the old management may have an influence in his appointment. At the worst, they have got back all the money they put in, plus the profits of the construction company; in the case supposed, 300 per cent. The bondholders, on the other hand, have paid $1,600,000 for a $1,200,000 road. But the troubles of the bondholders and the advantages of the old directors by no means end here. When the receiver takes possession he discovers that valuable terminals, necessary for the successful working of the road, are not the property of the company, but of the old directors. He finds that the road owns a very inadequate supply of rolling-stock, and that the deficiency has been made up by a car trust-also under the control of the old directors. Each of these things, and perhaps others, must be made the subject of a fight or of a compromise. The latter is often the only practicable alternative, and almost always the cheaper one; by its terms the ring perhaps secures hundreds of thousands more, at the expense of the actual investors. These are but a few of the many ways in which a few years control of property may be made profitable to the officials at the expense of legitimate interests. In a case like this, all depends upon the possibility of selling the bonds. It is usually impossible to place the whole loan before construction; and if the market price falls below the cost of the work undertaken, as was the case with the West Shore, the loss falls upon the construction company. Such accidents were for a long time rare. It took the public nearly twenty years to learn the true character of imperfectly secured railroad bonds. Within the past five years it seems to have become a trifle wiser. The crisis of 1873 was insufficient to teach the lesson; but that of 1885 has been at least partially successful in this respect. In cases like the one just described the bondholders are largely to blame for their own folly. But sometimes the loss falls on those who are in no way responsible for it. A railroad may be built as a blackmailing job. If a company is sound and prosperous, speculators may be tempted to build a parallel road, not with the idea of making it pay, but be cause they can so damage the business of the old road as to force it to buy them out. They build the road to sell It is but fair to say that operations as bad as those just described are the exception rather than the rule. But the fact that they can exist at all is by no means creditable to our financial methods. The whole system by which directors can use their positions of trust to make contracts in which they are personally interested puts a premium on dishonesty. Such contracts are forbidden in England. It may be true, as is urged by many railroad officials of undoubted honesty, that it would be inconvenient to apply the same law here; but on the whole the gain would far outweigh the loss. At the very best, a railroad president is subject to temptations to misuse his financial powers, all the more dangerous because it is impossible to draw the line between right and wrong. He knows the probable value of his railroad and of the property affected by its action a great deal better than any outsider possibly can. The published figures of earnings of the road are the result of estimates by himself and his subordinates. Out of the current earnings he pays current expenses, and probably charges permanent expenditures to capital account. But what expenditures are current and what are permanent? This division is itself the result of an estimate, and a very doubtful one at that. There are some well-established general principles, but none which will apply themselves automatically. With the best will in the world he cannot make his annual reports give a thoroughly clear idea of what has been done. Is he to be forbidden to buy stock when it seems too low, or sell it when it is high? Shall we refuse him the right to invest in other property which he sees will advance in value? Apparently not; and yet, if we allow this, we open the door for some of the worst abuses of power which have occurred in railroad history. The line between good faith and bad faith in these matters is a narrow one, and the average conscience cannot be trusted to locate it with accuracy. But the relations to the investors cover but a small part either of the work or of the responsibility of the railroad authorities. They are managing not merely a piece of property, but a vast and complicated organization of men, and an instrument of public service. In all these capacities their cares are equally great. The operating and the traffic departments are not less important than the financial department. The relations of the railroad to its employees and to the business community at large, are even more perplexing than its relations to the investors. Of the questions arising between the railroad and its employees we are just beginning to realize the full importance. They are not matters to be settled by private agreement or private war. If they involve a serious interruption of the business of the community they concern public interests most vitally. The community cannot afford to have its business interrupted by railroad strikes. On the other hand, it cannot allow the men to make this public duty of the railroads a means of enforcing their own will on every occasion, to the detriment of all discipline and responsibility, or in disregard of investors' rights. How to compromise between these two conflicting requirements is one of the most serious problems of the immediate future. Little progress in this direction has as yet been made, or even systematically attempted. The questions arising from the relations of the railroads to those who use them are wider and older. From the very outset attempts were made to regulate railroad charges by law in various ways. The fear at that time was that they might be made unreasonably high. This fear proved groundless. From the outset the rates were rather lower than had been expected, and much lower than by many of the means of transportation which railroads superseded. These low rates caused a great development in business; and this, in turn, gave a chance for such economy in handling it, that rates went still lower. Each new invention rendered it easier to do a large business at cheap rates. The substitution of steel rails for iron, which began shortly after the close of the war, had an enormous influence in this respect. This was not merely due to the direct saving in repairs, which, though appreciable, was moderate in amount. It was due still more to improvements in transportation which followed. It was found that steel rails would bear heavier rolling-stock. Instead of building ten-ton cars to carry ten tons of cargo, they built twelve-ton cars to carry twenty tons of cargo, or fourteen-ton cars to carry thirty tons; and they made the locomotives heavy enough to handle correspondingly larger trains. A given amount of fuel was made to haul more weight; and of the weight thus hauled, the freight formed a constantly increasing proportion as compared with the rolling-stock itself. The system of rates was adopted to meet the new requirements. Charges were made incredibly low in order to fill cars that would otherwise go empty, or to use the road as nearly as possible to its full capacity. In the twenty years following the introduction of steel rails, the traffic of the New York Central Railroad increased from less than 400,000,000 ton-miles to decidedly over 2,000,000,000; while the average rates fell from 3.09 cents per ton per mile in 1866 to 0.76 cent in 1886. This is but a single instance of a process which has gone on all over the country. The average freight charge on all railroads of the country to-day is little over a cent a ton a mile less than half what would have been deemed possible on any railroad a few years ago. : The progress of railroad consolidation contributed greatly to this economy. It saved multiplication of offices; it saved rehandling of freight; it enabled long-distance business to be done systematically. So great were its advantages that co-operation between connecting lines was carried far beyond the limits of actual consolidation. Through traffic was handled without transshipment, sometimes by regularly incorporated express companies or freight companies on the same plan, but more commonly by what are known as fast freight lines. These are little more than combinations for keeping account of through business; they are by no means ideal in their working, but they have the advantage of having few ex penses and no income, so that the temptation to steal, which is the bane of such organizations, is here reduced to a minimum. But all these things, while they increased the efficiency of the service, also increased the power of the railroad authorities and rendered the shipper more helpless. The very cheapness of rates only made a recourse to other means of transportation more difficult. If A was charged 30 cents while his competitor B was paying only 20 cents for the same service, he was worse off than when they were both paying a dollar; and the fact that no other means of conveyance could be found to do the work for less than a dollar simply put A all the more completely at the mercy of the railroad freight-agent. In other words, the fact that rates were so low made any inequality in rates all the more dangerous. The lower the rate and the wider the monopoly, the less was the chance of relief. Such inequalities existed on a large scale and they were all the more difficult to deal with because there was a certain reason for some of them, existing in the nature of railroad business. The expenses of a railroad are of two kinds. Some, like train and station service, locomotive fuel, or repairs of rolling-stock, are pretty directly chargeable to the different parts of the business. It costs a certain amount in wages and in materials to run a particular train; if that train is taken off, that part of the expense is saved. But there is another class of items, known as fixed charges, that do not vary with the amount of business done. Interest on bonds must be paid, whether the volume of business be large or small. The services of track-watchmen must be paid for, whether there be a hundred trains daily or only a dozen. In short, most of the expenses for interest and maintenance of way are chargeable to the business as a whole, but not to particular pieces of work done. The practical inference from this is obvious. In order that the railroad as a whole may be profitable, the fixed charges must be paid somehow. The railroad manager will try to get them as he can from different parts of his traffic. But if, for any reason, a particular piece of business cannot or will not pay its share of the fixed charges, it is better to secure it at any price above the bare expense of loading and hauling, without regard to the fixed charges. For if the business is lost, these charges will run on just the same, without any added means of meeting them. The consequence is that there is no natural standard of rates; or rather, that there are two standards, so far apart that the difference between the two is quite sufficient to build up one establishment or one locality and ruin another, in case of an arbitrary exercise of power on the part of the freightagent. In the use of such a power it was inevitable that there should be a great many mistakes, and some things which were worse than mistakes. Colbert once cynically defined taxation as "the art of so plucking the goose as to secure the largest amount of feathers with the least amount of squealing." Some of our freight-agents have taken Colbert's tax theories as a standard, and have applied them only too literally. It is this short-sighted policy which has made the system of charging "what the traffic will bear" a synonym for extortion. Interpreted rightly this phrase represents a sound principle of railroad policy-putting the burden of the fixed charges on the lines that can afford to pay them. But practically in the popular mind at least-it has come to mean almost exactly the opposite. The points which got the benefit of the lowest rates were the large trade centres, which had the benefit of competing lines of railroad, and often of water competition also. The threat to ship goods by a rival route was the surest way of making a freight-agent give low rates. The result was that the growth of such places was specially stimulated. In addition to their natural advantages they had an artificial one due to the policy of competing lines of railroad. It may well be the case, as is argued by railroad men, that sound railroad economy demands that goods in large masses should be carried much more cheaply than those which are furnished in smaller quantities. But it is certain the practice went far beyond the limits of any such justification. There was a time when cattle were carried from Chicago to New York at a dollar a car-load; and many other instances, scarcely less marked, could be cited from the history of trunk-line competition. The fact was that in an active railroad war freightagents would generally accede to a demand for reduced rates at a competing point, whether well founded or not, and would almost always turn a deaf ear to similar demands from local shippers, however strongly supported by considerations of far-sighted business policy. tice which would have fully deserved the The remedies proposed for all these evils have been various. From the very beginning until now there have been some who held that such abuses could be avoided only by state railroad ownerBut this was not the worst. Inequali- ship. Such experiments in the United ties between different places might after States have not gone far enough to fursome hardship correct themselves; dif- nish conclusive evidence either way; but ferences of treatment between individu- the experience of other countries indials could not be thus adjusted. And cates that state railroads as such do not the system of making rates by special avoid these evils. Where they have bargain almost always led to differ- been worked in competition with other ences between individuals, where favors lines, they have been as deeply involved were too often given to those who in these abuses as their private competineeded or deserved them least. The tors-perhaps more so. Where the govfluctuation of rates was first taken ad- ernment has obtained control of all the vantage of by the unscrupulous specu- railroads of the country, and made such lator. Often, if he controlled large arrangements with the water-routes as sources of shipment, he might receive to render competition impossible, the the benefit of a secret agreement by abuses have vanished, because there was which he could obtain lower rates than no longer any conceivable motive to conhis rivals under all circumstances. A tinue them. But this was the result of more effective means for destroying the monopoly, not of the state ownerstraightforwardness in business deal- ship; and the advantage was purchased ings than the old system of special rates by a sacrifice of all the stimulus of comwas never devised. Sometimes, where petition toward the development of new one competitor was overwhelmingly facilities. strong, the pretence of secrecy was thrown aside, and the railroad companies so far forgot their public duties as almost openly to assist one concern in crushing its rivals. The state of things in this respect twelve or fifteen years ago was so bad that it is painful to dwell upon; but the reformation today is not so complete that we can wash our hands of past sins. Less was said or felt of similar evils in passenger traffic, because the passenger business of the country generally is of much less importance than its freight business, either to the railroad investors or to the producers themselves. But there was the same fluctuation in passenger rates; and there was an outrageous form of discrimination in the development of the free-pass system; a prac It is a mistake to assume, as so many people do, that, because the Government represents the nation as a whole, therefore government officials will not be under the same temptations to act unjustly which are felt by the representatives of a private corporation. It is not as representatives of the investor that railroad agents do much injustice; this motive has practically nothing to with it. Most of the abuses complained of are positively injurious to the investor in the long run. When officials really represent the interests of the property with wise foresight, they as a rule give the public no ground to complain. The question reduces itself to this: Will the state choose better representatives and agents than a private corporation? Will it secure a higher grade of officials, more competent, more honest, and more enterprising? The difference between state and private railroads is not so much on matters of policy as on methods of administration. The success of government administration varies with different countries. In Prussia, where it is seen at its best, the results are in some respects remarkably good; yet even here the roads are not managed on anything like the American standard of efficiency, either in amount of train service, in speed, or in rapidity of development. And what is barely successful in Prussia, with its trained civil service on the one hand and its less intense industrial demands on the other, can hardly be considered possible or desirable in America. No one who has watched the workings of a government contract can desire to have the whole trade of the country put to the expense of supporting such methods in its transportation business. A more easy method of trying to regulate railroad charges has been by forced reductions in rates. This was tried on the largest scale in the Granger movement fifteen years ago. A fall in the price of wheat had rendered it difficult for the farmers to make money. The Patrons of Husbandry, in investigating the causes, saw that the larger trade centres, where there was competition, were getting lower rates than the local producer. They reasoned that if all the farmers could get such low rates, they could make money; and that, if the roads could afford to make these low rates for any points, they could afford to do it for all. The railroad agents, instead of foreseeing the storm and trying to prevent it, assumed a defiant attitude. The result was that legislatures of the States in the upper Mississippi Valley passed laws of more or less rigidity, scaling down all rates to the general level of competitive ones. After a period of some doubt, the right of the States to do this was admitted by the courts. But before the legal possibility had been decided, the practical impossibility of such a course had been shown. If all rates were reduced to the level of competitives ones, it left nothing to pay fixed charges. On such terms, foreign capital would not come into the State; nor could it be enticed by such a clumsy effort as that of one of the States, which provided "that no road hereafter constructed shall be subject to the provisions of this act." The goose which laid the golden eggs was not such a goose as to be deceived by this. The untimely death of several of her species meant more than any promises of immunity to those who should follow in her footsteps. In those States which had passed the most severe laws capital would not invest; railroads could not pay interest, their development stopped, and the growth of the community was seriously checked thereby. The most obnoxious laws were either repealed or allowed to remain in abeyance. Where the movement was strongest in 1873 it had practically spent its force in 1876. There have been many similar attempts in all parts of the country since that time; just now they are peculiarly active; but nothing which approaches in recklessness some of the legislation of 1873 and 1874. The lesson was at least partly learned. We had hardly passed the crisis of the effort to level down, when some of the more intelligent railroad men made an effort to level up. Recognizing that discriminations and fluctuating rates were an evil, they sought to avoid it by common action with regard to the business at competing points. A mere agreement as to rates to be charged was not enough to secure this end. Such an agreement was sure to be violated. Even if the leading authorities meant to observe it, their agents could always evade its requirements to some extent. Such evasion was favored by loose arrangements between connecting roads, and by the somewhat irresponsible system of fast freight lines. Wherever it existed, it gave rise to mutual suspicion. A believed that his road did it because he could not help it, but that B and C were allowing their roads to do it maliciously; while B and C had the same consciousness of individual rectitude and the same unkind suspicions with regard to A. It was at best a rather hollow truce, which did not really accomplish its purpose, and which might change to open war on very slight provocation. To avoid this difficulty a pool, or division of traffic, was arranged. It is a fact that, whatever wars of rates there |