior towns, but they also granted many carload ratings to terminals which were altogether denied to their interior competitors. In some cases this occasioned an extraordinary difference in the total charge.

On the other hand, it should not be forgotten that to encourage distribution through Pacific Coast terminals was not necessarily to concentrate the whole business of distribution. The competition between the Pacific terminal and the eastern jobber was just as real as that between the Pacific terminal and the intermediate point. It is sometimes forgotten how active this eastern competition was. That it continually threatened the western distributor is shown by the fact that in spite of the advantages enjoyed by western terminals, 50 per cent of the jobbing business in the hardware trade in southern California was done in 1902 by houses east of the Missouri River, so that the Interstate Commerce Commission expressed the opinion that in the absence of some distinct advantage in the rate it would be very difficult for Pacific Coast dealers to hold their own.[408] In central California the proportion of the jobbing business done by eastern firms ranged from 25 to 40 per cent. Certainly no decentralization in business would have taken place had the California distributors been compelled to withdraw in favor of men in Chicago and St. Louis, nor would the aggregate cost of getting goods from producer to final consumer have been decreased.

Inconsistency

It has been made clear in the discussion of transcontinental rates, that the transcontinental carriers as a group have not been consistent in applying the principles upon which they rely in justification of their charges. Not only have towns like Los Angeles been given terminal rates for reasons of general policy, but cities in the Mississippi Valley, upon the other end of the transcontinental haul, have been granted the same rates as New York on business to and from the Pacific Coast, in order to place them on an equality with points on the Atlantic seaboard. As the Interstate Commerce Commission remarked when the matter was brought to its attention, there is no logical ground for recognizing the desire of Chicago to compete with New York, and for refusing to accord the same privilege to Denver.[409] If market competition is to be recognized in one instance, it should be in another.

It is a striking fact that when the commission was considering the question of transcontinental rates in 1910, it appeared that the great bulk of traffic destined to intermountain cities originated at Chicago or at points west. Thus out of 21,000,000 pounds of carload freight moved from eastern territory to Reno, Nevada, during the year 1908, only 4,500,000 pounds originated east of Chicago, and of approximately 1,000,000 pounds of less than carload freight concerning which data were available, only 10 per cent originated at the Atlantic Coast cities of New York, Boston, and Philadelphia. The commission found in the case in which these facts were brought out that taking traffic to Reno as a whole, 75 per cent of it had its source between Chicago and Denver.[410] On this traffic, at least, the effect of water competition was slight, and yet it is upon the assumed presence of water competition that the transcontinental system primarily rests.

Not Responsive to Changed Conditions

Nor have the transcontinental carriers been quick to recognize changes in conditions which, temporarily at least, have eliminated water competition from coast to coast. When the Panama Canal was opened, considerable apprehension was felt by the carriers lest the new all-water route between the Pacific and the Atlantic seaboards should divert a substantial portion of the transcontinental traffic formerly handled by the railroads. On this ground the railroads applied to the Interstate Commerce Commission, and received permission not only to continue the practice of quoting higher rates to interior towns than were charged between eastern points and the Pacific Coast,[411] but actually to increase the difference upon a selected list of eastbound articles.[412] So much was directly in line with previous action and was to be expected.

The carriers were not, however, so ready to recognize the interruption of canal traffic as they had been prepared to take notice of its beginning, and in spite of slides and war conditions which suspended water competition, it took an order of the Interstate Commerce Commission to secure an equality in the treatment of intermountain and seaboard cities to which the former in accordance with the fundamental theory of transcontinental rates were entitled under the new conditions.[413]

In forming an opinion upon the rate system of the Central Pacific, however, too much weight must not be attached to inconsistencies in application so long as these are not altogether arbitrary, any more than to the demand of competing cities for their “fair share” of the business that is to be done. City ambitions are limitless, and impossible to reconcile. The question is not how to determine the territory within which a given city may be said to have a right to distribute its goods, but whether or not the rate system introduced by the Huntington group, all things considered, promotes the interests of the territory which is served better than some system that may be suggested.

Basing Rate System Necessary

It is the writer’s opinion that the transcontinental rate system has always had evident defects. In the first place, it has generally provided low rates to towns and it has quoted low rates on commodities which have no access to the water routes. In the absence of competition the distance principle should prevail. Second, it has often failed in the past to make concessions to the cost basis of rate-making, which would have removed complaint without altering the plan in principle, such concessions, for example, as the reduction of rates to interior points to something less than the sum of through and local rates to allow for the relatively small amount of terminal service rendered. And, finally, it has increased the amount of transportation incident to the distribution of a given amount of freight. While the assertion of cities without terminal privileges that they have the right to do a specified amount of business is to be received usually with skepticism, it does seem probable that the transcontinental railroads would have reduced the aggregate cost of distributing transcontinental freight had they encouraged more than they did the growth of the interior towns, provided that they had supported these towns both against Chicago and St. Louis and against the Pacific Coast.

This same policy would have had the important advantage, from the railroad’s point of view, of developing industry at points which were not affected by every change in the rates of its competitors. The Central Pacific was not the first railroad in the country confronted with the problem of how to treat the non-competitive points upon its lines. Nor, unfortunately, was it the only railroad which adopted the drifting policy of quoting rates to hold the business, thus favoring the towns served also by its rivals in preference to towns more peculiarly its own, and through the stimulus given to such places, in the end creating a distribution of production which, of all possible alternative distributions, was the one which rendered its hold upon the business of its territory the least secure.

In spite of these defects, it is the writer’s judgment that some basing rate system, in its broad outlines similar to the transcontinental system actually applied, was necessary and desirable for the development of the West. The principal advantages of such an arrangement were that it gave to the Pacific Coast the benefits of competing rail and water routes as no distance system could have done, and that it enabled the railroads to fill their trains with traffic which paid them something over the out-of-pocket costs. It is clear that the interior cities were mistaken in supposing that this practice increased the rates which they had to pay. On the contrary, it reduced them. There is also reason to believe that the transcontinental rate system decentralized the distribution of goods, while it certainly afforded western buyers and producers in most instances the important advantage of access on equal terms to the markets of Chicago and of New York.

There is little evidence that either Huntington, Stanford, Crocker, or Hopkins had an active part in moulding the local or the through rate structures of the Central and the Southern Pacific railroads. The work was probably done by the traffic experts whom they hired, of whom the chief was that very able individual, J. C. Stubbs. The contribution of the associates may be taken to have been a clear appreciation of the advantage of monopoly to railroad revenues, and the consistent support which they gave to the efforts of men who knew more about the subject of railroad rates than they did themselves.