Chapter XVI: Transportation and Communication

Almost as important for the conduct of modern industry as machine methods and credit are the rapid means of transportation and communication furnished by our railroad, steamship, express, post office, telegraph and telephone systems. Indeed the development of industry on a national scale and its integration under centralized control has been made possible only by these improvements. But not only have these businesses rendered the centralization of industry possible; they themselves exhibit on a national scale concentration 146 of control. They are all industries of increasing returns and lend themselves naturally to monopolistic control. At the very beginning of railroad construction one of the most far-sighted managers enunciated the doctrine that “where combination is possible competition is impossible.” For years competition was regarded as the regulator of rates, pooling between railroads was forbidden, canals were advocated as competitors, and by every possible device it was sought to stimulate it. We are at last beginning to recognize the monopoly character of the railroad industry and to regulate it accordingly.

Consolidation in the railroad world is not a new phenomenon nor is it confined to that industry, but it has proceeded further there than in any other line of business. The first form which combination took was that of pooling, according to which the traffic was “pooled” and the earnings then divided among the companies entering into the pool according to some previous agreement. This was forbidden by the Interstate Commerce Act in 1887 and even more stringently by the Anti-Trust Act of 1890, and accordingly railroad managers next resorted to actual consolidation of competing lines. Where this has not been possible or desirable, virtual combination has been secured by the so-called “community of interests” arrangements, based on the acquisition by one road of enough stock in competing lines to secure representation on their boards of directors. Today some eight or nine groups of capitalists control over two-thirds of the railway mileage of the United States, and according to a recent widely-published statement the late Mr. E. H. Harriman was credited with controlling, directly or indirectly, a system aggregating over 67,000 miles. These great consolidations have followed mainly the territorial groupings of railroads; the United States has now been districted out by a few large transportation companies, much as France, Italy, England and other European countries had previously been divided up. Consolidation 147 has in many instances resulted in increased convenience to the public and in economies in management and operation, but it places a dangerous amount of power in the hands of a few men, which has not infrequently been abused, and should clearly be under strict government control.

The primary economic problem connected with railways is always the question of rates. This has been called in a recent book “the heart of the railroad problem.” The first fact that strikes the student of the subject is the great reduction in rates and fares in the past twenty-five years, especially in freight rates. From 1.24 cents in 1882 the average revenue per ton mile received by railroads in the United States has decreased to .748 cents in 1906. Freight rates, especially through rates for bulky traffic, are considerably lower in this country, and passenger fares somewhat higher, than in Europe. But the vital problem connected with rates is not as to their relative cheapness or extortionateness; it concerns rather the granting of discriminating rates. Discriminations may be of three kinds: those between different classes of goods, those between localities, and those between persons. The first group is based upon the classification of freight and rests upon differences in cost of shipment, in bulk, in risk, etc. If reasonably employed, this kind of discrimination is justifiable. Local discriminations, that is, charging different rates to different localities for substantially the same service, is not only unwarranted in most cases, but is short-sighted as well. Where superior facilities or especially keen competition exists, lower rates may be permitted for favored localities, but the arbitrary exercise of such powers by railway officials is thoroughly unjustifiable. Even less defensible is the practice, now happily less frequent, of granting discriminatory rates to favored individuals or corporations. They have been given by means 148 of secret rates and rebates, by under-billing and under-classification, by free passes, etc. Both of these latter evils have been forbidden or greatly restricted by the passage of the Interstate Commerce Act in 1887 and subsequent legislation.

The public nature of railroads is now fairly well recognized in our law and is beginning to be understood by the people at large. Railroads enjoy peculiar privileges in the grant of corporate franchises and charters, in the right of eminent domain, and in enormous grants of land and money which have been made to them in this country. Moreover in the functions they perform the social character of their duties is emphasized, and they are under the necessity of maintaining a constant service open to all. Though they are owned by private investors and managed as private enterprises, they are essentially public enterprises as to their privileges, functions, and duties. Consequently most of the states have now undertaken, through commissions, to regulate the railroads in the public interest. Some thirty-one have appointed commissions, which probably control four-fifths of the traffic originating and ending in a single state. These state commissions differ in power, those of the Mississippi Valley and the South usually having mandatory powers, that is, power to prescribe and enforce maximum rates. In the eastern and central states commissions with supervisory powers merely, of investigation and report, have been created. The only exceptions are found in the Far West where the need of improved transportation facilities is more pressing than regulation, and in five eastern states whose legislatures are controlled by the railroad interests. While the state commissions have done and are doing valuable service, it is clear that the growth of giant railroad combinations which traverse several states necessitates federal control. The appointment of the Interstate Commerce Commission in 1887 established the principle of federal regulation, but the application of the principle in active practice has 149 been slow and has been impeded by the courts. The final control of rates has not yet been given to the Commission.

Owing to the individualistic character of our institutions and law, public ownership of railroads does not exist in the United States, which thus forms, together with England, almost the sole important exception to the world’s practice in this regard. On the continent of Europe government ownership is the rule. Public control through either ownership or regulation by commission is essential to secure an equitable adjustment of public and private rights and to prevent the abuse of monopoly power inherent in the very nature of railroads. Public ownership has many advantages and has given satisfactory results in Europe. But for the United States the principle of private ownership with stricter governmental regulation has been definitely laid down; the problem of the future is simply how far that control shall go.

The discussion of our steam railroads does not exhaust the subject of transportation. A recent and important development is the growth of electric interurban railways, which are opening up districts untouched by the more expensive steam roads and exercising a marked influence in rural districts upon business and social life. A more significant problem, both because of its close relations to the railroads and its monopoly character, is offered by the express companies. Organized at a time when railroads were new and undeveloped they took over the safe and expeditious delivery of small and valuable articles. They have since grown in importance and power; six large companies now control over 90 per cent of the business. Since they are generally in the form of partnerships and not of corporations it has not been possible to bring them under legal control, and their rates are extremely high--three or four times as much as freight rates. In some cases the railroads, in order to gain the profits from these high rates, have themselves organized express companies to operate over their lines, 150 immune from interference by the Interstate Commerce Commission. Even where that is not done, the express companies are performing a service which could as well be performed by the railroads themselves and at lower rates. These facts have lent great strength to the demand for the establishment by the Federal Government in connection with the post office of a parcels post, such as exists in England and in most European countries. By the extension of the maximum limit of mail packages to ten or fifteen pounds the usefulness of the post office could be immensely increased without any loss in rates. So far, however, the express companies have been strong enough to resist the introduction of this reform, though it is warmly advocated by the present Postmaster-General. A recent important improvement in our postal service has been the extension of rural free delivery to the farming districts, thereby breaking down to a great extent the isolation of country districts. This and the rural telephone have been of great social value.

The importance of the telephone and telegraph in our modern industrial life cannot be overestimated. As means of transmitting intelligence they have served to bring the most distant parts of the world into almost instant touch, and have made possible the modern centralization of business. Both offer the same problems of monopoly that we have seen exist in other parts of this field, the telegraph business being completely monopolized by two large companies, the telephone business by one, all strongly entrenched behind patents. The desirability of public ownership of these utilities rests upon stronger grounds than in the case of railroads and is strongly urged by many conservative writers.

Although attention has usually been centered upon the railroads in any discussion of the transportation question in the United States, there are important practical problems connected with both the inland and 151 the ocean water transportation. The questions of constructing artificial inland waterways and of subsidizing our foreign merchant marine are vital political and industrial issues. The United States is probably better provided with internal navigable natural waterways than any other country. Her navigable rivers comprise some 18,000 miles. Affording access to the very heart of the continent both from the Atlantic coast and from the Gulf. They form a cheap and convenient means of transportation, especially for bulky and cheap articles; 30,000,000 tons a year are carried on the streams of the Mississippi Valley alone, though much of the former traffic has been diverted to the railroads. On the northern border of the country the Great Lakes form an unrivaled series of inland seas. The traffic on these shows a great increase every year, amounting now to over 60,000,000 tons annually. The Federal Government has performed useful service in improving the conditions of navigation along these natural waterways, and is now considering a comprehensive scheme for their further improvement.

A very different problem is offered by our canal system. During the period 1820-1840 many canals were constructed by the states to connect existing waterways and provide an outlet for produce from the interior. The best examples of these were the Erie and the Ohio canals. After the development of the railway, however, traffic began to be steadily and then rapidly diverted from the canals to these quicker avenues of transportation. Many of the canals were bought up by their rivals and permitted to fall into disuse, while those retained by the state governments remained mere shallow ditches, unimproved and ill-adapted to modern needs. The recent appropriation by the people of New York State of over $100,000,000 for the improvement of the Erie Canal, and the construction of the Panama Canal by the Federal Government have brought the question of the 152 rehabilitation of our neglected canal system to the front again. It seems wasteful not to connect the separate links in the magnificent system of natural waterways already provided by nature, and this will probably be the first step taken. And indeed a beginning has already been made by the construction of the Hennepin Canal, the Des Plaines Canal, and others, and a company has been formed to connect Pittsburg with Lake Erie and to cut through Cape Cod. It must, however, be borne in mind that there are two distinct types of canal: those which are simply short connecting links between navigable waterways and which permit the passage of vessels used on those waters; and those canals which are shallow, have extensive lockage, and permit the use of only small boats, thus necessitating the transshipment of freight. One might well advocate the construction and enlargement of the first type, and yet hesitate to approve of the second. As yet, however, owing in part to the opposition and clamor of railroad interests, the question of canals has not received the attention it deserves in the United States.

The ocean merchant marine comprises two widely different branches, the coastwise and the foreign trade. The former is open only to vessels flying the American flag, and has shown a very steady growth; five-sixths of our ocean merchant marine today is engaged in this branch of commerce. Coal, lumber, cotton, and similar bulky commodities constitute the chief items entering into the coastwise trade. The tonnage of American vessels engaged in the foreign trade, on the other hand, has shown a steady decline ever since the outbreak of the Civil War. Foreign vessels today carry fully 90 per cent of the foreign commerce of the United States. The causes of this decline are economic rather than political, for American legislation has on the whole been very liberal to the shipping interests. At the time the western part of our country began to be opened up and its great resources exploited, our merchant marine was one of the best in the 153 world. But now the other opportunities for the investment of capital were so profitable and alluring, and the need of it so great, that all the available labor and capital of the American people began to be devoted to the development of their internal resources. A nation cannot do everything with equal advantage at the same time any more than an individual can. Accordingly we began to withdraw our capital from shipping and devote it to agriculture, mining, manufacturing, transportation, and similar more profitable enterprises. Foreigners could build vessels and run them more cheaply than we could and it paid us to hire them to do it. Recently, however, and especially since the recent awakening of a national consciousness after the Spanish-American War, the patriotism of many individuals has been hurt by the thought that we had to depend upon foreign vessels for the carriage of our foreign commerce, while in the minds of others a comprehensive naval program demanded the building up of a native merchant marine. Two questions suggest themselves here: Do we wish to stimulate this growth artificially? And, if we do, what means shall we adopt? On the second point the Merchant Marine Commission of 1904 recommended for the United States a general bounty on all shipping, such as France has, and the subvention of certain lines of steamers over ten specified routes, following the example of Great Britain, Germany, and Japan. Without committing ourselves on this point, it may be suggested that on political, geographical, and economic grounds we may expect in the near future to see the natural development of an American merchant marine. With the growth of our foreign trade, the accumulation of capital at home, and the building up of a strong navy, the conditions for American shipbuilding and shipping will become steadily more favorable, and we may expect to see American enterprise engage in this as in other lines of industry. Eventually we are 154 destined to become a maritime nation.