TRANSPORTATION BY RAIL.

RAILROADING.

RAILROAD OWNERSHIP; CAPITALIZATION; TRAFFIC ASSOCIA-
TIONS; POOLING; DIFFERENTIAL RATES; ETC.

In 1830 there were thirty miles of railroad in the United
States. This had increased to 9,000 miles in 1850, to 53,000 in
1870 and to 192,162 in 1900. The total railroad mileage of the
world in 1900 was, approximately 445,000 miles, with a capital-
ized value of $35,000,000,000, and of this the United States
possessed 42 per cent. nearly half. The railroad property in
the United States in 1900, consisting of track, rolling stock,
depots, shops and other buildings aggregated nearly $12,000,-
000,000. This enormous creation of property and development
of transportation facilities has heen the product of seventy
years' effort and progress, all growing out of the application of
Development steam power. The wide area of the United States
of Railroad will explain in a measure the enormous mileage of

our railroad systems. The European countries
being of smaller area have shorter railway lines, and yet it
should he remembered that the United States has the largest
mileage in proportion to population of any nation. For every
10,000 inhabitants in the United States we have 26.1 miles of
railway; England, Scotland and Ireland, 5.2; Germany, 5.6;
France, 6.6; Eussia, 2.2; Spain, 4.2; Brazil, 4.7; and Argentina,
19.6.

The enormous development of our railway interests has been
the means of accelerating the commercial progress of the

423



434 TRANSPORTATION BY RAIL.

United States to a wonderful degree. This development lias
not only been typical of the evolution of industrial organiza-
tions in this country, but in a large degree has assisted in bring-
ing about the wonderful industrial advancement which has been
made in the past fifty years. By means of the improvement in
transportation facilities our industrial and social
-^ e nas keen revolutionized. Producers have had
their market widened until it is now almost a
world market, whereas before, the sale of many articles was
restricted to the localities in which they were produced. The
consumer likewise has a world market in which to buy. He
is not confined to his home production. The prices of all the
utilities of life are more nearly uniform, since improved trans-
portation has given them a better distribution. The variation
in prices due to situation has been lessened. Improved trans-
portation has also lessened the general prices of commodities,
since it enables either raw or finished products to be moved
cheaper, thus reducing the item of transportation which enters
into the final cost of the goods. It also enables the merchant
to "turn over" his stock or capital quicker and oftener and
thus do business at less expense and hence at a smaller gross
profit.

The development of transportation has also been the cause,
in a large measure, of the growth of our cities, since it enables
manufacturers to locate their plants in the great centers of
population where there is an abundant supply of labor, and
where shipping facilities are favorable, irrespective of the loca-
tion of the raw material. The steel mills of Chi-
ca & an( ^ Milwaukee are examples of this, being
situated at a considerable distance from the ore
and coal, but near populous centers. The location of great in-
dustrial plants in or near towns or cities adds to their financial
and commercial importance, and this in turn assists in their
growth. New agricultural districts have been opened up and



RAILROAD OWNERSHIP. 425

profitably cultivated, through the facilities for disposing of the
crops, afforded by improved transportation, while other districts
have been abandoned or changed to grazing land, on account of
the competition of more productive localities. Thus Massa-
chusetts has practically ceased to produce wheat, and now re-
ceives its food products from the west in exchange for its
manufactures.

The railroads of the United States are owned and conducted
almost entirely by private corporations. The majority of the
railroads of Germany belong to the government, and those of
most other European nations, except England,
ownership are un( ^ er the direction and control of the gov-
ernment. The advantages in favor of government
control are, that the system of transportation will be operated
at actual cost, thus saving to the people as a whole the profits
which otherwise would go to private individuals, and that the
power and control of the government will be extended and en-
larged. This latter may be desirable in a monarchy, where the
hand of the government is constantly upon all of its subjects.
The Roman Empire built extensive roads as a means of extend-
ing and solidifying its power. In a republic, however, the same
reason scarcely exists. The reasons against government control
are that we prefer to check, rather than extend, the power and
influence of our government; that private enterprise supplies
every demand for transportation facilities, and builds competing
lines which would not be built if our railroads were all under
government control; that the tariff rates for both passenger and
freight traffic are reasonable, and are made under government or
state restrictions.

The average capitalization of the railroads in
capitalization the United States is lower than that of any other
country, being about $60,000 per mile. This in-
cludes costly bridges, such as those which span the Mississippi
river, tunnels through mountains or beneath cities, such for



426 TRANSPORTATION BY RAIL.

example as those under St. Louis or Baltimore,, besides numer-
ous examples of costly expenditures in the execution of difficult
feats of engineering and construction. The English railroads cost
$200,000 per mile, those of France $128,000 per mile and of
Germany $105,000 per mile. This difference in cost between
American and European railroads has been ascribed to various
causes, but is no doubt due largely to the more permanent and
costly character of European roads. Perhaps more water in
the stock, items of general expense such as the cost of floating
the bonds, interest on the capital while the roads are under
construction and profits of construction companies, are included
as a part of the cost of European roads.

Inventions and improvements during the past twenty-five
years have steadily increased the efficiency of the railways and
made the transportation of both passengers and freight not only
more rapid, but safer and more economical. The substitution
of steel for iron rails, made possible by improved processes of
manufacturing steel, the use of heavier rails
Efficiency more than 120 pounds to the yard in some in-

stances heavier cars, air brakes, automatic
couplers, block signals, all have combined to improve the effi-
ciency of our railway systems.

Another condition which has contributed powerfully towards
the general efficiency of the railways of the United States dur-
ing the past third of a century has been the consolidation of
companies and concentration- of management. The early rail-
way companies were small, and their lines were
Consolidations short with varying regulations and tariffs. Be-
tween Buffalo and Albany in 1850 there were
seven different companies operating, resulting in great incon-
venience to both passengers and freight traffic. The small
companies have nearly all entered into combinations, or been ab-
sorbed by large companies, until the railways lines of the coun-
try are now combined in a few great systems, with thousands



CONSOLIDATIONS. 427

of miles of track, such as the Pennsylvania, New York Central
and Santa Fe. As an example, the Pennsylvania system now
comprises over ten thousand miles and is composed of nearly two
hundred small railway lines. Many of these were purchased
outright by the Pennsylvania Company and absorbed into the
system, while others are operated as subsidiary corporations.
This great system transacts one-eighth of the entire railway
freight and passenger business of the United States.

Railway associations and agreements in regard to the main-
tenance of rates, character and conditions of service to be per-
formed, classification of freight, interchange of cars whereby
shipments between roads can be made without transfers from
car to car, establishment of rates, etc., have tended to further
develop the efficiency as well as economy of our railways. The
causes which brought about the organization of
railway traffic associations were the necessity for
co-operation, through tickets and through bills
of lading, the interchange of cars with connecting lines, so that,
for example, a car load of grain could be shipped from Minne-
apolis to the seaboard without change, and the necessity for the
regulation of competition. As a result we have claim associa-
tions, car-service associations, passenger associations and other
organizations for the adjustment of all questions arising in
each department of railway service. The organization of small
companies into large ones and the consolidation of lines led to
violent competition and rate-cutting during the '70's, and was
finally overcome by the associations referred to.

From the organization of railroad associations it was an
easy step to "pooling," which consisted in dividing the total
earnings of several competing lines according to an agreed basis
irrespective of the amount of business actually done by the
different roads in the pool.* The organizing genius of Mr.

*The dangers of a pool lie in the arbitrary power which it places in the
hands of a few men, to fix rates, control traffic and exercise a monopoly
which affects business interests extensively, but in this there is a reliet from



428 TRANSPORTATION BY RAIL.

Albert Fink first developed the railroad pool. He organized the
Southern Railway and Steamship Association (1875) in which
were included nearly all of the railroad systems of the south be-
sides several connecting steamship lines. The
Pooling object of this pool was to settle what portion

of competitive traffic each line should carry,
and those which carried more than their share were re-
quired to pay their rivals the excess receipts less the bare cost
of carrying. The "pooling" feature was more or less a promi-
nent one in nearly all railroad association agreements until pro-
hibited by the Interstate Commerce Act.t

The earnings of the railroads of the United States for freight
traffic are much more important than those for the passenger
service, being about three times the amount received for passen-
ger business. In some parts of New England where the popu-
lation is dense, the passenger receipts may equal the freight, but
a large portion of the freight of the country is hauled consider-
able distances, and the earnings ar.e correspond-
Freight Traffic ingly great. Our principal grain fields are 1,000
to 1,500 miles from the seaboard, and hundreds
of miles from the great commercial centers; our mines and for-
ests are situated long distances from the coal beds or the fac-
tories. The fruit from California and live stock from the
great plains of the west are carried to the Eastern market. This
movement of great quantities of bulky freight long distances
results in large revenues for freight traffic while the distance dis-
courages passenger travel.

Railway freight rates in the United States average but a cent

the evils of the competitive system with its rate wars and destruction of
profits which should accrue to stockholders or be used for the betterment of
the road.

fThe Interstate Commerce Law was passed by Congress in 1887, after
fifteen years of agitation and investigation. It prohibited unreasonable rates
and unjust discriminations, between persons, places and classes of traffic,
prohibited pooling agreements, provided penalties for violations of its pro-
visions and established a commission of five men to enforce its requirements.



COST TO CONSUMER. 429

and a quarter per ton per mile.*. This is lower than any other
nation and probably not more than half what it was thirty
or forty years ago. Improved machinery, Bessemer steelt and
competition have caused a steady decline in the rates. This
decline has been accompanied by a general lowering of the
prices of the most important articles of traffic, and would have

been even greater but for the fact that it was made
consumer * u ^ ne ^ ace f steadily advancing wages for labor.

In the case of most commodities the public will
buy and use a given quantity at a fair price. If then the price
is lowered, the quantity consumed will be increased, or if the
price is raised, the quantity will be diminished. Transportation
charges are properly regarded as a part of the first cost of all
those commodities which must be transported from the producer
to the consumer. The consumer always "pays the freight" as
well as the profits of the middlemen, in addition to the original
cost. Each producer, then, who desires to extend his business
or increase his sales, perceives at once that it is only necessary
for him to secure lower rates on his shipments. Any concession
in rates cheapens the cost to the consumer and increases the
volume of sales. Whether certain articles shall be sold in a
given locality often depends upon freight rates from two com-
peting points. Whether salt from Michigan or from Kansas
will be marketed in St. Louis depends upon the freight rates be-
tween these two localities and St. Louis. Whether shoes made in
Chicago can be sold in Pennsylvania in competition with eastern
shoes, depends upon the freight rates. A persistent pressure is
being constantly brought to bear upon the railroads by both
shippers and consumers to secure a reduction of the transporta-
tion charges in order to extend sales or reduce the cost of pur-

*Our average passenger charge is 2.35 cents per mile, while that of most
European countries varies from 1.3 to 2 cents.

f Price of Rails Per Ton 1868 1872 1876 1880 1884

Bessemer steel 158 112 59 67 31

Iron . , 79 85 41 49



430 TRANSPORTATION BY RAIL.

chases. This was strikingly illustrated by the rivalry which
existed at one time between our principal seaboard cities, New
York, Boston, Philadelphia and Baltimore, in
their efforts to secure export business. So great
was the pressure brought to bear on the railroads
by the commercial organizations of these cities in their com-
petition for export shipments that rates were utterly demor-
alized. This was through the competition of the cities, as well
as the railroads, and to such an extent was the contest carried
that in 1882 it culminated in arbitration proceedings in which
the questions involved were submitted to a committee consisting
of Messrs. Allen G. Thurman, Elihu B. Washburne and Thomas
M. Cooley, for adjustment. The findings of the committee re-
sulted in fixing the relative freight charges to these ports, called
"differential rates," upon such a basis that they have remained
practically unchanged since. By this adjustment Philadelphia
was given a small advantage over New York, in the matter of
rates from the West, and Baltimore, a still smaller advantage
over Philadelphia. Owing to a threatened diversion of the grain
trade of the Northwest to Gulf ports, the rates on grain to all
eastern ports have since been materially reduced to meet this
competition. A "differential" rate then may be defined as one
which is made between two points, not with respect to the dis-
tance as traversed by the different transportation lines, but with
regard to competitive traffic. Thus between Chicago and New
York the passenger fare is the same on several ,lines of railroad,
and yet the distance traversed varies more than four hundred
miles.*

While it is strictly true that a decrease in transportation
charges causes, as a rule, an increased demand for the products

*Between Chicago and New York there are over twenty routes varying
in length from 912 to 1,376 miles, which compete for traffic. Between St.
Paul and Chicago the short line distance is 373 miles and traffic is carried
by a line 734 miles in length. Between Omaha and San Francisco five roads
compete, varying in length from 1,865 to 2,765 miles,



DIFFERENTIAL RATES. 431

shipped, nevertheless this rule is not an invariable one. There
are commodities which form a partial exception, and if consider-
able reductions in cost were made, the volume of business would
be but slightly augmented. For example, rates on boots,

shoes, clothing and household utensils, if reduced
GeneraiRuie * wou ld not materially increase consumption, since

people are inclined to purchase such articles as
they are needed. The same could be said of coffee, tea, salt
and those articles which are consumed in small proportion to the
total value of the requirements of consumers. In making
rates then for freight traffic, it would be useless for an associa-
tion to reduce the tariff on those articles which have a fixed
and uniform demand, and would not be influenced by a
reduction.