Chapter X: The Trunk Line Rate System: a Distance Tariff

Conditions prevalent in 1875, 356.--Various elements
distinguished, 358.--The MacGraham percentage
plan, 360.--Bearing upon port differentials, 361.--The
final plan described, 363.--Competition at
junction points, 368.--Independent transverse
railways, 370.--Commercial competition, 372.--Limits of the
plan, 375.--Central Traffic Association rules, 376.

The trunk line freight rate system effectively demonstrates certain principles in railway economics which are of great importance. The danger of arbitrary administrative interference without a full understanding of the intricacies of rate making, and at the same time the essential soundness of American railway practice in seeking independently to solve these complex problems by equitable means, are amply illustrated. The fallacy of certain objections to governmental control, on the other hand, is revealed with corresponding clearness. Three principles in particular deserve mention in this connection. These are: (1) that the element of distance should be a prime factor in the final adjustment of rates as between competing localities;[389] (2) that coöperation and agreement between competing carriers are essential to any comprehensively fair system; and (3) that permanency and stability of rates are of equal importance with elasticity. That all three of these results have been voluntarily worked out in practice by the trunk lines is a tribute at once to the ability and fairness of their traffic officials. Standards are thus established toward which the carriers in the West and South should strive, as soon as their local traffic conditions will permit, in an endeavor to promote good relations with the shipping and consuming public.

That distance tariffs, modified in part to suit commercial conditions, are not only theoretically sound, but entirely practicable, this study aims to prove. The bogey of German rate schedules vanishes into thin air when it appears that the greatest railway companies in the United States have for years adopted the same principles in working out their tariffs. The long and short haul rule is here enforced, not alone as between various points on the _same_ line, but also as between points equally distant from a common destination on _different_ roads. Thirty years ago the trunk lines conceded the principle, for the recognition of which the shippers of the West and South are now so vociferously clamoring before Congress and the Federal courts.

This desirable end could never have been attained if the several competing companies had not been able to act in coöperation. The erroneous popular opinion that railway competition must be preserved in the public interest, had it been legally enforced in this territory a generation ago, would have prevented absolutely any comprehensive solution of the problem. Until Congress abandons this theory, and treats railways as essentially monopolistic, thereafter to be protected and maintained as _beneficent_ monopolies through adequate governmental supervision, the lesson of trunk line experience will not have been learned. And, finally, the interesting fact that for almost thirty years it has not been necessary to change either the main system or, in many instances, the actual rates charged thereunder, is an offset to the contention that success in railway operation is to be judged by the instability of rates, seeking to follow constantly the ups and downs of commercial conditions. Certain modifications, especially in export and import traffic, or wherever water rates have to be made or met, are, of course, inevitable. But it is absurd to reason from this that railway tariffs in the main need to be continually jostled about at the behest of the shipping public. Of course, if one railway changes its rates, all the rest must follow. That is the principal reason why many of our rate schedules have been as uncertain as the weather. But there is no reason why, if all parties in competition keep good faith and observe their tariffs, a schedule of class rates for domestic shipments should not remain practically constant.

Take the rates on raw cotton from Mississippi river points like Memphis to New England cities, for example. Was any staple product ever subject to greater fluctuations in price than raw cotton, varying as it has in the last few years, from five to fifteen cents a pound? Yet through it all, good years and bad, whether for the planter or the manufacturer, the freight rate has stood unchanged at fifty-five cents per hundredweight. In the same way, within the limits hereafter to be described, the trunk line rate system has endured for a generation. Founded upon sound and, consequently, defensible principles, it has promoted good feeling between railway and shipper. And, if the changes of classification since 1900 had not been made, one may reasonably doubt whether the demand for Federal legislation would have been any more insistent throughout the eastern central states than it now is in New England.

* * * * *

The causes leading to the adoption of a systematic rate scheme by the trunk lines acting jointly[390] can be understood only in the light of the conditions existing about 1875. The Baltimore & Ohio Railroad had entered Chicago in 1874, after which time the most furious rate wars between the four trunk lines had been in progress. The main dependence of all these lines was still upon the grain traffic, and all of this was moving in one direction toward the seaboard. As late as 1882, seventy-three per cent. of the trunk line tonnage east bound consisted of such commodities.[391] Moreover,--and this is a point of especial importance,--the bulk of this grain originated in the territory east of the Mississippi and south of Chicago. Over four-fifths of the eastbound traffic came from the states of Illinois, Indiana, Ohio, Michigan, and Pennsylvania. The great northwest and trans-Mississippi territory was not yet opened up. Wisconsin and Iowa contributed only about ten per cent. of the eastbound tonnage, while over two-thirds of the westbound business did not pass beyond Illinois.[392] Nor was the traffic concentrated as yet in the larger cities. Mr. Fink makes it clear that most of the business was gathered up by the trunk lines and their connections from small towns along the way. The modern problem of the great city in competition with the small towns was as yet unknown.

The trunk lines had few feeders. Only the main stems to Chicago had been built. Consequently these central states were served by a host of little cross lines, built as local enterprises, many of them radiating from Chicago, Cincinnati, Toledo, or Cleveland at right angles with the trunk lines, and, for the main part, engaged in an endeavor to open up their territories to water communication with the East by way of the lakes and the Erie Canal. Rail rates, nominally at least, were still high, the rate first-class Chicago to New York, for example, being about double its present figure; and the conditions of railway operation were such that water competition was a matter for grave concern. Every change in the lake situation was at once reflected in the rail rates, violent dislocations at the opening and closing of navigation in the spring and fall being of especial importance.

Among these confusing elements in the problem of trunk line rate adjustment five distinct phases were prominent. In the first place the four trunk lines were a unit in opposition to the diversion of traffic to the Great Lakes and the Erie Canal. However much they might bicker with one another afterward,--apportionment of the rail business being a distinct feature of the problem,--their interests at the outset were identical respecting the necessity of holding the business on land. Water competition by way of the lakes or the Ohio river was a danger common to them all. The intensity of this pressure may be understood from the statement that the trunk lines were not even consulted in making the Chicago-New York rate on which the western lines pro-rated. They had no voice in it, merely accepting the figure offered them by their connections into Chicago.[393] The second feature of the problem, namely, the division of the all-rail traffic among the competing carriers, is immaterial to the main question before us. Thirdly, it was essential to the trunk lines to restrict and control the activities of the subsidiary cross lines and feeders, most of which, as has been said, were independent. Many of these, aside from having a direct interest in their longest haul to a terminus on the lakes or the Ohio river, had been built by local capital, and were administered in the interests of the lake cities or Cincinnati and Louisville. There was no unity whatever in their policies, and the most ridiculous wastes of transportation resulted. Grain was literally meandering toward the East instead of moving by a direct route.[394] Joint through rates would be made by the most extraordinary chain of connecting links leading to the seaboard by very circuitous ways.[395]

A fourth evil, akin to this, consisted of the difficulty of maintaining through rates, not as among the trunk lines who might be made parties to a pool, but by reason of cut-throat competition between their western connections.[396] The agents of these western lines would indiscriminately cut rates to or from points on their lines, and then expect their trunk line connections to accept a proportionate shrinkage of the joint through rate for their part of the haul. The weaker companies would, of course, be susceptible to such temptations in order to secure the business. No stable apportionment of this western traffic among the eastern lines would be possible until they could agree upon a fair rate for the trunk line haul, and rigidly adhere to it. And, finally, water competition, causing constant fluctuations in the lake and Ohio river rates, while directly potent only at waterway points, was continually putting the through rates from these points out of line with the local rates from non-competitive inland centres. Or, perhaps, the Ohio river and lake rates would be out of joint with one another. The Chicago basis, if applied to Paducah, would make a rate on tobacco that would send it _via_ New Orleans.[397]

Products would go down the Mississippi after the lakes had been closed by ice. A considerable amount of corn was certainly moved to New York by that route.[398] Some device for coordination of the through and local rates--or, as one might put it, for the distribution of the localized shock of water rate changes--was imperatively necessary.

An ingenious rate clerk named MacGraham, in the offices of the Pennsylvania Railroad, proposed a comprehensive scheme for meeting these difficulties which was first used for westbound rates on December, 15, 1871. The Chicago-New York rate was to constitute a basis, upon which all other rates were to be made in percentages, according to their relative distance from New York.[399] Thus, assuming Chicago to be 900 odd miles from New York, the rate from a point 600 miles inland would be about sixty-six and two-thirds per cent. of the Chicago rate, whatever that might be. Whenever the lake rate at Chicago changed, every other rate throughout trunk line territory would vary in due proportion. Relativity of charges would thus be preserved. Moreover, the shortest route, "worked or workable," was to be used in calculating the rates, the basic distance being about 920 miles by the Lake Shore from Chicago to Dunkirk, Ohio, and thence by the Erie to New York. This would give compelling effect to distance as a factor, and would tend to penalize the roundabout carriage of goods. More than this, however, it would render the inland territory directly tributary to New York. From a point, for example, fifty or one hundred miles south of Chicago, Toledo, or Cleveland, the local rate into those towns plus the through rate east to New York would always exceed the rate by a direct route east. For the hypothenuse of a triangle is clearly always shorter than the sum of the other sides. All shipping points equidistant from New York would enjoy equal rates, those rates at any time being determined by the state of water competition. This was a manifest advantage to the small inland centres, while the rate on the lake front was not affected. The trunk lines lost something, perhaps, through lower rates at intermediate points; but the gain through diversion of traffic from the lake to the rail lines more than compensated. For conditions were such in the summer of 1875 that the lake boats were prepared to carry grain for almost nothing. The railroads were helpless in such cases.[400] The only real sufferers were the short, independent cross lines and the lake and river cities. Of these, the former were reduced to a status of mere feeders or branches of the trunk lines. They were compelled to accede to the plan, however, by threatened refusal of the trunk lines to turn over business to them westbound, unless they reciprocated with their grain shipments eastbound.[401] Many of these lines became bankrupt later, and were absorbed by the larger companies.[402] And, as for the cities unfavorably affected, the scheme based upon distance was so obviously fair that their protests were of no avail.[403]

The great contest between the trunk lines over the granting of differentials to Philadelphia and Baltimore, as against New York and Boston, played a not unimportant part in the diplomacy leading to the acceptance of the MacGraham system. The New York Central, the Lake Shore, and the Boston & Albany roads, of course eagerly accepted it, because it promised aid in meeting the lake competition to which they were peculiarly exposed. The Pennsylvania and the Erie, lying considerably further from Lake Erie, would also be benefited, operating as they did in a territory naturally tributary to them, but exposed to drainage to the lakes by lateral lines. But the Baltimore & Ohio, ever since its entry into Chicago in 1874, had been a thorn in the flesh of the others. The territory along its line was so far from the lakes that it had little to fear from water competition at intermediate points between Chicago and the seaboard. Would it accept a plan primarily intended to meet a danger which, while injuring its powerful rivals, was of less consequence to itself? Fortunately for the scheme, it was based upon the solid principle that distance was of preponderating influence in the adjustment of rates. The entire contention of the Baltimore & Ohio and the Pennsylvania for a differential rate to Baltimore and Philadelphia below New York rested upon this same principle. The distance from Chicago to the southern ports was less. Consequently, they insisted, they were entitled to offer a lower rate. The MacGraham scale and the port differentials were thus logically connected. They stood or fell together. The MacGraham plan materially aided the Baltimore & Ohio in making good its demands.[404] It was acceptable, therefore, by reason of this collateral advantage.

Another factor in the situation appealed to the Pennsylvania and the Baltimore & Ohio. Their lines to tide water were about seventy-five and one hundred miles shorter, respectively, than the shortest line to New York.[405] In the division of the joint through rate between a chain of connecting railway lines this was of great advantage. It always aids the shorter line if pro-rating is based upon mileage. A feeder one hundred miles long pro-rating with a trunk line one thousand miles in length would be entitled to only one-eleventh of the total rate. Were the trunk line only eight hundred miles long, the neutral road might claim one-ninth. This seemingly slight difference might mean several hundred thousand dollars more earnings to the neutral road or feeder, if it turned over its business to the short line.[406] Any emphasis upon distance as a general principle strengthened the Baltimore & Ohio in securing patronage from other roads by this means. The other trunk lines, through acceptance of the MacGraham scale, conceded the distance principle, and with it, coincidently, the pro-rating practice.

After three years' experience, the MacGraham scale was readjusted to conform more closely to the cost of service principle. The plan, as thus revised, is the one still in force.[407] It recognizes that railway charges should be proportioned to the length of haul, so far as actual costs of haulage are concerned; but it first eliminates those constant elements in cost which do not vary with distance. The original MacGraham scale made no such distinctions. The expenses at terminals, such as loading and unloading, are, of course, entirely independent of the distance covered by the shipment. These, being determined roughly by experimentation, are first deducted from an assumed Chicago rate. From the remainder the rate per mile by the shortest route to New York (920 miles) is then calculated by simple division. This rate per mile is then applied to the distance to any intermediate point, and the terminal charge is again added. Thus a rate is found which is reduced to a percentage of the original Chicago base rate.

FOR ILLUSTRATION[408]

Cents
per 100 lbs.

Chicago to New York 25
Less fixed charges on both ends of the line 6
--
The basis of rate for computation being the remainder, or 19
Using short line mileage 920 miles, Chicago to New York,
would yield a rate per mile 00.0206
Short line mileage Indianapolis to New York, 833 miles,
yields a rate of 17.2
Plus six cents fixed charges, as above, makes 23.2
The percentage of New York rate being 93 per cent.
Which is the present percentage basis Indianapolis to
New York
Short line mileage Frankfort, Indiana, to New York is 881
miles, which would yield at the rate of 00.0206 cents
per mile 18
Plus terminal charges 6
--
Which is 96 per cent. of 25 cents 24

]

The revised system provides in theory for an absolutely constant rate per ton mile. It is a rigid mileage tariff in every respect. The original MacGraham scale had been so in theory, but not in practice. As amended in conformity with a sound economic principle, it had, moreover, one important practical advantage over the original scale. It yielded more revenue at all the intermediate points.[409] Local rates would be higher as thus calculated than they were originally. It would be unjust to ascribe undue importance to this motive on the part of the roads in the adoption of the new system. That the plan yielded additional revenue, while obviously more just in theory, was naturally no objection to its acceptance.

The fruits of all this process of adjustment are depicted upon the accompanying diagram. Viewing it in a large way, and reserving details for later consideration, we may compare it to a topographical contour map. The several rate zones are thus analogous to a series of levels or steps rising from east to west. Our cross section of these along a line from Pittsburg to Burlington, Iowa, makes this relation plain. Another cross section at right angles to the first from Louisville, Kentucky, to Lansing, Michigan, and beyond, shows how these levels are arranged in a plane from north to south. These steps form a sort of irregular amphitheatre opening toward the east, with its main axis lying in a direction slightly south of west toward St. Louis. Or, more correctly, these rate zones, pursuing our analogy to a topographical contour map, indicate a broad valley opening toward the east. Along the bottom of this freight-rate valley lie the great direct trunk lines converging from Chicago and St. Louis. Throughout the State of Illinois the valley opens up onto a plateau, somewhat grooved in the middle at Peoria, where the direct lines from the west cross a neutral field tributary neither to Chicago nor St. Louis exclusively.

This general description harmonizes with the apt figure used by that master mind in railway economics, Albert Fink. Speaking of this situation, he says, "The trunk lines are nothing but great arteries of commerce, like rivers, only with this difference: the rivers never run across each other, the territory from which they draw their supplies is distinct and well defined." Since his time, by reason of coöperative action for a generation, the confusing maze of railway lines has now been reduced to a single comprehensive system. Cross-currents of trade hither and thither have been united or articulated in such a way as, speaking in terms of freight charges, to cause the great internal commerce of the country to flow downhill toward the seaboard in an orderly and reasonable way. The inequalities incident to commercial competition have been modified, or, to revert to our original figure, eroded; so that one may literally speak of the products of the country as flowing, like rivers, in more or less natural channels over the railway lines from the great interior basin towards the Atlantic seaboard.

The mathematical precision of the method of computation heretofore described, while theoretically applicable to a series of parallel roads in a flat country, free from either water competition, the competition of cross railway lines, or the competition of towns and cities of unequal size and importance, obviously requires modification to suit the actual traffic conditions in this densely populated trunk line territory. The process of adjustment has been gradual and necessarily tentative. Every influence brought to bear has been subversive of systematic arrangement, tending, that is to say, to amend the scheme out of all semblance to mathematical order. After reading volumes of the Proceedings of the Joint Rate Committee, filled with petitions of railways, towns, and individuals for exception to the general rules, one is surprised to find that, after all, the scheme is so well ordered as it is. It has been held true only by rigid adherence to the rule that by the shortest "workable and worked route" no intermediate place shall be charged more than is charged to any point beyond. In other words, the long and short haul principle is consistently observed. Space does not permit a discussion of all of the factors which have tended to modify the original simple scheme. Three alone may be considered as illustrative of the rest. These are: (1) the effect of railway competition at the important junction points; (2) the influence of the independent cross lines of railway; and (3) commercial competition between producing or distributing centres.

The effect of railway competition at junction points is revealed at once, upon inspection of the map, by the general law that the boundary line of zones lies immediately west of the large cities. Notice the location of Cleveland; Warren, Pennsylvania; Newark, Ohio; Dayton, Fort Wayne, Detroit, Port Huron, Cincinnati, Indianapolis, Louisville, Lansing, Logansport, Terre Haute, Peoria, and Decatur. Columbus, Toledo, and Evansville, Indiana, are about the only exceptions. In nearly every case the theoretical zone boundary has been shifted in such a way that the rate rises just west of the important competitive point. The reason is obvious. Rates being held down at these points, and no greater rate being possible at any other point further east, conditions must be equalized _upwards_, immediately the depressing influence of competition is removed. Each zone level is of necessity an average of a theoretic constantly rising scale from east to west. Places immediately west of an important junction point are raised somewhat above their theoretical grade as a compensation for those places on the westerly side of each zone whose rate is held down below their theoretical level by the exigency of competition at the next large town. Or, to be specific, Indianapolis may hold down the rate to ninety-three per cent. of the Chicago rate farther west than otherwise would be the case. In fact, by reason of its paramount importance as a railway centre, it has held down the rate so far west that for purposes of equalization the rate west of it immediately jumps to one hundred per cent. For, as will be observed, on inspection of the map, the 96-97 per cent. zone is interrupted at this point; the 92-95 per cent. zone being extended unduly far west and the one hundred per cent. zone being extended inordinately far east, until the two meet just west of Indianapolis. Detailed study of the schedules and maps will reveal many similar instances.

The converse of the proposition that important junction points lie near the western zone boundaries is found in the fact that, where competition is absent, the zones sweep much farther east than mathematically would be prescribed. In other words, wherever competition is less keen, the percentage rates remain high. Were competition entirely uniform in its geographical distribution, the several zones would be parallel, sweeping evenly clear across the map. Illustration of this circumstance will be found in the extension of the 87 per cent. zone far to the east, along the Ohio river, in fact nearly to Parkersburg, West Virginia; or, again, in the 110 per cent. territory which extends nearly to Louisville. This latter rate has been recently amended, as will be shown later; but for many years continued, as here represented, abnormally far to the east. In both these instances the railway facilities along the river are monopolized by the Baltimore & Ohio as a trunk line. The only competition is due to the Cincinnati, Hamilton & Dayton and Norfolk & Western, both of which work their traffic from New York north. The population and traffic density being at the same time low, a relatively high level of rates has resulted. Sometimes, also, it may happen that in these outlying regions the shortest line "workable and worked" to the seaboard may not be due east, but may proceed north until a junction with a trunk line can be effected.[410]

The influence of independent transverse lines of railway has been of great importance in shifting the zone boundaries from their theoretical location to conform to practical requirements. Study of the map permits a second important generalization. Not only does the boundary of the zones usually lie just west of large cities, the course of the boundary at the same time frequently follows the location of important independent transverse railways. The zone boundary, in other words, lies just west of the cross railway line. For example, the western boundary of the 100 per cent. Chicago zone, after leaving a point on the Illinois Central, is defined from north to south by the course of the Chicago & Eastern Illinois Railroad, and below Terre Haute by the line of the Terre Haute & Evansville. Similarly, practical exigencies determined the odd shape of the 110 per cent. zone, formed like a great distorted boot leg. The western boundary of this 110 per cent. zone from Peoria south closely follows the Peoria, Decatur & Evansville road nearly to the Ohio river. Similarly conditioned by railway lines are the boundaries north and south of Indianapolis, and especially north and south of Fort Wayne, Indiana. In other cases where the transverse lines do not cross nearly at right angles with the trunk line, the zone boundary will follow one railway for some distance, and then skip across to another railway whose general direction is more nearly perpendicular to the trunk lines. Thus, from Toledo to Lima, Ohio, the western boundary of the 76-80 per cent. zone follows the Cincinnati, Hamilton & Dayton, cutting the Baltimore & Ohio and Pennsylvania trunk lines at right angles; and then it jumps across to the east until it strikes the sweep of the Toledo & Ohio Central, which carries it down almost to Columbus. Similarly, the western boundary of the 66-1/2 per cent. zone follows the line of the Pittsburg & Western north from Warren, in order that that line may participate in New York business by working its line north _via_ Painesville on the Lake Shore.

Why is it apparently necessary that these zone boundaries should follow along just west of the cross railway lines? The reason may be made clear by a concrete instance. Originally and until about 1891, Louisville, Kentucky, instead of having the 100 per cent. Chicago rate, as at present, enjoyed, on the base of its distance from New York, about 96 or 97 per cent. of the Chicago rate. In other words, the 96-97 per cent. zone shown on our map as interrupted at Indianapolis, partly for reasons already mentioned, originally swept across the map all the way from Grand Rapids to the Ohio river. This territory from Chicago south is served by the Monon Railway (Chicago, Indianapolis & Louisville), whose line, not fully indicated on the map, thus lay partly in 100 per cent., partly in 96 per cent., and partly in 97 per cent. territory. An important part of the traffic of the Monon, as well as of the other independent north and south lines, consists of business coming in from the east at the north and worked south, or coming in from the east at the south and worked north. Or, in other words, this line subsisted in part upon indirectly routed tonnage from New York, let us say, destined for Louisville, but reaching it by way of Chicago junction points. Freight thus hauled around two sides of a triangle, instead of by a direct line, as described in