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RAILWAYS, Legislation Concerning, and Management of, in the United States - John Joseph Lalor, Cyclopaedia of Political Science, Political Economy, and of the Political History of the United States, vol. 3 Oath - Zollverein 
Cyclopaedia of Political Science, Political Economy, and of the Political History of the United States by the best American and European Authors, ed. John J. Lalor (New York: Maynard, Merrill, & Co., 1899). Vol 3 Oath - Zollverein
Part of: Cyclopaedia of Political Science, Political Economy, and of the Political History of the United States, 3 vols.
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RAILWAYS, Legislation Concerning, and Management of, in the United States. After the passage by the state of New York, in 1850, of its general railway act (see the preceding article) there was inaugurated in the United States a deliberate withdrawal of governmental supervision from railway enterprises, on the theory that they were private businesses, to be left as unrestricted as the manufacture of boots or clothing.
—The New York law, with but slight modifications, was enacted by the various states, so as to promote railway building, and also to remove the corrupting tendency of special railway legislation. When each railway corporation was the recipient of a special grant by legislative enactment, the railways, in consequence of the large interests involved, corrupted the members of the legislature, and it was honestly supposed that by permitting everybody to build railways the principle of competition would be applicable. It was argued that there could be no such thing as monopoly in matters free to all, and that the rivalry between the respective lines for business would create, as to railway administration and railway management, the same beneficial results that rivalry and competition create in other private enterprises. The rapid development of the country from 1850 to 1857, under the low tariff, good crops and general confidence, in connection with the rapid development of the railway system, prevented, down to that period of time, any evil effects arising from this absence of control from becoming apparent. Though some few evil consequences did come to the surface, yet these were so largely counteracted by the beneficial results of railway construction, that the community regarded them as but passing vexatious incidents to a great benefit, and that time would cure the evil.
—When, in consequence of the financial crisis of 1857, many of the railways became embarrassed and mortgages were foreclosed, a new device was concocted, which at the outset appeared conservative and innocent enough, but brought in its train evil consequences of considerable magnitude in the relation of the railway to the state. These foreclosures, if carried out rigorously, threatened to destroy the value of all junior mortgages and of railway stock. The junior mortgagees and the stockholders thereupon fought desperately in the courts, to delay as much as possible the right of the holders of the bonds under the first mortgage either to take possession of the railway, or, by a sale under the hammer, to cut out all equities beyond the first mortgage, in the hope that such delay would tide the road over into better times. To bridge over these difficulties, and to prevent such delays, railway lawyers devised a scheme of reorganization committees, to represent in the reorganization of railways all the rights existing with reference to the property at the time of the insolvency, and on their behalf to repurchase the property, and, by a new capitalization, to readjust these rights. Under the reorganization the first mortgage holders received new bonds representing again a first lien, and certificates or bonds to represent accrued interest; the junior mortgages were again recognized by junior liens or preferred stock; and the stock holders generally, on condition of making some payment toward defraying the expenses of the readjustment and putting the line in proper condition, received scrip or stock to represent their former interests in the roads. Bankruptcies, therefore, did not, after this device was generally adopted, produce as to railways the same result in the way of the destruction of fictitious value that they produce by failure in other departments of business, i.e., to transfer the commodities or property, by means of such a sale or title, at bottom or conservative figures; but, on the contrary, the stock and bond capital of the corporations which had emerged from insolvency came to the surface with a larger capitalization than before default, with no construction to balance such additional capitalization account. Therefore, to enable the corporation to pay, in addition to operating expenses, interest upon its stock, the directions were under the strongest incentive, and even necessity, to oppress, at non-competitive points, the territory where the railways had a monopoly power.
—The courts lent themselves readily to this new device of reorganization, because it appeared to be conservative of vested rights of property, and prevented waste and destruction. The possible influence of these devices upon the future development of the railway system in its relations to the state and the people, was either not thought of or disregarded.
—From 1857 to 1860 many insolvent railways were reconstructed upon this plan, and, at the end of this reconstruction period these railways emerged with a considerable additional capitalization, representing simply accumulated debt. In 1861 the war broke out, severing the lines running north and south, and in consequence of the operations of the government and the increased and feverish activity of the country during the four years of the war, the trunk lines running east and west were greatly developed. It was during this period of the war that congress began, upon an extensive scale, to charter the transcontinental lines of rail so as to connect the Pacific coast with the east.
—The charter of the Union Pacific railroads was passed July 1, 1862. Under this charter the right of way, and a subsidy of land and of money, were granted. By the act of July 2, 1864, the governmental subsidy was greatly increased. Land to the amount of five alternative sections per mile on each side of the road was granted to the railways. The secretary of the treasury was required, upon a certificate in writing of the commissioners, showing the completion and equipment of forty consecutive miles of railroad and telegraph lines, to issue to the company bonds of the United States, of dollar;1,000 each, to the amount of $16,000 per mile; and as to the 150 miles westwardly from the eastern base of the Rocky mountains, and 150 miles eastwardly from the western base of the Sierra Nevada mountains, $48,000 per mile, and between the two mountain chains $32,000 per mile. The Central Pacific railroad, chartered under the laws of the state of California, was taken care of in the same manner. A like amount of land was granted to it, and a like sum of money subsidy. These were not, however, the only grants made by congress in this act. The Hannibal 8 St. Joseph railroad, the Leavenworth, Pawnee 8 Western railroad and the Kansas Pacific railroad became the recipients of sections of land and subsidies of bonds. The Burlington 8 Missouri railroad was also the recipient of a land grant.
—The act of 1862 gave to the government of the United States, in return for the subsidy, a first mortgage upon the railway property to be created by the Union and Central Pacific railroads. The act of 1864 allowed the corporation to postpone the government's lien by a first mortgage to an amount equivalent to the subsidy given by the United States, and made the lien of the United States for its money subsidy subordinate to that of the bonds of the companies issued under such first mortgage. About $65,000,000 was thus given to these corporations, in addition to their valuable land grants, and the lien of the government postponed to that of another mortgage, authorized to be issued for an equal amount. The Union Pacific railroad was thereupon constructed by an organization known as the crédit mobilier, composed, as to persons interested therein, mainly of the persons who were instrumental in procuring the passage of the act, and who were the real incorporators of the road. To this corporation all the issues of bonds and stock were made, and it also was the recipient of the subsidy of the United States after building and equipping certain parts of the road. It proved an instrumentality of distribution of profits under the cover of building the road.
—The grants of land to the Union Pacific railroad amounted to 2,000,000 acres; to the Kansas Pacific, 6,000,000 acres; to the Central Pacific, as successor of the Western Pacific, 1,100,000 acres; to the Burlington 8 Missouri River, and to the Sioux City 8 Pacific, 2,500,000 acres.
—On July 2, 1864, the Northern Pacific railroad was also incorporated, and although no money subsidy was given to that corporation, it was the recipient of the largest land grant of any of the corporations, being entitled to receive under its grant 47,000,000 acres. By the act of July 27, 1866, there was granted to the Oregon branch of the Central Pacific, 3,000,000 acres; to the Oregon 8 California railroad, 3,500,000; to the Southern Pacific, 6,000,000; and to the Southern Pacific branch line 3,500,000 acres. A considerable proportion of this acreage may be saved to the people by the failure of many of these railway companies to complete their lines within the time specified by the acts of incorporation. But these grants show with how liberal a hand the congress of the United States disposed of the public domain in favor of these corporations, to aid them in the construction of their lines.
—During the same period of time large grants of land, owned by the general government within the states, were made by congress to the states, for the purpose of enabling such states to make large land grants to the railways proposed to be built within their borders. As early as 1850, about 2,500,000 acres were granted to the state of Illinois, and by it granted to the Illinois Central railroad, mainly, to aid in its construction. In 1856 Florida received grants of land amounting to about 2,000,000 acres, and which Florida, in turn, transferred in great part to the Florida railroad and the Florida 8 Alabama railroad. Arkansas was the recipient of more than 2,000,000 acres, which it, in turn, transferred almost wholly to railways. Minnesota, Kansas, Wisconsin, Michigan and Iowa were all the recipients of large grants of land, from which these states endowed railway corporations by heavy grants of land. The territory of the United States appeared to the legislator of that period an inexhaustible fund of land, and millions of acres were given away with what now appears to be reckless extravagance. Long anterior to these munificences on the part of the general government, some of the states were called upon to aid, by actual grants of money, some of the railways which were built within their borders. The state of New York paid to the various railroad corporations within its borders about $8,000,000, of which about $5,000,000, granted to the Erie railroad company, was wholly lost, and granted about $30,000,000 in municipal and county subscriptions.
—The right of the United States to charter railway corporations was exercised under the power given to it by the constitution "to regulate commerce with foreign nations and among the several states and the Indian tribes, to establish postoffices and post roads," and also under the general authority to execute all powers vested by the constitution in the government of the United States, and likewise under the authority given to congress to provide for organizing the army.
—The lines of the Pacific roads were constituted post roads, as they necessarily carried on the function of interstate commerce; and, as they were required to carry the army and army supplies of the United States, the establishment of these corporations as United States corporations is warranted under a liberal construction of the constitution. As these corporations have been the recipients of immense gifts of property from the general government, and as the latter is in nowise restricted by the prohibition as to impairing obligation of contracts, these beneficiaries can not possibly make any valid claim against being subjected to regulation, even if such regulation be in the nature of afterthoughts on the part of the United States government in the interest of the people of the country.
—The system of through lines, now known as trunk lines, developed between 1868 and 1872. The Lake Shore road passed under the control of the Vanderbilt interest, and there was no longer any necessity to break bulk as far as Toledo. The Michigan Southern and Michigan Central likewise passed under the same control, and through lines were established to Chicago, although the several railways remained state organizations, and were never consolidated as one company. The Pennsylvania railroad, under the name of the Pennsylvania company, leased the Fort Wayne road in June, 1869; the Erie 8 Pittsburg, in March, 1870; the Columbus, Chicago 8 Indianapolis, in February, 1870; the Little Miami road from Columbus to Cincinnati, likewise, in February, 1870, and the Cleveland 8 Pittsburg road, in 1871. These, together with the Ohio, Madison 8 Indianapolis railroad, and the Cincinnati, Wilmington 8 Zanesville railroad, gave to the Pennsylvania line practically two lines to Chicago and one to Cincinnati during the same period. The Baltimore 8 Ohio road was opened to the Ohio river in 1852; it leased the Central Ohio road in 1872, and then built an independent line to Chicago in 1874, completing its through connection to Chicago. The Grand Trunk railway, by controlling and leasing other lines and building links, pushed its connection at about the same period through to Chicago, so that there were substantially, from the seaboard to Chicago, five trunk lines vying with each other for business for the west, from the time these trunk lines pushed their connections on to Indianapolis and St. Louis.
—Prior to completing the organization of these trunk lines, freight was compelled to break bulk and suffer transshipment at the end of each state line, where a new corporation took up the traffic and carried it beyond. To prevent this breaking of bulk, and to expedite the carriage of freight, fast freight lines on separate capitalizations were organized, at first by the managers of the railways themselves owning or leasing their freight cars, and then made profitable by special arrangements with the railways readily enough secured, because of the fact that the railway officials themselves were largely interested in the fast freight lines. These lines carried a considerable proportion of the traffic in the period anterior to the organization of the trunk roads. With the completion of the trunk line west came also a change in the organization of the fast freight lines. The managers of the railways became more largely interested in the success of their trunk organizations than in the subsidiary lines that were absorbing a considerable proportion of the business of the roads. These subsidiary lines were therefore broken up, and the private corporations abandoned and each of the various railroad corporations constituting the trunk lines, in the proportion of the percentage of traffic carried over their roads, as nearly as that could be ascertained, contributed freight cars to the formation of fast freight lines intended to carry through traffic. Thus a great reduction in the cost and an increase in the speed with which goods were carried, were introduced, and it is now no longer necessary to break bulk at various points, but goods can be shipped to their terminus by either of the trunk lines through the instrumentality of fast freight lines connected with them.
—From the fact that a large portion of the business of the roads was thereupon done by these fast freight lines, and that these fast freight lines were represented by an independent organization or staff of officers and agents, it was supposed by the public that these lines were barnacles fastened upon the railway companies for the purpose of abstracting from them, to the advantage of the managers and to the detriment of the shareholders, a large proportion of their traffic.
—Although this suspicion was well founded in the early history of the fast freight lines, it ceased to be true after the organization of the trunk line system. A peculiar result, however, arose from the existence of the fast freight lines as an independent organization. In consequence of the freedom of the freight agent of the fast freight lines from the direct control of the trunk managers of the railroads, the railroad companies themselves found it almost impossible to fix a rate of freight which would not, in the intense desire to gain traffic, be immediately cut by the fast freight lines doing business over their roads. Thus, contemporaneously with agreements between the trunk line organizations to maintain rates, an active rivalry was kept up in the rates charged by the railroad corporations themselves and by the fast freight lines which ran over the roads and belonged to them.
—The pool agreement, to which reference will presently be made, removed this difficulty. The financial crisis of 1873, like that of 1857, caused the insolvency of a large number of railroad corporations, and the same proceedings which resulted in the emerging from bankruptcy of the railroad corporations that became insolvent in the preceding crisis, followed the insolvency of the railroad corporations in 1873, by which reconstruction committees were appointed. The various corporations emerged after insolvency through this process of reconstruction with capitalizations of funded debt and stock capital generally larger than that with which they entered into this condition of insolvency, and without any additional road or construction to account for the increase.
—The general depression of trade and the failure of crops succeeding the crisis of 1873, and the struggle for business between the roads, caused them to carry through traffic to the east at very low rates, for which they sought to compensate themselves by excessive charges for local traffic. This produced in the western states a very general feeling of dissatisfaction with railway methods and railway management, and gave rise to what is known as the granger movement.
—The western states were more liberal than the eastern states in grants of land and money to railroad corporations. From 1860 to 1870 these railroad corporations not only obtained large donations of land, but counties, townships, cities and villages desirous to become connected with the net-work of railways of the United States, and to be brought into active communication with the movement of commerce throughout the country, vied with each other in debt accumulation for the purpose of granting subsidies to railways. A large proportion of the whole bonded municipal indebtedness of the United States is due to what may be termed the frenzy on that subject. This recklessness of debt creation for the purpose of obtaining railway communications has some degree of justification in far western states, which it would not have had in any community otherwise situated. France, England and Germany, and also the seaboard and middle states of the United States, had, prior to the existence of the railway, good means of intercommunication by canals and highways. But, in the far western states, the railway was practically the only road. The western counties, townships and cities regarded the expenditures on railways as something analogous or equivalent to expenditures on the ordinary roads, and much of this debt creation was fostered by the influences of the railway corporations themselves, and a great part of it was doubtless fraudulently contracted through the bribing of local officers. In many cases the railways obtained subsidies of bonds, which they sold, and never built the railways. A large number of litigations, on the question of the liability of the public bodies granting such subsidy bonds, arose in the states themselves, many of which were disposed of in the United States courts. The innocent holders of these bonds sought to obtain judgment against counties or towns, which, either failing to obtain the consideration for which the bonds were issued, or discovering that the bonds were fraudulently issued, or from the mere desire to repudiate the burden imposed by the issue, sought to escape from the payment of the principal, or the levying of a tax to pay the interest. In a great number of these cases the decision of the supreme court of the United States was favorable to the bondholders, and the burden once imposed was allowed to rest, however recklessly or extravagantly the bonds were issued and the burdens assumed.
—The extent of this indebtedness, however, added fuel to the spread of the granger agitation. The heavy local taxation reminded the farmer or local tradesman of the aid which he assisted in giving and was called upon to pay to the railway; at the same time, the railway, which he supposed would confer upon him a great benefit, was placing his particular locality at a disadvantage by carrying past his door to more distant points and to the seaboard freight at rates very much lower than he was charged as local rates, the reason being simply that the more distant point was a competitive point, and he was entirely at the mercy of a single railroad corporation.
—The western farmer's efforts to seek relief from this condition of affairs would have met with very considerable obstruction had he not been aided by the wording and language of the constitutions of the several states, which enabled him to avoid any contract relation being successfully established between the state and the railroad corporation by reason of its original charter.
—In the Dartmouth College case it was decided, in 1819, by the supreme court of the United States, that, by the legislative charter to a private corporation, a contract relation was created, which, under the clause prohibiting the states from impairing the obligation of contracts, forbade the state from thereafter passing laws substantially changing property rights of such corporation. The various states of the Union took alarm at the possible consequences of that decision, and, either by general laws or by constitutional amendment, provided that the legislature shall, at all times, be at liberty to alter, amend or repeal the rights or privileges conferred upon corporations.
—The state of New York, after having had for many years a provision to that effect upon its statute books, embodied, in 1846, such a provision in its constitution; and the western states, on their organization, followed substantially the provision of the constitution of New York. In obedience to a strong public sentiment, which made itself felt during 1871-4, throughout the western territory, the legislatures of Iowa, Wisconsin, Illinois, Ohio, Missouri, Minnesota and Michigan, passed laws, known as granger laws, by which railway commissioners were appointed, railway tariffs sought to be regulated, preferences forbidden, and railways required to carry for the inhabitants of a locality freight at a rate somewhat proportionate to that which they established for through traffic.
—This legislation was violently attacked in the courts by the railways themselves, and the bondholders of the railways also called it in question on the ground that such legislation impaired the obligation of their contract, because, though it left the rails and the cars, it substantially took away the profit of operating, and thus, in disregard of the constitutional provision that no private property shall, without compensation, be taken for public purposes, deprived them of property without compensation. These cases came before the supreme court of the United States in 1876, in the test cases of Munn vs. Illinois, and Peake vs. The Chicago, Burlington 8 Quincy Railroad. This controversy was disposed of by the supreme court of the United States adversely to the claim of the railroads and of the bondholders, by upholding the validity and right of all such state legislation.
—Panic legislation of this character was, of course, faulty. It proceeded from an insufficient examination of the whole subject. It was, in fact, treating the symptom instead of the disease. Notwithstanding the complete vindication, by the supreme court of the United States, of the right of the states to enact legislation laying down tariff rates for railways, whether remunerative or not, the majority of the states which had enacted such legislation receded from their original position and modified their tariff rates; many abrogated them, and contented themselves with the establishment of railroad commissions for the purpose of investigation and examination of grievances, and to report thereon to the legislatures, but left on the statute books, however, prohibitions against preferences, and forbade the railways from destroying the commerce and trade of a locality by rival contests for through traffic.
—In some of the eastern states, notably in Massachusetts, a different course was pursued. In that state an excellent board of railroad commissioners was appointed by the act of the legislature of 1869, composed of Charles Francis Adams. Jr., James C. Converse and Edward Appleton. The duty of these commissioners was to inspect the railway system of the state, and to inquire into accidents and the system of management, as well as the general question of railroad development, and the relation of the community to its railroad corporation. To entertain complaints of individuals or localities against discriminations or unjust treatment, and to report thereon, was also made part of their duties. Authority was also given them to hold public sessions, and to make report of their conclusions to the legislature. They had no judicial powers, but were constituted a general board for public investigation of railway management, thus to draw public attention to, and to bring to bear public opinion upon, the subject. To concentrate responsibility, to sift information, and to advise the legislature, also appertained to their functions. They were subsequently empowered to prescribe and enforce, and they did prescribe and enforce, a uniform system of accounts.
—This board has been in successful operation since its organization; and has been of great benefit to the commonwealth which appointed it, and of great service as an example, beneficially imitated by other states, of one of the most conservative modes of dealing with railroad corporations.
—Mr. Charles Francis Adams, Jr., the chairman of this commission, in an argument before a committee of the federal congress in 1880, in speaking of railroad management and its relation to the public, says: "I must ask you to dismiss all preconceptions from your minds, and to fairly consider what is the real cause of the inequality, the injustice, the discriminations of the existing railroad service, those ills of the body politic for which you are now undertaking to prescribe. I will not stop to dwell upon them or to denounce them. It is not necessary to do so, for I hold them to be proven and their existence notorious. The record is full of evidence on the subject. We all know, every one knows, that discriminations in railroad treatment and charges do exist between individuals and between places. We all know that railroad tariffs fluctuate wildly, not only in different years, but in different seasons of the same year. We know that certain large business firms, the leviathans of modern trade, can and do dictate their own terms between rival corporations, while the small concern must accept the best terms it can get. It is beyond dispute that business is carried hither and thither—to this point, away from that point, and through the other point—not because it would naturally go to, away from or through those points, but because the rates are made on an artificial basis to serve ulterior ends. In regard to these things I consider the existing system nearly as bad as any system can be. Studying its operations as I have, long and patiently, I am ready to repeat now what I have repeatedly said before, that the most surprising thing about it to me is, that the business community sustains itself under such conditions. The first principles of law governing common carriers are habitually violated. Special contracts covering long periods of time are made every day with heavy shippers, under which the common carrier, whose first duty it is to serve all equally, gives to certain parties a practical control of the markets. There is thus neither equality nor system, law nor equity, in the matter of railroad charges. A complete change in this respect is a condition precedent to any just and equitable system of railroad transportation."
—Coming as they do from a gentleman of high authority, who for ten years held the position of chairman of the railroad commission of the state of Massachusetts, and who at the time when he spoke had held for one year the position of arbitrator, selected by the great trunk lines to settle disputes and differences between them as one of a court of three arbitrators voluntarily constituted, these words are more cogent, and are to be assumed as a more correct representation of existing conditions resulting from the development of the railroad system of the United States, than any speech, either of granger suffering from his particular grievance, or of railway president anxious to retain his hold upon a monopoly interest.
—The attempt to enforce upon the railways of the state of Massachusetts the adoption of a system of accounts prepared by a set of "theorists," was vehemently opposed by the railway corporations, who called it an infringement of their chartered rights, which would prove a mere appliance for exacting blackmail, and expose details of management concerning which the public had no interest. The commissioners, on the other hand, insisted that the community had an interest in its railroad lines, and that an administration which was a mere hot-bed of abuses should be thereafter managed in full public view. To the new system of accounts prescribed, the railways quickly accommodated themselves, and, much to their surprise, they experienced no evil result from their rendering of accounts intelligible to public bodies and to the public at large, but rather found great benefit flow therefrom.
—The recent instances of the failure of the Eastern railroad company, the sudden collapse of the New Jersey Central and of the Reading railroads, show how utterly unable was the public to form, from the published accounts in annual reports, any adequate conception of the condition of railroad property. In each of these cases the annual report preceding the insolvency claimed the roads to be financially in flourishing condition. Against such abuses as these, the system of uniform accounts and thorough investigation seems to be a specific. On this subject and its success, the Massachusetts commissioners, in their report for 1879, draw a very correct line of distinction. In speaking of the spirit which called forth an investigating board such as the Massachusetts commissioners, and that which prescribed a hard and fast tariff of rates for railway companies such as granger legislation attempted, they say: "After a careful investigation, which extended through a year, and the conclusions of which are to be found in its earlier reports, this board wholly rejected the idea of attempting to regulate railroads in this country, at least through direct legislative intervention. It was said that such an attempt would result only in failure, or perhaps generate new and dangerous abuses of its own. The board, on the contrary, maintained that every desired result or needed reform could be secured by simply developing in the public mind the idea of corporate responsibility, and supplying the necessary machinery to act directly upon it. To bring this about, it was necessary to force the corporate proceedings into the full light of publicity, and to compel those responsible for railroad management, whenever an abuse was alleged, to submit to investigation, and to try to show that the abuse did not exist. Failing to do this, their only alternative was to discontinue its practice or to persist in it in open defiance of public opinion. This is the theory of railroad regulation now known as the commissioners' system, in contradistinction to the granger system. The public supervision of the accounts of the railroad corporations is an essential feature in the successful development of this theory. If that can be established, it will certainly lead to the gradual abandonment of the granger system in favor of a supervisory system. The commissioners believe that it has been established in the practical experience of the Massachusetts railroads in the last two years, and they further believe and say that the system works well." (Massachusetts Railroad Commissioners' Report, 1879, pp. 29, 30.)
—In New York state the board of trade and transportation, a body originally organized under the title of "The Cheap Transportation Association," set itself the task, in 1873, of bringing the railway corporations of the state of New York to public amenability. From 1850, down to that period, no serious attempt had been made in that state to create in railroad management any sense of public responsibility. The reports which the various railroad corporations of the state were required to file with the state surveyor and engineer, were almost wholly meaningless. No balance sheet accompanied the reports, and the railroad corporations, in conforming with the letter of the law, vied with each other in giving as little information as possible. The state surveyor had neither power nor desire to make any independent investigation. He simply published from year to year such information as the railway corporations saw fit to give him. No penalty, which had the slightest deterring influence, was imposed for giving insufficient or even false information. The state law forbade parallel lines from being leased to each other. Nevertheless, railroad corporations, by purchasing the majority of the stock of the parallel lines, ran them in the interest of their main railroads.
—In 1868 a consolidation took place between the New York Central railroad and the Hudson River railroad, by which they subsequently became one line. On the consummation of the consolidation new stock was issued, substantially doubling the capital, or, in other words, watering the stock, of both lines. This watering of stock was promptly legalized by the legislature of the following year, which conferred authority for exchanging the certificates into shares of stock. Thus, these roads in their new capitalization neutralized all the advantages that they had of easier gradient and no mountains to pass over, which had given to New York state cheaper railway construction than to Pennsylvania and Maryland. Although during the summer months, when canal competition is active, or under circumstances when the competition for through traffic with other roads creates a strife, capitalization is of little or no consequence, yet, on the local traffic, capitalization produces the result of compelling the local shipper to pay such a rate as to make it possible for the proprietors of the road to pay dividends on their stock. By the general railroad laws of the state of New York it is provided, that when the dividends of any railroad corporation shall reach 10 per cent., the state can declare how the surplus above the 10 per cent. shall be applied. This provision, however, was made quite nugatory by the trick of stock watering. It is clear, if with each increased valuation of the road the proprietors can declare stock dividends not representing construction account, that a dividend of 10 per cent. on stock will never be declared, although in point of fact the railway may be earning 20 or 39 per cent. upon its actual cost of construction.
—This bold stroke of financial policy, which laid the foundation for the colossal wealth of the Vanderbilts, drew attention to this evil, and gave to the cheap transportation association (subsequently the board of trade and transportation) an excellent ground for agitating the subject of railroad abuses. To this agitation considerable vigor was imparted about this time by the discrimination then practiced against the interest of the commerce of New York, whereby the railroad corporations chartered by the state of New York made more favorable rates to Baltimore, Philadelphia and Boston in their charges for all west-bound as well as east-bound freight, than to New York.
—One of the periodical treaties of peace after a railroad war of great intensity gave to Philadelphia an advantage of two cents a hundred on freight rates from the west, to Baltimore four cents a hundred, and to Boston the same rate as was given to New York, on the lowest class of freight. On the western-bound freight the discrimination against New York in favor of Philadelphia and Baltimore amounted to from seven to ten cents a hundred on the different classifications of freight. This difference in rates was made on the theory that Philadelphia and Baltimore were relatively nearer to the western centres than New York. Boston, however, which was farther away by two hundred miles than New York, was given the same rate. On east-bound freight the theory upon which the discriminations were made against New York was, that the ship charters from and to New York were lower as compared with the other seaboard cities. This, however, on examination, proved untrue. Upon this state of affairs being made apparent, the chamber of commerce, as well as the board of trade and transportation, took up the question of railroad discriminations, and in a report published by the chamber of commerce in 1878, it appeared that during a considerable part of January of that year, the rates over the New York Central, the Erie and the Grand Trunk roads, were from Boston to Chicago from thirty-five to forty cents a hundred. From Boston to Chicago salt was shipped at fifteen cents, while forty-five cents was the lowest rate from New York. From Philadelphia to Chicago the rates during the same dates were made as low as seventy cents on first-class goods, while during the same period the rates were maintained at a dollar from New York to Chicago. The lower classes were relatively as high. The committee reported that goods stored in New York were shipped to Boston to be forwarded to the west through New York over the Erie road, or via the Boston 8 Albany over the New York Central road, at a saving of almost 50 per cent. over direct shipments from New York. Through freights from Liverpool to Chicago, fourth class, were as low as twenty to twenty-five shillings per ton, while the rates remained from Liverpool to New York forty to forty-five cents per hundred pounds, equivalent to about thirty shillings per ton. These facts were brought to the attention of the railway presidents, and their aid was solicited to remove the discriminations against New York. They made a contemptuous answer, Mr. Vanderbilt more especially drawing attention to the facilities offered by other cities to their railroad corporations, and claiming that the New York Central had not the same facilities offered to it by the municipal government, and that the merchants should use their influence upon the municipality to extend the facilities afforded the railway corporations in like manner as facilities were extended to the Pennsylvania railroad by Philadelphia, and to the Baltimore 8 Ohio railroad by Baltimore. A commissioners' bill, which had been drawn, was, for four successive years, submitted to the legislative committees of the state of New York for action, but in almost every instance it had either been reported upon adversely, or, if reported favorably, had, through the influence of the railway companies, been smothered in one or the other of the houses.
—Finding redress impossible through the voluntary action of the corporations themselves, the chamber of commerce, through its committee on transportation, therefore determined to lend its aid to procure the establishment of a railroad commission for the state of New York.
—Besides the grievances before referred to, another, of an extremely burdensome character, which affected the people of the state at large, also existed at that time. Between 1875 and 1877 the great railway corporations entered into an active railroad war, and in consequence of the resulting freight rates, cereal products and flour were frequently carried by the companies at a loss from the west to the seaboard. That loss might possibly have financially ruined the railway corporations of the state had a corresponding reduction been made in their local tariff; but to recoup this loss on through rates, they maintained, as to the local shipper, rates which under such circumstances became extortionate; thus making the people of the state bear the burden, through the exactions of the local tariff, of the trunk line war, in the same manner as though the state were at war and levied a tax upon its inhabitants to maintain it. This discrepancy between through and local tariffs led to the practical abandonment of milling at the great flouring centres of the state of New York, such as Rochester and Black Rock. It was impossible for them to maintain competition against the Minneapolis miller who had his cereals produced at his door and had the flour carried to New York at twenty cents a hundred, when they were compelled to pay more than that for the mere carriage of the wheat to their mills, and a higher absolute rate for the carriage of the product of their mills to the seaboard.
—The grazing and cattle interest of the western part of the state suffered in consequence of the low rates of carriage from the western country of cattle on the hoof, and a destruction of interests took place to such an extent that grazing and cattle raising became a non-remunerative occupation solely by reason of discriminating freight rates against the western part of the state. These subjects were taken up and agitated by the state grange organizations and the farmers' alliance, who joined hands with the chamber of commerce and board of trade and transportation in insisting upon some remedial measure against such discriminations.
—Another abuse, which, however, was carried to its extreme limit by the New York Central railroad company, gave additional ground for complaint. This abuse was the entire abandonment of any fixed schedule of tariff rates for local traffic. There was a tariff of rates which existed only for the unwary shipper who made his shipment on the assumption that all shippers were treated alike, and he was punished for his want of knowledge by being compelled to pay extortionate rates. A special rate, which was entirely personal to the particular shipper, was made almost invariably, on application, by the freight manager of the New York Central railroad exercising his discretion to make it as he saw fit. At the time when a legislative investigation was ordered, there were in existence on the line of the New York Central railroad upward of 6,000 different contracts varying in the most arbitrary manner the published schedule rate for the carriage of local freights. Underlying these special rates there was neither principle based upon car loads or train loads as contradistinguished from single packages, nor upon extent of business or readiness of handling, nor any other well-known basis of railway management. They were granted as the caprice, the whim or the interest of the railway freight agent dictated at the hour. The charge that such discriminations and special rates existed, when made to the legislative committee appointed in 1879, was at first flatly denied, but within the first few days of the investigation which followed, and to which reference will presently be made, it was overwhelmingly proved.
—Public opinion had become so agitated upon the subject that at last all the opposing influences of the railways in the assembly were overcome. An investigation of the railway system of the state of New York was ordered by the legislature of 1879, and a committee appointed to investigate the abuses alleged to exist in the management of the railroads of the state of New York. This committee was composed of A. B. Hepburn as chairman, H. L. Duguid, James Low, William L. Noyes, James W. Wadsworth, Charles S. Baker, J. W. Husted, and Thomas F. Grady. The committee invited the chamber of commerce and board of trade and transportation, which had made the charges upon the basis of which the committee was acting, to appoint counsel to conduct the examination, and stated that the committee would give to such counsel standing before it by substantially adopting him as the counsel of the committee. Under this invitation the chamber of commerce and the board of trade and transportation appointed the writer of this article as its counsel to conduct the investigation, and then during a period of eight months the investigation proceeded in the taking of testimony and the preparation of its report.
—Prior to the appointment of this committee a great change had taken place in the management of the great trunk lines in their relation to the public. Mr. Fink—who had been the vice-president of the Louisville 8 Nashville railroad, and who was commissioner or chairman of the committee of the Southern railway and steamship association, which was comprised of twenty-five railroads, and who by a pooling arrangement of freights in the organization of that association had substantially stopped railroad wars and competition among them, and the success of whose management had drawn attention to his executive ability—was invited by the railroad magnates of the east to organize, upon the plan of the Southern railway and steamship association, an organization to keep the peace and maintain rates for the trunk lines centring at New York, Boston, Philadelphia and Baltimore. Down to that period of time every attempt to create a "joint purse," as it is called in England, or a "pool," as it is termed in the United States, by which, to prevent railway wars, the proceeds of freight charges were divided between the railway companies, had proved fruitless. Scarcely was the ink dry on the contract made between the railway presidents before each particular railway company attempted, in one way or another, to break away from the contract thus made. So little under control were some of the freight agents, that even if the railway presidents desired to maintain the contract in its integrity, they found it impossible to control the various freight lines doing business over their own roads, and the contracts were broken almost as soon as made. Thereupon, in June, 1877, Mr. Fink was appointed commissioner of the four trunk lines, the Baltimore 8 Ohio, the Pennsylvania, the Erie, and the New York Central 8 Hudson River railroads. In December, 1878, he was further appointed commissioner of the combined trunk lines of the western roads. A contract was made, by which, in addition to the agreement as to regular tariffs, each railroad corporation agreed to accept a certain percentage of all the freight that was offered, and to send to the other lines which had a deficiency whatever surplus was offered to it, in consideration of which it was likewise to receive from the other line its own deficiency. Substantially it was then agreed as to west-bound freight, and subsequently as to east-bound freight, that the roads were to be operated with reference to traffic as though they were one corporation, and Mr. Fink, as a commissioner, was to see to it that this arrangement was faithfully carried out. He had supplied him a large staff of clerks to make these equalizations from time to time. A further development of this principle was the appointment of arbitrators, three in number, to determine disputed questions. The system has certainly resulted, first, in maintaining rates, and secondly, in stopping railroad wars between the contracting parties. A railroad war, while, on the one hand, great demoralization in business by the element of uncertainty in commercial transactions caused by the absence of a certain rate, vastly more expensive in its ultimate results than the higher rate for freight.
—The all but unanimous report of the investigating committee appointed in 1879 was made after an exhaustive inquiry, contained in five closely printed volumes of testimony. This committee, in summing up the condition of railroad management as they found it in the state of New York, pass in review the various abuses which have grown up under the management of these great highways by private corporations without responsibility to the state. They refer to the evil of the drawing room or sleeping car companies, which, by their contracts with the railroad companies, create a special interest that diminishes the return of the shareholders of the railroad companies. They speak of the fast freight lines and express companies as now conducted as free from evil. They condemn the methods by which the stock yards at the terminal points of the railways are let out to individuals, and speak of this as an instrumentality which is usually attended with additional taxes upon transportation. They consider the suborganizations of railways in the way of coal companies and elevator associations, which are designated as barnacles upon commerce, as organized for the purpose of tolling the commerce of that port (Buffalo) to the greatest possible extent. On alluding to watered stock the committee refers to the fact that it was proved before them, that $40,000,000 was probably the whole value of the property and equipment of the Erie Railway company, and that $25,000,000 more would cover all the additional value of the road, as represented by stock and bonds and interests in other corporations, while it was capitalized at about $155,000,000; that its construction account covered in 1873 an item of "legal expenses" of $891,000; and that the watering of the stock of the Erie railway, as well as its bonds, is estimated by them to be not less than $70,000,000. They proceeded to examine the accounts of the New York Central railway. They found that in 1853 the stocks and bonds of the roads which at that time formed the various links of the chain of consolidation thus effected, amounted to a total of $23,000,000, and that at the time when the first consolidation was effected, premiums, or, in other words, water, to the extent of almost $9,000,000, were given to the stockholders and shareholders of these various roads. From 1868 to 1870, by the consolidation of the New York Central and Hudson River railroads, over $44,000,000 was added to the combined capital of both the Hudson River and the New York Central roads, by stock dividends of 80 per cent. on the New York Central road in 1868, and 85 per cent on the Hudson River road.
—The committee pass in review local questions, which it is not necessary to enter into here, on the subject of the terminal facilities and the injustice done by the discriminations against New York by the arrangement of discriminating rates, and then they touch upon the abuse fully developed before them, connected with the Standard oil company.
—It appeared by the testimony submitted, that on Jan. 8, 1872, the Central, Erie, Lake Shore and Pennsylvania roads made an agreement with the South improvement company, a Pennsylvania corporation, giving to the improvement company, on shipment of oil to different points, rebates ranging from forty cents to $3.07 a barrel. The agreement provided that its object was to maintain the business of the South improvement company against loss or injury by competition, and that the roads would lower or raise the gross rate of transportation over their respective railways and connections, to such an extent as might be necessary to overcome all competition.
—When the agreement became public, the legislature of Pennsylvania was compelled by public opinion to vacate the charter of the corporation. A more ingenious and secret agreement, however, was subsequently made with the Standard oil company, by the railroad corporations, securing to that corporation the objects which were intended to be secured to the South improvement company. This company, originally composed of a few enterprising oil men of the western states, gradually absorbed into its management the Standard oil company of Cleveland, the Standard oil company of Pittsburg, the Acme oil company of New York, the Imperial oil company of Oil City, the Atlantic refining company of Philadelphia, Charles Pratt 8 Co. of New York, the Devoe manufacturing company of New York, J. A. Bostwick 8 Co., and Messrs. Rockfeller, Day, Flagler, Warden, Frew 8 Co., and others.
—This combination against the remainder of the trade, now banded together under the name of the Standard oil company, is characterized by the committee as a flagrant violation of every principle of railroad economy and natural justice. It resulted in driving out of business nearly all competitors, and enabled the Standard oil company to purchase, at such rates as they saw fit, the refineries distributed over the United States which they desired to control either for the purposes of manufacturing or to dismantle. This threw the production, distribution and refining of oil into the hands of a single corporation, to the extent, estimated at that time, of 95 per cent. of the whole product. In this regard the committee say, that from January to October, 1879, the total shipments from the oil regions to all points were 12,900,240 barrels, and that all shipments to the seaboard would have easily borne one dollar more per barrel than they did (the rate then being about twenty-five cents a barrel); that, tested by the charge which the roads imposed upon every other commodity, it should have borne that much more; and that all the trunk lines have grown into such relations with this oil company that they were forced to forego all these millions they might have earned, and compelled to look to the other products of the country for their revenues; thus burying their own interest in the interest of the Standard oil company, and joining in this war of rates to protect the latter against injury by competition.
—The attention of the committee had been drawn to the evils connected with the proxy system, by which railways were captured by the mere purchase of voting power from persons, mainly bankers, in whose names large amounts of stock were registered, but which had been sold and distributed to their customers, and were left on the stock books of the companies, standing in their names, simply for prudential reasons. This situation gave to such persons a large voting power in the railway without a substantial interest or stake in the result of the vote. To persons who desired to capture the road, it was a strong temptation to purchase such voting power; and, to persons who had no permanent interest in the road, it was a corresponding temptation to sell the power, the evil effects of which sale they were not called upon personally to bear. The committee, therefore, recommended the passage of a bill to remedy this abuse.
—The committee likewise condemned the system of the reports to the state engineer and surveyor, and then passed under review the system of special rates, which was founded upon no other basis than the arbitrary will of the freight agent in giving individual shippers, located in the same town, rates varying as much as thirty cents a hundred. The committee investigated the theory that had been advanced by all the railroad experts of "charging a traffic what it will bear." Of this they said, that, "as to an increase of from fifteen cents in August to forty cents in November on grain, the rate was raised simply because the condition of the market warranted it, and the product could bear it. It would be difficult to make a criticism upon that raise which public judgment would sustain, but we are distinctly told that public interest plays an insignificant rôle in the theatre of railroad management. It is at best but a service waiting upon the interest of the stockholders. The wrong consists in exercising a censorship over the business affairs of the community; secretly, arbitrarily and unequally varying rates, building up this, developing that; not only performing the proper functions of transportation, but taking into consideration the probable or possible profit of a shipment, and adjusting their rates accordingly. If the shipper is likely to make a large profit, they compel him to divide; if the margin is a close one, they determine whether the shipment shall be made or not, whether it shall result in a profit or loss. Thus, under this system of management and this method of giving rates, is every merchant, every manufacturer, every shipper, and, through them, every individual along the 5,500 miles of railroad in this state, with its five hundred millions of capital, measurably in the power of these corporations. Conciliate their good will, court their favor, and favorable rates will follow; incur their hostility, and the margin of their displeasure may be read on your freight bills."
—The committee speak of the enormous political influence which is wielded by corporations having in their employ, in 1879, upward of 30,000 voters. They speak also of the contemptuous disregard exhibited by the railroad corporations of the state to the milling interest, in April, 1879, when they answered a temperate statement of grievances by saying, "that the first condition of having them listened to was to retract their signatures from a certain circular, dated March 15, 1879," in which these grievances were stated in moderate terms, and "to withdraw their support from a pro rata freight bill, which was then before the assembly."
—The committee conclude their analysis of the testimony with the citation of the Shoelkopf 8 Matthews agreement, whereby the New York Central railroad bound itself to carry to New York, for these millers situated at Niagara Falls, at a pro rate of the through east-bound rate on grain or flour, whatever it may be, which enabled these millers to maintain their mill in full operation while their neighbors were going out of business simply because they had not as favorable a contract. The contract appeared to have been made for five years, and was to be valid on condition that it was to be kept secret. Personal discrimination could no farther go than was illustrated in that case.
—This investigation proved conclusively that every charge that had been made against the railway corporations by the commercial bodies of the state was under-stated rather than over-stated; that these great trusts had fallen into the hands of persons who exploited them for their personal benefit solely; that the public was only in so far regarded as any tyrant would regard the public; that it was dangerous to exasperate them too much; and that as freight charges are in the nature of taxes, if you want a continuous revenue from taxation, it must stop short of confiscation.
—The recommendations of the committee, therefore, were embodied in bills which embraced, in substance, the commission bill which, with some slight modifications, had been previously drafted at the request of the board of trade and transportation; a bill upon the subject of railway proxies, railway consolidations and stock waterings; a bill to regulate the transportation of freight by the railroad corporations, so as to prevent unjust discriminations; and a bill to insure a uniform system of accounts and a different system of reports.
—Of these bills, the one to create a board of commissioners became law; likewise the one, with considerable modification and amendment, upon the subject of proxy voting; also the one which prescribed a different method of rendering accounts. The other bills failed of adoption.
—During this period, the valuable reports on internal commerce, issued by Mr. Joseph Nimmo, chief of United States bureau of statistics, aided considerably in creating an enlightened public opinion on the relations of the railways to the state, and the part that they perform in the movement of the commerce and development of the industry of the nation.
—The New York commission bill was passed, and Gov. Cleveland, as one of his first acts after his installment into office, appointed Messrs. Kernan, O'Donnell and Rogers commissioners. The bill authorized the chamber of commerce, the board of trade and transportation, and the anti-monopoly league, to nominate one of the commissioners to the governor; and Mr. O'Donnell was so nominated by two of the three bodies, and the governor, under the bill, made the appointment.
—By the establishment of this commission, the long struggle between the railways of the state of New York and the people was brought to a close, favorably to the people. A body was now interposed, with power somewhat similar to that of the Massachusetts commission, between the people and the powerful railway corporations, clothed with authority for searching and continuous investigation and, in all probability, that body will prove to be a permanent one. The sense of responsibility in the performance of the task, together with the natural aptitude of intelligent men to grow to the work they have in hand, will, in time, make this commission a valuable aid to proper legislation. The important interests constantly connected with the subject committed to their care, will cause the work of the commission to be carefully watched, and the strong temptations that are placed in the way of these commissioners, in consequence of the enormous wealth and power of one of the parties constantly before it, will inevitably cause the commission to act with prudence, for the purpose of shielding themselves against suspicion.
—During the same years, other states had parallel experiences with struggles for the appointment of railroad commissioners. There are now in existence fourteen railroad commissions in the various states of the Union, whose business it is to supervise and investigate, if not control, the railroad corporations within the state; to report such amendatory laws as in their opinion are necessary for the purpose of correcting the abuses incident to railroad management; and to cause actions to be instituted to prevent either violations of charter limitations or violations of the rights of shippers or passengers, which may be brought to their notice.
—During the last five years, efforts were made in the United States congress to create a board of railroad commissioners for the United States, to exercise over all the railway corporations doing an interstate business the same kind of supervision and control as is exercised by the various state commissions over corporations chartered by the several states. Almost pari passu with this at tempted reform, an annual effort is made in congress to regulate interstate commerce, without the intervention of a commission, in the passage of a freight bill, in the nature of a pro rata bill, containing anti-discrimination clauses. Thus far, the advocates of the two measures have opposed each other, and no good results will probably be accomplished until the friends of federal legislation agree upon a commission bill, as the entering wedge to such legislation as should properly be passed by the United States, for the purpose of making this enormous interest, in the aggregate more powerful than any single state organization, amenable to the better concentrated public power, as represented in the United States congress. The railroad corporations, organized by the states, have thus far resisted, at every step, every attempt to make them amenable to federal legislation. Although many of these corporations derive their charter powers from several states, and substantially run cars over the territory of half the Union, they nevertheless insist that they are amenable only to such states as have granted them their charter privileges, and that the United States congress can not properly exercise any control over them. The necessity of the case, as well as sound logic, fights against their cause; and the time is not far distant when all the people of the United States, as represented in the general government, must take in hand the railway corporations of the United States, concentrated as they now are in power by becoming more and more under the control of a few leading minds, who can be gathered together in a single room of a private gentleman's house, and, for weal or for woe, can, and do, more materially affect the welfare of the people of the United States than can any representative body which has been organized in any of the states of the Union, or under the federal constitution. It is, therefore, not a figure of speech to say that an imperium in imperio has grown up in the community, which, by combination and concentration of power, is more powerful than the community, and that the question of making it amenable to the general powers of the government is no longer one of expediency, but one of prime necessity.
—This brings us to a consideration of some of the general questions, which are as yet unsolved problems, with reference to the government of railways, either by the state or by private management.
—The general result of investigation upon the question of railways within the past fifteen years, in the United States, and the development that has taken place, both in railway construction and in many of the evils incident to railway administration, have modified both public opinion and the opinion of experts who are not blinded by personal interest, on the subject of the extent to which competition is a regulator of the price of service in railway transportation. It went hard for the free trader to surrender his faith in competition, and to admit that it is not a universally applicable principle. It has now been ascertained that, notwithstanding the enormous progress of railway construction in the United States within the past thirty years, railways can never be multiplied to such an extent as to make them compete in the same sense that grocers, butchers, hatters and shoemakers compete. They will be at war for a time, and then comes a long period of peace, when the railways work under combination even at competitive points. It is difficult to tell whether the war is not more injurious than the peace, so far as public interests are concerned. When there is competition between rival hatters, customers are treated alike at one or the other shop in the purchase of the commodity they want, and even if they were not so treated, no great harm would be done. A railway war is generally carried on secretly for a considerable period of time before open hostilities begin. Railways, in vying with each other, seek to obtain the more important customers from each other, and make concessions to larger shippers, which they are not ready to make to the smaller men. This instantly gives to the larger shipper so great an advantage in addition to that which he already has by reason of his greater capital over the smaller man in the same line of trade, that the smaller dealer does his business at a loss; he discovers that his formidable rival can offer goods at prices with which he can not compete, and he is frequently driven out of business or into bankruptcy by reason of a secret advantage which his stronger competitor has in transportation rates. Thus monopoly breeds monopoly, and centralization of business is built up, not by greater natural aptitude, but by injustice and wrong. Even during periods of railway peace these advantages are frequently got and maintained by the more formidable shipper for the purpose of tying him to a particular railway, with the mischievous tendency to make the poor poorer and the rich richer. This personal system of tariffs produces absolutely the same effect as unequal taxation. As the beneficial results of competition are not obtained by duplicating lines such additional routes are an evil rather than a good. The large expenditure of capital in creating the duplicate line might have been saved, since but very few railway corporations in the world have their road bed taxed to their maximum capacity. The existence of the new line built for competition is in reality an investment of an enormous amount of capital to divide the traffic which the existing line is perfectly competent to carry, and results in the traffic being done at a very much greater expense for fixed charges than if the existing road had added to its rolling stock facilities and had been permitted alone to accommodate such traffic. When peace is made, rates are fixed so high as to afford a reasonable expectation of a return upon a very large amount of capital unnecessarily expended in the building of so-called rival lines. This has led to the general conviction, that, for economizing capital and producing, through these instrumentalities of commerce and of trade, the maximum result for the benefit of society, it would be better were we to start de novo; and instead of dealing with existing conditions, to transfer to a corporation a definite field for its operations, under strict supervision of its tariff rates, and to stipulate that the corporation shall not be interfered with as to the field so long as it keeps down its rate to a certain percentage of profit. At almost every western point, whether in Colorado, Utah or Arizona, we find railway corporations just constructed, and who operate upon their roads two or three trains a day all included, threatened with rival enterprises, which propose to divide between them the little traffic that there is, and to destroy the profitableness of the capital investment in the original line, so that in the end the business divided between them, at extortionate rates, is not sufficient to pay for operating expenses and fixed charges on both capitalizations. But we are not now called upon to deal with this question de novo, as railway development in the United States has proceeded to a point to make assignments of fields almost impossible of accomplishment through the instrumentality of legislation. The railway companies themselves are beginning to discuss the expediency, as a matter of self-preservation, of coming to some agreement as to fields between them. This, however, will be extremely difficult to accomplish by voluntary action. However faithfully existing railroad corporations adhere to an agreement not to invade each other's field, the absence of legislation holding the railway corporation to a strict accountability as to charges within the field with reference to which it by common consent thus obtains a monopoly, makes such an agreement one that the courts would probably declare void as against public policy, and it would, in reality, in the absence of such supervision and control, be a conspiracy against the public. That the railway corporations already discuss these questions, and begin to regard the occupation of a field as a right arising from the circumstances of the case in favor of the particular railway occupying it, is an indication that the railways themselves have abandoned all pretense of competition in the same sense in which that term is understood in private enterprises. The practical consolidations rapidly proceeding under the commissioner-ships such as that of Fink's, will tend somewhat toward the solution of this problem, because it will enable the government to deal with these corporations upon the basis of their dealing with each other, and at some day or another to practically appoint fields to conglomerate bodies of railway corporations in following out the line traced by their voluntary action.
—One of the peculiarities of railway competition is, that the unsuccessful competitor in a railway war, driven to insolvency, unlike the unsuccessful competitor in mercantile life who is driven into insolvency, is not thereby driven out of the market. The insolvent corporation becomes in many respects a menace to the solvent corporation more formidable than it was in its solvent condition. It begins, in railway parlance, to "run wild" after its insolvency, being exonerated from paying interest upon bonds, or dividends upon stock. Being required to earn simply operating expenses, it carries on a war of rates with a recklessness that threatens to break the solvent corporation fighting it into the same condition of insolvency. Therefore, during the active railway war of 1875-7, carried on between the New York Central, the Erie, the Baltimore 8 Ohio and the Pennsylvania railroads, the more favorably placed New York Central railroad did not dare to carry the war to a point which would drive its adversaries into insolvency, lest the insolvency of the Baltimore 8 Ohio railroad, and possibly of the Pennsylvania railroad, might threaten the solvency of the New York Central. The motive and the facility for combination are so great that combination will almost invariably take the place of competition; and railway managers and legislators must now recognize as a fact that the railways are not and can not, without the interference of government, be subjected, within any period of time about which we need give ourselves any concern, to the law of competition to that degree that we may look for the same results as in other departments of human activity, with any confident expectation of maximum results to society at minimum expense. The natural law of competition being inapplicable, the question of governmental interference, therefore, resolves itself simply into one of degree: how far is it expedient to regulate railways by the public? and that depends very much upon other questions to which in this country we can not shut our eyes.
—As political machinery has, by a vicious party system which by no means can find its complete corrective in the rules of civil service reform, more and more insidiously divested the people of self-government within the past generation, we are in a condition in which is presented the question when we speak of governmental control, not whether the railways shall manage themselves, or the people, through the government, shall control their management, but whether the railways, banded together in organizations, having at their head powerful, astute, intelligent and somewhat unscrupulous men, shall, in affairs in which they have a large interest and in which they must pay to public welfare some regard, varying in degree according to circumstances, manage those important trusts, or whether the politicians, equally unscrupulous and astute, but not quite equal in intelligence as banded together in party machinery, shall, in the interest of those political organizations which represent even more remotely the public interests than the railway direction represents them, manage those important trusts for them. There are many important reforms, therefore, in our governmental machinery which must proceed contemporaneously with the transfer of power from the corporation management to public control before we can hope for any great relief from public control as compared with corporate management. It is, therefore, well to proceed slowly even in a proper direction until the machinery of government in the United States shall be emancipated more from the bossism, political corruption and chicanery concomitant and attendant under existing representative and party conditions. It must be admitted that the direction must be toward governmental control, but this imposes upon the people of the United States the duty of making its governmental machinery fit to exercise such control. Neither the state nor federal machinery is as yet in that condition.
—Another important question which must be taken in hand with reference to railway management, is to find some proper-basis for railway charges. The doctrine which now prevails among railway managers, of charging the traffic all that it will bear, the basis upon which its classification as well as its tariff rates depends, is monstrously unjust, and should be radically changed. It is true that the responsibility on the part of a corporation for the carriage of a case of silks is greater than it is when it carries a bale of cotton. But the difference in the rate charged is not based upon the slight premium which would represent an indemnity fund for the losses they might possibly incur by the loss of the package, but the difference is based really upon the supposed profit that the merchant or jobber makes on a case of silk as compared with the bale of cotton, and that he can afford, therefore, to divide with the railway the larger amount in the general result. This makes this service differ from that of any other rendered under competition in society. What regulates prices ordinarily is the cost of production, not benefit to the consumer. The ounce of laudanum that is intended to cure a toothache costs at the store of the druggist the same sum as the laudanum which is to save a life. The use to which the object is to be put, or the benefit conferred upon the consumer, does not affect the price. It is said, in answer to this position, by the railway manager, that he must regard his traffic as a whole, and that, by reason of the greater value of these first-class goods and the higher charge which he can make on them, he is enabled to carry the lowest price goods at a rate at which they can be moved, and that, if he were precluded from charging the higher rate on goods as readily handled, but which are much more valuable in money, he could not carry ores, coal or stone at any such rate as would justify their transportation from place to place. There is force in this position, but not to the extent to which it is claimed, and in that respect intelligent investigation and careful governmental control will have to strike a mean which will be more just than the existing classifications, and so adjust the rates both to consumer and producer as to enable all classes of commodities to be moved without doing injustice to the railway corporation.
—The application of the doctrine of charging what the traffic will bear, substantially makes the railway corporation a special partner, without investment of capital, in every enterprise along its line. The extent to which unscrupulous traffic managers and agents can, for their private emolument, carry this power of enforced copartnership, and that this power is availed of, is exemplified in the fact that on comparatively moderate salaries these traffic managers very often do become men of great fortunes, within a very few years. It is a power to which modern society has known no parallel since the days of the farmers general of France, who, in consideration of a sum total paid into the French treasury during the corrupt regency of the duke of Orleans, and the reign of Louis XV., obtained the privilege of having a section of France farmed out to them to tax at their own will. It is therefore absolutely essential with reference to transportation lines, that without thereby fixing absolute rates, severe penalties shall by legislation be imposed for breach of the public trust for personal ends, and also stringent penalties imposed upon the making of discriminations between persons of the same locality. It is likewise the duty of the public to see to it that some unit, whether car load or train load, be established, upon the basis of which all shippers shall be treated alike, and to place the smaller shipper upon some basis of equality with the larger shipper. The smaller shipper should by law be permitted to avail himself, in combination with other people, of the car load unit.
—Maximum charges have, in the experience of England, been found to be almost universally useless. The economies in railway traffic arising from steel rails, improved roadbeds, better gradients, the greater power of engines, reduced rates of fuel, and through lines obviating breaking of bulk, have been so great within the past fifteen years that any fair rate at one period of time becomes at any other period so excessive as to cease to be a criterion. Maximum rates, therefore, when fixed, must be so arranged as to be under the supervision of some tribunal commanding public confidence and authorized to exercise such supervision, and to be from time to time registered upon a lower scale with reference to cost of traffic.
—A serious grievance in relation to American railway administration arises from railway tariffs being secret, and subject to sudden changes or modifications. No tariff of transportation rates should be permitted to be changed, except upon previous notice of a considerable period of time. Even the lowering of a tariff rate produces at the outset as much financial and commercial disturbance as the raising of it does. It is said that the knowledge obtained by the officers of the Standard Oil company in 1880, that the tariff rates on oil would be suddenly increased by the railroad corporations, gave to that combination a profit of several millions of dollars. Whether true or not, is immaterial. It is possible for special favored private interests to be informed secretly of an intended sudden change of tariff on an important commodity. In consequence of that information, which necessarily changes the price of that commodity at the point of delivery or at the point of shipment, the making of a purchase or a sale in advance, based upon that knowledge, gives absolute certainty of a large profit, which is so much wrested from those who do not know it. This is an advantage which should not be permitted to remain in the hands of railway administrators to make use of, either for personal ends or for the benefit of friends as they may see fit. A law, therefore, providing with great stringency that all tariffs shall be published for at least six months in advance, and that no modifications thereof shall be permitted during that time, is a necessity to avoid this mischief. Tariffs also should be published at every station, with classifications, so that every man doing business with the railway corporation should be permitted, at a glance, at every station either of delivery or of receipt, to compare his freight bills with the published tariff rates, and see to it that he is fairly treated. Every deviation from the tariff to a favored shipper should result in imposing upon the railway corporation that allows such a deviation the payment, to every other shipper. of a rebate based upon the lowest shipment made. This penalty would be so severe that there would be no longer any favored shippers, and it is right that it should be so, because, of all evils incident to American railway administration, that of personal favoritism has been the most shameless and the most mischievous.
—Another problem presented by the existing condition of the railways in the United States, is that which arises from secrecy of management. This evil must be dealt with radically. One of the prime motives for secrecy of management is the enormous advantage which at the present day it gives to the managers in the maintenance of their power. They alone know where the stockholders are to be found, and can therefore control votes by the knowledge of how to reach or buy them, thus perpetuating their control. Another motive is the advantage thus afforded for stock speculations. The board of managers, by keeping unto themselves the knowledge that their property is losing heavily in comparative traffic, can sell their own holdings and go short of the market, under circumstances which will yield them an absolute certainty of profit on the transaction. This gives them an enormous advantage over the community by depleting the pockets of the unwary, who find themselves saddled with stocks at high prices, bought months in advance of the public announcement that the road is in difficulties. The knowledge of rapid gains in the development of business likewise gives, so long as it can be kept secret, a like advantage in purchase of stock. This advantage has been exploited to such a degree in the United States that the investing public has become inspired with a general distrust for railroad stock investments.
—In the states of the Union and in the United States the existing condition of legislation which gives the absolute control of corporate enterprises into the hands of majorities of stock, and which gives to such stock equal weight, lends itself to this species of management, and places the stockholders' interest, as well as the public, at the mercy of this class of railway directors. The majority of the holders of record at the time of the closing of the books of a corporation, have, at the annual election, the power to elect the whole board of directors. As much of the stock of great railway lines in the United States is held abroad, and is not transferred on the books to the actual owners of the property, but remains registered in the names of the persons who had long before parted with all interest therein, there is, at the time of the closing of the books in a great many of these railroad corporations, a large fictitious holdership, ranging from one-half to one-eighth of the whole capital stock holding interest, and this fictitious holding frequently controls such election. Who are fictitious and who are true holders are, as a general rule, approximately known to the directors. The directors, therefore, can sell their real holdings at high prices, and can purchase at low prices the fictitious holdings or power to wield proxies, and thus, for the purpose of depleting the road, capture the railway, in which neither they nor the constituency that elected them, have a substantial interest. This evil also can be remedied by legislation. Severe penalties should be imposed upon any one, having no interest in the corporation, offering to vote, or voting, either personally or by giving a proxy to vote, at any election of directors of such corporation.
—The severest blow, how ever, which could be dealt to corporate mismanagement, would be the rigorous introduction of minority representation in boards of direction, which would make secrecy of management, as against the interest of shareholders, substantially impossible, and would prevent the possibility of the recurrence of some of the worst abuses which characterize their administration. Suppose twenty directors were to be elected, the reform would consist in allowing each section of one-twentieth of the stockholding interest to elect one director, by accumulating their votes upon a single name, or by distributing their votes for one or more, as they may see fit. This is the cumulative plan. Another is the preferential or list plan, in allowing each twentieth part of the constituency to elect one director, by preferences indicated on a ballot, in the order of the names as printed. When the first name has a quota sufficient to elect him, i.e., one-twentieth of the votes cast, the ballot is counted for the second name, and so forth. The result of this system of minority representation would be to make of the board of direction a reduced photograph of the whole constituent body, and make it impossible to capture an organization like a railway from the actual owners thereof. Any one of the numerous plans suggested for securing minority representation, if applied to corporate management, would successfully accomplish that result. The objection which has been urged to the adoption of minority representation in public representative bodies, has no validity to corporate elections, as in corporations neither localities nor persons are supposed to be represented, but pecuniary interests only. It would better secure fair representation than does the English system of diminished value of votes in proportion to stock holders' interests, i.e., one vote for every share up to ten, an additional vote for every five others beyond the first ten, and one vote for every ten beyond one hundred shares; or the classification plan, by which only a few directors of the whole retire each year; minority representation would give permanency in management, and prevent the swamping of the interests of the smaller shareholders.
—Pro rata tariffs are the refuge of people of little thought on the subject of railway management. It is fair that for the haul or for the car load alone there should not be permitted a higher rate for the shorter distance than for the longer, as it is manifestly unjust artificially to wholly wipe out and even to reverse the advantages of proximity to the market; but to arrive at anything like a just conclusion on this subject, it will be necessary for the railways themselves, or through legislation to be compelled, to make a distinction in their freight rates between what they charge for terminal handling and what they charge for the haul. The terminal handling at a great market is effected on so large a scale that it can be done at very much lower rates for each particular package than the terminal handling at a way station. The cars are more likely to be filled than they are at way stations, so that a perpetual difference must exist in favor of the facilities of commerce which the great centres of activity produce. This would be represented by lower terminal charges for places like New York, Buffalo and Chicago, than at the small way stations or small hamlets along the line. And the haul would be proportionately much less, and justly so, from extreme points of concentration of freights to extreme points of market, because the whole train loads would go unbroken straight through. On the other hand, it should not be permitted to be so much less as to invert the situation, and to make the more distant point more favorably situated to the seaboard than the nearer point.
—Pro rata freight rates disregard the laws of commerce in that particular, and must therefore be receded from wherever introduced. On the other hand, we must not be blind to the justification which lies at the root of the demand for pro rata rates, i.e., the unrighteousness of inverting the natural situation, which is ordinarily done under the spur of a railroad war at competitive points, under the effect of which the intermediate localities, which are at the mercy of the monopoly power of the railway, must suffer the burden of the war. This can be remedied only by legislation, but in that particular care must be taken that the legislation shall not go too far, as in doing so it defeats its own ends, because it becomes impracticable to work under it, and the repeal of the law leaves matters worse than before the law was enacted, as the unsuccessful law is used as an argument against the expediency of any law on that subject.
—A director found speculating in the stock of his own road, either by purchase on margins or sales on margins, should be severely punished. The temptation to sacrifice the interests of the road to subserve his stock operations is too great to be permitted to exist. The man who desires to speculate in the stock of his own railway should be required first to leave the board of direction; if he fails to do so, he should, on detection, be punished as a malefactor.
—The fictitious capitalization of railroads in the United States is an evil more difficult to deal with. Many motives combine to create such fictitious capitalization. Some are justifiable, others are sinister. Take the case of a mining property. A prospector discovers a silver mine; he sells it for $30,000 to a capitalist in the neighborhood. The property is not developed; the discovery may amount to nothing. It may also be worth millions of dollars. The capitalist, the first investor, spends a few thousand dollars in developing the property, and thereby ascertains that the leads open into a vein within the domain of the lines of the stakes. He has his ore analyzed, and discovers that it yields from sixty to eighty dollars a ton. He thereupon proposes to sell this property, and does sell it to a stock company, who capitalize the property at a million of dollars, pay him a hundred thousand dollars cash, and something less than half the capital stock, and with the remainder of the capital stock, they supply the treasury sufficiently to develop the property. They find some takers on the basis of a million; others on the basis of half a million; others on the basis of a quarter of a million; but, as it is possible that the mine may be worth a million of dollars by capacity to yield sufficiently to pay interest upon such a sum and to return the capital invested within a given period of time, there is no public wrong in such fictitious capitalization, unless it is accompanied by fraudulent pretenses. The injury, if any is done, is limited also. The individual has invested his money at an excessive valuation, and there is an end. Railway corporations are, however, organized upon fictitious capitalization upon a different basis. A line from one point to another, say a distance of a hundred miles, is surveyed. It is ascertained that it will cost about $15,000 a mile to build, including acquisition of land, and about $5,000 a mile to equip; a total of $20,000 a mile. Application is then made for town and county aid, which aid is generally represented by investment in the stock of the road. The first purpose is to give as little as possible in the way of value in return for such money aid, and it is, therefore, necessary to interpose between the stock and the property a sufficient number of mortgages to make the prospective value of the stock of little or no value. A construction company is then organized, which takes the town and county aid as part of its capital, and the railway corporation, instead of making its contract upon the basis of cash, issues to the construction company, say first mortgage bonds of $20,000 a mile, or possibly $25,000 a mile; second mortgage bonds of $20,000 a mile, and stock of an equal sum, making a total capitalization of $65,000 a mile, instead of the $20,000 a mile at which the road could be constructed. The construction company is composed generally, directly or indirectly, of the officers of the road and their friends, who build the road upon the basis of cash obtained by negotiating through bankers the securities represented by the bond issues of the railroad company; they acquire the stock for little or nothing, and also frequently a large proportion, if not the whole, of the second mortgage, and in prosperous times they may succeed in building and equipping the road on the issue of the bonds secured by the first mortgage alone. By this system the road comes into existence laboring under the necessity to earn, over and above operating expenses, interest on a funded debt, about double the cost of the enterprise, and, if possible, to earn dividends on the stock beyond that sum. That this rate of earnings has been accomplished in the United States to a very considerable degree is an illustration of the remarkable development which the country has experienced in every direction during the past twenty years, and is an illustration, likewise, of the enormous growth and progress of all material interests which have taken place; because this mode of stock and bond issue is the all but universal rule with reference to the construction of new lines in the United States.
—The excuse made by railway builders for this course of proceeding is, that upon the basis of an ordinary profit no one would undertake the extremely hazardous task of introducing railways into new territory. The peculiar risks incident to such an enterprise are, that if the traffic fails to come they lose their money, and if the traffic develops they are in imminent danger of being immediately compelled to divide such traffic with some other rival line; that, therefore, they must find the return of the capital and their profit, not in waiting for the development of the business, but in selling bonds and stock to the investing public upon a basis of fictitious value. So long as investors purchase without proper investigation this class of securities, it is difficult to see how they have any ground for complaint; as the mode of manufacturing these securities is sufficiently well known to be a matter of public notoriety. As to the people at large, however, the effect of this fictitious capitalization bears a different aspect. It is true that the cost of a road and its capital account have but little to do with the rate at which it is required to carry to and from a few competitive points. It has, however, very much to do with the fixing of the local rates, and is a constant incentive to increase the rates for the purpose of paying interest and return upon all the capital issues of the road. For the state to interfere and absolutely forbid any false capitalization, which is, in other words, the anticipation in the capital account of the development in time of the traffic, would probably interfere considerably with the undertaking of new railroad building, unless such interference and prohibition are accompanied with some guarantee of the field.
—The two evils, unrestricted competition in railroad building and false capitalization, hang together. Were railway projectors secure that a certain territory would be left in their possession until they could receive back the return of their capital and a reasonable percentage on the outlay, there would be no reason for continuing the incentive to railway construction of false capitalization, so that the promoters can immediately obtain by means of this quasi-fraudulent element a return and profit for the outlay of their money; they could then contentedly wait to receive an adequate return for their money upon the basis of a capitalization bearing a close relation to the actual cost of the construction and its equipment. Justified as is the opposition to stock watering, both on the part of the investor and on the part of the public, the reform of this evil can only then be safely entered upon, so as not to avoid materially checking new railway enterprises, with a concomitant change in the policy of the state governments as well as the national government, recognizing the fact that railway construction should not be left to absolute free competition, but is a trust which should be given with circumspection, and, when given, surrounded, first, with guarantees to the state and to the people that the men who undertake it will faithfully perform their trust, and secondly, with guarantees from the people and the state to the entrepreneurs that they will permit them for a given number of years undisturbedly (under limitations as to charges) to obtain the advantage of the traffic development which their enterprise has created, without incurring the danger of being compelled to divide such traffic with another organization, which takes possession of the developed field, not to render additional services to the public embraced within its line, but simply to take away from and divide the income of the existing road.
—There is no question but that the system is entirely vicious, but it is a system that has its roots in the false path which the public has traveled in relation to railway enterprises by treating them as private enterprises instead of public ones, and therefore has given a basis for the railway speculators point of view, that it is their business, and not the public's business, at what rate they see fit to capitalize their roads; and, as the public gives no care to protect the railway constructor in his enterprise, the railway builder, in his turn, imagines that he owes nothing to the public in that regard.
—Mr. Poor, in his introduction to his Manual for 1883 (and he speaks from the railroad point of view), can not but admit "that the increase of share capital and indebtedness of the railroad companies for the three years ending Dec. 31, 1882, was $2,023,646,842, the average cost per mile of the new roads being in round numbers $70,000." He estimates that the cash cost of all the railroads built in the United States in the last three years did not exceed probably $30,000 per mile, or $900,000,000 in all. He estimates, therefore, that more than half of this enormous capitalization is entirely fictitious. He says, with great frankness, "Of course such an enormous increase of liabilities over cash outlay is to be greatly regretted, and is well calculated to create a distrust of all securities, good and bad." There is an abuse connected with railway administration which requires legislative remedy—the granting of the right of way for telegraphic purposes at the same time with that for railway purposes. With every extension of an old railroad or the building of a new one, the Western Union telegraph company is ready to step in and stretch wires for the new corporation or line, under a contract that the railway company gives to the Western Union telegraph company the exclusive right to maintain the telegraph service to the towns and stations along the line, in consideration of which the railway company can, for its purposes in the management of its road and in the dispatching of its trains, use the telegraph line thus built. This gives to the telegraph line a free right of way; and, as the railway in all territory west of the Mississippi and south of the Potomac is in reality the main line of travel, along the line of which towns spring up and population congregates, it gives to that particular organization an enormous advantage over its competitors and all new organizations, inasmuch as it not only gives the free right of way along the line of the railways, but an exclusive service in connection with the railways. This abuse, which as yet has scarcely attracted public attention, came to the surface only during the recent controversies in relation to the stock waterings and acquisitions of rival properties by the Western Union telegraph company. This is also difficult of remedy without legislation recognizing the monopoly character of railroad and telegraphic enterprises, and should, if permitted hereafter, be allowed only on condition that such field may be secured in consideration either of lower charges to the community, or providing some species of sinking fund by which the community shall ultimately acquire the property.
—This brings us to the final consideration of what is the probable future of the railway question in the United States. The railways now represent an aggregate capital of something approaching $7,000,000,000. A considerable proportion of that total capitalization is in the hands, or largely under the control, of less than one hundred men, who are not the highest type of modern civilized life. After giving them credit for business capacity, shrewdness and intelligence, there are still lacking some elements of character which are created by living up fully at all times to contracts, the basis of the modern social organism. Unlike increase of capitalization in any other business, increased capitalization in railroad enterprises does not increase the number of great capitalists engaged in the business, but has a tendency to decrease them, because amalgamation and consolidation proceed with greater rapidity than extension of mileage. Compared with the power represented by this vast aggregate of capital, the power and the influence of nobility in any civilized community are small.
—One of the arguments in favor of a great national indebtedness at the time when it was in process of growth, was, that, though unfortunate for the country to be compelled to roll up so large a debt, yet it had a counterbalancing good, inasmuch as it interested vast numbers of people in the success of the government and in its stability by the pecuniary interest of the bondholders. As the indebtedness of the United States was, at its very highest, less than one-half of the aggregate capital now represented by the railway interest, it is clear that there is a larger pecuniary interest on the side of the railway to-day, arising from capital investment in its obligations, than there was at any time on the side of the government. Railway capital is now four times the amount of the public debt. In any contest, therefore, between the government and the railway enterprises, it is clear, that, so far as mere pecuniary interests are concerned, the railway enterprises largely preponderate. Adding to this the circumstance of the concentration of this great railway power in comparatively few hands, the extent to which they can corrupt the commonwealths is practically limited only by their will.
—At the time of the institution of the government of the United States and of the various states, European governments were great monopolies in the hands of the few. From the corrupting influence of a like power American statesmen sought to shield the American people. Governmental responsibility and prerogatives of executive power, instead of being centralized, were diffused and split up, and to a large extent sacrificed, for the purpose of creating a larger degree of individual freedom. The governments of the states of the Union were therefore loosely put together, so that public opinion could break through at any point and influence them. Permanent large ownerships of land; titles of nobility, special privileges and great accumulations of capital were guarded against by abolishing the right of primogeniture, of patents of nobility and of accumulations. The corporation was but little extended, because credit was but little developed at the time of the organization of the United States government. Hence it was not observed that some of the evils which were thus carefully intended to be guarded against, such as primogeniture and accumulations, were allowed to come back in more aggravated form through the perpetual existence of the corporation, making a continuous increase of capital accumulations possible through its instrumentality, with the aggravating circumstances, that, instead of those vast properties being in the hands of individuals responsible for their right conduct in their individual capacity, and distributed by the natural process of death into a greater number of portions, the great accumulations and vast possessions of modern times are under the control of boards of directors having less immediate responsibility than the individual to legal influences, and being less governed by considerations of a social character properly to administer their trusts. The United States constitution and the constitution of the states contain provisions against unjust taxation by carefully worded provisions that taxation shall be equal. The amount collected for freight and passenger traffic in the United States by the railways of the United States in 1882 was $770,000,000, an amount double that of the revenues of the United States government. Every dollar of this, as to mode and manner of expenditure, is in the hands of boards of direction, with scarcely any accountability to the public, and but a very remote one to their own shareholding interests.
—In every presidential election for the past twenty years the railway corporations took an important part. In the election of governors in the various states and in the formation of the state legislatures, in influencing appointments of committees, they play a significant rôle, and one which is scarcely any longer disguised. They do this avowedly on the theory of self-protection; but no irresponsible body ever stopped short at self protection, because the power which enables them to protect themselves against aggression is likewise a power which may be wielded in aggressing upon the rights of others.
—The mode and manner of the collection of this revenue is not yet amenable to public control in the United States, and yet the cost of transportation more closely resembles taxation in all its incidents than any other method of receiving return for services in the industrial world.
—When the railway corporations, under the administration of Mr. Fink, in July, 1882, raised their rates on west-bound freight from New York to Chicago, from forty-five to sixty cents per hundred pounds on first class, from thirty-two to fifty cents on second class, from twenty-six to forty cents on third class, and from nineteen to thirty cents on fourth class, every commodity transported from New York to Chicago had this additional tax imposed upon it as part of its cost of production in Chicago, in the same manner as though the government had imposed the tax, and there was little and even less possibility of escaping from that imposition than there is from a governmental tax.
—It is, therefore, of at least as much importance to a community to be fairly and equitably dealt with in its cost of transportation as it is to be fairly and equitably dealt with as to taxation. And unfairness and injustice in the cost of transportation bring about the same disastrous consequences to individuals and to classes as unfair and unjust taxation does. It is indeed, a mild statement of the case to say that the injury inflicted by the unfair cost of transportation is as great as that inflicted by unequal taxation, because the mischievous consequences of unfair or unwise transportation rates are necessarily greater than those that arise from unequal taxation, and dry up, more rapidly than would bad taxing laws, the prosperity of a community. Therefore, by carefully worded constitutional provisions, to protect the community from the evils of oppressive and unequal taxation by government, and then to leave this great and growing power of private taxation without responsibility to government in its administration, is to guard the public against the ravages of the wolf, and to leave it unguarded from the attacks of the tiger. That already the legislative bodies of the states of the Union are as wax in the hands of the modeler under the manipulations of these great corporations, is a truth which, in all the more densely populated states, in the north and the east, the people have been made to feel. How to get back their control, and yet not change it into a control of a very dangerous character, by adding the supervision of the expenditures of the enormous revenues of the railways to the supervision of the enormous revenues of the United States, and of state and local administrations, administered as they are in the main by politicians not much, if any, above the status of the railway magnates, is probably the most serious problem which, since the abolition of slavery, has confronted the people of the United States. There is much keen perception and wisdom in the way Professor Sumner puts the relation of the government to the people in the United States, when he says that the government, in the abstract, is all of us, and, in the concrete, some of us, who, by accident or chicane, obtain control, and those some of us not the best of us, and that, therefore, it always becomes a serious question what these some of us should be permitted to do for all of us. Therefore, no heroic measures can, in the present aspect of political conditions in the United States, safely be entered upon. These very political conditions suggest a possible point of view from which we can regard this powerful imperium in imperio of the aggregated railway corporations as something other than an unmixed evil. The corruption of our political machinery has proceeded almost simultaneously with the growth of the railway corporation. As the basis of civilization, the security of capital is certainly of as much importance to a community as its form of government. Peoples have become civilized, and enjoyed a certain degree of prosperity, under forms of government other than our own. No community can enjoy prosperity, or attain any high degree of civilization, where property rights are not secured. Property protects itself best from aggression, or unjust tribute, when it is congregated under corporate management, in few hands, because it becomes, in its centralized form, capable of wielding a power which the politician is bound to respect. Under the corrupting conditions of existing administrations, it has, perhaps, been one of the modes of preserving property from the grasp of those who, in national, state and municipal governments, represented public power ostensibly, but really represented their personal interests first, and party caucus and boss interests in the second rank. In the long run, however, this condition becomes intolerable. No community can safely pursue its course of happiness and well-being where the actual highest power wielded in the community is not responsible to the people, where its government is a mere simulacrum, and all real power is moulded behind the throne by a moving power. It is just as objectionable if this moving power be a band of railroad directors who move the government, as that it should be the mayor of the palace, a church institution, a cabal of courtiers or loose women. Against such an insidious power the ballot is ineffectual, and even revolution almost hopeless.
—It is, therefore, essential, as a necessary part of the solution of the problem before us, that the people of the United States should awaken to the fact that their methods of legislation and their methods of selecting legislators, their political organization and political administration, must be reformed as well as the railway administration, and that the amenability of railways to the public is very largely dependent upon such reform in political administration. The civil service reform is already a step in the right direction, and its permanent establishment will make thoughtful investigators on current events less fearful of clothing governments, both state and national, with the additional powers necessary to cope with the railway problem. The other more important reforms, however, are those of methods of legislation and representation. (See LEGISLATION, REPRESENTATION.) The people must concede, once for all, that the line of policy as to railway management has proceeded upon a mistake. They must recognize the fact, that in all services, the supply of which is limited to a certain locality, and which, as to such locality, can practically be indefinitely increased without proportionately increasing the plant, there is a monopoly character implanted upon such service, whether it be the supply of ways and means of transportation, of gas, of water, of electricity, or of motive power on some general plan, which takes these enterprises out of the domain of competition, and compels a treatment separate and apart from that of strictly private enterprises. Some modification must be made, limiting the existence of corporations, so that from time to time something analogous to the service that death performs in the individual world shall happen to their accumulations and power. Some plan should be provided, by way of sinking fund, or gradual acquisition by the government, by which enterprises of this character shall in time become the property of the state. Such a plan of compulsory sinking fund to repay capital must, of course, in all cases be accompanied by some guarantee against invasion of the field by other organizations; and, as Mr. Fink observes, in his answer to inquiries of Mr. Nimmo, in his report for 1878, "In the consideration of this subject one important fact should always be kept in view, to-wit, that the effect of the construction of a greater number of railroads than are necessary to accommodate the traffic, is to increase to a great extent, not decrease, the cost of transportation. The interest on the cost of two roads built for the purpose of transacting the business that could be transacted by one, and the cost of maintaining the two roads, are of course twice as much as the interest and the cost of maintaining one road." The interest and cost of maintaining a road, he estimates as from 40 to 60 per cent. of the whole cost of transportation. "It follows, therefore," he continues, "that for every additional road built for the purpose of transacting the business that could be accommodated by the road already built, the cost of transportation is increased from 40 to 60 per cent." This truth borne in mind would enable the government to give practical control of the field, without thereby adding to the cost of transportation. It could at all times annex the condition that no more than a certain percentage of profit shall be earned, and that out of this surplus a sinking fund shall be provided, to repay capital outlay, and that, when the cost shall be repaid, the road shall become public property.
—We are very far yet from this solution. The course which is likely to be run in the United States in regard to the railway problem is the extension of the commissioner system by state legislation and its adoption by the federal government. A mass of light thrown through the investigations of these bodies upon the subject will make matters appertaining to railway administration more generally understood by the people of the United States. And, by the time the railways are ripe for more heroic treatment of the question, the people in all probability will also be ripe to treat it more intelligently, and will have made such progress in the moral development of the administrative machinery of the government that the additional powers to be intrusted to that machinery can safely be to it delegated by the people.