174. The Dual Nature of the Railway Corporation

We are all familiar with the easygoing classification of business enterprises into public and private. There is something quite satisfying about the ready way in which this antithesis permits one to call the corner grocery a private business and the mail service a public enterprise. Since the two classes are all-comprehensive and mutually exclusive, it is quite unfortunate that their author was not possessed of the supreme pre-wisdom to make provision for the railway which in course of time was to appear, reach gigantic proportions, work itself into the whole fabric of the industrial system, and spoil a very serviceable antithesis. For the railway can be properly called neither a private nor a public enterprise; it partakes of the nature of both.

That it is a private enterprise is the more evident. You know that trains are run by a private corporation; that the corporation sells you a ticket, thereby making a contract with you, to transport you from New York to Philadelphia; that when Hiram Rankin's cow is run over, he brings suit against the New York Central & Hudson River Railroad Company; and that your next-door neighbor, James Street, regularly receives what he calls a dividend on the three shares of preferred stock which he owns in the Pennsylvania. So far as its actual business is concerned, it appears to you that a railway company is much like any other corporation.

But if you will study a moment, you will see just as clearly that the business is of a public nature. You remember your grandfather telling you how, when he was a member of the state legislature back in the forties, he helped put through a bill which appropriated state money to help the K. & W. build a line through your part of the state. You never heard of the state helping Simpkins, the corner grocer, in that way. You remember, too, just a few years ago, that when the L.R. & Q. was running the spur out to Dalton, Rufus Lunsford would not sell the narrow strip of land through his farm, which the company wanted to make a part of their right of way. You remember that he said that he was just as much entitled to that land as any private corporation was entitled to its property; and that no private corporation should get a foot of ground belonging to him. Yet you remember how it turned. out-that there was a trial; that the lawyers representing the railway said that the company has been clothed with the right of "eminent domain," and that this gave them the right to take Lunsford's property, if they needed it to complete their line, provided they paid him full compensation for it. You know, too, that the railway has no right to refuse to handle your freight, if you offer it to

them and if you comply with all the conditions. Perhaps you do not know that when the railway first came, it was thought of as a "rail" way, as a public highway upon which each man should be allowed to run his own cars, just as he drove his own carriage or wagon along the thoroughfare. Of course you see that technical difficulties prevented this from being done and led to a single corporation being granted an exclusive right to run trains over the road. But, in making the grant the state was merely meeting the peculiar situation. It was not surrendering all of its rights to the private corporation. Thus you see that the railway corporation is of a public as well as of a private nature.

175. The Economic Basis of Regulation2

BY I. LEO SHARFMAN

The need of a system of governmental control arises from the economic characteristics of the railway. Most of the important questions involved in the so-called railroad problem can be traced to the economic character of the railway business. It is necessary, therefore, to indicate the general nature of those economic particularities and their most striking consequences.

The Monopolistic Character of the Railway Business. The need of regulation depends chiefly upon the monopolistic character of the railway business. In ordinary industrial enterprises the existence of competition, when free and unrestricted by artificial means, provides an automatic force for the protection of the public. High prices and large profits in a given industry tend to attract additional capital to that industry, which results, in the long run, in a readjustment of charges and a reduction of net returns. In like manner, inefficient service and goods of inferior quality cannot permanently be imposed upon the public because a policy which is clearly detrimental to the interests of the consumer cannot permanently withstand the force of competition. The railway business, on the other hand, tends to be operated under monopolistic conditions. To some extent railways are entirely exempt from the operation of competition. The amount of capital necessary for the construction of a railway is so large and the task of railway building is so substantial that competition is always relatively slow in becoming active. Capitalists will not unite so promptly in building a parallel road because of the large sums that must be risked in the enterprise; and even when they decide to enter upon such an undertaking, the work of Adapted from an unpublished volume entitled Railway Regulation, soon to be published by the LaSalle Extension University.

construction requires so much time that the appearance of active. competition is still further delayed. Moreover, even when the parallel road is built, it actually competes with the original line only at certain points, usually the more important cities, while at intermediate points the lines separate and pass through numerous small communities which have no other railway facilities. At these noncompeting points, then, the railways usually enjoy a monopoly of local traffic; and while the number of non-competing points is gradually being reduced by the construction of new steam roads and the multiplication of electric railway lines, doubtless, because of the very nature of the railway, there will always be many localities which, in the absence of government control, will be at the mercy of one transportation agency. In part, therefore, the railway business is clearly monopolistic in character.

The Nature of Railway Competition. But the railway business tends to be carried on under monopolistic conditions even when competition does exist, because of the character of railway competition. Railway rivalry tends to be abnormally keen and competition ruinous. This, in turn, leads to coöperation in various forms, and the inevitable result follows that railway competition becomes selfdestructive. Competing railway companies, weary of the keen struggle which invariably ensues when competition becomes active, either assent to a truce whereby competition between them is abolished and an agreement is reached for the maintenance of rates, or they continue their warfare until one of the roads is driven to insolvency, and the unsuccessful line, upon reorganization, is taken over by its victorious rival. In either case effective competition is destroyed and monopoly conditions are established. The basis of this ruinous competition is to be found in two fundamental economic characteristics of the railway business:

Joint Cost and Railway Management. The services of a railway are rendered to a very large degree at joint cost. From onehalf to three-quarters of a railway's expenditures must be incurred regardless of the performance of any particular service. In order to conduct transportation at all, a roadbed must be provided, tracks must be laid, terminals must be built. This plant is equally necessary for the transportation of passengers and freight, and express and mail matter. Moreover, it is equally necessary for the transportation of different classes of passengers and different kinds of freight. The expenditures for the fundamental purpose of providing the plant of a railway enterprise create the fixed charges of the business: and these fixed charges, the interest on the capital invested in the construction of the railway, form a part of the

cost of every service rendered by that railway. As far as expenditures for plant are concerned, all railway operations are conducted at joint cost. But even the operating expenses are largely joint. The roadbed and equipment must be maintained in a state of reasonable repair and efficiency, and many of the employees and much of the material necessary for conducting transportation must be provided and most of the general administrative expenses must be met, regardless of the amount or the kind of traffic carried by the railway. In other words, a substantial proportion of the operating expenses, like the fixed charges, are constant. It is practically impossible, therefore, for the railway manager to ascertain the exact cost of a given service. Rate making must necessarily involve a large degree of guesswork, though it is true that this guesswork is entrusted to experts. Railway officials have no means of determining with certainty that rates have been reduced to unprofitable limits. Under the stress of keen competition, then, conditions are decidedly favorable to ruinous rate-cutting: and cutthroat competition invariably becomes self-destructive.

Increasing Returns and Railway Policy. Railway operations are so largely conducted at joint cost because a very large proportion of railway expenditures are fixed or constant. If a railway is built and equipped and is carrying a given amount of traffic, it can usually handle a vastly increased quantity of business at a relatively slight additional expense. Within very wide limits, a given plant and equipment will accommodate a large as well as a small amount of traffic, and the only additional cost involved in handling an increase in traffic will consist in that portion of the operating expenses which varies with the amount and kind of service rendered. In other words, the expenditures of a railway company do not keep pace with the services which it performs; an increase in traffic does not involve a proportionate increase in railway expenditures. If follows, then, that with each increase in the amount of traffic carried, the cost per unit decreases; and the net revenues of a railway increase faster than the growth of its traffic. The railway business is subject to the law of increasing returns: every increase in traffic results in more than a proportionate increase in profits. Railway traffic managers, therefore, work under a powerful incentive to increase the volume of their business, and the competition for traffic is intense. In fact, the passion for traffic becomes the controlling passion of the railway business. Traffic managers consider it their most urgent duty to get business-to get it at the highest rates possible, but in any event to get it. The profitable

limit of rate reduction is so uncertain, because railway expenditures are largely joint, and the advantage of extensive traffic is so great, because railway expenditures are largely constant, that there is a natural and compelling tendency on the part of railway officials to reduce rates to whatever point may be necesary in order to attract business from competing lines. Ruinous rate wars follow and competition tends to destroy itself. These conditions lie at the basis of the abnormal character of railway competition which almost invariably leads to railway operation under monopolistic conditions.

Railway Competition and Discriminatory Practices. The keen rivalry for business leads not merely to rate wars and general rate cuttings, but to discriminatory practices as well. The passion for business is so intense that the traffic manager will resort to any means in order to get it. If the amount of railway traffic can be extended and hence the size of railway profits disproportionately increased by means of granting special privileges in the transportation of one commodity as compared with another, or in the case of one person or locality as compared with competing shippers or markets, railway officials will not hesitate long to resort to these discriminatory practices. The history of American railways, and of our monopolistic industrial combinations or so-called trusts, divulges no greater evil than the granting of railway discriminations in rates and service for the benefit of one person, locality, or kind of traffic, to the prejudice and disadvantage of rival shippers, places, and industries. The motive or stimulus for these practices lies in the keen desire for additional business, with its disproportionate increase in railway profits. Discrimination has been one of the most baneful as well as one of the most certain effects of railway competition.

Railway Discrimination and the Public Welfare. The danger as well as the injustice of discriminatory practices cannot be overemphasized. If our industrial life is to reach its natural and most efficient economic development, there must be freedom of enterprise and fairness of treatment for all persons, all sections, and all undertakings. In a sense, transportation is a fundamental industry, underlying all others; for it is essential to the conduct of all business and goes far towards determining the direction and conditions of industrial activity. The item of transportation, whatever it may be, is one of the elements in all costs, and the outcome of competition between different producers may be largely affected by any divergence in railway rates which must be paid by each of two or more competitors. It follows clearly, then, that the