Unrestricted competition on competitive freight has proved very disastrous to railroad companies, especially when they have endeavored to prevent their business from slipping away from them by reducing their rates in order to meet competition below the point where it even paid the actual additional cost of operation. To avoid such cutthroat competition many competing railroads formed what were called pools, under which they agreed to maintain rates and to insure to each of the competing roads their proportion of the freight business. The passenger pools were sometimes arranged in the same way. The proportions assigned to each road were determined by the actual business of that road during the previous year. The pools were of two kinds, money pools and traffic pools. On the basis of the money pools, each road was allowed an agreed share of the total receipts on the business done by all the roads, almost regardless of the work which it actually did. Some slight adjustment was made by allowing roads which had handled more than their rated share of business a small extra amount which would partially compensate them for the extra work which they actually did. But the compensation was purposely made so small that it would be no object for the railroad to attempt to get more than its share of business. The traffic pools were managed so that the actual traffic of the roads would be kept at the prearranged ratios, this being accomplished by diverting traffic to roads which showed a tendency to fail to get their due share. Since shippers usually object to the diversion of their freight shipments, certain large shippers, who were called "eveners," consented to allow their shipments to be diverted to any route so as to even up the traffic to the different roads. Of course they were allowed concessions in the freight-rate on account of this arrangement. But as pooling was popularly supposed to be detrimental to competition, it was declared illegal by federal legislation and has been discontinued.
It has been attempted to maintain competitive freight-rates between railroads by means of traffic associations. The traffic associations which have been formed have adopted uniform systems of classification together with uniform systems of freightrate charges which would prevent rate-cutting. The many attempts in this direction have been rendered ineffectual, because the railroads themselves would not abide by the schedules. One freight agent would suspect (justly or otherwise) that another freight agent was cutting rates and he would proceed to meet the cut. A rate war would soon be in progress, which would probably disrupt the association. Even traffic associations were declared illegal, on the ground that they were "in restraint of trade." Traffic associations are still in existence, but their powers have been legally curtailed. Any attempt in their by-laws to discipline any road for an infraction of their rules is declared illegal. All agreements regarding rates are merely "gentlemen's agreements" and this gives no guarantee of immunity from a rate war.
Pooling and traffic associations having been declared illegal, the only method left to prevent competing roads from ruining each other financially by means of rate wars was to cut off all incentive for competition by consolidation. Even this has been somewhat prevented by legal provisions against the consolidation of parallel or competing lines. But such prohibitions have not prevented the elimination of competition by combinations of groups of capitalists who so control the roads on the principle of "community of interests" that there is practically no such thing as an active competition which has an effect in cutting down rates. Consolidation has already progressed to such an extent that the great railroads of the country are now combined into a very few groups and are owned or controlled by a comparatively small number of men. Since the reduction in rates through active competition is now practically hopeless, the only means of preventing the railroad from being the sole judge of how much it shall demand from a helpless shipper appears to lie in the power of Congress to directly specify what a traffic-rate shall be. This power appears to be only limited by the common-law rule that "it must be reasonable," which, of course, includes the constitutional provision that "it must not be confiscatory".
The scope of State control is somewhat the same as that of federal control, but it has different limitations. It must be subject to federal control and cannot apply to any traffic except that in the State. Like the federal control its authority is based chiefly on the principle of a governmental control of common carriers. The control actually exercised by the States applies chiefly to police regulations as to their physical condition. Railroad charters are usually granted by State legislatures. These have already been discussed in Chapter II (The Organization Of Railroads. 7. Economic Justification Of Railroad Projects). The control by the States of such matters as grade crossings, etc., has also been referred to. Comparatively few of the States have interfered with the rates which shall be charged by a railroad, except as it has been done in the charters of the railroad. Even the limitations imposed by the charters are frequently so much higher than the rates which the railroad company themselves see fit to charge, that it cannot be said to have any influence on rate-making. Space is too limited to discuss the so-called "granger legislation," which was the all-important political controversy in the Northwestern States several years ago. The prevalent opinion that freight-rates were extortionately high produced very drastic legislation, cutting down the charges which the railroads were permitted to make. The legislation went too far, and the result was financial embarrassment and even bankruptcy for many of the roads. Much of this legislation has since been repealed. Some of the State Railroad Commissions, notably that of Texas, have been active in recent years in regulating the charges made by the railroads. It remains to be seen whether this action will prove beneficial alike to the railroads and to the communities.
Other elements of State control have already been discussed in Chapter II (The Organization Of Railroads. 7. Economic Justification Of Railroad Projects).