Dr. Carson is a frequent contributor to THE FREEMAN and other journals and the author of several books, his latest being The War on the Poor (Arlington House, 1969). He is Chairman of the Social Science Department at Okaloosa-Walton College in Florida.
There have been three stages of government regulation of the railroads, though a fourth one appears to be taking shape in recent years. The first stage was that of state efforts at regulation and control, a stage which encompassed such regulation as there was until 1887. In the second stage, 1887-1920, the Federal government began its regulatory intervention and to occupy much of the field. The third stage is bounded by the years 1920-1958, and the Federal government has been the dominant intervener in this period. Since 1958, governments have begun a hesitant shift back toward the much earlier practice of offering subsidies to the railroads.
There have been two different levels of restrictive intervention which cut across the chronological stages. The most obvious level is that of direct governmental intervention by which governments acting by legislation or through commissions have regulated, controlled, restricted, obstructed, prescribed, taken over, aided, or inhibited the railroads in the conduct of their business. The other level is the one on which governments have interfered indirectly by the empowering of labor unions to carry on their activities of extracting agreements from the roads as to working conditions and wages, have aided and subsidized competitive modes of transportation, and have in various ways established surrounding conditions within which railroads operate.
There is no need here to dwell on the first stage of regulation—that by the states before 1887. Suffice it to say that many of the devices and objects of regulation were introduced and tried by the states, such as the establishment of regulatory commissions, prescriptive legislation, rate control, and requirements as to service. The extent of such regulation varied, of course, from state to state and from time to time. Some of the Midwestern states made the most extensive and restrictive efforts. State regulation did not end, either, with the beginning of Federal activity in 1887; certain intrastate rail operations have continued to fall under the states; but, increasingly over the years, the Federal government has pre-empted more and more of the field.
Federal Intervention and the Crisis of World War I
In any case, the damage done to the railroads by the states was spotty, sporadic, and tended to be localized. Not so, that of the Federal government. The Federal government’s intervention intensified from its beginning in 1887 until World War I; the effects reached to virtually all the railroads in the country, and the tendency was to tighten control ever more effectively.
The bitter fruits of this intervention came rather swiftly, and they were such as should have been expected from it. Indeed, attempts to fix rates were less than a decade old when intervention led to a full-fledged crisis. World War I precipitated a crisis for which the intervention had prepared the way. Even before the United States declared war, there was widespread awareness that the railroads were in no position to perform all the services that were expected of them. Exports, mainly to the Allies, in 1915 and 1916 greatly increased the amount of freight traffic. By the time the United States entered the war, government and railroad officials were discussing means and organizing for improvement of rail services. This did not work, and as the months passed in 1917, the situation worsened.
Poor performances in coal production and distribution led the list of transportation difficulties, although alarm over adequate shipping for food exports and the grain harvest ran a close second. As autumn passed dangerous lows in coal supplies were reported throughout the nation…
Between August 12 and November 24 the drop in coal production due to car shortages totaled 20,166,412 tons.
… By December the possibility of completely empty coal bins faced New England factories and homes. Nor was the coal famine the only major national problem; the annual grain harvest was moving to market slowly because of car shortages and blocked rail facilities…. Terminal congestion was frightful. Around New York City unloaded freight was actually piled in the space between tracks.¹
The war exposed the condition of the railroads by placing unusual demands on them, but the war was not the source of the incapabilities of the railroads. The truth was that the United States did not have an integrated rail system: the railroads did not cooperate well with one another; traffic did not flow by the best routes; many railroads were in a state of disrepair; and the routing of boxcars was largely uncoordinated. Despite the fact that historians have long written of transcontinental railroads, there is not to the present day a single transcontinental railroad.
The source of the crisis was the government measures of the preceding three decades. On the one hand, the government attempted to force the railroads to compete; on the other, it refused to allow them to compete. The government proscribed certain kinds of cooperation, attacked efforts at coordination, refused to allow rates to rise in crucial circumstances, and produced conditions in which railroads were considered a relatively poor investment. The thrust of government into railroad regulation had produced an ineffective and disintegrated rail system. To see how this was done, let us turn now to an examination of the regulation.
The Interstate Commerce Act
The first Federal act of regulation was the Interstate Commerce Act, and it was also the basic act from which much of the rest has flowed. This complicated statute, passed in 1887, had many provisions with qualifiers attached to them and the whole was cast in the extensive verbiage and redundancies by which a law is made to close as many loopholes as may be desired. Stripped to their essence, these were its provisions. It was to apply to all interstate freight and passenger traffic by rail. All rates for such traffic should be just and reasonable. Any and all rebates were prohibited. The railroads should not give any unreasonable preference or advantage to any shipper over any other, and should make their services available to all corners on equal terms. A railroad should charge no more for a short haul than a long haul on the same route under substantially similar circumstances, with the proviso that the Interstate Commerce Commission could relieve a railroad from its obligation to conform if circumstances warranted. The pooling (dividing up) of either freight or receipts among competing railroads was prohibited. Rates and fares were to be posted prominently, and not to be changed until public notice had been given. And lastly, it provided for the establishment of an Interstate Commerce Commission to enforce the provisions of the Act.
There were many minor amendments to the Act during the early years, amendments which had the general aim of spelling out and increasing the powers of the Commission. For example: "In 1888 the act was amended to cover classification…. In 1889 it was amended to provide for the proper publication of freight and passenger tariffs…. In 1889 and 1891 the Interstate Commerce Act has been amended to strengthen the powers of the Commission to compel attendance of witnesses and the production of documents at the hearing of complaints. This provision was further amended in 1895 to protect witnesses from the penal consequences of their own incriminating testimony and to punish recalcitrant witnesses by maximum penalties of $5,000 fine and one year’s imprisonment."2
Other Restrictive Legislation
The other major acts affecting the railroads before World War I, however, were the Sherman Antitrust Act of 1890, the Elkins Act of 1903, the Hepburn Act of 1906, the Mann-Elkins Act of 1910, the Panama Canal Act of 1912, and the Physical Valuation Act of 1913.
Railroad men generally assumed at the first that the railroads were exempt from the Sherman Act since they already fell under restrictive legislation, but the Supreme Court was soon to rule otherwise. The ostensible purpose of this antitrust legislation was to compel competition. Yet a close examination of it shows that meaningful competition is actually outlawed if the statute were to be literally applied. Section 2 says, in part, that "every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a misdemeanor…." Certainly a major reason for anyone competing in commercial activities is to gain a larger share of the market. By doing so, he would, in effect, be attempting to monopolize all the trade or commerce in his particular business, though he might not be conscious of so extensive an ambition. Though the statute may not have been applied in just that way, it has been applied to deter growth and expansion and reduce effective competition.
The Elkins Act made it a misdemeanor for railroads to deviate from the published rates, defined unfair discrimination more fully, and provided punishments for officials who might be involved in giving or receiving rebates.
The Hepburn Act was much more extensive; it was comparable to the Interstate Commerce Act as major legislation, and gave the Commission far more power than it formerly had. This Act empowered the Commission to fix maximum rail rates according to the prescription that they should be just and reasonable. The Commission could prescribe uniform systems of accounting for the affected carriers. Moreover, railroads were prohibited from transporting any goods produced by themselves or of companies in which they held an interest except such as would be useful to them in maintaining their roads and related operations.
The Mann-Elkins Act once again extended the jurisdiction and powers of the Interstate Commerce Commission. The provisions for charging no more for a short than a longer haul were greatly tightened. The new act "absolutely forbade lower charges to longer-distance points except after hearing and approval by the Interstate Commerce Commission."³ The Commission could suspend new rates proposed by the railroads until the court had rendered a decision. The act provided that if a railroad lowered its rates to compete with water traffic, it could not raise them later—after having driven water carriers out of business—until a hearing had been held that would show that some other condition had changed besides the removal of water competitors. A Federal Court of Commerce was set up to hear appeals from the decisions of the Commission, but it was abolished two years later.
The Panama Canal Act "provided that after July 1, 1914, it should be unlawful for any railroad to own, lease, operate, or control or have any interest whatsoever through stockholding or community of management, in any water carrier operating through the Panama Canal. Neither was any such relationship to continue elsewhere than through the Canal in cases where the railroad did or might compete with the water line for traffic."4 This was an attempt to make the railroads compete with steamships.
The Physical Valuation Act was supposed to aid the Commission in setting rates or determining if rates were just and reasonable. The underlying idea was that a rate should ideally be such that an efficient carrier would receive a "fair return" on his investment and that this could somehow be calculated if the value of the property could be ascertained. To that end, the Commission was to make exhaustive computations as to the costs to the railroads of all their properties. The Commission was to "report for each piece of property the original cost to date, the cost of reproduction new, the cost of reproduction less depreciation, and `other values and elements of value, if any.’ " The railroads were "required to aid the Commission by furnishing maps, profiles, contracts, and any other pertinent documents and to cooperate in any way desired in the undertaking."5 This act is interesting not for any results produced, though the Commission labored many years to try to arrive at the required conclusions, but for what it indicated about the extent to which legislators were willing to go to regulate the railroads.
It should be clear from the above summary of the legislation prior to World War I that the Federal government was gaining more and more control over the railroads and that, conversely, the railroads were more and more circumscribed in what they could do. In addition, labor unions were being given more and more power, but that story will be told in another connection. Something does need to be said about the tendency of court rulings.
The Commission Gains Power
The chances are good that had the Supreme Court been confronted in the 1890′s with an Interstate Commerce Commission clearly clothed with the quasilegislative-judicial-executive powers which it was later to exercise, it would have declared such a body unconstitutional. At any rate, it is clear from the decisions of the 1890′s that the Court considered the Commission to be only an advisory body. Certainly, it did not recognize the Commission as a court; no more could it legislate or execute. But then, neither was such a body in violation of the Constitution. However, the Commission struggled vigorously over the years to have its powers increased, and they were. In the early years, the Court circumscribed the powers of the Commission by ruling on the basis of legislative intent. The Court thus allowed the issue of the constitutionality of such a body to disappear; meanwhile, the legislature made it ever clearer that they intended the Commission to have more and more power. Thus it was that the Federal courts were by World War I largely adjuncts of the Commission in enforcing their rulings.
Undoubtedly, many of those who sought to regulate the railroads in many ways had the best of intentions. They sought to establish just and reasonable rates, extend the benefits of competition to those not receiving it, provide similar services for all shippers, allow the railroads a "fair return" on their investment, and see to it that the general public were beneficiaries of railway services. Good intentions, however, have no discernible effect on results; these are a product of the actions taken. The acts of the regulators were often contradictory, self-defeating, ignored the nature of rail competition, and harmful both to the railroads and the general public. The results were such as should have been expected from such acts.
Even the intent of the regulators as to competition is not clear.
On the one hand, they apparently wanted to preserve it; on the other, they wanted to prevent it. One writer describes the aim of part of the legislation in this way: "It attempted to continue competition at points not naturally competitive by the prohibition of traffic agreement, and at the same time to protect other points against such competition by making it unlawful for the railroad companies to discriminate in favor of artificially competitive points."6 By outlawing rebates, the government attempted to stop that sort of rate competition.
Certainly, one of the ways in which businesses compete with one another is in price. If prices cannot vary from the list price, that sort of competition is greatly reduced. Another way railroads might compete with one another was in services. But if services had to be extended to all comers on an equal basis, as the law required, a railroad would be greatly hampered in offering better services to a particular shipper than another line would offer him. When a railroad could not work out a more favorable agreement with a connecting line than others could, it was that much more difficult to offer a better price.
The long and short haul clause sometimes made it prohibitive for a weak road to haul commodities long distances at rates competitive with alternative routes. To do so it would have to lower its rates for shorter hauls to a point that would make them unremunerative. A port city, for example, served by financially weak railroads could not expect to compete with ports served by stronger roads. This situation was aggravated by the Panama Canal Act which tended to discourage favorable rail and steamship rates for a particular port. In short, all sorts of competition were hampered by regulation.
As rail regulation became ever more restrictive, it tended to freeze the rail system in its existing pattern. There is every reason to suppose that in the absence of hampering and prohibitive legislation these United States would have had by or before World War I a few great railroad systems spanning the continent in its length and breadth and providing not one but several unified systems of transport. These, in turn, would have been linked with steamship lines to the rest of the world. These several systems would have been in position to compete effectively with one another as, for example, great oil companies do today. Certainly the tendency was toward the linking together and forming of such systems prior to the restrictive legislation.
Financiers in Control
The question is, what froze them into the early pattern? One might suppose that it was antitrust action which prevented or prohibited such unification. Yet antitrust suits did not prevent such expansion and unification before World War I, to my knowledge. Instead, it was the railroad financiers who turned their attention from expanding into new territory and linking together truly transcontinental systems to combining railroads serving the same general area, an effort which has continued to the present day. The most famous early example of this was the formation of the Northern Securities Company. This was a holding company for the controlling stock of the Northern Pacific and Great Northern, two roads serving the same general area. The Supreme Court ordered the holding company dissolved in 1904.
Financiers could and did, however, manage to gain control of railroads serving the same general area by stock purchases. For example, "The traffic of the East and eastern Middle West was dominated by the New York Central and Pennsylvania, allied with the Morgan interests, which controlled the Chesapeake and Ohio, the Baltimore and Ohio, and the Norfolk and Western. Under Morgan’s direction, moreover, the New Haven bought control of the Boston and Maine, the trolley lines of New England, and even the Long Island steamship companies."7 The tendency of such controlling combinations—there were several over the country—was to divide the country into noncompetitive railroad empires, reduce competition within an area, and to delay or prevent integration. If the threat of antitrust action did not prevent such combinations, it is reasonable to suppose it would not have prevented combinations aimed at building integrated transcontinental systems.
Long and Short Haul Rules
We must look elsewhere than the antitrust legislation for an explanation of why financiers did not see any great prospect for profit in building great nationwide systems. It is not necessary to look far, because the long and short haul rules provide a sufficient reason, especially when combined with the rules inhibiting competition. An ideal railroad under the long and short haul clause would be one whose main line connected two or more major shipping centers at considerable distance from one another with only a few intermediate points spaced far apart. In fact, it might be ideal if there were no intermediate stations, for rates could then be set to take full advantage of the economies of operation involved in pulling long trains for very long distances. But a railroad connecting, say, Omaha or Kansas City with Los Angeles or San Francisco might approach the ideal under the long and short haul restriction.
Indeed, there were, and are, several roads well situated to profit from this peculiar regulation. They are such Western roads as the Santa Fe, Southern Pacific, Union Pacific, and Northern Pacific. But there is a counter incentive to linking these roads with those in the East which traverse thickly populated areas with numerous intermediate points. This would only serve to tie what had been profitable long haul rates to short haul rates in such a way as either to incur great losses in the short haul business or to price themselves out of much of the long haul traffic. In practice, any Eastern and Western system so linked would be at the mercy of those Western roads free of such ties.
Since the railroads could not effectively compete in so many ways, such opportunity for improving their situation as existed would usually be to combine roads covering the same general area so as to maintain some control over rates and get as much of the profitable business as possible within an area. This is what railroad financiers tended to do. The result, as far as the public was concerned, was a nonintegrated rail system, reduced competition, poorer service, and higher rates.
Other Inhibiting Factors
There were other infelicities produced by regulation. Even where they desired to do so, railroad men were hampered in coordinating services and charges with one another. Not only was pooling prohibited but any other sorts of agreements might make them subject to antitrust suits. It is difficult to imagine an agreement which the officials of two or more railroads might enter into that might not be construed as an attempt to monopolize the transport business of an area. Certainly, if they made any agreement it would likely be with the prospect of increasing business, and any such increase would "tend" toward monopoly.
If rate regulation worked as simply as it has sometimes been conceived, it would have the effect of coddling the inefficient. That is, if by raising rates the income of the railroad could be proportionately increased, and if the Commission wanted to keep every line in operation, the maximum rates would be those which would yield a profit to the most inefficient line. Such rate setting would have the interesting result of pushing all rates upward insofar as uniform rates prevailed. The Commission has not, of course, behaved in so simplistic a fashion. Even if it did, the demand for rail service is not inelastic. In consequence, rates can be increased without necessarily increasing revenues. The Commission tried to steer a course between raising rates so high that they would reduce traffic appreciably and keeping them so low that many railroads would be ruined. The results were a mixed bag also in the years before World War I: rates did generally rise; some rates were kept too low; many roads were caught in the squeeze of declining revenues.
Statistics indicate that railroad earnings declined after the Interstate Commerce Commission became involved in setting rates. The "aggregate amount paid in dividends fell off $100,000,000 from the high year of this period (1911), and the average rate on dividend-paying stock which was 8.07 per cent in 1908 was 6.75 per cent in 1916. Whatever may be one’s personal view as to whether this was or was not a satisfactory financial showing for our railroad system, the fact remained that it did not satisfy the investor. Consequently, the sound policy long practiced by railroad management of keeping ahead of traffic by providing the necessary facilities for handling it was gradually weakened, and at the time the country entered the war the railroad system was far short of that standard of efficiency which the demands of traffic required."8 One of the signs that the railroads were not spending nearly enough on new equipment was the increase of accidents. Accidents due to derailments increased from 6,697 in 1911 to 22,477 in 1920.9 In short, government policies reduced earnings, discouraged investment, and set the stage for the railroads to live off past capital investment to the detriment of efficient maintenance.
When World War I came, the railroads were ill prepared to provide the services wanted. This was, in large measure, due to government policies which had frozen the railroads in an earlier pattern, made it difficult for owners and managers to run them effectively, discouraged investment, supported inefficiency, deterred cooperation and coordination, and inhibited the development of nationwide systems. The Federal government took over the operation of the railroads on December 26, 1917, and continued to run them until 1920. Having prevented an integrated system from developing and thus having set the stage for a crisis, the government took over and did much that it had prevented the railroads from doing.
Next: Railroads in the Grip of Government.
1 K. Austin Kerr, American Railroad Politics (Pittsburgh: University of Pittsburgh Press, 1968), pp. 54-55.
2 Henry S. Haines, Restrictive Railway Legislation (New York: Macmillan, 1905), pp. 223, 261.
3 Frank H. Dixon. Railroads and Government (New York: Scribner’s, 1922), p. 30.
4 Ibid., p. 83.
5 Ibid., pp. 70-71
6 Haines, op. cit., p. 326.
7 Arthur S. Link, American Epoch (New York: Alfred A. Knopf, 1955), p. 53.
8 Dixon, op. cit., pp. 23-24.
9 Ibid., p. 78.