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view, any service which pays a profit over the actual
cost of performing it is worth doing. Any rate
which returns a surplus over the expense of earning
it is justifiable, although such rate if applied to the
whole traffic would be ruinous. It is worth while to
obtain even the smallest contribution toward fixed
charges if the business can be obtained upon no
other basis than the cheap rate, and other business
will not be driven away by granting it. There may
be said to be, therefore, three classes of freight with
respect to the revenue produced :

(i) Cheap and bulky articles which pay little —
but necessarily something — above the actual cost
of moving them. These articles could not be car-
ried at all if there were no other traffic. With other


traffic they help pay expenses. And as cost de-
creases with volume, traffic in these articles is worth
developing. But they never pay their proportion of
the joint costs.

(2) Articles of medium bulk and value which pay
the expense of moving them and a fair profit be-
sides. This class of articles pays its proportional
share of joint costs and capital requirements, but
nothing more.

(3) Articles of small bulk and high value which
pay the expense of moving them and a high profit.
This class of articles pays not only its own propor-
tion of the joint costs and capital requirements, but
makes up for the deficiencies of the articles in the
first class.

Upon similar principles through traffic has not the
ability to pay local rates. Shipments from a distance
cannot be obtained at the rate justifiable for short
hauls. A high rate per ton-mile may be an unim-
portant factor to a shipper who sends his goods only
a short distance, while such a rate would wholly pre-
vent the railroad from obtaining through traffic. The
long-distance traffic corresponds to the cheap goods ;
the local traffic, to the dear goods. And the long-
distance traffic, like the cheap goods, is worth hav-
ing at a low rate, and is more profitable as its volume

Competitive traffic stands upon the same basis as
long-distance traffic. At points upon the railroad
where there are rival carriers — water or rail — the



road must meet competitive rates to obtain competi-
tive business. In order to meet these rates it may
be necessary to reduce its charges to an extent which,
if applied to its whole business, would throw the road
into bankruptcy. There are only two alternatives.
It may not compete. In this case non-competitive
traffic must bear the entire expenses of the railroad.
It may compete, and while the rates may be low,
there will still be a small surplus which will help, so
far as it goes, the non-competitive traffic to pay ex-
penses. Competitive traffic, like cheap goods and
long-distance traffic, cannot bear high rates.

The value of the service theory is beneficial both
to the railroad and to the shipper. As we have seen,
each ton of cheap and bulky goods and of through
traffic, even if it cannot afford to pay average rates,
pays something. It leaves a surplus, however
small, available for joint costs. This traffic may be
enormously increased by low rates. It cannot be
obtained at all at high rates. The small returns
may amount in the aggregate to large sums, and the
indirect effect of low charges in developing business
by building up communities along the line, and by
reaching into new territories, may be immeasurable.
Moreover, while the value principle is especially ad-
vantageous to those who ship cheap goods or ship
long distances, it does not hurt and even helps other
shippers. The shipper of the high priced article,
and the shipper who has the advantage of location
near the market, undoubtedly pay a higher propor-


tional rate than he who ships cheap goods, or ships
them a long distance. But in the one case the rate
is so inconsiderable in comparison with the value of
the article, and in the other it amounts to so little
for the short distance, that it does not affect the
shipper's business. And the traffic which can stand
high rates gains by every shipment at any profit of
goods which can only stand low rates. Whatever
surplus for joint costs is paid by cheap goods reduces
to that extent the amount which must necessarily be
raised from goods of high grade, and, consequently,
lowers the rate upon such goods. The value of the
service principle in making possible a low grade or
through traffic aids the high grade or local traffic.^

1 The development of the value of the service theory of rate making
and the reasons upon which it is based, are clearly outlined in the Re-
port of the Interstate Commerce Commission for 1887 (p. 30) :

'< It was very early in the history of railroads perceived that if these
agencies of commerce were to accomplish the greatest practicable good,
the charges for the transportation of different articles of freight could
not be apportioned among such articles by reference to the cost of
transporting them severally, for this, if the apportionment of cost were
possible, would restrict within very narrow limits the commerce in
articles whose bulk or weight was large as compared with their value.

*' On the system of apportioning the charges strictly to the cost, some
kinds of commerce which have been very useful to the country, and
have tended greatly to bring its different sections into more intimate
business and social relations, could never have grown to any consider-
able magnitude, and in some cases could not have existed at all, for
the simple reason that the value at the place of delivery would not
equal tlie purchase price with" the transportation added. The traffic
would thus be precluded, because the charge for carriage would be
greater than it could bear. On the other hand, the rates for the car-
riage of articles which, within small bulk or weight concentrate great


It is, however, sometimes sought to justify the
value principle upon untenable grounds. Thus it
is said that charging according to the worth of the
service is like making prices according to supply and
demand. "The value of conveyance like the value
of any other service is not necessarily what it costs,
but what it is worth to him who wishes his goods
carried. On supply and demand the available means
for transport and the demand for it determine what
it is worth while to give for carrying goods from A
to B." ^ But this argument would justify ^//charges.
Any rate would be warranted if shippers could be
made to pay it. But railroad rates cannot be wholly
based upon commercial principles. The railroad is
not a private corporation but is engaged in a pub-
lic business. It cannot justify unreasonable rates
upon the ground that, being a monopoly and con-
value, would on that system of making them be absurdly low, — low
when compared to the value of the article, and perhaps not less so
when the comparison was with the value of the service in transporting
them. It was, therefore, seen not to be unjust to apportion the whole
cost of service among all the articles transported, upon a basis that
should consider the relative value of the service more than the relative
cost of carriage. Such method of apportionment would be best for
the country, because it would enlarge commerce and extend com-
munication j it would be best for the railroads because it would build
up a large business, and it would not be unjust to property owners,
who would thus be made to pay in some proportion to benefit received.
Such a system of rate-making would in principle approximate taxation ;
the value of the article carried being the most important element in
determining what should be paid upon it."

1 Railnvay Rates, English a7id Foreign. By J. Grierson. London,
1886, p. 68.


trolling the supply, it can force the public to pay
them. The public obligations of the railroad must
always qualify the working of the value of service

Charging for transportation services according to
their value is analogous to taxation. Rates like taxes
are based upon ability to pay. The analogy is espe-
cially close in the case of aJ valorem duties. The
power to make rates, however, unlike the power to
levy taxes, is not of a compulsory nature. While
the shipper must pay the charge if he make the
shipment, he is not obliged to make it. Moreover,
competition, where it exists, affects rates. Rates are
not taxes ; they are similar to taxes.^

^ Professor Cohn in his able work {Die Englische Eisenhahnpolitik
der letzten zehn Jahre. Leipzig, 1883, p. 65) states tliat railroad
rates must necessarily be based not on the cost of the service but upon
what the shipper can afford to pay and ought to pay for the service,
and that, being so based, they are fundamentally like taxes ; that basing
a rate upon what the shipper ought to pay involves a question of ethics
as well as economics ; and that where determining the price of a ser-
vice involves considerations of public policy and questions of right and
wrong it cannot safely be left to private corporations. His conclusions
are in favor of public ownership of railroads or at least public regulation
of rates.

Making rates upon the value of service principle does not lead to
public oavnersfiip. Rates have been so made since the earliest days
of railroads, and the privately owned railroads making them have given
the public the best and most economical service in the world. It is
more difficult to show that charging according to ability to pay does
not lead to public regulation of rates. It is still more difficult to show
that it does not at least lead to public super'vision and the correction
of injustice where it is shown to exist. We shall recur to these
questions later.


The phrase, " charging what the traffic will bear"
— the application of the value of service principle
"Charging — means charging what the shipper can
traffic will afford to pay. There will be no ship-
bear." ments if the shipper is charged 7nore than
the service is worth to him. There will be no in-
ducements to shipments if he is charged all the ser-
vice is worth. There will be an inducement to
continued shipments if he is charged less than it is
worth. The question is what the shipper is able to
pay not what he can be made to pay. Unfortu-
nately this distinction is not thoroughly appreciated
by the railroad officials themselves. Witness the
well-known remark of M. Solacroup, director of the
Orleans Company : " In the matter of transport
tariffs there is only one rational rule, viz. : to ask
of merchandise all it can pay ; any other principle
is no principle."

" Charging what the traffic will bear" is the sys-
tem of making rates to develop business. It is rather
an excuse for low rates upon cheap goods than for
high rates upon dear goods. The traffic manager
has solely in view the present and future revenues
of his railroad. He adopts no fixed standard, but
endeavors to ascertain what different classes of goods
cost to produce, the demand for them, and their
prices in different places, in order to determine what
they are able to pay and whether lowering the ra

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Online LibraryWalter Chadwick NoyesAmerican railroad rates → online text (page 4 of 17)