railway officials who make transportation rates exercise a tremendous power. By the soundness of their adjustment of rates and by the degree of fairness with which established rates are observed, the railways may profoundly affect-or absolutely determine even the prosperity of individuals, of industries, of cities and towns, or of entire sections of the country. By discriminating between competing shippers, they may destroy the business of one and build up that of another, making one man rich and another poor. By stimulating or discouraging a particular class of traffic they may increase or diminish the importance of industries and the extent of production of particular articles of commerce, shaping the direction of industrial activity. By discriminating among cities and towns, they may cause one to grow and another to decay, determining the commercial importance of business centres. By modifying their rate schedules in special instances, they may determine the location of industries, guiding the movements of population and affecting the prosperity and welfare of extensive localities. By these unfair practices the railways also have it within their power to build up industrial monopoly; and the most powerful of the trusts against which the people are now struggling made their first advances towards control of the market through the agency of special favors in the form of railway discriminations.

176. The Futility of Railway Competition3

BY ARTHUR T. HADLEY

We have been taught to regard competition as a natural, if not necessary, condition of all healthful business life. We accept, almost without reserve, the theory that, under open competition, the value of different goods will tend to be proportional to their cost of production. According to this idea, if the supply of a particular kind of goods is short, and the price comes to exceed cost of production, outside capital will be attracted into the business until the supply is sufficiently increased to meet the wants of the market. But as soon as this point is passed, and the price begins to fall below the cost of production, people will refuse to produce at a disadvantage, the supply will be lessened, and the price will rise to its normal figure. If all this be true, competition furnishes a natural regulator of prices, with which it is wicked to interfere.

Adapted from Railroad Transportation: Its History and Its Laws, 69–74 Copyright by G. P. Putnam's Sons (1885).

This may once have been true, but it is not true today, that people find it to their interest to refuse to produce, if price drops below cost. To stop producing often involves the greater loss.

Let us take an example from the railway business. A railroad connects two places not far apart, and carries from one to the other 100,000 tons of freight a month at 25 cents a ton. Of the $25,000 thus earned, $10,000 is paid out for the actual expenses of running the train and loading and unloading the cars; $5,000 for repairs and general expenses; the remaining $10,000 pays the interest on the cost of construction. Only the first of these items varies in proportion to the amount of business done; the interest is a fixed charge, and repairs have to be made with almost equal rapidity, whether the material wears out, rusts out, or washes out. Now suppose a parallel line is built, and in order to secure some of the business offers to take it at 20 cents a ton. The old road must meet the reduction in order not to lose its business, even though the new figure does not leave it a fair profit on the investment; better a moderate profit than none at all. The new road reduces to 15 cents; so does the old road. A 15-cent rate will not pay interest unless there are new business conditions developed by it; but it will pay for repairs which otherwise would be a dead loss. The new road makes a still further reduction to II cents. This is better than nothing. If you take at II cents freight that costs you 25 cents to handle, you lose 14 cents on every ton you carry. If you refuse to take it at that rate, you lose 15 cents on every ton you do not carry. For your charges for interest and repairs run on, while the other road gets the business.

Under competition such cases are of constant occurrence, and almost as a matter of course when one of the roads is bankrupt. "Business at any price rather than no business at all" is the motto of such a road. It has long ceased to pay interest; it can pay for repairs by receiver's certificates; and it will take freight at almost any price that will pay for the men to load the goods and the coal to burn in the engine. And it is to be observed that when a competing road does not carry the war to this point, it is not a competitive rate. They may agree on a 25-cent rate, thinking it will be a reasonable and a paying one; but such a rate is actually determined by combination, even though they take cost of service into account. The theory that when payment falls below cost active competition will cease fails. This is because far below the point where it pays to do your own business it pays to steal business from another man. The influx of new capital will cease; but the fight

will go on, either until the old investment and machinery are worn out, or until a pool of some sort is arranged. This is not confined to the railway business. Wherever there are large permanent investments of capital we see the same cause at work in the same way.

There is a marked difference between mercantile competition, such as was considered by those who established the old law of competition, and the competition of railroads or factories, such as we have been considering. In the former case its action is prompt and healthful, and does not go to extremes. If Grocer A sells goods below cost, Grocer B need not follow him, but simply stop selling for a time. For (1) This involves no great present loss to B. When his receipts stop, most of his expenses also stop. (2) It does involve present loss to A. If he is selling below cost, he loses more money, the more business he does. (3) It cannot continue indefinitely. If A returns to paying prices, B can again compete. If A continues to do business at a loss he will become bankrupt, and B will find the field clear again.

But if Railroad A reduces charges on competitive business, Railroad B must follow. (1) It involves a great present loss to stop. If a railroad's business shrinks to almost nothing, a large part of its expenses run on just the same. Interest charges accumulate; office expenses cannot be suddenly contracted; repairs do not stop when traffic sinks; for they are rendered necessary by weather as well as by wear. (2) If B abandons the business, A's reductions of rates will prove no loss. The expense of a large business is proportionately less than that of a small one. A rate which was below cost on 100,000 tons may be a paying one on 200,000. (3) Profitable or not, A's competition may be kept up indefinitely. The property may go into bankruptcy, but the railroad stays where it is. It only becomes a more reckless and irresponsible competitor.

The competition of different stores finds a natural limit. It brings rates down near to cost of service, and then stops. The competition of railroads or factories finds no such natural limit. Wherever there is a large permanent investment, and large fixed charges, competition brings rates down below cost of service. The competitive business gives no money to pay interest or repairs. Sometimes the money to pay for these things comes out of the pockets of other customers, who do not enjoy the benefit of the competition, and are charged much higher rates. Then we have the worst forms of discrimination. Sometimes the money cannot be obtained from any customers at all. Then we have bankruptcy, ruin to the investor, and-when these things happen on a large scale-a commercial crisis.

B. DISCRIMINATORY PRACTICES OF THE

RAILROADS

177. Types of Railway Discrimination1

BY GEORGE H. LEWIS

Discriminations are principally of three kinds: first, discriminations between commodities, leading to freight classifications; second, discrimination between places, developing the "long-and-shorthaul" problem; third, discrimination between individuals.

The first class of discriminations has gradually grown up from the practical experience of railroad men. In the earlier years of railroading the principles of classifying freight according to the character and value of the articles transported were little practiced. But it soon became evident that cheap and bulky articles must be carried at a low rate. But, if all rates were reduced to the standard of the cheaper goods, the road could not be maintained. To meet this exigency a charge of higher rates was made on the more costly commodities. In this way has gradually grown up the practice of freight classification. The principle underlying it is "charging what the traffic will bear." Proper classification alike benefits the roads and promotes the general good. But the principle is sometimes abused. For instance serious discrimination can be effected by placing in different classes two commodities physically alike or substitutable for each other.

The second class of discriminations is between places. It may happen that a director or prominent officer of a road is pecuniarily interested in one of two competing towns, and hence cheaper rates are accorded that place. In newer sections of the country, speculations in real estate by railroads, or by their officers, have often led to such discriminations.

More important are those involved in what is known as the "long and short haul." This is the practice of giving to certain points on a railroad line lower rates than are accorded to intermediate points which are, of course, nearer each other. To illustrate: The rates for a carload of freight from New York to points in Colorado are much higher than the rates on the same freight carried through the same town to San Francisco, more than a thousand miles farther. The regular traffic to San Francisco is about fiveeighths of the rate to Ogden. In other words, the railroad charges for not hauling a carload of freight one thousand miles from Ogden. to San Francisco.

'Adapted from National Consolidation of the Railways in the United States, 80-105. Copyright by Dodd, Mead & Co. (1893).

Another example will make even clearer the nature of this discrimination. A friend of mine a few years ago bought some anthracite coal in Chicago. He shipped it to Omaha, and then reshipped it to Grinnell, Iowa, 225 miles in an almost direct line toward Chicago. He was enabled thus to deliver the coal in that place cheaper than local coal dealers could supply it, although it had been hauled nearly three times the distance necessary to bring it to Grinnell directly.

Thus the excessively low rates made to certain competitive points give an overwhelming advantage to shippers located there, and, as a result, business men are attracted to these points in great numbers. Likewise business establishments are driven away from points having excessively high rates. To illustrate: A large factory for making barbed wire, located in the city of Des Moines, abandoned its buildings and transferred its establishment to Chicago, finding that it saved a large sum on every carload that was shipped, although the wire was mainly carried through its old location, 360 miles. nearer the Pacific Coast than Chicago. Cases like this have been abundant throughout the West. The long-and-short-haul practice has been one of the factors which have taken people from the small towns and crowded them into great cities.

The third class of discriminations is that in favor of or against individuals. The principal device used in effecting this has been the well-known rebate. By this means favored shippers have been able to pay higher prices for grain or to sell flour for lower prices. than their competitors and still grow rich. The most striking example is that of the Standard Oil Company, to which rebates. amounting to $10,000,000 were paid in sixteen months. The company gained its immense wealth largely from a skilful use of this class of discriminations. But the immensity of this serves to conceal the incalculably larger aggregate amount of rebates and drawbacks paid in the cities and towns throughout the South and West. In a single town in Iowa judgments for nearly $40,000 were recovered against a single railroad for illegal discriminations in that town alone. It is estimated that the total amount of these discriminations in northwestern Iowa will reach $1,000,000. These discriminations have all been subsequent to the Interstate Commerce Act.

Old forms of discrimination are undoubtedly ceasing. But in the stress of competition which the system of private ownership of rival roads always necessitates, new devices and new schemes of evasion of the law are constantly arising in spite of the act.