A road that is already bankrupt is usually the one which most recklessly breaks established rates and starts a rate war. Such a road will enter the most reckless competition in order to obtain business under any conditions. A rate which will pay operating expenses, even though it necessitates a default of the interest on the bonds and, of course, pays no dividends, is doing better than to remain idle, since, if it pays the operating expenses, it is at least maintaining its road-bed and track in some sort of condition. Therefore such a road will try to obtain business at any rate which will actually pay the operating expenses. The solvent road which is so situated that it must meet the competition of the road which is recklessly cutting rates has forced upon it the alternative of accepting business at much less than its usual rates or refusing it altogether. If the general manager can estimate that such business can be handled at a rate which will more than cover the additional operating expenses, he is justified in accepting the business, especially since it will actually prove a source of profit to the road. It is claimed that those who ship their freight on the non-competitive high rates are helping to pay the freight of others. This is not true, since the others will not pay anything to the road except at the reduced rate. As a matter of fact, it might even be said that the low-rate shipper helps to pay the freight of the high-rate shipper, since the profits of the road are increased by the payments made by the low-rate competitive shipper, thus enabling the road to reduce the rates of the high-rate non-competitive shipper. We are thus led to the conclusion that freight-rates are not, and cannot be, based on any rational estimate of the cost of service. The railroads really charge "what traffic will bear,", and this charge is determined very largely by causes over which the railroads have little or no control. This will be discussed later.

30. Indirect Competition

It has frequently been stated in this book that the prosperity of a railroad company is very intimately connected with that of the community which it serves. A large part of the business of a railroad is freight business. The freight business of a railroad depends on the business prosperity of its customers. Commercial competition requires that a manufacturer shall not only manufacture his goods as cheaply as his competitors, but that he shall also be able to deliver the goods at the very door of his customers as cheaply as another manufacturer. Since a very considerable item in this total cost is the cost of transportation, it becomes a matter of business for the railroad to assist the manufacturer by making the freight-rate, if possible, at such a figure that it will permit the manufacturer to meet the competition of others. If the manufacturer cannot do this, he cannot do business at all, and the railroad company loses his business altogether. This course of reasoning is the justification of the discriminations which have been practiced by railroad companies in favor of certain shippers. These shippers could not do business profitably, except at certain freight-rates which were below the normal. The railroads could handle such business as extra business at a profit, and could make more money on such an arrangement than by not handling the business at all. Of course there are reasons which make such discriminations unjust as well as illegal, especially when these methods have been used to build up the wealth of great monopolies. A treatise of this sort is not the place to discuss discriminations, but the above statements have been made to show why discriminations may be profitable to the railroad company. The indirect competition furnished by other railroads, who are trying to build up their own prosperity by building up the prosperity of the shippers along their lines, is one of the most potent causes to reduce freight-rates, even to a shipper who has absolutely no choice except to ship his goods on the one road which passes his place of business. The railroad company is therefore virtually compelled to reduce its freight-rates to a point where they will pay the operating expenses and leave as much margin as possible on the capital investment. It will thus be seen that a profit which is made out of the low-grade competitive business will actually enable the railroad management to reduce the freight-rate on the so-called non-competitive business, if it is found necessary to do so in order that the local shipper may meet the competition of another shipper on a railroad perhaps 200 miles away.