The Railroad Question Part 9

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

In the days of inflation such transactions did not seem to seriously affect railroad securities. Even when they were no longer a secret to the public, stocks and bonds sold readily, because, owing to the large earnings of the roads, this cla.s.s of investments was unusually productive.

In 1868 the earnings of the railroads of Ma.s.sachusetts averaged $15,400 a mile, and were equal to 38 per cent. of the total reported cost of all the lines of the State. The Chicago, Burlington and Quincy earned $15,386 per mile in 1867, and paid a 15 per cent. dividend. Its stocks were quoted 100 per cent. above par. In 1867 the Lake Sh.o.r.e Railroad earned more than 50 per cent., and the Terre Haute and Indianapolis even as much as 57.2 per cent. of the amount of its cost. Previous to the war the inflation of railroad securities was, as a rule, confined to the stock. Where roads were bonded for more than the cost of construction it was, with but very few exceptions, done to make their capital to correspond with their earning capacity, or rather to divert public attention from the fact that the rates in force had outlived their reasonableness. It was reserved to the Union Pacific and the Central Pacific companies to bond their roads from the beginning to an amount equal to twice their actual cost, or, in other words, to virtually receive them as a present from the Federal Government, bond them for all they were worth, and, in addition, issue stock to an amount largely in excess of the cost of construction, and then try to earn interest and dividends on the whole amount of securities issued. The history of these companies forms so interesting and instructive a chapter in the railroad annals of America that a short synopsis of it may not seem out of place here.

The charter of the Union Pacific Railroad Company was granted by Congress on the first day of July, 1862. Shortly after the beginning of the War of the Rebellion it was made to appear to the country that a transcontinental road was a national necessity; that without it we could not hope to retain long the Pacific Coast. It was also very plausibly argued that the political benefits to be derived by the country from the construction of such a road, as well as its great length and extraordinary cost, made it the duty of the nation to aid liberally its enterprising and patriotic promoters in the prosecution of their gigantic task. In those stirring times few people were inclined to question the motives of those who advocated what appeared to be patriotic measures, or to be penurious in the expenditure of public funds when the public weal seemed to demand such expenditure.

The Union Pacific Railroad charter, which in substance was pa.s.sed by Congress as it had been drafted by the promoters of the enterprise, gave to the new company the right of way through the public lands, and authorized it to take, from the lands adjacent to the line of its road, earth, stone, timber and other materials for its construction. It further granted to the company every alternate section of land to the amount of five alternate sections per mile on each side of its line, excepting only those lands to which preemption or homestead claims attached at the time when the line of the road should be definitely fixed. In addition to these donations the United States issued to the company subsidy bonds in an amount equal to $16,000 per mile for the distance from the Missouri River to the eastern line of the Rocky Mountains, $48,000 per mile for a distance of 150 miles through the Rocky Mountains, and $32,000 per mile from the western base of the Rocky Mountains to the terminus of the road. Similar franchises were at the same time given to the Central Pacific Railroad Company, a corporation which had previously been chartered by the State of California. Besides its grant of right of way, land, timber, etc., this company received subsidy bonds at the rate of $16,000 a mile for a distance of 7.18 miles east of Sacramento, of $48,000 a mile for 150 miles through the Sierra Nevada, and of $32,000 a mile for the distance from the eastern base of that mountain range to its junction with the Union Pacific. The charters of the two companies provided that, to secure the repayment to the United States of the amount of those bonds, they should _ipso facto_ const.i.tute a first mortgage on the entire lines of the road, together with their rolling stock, fixtures and other property. The franchises and donations thus granted by Congress were most valuable; in fact, the latter were alone sufficient to build and equip the roads. In spite, however, of the liberal grants and in spite of the urgent necessity of the roads in those years of national trial, both of these enterprises made very slow progress. Their promoters were men of small means, and the capitalists to whom they appealed for help failed to realize the value of the franchises. No doubt when these men first engaged in their cause they expected to encounter serious obstacles in Congress, supposing that that august body would consider the proposed measure with much deliberation and to act upon it with still more circ.u.mspection.

Their success greatly surprised them. They made the discovery that members of Congress could be imposed upon as easily as private citizens, and when they fully realized how readily their demands had been granted, they were greatly provoked at themselves because they had not asked for more.

According to a story told by my old friend Mr. J. O. Crosby, an experienced member of the brotherhood of tramps late one afternoon chanced to stroll into the city of Alton. Having no visible means of support, he was picked up by the police and brought before the Mayor to give an account of himself and to be dealt with as that dignitary might see fit. The tramp, a printer by profession, and by no means a tyro in meeting such emergencies, so managed to impress the Mayor with his superior accomplishments that the latter concluded it would be a good investment, both for himself and the city over which he presided, to offer the genial stranger a contribution to his traveling fund, upon the condition that he would no longer than absolutely necessary molest the city with his presence. He accordingly told the intercepted tourist that while it had been for years the policy of the city and its officials to entertain all tramps found within the limits of Alton for thirty days at the city jail in exchange for a fair amount of labor, he would, in consideration of the apparent fact that he was of better metal than the average tramp, make an exception in his case, and would, even at the risk of being censured for it by his const.i.tuents, hand over to him five dollars from the munic.i.p.al funds if he would agree to leave the city early next morning. The tramp gladly accepted the proposition, replenished his empty purse with the proffered bounty and withdrew from the City Hall, to take a stroll through Main Street. The city seemed to him as prosperous as the Mayor had shown himself liberal. It occurred to the itinerant typographer that its treasury would not have been the worse off for a ten-dollar levy, and he hastily returned to the Mayor's office to plead for a larger donation. The Mayor, not disposed to argue the question, handed him another five-dollar bill and improved the opportunity to remind him of his previous promise and to give expression to the hope that as a gentleman of honor he would now discharge his obligation. The tramp fairly overwhelmed His Honor with a.s.surances of good faith and bade him an affectionate good-by. The next rising sun found him on his onward journey. His route led through Alton on the Hill, a portion of the city which he had not seen before. He viewed with surprise the many fine residences and other evidences of opulence which this part of the city contained. He pa.s.sed on in a pensive mood until he reached the summit of the hill, which commanded a fine view of the entire city. Here he turned to cast a farewell glance over the town ruled over by the most generous mayor that it had ever been his privilege to meet. As he beheld before him the fine homes and beautiful yards, and below in the valley the lofty church-steeples, the many school-houses, the ma.s.sive business blocks, the long and well-paved streets and the s.p.a.cious and shady parks, an expression of mingled surprise and disappointment stole over his face. He thrice slapped his wrinkled brow and then hurriedly retraced his steps down the hill. When the chief magistrate of Alton came to his office that morning, he met the irrepressible tramp anxiously waiting for him at the door. "Mr.

Mayor," said the wily extortioner, "I acted very hastily yesterday when I accepted your second proposition. You have here a much larger town than I ever supposed. I have been constrained to take our last agreement into reconsideration, and I shall not leave this point until you add another five dollars to your consideration. You can certainly better afford to do that than to throw away thirty days' board and the ten dollars which you have already paid me besides."

The diplomacy of the Union Pacific and Central Pacific railway companies was the same as that of the Alton tramp. They had found Congress as generous as the tramp had found the Mayor of Alton, and now reproached themselves for their modesty and resolved to bring the pliability of Congress to a severer test. They again appeared before that body in 1864 and asked that their charter be so amended as to grant to them ten alternate sections instead of five on each side of the road, and also all the iron and coal found within ten miles of their track, which had previously been reserved by Congress. And in addition to this they asked that they be authorized to issue their own mortgage bonds on their respective roads to an amount equal to the bonds of the United States, and that the lien of the United States bonds be made subordinate to the lien created by the companies' bonds. By the act of Congress, July 2, 1864, all these demands were granted, and the two companies were thus virtually presented with their roads and were at the same time given permission to mortgage this gift of the people and divide the proceeds among their shareholders, many of whom had received their stock chiefly in consideration of their influence in and out of Congress. The contribution of the United States to these companies on account of their main lines has not been far from $80,000,000, of which over $52,000,000 was paid in bonds, and the remainder in lands, which aggregated about 23,000,000 acres. The whole line from Council Bluffs to Sacramento is 1,780 miles long. It will thus be seen that the national contribution was about $45,000 per mile, besides the right of way and all timber, iron and coal found within ten miles of the road. There is no doubt that this contribution was equal to, if it did not exceed, the actual cost of the road. There has been an erroneous impression abroad which has likened the Pacific road to those wonderful and very expensive lines which cross the Andes and the Alps. Those who have not crossed the continent can hardly believe that the construction of this line was neither more difficult nor more expensive than that of any of the numerous railroads crossing the mountain ranges of the East, but such is the fact.

Starting from Omaha, the Union Pacific follows for nearly 500 miles, or almost half of its entire length, the valley of the Platte River. A better route for a railroad cannot be found upon the western continent.

There are between Omaha and Cheyenne but three bridges worthy of the name. The Platte Valley is almost straight, rising toward the west at a nearly uniform rate of about 10 feet to the mile. Grading was practically unnecessary, and the work of construction consisted of little more than the laying of the ties and track. From the base of the mountains at Cheyenne to their summit is a distance of about thirty-two miles, the difference in alt.i.tude between the two points being less than 2,200 feet. The average grade is therefore about 68 feet to the mile, and nowhere are the grades heavier than 80 feet to the mile. There are heavier grades than these in the prairie State of Iowa, and the mountain grades of a number of Eastern roads exceed those of the Union Pacific by from 30 to 40 feet to the mile. The rise is, if not uniform, at least gradual, and the construction of even this portion of the road required, therefore, neither great engineering skill nor any unusual expenditure of money. The road now crosses a plateau which extends almost to the terminus of the Union Pacific at Ogden, and a very large portion of this is as favorable for a roadbed as the average railroad territory of the country.

The route of the Central Pacific presented to the engineer no great obstacles between Ogden and the State line of California, the only elevation of any note to be surmounted being the Humboldt Mountains in Nevada. Their highest point, Humboldt Wells, is 221 miles west of Ogden, and has an elevation of 5,650 feet above the level of the sea, while that of Ogden is 4,320 feet. Upon an average the grades of this portion of the road do not differ from those found in the Mississippi Valley.

The portion of the Central Pacific Railroad which traverses the Sierra Nevada is the most expensive of the whole line, but the cost of construction did not, even on this division, exceed the amount contributed for it by the Federal Government; for the statement is made upon good authority that a few of the leading promoters of the road built the first western section of twenty miles with their own capital, of less than $200,000, and a loan from the city of Sacramento and Placer County, amounting to $550,000, and then drew $848,000 Government subsidy, or more than enough to build the second section and draw another installment of the subsidy; and that they repeated the operation until the whole line was completed. These men were in such haste to realize the profits which their undertaking promised them that they did not even take sufficient time to make a proper survey of their line. Had they done so, a great saving, both in the construction and in the subsequent operation of the road, might have been effected. It is now well known that a route could have been found through the Sierra Nevada Mountains, not far distant from the route chosen, which would have saved 800 feet in elevation and at least 25 per cent. in the expense of grading.

It is certainly safe to say that if less than forty thousand dollars a mile was sufficient to construct the road through the Sierra Nevadas the Federal contribution of $50,000,000 for the entire line, from Omaha to San Francisco, left, after the completion, a respectable surplus, either to the companies or those of their members who had the construction contract, and that the $75,000,000 of capital stock and the $55,000,000 of first mortgage bonds which the two companies issued were a gigantic dividend to the stockholders, for which, practically, no consideration was given.

The companies might well have been satisfied with the Government's generosity, but their success in imposing upon Congress stimulated their greed. The act of 1864 provided that the charge for Government transportation over these roads should be applied to the liquidation of its bonds, and that after the completion of the lines five per cent. of their net earnings should likewise be so applied. When the Secretary of the Treasury, under the law, refused to pay them the amount earned by Government transportation, and in addition to this demanded the five per cent. of their net earnings in liquidation of their debt, the companies applied to Congress to again amend their charters so as to relieve them for the time being from any direct payment of either princ.i.p.al or interest of the Government bonds, and to make it the duty of the Secretary of the Treasury to pay to the companies in money one-half of the compensation allowed to them by law for services performed for the Government. And again Congress responded to their demands, granting them, by a rider to the army appropriation bill, pa.s.sed March 3, 1871, all the relief asked for. Owing to the policy of the managers of the Pacific line to pay as little of the interest on the Government subsidy debt as is absolutely necessary to prevent foreclosure proceedings, the unpaid interest has acc.u.mulated until it now almost equals the amount of the original indebtedness. The last report of the Commissioner of Railroads shows that the total indebtedness, princ.i.p.al and interest, to the United States of the Pacific railroad companies, was $114,490,000 on July 1, 1892. The Commissioner seems to be of the opinion that the Union Pacific Company will not be able to pay the subsidy bonds at maturity, and he urges that some step be taken in the matter by Congress, whether it be to extend the loan, which will mature within the next six years, or to sell the road. The managers of the Pacific roads and their friends ask an extension of the Government subsidy bonds for fifty years, and a reduction of interest from 6 to 2 per cent. If Congress continues to be servile to these interests, the Pacific railroad lobby will secure just such legislation as they demand.

At the time the Pacific roads were built the people of the United States had no adequate knowledge of the topography of the Territories, and the promoters of the road for a while found it a difficult task to convince capitalists that the investment would be a safe one. That they knew the value of the projected road was shown by the contest between the Central Pacific and the Union Pacific for mileage. For a distance of over 200 miles the two companies graded roads side by side in contest for the Government subsidy.

The promoters were even disappointed in the cost of the roads, as Mr.

Sidney Dillon states in an article published in the August number of _Scribner's Magazine_, 1892, in which he says:

"At the end of 1867 the road was completed to the top of the mountains and nearly half way to Salt Lake City. The cost of building over the mountains was so much less than we had expected that the construction company found itself with a surplus from the proceeds of the subsidy bonds. This was imprudently distributed in dividends."

The United States Government could parallel to-day the line of either road for less than the amount of its first mortgage bonds, and its subsidy bonds are therefore nearly worthless.

Mr. Clews, in his "Twenty-Eight Years in Wall Street," says:

"After the Thurman bill had been sustained by the Supreme Court Mr. Gould had a plan to build a road from Omaha to Ogden, just outside the right of way of the Union Pacific, and give that road back to the Government. It would give others 'a chance to walk.' The Government tried to squeeze more out of the turnip than was in it. For $15,000,000 a road could be built where it had cost the Union Pacific $75,000,000."

It may be admitted that the Pacific roads, even at an extravagant cost, have proved a good investment for the country, yet their history reflects severely on the statesmans.h.i.+p of those members of Congress whose duty it was to properly protect the interests of the nation at that time. They were unequal to their task.

The Great Northern Railway Company has just completed its road to the Pacific Coast. Its line is very direct, and it has unusually light curvature and low grades, which will enable it to be operated more cheaply than any Pacific line yet constructed. Much of its route is through a rich and productive country, insuring to it a heavy local business.

The following statistics concerning it are given in the _Railway Age_:

Total mileage, December 18, 1890 2,850 Average bonded debt per mile $18,636 75 Average stock per mile 7,015 67 Total 25,652 42 Interest charges per mile 1,005 76 Dividend charges per mile 420 94

A comparison of these figures with those corresponding of other transcontinental lines is instructive, and is commended to Congressmen who have to deal with the Union Pacific and Central Pacific questions.

Stock and bond inflation, it may confidently be a.s.serted, has created from five to six thousand millions of dollars of fict.i.tious railroad capital. In 1890 the average liabilities of the railroads in the United States, including the capital stock and the funded and unfunded debt, were $63,600 per mile. According to Mr. Poor's estimate of the average cost of American railroads per mile, more than 50 per cent. of this vast sum is pure water. But, as has been stated before, Mr. Poor is partial to the railroad interest, and his estimate of $30,000 a mile is too high for the time at which it was made. Furthermore, railroad building has since then been materially cheapened. Tens of thousands of miles of road have been built in recent years that did not cost to exceed $10,000 a mile. Very recently the Union Pacific Railroad Company proved, before the Board of Equalization at Salt Lake City, by the testimony of engineers, that the average cost per mile of the Utah Central line was only $7,298.20, itemized as follows:

Engineering $ 300 00 Grading 5-ft. fill, 18,480 yds. 2,310 00 Ties, 2,640, at 30 cts. 792 00 Rails, 82 tons 1,845 00 Splices 12 00 Bolts 24 00 Spikes 142 20 Track-laying 600 00 Bridges 200 00 Station-building 100 00 Fences 150 00 Right of way 720 00 --------- $7,298 20

In a recent article Mr. C. Wood Davis states that "many auxiliary lines have been built at costs ranging from $8,000 to $15,000 per mile, and capitalized at two, three, four, and even five times their cost, as in the case of the 107 miles of the Kansas Midland, costing, including a small equipment, but $10,200 per mile, of which 30 per cent. was furnished by the munic.i.p.alities along its line. Yet, with construction profits and other devices, this road shows a capitalization of $53,000 per mile."

And that "the Missouri Pacific line from Eldora to McPherson, Kansas, a comparatively expensive prairie road, being located across the line of drainage, cost much less than $10,000 per mile, as have thousands of miles of other prairie roads."

It is safe to say that $25,000 is a liberal estimate of the average cost per mile of American roads to the stock-and bondholders, and that their capitalization represents $38,000 of water per mile. The total net earnings of the railroads of the country were $341,666,639 in 1890, and $356,227,883 in 1891, upon an actual investment of only about $4,250,000,000. This is a return of about 8-1/2 per cent. and shows the force of Mr. Poor's statement that, if the water were squeezed out of railroad securities, no better-paying investment could be found in the country.

We often see references to the fact that no dividends are paid upon a large portion of railroad stocks, but there is no reason why dividends should be paid upon many of them, as they represent no capital whatever that has gone into the road. It is probable that not to exceed ten cents on the dollar upon an average was originally paid for these stocks, and the $80,000,000 distributed annually as dividends upon them does not vary much from fifteen to twenty-five per cent. upon the amount actually invested in them.

CHAPTER VII.

COMBINATIONS.

It is the favorite argument of railroad men, and the writer must confess that he himself formerly believed, that if all legal restraints were removed from railroad business, the laws of trade would regulate it more successfully and more satisfactorily, both to the railroad companies and their patrons, than the wisest statutes could ever regulate it. To give force to their argument, they cite the old Democratic maxim that that State is governed best which is ruled the least. They also a.s.sert that it is the province of the State to guarantee to each of its citizens industrial freedom; to permit him to transact any legitimate business according to his best judgment; to buy and to sell where and at what price he pleases; in short, to earn without restriction the reward of his intelligence and his industry. They further contend that under a free government the law of supply and demand should be allowed free sway, and that he who buys or sells transportation should not be hampered in his transactions any more than the grocer and his customer.

The reply to this is that, while the grocer is a natural person, the railroad company is an artificial person, and that, while the business of the former is purely private, that of the latter is quasi-public. The grocer must rely solely upon his personal rights and private resources, but the railroad company accepts from the State the franchises which enable it to do business. And yet, if the public had any a.s.surance that the laws of trade would regulate both kinds of business alike, it is not likely that the State would distinguish between the two. They claim that their business is like other private business, and therefore they should be let alone; that compet.i.tion can be relied upon to correct abuses; and where compet.i.tion does actually exist they forget, and then claim that their business is not like other private business, and they should be allowed to make pools and combinations, because in their business compet.i.tion is ruinous. Experience has certainly demonstrated that compet.i.tion is only possible where combination is impossible. Where the same commodity is supplied by a large number of individuals, there is but little danger for the public from those who supply it, for an agreement among many cannot easily be effected; and even if an understanding could be reached, it would not long be satisfactory to all parties. Disagreements would arise which would end in the dissolution of the combination. Where, however, the number of compet.i.tors is small, agreements can be easily effected and successfully maintained.

It is doubtful whether there is at present any interest in the commercial world which has a greater tendency to monopoly and combination than the railroad interest. There are in the United States some 40,000 railroad stations. Not more than 4,000 of these are junctions of two or more roads. At 90 per cent. of these stations s.h.i.+ppers are therefore confined to one line of railroad, and are, in absence of State regulation, compelled to pay for transportation whatever price the companies may be disposed to charge, subject only to such restrictions as the proximity of competing points may impose. If compet.i.tion obtained at all points where two or more roads meet, many railroad companies could not afford to charge excessive rates at non-compet.i.tive points along their lines of road, for such a policy would slowly but surely drive a large volume of their legitimate business to rival roads, to whose interest it would be to encourage by every means in their power such diversion of traffic. Railroads early recognized this fact and took steps to enable each line to control its local business. The first combinations among railroad companies to control prices at compet.i.tive points were rather crude; in fact, much cruder than the first Granger legislation. They were simple agreements among the various roads touching a common point to maintain certain fixed rates. But while each road was anxious to have the rates agreed upon maintained by all of its rivals, it cared but little about maintaining its own good faith, and it improved every opportunity to get business at reduced rates so long as it could reasonably hope to escape detection. As soon as any of the competing roads, through the falling-off of its business, became convinced that it was the victim of overreaching rivals, it retaliated by offering still lower rates to close-tongued s.h.i.+ppers. This tricky rivalry would be continued until the animosity engendered by it would lead to an open rupture, and what railroad men are pleased to term a rate war would follow. As the schedule rates had before been unreasonably high, so they became now unreasonably low. Hostilities would be continued until all belligerents became exhausted and manifested a disposition to negotiate a treaty of peace. The former high rates would then be restored; the compact was carried out for a short time, to be again violated and finally annulled.

These rate agreements were in vogue in New England before the War of the Rebellion and gradually found their way to the Middle States and the West. Wherever they were tried they were violated, until even among the most unsophisticated of freight agents a rate agreement was looked upon as a farce.

The statement is often made by railroad managers that excesses in railroad compet.i.tion are the result of the peculiar conditions of their business, which has heavy fixed charges on one hand and a fickle patronage on the other; that the uncertainty of through business compels them to rely upon the local business for such revenue as is necessary to meet these fixed charges; and that, inasmuch as their trains _must_ run, and any through freight hauled by them is so much business taken from the enemy, they can better afford to take it at any price than to have one of their compet.i.tors take it.

It is difficult to see why this reasoning should not be applied to other branches of business; for instance, to milling. The mill-owner, like the railroad company, has heavy fixed charges. He has to earn the interest on his capital, he has to keep his mill in repair, he now and then has to meet the demands of the times and purchase improved appliances, and he has to keep a certain number of employes, whether business is brisk or slack. He might, therefore, if he saw fit to employ the logic of railroad managers, earn revenue enough to meet his fixed charges from the business which his regular customers give him, and then do any business coming from beyond this circle at any price rather than surrender it to a rival.

It will readily be conceded that any enterprise conducted on such principles could, at the best, flourish only temporarily, for it would soon encounter difficulties from two sources. Its local customers, thus discriminated against, would withdraw their patronage, while its compet.i.tors, finding their territory encroached upon, would, in self-defense, offer still better terms to the public to regain their lost customers. Such ruinous compet.i.tion, if long persisted in, must necessarily cripple, if it does not bankrupt, a majority of those who engage in it. It is fortunately as rare in industrial and commercial circles as it is common among public carriers.

This difference can easily be accounted for. Where there are a large number of compet.i.tors the prices of the commodities supplied by them are leveled down until they reach a point where they will afford only a reasonable margin of profit, and beyond which they will cease to be profitable, and will therefore cease to be supplied until the equilibrium is again established. Where, however, the number of compet.i.tors is small, the price of the commodities supplied by them will, by agreement, for a time at least, be maintained at a point where it affords considerable more than a reasonable profit. Here the large gain presents to the various compet.i.tors such a temptation to outstrip their rivals and increase their business at the expense of good faith, that but few, if any, of them will, in the long run, resist it. The tendency to underbid rivals will always be strong where profits are large, and it may safely be a.s.serted that efforts to maintain, through combinations, excessive rates are the most fruitful source of ruinous compet.i.tion.

In time railroad managers became convinced that, unless it was possible to radically reform railroad ethics, rate agreements could never be relied upon for the maintenance of excessive rates at competing points.

The combined roads found it an easy matter to agree upon excessive rates, but were powerless to enforce them. Experience convinced their managers that to make their tariffs effective it was necessary to deprive individual roads of the power or the inducement to cut below the agreed rates. Their ingenuity in time developed a system which promised to remove from individual roads every temptation to take business at less than schedule prices. This device consists in a division of railroad business and is commonly called a pool. There are various ways in which such a division is made. Either the traffic is divided among the various companies meeting at a common point, or each road is allowed to carry all freights that it may receive, and then the earnings of the different roads are divided, each road being paid the actual cost of such service as it has performed. There is still a third pooling arrangement, consisting in a division of territory, but this has been found less satisfactory and is now but rarely resorted to.

It is said that the first regular pool organized in the United States was the Chicago-Omaha pool, formed in 1870 by the Chicago, Burlington and Quincy, the Chicago, Rock Island and Pacific, and the Chicago and Northwestern railroad companies, then the only three lines connecting the cities of Chicago and Omaha. This pool, which was subsequently joined by other lines, made an equal division of the traffic, and was so well organized that it lasted fourteen years "without a break." The abuses practiced by the companies belonging to this pool were one of the chief causes of the Granger movement in Iowa. It is indeed doubtful whether any other railroad combination ever maintained itself longer or pursued its ends with greater pertinacity than this pool. Another pool of national notoriety was the Southern Railway and Steams.h.i.+p a.s.sociation, which was organized, though at first under a different name, in the State of Georgia, in 1875. It was probably the first money pool formed in the United States. Each member was awarded a certain percentage of the total business between the various compet.i.tive points along its line. If a company carried more than its share, it was compelled to turn over the receipts from such additional traffic to its rivals, which paid it a nominal price for carriage. This allowance was always made so low that there was no inducement for any company to seek to carry more than its allotment. The pool had its own executive, legislative and judicial departments, and it enforced its decrees with an iron hand. It maintained a strong centralized government, and rebellious members had but little mercy to expect from it. It provided that if any officer or representative of any company should authorize or promise, directly or indirectly, any variation from established tariffs, he should be discharged from the service, with the reason stated. The strong sentiment which we to-day find in the South in favor of State control of railways is the direct result of the many evils which this powerful pool introduced into the railway business of that section of the country.

Other pools followed, as the Southwestern a.s.sociation, organized in 1876, to control the traffic between Chicago and St. Louis, and the Minnesota and the Colorado pools. Within a few years railroad pools covered the whole country. All pursued the same object, viz., the control of rates at compet.i.tive points, which enabled the companies to maintain excessive schedule rates at local points.

Between 1875 and 1880 the pooling system rapidly spread all over the Union. Wherever compet.i.tion promised to regulate rates by the application of the law of supply and demand, the pool was resorted to as the never-failing remedy to preserve dividends on watered stock. As long as lake and ca.n.a.l navigation controlled the carriage of heavy freights between Chicago and New York by means of rates so low that railroads found it, or at least thought it, impossible to compete with them in the transportation of agricultural products during the greater part of the year, railroad pools between Chicago and New York could not be successfully maintained. In 1873 the railroads transported only about 30 per cent. of this kind of freight from the West to Eastern ports.

Owing, however, to the rapid decrease of the cost of transportation, railroad companies from this time on were enabled to encroach rapidly upon the business of water routes, so that in 1876 they carried over 52 per cent. of the entire volume of agricultural products that were moved from the West to the East. As long as these products were carried almost entirely by water from lake ports to the East, New York, as the terminus of this route, enjoyed decided advantages over the other Atlantic ports.

When, however, the railroads commenced to successfully compete with the water routes in the transportation of these commodities, a considerable share of this business was diverted to Boston, Philadelphia and Baltimore, and it soon became apparent that these ports, in some respects, enjoyed advantages for the export trade not possessed by New York. It was, therefore, not surprising that the business men of these cities, together with the railroads terminating in them, made every effort to come in for their share of the traffic which was drifting away from New York.

Compet.i.tion between the New York Central and the Pennsylvania Railroad for the Western through traffic dated back as far as 1869, the year in which both systems secured, through consolidation with connecting roads, through lines to Chicago. Rates fell in one year from $1.80 to 25 cents per hundred pounds. After a time the managers of the two companies met, and schedule rates were restored. Rates were, at least outwardly, maintained until the Baltimore and Ohio and the Erie system entered Chicago, and the Grand Trunk made connections with Milwaukee and other lake points, and thus disturbed through rates. All efforts to maintain the level of the old tariffs, through agreements, proved now fruitless, for both the Baltimore and Ohio and the Grand Trunk found it to their interest to pursue independent policies, and refused to have their hands tied by an agreement with roads that were interested in continuing, if possible, the commercial supremacy of New York.

Rate skirmis.h.i.+ng finally developed into open war in 1876, when fourth-cla.s.s rates between Chicago and the Atlantic fell as low as 16 cents per hundred. This rate, however, was eclipsed in July, 1878, when wheat was carried from Chicago to New York for 10 cents per hundred. The existing conditions left no doubt in the minds of those familiar with railroad tactics that this war was simply the precursor of a gigantic combination between the trunk lines. An unsuccessful attempt to effect such a combination had been made before. In 1874 the managers of the Erie, Pennsylvania and New York Central met at Saratoga for the purpose of devising means for the suppression of compet.i.tion in the trunk line traffic. This meeting, however, known in railroad history as the Saratoga Conference, was the first step toward the organization of a trunk line pool, although the conference did not lead to any immediate results, the Grand Trunk and the Baltimore and Ohio refusing to be bound by its decision. It was certainly no easy task to devise means to bring about an effective and permanent combination among five large through lines with greatly conflicting interests.