Throttling the Railroads: 7. The Grip of Privileged Competitors
NOVEMBER 01, 1970 by CLARENCE B. CARSON
Dr. Carson is a frequent contributor to THE FREEMAN and other journals and the author of several books, his latest being The War on the Poor (Arlington House, ¹969). He is Chairman of the Social Science Department at Okaloosa-Walton College in Florida.
As late as World War I, the railroads were king of American transport. Virtually all of the intercity freight within the United States moved by rails. For practical purposes, there were no competitors for passenger transport, if steam and electric lines were both properly considered as rail transportation. So great was the preponderance of the railroads that governments had come to treat them as the only effective means for moving either people or goods to most places within the country. In the parlance of politicians and reformers, they had a monopoly of transport. Judging by the Transportation Act of 1920, Congress expected this preponderance to last indefinitely into the future.
It was not to be, of course. Looking back from the perspective of a half a century, it is now clear that the railroads had reached and passed the peak of their dominance of transport by the time that law was passed. The total railroad mileage in the United States had already begun to decline. It reached a peak of 254,037 in 1916 and had dropped slightly to 252,845 in 1920. This downward trend has continued over the years. By 1930, it was down to 249,052; by 1940, 233,670; by 1950, 223,779; by 1960, 217,552; and by 1968, it had fallen to 209,000.¹
Loss of Passenger Traffic
Of themselves, the figures for total railroad mileage might signify little. But when combined with the statistics for passenger and freight traffic they help to illustrate the declining condition of the railroads. The most drastic decline has been in passenger traffic. It is estimated that in 1926 the railroads provided 39.5 billions of passenger miles of transport for people. There was an absolute decline in this over the years; the figure was 28.6 billions in 1956.2 In 1968 there were only slightly over 13 billion passenger miles by rail. Relative to the total passenger miles by every means of intercity transport the rail total declined much more drastically. The rail share of such transport by all common carriers was estimated to be over 83 per cent in 1926. By 1956 it was only a little over 35 per cent. When private transport was taken into the estimate, the rail percentage for 1926 was 22.48. By 1956 it was only 4.09.3 "In 1968 the slightly over 13 billion passenger-miles of rail travel were only a half of the volume of bus travel, and less than one-seventh of the total air carrier traffic. The rail traffic constituted less than one-tenth of the total commercial intercity traffic, and was under 1.4 per cent of the total private automobile travel."4 As things have been going, the passenger train will soon join the oxcart in the museum of abandoned transport.
The freight tonnage hauled by the railroads for distance has not generally declined over the years. In 1926 the railroads carried a little over 452 billions of revenue ton-miles of freight. In 1956 a good year for rail freight—the total was over 655 billions of revenue ton-miles. But the rail share of this intercity traffic has declined greatly over the years. It was estimated to be 76.56 in 1926, and to have fallen to 48.22 in 1956. However, the percentage of revenue coming to the railroads visa vis that to other modes has declined much more than the percentage of freight ton-miles might lead one to suppose. For example, "the rail share of combined truck-rail freight revenues fell from 67.4 per cent in 1940 to 38.7 per cent in 1955.5
More Freight—Less Revenue
What has happened most generally is that the railroads have made their gains for the most part in low-rated bulky commodities and lost much of the high-rated traffic, which accounts for the relatively greater decline in proportion of revenues received than of freight ton-miles transported. Certain kinds of traffic have been taken away from the railroads almost entirely. In 1922 there were 80,000 railroad stock cars; the number had declined to 20,000 in 1966. "Long-haul furniture vans soon made boxcar movement of household furnishings a thing of the past, and the increased use of intercity trucking caused a reduction of less-than-car-load lot freight from 51,000,000 tons in 1919 to 1,000,000 tons in 1966."
It has been commonly supposed that these absolute and relative declines in passenger and freight services by the railroads were an inevitable consequence of the development of other means of transportation. Undoubtedly, automobiles, trucks, buses, barges, pipelines, and airplanes have, each in its own way, advantages over rail transport. Automotive transport on highways has much greater flexibility than that on rails. Water transport is much less expensive. Air is much faster. The public might well welcome and use these alternative means of getting goods and people to distant places.
However, we do not know with certainty today which of these is superior to others in transport in many ways and which the consumer would prefer for what in the open market. This is so because governments have intervened so extensively in transport that the market for transport has been greatly distorted. Almost all of this intervention in the twentieth century has been detrimental to rail transport and much of it has been advantageous to other means of moving goods and people. The restrictive legislation on the railroads has already been surveyed. Here, the task is to examine government aid to other means of transport and the much less extensive and later regulation that generally has been the case there.
What happened to the railroads in relation to other means of transport can be put succinctly. The railroads were regulated, restricted, restrained, and circumscribed: their rates were set, expansion and contraction limited, investments monitored, competition hindered, and services prescribed. They were bound hand and foot, as it were, most managerial leeway taken from them, vested with responsibilities without corresponding freedom, and treated as though their owners and managers were irresponsible children. Their would-be competitors, on the other hand, were given special privileges, were fostered, succored, developed, and were for varying periods of time little hampered by restrictive legislation.
Much of rail traffic has been diverted to the highways. People in ever larger numbers have turned to travel by way of the private automobile, and buses and taxis have provided transport for those not having or wishing to use their own conveyances. Trucks have come to haul larger and larger portions of intercity freight as well as that within cities. Governments have long played some role in road building, maintenance, and, of course, such policing as was done. From the 1830′s—when the Federal government abandoned extensive projects and state governments shifted their activities elsewhere—to the 1890′s most road building was done by local governments, frequently counties. States began at about that time to play a larger role in road construction. They were doing much more by World War I, by which time automobiles and trucks were in widespread use.
The Federal government began to evince an interest in highways once again in the 1890′s. Initially, this interest only resulted in such activities as surveys. To this end, $2,997 was spent in 1894. However, Federal expenditures grew over the years until by 1916 $662,785 was spent. In the latter year, the Federal government went more directly into highway construction by authorizing grants-in-aid to states "to establish post roads, regulate commerce, provide for common defense and promote general welfare." It entered much more extensively into road building by way of the Federal Highway Act of 1921. According to that Act the Secretary of Agriculture was to designate a system of interstate highways. For the construction of roads so denominated states were to be granted half the cost on a matching basis. Road building then got underway in earnest. Total expenditures for roads by all levels of government increased from approximately 11/2 billions of dollars in 1921 to 2¹/2 billions in 1930. The Federal share of spending increased from 4.68 per cent in 1921 to 37.11 in 1938, after which it decreased somewhat for a number of years.8 Total government expenditures for road construction rose rapidly once again in the 1950′s; by 1957 it had reached $5,662,000,000.9 The Federal percentage began to increase once again also. This was even more the case as the Federal government gave priority to the Interstate system and began to fund it vigorously after 1956.
Railbeds Are Taxed
That the development and use of the highways had a debilitating impact on the railroads is clear. It should be clear, also, that governments were promoting highway use by road building and maintenance. The power of eminent domain was brought into use to acquire routes. The power of taxation was used to finance construction and maintenance. Governments undertook the erection of safety devices, patrolling, and the provision of auxiliary services such as aid to motorists in distress. They were aiding one form of transportation while they were restricting and inhibiting another. Whether those who have used these roads have borne the full burden of the costs is an interesting question, though one difficult to answer. Much of the cost has been paid by user taxes, such as those on gasoline, oil, tires, and so forth, but by no means all. It has been estimated that between 1921 and 1965 a total of $216 billions were spent by all governments within the United States on roads and highways. Only about 60 per cent of this has come from user taxes, leaving some $80 billion to be made up elsewhere. One writer notes that "a considerable fraction of the $80 billion of tax money clearly has provided a public route for the more than 16,000,000 buses and trucks which crowd our highways today."¹°
There have been efforts in recent years to close the gap and to have the users of the roads and highways pay for them fully by way of taxes related to their use. Even when and if this is done there is the much debated question of whether trucks and buses are paying their share through the taxes. This last question can be left for the experts to hassle over, but there is one difference between the users of the highways (and the users of airways and waterways) and the railroads that incontestably favors the former.
The railroads have generally been treated as private property and have thus been assessed heavy real property taxes by local governments over the years. By contrast, highways are generally governmentally owned and are free from all property taxes. The result is a subtle but real promotion of highway use vis a vis the railroads by government. There are other differences to be taken up below.
If there is doubt about the extent of government subsidization of highway travel, there can be little about the amount and extent of that of the use of the waterways. One writer notes that total "federal appropriations for the rivers and harbors program amounted to $4.6 billion through fiscal 1954. It has involved improvement and maintenance of some 286 commercial seacoast harbors, 131 Great Lakes harbors, and 22,500 miles of waterways, including several multiple-purpose dams."¹¹ Extensive expenditures have been authorized more recently for the St. Lawrence Seaway and the Ohio river, among others. States and cities have also undertaken improvements of ports and waterways. For example, the state of New York widened and deepened the Erie Canal early in the twentieth century at an expense of $176 million.¹² In consequence of all these expenditures there has been a dramatic rise in freight ton-miles shipped over water.
Users of the waterways pay little, if any, of the expense of improving and maintaining the rivers and harbors. Such costs as these users have, one economist notes, are "only the expenses of owning and operating equipment and of rendering services. Nothing is included for operating, maintaining and amortizing the federal investment in waterways… or for tax contributions on public waterway facilities."¹³
Air travel has also been extensively subsidized by governments. Most of the major airports in the United States have been built and are maintained by local governments, or agencies set up by them. The Federal government has also made extensive grants for the establishment of airports. Weather information for take-offs, landings, and flights is provided by the Federal government. Air space over the United States is, in effect, owned by the Federal government, and authority over it is exercised by the Federal Aviation Agency. Acts passed in 1926 and 1938, according to a summary, authorize and direct "the Administrator of Civil Aeronautics to designate such civil airways as may be required in the public interest, and authorizes him to develop, establish, improve, operate, and maintain air navigation facilities wherever necessary… "¹4 Between 1925 and 1957 something over one billion dollars were spent in this operation within the United States. Airlines were rather extensively subsidized, at least in the early years, by government contracts for carrying the mails. A study made of the situation for 1940 concluded that if all subsidies to commercial airlines had been eliminated for that year, "gross revenues would have fallen from the actual $65,000,000 to only $50,550,000 and operating expense would have increased by $8,000,000. The 1940 net income of $6,900,000 would have been converted to a deficit of $15,300,000."¹5
Airplanes have not been quite as fortunate as barges and ships in the use of these governmentally provided facilities. They do have to pay for some of the facilities and services, at least some portion of the cost of them. Airplanes pay a fee to land at airports. They also pay a tax on fuel which partially pays for services rendered. However, there can be no doubt that the airlines have been heavily subsidized by governments. The House Committee on Appropriations observed in 1954: "This committee has year after year called attention to the fact that the Federal Government is providing huge sums for airway facilities and operations without reimbursement from the aviation industry. The committee does not propose to continue indefinitely making… such large appropriations unless some system of airway user charges is placed in effect…."¹6 Nonetheless, Congress has in recent years turned to the development of commercial aircraft.
Early Aid Was Repaid
It may be objected that the railroads were aided also in the early period of development. So far as it goes, the statement is correct, but there are some significant differences between that and the aid given to competitors in more recent times. In the first place, no new aid was given to the railroads by the Federal government (until very recently) after 1871; nor, so far as I know, was any extensive state or local aid given after that date. In the second place, the Federal aid was repaid over the years.
That which was extended as loans was, in general, repaid with interest. The lands granted were paid for over many years by the individual railroads which hauled government cargoes at reduced rates. One writer describes the culmination of the latter in this way: "Land-grant rate reductions and voluntary equalization of rates by competing railroads up to June 30, 1943, totaled an estimated $580 million. Since this was several times the value of the land grants at the time land was granted for railways and it exceeded the sums derived by the railroads from the grants, the Congress in 1945 relieved land-grant roads of the obligation and land-grant reductions ceased as of Oct. 1, 1946."17 As for state and local aid, it has probably been repaid many times over by property taxes.
Other Aids to Rail Competitors
Governments have not only hamstrung the railroads with regulation, restricted them in various ways, taxed them, and subsidized competitors, but they have given other aid and comfort to them. They were usually regulated much later. Motor carriers did not come under general Federal regulation until 1935. They have also protected competitors rather assiduously.
The Federal government has been most solicitous in the protection of water transport. It has frequently taken care to see that railroads did not under price and drive out water carriers. A fantastic example of this solicitousness occurred several years ago when the Southern Railway proposed to haul grain in huge boxcars at greatly reduced rates. This, it was supposed, would have considerable effect on the transport of grain by barges on the Tennessee River. Therefore, the Interstate Commerce Commission held lengthy and involved hearings, going from town to town in the Tennessee Valley to explore the ramifications of the matter. In like manner, the railroads were long prohibited from the use of the "unit train" as a means of lowering rates. Bus and truck rates have usually been lower than rail rates. It is likely that this frequently would not have been the case were all means of transport competing vigorously and freely with one another.
Newer modes of transport have not only been subsidized and protected but also given special privileges. The most notable of these special privileges is the franchise. All interstate trucking common carriers have franchises for their activities. In like manner, states frequently license and franchise intrastate and intracity carriers. Entry into the taxicab business is usually restricted in some similar fashion. In like manner, airlines have their routes granted to them, and a limited number are permitted to service any area.
It may be objected that the railroads were also franchised. So they were, but this had a somewhat different rationale. Railroads were expected to provide their thoroughfares, safety equipment, and stations—all of which were or became quite expensive. Franchises and other aids were granted to lure entrepreneurs into the business. By contrast, airlines, trucking, and water transport companies have not provided their thoroughfares, rarely provide safety equipment except that on their conveyances, and frequently do not provide their stations. Certainly, franchises were not needed to lure men into the trucking business, and it is doubtful whether airlines were for long promoted by this privilege. In any case, trucking and airline franchises were different; they were and are special privileges to use facilities provided by governments. The highways may have been built initially for all to use, but only those with special charters may use them commercially as common carriers. In like manner, the airways are there; they are open space above the earth altered only by surveillance and the provision of take-off and landing facilities. Yet only a most limited number of companies are permitted to use them for scheduled commercial purposes.
These chartered privileges have usually been granted in such ways as to protect established businesses and assure, so far as possible, the prosperity of those engaged in them. By limiting entry, governments have endeavored to see that only those would offer service who could continue to provide it, that they were protected from numerous small competitors, and that those earliest in the field would not be unceremoniously shoved out. If the railroads ever had such protection, it has long since lost its earlier significance. In any case, the railroads have long been stuck with special responsibilities while their competitors have been granted special advantages along with such responsibilities as they have.
A Brief for The Consumer
This work should not be mistaken, however, as a brief for the railroads. If it is a brief for anyone, it is a brief for the consumer. And the consumer has frequently been disadvantaged by government policies on all means of transport. The limiting of entry to various fields has reduced the price and service competition which the consumer would otherwise have enjoyed. In interstate moves of household furniture today, for example, the shipper pays tribute, wittingly or not, to some company which has the good fortune to be franchised. The moving company involved may not own a single piece of moving equipment—though some of them do—nor have any of its employees touch one item of household goods. Whether it does or not, it gets a considerable cut out of the moving bill because it holds a franchise for the interstate movement of household goods to the appropriate places. Whether it performs a commensurate service can be determined by doing away with all such franchises and seeing how well such companies fare.
Less Restraint on Private Noncommercial Transport
Yet another major infelicity has resulted from government intervention in commercial transport. However late it has come, regulation and restriction has come to almost all commercial transport in greater or lesser degrees. By contrast, private noncommercial transport has much fewer and more limited restrictions and restraints. For example, one may operate his personal automobile without a special franchise, may travel by whatever route of highways he chooses, have as his destination whatever town in whatever state he pleases, notify no authorities of his intention, abandon any service he has provided to others, cease to travel regularly between points where he customarily did, sell his automobile if he grows weary of it, and so on through an extensive list of freedoms. So may he do with his truck generally, so long as he does not haul for others. With some reservations, much the same can be said for private airplanes and boats, and for railroads that go nowhere of commercial interest. The consequences of this difference between the government treatment of commercial and private transport are everywhere to be seen. It is most apparent on the highways and city streets but it can also be seen in the airways and waterways. Much of public transport has been abandoned, shifted from the railroads to highways, or is in varying degrees of trouble. City street transportation systems have become money losers in numerous places. By contrast, private conveyances proliferate: they clog the highways and streets, are now said to menace the airways, and make many waterways hazardous. Not all of this should be attributed to differential government intervention but much of it should. Hampered common carriers and largely unhampered private carriers result in inordinate growth of private conveyances and stultification of common carrier enterprises.
The railroads are, however, the main subject of this work, and it is appropriate to focus upon them once again. They have been throttled by regulation and restriction, had their traffic reduced by aids given to competitors, and been made to look as if theirs was a dying industry by special protections to competitors. They were also the earliest major industry to have large numbers of their employees organized in labor unions. That part of the story must now be told.
Next: The Grip of the Unions.
¹ John F. Stover, The Life and Decline of the American Railroad (New York: Oxford University Press, 1970), p. 155.
2 There was a tremendous increase of passenger traffic during World War II. It declined precipitately after the end of the war, though for several years it was still above the prewar level.
6 Ibid., p. 27.
7 Stover, op. cit., p. 128.
8 See Marvin L. Fair and Ernest W. Williams, Economics of Transportation (New York: Harper, 1950), pp. 68-69.
9 Nelson, op. cit., p. 76.
¹0 Stover, op. cit., p. 137.
¹¹ Nelson, op. cit., p. 85.
¹2 Fair and Williams, op. cit., p. 90.
¹³ Nelson, op. cit., p. 90.
¹4 Quoted in ibid., p. 94.
¹5 Fair and Williams, op. cit., p. 114.
¹6 Quoted in Nelson, op. cit., p. 99.
¹7 Ibid., p. 69.
Government in Business
Have you ever heard of a private firm proposing to "solve" a shortage of the product it sells by telling people to buy less? Certainly not. Private firms welcome customers, and expand when their product is in heavy demand—thus servicing and benefiting their customers as well as themselves. It is only government that "solves" the traffic problems on its streets by forcing trucks (or private cars or buses) off the road. According to that principle, the "ideal" solution to traffic congestion is to outlaw all vehicles! And yet, such are the suggestions one comes to expect under government management.
Is there traffic congestion? Ban all cars! Water shortage? Drink less water! Postal deficit? Cut mail deliveries to one a day! Crime in urban areas? Impose curfews! No private supplier could long stay in business if he thus reacted to the wishes of customers. But when government is the supplier, instead of being guided by what the customer wants, it directs him to do with less or do without. While the motto of private enterprise is "the customer is always right," the slogan of government is "the public be damned!"
MURRAY N. ROTHBARD