It is the favorite argument of railroad men, and the writer must confess that he himself formerly believed, that if all legal restraints were removed from railroad business, the laws of trade would regulate it more successfully and more satisfactorily, both to the railroad companies and their patrons, than the wisest statutes could ever regulate it. To give force to their argument, they cite the old Democratic maxim that that State is governed best which is ruled the least. They also assert that it is the province of the State to guarantee to each of its citizens industrial freedom; to permit him to transact any legitimate business according to his best judgment; to buy and to sell where and at what price he pleases; in short, to earn without restriction the reward of his intelligence and his industry. They further contend that under a free government the law of supply and demand should be allowed free sway, and that he who buys or sells transportation should not be hampered in his transactions any more than the grocer and his customer.

The reply to this is that, while the grocer is a natural person, the railroad company is an artificial person, and that, while the business of the former is purely private, that of the latter is quasi-public. The grocer must rely solely upon his personal rights and private resources, but the railroad company accepts from the State the franchises which enable it to do business. And yet, if the public had any assurance that the laws of trade would regulate both kinds of business alike, it is not likely that the State would distinguish between the two. They claim that their business is like other private business, and therefore they should be let alone; that competition can be relied upon to correct abuses; and where competition does actually exist they forget, and then claim that their business is not like other private business, and they should be allowed to make pools and combinations, because in their business competition is ruinous. Experience has certainly demonstrated that competition is only possible where combination is impossible. Where the same commodity is supplied by a large number of individuals, there is but little danger for the public from those who supply it, for an agreement among many cannot easily be effected; and even if an understanding could be reached, it would not long be satisfactory to all parties. Disagreements would arise which would end in the dissolution of the combination. Where, however, the number of competitors is small, agreements can be easily effected and successfully maintained.

It is doubtful whether there is at present any interest in the commercial world which has a greater tendency to monopoly and combination than the railroad interest. There are in the United States some 40,000 railroad stations. Not more than 4,000 of these are junctions of two or more roads. At 90 per cent. of these stations shippers are therefore confined to one line of railroad, and are, in absence of State regulation, compelled to pay for transportation whatever price the companies may be disposed to charge, subject only to such restrictions as the proximity of competing points may impose. If competition obtained at all points where two or more roads meet, many railroad companies could not afford to charge excessive rates at non-competitive points along their lines of road, for such a policy would slowly but surely drive a large volume of their legitimate business to rival roads, to whose interest it would be to encourage by every means in their power such diversion of traffic. Railroads early recognized this fact and took steps to enable each line to control its local business. The first combinations among railroad companies to control prices at competitive points were rather crude; in fact, much cruder than the first Granger legislation. They were simple agreements among the various roads touching a common point to maintain certain fixed rates. But while each road was anxious to have the rates agreed upon maintained by all of its rivals, it cared but little about maintaining its own good faith, and it improved every opportunity to get business at reduced rates so long as it could reasonably hope to escape detection. As soon as any of the competing roads, through the falling-off of its business, became convinced that it was the victim of overreaching rivals, it retaliated by offering still lower rates to close-tongued shippers. This tricky rivalry would be continued until the animosity engendered by it would lead to an open rupture, and what railroad men are pleased to term a rate war would follow. As the schedule rates had before been unreasonably high, so they became now unreasonably low. Hostilities would be continued until all belligerents became exhausted and manifested a disposition to negotiate a treaty of peace. The former high rates would then be restored; the compact was carried out for a short time, to be again violated and finally annulled. These rate agreements were in vogue in New England before the War of the Rebellion and gradually found their way to the Middle States and the West. Wherever they were tried they were violated, until even among the most unsophisticated of freight agents a rate agreement was looked upon as a farce.

The statement is often made by railroad managers that excesses in railroad competition are the result of the peculiar conditions of their business, which has heavy fixed charges on one hand and a fickle patronage on the other; that the uncertainty of through business compels them to rely upon the local business for such revenue as is necessary to meet these fixed charges; and that, inasmuch as their trains must run, and any through freight hauled by them is so much business taken from the enemy, they can better afford to take it at any price than to have one of their competitors take it.

It is difficult to see why this reasoning should not be applied to other branches of business; for instance, to milling. The mill-owner, like the railroad company, has heavy fixed charges. He has to earn the interest on his capital, he has to keep his mill in repair, he now and then has to meet the demands of the times and purchase improved appliances, and he has to keep a certain number of employes, whether business is brisk or slack. He might, therefore, if he saw fit to employ the logic of railroad managers, earn revenue enough to meet his fixed charges from the business which his regular customers give him, and then do any business coming from beyond this circle at any price rather than surrender it to a rival.

It will readily be conceded that any enterprise conducted on such principles could, at the best, flourish only temporarily, for it would soon encounter difficulties from two sources. Its local customers, thus discriminated against, would withdraw their patronage, while its competitors, finding their territory encroached upon, would, in self-defense, offer still better terms to the public to regain their lost customers. Such ruinous competition, if long persisted in, must necessarily cripple, if it does not bankrupt, a majority of those who engage in it. It is fortunately as rare in industrial and commercial circles as it is common among public carriers.

This difference can easily be accounted for. Where there are a large number of competitors the prices of the commodities supplied by them are leveled down until they reach a point where they will afford only a reasonable margin of profit, and beyond which they will cease to be profitable, and will therefore cease to be supplied until the equilibrium is again established. Where, however, the number of competitors is small, the price of the commodities supplied by them will, by agreement, for a time at least, be maintained at a point where it affords considerable more than a reasonable profit. Here the large gain presents to the various competitors such a temptation to outstrip their rivals and increase their business at the expense of good faith, that but few, if any, of them will, in the long run, resist it. The tendency to underbid rivals will always be strong where profits are large, and it may safely be asserted that efforts to maintain, through combinations, excessive rates are the most fruitful source of ruinous competition.

In time railroad managers became convinced that, unless it was possible to radically reform railroad ethics, rate agreements could never be relied upon for the maintenance of excessive rates at competing points. The combined roads found it an easy matter to agree upon excessive rates, but were powerless to enforce them. Experience convinced their managers that to make their tariffs effective it was necessary to deprive individual roads of the power or the inducement to cut below the agreed rates. Their ingenuity in time developed a system which promised to remove from individual roads every temptation to take business at less than schedule prices. This device consists in a division of railroad business and is commonly called a pool. There are various ways in which such a division is made. Either the traffic is divided among the various companies meeting at a common point, or each road is allowed to carry all freights that it may receive, and then the earnings of the different roads are divided, each road being paid the actual cost of such service as it has performed. There is still a third pooling arrangement, consisting in a division of territory, but this has been found less satisfactory and is now but rarely resorted to.

It is said that the first regular pool organized in the United States was the Chicago-Omaha pool, formed in 1870 by the Chicago, Burlington and Quincy, the Chicago, Rock Island and Pacific, and the Chicago and Northwestern railroad companies, then the only three lines connecting the cities of Chicago and Omaha. This pool, which was subsequently joined by other lines, made an equal division of the traffic, and was so well organized that it lasted fourteen years "without a break." The abuses practiced by the companies belonging to this pool were one of the chief causes of the Granger movement in Iowa. It is indeed doubtful whether any other railroad combination ever maintained itself longer or pursued its ends with greater pertinacity than this pool. Another pool of national notoriety was the Southern Railway and Steamship Association, which was organized, though at first under a different name, in the State of Georgia, in 1875. It was probably the first money pool formed in the United States. Each member was awarded a certain percentage of the total business between the various competitive points along its line. If a company carried more than its share, it was compelled to turn over the receipts from such additional traffic to its rivals, which paid it a nominal price for carriage. This allowance was always made so low that there was no inducement for any company to seek to carry more than its allotment. The pool had its own executive, legislative and judicial departments, and it enforced its decrees with an iron hand. It maintained a strong centralized government, and rebellious members had but little mercy to expect from it. It provided that if any officer or representative of any company should authorize or promise, directly or indirectly, any variation from established tariffs, he should be discharged from the service, with the reason stated. The strong sentiment which we to-day find in the South in favor of State control of railways is the direct result of the many evils which this powerful pool introduced into the railway business of that section of the country.

Other pools followed, as the Southwestern Association, organized in 1876, to control the traffic between Chicago and St. Louis, and the Minnesota and the Colorado pools. Within a few years railroad pools covered the whole country. All pursued the same object, viz., the control of rates at competitive points, which enabled the companies to maintain excessive schedule rates at local points.

Between 1875 and 1880 the pooling system rapidly spread all over the Union. Wherever competition promised to regulate rates by the application of the law of supply and demand, the pool was resorted to as the never-failing remedy to preserve dividends on watered stock. As long as lake and canal navigation controlled the carriage of heavy freights between Chicago and New York by means of rates so low that railroads found it, or at least thought it, impossible to compete with them in the transportation of agricultural products during the greater part of the year, railroad pools between Chicago and New York could not be successfully maintained. In 1873 the railroads transported only about 30 per cent. of this kind of freight from the West to Eastern ports.

Owing, however, to the rapid decrease of the cost of transportation, railroad companies from this time on were enabled to encroach rapidly upon the business of water routes, so that in 1876 they carried over 52 per cent. of the entire volume of agricultural products that were moved from the West to the East. As long as these products were carried almost entirely by water from lake ports to the East, New York, as the terminus of this route, enjoyed decided advantages over the other Atlantic ports. When, however, the railroads commenced to successfully compete with the water routes in the transportation of these commodities, a considerable share of this business was diverted to Boston, Philadelphia and Baltimore, and it soon became apparent that these ports, in some respects, enjoyed advantages for the export trade not possessed by New York. It was, therefore, not surprising that the business men of these cities, together with the railroads terminating in them, made every effort to come in for their share of the traffic which was drifting away from New York.

Competition between the New York Central and the Pennsylvania Railroad for the Western through traffic dated back as far as 1869, the year in which both systems secured, through consolidation with connecting roads, through lines to Chicago. Rates fell in one year from $1.80 to 25 cents per hundred pounds. After a time the managers of the two companies met, and schedule rates were restored. Rates were, at least outwardly, maintained until the Baltimore and Ohio and the Erie system entered Chicago, and the Grand Trunk made connections with Milwaukee and other lake points, and thus disturbed through rates. All efforts to maintain the level of the old tariffs, through agreements, proved now fruitless, for both the Baltimore and Ohio and the Grand Trunk found it to their interest to pursue independent policies, and refused to have their hands tied by an agreement with roads that were interested in continuing, if possible, the commercial supremacy of New York.

Rate skirmishing finally developed into open war in 1876, when fourth-class rates between Chicago and the Atlantic fell as low as 16 cents per hundred. This rate, however, was eclipsed in July, 1878, when wheat was carried from Chicago to New York for 10 cents per hundred. The existing conditions left no doubt in the minds of those familiar with railroad tactics that this war was simply the precursor of a gigantic combination between the trunk lines. An unsuccessful attempt to effect such a combination had been made before. In 1874 the managers of the Erie, Pennsylvania and New York Central met at Saratoga for the purpose of devising means for the suppression of competition in the trunk line traffic. This meeting, however, known in railroad history as the Saratoga Conference, was the first step toward the organization of a trunk line pool, although the conference did not lead to any immediate results, the Grand Trunk and the Baltimore and Ohio refusing to be bound by its decision. It was certainly no easy task to devise means to bring about an effective and permanent combination among five large through lines with greatly conflicting interests.So far pools had never failed to suppress competition wherever they were organized. But in the past pools had, almost without exception, only attempted to control rates between common points. They accomplished their object by a division of the entire traffic or earnings from the traffic between common points. The schedule rates remained the same for all. But the traffic of the trunk lines brought a new factor into the problem. Here the rival routes did not terminate at the same points. It was contended by the Baltimore and Ohio that, whatever might be the facilities of Baltimore for exporting agricultural products, that port was at a disadvantage as compared with the more northern ports on account of the longer voyage and higher ocean rates to Liverpool, and that it could therefore not enter into a combination with the roads leading directly to New York and Philadelphia upon equal terms, since this would divert its legitimate share of the through business to those ports. The Grand Trunk, on the other hand, refused to enter the combination because, not having any direct Chicago connection, it feared that the enforcement of pool rates would materially diminish the volume of its business. As yet the railroad wiseacres did not seem to be equal to the emergency, and matters drifted along in the old channel. The rate war of 1876 gradually brought about an understanding among the belligerents. The competing roads accepted the terms offered, and with this a new principle entered into the science of pooling. Rates between Chicago and Baltimore were fixed somewhat lower than those between Chicago and Philadelphia, and in turn Philadelphia was allowed a small advantage over New York. This concession was made to equalize the difference in the ocean rates of the competing ports. These equalizing or—to use railroad nomenclature—differential rates were subsequently granted by pools to such roads as, on account of some disadvantage, could not compete with other members of the pool on equal terms. Thus the longest route was usually permitted to charge the lowest, and the shortest route the highest rate. This practice is in conformity with the principle of charging whatever the traffic will bear, but it is certainly devoid of every consideration of justice and equity. If the longer line can afford to carry freight at rates lower than schedule prices, no further proof is needed under ordinary circumstances that the regular schedule rates of the shorter line are exorbitant.

The concession of differential rates settled, at least temporarily, the difficulties that had arisen out of the east-bound traffic of the trunk lines. This arrangement did not, however, in any way affect the traffic moving in the opposite direction. The volume of west-bound freight is very much larger at New York than at any other of the Atlantic ports. In order to get its share of the business, each trunk line maintained an office in New York. These offices eagerly solicited business for their respective roads, and the freights which they received for transportation to the West would be forwarded either directly or by a circuitous route; but, the longer the route, the lower as a rule was the compensation asked for the service. Under these circumstances competition was brisk, and the profits realized were far from satisfying the cupidity of the competing lines. It was apparent to their managers that the competition in the west-bound traffic was similar to that formerly existing between Chicago and Mississippi and Missouri River points, which had promptly yielded to pools. The temporary adjustment of the more perplexing questions which had arisen out of the east-bound traffic now paved the way for a pooling arrangement for the west-bound freight. The Southern Pool, under the management of Albert Fink, had long attracted the attention of the trunk line managers. Its system of dividing the traffic, of reporting to a central office and of hearing and deciding complaints had enabled it to exert an almost absolute control over its members, to compel them to make honest returns and to prevent rupture and rebellion. It was believed that a pool of the trunk lines could not be effective or permanent unless organized upon the Southern basis and presided over by a trunk expert. Accordingly, when in 1877 an agreement for the pooling of the west-bound traffic was reached by the trunk lines, Mr. Fink was tendered the position of pool commissioner. Under the agreement reached the total tonnage of the west-bound business was divided in such a way that the Erie and New York Central roads each received 33 per cent., the Pennsylvania 25 per cent., and the Baltimore and Ohio 9 per cent. of it. If any road received more freight than was allotted to it by the pool, it delivered such surplus to the pool, or rather to such a road as the pool commissioner designated as not having received its allotment. The success of this pool from a railroad point of view made the trunk lines anxious to organize a similar pool for the whole east-bound traffic. It was proposed to control by such a combination the rates on all the east-bound traffic of the Northwest, by making Chicago the pooling center, fixing for it a schedule of rates and making the rates of all the railroad centers in the West and Northwest dependent upon it. The combination was to comprise more than forty companies, controlling over 25,000 miles of road. The scheme was tried for three months in 1878, but proved a failure, owing to the fact that nearly all of the many diverging interests sought their own advantage. The Eastern and Western trunk line pools were, through the efforts of their commissioner, successfully maintained, though even their harmony was occasionally marred by a short war precipitated by such members as would think themselves entitled to larger shares of the spoils. But a readjustment would invariably follow, and the expenditures of the war would be taxed up to the public.

After the failure of the gigantic Western pool which had been organized under the protectorate of the trunk lines, the companies which had composed it formed such local combinations as their individual interests dictated. It is doubtful whether during the five years immediately preceding the passage of the Interstate Commerce Law there was any junction of two or more roads in the United States which, except during the period of an occasional railroad war, had any competition in the transportation business. As has been shown before, discriminations without number were practiced between places and persons; goods were not unfrequently carried at a loss; but the general public was, as a rule, compelled to pay what the traffic would bear, or rather what the pooling roads thought it could bear.

It is claimed by railroad managers that pools are the only effective contrivances for checking ruinous competition among railroad carriers, and that they are therefore justifiable as a means of self-protection. This might perhaps be a valid argument if any attack were made upon the railroads which encroached upon their rights or endangered their existence, but if railroad companies are disposed to cut each other's throats, the public should not be made to pay the penalty of their depravity. As long as schedule rates are unreasonably high, railroads will be tempted to offer to certain shippers low secret rates; but as soon as all rates have been leveled down to a point where they will yield only a fair profit with good management, the inducement to cut below them is largely taken away. Pools, far from being a remedy for the evils of excessive competition, will in the end only aggravate the disease which they attempt to cure. The high rates which they maintain attract the attention of speculative men and lead to the construction of rival roads. While the traffic remains the same, the proceeds must then be divided among a larger number of carriers. Thus the construction of unnecessary roads, which has often been the subject of bitter complaint on the part of the older roads, is chargeable directly to their wrong policies.

One of the principal objections to industrial and commercial combinations is that they paralyze trade. Competition stimulates every competitor to offer the best at the lowest possible price. This increases the demand for the commodity, and both the producer and the consumer are in the end benefited by the operation of this law. On the other hand, combinations, or, what is the same, monopolies, increase the price, remove the stimulus to excellence, and reduce the demand, and thereby affect injuriously the producer and consumer alike. Competition in the railway service would mean an improved service and lower rates and would speedily be followed by a large increase of business.

Another serious objection to pooling is that it invariably leads to periodic wars, which unsettle all business, and but too often introduce into legitimate trade the element of chance. These wars give, moreover, to designing railroad managers an opportunity to enrich themselves by stock speculations at the expense of the stockholders, whose interests they use as a football for the accomplishment of their selfish ends. When rates are reduced to a right level, and are properly adjusted, and are equal to all, even railroad men will find no necessity for pools. The desire for such a combination is a desire to impose upon somebody, or some locality, or the public at large. The proposition to give legal sanction to pools, made by railroad managers, is preposterous; and even a pool to be approved by the Interstate Commerce Commission is out of the question, as it would cause the railroads to increase their efforts to control the appointment of the commission. However honest it may look on its face, however plausible may be the arguments produced in its favor, it should not be permitted.

There is no doubt but under the proposed pooling arrangement railroad interests, watered stocks and all, would be cared for, but there is every reason to believe that public interests would not be properly protected.

So long as servility by a member of the Interstate Commerce Commission to railroad influences serves as a stepping-stone to a high position in the employ of railroad combinations, with a salary of three or four times that of an Interstate Commerce Commissioner, so long will it be unsafe to permit such powers to be vested in that commission.

Pooling by railroads should not be permitted, if permitted at all, so long as representatives of speculative interests have a voice in their management, and not until all fictitious valuations are altogether banished from the equation, and until the roads are brought under complete Government control. There is no more necessity for pools among railroads than there is among merchants and manufacturers. The capital actually invested in railroads is now receiving larger returns than investments in other lines of business, and their incomes are increasing from year to year.

Every pooling combination of railroad companies for the maintenance of rates is a violation of common law. From time immemorial the law has stamped as a conspiracy any agreement between individuals to support each other in an undertaking to injure public trade. The Interstate Commerce Act reasserts this principle, and provides penalties for the maintenance of such combinations among railroad companies. If, in spite of this act, the evil still exists, it is no argument against the merits of the law, but it does prove that the machinery provided for its enforcement is insufficient. That railroad companies can be made to respect the law there can be no doubt; but much cannot be accomplished unless the people fully realize the magnitude of the undertaking and vest the Government with sufficient power to cope with an organized force whose total annual revenue is nearly three times as large as that of the United States. The discussion of the question how this may be done will be reserved for a subsequent chapter.