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189. Charging What the Traffic Will Bear1

BY W. M. ACKWORTH

The phrase "charging what the traffic will bear" has, for some not very obvious reason, undoubtedly acquired an ill repute. On the face of it, it surely seems to represent a principle, not of extortion, but of moderation. To charge what the traffic can bear is, in other words, not to charge what the traffic cannot bear. Yet the phrase is commonly understood quite differently. It has been asserted that railway managers claim to estimate for themselves production cost at A and selling price at B, and to appropriate as railway rate the entire difference. The truth is that, whatever rash statements have been made by individual railway men under peculiar conditions, no railway administration has ever acted on any such principle.

The real meaning of the phrase is that within limits-the supreme limit of what any particular traffic can afford to pay, and the inferior limit of what the railroad can afford to carry it for-railway charges for different categories of traffic are fixed, not according to an estimated cost of service, but roughly on the principle of equality of sacrifice by the payer. So regarded, "what the traffic will bear" is a principle, not of extortion, but of equitable concession to the weaker members of the community. Had railway managers in the past declared that their principle was "tempering the wind to the shorn lamb," their descriptive accuracy would have been great, while their popularity might have been even greater. Somehow the total cost of maintaining and operating the railway has to be paid for; broadly and in the long run, the capital invested in railway construction must be remunerated at the normal rate of interest. Can any system of apportionment of this necessary expenditure be more equitable than one under which the rich-wellto-do passengers, valuable freight, traffic with the advantage of geographical situation close to the markets, and the like-contribute of their abundance; while the poor-immigrant passengers, bulky articles of small value, traffic that has to travel far to find a market, and so forth are let off lightly on the ground of their poverty? Translated into railway language the principle means this: the total railway revenue is made up of rates which, in the case of traffic unable to bear a high rate, are so low as to cover hardly more than the actual out-of-pocket expenses; which, in the case of mediumclass traffic, cover both out-of-pocket expenses and a proportionate part of the unappropriated cost; and which finally, in the case of "Adapted from The Elements of Railway Economics, 75–78. Published by the Clarendon Press, Oxford (1904).

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high-grade traffic, after covering the traffic's own out-of-pocket expenses, leaves a large and disproportionate surplus available as a contribution toward the unappropriated expenses of the low-class traffic, which such traffic itself could not afford to pay.

This, in principle and in outline, is the system of charging what the traffic can bear. It is the system which is, always has been, and always must be adopted on all railways, whether they be state enterprises or private undertakings. It is a system at once in the interest of the railway, because even the lowest class traffic, by whatever small amount its rates exceed the additional cost of doing the business, contributes to the general expenses of the undertaking; in the interest of the public, because traffic is thereby made possible which could not come into existence at all, if each item of traffic were required to bear, not only its direct expenses, but its full share of all the standing charges; and in the interest of the high-grade traffic, because everything which the low-grade traffic pays beyond its own actual out-of-pocket cost helps to defray the general expenses of the undertaking, which otherwise the high-grade traffic would have to bear unaided.

190. The Rate Theory of the Interstate Commerce Commission18

BY M. B. HAMMOND

The tendency of the Interstate Commerce Commission's decisions is, on the whole, towards a cost of service theory of rate making. The following is an attempt at the task of so stating a theory of rates as to bring in the various considerations which the Commission has emphasized as factors in rate making, and show how they can be related to the fundamental principle. It is perhaps well to say that nowhere has the Commission undertaken to state such a comprehensive theory of rate making.

In any system of government-made or government-regulated railway rates, it wold seem that this fundamental economic principle should be kept in mind: to perform the service of transporting persons and goods with the least possible expenditure of social energy.

2. One transportation route or one transportation system should never be allowed to take from another route or system, merely as a consequence of competition, traffic which the latter route or system can carry at less expense.

18 Adapted from Railroad Rate Theories of the Interstate Commerce Commission, 192–195. Copyright by the Quarterly Journal of Economics and by Harvard University (1911).

3. Rates should be so adjusted as never to take from a place its natural geographical advantages of location; but natural advantages should not be so construed as to mean monopoly privileges.

4. Railway rates as a whole should just cover costs as a whole allowing for a normal rate of return on capital actually invested, a normal return for labor of all sorts, and for depreciation, but not for betterments. This would not mean that superior efficiency in railway management was not entitled to reap the rewards of its superiority in the same way it does in the ordinary industrial establishment where competition rules. On the other hand, the rule must not be construed to mean that any investment in a railroad, no matter how foolishly or recklessly made, is entitled to exact high rates from persons and industries along the line in order to earn current interest rates or dividends. Railway property is not more sacred than other property, nor are railway investors immune from the consequences of their own acts.

5. Each commodity transported should, as far as possible, be made to defray its own share, not only of operating and terminal costs, but also of the fixed costs and dividends. It is possible under modern accounting methods to determine these costs with an approximate degree of accuracy for the principal commodities and classes of traffic. The rates on other commodities may be determined by comparing their ascertainable costs with those of the principal commodities, and to a lesser extent by a comparison of the relative values of the commodities.

6. Differences in distance may be made a test of the reasonableness of differences in rates where other conditions appear to be similar; yet the general rule must be kept in mind that though the aggregate charge should increase as distance increases, the tonmile rate should decrease.

7. Where the application of none of the above principles seems practicable, competition, which has been conducted in a normal manner over a period of several years, may be assumed to have established a fair relation of rates.

8. A reasonable rate is one which yields a reasonable compensation for the service rendered. If a given rate is reasonable in this sense, an increase in the price of the commodity or in the profits to the producer will not be a valid excuse for increasing the railway rate. The carrier will justly share in the increased prosperity of the producer by securing a larger traffic in this commodity.

The possibility of applying these rules to the business of railway transportation is proved by the fact that the application of

every one of them can be shown by illustrations taken from the Commission's decisions. Their consistent application would mean that the railroads would neither tax the industries of the country nor have their own investments sacrificed; they would not build up one place of industry; they would not take from some persons or commodities their proportionate share of the costs of transportation and impose them upon other persons and commodities; and finally they would not by their system of rate making retard industrial progress or have their own development hindered by failing credit or lack of revenue.

E. VALUATION OF THE RAILROADS

191. Necessity for Valuation of Railway Property19

The Commission desires to reaffirm its opinion that it would be wise for Congress to make provision for a physical valuation of railway property. The increased responsibilities imposed upon the Commission make continually clearer the importance of an authoritative valuation of railway property, made in a uniform manner for all carriers in all parts of the country.

In the first place, the Commission has been called upon to pass judgment upon certain rate cases, in which the reasonableness of a general level of rates was brought into question, and for such cases one of the most important considerations is the amount of profit secured to the investment. The actual investment in an enterprise needed for giving the public adequate transportation facilities is entitled to a reasonable return, and no more than a reasonable return, in the form of a constant profit; and a reasonable schedule of rates is one that will produce such a return.

There is a growing tendency on the part of carriers to meet attacks upon their rates by making proof, through their own experts, of the cost of reproducing their physical properties. It is obviously impossible for shippers who are complainants in such cases to meet and rebut such testimony, or even intelligently crossexamine the railroad witness by whom such proof is made. In addition to the large expense of retaining experts competent to make such investigations, the shippers have no access to the property of the carriers or to their records showing the cost of construction and other necessary information. The carriers, on the other hand, having access to the records and property, can use the

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Adapted from the Twenty-Second Annual Report of the Interstate Commerce Commission, 83-85 (1908).

It is chiefly because of the force of commercial competition that freight rates are to a large extent interdependent. To change an unimportant rate may require the modification of but a few others, but to raise or lower the rate on wheat from Chicago to New York may require the readjustment of many other charges. The rate structure, like a spider's web, is delicately interwoven.

Rival markets and competing producing sections, no matter where located, will be kept on a common level, if it is possible for the carriers to so place them. At the present time the railways as well as the public realize that artificial limits must often be placed upon interregional competition.

The efforts of rival railways to secure traffic free to move by more than one line is a second force influencing the rate maker. Unlike the commercial competition just mentioned, it has become less instead of more powerful; because, as time goes on, it is more largely regulated by the consolidation of competing lines, or by traffic associations, community-of-interest arrangements, and informal mutual understandings. These are the means whereby rival railways have sought to substitute coöperation for unrestrained competition. This fact is well illustrated by the perennial strife of the trunk lines over the relative rates to be accorded North Atlantic seaports on a traffic to and from the central West.

The fact that the competition among railroads is in service rather than on the basis of secret rates enables the railways to regulate their struggles so as to prevent most, if not all, rate wars; but regulated competition that stops short of open war may not only be perpetual, but may also be keen, and may be effective in determining both the charges on particular commodities and the general level of rates. From the public point of view, this interrailway competition may not be an adequate regulator of rates; indeed, it may, like interregional industrial competition, lead to arbitrary discriminations that require correction by public authority; but this does not prove the absence or impotency of competition among railroads to secure traffic free to move by more than one route.

The influence of water competition upon the policy and practice of railway rate making, though less general and less controlling now than formerly, is still a factor of much effect in several parts of the country; and the practical certainty of a general improvement of the inland waterways of the United States indicates that water competition will be more potent in the future than it is at the present time.

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