'Che Conservative. 9
service above the cost actually incurred
expressly for handling that particular
item of traffic , is to be regarded as clear
gain unless there is to be set against
it revenue from traffic sacrificed in order
to obtain it or a higher sum which ,
with greater ingenuity , might have been
secured from this the service performed.
This opinion , which is commonly re
garded as a sound principle for the
guidance of traffic and rate making
officers , is , naturally , a great incentive
toward the acceptance of low rates and
the general encouragement and con
stant creation and re-creation of mar
ginal producers. The aim which it fos
ters is the constant multiplication of
tonnage and ton-mileage regardless , or
nearly so , of the effect which such busi
ness may have upon net revenues. The
following extract fairly illustrates the
traffic officer's attitude in this parti
cular :
"There is , of course , the underlying
idea that our traffic does produce net
earnings , but the certainty and amount
of this profit on each kind of business
are matter for inquiry at a different
time and in a more thorough way.
Therefore , the cry of the traffic depart
ment for 'tonnage,1 regardless of kinder
or distance hauled or amount of revenue ,
is not so mistaken. We cannot control
the destination of single shipments , or
regulate the length of the haul except
in the case of alternative routing of
through business. We can only take
the business that is offered , be its haul
great or small ; hence , the primary
measure of the business we get is simply
tons , irrespective of distance carried or
class of freight. "
Railways and Patrons.
Briefly summarized , the relations be
tween the railway and those of the
patrons who supply distant markets
with products subject to competition
are the result of the following condi
tious :
1. A definite price fixed by consum
ers.
2. A definite marginal cost of pro
duction at each producing point which
each producer of form utilities must
receive.
8. No definite cost of production of
specific railway services , i. e.t place utili-
ities.
4. Volume of traffic the principal
measure of current success in adminis
tration.
f
Under these conditions there can be
no doubt as to which party will be
found to bear the burden of whatever
sacrifice in revenue may at any time be
necessary.
The producer of form utilities who
does not receive his cost of production
will go out of business and every sched
ule of charges tends to create its mar
ginal producer , hence there can be no
advance in rates. There is usually an
applicant for lower charges at every
station who will guarantee increased
volume of traffic if only he is enabled
by lower charges , to place his goods or
more of his goods in the market. Rail
way officers are themselves watching
iarefully for opportunities thus to in
crease the traffic from their stations , to
) oint out new markets for the products
of industries already established , and to
encourage the inauguration of new
forms of production in their territory.
Such movements almost invariably re
quire modifications in rate schedules
and the changes are always downward.
The slightest change in one shipping
point must affect many others whinh
produce for the common market , for the
adjustment is always delicate and easily
disturbed.
If this analysis is accepted , the ques-
; iou naturally arises whether it is ap
plicable to the traffic of a single line or
of a single system. Will a railway sys
tem enter separate combinations with
shippers along its own lines and will
these combinations compete among
themselves , in a market not supplied
from other sources , in such a way as
ultimately to absorb the results of eco
nomies in operation and to keep divi
dends and interest at or below the cur
rent commercial level ? Probably no
such test is required in order to establish
the accuracy of the theory herein pro
posed as an explanation of facts which ,
as has been shownhave disclosed them
selves in fragmentary form and in
diverse aspects to numerous writers on
transportation. Yet , without venturing
the assertion that such competition will
always exist in effective form among
combinations to which a single line con
tributes all of the complementary utili
ties of place , it is believed that a few
suggestions will indicate that it must
control the charges of all but the least
extensive lines. These will be found to
be equally applicable to traffic origina
ting in more widely separated regions
and are merely supplemental to the con
siderations already advanced.
The constant fluctuations in indus
trial conditions , which proceed from
prosperity to depression with regular
wave-like variations , must have cense
queuces that are important in this con
nection. The industries that are tribu
tary to a single line will adjust them
selves to its schedules and , as has been
said , each shipping point will have its
marginal producer. If the adjustment
is regarded as that of a period of de
pression , it is obvious that progress
toward better times will entail increas
ing demand , and the raising of the mar
ginal cost of production. The former
marginal producer will begin to receive
a differential gain , and as the process
goes on new marginal producers will ap
pear , and in turn pass to the more for
tunate class until the highest * point of
business activity is reached. The rail
way officer has seen traffic increase in
volume and has possibly been able to in
crease the"return to investors. The re
action , however , finds an established
volume of traffic and this must not be
permitted to decrease , at least not with
out a severe struggle to maintain the
maximum. Prices at the ultimate
market are declining , marginal cost
of production at shipping points cannot
be reduced without decreasing tonnage ,
clearly rates must decline with prices.
Thus the process of declining rates con-
; inues , the adjustment of periods of de
pression becomes that of periods of pros
perity ; the latter cannot be maintained
; hrough the succeeding periods of de
cline.
Charges and Changed Conditions.
With regard to some forms of pro
duction , notably agriculture , the varia
tions of successive seasons may be sub
stituted for those of commercial condi
tions with the same result. If it is ob
jected that railway officers can adjust
charges to improving conditions as well
as to those of declining activity , the
answer , from every student of railway
history , will be that they never do.
Only the most superficial will fail to see
that they have no such incentive. To
quote Mr. Eaton once more :
"Very seldom is he ( the traffic man
ager ) called upon for an explanation for
increases of business. In some way the
superior official assumes that on increase
is per se a good showing. "
As conditions of prosperity give place
to those of depression , the barometer ,
volume of traffic , is frequently and
earnestly scrutinized ; when the move
ment is the other way , every one is too
busy "moving the business" and ex
changing congratulations over the good
times to think of translating its indica
tions in terms of earnings , much less of
comparing these with problematical
possibilities.
It has already been suggested that the
contention that the carrier mar protect
its net earnings by refusing traffic at
unprofitable rates is not groundless. In
spite of the fact that it is often cheaper
to carry business at a loss than not to
carry it at all there is a limit , not to
rates for specific services , but to general
reductions which , at least in a progress
ing country , will not permanently be
passed. It is possibly too much to say
that this limit is fixed by the sum nec
essary to meet operating expenses and
return to invested capital the current
rate of interest and insurance against
risks of similar hazard. There is evi
dence , possibly not conclusive , yet suffi
cient to suggest that the limit may be
still lower. The attractive possibilities
of gain through the manipulation of
securities , of the realization of collater
al profits through speculation in land
contiguous to new lines ; the misleading
hope of excessive gains growing out of
examples furnished under the peculiar
circumstances of some relatively early
railway enterprises ; and the allure
ments , formerly offered , in the way of
Federal aid by means of grants of land
