RAILWAY TARIFFS AND THE INTERSTATE

WHEN

COMMERCE LAW.

7HEN Solomon de Cause first advanced the idea of employing steam as a propelling power, in 1615, he was shut up in the mad-house as a hopeless maniac. Two centuries later, in 1812, when Colonel Stevens of Hoboken proposed to build a steam railway at far less cost than the projected Erie canal, he was regarded as absurdly visionary and somewhat demented. And yet to-day, within the short span of a human life, we have the vast network of over three hundred thousand miles of iron roads covering the civilized world. It is the central factor of recent economic development. Little wonder, then, that the weighty problems of railway management in its relations to the owners, the employees, and the public, should engross the earnest attention of legislators and publicists throughout the world.

The Interstate Commerce law of 1887 is the first serious attempt at governmental regulation for the whole of the United States. It may be well, therefore, to discuss the provisions of the act in the light of general principles. We shall confine ourselves primarily to a consideration of the railway tariffs, and attempt to ascertain the underlying doctrines and

their limitations.

Railway tariffs may be regarded from two essentially different standpoints, the private and the public. In so far as a railway is a business corporation, it is a private matter. It may fix its prices in accordance with general business principles. It will endeavor to subserve primarily the interests of its owners. It will strive for the greatest possible profits. Its course is legitimate and praiseworthy. But in so far as the railway forms our public highway, it is a public matter. The objective point now is the general welfare, the interests of the community. It

aims not at the greatest possible profits, but at the greatest possible benefits. It looks not at the interests of its owners, but at the interests of the public. The one point of view is individual, the other is social. The modern railway corporation shares both these characteristics. Its nature is hybrid. To subordinate the public to the private element is plainly inadmissible. To entirely engulf the private in the public element is equally unfair, as long as the railway is not owned by the state. Given the private corporation, the question is: How shall the two elements be reconciled? It is the problem of railway legislation and corporate regulation.

The inequality of railroad charges forms the pith of the complaints usually made. It is the crucial point of corporate management. On the one hand we have the anti-monopolists, who liken the common carriers to the feudal barons of old, using the medieval weapons of unjust privilege and ill-gotten power to carry out their ends of rapacity and favoritism. On the other side we have the railway managers, who exultingly exclaim, in so far as charges are concerned: All that is, is just. Where now is the truth of the matter?

The principle commonly advanced by the antagonists of the railways, as well as by the would-be reformers, is that of cost of service. Charges should be regulated in accordance with the cost of the particular transaction to the company. This is certainly not the actual method. Is it the correct method? Let

us see.

Railway expenses are divided into two great classes, fixed charges and operating expenses. By fixed charges is simply meant the interest account, the sum necessary to meet the periodically recurring interest on the mortgage debt.1

1 In Europe, not only the interest on the funded debt, but also the dividends on the capital stock are sometimes included in the "fixed charges." This is manifestly fallacious, as it is not legitimate to class as expenses what are really profits. Rates are nowhere determined by the prospective profits, but vice versa. Cf. Nördling, Die Selbstkosten des Eisenbahntransports und die Wasserstrassenfrage, (Vienna, 1885,) S. 206-210. The matter is, however, of less importance from the fact that with us railways are generally constructed on the proceeds of the mortgage bonds, not of the capital stock, as in Europe. The interest, hence, far exceeds the dividends. In 1885,

The proportion of fixed charges to operating expenses varies, of course, with each line. A careful calculation on the different branches of a single road found the interest charges to vary from 26 per cent to 59 per cent of the total expenses.1 But in a rough way it may be said that fixed charges amount to from forty to fifty per cent of the entire expenditures, not alone with us, but also in Europe.2 In other words, well-nigh half the expenses are constant or invariable. They do not change with the amount of business transacted, but are independent of the traffic. They remain the same whether there be much, little, or no additional traffic.

On the other hand, the operating expenses may be divided into several categories. No uniformity has as yet been attained in the classification of expenses, although the national commission has been empowered to prescribe a uniform system. One method is to divide the expenses into: (a) maintenance of road, buildings, and general expenses; (b) station expenses; and (c) movement expenses. Class a will in general be but very slightly affected by the amount of business transacted. Considerable variations in the traffic may take place without a proportionate, if any, increase in the expense involved. They may therefore likewise be set down as constant or invariable expenses. Class will vary, but only in part, with the business transacted. A certain organization must always be maintained, whether the traffic be heavy or light; but after a definite limit is passed, more men must be employed to do more business. These expenses are thus only partially constant. Class c, finally, fluctuates almost in proportion to the business transacted. The less trains, the less expense.

The proportion of each of these three classes to the whole will

e.g., 186 million dollars were paid in interest, 77 millions in dividends. Cf. Poor's Manual for 1886, p. i. For European figures, see Loisel, Annuaire spécial des chemins de fer belges, 1886, pp. 246 et seq.

1 Fink, Cost of Railroad Transportation (1882), table A, p. 4, for the Louisville and Nashville Railroad.

2 See the tables in Sax, Die Verkehrsmittel in Stats- und Volkswirthschaft, (1879), Bd. II, S. 368. For France in particular, Baum, Annales des ponts et chaussées, Mémoires, 5me série, t. i, p. 422,

of course vary with the widely different characteristics of each line; but in general it may be affirmed that about one-half of the operating expenses are constant or invariable.1

The total constant expenditures of a railway are thus the fixed charges plus one-half the operating expenses. In other words, a large majority of railway expenses are irrespective of the amount of business. They remain the same, notwithstanding an increase or decrease of the traffic.

This distinction between constant and fluctuating expenses is of vital importance to a correct understanding of the principle of railway rates. It leads to certain conclusions which form the fundamental explanations of actual tariffs.

It is unnecessary to explain the wide disparity of cost of carriage on different lines, or for individual transactions. Certain characteristics affect the roads themselves, such as the grades, the curves, the weight, and speed of the trains, the cost of construction, the quality of the supplies, the changing conditions under which the service is performed at different seasons, etc. These alone would show how difficult is the task of accurately determining the cost of carriage for any one service. But the task is complicated by other difficulties. It is apparent that the cost of transportation per ton-mile must vary with the tons and the miles, i.e., with the quantity of the freight and the length of the haul. But these differ widely in each case. On one line the greater portion of the freight is carried over its whole length; on another the local business far outweighs the through

1 Manager Haines, of the Savan. Fla. & W. R. R., divides operating expenses into five classes, and makes a careful calculation that 53 per cent of such expenses do not increase with additional business. Report of Senate Select Committee on Interstate Commerce (1886), App., p. 138. We shall hereafter speak of this as the Cullom report.

2 Mr. Fink's calculation varies but slightly from the above. He asserts that upon an average of $1 earned in the roads of the United States, 40 cents are required to pay 41⁄2 per cent interest on bonds and stock, 35 cents to pay the movement expenses, and 25 cents to pay maintenance and general expenses. Cullom Committee, Test., p. 95. The New York commission divide operating expenses into maintenance, general and transportation (including station) expenses. But the result is the same. For Europe, see Ulrich, Das Eisenbahn-Tarifwesen (1886), S. 40, but corrected as to Ger many in Archiv für Eisenbahnwesen, 1887, S. 253.