# 1911 Encyclopædia Britannica/Railways/Economics and Legislation

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Economics and Legislation
It was at one time an axiom of law and of political economy that prices should be determined by free competition. But in the development of the railway business it soon became evident ​that no such dependence on free competition was possible, either in practice or in theory. This difficulty is not peculiar to railways; but it was in the history of railway economy and railway control that certain characteristics which are now manifesting themselves in all directions where large investments of fixed capital are involved were first brought prominently to public notice.
For a large number of those who use a railway, competition in its more obvious forms does not and cannot exist. Independent carriers cannot run trains over the same line and underbid one another in offering transportation services. It would be practically impossible for a line thus used by different carriers to be operated either with safety, or with economy, or with the advantage to the public which a centralized management affords. It is equally impossible for the majority of shippers to enjoy the competition of parallel lines. Such duplication of railways involves a waste of capital. If parallel lines compete at all points, they cause ruin to the investors. If they compete at some points and not at others, they produce a discrimination or preference with regard to rates and facilities, which builds up the competitive points at the expense of the non-competitive ones. Such partial competition, with the discrimination it involves, is liable to be worse for the public than no competition at all. It increases the tendency, already too strong, towards concentration of industrial life in large towns. It produces an uncertainty with regard to rates which prevents stability of prices, and is apt to promote the interests of the unscrupulous speculator at the expense of those whose business methods are more conservative. So marked are these evils that such partial competition is avoided by agreements between the competing lines with regard to rates, and by divisions of traffic, or pools, which shall take away the temptation to violate such rate agreements. The common law has been somewhat unfavourable to the enforcement of such agreements, and statutes in the United States, both local and national, have attempted to prohibit them; but the public advantage from their existence has been so great as to render their legal disabilities inoperative. In those parts of the continent of Europe where railways are owned and administered by state authority, the necessity for such agreements is frankly admitted.
But if rates are to be fixed by agreement, and not by competition, what principle can be recognized as a legitimate basis of railway rate-making? The first efforts at railway legislation were governed by the equal mileage principle; that is, the attempt was made to make rates proportionate to the distance. It was, however, soon seen that this was inadmissible. So much of the expense of the handling, both of freight and of passengers, was independent of the length of the journey that a mileage rate sufficiently large for short distances was unnecessarily burdensome for long ones, and was bound to destroy long-distance traffic, if the theory were consistently applied. The system has been retained in large measure in passenger business, but only because of the conflict which inevitably occurs between the authorities and the passengers with regard to the privilege of breaking and resuming a journey when passenger rates are arranged on any other plan. In freight schedules it has been completely abandoned.
A somewhat better theory of rate regulation was then framed, which divided railway expenditures into movement expense, connected with the line in general, and terminal expense, which connected itself with the stations and station service. Under this system each consignment of freight is compelled to pay its share of the terminal expense, independently of distance, plus a mileage charge proportionate to the length of the journey or haul. There has been also a further attempt in England to divide terminal charges into station and service terminals, according to the nature of the work for which compensation is sought. But none of these classifications of expense reaches the root of the matter. A system of charges which compels each piece of traffic to pay its share of the charges for track and for stations overlooks the fundamental fact that a very large part of the expenses of a railway—more than half—is not connected either with the cost of moving traffic or of handling traffic at stations, but with the cost of maintaining the property as a whole. Of this character are the expenditures necessary for maintenance of way, for general administration and for interest on capital borrowed, which are almost independent of the total amount of business done, and quite independent of any individual piece of business. To say that all traffic must bear its share of these interest and maintenance charges is to impose upon the railways a rate which would cut off much of the long distance traffic, and much of the traffic in cheap articles, which is of great value to the public, and which, from its very magnitude, is a thing that railways could not afford to lose. It is also a fact that with each recurring decade these general expenses (also called indirect, undistributed or fixed charges) have an increased importance as compared with the particular (direct, distributed or operating) expense attaching naturally to the particular portions of the traffic. For with increased density of population it becomes profitable to make improvements on the original location, even though this may involve increased charges for interest and for some parts of its maintenance, for the sake of securing that economy of operation, through larger train-loads, which such an improved location makes possible.
Whatever the ostensible form of a railway tariff, the contribution of the different shipments of freight to these general expenses is determined on the principle of charging what the traffic will bear. Under this principle, rates are reduced where the increase of business which follows such reduction makes the change a profitable one. They are kept relatively high in those cases where the expansion of business which follows a reduction is small, and where such a change is therefore unprofitable. This theory of charging what the traffic will bear is an unpopular one, because it has been misapplied by railway managers and made an excuse for charging what the traffic will not bear. Rightly applied, however, it is the only sound economic principle. It means taxation according to ability—that ability being determined by actual experiment.
In the practical carrying out of this principle, railways divide all articles of freight into classes, the highest of which are charged two or three, or even four times the rates of the lowest. This classification is based partly upon special conditions of service, which make some articles more economical to carry than others (with particular reference to the question whether the goods are offered to the companies in car-loads or in small parcels), but chiefly with regard to the commercial value of the article, and its consequent ability to bear a high charge or a low one. For each of these classes a rate-sheet gives the actual rate charge per unit of weight between the various stations covered by the tariff. This rate increases as the distance increases, but not in equal proportion; while the rates from large trade centres to other trade centres at a great distance are not higher than those to intermediate points somewhat less remote; if the law permits, there is a tendency to make them actually a little lower. Besides the system of charges thus prescribed in the classification and rate-sheet, each tariff provides for a certain number of special rates or charges made for particular lines of trade in certain localities, independently of their relation to the general system. If these special rates are published in the tariff, and are offered to all persons alike, provided they can fulfil the conditions imposed by the company, they are known as commodity rates, and are apparently a necessity in any scheme of railway charges. If, however, they are not published, and are given to certain persons as individual favours, they become a prolific source of abuse, and are quite indefensible from the standpoint of political economy.
While the superficial appearance of the railway tariff is different for different countries, and sometimes for different parts of the same country, the general principles laid down are followed in rate-making by all well-managed lines, Whether state or private. It is a mistake to suppose that the question of public or private ownership will make any considerable difference in the system of rate-making adopted by a good railway. A state system will be compelled, by the exigencies ​of the public treasury, to arrange its rates to pay interest on its securities; a private company will generally be prevented, by the indirect competition of railways in other parts of the country which it serves, from doing very much more than this. The relative merit of the two systems depends upon the question how we can secure the best efficiency and equity in the application of the principles thus far laid down. There are three different systems of control:—
1. Private operation, subject only to judicial regulation, was exemplified most fully in the early railway history of the United States. Until 1870 railway companies were almost free from special acts of control; and, in general, any company that could raise or borrow the capital was allowed to build a railway wherever it saw fit. In the United Kingdom there was almost as much immunity from legislative interference with charges, but the companies were compelled to secure special charters, and to conform to regulations made by the Board of Trade in the interests of public safety. The advantage of this relatively free system of railway building and management is that it secures efficient and progressive methods. Most of the improvements in operation and in traffic management have had their origin in one of these two countries. The disadvantage attendant upon this system is that the courts are reluctant to exercise the right of regulation, except on old and traditional lines, and that in the face of new business methods the public may be inadequately protected. There is also this further disadvantage, that in the gradual progress of consolidation railway companies take upon themselves the aspect of large monopolies, of whose apparently unrestricted power the public is jealous. As a result of these difficulties there has been, both in the United Kingdom and in the United States, a progressive increase of legislative interference with railways. In the former the Railway and Canal Traffic Act of 1854 specially prohibited preferences, either in facilities or in rates. The Regulation of Railways Act of 1873 provided for a Railway Commission, which should be so constituted as to take cognizance of cases on the investigation of which the courts were reluctant to enter. Finally, the legislation of 1888 put into the hands of a reorganized Railway Commission and of the Board of Trade powers none the less important in principle because their action has been less in its practical effect than the advocates of active control demanded. In the United States the years from 1870 to 1875 witnessed sweeping and generally ill-considered legislation (“Granger” Acts) concerning railway charges throughout the Mississippi valley; while the years from 1884 to 1887 were marked by more conservative, and for that reason more enforceable, acts, which culminated in the Interstate Commerce Act, prohibiting personal discrimination and gradually restricting discrimination between places, and providing for a National Commission of very considerable power—not to speak of the pooling clause, which was extraneous to the general purpose of the act, and has tended to defeat rather than strengthen its operation.
2. Operation by private companies, under specific provisions of the government authorities with regard to the method of its exercise, has been the policy consistently carried out in France, and less systematically and consistently in other countries under the domination of the Latin race. It was believed by its advocates that this system of prescribing the conditions of construction and operation of lines could promote public safety, prevent waste of capital and secure passengers and shippers against extortionate rates. These expectations have been only partially fulfilled. Well trained as was the civil service of France, the effect of this supervision in deadening activity was sometimes more marked than in its effect in preventing abuse. Moreover, such a system of regulation almost necessarily carries with it a guarantee of monopoly to the various companies concerned, and not infrequently large gifts in the form of subsidies, for without such aid private capital will not submit to the special burdens involved. These rights, whether of monopoly or of subsidy, form a means of abuse in many directions. Where the government is bad, they are a fruitful source of corruption; even where it is good, they enable the companies to drive hard bargains with the public, and prevent the expected benefits of official control from being realized.
3. State operation and ownership is a system which originated in Belgium at the beginning of railway enterprise, and has been consistently carried out by the Scandinavian countries and by Hungary. Since 186O it has been the policy of Australia. It has generally come to be that of Germany and, so far as the finances of the countries allow, of Austria and Russia; British India also affords not a few examples of the same method. The theory of state ownership is excellent. So large a part of the railway charge is of the nature of a tax, that there seem to be a priori reasons for leaving the taxing powers in the hands of the agents of the government. In practice its operation is far more uncertain. Whether the intelligence and efficiency of the officials charged by the state with the handling of its railway system will be sufficient to make them act in the interest of the public as fully as do the managers of private corporations, is a question whose answer can only be determined by actual experience in each case. If they fail to have these qualities, the complete monopoly which a government enjoys, and the powers of borrowing which are furnished by the use of the public credit, increase instead of diminishing the danger of arbitrary action, progressiveness and waste of capital. Even in matters like public safety it is by no means certain that government authorities will do so well as private ones. The question is one which practical railway men have long since ceased to argue on general principles; they recognize that the answer depends upon the respective degree of talent and integrity which characterize the business community on the one hand and the government officials on the other.
Authorities.—On economics of construction and of operation, see Wellington, The Economic Theory of Railway Location (5th ed., New York, 1896). On principles governing railway rates in general, and specifically in England, see Acworth, The Railways and the Traders (London, 1891). On comparative railway legislation and the principles governing it, see Hadley, Railroad Transportation; its History and its Laws (New York, 1885). On the history of railway legislation in England, see Cohn, Untersuchungen über die Englische Eisenbahnpolitik (Leipzig, 1874–83). On practice concerning rates in continental Europe, see Ulrich, Das Eisenbahntarifwesen (Berlin, 1886). (Since this was published, continental passenger rates have fallen. The French translation—Paris, 1898—gives Russian tariffs.) On the question of “nationalization” (i.e. state ownership and operation), see an article by Edgar Crammond in the Quarterly Review (London) for October 1909, which cites, among other works on the subject, Clement Edwards’s Railway Nationalization (1898); Edwin A. Pratt’s Railway Nationalization (1908), and E. A. Davis’s Nationalization of Railways (1908).  (A. T. H.)