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known and used in other countries as well as ours, but nowhere else are they known and used in such abundance.
Growing out of that fact is the thing that is unique about transportation in America. That thing is the use we make of it. Use of transportation in most countries is restricted by the concept, with how little can we get along? In our country the idea is, how much transportation can we use to increase production, to enlarge output, to cut costs, to enrich life?
Theorist Would Limit Producer to One Area
Every day in the year the railroads alone move twelve ton-miles of freight for every man, woman and child in the United States. The theorist in transportation will say that not all this hauling is necessary. The theorist will tell you it is wasteful to move St. Louis shoes to Boston and Boston shoes to St. Louis; to move Baltimore beer to Milwaukee and Milwaukee beer to Baltimore; to move Kansas City steaks to Chicago and Chicago steaks to Kansas City. The theorist would have each producer restrict his sales to the trade area of his production, and would do it by the expedient of prohibiting absorption of freight charges. Well, let's see what we get into if the theorist's philosophy obtains.
Why is freight cross-hauled? No one knows all the reasons why, for there are so many of them, variously combined in each individual case. But there are reasons, for most certainly nobody ships freight for fun. Nobody gives himself the pleasure of crating it up, and loading it and paying the charges, just for the fun of doing it. Shipping freight is not a game. It's a business, and for every shipment made, there is a reason, or more likely a whole complex of reasons adding up to one controlling fact, namely, that somebody thought that the freight shipped would have enough more value at destination than at point of origin to make it worthwhile to go to the trouble and pay the cost of shipping it. This is a good business reason so long as the business man is free to make up his own mind where and how he will ship and how much he will charge for his product at destination. And since it is his goods that are being shipped, and his money that pays for the movement, and his privilege to make a profit on the sale of the goods-if he can-and his responsibility to bear the loss if his judgment is wrong, doesn't it seem reasonable to let him say what he will charge and how he will go about figuring the price? Shouldn't it be his business to say whether he will absorb all or a part of the freight charges or pass them along in their entirety to his customer, if he can, just so long as he does not conspire with his competitors to fix prices?
American Economic System Based on Free Choice The American economic system is based on freedom of choice, freedom of judgment, freedom of the market place, and freedom of movement. For the most part-except when and where we have had price supports or their opposites, price controls, or where questions of public utility regulation, or of conspiracy and combination, have intervened business men in making prices have been free to use their own judgment.
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They have been free to give effect to any and all the elements which go into the making of prices. The seller has been supposed to know better than anyone else what prices would cover his costs; the buyer has been supposed to be able to say whether any or none of the prices offered him was satisfactory. The whole process has been one of free meeting of the minds—with both buyer and seller taking into account all the tangible and intangible factors which enter into the making of a bargain.
Even now, no one seriously proposes to restrict this free method of selling as a general practice in the conduct of business—except insofar as transportation costs may enter into the determination of prices. The seller may continue—insofar as the theorists in transportation are concerned—to make his prices in relation to the supply and demand of his product, to the prices of his raw materials, to the cost of manufacture, to taxes, rent, insurance, interest charges, overhead of every character, and even to the transportation charges he pays on his inbound raw materials—but, according to these theorists he must not take account of the outbound freight charges upon his finished product. According to them, he must sell FOB mill, if he is to avoid the suspicion of collusion, and must let the consignee worry about the freight charges. As to whether he is actually subject to suit if he absorbs freight charges, on his own, without conspiring with competitors, not only the lawyers but also the government officials themselves disagree-there is almost a confusion of tongues, so to speak, on this subject.
If it should turn out to be the law that no systematic absorption of freight charges is to be permitted—and that delivered pricing even in individual instances is subject to risk—the effects upon the structure of the economy would be profoundly disturbing.
Under such a system, there would be an unpredictable relocation of industry on the part of those businesses which say, unequivocally, that without some sort of freight absorption they cannot operate present plants which were built not to serve merely limited and restricted local markets but great sections of the country, or even the whole nation.
Unrestricted Access to Markets an American Tradition The structure of the economy of this country traditionally has been founded upon the concept of unrestricted access to markets and to sources of raw materials. It has been left for each producer to judge how far he should reach, either to secure his materials, or to distribute his product. It has been up to him to make the crucial decision as to where, in each individual case, he might reach the point of diminishing or vanishing returns, Under this concept, the country has grown and prospered as no other country in the history of the human race. Moreover, the experience of two wars has shown that the industrial capacity which has been achieved under this concept is indispensable to the national security.
The great productive capacity of this country has been built-and the transportation plant has been built-not upon the basis of the use of transportation only under the compulsion of niggardly necessity, but on the basis of its abundant use. The abundant use of transportation
has made possible national opportunities for producers, and nationwide choices for consumers. These have created the American marvel of mass production, and this industrial marvel of the world could not be sustained without a continuation of national markets. In individual instances, there may be wasteful hauls. If so, they are the result of errors of judgment which are subject to the self-correction of results—the unrelenting testing of the market place. By that testing there is an almost automatic limiting factor, in that the producer who habitually overreaches in seeking new markets, or who habitually brings his raw materials from too great a distance and at too great a cost, soon ceases to be a producer. That, incidentally, is one of the great efficiency advantages of the private enterprise way of getting things done, in comparison with the government controlled way. Under the private enterprise way, repeated and habitual mistakes of judgment are corrected by failure; under the government control way, too often they are perpetuated through the involuntary, and sometimes unrecognized, support of the taxpayers.
Artificial Limitation of Business Would Mean Loss But to limit artificially—as is proposed from time to time—the range within which a business may operate, is to do more than merely to limit that particular business. Such artificial limitation would result in the economic loss of junking plants built to serve great areas. It would create both economic and social dislocations. It would create uncertainties as to what would and what would not be permitted under such a policy of artificial limitation of transportation. It would limit the freedom of action and of choice which is the basis of our American largescale production and widespread consumption.
Such artificial limitations upon the use of transportation would, in time, do even more. They would bring about the atrophy, more or less complete, of the very transportation systems which are one of the secrets of our national strength. The strongest muscles, when not exercised, wither and decay, and the complex mechanism of transport, if not used, would rust out. This is not to suggest transportation just to be transporting things but then that doesn't happen to any significant degree because, as stated above, nobody ships freight for fun. But it is a fortunate fact that in our daily peacetime operations we do ship, by the various means of transport, enough to keep our transport agencies in vigorous working order.
It is a further fortunate circumstance that the cost of using our transport facilities is so little. Of course, we hear the words high freight rates--sometimes pronounced almost as if they were one word, highfreightrates but actually the cost of transportation, and particularly of rail transportation, in this country is neither high nor burdensome. It is true that rail freight rates are higher in dollars and cents now than they were before the recent war. But when measured against the average value of the goods transported, rail freight rates are not only lower now than they were before the war, but in this post war period are less than they have been since the Interstate Commerce Commission's Bureau of Transport Economics and Statistics has been keeping figures on the subject.
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Because transportation in America is so cheap, it is used abundantly. And the converse is equally true. Transportation in this country is produced more cheaply because it is so abundantly used. In our transportation operations, we have applied the law of increasing returnsdoing more and more for a smaller and smaller proportion of the total national production or income.
Those who would artificially limit the usefulness of transportation as a great tool, a great balance wheel of production and consumption would-if they should succeed-sharply reverse this trend. They would do so, no doubt, with high motives and good intentions. They would do so in the honest conviction that some commission, some board, some body with the compulsive power of government could make the right and the wise decisions in the multitude of daily transactions. Some may contend that such a body, removed from the pressure of responsibility for results, would be wiser in its actions than the common business man who has to make his guess, call his shots, and stand the consequences. But most Americans don't see it that way.
Most Americans recognize that prohibition of freight absorption would undercut the very foundations of the system of production and exchange of goods and services which have made America what it is—the great foundations of freedom of choice and action, and of the use of transportation as a productive tool. That would be a high price-a tragically high price—to pay for the testing out of some theory of compelling business enterprises to ignore one of the fundamentals of value and price—that is, the cost of putting the goods where the buyer wants them. It might even be that mankind ought to be willing to strive and struggle, to plan and sacrifice, without the incentive of the hope of profit-for which, incidentally, he takes the risk of loss. But that's not the way the American economy and the economic freedom which is the sustaining force behind all our freedom-were built.
By FORD K. EDWARDS, Director
Interstate Commerce Commission
Relation of Rail Costs to Length of Haul Principles Underlying Rail Cost Finding
As a means of introducing the subject of rail costs, I would like to quote a passage from the Commission's decision in the Class Rate Proceeding, Docket 28,300:1
“Since the inception of Federal regulation of common carriers cost of service has been recognized as one of the basic elements entering into the process of making and judging rates. It has never been out of mind even though it has not always been in sight. Lake Cargo Coal Rates: 1925, 101 I. C. C. 513. The reality of costs in the rendition of transportation service is indisputable. The problem, from the standpoint of rate-making and rate regulation, is to convert such costs into practicable and usable terms."
As the Commission pointed out in its decision in the Class Rate proceeding, extensive progress has been made toward the development of practical and usable cost studies which will give guidance to the ratemaker in fixing rate levels and in establishing rate relationships. Among the latter, needless to say, the relation of rates to distance is one of the most important.
A rail cost study is fundamentally based on the principle that the performance of the transportation service requires the production of a number of homogeneous service units such as gross ton-miles, car-miles, consignments billed, cars switched by classes of switching, etc. The cost study determines the quantity of service units of each kind consumed in rendering the service in question, based on the length of the haul, the net weight of the load, the tare weight of the car, the percent of empty return, whether carload or less than carload, and, where desired, the particular trains in which hauled and the specific switching services rendered. The number of service units thus accumulated are then priced out at the out-of-pocket cost per unit. The aggregate of the costs thus determined constitutes the out-of-pocket costs of hauling the given shipment. The fact that unlike commodities are handled does not affect the accumulation of the quantities of homogeneous service units that are
* Paper presented before the National Association of Railroad and Utilities Commissioners, Cleveland, Ohio, August 11, 1949.
1 Reference 262 1. C. C. 447, 692.
2 Expenses which are unaffected by the production of service units, i.e., the constant or indirect costs, are set apart for distribution as an "overhead burden."