Differential Freight Rates

by Avery White

While I was a student at Georgia Tech, I had a summer job at the old Army Depot near Forest Park, Georgia, now called Fort Gilliam. It was recommended that I go hear a speaker, Harold Dye, who was then Chairman of the Department of Industry and Trade. I figured it would be a dry, boring, typical “engineering” talk.

Part way into his speech, Mr. Dye made the statement that “the main thing that held Georgia back were forces set in motion during Reconstruction which crippled economic development in the South.” Then he proceeded to tell the following story which I remember almost verbatim because it had such an impact on my thinking.

He said he first knew something was wrong with the way the South was treated from an experience he had in school when he was ten years old. He had a teacher who every year did the same thing with his class – he took them all down to the hardware store of the little town they lived in and helped them buy a one-pound box of nails. From the hardware store, they walked straight to the train depot. There they gave the box to the freight clerk to be shipped to a man in New York who was a friend of the teacher. The freight clerk showed the class that the box cost $1.00 to ship to New York. A few days later, the teacher said, “Our nails are back,” and he had them go pick up the box at the depot which the man in New York had shipped back to them. He told them to look at the cost of the return shipment. It was $.75. a twenty-five percent difference.

The teacher then asked his class if they could figure out why it was cheaper to send the nails back, and why it was so much cheaper – because 25% is a whole lot of difference. Harold held up his hand because he thought he knew. “People always say ‘down South’ and ‘up North.’ If it’s up hill to ship something up North then the train would use a lot more coal on the trip and it would have to charge more for the shipment.”

The teacher replied, “Harold, that’s not right, but it makes more sense than what I’m about to tell you.”

Harold Dye then explained to us what his teacher had explained to him many years before. And it is something I’d heard my grandparents and parents complain about but had never understood. It is something you won’t find written up in any typical American history book, though it is the core to understanding the deep, lingering bitterness the South has had toward the North. And it re-emphasizes just how much the War Between the States was a war for money and power. The North did indeed win, and it won exactly what it was after: total economic dominance of the South and its rich natural resources.

Harold’s class paid more to ship those nails north because the North was imposing a tax of $.25 on every dollar on all manufactured goods (like nails) shipped from South to North. And effectively this kept the South an economic “colony” of the North. In fact, colony is a perfect term for it because this was exactly what England did to the American colonies before the Revolutionary War. England had actually gone one step further and made it illegal in America to manufacture any product which might compete with English produced goods. They wanted everyone to buy English made products to help out the English merchants and therefore help England get a little richer. A tax accomplishes the very same thing by making the product so expensive that no one buys it. If you lived in Kentucky, would you buy northern-produced nails for $.75/pound, or would you buy southern-made nails for $1.00?

When an area is not allowed to become a manufacturing center, it will never become prosperous. The real money is always made in selling manufactured goods, not raw materials (such as cotton, wheat, or pulpwood). The economic term for this concept is called a negative “balance of trade.” A country must have a positive, or at least equal, balance of trade with other countries in order to prosper economically. Even today the nightly news often reports about the dangerous effects of a negative balance of trade between the U.S. and countries such as China. China currently imposes the same sort of tax (or tariff[1]) on U.S. goods that the North did on the South after the war. Each country knows that it cannot prosper under a negative balance of trade with other countries. The American colonies knew this and thought it was worth going to war over. They thought it was worth breaking away from their union with England. When the North attempted to do the same thing to the South before the Civil War, the South thought it was worth leaving a union over, too.

Then after the War, with a devastated South on its knees, the North insured that it would have a positive balance of trade with the South by imposing an illegal tariff from 1865 (the year the war ended) until–and you won’t believe this–1952. Eighty-seven years! This, above all else, kept the South an economically disadvantaged area in relation to the North. In 1944 Georgia’s Governor Ellis Arnall filed a suit with the Supreme Court and began a battle to overturn what he claimed was the gross unfairness of the freight rates. In 1945 the Supreme Court ruled that certain class rates were detrimental and unfair to the Southern and the Western states.This was considered a huge step in the right direction, but the matter was not resolved until 1952 when the ICC (the federal government’s division that oversees interstate commerce) took the matter in hand, struck down the unfair freight rates, and implemented a new system of uniform rates for all the states. The “differential freight rates,” as they were known, were overturned at last, and the economic stranglehold the North had on the South was ended.

The economy literally exploded in the South when its manufacturing capabilities were allowed to grow without the burden of a 25% tax on each item. If you looked at a chart of Georgia’s economic growth you would see the line shifting dramatically upward after 1952. Until that time no bank in the South had ever made a loan of a million dollars. The first million dollar loan was made shortly after the overturning of this tariff. And, because economic development follows economic development, once the South got growing, there was no stopping it. After the 1952 ruling we quickly saw the appearance of professional sports teams in the South, an international airport,[2] and the hosting of national conventions in Southern cities. Atlanta is well known today as one of the leading banking and investment centers in the country.

When people from other parts of the country come to the south, they sometimes still run into lingering feelings from Southerners about Yankees or the Civil War. Understandably the outsiders usually want to ask, “Why can’t you just move on and forget about it? It happened so long ago.” But what most people don’t understand is that the effects of the war lasted long into the 20th century and most Southern businesses were very much aware of the inequities laid upon Southern industry as a result of the War. School children are taught that in 1954 black southerners were freed from segregation by the Supreme Court ruling of Brown vs. the Board of Education, a landmark decision and one that changed and improved thousands of lives. But the ruling over freight rates is usually left out entirely, and if mentioned at all, the ramifications are not well explained. Yet this ruling brought about dramatic improvement in living standards for all southerners, both black and white, and knowing about this pivotal change for the South helps everyone understand the lingering effects and sentiments that stem from the Civil War. The Supreme Court’s ruling on freight rates is one for the history books too!

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