Walter Chadwick Noyes.

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Copyright, igos.
By Little, Brown, and Company,

jill rights reser'ved
Published November, 1905



^\^' -



L. A. N.



The railroad problem, with respect to charges,
has always been a problem of freight rates rather
than of passenger fares. The freight traffic upon
the American railroads far exceeds the passenger
traffic in volume, complexity, and importance. In
order to avoid confusion of statement, this book
deals only with freight rates. But the fundamental
principles governing rates and fares are the same.

W. C. N.

Lyme, Connecticut,

September 20, 1905.


Chapter Page

I Underlying Principles i

II Limitations of Rates 25

^ III Making Rates 36

IV Classification and Tariffs 64

V Discrimination 89

VI Competition and Combination . . . . 124

VII Movement of Rates 160

VIII Comparison of Rates 181

IX State Regulation of Rates .... 200

X Federal Regulation of Rates . , . 222





The nature of the railroad enters into the charge
for transportation. Its business has few analogies
in other enterprises. Chartered to operate a high-
way of commerce, it exercises far broader powers
than other corporations. Its duties are as broad as
its powers. Its rates are determined by economic
principles peculiar to itself. Its obligations in mak-
ing charges are of their own kind. Railroad rates
are what they are because the railroad is what it is.

A railroad corporation is of a dual nature. The
State grants to it the right of eminent domain — the
power to condemn lands for its way and twofold
structures — for the public benefit. In obligations

. , ,. . of railroad

accepting its charter it assumes obligations
to the public and, within constitutional limits, be-
comes subject to State regulation. In this degree
it is a public corporation. On the other hand, the
stockholders furnish the means for the construction
and equipment of the railroad and are entitled to
the profits derived from its operation. To this ex-


tent a railroad company is a private corporation.
Being thus at once a public corporation existing for
private gain and a private corporation owing public
duties, a railroad company is distinctively a quasi-
public corporation — a corporation of double obli-

The public duties of a railroad are not wholly
dependent upon its corporate character. If it were
under no responsibilities to the State in considera-
tion of the grant of its charter it would still owe
■ obligations to the public. It is a common carrier.
I Its road is a public highway. It applies its private
I property to a use in which the public is interested.
! It is engaged in a business affecting the public and
' is subject to governmental control. " Property does
become clothed with a public interest when used in
a manner to make it of public consequence and
affect the community at large. When, therefore,
one devotes his property to a use in which the
public has an interest he, in effect, grants to the
public an interest in that use, and must submit to
be controlled by the public for the common good
to the extent of the interest he has thus created." ^
Whether, therefore, the railroad corporation be

1 Munn V. Illinois, 94 U. S. Rep. 125.

That private property when devoted to public use becomes subject
to public regulation, was an early rule of the common law. Lord
Chief Justice Hale, more than two hundred years ago, said that when
private property " is affected with a public interest it ceases to be juris
pri'vati only." Under this rule it has been customary in England
from time immemorial, and in this country since its colonization, to


regarded as of both a public and private nature, or
whether its private property be considered as clothed
with a public interest, the result is the same — its
rates are subject to governmental control. The right
of control, however, is not unlimited. Power to
regulate is not power to destroy. Limitation is not
confiscation. The stockholders and bondholders
who furnished the money to build the road and
took the risk of its successful operation cannot be
deprived of a fair return upon their investment.

At the outset, then, rates must be examined from
two essentially different standpoints — private and
public. To the extent that a railroad company is a
private corporation, and in the sense that its property
is distinctly its own, it may fix its rates solely with re-
gard to the interests of its stockholders. It may
strive for the largest possible revenue and regulate its
charges only in accordance with the laws of supply
and demand. It is governed solely by commercial
principles. Its object is to make dividends. But in so
far as a railroad company is a public corporation or
its property is affected with a public interest, its
purposes are essentially different. Its object is to
promote the welfare of the public rather than the
interests of its stockholders. Its aim is not so
much to make money as to furnish the public with

regulate the charges of wharfingers, warehousemen, innkeepers, hack-
men, millers, bakers, etc., as well as common carriers of goods.

The first statute regulating the charges of common carriers was
passed in the third year of the reign of William and Mary.


the best possible facilities. From the public point
of view the public benefit is of the first importance.
From the private view point the return upon the
capital invested is of the greatest moment. The
problem is to reconcile the public and private rights
without unduly subordinating the one to the other.
The functions of a railroad, like its duties, are of
a twofold nature. A railroad differs from other
agencies of transportation. The drayman

Railroad a ° ^ . ■'

carrier and furnishes his wagon and carries the goods

toll taker. r i • tt i i i-

or his customers, rie uses the public
road provided through taxation. The boatman
supplies his boat and conveys the articles offered
him. He employs the way afforded by nature.
Drayman and local express company, boatman and
steamship line, are carriers only. Their charges
are for carriage. The canal company furnishes an
artificial way along which the water carrier may
transport his cargo. It does not itself operate canal
boats. The owner of the turnpike supplies a private
road upon which the drayman may carry his goods.
He does not carry them himself. Canal company
and turnpike owner collect tolls for passage. The
railroad company combines the functions of carrier
and toll taker. It furnishes the road along which,
and the means by which, the freight may be moved.
Then it completes the service by moving the freight.
Its charges represent

(i) The toll for passage of the toll owner.
i (2) The charge for carriage of the carrier.


The weight of the passing vehicle is all that
affects the turnpike owner. The heavy cart wears
out the road and makes repairs necessary quicker
than the light pleasure carriage. Weight is seem-
ingly the only basis of tolls. But the owner of the
turnpike has ever looked further. The value of
the privilege of passing to the owner of the carriage,
as well as its weight, has always been considered.
From the earliest days of turnpikes, vehicles have
been placed in different categories with different tolls

— and with weight only a factor entering into the
toll. In 1776 Adam Smith recognized the prac-
tice in his " Wealth of Nations : " " When the toll
upon carriages of luxury, post-chaises, etc., is made
somewhat higher in proportion to their weight than
upon carriages of necessary use, such as carts, wagons,
etc., the indolence and vanity of the rich is made to
contribute in a very easy manner to the relief of
the poor by rendering cheaper the transportation
of heavy goods to all the different parts of the
country." ^

The early canal companies went further than
the turnpikes in basing tolls upon value. Their
concern was with the commodities carried along
the canals, not with the vehicles — the canal boats

— in which they were carried. The value of the
goods was the important factor. The companies
were authorized to collect tolls according to a rough
classification which imposed the higher charge upon

1 Book V. p. 326 (McCulloch's Ed.).


the more valuable article. It was considered that
the shipper of manufactured goods could afford to
pay more for their passage along the canal than the
shipper of sand or limestone. The underlying idea
was indirect taxation.

The first railroad companies were regarded, both
in England and this country, as being similar to
the canal companies. The legislatures and the
courts treated them as merely owners of roads upon
which rails were placed, and along which all persons
had a right to operate their vehicles upon payment
of tolls. The railroad was assumed to be a public
highway for independent carriers, and railroad com-
panies were empowered to charge tolls in the same
way as the canal companies. Thus the charter of
the Ithaca and Oswego railroad, granted in 1828,
provides that "all persons paying the toll aforesaid
may, with suitable and proper carriages, use and
travel upon said railroad." ^ Still, almost from the
beginning it was customary to authorize the rail-
roads to act with others as carriers upon their own
roads, although they had no such power without
special authority, and the functions of toll owner
and carrier were quite distinct. For example, the
Liverpool and Manchester Railway — one of the
earliest railroads empowered to use steam — was
authorized to form " an establishment for the car-
riage of goods," and to charge "carriage rates," but

^"Suitable and proper carriages'" meant, of course, cars with
wheels adapted to run on raised rails.


it was required to keep separate accounts of its
doings as carrier, and to make separate dividends
from that department if any were earned. It was
also authorized to charge " tonnage rates " for the
use of the road, which did not include motive power
or the use of vehicles. Its schedule of tolls ran
from one penny per ton per mile for limestone to
threepence for cotton, wool, and manufactured
goods. Traces of the old provisions concerning
tolls are still to be found in the English railway
acts, and to this day French railway concessions
distinguish between the toll {droit de peage) and the
charge for carriage [prix de transport).

While it might have been possible for indepen-
dent carriers to furnish cars for the transportation of
goods upon the railroad — as was sometimes done
in this country in the case of the fast freight lines,
and is still done in England by the coal companies
— it was quite a different matter to obtain the mo-
tive power. A locomotive was beyond both the
means and needs of most carriers and shippers.
Trains run by different managements upon the same
road would be dangerous. Independent carriers
could not serve the public with facility nor without
duplication of expense. Safety, convenience, and
economy soon compelled the railroad to operate its
own road. It became a carrier as well as a toll
owner. The functions, though distinct, could not
be separated.

The railroad, as a toll owner, is still concerned


with the principle of the value of the freight which
formed the basis of the old canal tariffs. It en-
deavors especially to obtain a return upon the
capital invested in the road. The railroad, as a
carrier, is interested in the bulk of the goods, the
method of packing, the risk, and other matters
affecting the cost of carriage. It seeks compensa-
tion for the particular service rendered. The rail-
road rate includes both the toll and the charge for

Cost to the carrier and value to the shipper were
the elements which determined the rate in the
earliest days of railroads. The practice of basing
rates upon these factors which then began has been
followed ever since. But whether rates are properly
so made depends upon principle rather than prac-
tice, however well the origin and development of
the practice may serve to illustrate the application
of the principle. And we shall later see that the
practice is well founded upon principle — that cost
and value must, theoretically and practically, fix
the rate.

The construction of a railroad involves a large

outlay of money. Preliminary surveys are neces-

sary. Lands are required for road-bed,

fixed in- sidings. Stations, and approaches. Hills

vestment. , , i i i • j

must be cut down and embankments raised.
Bridges, viaducts, and tunnels are needed. Stations,
engine houses, and other structures must be erected.
All the costly works of a railroad must be completed


and paid for. A transportation plant represents a
large investment of capital. It is capable of furnish-
ing transportation and nothing besides.

If there be no traffic for a railroad it is worthless.
It cannot be used for any other purpose. Its road-
bed is good for a railroad and nothing else. Its
lands have been ruined for other purposes by cutting
down or raising up. Its stations and engine houses
are adapted only for a special use. The works of
an abandoned railroad are of no value where they
are, and they cannot be moved. They represent an
investment which is lost — money thrown away.

When a manufacturing or mercantile establish-
ment becomes unprofitable it may be shut down or
its operations limited. Capital invested may largely
be withdrawn and invested elsewhere. But when a
railroad commences operations it cannot stop, and
there is no object in limiting operations. As we
shall see, the greater the operations at any profit the
greater the chance of success. When a railroad
cannot earn dividends it must run to earn fixed
charges. When it cannot earn fixed charges it must
run if it can earn operating expenses, in the hope of
future improvement.

These principles enter into railroad competition
and affect charges. The bankrupt railroad must
have traffic. To obtain business it cuts rates
quicker and deeper than its prosperous competitors.
Rates which return any profit may be acceptable if
no greater can be obtained. However small the


profit may be it helps preserve the permanent in-
vestment. Rates which return no profit at all, and
barely meet the out-of-pocket expense, may be justi-
fiable if they give the fixed investment a chance for
the future.

A railroad represents not only a large fixed in-
vestment, but an investment which must practically
Railroad ^'^ ^^ made before any income can be ob-
expenses tained. There is no way to make certain

largely in- . ^ .

dependent m advance that the road will be success-
ful or even that its expenditures will not
exceed its receipts. Road-bed, bridges, and tunnels
must be completed before the rails are laid. Sta-
tions, sidings, and signals must be provided before
the trains are run. And there can be no trains to
run until the rolling stock is purchased. A railroad
must be constructed and equipped to conform to the
minimum standard of usefulness — ability to carry
passengers and freight in safety and with reasonable
despatch — before it opens for traffic. It must com-
mence operations before it can earn any revenue. It
cannot know what the revenue will be until it begins.
Just as the site must be acquired, the specialized
building erected, the scenery supplied, the actors en-
gaged, before the doors of the theatre are opened, and
just as the play must go on whether the audience be
large or small, so the railroad must be completed
before it can begin to carry freight, and must continue
to operate whether its business be heavy or light.
But unlike the theatre which may terminate expenses


— except for maintenance — by temporarily closing
its doors, the great bulk of railroad expenditures goes
on irrespective of revenue coming in. And this
brings out the essential fact — underlying many
phases of the subject of rates — that the expenses of
a railroad are largely independent of the amount of
traffic. Stated in another way, the outgo of a rail-
road has little relation to its income.

Railroad expenses as distinguished from dividend
payments — the division of profits — are customarily
divided into two general classes;

(i) Fixed charges.

(2) Operating expenses.

These expenditures, considered especially in their
relation to the traffic, may also be separated into

(A) Constant and invariable expenses.

(B) Fluctuating and variable expenses.

These divisions proceed along very different lines.
All the items of fixed charges are constant, but the
outgoings for operating expenses are not all variable.
Constant expenses are independent of the amount
of business transacted. Profits may disappear, traffic
may fall away, but the constant expenses must be
paid. They are always with the railroad. Fluct-
uating expenses, on the other hand, vary with the
business. They depend upon the amount of the

Fixed charges are the necessary payments for
interest upon the funded and floating debts, taxes
and rentals, and for the sinking fund, if there be one. ,


While the proportion of fixed charges to operating
expenses varies with the railroad, an average of all
the railroads in the United States for the last five
years shows that the fixed charges amount to about
twenty-five per cent of the entire outgoings. This
percentage has steadily decreased in recent years
owing to the refunding of bonds at lower rates of
interest and the reduction of bonded indebtedness
through re-organizations and the substitution of
stock issues. But while the proportion is reduced,
fixed charges still represent a constant expense
amounting to one quarter of all the expenses of the
railroad — an obligation which must in any event
be discharged if the railroad is to remain solvent.

Operating expenses are separated in official ac-
counts under four heads :

(i) General expenses.

(2) Maintenance of way and structures.

(3) Maintenance of equipment.

(4) Conducting transportation.

General expenses represent expenditures made for
the benefit of the service as a whole and not for any
particular department. All administrative expenses,
— the salaries of executive officers and their sub-
ordinates, the cost of auditing the accounts and
keeping the books, and of receiving, caring for,
and disbursing the funds, — the law expenses, the
insurance fund, if any be created, and other items
of expenditures not incurred for any special part
of the work of operation, are included in the general


expenses. These expenses are only slightly affected
by changes in traffic. The auditor can check the
accounts with but little more work if the business be
greatly increased. The treasurer will hardly find his
labors diminished if the traffic fall off materially.
Legal expenses are quite independent of the amount
of business. In fact, general expenses may fairly be
treated as wholly constant expenses. They con-
stitute a comparatively small item — amounting to
about three per cent of the total expenditures of the
average railroad. The larger the railroad the less,
proportionally, the general charges.

Maintenance of way and structures requires a con-
siderable portion of railroad disbursements. The
amount per mile varies with the railroad. The road
having heavy traffic may be obliged to expend several
times as much for maintenance as the road having
only a light business. Heavy hauling wears out the
rails and road-bed. But the very density of the
traffic makes the cost per unit of traffic — the haul-
ing of one ton one mile — much less for the former
road than for the latter. The road having the largest
business can afford to spend the most to maintain
its plant. Taking all the railroads of the United
States as one system, the cost of maintenance of way
and structures is about sixteen per cent of the total
expenditures. But railroad stations and other build-
ings do not wear out. Painting and repairs are
necessary to make good the effects of wind and
weather. Bridges and other structures may become


out-of-date and be superseded, but they are rusted
and weatherworn and not worn by use. The ties
in the road-bed rot and the earth ballast is washed
away. Only the rails are worn out by traffic. The
buildings, bridges, and other structures must be
preserved from the weather whether the traffic of
the railroad be heavy or light. The rotten ties
must be replaced whether the trains be many or few.
The need of keeping the road-bed supplied with
ballast does not depend upon the road's business,
however much attention the ballast may require,
when supplied, on account of the continual jar of
trains. Expenditures for repairing bridges and
structures, supplying ties and ballast and the like
are, therefore, constant expenses. On the other
hand, disbursements for obtaining and laying new
rails and keeping the tracks in alignment and proper
order are variable and fluctuating, although even
these expenses are not entirely dependent upon the
amount of business done. Half loaded trains wear
out rails nearly as rapidly as loaded ones. On the
whole it may be said — using statistics as a basis —
that of the sixteen per cent of the total expenditure
required for maintenance of way and structures five-
eighths — or ten per cent of the total — represent
constant expenses, and the remainder — six per cent
— fluctuating expenses.

Another important class of railroad expenditures
is for maintenance of equipment, which absorbs
about fourteen per cent of the total outgoings of the


average railroad. The principal component items
as stated in railroad accounts are

(i) Repairs and renewals of locomotives.

(2) Repairs and renewals of passenger cars.

(3) Repairs and renewals of freight cars.

(4) Repairs and renewals of shop machinery and

(5) Superintendence.

Repairs and renewals of locomotives and of freight
cars are by far the largest items, taking together
three-quarters of this class of expense. The joining
of "renewals" and " repairs " is significant of the
fact that part of the expense of maintenance of
equipment is constant. Rolling stock generally
needs repairs because it is worn by use. The cost
of wear and tear increases with the use. Every mile
of travel takes something — though infinitesimal —
off the value of a car or engine. Repairs of rolling
stock vary largely with the traffic. Still, a car is
worn out just as much by carrying a half load as a
whole load. An engine will deteriorate little more
from hauling a heavy than a light train. Renewals
of rolling stock are more independent of the work
done. Locomotives and cars are replaced by new
ones quite as much because they become antiquated
and out-of-date as because they are worn out. But
the substitution of improved rolling stock for that
which has merely become obsolete, has little relation
to the amount of traffic. Improved cars and engines
may be more needed to attract business when traffic


is light than to deal with it when heavy. On the
whole, it is probably not unfair to apportion expen-
ditures for maintenance of equipment equally be-
tween constant and fluctuating expenses.

Conducting transportation — doing the work —
may be divided broadly into

(i) Station expenses.

(2) Movement expenses.

Station expenses include the cost of station service
and supplies, of switchmen, flagmen, and watchmen,
of signalling, and similar items. These expenses
are practically constant. The men must be kept
however light the traffic may be, and, up to a def-
inite limit, they will be able without assistance to at-
tend to an increase of business. Beyond such a
limit an increased business will necessitate the em-

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Online LibraryWalter Chadwick NoyesAmerican railroad rates → online text (page 1 of 17)