A History of US Economic Law Part 7: Regulating the Railroads

Beyond Saving's picture

 In the mid to late 1800's railroads were the cornerstone of the US economic boom since they quickly became the dominant form of transportation. Naturally, a good portion of the wealthiest Americans were men who owned railroads, since no matter what sector of the economy was growing products, people and raw materials had to be shipped from one side of the country to the other. By the end of the century, small railroads were failing or being bought up by the larger railroads and the industry was in the process of consolidating. This left many parts of rural America with a single railroad providing service either because they didn't have enough to ship to make two railroads profitable or all the railroads in the area were owned by a single person/corporation. 

It was common practice for large shippers like Rockefeller's Standard Oil to get discounts well below the normal freight rates say a small farmer would get. I'm sure you can see why a railroad would be willing to accept a much smaller profit per car from a company that filled a predictable and large number of trains on a daily basis and the farmer who purchased a few cars irregularly. Most railroads also charged more for short distance hauls than for long distance hauls, which many small/regional businesses saw as discriminatory towards them. While Rockefeller had more money to negotiate with, the farmers had more votes and was a pretty powerful constituency, demand for railroad regulation became prevalent by the end of the 1800's. 

At first regulations were passed at the state level, which posed a number of problems both for the states and the railroads. On one hand, state laws were often easy for a large railroad to ignore and extremely difficult to enforce when cargoes would be shipped through several different states, all with different laws. Cases were routinely brought to court, appealed multiple times often all the way to the Supreme Court.

The most noteworthy case was Wabash, St. Louis & Pacific Railway Company v. Illinois, 118 U.S. 557 (1886) where the WS&P railway was prosecuted under an Illinois law for charging a greater fee to ship from Gilman, IL to Peoria, IL than it charged to send the same cargo to New York City. Justice Miller summarized for the majority opinion,

Justice Miller wrote:

Of the justice or propriety of the principle which lies at the foundation of the Illinois statute it is not the province of this Court to speak. As restricted to a transportation which begins and ends within the limits of the state, it may be very just and equitable, and it certainly is the province of the state legislature to determine that question; but when it is attempted to apply to transportation through an entire series of states a principle of this kind, and each one of the states shall attempt to establish its own rates of transportation, its own methods to prevent discrimination in rates, or to permit it, the deleterious influence upon the freedom of commerce among the states, and upon the transit of goods through those states, cannot be overestimated. That this species of regulation is one which must be, if established at all, of a general and national character, and cannot be safely and wisely remitted to local rules and local regulations, we think is clear from what has already been said. And if it be a regulation of commerce, as we think we have demonstrated it is and as the Illinois court concedes it to be, it must be of that national character, and the regulation can only appropriately exist by general rules and principles, which demand that it should be done by the Congress of the United States under the commerce clause of the Constitution.

 

In 1887, Congress passed the Interstate Commerce Act which attempted to create a federal code of regulations for railroads to follow. It declared "unjust discrimination" unlawful, but did not clarify what was unjust. Instead leaving such decisions up to the newly created Interstate Commerce Commission (ICC). For the most part, the law was ignored by the major railroads. They sent the required paperwork to the ICC, litigated complaints with armies of lawyers and continued to offer either rebates or free passes to their largest customers. For a decade and a half, railroad regulation took a backseat to the issues of metalism, income taxation and other issues I have discussed previously. 

In 1903 it was brought back to life in the form of the Elkins Act which sought to stop the practice of rebates

Elkins Act wrote:
... and it shall be unlawful for any person, persons, or corporation to offer, grant, or give or to solicit, accept, or receive any rebate, concession, or discrimination in respect of the transportation of any property in interstate or foreign commerce by any common carrier subject to said Act to regulate commerce and the Acts amendatory thereto whereby any such property shall by any device whatever be transported at a less rate than that named in the tariffs published and filed by such carrier, as is required by said Act...

The penalty was a fine of $5,000 to $20,000 and could be levied on individual managers, the railroad or the customer. The effectiveness of the act is unclear. It certainly reduced the amount of outright rebates that were offered to customers but railroads continued to be accused of giving free passes, releasing late night announcements of "special fares" that favored customers knew of in advance and quickly booked, changing the classification of certain cargoes etc. In other words, the price discrimination remained, the railroads simply published enough paperwork to bury the bureaucrats and cover their ass in court. 

In a speech in Raleigh, NC Oct. 19, 1905 President Theodore Roosevelt spoke of the need to regulate the railroads more and how pricing discrimination continued.

President Roosevelt wrote:

 

...I do not believe in government ownership of anything which can with propriety be left in private hands and in particular I should most strenuously object to government ownership of railroads But I believe with equal firmness that it is out of the question for the Government not to exercise a supervisory and regulatory right over the railroads for it is vital to the well being of the public that they should be managed in a spirit of fairness and justice toward all the public.

Actual experience has shown that it is not possible to leave the railroads uncontrolled Such a system or rather such a lack of system is fertile in abuses of every kind and puts a premium upon unscrupulous and ruthless cunning in railroad management for there are some big shippers and some railroad managers who are always willing to take unfair advantage of their weaker competitors and they thereby force other big shippers and big railroad men who would like to do decently into similar acts of wrong and injustice under penalty of being left behind in the race for success

Government supervision is needed quite as much in the interest of the big shipper and of the railroad man who want to do right as in the interest of the small shipper and the consumer Experience has shown that the present laws are defective and need amendment The effort to prohibit all restraint of competition whether reasonable or unreasonable is unwise What we need is to have some administrative body with ample power to forbid combination that is hurtful to the public and to prevent favoritism to one individual at the expense of another In other words we want an administrative body with the power to secure fair and just treatment as among all shippers who use the railroads and all shippers have a right to use them We must not leave the enforcement of such a law merely to the Department of Justice it is out of the question for the law department of the Government to do what should be purely administrative work The Department of Justice is to stand behind and co operate with the administrative body but the administrative body itself must be given the power to do the work and then held to a strict accountability for the exercise of that power

The delays of the law are proverbial but what we need in this matter is reasonable quickness of action The abuses of which we have a genuine right to complain take many shapes Rebates are not now often given openly But they can be given just as effectively in covert form and private cars terminal tracks and the like must be brought under the control of the commission or administrative body which is to exercise supervision by the Government But in my judgment the most important thing to do is to give to this administrative body power to make its findings effective and this can be done only by giving it power when complaint is made of a given rate as being unjust or unreasonable if it finds the complaint proper then itself to fix a maximum rate which it regards as just and reasonable this rate to go into effect practically at once that is within a reasonable time and to stay in effect unless reversed by the courts I earnestly hope that we shall see a law giving this power passed by Congress

Moreover I hope that by law power will be conferred upon representatives of the Government capable of performing the duty of public accountants carefully to examine into the books of railroads when so ordered by the Interstate Commerce Commission which should itself have power to prescribe what books and what books only should be kept by railroads If there is in the minds of the Commission any suspicion that a certain railroad is in any shape or way giving rebates or behaving improperly I wish the Commission to have power as a matter of right not as a matter of favor to make a full and exhaustive investigation of the receipts and expenditures of the railroad so that any violation or evasion of the law may be detected.

The rest of this speech as well as many others on the topic is available here. (p. 679-681 quoted)

 

Whatever you think about Roosevelt, he was a very effective leader and when he set out to get legislation passed he got what he wanted more often than not. The most stringent railroad regulation act yet, the Hepburn Act was passed in June of 1906 with only three dissenting votes. It had most of the goals Roosevelt had outlined, increasing the power of the ICC exponentially. The ICC now had the power to set "just and reasonable" maximum rates which it defined, these rates were legally binding meaning the railroads had to obey or appeal to federal court. It extended the ICC's power to include private railcars, terminals, sleeper cars, express companies, ferries and even oil and gas pipelines. It increased the size of the ICC staff, outlawed free passes and included more anti-rebate provisions. It also gave the ICC the power to impose uniform accounting practices and require annual financial filings in order to make it easier to find violations.

The Hepburn Act had a significant effect on the railroads. Railroad stocks, which for over half a century were viewed as stable blue chip stocks weakened substantially. Railroads continued to experience a growing demand but their profit margins were lower. The economy slipped into recession in the end of 1906 and remained in recession throughout 1907 and into 1908. How much of a role the Hepburn act played in the recession is debatable. Maybe it hurt, maybe it was just the timing of natural economic swings- solid arguments can and have been made both ways.

However, IMO it is very clear that the act had a negative effect on the stock prices of railroads. Combined with a declining economy and the fact that railroad stocks were the most common stocks used as collateral for loans it lead to a bearish stock market. Things really came to a head in October of 1907 in what became known as the "Panic of 1907", triggered by a failed attempt to corner the copper market the inherent weakness of railroad stocks being used as collateral caused runs on several large banks. J.P. Morgan once again stepped up to the plate and organized a significant injection of millions of dollars in loans to provide liquidity to the market. The wikipedia article on the subject does an excellent job describing the timeline and the events that took place, I can't do better so I will refer you there. http://en.wikipedia.org/wiki/Panic_of_1907 I might discuss the panic in more detail when I get to talking about the creation of the Federal Reserve since this incident was one of the main driving forces towards its creation. 

The ICC would be further strengthened under the Taft administration in 1910 by the Manns-Elkin Act which expanded its powers to include the telecommunications industry. Giving the ICC the power to suspend proposed fare increases before they went into effect and making it illegal to charge more for short passenger trips than for long passenger trip unless specifically approved by the ICC. 

After these regulations railroads were substantially weakened. While they played a central role in WWI moving supplies for the government and continued to benefit from rising passenger traffic for a decade, their profits deteriorated. Of course, the blame cannot be totally laid on regulation. The railroad barons who had built profitable railroads retired and died, the railroads were more often than not ran by boards rather than the vision of a sole owner- which imo after the death of a strong owner taking an active interest in a large company the profits of that company almost always reduce as more often than not the people taking over are not as skilled. Furthermore, the automobile and airplane were both invented creating a brand new competitor for shipping. Obviously, air shipping and trucking have certain benefits over rail, however, I argue that the regulation on railroads that did not exist for trucking or airplanes at the time was a major factor that led to air and trucking having significant market dominance over railroads. While both eventually had to deal with similar regulations they didn't have to until their dominance was already entrenched and most railroads were either bankrupt or on life support. I believe that rail could have competed much better had the playing field been level.

It wasn't until the end of the 20th century when that right wing extremist, deregulating, corporate lap dog, libertarian, Ayn Rand loving, anarchist of a president pushed through a series of laws that massively deregulated railroads, airlines and trucking. In a series of three laws, the Airline Deregulation Act, the Motor Carrier Act and the Staggers Rail Act, all three transportation industries were deregulated and seventy years of law was repealed. The result has been that railroads have finally started gaining back market share against trucking and air and have become more profitable.

http://www.aar.org/~/media/aar/Background-Papers/The-Impact-of-Staggers.ashx

http://www.fra.dot.gov/downloads/policy/staggers_rail_act_impact.pdf 

http://www.gao.gov/products/GAO-07-94

Oh, and did I mention that these laws were passed in 1978, 1980 and 1980? Yeah, the right wing extremist, deregulating, corporate lap dog, libertarian, Ayn Rand loving, anarchist of a president who pushed through these reforms was named Jimmy Carter. Widely regarded by the right as the "worst president ever" lol. Take that you party line toting hacks, read a fucking history book and give Carter a little of the glory you bestow upon Saint Reagan. 

 

I just usually go with my own taste. If I like something, and it happens to be against the law, well, then I might have a problem.- Hunter S. Thompson