REBATES.

CONTENTS.

Nature and method of discrimination, p. 119; rebates, p. 120; early history of rebates, p. 120; elasticity of early system, p. 122; the Interstate Commerce Act, p. 122; amendments of 1889 to include shippers and provide prison penalties, p. 124; unexpected effect of including shippers, p. 125; shippers refusing to testify upheld by the courts, p. 126; consequent new legislation of 1893, p. 127; opinion of Judge Grosscup, p. 128; late decision of Supreme Court upholds the new law, p. 130; power to demand books finally upheld, p. 130; expectation that rebates would cease not fulfilled, p. 134; Elkins Law, p. 135; summary of legislation, p. 137; varying opinion of the Commission as to the effectiveness of legislation, p. 138; melancholy history of violations, p. 140; relative success of policy of persuasion, p. 143; working of the Elkins Law, p. 147; report of Secretary Moody reviewing history of prosecutions under the various acts, p. 148; real evil lies in secrecy, p. 151; necessity of discrimination according to size of shipment,

P. 152.

O

To discriminate is, according to the lexicographers, to recog

nize differences. Apparently, therefore, to discriminate in railway rates is to recognize differences in traffic conditions and to make the charges for railway services conform to such differences. Such discrimination is unquestionably beneficial, for, in the language of an eminent jurist quoted by Professor Ely, "nothing can be more unequal than the equal treatment of unequals."

Unjustly to discriminate in railway rates is, however, as baneful as just discrimination is beneficial. A difference in rates which exaggerates actual differences in traffic conditions, on the one hand, or one which fails fully to recognize them, on the other hand, amounts to an unjust discrimination. It is equally true that the absence of a difference in rates where a substantial difference in conditions warrants and demands a discrimination in rate-making must amount to real injustice and constitute a real as well as a technical unjust discrimination.

Unjust discriminations afford undue and unreasonable advantages to particular persons, places or kinds of traffic and subject other persons, places and kinds of traffic to undue prejudice and disadvantage. That some should enjoy improper advantages

and others suffer undue prejudice and loss is an offense against the moral sentiment of mankind, an impediment to industrial progress and a reproach to the nation or community which fails seriously to seek and energetically to apply an effective remedy.

Any secret device by which a portion of the charge for a particular railway service, or the amount legally required to be paid for such a service, is remitted to the person for whom the service is performed, constitutes a rebate. Such remission may be accomplished by the collection of less than the legal charge, by the repayment of a portion of the amount collected, by the performance of some additional service not properly to be included in the total charge, by underbilling, by excessive mileage payments for cars owned by the shipper, by the allowance of unduly large proportions of the through rate for terminal facilities supplied by the shippers and by countless other devices of varying degrees of subtlety. American experience shows that as the law has made the simpler devices difficult and dangerous, the ingenuity of those desiring to receive or willing to pay rebates has caused increasing resort to the more subtle forms.

There has never been a year, since the American railway system passed from its earliest and crudest stages, during which rebates in one form or another have not been an important feature of railway practice. During the period just before the enactment of the Interstate Commerce law they were the rule rather than the exception.1 Railways were then under no legal obligation, so far at least as interstate business was concerned, to observe the schedules of rates which they generally found it convenient to publish, and although they were bound by the common law requirement that their charges should be reasonable and just, it was commonly believed that while performing one service for a rate in itself reasonable they might perform another of substantially similar character for a lower rate. Under these circumstances there was freedom of contract between shipper and carrier. The schedules, which were given more or less publicly by the soliciting agents and other railway officers, were the basis of negotiations rather than recognized standards of charges. The shipper who desired services which might be per

'First Annual (1887) Report of the Interstate Commerce Commission, pp. 5-7.

formed by two or more railways "shopped" freely among them, and his offerings of traffic constituted a prize for which the officers of the rival lines competed with a degree of intensity directly proportioned to their volume or value. Competition for the traffic of points located on but one railway may have been less obvious and direct but it was not much less actual nor was it conducted in any very different manner. The individual, firm or corporation, which proposed the erection of a new productive establishment made its purposes known to the officers of all the railways along which eligible locations were to be found and the final choice of situation was governed very largely by the concessions in freight charges which could be contracted for in advance. Similarly those establishments whose owners desired new outlets for their products, or who desired to sell more goods in markets formerly open to them, found ready assistance from rate-making officers; and this aid frequently took the form, using the word in the broad sense hereinbefore indicated, of a rebate. Even the development of agrarian communities was strongly influenced in the same manner. Railways competed, as they still vigorously compete, to induce prospective settlers who proposed to engage in farming to locate along their lines, and the principal terms of the competition, then as now, were the rates on farm products. Then, however, it was easy to carry out the competition by offering rebates to grain buyers, and the device had the advantage that it might for a time conceal from actual and potential rivals the degree of rivalry which they would have to meet in order to be successful.

In short, rebates, prior to 1887, were the handy weapon of interstate railway competition. They were checked only by the consciousness of railway officers that they fostered an unbridled competition that often resulted in doing business at a loss, a consciousness which, when brought sharply home to some officers and owners by seriously depleted revenues and even by bankruptcies, resulted in agreements to maintain equal rates via rival routes, and, in some cases, to divide competitive traffic, or all or a part of the earnings therefrom, in fixed proportions. If beyond this consciousness and the arrangements which resulted from it there was any check upon rebating, it resulted from a

growing public opinion which condemned, as immoral, practices that, without entire accuracy, were commonly assumed always to be means by which unjust discrimination was effected.

Whatever may be the faults, and it is not suggested that they are not grievous, of such a system of rate-making as that which has been outlined, it possesses the great merit of elasticity. No one will adequately apprehend the conditions which existed prior to the enactment of the Interstate Commerce law if he fails to perceive the readiness with which it permitted the adaptation of the charges for railway services to the successive states of an intensely dynamic and rapidly changing industrial organization. The unjust personal discriminations which were equally possible and perhaps even more probable under unrestricted rebating doubtless produced irreparable injuries to some, but it may still be questioned whether, during the earlier portion of the period characterized by the practice which is now so strongly condemned, its existence was not, upon the whole, favorable to the industrial upbuilding of the nation.

Since April 4, 1887, the date on which the Interstate Commerce law became effective, the publication of rate schedules has been required by law and any deviation from the charges thus indicated has been an offense against the laws of the United States punishable as a misdemeanor. The section in the law, as originally adopted, requiring the publication of the schedules contains the following:

"And when any such common carrier shall have established and published its rates, fares and charges in compliance with the provisions of this section, it shall be unlawful for such common carrier to charge, demand, collect, or receive from any person or persons a greater or less compensation for the transportation of passengers or property, or for any services in connection therewith, than is specified in such published schedules of rates, fares and charges as may at that time be in force."

The second section of the original act reads as follows:

"That if any common carrier subject to the provisions of this act shall, directly or indirectly, by any special rate, rebate, drawback or other device, charge, demand, collect or receive from any person or persons a greater or less compensation for any

service rendered, or to be rendered, in the transportation of passengers or property, subject to the provisions of this act, than it charges, demands, collects, or receives from any other person or persons for doing for him or them a like and contemporaneous service in the transportation of a like kind of traffic under substantially similar circumstances and conditions, such common carriers shall be deemed guilty of unjust discrimination, which is hereby prohibited and declared to be unlawful."

It may well be doubted whether the section just quoted prohibits anything possible to general railway practice which is not forbidden by the broader language quoted from the sixth section, and this doubt is accentuated when the necessity of formulating the published rate schedules in accordance with the requirements of the third section (which prohibits undue preferences) is taken into account. Special rates which would cover the performance of a service for one individual or group of individuals for a smaller payment than was exacted from some other person or group "for a like and contemporaneous service in the transportation of a like kind of traffic under substantially similar circumstances and conditions" certainly could not be provided in published rate schedules unless these afforded an obvious "undue or unreasonable preference or advantage"1 to some "person, company, firm, corporation or locality," or some "particular description of traffic." The only way in which such special rates could be granted, therefore, would be by such departures from the published rates as those broadly prohibited by the sixth section. What is true of any "special rate" is more apparently true of any "rebate, drawback, or other device" intended to operate so as to make the charge to one railway patron lower than that exacted for like and contemporaneous service performed for some other patron. The strict observance of legally complete and properly published rate schedules would prevent violation of the law by any of the means enumerated or implied in the second section.

The first five sections of the Interstate Commerce law and that portion of the sixth section which has been quoted remain to-day in precisely the form of their original enactment. Some

1 These terms are used in the third section.