Railroad Rebates.

RAY STANNARD BAKER, IN McCLURE’S MAGAZINE December 1 1905

Railroad Rebates.

RAY STANNARD BAKER, IN McCLURE’S MAGAZINE December 1 1905

Railroad Rebates.

RAY STANNARD BAKER, IN McCLURE’S MAGAZINE.

Investigation by the State Government of Wisconsin disclosed the appalling fact that every railroad of any importance in the state was a rebate law-breaker. Every road gave rebates every year on both passenger and freight earnings. This article delines the rebate and shows how it is paid and its general effect on industry.

WHAT is a rebate? Strictly speaking, a rebate is a sum of money secretly paid back by a railroad company to a favored shipper as a refund upon his freight rate. And in this narrow sense, rebating is undoubtedly much less common than formerly. But the people, who are unaccustomed to making close distinctions—to whom stealing of any one of the seventeen kinds known to the law is still plain stealing—use the word “rebate” in a much wider sense. It means any sort of favoritism to one shipper that is not given to all shippers. We find the same distinction in politics. “Bribery” in the narrow sense—the ugly crude payment of cash—may be disappearing from politics. But “bribery” in the wider sense, meaning any reward for corrupt political services, still flourishes like the proverbial green bay-tree.

Indeed, there has been the same development in railroad (and in wider business) corruption, as in political corruption.

The railroad Crokers have followed the railroad Tweeds ; and we discover that the crude cash rebate is being replaced by scores of cunning devices of discrimination which accomplish the same results even more successfully and secretly than the cash rebate. Such, for example, are the widespread abuses that have grown up around the private car system, the industrial railroad, the “line” elevator ; such is the midnight tariff, the abuse of the carting and switching

charge, and innumerable other devices. And these new methods have not even the virtue of open-air robbery ; they are the work of underhand cunning, performed in the twilight of legality.

But I do not wish to admit for a moment that even the crude cash rebate has disappeared — vulgar and criminal as it is, and boldly as the railroad presidents have denied its existence. It has not disappeared, and really frank railroad men will admit it. I quote, for example, from a pamphlet by L. F. Day, vice-president of the Minneapolis and St. Louis Railroad :

“After the passage of the Elkins law,” he says, “there was a very great improvement in the rate situation, because shippers, as well as railroad men, were of the opinion that convictions could readily be obtained under the law. . . . This better condition has not steadily continued, because the belief has grown among shippers and others concerned that there is to be no serious effort to bring about the maintenance of rates under the provisions of the Elkins law.”

Corroborating this view, we discover that the first conviction under the Elkins law was obtained only the other day (September 21, 1905),

about two and one-half years after its passage. Four beef-packers in Chicago were fined $25,000 for accepting rebates.

On the very face of it the Elkins law, being a federal statute, did not

and could not apply to the immense traffic carried within the limits of the various states, though the plausible impression has been given by the railroad men that it did away with all rebates. Here, then, in state business, we find exactlv what we might expect to find : rebates still paid in large sums.

But perhaps I can best illustrate this fact, as well as many other remarkable features of the rebate evil, by recounting the recent experience of the state of Wisconsin, where Governor La Follette has just completed the most thorough investigation perhaps ever made by a state into railroad affairs.

In most places I visited, both east and west, I found plenty of individual charges of rebates, but they were not easily substantiated. A merchant or manufacturer would give me the most convincing circumstantial evidence that his competitor received rebates. If I went to the competitor he would, of course, flatly deny receiving any such rebates and the railroad officials naturally supported him.

This condition of vague charges boldly denied, with no way of getting real proof, has long prevailed throughout the country. Every one concerned is in a conspiracy of secrecy and the outsider who knows to a certainty that he is being discriminated against, who sees his business dwindling away in loss and ruin, can obtain no relief because he can not prove his case.

Governor La Follette had not been long at his work before he saw that legislation, to be really effective, must be preceded by a thoroughgoing knowledge of the facts.

No one, indeed, who looks into the efforts of the states to restrain the excesses of railroad rate-taxation can

fail to be amazed by the misinformation upon which much of the legislation has been founded.

The method of seeking facts has often been puerile in the extreme, as far from the intelligent directness of the business man, who wants to buy a railroad, as could be imagined. Manv valuable and interesting things were said last Winter and Spring before the United States Senate Committee which investigated the railroads. Legal details—which don’t much matter—were well thrashed out. But the facts, the real facts, as to rebates and discriminations, cost of service, true profits of railroads, definite information as to valuation, ownership, capitalization, taxation, and so on, which must, after all, be the basis of intelligent legislation, were curiously slighted. This is the way, for example, the committee got evidence regarding rebates. They called a railroad president and asked him soberly :

“Does your company pay rebates?” “No, sir,” he said, with equal sobriety, “rebates have disappeared.” They called another railroad president.

“How about discriminations ?” “Discriminations are unknown, sir,

to the - railroad.”

The accumulation of denials before they got through was something prodigious ! As for looking into the books of the companies for real proof —no one, apparently, thought of it !

In Wisconsin—and that has been the cause of the terrific nolitical struggle out there — Governor La Follette wanted, not mere charges on the one hand and denials on the other—both quibbles, perhaps, on the meaning of the word “rebate”—but downright, definite facts.

The information regarding rebates in Wisconsin came out as the by-pro-

duct of an investigation into railroad taxation. It was charged a number of years ago that the railroad corporations were avoiding taxes—that they did not pay their full share.

“The tax law,” said Governor La Follette, in his message of May, 1905, “was of their own devising and in practice it permitted them (the railroads) to tax themselves. The amount of earnings which they reported was the basis of their own taxation. They were in control of all facts pertaining to their earnings.” Governor La Follette thought there should be some way of ascertaining the facts besides asking the railroad men themselves, and taking their ready assurances. In 1903, after a bitter fight, legislation was passed empowering the Railroad Commissioner, John W. Thomas, to employ skilled investigators who should go, not to the railroad presidents for denials, but into the railroad offices, among the actual books, files, receipts and vouchers and investigate the real accounts of gross earnings. Everv one supposed that this investigation, like most railroad investigations, would be a farce. Governor La Follette said in his message : “When public attention was directed to the subject by the special message which I submitted to the legislature two years ago, it was made a matter of jest and criticism. When the work was finally unhertaken, it waspredicted that it would fail of any results. It was a great undertaking. The work is involved and complicated. It has been prosecuted under many difficulties.”

Governor La Follette possesses one quality sometimes lacking in reformers, thoroughness. For about two years, four or five skilled accountants have been at work in the main offices at Chicago and other cities, of all

the railroads that traverse Wisconsin. Before they began their work the railroad men denied just as plausibly and as positively as they did last Winter in Washington, that there were any such things as rebates ; but the very first thing the investigators learned was that immense amounts of money paid as unlawful rebates did not appear in the gross earnings reported by the companies. And when the cases came into court a few months later, these same men, who had denied the existence of rebates, in order to prevent all the details coming out in court—for they fear nothing so much as real publicity — signed a stipulation admitting that they had made those illegal rebate deductions from gross earnings !

The total amount of all such deductions from 1897 to 1903 was found to be $10,500,000 in the state of Wisconsin alone.

“Upon this amount,” said Governor La Follette, in his message, “the railroads should have paid a tax of four per cent., or approximately $420,000, of which sum the state has been defrauded.”

Three small railroad companies at once paid up, but the others are now fighting the stale in the courts.

Of the $10,500,000 of illegal tax deductions about $7,000,000 was in the form of illegal rebates and discriminations of all sorts. In getting at these figures the investigators went back in all cases to original records of the companies themselves and they excluded every sort of refund that could, by any excuse, be called legitimate-such as refunds on account of charity, courtesies between railroad officials, overcharges, mistakes, accidents, bankruptcies, and other refunds where no discrimination was practiced, as in the redemption of mileage-book covers. After leaving out

all these items it was shown that every railroad of any importance in the state was a rebate law-breaker. Every road gave rebates every year —and upon both freight and passenger earnings. Here is a table of passenger and freight rebates paid by the principal railroads operating in Wisconsin from 1897 to 1903 :

Freight. Passenger. Chicago Milwaukee & St Paul............ $1,346 237.29 $170,963.08 Chicago & Northwesteru............ 3,023,810.99 614,361.58 Chicago, St. Paul, Minneapolis & Omaha ...... 515,323 31 P4.559.64 Wisconsin Central.... 241,4 2.19 82,475 35 “Son Line”........... 461,041.75 39,807.63 Burlington............ 366,105 83 Other railroads........ 158,677.83 439.42 $6,118,689.18 $972,661.70

Large as these figures are, they represent only a part of the rebates really paid and do not, of course, give any idea of the tremendous machinery of favoritism which is not represented by actual cash items.

Part of these rebates were paid on state business, but a far larger part on interstate business. And the Elkins law, which was supposed to put an end to rebating, apparently had no effect whatever on the volume of rebates paid.

One of the most significant showings made by the investigation was the remarkable falling off in the amount of money paid in rebates the moment the expert accountants went to work. Here, for example, 'ís a list of the sums of money paid monthly during 1903 in illegal rebates by one of the principal railroads operating in Wisconsin :

JanuaryA 1903 .................$ 37,000 February ........................... 57,000 March :............................... 47,000 April ................................ 36,000 May ................................... 25,000 June .................................. 13,000 July .................................. 101,000 Aueust .............................. 32,000 September ........................ 46,000 October ............................. 9,000

November .......................... 666 December ........................... 2,032

Is not this interesting ? The Elkins law went into effect in February, 1903, and it will be seen that it hardly made a ripple in the amount of rebates paid. The Wisconsin investigators began work September 29, 1903, and instantly the rebates dropped off to $9,000 in October and to only $666 in November. This shows three significant things : First, how little the railroads care for law when there is no adequate machinery of enforcement ; second, it shows the marvelous efficacy of real publicity. Without anv threat of prosecution, indeed, without any intention of looking for rebates at all, the very sunlight of publicity almost dried up this particular rebate plague spot. Third, it showed that the officials of this railroad, although previously denying rebates, knew that they were guilty of criminal practices ; otherwise, they would not of their own motion have cut off the payment of rebates in October and November. One of their rubber stamps, “Not conflicting with the Elkins law,” used on certain vouchers showed how clearly they recognized what the law really was—though thev did not obey it until October, when threatened with actual exposure. These are certainlv excellent lessons for Congress and for state governments which really and honestly wish to make the railroads obey the law.

But there is evidence that the railroads have really made an attempt to obey the Elkins law and that this attempt has actually resulted in decreasing largely the amount of cash rebates paid.

It can not be too often pointed out that the railroad man no more desires to pay rebates than the people desire to have him. It is plain that

every rebate paid represents just so much money lost in earnings. Indeed, the Elkins law was -originally drawn up in the office of A. J. Cassatt, president of the Pennsylvania Railread Company. It was a railroad measure, else it would never have passed Congress so easily. And the railroads really wanted to obey it, but one reckless traffic agent cut the rate here, another there, and soon they were all floundering again in the old bog of lawlessness and favoritism where they are struggling at this moment. The secrecy and mystery with which railroad men cover their operations made them the easier victims of the irresponsible rate-cutter and the avaricious shipper.

But the fact that cash rebating has decreased in volume is by no means evidence that the principle of railroad discrimination has been changed. New ways of rebating were devised, but the thing itself—the injustice, inequality and favoritism — continued with uninterrupted vigor.

As a single example, the Elkins law, as I have said, applied only to interstate business. Accordingly, the Wisconsin investigators found that the railroads sometimes divided their interstate shipments so as to pay the rebate only on the Wisconsin or Illinois end of it. In one instance a railroad made out a “mem-bill” and shunted the carload across the state line where a new bill of lading was made out and stamped “Purelv State Business”—and the rebate was then paid without fear. Innumerable other ways were devised. I saw a most remarkable statement of the amounts paid by one railroad to “encourage new industries.” This is one of the points upon which railroad companies commend themselves—very often justly ; they help establish infant industries, “develop the country.” So

this particular list was most impressive. Such evidence of activity in new industries along this line of road seemed a tribute to a most enterprising industrial agent. But the investigators looked into some of the new industries so greatly encouraged by contributions of cash. One was established in 1873—an infant thirtytwo years old. But others were really younger, scattered through the 80‘s and 90’s mostly—and the cash they received were old-fashioned rebates !

After I had examined a few dozen of such devices I was inspired with a new respect for the genius displayed in railroad bookkeeping. Some one should write a book on the “Marvels and Possibilities of Astute Accounting.”

The conclusive upshot of the whole matter lies in the discovery by the investigators that the total rebates paid by the railroads in 1903, under the regime for ten months of the Elkins law (which took effect February 19, 1903), were greater than the rebates of 1902. In 1902, according to Mr. Thomas’ report to the governor, the Milwaukee Railroad paid $224,445.71 in freight rebates ; in 1903 the payment was $22(5,572.77. The Northwestern road jumped from $212,075.31 in 1902, before the Elkins law, to $410,476.90, mostly after the Elkins law took effect. This shows how little effect in stopping rebates the Elkins law really had. It is unfortunate that a change in the Wisconsin tax laws should have served to restrict the investigation from going beyond December 31, 1903, but it can be said with absolute certainty that rebates and discriminations continue to-day exactly as in the past, though often in changed forms, and probably in certain parts of the country in much smaller volume than formerly.

There are reasons, indeed, why rebating should have decreased in the last three years. That decrease is not so much due to the Elkins law, which so far has been a harmless bugaboo, or to the pious resolve of the railroad men, but to the rapid consolidation of railroads in non-competing ownerships ; in other words, to railroad monopoly. There is not the temptation now to pay rebates in the northwest where J. J. Hill controls all the railroads, or in the southeast where Morgan is king, or in California which is dominated by Harriman; monopoly arms the railroads against the greedy big shippers. But even where monopoly ownership exists, rebates, as I shall show, are still paid by the personally ambitious traffic officials of the subsidiary roads.

But if monopoly decreases rebates it introduces quite a different and a very real new danger—that of rate extortion, a most important subject which I shall treat in another article.

What is true in Wisconsin is true in various degrees elsewhere. An investigation along similar lines in Minnesota, begun before that of Wisconsin, though by no means so complete and definite, showed precisely the same facts, that enormous amounts in rebates were paid by the Great Northern, Northern Pacific and other Minnesota railroads. And in the Minnesota cases, to prevent the full facts being made public in court, most of the railroads naid the additional taxes demanded by the state and thereby forestalled further agitation and publicity.

Let us examine, now, the methods employed by the railroads in making these discriminatory payments. I cannot attempt completeness, for the devices are legion, but I can perhaps give enough illustrations to show the general system.

In the first place, all rebates are law-breaking conspiracies. To call a spade a spade, they are conspiracies to rob, as much so as if the general freight agent and the shipper got together and agreed to hold up another shipper in the night and steal his pocketbook.

Rebates and discriminations are forbidden by law, the same as highway robberytherefore they must be accomplished by roundabout, secret, devious methods, some of which plainly break the law, others of which are so neatly adjusted that they narrowly escape the letter of the law.

The common method of rebating in past years was for the railroad company to charge the favored shipper the full freight on his goods, and then at stated periods send him a check to the full amount of the agreed rebate. That was one way—crude and easilv discovered. Another way was and is to pay the favored shipper a so-called commission on his business, as though he were an agent of the company. Still another way is to pay a real traffic agent, say at Milwaukee, a large commission or a large salary, which he divides with the favored shipper. This method has spread enormously in the past year— to the alarm even of the railroads. The Wisconsin investigators found innumerable other devices, like the under-billing and the under-weighing of freight, the allowance to the favored shipper of cartage or switching charges, or the permission to hold cars as storage for coal or lumber for a long time without demurrage, or refunding the demurrage, if charged.

From figures given above, showing that the St. Paul Railroad paid only about half the amount of rebates in 1903 as the Northwestern Railroad, it may be concluded that the St. Paul is therefore the more virtuous.

But figures are proverbially deceptive. It was found that sometimes when one railroad frankly paid cash the rival road had another more secret, underhanded way of doing the same thing. In one city there are two equally important shippers in the same business. One of them used one railroad and received large rebates ; the other, shipping by the other road, apparently received no rebates. But the investigators knew that the second shipper could not have done business for a month in competition with the first unless this great discrepancy in rebates was somehow equalized. Upon instituting inquiries they found that the local agent of the second road was empowered to correct the way-bill and deduct a certain percentage from every freight bill presented to the favored shipper and to forward the amount collected as the full payment taking the necessary credit in the agent’s weekly report. By this method no incriminating evidences of rebates crept into the books of the St. Paul road.

And now the Northwestern Railroad has chosen new methods ; it is learning by experience. When the Wisconsin investigators began work, the Northwestern Railroad stopped paying cash rebates almost entirely ; but immediately it began to issue a great many so-called “hektograph tariffs”— that is, rate schedules, not regularly printed, and barely creeping within the fringe of the law, even if they do that. And the effect of the hektograph tariff was to give certain shippers advantages over others—exactly what the rebate did. Nothing could show better the progress from the crude cash rebate to the underhand device which accomplishes the same end.

In some cases discriminations are the result of intentional mistakes in

printing rate schedules. A defective tariff is issued to the shippers in which, let us say, the very natural error of a 3, used for an 8, appears— a rate of 33 instead of 38. When a few copies have been printed the error is “discovered,” and the schedule corrected for all ordinary shippers.

Another device shows how the passenger and freight departments of a railroad work together in giving rebates. It has long been known that the favored shipper could often get a pass not only for himself, but for his entire family. This is, of course, a true rebate, for it saves the shipper just so much money. But it is more or less public, therefore undesirable. Accordingly, one Wisconsin railroad, among others, has been employing a much shrewder device. Certain large concerns in Wisconsin who employ traveling men, purchase the ordinary passenger mileage-books, upon the cover of which, when the mileage is used, the railroad will refund $20. But it was discovered that in the case of certain favored shippers, when the cover was sent back the railroad refunded $20 in the ordinary way and then afterwards and secretly they rebated the entire original cost of the book—or $60. In other words, these favored Wisconsin industries were able to send out their entire force of traveling men without paying one cent of railroad fare—while their competitors paid full fares. A good many business men of Wisconsin do not know, to-day, of this insidious and despicable competition which is undermining their business. This article may give them the first news of it !

One of the concerns thus enabled to send out its traveling men free was the Northern Grain Company. I am allowed to print the names in this case because they have already been

publicly used by Governor La Follette. The Northern Grain Company owns a large number of elevators along the line of the Northwestern and the Wisconsin Central railroads. It has been successful in driving out competition and monopolizing the grain business in many towns, lndepentent elevator men have been forced out of business, and the Northern Grain Company has the farmers of a large territory wholly at its mercy. Why ? In five years the Northern Grain Company received in rebates from the Northwestern Railroad alone $151,447.47—or $30,00-0 a year, a fine profit in itself if they made no money at all on the grain business. Part of this was paid in passenger mileage-books in the way I have described ; the remainder in cash rebates. The traveling men of this concern apparently paid their fare like ordinary citizens, arousing no suspicion, while as a matter of fact they were traveling free. But this is not the only interesting thing about the Northern Grain Company. Its president is O. W. Mosher, of New Richmond, Wisconsin. In 1901 and 1903 Mr. Mosher was a state senator. And as a state senator he was one of the leaders in the fight against every reform measure proposed by Governor La Follette, especially the railroad bills. He defended “individual liberty” and the right of the railroad companies to “control their own property”—and at that very time, though no one knew it tho^ his corm pany was getting more than $30,Cr00 a year rebates from the railroads. All of which throws an interesting light upon the business man in politics and accounts for some of the opposition to proper railroad regulation. A real investigation of railroad affairs in other states would show many a similar “coincidence”—as I

heard this case euphoniously called.

Here is a copy of an actual letter, names withheld, sent by a general freight agent at Chicago to a local station agent in Wisconsin, directing him how to give a rebate to a certain shipper of cooperage stock. It shows one way of granting a rebate from the published freight rate :

“To the agent at -:

“Dear Sir :— For your information I would state that we wish to have

the rate on cooperage stock for -

15c. There are some reasons why we do not wish to put in this tariff. Please bill all future shipments for

via -care of -— R. R.

at the through rate of 17^c per cwt. For instance, a car weigh i i 40', 000 lbs. at 17^c would be $70.00, and you would show in prepaid column $10.00. This would leave $60.00 to be collected, which would be 40,000 lbs. at 15c. You will please send me at the close of each month a statement of the amount you are outstanding on account of the 2\ billed prepaid, and your station will be relieved. In jbhis way shippers will not be required to pay more than 15c through. Kindly acknowledge receipt of this letter, stating that you understand.

“Yours truly,

“Gen. Frt. Agent.”

This letter is the evidences of a deliberate violation of the law. The law requires that new rates shall be printed and filed, that no reduction shall be given without three days’ notice, and makes it a criminal offence to discriminate secretlv between shippers. And yet here is a signed letter of the general freight agent of a great railroad company ordering the station agent to break all these laws.k But in this case, as in most casés, the railroad man was no more to

blame than the shipper of the cooperage stock. It was exactly the case of briber and bribed in politics. The general freight agent surely would have preferred to get a 17^-cent rate rather than a 15-cent rate. It would have meant $10 a car more income for his company. But in order to get the business of the cooper away from a rival railroad he thought he had to break the law and make this reduction. Of course the cooper knew his power, and used it. He literally dazzled the eyes of the various rival railroad agents with his carloads, until they were all bidding against one another—and the law was tossed to the winds. The point that I wish to

make strongly is that this was a conspiracy, with the shipper fully as much to blame as the railroad men— if not more to blame.

Thus Rockefeller got his first rebates—actually driving the railroads to his terms. He had such large shipments that the loss of them to ‘a railroad company meant large losses in earnings, large losses in earnings meant no dividends, and whenever the Wall Street owners of a railroad learn the appalling fact that there are no dividends to be paid, the command goes forth, “Off with the president’s head.” And off it goes.

“Get dividends,” say the owners of the railroads, “or get out.”