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common law.^

^ Maximum Rate Case, 167 U. S, Rep. 501,



LIMITATIONS OF RATES 33

It is the duty of the courts to enforce the common-
law requirement that charges for transportation shall
be reasonable. The reasonableness of a rate pre-
sents a judicial question, although necessarily a ques-
tion of fact. The courts must decide when the
question is presented what is reasonable in the mat-
ter of rates, just as they determine as a fact what is
reasonable in other controversies. The problem is
difficult. The reasonableness of a railroad charge
involves many considerations and is affected by
many circumstances and conditions. But while
changed conditions have made it infinitely more
complicated, the real question is the same as that
presented two hundred years ago, when the shipper
complained that the wagon carrier had made an
unreasonable charge. The difference is not in the
■question but in the difficulty of answering it.

A shipper may maintain an action at common
law for the recovery of the amount paid in excess
of a reasonable charge. But this remedy is entirely
ineffectual and inadequate. The amount wrongfully
exacted from an individual shipper would ordinarily
be so small that he would rather lose it than enter
into an expensive and protracted lawsuit for its
recovery, and at the same time incur the ill-will of
the railroad. And if he brought suit and won his
case little would be accomplished for the future.
A more efficient remedy is clearly demanded. A
method should be provided by which shippers could
apply to the courts and, with little delay and possibly

3



34 AMERICAN RAILROAD RATES

at the public expense, obtain injunctions against un-
reasonable charges. This might possibly require
legislative action enlarging the equity powers of the
courts. It is made necessary by the relation of the
railroad to the shipper and the comparative helpless-
ness of the latter. This remedy should be provided
irrespective of the question whether unreasonable
charges are common or uncommon, or whether fed-
eral regulation is expedient. The mere existence of
an effectual remedy may make resort to it unneces-
sary. The courts cannot, however, be authorized
when they find a rate to be unreasonable to go further
and determine what rate would be reasonable, and
enjoin the collection of more than that. This would
amount to making future rates, and, as we shall see,
the rate-making power is legislative, not judicial.^

The rule that rates must be reasonable has always
been recognized. The difficulty lies in framing a
standard of reasonableness.^ With respect to an

1 See Chaps. IX. and X.

2 In the Trans-Missouri Freight Ass'n case, i66 U. S. Rep. 331,
the United States Supreme Court said : " What is a proper standard
by which to judge the fact of reasonable rates ? Must the rate be so
high as to enable the return for the whole business done to amount to
a sum sufficient to afford the shareholder a fair and reasonable profit
upon his investment ? If so, what is a fair and reasonable profit ?
That depends sometimes upon the risk incurred, and the rate itself
differs in different localities : which is the one to which reference is to
be made as the standard ? Or is the reasonableness of the profit to be
limited to a fair return upon the capital that would have been sufficient
to build and equip the road, if honestly expended ? Or is still another
standard to be created, and the reasonableness of the charges tried by
the cost of the carriage of the article and a reasonable profit allowed on



LIMITATIONS OF RATES 35

entire rate schedule we may say — as already shown

— that that is a reasonable schedule which returns
in the aggregate enough — but not more than enough

— to afford the capital invested in the railroad a re-
turn equal to that received by capital invested in
productive enterprises generally. Theoretically, the
rate for a particular service should be an infinitesimal
proportion of the amount required for all services.
But this is mere theory — impossible of application.
It cannot be said that there is any definite rule for
determining the reasonableness of an individual rate.
Rates are not made upon a scientific basis. Who
can determine — standing by itself — whether a dol-
lar is a more or less reasonable charge for a particular
service than ninety-five cents ?

Still the courts and railroad officials are not driven
to mere guesswork* A negative rule may at least
be stated. No rate is reasonable unless based upon

(i) The cost of the service.

(2) The value of the service.

The problem is to obtain a positive rate by follow-
ing a negative rule — to make a certainty from an
uncertainty. We shall see that the problem can in
practice only be solved by comparison.

that ? And In such case would contribution to a sinking fund to make
repairs upon the road-bed and renewal of cars, etc., be assumed as a
proper item ? Or is the reasonableness of the charge to be tested by
reference to the charges for the transportation of the same kind ot
property made by other roads similarly situated ? . . . It is quite
apparent, therefore, that it is exceedingly difficult to formulate even the
terms of the rule itself which should govern in the matter of determining
what would be reasonable rates for transportation."



CHAPTER in

MAKING RATES

Since the earliest days railroad rates have in-
cluded the charge of the carrier and the toll of the
toll owner. The charge represents the cost of the
service; the toll, the value of the service. The re-
sult of any correct practice must be reasonable rates.
Any other result indicates a wrong practice. We
have examined the origin and development of the
practice, have learned the result to be attained, and
have gone so far as to lay down a negative rule. Let
us now see whether the long established practice is
based upon correct principles ; whether it does produce
reasonable rates, and by whom rates should be made.
The phrase " cost of service " as used in relation
Cost of to railroad rates has three meanings :
service, ^j^ T\\Q actual outky required to move

the particular item of traffic.

(2) The expenses of the railroad in moving its
freight over a completed and equipped road ; of
which the particular item of traffic should bear its
proportional share.

(3) The entire expenses of the railroad, including
interest and a fair return upon capital invested ; of
which the particular item of traffic should bear its
proportional share.



MAKING RATES 37

I. The additional expense incurred in rendering
the particular service — cost of service in its narrowest
sense — determines the minimum charge and is con-
sequently an element in fixing the rate. It is always
important to ascertain the amount of tare — the pro-
portion of dead to paying freight. Freight carried
in half empty cars costs more than full loads. It
is equally of consequence to know whether the cars
can be returned loaded or must return empty.
Other considerations which to a greater or less de-
gree affect the actual expense to the railroad of mov-
ing the particular freight, and consequently enter into
the rate, are (a) the bulk of the goods transported ;
(b) the weight ; (c) the method of packing and pro-
tection ; (d) the extent of the shipment and whether
in car-load lots ; (e) the kind of cars required ;
(f) the necessary speed, and (g) the necessity for ice
or heat/ Mileage, of course, is also a most im-
portant factor.

II. Cost of service in a broader sense is synony-
mous with " moving the freight." It includes the
outlay of the railroad in carrying its freight over a com-
pleted and equipped road, embracing expenditures
for fuel, wages of freight agents, freight handlers,

^ Risk is always an element to be considered in making rates.
Articles which are dangerous and destructive or perishable and destructi-
ble must pay a higher rate than articles of a less dangerous or perish-
able nature. It may, however, cost the railroad little more to carry
the former than the latter. In so far as risk involves additional care
and expense it is an element of cost of service. In so far as it makes
the service worth more it is an element of value of service.



38 AMERICAN RAILROAD RATES

and men working freight trains, and for keeping the
freight equipment in repair. It also takes in such
proportion of all the other expenses, outside of
fixed charges, as the amount of freight traffic bears
to the whole traffic of the railroad. Now if we
could determine the total freight expense we would
only have to divide it by the total freight reduced
to ton-miles to get the average cost of freight
transportation per ton-mile. A basis for making
rates might be indicated. The insurmountable
difficulty, however, is that we cannot ascertain the
proportion of expenses which should be allotted to
the freight traffic. As we have seen, most of the
expenses of a railroad are not apportionable. And
even if an arbitrary result could be obtained by using
train mileage as a basis, it would furnish no founda-
tion for making particular charges.

III. Cost of service in its broadest sense includes
not only all the outlay for " moving the freight,"
but also the freight traffic's proportional share of
the interest upon the railroad debt and of a fair
return upon the capital invested. Rates in the
aggregate should be sufficient to meet this cost,
which is only another way of saying that a rail-
road is entitled to a fair return upon the value of
its property. The freight service should pay its
proper share. But as we have seen, the results
required from rates collectively are of little aid in
making rates individually, even if it were possible
to ascertain the freight service's proper share.



MAKING RATES 39

While cost Is always a factor in rate-making, it is
a popular idea that it should go much further —
that rates should be based upon the cost cost theory
of service. It is an economic principle, °^ ''^^^s-
it is said, that cost of production determines the
selling price. The prices of the products of manu-
facture or agriculture are fixed by the cost of making
or growing them. Transportation adds value to
commodities by placing them where they are needed.
It is a form of production. Cost of service is
cost of production to a railroad. Therefore, it is
urged, cost of service should determine the selling
price of transportation — the rate.

The cost theory of rates is that charges for dif-
ferent transportation services should be regulated
in accordance with the cost to the railroad of per-
forming them — that rates for services should vary
with the varying amounts of energy necessary to do
them. Each shipment should bear its proportional
share of the expense.

The primary difficulty with the cost theory is'
that it is wholly impracticable. The cost of a par-
ticular service cannot be ascertained. We have
seen that joint costs represent a very large part of
the expenses of a railroad. Energy is expended for
the benefit of the service as a whole and not for
any part of it. Constant expenses are absolutely,
and fluctuating expenses partially, non-apportion-
able. The out-of-pocket cost of a particular service
may be got at ; but this cost is merely an element



40 AMERICAN RAILROAD RATES

entering into the rate. Any attempt to use these
ascertainable expenses as a basis for estimating the
whole cost of a service would merely end in conjec-
ture. As said by General Alexander : " Results so
arrived at would be as unreliable as the distance to
the moon, estimated by measuring to the top of the
highest mountain and guessing at the rest." ^ Bas-
ing rates wholly upon the cost of service is im-
possible because it is impossible to find out what
the cost is.

The analogies by which it Is sought to justify the
cost theory may be carried too far. It is not always
true that the prices of manufactured products are
j based upon the cost of production. Indeed, it is
only the very smallest craftsman, who buys the ma-
terial for his job and charges the amount paid and
the usual wages for his labor, who bases his prices on
cost and nothing else. Let us go up a little in the

^ Railivay Practice. By E. Porter Alexander. New York, 1887,
p. 3 ; from which the following apt comparison is also taken :

" The case of a railroad's estimating the cost of doing a particular
piece of business is not unlike that of a lawyer estimating the cost of
giving an opinion. He has fitted himself for that particular business
and, as it were, invested his life in the education and experience neces-
sary to transact it. His time is good for nothing else, and if he is not
called upon for opinions it will be worthless to him. He can, there-
fore, render opinions up to a certain limit almost without cost except
for stationery. So a railroad is a large fixed investment capable of
furnishing transportation and nothing else. Up to certain limits it
can always take additional business without cost except for a very
small amount of fuel. The money it receives for the new business
above the small additional cost is all clear profit. It adds that much
to the ability of the road to serve other patrons at low rates."



MAKING RATES 41

scale and take a manufacturer with a small plant,
who makes but a single article, e. g. cloth. Here
it would seem that prices could be based solely
upon cost. It is true that such a manufacturer at
the end of the year may divide his total expense,
plus a fair profit, by the total number of yards pro-
duced, and determine the cost per yard — using the
word "cost" in its broadest sense. But the cost is
not determined until the goods are sold. It fur-
nishes a basis for the prices for the year to come, not
for that which has passed. And it can only be ap-
proximately correct as a basis for the future. Next
year the proportion of expense to output may be very
different from that expected. Still, in the case of
small manufacturers with few lines, cost of production
per ton or yard may be approximately determined,
and may furnish a fair basis for prices. But how is
it possible to ascertain the cost of production of any
particular article in a large manufacturing establish-
ment turning out many products ? Such an under-
taking, like the railroad, has its constant expenses.
Its expenditures cannot be apportioned to particu-
lar parts of the output. Nearly all costs are joint
costs. Prices cannot be based upon cost of produc-
tion because there is no way of ascertaining what is
the cost of producing one out of a hundred differ- V^-'^'Hl

ent articles. As a general rule, a manufacturer .does . -jji"^

not base his prices upon- cost of production. After
"making sure of his out-of-pocket cost, he seeks to
obtain from every sale just as much towards con-



t



V



42 AMERICAN RAILROAD RATES

stant expenses as it will stand. In manufacture and
other forms of productive industry — except along
the simplest lines — prices are rather based upon
the worth of the article to the buyer than its cost
to the seller.

Railroad rates based solely upon cost of service
would not be stable. They could not be made in
advance with precision because they could not be
fixed until the amount of the traffic had been ascer-
tained. And this is even more true than in the
case of the manufacturer which we have noticed.
Railroad cost varies inversely with the traffic. As
the volume necessarily fluctuates, the cost based
upon the volume must also vary. A schedule of
rates established strictly upon cost of service would
necessarily change as the business increased or
decreased.^

If it were feasible to prepare a tariff based upon
cost of service alone, the result would be unjust.
Expense of transportation must largely be based
upon the bulk of the article, and the cost principle
would often impose the heaviest burden upon the
cheapest goods. It costs a railroad more to trans-
port a carload of coal a hundred miles than a car-
load of dry goods half the distance. But if the rate

^ Upon the cost principle, the rate per ton-mile varies inversely
with the traffic. Now it is equally true that the amount of traffic, to
a certain extent, depends upon the rate. As already shown, low rates
tend to increase business ; high rates to restrict business. It therefore
follows that the more business, the lower the rate ; the lower the rate,
the more business. There is a curious interaction of cause and effect.



MAKING RATES 43

were fixed solely on a basis of cost, the price of the
coal would be made prohibitive. Moreover, high
rates upon bulky articles of small value, such as
lumber, coal, grain, and iron ore necessarily curtail
production, and, consequently, reduce the amount
of freight offered for transportation. If such rates
were made by law, railroads would be absolutely
prevented from building up communities along their
lines through handling raw materials cheaply. They
would be debarred from assisting — in the very
way American railroads have been most potent in
assisting — in the development of the country.

Analogous to the cost of service theory is that of
equal mileage rates. It is sometimes claimed — more
in the past than in the present ■ — that Equal miie-
the charge for carrying the same goods ^^^ rates,
an equal distance should be everywhere the same.
The claim — which at least has the merit of simplicity
— may be said to take two forms, one broader than
the other :

(i) That equal mileage rates should exist all over
the country.

(2) That equal mileage rates should exist upon
all parts of the same railroad.

Now it is at once apparent that equal mileage
rates are not based upon cost of service. Terminal
expenses — the cost of loading and unloading — are
not affected in the slightest degree by distance.
And if terminal expenses be separated, we come only
a little nearer cost of service. The underlying prin-



44 AMERICAN RAILROAD RATES

ciples we have examined show clearly that cost of
transportation does not vary in proportion to distance
carried. It does not begin to cost twice as much to
haul goods two hundred miles as one hundred. Mile-
age run is only one of the factors In cost of service.
But we make little progress in comparing mileage
and cost theories. If both are untenable it does
not matter that one is the antithesis of the other.
Equal mileage 'rates must be considered by them-
selves. Equality is not always equity. Equal charges
upon all the railroads in the country manifestly
would be inequitable. Conditions both of roads
and business are radically different. Cost of con-
struction and operation varies widely. One road is
built over the mountains and another across a
prairie. The gradients upon the mountainous road
may permit the hauling of less than half the train-
load which the other road may readily move with
the same power. The density of the traffic — a
most important factor in railroad operations — also
varies with the railroad. A road may be profitably
operated at lower rates with heavy than with light
traffic. Charges which would not support the rail-
road in New Mexico may make large profits for the
road in New Jersey. And if we compare the phys-
ical conditions of the road across the fiat country of
New Jersey with those of the mountainous road in
New Mexico, as well as the conditions of business,
the injustice of equal mileage rates is the more
apparent.



MAKING RATES 45

Equal mileage rates upon the same railroad stand
upon the same basis as such rates upon different
roads. Different divisions of the present railroad
systems vary almost as widely in physical and com-
mercial conditions as different independent roads.
As long ago as 1874 Albert Fink said that " under
the ordinary circumstances under which transporta-
tion service is generally performed the cost per ton-
mile in some instances may not ^yji^^di one-seventh of
a cent^ and in others will be as high as seventy-three
cents per ton-mile on the same road."*

The injustice of equal mileage rates both to the
railroads and the shippers is very clearly shown in
the report of the English Parliamentary Committee
of 1872:

" The principle [of equal mileage rates] would
prevent railway companies from making perfectly
fair arrangements for carrying at a lower rate than
usual goods brought in large and constant quantities,
or for carrying for longer distances at a lower rate
than for short distances.

" It would prevent railway companies from lower-
ing their fares and rates so as to compete with traffic
by sea, by canal, or by a shorter or otherwise cheaper
railway, and would thus deprive the public of the
benefit of competition and the company of a legiti-
mate source of profit.

" It wouJd compel a company to carry for the

^ Annual Report of Louisville and Nashville Railroad for 1874.



46 AMERICAN RAILROAD RATES

same rate over a line which has been very expensive
in construction, or which, from gradients or other-
wise, is very expensive in working, at the same rates
it carries over less expensive lines."

Equal mileage rates seem utterly out of the ques-
tion. They would warrant very slight consideration
were it not for the part which they have played
in railroad history. The Granger tariffs in the
Western States were largely based upon the equal
mileage principle. This, with modifications for
short distances, was the basis of the first Granger
law passed in Michigan in 1871. The Potter law
of 1 874 in Wisconsin, the fixed-distance rate act in
Iowa, and statutes in other States of the Middle
West were along similar lines. They did not work
because they were not workable and were soon
repealed. The equal mileage principle may, how-
ever, still be traced in the German and several
other European tariffs.^

Now, while equal mileage rates are clearly inequi-
table, rates upon a mileage basis are entirely just.
Generally speaking it is worth more to carry goods
a longer than a shorter distance. Every additional
mile of carriage involves an additional service.
But if rates per mile cannot be equal upon different
roads or the same for different services, and if the
necessary inequality cannot be based upon cost of
service, upon what can it be based ? We are driven
to the answer, Value of the service.

1 See Chap. VIII.



MAKING RATES 47

The value added by the service marks the maxi-
mum Hmit of rates. The value of the service
affords a basis for making rates. Value value of
in one way points out the bounds of ex- *^^ service,
tortion, and in another embodies the principle of
concession. Rates are based upon the value of the
service when they are based upon ability to pay.
The principle of value adapts charge to worth. It
is the principle of which the practice is " charging
what the traffic will bear."

Basing rates upon the value of the service is largely
the result of the operation of the element of joint
cost in railroad expenses. As we have seen, the
greater part of the expenditures of a railroad are
made for the benefit of the service as a whole, and
are not assignable to any part of the traffic. It is
impossible to ascertain the cost of any particular
service. But from all the traffic enough revenue
must be obtained to pay charges and expenses and
leave a fair return upon capital. How shall it be
obtained ?

In the first place, the revenue must be obtained
where it can be obtained. Cheap goods have less
ability to pay than dear goods. Different grades of
traffic must necessarily pay different rates for the
same service. The cost to the railroad of transport-
ing articles of low value may be no less than the
cost of carrying articles of equal bulk and weight of
high value, but the charge for transportation must
be less if the railroad is to obtain the business.



48 AMERICAN RAILROAD RATES

Cheap and bulky articles can be obtained for trans-
portation only at low rates. They have not the
ability to pay high charges. On the other hand, a
high rate may be an inconsiderable item to articles
of little bulk and great value, and will not deter their
shipment. They have the ability to pay the rate.
Charges for the transportation of coal, iron ore,
grain, lumber, and other articles of little value com-
pared with bulk must necessarily be at compara-
tively low rates. A high rate would be prohibitive.
They could not afford to pay even the average rate.
Dry goods, fine hardware, and similar articles can
pay several times the rate upon lumber and coal and
the volume of shipment be unaffected.

In the second place, from the railroad point of


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Online LibraryWalter Chadwick NoyesAmerican railroad rates → online text (page 3 of 17)