HOBSON, J. A. The Social Problem, Chap. iv; Problems of Poverty, Chap. ix. HENDERSON, C. R. Modern Methods of Charity.

JOHNSON, A. S. "Influences affecting the Development of Thrift," Political Science Quarterly, Vol. xxii.

KING, W. I. The Wealth and Income of the People of the United States. ROWNTREE. Poverty: A Study in Town Life.

STREIGHTHOFF, F. H. "The Distribution of Incomes," Columbia University Studies in History, Economics, and Public Law, Vol. iii, No. 2.

Principles of Economics, Vol. ii, Chap. liv.

TAUSSIG, F. W.

WATKINS, G. P. "The Growth of Large Fortunes," Publications of the American Economic Association, Third Series, Vol. vii, No. 2.

YOUNGMAN, ANNA. Economic Causes of Great Fortunes.

PART IV

SELECTED ECONOMIC PROBLEMS

CHAPTER XXVII

TRANSPORTATION ECONOMICS

Transportation Economics Defined. - Transportation may be studied from various points of view. It presents its peculiar problems to the engineer, to the lawyer, to the financier, to the accountant, to the operating official, and finally to the economist. The economist studies the relations of transportation to other industries and to the public welfare. Leaving to the engineer the building of bridges, to the accountant the recording of the condition of the business, and to the general manager the securing of efficient operation, we turn our attention primarily to the principles that govern the determination of rates and fares, although there are many other problems to be considered in transportation economics, some of them peculiar to this field and some but special illustrations of principles underlying all industry. We make use of the technical knowledge of the engineer and of the other specialists that have been mentioned, and yet our point of view is distinct.

Scope of the Term Transportation. A complete treatment of the subject of this chapter would involve a consideration of steam railways, interurban and city railways, the common. roads, water transportation, as well as the post office, the telegraph and the telephone. Aërial transportation may bring new economic problems in the future. But it will be necessary in this chapter to confine the discussion to some of the leading principles in the economics of railroad transportation. As

explained in Chapter VI, the early turnpike era was followed by one of canal building, and this in turn by the railroad era. We are now realizing that we must enter upon a new era of road building and of the improvement of waterways. Canal and river improvement, however, should be urged, not on the general ground that water transportation is cheap, but only in specific instances where it can be shown to be as advantageous as rail transportation when all of the elements of expense are taken into consideration. It is a matter of debate, for example, whether the recent construction of the New York barge canal was economically justified. The improvement of our common roads is now being vigorously forwarded by state and local activity. In 1916 the federal government made an appropriation to aid the states in carrying on this work.

Nature of the Railway Industry. - Hardly anything can be produced without the participation of some transport agency. Modern industrial civilization would be impossible without an efficient system of commercial intercourse. The dependence is mutual, for present methods of transportation clearly would be uneconomical without a large traffic. The influence of cheap transportation is especially important in the fact that it promotes an extensive division of labor by widening the market. It permits each region to devote itself to that line of production for which it is best adapted.

The number of persons employed by railways in the United States in 1910 was about 1.7 millions, which was 4.45 per cent of the number of gainful workers reported by the census of that year. This percentage probably understates the relative importance of transportation as compared with other economic activities, because the capital per employee is larger in the railway industry than in other lines of work. An attempt has sometimes been made to minimize the importance of the question of railroad rates by comparing the transportation charge on such an article as a pair of shoes with the cost of the shoes and showing that it is too small appreciably to affect the retail price. This overlooks the fact that freight charges enter into the cost of the materials and of the machinery required to produce the shoes.

The freight charge constitutes a large percentage of the cost of such an article as coal. But, on the other hand, the importance of changes in freight rates is sometimes overemphasized by comparing the total annual freight revenue per family with the estimated income of the average family. Thus in the year ending June 30, 1910, the freight revenue of railways in the United States was $1,925,553,036, and the number of families as reported by the census of 1910 was 20,255,555, making an average of ninety-five dollars per family. It should be obvious that this figure cannot be compared with the amount which the average family spends for food, clothing, and other items of final consumption. If the comparison is made at all, it must be with the total annual production of the nation per family, for freight charges enter into the cost of such items as the factories, war-ships, and railway bridges constructed each year as well as of the articles produced for final consumption.

Railways differ from manufacturing industries in that they produce place utility and not form utility, and in the further fact that it is customary for manufacturers to own the materials which they change in form while railways as a rule do not own the materials which they transport. In other words, railways sell services simply, while manufacturers sell articles in which they have embodied certain services. The freight charges paid by the shipper may be compared with the toll which the farmer used to pay for having his corn ground at the mill. The fact that railways do not buy and sell the commodities to which they add utility as manufacturers do, makes the amount of their yearly income and outgo much smaller in comparison with the amount of capital employed than is the case with manufacturers. Roughly speaking, it takes railways five years to "turn over " their capital, the total operating revenues of the railways in the United States being about three billions of dollars a year, while their capitalization is about fifteen billions (excluding intercorporate duplications). For the year 1909, the Bureau of the Census reports manufacturing establishments as having a capital of 18.4 billions of dollars and an annual value of products of

20.7 billions. The value of products less cost of materials chased, that is, the value added by the manufacturing process, was 8.5 billions. While no accurate comparisons are possible from these data, they warrant the conclusion that capital is relatively much more important as a factor of production in the railway industry than in manufacturing enterprises taken as a whole. The fact that railway services are rendered in connection with a large fixed capital explains much in our railway history, especially with respect to matters relating to competition, monopoly, and rate making.

Railway Competition. The early roads were short, independent lines, largely for local traffic or to serve as feeders to canals. The first movement toward the efficiency of the present system was the welding together of separate links into through lines. The New York Central, for example, was formed in 1853 out of ten or eleven previously independent lines between Albany and Buffalo. The development of parallel through lines introduced an era of sharp competition. In the seventies the lines connecting Chicago and the Atlantic seaboard engaged in a series of rate wars. The experience of this decade showed clearly the temporary and unstable character of competition among parallel lines. The rule seemed to be that a railway war must be followed by a rate agreement of some sort, so that instead of the maintenance of a supposedly fair level of rates by the steady pressure of competition, we find there was an alternation of high and low rates. The inevitable annihilation of direct competition in rates between railways is clearly portrayed in a congressional report in 1874, where the following prediction was made: "But when the natural tendencies of corporate power have wrought out their inevitable conclusions, the magnitude of our combinations will probably be in proportion to the extent of the field in which they operate." But so strongly was it felt at that time that competition is the life of trade, that the committee which made this report recommended that the government build a line of its own, merely to maintain competition with the private roads, for it was thought that the government could resist the temptation to enter into a combination.