Of all the problems associated with the development of American railroads, none has proved more baffling or explosive than the freight rate question. Cloaked in arcane technicalities and mathematical jungles, it contained enough political dynamite to make or break more than one election campaign. Railroad managers, financiers, shippers, merchants, farmers, and politicians alike vented their spleens over the issue, resorting as often to invective as to logic in their quest for a solution. For all their fury, however, the problem remained to most of the contestants a vast unfathomable iceberg. The onset of World War I found the question talked and analyzed into submission but still largely unresolved.
Especially was this true in the South. Here as elsewhere the issue was engulfed in a seamless web of economic logic, political expediency, and individual self-interest. The reason for such intensity of interest was simple: the stakes were high. They involved no less than the basic structure and character of southern economic development. The fates of men, firms, and whole communities hinged upon the influence exerted by freight rates upon the flow of trade. That flow in turn helped determine where distributing and manufacturing centers would arise—or if they should arise at all. Upon it depended the nature and extent of industrial and mineral development. In short, the freight rate question touched the very heart of the South’s anemic economy. For that reason alone men could not possibly treat it impartially regardless of its technical complexity. Southerners may often have been ignorant of the mathematics involved, but they were keenly sensitive to the economic and political implications.
Between 1865 and 1900 freight rates in the United States declined steadily. Southern rates followed this national trend but remained at consistently higher levels than other regions throughout this period. Several peculiar features of the southern transportation problem help explain not only the section’s higher tariff schedules but also the factors that shaped its freight rate controversy. To begin with, the South was a thinly populated agricultural section with few large cities or important distributing centers. Population and markets alike were not only sparse but scattered over long distances as well.
These few simple facts imposed severe limitations upon rail transportation in the South. Since agricultural products, which comprised the bulk of early traffic, were low-grade commodities and were often hauled long distances, they brought relatively modest income and provided little opportunity for interchange of traffic. Moreover, such commodities were seasonal cargoes. They glutted the carriers at harvest time and left them with empty cars the rest of the year. The South’s unbalanced economy aggravated this situation for decades; even during the years of nascent industrial development most of the tonnage continued to be raw materials (such as ores) rather than finished products. Some of these materials, coal being a good example, required specialized equipment that could not be utilized for return shipments.
The problem of one-way hauls dramatically illustrated the plight of southern railroads. Lacking an industrial base for its economy, the South was forced to import its manufactured goods from the North in true colonial fashion. This flow of finished products southward left the carriers with a serious dilemma over how to find cargoes for the return trip. Most of this southbound through traffic went to the region’s major distributing centers. Since the competition for it was fierce and the returns unpredictable, most southern lines had to rely heavily upon local business to remain solvent. But local business developed slowly and unevenly, with the result that most southern roads seem in retrospect to have been built ahead of demand. That is, the roads anticipated the growth of sufficient business to sustain their cost rather than responding to the prior existence of income-producing sources.
This situation shaped the contours of the freight rate controversy. It compelled the roads to devise a system of rate differentials that favored the urban distributing centers with low rates and penalized local or way customers with high tariffs. Since the latter schedules comprised the backbone of the railroad’s revenue, they could not be compromised without inviting financial disaster. Local rates were by nature monopolistic and could therefore be fixed, but rates to distributing centers were competitive and therefore fluid. The presence of extensive water competition in the South worsened this anomaly, for steamships and barges transported bulk cargoes between fixed points and were in no position to disturb local traffic. They could, however, and often did, wreak havoc with through rates.
From this differential emerged a distinctive “southern system” characterized by unusually high local rates in comparison with through rates. It abounded in overtly discriminatory tariffs and resulted in the most flagrant long-short haul abuses in the nation. It intensified the already vicious rivalry between the region’s gateway cities and interior distributing centers. At the local level it locked various interest groups such as the railroads, the merchants, the farmers, and others in mortal combat and to that extent hindered any unified or coherent approach to regional or local economic development. The consequences of their imbroglio spilled over first into local and then into state and national politics, with few clearcut gains for any of the combatants. Once erected, the southern rate system proved difficult to dismantle and may well have seriously handicapped the section in its struggle to achieve economic parity with the rest of the nation.
Unfortunately most critics of the system found themselves enmeshed in a fatal contradiction: the desire to achieve both stability and competition. By stability they meant reasonable rates that did not fluctuate at the carrier’s whim, and by competition they meant the end of monopolistic situations where shippers were entirely at the mercy of one particular railroad. What such critics failed to see was that competition bred instability and that the two goals were fundamentally incompatible within the existing economic and legal system. Most railroad managers recognized this contradiction clearly. As businessmen they naturally yearned for stability and realized that it could only be achieved by eliminating real competition. With unflagging skill and energy they concocted techniques and institutions for doing this only to incur a storm of public wrath. The ensuing stream of state and federal legislation checked the carrier’s effects to some extent but failed to resolve the underlying contradiction. The results left most of the interests involved frustrated and unsatisfied by 1920.
The close of the Civil War found nearly all southern roads in a state of acute physical and financial distress. Despite a general pattern of rapid improvement, the desperate need of the section’s roads for income, the relative paucity of steady traffic, and the heavy dependence upon local traffic all insured that rate structures for southern roads would be significantly higher than those of northern lines. At the same time the rapid growth of through traffic and the stiff competition for it insured the presence of sharp disparities between through and local rates for years to come. The reasons for this condition have already been outlined in Chapter 4. It was within this framework that the “southern system” evolved.
By 1873 the broad contours of the competition for through traffic had clearly emerged, including the rivalries among rail and water routes, among routes entering the South from different directions, and among the east-west trunk-line routes of the North and the north-south rail and water routes in the Mississippi Valley. In this scramble for business chaos reigned supreme, and the quest for stability and relative certainty of income clashed sharply with the desperate need for traffic. As a general rule the stronger, more solvent roads (such as the L & N) gave priority to stability while the weaker lines, unable to afford this luxury, sacrificed everything to the search for income. All agreed, however, that some kind of order had to be devised to rationalize both the intersectional and intrasectional competitive struggle. Most agreed, too, that high rate schedules were necessary to increase income levels, an approach that was feasible for local tariffs but impossible for through rates.
Several agencies emerged to reduce the level of disorder. Most of them strove to replace unchecked competition with some sort of monopoly agreement. The Green Line represented the first crude effort in this direction by establishing special through rates along certain routes, providing safeguards against rate-slashing, speeding up shipping schedules, and other related services. In its calculations the Green Line based its tariffs upon what were known as initial points, which included Cincinnati, Louisville, Nashville, St. Louis, and Chicago. No other rates were given to the seaboard except from these initial points. This practice became part of the basis for the most fundamental aspect of the southern system of making rates, the basing point system.
Stated briefly, the basing point system was defined by designating certain key cities as basing points and establishing a schedule of through rates to them. Rates for all neighboring points were then figured by adding that through rate to the local rate from the basing city to the destination point. Such a system, utilizing points instead of lines or distances, presented a host of difficulties. Since southern local rates were so high, the basing point received an obvious competitive advantage. Moreover, the geography of the South caused the system to make a mockery of any long-short principle of rates based upon distance from destination. Roughly circular in shape because of the seacoast and honeycombed with navigable rivers, the region often caused competing lines to converge from different and sometimes directly opposite directions. For that reason the South could not use a basing line system similar to that employed in the region west of the Missouri River, where competing lines all paralleled one another and rates could be computed by adding a local charge, which increased with distance, to the basing point through rate.
This peculiar condition led southern roads to eschew the line-distance factor in favor of a system where local rates rose outward from the basing point until the line touched the sphere of the next basing point. The most obvious flaw of this system concerned those towns along the line between basing points. These communities paid high rates for traffic that passed through town to reach the basing city and was hauled back to them. For example, one important Georgia Railroad Commission case noted in 1892 that the first class rail rate from Cincinnati was 76¢ to Chattanooga, $1.07 to Atlanta and Macon, and $1.08 to Montgomery. All were basing points. But Marietta, Georgia, lying north of Atlanta and therefore closer to Chattanooga, paid $1.27 for the same freight. Griffin, Georgia, lying north of Macon and closer to Atlanta, paid $1.39 and LaGrange, Georgia, between Atlanta and Montgomery, paid $1.46½ while Opelika, Alabama, farther from Atlanta but in Montgomery’s sphere of influence, paid $1.17. All these figures were computed by adding the through rate to the basing point onto the local rate from that city to Marietta, Griffin, LaGrange, and Opelika.
The anomaly here, of course, was the spectacle of rates actually falling as the length of the haul increased. As in the LaGrange-Opelika example, rates rose steadily from Atlanta to the perimeter of its sphere, at which point they declined steadily as they progressed through the Macon or Montgomery spheres even though the distance travelled increased. Marietta citizens, on the other hand, had the privilege of watching trains carrying their goods chug through to Atlanta and then return before unloading. For this privilege they paid 20¢ more than Atlantans. Small wonder, then, that the South became a hotbed of agitation in favor of some effective long-short haul legislation.
Artificial as it might seem, the southern basing point system, once evolved and adopted, was maintained and defended tenaciously by the southern lines until the Interstate Commerce Commission finally forced them to relinquish it in 1925. In 1880 some of the major southern carriers attempted to install the trunk line system, based upon distance, as the basis for making rates in its place. A genuinely scientific and thorough read-justment was proposed, but the effort failed because several companies viewed the new system as a threat to their self-interest. No other substitute program emerged prior to World War I.
The carriers offered numerous rationales for the basing point system, most of them grounded in economic necessity or exigency. They reasoned that the basing points were in fact historically significant trading centers which had not been made by the railroads but merely recognized by them. Such centers were vital for the peculiar needs of southern agriculture and naturally became distributing and jobbing centers. As such they required special rates if they were to compete successfully with their more established northern counterparts. A more frequent and familiar justification was the widespread presence of water competition in the South, which forced carriers to offer low rates at many points regardless of their tariffs to inland stations. Only in this way, it was argued, could they secure any business to these points, and any attempt to base all rates on this competitive situation would lead to instant bankruptcy.
The reality of serious water competition diminished steadily during the late nineteenth century to the point where one witness testified before the Interstate Commerce Commission in 1897 that there was “no more real water competition at many of these places than in the Rocky Mountains.”1 Nevertheless, the railroad spokesmen clung fiercely to the argument for years. A final and more plausible explanation for the southern system involved the relative paucity of local business. Unlike the North, where the volume of competitive business was large enough to lower charges at intermediate points, the southern condition of low tonnage and distant competitive points prohibited such a policy.
The ability to impose and maintain any such rate system required an organization of greater scope and power than the Green Line. That agency became the Southern Railway and Steamship Association, organized in 1875 with Albert Fink as its first commissioner. As the Association perfected its internal structure and extended its jurisdiction over the years, it became the most powerful force for stabilizing rates and rationalizing competition in the South. So pervasive was its influence that it survived the seeming death blow dealt by the Interstate Commerce Act and lingered on until 1897. As in the Green Line, the L & N had a major voice in the new organization even though it was not an original member.
The Association was organized frankly and openly as a pool. Its primary function was to eliminate cut-throat competition by apportioning traffic to major points of dispute on an equitable basis. The first such agreements, put into effect on November 19, 1875, covered only the cities of Atlanta, Augusta, and Macon. Gradually pooling arrangements were extended to other points, but the Association limited its activities to the southeastern cities until 1886 when a new organization, the Associated Roads of Kentucky, Alabama, and Tennessee, was founded to organize the business to and from western cities. Prior to 1886 the complaints over rate-cutting on the unpooled business were loud and bitter, but in 1887 the new organization was merged with the Association and the level of dispute dropped dramatically.
Besides apportioning traffic the Association fixed rates to and from competitive points, established differentials between neighboring cities, made classifications (some 1,250 articles were specified in the 1886 classification), and conducted foreign relations with lines outside its membership. Since all roads south of the Potomac and Ohio rivers and east of the Mississippi River, along with all steamship lines connecting these roads with North Atlantic ports, were eligible to join, the Association naturally tended to deal harshly with non-members. In such clashes the boycott and organized rate cuts became the chief weapon.
To conduct its affairs the Association evolved an organization that included a commissioner, an auditor, an executive committee, an arbitration board, and a rate committee. As executive officer the commissioner possessed certain limited legislative powers. Since he and the auditor had to keep track of all business done, the latter officer collected and published summaries of all transactions, relevant statistics, and other material helpful to the members. The executive committee consisted of an executive officer from each principal member line. It held jurisdiction over all joint traffic matters but could make decisions only by unanimous vote. The rate committee, a subcommittee of the executive committee, was composed of the general freight agents of each member line. It too could act only on a unanimous vote. As a result most controversial issues were referred from it to the executive committee and by the latter to the arbitration board. Originally a single arbitrator, this crucial office was changed into a three-member board in 1883. It made all final decisions on disputed divisions of traffic, differentials, rates, and other matters.
Under this arrangement the Association became one of the most effective pools in the nation. Because of its newness, imperfect authority, and limited jurisdiction, its first few years were characterized by disputes, rate wars, and constant strain. By 1879, however, the ordeal of survival was over. The Association then embraced some forty roads and twenty-nine coastal steamship lines. The previous year it had adopted a uniform classification structure for the entire Southern Territory, and thereafter freight rates were reasonably well maintained. The Association did not venture into passenger rates until 1885–86, by which time a serious threat to the organization’s existence loomed on the horizon.
The advent of federal regulation with the Interstate Commerce Act in 1887 disrupted prevailing relationships and sent all participants in search of a new order or a viable way to defend the old one. The Act forbade pooling and that function of the Association largely ceased, but the organization continued to maintain rates. Yet this activity, too, declined, and with it went the stability so desperately sought by most of the member roads. The Supreme Court decision in the 1897 Trans-Missouri case dealt the Association a fatal blow by declaring such pooling agreements to be in violation of the Sherman Anti-trust Act. Soon afterward the Association ceased operation, leaving many of its advocates bitter and apprehensive over the prospect of federal regulation. In this respect it is important to realize that these men resented losing what they had built fully as much as they dreaded what the future might bring. As staunch advocates of the public pool, they opposed not federal intervention but the government’s stubborn refusal to legalize pooling as the best approach to rationalizing the freight rate problem. Yet there was doubt even among the advocates, as Fink himself revealed in his testimony before the Cullom Committee in 1885:
The great difficulty that we experience in establishing and maintaining tariffs is to compel all the competing railroads to act together. … I sometimes despair that we can accomplish anything by voluntary agreement. … If we cannot and the government cannot step in and make these tariffs binding … then I do not know what is to become of the railroads of this country… . The question is how to get them together if one or the other wishes to stay out. I do not know how that can be done.2
In the struggle with the fledgling Interstate Commerce Commission the L & N assumed a leading role among southern railroads. This derived in part from the fact that the federal law struck the company on a vulnerable flank through its long-short haul provision. Major southern systems in general and the L & N especially viewed the differential between through and local rates as vital to their solvency; Section Four of the new statute struck directly at the basis of that rate structure. The attack on long-short haul discrimination threatened the road’s income position and the assault upon pooling menaced the stability imposed by the Association. Both of these areas happened to be dear to the heart of Milton Smith, who detested the meddling of ignorant outsiders in his business. Smith’s repugnance for governmental interference, to say nothing of the threat posed by it, insured that he would head up the resistance against federal regulations. Already at war with several state governments, he took up the cudgel against Washington with equal vigor. Both campaigns would be long and bloody.
Like most American businessmen, Smith subscribed enthusiastically to the tenets of laissez-faire capitalism, rugged individualism, private property, and the gospel of success. Unlike most of his peers, however, he did not give an intellectual blank check to what Thurman Arnold aptly described as the “folklore of capitalism.” Smith was more articulate and critical than most businessmen; his thoughts were complex enough to ignore consistency and embrace seeming contradictions. Nor did he always practice what he preached. A champion of individualism and self-help, he had no qualms about employing numerous relatives in the company or bailing them out of financial difficulties.
It is impossible to fathom the whole or even the core of Smith’s beliefs at this distance. Much of his surviving record consists of testimony given before legislative bodies or letters and articles written to educate the public on certain issues. There is no way to determine which of these ideas were intended as propaganda and which ones actually revealed his personal credo. Moreover, his views on some subjects changed between 1880 and 1920 to fit the new conditions in which he and the company found themselves. Finally, Smith had a facile and caustic wit and seemed to delight in the shock value of his more barbed comments. More than once he came to regret a choice phrase when some adversary turned it against him. The following description of Smith’s credo is, then, subject to these serious limitations.
In general terms Smith might well be described as a Social Darwinist. It is not clear whether he ever read either Darwin or Herbert Spencer, but on one occasion he read to the Interstate Commerce Commission a pertinent selection from William Graham Sumner, whom he referred to as “in his time, in my opinion, one of the wisest and sanest of men.”3 Smith’s views on government will be discussed in the next chapter; here it will suffice to consider his attitude toward the relationship between government and business, and specifically his opinion of governmental regulation.
It was, predictably, a negative one. He staunchly opposed governmental interference in principle and the meddling of the ICC in particular. He declared to that body in 1898 that “in my opinion the Government should let its citizens manage their own business. The carrier is a citizen, and by agreement does business with other citizens. … I say the people of the country and the carriers are getting along well, and I say let them alone. … I believe the Louisville and Nashville Railroad and its patrons can manage their business to their mutual satisfication.”4 Unmoved by Smith’s reasoning, Commissioner Charles Prouty replied that any shipper along the L & N’s line would be forced to pay whatever rate the company charged if tariffs were not supervised. When Smith denied this, a remarkable exchange ensued.
“What could he do?” Prouty asked.
“He could walk,” Smith answered. “He can do as he did before he had the railroad, as thousands now do who have not railroads.”
“He can hire a horse and drive?”
“Yes sir; the fact that the rates between these two points is perhaps one-third of what it was originally on freight and one-tenth of what it would cost him if he did not have the road and used his own power or hired some animal, as he used to, is evidence of the reasonableness of the rate.”5
These remarks have been used more than once to document Smith’s intransigent conservatism. Taken in context, however, they reveal only his penchant for allowing the sensationalism of his comments to obscure their intent. Smith understood clearly the railroad’s dual identity as private property and public conveyance. He conceded the vast dimension of public interest implicit in the railroad’s function and never denied government some protective role. He objected rather to the nature and extent of public involvement and for specific reasons. First of all, he believed that the rate problem could best be handled by open agreements among the carriers under the sanction of law. Secondly, he vigorously denied the right and the wisdom of the ICC to fix rates. Finally, he insisted that the Commission did not really grasp the essence of such basic issues as the tariff debate, the definition of competition, the long-short haul problem, and the peculiar situation of southern roads.
Smith assumed that railroad men like Fink and himself understood the complexities of the rate problem in far greater depth than any public officers and could therefore deal with them more competently. His position makes sense only if one recalls that he had been a lifelong student of the problem and had done much to bring order out of the early chaos. His involvement with tariff problems antedated the Civil War, and he first took charge of traffic affairs on the L & N in 1869. His aversion to the existing unrestrained competitive situation was immediate; in later years he would characterize such traffic management as “idiotic, criminal.”6 The opening of every new through line automatically signalled a rate war which led too frequently to bankruptcy for the loser.
Repulsed by such inefficiency and waste, Smith bent his efforts to rationalizing the rate problem. Stability became his goal, and cooperation leavened by coercion his method. In 1871 he completely revised the L & N’s local tariff by simplifying the formula and instituting the South’s first book tariff. His reforms included special low rates on certain items such as fertilizer and the region’s first sliding scale for mineral ores. When the Alabama line opened in 1872, Smith broke precedent by negotiating a traffic agreement with the Nashville, Chattanooga & St. Louis, Iron Mountain, Memphis & Charleston, and other rival lines. That agreement accepted the principle that traffic should normally move by the shortest route and brought peaceful (and profitable) cooperation instead of a costly rate war which the inferior longer routes would normally have launched against the shorter routes. It lasted unchanged until 1906, when the opening of a new line compelled some modification.
From this successful beginning Smith went on a brilliant career at peacemaking. In each case, whether it be the Green Line, the Association, the somewhat saucy letter to the Trunk Line presidents in 1875, or the 1894 agreement with Spencer, he advanced the theme that stability could be founded only upon rational cooperation. For this reason he insisted that “I spent my lifetime in trying to induce the managers of the railroads to maintain rates.”7 He admitted the effort had been only partly successful but argued that the public pool offered the best vehicle for completing the work. Yet the Interstate Commerce Act had outlawed pooling even though most railway managers, in Smith’s opinion, favored it and were perfectly willing to concede to the Commission the authority to supervise all pooling contracts and the rates made under them.
Smith held that the Commission and the general public took an erroneous position on the pooling question because they misunderstood the fundamental issues. The nature of competition was a typical example. To most observers competition meant “a war of rates, a cutting of rates. If you do not offer a reduced rate you are not competing. They do not consider the competition of facilities as competition.”8 In other words, the public failed to grasp the contradiction between competition and stability. Maintenance of rates necessarily implied the end of cut-throat competition. But by demanding competition, Smith noted, legislators and shippers alike were egging the carriers on into mutually destructive rate wars. As a lifelong opponent of such wasteful and demoralizing contests, Smith adamantly rejected such a definition. The only competition, he insisted, was one involving comparative service and facilities.
Smith attributed this pernicious definition of competition in part to the public confusion over the question of what constituted a reasonable rate. On this issue he took a hard line. “Practically, there are no unreasonable rates,” he stated flatly.9 Repeating his assertion that customers along the L & N’s line were satisfied with existing tariffs, he denied that the company could in practice charge “unreasonable” rates even if it wanted to. In general he viewed existing rates as low and declining steadily. Isolated instances of unusually high rates could be attributed to peculiar conditions. The real problem concerned the question of rate differentials, which derived from a combination of geographical differences, the unique circumstances governing southern transportation, and the pressure tactics of certain organized shippers. On one occasion he stated specifically that “this movement to secure legislation is by the wholesale merchants.”10
On this basis Smith itemized three kinds of traffic evils: “First, discrimination between individuals at the same locality; second, discriminations between different localities; third, excessive rates.”11 Having denied the practical existence of the third evil, he assumed the Interstate Commerce Act was intended to correct the first two. On the first point Smith warmly praised the Commission’s work. He denied the L & N ever practiced rebating and declared it to be criminal, indefensible, and in fact the only serious problem in railway traffic. He could not say enough against granting secret reductions to favored shippers. The rebater should be fined, locked up, and wiped out of existence. When Prouty mused that hanging might be more effective, Smith retorted, “I would not object to hanging him.”12
If the Commission confined itself to that evil, he observed, it would have the carriers’ warm support. But he vehemently opposed any attempt by it to fix rates. Against that position he trained every gun in his formidable arsenal. On one level he stated repeatedly that “It is equally plain that Congress never intended to confer the ratemaking power.”13 Smith distinguished between two kinds of railroad commissions. The first simply enforced the law by instituting prosecutions and assisting complainants against railways both in and out of court. He had no objection to this function and in fact saw positive good in its ability to combat rebating. The second kind, however, would actually fix rates or, in Smith’s pungent terms, “take charge of the traffic departments of the railroads and make rates for them.”14 He viewed the second type as an utter perversion of the law’s original intent and in less charitable moments blamed it on the Commission’s thirst for power. “You want more power,” he scowled at its members in 1916, “more power, and more power, and you have been asking it now since 1887, since you were first created.”15
At the heart of the controversy over the power to make rates lay the Commission’s relationship to the courts. A decade after the Commission was created the Supreme Court stripped it of the power to make rates and even impaired its function as a fact-finding body. Interpreting the power to fix rates as a quasi-legislative one, the Court denied its validity and allowed the Commission only the negative role of declaring rates unreasonable. It could then issue a cease-and-desist order and take the carrier to court if it disobeyed the order. But even this flimsy authority was crippled by the Alabama Midland decision in 1897, which rejected the intent of the original Act that the Commission’s findings be accepted as conclusive evidence. Instead the court ruled that circuit courts, in hearing appeals from Commission orders, could conduct extensive original investigations of their own—could review facts as well as legal arguments.
That ruling effectively gutted the Commission. Once the railroads knew that the court of appeals could make its own survey de novo, they began to hold back important data from the Commission hearings. This information could then be introduced in the court in such a way as to discredit the original Commission findings. Between 1898 and 1906, when the Hepburn Act was passed, the Commission did little more than gather information. Its efforts to bring offenders of cease-and-desist orders to bay in the courts failed dismally. Between 1897 and 1906 the Commission carried sixteen cases on appeal to the Supreme Court and won only one of them. Not surprisingly, several of the landmark decisions during the period 1887–1906 involved southern roads and shippers. In that sense the section’s carriers did yeoman service in helping to emasculate the Commission.
Smith, of course, was delighted at these developments. He did not object to the Commission’s role as adversary:
I recognize fully the power of the Commission to take cognizance of complaints as to transportation abuses, and to prevent them by pursuing the procedure outlined in the Act. The shipper … can go to the Interstate Commerce Commission; get it to espouse his cause, and order the discontinuance of the objectionable practice; and then the Commission can go itself into court to enforce that order. No one is objecting to that course.16
But he steadfastly opposed the Commission’s evidence being accepted as conclusive, arguing that it would give that body the vastest imaginable arbitrary power. “Thus, not only is the Commission in some respects a sort of railway superintendent and chief railway accountant,” he observed, “but it may in the same matter be detective, prosecutor, plaintiff and court.”17 In short, it would become independent of the judicial system rather than an auxiliary of it.
On a practical level Smith argued that so powerful a Commission would offer no real advantages. Having defined the major traffic problem as rebates rather than “reasonableness” of rates, he concluded that “it cannot possibly be more unlawful or less easy to cut rates decreed by the most autocratic commission than it is now to cut the rates published by the carriers as required by law.”18 No amount of additional power could achieve that end, and the existing law handled all other abuses adequately. Moreover, he predicted repeatedly that if rate-fixing powers were granted to the Commission, “it would destroy the solvency overnight of the Louisville and Nashville Railroad Company.”19
Thus convinced, Smith fought every legislative effort to give the Commission that power, such as the Cullom Amendment in 1898. But his approach was not purely negative. Although he favored self-regulation with governmental supervision, he realized the enormous difficulties involved. In 1898 he admitted that “I do not think the irregularities complained of can be cured by legislation. The remedy is the adoption of proper methods by the managers. That ought not to be impossible. … I do believe that with intelligent management these irregularities can be done away with, and I do not believe it is possible in any other way.”20 In this vein he vigorously supported the Foraker bill, which was designed to legalize pooling under governmental aegis. But the Foraker bill was defeated, and with it went the last hope of the pool advocates. By the turn of the century Smith found himself less preoccupied with theorizing than with fighting the growth of governmental regulation over practical issues. The real battle had long since shifted from the parlor to the trenches, where Smith always felt more at home.
Like many of his peers, Smith found himself impaled upon the horns of a persistent dilemma within the expanding industrial economy. He conceded the shortcomings of self-regulation and despaired of finding a solution, yet he resisted any attempt by government to take a significant role in the problem. He recognized clearly that the core of the problem was the bitter and complex clash of numerous rival interests, yet he proclaimed that the combatants were best equipped to reconcile their differences rationally. He acknowledged that the stakes of this struggle were high yet distrusted governmental intervention in part because he suspected the “outsiders” of ulterior motives. Small wonder, then, that his arguments became enmeshed in contradictions, the most flagrant of which concerned the shipper.
On one hand Smith insisted that L & N customers were satisfied with going rates and the existing system; on the other he singled out certain groups of shippers as the moving force behind the agitation for increased federal regulation. In truth the complaints of shippers were many and varied and shrill. They filled whole volumes of hearings held by such bodies as the Industrial Commission, and their viewpoints were no less disinterested than Smith’s. On the whole representatives from the major trading centers and favored cities sided with Smith and opposed further federal intervention, but there were notable exceptions such as powerful shipping interests in Atlanta. Spokesmen from the more rural areas, the obvious victims of the basing point system, tended to demand more rigorous legislation and supervision. Because of the South’s peculiar geographical circumstances, the controversy over rates and their reasonableness revolved primarily around the long-short haul issue.
The basing point system, and therefore the essence of southern rate structure, directly violated Section Four of the Interstate Commerce Act.21 The latter declared that no broad justification existed for charging more for a shorter than a longer haul if both shipments went the same direction over the same route under similar conditions of transportation. It provided, however, that dissimilar conditions could justify departures from the principle. The presence or absence of water competition was an obvious example of this proviso; the question of whether rail and market competition also qualified as exceptions provoked much debate before the Commission. These were vital questions to southerners, since most infractions of Section Four originated in that region.
On the issue Smith was especially adamant. He regarded Section Four as outright disaster to southern carriers and stated flatly to anyone who would listen that strict enforcement of the section would bankrupt the L & N immediately. He added that such action would tend to restrict markets by forcing railroads to withdraw from any rate differentials. On this point he reasserted the principle that local rates were the backbone of every carrier’s revenue. They could not possibly be lowered to the level of through rates; rather the roads, if forced to obey Section Four literally, would have little choice but to abandon most of their through business. The latter had, after all, arisen much later than local tariffs and largely as a response to special competitive and marketing conditions. In this respect Smith commented sarcastically that shippers “did not make the slightest objection … when, in competition with the river, it was decided to make lower rates for the longer distance than for the shorter distance, and that penetrated nearly all over the South.”22
Smith challenged the long-short haul provision at every turn. The Interstate Commerce Act became law on February 4, 1887. On April 5 Smith petitioned the Commission for exemption from Section Four. The ensuing arguments led to a landmark decision on long-short haul known as the Louisville & Nashville case. In its petition the company cited four major justifications for claiming exemption from Section Four. Each disputed point involved conflicting interpretations of the section’s key phrase, “under substantially similar circumstances and conditions.” Any argument for exemption would have to demonstrate that conditions and circumstances were dissimilar.
The L & N noted first that certain cities, such as Louisville and Cincinnati, had been natural trading centers even before the railroads, and the carriers deemed it unwise to disrupt the historic relationship of these centers with the surrounding countryside. Secondly, it was argued that the more circuitous routes between two points had to depart from the long-short haul principle if they were to compete for through traffic with shorter, more direct lines. For example, the Cincinnati Southern reached Lexington from Cincinnati in seventy-nine miles while the L & N’s track ran 150 miles. To compete for Cincinnati-Lexington traffic the L & N had to charge higher rates to intermediate points.
On a third point, it was conceded that rates from Louisville to Atlanta and Chattanooga were lower than rates to points between those cities. This was necessary, the company insisted, because of the denser traffic, competing markets, and the large number of competing lines. Any departure from these principles would reduce competition to these interior trade centers and thereby wreak havoc with southern commerce. Finally, the L & N noted that a third of its gross revenue derived from competitive through business. If it were forced to raise these rates to the level of local rates, the effect would be the abandonment of competitive traffic with disastrous effect upon its financial position.
A supplementary petition presented in May discussed the natural superiority of some trade centers and the regulating effect of water competition more fully. The company also argued that the low profit margins of southern roads could not tolerate unrestrained competition without complete ruin and offered several rationales for the favorable rates given to basing points. These included the argument that trade customs had long justified low rates to commercial centers; that light traffic justified higher rates to local points; that the low earnings per ton-mile of southern roads compelled higher local rates; and that, unlike such cities as Boston and New York, the southern ports acted as competitors and not feeders to the railroads.
Taken as a whole, the petitions displayed a remarkable blend of spurious argument, tortured logic, and cogent explanation of the South’s perversely complex rate problems. But the Commission was not swayed. It ruled unanimously that the L & N’s violation of Section Four was far too sweeping. In its decision it defined the dissimilar conditions, and circumstances that might justify exemption as threefold: the presence of water competition, the existence of other railroads not subject to the statute, and what it called “rare and peculiar” cases of competition between railroads subject to the law.23 The Commission also established certain other guiding principles. It refused to recognize the distinction between through and local business and declared that the carrier’s expense would not be a factor unless the case fell under the “rare and peculiar” rubric. And it denied the desire to build up or maintain trade centers and nascent industries as a valid reason for departing from the law.
In June, 1887, the Commission ordered the L & N, and all member roads of the Southern Railway and Steamship Association, to change their tariffs to conform with the provisions of Section Four. A few roads complied, but the majority, led by the L & N, ignored the order. In October the Commission sent a circular letter to carriers across the entire nation inquiring as to violations of the long-short haul principle. Of 367 roads responding, eighty-eight admitted to violations of Section Four, seventy-two of which were southern roads. In their defiance many of these roads looked to the L & N for leadership, and Smith did not disappoint them. He assailed the law unmercifully in the courts and in the press. He worked diligently to have it amended or repealed. When these devices failed him, he simply defied the law. As a result, the L & N did an extraordinary amount of business with the Commission.
Smith made no pretense of obeying. In testifying before the Commission in 1898 he denied any rebating on his lines with the disclaimer that “You know the Louisville and Nashville Railroad Company is the one virtuous corporation in the business. It has never engaged in the business of rebating or unjustly discriminating between shippers or localities.”24
By the end of his testimony Commission chairman Martin A. Knapp offered a different slant on Smith’s frankness. “Your iniquities are of another kind,” he observed. “You go up and down just as you please, openly. You make a rate and go up and down, establish your rates under the law, as you may lawfully do, and you make them so uneven that you do openly some of the things that other people do clandestinely.”25
There is no question that Knapp was right. The rate policy of the L & N remained directly in violation of Section Four for several years, as a brief glimpse at one of its more celebrated cases will show. The notorious Savannah Naval Stores case, decided January 8, 1900, actually focused more upon cotton traffic than turpentine or resin.26 The issue involved planters served by the L & N’s Pensacola & Atlantic division and connecting roads. Northbound cotton shipped by these planters could go either through Pensacola to New Orleans and then up the main line to northern connections or it could be hauled eastward to Savannah or some other port and journey northward from there by steamer. The choice made no difference to the planters but obviously affected the L & N. The first route gave the company a long haul while the second allowed it only a small portion of a competitive joint through rate.
To sway the planters the L & N in 1899 abruptly raised the cotton rate to Savannah from $2.75 to $3.30 a bale. It made similar discriminations on naval stores and used other inducements to entice traffic onto the western route. In effect this alteration bottled up the eastern outlet and threatened Savannah interests. The L & N held no grudge against that port, but neither did it have a line running there. The company argued that it must concentrate upon building up Pensacola and procuring the long haul traffic. The commission thought otherwise but lacked the power to enforce its order against the L & N.
Other cases followed a similar pattern that varied only in the particulars of each locale. Through various devices the L & N and its subsidiaries, along with many other Association roads, retained the same rate structures that existed prior to the Interstate Commerce Act. The special benefits afforded Nashville became an unusually bitter battleground, on which the Chattanooga case was but one campaign.27 The L & N had large stakes in that struggle, for it controlled all six roads running into Nashville. That city appreciated its protected position except on the occasions when some more favored commercial center, notably Louisville, received even better rates. When such situations arose, Nashville merchants did not hesitate to assail the L & N for its discriminatory practice—as in the sugar case of 1898.28
The number and variety of these cases suggested the diversity of conflicting interests. In opposing the L & N large shippers often worked through such organizations as the Freight Bureau or Chamber of Commerce in their city. But these groups could not possibly represent all interests and were just as often opposed by specific merchants or groups of shippers. On the whole the shippers’ struggle with the L & N and its allies bore disappointing results. Curiously enough, the Commission’s 1887 L & N decision, although it went against the road, left in its general principles some amount of leeway for the railroads to decide for themselves if they were violating Section Four and structure their rates accordingly. If the Commission disagreed with the road’s decision, it could issue a cease-and-desist order and eventually take the matter to court.
The problem with this leeway is obvious, for here as elsewhere the Commission fared poorly in the courts. Beginning in 1892, a series of lower court decisions cast doubt upon the Commission’s general interpretation of Section Four. This trend culminated in the Alabama Midland decision in 1897, which in effect destroyed any real enforcement of Section Four by making it impossible for the Commission to prevent long-short haul discrimination under virtually any interpretation. Frustration of the Commission’s efforts meant that shippers could find little comfort from the legal system on this issue. Time and again they might win their complaint before the Commission only to lose it in the courts. Since the litigation process was long, expensive, and usually fruitless, the shippers quickly grew discouraged with it. Testifying before the Industrial Commission in 1901, Edward P. Wilson, secretary of several Ohio commercial organizations, was asked if the courts offered the shippers sufficient remedy. “No, it is a very long remedy to go before the courts,” he replied. “I know of one case we prepared for the courts, and the preparation … is costing the parties really more than is involved.”29 Other witnesses echoed his lament.
For nearly a decade after the Alabama Midland decision the situation remained pretty much as Smith wanted it. The Commission, rendered impotent by the courts, was reduced to little more than a nuisance. The Foraker bill failed but so did the Cullom amendment and similar attempts to revitalize the Commission. For the moment the L & N and its allies retained nearly full authority over their “peculiar system” of rate-making with only token federal interference. The forces opposing the carriers were gathering new momentum, however, and fresh clashes loomed on the horizon. Well might Smith have cherished the fin de siècle period, for the coming years were to test and batter his philosophy and his power severely.
The agitation for more effective federal railroad regulation grew steadily and frequently, on specific issues, enlisted the support of many railroad men. Smith was not one of them. His lifelong struggle to achieve self-regulation and his recognition of the peculiar circumstances of southern carriers continued to spur his resistance to federal encroachment. His resistance to public interference was neither blindly reactionary nor reflexive, but it was no less tenacious. He used every weapon at his disposal, whether it be a tongue-lashing of some federal body or the raw exercise of political and economic power. William Z. Ripley, a noted authority on American railroads, exaggerated not at all when he observed in 1912 that “The worst offender and most defiant opponent of the government from the inception of Federal regulation, has been the Louisville and Nashville Railroad.”30
But the effort was in vain. Slowly and inexorably the tide of legislation eroded Smith’s position. A modest beginning came in 1903 when the Elkins Act did much to check rebates, a cause that Smith could not very well object to. Three years later, however, the Hepburn Act took the first serious steps toward restoring the authority of the Commission. A major provision of that bill, designed to nullify the court’s de novo review of evidence, was eliminated and replaced by an exceedingly vague amendment that failed to define the limits of judicial review. Even so, the Hepburn Act gave the Commission positive rate-making powers once a complaint had been filed, and it threw the burden of appeal upon the carrier rather than the Commission.
During the next four years the Supreme Court helped restore the Hepburn Act’s lost amendment. In two crucial cases involving the Illinois Central (1907 and 1910), the court served notice that it would no longer review the Commission’s decisions de novo but would decide only upon the constitutionality of a given order. Thus the court declined to review facts or decide policy questions; it would confine itself primarily to matters of due process. In a 1910 test case the court finally conceded the Commission’s authority to fix rates by ignoring the question that had long haunted its deliberations: whether or not Congress could legally delegate such power to an administrative commission.
That same year Congress passed the Mann-Elkins Act which, among other things, delegated original rate-making power to the Commission for the first time. Moreover, the burden for proving that a rate was inequitable was shifted from the Commission to the railroads. In another respect southerners in particular viewed the new legislation as an important step forward. To them the greatest weakness of the Hepburn Act was that it completely ignored the long-short haul question. Mann-Elkins remedied the problem simply by striking out the clause “under substantially similar circumstances and conditions” from Section Four. This action forced the carriers to obtain the Commission’s specific permission for every deviation from the long-short haul principle, and Commission and courts alike proved less lenient on the whole question of differences in competition between localities.
Still the southern roads held out stubbornly. The nation’s carriers, led by the South, promptly flooded the Commission with 5,000 requests for exemption from the long-short haul. Most of them were granted pending investigation. Not until 1914, however, did the Commission make a ruling on the matter. This decision, known as the Fourth Section Case,31 admitted that southern carriers could not survive if all rates to competitive points were lowered. The Commission therefore granted relief from the long-short haul clause under certain conditions. To that extent Smith and his allies were vindicated. Numerous readjustments were made but did not go into effect until January, 1916.
The eventual results of the Fourth Section Case disappointed practically everyone. The elimination of local discrimination was not accomplished on any scale. Although piecemeal revisions were made in some cases, the basic pattern remained intact. During the next few years southern shippers won twenty of twenty-three decisions before the Commission but these were isolated victories. The basing point system lingered on into the 1920s and serious rate differential problems continued to plague southern roads and shippers at mid-century. During Woodrow Wilson’s administration federal regulation of railroads was even more firmly established, but the South continued to harbor a thorny nest of exceptions and departures from principle. To this day the section offers perhaps more special transportation problems than any other part of the country.
The twilight years of Smith’s reign did witness a significant shift in the nature and structure of federal regulation. The nationalization of the railroads on December 28, 1917, inevitably forced a reconsideration of the whole rail transportation problem once the war ended. The efficient if costly operation of the carriers under federal control during wartime spawned some sentiment for keeping the railway system in the government’s hands. These sentiments crystallized in the Plumb Plan, largely the creation of labor, which proposed that the federal government buy the nation’s railroads with bonds and delegate operation of the entire system to a fifteen-man board. Within the industry management opposed the plan as vigorously as labor supported it. For various reasons the plan failed, and Congress was left with the task of devising a suitable format for returning the roads to private ownership.
Throughout 1919 Congress labored diligently on the problem. The result of its efforts was the Transportation Act of 1920, which strikingly altered the framework of federal railroad regulation. In its provisions could be found several fresh approaches for resolving the problems that had divided the carriers and shippers for decades. To achieve this end the Act necessarily redefined the fundamental role of the federal government in transportation regulation. However successful the attempt, the results were enduring. Richard C. Overton has characterized the Act’s impact succinctly: “A landmark in the formulation of public policy, this law remains today the fundamental basis of the railway regulatory system.”32
One of the most striking innovations concerned the government’s retreat from the old policy of enforced competition. For the first time the virtues of consolidation and pooling were officially recognized. The Act authorized one road to acquire any other line through stock purchase, lease, or total consolidation if the Commission judged the merger to be in the public interest. It also legalized the pooling of traffic and revenue under the Commission’s sanction and exempted such agreements from antitrust suits. In a backhanded way, this proviso vindicated some of the views Smith and others had been advocating for years. In other areas too the Act authorized the Commission to handle problems the carriers had been coping with for years through pools and private agreements.
The weak road problem provides an instructive example. The celebrated secret pact between Smith and Spencer in 1894 arose in part because of the threat posed by struggling roads susceptible to bankruptcy or takeover by more powerful systems. To rationalize the merger process and reduce unnecessary competitive conflicts, the Act required all consolidation plans to be approved by the Commission on the basis of a master plan of its own in which all American railways were to be grouped into a limited number of systems. The commission was to construct its plan with a view to preserving existing trade channels and competitive patterns. It was presumed that this approach might effectively parcel the weaker roads among the larger systems on some equitable basis. Competition would not be eliminated but it would be rationalized into quiesence.
In the area of rates and revenues several sweeping changes were made. The Commission was given power to prescribe minimum as well as maximum rates. More important, this floor beneath rates was designed to insure a “fair return” on investment and avoid serious losses to weaker lines when rates were reduced. The Act specified that for the first two years this “fair return” should be 5.5 per cent. It also included a surprising recapture clause that returned to the Commission one-half of any road’s profits above 6 per cent. Half the amount recaptured would be placed in a reserve fund administered by the road. The other half went into a contingency fund supervised by the Commission for granting loans to needy lines lacking capital for improvements or equipment. To a limited extent the Act thereby committed the Commission to redistributing income among the carriers much as the Association and some other pools had tried to do.
The Act granted the Commission broad powers in the service area as well. The Commission was authorized to impose any necessary changes in car-service rules. It could assume complete discretion over traffic movement and use of facilities in emergency situations. It was empowered to control both new construction and the abandonment of existing trackage. In the financial sphere the Commission was granted almost total control over railway securities.
Labor too received its due. The Act created a nine-man Railroad Labor Board with membership drawn equally from railroad management, workers, and the general public. The organization of adjustment boards to hear unresolved disputes was authorized but not required. Any case that could not be resolved by these adjustment boards was referred to the Railroad Labor Board, which was empowered to establish reasonable wage levels and working conditions.
The sweeping provisions of the Act made it a major turning point in regulatory policy. For the railroads it meant that the government was now prepared to abandon purely negative policing and assume positive responsibilities for the maintenance of the rail system. For men like Smith it marked a decisive end to the industry’s attempts at self-regulation. Most of the functions they had delegated to pools or more restricted agreements were now pre-empted by the Commission. In a sense this development reflected a victory for their ideas and a defeat for their methods. The right things were being done but the wrong people were doing them.
Men of Smith’s persuasion could scarcely appreciate the irony of this situation. The Act had largely gutted whatever remained of their image of private ownership and management. Virtually every policy initiated by the carriers now had to be reviewed and approved by the Commission, which could initiate a good deal of basic policy itself. The country had come a long way from the unhampered, hard-nosed confrontations of the early days after Appomattox. A new era had formally dawned and many railroad men were not ready for it. This was especially true of the L & N where the legacy bequeathed by Milton Smith to his successors insured a prolonged and bitter resentment of federal regulation for years to come.