Constant rates applied over long distances on the same line almost inevitably tend to pass over into a system of equality of rates over different lines.[230] The necessity was evident enough in the Milk Rate case. This phase of the matter may theoretically best be discussed by reference to the following diagram. Suppose A, B, C, and D to represent any four inland "common points." It remains to show how it comes about that they all finally enjoy equal rates to all four seaports, regardless of location. Each appears to be naturally tributary to some one of the seaports by a dominant or short-line route. In each instance this route properly rules the rate. Moreover, the four seaports may be considered for traffic purposes as equally and interchangeably distant from one another without regard to location. This follows from the fact that, except in extreme instances, rates by water do not vary according to distance, so small is the cost of mere propulsion by comparison with the terminal costs. In other words, the rate is the same from Wilmington to Brunswick or Savannah as to its next neighbor Charleston. From this it follows, further, that Wilmington, Savannah, and Brunswick can all reach B—the point to which Charleston is nearest—on even terms. They may each have a direct line to B; but, as compared with a possible combined low water rate to Charleston and a low direct rail rate inland to B, the Charleston route may be at least able to hold its own. All three outside competitors, then, are on even terms with one another in respect of access to B. But how does Charleston stand towards B as against the field? We have already concluded that a roundabout route must be allowed to meet, though not to undercut, the ruling rate. Such a roundabout route from Wilmington on this diagram to its own natural tributary A could be, and as a matter of fact is, made by passing around by way of Charleston or any other seaport. Charleston wishes to share in this trade at A, and may reach it by similar tactics. It stands towards A precisely as Wilmington stands towards B. They finally agree to enjoy both A and B on even terms. But, as we have already seen, the admission of Wilmington to B is equivalent to the admission of all the rest. Whence it comes about that all four establish B as a "common point." And of course the same procedure fixes all the others, A, C, and D in the same way. In the Savannah Fertilizer case[231] it appeared that there were no fewer than 148 points in ten states from Louisiana to Kentucky, to which rates on fertilizers were absolutely the same from each of the four seaports. The degree of local discrimination of course was negligible at the remoter places; but it augmented in proportion as the immediate neighborhood of each seaport was approached. The apparent anomaly was greatest in a north and south direction along the seacoast. Thus Dinsmore, Florida, was 275 miles from Charleston and only 160 miles from Savannah, yet the rates from both points were the same. The governing feature usually was the entire equality of coastwise water rates, regardless of distance, which in turn compelled the land lines to follow suit.

The Cincinnati Freight Bureau case, otherwise known as the Maximum Freight Rate case,[232] affords the best example of the difficulty in practice of adjusting rates over different and widely separated lines on a distance basis, in order to satisfy the demands of commercial competition. Atlanta, Georgia, the key to the southern market, is 876 miles by rail from New York, but only 475 miles from Cincinnati and 733 from Chicago. In other words, Cincinnati is fifty-four per cent. as far from Atlanta as is New York; and even Chicago is only eighty-four per cent. as remote. In general, this valuable southern territory, on the basis of mere distance, is really nearer to the leading middle western cities than to those on the Atlantic seaboard. Yet this geographical situation is not reflected in the railway tariffs. Rates from the West, especially on manufactures, were much higher, always relatively and often absolutely. Thus first-class goods in 1894 paid $1.47 per hundred from Chicago (733 miles), while from New York (876 miles) the rate was only $1.14. At points like Chattanooga the disparity was even greater. This city is only 595 miles from Chicago as against 1,060 miles from Boston. Yet the rates were actually lower ($1.14) from New England than from Chicago ($1.16). The principal reason for this of course was the cheap coastwise water competition by way of Charleston and Savannah. The eastern all-rail routes could charge no more than the combined rail-and-water lines. The difference in relative cost of operation by water was recognized by means of so-called "constructive mileage." From New York to Savannah by sea is about 750 miles; yet the allowance to the steamers was proportioned upon a distance of only 250 miles. Water cost was thus fixed by comparison with rail cost in the proportion of one to three. Yet, even with this allowance in favor of eastern cities, New York remained more distant from Atlanta than Cincinnati; the "rate-making" distance from the former being 538 miles as against only 475 miles from Cincinnati. The arbitrary reduction of the New York distance left Chicago more remote (733 miles), but not in so great degree as its tariffs implied. These tariffs were also peculiar in another regard. The handicap against the western cities was much higher in respect of manufactures and high-class freight than upon foodstuffs and raw produce. This in turn was clearly due to a long-established agreement between the lines east and west of the Alleghanies, as to a division of the field. Originally each set of lines was harassed by roundabout competition from the other. Western foodstuffs and raw produce were reaching the South by way of the Atlantic seaboard; and eastern manufactures from New York, for instance, were rambling about over western lines in order to reach places like Atlanta and Augusta, naturally served by direct routes from the East. The agreement to divide the field, dating from 1878, steadily became more irksome, however, to the West, with the development of manufactures of its own. The problems raised by this change are too large to be considered here. The main question for the present inquiry is as to the relative fairness of rates from two widely separated centres to a common market, those rates not being proportioned to distance. The final settlement of this knotty question is suggestive of the extreme difficulty of attempting to apply mileage or distance rates over different railroads too rigidly. The complaint being as to relativity, there were only two possible solutions.[233] One was to increase the eastern rates, the other to order a reduction of the charges from the West. The former course was impossible, owing to the presence of water competition by sea, not under control. The latter alternative was, therefore, chosen by the Interstate Commerce Commission in its decision in 1894. The rates from western cities were always composed of two parts. The charge from the Ohio south was kept distinct as a local rate. The other portion of the rate applied from Chicago, for example, down to the Ohio river. Of these two parts, the trunk line portion appeared reasonable enough. It was the southern local, often one hundred per cent. higher than the other, which seemed most unreasonable; and which, according to all appearances, had been used to bring about a closure of the market to western manufactured goods. Consequently the Commission ordered a reduction of the southern local rates, cutting them drastically, but leaving the northern locals unchanged. This decision was never carried into effect; as the Supreme Court of the United States held the Commission to have no such rate-making power. Nothing was done apparently to remedy the disparity in charges against the West, although the railroads serving that territory urgently pressed for action. Every time they threatened a reduction of their western rates, the eastern line came down in proportion. This left the relative rates as before, although the general scale would be lower all round.

At last, in 1905, the eastern lines from Baltimore south agreed to permit a reduction of five cents in the rates from western cities by lines north of the Ohio river; but they refused to accede to any change in the rates from the Ohio south. This was the exact opposite of the Interstate Commerce Commission's proposition, although both plans were intended to compass the same object; namely, to place western shippers more nearly on a parity with the East. The Commission, in 1894, laid all reduction upon the southern portion of the rate; the railroads, in 1905, placed it all upon the northern part. This obviously afforded no relief to the original complainant, Cincinnati. In fact, it actually operated to its great disadvantage, inasmuch as it let its two powerful rivals, Chicago and St. Louis, into the southern field on distinctly more favorable terms. Such was the outcome as a result of the friction of railroad competition. The reasonableness of some reduction was clear. But to the layman, the fairness of laying the reduction entirely upon the northern locals, already relatively low, instead of upon the extremely high southern part of the rate is not by any means so clear.[234]

One further detail of this adjustment of southern rates raises a question:

Is this not in a measure well described in the passage, "unto him that hath shall be given; but from him that hath not, shall be taken away even that which he hath"? This railway argument contains dangerous possibilities. In effect, upon the theory of charging what the traffic will bear, it means that a railway (in this case the Seaboard Air Line) may increase its own local rates, not in proportion to the length of its own haul (from Richmond to Greenwood), but according to the remoteness of that local point from another competing market. The inevitable effect of the general adoption of such a policy must be to erect arbitrary barriers to the free and widespread movement of commerce. The great advantage of the flat rate or of commodity rates is that, placing all competing centres upon an absolute parity irrespective of distance, they encourage the utmost freedom of trade.

Certain general conclusions seem to be warranted by the analysis of these cases of local discrimination. The first is that they all show the extreme delicacy of commercial adjustment and the existence of conditions well beyond the control of the carriers, jointly or singly. Trade jealousies in particular—the rivalry of producing and consuming centres—render relativity of rates of paramount importance to shippers. This class in the community is interested comparatively little in the absolute level of rates, that being more directly the concern of the general consuming public. To the public, as represented by State and Federal legislatures, it is difficult to make these complicated matters of commercial competition clear. The only basis of rate making that is easily understood is one founded in general upon the distance principle, or, in other words, correlated with considerations of cost of operation. Any departure from this basis is apt to breed suspicion, and at all events puts the carrier upon the defence. It is bad policy, in their own interest, for railroads to permit a continuance of such violations of the distance principle in their general tariffs (commodity rates as a special resource to meet the special needs of commercial competition may be set aside), except in extreme cases. This was recognized by the trunk lines when they almost unanimously acquiesced in the long and short haul provisions of the Act of 1887. The people of the United States have the same right that they had then, to expect that at the earliest possible moment the wise provisions of the trunk line rate adjustment shall be widely accepted in the West and South. Whether those regions, and the railways that reach them, have yet sufficiently developed to warrant the change is a matter requiring careful consideration in detail.

The necessity of some exercise of governmental control over these carriers of the country, in order to mitigate, if not to eliminate, local discrimination as far as possible, is evident. Many of the instances previously cited have clearly shown how impossible it often is for any railroad, single-handed, to deal with an involved situation in a large way. Take the Cincinnati Freight Bureau case, for instance. Conceding, as many would, the claim of western cities to some readjustment of tariffs in their favor, is it not an anomaly that the lines south from Baltimore, several hundred miles away, should finally dictate the means to be employed to remedy the situation at Cincinnati and Chicago? Who else but the Federal government could ever hope to disentangle the almost hopeless snarl of competition involved in the controversy over differentials to and from the Atlantic seaboard?[236] This controversy is at bottom one of local discrimination. And yet how is the Interstate Commerce Commission to aid in the solution of these intricate problems under present conditions? Its hands formerly doubly tied, are now in part freed by rehabilitation of the long and short haul clause. But it cannot yet deal with minimum rates, nor is it clear that it can prescribe differential rates.[237] True, the commission may, in some cases, accomplish by indirection its purpose of establishing a proper relativity between rates through the exercise of its newly granted power to fix maximum rates. This, as we shall see, was done in the recent Spokane and Denver decisions. Holding that the charges at interior points were out of line with through rates to the Pacific coast; and being unable to govern the long-distance tariffs, it simply ordered a reduction of certain rates at Spokane and Denver as inherently unreasonable. This solution is not, however, always practicable. Not infrequently the lower rate at the remoter point will drop as soon as the intermediate rate is lowered. Thus the former relativity of charges is re-established on a generally lower scale. The complaint in the Eau Claire lumber case required the exercise of such power over minimum rates, in order to remove the disability against a particular centre. And then, finally, it is indubitable that commercial competition as a "compelling" factor has been somewhat over-emphasized by the railroads. Too often conditions in part brought about by themselves, or in which at least they have acquiesced, have been set up as a defence for rates favoring certain points. This is especially true of the southern basing point cases.[238] Whether any further grant of powers to the Interstate Commerce Commission by Congress is necessary at this time in order to enable progress to be made in this connection, it is as yet too soon to predict. The course of affairs for the next few years will at all events bear attentive watching.

In the case of competition between a direct and a longer, more roundabout line, which one "controls" or fixes the rate? It is an important matter, involving as it does the economic, if not the legal, right of a carrier to participate in any given traffic. Concerning this question the greatest diversity of opinion prevails. On the one hand, both writers[239] and practical railway men[240] aver that the short line makes the rate, while the long line merely meets the rate thus made. This is probably the more prevalent opinion. Yet expert evidence of an opposite sort is to be had for the seeking. The Interstate Commerce Commission has repeatedly held that the short line is at the mercy of the longer line under certain circumstances;[241] and traffic managers not infrequently plead their inability to control rate situations in the face of irrepressible, roundabout competition.[242] There is evidently a confusion of thinking, or else a loose use of terms where statements are so conflicting. As a matter of voluntary agreement among roads, or of prescribed rates under government regulation, the issue often assumes the form of controversy as to whether a road operating under a physical disability shall be permitted to participate in a given business by a concession in rates or not. Thus in the notable Milk Rate cases it was a question whether roads with heavy grades should be allowed to make concessions in rates. This issue really also underlies the question of enforcement of the long and short haul clause. In the recent Spokane case the Harriman lines to St. Paul asked that they, being long lines, should not be compelled to reduce their rates to the figure prescribed for the direct Hill roads.

It is clear in the first place that "short line" and "long line" are merely used as convenient terms to designate differences in the cost of operation. This was well put by James J. Hill before the Elkins Committee of 1905.

The problem should really be stated thus in terms of cost not of distance. Suppose the roundabout line to be in part or wholly by water, as in competition between the transcontinental roads and the Isthmian or Cape Horn routes, or as between the direct all-rail line from Boston to Nashville, Tenn., and the steamer line from Boston to Savannah, and thence up to Nashville by rail. In such cases the rail lines allow the water routes a differential or constructive mileage in recognition of their relatively cheaper per mile expenses of operation. The differential may sometimes exist, where, judging by the bulk of traffic the advantage, irrespective of the differential, lies with the line giving the lower rate. In other words, as measured by volume of business, the stronger line and not the weaker one enjoys the benefit of the differential. This is the case in the coastwise traffic between Atlantic and Gulf ports; where the bulk of the tonnage goes by steamer and at lower rates than by all-rail lines. The difficult point to settle in all such cases is whether the allowance is made as a voluntary concession to the roundabout line because it costs more to operate; or whether it is a toll or tribute, because, irrespective of the cost, the long line rate is made on the basis of value of service. The problem, then, resolves itself into this: how far in practice does cost of operation really "control" the rate in cases of competition between two lines differently circumstanced in this regard? If cost is of fundamental importance, the "short line," using the term as above said in a figurative sense, "controls" the rate. If cost is an entirely secondary matter, rates being made in accordance with considerations of value of service, the "long line" holds the upper hand, and the short one is at its mercy.

It is important, moreover, in the comparison of costs of operation, to keep in view the interrelation between fixed charges and operating expenses. This point is often neglected. Any well-considered outlay upon permanent improvements, of course, increases fixed charges according to the extent of the new capital investment; but at the same time it presumably lessens the direct cost of operation. The interest upon funds spent for heavier rails, reduction of grades, straightening of curves, better terminals or heavier rolling stock, must be set over against the direct economies resulting from heavier train loads, lessened expenditure for wear and tear, for accidents and claims or for wages. This relation between current expense and capital cost was clearly emphasized in an arbitration decision by the late S. R. Blanchard, already cited in another connection. Two roads were in competition for business at New Orleans. One had costly but convenient terminal facilities. The other was so far from the heart of the city that the drayage expenses were an important item. This second railway began by offering free cartage to shippers in order to even up with its more favored competitor; but this soon gave way to the practice of private teaming by shippers with an allowance on the freight bill for "drayage equalization." The other road objected to this on the ground that it constituted a virtual rebate; that in other words the weaker line was taking business at an abnormally low rate. The arbitrator, however, upheld the practice, on the ground that the heavier operating expense for cartage was merely an alternative for increased interest charges, had the road elected to construct costly and more convenient terminals. One road virtually paid money for team hire, the other paid it in interest on bonds.

Analyzing the main question two propositions are certain. Firstly, the long line can never charge more than the short line; whence it follows that as the short line reduces its rate, the long one must accept that rate as made; and, secondly, the long line, costing more to operate, is, in the process of reduction of rates, bound to be the first to strike the bed-rock of cost incident to that particular service. To go below this point of particular cost would obviously be indefensible from every point of view. The general rule, then, is that "the short line rules the rate." This is accepted widely in practice, as for example throughout trunk line territory and between the so-called Missouri-Mississippi river points, where the short line from Hannibal to St. Joseph determines all rates by longer routes.[243] But the problem yet remains unsolved. The long line may never be able to charge more than the short line—may it, however, charge less under certain conditions? The moment it is enabled to do so, the long line and not the short line, for the moment, "controls the rate." If, now, we use the technically proper terms, the question becomes this: Under what circumstances is average cost of service in railway competition set aside in favor of other considerations; or, otherwise stated, when may a line, operated under a disability as to cost, properly give a lower rate than its competitors notwithstanding? Does disability justify a handicap or the reverse? This was the form which the question assumed in the notable Milk Rate case: as to whether the weaker lines in respect of distance or grades should be allowed compensation therefor by permission to charge higher rates.

One of the common instances of rate control by a line operating under a disability as to distance or normal cost is the competition of a bankrupt with a solvent property. The "roundabout" line, like the Erie or the old New York and New England, having repudiated its fixed charges, undoubtedly "makes" the rate which the other roads must meet or lose the traffic. Usually they prefer to absorb or control it otherwise, financially, thus substituting monopoly for a ruinous condition of competition. Yet such instances resolve themselves, evidently, into questions of relative cost of operation after all. The bankrupt road holds the whip hand, because, having repudiated its fixed charges, its average costs of operation are correspondingly reduced. The validity of operating cost as a basis of charges is surely not shaken by this exceptional case.

The relative proportions and the distribution of local and through traffic upon two lines of differing length in competition with one another are primary factors in determining the ability of either one to "make the rate." This is, of course, especially true under the operation of any long and short haul law, under which any reduction of the competitive rates would necessitate a lowering of the charges at intermediate points. No road is going to sacrifice lucrative rates upon a large volume of local traffic unless it can gain either a large volume of business or a very long haul from a competitive point. Many of the notorious rate disturbers in our industrial history have been "short cut" roads—the shortest lines between given important points, regardless of the nature of the intervening territory—like the old New York and New England, the Erie or the Canada Southern. Other roads, like the Chicago Great Western or the Central Vermont, were more roundabout, and yet enjoyed but little local business, depending almost exclusively for their livelihood upon long hauls between termini. On the Central Vermont at one time, through business constituted seventy-nine per cent. of the total; and only five per cent. was strictly local in origin. On the other hand, the Louisville & Nashville, in its original petition for exemption from the long and short haul clause, stated that eighty per cent. of its income was derived from local business. This consideration, as applied to competition between the two primary trunk lines, may not be without significance. As compared with the Pennsylvania Railroad, rich in local business, the New York Central, running along the narrow Mohawk and Hudson valleys, has not inaptly been described as operating "between good points, but not through a good country." Under a strict enforcement of the long and short haul clause, the dilemma on the former road would be more serious than on the latter. To choose between its rich local traffic in iron and steel or coal and the long haul business from the West, would be a more difficult matter for the Pennsylvania, than for the New York Central management to weigh its through grain business against the local traffic from interior New York points.

In one way the persistence of locally high rates in the South and West, irrespective of the low charges at competitive points, is defensible on the ground that local business is scanty.[244] The roads cannot live upon it. Their mainstay is the long-distance traffic from important points.[245] On the other hand, where there is no obligation to maintain a distance tariff, of course the road with rich local business enjoys a great advantage in making rates at competitive points. It can practically subsist upon its revenue from its own particular constituency, meeting all its fixed charges thereby; and can afford to cut rates on the competitive tonnage down to the bone. Such a road, quite irrespective of the length of its line, would obviously "control" the rate at competitive points, as against any rival without such a subsidiary and independent source of income.[246]

Volume of traffic is another fundamental element in the determination of cost of operation. No matter how short the line or how easy its curves and grades, unless it can handle its tonnage in large bulk it will operate at a disadvantage. Hence a most important factor to be reckoned with, in deciding which of two competing lines is in a commanding position as to rates, is the volume of traffic, both in gross and as susceptible of concentration on either line. In the notable Chattanooga case, for example, although the line from New York to Nashville, passing around to the south by way of Chattanooga, is 212 miles shorter than the lines via Cincinnati or Louisville, the latter, by reason of the density of traffic in trunk line territory, seem to stand at least on an even footing. On the other hand, the enjoyment of the bulk of the tonnage sometimes places its possessor at the mercy of a petty rival. The Fall River water line to New York, carrying an overwhelming preponderance of the business, obviously could not afford to cut rates to prevent the Joy Line from stealing a small portion of the traffic. The same principle holds good in other lines of business. The Standard Oil Company can better afford permanently to concede a small fraction of business to a small independent dealer, so long as he knows his place and refrains from ambition to enlarge, rather than to attempt to drive him out entirely by cutting prices on a huge volume of business. Occasionally independents are shrewd enough to take advantage of this; and so to distribute their business that they shall in no single place menace a powerful rival, and yet comfortably subsist on the gleanings over a wide area.[247] In no single locality are they important enough to exterminate, at the cost of cut rates applied to a large volume of business; and yet in the aggregate they may make quite a fair livelihood. The only difference between the status of a railway and other lines of business in this regard is that the railway may not be quite so free to deploy its forces. Its territory and tonnage are more definitely circumscribed by physical conditions of location.

A point to be noted in this same connection is the relative stability of the traffic. Is it concentrated in a few hands or does it arise from many scattered sources? In the former case either road by making a bold stroke may so entirely capture the business that, by reason of the enhanced volume, a handicap in operation may be overcome. Thus, in the notable instance of trunk line competition for the beef traffic some twenty years ago, the Grand Trunk, although much more roundabout, besides being handicapped in other ways, by securing all the business, could afford to make rates impossible under other circumstances.

Whether the business in question is natural or normal to a road, or is an extra, diverted from other more direct lines, is still another factor of importance affecting ability to compete successfully for any given traffic. The best statement of this is found in the argument of J. C. Stubbs before the Arbitration Board on Canadian Pacific Differentials in 1898.[248] "These are differentials in favor of weaker lines—lines which upon the merits of their service cannot successfully compete for the business, but claim a share of it as the reward of virtue, the price of maintaining reasonable rates.... For example, the Canadian Pacific road was not projected or built for the purpose of developing, fostering, or sharing the carrying trade between San Francisco and the eastern part of the United States.... After they were built and the various connections made, then, and not until then, it was seen that there was a business opened. The route having been opened, the newer and longer lines entered the field of competition against the older, shorter, and more direct lines by cutting the latter's rates.... In a fight of this kind, paradoxical as it may seem, the stronger line always got the worst of it.... The weaker or longer line, not having any business at the outset, had nothing to lose. Everything was gain to it, which appeared to show an earning above the actual cost of handling the particular lot of freight. Quite a distinction between that and the average cost of handling all business. Such an unequal warfare could not long continue, and the common result was that the stronger line sought for terms, and ultimately bought the weaker line off, ... this class of differentials is and always has been obnoxious."

Our final conclusion must therefore be that the outcome in cases of unequal competition in respect of cost of operation can seldom be predicted with certainty. Everything depends upon local circumstances and conditions. Sometimes the long line and sometimes the short line will dominate. Careful analysis of every feature of the business must be made before positive affirmation is possible. This result is at all events worth noting. A due appreciation of the complexity of the business of rate making may safeguard us against the cocksure statements of the novice, who has never closely examined into the subject. President Taft has recently emphasized the need of expert service in the field of customs and tariff legislation. It is greatly to be hoped that a similar appreciation of the care with which railway legislation should proceed may prevail at Washington during the present session of Congress.

[200] Cullom Committee, Report, Testimony, p. 532. Cf. instances in Hudson's Railways and the Republic; and Parson's Heart of the Railway Problem as showing popular misunderstanding.