traffic, so that the capacity of the rolling stock is not fully utilized. On one line the traffic moves in great part in one direction, and the number of empty cars returned is abnormally large; on another there is far more back-loading and a more even distribution of the traffic. On one line the trains are started with full loads, on another they are half empty. The proportion of paying to dead weight, or the amount of the tare, is of paramount importance.1 All these causes influence both the tons and the miles, and thus affect the cost per ton-mile. Logically, the cost per ton-mile is resolvable into two portions, -that which corresponds to the constant or fixed expenses, and that which corresponds to the fluctuating or variable expenses. The former portion is ascertained simply by dividing the constant expenses by the total ton-miles. It will therefore vary inversely to the traffic. But as the constant expenses form by far the larger portion of the whole, the rate per ton-mile will be determined by this corresponding portion. We conclude then that the cost tends to vary almost inversely to the traffic the more traffic, the less the cost per ton-mile; the less traffic, the greater the cost per ton-mile. That is to say, even if it were feasible to construct a tariff based on the cost of service of each particular transaction, — in itself a work of gigantic magnitude and infinite difficulty, such a tariff would be of very slight avail unless the amount of freight remained an unalterable quantity. So soon as the volume of traffic changes, the cost of service is necessarily altered. The rate would no longer be based on cost of service. - 1 The average gross weight of freight cars of all classes in the United States is eight tons per car. The average load they carry is five tons. Hence, 59 per cent of the weight hauled in freight traffic is non-paying or dead weight. In passenger traffic the non-paying load is almost 90 per cent, because the cars are not so fully packed. In Germany, in 1880, the dead weight was: for freight cars, 53 per cent (or taking only the loaded cars, 27 per cent); for passenger cars, 76 per cent; for baggage cars, 97 per cent. 2 Suppose the constant expenditures for transporting seven and a half million tonmiles amount to $75,000. Then if there are 7,500,000 ton-miles, cost = if there are 5,000,000 ton-miles, cost = 10000000= per ton-mile; = 0.75 c. per ton-mile; 75000 = = 1.5 c. per ton-mile. Furthermore, the amount of traffic itself depends to a large extent on the rate. Low rates produce large traffic, high rates make little traffic. This has led to the paradoxical conclusion that cost of service depends on the rate, and not inversely that the rate depends on cost of service. We thus have a curious interaction of cause and effect. But of course this is true only within certain limits, and subject to serious qualifications. The success of a decrease of rates in attracting additional business will operate only up to that point where increased traffic does not imply disproportionately increased expenses. If the additional business necessitates large expenses, like a double track, it may cost more than it is worth. Low rates do not always increase net profits. Again, the success of a decrease of rates will diminish with every successive diminution of the rates. There is a certain limit beyond which the efficacy of reduced rates as a financial venture becomes very problematical. The business is not expansible. On this account the railways rarely reduce charges simultaneously on all kinds of traffic, but experiment gradually with special classes or kinds of business, and even then are often unwilling to undertake the reduction at all.1 But if it is even partially true that cost of service depends on the traffic, and therefore on the rate, it cannot be wholly true that the rate depends on the cost of service. The two principles are mutually contradictory. We are thus logically forced to the conclusion that railway charges are not and cannot be based on cost of service alone. Cost of service does not fix rates. It forms in the long run only the minimum limit of rates. A well-managed road will not consciously continue a losing business, unless, indeed, it be 1 In regard to freight traffic, the above statement is notoriously true. In regard to passenger traffic, cf. the history of third-class traffic in England. In 1844 the railways had to be compelled by law to run cheap trains for third-class passengers, their opposition being silenced only by exempting these trains from the passenger duties. But before long these very trains resulted in immense profits, and to-day constitute by far the most lucrative portion of the passenger business. Cf. also the strenuous opposition of the New York elevated railroad to the five-cent bill, while to-day the profits are immensely increased by the voluntary reduction. operated by the state as a tax on the community, and no serious thinker has yet proposed this method of running railways. Differences in cost of service between two roads result not in proportionate differences in rates, but simply in different profits. Differences in cost cannot imply corresponding differences of rates. The principle is as applicable to portions of the same line as to different lines, since no two parts of the same line have the same cost of service, and hence if the principle were consistently applied, it would be necessary to make a different rate for each mile of every road, which is absurd. But if rates are fixed according to the average cost of service for the whole line, they may equally well be fixed for the average cost of services on all business, in which cases the element of difference of cost for each particular transaction is entirely eliminated. No freight is ever shipped at the average cost of service. It would hence be foreign to our purpose to attempt an exact mathematical computation of the cost of service. Not only would it be necessary to ascertain the exact percentage of fixed to variable expenses in each particular case, but further to calculate the exact proportion of increase of cost to increase of traffic. Numerous endeavors have been made, but no two agree.1 And even if successful they would, as we see, be of very slight practical utility. mera. The cost of service principle is neither practised nor practicable. The attempt to base rates solely in cost is a pure chiWell-nigh every expert, whether scientist,2 official, or legislator, and every parliamentary commission, from the early English to the late Italian and American, absolutely discards it as a principle. But although the rule is impracticable, it is 1 Cf. the works of Chanute, Morehouse, Fink, Kirkman, in America; of Fairbairn, Gordon, Lardner, in England; of Garke, Scheffler, Schüller, Schübler, Nördling, in Germany; of Baum, Jacqmin, Gournerie, Brière, in France; of Brioschi, Genala, Calvori, in Italy. 2 Even Wagner, the great apostle of state railways, comes to the same conclusion in his last edition. Finanzwissenschaft, 3. Ausg., I, 760–763. 8 "The movement of a commodity by rail is determined by considerations wholly independent of and not affected by the cost of the service to be performed." Cullom Com. Rep., p. 184. For Italy, cf. Atti della Commissione d' Inchiesta sull' esercizio ν asserted by some to be the only just, the ideal method. Before discussing this, let us ascertain the actual principle according to which tariffs are arranged. Only then shall we be able to answer the question of the relative justifiability of the two principles. How, then, are rates actually fixed? The object of a railway is to make the greatest possible net profits, i.e., to increase its traffic and to decrease its expenses. This it finds can be best attained by lowering the charges on certain classes of goods, or on the same classes to different localities. In other words, what decides the manager is not so much the cost of the service as the value of the service. This practice has been called "charging what the traffic will bear," an unfortunate expression and liable to much misconception. Charging what the traffic will bear, correctly understood, simply serves as an excuse for reducing rates on the low-class traffic, because it cannot bear higher rates. The phrase is a bad one, because it may be interpreted into meaning that the greatest possible charges on high-class goods are also legitimate. Correctly understood, it justifies lower charges on certain kinds of business; incorrectly understood, it seems to justify extortionate charges on other kinds of business.1 Charging what the traffic will bear, in its strict sense, does not fix rates; it determines only the maximum limit of charges, just as mere cost of hauling fixes the minimum limit. Between these limits the rate varies with the value of the service, or, as is sometimes said, is made to conform to the requirements of trade. It becomes a commercial question, and subject to the law of supply and demand. In so far it is a purely private delle ferrovie italiane (1881), Parte II, Riassunto, II, 932-953. For England, cf. Joint Select Committee on Railway Cos. Amalgamation (1872), pp. xxxiii and li. For France, see Rapport de Waddington (1880), in Picard, Chemins de fer français, t. 5 (1884), p. 128. Cf. also the statement of the advisory commission on differential rates to the seaboard (Thurman, Washburne, and Cooley) in Proceedings of the Joint Executive Committee (1882), p. 29. 1 The celebrated phrase of M. Solacroup, the French railway director, is hence regrettable: "En matière de tarification de transports il n'y a qu'une seule règle qui soit rationnelle; c'est de demander à la marchandise tout ce qu'elle peut payer. Tout autre principe est arbitraire." Professor Villey calls it "une phrase vide de sens." Traité d'économie politique (1885), p. 206. matter. But the railway is also partly a public institution: hence the necessity for important qualifications of the private business principle, for serious limitations of the law of supply and demand. These qualifications and these limitations have often been completely ignored by the railways, because of their mistaken assumption of being purely private enterprises. Let us study the limitations as well as the principle. Charging according to what the service is worth results in the two fundamental principles of classification and discrimination.1 Classification is due to the fact that the same service has a varying value when rendered to different commodities. Discrimination (i.e., local discrimination) is due to the fact that the same service has a varying value when rendered to different places. Whether the same service has a varying value for the freight of different persons, and may thus give rise to personal discriminations, is a question to be treated by itself. Classification. Value of service influences classification in a double way it puts the same articles into different classes; it puts different articles into different classes. It puts the same articles into different classes according to the methods of transportation, and makes a distinction between slow and fast delivery. With us this takes the form of freight and express traffic. Our general classification applies only to freight traffic. In Europe, where separate express companies are unknown, the rates are graduated according to this distinction - goods and parcels rates, petite and grande vitesse, Frachtgut and Eilgut. Such a classification is of course perfectly legitimate, whether from the standpoint of value or from that of cost of service. The better service benefits the goods and increases the expenses of the railway. 1 The word discrimination is not always used in the same sense. Some use it to Imply any variation from the cost of service, and make it include classification, which is to them a discrimination between articles as opposed to a discrimination between persons or places. But this is misleading. A classification as between two articles may be due to a difference in cost of service, in which case there would be no discrimination in the above sense. To make classification of this kind a part of discrimination is illogical. It is far preferable to separate the two terms completely, defining discrimination as is done on page 236, X |