Modern Economic Problems Part 33

Commerce became centralized. Enormous increases of value at a few points were offset by losses in other localities.

-- 6. #Reasons for governmental aid#. The growth of railroads in America was more rapid than in any other part of the world, but it did not occur without much help to private capital from governmental agencies. The railroad enterprise was uncertain, the possibilities of its growth could not be foreseen, and private capital would not invest without great inducements. In European countries the railways were built through comparatively densely populated districts to connect cities already of large size. Yet railroad extension was very slow there, even tho the states in many ways aided the enterprises. America was comparatively spa.r.s.ely populated, and most of the railroads were built in advance of and to attract population, business, and traffic.

In many cases railroad building in America was part of a gigantic real-estate speculation undertaken collectively by the taxpayers of the communities.

-- 7. #Kinds of governmental aid#. American states recklessly abandoned the policy of non-interference, and vied with each other in giving railroad enterprises lands, money, and privileges, in loaning bonds, in subscribing for stock, and in releasing from taxation. These fostering measures were expected to increase wealth and to diffuse a greater welfare through the community. Many states were forced to the point of bankruptcy by their reckless generosity, and some states repudiated the debts thus incurred.

The national government then took up the same policy and granted lands to the states to be used for this purpose. The first case of this kind was the grant to the Illinois Central road, in 1850, of a great strip of land through the state from north to south. Grants were made in fourteen states, covering tens of millions of acres of land. Then the national government, between 1863 and 1869, aided the building of the Pacific railroads by granting outright twenty square miles of land for every mile of track and by loaning the credit of the government to the extent of fifty million dollars,--a debt which was settled by compromise only after thirty years.

Counties, townships, cities, and villages then entered into keen compet.i.tion to secure the building of railroads, projected by private enterprise. Bonds, bonuses, tax-exemptions, and many special privileges were granted. To obtain this new Aladdin's lamp, this great wealth-bringer, localities mortgaged their prosperity for years to come. The promoters bargained skilfully for these grants, playing off town against town, cultivating the speculative spirit, punishing the obdurate. Not the civil engineer, but the railroad promoter determined the devious lines of many a railroad on the level prairies of America.

The effects of these grants were in many cases disastrous, and after 1870 they were forbidden in a number of states by legislation and by const.i.tutional amendments. But before this era of generosity ended, probably the railroads in America had received more public aid than has ever been given to any other form of industry in private hands.

-- 8. #Emergence of the railroad problem#. In most charters and laws authorizing the building of railroads, either nothing was specified regarding rates, or maximum rates were fixed which proved to be so high that they were of little, if any, practical effect. But very soon began to appear some serious evils in the policy of railroads toward the shipping and traveling public in matters of rates and of service.

As the ownership of the wagons, ships, and ca.n.a.l-boats of a country is usually divided, ocean ports and points along the lines of turnpikes and ca.n.a.ls enjoy compet.i.tion between carriers. In the early days of the railroads it was believed that a company or the government would own the rails and charge toll to the different carriers, who would own cars and conduct the traffic as was done on the ca.n.a.ls.

Experience soon showed the impracticability of this scheme and the need of unified management. An operating railroad company, therefore, has a monopoly at all points on its line not touched by other carriers. This, like any other monopoly, is limited, for the railroad, to secure traffic, is led to meet compet.i.tion of whatever kind--that of wagons, ca.n.a.ls, rivers, or of other railroads--wherever it occurs.

The railroads in private hands early began to "charge what the traffic would bear," high where they could, and low where they must, to get the business. Thus developed the various forms of discrimination which are now to be described.

-- 9. #Discrimination as to goods#. Discrimination as to goods is charging more for transporting one kind of goods than for another without a corresponding difference in the cost. When reasonably understood, this proposition does not apply to a higher charge for goods of greater bulk, as more per pound for feathers than for iron, the "dead weight" of car being much greater in one case than in the other. It does not apply where there is a difference in risk, as between bricks and powder, or coal and crockery; nor where there is a difference in trouble, as between live stock and wheat. Any difference that can reasonably be explained as due to a difference in cost is not discrimination; on the other hand a difference in cost without a difference in rate is discrimination. Discrimination as to goods may be by value, as low rates for heavy, cheap goods, and high rates for lighter, valuable ones. Coal always goes at a low rate as compared with dry goods, and sometimes more is charged for coal to be used for gas than for coal to be used for heating purposes.

Railroad discrimination so frequently has resulted in injustice to the shipping public that the term has taken on an evil significance. But it is well to observe that the word discrimination is not derived from _crimen_ (crime), but from _discernere_ (to discern). There are both reasonable and unreasonable forms of discrimination. In general discrimination as to goods more often appears, under certain conditions and made with due regard to the public interest, to be reasonable; less often to be justified is the form of local discrimination, next to be described; and least often of all to be justified is the last named form of personal discrimination.

-- 10. #Local discrimination#. Discrimination between places (called also local discrimination) is charging different rates to two localities for substantially the same service. This occurs when local rates are high and through rates are low; when rates at local points are high and at competing points are low; when less is charged for shipments consigned to foreign ports than for domestic shipments; when, more is charged for goods going east than for goods going west.

The causes of local discrimination are: first, water-compet.i.tion, found at great trade centers such as New York and San Francisco; second, differences in terminal facilities, making some places better shipping-points than others; third, compet.i.tion by other railroads, which is concentrated at certain points, only one tenth of the stations of the United States being junctions; fourth, the influence of powerful individuals or large corporations and the personal favoritism shown by railroad officials.

The effects of local discrimination are to develop some districts and depress others; to stimulate cities and blight villages; to destroy established industries; to foster monopolies at favored points; and to sacrifice the future revenues of the road by forcing industry to move in the competing points to get the low rates. The power of railroad officials arbitrarily to cause rates to rise or fall is happily limited in practice by the need of earning as large and as regular an income as possible, but even as exercised it has been at times as great as that possessed by many political rulers.

-- 11. #Personal discrimination#. Discrimination between shippers (personal discrimination) is charging one person more than another for substantially the same service. This most odious of railroad vices, rarely practised openly, is done by false billing of weight, by wrong descriptions or false cla.s.sification to reduce the charge below published rate-sheets, by carrying some goods free, by issuing pa.s.ses to some and not to all patrons under the same conditions, or by donations or rebates after the regular rate has been paid. In some cases a subordinate agent shares his commission with the shipper, and the transaction does not appear on the books of the company. In other cases favored shippers are given secret information that the rate is to be changed, so that they are enabled to regulate their shipments to secure the lower rate.

One group of reasons for personal discrimination is connected with the interests of the road. It is to build up new business; it is to make compet.i.tion with rival roads more effective by favoring certain agents, as was very commonly done in the Western grain business; it is to exclude compet.i.tion, as by refusing to make a rate from a connecting line or to receive materials for a new railroad which is to be a compet.i.tor; and it is to satisfy large shippers whose power, skill, and persistence make the concession necessary. Another group of reasons has to do with the interests of the corporate officials. It is to enable them to grant special favors to friends; or it is to build up a business in which they are interested; or it is to earn a bribe that has been given them.

The evils of personal discrimination are great. It introduces uncertainty, fear, and danger into all business; it causes business men to waste, socially viewed, an enormous fund of energy to get good rates and to guard against surprises; it grants unearned fortunes and destroys those honestly made; it gives enormous power and presents strong temptations to railroad officials to injure the interests of the stockholders on the one hand and of the public on the other.

-- 12. #Economic power of railroad managers.# Other evils of unregulated private management of railroads appeared. When the railroad was a young industry, it was thought to be simply an iron-track turnpike to which the old English law of common carriers would apply. This and similar notions soon, however, proved illusory.

It was seen that the higher railroad officials had, in the granting of transportation service and the fixing of rates, a great economic power. They had complex and sometimes conflicting duties to the stockholders and to the shipping public. They wore their conscience-burdens lightly, before the days of effective regulation, and frequently made little attempt to meet the one and no attempt whatever to meet the other obligation. The opportunities for private speculation brought to many railroad managers great private fortunes.

There were no precedents, no ripened public opinion, no established code of ethics, to govern. It was a betrayal of the interests of the stockholders when directors formed "construction companies" and granted contracts to themselves at outrageously high prices. It was an injury not only to shippers, but also to the stockholders, when special rates were granted to friends and to industries in which the directors were interested. In general, however, the interests and rights of the stockholders were more readily recognized than were those of the public. A railroad manager is engaged by the stockholders, is responsible to them, and looks to them for his promotion. Hence their interests are uppermost whenever the welfare of the public is not in harmony with the earning of liberal dividends.

The managers long felt bound to defend the principle of "charging what the traffic will bear" in the case of each individual, locality, and kind of goods, even if this ruined some men and enriched others, and if it destroyed the prosperity of cities to increase the earnings of the road.

-- 13. #Political power of railroad managers.# Likewise in various ways railroad managers may exercise great political influence and power.

Some writers maintain that the power to make rates on railroads is a power of taxation. They point out that if rates are not subject to fixed rules imposed by the state, the private managers of railroads wield the power of the lawmaker. By changing the rates on foreign exports or imports, the railroads frequently have made or nullified tariff rates and have defeated the intention of the legislature.

High rates on state-owned roads in Europe have been used in lieu of protective duties. These facts go to show that a change of railroad rates between two places within the country is similar in effect to the imposing or repeal of tariff duties between them.

The wealth and industrial importance of the railroads soon began to give them widespread political power in other ways. It was commonly charged in some states that the legislature and the courts were "owned" by the railroads. The railroads, in part because they were the victims at times of attempts at blackmail by dishonest public officials, declared that they were compelled, in self-defense to maintain a lobby. The railroad lobby, defensive and offensive, was, in many states, the all-powerful "third house." Railroads even had their agents in the primaries, entered political conventions, dictated nominations from the lowest office up to that of governor, and elected judges and legislators. The extent to which this was done differed according as the railroads had large or small interests within the state. These statements can with approximate truth now be made in the past tense, as was not possible a few years ago. A better code of business morality has developed, and the railroad management's relationship of private trusteeship toward the shareholders and of public trusteeship toward the patrons of the road is now much more fully recognized. The change was not brought about without long and strenuous agitation and effort, educational and legislative, as is in part described below.

-- 14. #Consolidation of railroads#. Gradually the consolidation of the railroad mileage into larger units put into fewer hands greater and greater economic power. The early railroads, many of which were built in sections of a few miles in length, have been slowly welded into continuous trunk lines with many branches. The New York Central between Albany and Buffalo was a consolidation, by Commodore Vanderbilt, of sixteen short lines. The Pennsylvania system was formed link by link from scores of small roads. In the decade of the nineties the growth of consolidation went on more rapidly than ever before. In 1903 it could be said that 60 per cent of the mileage of the United States was under the control of five interests; 75 per cent was controlled by a group of men who could sit about one table. The country was being divided territorially into great railroad domains, within each of which one financial interest was dominant. Since that time the policy of the leading roads has been still further unified by great financial alliances and by the method known as "community of interests."

Toward this result strong economic forces have been working.

Consolidation has many technical advantages: it saves time, reduces the unit cost of administration and of handling goods, gives better use of the rolling stock and of the terminal facilities of the railroads, and insures continuous train service. It has the advantage of other large production and the possible economies of the trusts.

Most important, however, from the point of view of the railroads, is the prevention of compet.i.tion and the making possible of higher rates and larger dividends. The statement that compet.i.tion is not an effective regulator of railroads often is misunderstood to mean that it in no way acts on rates. It is true that compet.i.tion between roads does not prevent discrimination and excessive charges between stations on one line only; but compet.i.tion usually has acted powerfully at well-recognized "competing points." The larger the area controlled by one management, the fewer are the competing points; the larger, therefore, is the power over the rate and the more completely the monopoly principle applies. It is a grim jest to say that consolidation does not change the railroad situation as regards the question of rates.

-- 15. #State railroad commissions.# When it became evident that public and private interests in the railroads were so divergent, it still was not easy to determine how the public was to be safeguarded. At first, some general conditions such as maximum rates were inserted in the laws and charters; but these were not adaptable to changing conditions and, for lack of administrative agents, could not be enforced. Some early efforts at state ownership were disastrous. The old law of common carriers gave to individual shippers an uncertain redress in the courts for unreasonable rates; but the remedy was costly because the aggrieved shipper had to employ counsel, to gather evidence, and to risk the penalty of failure; it was slow, for, while delay was death to the shipper's business, cases hung for months or years in the courts; it was ineffectual, for, even when the case was won, the shipper was not repaid for all his losses, and the same discrimination could be immediately repeated against him and other shippers.

In the older Eastern states, attempts to remedy these and other evils by creating some kind of a state railroad commission date back to the fifties of the last century. Ma.s.sachusetts developed in the seventies a commission of "the advisory type" which investigated and made public the conditions, leaving to public opinion the correction of the evils.

A number of the Western states, notably Illinois and Iowa, developed in the seventies commissions of "the strong type," with power to fix rates and to enforce their rulings. The commission principle, strongly opposed at first by the railroads, was upheld by the courts and became established public policy. By 1915 every state and the District of Columbia had a state commission. In Wisconsin and in New York, in 1907, in New Jersey, in 1911, and in many other states since, the "railroad" commissions were replaced by "public utilities" or "public service" commissions, having control not only over the railroads but over street railway, gas, electric light, telephone, and some other corporations. The state commissions have found their chief field in the regulation of local utilities, and they fall far short of a solution of the railroad problem. Altho they from the first did much to make the accounts of the railroads intelligible, something to make the local rates reasonable and subject to rule, and much to educate public sentiment, on the whole their results have been disappointing.

It was difficult to get commissioners at once strong, able, and honest; the public did not know its own mind well enough to support the commissions properly; and the courts decided that state commissions could regulate only the traffic originating and ending within the state.

-- 16. #Pa.s.sage of the Interstate Commerce Act.# Public hostility to private railroad management was greatest in the regions where the most rapid building of roads occurred from 1866 to 1873. One center of grievances was in "the granger states' of Illinois, Wisconsin, Kansas, Nebraska, Iowa, and Minnesota; another center was in the oil regions of Ohio and Pennsylvania. The Eastern states were not without their troubles, for the report of the Hepburn Committee of the New York legislature in 1879 showed that discrimination between shippers prevailed to an almost incredible degree in every portion of New York state. When the courts, in 1886, decided that the greater portion of the railroad rates could not be treated by state commissions, national control was loudly demanded. Scores of bills were presented to Congress between 1870 and 1886, and, despite much opposition, the Interstate Commerce Act was pa.s.sed in 1887.

The act laid down some general rules: that rates should be just and reasonable; that railroads should not pool, or agree to divide, their earnings to avoid compet.i.tion; that they should, under similar conditions, and, unless expressly excused, fix rates in accordance with the long- and short-haul principle (to charge no more for a shorter distance than for a longer one on the same line and in the same direction, the shorter being included within the longer). The act provided for a commission of five men, to be appointed by the President, which might require uniform accounts from the railroads, and which should enforce the provisions of the act.

-- 17. #Working of the Act.# The commission in its earlier years gave promise of effectiveness, but its powers, as interpreted by the courts, proved inadequate to its a.s.signed task. The railroads in many cases refused to obey its orders, and court decisions paralyzed its activity. Competent authorities declared in 1901, after fourteen years of the commission's operation, that discrimination never had been worse, and a series of exposures of abuses strengthened the popular demand for stricter legislation. The result was first the Elkins' Act of 1903, aimed at discrimination and rebates, and then the Hepburn Act Of 1906, which marked a new era in railroad regulation in this country. The commission was increased to seven members, its authority was extended to include express, sleeping car, and other agencies of transportation, and it was given the power to fix maximum rates, not to be suspended by the courts without a hearing. It became thus unquestionably a commission of "the strong type." It began to exercise its new powers with vigor, and the carriers reluctantly accepted its authority. Responsive to a calmer but insistent popular demand further amendments were made by the Mann-Elkins Act of 1910, which strengthened the long-and-short-haul clause, and gave to the commission, among other new powers, that of suspending new rates proposed by carriers. A special Commerce Court of five judges was created with exclusive jurisdiction in certain cla.s.ses of railroad cases, but this was abolished after a short trial.

It cannot be said that a final satisfactory solution of the railroad problem has been attained; indeed, in most human affairs such a thing is unattainable. But it can be said that there is no considerable sentiment anywhere in favor of reversing the railroad policy that has been developed, as here briefly outlined. Certainly the public has no such sentiment, and the railroads, which for many years opposed the progress of strong federal control, are now foremost in advocacy of a policy of exclusive national regulation, to remedy the evil of "forty-nine masters."

-- 18. #Public nature of the railroad franchise.# A pretty definite public opinion regarding the nature of the problem has emerged from the nearly half-century of experience and discussion, since the first vigorous agitation of the subject in the seventies of the last century. Railroads in our country are owned by private corporations and are managed by private citizens, not, as in some countries, by public officials. They have been built by private enterprise, in the interest of the investors, not as a charity or as a public benefaction. Railroad-building appears thus at first glance to be a case of free compet.i.tion where public interests are served in the following of private interests. But, looked at more closely, it may be seen to be in many ways different from the ordinary compet.i.tive business. Compet.i.tion would make the building of railroads a matter of bargain with proprietors along the line, and an obdurate farmer could compel a long detour or could block the whole undertaking. But the public says: a public enterprise is of more importance than the interests of a single farmer. By charter or by franchise the railroad is granted the power of eminent domain, whereby the property of private citizens may be taken from them at an appraised valuation.

The manufacturer, enjoying no such privilege, can only by ordinary purchase obtain a site urgently needed for his business. Why may the railway exercise the sovereign power of government as against the private property rights of others? Because the railway is peculiarly "affected with a public interest." The primary object is not to favor the railroads, but to benefit the community. These charters and franchises are granted sparingly in most European countries. In this country they have been granted recklessly, often in general laws, by states keen in their rivalry for railroad extension. When thus great public privileges had been granted without reserve to private corporations, it was realized, too late in many cases, that a mistake had been made and that an impossible situation had been created.

-- 19. #Other peculiar privileges of railroads.# Further, do the various grants of lands and money to the railroads make them other than mere private enterprises? One answer, that of those financially interested in the railroads, was No. They said that the bargain was a fair one, and was then closed. The public gave because it expected benefit; the corporation fulfilled its agreement by building the road.

The terms of the charter, as granted, determined the rights of the public; but no new terms could later be read into it, even tho the public came to see the question in a new light. Similar grants, tho not so large, have been made to other industries. Sugar-factories were given bounties; iron-forges and woolen-mills were favored by tariffs; factories have been given, by competing cities, land and exemption from taxation; yet these enterprises have not on that account, been treated, thereafter, in any exceptional way. So, it was said, the railroad was still merely a private business.

But the social answer is stronger than this. The privileges of railroads are greater in amount and more important in character than those granted to any ordinary private enterprise. The legislatures recognize constantly the peculiar public functions of the railroads.

In other private enterprises, investors take all the risk; legislatures and courts recognize the duty of guarding, where possible, the investment of capital in railroads. Laws have been pa.s.sed in several states to protect the railroads against ticket-scalping. Whenever the question comes before them, the courts maintain the right of the railroads to earn a fair dividend. Private enterprise has been invited to undertake a public work, yet public interests are paramount.

-- 20. #Private and public interests to be harmonized.# If an extremely abstract view is taken there is danger of losing sight of the real problem, which is that of harmonizing these two interests in thought and in public policy. Yet the extreme advocates of the private control of railroads for a long time resented indignantly any public interference with railroad rates and with railroad management as an infringement of individual liberty. Before the pa.s.sage of the Interstate Commerce Act, in 1887, this position was inconsistently taken by those in whose interests free compet.i.tion had been violently set aside at the very outset of railroad construction, and for whom governmental interference had made possible great fortunes. It has become generally recognized that the railroads ought not to be allowed to change from a public to a private character just as it suits their convenience. True, they are private enterprises as regards the character of the investment, but they are public enterprises as to their privileges, functions, and obligations.

Finally, it might be said that if there were none of these special reasons for the public control of railways, there is an all-sufficient general reason in the fact that a railroad is always, in some respects and to some degree, a monopoly. Therefore, the railroad problem may be viewed as but one aspect of the general problem of monopoly. To other aspects of this problem we are now to turn our attention.

[Footnote 1: Returns for 1915. The following figures are from the census taken in 1909.]

[Footnote 2: See A.T. Hadley, "Railroad Transportation," pp. 10, 32.]

[Footnote 3: See Vol. I, pp. 437, 438, 443.]

CHAPTER 28

THE PROBLEM OF INDUSTRIAL MONOPOLY

-- 1. Kinds of monopoly. -- 2. Political sources of monopoly. -- 3.

Natural agents as sources of monopoly. -- 4. Capitalistic monopoly; aspects of the problem. -- 5. Industrial monopoly and fostering conditions. -- 6. Growth of large industry in the nineteenth century. -- 7.

Methods of forming combinations. -- 8. Growth of combinations after 1880. -- 9. The great period of trust formation. -- 10. Height of the movement toward combinations. -- 11. Motive to avoid compet.i.tion.

-- 12. Motive to effect economies. -- 13. Profits from monopoly and gains of promoters. -- 14. Monopoly's power to raise prices.

-- 1. #Kinds of monopoly.# Monopolies may, for special purposes, be cla.s.sified as selling or buying, producing or trading, lasting or temporary, general or local, monopolies. The terms selling or buying monopoly explain themselves, tho the latter conflicts with the etymology.[1] Under conditions of barter the selling and the buying monopoly would be the same thing in two aspects. A selling monopoly is by far the more common, but a buying monopoly may be connected with it. A large oil-refining corporation that sells most of the product may by various methods succeed in driving out the compet.i.tors who would buy the crude oil. It thus becomes practically the only outlet for the oil product, and the owners of the land thus must share their ownership with the buying monopoly by accepting, within certain limits, the price it fixes. The Hudson Bay Company, dealing in furs, had practically this sort of power in North America. Many instances can be found, yet, relatively to the selling monopolies, those of the buying kind are rare.

A producing monopoly is one controlling the manufacture or the source of supply of an article; a trading monopoly is one controlling the avenues of commerce between the source and the consumers.