Online Library of Liberty: Economics, vol. 2: Modern Economic Problems

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CHAPTER 28

THE TRANSPORTATION PROBLEM

§1. Natural waterways. § 2. The era of canals. § 3. Temporary wreck of inland water transportation. § 4. Rapid building of American railroads. § 5. Eras in the railroad problem. § 6. Governmental aid to railroads. § 7. Emergence of the railroad problem.

§8. Discrimination as to goods. § 9. Local discrimination. § 10. Personal discrimination. § 11. Economic power of railroad managers. § 12. Political power of railroad managers.

§1. Natural waterways. In the simplest economic conditions the moving of men and their material goods from one place to another was a very important part of economic activity. Our elementary studies make clear that place change may be just as real and effective a way of increasing the value of goods as is form, stuff, or time change. Tens of thousands of years ago savage men began to supplement their comparatively weak powers as burden-carriers by using domestic animals, and to find other aids for carrying burdens in such instruments as yokes, litters, rafts, canoes, drags, and rude wheeled carts. Boats and ships on rivers, lakes, and seas early proved to be the least costly means of transportation for heavy weights and long distances; as the old saying goes, the oceans unite rather than divide the lands. Other means of transportation were naturally the shortest and most easily traversed caravan routes to navigable water, or portages between two waterways. A good system of natural waterways, while not reckoned among the private capital of a country, may be greater wealth to one nation than costly artificial means of transportation are to another.

In natural means of transportation, America was well endowed. The straight ocean coast-line measures 5700 miles, and the line following indentations of the coast is about 64,000 miles. The Great Lakes, with a straight shore-line of 2760 miles, are the most important inland waterways in the world. The 295 navigable rivers in the country have a length of 26,400 miles that might be navigable water.

The natural conditions of transportation and primarily the location of the navigable waters of oceans and rivers, determined entirely the location of industries and the spread of population in America until the eras of canals and railroads. The success of Fulton’s steamboat in 1807, indeed, so increased the importance of our natural inland waterways that they were the dominating feature of transportation in many parts of the country until after the Civil War. The successive rise in importance, however, of two artificial kinds of transportation is indicated by the terms “era of canals” and “era of railroads.”

§ 2. The era of canals. Canals were used in the ancient empires for irrigating, for the supplying of cities with water, and for navigation. In the late eighteenth and the early nineteenth centuries they were rapidly built in England and America. Six canals had been built in the United States before 1807, but the canal era in America dated from

Online Library of Liberty: Economics, vol. 2: Modern Economic Problems

the beginning of work on the Erie Canal in 1817, and continued until about 1840; when nearly all new work ceased; more than 4000 miles of canals had been built at a cost of $200,000,000. The New York State barge canal, costing more than $150,000,000, the most notable of our inland waterways, was opened for navigation May 10, 1918. It is the old Erie Canal, reconstructed to permit the passage of thousand-ton barges. The great advantage of canals is cheapness of operation due to the simplicity of the machinery needed and to the great loads that can be moved with small power. A cent a ton-mile proved to be a paying rate on a small canal in the canal era. For heavy, slow-moving freight, a railroad can even now barely rival a parallel canal at its best. As canals, however, can be built only along fairly level routes and where the water supply is at high level, their construction is limited to a small portion of the country. The principle of diminishing returns applies strongly to the construction of canals: the first canals in favored locations are easily constructed and economically operated, but it is only with greater cost and difficulty that the system can be successively extended. In temperate climates the use of canals is limited by ice to a part of the year, and by the summer’s drought sometimes still further. At its best, therefore, the small land-locked canal is fitted only to be a supplementary agent in the system of transportation wherever another transportation agency of higher speed and greater regularity is possible. Far different is the case of the oceanic canal in a tropical climate.

Canals do not appear to have developed many serious problems calling for public regulation. A first simple legislative act fixing the rate of tolls for boats was sufficient. Charges were made by distance as on a toll road, and the boats were owned by different private shippers or by common carriers among whom competition prevailed.

§ 3. Temporary wreck of inland water transportation. After the sudden check to canalbuilding about 1840, most of the existing canals continued to operate, with slowly declining prosperity, until after the Civil War, when many of them were abandoned. The reasons for their failure can be understood only in connection with the history of the railroads in that period. There was not enough traffic for both water and rail carriers to thrive, and, at every point where canals or rivers and railroads touched or were parallel, railroad rates were cut below average rates, or temporarily even far below the cost of carriage. The shipping on the Great Lakes was the one form of inland water transportation to survive and flourish.

This wreck of the canal and the river carriers ruined the prosperity of great numbers of business enterprises and of whole regions, while artificially favoring other enterprises and locations. In the long run (that is, forty or fifty years after it had been done), especially when traffic had so increased that the railroads were inadequate to care for it, this was seen to have been unfortunate for the country as a whole. Water transportation has its rightful place along with railroads in a general system of transportation, each agency to be used in the places and for the kind of traffic for which each is best fitted. The restoration and development of our inland waterways is one of the large transportation problems awaiting solution in the second quarter of the twentieth century.

Online Library of Liberty: Economics, vol. 2: Modern Economic Problems

§ 4. Rapid building of American railroads. The canal was just reaching the peak of popular favor when the railroad in 1830, after a half-century of slowly accumulating technical improvements, burst into view as a demonstrated success as a means of transportation.1 The railroad excels in adaptability any other agent of transportation; it can go over mountains or tunnel through them. It is markedly superior in certainty; it may be blocked for a day or two by floods and snows, but it suffers no seasonal stoppage of traffic. In speed, even the early railroad so far excelled that the canal could survive only by dividing the traffic, taking the lower grades of freight, and leaving to the railroad the passenger traffic and fast freight. Although in respect to cheapness, it could not equal the waterways in favored localities the railroad made rapid gains, and improvements in road-bed, rails, cars, engines, and other equipment soon reduced greatly the cost of conducting traffic on the main lines of roads. Because of these qualities railroads soon surpassed in importance every other agency of internal transportation. The miles constructed and miles in operation in the United States, by decades since 1830, were as follows (route mileage, not counting double tracks and sidings):

2 In this period the mileage abandoned on small and non-paying roads partially offset the new mileage constructed.

The extension of railroads was so rapid that there was not time for a gradual adjustment of industrial conditions. In many places the resulting changes were revolutionary. The building of railroads in the Mississippi Valley in the seventies lowered the value of eastern farms, ruined many English farmers, and depressed the condition of the peasantry in all western Europe.3 With the lower prices that resulted when the fertile lands of the western prairies were opened to the world’s markets, the less fertile lands of the older districts could not compete. Many other changes, of no less moment in limited districts, resulted from the building of railroads. Local trading centers decreased in importance. Villages and towns, hoping to be enriched by the railroads, saw their trade going to the cities. Commerce became centralized. Enormous increases of value at a few points were offset by losses in other localities.

§ 5. Eras in the railroad problem. The history of railroads in the United States is closely interwoven with the general economic development, the political ideas, and the public opinion of the nation from 1830 to the present time. Despite the absence of

Online Library of Liberty: Economics, vol. 2: Modern Economic Problems

clean-cut unified public convictions on the subject, the entire period divides into fairly well marked eras, as new ideas and policies dominate, not entirely displacing the old, and already foreshadowing still others. These eras may be designated as follows:

(1)Unregulated private enterprise, beginning 1830.

(2)Ineffective state regulation, beginning about 1870.

(3)Ineffective federal regulation, beginning 1888.

(4)Strong federal regulation, beginning 1906.

This latest era exhibits already two phases, the first being from 1906 to the war in 1917, and the second after that time. The history of these successive eras is instructive to the student of economic institutions in America, as showing how in a democratic society definite truths displace vague and mistaken opinions after long and bitter experiences.

§ 6. Governmental aid to railroads. The growth of railroads in America was more rapid than in any other part of the world, but it did not occur without much help to private capital from governmental agencies. The railroad enterprise was uncertain, the possibilities of its growth could not be foreseen, and private capital would not invest without great inducements. In European countries the railways were built through comparatively densely populated districts, to connect cities already of large size. Yet railroad extension was very slow there, even though the states in many ways aided the enterprises. America was comparatively sparsely populated, and most of the railroads were built in advance of and to attract population, business, and traffic. In many cases railroad-building in America was part of a gigantic real-estate speculation undertaken collectively by the taxpayers of the communities.

American states recklessly abandoned the policy of noninterference, and vied with one another in giving railroad enterprises lands, money, and privileges, in lending bonds, in subscribing for stock, and in releasing from taxation. These fostering measures were expected to increase wealth and to diffuse, a greater welfare throughout the community. Many states were forced to the point of bankruptcy by their reckless generosity, and some states repudiated the debts thus incurred.

The national government then took up the same policy and granted lands to the states to be used for this purpose. The first case of this kind was the grant to the Illinois Central road, in 1850, of a great strip of land through Illinois from north to south. Grants were made in fourteen states, covering tens of millions of acres of land. Then the national government, between 1863 and 1869, aided the building of the Pacific railroads by granting outright twenty square miles of land for every mile of track, and by lending the credit of the government to the extent of fifty million dollars—a debt that was settled by compromise only after thirty years.

Counties, townships, cities, and villages then entered into keen competition to secure the building of railroads, projected by private enterprise. Bonds, bonuses, taxexemptions, and many special privileges were granted. To obtain this new Aladdin’s lamp, this great wealth-bringer, localities mortgaged their prosperity for years to come. The promoters bargained skilfully for these grants, playing off town against

Online Library of Liberty: Economics, vol. 2: Modern Economic Problems

town, cultivating the speculative spirit, punishing the obdurate. Not the civil engineer but the railroad promoter determined the devious lines of many a railroad on the level prairies of America. The effects of these grants were in many cases disastrous, and after 1870 they were forbidden in a number of states by legislation and by constitutional amendments. But, before this era of generosity ended, the railroads in America had received probably more public aid than has ever been given to any other form of industry in private hands.

§ 7. Emergence of the railroad problem. In most charters and laws authorizing the building of railroads, either nothing was specified regarding rates, or maximum rates were fixed which proved to be so high that they were of little, if any, practical effect. But very soon began to appear some serious evils in the policy of railroads toward the shipping and traveling public in matters of rates and of service.

As the ownership of the wagons, ships, and canal-boats of a country is usually divided, ocean ports and points along the lines of trunpikes and canals enjoy competition between carriers. In the early days of the railroads it was believed that a company or the government would own the rails and charge toll to the different carriers, who would own cars and conduct the traffic, as was done on the canals. Experience soon showed the impracticability of this scheme and the need of unified management. An operating railroad company, therefore, has a monopoly at all points on its line not touched by other carriers. This, like any other monopoly, is limited; for the railroad, to secure traffic, is led to meet competition of whatever kind—that of wagons, canals, rivers, or of other railroads—wherever it occurs. The railroads in private hands early began to “charge what the traffic would bear,” high where they could and low where they must, to get the business. Thus developed the various forms of discrimination.

§ 8. Discrimination as to goods. Discrimination as to goods is charging more for transporting one kind of goods than for another, without a corresponding difference in the cost. When reasonably understood, this proposition does not apply to a higher charge for goods of greater bulk, as more per pound for feathers than for iron, the “dead weight” of car being much greater in one case than in the other. It does not apply where there is a difference in risk, as between bricks and powder, or coal and crockery; nor where there is a difference in trouble, as between live stock and wheat. Any difference that can reasonably be explained as due to a difference in cost is not discrimination; on the other hand, a difference in cost without a difference in rate is discrimination. Discrimination as to goods may be by value, as low rates for heavy, cheap goods, and high rates for lighter, valuable ones. Coal always goes at a low rate as compared with dry goods, and sometimes more is charged for coal to be used for gas than for coal to be used for heating purposes.

Railroad discrimination so frequently has resulted in injustice to the shipping public that the term has taken on an evil significance. But it is well to observe that the word discrimination is not derived from crimen (crime), but from discernere (to discern). There are both reasonable and unreasonable forms of discrimination. In general, discrimination as to goods more often appears, under certain conditions and made with due regard to the public interest, to be reasonable; less often to be justified is the

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form of local discrimination next to be described; and least often of all to be justified is the last-named form of personal discrimination.

§ 9. Local discrimination. Discrimination between places (called also local discrimination) is charging different rates to two localities for substantially the same service. This occurs when local rates are high and through rates are low; when rates at local points are high and at competing points are low; when less is charged for shipments consigned to foreign ports than for domestic shipments; when more is charged for goods going east than for goods going west. The causes of local discrimination are: first, water competition, second, differences in terminal facilities, making some places better shipping-points than others; third, competition by other railroads, which is concentrated at certain points, only one tenth of the stations of the United States being junctions; fourth, the influence of powerful individuals or large corporations and the personal favoritism shown by railroad officials.

The effects of local discrimination are to develop some districts and depress others; to stimulate cities and blight villages; to destroy established industries; to foster monopolies at favored points; and to sacrifice the future revenues of the road by forcing industry to move to the competing points to get the low rates. The power of railroad officials arbitrarily to cause rates to rise or fall is usually limited in practice by the need of earning as large and as regular an income as possible, but even as exercised it has been at times as great as that possessed by many political rulers.

§ 10. Personal discrimination. Discrimination between shippers (personal discrimination) is charging one person more than another for substantially the same service. This most odious of railroad vices, rarely practised openly, is done by false billing of weight, by wrong descriptions or false classification to reduce the charge below published rate-sheets, by carrying some goods free, by issuing passes to some and not to all patrons under the same conditions, or by donations or rebates after the regular rate has been paid. In some cases a subordinate agent shares his commission with the shipper, and the transaction does not appear on the books of the company. In other cases favored shippers are given secret information that the rate is to be changed, so that they are enabled to regulate their shipments to secure the lower rate.

One group of reasons for personal discrimination is connected with the interests of the road. It is to build up new business; it is to make competition with rival roads more effective by favoring certain agents, as was very commonly done in the western grain business; it is to exclude competition, as by refusing to make a rate from a connecting line or to receive materials for a new railroad which is to be a competitor; and it is to satisfy large shippers whose power, skill, and persistence make the concession necessary. Another group of reasons has to do with the interests of the corporate officials. It is to enable them to grant special favors to friends; or it is to build up a business in which they are interested; or it is to earn a bribe that has been given them.

The evils of personal discrimination are great. It introduces uncertainty, fear, and danger into all business; it causes business men to waste, socially viewed, an enormous fund of energy to get good rates and to guard against surprises; it grants unearned fortunes and destroys those honestly made; it gives enormous power and

Online Library of Liberty: Economics, vol. 2: Modern Economic Problems

presents strong temptations to railroad officials to injure the interests of the stockholders on the one hand and of the public on the other.

§11. Economic power of railroad managers. Other evils of unregulated private management of railroads appeared. When the railroad was a young industry, it was thought to be simply an iron-track turnpike to which the old English law of common carriers would apply. This and similar notions soon, however, proved illusory. It was seen that the higher railroad officials had, in the granting of transportation service and the fixing of rates, a great economic power. They had complex and sometimes conflicting duties to the stockholders and to the shipping public. They wore their conscience burdens lightly before the days of effective regulation, and frequently made little attempt to meet the one and no attempt whatever to meet the other obligation. The opportunities for private speculation brought to many railroad managers great private fortunes. There were no precedents, no ripened public opinion, no established code of ethics, to govern. It was a betrayal of the interests of the stockholders when directors formed “construction companies” and granted contracts to themselves at outrageously high prices. It was an injury not only to shippers, but also to the stockholders, when special rates were granted to friends and to industries in which the directors were interested. In general, however, the interests and rights of the stockholders were more readily recognized than were those of the public. A railroad manager is engaged by the stockholders, is responsible to them, and looks to them for his promotion. Hence their interests are uppermost whenever the welfare of the public is not in harmony with the earning of liberal dividends. The managers long felt bound to defend the principle of “charging what the traffic will bear” in the case of each individual, locality, and kind of goods, even if this ruined some men and enriched others, and if it destroyed the prosperity of cities to increase the earnings of the road.

§12. Political power of railroad managers. Likewise in various ways railroad managers, unlimited by rate regulations, may exercise great political influence and power. Some writers maintain that the power to make rates on railroads is a power of taxation. They point out that, if rates are not subject to fixed rules imposed by the state, the private managers of railroads wield the power of the lawmaker. By changing the rates on foreign exports or imports, the railroads frequently have made or nullified tariff rates and have defeated the intention of the legislature. On the other hand, high rates on state-owned roads in Europe have been used in lieu of protective duties. These facts go to show that a change of railroad rates between two places within the country is similar in effect to the imposing or repeal of tariff duties between them.

The wealth and industrial importance of the railroads soon began to give them widespread political power in other ways. It was commonly charged in some states that the legislature and the courts were “owned” by the railroads. The railroads, in part because they were the victims at times of attempts at blackmail by dishonest public officials, declared that they were compelled in self-defense to maintain a lobby. The railroad lobby, defensive and offensive, was, in many states, the all-powerful “third house.” Railroads even had their agents in the primaries, entered political conventions, dictated nominations from the lowest office up to that of governor, and elected judges and legislators. The extent to which this was done differed according as