i66

THE GREEN BAG

and the cost of its transportation, and, if we are to aim at completeness, the relation between the cost of transporting this article and others or the relative charge to be made for them. Cases requiring the ascertainment of the cost of transporting freight per unit arise in one of two ways; either a statute or an order of a railroad commission has pre scribed a schedule of rates or a preliminary investigation to ascertain the cost precedes the making of such a schedule. One of the earliest cases in which it was attempted to ascertain the cost of trans portation was the case of Smyth v. Ames.1 In that case the legislature of Nebraska had prescribed a schedule of rates applicable to the state tonnage moved upon all the carriers operating within that common wealth. The facts before the courts were as follows: By expert testimony it was said that the legislature-made rates reduced the charges upon freight traffic 29$ per cent; it was in evidence from expert witnesses that the cost of moving the purely intra state traffic was from 10 to 25 per cent more than the cost of moving the interstate traffic, the court assumed that 10 per cent increase was a reasonable one; figures were introduced showing operating expenses and receipts, number of passengers carried, the tons of freight, and the mileage over which freight was transported. With such evidence at hand, after sepa rating the passenger traffic from the freight traffic, the court used the following method. Dividing the cost of freight operation by the receipts from freight operation, a result was produced of 66.24. These figures (66.24) were said to show the percentage which the operating expenses bore to the receipts upon all the traffic carried by the railroad, and hence represented the cost of carrying. As the evidence showing that the cost of doing the intra-state freight business ex ceeded the cost of doing all the business 10 per cent, this last figure was added to 1169 U. S. 466-

the quotient heretofore obtained, making a total of 76.24. The legislature-made rates would reduce (according to the testi mony) the receipts 29$ per cent. That is to say, for each $100 of receipts, if it be assumed that the quantity of tonnage will not change (and the court made such as sumption) the carrier would receive $70.50. Thus, under the legislature-made rates (and it being assumed that there would be no increase in tonnage) the carrier would expend in operating expenses $76.24 and receive in return $70.50. Of course, upon such a basis the court held the legislaturemade rates of Nebraska unconstitutional, for the proposed rates would not be remuner ative. The fallacy of the mathematics of this case can be seen from two points, even if we concede that there will be no increase or decrease in the yearly tonnage by reason of the change of rates or commercial con ditions. 1. The percentage which the operating expenses bear to the receipts does not mean anything; it simply shows the relation < between the two items; they both might be relatively high or low, or one or the other may be entirely disproportionate to fairness or good management or justice. 2. Again, a careful consideration of the exhibits in the case shows the prospective effect of the proposed reduction of rates upon several carriers. If this change of rates produces a reduction for one carrier, it is fair to conclude that it must produce a reduction for another. And so, if it produce a reduction for one carrier in a single year, it must produce a reduction for that carrier every year. Such, however, is not found to be the case. For example, the Fremont Company was shown, had this reduction of rates been applied in 1891, to have gained, while seven other roads would have lost; and, in 1892, the Fremont Company would have lost with five other companies, and the Union Pacific (which had been a loser the year before) would