IF by Free Trade is meant the unrestricted exchange of the products of their industry among the peoples of the earth, George Stephenson more than any other man deserves to be called the great practical Free Trader. His invention went very far towards abolishing the one sure basis of the whole protective system, — the one tax for which not Adam Smith nor Cobden, neither abstract reason nor corn-law leagues, could suggest any measure of repeal. Stephenson took off from the world at large four fifths of the transportation tax. During the last quarter of a century it may be said that the whole efforts of the protectionist school have been concentrated upon the attempt to replace, in the form of an arbitrary impost, a portion of that burden which the improved facilities of transportation had removed from human industry. Meanwhile apt illustrations are not far to seek of the part which the railroad system has borne in the great work of bringing the price of things in their place of consumption as near as possible to their price in that of production. Perhaps as striking an example of this as could be found is presented in the case of the leading material interest of the American people, — the productions of agriculture, and more especially corn and wheat. Formerly, upon the old highways, it cost as much to carry a bushel of corn 125 miles, or a bushel of wheat 250 miles, as either of these articles was worth. The railroad has increased this distance of possible carriage twentyfold. In other words, it now costs less to carry a given quantity of corn or wheat from Boston to San Francisco by rail, than forty years ago it would have cost to carry the same quantity by the highway from Boston to Albany. Where, therefore, formerly a given centre could, as regards these cereals, hold tributary to it, through land carriage and before all value was exhausted, only some 50,000 square miles, or a region of about the area of New York, it can now hold, at the same cost, over 8,000,000 square miles, or more than twice the area of the whole United States.
Taking this given point as a centre, therefore, it follows that a slight fractional increase or decrease in the transportation tax must add to it or strike from it thousands of square miles of tributary area. For instance, Chicago is the great produce market of the country, and New York is its commercial centre. The distance from one point to the other is a thousand miles. In these days of fierce competition, five cents a bushel is no small fluctuation — loss or gain — for the dealers in corn and wheat. As a part of the transportation tax between Chicago and New York this important variation of five cents a bushel represents the merest trifle more than one mill and one half per ton per mile. To the producers of a very large portion of the interior of the continent, therefore, a matter of two mills a ton per mile in freights must necessarily involve the whole difference between a profit and a loss on their annual industry.
Exception may perhaps be taken to the use of the odious word “ tax,” in connection with the charge imposed for carriage by rail. It may be said that this is a tax in no other sense than a charge for any other necessary service rendered is a tax. Usage and long-established authority have, indeed, fixed upon this word a meaning which is too exclusively political, — as though some form of government could alone, and solely for its own purposes, impose a pecuniary burden under the name upon the wealth of a community. Such a definition is open to serious objections. It not only creates a mischievous confusion of ideas, but it actually deceives the community as to the extent and unnecessary nature of many of the burdens under which it labors. The burden of taxation, as it is called, is crudely measured by the proportion which the public revenue bears to the numbers or supposed wealth of any community as expressed in the census. Such a measure is fallacious in the extreme. A tax is not only a contribution taken directly from the resources of any community for governmental or public uses, but, in its general significance, it is also any burden, natural or artificial, which, without altering the intrinsic value, the quality, or the quantity of raw material, adds to its cost before it reaches the consumer.
It is an elementary principle of political economy, that all wealth comes from the soil ; neither human industry nor human ingenuity can produce any addition to the material possessions of mankind, except from the earth. Everything produced from the earth, moreover, is valuable only in so far as some one wants it and is willing to exchange labor or its products for it. Speaking somewhat loosely, all mankind may, then, be divided into the two great classes of consumers and producers, — to the first of which every human being, and to the last of which the vast majority of mankind, belongs. Between the producer of the raw material and the consumer there comes an intermediate class, the possessors of skilled labor, those who by their industry lend an additional intrinsic value to the raw material. Such are all manufacturers. The sum total, therefore, of the wealth of any community and of the whole world consists of all that which it has extorted from the earth, enriched by any factitious value which may have been added to it. These two elements of cost — production and manufacture — are necessary preliminaries to a fitness for consumption : everything beyond these which adds to the price of a commodity before it reaches the consumer is a tax levied upon consumption or production ; just as much a tax, if the increase is charged for transportation and collected by an importer over his counter, as if it is charged for revenue and received by a collector at the custom-house. If tea, for instance, is raised and cured in China, and thence transported thousands of miles to London, and the consumer in London pays three times the price at which it was sold by him who cured it in China, that additional sum, however fairly earned by the services rendered, is nothing more nor less than a tax of two hundred per cent on the consumption of tea in London, which again reacts and affects the profit on its production in China. It is a necessary tax, perhaps, in view of existing means of transportation, but none the less is it a tax. The process of removal from one point to another — from the point of production to that of consumption — has added nothing to the wealth of the world. It has, indeed, distributed, but it has in no way increased or intrinsically qualified human possessions ; for after it, as before, whether in Canton or in London, the world possessed the same number of pounds of tea of a given quality. So of flour, of cotton, and of every other product of the soil. Transportation is simply a distribution of wealth in existence ; and the cost of distribution constitutes a tax on consumption, levied indifferently on the producer, the manufacturer, and the consumer. This tax must necessarily fall upon all parties, though in unequal proportions very difficult to ascertain. Could it be wholly abolished, and breadstuffs be transported without cost to London, the exchangeable value ot flour would rise in Chicago and fall in Liverpool. Society would then at once be relieved of a tax in comparison with which all the imposts of governments are trivial. In like manner, anything which adds to the necessary cost of transportation aggravates the tax, and anything which diminishes it removes one more burden from human toil.
These facts and principles must be clearly borne in mind, else the great interest which communities have in all questions of transportation cannot be appreciated. The preliminary discussion may be fairly summed up as follows. All elements of price which add to the amount paid by the consumer of any commodity above the cost of the production and manufacture are in the nature of direct taxes on consumption and of indirect taxes on production, — whether imposed by government, by distance, or the friction of trade, — everywhere and always a tax.
The transportation tax, however, has one peculiarity in common with the tariff tax upon imports ; the lower it is fixed, within certain limits, the larger in the aggregate it becomes. Large aggregate receipts of railroad corporations, or large per capita payments to their railroads by communities by no means necessarily indicate an oppressive scale of railroad charges, but, not improbably, the contrary. Industry pays a large tax because the tax is levied in such a way that industry is stimulated, and carries its burdens easily. With municipal taxes, except those raised from tariff imposts, the case is wholly different. Every increase there indicates a direct addition to a burden, — the larger its aggregate the heavier is the load imposed by it upon the production of the State ; in the case of the transportation tax, on the contrary, the larger the total becomes the greater is the volume of business indicated, and, very probably, the lower the tariff rates.
It is computed that the yearly revenue of the 53,000 miles of railroad now in operation in the United States is in the neighborhood of $450,000,000, and represents an annual average payment of nearly $12 per head from the whole population of the country. The rapid growth of this payment has been extraordinary, and well illustrates the importance of the limitation last referred to. In 1840, when there were less than 3,000 miles of railroad in the country, the annual payment hardly exceeded $8,000,000 or fifty cents each to the inhabitants of the country. Even in 1860 it scarcely equalled $150,000,000 or less than five dollars per head. These sums measure the growth of the internal commerce of the country. Should a new invention come into use which should prove as great an improvement upon steam locomotion as that is on the system which preceded it, the aggregate transportation tax would not improbably be increased several fold, and amount, perhaps, to fifty dollars a year for each inhabitant, and yet, upon the tonnage now moved, the yearly expenditure would be decreased from $450,000,000 to $45,000,000. The large amount of the levy affords in itself no just ground for complaint.
The next question is, For what purpose is this tax levied, and to whom does it accrue ? What portion of this large sum is a necessary tax upon the community ; and what portion, if any, is unnecessary ? Railroads must not only be built, but they must be operated. The gross income of the system must therefore be devoted to two ends : first, to the operating of the roads ; and, secondly, to the remuneration of the capital invested in them. The tables of statistics show, that, under the present system of operating American railroads, which must be presumed to be reasonably economical, seventy per cent of the gross earnings are consumed in operating expenses. This is approximately the absolute cost of working and replacing the machinery which keeps up the movement of commerce. It is the necessary tax, the first cost, as it were, of friction. The remaining thirty per cent of the $450,000,000 of gross revenue — perhaps $150,000,000 per annum — is the amount reserved as a remuneration for the capital and the risk involved in the construction and management of the system. This sum is, therefore, an annual tax by itself, which the people of this country pay to those who own and control our railroads. In view of the inestimable value, both immediate and prospective, of the service rendered, and of the essential part it plays in material and moral progress, it would indeed be strange if this tax were very closely scrutinized, or were not cheerfully, and even eagerly, paid. Yet every tax upon their resources should be calmly and carefully scanned by a people which pretends to guide its own destinies. In spite, however, of its enormous proportions and onerous nature, in spite of the fact that it adds to the cost of every article of consumption and enters into the expense of every movement of national and individual life, this transportation tax is so indirect in its nature, so plausible and fair in its reason, and is so completely a part of the customary life of the community, that, until within a very few years past, it has excited absolutely far less real attention and less earnest discussion than a tax of a dollar a gallon on whiskey, or two cents a pound on cotton. Indeed, it has not as yet even excited enough attention to cause the several State governments to procure returns and statistics about it. Its very amount must be guessed at from such partial data as the corporations themselves see fit to furnish.
Two thirds of this annual tax of $450,000,000 may then be regarded as made in payment of actual work of transportation, and the remaining one third represents what is, in the opinion of the owners of the roads, a fair compensation, or at any rate the best that can be got, for the use of the capital and the risk involved in the business. In other words, certain private individuals, responsible to no authority and subject to no supervision, but looking solely to their own interests or to those of their immediate constituency, yearly levy upon the internal movement of the American people a tax, as a suitable remuneration for the use of their private capital, equal to about one half of the expenses of the United States government, — army, navy, civil-list, and interest upon the national debt included. Whether this sum is in the aggregate an excessive remuneration or not is immaterial. Probably, as will hereafter he seen, it is not. This consideration only partially meets the real vital point at issue. The question of the manner in which the amount is raised is even more important than the amount itself. For it may well be that a tax, not in itself excessive, may be raised in an annoying and vexatious manner ; or so as to oppress one locality, at the expense of another ; or it may be exacted in payments which fluctuate wildly at different times, destroying all basis of sound business calculation ; or it may be regulated so as to exact the greatest compensation possible for the least possible service ; or, finally, it may be calculated to produce a fixed and reasonable profit, and to discourage all business development in excess of that easily able to pay such profit. All of these are matters not of mere study, — they are not suggestions of that which is improbable, — but they are points of serious public concern. They are all involved in the question of the manner in which the transportation tax is raised, as contradistinguished from its amount.
The obvious danger of committing so extraordinary a power as that described to private individuals, could not well have escaped the attention of legislators even in the earliest days of the system. But when the process of railroad construction began, forty years ago, those who were called upon to inaugurate it little foresaw the proportions which it was soon to assume. They, however, took every precaution against abuse which suggested itself, and the world has since done little more than follow in the path marked out, and elaborate and work over the various measures then devised.
This, however, took place the lifetime of a generation back. The practical working of the various theories on which the system was inaugurated has of late years been anxiously discussed, and the question of how the community can best regulate and keep within bounds the cost of its transportation is assuming a new significance. The time also has now come when the operation of the various laws, whether natural or human, — whether laws of trade or acts of legislature, — which were relied upon to secure a healthy and economical railroad development can be passed in review and a judgment be calmly formed upon them.
Sir Robert Peel and King Leopold of Belgium were probably the two men of those days whose minds exercised the most immediate and lasting influence upon this question. They both approached it, however, in the manner characteristic of their education, habits of thought, and the political and social surroundings in which they were placed. Peel was essentially a parliamentarian ; King Leopold was the model head of a bureaucratic government. The former instinctively turned for protection to the operation of natural laws, such as competition or the laws of supply and demand, supplemented, if need be, by any desired amount of acts of Parliament ; the latter took counsel with the economists and administrators, and shaped a policy under which the community was intended to cut itself loose from the capitalist, and to undertake the management of its own channels of communication in its own interests. The systems inaugurated respectively in England and Belgium under the impulse of these two minds have since spread over the whole civilized world. The several nations have modified them in greater or less degree to meet local conditions or habits of thought or action ; but, in great essentials, the two groups all the world over clearly exhibit their distinctive characteristics.
The English system, which is that also in use in America, rests wholly upon the fundamental principle of the private ownership of railroads by corporations. By these corporations the roads are to be constructed, and they recoup themselves for the risk and expenditure involved by levying a toll for the transportation of merchandise or passengers. Two agencies were relied upon to prevent the owners of the railroads from abusing the power confided in them ; the one was competition, the other was statute regulation. It was argued, and still is argued, that if railroads were left wholly alone, if all parties were free to construct them wherever a demand for them was thought to exist, if these parties were free to make what they could on them, that, in this case, wherever the profits of the capital employed were excessive new capital would flow in and new roads would be constructed until here, as in all other departments of trade, profits and charges would equalize themselves. This was Peel’s early argument ; it did not last long with him.
It was many years, however, after the railroad system was inaugurated, before any, except the most clear-sighted, could be made to realize that railroads were monopolies, and must be treated as such, not only in their own interest, but in that of the community. King Leopold, saw it as early as 1834. George Stephenson saw it from the beginning, and condensed the whole question into the pithy apophthegm, that “where combination was possible, competition was impossible.” Again in 1846, before a committee of the House of Commons, he gave it as his decided opinion that the power of government supervision should extend to vetoing the construction of competing lines, to protect the public against the heavy rates of traffic which would be required to remunerate the capital involved in their construction. Stephenson fully appreciated what the ultimate burden of free trade in railway construction would amount to. He saw that a line once built must impose a tax on the community, if only to keep itself in existence. He also saw, that, if a competing road was built to divide any given business which could by any possibility be done over a road already constructed, in the end that business must support two roads instead of one. A very slender knowledge of human nature would have enabled him to take the next step, and conclude that any number of competing roads would ultimately unite to exact money from the community, rather than continue a ruinous competition. As combination must always remain possible, no matter how many roads are constructed, it necessarily follows that the more roads the heavier tax, provided always a less number properly managed could have been made to do the work. Relief did not lie in that direction ; it could be found there only under circumstances which rendered exclusive combination impossible. Nor is human legislation to be included in the number of such circumstances. Had Stephenson lived a few years longer, he would have seen in England an excellent example of the virtues of railroad competition guaranteed by law, as a safeguard to the community, — an example not without a savor of comfort for America, with the memory of recent legislative experiences fresh in mind. The Great Northern Railway went before Parliament for its charter. The lines threatened with competition combined their influence, and the bill was thrown out. The next year the application was renewed, and those having the bill in charge engineered it successfully through Parliament by offering to accede to a charter limitation of first-class fares to a point thirty per cent below those charged by the existing companies. The bill was passed and the line constructed, so that a combination, except at low fares, seemed prohibited by act of Parliament. Before the new road was opened, however, before a passenger had passed over it, its directors, pointing out to the other companies how much they would suffer from such ruinous competition, induced them to combine the Parliamentary strength of all concerned, and they actually got through Parliament an amendatory bill, raising the fares of the new road to the level of the old. The law of self-preservation had simply been repealed by act of Parliament.
How much this fallacy of cheap transportation through railroad competition has cost Great Britain cannot well be estimated. During the mania of 1845-46, it was estimated by Mr. Laing, of the Board of Trade, and the estimate was confirmed by Robert Stephenson, that out of three hundred millions sterling, at that time expended, seventy millions had been completely thrown away in constructing unnecessary duplicate lines with a view to competition.
The result of this dependence upon a correct general principle, misapplied, has, in America, been both singular and interesting ; and, indeed, it is a question whether competition has done more harm or good to the business community which has relied upon it as a protection in this case against monopoly. No system can work its way out to logical results which is perpetually subject to fluctuations ; and competition has ever acted on the railway system as a violent disturbing element. At one time it has forced down the charges on transportation to an unnaturally low rate, only to elevate them at another time by artificial combinations to a rate as unnecessarily excessive. During the year 1869 freights between New York and Chicago fluctuated under this influence, between $5 and $37.60 per ton ; and between the same point and St. Louis, between $7 and $46 ; while, the Erie Railway carried goods to Chicago at as low a rate as $2 per ton, and from this bounded back to $37. In the last case, part of the transportation was by water ; but rates on the same class of freights carried through by rail have ranged all the way from four mills to four cents per. ton per mile, and fluctuated violently from the one point to the other. Such has been the result of competition as regards through business, while upon local business its effect has been even more pernicious. “ Usually, competing lines, while they seek the same large centres of commerce, reach them through different districts. This confines their competition to the trade of such centres, while the traffic of the country peculiar to each line is not only uncompeted for, but subjected to an extra and often oppressive tax, whereby to restore the revenue depletions each road suffers in its violent struggles with the others for jointly accessible business. The ability to unjustly burden uncompetitive or local trade supplies transporters with strength to wage prolonged contests for other tonnage at less than cost of transport ; and this wretched warfare, indirectly ruinous to the local business it overtaxes, is of little real benefit to the property battled for ; as, sooner or later, truce is declared, and, if the truce becomes a permanent peace, competition ceases ; while if but a temporary measure, it is presently broken, but only to be renewed ; then renewed, but only to be broken ; while the tax on trade fluctuates with the shattering or maintenance of covenants, until commerce is harassed and dazed and partially prostrated by its wild, illogical, and ruinous changes.”(2)
For these reasons competition has long been regarded among the best authorities on railroads as a dangerous evil. The most sagacious look upon it as a terrible weapon in the hands of the visionary, the reckless, or the ignorant ; an almost insuperable obstacle in the way of the judicious, the conservative, and the progressive. It disturbs every calculation, vitiates every result, puts a stop to all experiment, destroys all system. All persons concerned in the management of railways are therefore anxious to get rid of it, — the more respectable, that the railway system may have a chance to work out its results under a settled policy ; the unscrupulous and less reputable, that a better occasion for levying plunder may be afforded. Under these circumstances it is not impossible that all may unite in the adoption of the principle now lying at the basis of what are known as the “ colored lines,” — that of a combination and a clearing-house for the adjustment of difficulties, — as a solution of the question.
Such a combination would, of course, at once put a stop to competition in so far as the land carriage of freight is concerned. And for this reason in many of the States legislation has been directed against the consolidation of competing lines. In 1869 an act forbidding it was passed in New York, and more recently a provision to the same end has been incorporated into the Constitutions of Illinois and of Michigan. It is wholly unnecessary to say that all such measures of State legislation are utterly futile, almost childish. These giants have sometime since outgrown State swaddling-clothes. Even had they not, the character of such legislation is most open to criticism. Certainty and responsibility in management are two of the most important requisites of a good railroad system. This is peculiarly the case in America, where almost our only machinery for the correction of abuses lies in the degree of concentration with which public opinion can be brought to bear in a given direction. If our people distinctly feel an evil and can be made to see that some one is responsible for it, there is no interest nor combination of interests which can long resist the pressure. So far as railroads are concerned, competition puts both certainty and responsibility out of the question ; it renders the first impossible, and, by dividing, destroys the last. Most conclusive illustrations of all these propositions, as well as of the utter insufficiency of State legislation to deal with the subject, may be found in the experience of the year 1870.
During that year competition was bitter in the extreme ; the rates made East and West were simply ruinous. On certain descriptions of freight they literally were reduced to nothing, and cattle were carried over the Erie road at a cent a head, as against one dollar a car, the rate charged on the Central. On other articles the reduction was not so great, but, both on passengers and goods, rates were purely nominal, and hardly averaged a third of the usual amounts. Of course this could not last. Early in September, 1870, representatives of the competing lines met in New York, and proceeded to put a stop to competition in the one way possible among monopolists, — by combination. The parties in interest were the Central, the Erie, and the Pennsylvania Railroads. The competition was mainly from Illinois to New York. In both Illinois and New York laws forbidding the consolidation of competing lines were in force, and all the roads were carrying on operations in one or both of those States. At the meeting in question it was decided to “pool” the earnings of the colored lines to all competing points ; in other words, all receipts from that business which was supposed to receive a peculiar benefit from competition, were to be paid into a common fund, competition was immediately to cease, fixed rates were to be charged, and thus, at last, all the great trunk lines were to be practically consolidated, in so far as the business community was concerned. This arrangement was agreed to, but broke down for the moment because of quarrels among certain of the individual contracting potentates. The irreconcilables were Messrs. Gould and Vanderbilt, two New York men, who represented two New York roads ; and yet the New York statute-book contained a recently enacted law intended to prevent and render impracticable any combination like the one agreed upon. Not being able to effect the desired arrangement there, certain of the same parties went to Chicago, in a State where a similar provision to that in force in New York had been made a part of the Constitution, and there they actually did enter into an agreement, under which all the roads between Chicago and Omaha “pooled” their receipts between those points, and this contract went into effect. Yet no law, no constitutional restriction, was violated. No law, in fact, could be framed which would meet the case, and the solemn efforts to accomplish it were simply illustrative of the extreme ignorance prevailing among fairly intelligent men as to the practical limits of legislation.
The failure of the New York negotiators was, however, only temporary ; and, moreover, it is by no means clear that its failure was not a disaster to the community. In this combination would at least have been found some degree of certainty and of responsibility. Rates would no longer have varied with every season and to every city ; points destitute of competition would not have been plundered, as they now habitually are, that competing points might be supplied for nothing. During the summer of 1870, accordingly, many towns in New England were charged upon Western freights heavily in advance of the sums charged for carrying the same freights on the same roads a hundred or two miles farther on. All because, through competition, the farther point was served at a loss to the carrier, and, therefore, the nearer had to pay the road profits for both, besides replacing the loss. The agents of the roads do not seek to deny this ; they acknowledge and defend it. They say, and say truly : “ We must live. If our through business is done at a loss (and they show that it was done for nothing), then our local business must pay for all.” This was the case in New England. The cities of central New York fared no better. During a war of rates, almost any manufactured article will be carried from the seaboard to the West for perhaps one half of the amount charged for carrying the article there from a semi-interior point. So also as regards Eastern freights. Syracuse, Rochester, and the like class of cities can neither compete on equal terms with Boston in the markets of the West, nor with Chicago in those of the East. The discrimination against them is said to amount in certain cases to ten per cent of the whole value of the article transported. Neither, under the competing system, is there any remedy for this evil, and a consciousness of this fact, of the risk to which they are continually exposed, has caused the breaking up of many manufacturing establishments at interior points.
Again, the element of gambling is not considered as an advantageous one in the transaction of business. To eliminate it, to equalize, to insure stability and an even operation of natural laws in trade, is one attribute of an advancing civilization and a chief result of science. Does not a sudden change in a tariff, a change sprung on the community in an hour, ranging all the way from one hundred to fifteen thousand per cent on all classes of freights, — infuse an element of chance into current transactions ? Just this fluctuation took place in September, 1870. How, also, could the business community deal with certainty, or make orders or contracts during that year, when it at one time cost far more to send goods from Boston to Chicago than from New York, and shortly after New York firms had to ship their goods to Boston as the cheapest way of getting them to the West. Thus competition by rail, unlike that by sea, knew no law of supply and demand ; there was always a given supply of machinery, wholly irrespective of the demands of trade. Here, then, was no certainty, no stability ; a great evil existed ; yet who was to be held responsible for it ? Upon what point was public opinion to be concentrated ? It could not be on the system, for nothing of the sort in an organized form exists ; neither could it be on individuals, for they clearly were unable to control events, otherwise there would have been no recourse to “pooling.” The responsibility, in fact, was and is absolutely divided away ; it does not exist.
States and legislatures will doubtless for some little while longer cling to the idea of competition as regulating tariffs by rail, but it must break down in the end. The value of competition as affecting the railroad system is very great, but it lies in the superior quality of the service it exacts, — the promptness, comfort, civility, and general regard to the wishes of the public. These things no statute can regulate, but competition does ; as regards rates on the other hand the result of thirty years’ reliance upon competition may be briefly summed up by saying that nineteen places out of every twenty on our railroads are wholly at the mercy of close monopolies, while each twentieth point enjoys such advantages of the law of supply and demand as may be evolved out of fierce competition, alternating with close combination.
The school of Sir Robert Peel had, however, by no means exclusively relied upon the operation of natural laws to regulate the new system. They would not have been English statesmen had they not had recourse to acts of Parliament to make good any deficiencies in the law of supply and demand ; and following, as is the custom in such cases, the precedents already upon the statute-book, they undertook, in the complete breakdown of competition, to apply the remedy against extortion which most naturally suggested itself, that of affixing a limit to profits.
This was accordingly done, and, following the example thus set, in the earliest charters granted in this country are found clauses reserving a power of abating charges for transportation whenever the dividends of the companies shall exceed a certain percentage on the capital. In England, Parliament further attempted to limit the profits of these enterprises by including in the charters long and carefully prepared lists of charges which the companies could not exceed. Such an attempt, made at that time, could of course only be very crude and unsatisfactory. The system, however, expanded through long years into a mass of legislation, half public, half private, based on no principle and no knowledge, and finally culminating, after the manner of the English, in a multiplicity of conflicting acts, and a confusion worse confounded. For instance, by the charter of the Lancaster & Carlisle Railway, passed in 1844, and resembling, at great length, the old toll-boards of the turnpikes, it was minutely set forth that a “horse, mule, or ass” should not be charged at more than three pence per mile, nor a calf or pig, “or other small animal,” at more than a penny ; and so on through an interminable list, beginning with “dung, compost, and all sorts of manure,” and ending with “passengers and animals.” The charter of this road, by the way, consisted of three hundred and eighty-one distinct clauses ; and the commission of 1867 reports, that, in addition to the acts of universal application, “the powers of the railway companies and the consequent rights of the public are now scattered through three thousand one hundred acts of Parliament,” and are exceedingly difficult of ascertainment.
It further resulted that the tariffs of charges, being based upon the old turnpike and canal experiences, were extremely exorbitant, and the profits of the early lines were unduly large. In other words, the tax levied on the community by the proprietors of the lines in their own favor was evidently oppressive. The attention of Parliament was called to the subject, and in 1844, at the instance of Mr. Gladstone, a law was enacted which contained a clause of general operation, practically, in the view of railway directors, limiting their dividends to ten per cent per annum upon the stock of their roads. This particular feature of an otherwise well-considered act led to results in no way anticipated. Not only did it go far towards bringing on the railroad mania of 1845, which was comparatively a small matter, but it introduced into England the practice of what has since been known as stock-watering, — one of the most ingenious and oppressive forms of burdening the growth and industry of a people and of mortgaging future development which has ever been devised. Immediately upon the enactment of this law the railway managers resorted to the usual weapons of those who wish to tax an unwilling community. The more direct and lighter tax having raised a popular outcry, they acquiesced in what they regarded as its repeal, and at once proceeded to levy several times the sum previously levied, through a vastly more oppressive form of indirect taxation. As they considered that after the enactment of 1844 they could no longer, on their existing stock, safely divide all the money they could earn, the railroad financiers, on every possible pretext, create additional shares, until the gross amount of the stock should be sufficient to absorb, in the dividends allowed by the act, the utmost possible net earnings of their roads. The Gladstone act, in so far as it failed to place checks upon the creation of new stock, was defective. Excessive charges and large profits had been found to be like excessive direct taxation, — a present burden, which wrought its own cure, and that speedily ; but an increase of stock was nothing more nor less than a creation of new national debt. It represented so much paper capital to pay dividends and interest upon which a tax in the shape of transportation charges was to be levied forever. In other words, the increasing business of the community was mortgaged in perpetuity to pay dividends on capital stock of railways upon which not a penny had ever been paid in.
It is not worth while, however, to go into the details of the history of stock-watering in England. There it has never been reduced to a science, although Sir Morton Peto carried it to a very creditable degree of perfection. In America only is the process found in its highest stage of development. Here it may be studied as an art now in its mature perfection, and as such merits consideration by itself.
Neither would it be difficult in American railway history to select examples of another no less unsatisfactory result of this usury law. Roads could be named which have found themselves inconveniently prosperous ; so far from having any incentive to increased energy they already, on the business they conveniently did, earned more than it was quite safe for them to confess to. Their profits seemed to invite legislative interference. As a result, development stopped. Every proposal of new enterprise was quietly but honestly met with the argument that it was better to “leave well enough alone.” And for this result the corporations should not be held responsible. They had fulfilled their contract, only, by the terms of that contract, the community, at a certain point in their development, not only deprived them of every incentive to growth, but made growth absolutely dangerous to them. Neither men nor corporations will labor, of their own free will, that others may enjoy all the fruits of their labor ; and, while the sic vos non vobis principle is rigorously applied to railroad enterprises, who can blame them if they practically reply to all remonstrances and appeals with an indolent cui bono ? Corporations, like men, will labor unceasingly, and incessantly develop under the impetus either of necessity or gain ; but to suppose, when absence of all competition deprives them of the first impulse, and force of law destroys the second, that an abstract love of the general prosperity will induce corporations, any more than men, to do double or fourfold the labor necessarily required to earn a given profit, requires an absence of common sense not infrequently characteristic of the statute-book.
In spite of the ill success which attended all the earlier efforts in that direction, the idea of regulating railroad charges by act of legislature has continued to be a very favorite one in the Anglo-Saxon mind. A deep-seated faith in “the omnipotence of Parliament” is inherent in the English speaking race. No act has, however, yet been framed which meets the case proposed, and it is not easy to see how one could be framed. The difficulty is very apparent. The railroad system of every large community is made up of many different members. These members exist and perform their duties to the community under all sorts of varying conditions. One road is built for passenger travel and another for freight, or even for the transportation of a particular kind of freight, such as iron or coal. There are roads to accommodate local travel and others to accommodate through travel. Construction, and consequently the cost of operation, vary just as much as the configuration of the soil. We thus have a complicated system, between the numerous members of which no connection necessarily exists. The legislature is called upon to frame a law, or a series of laws, which shall regulate the tariff of charges throughout this system.
There are but two kinds of statute which any legislative body can pass ; — there are statutes of general operation and those of special operation. A law establishing a scale of fares and freights of universal operation, which would affect one road very slightly, would inevitably ruin another ; and a law which would meet the requirements of one half of the community would almost inevitably ignore those of the other. A simple general law being thus out of the question, the only other resource has hitherto been to acts of special legislation. These of course can be put in operation to any extent, as has already been done in England, and probably with precisely similar results. No large and constantly shifting legislative body can, in the nature of things, be qualified to specifically regulate the tariffs of numerous railroads.
Instinctively appreciating the great difficulties inherent in this matter, and yet feeling a strong desire to do something in the premises, many legislatures in America have taken refuge in a sort of rude rule of thumb. They have sought to fix upon all, or certain of the roads subject to their jurisdiction, a hard indiscriminate tariff on travel or freight of so much per mile. Such a solution of the difficulty may be popular, but it is not intelligent. It ignores all special requirements ; all considerations of speed, comfort, distance, quantity or frequency of movement. The operation of a simple clause inserted in its charter, limiting the rates for travel upon the New York Central Railroad, is always pointed out as conclusive evidence of the wisdom of this class of legislation. The Central is one railroad out of many in the State, however, and two obvious criticisms may be made upon the operation of the law even in this case. It wholly fails to provide for the universally recognized principle that the burden of taxation should be adjusted so as least to be felt. He who travels daily is no more considered than he who travels once a year. No provision whatever is made for that discount in price which should always be allowed to the heavy purchaser. The most serious argument that can however be adduced against this precedent is that it discourages and defeats more searching but more complicated efforts at reform. Confining itself to fares, it does not even pretend to touch the intricate subject of freights. In 1851 the freight business and the passenger business were of nearly equal value to the railroad system, returning for that year about $20,000,000 each ; but during the year 1868 the ratio of freight earnings to passenger earnings was as $280,000,000 to $120,000,000, or as nearly two and a half to one. The law in question, therefore, ignores that which bears the great burden of the transportation tax. And yet this is the best result of thirty years of consecutive effort towards controlling the method of levying this tax by means of legislative action ; — a short, simple rule, ignoring every principle of railroad economy and two thirds of its business, but limiting the charge for travel over a specified road to two cents per mile.
Enough has perhaps been said of the practical working of competition, supplemented by statute regulation, as a means of controlling the mode of raising the transportation tax. It is unnecessary to recapitulate. It is sufficient, in leaving this branch of the subject, to say that, waiving all question of reasonableness of amount, the levying of the $450,000,000 a year which constitutes this tax would seem to be marked by many of those characteristics which are considered most objectionable in a government tax. The amount fluctuates wildly and is very unequally imposed ; the laws which seek to limit its amount lead to fraud, evasion, and abuse, besides occasionally even to the wilful sacrifice of those interests which they were intended to protect.
It only remains in this connection to briefly describe the results arrived at by the other method of controlling, in behalf of the community, this subject of the transportation tax, — the method of ownership by the state as inaugurated by King Leopold and Stephenson. This also has practically developed into results which its originators could hardly have foreseen. The magnitude of the task involved in supplying with railroads a country even so densely populated and of so limited extent as Belgium was evidently more than the government had anticipated. Accordingly at a very early period it was forced to devolve a large portion of the work upon private enterprise. The result was a mixed system of ownership. The government lines, managed by a bureau at the head of which was a cabinet minister, ran side by side with private lines owned and operated by companies as in England and America. These were gradually consolidated until, in 1864, of the 1247 miles of railroad in the country some 460 were either absolutely owned or controlled under lease by the government, and the remaining 780 miles, or little short of two thirds of the whole, were in the hands of two private companies. The result of this division of ownership was something wholly unanticipated. It led to a new form of railroad competition, which gave the government without recourse to legislation a complete practical control over the railroad system as a whole. The essential principle of this control was found, not as in England and America in a multiplication of roads built to compete but more frequently combining in private hands, but in a regular and healthy competition through the mixed ownership of roads already existing. Or, stated in another way, the power of combination was destroyed by the introduction into the system of an element which would not combine. In 1866 the practical effect of this novel form of competition was stated by the Belgian Minister at the head of the bureau in these words, “the state railways thus find themselves placed in constant comparison with the railways worked by private companies ; on the one hand stimulating them to general improvements, and on the other hand acting as a sort of check against any attempt to realize extravagant profits at the cost of the public.”
A sufficient illustration both of the method of practical procedure and of the results arrived at under this system is furnished by the record of the doings of the ten years between 1856-65.
In 1856, in spite of a considerable increase in the miles of railroads worked, the freight movement of the Belgian roads was found to have seriously decreased. Instead of making good the deficiency in receipts by increased rates on existing business, after the manner of private companies, the administration met the emergency by accepting all traffic that offered at greatly reduced special rates. This policy succeeded so well that in 1861 the principle was adopted as regards minerals and raw materials of a regular low scale of charges, with a reduction according to distance. This resulted in the following year in an increase of 72 per cent in the tonnage of this class of goods. In 1862 the principle was extended to goods of the next class with similar results. In 1864, freights were reclassified and the new principle applied to all except the first class, or small parcels, which in this country are known as express matter. The result was summed up by the Minister of Public Works as follows : “ In eight years, between 1856-64, the charges on goods have been lowered, on an average, by 28 per cent ; the public have sent 2,706,000 tons more goods, while they have actually saved more than $4,000,000 on the cost of carriage, and the public treasury has earned an increased net profit of $1,150,000.” A further reduction, made subsequently to this statement, in 1864, exceeded even these results, and under it the tonnage rose from 4,479,000 tons in 1863, to 6,533,000 in 1864.
In 1865, the government, encouraged by these results, turned its attention to fares, now applying to them principles before applied to freights. A general scale was adopted, in which the charge per mile was diminished in proportion to the length of the journey over 22 miles. For distances less than 22 miles the old rates were retained, varying between 1.2 and 2.5 cents per mile, according to the class of carriage. Above the 22 miles the rates rapidly decreased until the fares for distances over 155 miles were as low as one cent per mile for first class, and seven mills per mile for second class tickets. Under this system the fare from Boston to Albany, for instance, would be respectively $2, $1.40, and $1, according as it was paid for a first, second, or third class ticket, instead of $6, as at present. The effect of this change was a singular and very striking illustration of the immediate influence of any reduction of rates on the volume of travel. The traffic within distances of 22 miles, on which no reduction was made, scarcely increased at all. Between 22 and 46 miles, on which distances the reduction was small, it increased only 20 per cent, while on distances over 46 miles, on which a heavy reduction was made, it nearly doubled.
Here at last we see experiments carried on steadily to a legitimate result by which principles are evolved. A free, untrammelled competition between agents not limited in number would be equally effective, but no such results have yet been arrived at through the spasms of railroad competition. The grand result, therefore, so far as Belgium is concerned, has been all that could be desired. While the state roads have boldly led the way, as in the case cited, in all the reforms which have made the Belgium system famous, they have yet accomplished these great results without injury to the private roads. These have followed the lead of the state roads only as that lead was seen by its results to be safe, and they have proved in consequence far more profitable investments to their owners than the roads in England. As a result of this happy deviation from the strict plan of state ownership originally formed by King Leopold, the Belgian people are better satisfied than any other with the present condition of their railroad system. There is no popular disposition to dispose of the State roads to private parties, and, while the service of the roads in private hands is not manifestly inferior to that of the public roads, there is no danger that the mixed system of ownership which is the essence of the system will be broken up by a popular clamor for a universal assumption of its railroads by the State.
The curious result is thus finally arrived at that the two typical railroad systems have worked round and almost completely changed front. The English system, organized in a complete reliance on competition, is tending both in England and America more and more strongly towards regulation by act of Parliament ; while the Belgian, founded on the complete negation of the power of competition under the circumstances, has practically found competition, through a system of mixed ownership, its effective weapon of control. Though to a degree in this way approaching each other, the two systems are still widely divergent, but it can hardly admit of any question that, up to the present time, the railway system in use in Belgium has furnished the community with a far more efficient and reliable method of controlling and regulating the levying of the transportation tax than has been furnished by the system in use in England or America.
* From the North American Review for April, 1870.
2 “ Transportation as a Science.” A paper read by Jos. D. Potts, President of the Empire Transportation Co., before the American Social Science Association at a meeting in New York, October 28, 1869.