The philosophy of rebating has perhaps never been better described than in the following quotation from the Cullom Committee investigation of 1886:

The force of this description of the underlying motive for personal discrimination, so far as the carrier is concerned; namely to build up one man at the expense of his competitors and to attach him in interest indissolubly to the company, is well exemplified in a case which occurred in 1908 at Galveston, Texas.[162] Practically all railway traffic entering Galveston was destined for export. Wharfage facilities were limited to two concerns, one of them being the Southern Pacific Terminal Co. A uniform charge of one cent per hundredweight for cotton seed meal and cake passing over the wharves of both companies had been the rule for a long time. Yet it appeared on complaint that one merchant had been granted wharfage space under discriminatingly favorable conditions. Exemption from demurrage charges, free storage room and other favors and a fixed rental of $15,000 per year irrespective of the amount of his shipments, had enabled him, having been in business only since 1898, to build up a very large traffic. The export of cotton seed cake instead of meal had greatly increased since 1904. The business of all other competitors since this contract was made had shrunk to insignificant proportions by comparison with that done by this favored merchant. The margin of profit in the business was so small that the difference between the charges and privileges enjoyed by this individual and his competitors, was forcing them all out of business. It was estimated by the Interstate Commerce Commission that if the customary wharfage charges had been paid, the rental would have been nearly $30,000 for the year 1907, irrespective of other favors. The cotton planters complained also that this monopoly limited their market and depressed business. It is clear that the larger the business, that is to say the more nearly it became a monopoly, the smaller became the wharfage charges per hundredweight under this system of a fixed rental; and, in consequence, the greater was the disability of the other shippers. The advantage to the railroad appeared in a contract entered into, which provided that all traffic for this individual should be routed over the Southern Pacific or its connecting lines. As he had practically gathered in all the cotton seed export business of Texas and the adjoining states within two years, it is evident that this consideration was of great value to the railroad. The economic motive in this case and in the one previously cited was the same. It will be found in fact to underlie almost all cases of personal favoritism and discrimination.

The supreme disadvantage in building up a great monopoly in order to win traffic for a railroad is, of course, that the moment the shipper becomes sufficiently powerful, he can play off one road against another, thus becoming practically master of the situation. Sindbad is soon overwhelmed by the old man of the sea. And the weaker the road financially, the more powerful is the appeal, to which at last even the strongest lines must succumb. The history of the Standard Oil Company during the eighties clearly exemplifies this. The rapid rise of the cattle "eveners" yet earlier, until, as the private refrigerator car companies they controlled the situation, was primarily traceable to the same causes. The late J. W. Midgly[163] gives a forcible illustration in the attempt in 1894 of ninety-five railroads to reduce the mileage allowance paid for use of oil tank cars owned by private companies from three-fourths to one-half cent per mile, loaded and empty. The Union Tank Line promptly replied that it would in that event at once concentrate all its vast tonnage to points north and west of Chicago, upon the single line—presumably the weakest one—which would continue the old rate. This argument was irresistible; and in the old days of unregulated competition was in the nature of things bound to be so.

Careful distinction must be made at this point, between personal discrimination and general rate cutting. Rebating,—that is to say, departure from published tariffs,—occurs in both cases. The difference between the two is that in the one case it is special, particular and secret; while in the other it is so general, if not indeed universal, as to be matter of common knowledge. Rebating, in other words, is a common feature of rate wars. But, on the other hand, general harmony in the rate situation by no means implies the absence of personal favoritism. During a wide-open rate war, indeed, the most iniquitous aspect of rebating,—inequality of treatment as between rival shippers,—may be quite absent. All may be getting the same rate, namely a cut rate; although the chances are of course that the bigger the shipper, the more substantial the concessions offered. It is important to keep this distinction clear, especially since the railways have awakened to the losses to themselves attendant upon rate wars.

All parties concerned are probably agreed in the hope of eliminating the rate war forever. But there is not the same evidence of either an intent or desire on the part of railway officials to get rid of what, from a public point of view, is even more insidious and unjust; that is to say, the secret concession of favors to a few chosen large shippers. General rate wars, as will later appear, are probably a thing of the past.[164] But secret rebating seems, on the other hand, to be an evil which must be combatted vigorously and un-intermittently in order to uproot it as a feature of American industrial life. And of course it must cease. For it is the most prolific source of evil known in transportation. It has probably had more to do with the creation of great industrial monopolies than any other single factor. The first feature of any reform of our intolerable "trust" situation, must be to keep the rails open on absolutely even terms to all shippers, large or small.

The keynote of discrimination is, as we have said, the creation of monopoly, or, at all events, of so large an aggregation of shipments, that a profitable partnership between the shipper and the railroad results. This is clear in recent indictments which charge that the railroads concerned, having selected one large firm of forwarders in New York and Chicago are giving them a monopoly in respect of all imports. In the case of the great beef packers, the railroad having once built up a shipper by favored rates, may continue in the enjoyment of this concentrated tonnage with greater security and profit than if it moved in a multitude of small shipments by numerous competitors. Of course there is another less common form of rebating which, so far as its profit is concerned, is limited to the particular dishonest railway official who arranges the matter. Such favoritism as this, however, represents a loss to the company; and has always been stamped out by the carriers when discovered. The principal form above described, is much more difficult to uproot. And yet for some reason, it is a distinctively American abuse. European countries seem never to have suffered from it, to any such degree as has the United States. It is, as has just been said, perhaps the most iniquitous, the most persistent and until very recently the most nearly ineradicable evil connected with the great business of transportation.

Rebating in the early days consisted in simply refunding by direct payment to the favored shipper, a certain proportion of the freight bill. This refund might be in cash, in presents to himself or his family, in salary allowances to clerks, in free passes, or in free transportation of other goods. In a recent case in New York it has taken the form of importer's "commissions." But, since 1887 at least, an inconvenience in all such transactions is their necessary entry in some form or other upon the books of the company. Of course such rebates could be covered up as a fictitious charge to operating expenses; or, as in the case of the Atchison in 1893, might be carried as an asset, as if such refunds would ever be paid. Nearly $4,000,000 was thus entered as padding in Atchison assets, when it went into a receiver's hands at that time.[165] Much of the flagrant Standard Oil rebating in the eighties was almost openly, and certainly boldly, carried on by these means. But public sentiment was always against it; and of course, it was a breach of good faith as between the railways themselves, in their endeavor to maintain agreed rates. Secrecy, therefore, always attaches to these transactions; and the most ingenious devices were invented to confer favors without detection.

Underclassification of freight was a very common device in the old days. It has reappeared again since 1907 in much the same form. There is a great difference between the freight on a keg of nails and of fine brass hardware or cutlery. Who is to know whether a shipment be billed as one or the other? Is every box of dry goods to be examined in order to discover whether it contains silks or the cheapest cotton cloth? A carload of lumber or cordwood might easily by prearrangement be filled inside with high grade package freight. The utmost vigilance is in fact necessary on the part of carriers, to prevent such fraudulent practices by shippers. Under the Joint Rate Trunk Line Inspection Bureau in 1893, 183,575 such false descriptions or underweighings were detected on westbound shipments from seaboard cities alone.[166] What the amount of such Underclassification of freight by collusion between agent and shipper was, can only be conjectured. Even more difficult to detect was the practice of under-billing.[167] At a certain time, the rate on flour from Minneapolis to New York was thirty cents per hundredweight, divided between connecting roads in the proportion of ten cents from Minneapolis to Chicago, and twenty cents from there on to destination. In the meantime, as against this ten cent proportion of the through rate to New York, the local rate from Minneapolis to Chicago was twelve and one-half cents. As between two rival shippers, the one sending to Chicago on a New York through rate instead of a local one, would enjoy a clear advantage of twenty-five per cent. over his competitor. And who was to know whether a car billed through to New York, was really going beyond Chicago or not? In one period of three months, 1098 cars thus through billed to New York were turned over at Chicago to a belt line road; and only 468 actually went on to that destination. About sixty per cent. of the traffic was being rebated by this means. Very complicated arrangements of this sort were rife in the Missouri river rate wars on grain in 1896. This was known as the "expense-bill" system; or "carrying at the balance of the through rate."[168]

Many services or facilities are worth as much to a merchant as a direct refund in cash. He may be given free cartage. This was a very common expedient in the early days; being fully considered by the Interstate Commerce Commission.[169] Or free storage on wheels or in freight houses may be utilized as a cover for favoritism. A low carload rate might be given, and then the goods be held, storage free, by the railway at some central point; to be subsequently delivered piecemeal as sold. The dealer would be relieved of all expense for warehousing as well as of high less-than-carload rates from the initial point of shipment. The competitor who paid the less-than-carload rate on an equal volume of business would be sadly handicapped. Cases are on record where fish was thus stored free from November to February, being reshipped on order in small lots. Or an excessive allowance might be made by the railway for some service or facility afforded by the shipper. The beef interests first got their hold upon the carriers by demanding liberal rebates in return for acting as "eveners" in the partition of traffic between the trunk lines about 1873. Complaint against excessive allowances to favored grain elevator owners, was common all through the West for years. The elevator allowance cases before the Interstate Commerce Commission in 1906-1910 concerning practices on the Union Pacific lines illustrate the delicacy of the issues involved.[170]

Deductions from the full tariff for the use of special equipment owned by shippers, has been one of the commonest means of building up great monopolies.[171] The allowances to the Standard Oil Company for the use of its tank cars, before the construction of pipe lines, and especially prior to 1888, were a source of great unrest.[172] But the construction of pipe lines has not lessened their importance. It is on record that the use of private cars in other lines of business has led to grave abuses. When stock cars and beef refrigerator cars, owned by private shippers, first began to be used about 1883-1884, they were much sought after by the railroads as traffic. They moved regularly, not by seasons; the volume of business was large and rapidly growing; it was concentrated at a few large initial points; much of it was high class and very remunerative. With the enormous extension of refrigeration to cover the long-distance movement of fruit and vegetables, a still more powerful encouragement came into play. These latter businesses were highly seasonal. Few roads could afford to maintain highly specialized equipment to care for a business of a few weeks length. But a private company operating all over the country, could utilize its cars first for early vegetables and fruits from the south, then from the middle west or the Oregon-Washington region, and finally in winter for oranges from California or Florida. The number of these cars rapidly increased until by 1903 there were 130,000 in service,—in fact about one-eleventh of all the freight cars in the United States were privately owned. The so-called Armour interests, primarily engaged in the packing business, were by far the largest single concern.

The system of payment for the use of these cars consisted of an allowance, based upon the mileage performed. This used to be one cent per mile, loaded and empty, for refrigerator cars. In 1894 a determined effort was made by the carriers to reduce this below the point then reached of three-fourths of a cent per mile. But the extraordinary concentration both of ownership and traffic, rendered it easy for the car companies to defeat the proposition. In the meantime the steady increase in volume of traffic, making whole trainloads possible, together with the growth of very long distance business, made it imperative that these trains be operated at high speed with few stops. This at once enormously enhanced the earning power of each car, as based upon mileage. The performance was often as high as four times that of the ordinary freight cars.

Under these new conditions, at the current rate of earnings, a car would pay for itself in three years, besides paying all expenses of maintenance. The burden of these allowances became very great. The situation some years ago is well described by a former member of the Interstate Commerce Commission, as follows:—

By 1903 the railroads were paying over $12,000,000 annually for the use of such equipment.

With the growth of their power, the extortionate demands of these private car lines, both upon the railroads and the shipper, steadily enlarged. From the roads they often compelled fictitious mileage allowances; and from the shipper the most outrageous charges were made for icing and other services en route. The reports of the Interstate Commerce Commission for 1903-1904 and of the Senate (Elkins) Committee of 1905 deal fully with these abuses. Moreover the Armour company gradually forced other competitors out of business, and with the growth of monopoly, its exactions became even more extreme. The following instance is typical.

Fortunately the progressive enlargement of Federal powers of supervision has tended to check these exactions. But the system of special allowances for the use of privately owned equipment, is one which needs the most careful watching by the authorities.

With the passage of time, and especially since 1896, new and even more elaborate schemes for rebating have come to light. One of the most ingenious, which was discovered about 1904 to be very widespread, was the use of terminal or spur track railway companies.[173] In Hutchinson, Kansas, for example, were salt works having a capacity of some 6000 barrels a day. Two railways were available for shipments. A new company was incorporated, all its stock being held by the salt works owners, which constructed sidings to both railroad lines. The spur track was less than a mile long and cost only about $8000 to build. But the company was chartered as the Hutchinson and Arkansas River Railroad. Its officers were the owners of the salt mills. It owned neither engines nor cars. Yet it entered into a traffic agreement with the Atchison road for a division of the through rate to many important points, its share being about twenty-five per cent. So substantial a pro-rate was this, that in a few months the H. and A. R. R. received back some fifteen thousand dollars as its share of the through freight rates. And every dividend declared by it was, of course in effect a rebate enjoyed exclusively by this particular mill, as against less favored competitors.

Obviously, rebates assuming the above-described form are open only to very large shippers, to whom it is worth while to incur the considerable expense. But many concerns have already such trackage in or about their works. Nothing is needed except to incorporate them separately, and then to enter into suitable traffic agreements with standard roads. Many of the so-called trusts were implicated in such transactions, about 1904-1905. The International Harvester Company at Chicago had for years performed much of its own terminal service; and until 1904 was allowed as high as $3.50 per car for switching charges by connecting railroads. It then incorporated the Illinois Northern Railroad, which was promptly conceded twenty per cent, of all through rates, with the Missouri river rate as a maximum. On this traffic it would be allowed as high as $12 per car, instead of $3.50 as before. The Illinois Steel Company afforded in 1905 an even more flagrant example. Apparently it had enjoyed extra-liberal proportions of through rates since 1897, by means of its separately incorporated and, in fact, really important terminal road. But an allowance of $700 to $1000 for hauling a trainload of coke some seven miles, yielded a profit on the business of perhaps ninety per cent. It was an advantage which no competitor could hope to equal. No doubt the practice of switching allowances was properly used at the start. But the large crop of cases discovered in 1904-1905 proved that they had come to be very widely used as a cover for rebating. It is not always easy, however, to decide when such an allowance ought to be made to a privately owned terminal company. The Anheuser-Busch case, decided in June, 1911, with a dissenting opinion by Commissioner Harlan, shows how intricately involved such issues may become.[174]

The so-called "midnight tariff" was a strictly legal way of conferring favors upon certain shippers. It was much in evidence during the grain wars between lines serving the Gulf ports about 1903. And it seems to have been a device used at times all over the country. A traffic manager wishing to steal all the business of a large shipper from some competing road, and to build him up at the expense of his rivals, secretly agrees to put into effect a low rate on a given date. The shipper then enters into contracts calling for perhaps several hundred carloads of grain to be delivered at that time. This reduction is publicly filed, perhaps thirty days in advance, with the Interstate Commerce Commission at Washington. But who is to discover it, in the great medley of new tariffs placed on file every day? Yet this is not all. A second tariff, restoring the full rate, is also filed to take effect very shortly,—perhaps only a day,—after the reduction occurs. All these are public, and open to all shippers alike. But only the one who was forewarned is able to take advantage of them. He rushes all his shipments forward while the reduced rates are in effect. Before other competitors can assemble their grain or other goods, the brief reduction has come to an end; and rates are restored to their former figure.

The President of the Chicago Great Western Railway has concisely described the commercial effect of one of these midnight tariffs.

A similar device was used by the Burlington road in its dealings with the Missouri river packing houses on export traffic. They signed an agreement making a rate to Germany of twenty-three cents per hundred to last until December 31, 1905. Before the expiration of this time, however, the roads concerned, publicly filed an amended tariff presumably for all shippers of thirty-five cents per hundred. They nevertheless continued the old rate to the packers. This case went to the Supreme Court which decided in 1908 that the device was unlawful and discriminatory.[175]

And then again there are all the possibilities of the printer's art to be used, in connection with the preparation of elaborate tariffs.[176] The tariff of "33 cents per hundredweight" may conceivably be a typographical error, to be speedily corrected in a supplementary hektograph sheet filed the next day. Involved and elaborate rate sheets may be reprinted with only one little change among a thousand items left as before. Different tariffs may interlock with complicated cross references. In one case in 1902 it took seven different tariffs to enable one to compute the rate for a given shipment. In twelve months, to December 1907, there were filed with the Interstate Commerce Commission 220,982 such tariffs, each containing changes in rates or rules. Some "expire with this shipment,"—and some agree to "protect" any rate of any competing carrier, that is to say, to meet it if it happen to be lower.

An entirely different plan of rebating,—and a most effective one,—has to do with apparently unrelated commercial transactions.[177] Many shippers are large sellers of supplies to the railroad. How easy then to make a concession in rates to an oil refinery for example, by paying a little extra for the lubricating oil bought from a subsidiary concern. The Federal authorities in recent years and especially in connection with the prosecution of the Standard Oil Company in 1908-1911, have discovered the most extraordinary variations in the prices paid by railroads for supplies. Independent concerns were often not allowed to compete in the sale of lubricants at all. It would be difficult to prove any connection between so widely separate sets of dealings; and yet it is clear that rebates are often given in this way. Or even more fruitful as an expedient, especially in these later days when rebating is a serious offence, why not confer a favor by extra liberality in allowances for damages to goods in transit? In 1909 the so-called Beef Trust was specifically ordered by the Attorney General of the United States to desist from such practices. Positively the only way to detect such fictitious allowances for damages, is to ferret out each case by itself. This is a slow and necessarily expensive process. Damage allowances and quid pro quo transactions in the purchase of supplies, are indeed almost "smokeless rebates," as they have aptly been termed.

Personal discrimination may be as effective upon competition through denial of facilities to some shippers, as through conferring of special favors upon others. Practices of this sort have been quite common in the coal business, especially in the matter of furnishing or refusing to furnish an ample supply of cars or suitable spur tracks to mines. In the well known Red Rock Fuel Company case in 1905,[178] the railroad definitely announced its policy, "not to have a lot of little shippers on its line who would ship coal when prices were high and then shut up shop and go home and let the large shippers have the lean years." The development of over 4,000 acres of coal lands was thus denied in favor of the large companies, until the Interstate Commerce Commission took the matter up. A year later came the startling revelations upon the Pennsylvania Railroad as to the practice of discrimination in furnishing cars to coal mines.[179] A comprehensive investigation by the company itself resulted in the discharge of a number of high officials. It appeared, for example, that the assistant to President Cassatt had acquired $307,000 in stock of coal companies without cost; that a trainmaster for $500 had purchased coal mine stock which yielded an annual income of $30,000; and that one road foreman was given three hundred shares of the same company stock for nothing. In all these cases the object was to secure not only an ample supply of cars for the favored companies, but perhaps even the denial of suitable service to troublesome competitors. In this regard, the old practices of the Standard Oil Company in the eighties are recalled. Not only, as in the celebrated Rice case,[180] did it demand heavy refunds on its own shipments, but it also compelled the imposition of a surtax on its competitors' traffic which was to be added to its own special allowance.

Yet other means of favoring large shippers at the expense of small ones, are almost impossible to eradicate. Certain of these may be illustrated by recently discovered practices of the Standard Oil Company. They are fully described in a special report of the United States Commissioner of Corporations in 1905. Upon the basis of this evidence, extraordinary efforts were made by the Federal authorities to secure convictions and to impose heavy fines for violation of the Elkins law. But the company escaped heavy penalties, in the main, by reason of legal technicalities. The prosecutions of 1906-1909, however, cannot be regarded as valueless, merely because the company escaped the imposition of fines aggregating millions of dollars. The moral effect of it was thoroughly good; and it is now clear that laws can be so drawn as to apply in future. Nor can any student of the evidence doubt for a moment, that, whether strictly an infraction of the law or not, the net result of these practices was to confer an advantage upon this large shipper, not open to its smaller competitors. Certain of its advantages, such as the ownership of pipe lines from the wells to the seaboard refineries and the strategic location of its plants, are the fruit of great resources and keen business acumen. But other advantages, particularly the relative rates on refined oil from Standard Oil plants and from centres of independent refining, are, according to the report of the Bureau of Corporations, due to pressure brought to bear upon the carriers. Whether they are or not, the result is discriminatory just the same.

The reason for the persistent pressure for low rates on petroleum products is, of course, that the cost of manufacture is so low relatively to the expense of transportation. An ample manufacturing profit is one-half cent per gallon of crude oil; and the average cost of refining does not exceed that amount. Yet a half cent will scarcely pay freight for more than one hundred miles. Hence it follows that for distances greater than this, the question of profit or loss may entirely depend upon the delicate adjustment of the freight rate. In this regard, a great company shipping all over the country has a great advantage over smaller competitors with a strictly local market, in that it can play off one rate against another. Thus, in one notable case, cited by the Bureau of Corporations, the Burlington road gave an absolutely unremunerative rate from the Standard refinery at Whiting near Chicago to East St. Louis, thereby enabling troublesome competition to be subdued; but it was recompensed by the payment of heavier charges on shipments to other points on the Burlington system, where, there being no competition, the high freight rate could be shifted on to the consumer. The Commissioner of Corporations gives one instance on the Northwestern road of a carload rate from Whiting to Milwaukee in order to meet water competition from independents at Toledo, which netted the carrier just ninety-two cents for the carriage of 24,000 pounds of oil a distance of eighty-five miles, with free return of the empty car.

The peculiarity of many of these rate adjustments of the Standard Oil Company of late years was that they were publicly filed; and hence not open to legal attack. This does not however detract in the least from their discriminatory character. One example, right here in New England, now happily corrected, may be cited from the records of the Interstate Commerce Commission for 1906.[181] The southern half of New England was mainly supplied with kerosene from the great Standard refinery at Bayonne, New Jersey. The oil was brought there from the fields by pipe line; and, being refined, was distributed by tank vessels all along the coast, with a short rail haul thereafter to inland points. The total cost to the Standard company was estimated by the Bureau of Corporations at between fourteen and sixteen cents per hundredweight. To meet this, the independent western refiners had to ship all the way by rail. This was more expensive in any event; but for some years they found their handicap greatly increased by the refusal of the New Haven road to join in any joint through rate. The western independents, therefore, had to pay the sum of two local rates, up to and beyond the Hudson river, thereby bringing their transportation up to approximately thirty cents per hundred pounds. In other words, their cost of carriage per gallon was enhanced more than enough to constitute a fair refining profit in itself. The result was the practical exclusion of competition from this source. Fortunately, however, after this investigation the New Haven was ordered to pro-rate with the western roads, thereby overcoming about half of this disability. This case clearly evinces the necessity of effective Federal regulation of such matters as joint rates; and it also shows how possible it may be to so adjust tariffs, openly and even legally, as to favor one shipper over another.

Unlike the preceding instance, most of the Standard's rebates have been, in fact if not technically, secret. Perhaps the most flagrant case occurred in the rates from Whiting to the southeastern states. The Bureau of Corporations estimated that $70,000 a year was saved by this device; and all competition from independent sources was eliminated within that territory. The Illinois Central and Southern roads cross at an obscure point in Tennessee known as Grand Junction. This was made a centre of distribution for the entire South.[182] But the rate under which the oil moved,—and in one given month 169 carloads were thus carried,—was given on a special tariff, publicly filed at Washington, to be sure, but prescribing the rate, not from Whiting but from Dalton, Illinois, to Grand Junction, Tennessee. Dalton was an almost unknown station, near the refinery. Of course any other shipper who happened to know of it, and who happened to have oil to ship from Dalton to Grand Junction, could have had the same rate of thirteen cents a hundred pounds. But he would find it moved over a roundabout route, over four different connecting lines, instead of over the rails of a single company. As against this rate of thirteen cents, the only routes known to the Ohio independent producers charged from nineteen to twenty-nine and one-half cents per hundred pounds. Meantime the Standard's oil was by this devious means reaching every point in the South at prices which no competitor could hope to meet. In one case, the oil going by way of Grand Junction, travelled over one thousand miles when the direct route from Chicago was only a little over five hundred miles. The adjustment was everywhere such that, even on the commonly known tariffs, Whiting enjoyed a special advantage over the sources of independent oil. Atlanta, Georgia, is only 733 miles by short line and 1003 miles by way of Grand Junction from Whiting. Toledo, with its independent refineries, is distant only 687 miles. Yet despite this fact, the commonly known rates were shown to be, from Whiting, 33.2 cents as against 47.5 cents from Toledo. So, even without the Grand Junction contrivance, the Standard was seemingly favored more than enough. It should be added, in conclusion, that while the Grand Junction rate was publicly filed, its discriminatory character stands proven by the fact that all the actual shipments were "blind billed;" that is to say, no local agent knew what was the rate actually paid. Such blind bills of lading are photographically reproduced in the report above named. Moreover the ill repute of the transaction was indicated by the prompt cancellation of the rate when discovered in 1905. But in the meantime it had done its work, and fixed monopoly prices for an indispensable product over a quarter of the territory of the United States.

Aside from the palpably dishonest secret rebating, the real root of the difficulty with many of the other big shippers beside the Standard Oil Company,—and an abuse moreover exceedingly hard to correct,—is the open adjustment of rates from competing centres of manufacture or distribution in such a way as to confer favors. The Bureau of Corporation's report on the Transportation of Petroleum Products deals fully with this. Relative rates, as above stated, always seem to favor Chicago (Whiting) as against the centres of independent refining such as Cleveland, Pittsburg, or Toledo. Formerly, before the great refinery was established in 1890 at Whiting,—which, by the way, produces one-third of all the kerosene used in the United States,—the roads from these centres made joint through rates all over the country. They still do so on many other commodities. But on petroleum products they have been withdrawn. The result is that everywhere, except where they can secure entrance by water, the disability in rates against the independent refiner is most effective. That much the same conditions prevail in other lines of business is affirmed on the highest authority. The Railway Age Gazette has repeatedly protested against the pressure which is now brought to bear against the carriers by such organizations as the Illinois Manufacturers' Association to substitute open but discriminatory local rates for the old secret favors upon which the great shippers throve for so many years. Fortunately, however, this situation in some cases relieves the Federal government of the burden of detection of maladjustments of this sort. For the communities aggrieved are constantly on the watch to protect their interests against rival cities. This factor clearly appears in the sugar and cement lighterage cases in 1908.[183] Carriers at New York in order to equalize rates with carriers serving Philadelphia refineries, grant "accessorial allowances" for the use of lighters or for cartage, in order, as they aver, to overcome the disability against their clients. But Philadelphia shippers are ever on the alert to detect such favors given at New York; and substantially aid the government in eradicating the evil. In the grain elevator allowance cases, likewise, at Omaha and Council Bluffs in 1906-1909, not only unfavored shippers at these points but St. Louis grain merchants as a body, intervened as complainants against the system. The powerful motive of self-interest thus invoked is of great service.

Before dismissing these recent and widely "muck-raked" oil cases, it may not be out of place to mention the new interpretation of the Elkins law which has resulted therefrom. One concerns the definition of separate offences. In the notorious $29,000,000 fine case, the Federal Circuit judge applied the maximum penalty of $20,000 for each offence to each separate carload in a large aggregate of shipments. On review of the case, each separate settlement of freight rates was defined as the unit of an offence. As entire train loads had been forwarded or paid for at one time, this materially reduced the aggregate of possible penalties. And, in the second place, the question of legally provable intent was raised. The turning point in the $29,000,000 fine case, was the ruling of the judge on review, that it was necessary to prove that a standard rate, higher than the one actually paid, had actually been filed at Washington; and that the defendant had knowingly accepted a concession from this figure. These points the government was unable in fact to establish; and this ended the case.[184]

While general rate cutting has been less common since 1900, partly also because the roads were rapidly forming great combinations especially in order to eliminate it, subsequent developments have proved that personal and secret favoritism to large shippers was still very common. Despite all they could do to withstand pressure, traffic managers seemed powerless without the aid of the law. Perhaps the greatest revelation of the extent of personal rebating was afforded by the great Wisconsin investigation under the leadership of Governor La Follette in 1903.[185] The original purpose of this inquiry was fiscal; namely, to examine into the subject of railroad taxation. But its scope speedily widened, and at last skilled accountants were put into the books of all the railroads traversing Wisconsin.

The facts elicited by the Wisconsin investigation were startling. For the years 1897-1903, the direct rebates appearing in the accounts of the Wisconsin lines alone,—taking no account of other forms of rebates such as excessive damage allowances and the like,—were $7,000,000. The Chicago and Northwestern alone had allowed more than half of this amount. And from what is now known of other forms of allowance, the total must have been indeed very great. In one year recently, there was evidence to the effect that rebates on the New York Central lines amounted to $1,000,000. According to its own admission, the Michigan Central road, in 1902-1903, made allowances of $586,000. The rebating to the beef packers, especially on export business during 1902, was notorious. No wonder the progressive railroad leaders desired to put an end to this leakage of revenue. And at their request, the wise legislation known as the Elkins Amendments to the Act to Regulate Commerce was passed in 1903.[186]

The Elkins law of 1903 not only came at a time when the carriers were in need of every cent of revenue to tide over a hard year, but it also followed demonstration under the test of judicial procedure, that convictions for rebating were practically impossible under the old law. To convict for unjust discrimination it was necessary to show, not merely the allowance to one favored shipper, but the fact also had to be proved that no such allowances were made to others on the same sort of traffic under similar conditions. This could scarcely ever be done. In fact, during almost twenty years, there had been less than a score of convictions. Most of the prosecutions had failed utterly. Both government and carriers pressed for legislation. This was promptly given in the Act of February 19, 1903. There were four important features of this law. Railway corporations, not merely individuals as before, were now made directly liable to prosecution and penalties. The tariff filed became the lawful standard. The fact that all shippers got the same low rate was, therefore, no longer a defence. In the third place, the shipper as well as the carrier could be held accountable. In other words, accepting as well as giving rebates, became unlawful. And, finally, jurisdiction was conferred upon the Federal courts to restrain any departure from published rates or any "discrimination forbidden by law" by writ of injunction. This fully legalized a rather doubtful course of procedure to which the Interstate Commerce Commission had been compelled to resort as a last weapon in the rate wars on grain and beef since 1901. It also abolished the penalty of adjustment; imposing fines instead. But this action was subsequently rescinded in the law of 1906.

The record of the vigorous prosecutions against rebating under the Elkins law,[187] affords conclusive evidence, not only as to the widespread extent of the evil, but as to its identification with many of the large industrial combinations. The history of the activities of the Interstate Commerce Commission is to be found in its file of annual reports. But little seems to have been done for the first two years; but great activity was displayed during 1905. The ensuing year was rather notable by reason of the success in securing convictions. Besides the Standard Oil cases, there was collected in fines for rebating between October, 1905, and March, 1907, the sum of $586,000. Several men were sent to jail, for from three to six months. Among the trusts implicated were the beef packers, who have been indefatigable in concocting rebating devices; the tin plate combination; and, most notable of all, the American Sugar Refining Company. Nearly $300,000 in fines was imposed upon this concern alone. The secret allowances in these cases were most ingeniously arranged. Some were "refund of terminal charges;" some were "lighterage demurrage;" some were allowances for damages. Many were paid by drafts instead of checks so as to preclude identification of individuals; some were by special bank account; but the sums involved were very large. Shipments of sugar on which rebates of four to six cents per hundred were given, amounted within a relatively brief period to upwards of 70,000,000 pounds on one line alone. As sugar shipments westbound from New York constituted nearly one-third of the total tonnage, the importance of these prosecutions appear. The following quotation from a letter from an agent of the sugar trust accompanying a claim for overcharge of $6,866 on shipments of syrup, introduced in evidence in one of these cases, aptly describes the situation, both then, now, and always. "We hope to devise some means to enable us to conduct our freight matters with the transportation companies satisfactorily even under the new conditions imposed by the Elkins bill; but there may be some cases that cannot be taken care of, in the event of which we will, like all other shippers, have to take our medicine and look pleasant." The Interstate Commerce Commission reported as to the conditions in 1908 that "many shippers still enjoy illegal advantages." Many convictions were, however, secured. And investigations in California showed the existence of an extensive system of preferential rates.[188] A list of 108 firms was discovered on the Southern Pacific road alone, who were enjoying "special inside rates" which often aggregated $50,000 per month. Many of these assumed the form of refunds upon claims for damages.

Thus the rebate as an evil in transportation, even since amendment of the law in 1906-1910, while under control, is still far from being eradicated. Favoritism lurks in every covert, assuming almost every hue and form. Practices which outwardly appear to be necessary and legitimate, have been shown to conceal special favors of a substantial sort. Among the latest forms, undue extension of credit may be mentioned. It appeared, for instance, in 1910 that the Hocking Valley Railroad was favoring the Sunday Creek Coal Company to the extent of credit for transportation on its books to the amount of $2,400,000.[189] Another device which amounted to favoritism whether so intended or not, has been brought into court upon prosecution of the so-called Beef Trust. Substantial concessions in the rate from Kansas City to various foreign countries prevailed by reason of the fact that long time contracts for shipments at an established rate continued after a new higher general tariff had been put into effect. This increase of rates in general, leaving the trust rates at the old figure, of course created an undue and unlawful preference.[190] The chapter might be further amplified by details concerning "substitution of tonnage at transit points;"[191] excessive allowance for claims, and, as in a recent important case against the New York Central, exorbitant rates paid for advertising in a theatrical publication, in order to secure transportation for an itinerant troupe of travelling players.[192]

The extreme subtlety of personal favoritism was recently brought to light in connection with the selling price of coal in the little town of Durham, North Carolina.[193] Complaint was entered that a certain retailer was charging but five dollars a ton while his competitors were unable to dispose of theirs at a profit for less than six dollars. The explanation offered, that this person employing no bookkeeper and, paying no rent, was enabled to do this because of these savings, proved inadequate. Investigation developed the fact that no direct preference from railroads existed, but that there were, nevertheless, various peculiar features as to division of rates which invited further examination. Thus, for example, while the Norfolk & Western received $30.80 for hauling a carload of coal 160 miles, the Durham & South Carolina Railroad received $24.80 for hauling the same car one mile. This little railroad was owned by a lumber company which seemed in effect to have set up the defendant coal merchant in business. An arrangement between this little switching road and the Seaboard Air Line, as well as the Norfolk & Western, also favored the Durham & Southern. The key to the situation lay in the fact that the Dukes,—powerful financial interests controlling the American Tobacco Company, the Southern Power Company and large cotton mills,—also controlled the Durham & Southern through the lumber company. The Seaboard Air Line, therefore, when it gave to this little switching road for a twenty-mile haul, about forty per cent. of its division on through business, surreptitiously conferred a heavy bonus upon its little connection. It must have lost money under such a division of rates. The only conclusion possible is that this little railroad was specially favored in order to purchase the goodwill of financiers controlling a large traffic in other lines of business. The rebate, however, was not given to the American Tobacco Company, but constituted a comfortable profit "on the side" for powerful interests in its management.

The elevation cases concerning the legitimacy of a special payment for unloading grain in private elevators, have been under dispute for years. Their validity has recently been affirmed by the Supreme Court in an important decision in 1911.[194] This litigation illustrates the difficulty of defining rebates as an expression of personal favoritism. In 1899, the Union Pacific Railroad made a contract with Peavey & Company at Council Bluffs to erect an elevator and to transfer grain for a charge of one and one-quarter cents a hundred pounds. This arrangement was objected to by competing railroads on the ground that it gave compensation to a private concern, engaged in general grain business for the handling of its own property. The Union Pacific insisted that the expedient was necessary and proper as a means for promptly unloading its cars at Omaha. The Commission, after investigation, sanctioned the contract. In 1907, the matter again came before the Commission upon complaint of other railroads competing with the Union Pacific along the Missouri river. It was alleged that the continuance of the elevator allowance by the Union Pacific would virtually compel all other roads to make similar allowances. Still the Commission adhered to its former conclusion that undue discrimination did not result. The practice, however, gradually spread until all the roads at Missouri river points put in an allowance of three-fourths of one cent as an elevator charge. This brought forth a complaint from the lines at St. Louis that traffic was being diverted from that point as a result; and the Commission, once more considering the matter, held that the practice was prejudicial to public interest. Conditions, in fact, had changed, mainly through the increase of through shipments to the East without transfer at the Missouri river. The Commission, therefore, held that when such transfer took place, it was for the accommodation of local grain merchants, who ought to pay for the service rendered. At this stage of the proceedings, the matter went to the Supreme Court of the United States upon appeal. The decision finally upheld the Commission, in holding that the payment of an elevation allowance was not unlawful, but that if paid to one elevator, it must be paid to all. The bearing of this case upon the larger issue, of payments by railroads for special services rendered by, shippers cannot fail to be of great importance in the future.

The use of the industrial railroad as a means of preferential treatment still occasions difficulty.[195] The case is simple where but one shipper makes use of the terminal plant; but where a number of shippers may utilize it jointly, it becomes difficult to draw the line between pro-rating allowances and actual rebates. The Manufacturers' Railroad Company, with twenty miles of track, four locomotives and one hundred and ten employees, serves a considerable manufacturing section in South St. Louis. A majority of the stock of this terminal railroad is held by persons controlling the Anheuser-Busch Brewery. The enormous traffic of this concern, equal to about one-thirtieth of the total tonnage of St. Louis, is handled over the line of the Manufacturers' Railway. Almost nine-tenths of its business consists of shipments of beer; but in 1910 some 5,424 carloads belonging to other patrons moved over its rails. For this terminal service the Anheuser-Busch Company, through the Manufacturers' Railway, got a very substantial allowance for the service rendered. For example, in one month on ten carloads of beer, the Louisville & Nashville allowed $45 out of a total revenue of $391.60 for moving the traffic something less than four thousand feet. The disparity is obvious between this allowance and the balance remaining as compensation for moving the traffic 477 miles, including three first-class railroad tolls and terminal charges at the other end.[196]

A prime difficulty is to determine whether unduly low commodity rates amount practically to special favors granted to large shippers. Much evidence recently tends to show that the trusts enjoy advantages of this sort not extended to other competitors. The Steel Corporation, through its ownership of railroads and steamships, certainly has a great advantage over its rivals.[197] But other trusts not controlling common carriers of their own, are also accorded what seem to be unduly low rates upon their products. Recent evidence before the Interstate Commerce Commission seems to show that sugar, beef, and coffee do not bear their proper share of transportation costs.[198] Copper, the product of a powerful trust, enjoys a lower ton mile rate than grain,—a rate, despite its high intrinsic value, actually below that on soft coal.[199] The discrimination is too palpable to be passed over without explanation.

From the survey of rebating and rate wars,—which latter of course afford the most favored soil in which personal favoritism may flourish,—one cannot avoid the conclusion that a great improvement in conditions has been brought about. The strengthened arm of the Federal government has come to the support of the carriers; and has assisted them to a material enhancement of their revenues, by putting a stop to serious leakages in income. But the carriers could undoubtedly do much on their own account, could they be granted the right to make traffic agreements, subject always, of course, to the approval and supervision of the Interstate Commerce Commission. Whether Congress will ever permit this, remains to be seen. The most important result of all this Federal activity so far, has been the moral stimulus toward fair business dealing which has been given. Thousands of shippers today, quite apart from the fear of fines or imprisonment, would disdain to ask or accept favors which a decade since would have been regarded as entirely proper. No one can doubt that the morale of business is distinctly higher than it used to be. Could such higher standards become universal, the Department of Justice would be relieved of a substantial part of its present duties.

[162] 14 I. C. C. Rep., 250. Upheld by the Supreme Court in 1911; 219 U. S., 498. Also 23 Idem, 535.