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ARBITRARY PRICE-MAKING THROUGH THE FORMS OF LAW A Few Points Bearing upon the Proper Limits of Governmental Supervision or Interference in Railroad Transportation BY HBNKY ^OOD Author op " Natural Law in the Business "World " and " The Political Bconomt oi' Natural Law," -which hate been merged, revised and enlarged, and at present are issued onlt under the title 01" " The Pol- itical ECOHOST OF HUMAHISM," ETC. Cornell University Library .W87 the forms BOSTON LEE AND SHEPARD, PUBLISHERS Published February, 1905 COPTRIGHT, 1905, BY HeNRT WOOD All rights reserved This pamphlet will be mailed free on receipt of ten cents in stamps i 3 copies for 25 cents; 15 copies for $1.00, or $6.00 per hundred ARBITRARY PRICE-MAKING THROUGH THE FORMS OF LAW. This pamphlet is not issued as a partisan argument upon the proposed new economic legislation which is now attracting so much attention. Its aim is a simple, impartial study in brief terms of underlying principles. The correct determination of the proper limits of gov- ernmental supervision or interference in railroad trans- portation is a complex problem. Many propositions which are being urged as remedies for existing evils are without precedent in scope, and they invite careful study before hasty endorsement. The writer has no direct interest, professional, pecuniary or political, in this question and his stand- point is only that of a common citizen. His sole desire is the evolution of the truth, and that correct views may prevail which will work out the greatest good for the greatest number. If the statements made are not in full accord with those opinions which just now are most popular and insistent, it is due to a con- viction that an educational work is desirable. The very condensed study of some fundamental principles here offered is in response to many special requests from those who have read some of the author's more elaborate economic works. In these days of hasty conclusion and sentimental impulse, it is profitable, at times, to review the lessons AEBITEART PRICE-MAKING 6 of the past with its more deliberate logic, which has been tested and approved. There is a subtle charm attached to radical departures which is powerful if they promise an abatement of prevalent abuses. To be a " reformer " in some department is a most popular accomplishment. This is a wholesome public symptom and whatever the mistakes involved they will at least be educational. Anything which purports to be able to wipe out financial abuses and to defeat monopoly and greed strikes a popular keynote. If legal enactment, even when piled up, were able to make men honest, the pro- cess would be very simple. Genuine reform never was more needful than to-day, especially in the reestab- lishment of commercial honor, integrity and character. Fifty years ago it was an adage that the word of a Boston merchant was "as good as his bond," and a similar standard largely prevailed elsewhere. It is peculiarly a modern mistake to infer that character, in motive or act, can be imposed from the outside. Moral agitation, and even an enlightened self-interest, less hastily invoked are more effective. Extremes in legis- lation are to be avoided because the reaction from them often makes the last state worse than the first. Good intentions when overdone may breed a new set of conditions which are more intolerable. There is a general impression that railroad corpora- tions are naturally/ monopolistic and unscrupulous, and there is a very popular feeling to the effect that " we will now take hold and give them a good drubbing." But with all their faults they have grown to be an integral part of the modern social organism, and in 4 AEBITRAKY PRICE-MAKING striking out wildly to punish them we may finally pun- ish ourselves more. The abuses of things are not identical with the things themselves, and discrimina- tion is necessary. As the arteries convey the life- blood in the human system from the centres to the extremities, so the highways of commerce perform a similar function for the larger organism. Their mission is not only important, but complex and delicate. There are certain business laws — natural laws — which legislation can no more repeal than it can set aside the tides. They are so broad, deep, and self- operative that their unceasing action is but lightly appreciated. Like the laws of steam or electricity, our accomplishment is vastly increased when we work with instead of against them. These immutable principles are also compensatory and include self-regulative and corrective forces which are mostly unrecognized. Few people realize the radicalism of the proposed new departure in legislation for the imposition of values — even of transportation — for which there is such a popular pressure. Is it a proper function for legislative or judicial control, and if so admitted, can any one predict the logical limit? Under all free con- ditions, value is such an inherent and elastic quality in its relations that no law can ethically add to or subtract from it, hence the difiiculty of artificially com- pelling sellers or buyers contrary to its conclusions. The present demand is that everything shall be " regu- lated." Any artificial interference which steps in between the producer and consumer, setting aside self- regulative forces, must in the nature of the case be stiff, inelastic, fallible and imperfect. The subtle com- AKBITRAKT PKICE-MAKING 5 pensatory influences, which Emerson showed to be ubiquitous in every department of life, are ignored or deflected. Evolutionary and moral pressure, which are always pushing in the direction of equity, are counted as dead. In the great body of common law, national, state, and municipal, which already is inscribed upon the statute books, moral and financial delinquency are provided for, with proper enforcement, which should be insisted upon. Many things may be expedient or inexpedient which cannot be definitely divided by an ethical line of right and wrong. Legislation has come to be the grand panacea that is to be invoked to cure "all the ills that flesh is heir to." Is there selfishness or injustice? Make a special law against it ! But these things come from within men, and nothing on the outside can cure, but only whitewash them. Is there too much or too little competition? Prescribe just the right amount by law ! Are times hard ? We will not work a little harder, or economize a little more, but we will make them good by law ! Is money tight ? Start the presses and make plenty by law ! Is the millennium slow in coming ? Force it on by law ! An able writer characterizes the phenomenal structure of legislation as " the modern tower of Babel." The statute-book is expected to outwit evolution and overtop moral and natural forces. Through the sentimental vision of the theorist, " The State," which is the all-comprehensive agency for reg- ulation, will be a perfect, omnipresent, omnipotent instrumentality, able to cognize every detail and impose universal equity and righteousness. But the real State is composed of politicians of the dominant party. 6 ARBITRARY PRICE-MAKING With ten-fold greater opportunities than present con- ditions afford, the probable reign of dictation, jobbery, and favoritism may be faintly imagined. Shakespeare, in " King Henry VI.," gives a glimpse of the arbitrary character of authoritative edict. Jack Cade vows " reformation " upon his accession to power : " There shall be in England, seven half-penny loaves sold for a penny : the three hooped pot shall have ten hoops : and I will make it felony to drink small beer." But in " Measure for Measure," through the lips of Isabella, the great dramatist utters a bit of genuine wisdom : " Oh, it is excellent To have a giant's strength ; but it is tyrannous To use it hke a giant." It is obvious and admitted that as modern civili- zation becomes more complex, population denser and inventions more numerous, the legitimate scope of legislation widens. As an example, the supply of water and light in a municipality involves the use of the public streets, which makes it a local, natural monopoly. Therefore if not owned by the city it must be regulated by it, and the suitable provisions are made in its charter. But any enlargement of public functions within the limit of practical private management opens a wide gate for official waste, political corruption, rings and spoils, with all their incidental demoralization. Legislation is indispensable in its normal field, but the arbitrary fixing of prices, rates and contracts between people in their business relations is beyond its limit. It could easily become an engine for hidden partiality, AEBITEAET PEICE-MAKING 7 simply through majority rule, and gradually glide into virtual confiscation. It might exercise a power which would throw Czarism into the shade. Its control might easily become subservient to sectional prejudice and tyranny would result for which there would be no possible remedy. Even if such unlimited domination were lodged in the hands of the most eminent and incorruptible commissioners which can be imagined, it would be necessary for them to be infallible and uni- versal experts. The conditions of the cases presented would be of infinite variety and their nature such as has never been recognized as within the jurisdiction of any organized court. With a breaking up of the stability of foundation principles and the destruction of confidence in values which would be at the mercy of uncertain and unprecedented assumption, general panic and even chaos in the whole industrial world would not be impossible. The total amount op the stocks and bonds of THE KAILEOADS OE THE UnITED StATES IS IN EXCESS OF FOURTEEN BILLIONS OP DOLLARS. ^ ThIS APPROXI- MATELY REPRESENTS ONE-SIXTH OP THE ENTIRE WEALTH OF THE COUNTRY, AND PERHAPS ONE-HALF OF THAT PART WHICH IS IN A FORM THAT IS AVAIL- ABLE AS NEGOTIABLE SECURITIES OR EXCHANGEABLE REPRESENTATIVES OF VALUE. It ALSO COMPOSES THE SUPPOSED SOLID BASIS FOR AN UNDOUBTED MAJORITY OF ALL THE PRIVATE SAVINGS OUTSIDE OF REAL ESTATE. The SECURITY, and even the very EXISTENCE ' See Poor's Manual of Railroads for 1904. O AKBITRAEY PKICE-MAKING OF THE GREAT LIFE, FIRE AND OTHER LNSURANOE COMPANIES, WITH NUMEROUS FINANCIAL INSTITUTIONS, IS DEPENDENT UPON THE MAINTAINED VALUE AND STABILITT OF THE RAILROAD SECURITIES ABOVE MEN- TIONED. The ONLY POSSIBLE INHERENT VALUE IN that fourteen billions op present wealth is in prospective net earnings. destroy confidence so that this becomes doubtful, and the conse- quences cannot be imagined. important as are the current abuses and inequalities in amount, they are not a thousandth part of the possible loss which may finally result from arbitrary action avhen once entered upon and pursued. The country is only a larger organism and its inter-related functions and factors are so interwoven that the welfare of all depends UPON THE VALIDITY OF EACH PART. ThE SIMILE OF " A ROW OF BRICKS " WELL ILLUSTRATES THE SIT- UATION. The writer of this pamphlet is an optimist of the most pronounced kind, and with great reluctance here appears (superficially) otherwise. Great lessons are to be learned, but let us not make them excessively dear. It is wise to glance forward to the natural outcome of theories which many accept with good intent. The sentimentality and artificiality of the present era is the root of prevailing misapprehension. Our economic and industrial dogmas have drifted away from nature and are abnormal and unfitted to the human constitution, as it is, in this evolutionary stage. To burn the barn to rid it of a few rats is an ill-advised proceeding. The American people have too much good sense to AEBITRAEY PRICE-MAKING 9 travel far in a road the terminal of which is general chaos. But how much better not to enter upon its illusory windings. To render a large part of the ac- cumulations of a nation uncertain and even precarious, which from time immemorial has been thought to be beyond contingency, is a serious matter. Confidence which never before has been shaken is to be rudely jostled, and this not from an outbreak from the sup- posed lower stratum of opinion, but from those who occupy high positions of trust, under the forms of ostensible beneficent and authoritative legality. In proportion as political administration is forcibly fastened upon the domain of business, where it does not belong, and for which it has no training, the amount of spoils, already too large, would demoralize every presidential election. Divorce politics from any in- dustrial enterprise and a long step is taken toward doing business upon business principles. Official methods are extravagant and operations under them are so hampered by ' ' red tape " that they lack direct- ness and efficiency. The opportunity for abuses with us is vastly greater than with the nations of the Old World whose powers are more centralized. There the civil service is more a matter of business and less of politics, and the administration of aifairs is not con- tinually changing. The rule of laisser faire may be looked upon as outgrown, but under it the country was greatly prospered. While it should receive some modification to fiiUy fit modern conditions, it remains that the threatening evil of the present time is abnor- mal regulation. Quite an extensive test of legislative interference 10 AEBITKAUT PRICE-MAKING was made a few years since by the enactment in a few of the western States of what were known as " granger laws." Experience proved that these regulations were not only useless, but an injury to the public. It was only another of the oft-repeated attempts to substitute the artificial for the natural. Without State interfer- ence, both business policy and competition are con- stantly forcing the rates for service toward the normal standard, or to such a point as is natural and fair. Take, for instance, the worst possible case, that of a road without any apparent competition, either by land or water. The popular estimate of such a line is that it is a perfect monopoly, and that its policy and inter- est will naturally cause it to make a tariff of high rates. A more careful examination will show that it is against the true financial policy, even of such a road, to establish rates above a fair standard. Normal rates attract, foster and increase both business and profits. Such a road, to be permanently successful, must adopt a policy which will encourage the location of manufactures, the development of agriculture, and the thorough improvement of the tributary territory. Sagacious railroad managers are learning that a large business at fair rates is far more profitable than a re- stricted traflBc at high prices. In other words, they cannot afford to fix rates above the normal any more than below it. It is no doubt true that the managers of many roads have not fully realized the application of this general law ; but as experience and observa- tion are persistent teachers, the tendency is steadily in the direction of a normal standard. In numerous instances, roads have voluntarily reduced their rates. ARBITRARY PRICE-MAKING 11 thereby realizing as a direct result an increase not only of business but of profits. As equipments and appliances have become more perfect, natural rates have steadily declined, and will continue so to do, regardless of legislation. Every reduction brings a great and often unexpected increase of business. The problem before every i-ailroad management is to find as nearly as possible the normal basis, for in the end it is the most profitable. In proportion as rates are removed from it, either above or below, profits de- crease. Artificial restrictions prevent the increase of competition and discourage the building of new roads, as some of the " granger States " found to their sorrow after the adoption of their cast-iron regulations. The old usury laws, now nearly obsolete, furnish an incidental illustration of the futility of legislative attempts to fix artificial prices. They proved to be an actual injury to the borrower. In those localities where the freedom of individual contract was inter- fered with, the risk was increased and real money became scarce and dear. The more that artificial obstacles and restrictions are erected in the channels of business, the higher will be the cost of product, whatever its nature. To trace the natural evolution of the railroad throws some light upon the principles in question. The wide difference between civilization and barbarism depends upon the facilities for travel and commercial inter- course. As an ancient instance, the Roman Empire at the height of its prosperity was distinguished for its wonderful and perfect roads, and their facilities largely made it what it was. Inter-communication 12 ARBITRARY PRICE-MAKING excites intellectual activity and stimulates science and invention. Nothing has so contributed to dispel the lethargy of the ages as the utilization of steam and electricity. Even turnpikes in England only date back to the early part of the eighteenth century, and the first canal was dug as late as 1760. Not until 1833 was there a daily mail between London and Paris. In our own country the domestic rates for postage were from 6 to 25 cents per half-ounce, according to distance. The people of our vast territory are more thoroughly assimilated and unified than was possible a century ago for a single small State. We soon become accustomed to modern facilities, accept them as a matter of course, and regard their usefulness with indifference. Not only so, but we be- come exacting and almost unreasonable in our demands upon them. The prairie farmer, who perhaps used his corn for fuel for lack of transportation and a market, soon forgets his experience and is dissatisfied with his present advantages. The railroad, which has doubled the value of his farm and products, and for the com- pletion of which he ardently longed, soon becomes to him an offensive " monopoly." A hundred years ago it cost three dollars to trans- port a barrel of flour a hundred miles, and salt, which was a cent a pound at a seaport, often cost six cents at an inland market. A part of the price of all products is made up of their cost of carriage from the place where they are grown or manufactured. Often a slight voluntary decrease in transportation charges creates new business and enlarges that before estab- ARBITEAET PRICE-MAKING 13 lished a hundred-fold. A railway is not merely an improved highway, but a great and complicated trans- porting machine, requiring the highest order of ability for its successful operation. What about rebates ? While this question is entirely distinct from that of the imposition of artificial rates — or the forcing of contracts upon the seller of transpor- tation — it is by no means a simple one. The desire to have all buyers of railway service treated not only fairly, but impartially, is a laudable one and seems to be somewhat within the province of enlightened legis- lation. But there are certain difficulties and complex- ities which will be found formidable. Equity demands that all railroad patrons under equal classification and condition should receive like treatment. But shall the shipper of a single carload be favored with the same rates as the one who sends a thousand? As wholesale prices in every line of business have uni- formly been a little less than the same at retail, and the cost of the larger service to the road is proportion- ately smaller, is it proper to force the two to the same level through the forms of law ? It is easy to theorize, but in practice complexities multiply. Prevailing public sentiment almost ignores the inter- est of the great consuming public. Consumers — who include the poor and helpless classes — outnumber the small shippers a hundred to one, and yet our concern seems to be entirely for the latter. The public gets the real though unconscious benefit from low wholesale rates and intense competition While our ethical sense of justice rebels against anything like favoritism or partiality, yet in the repression of the fundamental 14 ARBITRARY PRICE-MAKING principle of freedom we are liable to increase prevail- ing abuses and unwittingly introduce other kinds. There are certain things which are beyond the power of legislation and one is to compel unselfishness. Too little dependence is placed upon publicity, moral forces, and commercial honor. The more these are relied upon, the greater will be their growth and development. If a man feels that his natural and moral freedom is tyrannically curtailed by the rule of an unintelligent legislative majority so that his inherent sense of justice is put upon the defensive, he is far more likely than otherwise to attempt to circumvent the interference. Even a well-meant effort to compel righteousness in detail through some prescribed method will so hamper the invaluable principle of general liberty that it may prove a dear purchase. Law must be so framed and enforced as to inspire general respect, otherwise it loses dignity and men feel warranted in evading its spirit while outwardly complying with its form. This especially if it be enacted fi-om motives of political expediency rather than upon its merits. The relations between the railroad corporations and the companies which furnish refrigerated, heated and other special kinds of cars, with other necessities of modern transportation, are so interwoven as to require expert consideration, and hardly any two cases are quite the same in detail. The charters under which the roads are operated do not require these unique lines of service, and the roads themselves have not the facilities nor the training for their installment and maintenance. If legislation should presume to add such obligations to the duties of common carriers, there AKBITEAKY PEICE-MAKING 15 would, at the best, be a confusion which might greatly inconvenience millions of consumers. A recent writer, who has made considerable investigation into the growth and practice of the rebate system, says : "Throughout the sixties and seventies and early eighties, the competition of the railroad systems lying between the Atlantic seaboard and the Mississippi river was so intense that every rail- road manager, in order to get sufficient traffic to keep his road in a solvent condition, felt obliged to make the best arrangement he could with the largest shippers along his line, to get an assured amount of regular freight. . . . The apparent necessity of such arrangements, from the railway manager's point of view, used to be shown in the railroad rate-wars in the cattle-carrying trade at Chicago. By suddenly withdrawing their usual ship- ments from the road and shipping entirely by a rival road, the cattle-shippers could inflict a tremendous financial loss upon the unfortunate railroad and throw its entire operation into confusion. A few days of such demoralization were sufficient to bring the traffic manager to the point of offering favorable rebates upon the condition that shipments should be regular in amount. . . . Only by arrangements of this kind, whose foundation was the re- bate, could the railroad manager of that day bring about any stability in freight traffic. As a result, throughout that period there was a constant effort on the part of railway officials to select the strongest group of shippers and bind them to the railway by such arrangements." It will seem that a very general law, enforcing im- partial rates for like classes and quantities of business between direct competitors, will be as far as legisla- tion can properly proceed in the attempt to regulate commercial detail by the statute-book. What of the remarkable movement toward railroad consolidation which has taken place during the last two or three decades ? Popular sentiment is distrust- ful of growing aggregations of capital and power and 16 ARBITEAEY PBICE-MAKnSTG some look upon them as only an evil and menace. The fact that consolidation is not only caused by natural law, but is also ruled by it, is too much below the surface to be appreciated in general. If any com- bination makes an eflfort to impose artificial rates, or those which are even a little above the normal, then in greater proportion demand falls off and business and profits decrease. Supply and demand subtly perform their ofiice in a compensatory way like the " governor" of a steam-engine. Many people have been persuaded that this natural law has been outgrown or become inoperative, but gravitation might as easily be sus- pended. While locally its operation may be tem- porarily obstructed, its steady sway is as irrepealable as any law of physics or chemistry. The earliest railroad charters were for short inde- pendent lines. For some little time in England the railways averaged only fifteen miles in length. In 1847 five thousand miles were owned by several hundred different companies. In 1872 thirteen thousand miles were nearly all owned by twelve com- panies. This tendency has been as marked in this country. As a single instance, that part of the New York Central line between the Hudson river and Lake Erie originally belonged to sixteen different com- panies. During the last few years the development has been, not merely into longer lines, but into great sys- tems. Many of these now embrace from two thousand to ten thousand miles each, and form arteries through which commercial currents flow, giving life to great domains, each larger than some of the entire kingdoms of the Old World. What is the cause of this general and AEBITRAEY PRICE-MAKING 17 rapid consolidation, what its tendencies, and what will be its results? It has taken place, not by chance, nor because of any local and temporary reason, but in obedience to the pressure and behest of unvarying Natural Law. The natural demand for decreasing rates of transportation together with competition has made it indispensable. It is a case of the survival of the fittest and of a development of the lower into the higher. In no other way could such remarkable reductions in rates and vast increase of business have been realized. Modern convenience, comfort and luxury are the results of the working of the law of combination and consolidation. Contrast the present passenger service with that of fifty years ago. Then, a passenger leaving New York for Chicago not only paid a much higher fare, but was obliged to change at the end of each separate short line, and often compelled to stand in line to wait for the rechecking and reloading of baggage, subject to frequent lack of connection, long hours of waiting, and other numerous discom- forts. One consolidated system of a thousand miles in length can render to the public a service which is immeasurably superior in luxury, cheapness, speed and safety to that which would be possible with any half-dozen distinct corporations. The special and unprecedented national legislation known as the Interstate Commerce Law has now been in force for several years ; and on the whole its work- ing seems to have been detrimental to the owners of railroad property with no compensating advantage to the general public. This law is based upon that clause in the Constitution which includes among the 18 AKBITBARY PRICE-MAKING duties of Congress the regulation of commerce between the States. The plain intention of the framers of the Constitution was to forever prevent by any State the erection of any customs tarijQFs, so that State lines should be no obstruction to the free currents of commerce. The idea of regulating the market price for carrying freight or passengers probably never entered their minds. The constitutional basis for a national inter- ference with the legitimate, free, competitive business of common carriers therefore seems strained and un- natural. As the courts have sanctioned such interfer- ence, however, their decision must be accepted. The object of government and legislation is not to destroy value, but to protect and conserve it. The interstate law, through the long and short haul clause and the prohibition of pooling, destroys value in the pro- portion that it is enforced. The right to arbitrarily regulate the rates for freight or passenger service, and thus place not only the revenue, but the absolute capi- tal — which derives its entire value from expected earn- ings — at the mercy of a possible unintelligent or unscrupulous majority of Congress, even through a political commission, is the most radical and mistaken legislative experiment of our national history. It is an assumption of legal authority which lacks any proper moral basis. The stiff, unscientific hand of legislation undertakes to arbitrarily fix prices which inherently have in them the elements of self-regula- tion. Objection to this position will be made on the ground that railways are quasi-Tpuhlic institutions, and that by their charters they have been granted the right of eminent domain ; all of which is true, but the sole AKBITRAKY PRICE-MAKING 19 reason for granting that right was the public conven- ience, and the shareholders paid full value for every square foot of ground taken or damaged. There had been a steady decline in actual rates for railway service before there was any legislation upon the subject. A reduction of ten per cent, in rates often brings an increase of twenty-five or even fifty per cent, in business. Can any other law be named except the interstate commerce enactment to which the enforcement or per- mission to ignore is left optional in each case with a board of extra-judicial commissioners? The power vested in these few men is autocratic. The duty of the judiciary is to interpret and enforce law ; but this commission has the power to settle questions involving millions, as mere pi'oblems of expediency, in which no principle of right or wrong is involved. This inter- state law, if thoroughly enforced, puts in jeopardy unnumbered millions of the actual investments of the people, and without any corresponding advantage to shippers. The shipper, during a general business depression, caused by a shrinkage in railway values, suffers in common with all other classes. If, however, a few shippers were benefited, it would be at the expense of justice. That section of the law which pro- hibits pooling naturally forces further and greater consolidation as the only alternative to general bank- ruptcy. Business can flourish only under free condi- tions, and the true province of legislation is to enforce contracts which have been voluntarily entered into. In the main, the interstate law is the embodied expres- sion of an unreasonable prejudice against railway investments. 20 AEBITRAEY PEICE-MAKING Abnormally cheap long hauls under free conditions create a vast business which any enforcement of the long and short haul clause would destroy. In many cases if roads are forbidden to do it at a somewhat less price, proportionately, than is charged for a shorter haul, the business is lost. A railway must maintain its facilities and fixed charges in either event, and therefore cheap long hauls are almost so much clear gain to the ordinary revenues of the road. With this source of income cut off, the deficiency in the long run must be made up by higher way rates than were necessary before the freedom of railway transpor- tation was taken away. Eates for railway service in the United States, when compared with those demanded in Europe, are found to be astonishingly low, notwithstanding the fact that employees' wages are more than double the European average. The rate charged per ton per mile by the great trunk lines running from Chicago to the Atlantic seaboard, as shown by ofiicial statistics, are less than one-quarter of the average rates of the year 1865. On the great systems, west, northwest and southwest of Chicago, they have been reduced nearly in the same proportion. All this, in accord with natural law, the larger business, and the greater revenue, and with free- dom from the shackles of legislation. The results of the repressive policy, national or State, while disastrous to dividend-earning capacity, will at the same time prove morally and financially detrimental to the whole country. " When one mem- ber suffers all suffer." The track, road-bed, and roll- ing-stock of bankrupt and non-dividend-earning roads ARBITRARY PRICE-MAKING 21 necessarily deteriorate, and the public service runs down. Railway enterprise, responsibility and reliabil- ity will surely weaken under a continuance of hostile legislation. Labor also will correspondingly suffer in a resulting enforced decline of the wages of a million and a half of railway employees. In making a tariff for service, the problem for the management is to attract the largest amount of business and at rates which are neither too high nor too low for the maximum revenue. Profits will as surely diminish in the one case as the other. The normal point varies with every road, and with every difiierent class of trafiic, and is a very complicated question, and one entirely beyond the province and ability of any general legislation or commission. It is claimed that it must be " reasonable," but under that term will prac- tically lurk endless uncertainty, difference of opinion and friction. Nothing which is arbitrary and artificial can ever find final and unquestioned settlement. Legis- lation is futile, not only because price-making is out- side of its province, but for the reason that no two roads are alike in cost, grade, possible amount of busi- ness, expense of maintenance, character of traffic and numerous other details. There is the same variety in these as in individual enterprises. To a great extent rates fiix themselves, and the power of the management in this direction is greatly overrated. Suppose two or more competing roads enter into a " cast-iron " agree- ment to fix prices somewhat above the normal. How soon shipments fall off, rival routes or water transpor- tation compete, markets are disturbed, and speedily the " cast-iron " crumbles. ^2 ARBITEAEY PRICE-MAKING In no other kind of business is the old adage of " large sales and small profits " so applicable and profit- able as in railroad transportation. The reason for this is that a large part of the expenses consists of " fixed charges," which are almost unchanged, whether the traffic be large or small. Outside of these, expenses increase much more slowly, relatively, than the amount of business. A system of five thousand miles probably would not cost more than one-half as much to operate as when the same was made up of a dozen distinct cor- porations. It has one board of management instead of many, unity of purpose instead of diversity, single and thorough organization instead of inharmonious variety. The friction of one large wheel is much less than that of many small ones, and its power and momentum vastly greater. Consolidation is the greatest labor and expense saving process of the age. Why should " re- formers " make such efforts to excite popular prejudice against consolidations? Is it simply because they are great ? This is an era of grand things, and of wonder- ful benefits and privileges that are lightly appreciated. A sentimental cry of " monopoly " seems to be all that is necessary to arouse unthinking condemnation. With constantly diminishing rates for service and increasing safety, luxury and rapidity, it is not easy to see how the modern railroad can be a " menace," either to the citizen or government. Granted that sharp prac- tice, stock-watering, and many abuses exist, the sys- tems are here and to remain, and the public gets the benefit. Abuses are incidental to every enterprise, no matter how meritorious, and this will be the rule so long as self-interest is dominant in human nature. AEBITEART PRlOE-MAKIPrG 23 Statistics show that in a great majority of cases the original stockholders sunk the money invested, and that the lines were afterwards, and are still, being operated by other and different proprietors who purchased the assets at a nominal price. On an average few other investments pay so small a return as those in railroad property. Stock-watering is indefensible as a system, but a candid view will show that in some cases it is only a " marking up " of nominal value to correspond with what has taken place in actual value. The enhance- ment of market and taxable values of terminal facilities and other kinds of property is often considerable in a series of years. For example: If the taxable and sale- able value of a road has increased fifty per cent, in ten years, is the increase of stock by which it is represented in the same proportion in any way illegitimate ? While this is the popular impression, there seems to be no valid reason why railroad property should be unique in this respect. Another very prevalent fallacy is that " stock-water- ing" necessarily results in higher prices for service. But rates are made by causes entirely different. If the nominal amount of the stock of any road were quad- rupled or reduced in the same ratio, its material property remains unchanged. Its earning capacity, surroundings, facilities and opportunities are neither increased nor diminished. The normal rates at which business and profits are at the maximum continue as before. Wherever there is dishonest or extravagant manage- ment, or directorial stock manipulation the investor 24 ARBITRARY PRICE-MAKING suffers, but the public usually escapes, except in unim- portant and very indirect ways. If unreasonable popu- lar prejudice were gratified to the extent that by hostile legislation these great corporations could be crushed, it would be found not only that the general public would, like the human body, suffer from a constriction of the arteries, but that scores of small owners would be ruined as often as one " millionaire." A large ma- jority of the stock and bonds of these corporations is widely scattered among hundreds of thousands of small holders, including many widows and orphans. The commercial importance of these far-reaching systems is even excelled by their moral and political value in uni- fying all our diverse sections and interests. The high- est order of executive talent, which is very scarce, and commands a very high price, is indispensable for their successful management. Under political control, changeable every four years, one may faintly imagine what kind of service the public would receive. Cheap and rapid transportation has created new com- mercial centres and scores of busy cities, and millions of worthless acres have not only been transformed into productive farms, but have practically been moved two or three thousand miles nearer to market. The " long haul " business is entirely a thing of recent times. The food products of the great trans-Mississippi region, and even the varied products of Southern California, are found in the European markets through the practical annihilation of distance by the power of modern trans- portation. It is just announced (Feb. 3, 1905) that corn is being taken from Omaha to New York for 14^ cents per hundred pounds, to Philadelphia for 14 cents, AEBITEAKY PRICE-MAKING 25 to Baltimore for 13 cents, and to New Orleans for 11 cents. Doubtless the amount of revenue from this busi- ness is much larger than would be realized from higher prices. A brief popular consideration of the corporation, as such, may not be out of place in this connection. In the steady growth and diffusion of the peaceful arts and industries during the last few decades its force has been paramount. "We can hardly conceive of the universal paralysis that would touch every phase of modern social life if we were suddenly thrown back to a condition of full dependence upon personal units. Any effort to live independent of corporate aid would at once result in the most primitive conditions. Its accomplishments are multiform, and it furnishes employment both for capital and labor. It is peculiar to a high order of social and moral development, and is not found to any extent elsewhere. Those nations and peoples who possess the genius for organization and understand its power are distinguished for the number and variety of their corporations. The office of the corporate institution is to take com- bined capital and wield it through executive agents of unusual qualification, and thus increase its power and utility. If rightly handled it is like a labor-saving machine to the shareholder. As an economic force it is so virile that it may advance far beyond the confines attainable to the individual. An English lawyer logi- cally demonstrated that corporations " have no soul." He affirmed that " none but God could create souls, but that corporations were creations of the king." This is often quoted to prove that they naturally are hard and 26 AKBITKARY PRICE-MAKING selfish. But as some compensation, the fact that they are soulless, and especially that they are impersonal, may free them from individual weakness and idiosyn- crasy. The distinguishing corporate characteristic is perpetuity. The operations of the personal unit close Avith his life, while this complex theoretical personage lives on. The rapid increase in the number and variety of corporations, and their growing power, irf suspiciously regarded by popular sentiment. But we vastly over- rate their ability for harm, even if they have harmful motives. Their prosperity is bound up with that of the body politic. As producers, they are entirely dependent upon voluntary demand, and as purchasers of labor or material no one is obliged to sell to them except of his own free will. Because a corporation is a corporation, it is not necessarily rich or selfish. It is an economic industrial force, created for a specific purpose. Its executive management should be a moral trusteeship for the eflScient and reliable carrying out of the proposed enterprise. The existing prejudice against corporations is not due to any inherent fault, or lack of usefulness in the principle, but to the large amount of unfaithfulness among corporate managers. It lies in personal character — or rather the lack of it — and not in the system. It is true that in the establishment of new forces in material civilization there is a tendency toward tem- porary monopoly. But this is only a process. Its working is seen in the patent laws of all civilized nations. The secondary and permanent tendency is diffusive. There must be a gathered energy in the ARBITRARY PRICE-MAKING 27 beginning to project new agencies into wide distribu- tion. Meritorious inventions often fail to come into broad application, because of the weakness of the centralized agency at their fountain-head. This brief study of principles and underlying eco- nomic laws would be incomplete without an unsparing condemnation of the abuses and moral delinquencies of corporate management. But it must not be inferred that such are the rule, as so many thoughtlessly take for granted. Such a sweeping assumption is not only unjust, but tends directly toward further demoraliza- tion. In law, men are held to be innocent until proved guilty, and far more of this spirit should prevail in public sentiment. A hundred corporations may be efficiently and honorably managed, and no public com- ment is made, but let five be dishonestly administered and the fact attracts general attention. The propor- tion of faithfulness in official trusteeship is the correct index of the public ethical standard. The eruptive sores on the body politic show the general condition of health or disease. It is just possible that if some of the loudest critics were given full opportunity, the general average would be much the same. Said Disraeli : " All power is a trust, and we are account- able for its exercise." The comments which follow are not made in any indiscriminative range, but apply only to the guilty. Directorial unscrupulousness blunts public honesty, drags down high ideals, chills wholesome enterprise and furnishes a plausible excuse for injurious or revolu- tionary panaceas. It is no inherent part of a corpora- tion, or of our " social system," because its location is 28 ARBITRARY PRICE-MAKING entirely in personal character. If business is dull, or the times " hard," people scan the financial horizon and think that some additional legislation will cure the difficulty, whereas the real and sole cause is too little honesty. This fact destroys confidence, and confidence is the foundation of prosperity. The " lambs " hare been shorn, or the " goose killed that laid the golden egg," and others are not forthcoming. The directorial board of a corporation, who, theo- retically, are its trustees and servants, may become not only its dictators, but its practical enemies. Such abuses are often subtle and positively immoral, even though technically and formally within the limits of law and even custom. To be on the "inside" often implies a dishonorable advantage. So long as un- scrupulous management escapes legal cognizance and punishment, many regard it only as " shrewd financier- ing," or as a "brilliant" operation. The various methods through which these abuses occur are so well known that they need not be recounted in this connec- tion. Financially, it is the stockholders^ who sufier, and not the general public. After this catalogue of managerial short-comings, some of our well-meaning sentimentalists will doubt- less respond : " Yes, the abuses are heinous and there- fore the government should acquire and operate the roads." Who is "the government"? The politicians of the dominant party. Added to all the present evils would come the still greater corruption which inheres in partisanship and "bossism." These fastened upon '■ In the railroad corporations their numbers range from a few hundred in the shorter lines up to fi'om ten to thirty thousand in some of the great systems. AEBITRARY PRICE-MAKING 29 the great ai-teries of commerce would be positively destructive. Though a great reform in the public morale is the important thing needed, there is a possible field where legislation might be promising, and, unlike that of arbitrary price-making, would be legitimate. Per- haps it might be briefly outlined as follows : First. The compulsory issuing of monthly reports in a uniform manner, and afber a prescribed formula, the correctness of which should be affirmed by the oath of one or more directors, adding thereto such explana- tory matter as the management might deem necessary. Second. A periodical audit by outside governmental examiners or professional accountants, duly qualified and sworn for this special service on some plan similar to that used in the case of the national banks. Doubtless other details in such a practical line might be added to advantage. Under the present construc- tion of the Interstate Commerce Law, the above would be practically applicable, at least for those roads which do an interstate business. It is also quite possible that stockholders' associar- tions, voluntarily organized, on a considerable scale might be of use in correcting certain managerial abuses. They might possibly wield considerable power which no individual could command. From the outside, every corporation in all its relations is a unit. But though a unit as viewed from without, its internal relations are many and complex. In the pub- lic mind the management stands for and is the cor- poration. Thus the stockholders are virtually hidden, and their interests, as dealt with by legislation, are lightly regarded. THE POLITICAL ECONOMY OF HUMANISM Fine Cloth, Gilt top, Laid Paper 320 pag^es Price in Cloth, postpaid, $1.36, or in Paper Covers, 50 cents OPINIONS OF THE PRESS. Mr. "Wood possesses the rare art of making- an admittedly dry subject, not only instructive, but positively entertaining, and this art is demonstrated in the present volume, — Boston Advertiser » Mr. Wood's task has been accomplished in admirable style. The work is one that breeds reflection. Its perusal broadens the horizon and lifts the thinker into lofty altitudes — altitudes where mind is seen to be the worker, and labor, land, capital, and coin to be but the tools ; where altruism is stimulated and the sweetness of charity is realized, and the fact of racial unity is felt, and a glimpse is had, as from Pisgah's summit, of the final fraternization of humanity. — Chicago Evening Post. " The Political Economy of Humanism " is written in a clear style, and is in all points an admirable, satisfactory, and original treatment of the subject. — San Francisco Call. It were well for the nation if more works of like facility of comprehension and dealing with such subjects were disseminated. — Philadelphia Item. It would be difScult to imagine a clearer statement of premises and conclusions than is therein contained, and there is no profession nor business to which its teaching's do not apply. — Boston Ideas. It would be well indeed for the future were this work adopted as a text-book.— The Occident {Chicago). His mental powers are both anal3rtic and synthetic, and it is a genuine pleasure — a mental recreation — to follow him through his reasoning processes. — Christian Leader ( Cincinnati), The " Trade Journal " mig-ht fill ten of its columns with just such interesting quotations, but it does not intend to. Every reader of this paper should lose no time in possessing themselves of a copy of the book. — Indianapolis Trade Journal, We wish it might be read by every thoug^htful man — laborer and capitalist — in our country. — Boston Home Journal. It is a good book for teachers who want to be fairly intelligent on these vital questions. — Ohio Educational Monthly. It is long since we have read so much good sense, sound reasoning, and practical wisdom in a book on this topic as we find in this volume. No one who wishes to be posted on these vital issues of the day should fail to read this book. Besides its soundness of view, it is well-written, and in a plain, matter-of-fact style that is delightful and refreshing. — Educational Courant {Jonesville^ Ky). Mr. Wood's pen is charged with electricity, and it emits flashes quite frequently, It is also epigrammatic. "The desire to find a certain opinion true," he says, "often clouds the reality." Again he says: "To truly learn, it is necessary to unlearn.'* The book abounds in such aphorisms. Every subject taken up is dis- cussed with judicial impartiality. — Commercial Gazette {^Cincinnati). Mr. Wood has strongly accentuated the idealistic side of political economy, while the marked optimism is in pleasing contrast to the pessimistic treatment of some authors. There are twenty-four chapters, each devoted to the consideration of an important phase of the labor problem. It is original, effective, and above all, interesting. — Broivn Magazine {Providence)^ THE POLITICAL ECONOMY OF HUMANISM Principles are here set forth which, if adopted, would go far to heal the chaos now prevailing, for example, throughout almost the whole labor world. Mr. Wood is among those men now living who have explored this whole field of inquiry most diligently, with clearest insight of both effects and causes, with a bent of mind truly philosophical, and with results which should commend themselves to the practical man as well as to the theorist. — The Standard (^Chicago). The name of Henry Wood is not an unfamiliar one in the list of deep thinkers and instructive writers. He has devoted time and study to ques- cions involving man's highest interests, and the book under consideration is one of his happiest efforts. — The Gazette (Fori Worth, Tex."). The popular style of the work should insure it a wide reading, and it cannot fail to have a useful influence. There is no partisanship in it, either commercial or political, but it embodies the reflections and sugges- tions of a man of broad mind, large information, and an earnest desire to enlighten others. — 7'he Congregationalist (^Boston). Mr. Wood is a most delightful writer, and succeeds in investing what would usually be a dry subject with much interest. His thorough acquaint- ance with and knowledge of his subject is evident, and his treatment of it is thoroughly original. We wish the book could be read by every capital- ist and every laboring man in the country. It gives each class much to reflect 'upon, and its wide circulation could not fail to be productive of much good. — The Green Bag. In twenty-four lucid chapters the author of this book shows that natural law in every sphere of business and society must be investigated to dis- cover its immutable tendencies, and that it must be regarded by reformers, legislators, and philanthropists. — Nerw York Evangelist. We have carefully read every word of this well written, nicely bound, and finely printed volume. It contains twenty-four lucid and fresh chap- ters by one who evinces great familiarity with the formulating science of sociology. If social conditions are to improve in the future as they have in the past, by the constructive principle, Mr. Wood has furnished excel- lent lubricating oil for every wheel and cog in the machinery of society, and to which all additions made shall become parts of one whole. The book should be read by every student of "Social Problems." — The Watchman (^Boston"). In the chapter on "Booms and Panics" the author is particularly feli- citous, recalling recent history with which the members of the present gen- eration are familiar, and whose depleted pocket-books can attest to the truth of what Mr. Wood has to say. Though the book is instructive, it never ceases on a single page to be entertaining. — Times-Star {Ciruin- It is a work, not only for schools, but for everybody. If, in these times of stringency, this subject were studied more closely, a great benefit would result to the entire people. Get a copy of this book. — National Educa- tor (Allentown, Pa.'),