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East went by water routes, of which the Erie Canal
was the most important. The railroads could not
meet the water rates. But with the improved facil-
ities — employed about 1870 — the railroads were
able to make great reductions in rates, and, finally.,
to attract the greater part of the business of the
canals. Through traffic proved to be profitable
under the changed conditions, and rates were deeply
cut by the competing roads to obtain it. New
roads made connections and came into the field.
Violent rate wars raged at different times prior to
1877. Then an association of the trunk lines and
their connections was formed under the name of
the Joint Executive Committee. This first related
solely to west bound traffic. In 1879 east bound
traffic was included. This Committee dealt with
the differentials which we have seen still exist be-
tween the Atlantic cities, apportioned the competi-
tive traffic, and had general supervision over the
pooled business. It was at first a traffic pool, ship-
ments being diverted to make up the allotments.
In 1885, however, it was reconstructed as a money

1 The term " trunk lines " is applied to the railroads operating be-
tween the Atlantic seaboard and the Middle West.



COMPETITION, COMBINATION 145

pool with monthly deposits and settlements. The
Joint Executive Committee continued as an effective
pooling organization until 1887 when the pooling
feature was necessarily eliminated.

While the pools mentioned were the most impor-
tant, many other pools existed in the United States in
the years preceding 1887. Practically every railroad
which sought for competitive business was in one or
more pools. Thus it was stated in 1878 that the
Illinois Central Railroad was then a member of twenty
different pools in Illinois and Iowa alone. Pooling
was sometimes effected by means of simple pools.
More often traffic associations were formed which
attempted to regulate generally the relations between
their members. But the pooling arrangement was
the important feature of all these associations and
the real reason for their existence.

V. In the early eighties a strong public sentiment
against pooling arose. It was believed that pools
kept up rates and, in eliminating competition, injuri-
ously affected the public. Statutes were enacted in
several states prohibiting pooling and finally in 1887
Congress, after much hesitation, inserted an anti-
pooling provision in the Interstate Commerce Act
then adopted.

Section 5 of the Act provides : " It shall be un-
lawful for any common carrier subject to this Act
to enter into any contract, agreement, or combina-
tion with any other common carrier or carriers for
the pooling of freights of different competing rail-



146 AMERICAN RAILROAD RATES

roads, or to divide between them the aggregate or
net proceeds of the earnings of such railroads or
any portion thereof; and in any case of an agree-
ment for the pooHng of freights as aforesaid, each
day of its continuance shall be deemed a separate
offence."

The violation of this provision, as well as of the
other provisions of the Act, was made a misdemeanor,
and pools were effectually put an end to. The rail-
roads were driven to other devices to avoid the
effects of competition, if any could be found. As
we shall see, the traffic associations, with the pooling
arrangements eliminated, continued in existence.

VI. The Interstate Commerce Act attempted
the impossible. Competition cannot be enforced
and discriminations prevented at the same time.
The anti-pooling clause is irreconcilably at variance
with the provisions against discriminations. The
statute presents the anomaly of prohibiting discrim-
inations and, at the same time, prohibiting the most
available means of preventing them. Legislation
has never yet permanently prevented both pool-
ing and discriminations, except as pools have been
followed by closer combinations. The Interstate
Commerce Act was no exception to the rule. While
pooling was substantially abandoned upon its pas-
sage discriminations continued, as we have seen, to
an even greater extent than before. And when, at a
later period, discriminations diminished, it was largely
because consolidations and community of interest



COMPETITION, COMBINATION 147

had eliminated competition in certain sections to a
greater extent than was ever possible under the pool-
ing system.

These principles are well recognized in foreign
countries. Discriminations have only been pre-
vented by consolidations and pooling. Pools are
not treated as agreements beyond the pale of the
law. They are legalized and made enforceable.
There are well organized systems of pools in most
of the Continental countries of Europe and, in some
cases, the governments themselves enter into pools
with respect to government lines and private lines.

The prohibition of pooling by the Interstate
Commerce Act was most unfortunate. The legisla-
tion should have been in the opposite direction.
Pools should have been made lawful and enforceable,
and then regulated. Various measures concerning
pooling have been proposed during the last ten
years. Some have merely removed the prohibition.
Others have made pooling lawful, but provided for
the submission of the pooling agreement to the
Interstate Commerce Commission. Others have
provided for supervision by the Commission, but
with the right of appeal to the courts. It is now
late for any such legislation. Consolidations have
largely divided the field and made pools un-
necessary.

Still consolidations do not cover the whole field,
and in providing an effective method for dealing
with competition and its effects, one of the incen-



148 AMERICAN RAILROAD RATES

tives to further consolidation would be removed.
On the whole, legislation legalizing pooling seems
expedient.

As we have seen, the statute against pooling put
an end to that form of combination. But being
Rate specifically directed against pools, it left

mems" agreements to maintain rates in the same
hlbiUo^'^of condition as before. The traffic associa-
Pooiing. tions, therefore, continued in existence with
rate agreements in the place of pools. Various
methods were devised for enforcing the provisions
of these agreements.

In the South, the Southern Railway and Steam-
ship Association existed for several years with the
pooling feature eliminated. It sought to maintain
rates by imposing fines upon its members for in-
fractions of the rate agreement. It continued until
the business depression of 1893 when rates could
not be maintained, and it was dissolved. Its place
was taken in 1895 by the Southeastern and Mis-
sissippi Valley Association which, in turn, was later
superseded by other associations. These associa-
tions in modified forms still exist. Pools for the
division of the cotton traffic have also existed for
many years in the Southern States. In these
pools an arrangement is made between the railroads
competing at commercial centres for export cotton,
whereby the competition which would necessarily
follow fluctuating ocean rates is avoided. The roads
merely agree to accept each day upon all routes the



COMPETITION, COMBINATION 149

lowest rate quoted upon any route and to take the
traffic in agreed proportions.

In the territory west of Chicago, the adoption of
the anti-pooling clause left railroad relations in a
chaotic state. The old pools were disrupted and
several new associations which were formed proved
failures. In 1891, however, the Western Traffic
Association was formed as a sort of federation of
several associations covering traffic in different
territories. One of these subsidiary organizations
was the Trans-Missouri Freight Association, which
had been formed in 1889 "for the purpose of
mutual protection by establishing and maintaining
reasonable rates, rules, and regulations on all freight
traffic, both through and local." In 1892 a suit
was instituted by the United States against this
association, charging that it was a combination in
violation of the federal anti-trust statute of 1890,
called the Sherman law, which provides that " every
contract, combination in the form of trust or other-
wise, or conspiracy in restraint of trade or commerce
among the several States, or with foreign nations,
is hereby declared to be illegal." The decisions of
the lower courts were in favor of the Association,
and the case was appealed to the Supreme Court of
the United States. Two questions were presented:
(i) whether the anti-trust statute applied to rail-
roads; (2) whether the Trans-Missouri Associa-
tion violated its provisions. The Supreme Court
answered both questions in the affirmative, and held.



I50 AMERICAN RAILROAD RATES

broadly, that agreements between competing rail-
roads to maintain rates — whether reasonable or
unreasonable — are against public policy and con-
trary to the federal statute/

In tracing the history of the rate agreements of
the trunk lines since 1887, we meet another decision
of the Supreme Court fully sustaining and support-
ing its Trans- Missouri decision. Upon the passage
of the Interstate Commerce Act, the trunk lines
abandoned pooling and adopted a system of differ-
entials in favor of the weaker roads by which they
were able to secure their share of the traffic. The
Grand Trunk Railway, however, was not a party to
the differential agreement, and a serious rate war
followed. In 1889 a new agreement was made to
which the Grand Trunk was a party. This agree-
ment provided for the payment of money subsidies
to the weaker roads in lieu of the diversion of
traffic required in pooling. The Trunk Line and
Central Traffic Associations supervised different
portions of the territory. In 1896 these asso-
ciations were superseded by the Joint Traffic
Association. The nine leading trunk lines were
represented in the permanent board of this associa-
tion, and a failure to comply with its recommenda-
tions was punishable by a fine of I5000. Before
the Joint Traffic Association got fairly under way a
suit was instituted by the United States against it

1 United States 'v. Trans-Missouri Freight Ass'n, i66 U. S.
Rep. 290.



COMPETITION, COMBINATION 151

charging: (i) that it was in violation of the anti-
trust statute, and (2) that it contravened the
anti-pooling provision of the Interstate Commerce
Act. The case came to the Supreme Court of the
United States, where an attempt was made to dis-
tinguish it from the Trans-Missouri case upon the
ground that in the latter case power was conferred
upon the association to actually make rates, while
the Joint Traffic Association merely adopted rates
already in force. The Supreme Court, however,
held that the Joint Traffic Association violated the
anti-trust statute, but did not pass upon the ques-
tion whether it was also a pool.^
. The decisions in the Trans-Missouri and Joint
Traffic Association cases show that under the
Sherman law the right of railroads to co-operate is
confined within very narrow limits. They have no
right to enter into agreements to maintain rates in
any form. And yet some measure of co-operation
with respect to rates is absolutely necessary to
carry on railroad business. If each railroad should
make its own classification, and fix its rates without
regard to the charges of its competitors or the charges
of other roads serving competing cities, discrimina-
tions would become the rule, and the attendant con-
fusion intolerable both to the railroads and shippers.
Modern business could hardly be carried on under
such conditions. The road which happened to
make the lowest rate would get all the traffic. Ac-

* United States t;. Joint Traffic Ass'n, 171 U. S. Rep. 505.



152 AMERICAN RAILROAD RATES

cordingly, while the anti-trust decisions have been
regarded in the letter, they have been evaded in the
spirit. Informal understandings have taken the
place of formal agreements. Each road makes its
own rates, but rates upon competitive business are
only made after conference between competing
roads. These conferences undoubtedly often take
place at the meetings of the traffic associations,
which still exist all over the country, and which
constitute convenient vehicles for the interchange of
views. There are "gentlemen's agreements " that the
result of the conferences shall be observed, and these
agreements have been lived up to. In fact, in the
prosperous times which have existed since they were
rendered it is undoubtedly true, as said by the Inter-
state Commerce Commission in its report for 1901,
that " the decisions of the United States Supreme
Court in the Trans-Missouri case and the Joint
Traffic Association case have produced no practical
effect upon the railway operations of the country.
Such associations in fact exist now as they did before
those decisions, and with the same general effect."

But if the decisions of the Supreme Court have
been ineffective in the past, it does not follow
that they will not be most effective in the future.
Good times began in this country very soon after
they were rendered, and have continued ever since.
The railroads generally have had all the traffic they
could move. There is no object in competing for
business when it can be obtained without compe-



COMPETITION, COMBINATION 153

tition. Informal understandings and " gentlemen's
agreements " answer their purpose when there is little
to be gained by evading them. But it remains to
be seen how they will operate in times of depression
when there is not enough business to go around,
and when the weak roads must have traffic. The
early agreements of this character proved to be
merely ropes of sand.

Fluctuating and unequal rates necessarily result
from the operation of railroad competition. They
benefit the few who obtain the low charges ; they
injure the many who pay the correspondingly high
rates. Stable and equal rates, which are beneficial
to the people as a whole, can only be obtained by
eliminating competition. Whether or not, there-
fore, it be expedient to legalize pooling, agreements
to maintain rates should be made lawful and enforce-
able. At the very least, the federal anti-trust statute
should be modified in its eflfect upon railroads. When
competition is eliminated by lawful agreements and
stable and equal rates are maintained, the only
other requirement is that they shall be reasonable
and just. And rates which are both stable and equal
and reasonable and just may be obtained by author-
izing the railroads to eliminate competition, and by
regulating their charges when regulation is necessary.
With no legislation whatever, one of these results
seems inevitable:

(i) Unrestricted competition with Its attendant
discriminations and evils.



154 AMERICAN RAILROAD RATES

(2) Agreements based wholly upon confidence —
which fail when confidence is impaired and lead to
result I.

(3) Consolidation — which generally is lawful but
which is the least desirable form of combination
from the public point of view.

The present laws tend to produce in the worst
form the very results they were designed to prevent.

The anti-pooling clause in the Interstate Com-
merce Act was undoubtedly influential in bringing
Consoii- about railroad consolidations. When the
dation. railroads were prevented from forming
pools, they naturally looked for some other method
of avoiding the effects of competition. Consoli-
dation was lawful, except in a few States. Consoli-
dations excluded competition, and many took place.
But the roads had other alternatives. Agreements
to maintain rates, while extra-legal, were not pro-
hibited ; and, as we have seen, many railroads
merely substituted such agreements for the pooling
arrangements.

The decisions of the Supreme Court construing
the Sherman law limited the field of action. The
roads could evade the law by informal understand-
ings ; or act within the law and consolidate when the
statutes permitted.^ Some took the one course and

^ This is upon the assumption that the consolidation of competing
railroads by means of technical consolidation, purchase or lease, when
authorized by State statutes, is not in contravention of the Sherman
law. That the practical consolidation of such roads by means of a



COMPETITION, COMBINATION 155

some the other. But this was not the only reason
— perhaps it was not the most important reason —
why consoHdations took place. The Supreme Court
decisions were rendered just before the unexampled
wave of prosperity struck this country in 1898.
With prosperity came the tendency in all branches
of industry to co-operate. Industrial combinations
of unprecedented magnitude took place. The same
tendency operated upon the railroads. Railroad
consolidations would undoubtedly have occurred
had the decisions of the Supreme Court been the
other way. But the tendency to consolidate being
coincident with the necessity for consolidating, rail-
road consolidations kept pace with industrial com-
binations. The railroad map of the United States
was made over. Great railroad systems took the
place of the former independent roads. A division
of the entire field of the United States seemed a
probability.

It appears, therefore, at the outset that the effect
of the anti-trust statute, as construed by the Su-
preme Court — like the effect of the statute against
pooling — was, so far as it went, to eliminate that
which it was intended to protect. Combinations
which could only restrict competition were prohib-
ited. Consolidations which, in the territory covered,
excluded the possibility of competition flourished.

The character of the consolidations since 1898

holding corporation Is prohibited, was settled by the Northern Securities
decision.



156 AMERICAN RAILROAD RATES

indicates that they were formed primarily to put an
end to competition. Earlier consolidations, as a
general rule, were for the purpose of strengthening
the position of the principal road by branching out
into new territories, extending existing lines, and
taking in feeders. Expenses of operation were thus
reduced, traffic increased, and more efficient service
made possible. Recent consolidations have been
those of competing lines. These consolidations,
like the earlier, afford opportunities for economies
in operation. Duplications in service may be elim-
inated. But these economies are limited by the
fact that when two great roads unite they must be
operated through many different departments as
before. The saving is often proportionally less in
a large consolidation than a small one.

Consolidation, like every form of combination,
by excluding competition, prevents discriminations.
The elimination of the power to compete eliminates
the inducement to discriminate. When a railroad
controls all the traffic, there is no necessity for grant-
ing rebates and concessions to particular shippers.
Consolidation, therefore, tends to make rates equal.

If consolidation tended to make rates reasonable
and just, as well as equal, its effect upon charges
would be wholly good. The effect of economies
in operation should be to lower rates. On the
other hand, consolidation makes it very easy to
advance rates. An advance of ever so little upon
the vast volume of traffic carried by a consolidated



COMPETITION, COMBINATION 157

system largely augments receipts and is hardly felt
by ordinary shippers. Under a pool or rate agree-
ment several minds must meet to make the advance.
When the official of the consolidated system has only
the needs of his own road to consider, and has only
to agree with himself, he is not unlikely to think
that a slight advance will do his road more good
than it will do shippers harm. The decline in rates
which had been going on for thirty years was
checked, and an advancing tendency first shown,
during the era of consolidation. We are not
now considering whether the advance — which was
slight — was justifiable. We merely note that it
was made entirely feasible by the conditions then
existing.

This point, however, must not be passed over.
That consolidation may lead to advances in rates is
true only of through rates. Local rates are not
affected by consolidation. The railroad serving
the intermediate station is usually a monopoly any-
way ; and local conditions are not changed if it be-
come a part of a greater monopoly. Local rates are
not likely to be increased by consolidation ; and
the interest of the railroad to make rates to de-
velop business along its line will not, as a general
rule, be diminished.

But, while intermediate stations are usually un-
affected by consolidation, it cannot fail to materially
affect localities especially favored by a constituent
road. When a railroad is identified in interest



158 AMERICAN RAILROAD RATES

with a particular city, it will adjust its rates to pro-
mote the interest of that city. But when the road
becomes merely a part of a consolidated system the
identity of interest between it and the favored city
ceases. Thus the Mobile and Ohio Railroad did
much to build up Mobile, and always gave that
port especially favorable rates. The interests of
the city and the railroad were the same. But when
the Mobile and Ohio became a part of the Southern
Railway the latter road had no more interest in
Mobile than in half a dozen other seaports upon
its lines. In fact, if the Southern Railway could
get a longer — and, therefore, more profitable — haul
to another port, it would probably favor it rather
than Mobile.^

The most serious objection to consolidation,
however, does not relate to rates at all. Its found-
ation lies in the tremendous inherent and collateral
power which a great consolidated railroad system
possesses — a power far greater than its component
roads, when independent, could ever possess. The
possibility of a misuse of this power — especially
in influencing legislation — is the real evil, both
of the railroad and of the industrial combination.
Still, if it were a question between consolidation
and unrestricted competition, we should unhesita-
tingly take the former. But when it is between
consolidation and other methods of eliminating com-
petition, our conclusion must be different. Con-

1 Report of Industrial Commission, Vol. XIX, p, 324.



COMPETITION, COMBINATION 159

solidation puts an end to competition within the
territory covered by it. So does a pool or rate
agreement, if lived up to ; and these may cover a
wider field and take in more circuitous routes than
any consolidation not of the most comprehensive
character. Economies in operation resulting from
consolidation may permit lower rates ; but this is
balanced by the facility with which rates may be
raised. And pools and rate agreements have slight
collateral power for evil. On the whole, it seems
clear that independent railroads with pooling or
rate agreements — if made lawful and enforceable
— would better subserve the public interest than
the railroad systems resulting from consolidation.

Consolidations have, undoubtedly, been acceler-
ated by the anti-pooling statute and the Sherman
law. It would seem that the repeal or modifica-
tion of these statutes, which might retard further
consolidations, would be expedient. In any event,
the latter statute should be made inapplicable to
railroads so far as it prevents agreements to maintain
reasonable rates.

But the process of consolidation has been going on.
Many consolidations have taken place. A condition
and not a theory confronts us. The tendency to
consolidate must be recognized. That consolida-
tions will go much further is altogether probable.
Strict regard to charges should accompany the con-
solidation movement, to the end that rates may be
made not only equal, but reasonable and just.



CHAPTER VII

MOVEMENT OF RATES

Tracing the movement of rates through a series
of years requires something more than mere compi-
lations of figures. Differences in the nature of the
traffic, and in the conditions under which it is moved,
make averages unrehable. Yet changes in average
rates indicate in some degree the movement of actual
rates. Variations in particular charges show to
some extent the course of charges in general. Ex-
amining together the movement of average rates,
and of some particular rates, we may approximate
the general course taken by actual charges.

During the period between the close of the civil
war and the end of the century there was a marked
Decline of downward movement in freight rates in
rates. ^}^jg country. Rates declined far more


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Online LibraryWalter Chadwick NoyesAmerican railroad rates → online text (page 10 of 17)