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Georgia's Fight Against Discriminatory Freight Rates by Carole E. Scott

The belief that the South was an oppressed colony of the North was widespread for many decades after the War Between the States. Georgia's governor in the mid-1940s, Ellis G. Arnall, for example, said that while growing up in Newnan, Georgia in the early 20th century, he "realized that the South was merely a colonial appendage of the imperial domain called the North; that the South was the economic doormat of the United States as Ireland was of the United Kingdom. Eastern and Northern writers," he observed, "had field days in steady criticism of the South, its poverty and problems."

In 1945, the 13 southern states had 28 percent of the nation's population and more than 40 percent of its natural resources. Yet they produced only 10 percent of the nation's manufactured goods. The South also had only 10 percent of all the nation's financial and money resources. (Most of the South's wealth was destroyed during the War Between the States, and its banking system ceased to exist. Its banking system was handicapped in recovering by the fact that there were available for Southerners few national banking charters. (The national banking system was created in 1863.)

Without the capital necessary to develop manufacturing, the South was dependent upon the North for capital. Northern capitalists concentrated on the exploitation of the South's plentiful natural resources. Northern owners of southern plants confined them to the crude processing of raw materials, shipping them North for final fabrication. Since the essence of this primitive type of industry is the payment of low wages, the South was mired in poverty. Racial conflict was the result of the fact that there was only "half a loaf of bread" available to divide between them.

According to Arnall, "after the Civil War, instead of rehabilitation, the North inflicted upon our people a program of retribution, discrimination, and restrictions. I determined that if ever the opportunity came I would do something to bring about the readmission of the states of the South into our Union as equals with comparable economic and commercial opportunities...."

I found," he said, "that the only way the few textile mills in the South could stay in business competitively with their Northern counterparts was by paying low wages, requiring the workers to live in mill villages owned by the companies and requiring high rentals from the workers, requiring the workers to trade with the mill commissaries on credit terms which were much higher than offered by non-company stores, to use child labor and other devices which the mill owners did not want to employ but which were required for them to stay in business." [Arnall]

The people of the South, Arnall claimed, had reason to know that he who controls the means of production is in a position to be a tyrant, and who was in control were northerners. Although the degree of northern corporate overlordship may have varied in different places, most southerners had long been subjected to a rule which, though, of course, short of the total occupation that took place during Reconstruction. As a result, Southerners did not enjoy real freedom.

Arnall, a liberal for his day whose statue was recently placed on the lawn of the State Capitol, got the chance to do something about this situation when he became Georgia's attorney general and an even better chance later when he became the State's governor..

Arnall attributed the South's relative poverty in part to discriminatory (railroad) freight rates. (Up until after World War II, railroads were the nation's dominant carrier of freight; not only heavy, low-value freight, but of all freight than moved a substantial distance. Therefore, the level of their rates was very important.) Railroad freight rates were, he said, discriminatory to both the South and the nation's other "colonial" economy, the Mountain States.

The fact that it was cheaper for northerners to ship manufactured goods South than it was for southerners to ship manufactured goods North, while it was cheaper for Southerners to ship raw materials North than for northerners to ship raw materials South, almost irremediably handicapped the South by limiting its industrial production to unfinished, heavy goods. Low rates for shipping raw materials to northern manufacturers and for shipping northern finished goods South , of course, profited northern manufacturers, and southern manufacturers of finished goods were harmed. (Both northerners and southerners wanted to produce finished goods because profit margins are higher on finished goods. Arnall claimed that the higher freight rates southern manufacturers had to pay precluded even the manufacture of fine cotton textiles in the South. Georgia, for example, despite its man cotton mills, had not a single fine-goods bleachery.

Rates on raw materials moving from the South were set so low that they amounted to a subsidy to manufacturers in the North, especially in parts of New England where obsolete plants might have to be refitted or junked if they did not enjoy an effective subsidy on their raw materials and a domestic tariff (the higher freight rates southern manufacturers paid to ship their goods to the North) that protected their goods from the competition from newer and more efficient establishments in the South.

Encouraged by President Franklin D. Roosevelt, who, because he treated his paralysis by spending part of the year in Warm Springs, Georgia, had developed an interest in what he called the nation's number one economic problem (the South), in 1937 nine southern governors belonging to the Southern Governors Conference filed a futile complaint with the Interstate Commerce Commission (ICC) about freight rate discrimination against the South. (Concern over discriminatory freight rates was what led to the creation of this group.) In their complaint, these governors asked the ICC to reduce railroad rates on freight moving from the Southern Territory to the Official Territory. (The Official Territory encompassed the area north of the Ohio River and east of the Mississippi River, a portion of West Virginia, and most of Virginia. The Southern Territory was south of the Official Territory and east of the Mississippi River.)

During the same month the governors filed their complaint, a TVA economist subsequently appointed to the ICC by President Roosevelt, issued a report which strengthened their case because it claimed to provide incontrovertible proof that freight rates on manufactured goods shipped from either the West or the South into the Official Territory were higher than those within the Official Territory. (Roosevelt increased the number of southerners on the ICC above what it had been before.)

Shipments to the Official Territory were much more important to the South and West than shipments to the South and West were to the North. Northerners' claim that, on a ton-by-ton basis, Southerners were paying less to ship to the North than Northerners were paying to ship to the South fell on deaf southern ears, because this was not the issue. The issue was that existing and potential southern manufacturers of high-value goods could not compete in northern markets with northern firms located no closer to them because southerners had to pay higher inter-territorial transportation charges than northerners had to pay within their territory. (Rates within the Southern Territory were also higher than those within the Official Territory.)

In their brief, the Southern governors' disagreed with a variety of northern justifications for the higher rates freight rates charged southerners. Northern industrialists claimed higher southern freight rates were fair because the South was more generously endowed by nature than the North and had lower wage rates; therefore, the South should, like the race horse with the lighter jockey, be handicapped. They also claimed that southern industry was more prosperous than northern industry!

Connecticut's Governor claimed that one of the functions of the ICC was to prevent substantial migration of industry from one region to another. The Governor of Vermont feared that lower freight rates out of the South would enable Georgia's marble industry to destroy his state's. Northerners also argued that higher rates were justified by southern railroad's higher operating costs, however, in 1939 the ICC ruled that higher southern rates were not justified by higher costs. (For 20 years the ICC had been arriving at the opposite conclusion, that is, that the operating costs of Southern railroads were higher.) In 1965, the ICC reversed its position, declaring that northern railroads had the higher costs.

In 1939, the ICC concluded that northern railroads as a group effectively controlled the rates both within the North and northbound inter-territorial rates. Northern carriers were much larger than southern carriers, and the majority of southern carriers' stock was in northern hands. The National Resources Committee estimated that the northern investment banking firms of Morgan and Kuhn Loeb had financial interests in 98 percent of all American railroad assets.

Because the South had more natural resources and lower average labor costs, having lower transportation costs than the South was probably of more importance to the North than freight rate equality was for the South. Northerners claimed that the fact that manufacturers were moving South proved that higher freight rates did not harm the South. Southerners countered this by pointing out that the firms that were moving South were firms that the South's resources and cheap labor were very important to; thus, they claimed, the importance of these costs outweighed the higher transportation costs southern manufacturers were subject to. (Between 1929 and 1954 the New England and Middle Atlantic states share of the nation's manufacturing employment declined significantly, continuing a trend evident in the first quarter of the century. The comparative gains of the South Atlantic region were predominantly in textiles, a cotton-using, labor-intensive industry that the South, therefore, had special appeal to.)

In their 1984 article in Growth and Change, Gerald S. Goldstein and Robert H. Pittman disagreed with the usual contention that transportation costs are not very important, and that in regional development transportation networks have mainly simply accommodated growth and trade, rather than directly influencing their composition. They concluded that a transportation system can influence the commodity composition of trade.

In 1944, in tandem with a suit by the Department of Justice, Governor Arnall, a New Deal loyalist, decided to bypass the ICC by appealing to the Supreme Court. The State of Georgia filed suit against the principal eastern (northern) and southern railroads under the Sherman Antitrust Act, requesting that the Court strike down a purported, man-made set of discriminatory freight rates favoring the manufacturers of one part of the nation at the expense of the others by making it less costly to ship manufactured goods into a region than out of it and vice versa in the case of raw materials. (That is, it cost the North relatively little to import southern raw materials and to export to the South its manufactured goods, while for the South the opposite was true.)

In 1934, during the Great Depression, a new, nation-wide, private rate-making organization whose objective was to prevent freight rates from declining was created. Arnall's suit attacked, not the rates set by thie organization, but the method of setting them. The Justice Department's brief in its parallel suit noted that the steering committee that drew up this group's covenant consisted entirely of men affiliated with the investment banks Morgan and Kuhn Loeb.

Arnall's brief alleged that a combination of investment bankers and owners of railroad securities had amalgamated all railroad rate-making bodies into a new nation-wide, private organization for the purpose of preventing downward reduction in freight rates. Unfortunately, he was not backed either by other southern governors or Mountain State governors, and southern businesses, many of which were northern controlled, provided him with only weak support. Then, in 1948, northern Congressman got a bill through Congress that survived a veto by President Harry Truman that exempted the railroads from the Sherman Act.

However, not long after the Supreme Court agreed to accept Arnall's case, the ICC announced that it had decided that the higher rates in the South and West and higher rates between them and the Official Territory constituted undue and unreasonable prejudice and disadvantage; therefore, they violated the Interstate Commerce Act, and, in 1947, the Supreme Court upheld this decision. However, freight rate discrimination did not end until 1952. (Georgia's Public Service Commissioner, Walter R. McDonald, estimated that the ending of this discrimination would save save southern shippers $28 million a year.)

Historian Gavin Wright finds it impossible to believe, because he thinks it would have to involve too many people, that there was a conspiracy to keep the South down. Yet, is it not equally unlikely that the white people of the South could form a conspiracy to keep blacks down? Yet, most assuredly, blacks were kept down. Clearly, therefore, it is not necessary for a conspiracy to exist. All that is necessary is common interest(s).


Sources

Arnall, Ellis G., "The South's Readmission to the Union," Franklin Forum Lecture, Atlanta Historical Society (February 2, 1982).

Carson, Robert B., Main Line to Oblivion (1971).

Flint, Sam Hall, "The Great Freight Rate Fight," Atlanta Historical Journal (1984).

Fuchs, Victor R., Changes in the Location of Manufacturing in the United States Since 1929 (1962).

Goldstein, Gerald S. and Pittman, Robert H., "Transportation and the Commodity Composition of Interstate Trade," Growth and Change (July 1984).

Hackney, Sheldon, "Origins of the New South in Retrospect," Journal of Southern History (1972).

Heath, Milton S., "The Uniform Class Rate Decision and Its Implications for Southern Economic Development," The Southern Economic Journal (January 1946).

Jourbert, William H., Southern Freight Rates in Transition (1949).

Mezerik, A. G., The Revolt of the South and West (1946).

Shott, John G., The Railroad Monopoly, An Instrument of Banker Control of the American Economy (1950).

Wiprud, Arne C., Justice in Transportation, An Expose of Monopoly Control (1945).

Wright, Gavin, "The Economic Revolution in the American South," Economic Perspectives (Summer 1987).


Copyrighted, 1997, by Carole E. Scott - Do not publish without permission. (This article is based on one by Carole E. Scott that appeared in Essays in Economic and Business History published in 1990 by the Economic and Business Historical Society.)