freight rates and regionalism

Freight Rates and RegionalismAuthor(s): A. W. CurrieSource: The Canadian Journal of Economics and Political Science / Revue canadienned'Economique et de Science politique, Vol. 14, No. 4 (Nov., 1948), pp. 427-440Published by: Wiley on behalf of Canadian Economics AssociationStable URL: http://www.jstor.org/stable/137828 .

Accessed: 14/06/2014 13:34

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .http://www.jstor.org/page/info/about/policies/terms.jsp

.JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range ofcontent in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new formsof scholarship. For more information about JSTOR, please contact [email protected].

.

Wiley and Canadian Economics Association are collaborating with JSTOR to digitize, preserve and extendaccess to The Canadian Journal of Economics and Political Science / Revue canadienne d'Economique et deScience politique.

http://www.jstor.org

This content downloaded from 91.229.229.49 on Sat, 14 Jun 2014 13:34:01 PMAll use subject to JSTOR Terms and Conditions

http://www.jstor.org/action/showPublisher?publisherCode=black

http://www.jstor.org/action/showPublisher?publisherCode=cea

http://www.jstor.org/stable/137828?origin=JSTOR-pdf

http://www.jstor.org/page/info/about/policies/terms.jsp


THE CANADIAN JOURNAL OF

ECONOMICS AND POLITICAL SCIENCE

Volume XIV NOVEMBER, 1948 Number 4

FREIGHT RATES AND REGIONALISM*

mHE freight rate structure is the price list at which railways sell their services. It is distinguished from the pricing systems of businesses

other than public utilities by the degree of its differentiation or discrimination. Freight tolls are not based on cost except in a general way but on value of service. The carriers charge low rates on raw materials and basic commodities, the products of farm, forest, mine, and sea which will not stand higher rates and still move in volume, and they collect relatively heavier tolls on manu- factured articles and general merchandise which are better able to bear such tolls. This differentiated pricing arrangement was devised to enlarge railway revenue by encouraging the movement of freight, the widening of market opportunities, and the settlement of the country. Though calculated chiefly to meet the financial requirements of the railways, the system aided business and advanced national interests. During the last twenty years, however, the conditions of transportation have so altered that a complete re-examination of the entire pricing system of railways is now required.

The need for this re-examination can be seen most clearly in terms of the historical development of the Canadian freight rate structure. During the period 1885 to 1915 railways benefited from improved technological efficiency, rapid growth in the volume of their traffic, and increasing density per mile of line. The gains from these changes went chiefly toward generous dividends on Canadian Pacific stock and capital re-investment in railway property. In addition, some important reductions in rates were granted. For the most part, these did not take the form of scaling down substantially all rates but of cutting the tolls on basic commodities and the rates to various sections of the Dominion.

The first classification1 was presumably intended to cover all types of freight traffic but within a few years rates lower than those on the classification

*This paper was presented at the annual meeting of the Canadian Political Science Association in Vancouver, June 18, 1948.

The author acted as econonlic advisor to the Province of Saskatchewan in the General Increase Case, 1946-8. The views expressed in this article are his own and are not necessarily those of the province by which he was employed.

'In 1874 the Grand Trunk introduced a tariff with four classes for merchandise and special columns for carloads of flour, grain, lumber, livestock, and a few other items. In 1884 the ancestor of the present classification with its ten classes and six multiples of first was devised by the railways in Ontario and Quebec. It was adopted by the Canadian Pacific north of Lake Superior in 1885 and west of Fort William in 1894. Meanwhile, in 1889, it was accepted by the Intercolonial, replacing an older four-class tariff, though the mileage scale was lower.

427



428 The Canadian Journal of Economtics and Political Science

basis were published on grain, cement, coal, lumber, and other commodities.2 Apparently it was early realized that the rates under the classification were too high to allow any large movement of low valued goods. At all events the amount of freight transported below the classification has progressively increased relatively to the classified traffic.

In 1888 the Manitoba government subsidized the Northern Pacific in return for rate reductions from Winnipeg to Duluth, and the Canadian Pacific met these rates on its Winnipeg-Fort William line.3 Then in 1897 and 1898 the Crow's Nest Pass Agreement4 cut the tolls on grain eastbound from the Prairies to the Head of the Lakes for export by 3 cents a hundred pounds while rates on agricultural implements, certain building materials, coal oil, and fruit were reduced, in general, by 10 per cent. Under the Manitoba Agreement of 19011 the rates on the Canadian Northern between that province and Port Arthur were reduced by about 15 per cent on commodities other than grain, and by 3 cents a hundred pounds on grain.6 Under all these agreements one railway company received a cash subsidy but its competitors had to meet the reductions even though they received no quid pro quo. The reductions were made voluntarily with the hope of bankrupting a competitor7 or in order to have the same rates from competitive points or to equalize conditions over different parts of the same company's lines.8 Other rates were cut by the Board of Railway Commissioners in order to remove or at least to reduce the discriminations which the agreements made in one district as against another.9

2"Effective October 1st, 1888, to assist the mnilling trade to secure local Ontario and Quebec grain for milling, a low scale of Mileage rates was published on a level of from 40 per cent to 60 per cent less than the 'Eighth Class' rates [the standard classification for grain] in the Maximum Standard Tariff of January 1st, 1884." C. W. Wells, Domestic Freight Rate Structure: A Verbatim Report of the Lectures in the Course on Traffic (Toronto, 1945).

3Regina Tolls Case, (1912) 11 C.R.C. 380 at pp. 387-9. 4Statutes of Canada, 1897, 60-1 Vict., c. 5. 'Manitoba Statutes, 1901, c. 39; Statutes of Canada, 1901, c. 53. GThe original total reduction on the Canadian Northern was 4 cents but when the Canadian

Pacific agreed to be bound by the scale the reduction was limited to 3 cents. 7"The result of the [Manitoba] agreement was that, although the operations of the

Canadian Northern at that time were comparatively small, for competitive reasons the Canadian Pacific was compelled to accept the scale of rates that the Canadian Northern had been paid to adopt and to put in decreases which ... the Canadian Pacific thought could but result in the insolvency of the Canadian Northern." Western Rates Case, (1914) 17 C.R.C. 123 at p. 215.

8The Crow's Nest Pass Agreement legally applied only to the Canadian Pacific lines as they existed in 1897 but that carrier voluntarily extended the rates to other parts of its line as extensions were built. Furthermore, complementary to accepting the Manitoba agreement, the Canadian Pacific voluntarily cut all its rates in what is now the provinces of Alberta and Saskatchewan by 7y per cent.

9"When the statute was passed and when the [Crow's Nest Pass] agreement was made, the law prohibited unjust discrimination between localities and while Parliament did not stipulate for similat reductions over the western portions of the company's railway, it should not, in my opinion, be considered as having authorized what would, if done otherwise, have produced unjust discrimination." Coast Cities Case, (1908) 7 C.R.C. 125 at p. 146. For similar reasons reductions were ordered in Regina Tolls Case, 11 C.R.C. 380 and Western Rates Case, 17 C.R.C. 123.



Freight Rates and Regionalism 429

Finally the railways voluntarily cut the rates on some commodities with the object of encouraging development in the West, increasing the volume of their traffic, and adding to the sale value of their land grants. In particular, the rates on farm implements from Lakehead to most points in the West were reduced below the agreed tolls.'0 Thus west of the Great Lakes the carriers adopted a definite policy of maintaining the class rates but of cutting the charges on the chief article of export, on settlers' effects, and on agricultural machinery. Dominion and provincial governments, the Board, and the railways had a common policy of fitting the rate structure to the needs of the growing West.

In the thickly-settled sections of Ontario and Quebec "it is not certain that the Canadian railways followed those of the United States in the last two decades of the ... [nineteenth] century in the reduction of rates.... The financial difficulties of... [the Canadian Pacific] and the Grand Trunk do not lend countenance to any supposition that in the years immediately following... [1886] there was any perceptible lowering of freight rates."1 Unjustly discriminatory rates were gradually cut out by the Board'2 and recognized departures from the standard scales such as town tariffs were made uniform.'3 Thus the low rates which were unduly preferential to certain persons and localities were eliminated.

The rapid expansion of the West was accompanied by the extension of rail and water competition to the Head of the Lakes.14 In the early years of the twentieth century intensive competition apparently developed between railways and steamships for this western traffic. In 1908 the two groups tacitly agreed that rates by all-water or by rail-and-water should be at a fixed differential below all-rail rates. This agreement, with minor exceptions, has been adhered to ever since because it gives each transportation agency what it regards as a "fair" share of the traffic. The charges on bulk commodities like grain and coal by water have always fluctuated from day to day during the season of navigation in accordance with the demand for and the supply of shipping space. On account of improved terminal handling facilities, specially designed lake vessels, and deeper canals, the water lines gradually captured substantially all this traffic. The National Trans- continental which was built east from Winnipeg primarily to haul grain to Quebec, Halifax, and Saint John, never fulfilled its original purpose. The

10The same redtuction applied, to a less extent, to rates on coal oil and apples. Tolls.. Increase, (1917) 22 C.R.C. 49 at pp. 58-9.

11W. T. Jackman, Economic Principles of Transportation (Toronto, 1935), pp. 245-6. 12Debates of the House of Commons, 1886, pp. 585-99, passim, the reports of Dr. S. J. McLean

(Rate Grievances on Canadian Railways, Canada, Sessional Papers, 1902, no. 20a) and the cases before the Board (e.g., Sydenham Glass Co., (1904) 3 C.R.C. 409; Brant Milling Co., (1904) 4 C.R.C. 259; Kennedy v. Quebec and Lake St. John Ry. Co., (1911) 14 C.R.C. 161) indicate that unreasonably preferential treatment was not uncommon. It is, of course, impossible at this late date to ascertain the extent, if any, to which the railways surreptitiously allowed departures from the published rates before the Board was able to curb the practice.

13Wells, "Domestic Freight Rate Structure," pp. 72-3. "The canal on the Canadian side of the St. Mary's River between Lakes Superior and

Huron was completed in 1895 and the Welland was deepened to 14 feet in 1887.



430 The Canadian Journal of Economics and Political Science

Canadian Pacific which had started double tracking its line from Sudbury to Fort William before the First World War, in order to "relieve the congestion that has prevailed from time to time and ... to handle the traffic more expeditiously and economically,"'5 abandoned the scheme. Meanwhile small steamers were continuing to haul freight between a large number of points along the Lower Lakes and St. Lawrence River. There could "be no doubt at all as to the efficiency of the waterways spread through Eastern Canada from its easterly coast and terminating with the western limit of the most westerly division of the East-at Port Arthur and Fort William."'6 In short, water competition deprived the railways of traffic and forced reductions in rates on other freight. Nevertheless the classification was, in general, maintained. Though wages, taxes, and the cost of supplies had been rising since 1907, the carriers in this territory did not make an application for higher rates until they instigated the Eastern Rates case early in 1915.

In the Maritimes, rates on the Intercolonial were not set on a commercial basis in the sense that they were expected to cover the operating expenses and fixed charges on the road. Instead they were designed to develop the region and "to afford Maritime merchants, traders and manufacturers the larger market of the whole Canadian people instead of the restricted market of the Maritimes themselves. "'17 The Intercolonial used the uniform Canadian classification but the standard mileage scales were lower and, owing to the pervasive influence of water competition, departures from classification rates were even more common than in the St. Lawrence valley. A considerable volume of export grain moved through Atlantic ports" at rates which, though low, were presumably remunerative.

Thus for the years up to 1915 in all parts of the country the classification was adhered to in the main but low rates were published to meet competition and to promote regional interests. By and large the low rates were confined to the staples of production such as grain, to the means of production like farm implements, and to bulky, low valued, relatively imperishable goods for which comparatively slow movement is not a disadvantage. The revenue from high-rated articles, coupled with the steadily growing volume of traffic and increasing technological efficiency, was sufficiently large to permit the railways, or at least the Canadian Pacific, to function profitably. Rates in different parts of Canada were far from equalized but the West was probably more interested in getting new lines built than in the rates on existing lines. The Maritimes were tolerably prosperous while Ontario and Quebec thrived on account of the boom in the Prairies. The theory of a differentiated rate structure was successfully put into practice during the years 1885 to 1915.

The course of development from 1915 to 1927 was associated with two factors: the inflationary rise and subsequent collapse of wages and prices, and the agitation for the reduction or elimination of regional differences in

"Canadian Pacific Railway, Annual Report to the Shareholders, 1913. I6lnternational Rates Case, Third Annutal Report, (1908) B.R.C. 5.

17 Maritime Freight Rates Act, (1927) 17 Geo. V, c. 44, preamble. "8In 1914 about one-third of the ton-miles on the Atlantic division of the Canadian Pacific

(lines in New Brunswick and Maine) consisted of grain and flour.




rates. In connexion with the revenue or financial need cases, that is, those concerned with relating total revenues with total costs,'9 a number of features are notable. Whereas formerly the railways or the Board had made a few blanket decreases, these had applied only to relatively small regions. Now for the first time the Board of Railway Commissioners changed by percentage increases and decreases substantially all rates in Canada. Even so, in connexion with the advances, the Board raised the rates on particular commodities like coal, building materials, pulpwood, and livestock, less than the amount of the increases generally. Later when reductions were effected, the railways voluntarily brought down the rates on basic commodities, such as agricultural and forest products, before rates generally were decreased. Finally, the increases were heavier in Eastern than in Western Canada. Though the general level west of the Great Lakes remained higher than in the East, possibly to the extent of 15 or 18 per cent according to the chief commissioner of the Board,20 the policy of equalization was definitely adopted by the Board and approved by the government.2"

The lack of equality between the various sections of Canada was a contro- versial topic in the early nineteen-twenties. The completion of the Panama Canal and the construction of elevators at Pacific coast ports made British Columbia cities, especially Vancouver, ambitious to capture a larger share of the trade of the Prairies. After several efforts and perhaps even a certain amount of chicanery,22 they got the Crow's Nest Pass rates on grain for export applied westbound, though not on exactly the same basis as eastbound through Fort William.23 Their attempts to eliminate the mountain differential were only partly successful.24 Vancouver did, however, receive the benefit of the low transcontinental rates which railways introduced to meet

"9Eastern Rates Case, 22 C.R.C. 4; Western Rates Case, 17 C.R.C. 123; Tolls . . . Increase, (1917) 22 C.R.C. 49; Twenty-Five Per Cent, (1918) 8 J.O.R.R. 277; Forty Per Cent, (1920) 26 C.R.C. 130; Re Freight Tolls, (1922) 27 C.R.C. 153.

20Forty Per Cent, 26 C.R.C. 130 at pp. 142-3. 21"The Committee of the Privy Council therefore further recommend that ... an inquiry

by the Board be directed to be held. . . with a view to the establishment of rates meeting to the utmost extent possible the ... requirement as to equalization." P.C. 2434, Oct. 6, 1920, reprinted in (1920) 26 C.R.C. 147 at p. 151. "The Committee are of the opinion that the policy of equalization of freight rates should be recognized to the fullest possible extent as being the only means of dealing equitably with all parts of Canada and as being the method best calculated to facilitate the interchange of commodities between the various portions of the Dominion, as well as the encouragement of industry and agriculture and the development of export trade." P.C. 886, June 5, 1925, reprinted in (1927) 33 C.R.C. 127 at pp. 131-2.

22A. W. Currie, "Freight Rates on Grain in Western Canada" (Canadian Historical Review, vol. XXI, no. 1, Mar., 1940, pp. 40-55).

23The rates from Calgary and points east are based not on the actual mileage (642) from that city to Vancouver, but on an assumed mileage of 766, the distance from Edmonton to Vancouver.

240riginally rates under the Pacific standard tariff were twice as high per mile as the standard mileage rate under the Prairie scale. Under the W[estern Rates Case, 17 C.R.C. 123, the basis was changed to one and a half and under Freight Tolls, (1922) 27 C.R.C. 153, to one and a quarter. Equality was denied in General Investigation, (1925-7) 33 C.R.C. 127 at pp. 137-53.




the competition of water lines through the Panama Canal. For the time being she was content.

On the Prairies the restoration of the Crow's Nest Pass Agreement, which had been set aside by order-in-council and by special legislation from 1918 to 1922, occupied the bulk of popular attention with respect to freight rates and politics generally. The upshot of a good deal of political pressure was the restoration25 of Crow's Nest Pass rates on grain and flour to Lakehead for export, the application of these rates to all shipping points in Western Canada and not merely to the Canadian Pacific Lines as they existed in 1897, and the abrogation of the 1897 reductions in rates on implements and other goods inbound. Rightly or wrongly the West considered that these low statutory rates were, and still are, fundamental to its prosperity. Though the Prairie Provinces made a vigorous but futile effort to have rates generally equalized between eastern and western Canada, they were prepared to accept the situation on the general rate level provided they got low rates on the single commodity in which they were chiefly interested.

Meanwhile the Maritime Provinces had been experiencing the loss of most of the pre-war grain traffic and, more important, had been suffering from the collapse of the war-time boom and a secular decline in prosperity. Although the export rates on grain were reduced26 and the Board was directed to set rates to encourage trade through Canadian ports,27 the traffic did not revive owing to further gains in the operating efficiency of lake and river steamships,28 the opening of the new Welland Canal in 1927, the pull of New York city, and the growth of the grain business through Vancouver. The most important reduction in this area was brought about by the Maritime Freight Rates Act, 1927, cutting rates 20 per cent below the then current level on all traffic within the three provinces and the Gaspe Peninsula, along with a similar reduction on the Maritime portion of the rate from points in this "select territory" to other parts of Canada. The object of this legislation was to restore the same relationship between rates in the Maritimes and those in the St. Lawrence valley as existed in 1915.

Notwithstanding all these adjustments, equality between eastern and western Canada had not been achieved, the mountain differential eliminated, nor the grain traffic through Halifax and Saint John resuscitated. Neverthe-

25Statutes of Canada, 1922, 12-13 Geo. V, c. 41; 1925, 15-16 Geo. V, c. 52. 26In 1927 the rates on export wheat to Quebec from Armstrong, Ont., which is the same

distance from Winnipeg on the National Transcontinental as Fort William on the Canadian Pacific, were put on the same basis per ton-mile as the Crow's Nest Pass rates, being reduced

from 3412 to 18.34 cents a hundred pounds. The Board, and subsequently the Cabinet, refused to reduce the rates on export grain from Armstrong to Halifax from 35?/ to 19.34 cents, thus retaining the long recognized differential of 1 cent a hundred pounds of Halifax above Quebec city. In 1929 and again in 1931 the export rate on grain from Georgian Bay to Atlantic ports was cut to meet corresponding reductions made by United States roads. Jackman, Economic Principles of Transportation, pp. 478-88.

27By P.C. 886, quoted, in part, in n. 2, supra. 28" As a result of special attention to design, English builders began to turn out in 1923 and

1924 a highly economical lower lake steamer capable of carrying 15 to 30 per cent more wheat

at the same daily operating costs." F. H. Brown, "Canadian Lake Shipping," in H. A. Innis and A. F. W. Plumptre, The Canadian Economy and Its Problems (Toronto, 1934), pp. 92-3.




less, by the reduction of many of the old differentials and by the restoration of old relationships, British Columbia, the Prairies, and the Maritimes had obtained a good deal of what they desired. Moreover the general investigation, 1925-7, and a revised classification,29 presumably ironed out discrepancies in individual rates. In 1927, too, the Canadian Pacific was able to make a reasonable return and the Canadian National deficit seemed to be coming down. Despite alarms, the freight rate structure was in relative equilibrium and Canada was able to continue her original policy of using freight rates to stimulate export trade and develop the various parts of the country.

Since 1927 profound changes have occurred. The economic depression and the increases in the cost of labour and supplies after the Second World War raised problems regarding the adequacy of the general level of rates. In 1947 the prospect of a general increase made all the provinces except Ontario and Quebec apprehensive. The seven provinces opposing the increase asserted, among other things, that the application of the same percentage to rates already high as to rates held down by water and truck competition would widen the differentials between the different regions of Canada and aggravate the conditions which the decisions of the Board and the directives of the Cabinet had, during the period prior to 1927, attempted to reduce.

In particular, the Maritimes alleged that they could not stand any higher freight charges which, they declared, would merely force more of their factories and people to move to the St. Lawrence valley. Moreover the Maritime Freight Rates Act had been a disappointment. In spite of the concessions on rates, the relative retrogression of the area had continued. In order to meet truck competition in Ontario and Quebec, the railways cut rates there while maintaining the existing tolls in the Maritimes so that the latter found it as difficult as before 1927 to sell in the St. Lawrence valley.A0 The Act which had been framed to increase the competitive power in central Canada of Maritime industry failed in its purpose because of the rise of a new transportation agency.

The West, in its turn, alleged that highway carriers were more active in Ontario than on the Prairies owing to more paved roads, better climatic conditions, and a larger proportion of high valued traffic moving in small lots. Also Manitoba, Saskatchewan, and British Columbia set rates legally charged by common carrier trucks whereas in Ontario and Quebec, there being no such control, rate cutting occurs." In consequence railway freight rates have been cut to meet highway competition to a greater extent in one area than in the other. In other words the relative prevalence of trucking has nullified the pre-1927 efforts toward equalization. Also, the West has always feared the effect of higher, inflexible costs of transportation on agriculture with its fluctuating prices. As long as taxes were low while wages and power (horses

29No. 17, issued in 1925, was a more or less complete revision and took a number of years to accomplish. It was changed but only in minor respects by no. 18, 1929.

30Nova Scotia, Royal Commission of Inquiry, Report (Halifax, 1934), pp. 58-68. "iThis becomes rampant at times when traffic is declining in volume. The current agitation

of the Canadian Automotive Truckers Association for rate control in Ontario indicates that it rarely disappears entirely.




and feed) tended very broadly to fluctuate with commodity prices, the rigidity could be tolerated. Today with higher taxes and expensive tractor fuel, inflexibility of freight rates is a more serious matter. The West also considers that increased tolls for the carriage of butter, eggs, and livestock will discourage production along these lines, direct the efforts of farmers more largely to wheat on which the rates are set by statute, and defeat the purposes of the Prairie Farm Rehabilitation Act and other measures for diversification of agriculture and the stabilization of farm income. Finally, some of the western provinces, notably Alberta, are anxious to develop industrially and consider that the existing freight structure handicaps their incipient manu- facturing.

Then British Columbia, having prospered as a result, in part at least, of some rate adjustments, renewed its campaign for the elimination of the mountain differential which a horizontal increase would accentuate. Before the first war British Columbia had found on the Prairies the chief market for many of its products especially lumber, fruit, and vegetables. The opening of the Panama Canal and the virtual completion of construction on a large scale in the West reduced the relative importance of the Canadian market. The Pacific coastal province came to depend heavily on exports to the United Kingdom, the United States, and other countries. The markets abroad were less satisfactory from many points of view than the Prairie outlet: foreign and domestic policies on the customs tariff may deal sudden blows to the coastal economy; ocean shipping rates are sometimes high; competition from the rest of the world is keen; overseas trade is interrupted in time of war; the rapidly growing population in coastal cities seek new employment opportunities. In addition, Edmonton has appropriated the expanding trade not only of the Mackenzie valley but perhaps of a large part of northern British Columbia and the Yukon. As a result of all these factors British Columbia has again become keenly interested in the growth of her distributing trade with the Prairies, the abolition of the mountain differential, and the extension of the provincially-owned railway to the Peace River country.

Alberta sympathized to a large extent with the complaints of the other Prairie Provinces and British Columbia, and had some axes of its own to grind. She claimed to be at the apex of the freight rate structure because of the long haul from or to Eastern Canada and the mountain differential on traffic through Vancouver. Transcontinental freight rates were often lower to Vancouver than to Calgary and Edmonton even though the freight in moving to the coast had to pass through Alberta. What is more, rates to Alberta points were sometimes more than the through rate to Vancouver plus the local rate back to Edmonton or Calgary. Hence the province demanded the application of the Spokane principle32 whereby the transcontinental rate to the more distant, competitive point would constitute the maximum to all intermediate points. The claims of Vancouver and of Edmonton were hotly contested by the Winnipeg Board of Trade which feared any adjustment of freight rates which would have the effect of reducing

32Eliot Jones, Principles of Railway Transportation (New York, 1924), pp. 171-82.




the area in which its wholesalers could distribute freight. In short, the regional problem had, by 1947, again become prominent.

In dealing with regional problems on previous occasions, the Canadian Pacific, which was, generally speaking, taken as the standard for rate making purposes, had typically been in a flourishing financial condition. It could be operated at low cost, had a steadily growing volume of traffic, and could use revenues from outside operations, including the proceeds of the sale of land grants, for interest, dividends, and capital expansion. The Grand Trunk was such a high cost line that its expenses had to be more or less ignored in setting rates. The Canadian Northern and Grand Trunk Pacific had not at the time been completed and any losses which they experienced could be written off as part of the cost of construction.

Today the situation is different. Despite heavy repayment of debt during the War and the refunding of bond issues at lower interest rates, the Canadian Pacific is no longer the low-cost carrier it once was. Wage rates are high and the unions press for increases whenever net revenues expand. The Board of Transport Commissioners has ruled that profits from outside or non-railway operations are not to be taken into account in rate-making.33 The other major railways are "now fully integrated into one great railway system [the Canadian National] which is ... efficiently operated and managed"34 and has costs, except for interest per mile of line, probably approaching those of the Canadian Pacific. No longer is it a matter of investors in an old road living in a distant land35 being affected, but taxpayers of the Dominion who have to pay for interest deficiencies on the higher cost road. Further, the owners of Canadian Pacific stock are now numerous in Canada where they can, if they see fit, make their individual influences felt. In short, we can no longer more or less take for granted that the Canadian Pacific will get a reasonable return no matter what we do, within limits, to freight rates nor can we ignore the rate of return to other railway companies.

Up to 1915 the governments of the Dominion and all the provinces,36 as well as primary producers and big business,37 agreed, by and large, on the policy of subsidizing railway construction and reducing rates on basic com-

3Application of the Railway Association for a General Increase, (1948) 38 J.O.R.R. 1 at pp. 18-22.

34Ibid., at pp. 35-6. 35The shabby treatment by Canada of shareholders in the Grand Trunk in comparison

with its solicitude for the owners of the Canadian Pacific who also lived in Britain, has often been commented upon. It may be significant that the head office of the one was in London and the other in Montreal.

36Though Sir John Macdonald contemplated disallowing the agreement of Manitoba with the Northern Pacific. Sir Joseph Pope (ed.), Correspondence of Sir John Macdonald (Toronto, 1924), pp. 403-4.

37"We all recognize that rapidity, efficiency and cheapness in transport are just as vital to a new country as that the products it creates shall be high enough in quality and low enough in cost to satisfy the markets of the world.... [We] cannot study the commercial development of our country without concluding that what we are, apar.t from the natural richness of our country and the energy of our people, we owe mainly to the aid given our governments to facilitate transportation." General Manager, Canadian Bank of Commerce, Address at the Annual Meeting, 1900.




modities. In the early twenties some divergence in views developed but on the whole they were not serious.38 Before the Rowell-Sirois Commission the then premier of Ontario stated that he would not attempt to compute the "excess" burden shouldered by the people of the eastern provinces by the world's lowest per mile rates on wheat.39 In the recent case the governments of Ontario and Quebec made no submissions probably because the residents of these provinces, being less dependent on distant markets and sources of supply and having the benefit of competition from carriers by water and highway, considered themselves less adversely affected by the proposed increases. The most significant change in view, however, has been that of the Dominion government. Because it must find the money to cover the deficits on the Canadian National which reductions in rates to meet regional requirements might entail, it can no longer look at regional complaints in the same light as it once did. Further, the financial interests, or in any event the newspapers which typically reflect their attitudes, favoured an immediate increase by the full 30 per cent applied for. The railways fought strenuously to have the Board exclude all regional considerations from the case. In brief, the unanimity which had existed in the previous rate cases has dis- appeared.

When, if ever, all the regional discrepancies have been ironed out, a basic difficulty will still remain. Competition with other transportation agencies is now stronger than ever. When it was confined to water lines, the railways could afford either to ignore it and lose business or to cut rates and try to keep the traffic at a reduced margin of profit. They could adopt this policy because they still retained a large and on the whole a growing volume of business which moved under the classification at standard mileage or distributing class rates. They could use the "profits," if such they may be called, from high-rated traffic to carry freight at rates lower than the average cost of handling all traffic. In the last two or three decades the advent of the highway competitor has robbed the railways of a large volume of high-rated business and has compelled rate reductions on a good deal of what remains. Simultaneously, new competitors have arisen to deprive the rails of low valued freight. Though few pipelines for crude oil or gasoline have, as yet, been built in Canada the possibility of such construction has already forced

38The Conservatives, most of whom were from Ontario, fought the restoration of the

Crow's Nest Pass rates in 1922 and one Liberal from Ontario bolted his party. Also both large railways warned of the danger of reductions made without ftull realization of their

financial position. "Were rates in Canada to be determined for reasons of political expediency or as the result of political pressure, Canada. . . woulc take a backward step. In public

discussions of the subject the value of the work of the transport companies . . . is frankly recognized, but the fact that the work can only be carried on successfully under a fair scale of rates is sometimes overlooked." Canadian Pacific Railway, Annual Report, 1924.

39Statement of the Honourable M. F. Hepburn to the Royal Commission on Dominion- Provincial Relations (Toronto, 1938), p. 38. Before the House of Commons Committee on Railways, 1938, Mr. S. W. Fairweather, then head of the Bureau of Economics of the Canadian National, stated that a reasonable average crop (400 million bushels) would give an increase in net revenue of about $12 million over a crop failure (165 million bushels) while a bumper

crop (560 million) would give $20 million net.



Freight Rates and Regionialism 437

the railways to make drastic reductions in rates.40 The increased use of hydro-electricity for lighting and for industrial power has cut deeply into the coal business, at least potentially.41 The location of factories closer to markets,42 the more economical use of raw materials including fuel, and even better packaging methods, while doubtless beneficial to society as a whole, have reduced railway revenues. Finally water competition is possibly as keen as ever.43 Thus the rail carriers are now losing traffic at both ends of their differentiated rate structure.

Nor is this the end of the story. Up to, perhaps, 1930 revenue from passenger traffic, commercial telegraphs, express and other ancillary services covered the out of pocket costs of railways and made a significant contri- bution to the common expenses of operation. Probably such services were not profitable in the sense that they bore their full share of the common expenses, but to an important degree they reduced the amount of common charges which had to be supported by the freight traffic. In this way they helped to make it possible for the railways to grant low rates on staples. Within the last two decades or so, competition from private passenger auto- mobiles, buses, airplanes, trucks, and from long distance telephones has resulted in a very great reduction in such revenue and, in consequence, an increase in the share of the common costs to be met by freight. As long as the public demands the ancillary services, and depends on railways to carry passengers and mail especially to outlying communities and in inclement weather, the funds to maintain such operations must come from somewhere. In the absence of a subsidy, the steadily increasing losses, if that term may be used, on these essential ancillary services must be borne by the freight user.

To recapitulate, before 1915 the differentiated rate structure worked satisfactorily because it promoted the economic development of the Dominion

40The pipeline from Portland, Maine, to Montreal competes in normal times only with water, not rail, carriers. The one from Turner valley and the projected ones from Calgary and Leduc to Moose Jaw and Regina will displace rail traffic. On account of the potential competition from Calgary to Regina the railways in 1936 cut their rates on crude petroleum in carloads from 68 to 27 cents a hundred pounds and later to 19 cents for single shipments of twenty-five cars or more. The latter rate was cancelled by the Board as being unjustly discriminatory against smaller refineries which could not buy in such large quantities. Consumers Co-operative Refineries Ltd. v. C.N.R. and C.P.R., (1937) 47 C.R.C. 321. See also Re Freight Rates on Crude Petroleum Oil Carloads, (1934) 42 C.R.C. 287. Imperial Oil Ltd. estimates that the proposed pipe-line from Leduc to Regina will cost $36 million and will cut the present rail rate of nearly $1.00 a barrel (80 cents before the recent increase) to 30 cents.

41" Secondary power generated in the Saguenay district is currently displacing about 540,000 tons of coal per year." Royal Commission on Coal, Report (Ottawa, 1946), p. 391. For many reasons this project did not rob the rails of this amount of business but the figure given indicates the extent to which the use of hydro-electricity reduces the traffic in solid fuel. "If the same amount and kind of energy as was obtained from water power had been obtained from coal, it is estimated that it would have required about 15 million tons of bituminous coal in 1937 and about 25 million tons in 1943." Ibid., p. 380.

42The recent erection of yeast factories in the West has deprived the express companies of some profitable business.

43This may be a matter of dispute because the war led to the abandonment of many coastal and intercoastal routes while higher wage costs and shorter hours owing to unionization of seamen have raised the costs of ship operation.



438 The Canadian Journal of Economiics and Political Science

and provided a good return to the shareholders of the Canadian Pacific which, alone of the railways then in existence, had a respectable claim to a rate level adequate to cover its costs. By 1927, after going through a series of stresses associated with the First World War and a succession of regional pressures, the rate structure had again attained a position of relative stability. Since 1927 it has been undermined by competition at either end of the rate scale and by additional financial burdens placed upon the freight user.

The fact is that in Canada, as in the United States, the differentiated rate structure formulated in 1884 and modified by the economic and governmental pressures of the last sixty-five years is out of date. The principle is still sound but in its practical application it is unbelievably complex, fails to provide the carriers with the revenues which they feel they require to cover their expenses, and makes the application for a general rate increase an almost interminable struggle. Probably half of the over five million words of testimony in the recent General Increase case related to regional complaints and not primarily to the question of financial need. This intrusion of matters of regional importance was not caused by the perversity of provincial witnesses and counsel but by the fear that a general increase superimposed on the com- plexities of the past rate structure and the higher levels in certain regions than in others would work hardship on particular producers and localities.

To deal with the situation three steps urgently need to be taken. The tariffs or price lists for railway services should be simplified.44 The various regional complaints should be re-examined by some competent body, and the provinces and especially the carriers given a full opportunity to present affirmative evidence in support of their positions; if humanly possible the complaints should be dealt with to the satisfaction of the entire country and of the railways. When this has been done, the whole relationship between types of rates would need to be exhaustively studied. The railways have lost the high-rated traffic, the cream which allowed them to carry the staples of the Dominion at skim-milk rates. Low freight rates on basic commodities and from relatively remote areas are the foundation of a large part of the nation's prosperity. To raise such rates would be to handicap Canada in competing abroad, would reduce production and railway traffic, and involve the relocation of agriculture, industry, and population. To raise the rates on high-valued goods while keeping the existing levels on raw materials would merely invite more competition from highway carriers and, eventually, more rate-cutting

"In accordance with (1945) 262 I.C.C. 447, United States railways and the Commission are abolishing commodity rates or exceptions as they are often called in that country and installing thirty classes ranging from 13 to 400 per cent of the present first. This will restore the classification to its original status of covering all freight. Simultaneously the classification is to be made uniform all across the country replacing the three or more currently in effect. In Canada it might be easier to adopt a classification similar to the American one. Our classification is already uniform (except on the White Pass and Yukon and in regard to mixing) but the relationship between the rates is different in eastern than in western Canada. Also our commodity rates, though related in a general way to the corresponding class rate, are rarely quoted as a percentage of the latter as is common in the United States. That country is also eliminating all differences in regional rate levels.




and loss of rail business. To order trucks to charge the same rates as rail carriers might help in reducing fluctuations in rates and eliminating unjust discrimination between shippers but in the long run such regulation, if carried beyond comparatively narrow limits, would break down because the shipper might put his own vehicle on the road rather than pay the charges of the common carrier. To prohibit the operation of shipper-owned trucks or to refuse to permit any trucks from operating beyond a certain number of miles with the object of preserving intermediate and long distance traffic to the rails which can handle it profitably, would be to deny the public the economic advantage of a new type of carrier; at all events such a policy would run into constitutional difficulties. To encourage railways to purchase and operate their own trucking companies is open to the objection either of throttling competition or of encouraging wasteful competition among highway carriers.45 To cut the existing rail rates on valuable articles in the hope of recovering business lost to trucks would merely perpetuate the road-rail rate competition of the last twenty years and aggravate a situation already bad. To maintain the present structure but introduce "the principle of open competition within the sphere where railway rates are necessarily limited by highway costs" and have the state "give assistance in one form or another" to railways for handling marginal or low-rated commodities would have, in spite of its advocacy by a vice-president of the Canadian National, all the dangerous implications of unrestrained competition on the one hand and of subsidization on the other.48

Apparently no simple juggling of rate relationships will solve the problem. It is conceivable, of course, that in some almost miraculous way the costs of railway operation may so decline that they will still be able to function profitably at current rates and after the demands of the various regions have been met. Though technological progress is continuous and the use of light- weight metals, gas turbines and so on opens up interesting possibilities for radical reductions in expenses, the rate of introduction of innovations is too slow to ease materially the present problem. Costs might also be reduced by line abandonment, a really whole-hearted effort at co-operation, and, in the short run at least, by amalgamation or unification, but such radical changes are likely to be taken, if at all, only after every other possibility has been exhausted; certainly they will not be undertaken as long as railway gross and net revenues are as good as they are at present.

Eventually the railways will have to decide whether they will concentrate their attention on handling bulk commodities at the lowest possible cost leaving the less than carload lots for short and intermediate distances to highway carriers or whether they will continue to try to cover almost the whole field of land transport except urban deliveries, as they have done in the

45The Canadian Pacific Transport Co. owns a series of franchises for highway trucking services for the entire distance from Winnipeg to Princeton, B.C., 225 miles east of Vancouver, except for a gap of about 150 miles between Creston and Osoyoos, B.C. It is understood that additional purchases in Ontario have been discussed but not yet consummated.

46S. W. Fairweather, "A Transportation Paradox" (Engineering Journal, Jan., 1948, pp. 11-14).




past. The time for such a decision has not yet arrived in Canada47 because our highway network is not well developed in many parts of the country and winter driving is difficult. As carriers of freight in large quantities at moderate rates of speed and at low costs, the railways are unrivalled among inland transportation agencies, except pipelines which are restricted in their types of traffic. They are still and for many years are likely to be the backbone of our transportation system. The differentiated rate structure is breaking down because of the growth of competition48 and because of renewed pressure for regional adjustments. The old structure provided for the financial needs of the railways and achieved important social or economic objectives such as giving advantageous rates on staples and promoting regional prosperity. It remains to be seen whether out of several alternatives or a combination of them a reformed rate structure can be devised to provide the carriers with enough income for their legitimate needs without doing too much violence to factors of social welfare which have attached themselves to the differentiated pricing system of the past.

A. W. CURRIE

The University of Toronto.

47The current application of United States railroads for materially increased rates on small lots may indicate that they are slowly withdrawing from the field which trucks have claimed they can serve more economically than the rails, See also Transportation Investi- gation and Research Board, Comparison of Rail, Motor, and Water Carrier Costs, H. Doc. 84, 79th Cong., 1st Sess. (1945).

48According to the freight traffic manager of the Canadian National not more than 5 per cent of the traffic now moves under standard mileage rates. The rest is handled under a variety of tolls-commodity mileage scales, special commodity, water and truck compelled, agreed charges and so on.



freight rates and regionalism

Documents