Some Economic Aspects of the New Long and Short Haul Clause

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SOME ECONOMIC ASPECTS OF THE NEW
LONG AND SHORT HAUL CLAUSE 1

SUMMARY

Early interpretation of this clause, 323. — I. Cases in which relief is
granted; the general policy, 325. — Roundabout lines, 327. — Cross-
lines, 328. — Market competition, 330. — The parallel of a protective
tariff, 332. — II. Extent of relief granted, 333. — Recent trans-conti-
nental rate cases, 334. — The zone method criticised, 335. — Conclusion :
the margin of tolerance and the Commission's ideal, 336.

When a statute has been suddenly revived after a
sleep of twenty years, we cannot help wondering
whether it has, like Rip Van Winkle, been much
changed in the interval. In the early days of struggle
for existence, the Interstate Commerce Commission
was waging a losing fight in the mere attempt to give
to the " long and short haul clause " some meaning
and force. Now it feels free to give the clause what
meaning and force it will, subject only to constitutional
limitations and to the guiding principles of reasonable-
ness expressed in the statute. 2 Then as now, the Com-
mission had power in special cases to permit any carrier
to charge less for a longer haul, and to " prescribe the
extent to which such designated common carrier may
be relieved from the operation of the section." But
whereas at present this power to relieve is the central
fact of the fourth section, previous to 1910 it was from
force of circumstances a dead letter.

1 For a general survey, see Ripley, Railroads: Rates and Regulation, pp. 473
ff., 564-566, and chap. xix. The present study is more limited in scope, paying
especial attention to the cases of 1912-13.

» R. R. Com. of Nev. v. S. P. Co., 21 I. C. C. R. 329. 340.

32'2

THE NEW LONG AND SHORT HAUL CLAUSE 323

No sooner was the act of 1887 in operation than
many carriers took the ground that competition of any
sort at the more distant point was a substantially dis-
similar circumstance, and entitled them, not to relief
in the discretion of the Commission, but to complete
exemption. If this sweeping claim could be made
good, no special relief need be asked for, since all the
cases in which it could be of moment, or in which there
was any great probability of its being granted, would
be already taken out of the hands of the Commission
entirely. So the question of authority had first to be
fought out. In defending its jurisdiction the Com-
mission became more uncompromising than at the
outset as to what were " substantially similar circum-
stances." It held, for purposes of giving vitality to
the act, that nothing but competition of water carriers
or of rail carriers not subject to the act could remove
any rate from its operation, 1 tho in the first case heard
it had conceded that the roads might be entitled to
exemption " in rare and peculiar cases of competition
between railroads which are subject to the statute,
when a strict application of the general rule of the stat-
ute would be destructive of legitimate competition." 2

Whether or not this change of front was a wise tacti-
cal move, it probably had little effect on the outcome.
In any case it is hard to see how the power to grant
partial relief could have been anything but a dead letter
in the incongruous setting of the original fourth section.
The power could not be exercised arbitrarily, without
reason given, for then the Commission would be open
to the charge of exercising legislative powers which
Congress could not constitutionally delegate to it.
Only as it should follow the general rules of the act

' R. R. Com. v. Clyde S. S. Co., 5 I. C. C. R. 324. Reviewed in 21 1. C. C. R 414.
' Id re L. & N. R. R. Co., 1 I. C. C. R. 31.

324 QUARTERLY JOURNAL OF ECONOMICS

with regard to reasonableness and undue preference
would it be acting clearly within its powers as an ad-
ministrative body. But if some carriers were to be
relieved wholly or in part from the operation of a
section which applied to all alike, what reasonable
ground could possibly be shown for doing so, other than
some difference in the " circumstances and conditions "
surrounding the long and short haul in those cases in
which relief was granted ? If such difference were not
admitted to be " substantial," it could hardly furnish
reasonable ground for relief. But to admit that the
difference was " substantial " would seem equivalent
to admitting at once that this was a case to which the
clause did not apply at all.

It seems clear that the Commission could never have
succeeded in prescribing the degree of relief to be
allowed, even if it had made good its claim that the
clause applied to cases of competition between domestic
railways. This claim, however, the Supreme Court
refused to sustain. 1 A final attempt was made to pre-
scribe the degree of relief to be granted in cases where
circumstances were admittedly dissimilar, but the Com-
mission was again overruled. 2 The first chapter was
thus closed.

From this brief survey, one conclusion should stand
out clearly. The original attitude of the Commission
was not radical nor uncompromising. The rigid atti-
tude commonly ascribed to it was wrought out under
stress of combat, and expressed the Commission's ideas
of the legal necessities of the struggle for jurisdiction,
not a settled economic policy that would be followed
out, once the fight for jurisdiction should be won.

1 I. C. C. v. Alabama Midland Ry. Co., 168 U. S. 144.
' E. T. V. & G. Ry. Co. v. I C. C, 181 IT. S. 1.

THE NEW LONG AND SHORT HAUL CI.AUSE 325

I. Cases in which Relief is Granted

In fact, the effect of the amendment of 1910 has not-
been by any means to establish a rigid long and short
haul policy for all cases in which the discrimination is
due to competition of carriers subject to the act. In
the general statements with which the Commission
signalized the reviving of the fourth section, it went
back to the tone of its very first decisions, made nearly
a quarter of a century previous, before the opening of
the struggle with the courts. It proposed to grant
relief in situations beyond the carriers' control — in
difficulties that he has not brought upon himself by
his own competitive policy. " If at the more distant
point it finds a competition to which it must conform
under the imperious law of competition, if it would
participate in traffic to that point, it may discriminate
against the intermediate point without violating the
law, provided it establishes such necessity before the
Commission." '

The passage quoted sounds very like the " rare and
peculiar cases " phrase of the original Louisville &
Nashville decision. 2 Indeed the " rare and peculiar "
case dealt with in this early ruling is the type of the
most important class of exceptions granted in con-
sideration of railroad competition under the new act;
namely that of roundabout railroad lines which are in
competition with more direct routes. These it is the
settled policy of the Commission to relieve from the
operation of the fourth section, provided always that
the short line bases its charges on distance, and that
the rates to intermediate points on the roundabout line
are shown to be in themselves reasonable/'

1 R. R. Com. of Nev. v. S. P. Co., 21 I. C. C. R. 341.
' In re L. & N. R. R. Co., 1 I. C. C. R. 31, 81.

' Wright Wire Co. et al. v. P. & L. E. R. R. Co. et al., 21 I. O. ('. R. 04; In re Rates
on Salt. 24 I. C. C. R. 192, 195, and other eases.

326 QUARTERLY JOURNAL OF ECONOMICS

This might seem to make a rather large breach in the
barrier of prohibition that was intended to be " well-
nigh universal," but no one familiar with the history of
the question will be surprised. The Commissioners are
only following the original policy of their predecessors;
they are in accord with foreign practice, and with a
sound " cost " theory of charges. The essential thing,
under such a theory, is that each locality should get
the benefit of its location, as measured in the actual rela-
tive costs of carriage. The circuitous route is, of course,
ordinarily the more expensive, especially as the Com-
mission has tentatively defined a circuitous route for
this purpose as one at least 15 per cent longer than the
direct line. 1 This is by no means a fixed rule, however;
other disabilities than distance might have the same
effect, even if the distance were the same. 2 The deci-
sive thing is an economic disadvantage of some sort,
that would of itself justify higher rates than those of
the stronger (usually shorter) line. In view of more
complex situations to come, the writer begs the reader's
patience in a brief review of the economics of this simple
and familiar case. s

An intermediate point (C in diagram) on the longer
route has a right to a reasonable joint rate through the
common junction and on by the direct line (CAB), if
it is so near the common junction that this is the least
expensive way for the carriers to haul the goods. This
means a rate higher than the junction pays by an
amount approaching the local charges for the haul AC.

To this rate, C is entitled on a cost basis and as a
result of its location, no matter how the traffic moves;

1 In re Rates on Salt, 24 I. C. C. R. 192, 195. Edwards & Bradford Lumber Co.
v. C. B. & Q. R. R., 25 I. C. C. R. 93.

> In re Rates on Salt, 24 I. C. C. R. 192, 196. In re Lumber Rates, 25 I. C. C. R.
61. Grand Junct. Chamber of Com. v. D. & R. G. R. R. Co., 23 I. C. C. R. 115.

* For a fuller discussion, going into some aspects of the situation not treated here,
see Ripley, Railroads: Rates and Regulation, pp. 219 ff.

THE NEW LONG AND SHORT HAUL CLAUSE 327

and it is not entitled on a cost basis to any lower rate.
If the route CAB were owned by one company and
CDB by another, there would be no question raised of
the fairness of the adjustment of charges. Why then

Diagram I

should the principles of justice, as based on cost, turn
a somersault if we suppose the stretch of track AC has
been sold by one company to the other ? In a closed
circuit of this sort, the cost principle demands that to
any terminus the economic mid-point should pay the
highest rate, and it is only by chance that this mid-point
could be identical with a junction of the lines of two
separate companies.

Now if the roundabout route chooses to compete for
traffic between the common termini, so long as this
does not result in unduly low rates from A to B direct
(the Commission requires the direct line to observe the
fourth section), it is a matter purely between the two
companies, injuring no one, unless it results in wasteful
carriage. This latter aspect is not to be neglected; x
but such bidding for roundabout hauls is not likely to
be very prevalent unless there is some unused capacity
which can be employed at slight additional expense, so
that the possible waste of the roundabout haul is not
necessarily as great as would appear from a glance at

1 See Ripley, op. cit., chap. viii.

328 QUARTERLY JOURNAL OF ECONOMICS

the map. If the direct line is unable to carry all the
traffic between its termini, the roundabout haul be-
comes the cheapest way to handle the surplus and avoid
congestion; a condition which occurs, to be sure, only
intermittently.

But even if the short line is not congested, to compel
the granting of terminal rates to intermediate points
would not prevent a discrimination but create one, and
one that might just as logically be extended to an out-
side point E. In fact, if it were not, the point E would
have just cause of complaint. Thus, if a territory is
divided into zones whose rates increase with distance,
and one carrier happens to have a route that passes
through a higher zone on the way to or from points in a
zone of lower charges, it would not simplify matters to
compel that carrier to observe the fourth section. 1

Another interesting case is that of the independent
cross-line forming the base of an isosceles triangle or
one side of a rectangle, and able to divert in either direc-
tion through freight from its own local stations — the
type of a large class of problems with which Professor
Ripley has made us familiar. 2 A case of this sort has
been settled, not on the ground of preventing waste in
roundabout carriage, but, like the general case of the
circuitous route, on the sole basis of giving each station
the benefit of the shortest route available by which its
traffic might move. Carthage Junction :t is farther
from various Ohio River crossings than are the points
on either side of it, and it pays a higher rate. This is
upheld, even tho " it often happens . . . that this
carrier, . . . for purposes and reasons of its own,
desires to haul traffic which originates west of Carthage
Junction through Carthage Junction east to a connec-

1 In re Lumber Rates, 25 I. C. C. R. 50. » Op. cit., pp. 282 ff.

J In re Lumber Rates. 25 I. C. C. R. 50, 56.

THE NEW LONG AND SHORT HAUL CLAUSE 329

tion with the Louisville & Nashville at Harriman or the
Southern Railway at Emory Gap, and conversely, it
might desire to handle traffic originating to the east of
Carthage Junction through that point west to a connec-
tion with the Louisville & Nashville at Nashville or
Clarksville, or the Illinois Central at Hopkinsville. In

1

Louisville

Cincinnati

y /

r

Hopkinsville

Nashvi

Carthage Junction

Diagram II

4* Harriman
Emory Gap

either case the traffic would pass through a point taking
a higher rate than the point of origin."

The Commission holds, in granting relief from the
fourth section, that so long as the " rates are mani-
festly constructed upon the proper plan ... it is en-
tirely immaterial to the shippers upon that line whether
traffic is handled by the Tennessee Central through its

330 QUARTERLY JOURNAL OF ECONOMICS

eastern or its western junctions." * The opinion in the
case gives no hint whether the " purposes and reasons
of its own " which give rise to the practice complained
of are matters of transportation convenience, such as
the balancing of its eastward and westward tonnage so
as to reduce the haulage of empty cars, or whether they
are concerned with getting the most favorable division
of the through rate with the connecting carriers. But
it seems plain that the question at issue is not to be
settled on the basis which Professor Ripley suggests,
of preventing roundabout shipments at lower rates than
are granted to points on the way, through which the
shipments pass.

So much for the circumstances which will justify the
granting of relief. The fact has already been mentioned
that competition with other railroads will not of itself
furnish a basis for the granting of relief to the shortest
line, nor to any other of approximately equal length. '-
Market competition falls almost in the same category.
By itself, it is not enough to justify departure from the
general rule, tho the Commission will not say that it-
could never do so. 3 The writer may hazard the con-
jecture that when exception is made, it will be to pre-
serve the life of established industries and the value of
invested capital which have been protected so long
against the superior advantages of others that they
have acquired a " vested interest " in such protection.

The Commission argues, however, that if carriers
make an extra low through rate to put Kansas salt into
St. Louis in competition with salt from Michigan, the
carriers of the Michigan salt could retaliate with equal
justice, 4 and there would be no logical limit. " This

i Cf. Ripley, op. cit., pp. 295, 296.
» 24 I. C. C. R. 192, 25 I. C. C. R. 61.
' In re Lumber Rates, 25 I. C. C. R. 50, 59.
« In re Rates on Salt, 24 I. C. C. R. 192.

THE NEW LONG AND SHORT HAUL CLAUSE 331

form of discrimination is one which feeds upon itself,
. . . and it ought to be snuffed out in its infancy before
property rights and commercial conditions have inter-
vened to render the thing aimed at difficult of accom-
plishment." 1 It seems here to be implied that if
another case of this same sort were to arise, in which the
practice was not attacked until after property rights
had grown up, the answer might be different.

While agreeing entirely with the general view of the
Commission, the writer has had some questionings as
to the logical consistency of the policy. If we accept
the idea that market competition may be something
more than a mere " euphemism for railroad policy," 2
we may draw some interesting comparisons. If the
actual cost of making goods and carrying them to St.
Louis from the east is less than from the west, but
if the western carrier makes an extra low rate, low
enough to meet the eastern competition, it is not at
once obvious how this weak-line competition differs in
principle from that of a roundabout route against a
direct one joining the same termini. And if the western
road makes the rate to St. Louis lower than to nearby
intermediate points, have these points been robbed of
anything to which their geographical situation entitled
them ? By the terms of the problem, the lowest actual
cost at which the goods can be made and laid down at
their doors is more than the same goods need cost laid
down at St. Louis.

But the assumptions (expressed and implied) on
which this case rests are such as would prove in practice
both elusive and unstable. To ascertain with accuracy
the point at which the combined cost of making and
laying down the goods is the same from the east as

' In re Lumber Rates, 25 I. C. C. R. 50, 60. See also Bluefield Shippers Assoc, v.
N. & W. R. Co., 22 I. C. C. R. 519, 525.
' 21 I. C. C. R. 367.

332 QUARTERLY JOURNAL OF ECONOMICS

from the west, we must know the relative costs of pro-
duction at the different sources of supply, and must
make allowance as well for any differences in quality
which might enable one producer's goods to make way
against another's even at a higher price. And if we
were to base a rate policy on our findings, we ought to
be sure that these relative costs and qualities would not
change in the future. For if the western producers
should become enough more efficient, the whole argu-
ment would fall to the ground, and the case become one
of obvious discrimination in favor of St. Louis and
against the intermediate points. Such justice totters
on a narrow pedestal. We should also make sure that
the financial situation of the railway will not change,
for if it does, the road may find itself no longer anxious
to carry the traffic in question at such low rates, and yet
unable to alter its policy without damage to " vested
interests."

The essential difference between the two kinds of
competition shows itself in facts like these. In any
case like the one just described, capital and labor are
being supported in a relatively unproductive locality,
while in the competition of routes, so long as the rates
of the strongest route are not twisted out of a reason-
able adjustment, no industry is affected save the rail-
roads themselves. And if the roundabout line should
decide to cease bidding for competitive traffic, or to
let part of it go, that is an affair between the traffic
manager and his superiors, making no essential differ-
ence to anyone outside.

Railroad systems, like nations, are prone to protect
their own infant industries; l but the regulator who

1 The writer has elsewhere discussed more fully the parallel between railway rate
theory and the theory of international trade. Columbia Univ. Studies, vol. 37, no. 1,
pp. 125-135. The discussion of Commissioner Meyer's paper at the last session of
the American Economic Association (held since the above was written) shows that
economists recognize the fundamental identity of principle involved.

THE NEW LONG AND SHORT HAUL CLAUSE 333

seeks a nation's welfare is like an economist with a
world-inclusive outlook viewing a protective tariff.
He concedes it justifiable in certain cases, but he is
likely to conclude that out of the great array of pro-
tected industries, the infants whose special nurture has
repaid its cost are few and far between. Hence the
fact that the Commission will not allow market competi-
tion, if unsupported by special considerations, to justify
lower charges for the longer haul, may be regarded as a
salutary check, making somewhat more expensive a
policy which is likely in any case to be carried beyond
the limits of gain for the country at large.

II. Extent of Relief Granted

It is in the exercise of its discretion to decide the
degree and kind of relief to be granted that the most
interesting questions arise, for the burden of proof is on
the carrier to justify the rates he wishes to charge. " It
must be affirmatively shown by the carrier seeking such
exception that injustice will not be done to intermediate
points by allowing lower rates at the more distant
points." 1 This is a return to the principle of the
Cullom Report of 1886, which proposed that a greater
charge for a shorter distance should be " presumptive
evidence of unjust discrimination."

As to the extent of the Commissioners' discretion,
they have maintained that confiscation is the only
limit. 2 They may fix a maximum difference between
the rates of the two points in question, or a minimum
rate at the farther point (a rare thing in rate regulation).
They may " define the territory from which a higher
intermediate charge may be made," or fix a maximum
rate at the intermediate point. In fact, they may

» R. R. Com. of Nev. v. S. P. Co., 21 I. C. C. R. 341.

* R. R. Com. of Nev. v. S. P. Co., 21 I. C. C. R. 329, 340.

334 QUARTERLY JOURNAL OF ECONOMICS

limit the discrimination " in any way that is definite
and certain." l Within the limits set, it would seem
that the Commissioners have a freer hand to work out
their own ideas of relative reasonableness than ever
before.

By far the most striking rulings have been in the
cases dealing with the rates from the eastern and central
section to points near the Pacific coast. The questions
at issue and the general features of the decisions are
now familiar. On account of water competition, the
rates from the eastern coast are highest to points some
distance inland, and lower to Pacific ports. When the
carriers serving Chicago and other points in the eastern
half of the continent began the policy of putting these
cities on a par with the seaports in competition for the
western markets, they took the rates as they found them,
discriminations and all. Under these rates, producers
west of the Alleghenies have come to do more and more
of the business, until now most of the traffic paying the
rates is not subject to water competition that would of
itself account for the discrimination. 2 It seems to have
been true, however, that the ocean carriers did reach
inland and draw cargoes to the Pacific coast via the
Atlantic from as far west, at times, as Chicago, often
themselves " absorbing " the cost of the eastward haul.
The Commission met this situation 3 by dividing the
country into zones, one where water competition ad-
mittedly has full force, one where it has no force, and
two intermediate zones where its effect is weak or inter-
mittent. The amount by which the intermediate rates
in question might exceed the through charges was
limited to 25 per cent from the eastern zone, 15 per cent

i City of Spokane v. N. P. Ry. Co., 21 I. C. C. R. 400, 415.
' R. R. Com. of Nev. v. So. Pac. Co. et al., 19 I. C. C. R. 238, 247-251.
» Intermountain Rate Case, 21 I. C. C. R. 355. City of Spokane v. N. P. Ry.
Co., 21 I. C. C. R. 400, 423.

THE NEW LONG AND SHORT HAUL CLAUSE 335

from the next, 7 per cent from the next and none from
the zone farthest west.

At first sight the ruling seems logical. Yet here also
disturbing questionings arise which make one doubt if
this will prove a permanent solution of the problem.
Indeed the Commission can hardly be said to regard
it as such, since it held that it would be within its rights
in refusing relief to all but the seaboard zone, as it had
not been affirmatively shown that the coast-to-coast
rates were unreasonably low in themselves if applied
to the haul from the inland zones to the intermountain
region. Such being the case, and the law placing the
burden of proof on the carriers to establish the reason-
ableness of their intermediate charges, the Commission"
could legally have lowered all the intermediate rates to
the level of those granted to the seaports. The fact
that they gave the permission to charge more, repre-
sented an attempt to be " extremely conservative in
this, the first application of the new law." * Regarded
as an attempt to set up the exact reasonable charge to
the intermountain region (of which no pretense is made),
the decision would surely be open to the objection raised
by the Commerce Court in enjoining it, 2 namely, that
the Commissioners cannot say whether the intermediate
rates chargeable under their order are absolutely rea-
sonable or not, for they do not know what those rates
will be. Apparently, the Commission assumed that the
coast-to-coast through rates would go no lower than
they were at the time — a bold assumption in view of
all the possibilities of the Panama Canal. If the deci-
sion had used percentages of the coast-to-coast rates as
they stood at the time, its position might have been un-
assailable. Possibly the Commission had in mind its
experience with the Texas Commission, in which its at-

' R. R. Com. of Nev. v. A. T. & S. F. Ry. Co., 21 I. C. C. R. 329, 369.
1 A. T. & S. F. Ry. Co. v. IT. S., 191 Fed. 8.56.

336 QUARTERLY JOURNAL OF ECONOMICS

tempts to prevent a discrimination by lowering an inter-
state rate were frustrated by lowering the competing
intra-state rate still farther. Were the Commissioners
afraid that an order that should merely lower these inter-
mediate rates would be the signal for an orgy of rate cut-
ting by the roads who are interested in seeing the Pacific
seaports do as big a jobbing business as possible ?

As to the logic of the competitive situation, it would
seem that the straight path to the end desired would be
to determine, if possible, what rates from the various
zones are needed, bona fide, to meet the rail-and-water
competition, and to order that the only rates exempt
from the long and short haul prohibition shall be rates
that are not lower than the competitive rates so found.
The result would be quite similar to that of the rulings
of the Commission: it would level off the summit of
the mountain-peak of high rates which raises its bulk
so forbiddingly to the western inland rate-payer, but
the method would be more direct. A rate is either
determined by water competition or it is not. If not,
it is not entitled to exemption; but if it is so determined,
what reason is there for putting a percentage limit on
the relief granted ? If the method here suggested be
practicable, it would seem to offer the simplest way of
separating "business" reductions of rates (made neces-
sary by direct competition of routes) from " charitable "
ones (due to market competition), and enacting that
charity must begin at home.

In conclusion, a few general impressions present
themselves. In the first place, all cases under the fourth
section cannot but be witnesses to the wide margin of
tolerance for different methods of constructing tariffs
that exist in our regulative machinery. Strict mileage
scales, tapering scales, blanket rates of wide extent,

THE NEW LONG AND SHORT HAUL CLAUSE 337

and combinations both forward and (with the permis-
sion of the Commission) backward from a competitive
terminal point, — all are allowed within the limits of
this discretionary statute. All that is accomplished
by rulings under the fourth section is to substitute
blanket rates for rates that disregard distance still
more violently.

In many cases the Commission, acting under its
general powers, has gone farther than this. It has
limited the extent of single blanket rates when that
seemed excessive, and has prescribed rates of its own
making in the form of modified distance scales. But
this work tho of the utmost interest, is beyond the
bounds of the present study.

Secondly, it seems that the Commission's ideal has
much to do with the efficiency to be gained by placing
the country's industries in the situations most favor-
able for them, and less to do with preventing the losses
in transportation efficiency that come directly from
wasteful carriage, in ways made familiar by Professor
Ripley's analysis. 1 And, thirdly, one cannot but
wonder whether the shifting to the carriers of the bur-
den of proving that rates to intermediate points are
reasonable may not have been, during the months that
are past, a more effective weapon in lowering these rates
than it can ever be again. For the attorneys of the
railroads cannot fail to learn better and better now to
support this burden of proof, as the Federal Depart-
ment of Justice in enforcing the Sherman Act had to
learn, through the fiasco of the Knight case, how to
prove to the courts that an illegal combination existed,
and emerged at the end successful.

J. M. Clark.
Amherst College.

1 Railroads: Rates and Regulation, as cited.