Author’s note:
This series of blogposts will be my paraphrased notes on a lecture given by Murray Rothbard called “The American Economy and the End of Laissez Faire“. This means the post will contain some word for word transcriptions of Rothbard’s words and some editorializing and rephrasing of my own. I will not distinguish between the two.
The American Circulatory System
By the mid 1880’s every large town in the United States had at least two railroads, and in some cases more. For example, between St. Louis and Atlanta there were 20 competing railroad groups, which meant lots of competition. It is important to remember that during this time there were no roads between cities (certainly not in the sense that we think of roads today), and thus railroads were the circulatory system of United States enterprise at the time.
Due to the fierce competition of the various railroad firms, prices were always going down, often in large bursts as competitors sought to undermine one another and deliver cheaper experiences to their users.
There were 5 major, fiercely competitive “trunk lines”. In other words lines that traveled from the eastern seaboard of the US to Chicago
B&O (Baltimore & Ohio) Railroad traveled from Baltimore to Chicago.
Pennsylvania Railroad which went from Philadelphia to Chicago.
New York Central which went from New York up the Hudson River and to all the way to Chicago.
Erie Railroad which ran from Jersey City to Chicago.
And finally Grand Trunk which ran from Quebec & Ontario, throughout the North Eastern United States, all the way to Chicago and across the span of the Canadian border.
As we will see, there were major efforts to cartelize these trunk line railways, that is to say, how to price freight and passengers on these lines in such a way that was non-competitive (with each rail line looking to preserve it’s own self interest). Much of the debate was over how pricing should be determined, or what factors it should be based upon.
Baltimore & Ohio, and Pennsylvania railroads had the shortest routes. They argued that rail rates should be determined by distance, thus allowing them to offer prices cheaper then their competitors (implying that longer railroads should be required to charge higher prices and putting them at competitive disadvantage).
New York Central had flatter grades and could produce track at a relatively cheaper margin and lower operating costs, they thus argued that rail rates should be determined by the cost of ongoing operation & maintenance.
Grand trunk (which was always on the edge of bankruptcy) argued that prices should only cover operating costs (excluding construction costs).
Of course, there is no solution to these disagreements aside from emergent prices determined by the free market. What are consumers willing to pay and what are they not willing to pay. There is no other rational way to calculate pricing for goods and services. No magic criteria (always giving one operation advantages over another) constitutes a sufficient standard.
The Rate Wars
Rail rates between these competing trunk lines fell across the board in 1876. The beginning of this price war was marked by the completion of the B&O railroad in 1874, which added sufficient competitive pressures to the marketplace causing prices to come down.
Between 1876 and 1877 alone, 1st class freight rates from the Eastern seaboard to Chicago dropped from $0.75 per Hundredweight (100 lbs aka CWT) per mile to $0.25 per CWT per mile.
The East bound rate (outbound from Chicago) fell from $1 per CWT per mile to $0.15.
These rates did not return to their previous heights. Passenger rates were also cut in half at this time (which made up a smaller proportion of railroad earnings than freight).
By the way, in those days if you were a government big shot of some kind (senator, governor, etc) you were given railroad passes that let you travel for free. Inclining you to legislate more kindly towards railroad companies.
Westbound freight rates from New York to Chicago from May 1865 to the end of 1888:
1st class $2.15 -> $0.75
2nd class $1.80 -> $0.55
3rd class $1.06 -> $0.50
4th class $0.96 -> $0.35
Even when correcting these price decreases for monetary deflation which was widespread throughout this period, these rail rates still experienced a significant drop in real terms.
As apart of the competitive process, not only did railroads cut their pricing but they also cut their freight classifications. In other words, they would move cargo up a freight class free of charge, moving 2nd class freight up to 1st, for example. This is in essence a price cut.
In addition this, railroads were so anxious to attract and maintain producers who would ship freight on their rail lines across the country, they would offer special rates, rebates, and discounts from the advertised rates to highly valued customers.
We will see this again in the context of the anti trust (“monopoly”) legislation when we later address the Standard Oil Company.
Thus, not only were official rates going down on the books while rate classifications were being upgraded for free, everybody was giving out discounts and rebates. This was great for consumers and producers who needed to distribute their products across the nation.
