develop a new business. Rates from Buffalo to New York will immediately fall, and the competition may be carried so far as to reduce rates to or below the level of mere transportation expenses. Local rates may remain unaffected. The result will be a disproportionately small charge to the point of competition. The number of competitive centres in the United States is immense,1 the quantity of local discriminations is hence correspondingly large. A lower rate to the competitive centre is the sole condition of the retention of the competitive traffic. Increase of charges means a destruction of the business.2 From the standpoint of the railway, therefore, the principle of differential rates is beneficial. It is due in the last instance to the distinction between fixed and variable expenses. Any rate on the through business above mere operating expenses is pro tanto profitable. The surplus goes to defray the fixed expenses. Rather than not get the traffic at all, the railway will take it at reduced rates, and yet these reduced rates if applied to all business would be ruinously unprofitable. The charge per mile on the longer haul may be less than the charge per mile on the shorter haul. How much less it may be is of no concern to the railway, as long as operating expenses are paid. The only endeavor is to retain and extend the traffic.

From the standpoint of the public the principle of differential rates is also justifiable as a principle. The element of competition would in itself not be a valid justification. Whether the freight is carried by one route or another, ceteris paribus, makes no difference to the shipper, except indeed that public interest might oppose competition of foreign railways. But the long-haul consideration is of vital importance to the public. It becomes the question of having the goods transported at the lower rates, or not having them transported at all. The industrial progress of the nineteenth century is due to cheapened methods of production. Whatever tends to reduce

1 In 1886, of the 33,694 railway stations in the United States, 2778 were junction points. Chief of Bureau of Statistics quoted in Congressional Record, Jan. 12, 1887, p. 562.

2 Cf. Michaelis, Die Differentialtarife der Eisenbahnen, Bd. I. (1873); Boinvil liers, Des transports à prix réduits sur les chemins de fer (1878).

the cost of transportation and to eliminate the element of distance in so far increases national prosperity. [Only under a system of differential rates does this development become possible. Without local discriminations the growth of our country would be set back many decades. They form an indispensable condition of national prosperity.

The legitimacy of the principle of differential rates may be inferred from considering the effects of their abolition. The opposite of a differential rate, i.e., a different charge per mile, is an equal mileage or pro rata rate, i.e., the same charge per mile. We pass over the absurd inconsistency of those who in the same breath advocate cost of service and pro rata charges. One of the plainest principles of railway economics is that cost of service becomes relatively less as the distance traversed becomes greater. To transport an article twenty miles does not cost twice as much as to transport it ten miles. Only a portion of the expense increases with the distance. The greater part is independent of distance, so that the cost of service diminishes with every additional mile. The separation of terminal charges, which are of course utterly irrespective of the distance traversed, from pure hauling expenses, would diminish, but by no means remove the objection. Hence to base equal mileage rates on the principle of cost of service is illogical. Even according to the doctrine of cost, differential rates are perfectly legitimate. Rates absolutely proportional to cost of service would be differential rates.1

But omitting the question of logic, what would be the effect of pro rata charges? Here both theory and practice come to our aid. The theoretical conclusions have been well formulated in various governmental commissions, the practical illustrations have been afforded by the working of our Granger laws and, in a greatly modified extent, by the experience of some European railways. Nowhere, perhaps, has the matter been more tersely put than by the English parliamentary committee of 1872:2

1 This has led to the sliding scale and zone systems — mileage rates decreasing with distance in various parts of Europe, and even in the United States.

2 Joint Select Committee on Railway Cos. Amalgamation, 1872, Rep., p. xxxii,

(a) It would prevent railway companies from lowering 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 legitimate source of profit.

(b) It would prevent railway companies from making perfectly fair arrangements for carrying at a lower rate than usual goods brought in larger and constant quantities, or for carrying for long distances at a lower rate than for short distances.

(c) It would compel a company to carry for the same rate over a line which has been very expensive in construction, or which, from gradients or otherwise, is very expensive in working, at the same rate at which it carries over less expensive lines.

In short, to impose equal mileage on the companies would be to deprive the public of the benefit of much of the competition which now exists or has existed, to raise the charges on the public in many cases where the companies now find it to their interest to lower them, and to perpetuate monopolies in carriage, trade, and manufactures, in favor of those rates and places which are nearest or least expensive, where the varying charges of the companies now create competition.

In like manner, the New York commission concludes, after a comprehensive review of the whole subject, that pro rata charges are absolutely injudicious and impracticable.1 The Senate committee of 1886 does not even consider the proposition worth a separate discussion. The late French and Italian commissions hold the same views.2 American experience is no less emphatic. The first Granger law, enacted in Michigan in 1871, prescribed equal mileage rates - with a slight modification for short distances. Even as changed by the law of 1873 these rates were so utterly impracticable that they were disregarded by the railways with the tacit consent of the people. The com

where the conclusions of the Royal Commissions of 1865 are simply re-formulated. The Select Committee of 1882 reprints the conclusions and discusses them at length. Report, pp. ix et seq.

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1 Report of the Board of Railroad Commissioners on the pro rata bill (1884), p. 125. Also the annual report for 1884, App. 63. Pro rata laws are described as straight-jackets, preventing perhaps some positive evil, but dulling the energy and cramping the development of business. They hamper legitimate efforts at expansion." 2" È altresi un fatto incontestabile che il sistema delle tariffe differenziali ha contribuito a rendere più forti e migliori le industrie nazionali,” etc. Atti della Commissione d'Inchiesta (1881), Riassunto, II, 832. For France see the report translated in the English Select Com. Rep. (1882), App., especially p. 450.

missioner pronounced the duties imposed upon him impossible of accomplishment.1 The fixed-distance tariff of Iowa, according to the law of 1874, proved to be so unequal and unjust in its operation that it was repealed shortly after.2 The results of the Potter law of 1874, in Wisconsin, and of similar enactments in Minnesota and Illinois, were equally convincing. They proved to be rather a burden than a relief. The demand for equal mileage rates is an emanation of crude ideas; the outcome of a laudable demand for equality, which would in actual practice result in glaring inequality and in an abandonment of the greatest benefits conferred by railroad transportation. Differential rates or local discriminations form a necessary part of all railway management.3 They constitute the second corollary from the distinction between fixed and variable expenditures.

The principle of value of service may thus be analyzed into the two constituent elements of classification and local discrimination. But now the question arises: Is value of service indeed a just basis for railway charges? Should not cost of service be preferred? We leave the domain of practicability and come to the field of justice.

Let us first ascertain whether the value-of-service principle is indeed so novel in transportation charges as the anti-monopoly league and others maintain. This assertion may be categorically denied. The old turnpike tolls in England, as in America, whether for vehicles or animals, were not the same for all, but were divided into different categories. The English turnpike acts fixed higher rates for coaches than for dray wagons; according to the doctrine of cost of service they should have done the opposite. In France the charges on the highways varied not only from road to road, but frequently from day to day, keeping pace with the intensity of the traffic. The charges on the canals again were nowhere based on cost of service; not only were differences of charge made according to the value of the

1 Cullom Committee Rep., p. 109.

2 Eighth Report of Iowa Board of R. R. Commissioners (1885), p. 35.

8 Cf. Aucoc, Les tarif des chemins de fer (1880), p. 43.

4 De Foville, Transformation des moyens de transport (1880), p. 63.

commodities transported, as on the American and English canals, but in many instances differential rates were charged, although no one thought of opposing them in principle.1 So the earliest railway acts were based unconsciously on value of service. In the charter of the first English steam railwaythe Stockton and Darlington-among other charges which deviate from cost of service we find that rates on coal destined for exportation are fixed at 4d. per ton-mile, but on all other coal at d. per ton-mile. Similar distinctions may be found in most of the early charters. In the United States these provisions were not so common, simply because there were very few charter-maxima for freight. But at all events these examples prove that the cost of service principle was by no means avowedly followed. What has been called, even in the official documents the "outrageous principle" or the "audacious plea" of value of service2 is thus not a new departure. The principle is as old as the improved methods of transportation themselves.

Moreover, the value theory is not so opposed to the cost theory as is frequently imagined. We know that lower rates. for cheap (or distant) goods increase the traffic and thus diminish the cost of service. The value of the articles thus affects traffic and cost. And since the reduction of rates for cheap goods leaves only a small surplus above operating expenses for fixed charges, while higher rates affect the dear (or near) goods very little, there is no valid reason why the latter should not be made to bear a proportionately larger share of the fixed charges. From the standpoint of justice no exception can be taken to the principle of value, even regarded as a product of the principle of cost.

But is the doctrine of cost of production itself universally applicable as the foundation of prices? What the railway produces is transportation; its cost of production is cost of service. It is claimed that the utilities produced by the railway, like all

1 On the Pennsylvania canal there were 12 classes, the rate varying from 0.6 to 4 cents per ton-mile. For Europe, cf. Sax, Die Verkehrsmittel (1878), I, 180; Jacqmin, De l'exploitation des chemins de fer (1868), I, 368.

2 Report of Mass. R. R. Com. (1885), p. 35. Cf. the minority view of English Select Com. of 1882, Rep., p. liv.