To crown its monopoly, the Standard Oil Company finally bought of the New York Central and Erie roads their terminal facilities for the transportation of oil, and thereby made it virtually impossible for them to transport oil for any of its few remaining competitors. Mr. Josiah Lombard, part owner of the New York refinery, stated in 1879 before the investigating committee of the legislature of New York that in 1878 he had requested the Erie Company to transport for him 100 cars of crude oil from Carrollton to New York; that he had called upon Mr. Vilas, the general freight agent of the company, in person, but had never been able to obtain the cars, though the oil had been held in Carrollton three or four months ready to be loaded. This gentleman also testified that he had found it impossible to obtain cars from the New York Central, and that the company's general freight agent had informed him that the road did not own and could not furnish any oil cars.

After the Standard Oil Company had secured control of the various pipe lines of the oil regions, it frequently lowered the price of crude oil to such an extent as to make its production unprofitable. It even refused to buy oil, basing its refusal upon the ground that the railroad companies failed to furnish cars for its transportation. When the well-owners had their tanks filled, they had the choice to let the oil run away or to be at the expense of closing up their wells. In one instance, however, when their ruse threatened to cause a riot, several hundred cars were brought to the wells within a few hours.

The Standard Oil Trust, not satisfied with the monopoly of the wholesale trade, even tried in places to control the retail trade by peddling oil at private houses. This method of destroying competition was chiefly resorted to where independent dealers obtained their supply by a water route.

That many of the deeds of the Standard are dark is evident from the fact that its members, when summoned by the Hepburn committee, declined to testify, lest their testimony be used to convict them of crime. Officials of the trust have bribed or attempted to bribe employes of rival firms, for the purpose of ruining their business. By its peculiar methods the company has been successful in courts of justice and legislative halls, and has enjoyed an impunity for its conspiracy against the public that is without precedent in America. It has accumulated a capital of more than $100,000,000, and it is even claimed that for years its annual dividends have exceeded in amount the capital actually invested. This is not at all strange when it is considered that they have levied upon the producers, consumers and transporters alike. Mr. Cassat testified before the New York investigating committee that in eighteen months the railroads had paid the Standard in rebates no less than $10,000,000. And the very payment of these enormous rebates enabled the Standard to decrease the price of oil to the producer and to increase it to the consumer.

It is claimed by the defenders of the Standard monopoly that under the trust the price of petroleum has been constantly decreased to the consumer. That the price of kerosene is lower now than it was fifteen years ago is undoubtedly true, but the reductions were brought about not by the trust, but in spite of the trust. The price now maintained is an unnatural one. The Standard Oil Company never lowered the price of its oil except when compelled to do so by competition. The largely increased output of crude oil, the improved methods of refining, the greatly lowered cost of transportation would have lowered the price of coal oil without the philanthropy of the Standard Oil Company. Iron, steel, calico, woolen goods and a thousand other commodities have within almost the same period suffered much larger reductions than coal oil. But even if the Standard monopoly had voluntarily lowered the price of its products, the American people could never approve of its methods. They can never be made to believe that the end sanctifies the means, especially when those means are railroad favors, secret combinations, bribery, intimidation and lawless arrogance.

Many other interesting cases might be given. The Southern Pacific Railway Company, for instance, owns nearly all of the railways of California, and enjoys at the present time almost a complete monopoly of the transportation business of that State and much more of the Pacific Coast. Perhaps no set of managers would be more considerate of the people's rights in the absence of legal restraint than those in charge of this company, yet there is not a business man on the Pacific Coast who comes in contact with this company who does not realize and feel the power of its iron hand, unless it be those who for various reasons are recipients of its special favors. It has become notorious that the legislature, Board of Railroad Commissioners and some of the judges of the courts of that State are as servile to the demands of this railway company as are its own employes.

The railway company is a closely organized body of shrewd, active men, while those who furnish business for it are not organized, and they will never be able to properly protect their own interests until they control the machinery of their State government.



CHAPTER V.

RAILROAD ABUSES.

As has already been shown, railroad enterprise met with comparatively little opposition in the United States, for, as compared with the interests certain to be benefited by the introduction of the new mode of transportation, those likely to be injured by it were insignificant. It is true, the innate conservatism of man even here recorded its objections to the innovation. It viewed with distrust the new power which threatened to revolutionize well-established systems of transportation and time-honored customs and to force upon the people economic factors the exact nature and value of which could only be ascertained by practical tests. But the progressive portion of the community was so decidedly predominant that these protests were soon drowned in the general demand for improved facilities of transportation. The farmer who had to haul his produce a great distance to reach a market appreciated the advantages to be derived from the location of a railroad station nearer home. The manufacturer who heretofore had, had a very limited territory for the sale of his products well realized that he could with the aid of a railroad enlarge his territory and increase his output, and with it his profits. The pioneer merchant found that he could no longer compete with former rivals in adjoining towns, since the iron horse had reached them and lowered their freights, and he also became a convert to the new order of things and clamored loud for railroad facilities. Railroads seemed the panacea for industrial and commercial ills, and every inducement was held out and every sacrifice made by communities to become participants of their blessings. So great was the estimate of the conveniences afforded by them and so strongly was public opinion prejudiced in their favor that it is no exaggeration to say that railroad companies as a rule were permitted to prepare their own charters, and that these charters almost invariably received legislative sanction.

To such an extent was the public mind prepossessed in favor of railroads that any legislator who would have been instrumental in delaying the granting of a railroad charter for the purpose of perfecting it, to protect the people against possible abuses, would have been denounced as a short-sighted stickler and obstructor of public improvements. Anxious for railroad facilities, the people were deaf to the warnings of history. Their liberality knew no bounds. National, State and county aid was freely extended to new railroad enterprises. Communities taxed themselves heavily for their benefit, and municipalities and individuals vied with each other in donating money, rights of way and station buildings. This was especially true of the West, whose undeveloped resources had most to gain by railroad extension. So large were the public and private donations in several of the Western States that their value was equal to one-fifth of the total cost of all the roads constructed. To still more encourage promoters of railroad enterprises, general incorporation laws were passed which permitted companies to be formed and roads to be built practically without State supervision. In their admiration for the bright side of the picture, the people entirely overlooked the shady side.

Besides this, there was virtually an absence of all law regulating the operation of railroads. It was, under these circumstances, not strange that abuses early crept into railroad management which, long tolerated by the people and unchecked and even encouraged by public officers, finally assumed such proportions as to threaten the very foundation of free government. Great discoveries that add rapidly to the wealth of a country tend to overthrow a settled condition of things, and organized capital and power, if not restrained by wholesome laws and public watchfulness, will ever take advantage of the unorganized masses. The people of those regions which the railroad stimulus had caused to be settled thrived for years so well upon a virgin soil that they gladly divided their surplus with the railroad companies. They looked upon the railroads as the source of their prosperity and upon railroad managers as high-minded philanthropists and public benefactors, with whom to quarrel would be an act of sordid ingratitude, and they paid but little attention to the means employed by them to exact an undue share of their earnings. Railroad men did whatever they could to foster through their emissaries this misplaced adoration. They posed before the public as the rightful heirs of the laurels of Watt and Stephenson, insisting that their genius, capital and enterprise had built up vast cities and opened for settlement and civilization the boundless prairies of the West. These claims have been persistently repeated by railroad men, though they are so preposterous that they scarcely deserve refutation. The railroad, gradually developed by active minds of the past, and greatly improved by the inventions of hundreds of men in the humbler walks of life, is the common inheritance of all mankind, though no class of people have derived greater benefits from it than railroad constructors, managers and manipulators. Railroad managers are no more entitled to the special gratitude of the public for dispensing railroad transportation at much more than remunerative rates than is the Western Union monopoly for maintaining among us an expensive and inefficient telegraph service. No one believes that the disbanding of the Western Union would leave us long without telegraphic communication. In like manner railroads will be built whenever and wherever they promise to be profitable. If one company does not take advantage of the opportunities offered, another will. That large cities have been built up by the railroads is true, but it is equally true that these cities by their commerce and manufactures administer to the prosperity of the railroads as much as the railroads administer to theirs. Commercial centers in days gone by existed without railroads, but railroads could not long exist without the stimulating influence of these busy marts of trade. The same argument applies with still greater force to the agricultural sections of our country, especially the great Northwest. The dry-goods merchant might as well boast of having clad the public as the railroad manager of having built up farming communities by selling to them transportation.

And yet the American people have never ceased to be mindful of the conveniences afforded to them by this modern mode of transportation. On the contrary, they have been but too prone to credit railroad men with being benefactors, when they were but beneficiaries, and this liberality of spirit made them overlook, or at least tolerate, the abuses which grew proportionately with the wealth and power of the companies.

The first railroad acts of England had contemplated to make the roads highways, like turnpikes and canals. These roads were established by the power of eminent domain. Companies were empowered to build and maintain them and to reimburse themselves by the collection of fixed tolls. Had the owners of the roads from the beginning been deprived of the privilege of becoming carriers over their own lines, the system might have so adjusted itself as to become entirely practicable; but as they were allowed to compete with other carriers in the transportation of passengers and merchandise, they were soon able to demonstrate, at least to the satisfaction of Parliament, that the use of the track by different carriers was impracticable and unsafe. A number of circumstances combined to aid the railroad companies in their efforts to monopolize the trade on their lines. In the first place, when the early railroad charters were granted, but few persons had any conception of the enormous growth of commerce which was destined to follow everywhere the introduction of railways. The tolls as fixed in the charters soon yielded an income out of proportion to the cost of the construction and maintenance of the roads. Their large margins of profit enabled the owners of the roads to transport goods at lower rates than other carriers and to thus compel the latter to abandon their business. Another defect of the original charters worked greatly to the disadvantage of independent carriers. They contained no provision as to the use of terminal facilities. The railroad companies claimed that these facilities were not affected by the public franchise and were therefore their personal property. This placed independent carriers at a great disadvantage and made in itself competition on a large scale impossible. These carriers were thus at the mercy of the railroad companies for the transportation of their cars, and the companies never permitted their business to become lucrative enough to induce many to engage in it. It soon became apparent that under the charters granted to the railroad companies such competition as existed on turnpikes and canals was out of the question on their roads. In England the great abundance of water-ways exercised for many years a wholesome control over the rates of railway companies, until these companies, greatly annoyed by such restraint, absorbed many of the larger canals by purchase and made them tributary to their systems. These companies have also acquired complete control over many important harbors.

In the United States the people depended from the beginning of the railroad era on free competition for the regulation of railroad charges. This desire to maintain free competition led to the adoption of general incorporation acts, it being quite generally believed that such competition as obtains between merchants, manufacturers and mechanics was possible among railroads and would, when allowed to be operative, regulate prices and prevent abuses. The remedy was applied freely throughout the country, but for once it did not prove successful. Stephenson's saying, that where combination was possible competition was impossible, was here fully verified. The great ingenuity of the class of men usually engaged in railroad enterprises succeeded in thwarting this policy of commercial freedom. The opportunities for those in control of railroads to operate them in their own interest, regardless of the interests of their patrons or stockholders, were so great that men of a speculative turn of mind were attracted to this business, which indeed soon proved a most productive field for them. One road after another fell into the control of men who had learned rapidly the methods employed to make large fortunes in a short time.

As the roads multiplied, transportation abuses increased. A considerable number of people early favored State control of railroads as the best means of regulating transportation, but a majority looked upon the existing abuses as being merely incidental to the formative period, and hoped that with a greater expansion of the railroad system they would correct themselves. And this doctrine was industriously disseminated by railroad managers and their allies. They lost no opportunity to impress upon the people that State regulation was an undue interference with private business and that such a policy would soon react against those who hoped to profit by it, inasmuch as it would prevent the building of new roads and would thus hinder, rather than aid, in bringing about the right solution of the railway question, viz., regulation by competition. They contended, in short, that State regulation would be destructive to railroads as well as to every other class of property.

Railroad sophistry for many years succeeded in preventing the masses from realizing that an increased supply of transportation does not necessarily lower its price, or, in other words, that railroad abuses do not necessarily correct themselves through the influence of competition. A large capital is required to build and maintain a railroad, which must necessarily be managed by a few persons. Besides this, the construction of a railroad practically banishes at once from its field all other means of land transportation. The railroad has thus a practical monopoly within its territory, and its managers, if left to follow their instinct, will despotically control all the business tributary to it, with unlimited power to build up and tear down, to punish its enemies and to reward its friends.

It is not true that State control checks railroad building. While it may prevent the construction of useless lines and discourage speculation, it will encourage the building of roads for which there is a legitimate demand. Stockholders as a whole do not participate in the management of the roads and do not profit by railroad abuses, the origin of which may almost invariably be traced to selfish designs on the part of a few entrusted with the management of the property. Where through wise legislation these abuses are prevented, the roads are managed in the interest of all the stockholders, develop business and enjoy lasting prosperity.

It may be laid down as a general rule that the policy which best subserves the interests of the patrons of a road is always the best policy for its owners. Injustice to a railroad will interfere with its usefulness; injustice to shippers depresses production and consumption; and in either case both the road and its patrons will suffer. State control is therefore as much needed in the interest of the owners of railroads as in the interest of their patrons. What should be the nature of such control will be discussed hereafter. A full understanding of the question at issue, however, makes necessary an inquiry into the various abuses which unrestrained railroad management of the past has developed. Perhaps no better presentation of the evils and abuses of railroads and their consequences can be found than that contained in the report of the Senate Committee on Interstate Commerce, submitted by Senator Cullom, in 1886. This report charges:

1. That local rates are unreasonably high, as compared with through rates.

2. That local and through rates are unreasonably high at non-competing points, either from the absence of competition or in consequence of pooling agreements that restrict its operation.

3. That rates are established without apparent regard to the actual cost of the service performed, and are based largely on "what the traffic will bear."

4. That unjustifiable discriminations are constantly made between individuals in the rates charged for like service under similar circumstances.

5. That improper discriminations are constantly made between articles of freight and branches of business of a like character, and between different quantities of the same class of freight.

6. That unreasonable discriminations are made between localities similarly situated.

7. That the effect of the prevailing policy of railroad management is, by an elaborate system of secret special rates, rebates, drawbacks and concessions, to foster monopoly, to enrich favored shippers, and to prevent free competition in many lines of trade in which the item of transportation is an important factor.

8. That such favoritism and secrecy introduce an element of uncertainty into legitimate business that greatly retards the development of our industries and commerce.

9. That the secret cutting of rates and the sudden fluctuations that constantly take place are demoralizing to all business except that of a purely speculative character, and frequently occasion great injustice and heavy losses.

10. That, in the absence of national and uniform legislation, the railroads are able by various devices to avoid their responsibility as carriers, especially on shipments over more than one road, or from one State to another, and that shippers find great difficulty in recovering damages for the loss of property or for injury therefor.

11. That railroads refuse to be bound by their own contracts, and arbitrarily collect large sums in the shape of overcharges in addition to the rates agreed upon at the time of shipment.

12. That railroads often refuse to recognize or to be responsible for the acts of dishonest agents acting under their authority.

13. That the common law fails to afford a remedy for such grievances, and that in cases of dispute the shipper is compelled to submit to the decision of the railroad manager or pool commissioner, or run the risk of incurring further losses by greater discriminations.

14. That the differences, in the classifications in use in various parts of the country, and sometimes for shipments over the same roads in different directions, are a fruitful source of misunderstandings, and are often made a means of extortion.

15. That a privileged class is created by the granting of passes, and that the cost of the passenger service is largely increased by the extent of this abuse.

16. That the capitalization and bonded indebtedness of the roads largely exceed the actual cost of their construction or their present value, and that unreasonable rates are charged in the effort to pay dividends on watered stock and interest on bonds improperly issued.

17. That railroad corporations have improperly engaged in lines of business entirely distinct from that of transportation, and that undue advantages have been afforded to business enterprises where railroad officials were interested.

18. That the management of the railroad business is extravagant and wasteful, and that a needless tax is imposed upon the shipping and traveling public by the necessary expenditure of large sums in the maintenance of a costly force of agents engaged in a reckless strife for competitive business.

Under the operation of the Interstate Commerce Law some of these evils have, so far at least as interstate commerce is concerned, disappeared, and others have been considerably mitigated. It cannot be expected, however, that a bad system of railroad management, to the development of which the ingenuity of railroad managers has contributed for two generations, could be entirely reformed in a few years. It is a comparatively easy task for shrewd and unscrupulous men, assisted by able counsel and unlimited wealth, to evade the spirit of the law and to obey its letter, or to violate even both its letter and spirit, and escape punishment by making it impossible for the State to obtain proof of their guilt.

It is a humiliating spectacle to see the self-debased railroad officials confessing their own guilt by refusing to testify before the Interstate Commerce Commission on the ground that they would thereby criminate themselves. Congress should have sufficient respect for this commission and for itself to provide a way to punish such recusant witnesses who are willing to degrade themselves in so base a manner. Whether the law will eventually be respected by all depends upon the vigilance and courage of the people.

That our railroad legislation is not yet perfect even its friends will admit; and as under a free government the demand of an enlightened public opinion is the first step toward the enactment of a law, it behooves the intelligent citizen to study the various railroad problems and to then exert his influence toward bringing about such a solution of them as justice and wisdom demand.

In discussing the various evils of railroad management, the author will commence with and dwell more particularly upon those abuses which maybe said to be the cardinal ones, viz., discrimination, extortion, combinations and stock and bond inflation. When these are once effectually eradicated, other abuses of railroad management which have been the subject of public complaint will not long survive them.

One of the strongest arguments that could be adduced by the founders of the American Constitution in favor of the establishment of a more perfect union was that the inequality of taxes placed upon commerce by the various States was a serious obstacle to its free development. Much as the individual States dislike to give up a part of their sovereignty to a central or national power, the demand for a common and uniform system of commercial taxation was so great that they were forced to yield and ratify the new Constitution. Our forefathers thus considered it a dangerous policy to permit a single State to lay any imposts upon the commercial commodities which passed over its borders. They were rightly of the opinion that industrial and commercial liberty was as essential to the welfare of the nation as political freedom and that therefore interstate commerce should not be hemmed in or controlled within State lines, but that the power to regulate it should be lodged in the supreme legislative authority of the nation, the Congress of the United States. For over half a century Congress alone exercised the power thus conferred upon it by the people. After the introduction of railroads, however, their managers gradually assumed the right to regulate the commerce of the country in their own interest through the adoption of arbitrary freight tariffs. Freight charges are practically a tax which follows the commodity from the producer to the consumer. An arbitrary and unjust charge is therefore an arbitrary and unjust tax imposed upon the public without its consent. It is a well-established rule of society that laws should be equitable and just to all citizens. Congress never assumed the role of Providence by attempting to equalize those differences among individuals which superior intellect, greater industry and a thousand other uncontrollable forces have ever created and will ever create. It has been reserved to railroad managers to demonstrate to the public that a power has been allowed to grow up which has assumed the right to counteract the dispensations of Providence, to enrich the slothful, to impoverish the industrious, to curtail the profits of remunerative industries and revive by bounties those languishing for want of vitality, to humble proud and self-reliant marts of trade and to build up cities in the desert. It will scarcely be claimed even by railroad managers that their policy of thus arbitrarily regulating commerce originated in philanthropic motives. They are forced to admit that it grew out of an attempt to increase the income of railroads by the extension of favors to naturally weak enterprises and to recoup by overtaxing stronger ones.

The practical operation of this system soon showed to railroad managers their power and to the patrons of railroads their dependence upon those who dispensed railroad favors. The former soon discovered that their power might be used to further their private interests as well as those of the roads, and unscrupulous patrons were not slow to offer considerations for favors which they coveted. When such favors were once granted by the officials of one road, rival roads would grant similar ones in self-protection. Thus this vicious system grew until the payment of a regular tariff rate was rather the exception than the rule, and special rates became an indispensable condition of success in business.

We may distinguish three classes of railroad discriminations, viz.:

1. Those which affect certain individuals.

2. Those which affect certain localities.

3. Those which affect certain branches of business.

Discrimination between individuals is the most objectionable, because it is the most demoralizing of all. Where such discrimination obtains, every shipper is in the power of the railroad corporation. It makes of independent citizens of a free country fawning parasites and obsequious sycophants who accept favors from railroad managers and in return do their bidding, however humiliating this may be. The shipper, realizing that the manager's displeasure or good will toward him finds practical expression in his daily freight bills, finally loses, like the serf, all self-esteem in his efforts to propitiate an overbearing master. He is intimidated to such an extent that he never speaks openly of existing abuses, lest he lose the special rates which have been given him, or, if he is not a participant of such privileges, lest additional favors be given to his rivals and they be thus enabled to crush him. Intimidation of shippers prevailed to such an extent previous to the enactment of the Interstate Commerce Law that when, in 1879, the special committee on railroads appointed by the legislature of New York invited all persons having grievances against railroads to come before them to testify, not one shipper testified voluntarily. On the contrary, they all insisted upon being subpoenaed, hoping that the railroad managers would not hold them responsible for any statement which they might be compelled to make under such circumstances. The report of that committee stated that the number of special contracts in force within the period of one year on the New York Central and Hudson River Railroad alone was estimated by the railroad people at 6,000. Mr. Depew, when he made the statement: "In territories comparatively new, and with little responsibility on the part of the managers to distant owners, they became in many cases very arbitrary and exercised favoritism and discriminations, which led to popular indignation and legislation," had probably not heard of this. The committee's report further stated that these special rates conformed to no system and varied without rule, that every application for a special rate was judged by itself and with reference to its own peculiar circumstances, and that it depended upon the judgment, or rather caprice, of the officer to whom the application was made, whether and to what extent a special rate should be granted. The reductions made to privileged merchants often amounted to more than what would be a fair profit to the dealer on the commodities shipped. The privileged dealer was thus enabled to undersell his rivals and eventually force them out of business or into bankruptcy. It was not at all uncommon for railroad companies to allow discounts amounting to 50, 60, 70 and even 80 per cent. of the regular rates. The New York Central gave a Utica dry-goods merchant a special rate of 9 cents while the regular rate was 33 cents on first-class freights. The lowest special rate granted at Syracuse was as low as 20 per cent. of the regular tariff rate on first-class goods. David Dows & Company and Jesse Hoyt & Company, by means of a grain rate from 2-1/2 to 5 cents lower than those given to other firms, were enabled to control in the winter of 1877 the grain trade of New York. The railroad even extended its fostering aid to A. T. Stewart & Co., giving them a special rate "to build up and develop their business." The testimony given by Mr. Goodman, assistant general freight agent of the New York Central, in reference to the principle by which he was guided in granting special rates, is of sufficient interest to be given a place here:

Question. You made the rate for A. T. Stewart & Company? Answer. Yes, sir.

Q. Was that to build up and develop their business? A. Yes, sir.

Q. That was the object? A. That was one of the objects.

Q. January 11th, 1879? A. Yes, sir.

Q. You thought that business was not yet sufficiently built up and developed? A. No, sir; not the manufacturing part of it.

Q. How long had the factories of A. T. Stewart & Company been in existence? A. The one at Duchess Junction about three years, I think; it isn't completed yet.

Q. And they were languishing and suffering? A. To a great extent; yes, sir.

Q. And you acted as a fostering mother to A. T. Stewart & Company to build it up? A. Yes, sir; I added my mite to develop their traffic; we wanted to carry the freight; boats might have carried it in the summer.

Q. Do you know anything of G. C. Buell & Company? A. Yes, sir.

Q. You wanted to develop their business? A. Yes, sir; they are at Rochester—wholesale dealers.

Q. Do you know H. S. Ballou, of Rochester? A. I do not.

Q. He seems to be a grocer there? A. A small concern, perhaps.

Q. Small concerns are not worth developing, according to your opinion? A. Our tariff rates are low enough for them at Rochester.

Q. That is to say, a small concern ought to pay 40, 30, 25 and 20, as against a large concern, 13; that is your rule? A. Well, if he is a grocer, most of his business is fourth-class freight.

Q. And he ought to pay 20, as against 13? A. Yes, sir.

Q. That small man has no right to develop? A. He has the same chance that the other man has.

Q. At 20 against 13? A. Oh, yes.

Q. Do you call that the same chance? A. About the same chance, yes, sir.

Q. You consider it the same chance? A. Yes, sir.

Many reasons were assigned by railroad men in justification of their practices. It was claimed that special rates were given to regular shippers, but it has been proved that not all regular shippers had special rates, and that persons who made only single shipments were often fortunate enough to obtain special favors. It was further claimed that special rates were given to those who, starting out new in business or developing new enterprises, needed aid and encouragement. But it was shown on the other hand that the aid and encouragement thus given to some bankrupted others, and in the end deprived the companies of more business than their policy of discrimination brought them. Railroad managers also argued that they could afford to make lower rates on large shipments than on small ones for the same reasons that the wholesale merchant can sell his goods for less than the retailer. But while this may be a good reason why rates on car-load shipments should be lower than rates on shipments in less than car-load lots, it is certainly no good reason why five car-loads belonging to one shipper should be transported the same distance for less than five carloads belonging to five shippers. In the case of local shipments the car is scarcely ever loaded to its full capacity; one shipment after another is taken from it as the train moves along, and the car perhaps reaches its final destination nearly, if not entirely, empty. The terminal charges are here also largely increased, and it is but just that the shipper should pay the additional cost of carrying and handling the goods. The case is entirely different when the railroad company carries five full carloads from one station of its line to another. Whether they have been loaded by one or five persons, whether they are consigned to one or five persons, matters little to the railroad company. It merely transports the cars, and in either case its responsibility and its services are the same. The car-load must therefore be accepted and is now generally accepted by the best railroad men as the unit of wholesale shipments, and any discrimination made in favor of large wholesale shippers is arbitrary and unjust. In the shipment of some commodities, such as wheat, flour and coal, a small advantage in rates is sufficient to enable the favored shipper to "freeze out" all competitors. It is certainly not to the interest of any railroad company to pursue such a policy; for by driving small establishments out of the business it encourages monopoly, which almost invariably enhances prices and decreases consumption. The railroad thus suffers in common with the public the consequences of its short-sighted policy. That even railroad managers realize that these practices cannot be defended upon any principle of justice or equity is apparent from the fact that one of the never-varying conditions of special rates is that they be kept secret. A specimen of a special rate agreement which was placed before the New York investigating committee is here presented to the reader:

"This agreement, made and entered into this eighteenth day of March, 1878, by and between the New York Central and Hudson River Railroad Company, party of the first part, and Schoellkopf & Mathews, of the city of Buffalo, N.Y., party of the second part:

"Witnesseth, That said party of the first part hath promised and agreed, and by these presents does promise and agree to transport wheat from the elevator in Buffalo, reached directly by said first party's tracks, except at such mills as time said tracks may be obstructed by snow or ice, to the which said second party may erect or operate at Niagara Falls, N. Y., at and for the rate of one and a quarter cents per bushel.

"And further, that said first party shall and will at all times give, grant and allow to said second parties as low rate of transportation on all property shipped by them from their said mills at Niagara Falls, and as favorable facilities and accommodation in all respects as are afforded by the party of the first part to the millers of Buffalo and Black Rock. And also that the said party of the first part will transport for said second party all of their east-bound New York freight at and for the price or rate of forty-seven per cent. of the current all-rail through rates, via the route of party of the first part, from Chicago to New York, at the times of shipment, adding thereto three cents per barrel for flour and one and one-half cents per hundred pounds for mill feed or grain, as a terminal charge, to provide for the incidental expenses attending local transportation.

"And will transport their freight to Boston and all points in New England, taking Boston rates at the same rate as to New York, with ten cents per barrel added for flour and five cents per hundred pounds added for mill feed or grain.

"Provided, however, and this agreement is made upon the express understanding and consideration, that said second party shall regard and treat this agreement as confidential, and will use all reasonable precaution to keep the same secret.

"And upon condition also that said second party shall ship by the first party's road all the product from their mill at Niagara Falls destined to all points in New York, Pennsylvania and New England, reached by said first party, directly or by connections with other routes.

"And this agreement shall be and remain in force for the term of five years from and following the first day of September, 1878, after which period it may be terminated by sixty days' written notice from either party.

"In witness whereof, the parties hereto have signed these presents the day and year first above written.

"N. Y. C. & H. R. R. R. Co., By J. H. RUTLER, General Traffic Manager. SCHOELLKOPF & MATHEWS."

It will be noticed that this agreement was based upon the expressed condition that Schoellkopf & Mathews treat it as "confidential," and use all reasonable precaution to keep it secret. It is difficult to account for this strong injunction of secrecy except upon the assumption that the managers of the road, conscious of the great wrong which they inflicted upon the body of the people by their discriminations, hoped to escape public criticism by adopting a policy of secret dealing. Much as special rates were sought after, but few shippers to whom they had been granted were contented with their lot, for none was confident that his rivals did not have better rates than himself.

Discriminations between localities had their origin in the natural desire of competing roads to increase their business at the expense of their rivals. When two or more railroads touched the same point each would attempt to secure the largest possible share of the through business by holding out every possible inducement in rates to the shippers of that place. Indeed, the freight rates at competitive points were often so low that railroad managers found themselves placed in a rather unpleasant dilemma. They either had to admit that the rates charged by them at non-competitive places were exorbitant or that they were carrying the freights of competitive points at a loss and were thus squandering the money of their stockholders. They preferred as a rule to admit that they were doing competitive business at a loss, but asserted that, inasmuch as they were compelled to run their trains, they could better afford to do competitive business temporarily at a loss than not to do it at all. The same logic might with equal propriety be employed by the grocer. To draw to him distant customers, he might offer to sell to them at cost or even at a loss; and then, to recuperate, he might advance the prices of his goods for his regular customers. If there is any difference between the grocer and the railroad company, it lies in the fact that the former's old customers would soon find relief at a rival store, while the patrons of the railroad at non-competitive points are like the traveler in the hands of a highwayman, without immediate redress. The railway company which discriminates between competitive and non-competitive points forgets that its line is a common highway for all points tributary to it; that all have equal rights, and that the only differences in tariff which the principles of the common law permit are those which arise from a difference of service and cost. All other differences that railroad companies may make are unjust discriminations in violation of their charter and expose them to a forfeiture of the franchises conferred upon them.

The nature and extent of the discrimination practiced between different places are often such that no interest of the company can possibly be subserved by them, and the conclusion is forced upon us that the advantages granted by railroad managers to certain places are designed to serve chiefly personal and selfish interests. The great fortunes amassed in a brief period of time by railroad managers can in almost every case be traced to stock, real estate, commercial and other speculations directly or indirectly connected with railroad construction or management. And where other than personal interest cannot be shown, this is the only basis upon which the many apparent absurdities of railroad discrimination can be harmonized.

It is claimed by railroad men that transportation by water is a regulator of railway rates which they must respect. It is contended, for instance, that, although the cities situated on our large lakes enjoy superior commercial advantages which are mainly due to their having at their disposal water communication with the Atlantic Ocean, inland towns have no cause to complain against the railroads for not equalizing those differences which nature has largely created. It might be more difficult to meet this argument if, owing to peculiar combinations, these water rates were not made to extend their influence to almost every inland city north, east and south in the Union, and if those cities were not given much lower rates than hundreds of places much nearer the lakes. The teamster who, half a century ago, found it impossible to compete with the canal, river or lake boats, simply surrendered the field to them and confined his operations to such a territory as could give him assurance of a profitable business. Let the railroads do likewise. No company has a right to destroy a rival route, water or rail, by adopting special tariffs for competing points. There are at points accessible to water transportation certain freights requiring speedy carriage which will go to the railroads at profitable rates, but the heavier freights, as coal, lumber and even certain kinds of grain, should go to the carrier by water if he can afford to transport them at lower cost.

There have been but few legislative investigations of railroad abuses in this country, but the disclosures which they have made to the public are astounding. The most noteworthy of these were made by the Hepburn committee, of New York, to which reference has already been made. It is difficult to understand how a free and enlightened community could so long and so patiently bear railroad despotism. Individual discrimination might, under the veil of secrecy, long escape notice, but that a system of open and widespread discrimination affecting every non-competitive and even many a competitive point in the State, doing visible and irreparable injury to thousands of shippers, and infringing upon the rights of millions, should long be borne by a free and enlightened people, is a strange phenomenon of democratic endurance.

It would lead us too far from our subject to review in detail the many and glaring instances of local discrimination which the report enumerates. A few will suffice to show their scope and nature.

William W. Mack, of Rochester, a manufacturer of edged tools, testified that, in order to save fourteen cents per hundredweight on his freights to Cincinnati, he shipped his goods to New York and had them shipped from there to their destination, via Rochester; and that he availed himself of the same roundabout route for his St. Louis shipments, and saved thereby eighteen cents per hundredweight. In both of these cases the railroad company carried the goods 700 miles farther than the direct distance for a less charge.

Port Jervis millers had their grain shipped from the West to Newburgh, a point fifty miles to the east of them, and then had it returned to Port Jervis on the same line, at a less rate than that charged for a direct shipment.

The grain rates from Chicago to Pittsburgh were 25 cents per hundred in March, 1878, and only 15 cents from Chicago to New York.

Flour was carried from Milwaukee to New York for 20 cents, while the rate from Rochester to New York was 30 cents at the same time. It was also carried from East St. Louis to Troy at the same rate as from Rochester to Troy. The rate on butter from St. Lawrence County, N.Y., to Boston, over the Ogdensburg and Lake Champlain and Vermont Central, was 60 cents per hundred; from the nearer county of Franklin, 70 cents; it then continued to increase as the distance decreased, until it reached 90 cents at St. Albans, Vermont.

Soap shipped by Babbit & Co., of New York, to Crouse & Co., of Syracuse, paid 8 cents per box when the freight was paid in Syracuse, but 12 cents per box when paid by the shipper in New York.

It cannot even be said that New York fared worse than any of her sister States. There is hardly a business man in any community in the United States who cannot cite many cases of similar discrimination. Hundreds of well authenticated cases have been reported from every part of the country. A few striking ones may be given space here:

The Illinois Central Company hauled cotton from Memphis to New Orleans, a distance of 450 miles, at $1.00 a bale, while the rate from Winona, Miss., to New Orleans, about two-thirds of the distance, was $3.25 a bale. The same company charged for fourth-class freight from Chicago to Kankakee, a distance of 56 miles, 16 cents per hundred, and only 10 cents to Mattoon, 116 miles farther. The rate from New York to Ogden was $4.65 per hundred, and only $2.25 per hundred from New York to San Francisco. The car-load rate on the Northern Pacific was $200 from New York to Portland and just twice as much to a number of points from 100 to 125 miles east of Portland. The Chicago, Burlington and Quincy hauled stock from points beyond the Missouri River to Chicago for $30 per car-load, while it exacted $70 per car in Southwestern Iowa for a much shorter haul.

To what extent local discrimination has been carried by railroad companies is well illustrated by the following incident: A nurseryman residing at Atlantic, Iowa, a station on the Chicago, Rock Island and Pacific Railroad, 60 miles east of Council Bluffs, bought a car-load of grapevines at Fredonia, New York. Finding that the through rate from Fredonia to Council Bluffs, plus the local rate from the latter place to Atlantic, was less than the rate for the direct shipment from Fredonia to Atlantic, he caused the car to be consigned to Council Bluffs, intending to have it thence hauled back to Atlantic. Being short of stock at the time the train containing his car passed through his town on its way to Council Bluffs, the consignee prevailed upon the station agent to set out his car. In due time he received a request from the general office of the railroad to pay an amount equal to the rate per car-load from Council Bluffs to Atlantic. The request was promptly complied with by the appreciative nurseryman, who after all had been saved an annoying delay by the courtesy of the company's agent.

An infinite number of similar discriminations might be cited. They all show the same violation of the fundamental principles of justice and equity, the same despotical assertion of the power of the railroads to regulate the commerce of the country as the caprice or selfish interests of their managers might direct.

Discriminations between commodities, or, as they might also be called, discriminations in classification, are probably the most common of unjust railroad practices. For the purpose of establishing as near as may be uniform rules in all matters pertaining to rates, the various roads operating in a certain territory usually form traffic associations. The general freight agents of the roads that are members of the association in turn form a select body known as the rate committee. These committees of freight agents have for more than twenty years constituted the supreme authority in all matters pertaining to freight classification. The trunk line classification recognizes six regular and two special classes, and every article known to commerce is placed in one of these classes. One whom Providence has not favored with the mysterious wisdom of a general freight agent might suppose that considerations of bulk, weight, insurance and similar factors formed a basis of railroad classification. Nothing, however, is farther from the truth. Freight charges, when permitted to be fixed by railroad companies, are invariably such as the traffic will bear, and freight classifications are arranged on this principle, provided competition by water, rail or other land transportation does not demand a modification. It is, as a rule, not to the advantage of a railroad to entirely starve out any commercial or industrial concern along its line. Hence tariffs are scarcely ever made entirely prohibitory. Railroads proceed here upon the principle of the robber knight of mediaeval times, who simply plundered the wayfaring trader to such an extent as to reduce his profits to a minimum. He never stripped him, for by doing so he would have prevented his return and would have destroyed his own source of revenue. In like manner a railroad will never annihilate any weak branch of business along its line, nor will it, if it is in its power, permit any business to prosper without paying to it heavy tributes out of its profits. Every commodity is therefore made to pay a transportation tax based chiefly on its value and the profit which it yields, and all classifications are prepared with this object in view.

The protection which, through exceptionally low rates, is extended by the railroad companies to certain industries, may not be objectionable per se, but the question arises whether the railroad companies or the people should exercise the right to determine when and where such protection is necessary. Moreover, to tax one branch of commerce for the benefits bestowed upon another is a practice of extremely doubtful propriety, and the power to do so should certainly never be conferred upon a private corporation. When customs laws are proposed in Congress ample opportunity is given to the representatives of the various industries of the country to be heard upon the subject. No hasty step is taken. Members of Congress have every opportunity to ascertain the sentiment of their constituents, through the public press, petitions and private correspondence. The subject is discussed in all its phases, both in the committee-rooms and upon the floors of both houses of Congress. Every detail is fully considered, and many compromises are often necessary to secure for a bill the support of the majority. When it finally passes it represents the will of the people, or at least the will of their legal representatives, who may be expected to know their wants and are accountable to them for their acts. Freight classifications, however, while they are fully as far-reaching as customs laws, are made by a few freight agents meeting in secret session, listening to no advice and acknowledging no higher authority.

It is claimed by the railroad men that it is to the interest of railroad companies to do justice to all, and that the best classification for the largest number of people is also the best for the roads. If this be true, it is difficult to see why railroads should fail to consult their patrons in the arrangement of their freight classifications. Intelligent shippers may certainly be supposed to know as well as the railroad companies what classification is to their common interest. Railroad managers are naturally despotical. They do not wish and do not tolerate any outside interference with what they obstinately term their private business. Even if the general policy of the companies designed the greatest good to the greatest number, the opportunities and temptations of their agents to pursue selfish ends or take advantage of individuals in the preparation or application of their tariffs are such that in the practical execution the evil will always outweigh the good.

It is not within the scope of the present inquiry to review in detail the various classifications in force, or to point out the unjust features. The author will confine himself to showing by a few characteristic examples that the power now in the hands of the railroad companies to classify the various commodities of commerce for the purpose of rating is greatly abused and is a potent means of railroad extortion. And that it may not be charged that abuses have been cited which are a thing of the past, the examples will chiefly be taken from cases which have come before the Interstate Commission for adjudication.

A complaint was filed with the commission in 1887 by T. J. Reynolds against the Western New York and Pennsylvania Railroad Company, from which it appeared that that company charged a greater price for the transportation of railroad ties from points in the State of Pennsylvania to points in the State of New York than was charged at the same time for the transportation of lumber between the same points. The commission held that this was a case of unjustifiable discrimination and ordered the company to place railroad ties in the same class with other rough lumber. Many Western roads for years have been guilty of the same discrimination. The reasons for such a policy are obvious. A high tariff on railroad ties prevents their being shipped, depreciates their market price at home, to the sole benefit of the discriminating company, which is thus enabled to buy ties at a low price. Prohibitory rates on ties and rails are also often maintained by railroad companies to either delay or render more costly the construction of new lines which threaten to become their competitors. The Union Pacific Railroad Company several years ago even went so far as to make prohibitory rates on steel rails intended for the construction of a road which promised to become a competitor of one of its connecting lines.

From another case decided by the Interstate Commerce Commission it appeared that the Lake Shore and Michigan Southern Railway Company charged for blocks intended for wagon-hubs, and upon which only so much labor had been expended as was necessary to put them in condition, a higher rate than for lumber, claiming that such blocks were unfinished wagon material and were therefore, as articles of manufacture, subject to higher charges than raw material. The commission justly held that these blocks were as much to be regarded as raw material as the boards from which wagon-boxes are made.

In the classification of the Southern Railway and Steamship Association pearline was placed in the fourth class, with a rate of 73 cents per hundred pounds, and common soap in the sixth class, with a rate of 49 cents per hundred pounds. This latter article, when shipped by large manufacturers, enjoyed besides a special rate of 33 cents per hundredweight. Pearline and soap are competitive; there is no appreciable difference between them as regards the cost of transportation; but one commands a higher price in the market than the other, and upon this fact solely did the railroad company base its alleged right to levy upon pearline a transportation tax 120 per cent. in excess of that levied upon soap, though the service rendered by the company was the same in either case. The commission held that the discrimination made by the "special rate" of the Southern Railway and Steamship Association between pearline and common soap was unjust, and ordered that it be discontinued and that, with common soap in the sixth class, pearline be placed in the fifth.

For years the rate from Indianapolis to New York was the same for corn as for its direct products, such as ground corn, cracked corn, corn meal, hominy and corn feed. Such a tariff made it possible for Western mills to compete with similar mills that had been established in the East, since a discrimination of 5 per cent. was sufficient to absorb three or four times the profits of any Western mill. It was shown by the evidence produced that the actual cost of transportation was substantially the same for direct corn products as for the raw corn. The only defense which the railroad company could make for this discrimination was that in the carriage of raw corn they had to meet lake competition. The weakness of this argument will be perceived when it is remembered that Indianapolis is 154 miles from the nearest lake-shipping point. There is but little doubt that this discrimination was made by the railroad company because it was to its interest to haul the raw corn from the West to the East and to return it in altered form. Railroads care, as a rule, little for a waste of force, if such waste is to their own advantage.

In another case brought before the commission in 1889 it was shown that the "Official Classification" placed common soap in carload lots in Class V, while such articles as coffee, pickles, salted and smoked fish in boxes or packages, rice, starch in barrels or boxes, sugar, cereal line and cracked wheat are placed in Class VI. The chief reply of the railroad companies to this complaint was that soap was justly placed in Class V because the components from which it is in part made stood in Class V.

In another case it was shown that one kind of soap was burdened with a higher transportation tax than another, irrespective even of cost, because one had been advertised as toilet and the other as laundry soap.

The principle of charging what the traffic will bear is well illustrated by the relative rates on patent medicines and ale and beer, as maintained by the Official Classification.

In a complaint made by a prominent manufacturer of proprietary medicines against the New York Central and other roads, it was shown that the complainant's products were shipped at owner's risk, and that they were in bulk and intrinsic value similar to ale and beer, but that in spite of these analogies the former were rated as first-class and the latter as third-class goods, simply because they retailed at a higher price.

Another unwarrantable discrimination is that in favor of live stock and against dressed beef. While Mr. Fink, the commissioner of the Trunk Line Pool, himself admitted that the cost of carrying dressed beef from Chicago to New York was only 6-1/4 cents per 100 pounds in excess of the cost of hauling live stock, the trunk lines maintained on dressed beef a rate 75 per cent. higher than that on live cattle. The railroad companies asserted that this was due to those people in the East whose living depended on the live-stock interest. The railroads have in this assumed a paternalism which would not be tolerated even in the Government. To protect the East, railroads will not permit the West to engage in new industries.

The position which the Interstate Commerce Commission has assumed in interpreting the rights of shippers under the law which railroad companies are bound to respect in the preparation of their tariff sheets and classifications cannot but be most gratifying to the people. In a decision relating to the classification and rates for car-loads and less than car-loads, filed March 14, 1890, the commission laid down the following rules for the guidance of railroad companies:

"1. Classification of freight for transportation purposes is in terms recognized by the act to regulate commerce, and is therefore lawful. It is also a valuable convenience both to shippers and carriers.

"2. A classification of freight designating different classes for car-load quantities and for less than car-load quantities for transportation at a lower rate in car-loads than in less than car-loads is not in contravention of the act to regulate commerce. The circumstances and conditions of the transportation in respect to the work done by the carrier and the revenue earned are dissimilar, and may justify a reasonable difference in rate. The public interests are subserved by car-load classification of property that, on account of the volume transported to reach markets or supply the demands of trade throughout the country, legitimately or usually moves in such quantities.

"3. Carriers are not at liberty to classify property as a basis of transportation rates and impose charges for its carriage with exclusive regard to their own interests, but they must respect the interests of those who may have occasion to employ their services, and conform their charges to the rules of relative equality and justice which the act prescribes.

"4. Cost of service is an important element in fixing transportation charges and entitled to fair consideration, but is not alone controlling nor so applied in practice by carriers, and the value of the service to the property carried is an essential factor to be recognized in connection with other considerations. The public interests are not to be subordinated to those of carriers, and require proper regard for the value of the service in the apportionment of all charges upon traffic.

"5. A difference in rates upon car-loads and less than car-loads of the same merchandise, between the same points of carriage, so wide as to be destructive to competition between large and small dealers, especially upon articles of general and necessary use, and which, under existing conditions of trade furnish a large volume of business to carriers, is unjust and violates the provisions and principles of the act.

"6. A difference in rate for a solid car-load of one kind of freight from one consignor to one consignee, and a carload quantity from the same point of shipment to the same destination, consisting of like freight or freight of like character, from more than one consignor to one consignee or from one consignor to more than one consignee, is not justified by the difference in cost of handling.

"7. Under the official classification the articles known in trade as grocery articles are so classified as to discriminate unjustly in rates between car-loads and less than car-loads upon many articles, and a revision of the classification and rates to correct unjust differences and give these respective modes of shipment more relatively reasonable rates is necessary and is so ordered."

The efforts which the commission has made to bring about a uniform classification throughout the country are in the right direction, while the results of its labor are not yet satisfactory.

In their fifth annual report, the Commissioners, after giving an account of their efforts and the shuffling and double-dealing of the railroad companies with them upon this matter of uniform classification, said:

"Its conviction remains unchanged that the necessities of commerce require that the existing classifications be consolidated, and that this result should be accomplished as speedily as may be found practicable; and it does not feel justified in asking for the further efforts of the carriers the same measure of indulgence which from time to time it has heretofore suggested should be extended to them, and which was thought to be required in the public interest.

"The commission can not but think that if legislation to that end be enacted by Congress the carriers will speedily consummate the reform already begun in this direction. It is therefore recommended that an act be passed requiring the adoption within one year from the date of its passage of a uniform classification of freight by all the carriers, subject to the act to regulate commerce, and providing that if the same be not adopted within the time limited, either this commission or some other public authority be required to adopt and enforce a uniform classification."

The present confusion which exists in the classification and rates of the seventeen hundred railroad organizations of the country makes it difficult for the commission to do justice to all interests and localities. With the adoption of a uniform classification it is to be hoped that in time many of the present inequalities will be adjusted, especially if an intelligent public sentiment upon the subject of railroad regulation is maintained. A prominent railroad manager in the East, whose devotion to corporate interest is only equaled by his political ambition, has recently made repeated efforts to convince the people that railroad abuses are things of the past and that, if any such abuses still linger in isolated districts, they are simply unavoidable exceptions to the rule which will soon have to yield to the general spirit of fairness and amity for which, in his opinion, the railroads have of late been distinguished. He reasons that the law has fulfilled its mission, that the railroads have reformed, and that it now behooves the people to relent and to extend to the much persecuted corporations the hand of friendship and good will. The postprandial eloquence of this gentleman has often suavely intimated that the repeal of the Interstate Commerce Act would be the most opportune recognition of restored confidence.

Still bolder champions of the railroad cause do not hesitate to demand the repeal of the law. It is not likely that the sophistry of railroad hirelings will triumph over the practical logic of an intelligent public. No law, be it ever so wise, can in the space of a few years correct all the abuses which half a century of unbridled railroad domination has developed. Yet, since both the friends and the enemies of the law agree that it has been partially successful in its operation, it should be continued and improved to keep it in harmony with new conditions and a progressive public sentiment. It is claimed by railroad managers that the adoption of a uniform classification will remove the only vestige of discrimination still left. This is not true, for by far the largest number of complaints that have recently been brought before the Interstate Commerce Commission charged personal and local discrimination independent of any question of classification.

It is shown by the reports of the commission that discriminations are still practiced by various companies, that annual passes are still illegally issued to bribe or appease men of influence, that discounts are still given to favor shippers under various pretexts, that some large railroad centers still enjoy more favorable rates than smaller towns, and that the long and short haul clause of the Interstate Commerce Act is still violated by railroad companies. There are besides these scores of other devices in vogue among railroad managers to subvert the principles of the common law. No doubt discriminations are now much less frequent, and are possibly the exception where but a few years ago they were the rule, but the fact that such abuses still exist is a strong argument for the retention of the law as well as for the necessity of continued vigilance on the part of the people and those especially charged with the execution of the laws. The railroad acts of Congress and the various States ask nothing of common carriers but just and equitable treatment for all their patrons. If this is freely accorded, these laws are no burden to the railroads. If, on the other hand, there is a tendency on the part of the railroads to resort to subterfuges and evasions, the wholesome restraint of the statute is absolutely necessary for the protection of the shipper.

The repeal of the Interstate Commerce Law, or the adoption of such amendments as are demanded by railroad men, would be interpreted by them as an abandonment of all its principles and would inaugurate an era of unprecedented railroad oppression. History ever repeats itself. Unchecked license will always lead to arrogance and despotism, and any power which is long permitted to defy the state will in time control it. It is not likely that the people of the United States can be induced to demonstrate to the world that democratic government is incapable of profiting in the dear school of experience.

Our railroad legislation contains no principle that is not found in the common law. Its maxims are our birthright and will be the birthright of our children and children's children, and while railroad companies may be able in the future, as they have been in the past, to violate the law temporarily with impunity, they will never be able to prevail upon the American people to abandon the policy of railroad reform which the passage of the Interstate Commerce Law inaugurated.

The Interstate Commerce Commissioners say in their sixth annual report:

"Whoever will read the report of the special committee of the United States Senate, commonly called the 'Cullom Committee,' will be astounded at the magnitude and extent of railroad abuses brought to light by their investigation. Those unfamiliar with the facts made public at that time can hardly believe the outrages which were proven to exist and the manifold devices by which the most flagrant injustice was perpetrated. A single illustration will furnish a better reminder than extended comment.

"It appears from that report that the Standard Oil Company, in one instance at least, boldly demanded from a certain railroad that its shipments should be carried for 10 cents a barrel; that all other shippers should be charged 35 cents a barrel on the same article, and that 25 cents of the 35 paid by such other shippers should be handed over by the railroad to the Standard Oil Company, and the penalty threatened for non-compliance with this impudent extortion was a withdrawal of its entire business.

"The foregoing statements but imperfectly describe the situation which existed when the Interstate Commerce Law was enacted. In any reasonable view of the case it was too much to expect that the common and long continued abuses of railroad management could be corrected in less than half a dozen years, or that the first scheme of legislative regulation would prove adequate to that end. It would be contrary to all experience if so great and radical a reform could be thus speedily accomplished, or if the initial statute should be found sufficient to bring it about. The law was the outgrowth of an aroused and determined public sentiment, which, while united in demanding Government interference, was divided and uncertain as to the best methods of affording relief. Like all attempts in a new field of legislation, the statute was a compromise between divergent theories and conflicting interests. It was scarcely possible that it should be so complete and comprehensive at the outset as to require no alteration or amendment. Those who are familiar with the practices which obtained prior to the passage of this law and contrast them with the methods and conditions now existing will accord to the present statute great influence in the direction of necessary reforms and a high degree of usefulness in promoting the public interest.

"Whoever will candidly examine the reports of the commission from year to year, and thus become acquainted with the work which has been done and is now going on, will have no doubt of the potential value of this enactment in correcting public sentiment, restraining injustice and enforcing the principle of reasonable charges and equal treatment. Imperfections and weaknesses which could not be anticipated at the time of its passage have since been disclosed by the effort to give it effective administration. The test of experience, so far from condemning the policy of public regulation, has established its importance and intensified its necessity. The very respects in which the existing law has failed to meet public expectation point out the advantages and demonstrate the utility of Government supervision.

"Moreover, it may be fairly claimed that much greater benefits would have been realized had the statute as enacted expressed the evident purpose of those who framed it, and received a construction according to its apparent import. It is not too much to say that judicial interpretation has limited its scope and ascribed to it an intent not contemplated when it was passed. If its supposed meaning, as understood at the time of its passage, had been upheld by the courts, it is believed that its operation would have been much more effective and its usefulness greatly increased. So far as failure has attended the efforts to give it proper administration, that failure can be mainly attributed to differences between its apparent meaning and the judicial interpretation which some of its provisions have received; and the commission is of the opinion that if the present law could be so altered as to express clearly and beyond doubt what it was evidently intended to express at the time of its enactment, it would prove, even without other amendment, an instrumentality of the highest value in removing the evils against which it is aimed.

"The specific instances in which the statute has received judicial construction, and the limitations upon its scope and meaning which the courts have imposed, will be alluded to at greater length in another part of this report.

"It seems proper, however, to observe in this connection that the effect of these decisions in weakening the law and preventing its enforcement has been greatly exaggerated. The impression has been created in many directions that judicial construction has invalidated the essential feature of the statute and condemned the general principle which lies at its foundation. That impression cannot be too speedily corrected, for nothing has been decided which permits such an inference. On the contrary, neither the power of the national legislature to regulate the transportation of interstate commerce nor the general policy of the existing law has been questioned by any tribunal."

Probably no law in the United States has ever before been so fiercely attacked at all of its vital points as has this law. It is not strange that among the great number of National and State courts the railroad companies have found occasionally a judge ready and willing to assist them in breaking it down, but upon the whole the judiciary has been disposed to co-operate with other departments of the Government in their efforts to secure effective regulation of the transportation business.



CHAPTER VI.

STOCK AND BOND INFLATION.

The complaint is frequently heard from railroad men that our freight rates are too low, and in support of it the statement is usually made that the greater part of the railroad stocks of the United States pays dividends considerably smaller than the average interest realized by capitalists on money loaned or invested in other enterprises.

This statement may be true, and yet it is valueless as an argument for higher rates. It may be admitted that the dividends declared upon the face values of railroad stocks are quite moderate, but it is a fact too well authenticated to be contradicted that railroad securities represent to a considerable extent only fictitious capital. The public concedes that liberal returns should be allowed to railroad companies on money actually invested, but it naturally objects to being taxed for the purpose of making dividends on watered stock. The evil referred to is a serious one, and has contributed much to the general demand for railroad reform. Most of the early roads of this country were built for the accommodation of local traffic. They were constructed and managed by business men upon business principles. The stock issued by the companies was in most cases paid for in full and was not unfrequently sufficient for the completion of the entire road, and no incumbrance was permitted by the owners to be placed upon the property. These enterprises as a rule proved very profitable. One of the first roads running west of Chicago will serve as an illustration. The Galena and Chicago Union Railroad Company paid a 10 per cent. dividend within a year after being opened to traffic, and gradually increased its dividends to 15, 20 and 22 per cent. During the first two years of the road's operation its expenses were only 38-1/2 per cent. of its earnings. During the second year the company, after paying a 15 per cent. dividend, diminished its debt nearly $60,000 and increased its surplus $11,700. In 1856 the road had a length of 232 miles, on which the gross earnings amounted to $2,315,787. This revenue exceeded the estimate made by the company's officers the year previous by $300,000. In his annual report for 1856 the president of the company said: "This result shows an increased surplus of $65,000, after paying 22 per cent. in dividends and all expenses and interests chargeable to income account." The report also shows that expensive improvements, such as large permanent bridges and stone culverts, displacing as a rule wooden ones, were charged to current expenses.

The financial success of railroads soon attracted the cupidity of financial adventurers—men of great energy, but small means—whose aim was to secure the greatest possible returns with the least possible outlay of money. With the introduction of these elements into railroad circles the era of speculation commenced. Take the line just referred to. In 1852 the average number of miles operated was 62, and the year following, 90. But while the number of miles operated increased less than 50 per cent., the capital stock of the company grew from $444,193 to $1,362,559, and its debt from $60,145 to $542,287. The capitalization of the road was thereby increased from $8,000 to $21,000 per mile, and this was done for the purpose of making the capital appear adequate to its earnings. Nearly all railroads became in time the foot-balls of shrewd manipulators. They were bonded before they were constructed, and often for more than the value of the completed road. Stocks at the best only represented nominal values and were given as premiums to the bondholders or promoters of the road.

But the science of stock-watering did not reach its fullest development until during the period of railroad consolidation. Fictitious values were now created as often as a new consolidation took place. Watered stocks and bonds were watered again and again, until they represented little more than a purely imaginary capital upon the basis of which dividends might be declared. Take the case of the New York Central and Hudson River Railroad companies, which consolidated in 1869 with a capital of $103,110,137.31. The former of these roads was organized in 1853 by the consolidation of ten smaller roads connecting the cities of Albany and Buffalo. The capital stock of these companies amounted to $20,799,800, of which $16,852,870 was claimed to have been paid in. Their funded debt was $2,497,526. It is impossible at this day to ascertain the original cost of all these roads, but it is certain that the above sums represent about three times the amount actually expended for their construction.

One of the roads entering into the consolidation was the Utica and Schenectady. It was 78 miles long and formed about one-fourth of the consolidated line. It had the heaviest grading and rock-cutting, was the best-equipped and undoubtedly the most expensive, in proportion to its extent, of the ten roads out of which the New York Central was created. The original cost of this line was $2,000,000. Bonds were never issued by the company. The line was profitable from the very beginning, paid regularly ten per cent. dividends,—the limit to which railroad companies were then restricted,—and had a large surplus, which it expended mainly for improvements. No assessment was ever made on the stock beyond the $1,500,000 which was originally paid in by the shareholders and upon which they had drawn regular and liberal dividends. Taking the original cost of this line as a basis, it is but fair to presume that the entire line from Albany to Buffalo, covering a distance of 297 miles, did not cost to exceed $6,000,000. These roads, however, entered into the consolidation with a capital stock of $15,274,800 and a bonded indebtedness of $1,696,326.

Estimating the cost of the branches upon the same basis upon which we have estimated that of the main line, we shall find that the total original cost of the consolidated lines cannot have exceeded $8,000,000. The Mohawk Valley road was put in at $2,000,000 and the Syracuse and Utica direct at $600,000, though the roads only existed on paper and did not represent any value whatever. The Schenectady and Troy road, which went into the consolidation with $650,000 stock and $90,000 bonds, had been bought for less than $100,000 two months previous to the consolidation.

It will thus be seen that already nearly one-third of the stocks and bonds of the consolidated companies was water. The consolidation agreement fixed the capital stock of the New York Central at $23,085,600 and its funded debt at $11,564,033.62, increasing the stock over $2,000,000, and the bonded debt over $9,000,000. The latter was more than quadrupled, and $8,000,000 worth of bonds were, under the name of consolidation certificates, given as a present to the stockholders of the new road. The capital stock of the New York Central grew steadily up to the time of its consolidation with the Hudson River road, when it was $28,795,000. All improvements made during this time were paid for out of its surplus earnings, with the single exception of the Athens branch, for which the company issued $2,000,000 of its stock.

The gross earnings of the New York Central in 1854 were $5,000,000, and its net earnings $2,830,000. In 1863 its gross earnings were in round numbers $10,000,000, and in 1869 they reached $15,000,000. The dividends paid during that year amounted to $4,300,000, and the interest to $894,000. In view of the fact that the bonded indebtedness of the road was from two to three million dollars more than the original cost, this dividend of 15 per cent. upon a wholly fictitious capital must be regarded as an unwarranted tribute levied upon the commerce of the country. But we shall soon see that in railroad hydraulics, as well as in other branches of human industry, success stimulates to still greater energy.

The Hudson River Railroad Company was organized in 1847. It extended from New York City to East Albany and was 144 miles long. There are no data extant upon which could be based a reliable estimate of its original cost. Estimating it upon the basis of that of the Utica and Schenectady, we should have to place it somewhat below $3,000,000. While such an estimate may be too low, the amount of its funded indebtedness in 1851, which was $5,640,000, probably more than covers the amount actually expended in the construction of the road. In 1851 the capital stock of the Hudson River road was $4,000,000. In 1853 the funded debt had increased to $7,000,000, and in 1862 to $9,000,000. In 1869 the bonded indebtedness had decreased to $4,309,000, but the capital stock had grown to over $16,000,000. Between 1853 and 1869 the company increased its stock and bonded indebtedness nearly $11,000,000, while the assessments paid by its stock and bondholders during this time did not exceed $1,000,000. Improvements were made, but these were chiefly paid for out of the surplus earnings of the road. It has been shown by experts that $6,640,000 is a high estimate of the actual original cost of the Hudson River road to its stock-and bondholders, and that securities to the amount of more than $13,000,000 represented surplus earnings and water. At the time of the consolidation of the Hudson River and New York Central railroads the capital stock of the two roads had grown to $44,800,000. Under the consolidation agreement the stock was fixed at $45,000,000. The new company also assumed all the bonded and other indebtedness of both roads. If the consolidation manipulators had paused here, the capital of the new company would have been somewhat less than $60,000,000, or more than three times the cost of the property. But the road was, under existing rates, capable of earning dividends on a much larger capital, and this emergency was met by the issuance of consolidation certificates to the amount of $45,000,000. The total capital of the road was thus increased to and made to pay dividends on over $103,000,000, while the total cost of the road and its equipment, as claimed by the company in 1870, was less than $60,000,000, their estimate being based upon assumed consolidation values and the expenditures made from surplus earnings. During the same year the gross earnings of the company were $22,363,320, and their net earnings $8,295,240. In 1880 the gross earnings had increased to $33,175,913, and the net earnings to $15,326,019. The company was able to declare in that year 11.82 per cent. dividend on its $89,500,000 of fictitious stock. In 1890 its gross earnings were $37,008,403, or $26,050 per mile, while its total net earnings were $12,516,273. The gross earnings have largely increased during the years 1891 and 1892. It is safe to say that $2,000,000 per annum would pay very liberal interest and dividends on the amount of money expended upon the construction of the New York Central and Hudson River Railroad from the proceeds of its bonds and stocks. By the creation of fictitious values the managers of the company have attempted to impose an exorbitant tax upon the commerce and travel of the country for all time to come. The Government guarantees an inventor a monopoly only for a limited space of time, upon the expiration of which his invention becomes the common property of the people; but railroad managers endeavor to collect, under the protection of our laws, an exorbitant royalty from our people forever.

The case of the New York Central and Hudson River Railroad Company is only one of the innumerable instances of stock watering in the history of American railroads. Indeed, it can be shown that stock-watering reached a still higher degree of development in the case of the Erie road. It has been demonstrated that the actual original cost to the stock-and bondholders of the New York Central Railroad Company, which was, with its branch lines, 593 miles long, did not, including the Athens branch, exceed $10,000,000. Its cost to its owners, in 1869, including the bonuses, premiums, commissions and fictitious equalization values of several transfers, was reported by them to be only $37,600,000, or about $63,400 per mile. At about the same time the main stem of the Erie Railway, extending from New York to Dunkirk, a distance of 459 miles, was represented by a capital of $108,807,687, or $237,000 per mile. Considering the inferiority of this road to the New York Central, we are forced to the conclusion that nearly 85 per cent. of the capital of the road represented water, or, in other words, that the commerce of the United States was taxed to pay dividends on about $90,000,000 of watered securities. In 1863 the Erie Railroad had outstanding $11,437,500 of common stock. In 1864 this had been increased to $15,693,000, in 1868 to $37,765,000, and in 1869 to $70,000,000. Not one-tenth of this enormous increase of capital was ever expended on the property of the road. The stock was sold at from 20 to 40 cents on the dollar, and the proceeds disappeared in the hands of its managers. To what extent this freebootery was carried will probably never be known. An idea of the rottenness of the Erie management may be had from the fact that the courts at one time ordered its president to restore to the company $9,000,000 of diverted securities, which order was complied with. Vast private fortunes were amassed by nearly all the men who directed the affairs of the road, and the mismanagement became in time so notorious that the legislature of the State of New York was appealed to, to remove the directors of the road for the protection of its stockholders, and to reduce the capital stock of the company to the amount actually paid for it. This movement failed, however, because it was opposed by the very stockholders whose interests were supposed to have suffered by directorial mismanagement. They preferred to continue to draw dividends on the face value of stocks which they had purchased at 20 cents on the dollar. The capitalization of the company has since been increased to $163,679,825, and it is by no means a secret among those familiar with railroad values that the bonded indebtedness of the Erie road represents alone many millions more than the total amount that was ever invested in the property.

The principal competitor for through traffic of the two companies whose financial operations we have just reviewed is the Pennsylvania Central Company. It has often been asserted by the managers and friends of this company that its capital is free from water; but this is not true. In 1864 a dividend of $4,130,760 was made out of the surplus earnings of the road. This dividend was payable in capital stock and was equal to 30 per cent. of the then outstanding capital. Similar surplus dividends, each equal to 5 per cent. of the company's outstanding stock, were declared in 1867 and 1868. The people were thus taxed to pay dividends on a capitalized surplus which had been derived from excessive charges previously imposed on them. I shall not attempt here to determine whether the capital represented by the Pennsylvania Railroad Company has been honestly invested. A committee of Congress has expressed the opinion that the capitalization of its main line exceeds the amount of the actual cost of the property by more than eleven million dollars. There is, however, a system of inflation practiced by the Pennsylvania Railroad Company which is simply a new form of bond and stock watering. More than one-half of the capital of this company has been invested in the stocks and bonds of other corporations. In 1891 the amount so invested was $154,319,240, and the income derived from it $4,852,181. This does not only cause the stocks and bonds of certain companies to be counted twice, but exacts a double tax from the commerce of the country, interests and dividends upon the same capital being paid both to the bond- and stockholders of the Pennsylvania Central and to the bond-and stockholders of the roads in whose securities it has made investments. The income of the company is thus swelled far beyond the amount which the traffic reports indicate. It will be seen that, to perpetuate extortionate rates, this process of manifolding securities might be continued indefinitely.

The cost to its stock-and bondholders of the Baltimore and Chicago line of the Baltimore and Ohio Railroad, which has a length of 795 miles, was estimated by the company's officers at about $57,000,000. The actual cost of this road, owing to its expensive mountain grades, was probably greater than that of any of the other through lines between the sea-coast and Chicago, but there can be no doubt that the capitalization of this road represents from one-half to one-third pure water. At the time of the completion of this road to Chicago the surplus earnings of the company, after the payment of interest and dividends, amounted to over $29,000,000. This had been charged to "profit and loss" and used in the construction of branch lines. Thus an amount equal to more than half of the reported cost of this line had at the time of its completion been returned to its owners in other railroad values.

The Select Senate Committee on Transportation Routes to the Seaboard in 1874 estimated the excess of the capital over actual cost of the Erie road, from New York to Dunkirk, at $68,807,000; that of the New York, Lake Shore and Michigan Southern line to Chicago at $115,188,137, and that of the Pennsylvania and Fort Wayne line to Chicago at $11,290,374. If this estimate was correct the entire over-capitalization of these lines, on which the commerce between the West and the East was forced to pay a dividend of 8 and 10 per cent. per annum, was no less than $195,000,000. The committee assumed the actual cost of these roads to be $182,000,000, or about $78,000 per mile. They based their estimate upon the cost of the main branch of the Baltimore and Ohio, as reported by their officers, supposing it to represent the actual outlay made by its stock-and bondholders. Various revelations which have since been made to the public, as to the real cost of railway construction, justify the belief that the estimated cost of $78,000 per mile for those roads is far too high. Mr. Henry Poor, several years ago, estimated the average cost of the roads of the United States at $30,000 a mile. Making allowance on one hand for Mr. Poor's tendency to favor the railroad side of the question, and on the other hand for the more expensive grades, double tracks and better terminal facilities of these trunk lines, $50,000 per mile may be considered a fair estimate of their average cost. Upon this basis the total cost of the three lines in question would amount to $116,450,000, and the excess of their capital over actual cost would be the enormous sum of $261,000,000, or 325 per cent. of their actual cost, and probably not less than 400 per cent. of the original cost to their stock-and bondholders. The capital of these companies has since been considerably increased, to enable their managers to increase their dividends, and with it the tax levied upon the commerce of the country.

These are only a few of the many instances of stock watering that might be mentioned. In fact, there are to-day very few railroads in the United States that are entirely free from it. It is a notorious fact that the stock of a large number of railroad companies represents little or no value, having either been sold at a mere nominal price or been donated as a premium or bonus to those who purchased a large amount of the company's bonds. In recommending, in his December, 1891, annual message, Government aid for the Nicaragua Canal, President Harrison said: "But if its bonds are to be marketed at heavy discounts and every bond sold is to be accompanied by a gift of stock, as has come to be expected by investors in such enterprises, the traffic will be seriously burdened to pay interest and dividends." It is not difficult to surmise to what enterprises the President referred. It has for many years been a well-settled principle among railroad incorporators that no larger assessments should be made upon the stockholders than is necessary to float the company's bonds. A company, for instance, is organized with a capital stock of, say, $1,000,000. Five per cent. of this sum, or $50,000, is paid into defray preliminary expenses. The road is then bonded for perhaps $2,000,000, but as the bonds are sold for only 80 per cent. of their face value and as the incorporators allow themselves 5 per cent. for the negotiation of the bonds, only $1,500,000 is realized for the construction of the road. The incorporators now vote to themselves a contract to construct the road for $1,500,000 and at once sublet it to a contractor who is ready and anxious to build the road for $1,200,000. The incorporators thus realize $1,000,000 worth of stock, a portion of which is unloaded upon unsophisticated investors, and $300,000 in cash, at an outlay of $50,000; and the road, which cost $1,200,000, is made to pay interest and dividends on a total capital of $3,000,000, and this is subsequently watered indefinitely if the road proves profitable or a consolidation with some other road justifies the belief that its earning capacity might be increased. Nor is this an overdrawn picture. On the contrary, instances might be cited where only one-half of one per cent. of the company's stock was paid in by the shareholders.