Author’s note:
This series of blogposts will be my paraphrased notes on a lecture given by Murray Rothbard called “The American Economy and the End of Laissez Faire“. This means the post will contain some word for word transcriptions of Rothbard’s words and some editorializing and rephrasing of my own. I will not distinguish between the two.
Price Fixing
How do we know that steel rail prices remained the same? A lazy economist might tell you that it was because the list prices remained the same. But, if you go out into the real world you would find no steel rail was ever sold at these list prices, and real prices on steel rail did not reflect reported prices.
Stigler performed on a study on real rail prices and found that nobody sold at list price, if you had a boom period it sold approximately 5% down from list and during depressions it sold for approximately 30% down from list. Thus, steel rail prices were actually fluctuating regularly as one might expect, they were simply not reported or recorded officially.
In times of uncertainty, businesses will often offer steeper discounts on inventory to recoup overhead costs quicker while forgoing some or all profit margin.
In this effect, “secret rebates” on rail prices were an attempt to undermine cartel price fixing. By doing so off the books, cartel participants could avoid tipping off other cartel members that they were violating the rules of agreement. But in the case of the railroad industry, these methods of undermining the cartel agreements were often not done in secret, but out the open. Such as in the cases of cutting rail rates and freight classifications discussed in part 12.
In today’s day, we find economists often preoccupy themselves with hiding price increases, but in 19th and early 20th century it was more often about hiding falling prices rather than rising prices.
Tremendous competition and increases in production (helped along by sound monetary standards of economic value measurement) lead to falling prices.
In addition to falling prices and freight classifications, quality of service would also increase relative to cost to the consumer. One thing railraods began to do was give special discounts to high quantity shippers that filled up an entire railroad car. The reason for this was that any empty space on a rail car meant lost profits for the rail companies. So getting a rail car as close to capacity as possible before departure meant increased operational efficiency.
For example, New York Central at one point had 6,000 special rate contracts with shippers. These rates even went so far as to offer rebates to customers for storage fees both prior to and after rail transport.
In other words, when governments step in and fix prices on something like rail rates, this often leads to businesses finding other competitive avenues with which to differentiate their services. Recall that this exact scenario occurred with the Hepburn Act of 1907, a driving factor of the panic of 1907.
In such cases, businesses can claim they haven’t raised their rates in many years, which is true on the surface, but what has actually changed dramatically along that time is the quality and the classification of service at that unchanged official price rate.
Prior to the early 20th century, however, when not prohibited by ineffective & heavy handed government intervention, the most common form of this competition came in the form of price rate cutting.
Discrimination and Disparities
It has been said before that railroads were the first big business in America (and arguably in the history of the world). Southern US states would frequently complain about higher rail rates in southern territories than in northern territories. They believed that this was a sinister plot against the south following the less than favorable confederate reconciliation to the Union after the civil war.
The reality is that this had an easily explainable economic causation. There were no through lines in the Southern US, in other words, rail lines in the north had very long through lines (or trunk lines), but the south had very short lines, and could not travel long distances on one line.
Shorter routes resulted in higher costs for operation, higher costs for operation resulted in higher priced rates.
Another issue with the south was that trade moved in a triangular pattern. The South would buy grain from the Midwest and sell cotton to the East (for export to Europe). As a result the rail cars would be empty when headed outbound westward (because the south had little to sell to the Midwest) and rail cars would be empty when returning from the east (because the South would purchase it’s finished goods from the North).
In other words, rail cars on these lines were empty half of the time and meant that discounted rates were less likely to be offered to high quantity Southern shippers because it was simply less economical. As unfortunate as this situation was for the South, it was firmly rooted in economic reality, rather than discrimination.
