a Railroad Rates By HOWARD ELLIOTT 11 Chairman Northern Pacific Railway Company • 8 ? Reprinted from THE NEW YORK COMMERCIAL May 8, 1923 Digitized by the Internet Archive in 2015 https://archive.org/details/railroadratesOOelli RAILROAD RATES By HOWARD ELLIOTT Chairman, Northern Pacific Railway Company Effect of Rail- In the discussion about the railroads and road Rates on the rates charged by them there is danger Business Liable that the public may be confused and its to Misconstrue- judgment distorted. There is a tendency to believe that the rates of the railroads are a primary and potential cause of success or failure in industry and agriculture and that by reducing rates, adverse economic conditions, errors in judgment and failures in management on the farm, in the factory and the mine could be corrected and avoided. Rates are important, but their effect upon the success of any business enterprise has been magnified and there is danger that the theory of reducing rates in an effort to im- prove business and agricultural conditions will do more harm in other directions than the possible good to be obtained by such reductions. The Cases of E. C. Simmons made St. Louis the greatest Two Great hardware market and Marshall Field made Merchants. Chicago the greatest dry goods market in the west. They sold their respective goods all over the United States, although St. Louis had much bet- ter rates than Chicago in some directions and Chicago had better rates than St. Louis in other directions. Brains, man- agement, “push,” and resourcefulness had much more to do with the success of these two great enterprises than the freight rates. If Marshall Field had begun in St. Louis and E. C. Simmons had begun in Chicago, each would have succeeded in his respective line in just the same way as he did regardless of rates. Other illustrations could be given where efficient management, brains and energy brought suc- cess, and where the freight rate was of secondary consideration. 3 Service and an adequate supply of a good quality of trans- portation at remunerative rates, even if higher than pre-war rates, are more important to business and agriculture than starvation rates with poor service and insufficient transpor- tation. A Railroad Rate What is a railroad rate? There is nothing Explained. mysterious about it any more than there is about the rate for a room in a hotel or the price of a ticket to the movies. A rate is the price charged by the greatest manufacturing plant in the world — the rail- road system of the United States — for what it produces and sells; namely, transportation in enormous volume and in almost countless forms; the transportation of a package of pearls by express for one thousand miles; of a carload of broken oyster shells for ten miles for a highway; of a com- muter twenty miles a day in and out of a big city; of a trip of a lover of his country six thousand miles from the Atlantic to the Pacific and back; of a letter from Portland, Maine, to Los Angeles, California; of a package of butter by parcel post from Princeton, N. J. to Philadelphia; of a car of pig iron from Birmingham to Chicago; or of a car of cattle from Montana to Kansas City. Railroads Must The railroads must be ready at all times Be Ever Ready with a most varied assortment of trans- With Service. portation for their customers. This trans- portation cannot be produced today, stored, and sold tomorrow; if not used when produced, it is wasted. The railroads must be ready to meet the maximum demand and must be compensated for that “readiness to serve” by the prices or rates they charge for the thousands of kinds of transportation that the public uses every day, and must have, if our country is to progress. Not every one buys transportation directly; a great many people do not travel either for pleasure or business; never send a package by freight, express or parcel post. All, however, are directly or indirectly interested in the rates or prices at which transportation is sold. Every one also eats food, wears clothes of some kind and nearly every one wears shoes, and all must have food and clothing, and yet the country does not spend a large amount of its economic and political energy debating methods, of regulating the rates and prices on food and clothing, making the production of these two essentials more difficult and ex- pensive to the buyer by restrictive laws, regulations, and interference with management, as is done in the production of transportation. Billions of Look at the number of transactions that Railroad Trans- the manufacturer of transportation has in actions. a year and what an enormous supply of varied forms this great manufacturing plant of the steam railroads must be ready to furnish to the buyers. The best available figures show the following for one year: Passengers Express shipments Freight shipments 1,060,000,000 190.000. 000 (estimated) 400.000. 000 (estimated) Total 1,650,000,000 Mail and parcel post (from P.O. Dept.) 18,000,000,000 Total 19,650,000,000 Here are nearly twenty billion transactions with in- dividuals all involving transportation, a number that cannot be visualized, and these transactions increase with every dec- ade, for the reason that American civilization demands a larger amount of transportation per capita than any other nation. This almost inconceivable amount and variety 7 of transportation is manufactured and sold all over the country under varying conditions — physical, climatic, social, with all the elements affecting cost and prices that enter into the manufacture of clothing, shoes, wheat, hotel accommoda- tions, moving picture shows, etc. Wages, fuel, taxes, in- terest, loss, accidents, etc., and always in addition the risk of having a large amount of transportation capacity that cannot be stored up and marketed and, therefore, is not used. Then there must be some profit in this manufacturing 5 business or it will not grow to meet the demands of the buyers and they will suffer by not having a supply of trans- portation when they most need it. These different elements enter into the making of prices at which transportation can be sold — or the rates, as they are called — just as they enter into the making of prices on wheat, corn, clothing and shoes. There is no difference. The prices or rates are arrived at by the friction of commercial currents and the forces of life all over this country and to a certain extent throughout the entire world. While there is nothing mysterious about rates, there are many complications. Lately there have been discussions about a scientific basis for rates. Exactly what is meant by this is not very clear, but some say the term means that there shall be terminal charges for receiving and delivering the freight and a haulage charge for the movement between the shipping and receiving points. Also that rates shall be higher on high-priced articles than those on heavy, coarse and cheaper articles, sometimes described as “basic commodities” with the idea that prices or rates for these latter can be reduced materially and the difference made up from the higher-priced articles. The People In a large way, these two basic principles Recognize Basic have been recognized in the tariffs and Rate Principles, classifications that have developed since 1 8 87 when the Interstate Commerce Law was passed, but with countless modifications to meet varying conditions in this great country. These rates and classifi- cations have become part of our national life and have re- ceived the approval of the people through the agencies es- tablished by them; namely, the Interstate Commerce Com- mission and the various State Commissions. The United States could never have developed on a rigid mileage system of rates and to apply any such basis now to industry, mines, manufactures, jobbing, agriculture and the great development west of the Mississippi River with its countless human activities, social and educational, all created in the last fifty years, would disrupt commercial, agricultural and social relations to such an extent that a chaotic condi- tion would result and the development of the country would be disturbed and checked. 6 To make material reductions on basic commodities and obtain the revenue lost by such reduction through increasing the rates on other articles is an impossible task as the follow- ing figures show: Facts Reported In 1922, the Interstate Commerce Com- By the Interstate mission reports that 234,882 miles of Commerce Com- Class I roads carried 1 ,859,484,476 tons mission in 1922. 0 f revenue freight. Of this tonnage 7% is an extreme estimate of those high priced and bulky articles on which it may be possible to make some increases at this time including all less than carload ship- ments, even if thousands of communities and individuals can be made to see that such adjustment is fair and the increases receive the approval of the Commerce Commission. On many railroads the percentage would be less than 7%. In- dustry that has heretofore been developed on the present basis of rates, established through commercial friction and approved by State and Federal authorities, will naturally be slow to assent to increases as suggested. The other 93% of the tonnage is largely, if not entirely, made up of Products of agriculture and animals. . . 268,000,000 Products of mines 922,000,000 Products of forests 173,000,000 Heavy manufactured articles and other so-called “basic commodities” on all of which it has been suggested that rates might be reduced 366,321,000 Total 1,729,321,088 as against 130,163,388 tons of commodities on which it is possible rates can be increased. The Country In discussing the rate revisions, the coun- Should Face try should face the facts and realize that it * acts * is not possible to increase the rates on 7% of the tonnage, enough to make up for reductions in revenue on basic and heavy articles comprising 93% of the tonnage. It cannot be done, and such a plan 7 would make it very difficult for those roads that have been built quite largely for the development of agriculture, lumber and mining to sustain themselves and furnish the transporta- tion needed, because they could not increase their revenue from other articles sufficient to make up for the losses in handling the heavy tonnage articles. A road obtaining its chief revenue from handling agri- cultural products, lumber, coal and ore, could not make up the loss caused by a reduction of, say 5% in the rates on those articles by increases of any practicable per cent on the higher priced commodities, because there are not enough of them carried by that road. The increase in rates on such articles would benefit chiefly those roads that did not suffer from the reduction in rates on agricultural products, lumber, coal and ore. This statement does not mean that railroad officers are not making and should not continue to make every effort practicable to fix and adjust rates so as to increase them on higher priced and bulky commodities, meeting existing com- mercial conditions and with due regard to sustaining the various properties, so that the transportation needed will be produced. This process is going on all the time by negotia- tion between railroad officers and shippers and communities. Interstate Commerce Commissioner Lewis on October 26, 1921, wrote to Congress- man Sanders of Indiana giving a list of the rate changes (mostly reductions) made since the general rate advance of August 26, 1920, usually referred to as Ex Parte 74. This list covered 36 pages of closely printed matter and the Com- missioner says — “It would be safe to say that during the year that has passed since the general increase following Ex Parte 74 at least a million changes of individual rates have been filed with the Commission.” The same kind of revision has been going on ever since and is in process today. Commissioner Lewis Tells of a Million Rate Revisions. 8 The Interstate In considering the general level of rates, Commerce Com- jt i s we ll to remember what was said by mission Reports (-fog Bureau of Statistics of the Interstate Present Rates not Commerce Commission about the railroad Retarding situation in 1922. Rusmess. “On the whole, the present railroad situation, from the standpoint of railroad finance, clear- ly does not on the one hand warrant pessimism, nor on the other hand, at present, any radical reductions in total charges to the public. From the standpoint of the public, which is interested in adequacy of service and in the fairness of the charges, two facts stand out prominently — 1. An enormous traffic has been handled in spite of strike handicaps. 2. The average revenue per ton per mile is pretty well in line with the general level of the whole- sale prices and there is no reason to believe that the general level of rates is retarding the business revival.” The business revival has come, and in many parts of the country agricultural conditions are improving. Since this statement was made by the Commerce Commission, the gen- eral level of prices as a whole has improved and if there were no reason for reducing the general level of railroad prices or rates in 1922, there is still less reason today with the railroads facing increased costs in every direction over those in effect a year ago. Government Should Pay More for Carry ins Mail. The Government itself could set a good example and perhaps add $60,000,000 a year to the revenue of the railroads by in- creasing slightly rates where they could easily be borne in the charges for the vari- ous classes of mail matter which, as a whole, are now carried at a loss to both the railroad and the Government. The value of this service to the user of it is much greater than what is paid, which is much less than the user can well afford to pay. 9 Express and Mail Express rates apply to small unit ship- Carried at a Loss. m ents, and these rates are of a kind that could and should be increased. That mat- ter is now in the hands of the Interstate Commerce Com- mission. Today, the loss in handling mail and express has to be borne chiefly by the freight business. In a general way, rates, like other prices, are fixed some- where between the cost of the service as a minimum and the value of the service as a maximum. No manufacturer can afford to charge less for his product than the cost of produc- ing it, for such a policy would eventually result in bank- ruptcy. The minimum point must, therefore, be the cost, so far as can be ascertained, which, in the cost of trans- portation, must include the cost of handling the business, moving the trains, a fair allowance for the maintenance of property and equipment, general administrative cost, and a margin for the payment of interest and other capital charges with, at the same time, some profit to sustain credit and attract new capital. Interstate It is well to recall what the Transportation Commerce Com- Act says on this subject: mission's Power “I n the exercise of its power to as to Rates. prescribe just and reasonable rates, the Commission shall initiate, modify, establish or adjust such rates so that carriers as a whole (or as a whole in each of such rate groups or territories as the Commission may from time to time designate) will, under honest, efficient and economical management and reasonable expenditures for maintenance of way, structures and equipment, earn an aggregate annual net railway operating income equal, as nearly as may be, to a fair return upon the aggregate value of the railway property of such carriers held for and used in the service of transportation; provided, that the Commis- sion shall have reasonable latitude to modify or adjust any particular rate which it may find to be unjust or un- reasonable, and to prescribe different rates for different sections of the country.” The return on the railway property of the country for 1922, based on the Commission’s tentative valuation was 10 only 4.14% and based on the amount shown on the carriers’ books, only 3.68%. Secretary Hoover The maximum price on any article to be is Right. sold is the value to the buyer. Secretary of Commerce Hoover testified before the Interstate Commerce Commission in January, 1922, that “ ‘what the traffic will bear’ had some economic back- ground.” He is right. This much criticized phrase — “what the traffic will bear,” describes a policy that within limits, is based upon sound economic principles for making of all prices and rates. Sales of manufactured articles can only be made under prices that are no higher than the value of the article to the buyer, and no one ever attempts to get all that the traffic will bear, but strives constantly to adjust prices so as to develop territory, enlarge business and do the maximum amount. The manufacturer of transportation is particularly keen about this and is trying all the time to have rates or prices as low as is consistent with maintaining, operating and expanding the plant. Between the maximum of what the traffic will bear and the minimum of the bare cost of production there is a very wide margin where judg- ment must be exercised as to what constitutes a fair and equitable rate and the Transportation Act has endeavored in the paragraph just quoted to lay down a general principle. Interstate The people, in the Interstate Commerce Commerce Com- Law of 1887, and its amendments, and the mission the Transportation Act of 1920, laid down a Umpire. basis for settling most of the differences between sellers and buyers of transporta- tion and selected the Interstate Commerce Commission as Umpire. Having selected the Umpire, it is not for the best interest of the country to show a lack of confidence in the Umpire. Either trust the Umpire or get a new one. The Commission is devoting its time and accumulating knowledge in order to safeguard the true interests of the public, and this should mean that rates shall be sufficient to enable that public to have the necessary quantity and quality of transportation. And yet today there is more or less effort under way to adjust this complicated system of rates or prices by direct 11 action of Congress, which with the very best intentions to help, has not the accumulated knowledge and experience possessed by the Commerce Commission to pass upon the justice of rates as between commodities, communities, and between railroads — the sellers — and their customers — the buyers of transportation. Too Rigid Rate One danger in the rate system today is that System. there is too much rigidity; rates cannot be changed with reasonable promptness to meet changing conditions. Again, if a rate is made because of some condition in Florida, it is urged that necessarily the same kind of rate be made in Washington, where conditions may be entirely different. This is not sound policy. A sound policy for the railroads of the country demands the accumulation of reserves in periods of good business, which may serve to help out in times of poor business. Such a sound policy can be achieved only if the revenues and ex- penses of the railroads are so adjusted that during a series of years, including both periods of prosperity and periods of depression, there is realized a fair return on the average value of railroad property used in the public service. There is no other way in which the railroads can be in a position to share in periods of adversity without deferring maintenance, repairs and betterments. It is essential, therefore, that some way should be found in the process of administering the existing system of regulation to permit the railroads to share in the advantages of business prosperity, in order that they may be in a position to share without collapse in periods of business adversity. It is to be hoped that some day this essential truth will be recognized and put into practical ef- fect by those who are charged with the responsibility of creating and administering governmental systems of regulation. Regulation has Considering the country and the need of Encroached on steady growth of its transportation supply, Management. Regulati on has encroached entirely too far on the field of Management and by dividing responsibility and checking initiative, this policy has increased costs and with resultant rates higher than would have been the case if more freedom of action had been permitted. 12 Better and more prompt results for the public could be obtained if railroad managements familiar with local con- ditions — studying all phases of the business, anxious to go as far as possible to meet the needs of their customers — were allowed to make rates or prices subject to investigation and review by the Commission; these rates or prices to be sus- pended only after a review that would disclose these rates to be contrary to public policy; reparation could then be ordered by the Commission. A Disastrous Under the Government regulation of to- Policy. day, changes in rates become a burden of proof upon the carriers and these rates are suspended until extensive hearings have been held and a decision is reached by the Interstate Commerce Commission. This situation has been disastrous. For instance, it was obvious to everyone acquainted with the condition of trans- portation, that rates must be increased to the carriers in 1920 when they were restored to private control. The Government had permitted the roads to become economically unbalanced. Operating expenses had increased to such an extent that revenues w'ere more than absorbed at the very time that the roads came back to private control. Under these circumstances, rate increases were not possible until the Interstate Commerce Commission had held exhaustive hearings. As a matter of fact, rate increases were not granted until August 26, 1920, when commodity prices had already broken in the market and industry was becoming rapidly less and less able to meet the extra charge. It is a situation that illustrates a real, vital issue in the trans- portation business today; that issue is how to make rates reasonably flexible and quickly sensitive to industrial and market changes. Danger to The Transportation Act gives to the Com- the Public . mission very large powers to prevent Un- Through Unjust j us t Discrimination and Extortion, or Rates Eliminated, “profiteering”; it contains also a limitation of aggregate earnings so that any danger to the public of unjust rates is eliminated. 13 Remedies and In view of these facts regarding the freight Conclusions. rate system of the country, it seems fair to conclude that: (1) A deqc te transportation to meet the growing needs of commerce and industry, and good credit for the railroads so they can oh:; 'n new capital rather than lower rates, is the condition t at si ould be sought. (2) A railroad rate is simply a price for service and not a thing of my.; ry; but the rate system is made up as a result o' :o many different factors that it is a most delicate and complicated mechanism. (3) Service, which is the commodity sold hy railroads, in a most perishable commodity and unused equipment and trackage represents waste. (4) It is impracticable to attempt to transfer much of the rate burden from basic commodities, which make up so large a proportion of the total tonnage, to those higher priced articles, which comprise a relatively small percentage of tonnage and produce a small percentage of revenue. (5) Freight rates today are not hampering business and adjustments are constantly being made to secure the most equitable rates possible; but the rigidity resulting from too stringent regulation and deferred changes prevents rates from being sensitive and quickly responsive to changing economic conditions. (6) Between the maximum of “What the traffic will bear,” and the minimum of the bare cost to the carriers lies a fairly wide field for the judgment and initiative of skilled railroad managers, subject to review by the Umpire — the Interstate Commerce Commission. In the preface to his friendly volume, “The United States in the Twentieth Century,” Mr. Pierre Leroy-Beaulieu, one of the keenest foreign observers of conditions in the United States, and a noted economist, uses this striking language: “The essential condition to the development of energy is liberty. Every restriction on liberty, with however good purpose, diminishes the individual re- sponsibility and initiative. Yet we often hear mooted in America, as elsewhere, measures which under the pretext of correcting abuses, would immeasurably ex- tend the State’s field of action, and reduce the liberty 14 of citizens. It is my earnest hope that the American democracy will reject such enervating proposals, and will remain true to the virile and liberal traditions that have ensured the United States so wonderful a growth.” The country and its railroads were built up by the splendid energy and initiative of the American Man. He was al- lowed more liberty in doing this work than he is today! There is grave danger that in an effort to correct abuses and errors incident to all human affairs harm is being done to development by reducing liberty of action. Leroy-Beaulieu is right. 15