<h2>CHAPTER 55</h2>
<h3>THE PUBLIC NATURE OF RAILROADS</h3>
<h4>§ I. PUBLIC PRIVILEGES OF RAILROAD CORPORATIONS</h4>
<div class="sidenote">Public nature of railroad franchises</div>
<p>1. <i>Railroads enjoy peculiar public privileges through their charters,
franchises, and the right of eminent domain.</i> Railroads in our country
are owned by private corporations and are managed by private citizens,
not, as in some countries, by public officials. They have been built
under the motive of private enterprise, in the interest of the investor,
not as a charity or as a public benefaction. Railroad-building appears
thus at first glance to be a case of free competition where public
interests are served in the following of private interests. But, looked
at more closely, it may be seen to be in many ways different from the
ordinary competitive business. Competition would make the building of
railroads a matter of bargain with proprietors along the line, and an
obdurate farmer could compel a long detour or could block the whole
undertaking. But the public says: a public enterprise is of more
importance than the interests of a single farmer. By charter or by
franchise the railroad is granted the power of eminent domain, whereby
the property of private citizens may be taken from them at an appraised
valuation. The manufacturer, enjoying no such privilege, can only by
ordinary purchase obtain a site urgently needed for his business. Why
may the railway exercise the sovereign power of government and invade
other private property rights? Because the railway is peculiarly
"affected with a public interest." The primary object is not to favor
the railroads, but to benefit<span class="pagenum"><SPAN name="Page_535" id="Page_535">[Pg 535]</SPAN></span> the community. These charters and
franchises are granted sparingly in most European countries. In this
country they have been granted recklessly, often in general laws, by
states keen in their rivalry for railroad extension. When thus great
public privileges had been granted without reserve to private
corporations, it was realized, too late in many cases, that a mistake
had been made and that an impossible situation had been created.</p>
<div class="sidenote">State and National aid to American railroads</div>
<p>2. <i>In America and in many other countries, large grants of lands and
money have been made to railroads on the ground of their peculiar public
nature.</i> Railroads were granted not only peculiar powers and privileges,
but also material aid. The railroad enterprise was uncertain, the
possibilities of its growth could not be foreseen, and private capital
would not invest without great inducements. In European countries where
capitalists were less enterprising or venturesome than in America,
railroad extension was very slow except where the state in some manner
extended its aid to the enterprise. The American states abandoned the
principle of non-interference most recklessly, and vied with each other
in giving lands, money, and privileges, in loaning bonds, in subscribing
for stock, and in releasing from taxation. These protective measures
fostering a special enterprise were expected by increasing wealth to
diffuse a greater welfare throughout the community. Many of the states
were forced to the point of bankruptcy by their reckless generosity, and
some of them repudiated the debts thus incurred. The national government
then took up the same policy and granted lands to the states to be used
for this purpose. The first example of this was the grant to the
Illinois Central road, in 1850, of a great strip of land through the
state from north to south. Grants were made in fourteen states, covering
tens of millions of acres of land. Then the national government, between
1863 and 1869, aided the building of the Pacific railroads by granting
outright twenty square miles of land for every mile of track and by
loaning the credit of the government<span class="pagenum"><SPAN name="Page_536" id="Page_536">[Pg 536]</SPAN></span> to the extent of fifty million
dollars—a debt settled by compromise only after thirty years.</p>
<div class="sidenote">Railroad grants by localities</div>
<p>Counties, townships, cities, and villages along the line of projected
roads then entered into keen competition to secure them. Bonds, bonuses,
tax-exemptions, and many special privileges were granted. To obtain this
new Aladdin's lamp, this great wealth-bringer, localities mortgaged
their prosperity for years to come. The promoters bargained skilfully
for these grants, playing off town against town, cultivating the
speculative spirit, punishing the obdurate. Not the civil engineer, but
the financial engineer platted the devious lines of many a railroad on
the level prairies of America. The effects of these grants were in many
cases disastrous, and since 1870 they have been forbidden in a number of
states by legislation and by state constitutions. But before this era of
generosity ended, probably the railroads had received more public aid
than has ever been given to any other form of industry in private hands.</p>
<div class="sidenote">Investors' view of railroads' obligations</div>
<p>3. <i>The railroads are now generally held to have peculiar public duties
corresponding to their privileges.</i> Do all these grants in the past make
the railroads other than mere private enterprises? One answer, that of
those financially interested in the railroads, is No. They say that the
bargain was a fair one, and is now closed. The public gave because it
expected benefit; the corporation fulfilled its agreement by building
the road. The terms of the charter, as granted, determine the rights of
the public; but no new terms can now be read into it, even though the
public now sees the question in a new light. Similar grants, though not
so large, have been made to other industries. Bounties have been given
to sugar-factories; tariffs have favored iron-forges and woolen-mills;
factories have been given, by competing cities, land and exemption from
taxation; yet no attempt is made on that account to control these
businesses in a peculiar way and to treat them as public enterprises.
So, it is said, the railroad is still merely a private business.</p>
<p><span class="pagenum"><SPAN name="Page_537" id="Page_537">[Pg 537]</SPAN></span></p>
<div class="sidenote">Social view of railroads' obligations</div>
<p>But the social answer is stronger than this. As to the precedent of
tariff- and bounty-favored enterprises, most careful students would
admit a close analogy in the two cases, but would maintain that the
tariff policy also has been carried to an unjustifiable extreme, and
that it could not be used to vindicate a still greater assault on public
rights. But, further, privileges of railroads are greater in amount and
more important in character than those granted to any ordinary private
enterprise. The legislatures recognize constantly the peculiar public
functions of the railroads. In other private enterprises, investors take
all the risk; legislatures and courts recognize the duty of guarding,
where possible, the investment of capital in railroads. Laws have been
passed in several states to protect the railroads against
ticket-scalping. Whenever the question comes before them, the courts
maintain the right of the railroads to earn a fair dividend. Private
enterprise has been invited to undertake a public work, yet public
interests are paramount.</p>
<div class="sidenote">Need of harmonizing public and private interests</div>
<p>If an extremely abstract view is taken there is danger of losing sight
of the real problem, which is that of harmonizing these two interests in
thought and in public policy. Yet the extreme advocates of the private
control of railroads have resented indignantly any public interference
with railroad rates and with railroad management as an infringement of
individual liberty. At the time of the passage of the Interstate
Commerce Act this position was inconsistently taken by those in whose
interests free competition had been violently set aside at the very
outset of railroad construction, and for whom government interference
had made possible great fortunes. The railroads cannot change from a
public to a private character just as it suits their convenience. They
cannot be allowed to play Dr. Jekyll and Mr. Hyde; smooth and affable in
the character of public agents when public advantages are to be gained,
and then as private enterprises ugly and scowling, flouting the public
interests, charging all the traffic will bear, and resisting all
reasonable regulation and<span class="pagenum"><SPAN name="Page_538" id="Page_538">[Pg 538]</SPAN></span> conditions. Though railroads are private
enterprises as regards the character of the investment, they are public
enterprises as to their privileges, functions, and obligations.</p>
<h4>§ II. POLITICAL AND ECONOMIC POWER OF RAILROAD MANAGERS</h4>
<div class="sidenote">Railroad rates like taxes</div>
<p>1. <i>In various ways railroad managers exercise great political influence
and power.</i> Some writers maintain that the power to make rates on
railroads is a power of taxation. They point out that if rates are not
subject to fixed rules imposed by the state, the private managers of
railroads wield the power of the lawmaker. By changing the rates on
foreign exports or imports, the railroads frequently have made or
nullified a protective tariff and have defeated the intention of the
legislature. High rates on state-owned roads have openly been used in
lieu of protective duties. These facts go to show that a change of
railroad rates between two places within the country is similar in
effect to the imposing or repeal of tariff duties between them.</p>
<div class="sidenote">Political influence of railroads</div>
<p>The wealth and industrial importance of the railroads give them
widespread political power in other ways. It is commonly charged in some
states that the legislature and the courts are "owned" by the railroads.
The railroads, in part because they are the victims at times of attempts
at blackmail by dishonest public officials, are compelled in
self-defense to maintain a lobby. The railroad lobby, defensive and
offensive, is in many states the all-powerful "third house." Railroads
even have their agents in the primaries, they enter political
conventions, they dictate nominations from the lowest office up to that
of governor, and they elect judges and legislators. The extent to which
this is done differs according as the railroads have large or small
interests within the state. How is this great political problem to be
met except by an appreciation of its importance and by a growth of
public integrity?</p>
<div class="sidenote">The complex obligations of railroad directors</div>
<p>2. <i>The economic power of the higher railroad officials enables<span class="pagenum"><SPAN name="Page_539" id="Page_539">[Pg 539]</SPAN></span> them to
exercise certain functions of an important public nature.</i> When the
railroad was a young industry, its essentially public nature was not
recognized. It was at first thought to be simply an iron-track turnpike
to which the old English law of common carriers would apply. As this and
similar notions proved illusory, the railroad manager became invested
with complex and often conflicting duties to the stockholders and to the
public. He wore his conscience-burden lightly, and frequently made
little attempt to meet the one and no attempt whatever to meet the other
obligation. The new field offered for speculation gave opportunities for
great private fortunes. There were no precedents, no ripened public
opinion, no established code of ethics, to govern. It was a betrayal of
the interests of the stockholders when directors formed "construction
companies" and granted contracts to themselves at outrageously high
prices. It was an injury not only to shippers, but also to the
stockholders, when special rates were granted to friends and to
industries in which the directors were interested.</p>
<div class="sidenote">Unclear convictions as to the railroads' public nature</div>
<p>It is believed that a better code of business morality has developed,
and that the officers' relation of trusteeship toward the shareholders
is now more often recognized. But practical ethics need to be developed
much farther than this. A railroad manager is engaged by the
stockholders, is responsible to them, and looks to them for his
promotion. Hence their interests are uppermost whenever the welfare of
the public is not in harmony with the earning of liberal dividends. The
manager feels bound to defend the principle of "charging what the
traffic will bear" in the case of each individual, locality, and kind of
goods. If this ruins some men and enriches others, if it destroys the
prosperity of cities to increase the earnings of the road, at all events
he feels he has done his full duty. Railroad directors do not yet
recognize, and possibly never will, that their office is more than a
private trusteeship, that it is a public trust.</p>
<div class="sidenote">Progress of railroad consolidation</div>
<p>3. <i>The progress of consolidation among railroads is putting<span class="pagenum"><SPAN name="Page_540" id="Page_540">[Pg 540]</SPAN></span> into fewer
hands greater financial and economic power.</i> The early railroads, many
of which were built in sections of a few miles in length, have been
slowly welded into continuous trunk lines with many branches. The New
York Central between Albany and Buffalo was a consolidation, by
Commodore Vanderbilt, of sixteen short lines. The Pennsylvania system
was formed link by link from scores of small roads. The growth of
consolidation recently has been more rapid than ever before. Sixty per
cent. of the mileage of the United States is under the control of five
interests; seventy-five per cent. is controlled by a group of men that
can sit about one table. The country is being divided territorially into
great railroad domains, within each of which one financial interest is
dominant. Great financial alliances and "community of interests" still
further unify the policy of the leading roads.</p>
<div class="sidenote">Economic results of consolidation</div>
<p>Toward this result strong economic forces are working. Consolidation has
many technical advantages: it saves time, reduces the unit cost of
administration and of handling goods, gives better use of the rolling
stock and of the terminal facilities of the railroads, and insures
continuous train service. It has the advantages of other large
production and the possible economies of the trusts. Most important,
however, from the point of view of the railroads, is the prevention of
competition and the making possible of higher rates and larger
dividends. The statement that competition is not an effective regulator
of railroads often is misunderstood to mean that it in no way acts on
rates. It is true that competition between roads does not prevent
discrimination and excessive charges between stations on one line only;
but competition usually has acted powerfully at well-recognized
"competing points." The larger the area controlled by one management,
the fewer are the competing points; the larger, therefore, is the power
over the rate and the more completely the monopoly principle applies. It
is a grim jest to say that consolidation does not change the railroad
situation as regards the question of rates.</p>
<p><span class="pagenum"><SPAN name="Page_541" id="Page_541">[Pg 541]</SPAN></span></p>
<h4>§ III. COMMISSIONS TO CONTROL RAILROADS</h4>
<div class="sidenote">Railroad evils and the old legal remedies</div>
<p>1. <i>Most of the states have undertaken, through commissions, to regulate
the railroads in the public interest.</i> When it became evident that
public and private interests in the railroads were so divergent, it
still was not easy to determine how the public was to be safeguarded. At
first, some general conditions such as maximum rates were inserted in
the laws and charters; but these were not adaptable to changing
conditions and, for lack of administrative agents, could not be
enforced. The early efforts at state ownership were, as was noted above,
futile and disastrous, the remedy of state ownership, as then applied,
being worse than the disease. The old law of common carriers gave to
individual shippers an uncertain redress in the courts for unreasonable
rates; but the remedy was costly because the aggrieved shipper had to
employ counsel, to gather evidence, and to risk the penalty of failure;
it was slow, for while delay was death to the shipper's business, cases
hung for months or years in the courts; it was ineffectual, for even
when the case was won, the shipper was not repaid for all his losses,
and the same discrimination could be immediately repeated against him
and other shippers.</p>
<div class="sidenote">Object and working of the state commissions</div>
<p>Attempting to remedy these evils, thirty-one of the states have
appointed commissions and, as the most important states are included,
this mode of regulation applies probably to four fifths of all traffic
beginning and ending in a single state. These commissions differ in
power, but in general they attempt to prevent excessive discrimination
in rates and to check all railroad practices injurious to the public
welfare. The commission principle, strongly opposed at first by the
railroads, has been upheld by the courts and is now an established
public policy. The state commissions, however, have fallen far short of
a solution of the problem. Though they have done much to make the
accounts of the railroads intelligible, something to make the rates
reasonable and subject<span class="pagenum"><SPAN name="Page_542" id="Page_542">[Pg 542]</SPAN></span> to rule, and much to educate public sentiment,
on the whole their results have been disappointing. It has been
difficult to get commissioners at once strong, able, and honest; the
public does not yet know its own mind well enough to support the
commissions properly; and—more fatal weakness still—the courts early
decided that state commissions could regulate only the traffic
originating and ending within the state, and this left untouched the
much greater volume and more important class of interstate traffic.</p>
<div class="sidenote">Passage of the Interstate Commerce Act</div>
<p>2. <i>The Interstate Commerce Commission is an agency by which it was
hoped to secure a uniform national public control of railroads.</i> Public
hostility to private railroad management was greatest in the regions
where the most rapid building of roads occurred from 1866 to 1873. One
center of grievances was in "the granger states" of Illinois, Wisconsin,
Kansas, Nebraska, Iowa, and Minnesota; another center was in the oil
regions of Ohio and Pennsylvania. The Eastern states were not without
their troubles, for the report of the Hepburn Committee of the New York
legislature in 1879 shows that discrimination between shippers prevailed
to an almost incredible degree in every portion of New York state. When
the courts, in 1886, decided that the greater portion of the railroad
rates could not be treated by state commissions, national control was
loudly demanded. Scores of bills were presented to Congress between 1870
and 1886, and, despite the bitter opposition of the railroads, the
Interstate Commerce Act was passed in 1887.</p>
<div class="sidenote">Its provisions</div>
<p>The act laid down some general rules: that rates should be just and
reasonable; that railroads should not pool, or agree to divide, their
earnings to avoid competition; that they should, unless expressly
excused, fix rates in accordance with the long- and short-haul principle
(to charge no more for a shorter distance than for a longer one on the
same line and in the same direction, the shorter being included within
the longer). The act provided for a commission of five men, to be
appointed by the President, which might require uniform<span class="pagenum"><SPAN name="Page_543" id="Page_543">[Pg 543]</SPAN></span> accounts from
the railroads, and which should enforce the provisions of the act.</p>
<div class="sidenote">Results of the act</div>
<p>3. <i>The object of the Interstate Commerce Act has been but imperfectly
attained.</i> This brief proposition sums up the story of years of efforts
and defeated hopes. The powers of the commission have proved inadequate
to attain the main purposes of the act—the prevention of discrimination
and the securing of steady and equitable rates to all shippers. By the
decisions of the federal courts, the commission's power has been reduced
far below the intentions of the Congress that passed the law. The
railroads have in many cases refused to obey the orders of the
commission and have succeeded in maintaining their refusal. Admirable
results have been secured in the way of uniform accounting, uniformity
of rates has been somewhat furthered at times, and the public has been
in many cases enlightened. But the greatest evils remain. Railroads
still give secret rates in great numbers; many competent witnesses
before the Industrial Commission in 1900 and 1901 testified that
discrimination had never been worse. From time to time the recognition
of the injury to dividends wrought by discriminating rates prompts some
railroad to offer its coöperation to the commission, and this inspires
new hopes of an effective administration of the act. The pressure of
competition, however, soon forces the penitent road back into its old
ways. On one thing the railroads and the commission are agreed: that
pooling should be permitted, though the commission wishes to have this
under strict supervision. To this point the public has not yet advanced.</p>
<div class="sidenote">The railroad problem unsolved</div>
<p>Despite the general acceptance now of the principle that the railroads
should be controlled in the public interest, despite the barren legal
triumph of the commission principle, it is evident that the railroad is
not yet under social control. The future must determine whether the
solution is to be found in effective public regulation or in public
ownership.</p>
<hr class="chap" />
<p><span class="pagenum"><SPAN name="Page_544" id="Page_544">[Pg 544]</SPAN></span></p>
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