character thereof to be fixed by classification as to volume, weight, value, the liability to accident, climatic influences, compilation, grades, curvatures, cost of maintenance, and that in fixing, establishing, or adopting fares and freights, all parties to all cases arising out of the adjustment of rates, before any such rates shall become and be established as the rates of this Board, shall have full and ample opportunity to appear before this Board to be heard in the premises, by counsel or otherwise, to summon witnesses, and to this end shall be entitled to processes of this Board, to the end that the judgment may be equitable, and its conclusions be just and reasonable.

Having thus given guarantees of our desire to act fairly throughout, it became necessary to inquire by what means the interest of the public, in reduced rates of transportation, could best be subserved. We were called, in the first place, to determine what constituted "reasonable" rates, the Constitution having left that question entirely to our discretion. Now there are few subjects more difficult to adjudicate, for there are few subjects on which greater differences of opinion appear to exist. For the most part men derive their ideas concerning it from their notions of what it costs to build a railroad, and they are very apt to confuse themselves with utterly irrelevant calculations as to the incidents of stock inflation upon tariffs, an incident which, as a matter of fact, has never had any existence, save in the imagination of persons ignorant of the subject. The belief that railroad rates are often fixed with a view to furnish certain percentages of profit upon a certain amount of real or fictitious capital is fallacious. No such method would be possible, and no such method has ever been attempted. The watering of stock has no practical connection with freights and passenger charges. Whoever doubts this may satisfy himself by a careful review of all the stockwatering transactions which have taken place in this country during the last ten years, and by a comparison between these transactions and the current tariffs, it will be found that the stock-watering has not affected the tariff, save in the most indirect and fitful way, and that the idea of any systematic connection between the two things is entirely erroneous. The question of what are reasonable rates, may be supposed to depend largely upon the amount of a railroad's earnings, but in what proportion these earnings should be divided is a matter concerning which the most radical differences of views exist. For example, Charles Francis Adams, an admitted high authority, has very recently expressed the opinion that "to pay interest on the capital invested in the railroads in this country, must, on the average, earn their operating expenses, and half as much, or fifty per cent more. In England they must earn their operating expenses, and as much or one hundred per cent more. În neither country would ten per cent above operating expenses begin even to pay interest on capital."

Without indorsing either view, it is the plain duty of this Board to endeavor to find justification for a reduction which, without endangering the efficiency of the transportation service, will benefit the people. And this has been effected by a careful and dispassionate analysis of the situation. In the first place it must be recognized that the railroads of California have been built and operated under peculiar conditions. The railroad system of the State is in advance of the development of the State and its settlement. The cost of operations is virtually a fixed rate; that is to say, the cost of running a locomotive and train of cars, given the locality, is capable of being estimated with precision. This cost is independent of the work done; that is to say, an empty train and engine going over a road, will cost

an amount which is not increased in proportion by the loading of the cars. The profits of railroad operations, consequently, depend upon the amount of tonnage carried, and it follows from this that, though a railroad obtains high freight rates, its profits may be low, if the aggregate tonnage carried by it is small; while a railroad obtaining low freight rates may make large profits if the aggregate of the tonnage carried by it is great. A second corollary of this condition of things is that a comparatively small reduction on the unit of railroad calculation, viz.: the ton, though apparently productive of trivial changes, will, when applied to the aggregate tonnage of the road, result in a diminution of earnings, which may bring about paralyzing effects. It is, therefore, necessary that the reductions should be made with the utmost caution. The reduction on each ton must be multiplied by the whole number of tons carried, and the large figure resulting from this calculation has augmented significance, when it is remembered that the entire volume of such reduction is from the sum representing the net profit. The whole amount of all reduction is, therefore, a subtraction, not simply from the aggregate gross income of a transportation company, but specially from its profits.

Again, in California there are great fluctuations in the volume of railroad traffic. It is necessary for the railroads to keep a large amount of rolling stock on hand, but during several months a considerable portion of this has little or nothing to do, and consequently is earning nothing. There is, it is true, one species of fluctuation to which the local railroads are not liable, and it is a result of the consolidation which has attained here. In the Eastern States the most serious evils to the public have been produced by that fierce fluctuation in rates which from time to time has sprung up between rival lines, and the first effect of which has always been the sudden and radical change of rates. These fluctuations have been so rapid and unforeseen that they have converted all business having any dependence upon transportation into speculation. The merchant has been unable to tell from day to day what the staples in which he dealt would be worth. He could not venture to increase or diminish his stock without encountering the most serious risks. He was forced to gamble against his inclination. In this way all business has been disturbed, and uncertainty and loss have been entailed upon the commercial classes. The absence of such fluctuations in California conclusively shows that the transportation companies of this State have adhered to a strictly legitimate business as carriers, and have not engaged in speculation in the products of the country, with the advantage radical fluctuations in freight rates confers upon those who control such fluctuations. The trunk road which supplies the chief exterior requirements being in competition with an ocean route, its rates cannot be made the sport of speculative changes in rates. It must continue to underbid the seas, or it must abandon through business. The local and leased lines being with few exceptions in the same hands, have been equally free from the kind of fluctuations referred to, and in this respect the situation has been to the advantage of the public. In considering the practicability of a reduction of rates it has become necessary to examine the commercial laws governing the question, and therefore we have analyzed the principles upon which the apportionment of rates has thus far been adjusted.

It has recently been alleged, as a special and obvious grievance and

abuse, that railroad companies fix their freight rates by a comparative ratio to the value of goods transported. The reason why this has seemed unjust appears to be that those who have called attention to it have always gone beyond the just implication of the principle, and have assumed that the practice was to charge as much as could be imposed without placing a prohibition upon transportation. But it is, we think, apparent that the principle in itself is, if not ideally the best, at least the best the exigencies of transportation admit of. For it is impossible to regulate charges, either on the principle of a fixed percentage of profit on the capital invested, or on the cost of service. The value of the service rendered must be the criterion, and there would seem to be no other means of ascertaining this than by ascertaining the market value of the goods transported. The real guaranty for the protection of the shipper in this regard consists in the interest of the carrier, which compels him so to regulate his charges that they shall not operate prohibitively, and that they shall not interfere with the extension of business. And it may be observed that unless the whole field of transportation is surveyed, it must be impossible to reach a just appreciation of the merits of the case, since the entire system of railroad traffic is inter-dependent and reciprocal. For example, it is a well established maxim of transportation that the higher the maximum the lower the minimum will be. Now, the explanation of this maxim really contains the elucidation of the freight question. For it means that by charging high rates upon the classes of goods which will bear high rates, it is made possible to charge low rates upon the classes of goods which must have low rates or not be moved at all. To charge comparatively higher rates upon general merchandise is not to impose any burden upon the public. Practically, as experience shows, it does not affect the retail price, and neither does it affect the profit of the merchant. To make large reductions upon general merchandise would therefore be to cripple transportation; but, in fact, it would still more certainly cripple production, for these interests are linked together. Production is primarily powerless without transportation. The latter is in fact the vivifying force which gives production energy and utility. It is the machinery of distribution to which mankind are indebted for the rapid progress and great prosperity enjoyed in these latter years. But the great staples of importation, the staples which we have succeeded in reducing to freight charges on, as shown by the accompanying tables, cannot, as a rule, support themselves as manufactured goods, and the higher classes of merchandise do. They will not bear high rates, for their market value is low, and it is so restricted by competition that it can seldom be raised.

If, therefore, these staples cannot be carried at a very low figure they must forego transportation altogether; and that is equivalent to the ruin of all producers who have settled outside of a certain limited area surrounding the centers of distribution or shipment. And if the railroads are compelled to carry general merchandise at low rates their earnings will be so curtailed that it will be impossible for them to afford to carry grain, wool, hides, wood, and other staples, at rates which will permit of their transportation at all. At present it is the practice of railroads to extend the area of profitable production as much as possible. Thus the selfish business interests of the producer afford the most effective guaranty to the latter that his distance from a market will not be used to cripple him. The higher the

maximum the lower the minimum will be is a rule the just comprehension of which further exhibits the futility of all attempts to do away with classification, or to make it arbitrary. A great railroad system is quite as complex as a great Government, and quite as impossible of being regulated by cast-iron provisions. Transportation is a business in which the needs of the time are for the most part paramount. The currents and channels of business and settlement are constantly changing, and as they change the necessities of the railroad business become altered. To develop new business, to foster young and growing industries, to accommodate infant settlements, require new regulations, and every such change brings into view fresh relations and complications, all of which have to be taken into consideration. If, therefore, it were possible to survey the whole field on a given day to grasp the requirements of the hour, and to meet every want with a special adjustment, the instability of the situation is such that it would be necessary to revise the entire settlement on the morrow, or the operation of unforeseen influences would wreck the experiment hopelessly.

There has never been any doubt in the public mind as to the desirability of reducing the minimum rate of freights, but there has been confusion of thought respecting its relations to the maximum. In fact, the two are inseparable in the existing system of transportation, and unless it is proposed to remodel that system upon some hitherto undiscovered principle, they will have to be recognized as incapable of elimination or radical alteration, and, as regards the system itself, it must be borne in mind that whatever its defects may be it is at least the product of natural development from the surrounding circumstances. The presumption in favor of the rationality of a system which has grown out of the needs of the public and the requirements of the railroads is strong. It must be admitted that such a system is more likely to suit the circumstances than one evolved from abstract considerations without regard to the existing facts. It may be worth while to quote some recent remarks of Charles Francis Adams once more on this head. He says: "Our laws, the political catchwords which outweigh all argument and uninformed public opinion, do not allow the railroad system to follow out quietly its natural course of development, subject to an intelligent restraint where the development runs into essential abuses. We are always pounding away at it, it is true, but generally after a crazy, mistaken fashion, or on some false or quite immaterial issue. The weak points of the system are not generally known; the patience necessary to find them out is looked upon as a sign of timidity or treachery, and thus every attempt at dealing with a really great and intricate subject takes, sooner or later, the form of a new quack cureall legislative pill." And he concludes: "What is needed, it seems to me, is the continuous pressure and the steady building up of legislation, which can only come through the employment of trained specialists a class politically despised, but of which the railroads avail themselves, with good results to themselves." We have quoted these sentences to show how a prolonged and conscientious study of the railroad question has convinced a particularly lucid and powerful intelligence of the absolute need of caution, hesitation, and moderate action in this connection.

The investigations which we have ourselves made in preparing to reduce freight rates have entirely persuaded us of the truth of this

position; and the more desirous such a Board as this may be to benefit the public, and to secure the greatest possible advantages from the regulation of transportation, the more it must become assured of the impossibility of venturing upon any arbitrary or sweeping measures. With the power conferred upon us by the Constitution and the Legislature, nothing would have been easier than for us to have met together, and, without permitting the railroads to make any representation on their own behalf, to have promulgated some large and general reduction of rates. The effects of such a policy, however, would unquestionably have been unfortunate. For, on the one hand, it cannot be doubted that corporations would have resisted such a reduction by every legal resort in their power, and thus have postponed the application of it indefinitely. And, on the other hand, it is certain that if such a tariff had been submitted to, it would have produced the most unexpected and calamitous results, injuring those whom it was intended to benefit, ruining those whom it was intended to enrich, and paralyzing transportation instead of diminishing the friction of its working. We have made no reference to the question. of the equities of the railroads, though they demand the most serious recognition. An arbitrary disposition of the property of others, no matter under what color of legality, no man trained in respect for the fundamental principles of the Constitution of the United States can approve or can execute, without serious doubts concerning the morality of such transaction. It has been our endeavor so to deal with this difficult and delicate subject that the interests of neither party should suffer in our hands. We approached it with a firm determination to relieve the public, if such relief was found practicable. Had we entered upon the work in a spirit of rancorous hostility to the railroads and a vindictive resolution to injure them, we should, in all probability, have accomplished nothing beyond engaging the State in interminable litigation. But by setting before ourselves a standard of equity as the guide for our conduct, we have succeeded in obtaining from the railroad companies acquiescence in a scheme of reduction which must be productive of great present benefits to the public, and which affords an encouraging earnest of future and perhaps even more important changes.

It is noteworthy that while popular clamor, unguided by intelligence, has, notwithstanding its force, failed in the past to bring about any substantial reduction in freight charges in California, yet the railroads themselves have on three different occasions voluntarily reduced their tariffs. The explanation of this is that as the development of the State proceeds, as settlements become more dense, as business enlarges, it becomes not only possible, but advisable to lower the rates of transportation. It is never with the approval of his business sense that a railroad manager maintains rates which tend at all towards prohibition. He is too well aware that the volume of business under the normal conditions is the real test of prosperity. But, as we have shown in this report, the circumstances of transportation in California are essentially different from those of the Eastern States, and it has been impossible to avoid the embarrassments which are inseparable from a railroad system largely in advance of the development of the community to whose wants it ministers. The tendency of our railroads towards reduction of rates demonstrates, however, tha as soon as circumstances make such changes