The State and the Railroads


CHICAGO and its marvelous railroad system have of late years been accounted almost chief among the marvels of material progress in America. It was Professor Goldwin Smith who, about the close of the war of the rebellion, first brought the “ Queen City of the Prairies ” into fashionable notice, and gave the world to understand that among the wonders of America he considered her, always excepting Niagara, as best worthy of a stranger’s attention. Not improbably the English scholar was right. Yet, even more than the city itself, the railroad system of Chicago then was and now is a wonderful result both of public spirit and of private enterprise, and indeed it may well be questioned whether, in a purely material way, the United States has anything more remarkable to show. More than all else, it is a most perfect example of the method of American railroad development. Founded on the principle of free, unembarrassed construction, favored and stimulated in its growth by the whole elaborate system of artificial inducements, — through landgrants, exemptions, and subsidies, — left for its sole regulation to the influence of competition, the Chicago railroad system sprang into existence with mushroom growth, and was intended to and did make the whole great region of the Northwest tributary to that favored spot at which its numerous members found their point of concentration.

Under all these circumstances it is certainly not among the least curious or notable events of the day that Chicago, par excellence the far-famed city of railroads, should suddenly be heard complaining loudly and bitterly of unjust and unbearable railroad discrimination against her. Such, however, has recently been the fact, and, strange as that fact seems, and indeed really is, a stranger fact yet is that this cry of complaint against its railroads, raised from Chicago, the railroad centre of the West, was echoed back by an exactly similar cry from New York, the railroad centre of the entire country. The railroads were charged with discriminating against the railroad centres, of all possible places, and giving to mere local points undue advantages over them. Such an unexpected turn of affairs as this would be curious under any circumstances, but is just now particularly deserving of thoughtful consideration. Its cause cannot lie upon the surface. It must needs indicate some radical defect in the system, or the incipient stages of some considerable revolution. It is not a thing to be disposed of by denunciation of the “ railroad kings,” or the “ thieves of Wall Street,” or the “ stock-gamblers ” and the “ Sliyloek moneyed interests ” of the East. All that is well enough in its way, and is indeed apparently a necessary part of every discussion on these topics, but it is open to the objection that it does not account for the existence of the phenomenon.

Here, apparently, was one of the final results of a system of railroads constructed on the theory that competition would necessarily bring about moderation in charges and equality in treatment; the very cities where the greatest number of railroad lines concentrate, where consequently competition should be strongest, were complaining most loudly that all other places were more favored than they, and that they were, through the adverse action of the railroad corporations, even driven out of the arena of business competition. Nor was the complaint groundless. There was, on the contrary, good cause for it. During the winter of 1875 and 1876, both New York and Chicago were discriminated against in the matter of railroad charges between the interior and the sea-board, and to such a degree also that, while shipments were made from New York to the West by the way of Boston, in like manner shipments East from Chicago were made through Milwaukee. At the moment this was regarded as merely a phase, and a passing phase at that, of railroad competition. This it was, too, but it was also something more. It was an outward manifestation of one of the most important of the changes now quietly working themselves out in the complex system of machinery through which the industrial movement of the country is carried on. The whole railroad system was trying, certainly unconsciously to the country and perhaps unconsciously to those who managed it, to pass through a great change. It was struggling to get away from the false principle of political economy upon which it was first established, and with us has always been developed, and to find its way to some other economical basis upon which it might hope to live and prosper. In fact it was, in its own way, following out the irresistible law of its existence, and working itself out through competition into combination.

It would hardly be possible that the subtle connections between a great economical revolution of the nature of that just referred to and its superficial symptoms should be easy to understand. In the present case, also, these connections are confusingly complex. To develop the subjectfully requires space; to understand it at all requires patience. It involves a realizing conviction of the truth of some of the most abstract and paradoxical politico-economic truths of the day; which have hardly yet found their place in the treatises, but which are none the less working themselves out in all civilized countries with an inexorable and sometimes, as in the case of Chicago, with a cruel logic. A great deal has of late been heard of the newly developed school of political and economic thinkers, which is making itself felt in Germany, and the tendency of which is supposed to be reactionary against English free trade and laissez faire. These German thinkers have been laid hold of in this country by the protectionists, and claimed by them as allies. In truth they are nothing of the sort. They are free traders themselves, but they declare that the principles of free trade also are not of unlimited application; that, on the contrary, experience, and especially the experience of the last few years, has definitely shown that, in the complex development of modern life, functions are more and more developed which, in their operation, are not subject to the laws of competition or the principles of free trade, and which indeed are reduced to utter confusion within and without if abandoned to the working of those laws. The more thorough ascertainment of these limitations on principles generally correct is one of the important studies of the day. Thirty years ago they were not understood at all; they are now understood only in part. John Stuart Mill had a clear though limited perception of them, and how limited his perception was will be realized from the fact that of the twelve hundred pages of his work on political economy he devotes just four pages to this subject. Yet to - day these limitations are asserting themselves in a way which cannot be ignored. It was the ignorant disregard of them years ago which led to the discrimination last winter against New York and Chicago. It is the fact of the existence of these limitations to the possibility of leaving everything to private enterprise and the law of supply and demand which now, more than anything else in this country, threatens the permanence of our political institutions. It works in this wise.

The traditions of political economy to the contrary notwithstanding, there are functions of modern life, the number of which is also continually increasing, which necessarily partake in their essence of the character of monopolies. This they do and always must do as the fundamental condition of their development. Now it is found that, wherever this characteristic exists, the effect of competition is not to regulate cost or equalize production, but under a greater or less degree of friction to bring about combination and a closer monopoly. The law is invariable. It knows no exceptions. The process through which it works itself out may he long, but it is sure. When the number of those performing any industrial work in the system of modern life is necessarily limited to a few, the more powerful of those few will inevitably absorb into themselves the less powerful. The difficulty of the process is a mere question of degree; its duration is a mere question of time. That the railroad system of any country is in its essence a monopoly, although not necessarily a strict monopoly, has been pointed out ad nauseam. In America a great many agents are employed in the work of transportation, hence the monopoly is looser than it is in many other countries; hence, also, the process of bringing about a thorough combination of the monopolists is rendered more difficult and requires more time. None the less it goes on. The essential spirit of monopoly reveals itself even in the competition which is carried on; for, while the result of ordinary competition is to reduce and equalize prices, the result of railroad competition, as is perfectly well known and as was clearly seen in the case of Chicago and New York during the recent winter, is to produce local inequalities and to arbitrarily raise and depress prices.

This important truth is precisely what, through a long series of years, Chicago and New York have demonstrated at the expense of other points; and other points are now, for the time being, demonstrating it at the expense of New York and Chicago. It remains to show directly how this came about — through what process these cities were thus brought to a realizing sense of the unstable character of that railroad competition which had created their prosperity. When the railroad system of this country was established, more than forty years ago, it was established with an entire faith, shared by the whole community, in the effective character of railroad competition. The people of the country in their political capacity had faith in it. Indeed, not to have had faith in it at that time would have seemed almost to imply a doubt of the very principles upon

which the government was established. The whole political experiment in America was based upon the theory that the government should have the least possible connection with all industrial undertakings, that these undertakings had been regulated in other countries far too much, and that now, in the New World, it was to be proved that they would regulate themselves best when most, left alone. The exceptions to this rule had yet to develop themselves. Forty years ago they had not begun, or had hardly begun, to develop themselves at all. If the people, and through the people the government, had faith in competition, the private individuals who constructed the railroads seemed to have no fear of it. They built roads throughout the country, apparently in perfect confidence that the country would so develop as to support all the roads that could be built. Consequently railroads sprang up as if by magic, and after they were constructed, as it was impossible to remove them from places where they were not wanted to places where they were wanted, they lived upon the country where they could, and, when the business of the country would not support them, they lived, as best they might, upon each other. In their case an essential principle had been ignored; or rather a principle generally correct had been misapplied. To make this perfectly clear required time. The country was of immense extent, and its development under the stimulus of the new impetus was unprecedentedly rapid, while the evils sure to ensue from the violation of a fundamental law revealed themselves by slow degrees. At first, and during the lives of more than one generation, it really seemed as if the community had not relied upon this fundamental law of competition without cause. Nevertheless, there never was a time, since the first railroad was built, when he who sought to look for them could not find in almost any direction significant indications of the violation of a natural law. Local inequalities always existed, and the whole system was built up upon the principle of developing competing points at the expense of all others. There were certain localities in the country known as railroad centres; and these railroad centres were stimulated into an undue growth from the fact that competition was limited to them. The principles of free trade did not have full play; they were confined to favored localities. Hence resulted two things: in the first place the community suffered; then the railroads. Under the hard stress of local and through competition the most glaring inequalities were developed. The work of the railroad centres was done at a nominal profit, while the corporations recompensed themselves by extorting from other points not competing the highest profit which could he exacted. Nor was this all. The effect of competition and of the unnaturally rapid construction which had been going on was to force many railroad corporations into bankruptcy. Bankruptcy, again, became merely the process through which absorption was carried on, and from which combination resulted. The undue severity with which the railroads were forced to combat each other inevitably resulted either in alliances between them or in the fact that the larger took possession of the smaller. As long as the business of the country was good and development rapid, this might continue. Railroad construction went on with greater and greater speed. At times there were business disturbances, but the great crash did not come until the year 1873; then, suddenly, from various causes the country for the first time for many years practically stood still. All business seemed at once to die away, and the movement of the community was relaxed. Accordingly the railroads found themselves in a most difficult position. There were already too many of them for the largest amount of business which the community could do even in speculative times, and when that business fell away they found themselves in a position in which, being no longer able to live legitimately upon the country, they were forced to live upon each other. Not only was the competition between them therefore uncontrolled and beyond all control, but a new element entered into it, the effect of which could not well be calculated.

While competition existed in the main between solvent roads, it might be said to be carried on subject to some limitation. There was a point at which the owners of the railroads ceased to he willing to do business in a manner which seemed likely to result only in their inevitable ruin. The moment that point was reached, and the conviction was fairly forced upon the minds of the contending parties that a conflict further prolonged would lead to this result, and that shortly, then the moment for an agreement or for a combination had arrived. They invariably came together and sought to save themselves at the expense of the community. In other words, there was always a point, as long as solvent roads only were concerned, at which competition naturally and quietly resulted in combination. This, however, was true only of solvent corporations. But the effect of the crisis of 1873 was sharply to divide the railroad system of the whole country, and more particularly the railroad system of the West, into two classes: the solvent roads and the insolvent roads. The trunk lines mainly belonged to the former class, and the latter class comprised certain of the trunk lines and many, if indeed in the West not a majority, of what are known as the cross lines and the side lines.

Between the solvent roads and the roads thus bankrupt a new form of competition then developed itself. The bankrupt roads were operated not for profit, apparently, but to secure business; business at any price seemed to be their object. If it was paying business, so much the better; if, however, the business would not pay, it was better than no business at all. Accordingly, the position of the trunk lines soon became almost untenable. They found themselves forced to decide whether they preferred to lose their business entirely and to see it pass away from them to rival lines, or whether they preferred to retain that business by doing it at a dead loss, which seemed inevitably to endanger their ultimate solvency also. Such competition as this could not have its natural termination in a combination, and, therefore, either the difficulty had to be left to solve itself, or some new effort for its solution had to be devised.

Accordingly, in the summer of 1873 those managing the principal through lines running east and west met together in conference. Commodore Vanderbit, who was supreme in the control of the most important of these lines, was then passing the vacation-time after his usual manner at Saratoga. There also the chiefs of the other lines found their way to meet him, and there took place that consultation among them which became subsequently famous as the “ Saratoga conference.”That conference resulted, it is true, only in a scheme which soon proved abortive; nevertheless it was deserving of all the temporary notoriety it achieved, for it will probably be found to have marked an era in the history of American railroad development. There were five rival through routes. Chief among them was the New York Central. North of the New York Central was the Grand Trunk, the through route of Canada. South of it lay three other competing lines: the Erie, the Pennsylvania, and the Baltimore & Ohio. Of those lines three only, with their connections, were represented at the Saratoga conference, or agreed to its conclusions. These were the New York Central, the Erie, and the Pennsylvania. At the time, the results of the Saratoga conference excited an amount of alarm and a popular clamor throughout the country which has rarely been equaled. It was looked upon as a movement against public policy, and the plan for operating the combined roads which resulted from its deliberations was denounced as one which, if successfully carried out, must necessarily result in the destruction of all competition for carriage between the sea-board and the West, and as consequently turning over the vital work of transporting the cereals of the interior to their market to a band of heartless monopolists. The cry of the " railroad kings ” and “ railroad extor-

tioners ” was at once raised from almost every quarter. Meanwhile this clamor, like most popular clamors, had little real cause. The essential principle of the Saratoga combination lay in fact merely in the substitution of an open and responsible organization for a secret and irresponsible one, which had for years been in existence. To any thoughtful and reflecting man it must at any time have seemed very questionable whether, after all, such a change was not directly to the advantage of the community; even more to the advantage of the community indeed than of the railroad corporations. That the whole business of transportation between the West and the sea-board, and the prices which should be charged for doing it, had long been performed under common tariffs binding on all the roads represented at Saratoga, and made by their agents at stated times, was a matter of common and public notoriety. The newspapers had for years contained among other regular news items the reports of the meetings of these freight agents of the different corporations, for the purpose of effecting those common tariffs, just as regularly as they had reported the doings of the state legislatures or of Congress. That such meetings should have been held and such common tariffs prepared and published was obviously a matter of mere necessity to the railroads. It would have been utterly impossible for them to live under the pressure of a war of rates, knowing no limitation, — a war in which rival lines would be continually forced to combine against each other until, as has actually been the case, freight of every description should be transported long distances absolutely for nothing. There was a time when cattle were brought over the competing roads in New York at a dollar a car. Such competition as this plainly opened the widest and shortest way to insolvency, and it was to avoid it that the conventions of freight agents met. There was no secrecy about their proceedings. The tariffs arranged by them were published in the papers. They took effect at stated periods, and they were subject to modifications at other periods. There was no more concealment about them, if indeed so much, as there was about the regular local tariffs in operation on the several roads represented. The only difference between the local and the through tariffs was that, whereas the former were tixed and rarely changed, the latter were subjeet to sudden and violent fluctuations. These fluctuations were known as railroad wars, and to these it was proposed to put a stop through the machinery devised in the Saratoga conference. It was not intended as the result of that conference to, as it is called, “ pool ” the profits of the different lines which were parties to it. On the contrary, each line was to he left free to procure all the business that it could, and charge the agreed-upon rates therefor, and to keep to itself all the profits that it could realize from it. There was nothing which looked to a common-purse arrangement. The attempt was solely to do away with wars of rates through the agency of arbitration. In place of leaving each company to assert its own rights and to maintain them if it was able, a central board was organized, the duty of which was to establish rules and tariffs which should be binding upon the various companies, and this central board it was intended should be clothed with sufficient powers to hold the companies firmly. It was an attempt in the first instance to substitute arbitration among railroads for a condition of perpetual warfare; consequently, though the roads through this board secured a much closer combination than had ever before been effected, yet, from the very fact of their so doing, they also concentrated responsibility upon the board and consequently upon themselves. The board of arbitration was their representative. It acted openly and publicly, before the whole country. It established rates, and it was responsible to the country and to public opinion for the rates thus established. Upon it, therefore, the whole force of public opinion could, at any time, be brought to bear, in place of being dissipated as before among a number of wholly irresponsible subordinate agencies. Apparently, therefore, to any one who looked below the mere surface of things, to any one who was not led astray by empty cries against railroad kings, and by the equally empty denunciation of monopolies, the Saratoga conference had resulted in no insignificant public benefit. It had substituted the responsible for the irresponsible; publicity for secrecy; it seemed, at last, to promise to bring the railroads together under one head, and that head directly accountable to public opinion.

Obviously, the adhesion of all the trunk lines was essential to the success of this experiment. The position would not be greatly altered from what it had been before, if, while the three central through lines between the West and the sea-board had effected a combination, they were yet flanked, ns it were, on the one side and the other, by lines not parties to the arrangement; by the Grand Trunk Railroad upon the north, and by the Baltimore & Ohio on the south. This proved to be the fact. At the time of the conference, Mr. Garrett, the president of the Baltimore & Ohio road, was absent in Europe. Immediately on his return, ostensibly to pay him a visit of compliment, but in reality to induce him to give in his adhesion to the new arrangement, the representatives of the other lines paid a visit to Baltimore. It soon became apparent that trouble was impending. Mr. Garrett declined to surrender what he called the independent policy of his line. He stated the willingness of the corporation which he represented to agree to adhere to the rates established by the combined lines, but he refused to subject his company to the jurisdiction of the board of arbitration. He sought, in fact, to avoid all entangling alliance, keeping the Baltimore & Ohio in a posit ion of absolute independence, to do what it pleased in view of the local interests which it had always been its policy to foster. The representatives of the three central lines returned, therefore, from Baltimore in no good humor. Nor were their apprehensions of impending trouble unfounded. Hardly was the board of arbitration under the Saratoga conference organized, when a bitter railroad war arose between the lines which they represented and their southern neighbor. The more active hostilities were necessarily confined to the Pennsylvania road, which was brought immediately in contact with the Baltimore & Ohio. The war, though short, was very severe, and, for the time being, seemed to disorganize the railroad relations of half the country. It ended, as wars between solvent corporations always have ended and always must end, in an agreement. The Baltimore & Ohio became one of the combination of roads, upon the old footing of tariffs agreed upon in conferences of freight agents. It retained its independence. It was not subject to the jurisdiction, or bound by the action, of any board of arbitration, and consequently the board became a useless piece of lumber. Thus the one thing, practically, which the furious struggle had resulted in was the destruction of that which was best in the Saratoga arrangement. The worst features of the old system of irresponsible combination were restored. The railroads, in fact, returned into what might be called a state of nature; a condition in which it might be said that the railroad companies became again Rob Roys, so far as business was concerned: for " they might take who had the power, and they might keep who could.” With the board of arbitration the two great principles of publicity and direct responsibility, which that board of arbitration necessarily represented, had also disappeared; there remained nothing but a loose understanding, such as it was, between four of the five through routes, which was binding upon them as long as they saw fit to be bound by it. Even this, however, did not perfect the combination. The Grand Trunk of Canada still refused to enter into it; and the Grand Trunk of Canada was not only thus a recusant road, but it also so happened that it was bankrupt. This, for the reasons already stated, sorely complicated the struggle. The combined and solvent roads were very loath to enter into a war of rates with an insolvent through line, aided, as it necessarily was, by the whole system of bankrupt Western connections. Therefore railroad competition in the winter of 1875 developed itself to its full extent, and hence the complaints of Chicago and New York. The Grand Trunk road led directly neither to the one nor to the other of these cities. Consequently, the combined roads being unwilling to meet that line in a war of rates at other points which it did not reach, it was left at liberty to compete at those points almost without restraint. Its rates, and those of the roads which connected with it, accordingly were marked down low enough to cause business to be turned away from the combined lines. This meant that business was diverted from Chicago and from New York, the centres which those lines especially connected. Meanwhile, though the Grand Trunk did not reach either Chicago or New York, it did through connecting roads reach the rival cities of Milwaukee and Boston. Hence it was that so long as that war of rates was suffered to continue, both New York and Chicago looked on, not without dismay, while the stream which flowed through their own channels seemed rapidly to be drying up, and that which flowed through the channels of their rivals was swollen beyond all precedent.

That such a condition of affairs should long he endured in silence was not to be expected. Accordingly the business communities of both cities soon began to bestir themselves, and the press of each to make itself heard. The course pursued in the two eases was almost diametrically opposite. In New York the merchants met together in conference, and a committee was appointed to wait upon the managers of the New York Central line and to point out to them the damage which was being done to what must after all, under any circumstances, remain the natural terminus of that line. The duty of protecting their own best customer, which devolved upon those managing the line, scarcely needed to be dwelt upon. The meeting between the committee and the officials was a very friendly one. No complaint was made as to the rates then charged by the New York Central. These were freely acknowledged to be reasonable and sufficiently low. But the competing rates of the other line were lower. On this point there was no dispute, the railroad officials freely admitting that the rates west from Boston were some fifty per cent, less than the rates at that same time from New York. It was not denied, either, that this condition of affairs necessarily resulted in great hardship. and must involve the destruction of many branches of New York business.

Under these circumstances, the Vanderbilts at once recognized and acknowledged the public duty which devolved upon them. They stated to the committee the circumstances under which they were placed, and promised at once that, at whatever cost, the interests of the city of New York should be protected.

A fierce railroad war now seemed impending. A bold announcement was at once put forth that the New York Central was prepared to enter into the field of competition, even with its bankrupt rival, and that rates would he marked down to any point necessary for the protection of New York interests, however low that point might prove to be. Accordingly they were at once reduced some sixty per cent. It was obvious that events must take one of two courses. Either there must be a destructive war, in which the New York Central, as the solvent line, would suffer the most; or it must be made worth the while of those managing the Grand Trunk to enter the combination and retire from the struggle. Events moved rapidly. Scarcely were the newspapers filled with the rumors of war and with the loud notes of preparation for it, when they also announced that a conference of the competing parties was about to be held in the city of New York. It was held there. The usual discussion took place in public, which promised, apparently, to produce small results. The parties seemed to stand too far apart from each other. These things, however, are not generally arranged in public, or in the presence of newspaper reporters. While the representatives of connecting roads, East and West, were discussing and hopelessly differing, those representing the three corporations most immediately concerned withdrew to the parlor of a neighboring hotel. In an hour or two they separated. What had taken place in that brief interview, no one knows. The deliberations have never been made public. All that is known is that the evening papers of New York for that day announced that all differences between the competing lines were adjusted, and that rates would at once be restored to a paying basis.

Thus in the East, so far as the through business to the interior was concerned, competition had played its full part and had resulted in combination — a combination crude, indeed, and imperfect; liable to fall to pieces at any moment, and inherently defective, so far as the community was concerned, in that it lacked the two essentials of publicity in its proceedings and an acknowledged and responsible head. Under its operation, however, local discriminations ceased, and the gross injustice of having forty and fifty per cent, difference in the rates between neighboring cities and the same points in the interior was no longer tolerated. In the West, however, even this distant approach to system and justice could not be attained. The process of evolution through which the railroad system has to pass could be studied there in one of its earlier phases. While at the East combination was possible, at the West competition was uncontrollable. At the very beginning of its sessions, therefore, the committee of the Chicago Board of Trade, to which the matter of the freight discriminations against that city had been referred, found itself confronted by a problem impossible of present solution. That problem involved the whole question of American railroad development, not only economically but politically. It included the relations which the system was in future to bear to the state, as well as the method in which it was to perform its duties to the community. The committee wholly failed to take in the situation. In its report it showed not only an inability to grasp the cause of the difficulty it had undertaken to investigate, but also its inability to suggest a remedy for it. The experience of New York and the proceedings of the Eastern roads ought apparently to have thrown some light on the course which events were inevitably taking. Apparently, however, they did not. It was a lesson lost. But the subject is one possessing an unusual interest for the people, not only of Chicago and the West, but of the whole country. The views about to be advanced upon it in these pages will to most appear paradoxical in the extreme, nor can they be properly developed in the space allotted to the present article.

Charles Francis Adams, Jr.