Rev Ind Organ
DOI 10.1007/s11151-013-9389-5
The ‘Railroad Problem’ and the Interstate Commerce
Act
John Howard Brown
Received: 1 March 2013 / Accepted: 14 June 2013
© Springer Science+Business Media New York 2013
Abstract The emergence of railroads presented a problem for the developing economic profession. Railroads, by their very nature, often had a localized monopoly.
The check that competition was expected to impose on firm behavior was singularly
lacking. At the same time, railroads in the United States were national in scope and
thus affected interstate commerce. The Interstate Commerce Act and the Commission spawned by the Act represented the first halting steps towards coping with the
monopoly power that was a consequence of the Second Industrial revolution. In this
paper, the views of prominent economic and legal thinkers regarding the proper legal
framework for railroads are reviewed.
Keywords Discrimination · History of economic thought ·
Interstate Commerce Act · Monopoly · Network industries
1 Introduction
Railroads dramatically changed the economics of transportation over the course of
the 19th Century. This unprecedented transformation challenged many of the existing
norms of society. This was even true in the discipline of political economy.
Economists rightly view Adam Smith as the founding father of the discipline.
Smith’s opus, The Wealth of Nations, arguing as it does for a system of “natural
liberty,” served as the foundation of laissez-faire policies followed throughout both the
J. H. Brown (B)
Department of Finance and Economics, Georgia Southern University,
PO Box 8152, Statesboro, GA 30460, USA
e-mail: [email protected]
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Ante-bellum and Gilded Ages of the 19th Century in the United States.1 Laissez-faire
doctrines held that monopoly as an economic problem originated with explicit grants
by governments to firms or individuals. Thus early Nineteenth Century economists
emphasized avoiding creating such favored enterprises.
Railroads presented a challenge to these views. As enterprises, railroads were a long
distance from Adam Smith’s famous pin factory. The railroad replaced a factory, where
working and human capital dominated and physical capital was simple and easily
transferred to other employments—with a firm where capital was mostly physical
and largely sunk. This paper examines how prominent economic thinkers of the 19th
Century dealt with this new type of enterprise.
In the next section, a brief overview of the development of railroads in the United
States during the middle half of the 19th Century is presented. This section is followed by a comparative discussion of the views of the economics of railroading by
some important figures. The succeeding section discusses the role of economics in
formulation of the Interstate Commerce Act.
2 Railroads in the 19th Century
It is difficult for 21st Century readers to grasp the profound transformation that railroads wrought upon society. These changes might be characterized by the notion of
singularity, proposed by the science fiction writer, Vinge (1993). A singularity occurs,
according to Vinge, when a society is so completely altered that individuals from the
previously existing civilization cannot grasp the way of life of the post-singularity
society.2
Consider Thomas Lincoln, Abraham Lincoln’s father. Throughout his lifetime he
was a subsistence farmer. This was a way of life recognizable to the majority of
humankind from the days of the Mesopotamians. His son’s life was quite different.
In particular, in 1860 Abraham, a relatively obscure lawyer from the backwoods of
Illinois, was able to travel in a matter of days from Springfield to New York City. There
he gave the famous Coopers Union speech which played a large role in his subsequent
nomination as President. This journey was literally unimaginable at the time of his
birth when the fastest anyone travelled on land was the speed of a galloping horse.
The rapidity of the change wrought by railroads is stunning. In 1830, when Lincoln
was already an adult, there were scarcely 30 miles of steam railways in the United
States (Report on Transportation, US Census Bureau, 1895.) By 1860, when he was
elected President, railroad mileage had skyrocketed to almost 29,000 miles. At the
1890 Census total railroad mileage was over 163,000.
1 Smith might equally be recognized as the founder of Industrial Organization as a discipline, since he
recognized both the wastes of monopoly and the temptations of collusion. These joint impediments to
economic performance represent the foundational problems of the discipline. Both of these issues loomed
large in the behavior of railroad.
2 Some would question the impact of railroads was so extensive as to represent a singularity. In particular,
Fogel (1964) assesses the impact of railroads on economic growth as quite modest. Fishlow (1965) attributes
greater power to railroad’s in fueling economic development.
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In addition to this rapid increase in mileage, the character of the railroad industry
was dramatically transformed. Initially, railroads functioned to connect a central city
with its rural hinterland. As the build out continued through the 1850s and 60s, a
new possibility emerged, that of creating integrated rail networks (Hadley 1885, 12.)
These networks were assembled piecemeal through a painful process of extended
leases, bankruptcy reorganizations, and new construction.
One important result was the railroads as interstate entities grew beyond the bounds
of state regulation. Another consequence was that certain of the previous modes of
economic analysis became obsolete. The competitive analysis of Smith and Ricardo
was of scant utility for an industry where network cost and demand effects are predominant.3
The effects of a locality having a single rail connection were easily incorporated into
the existing analytical framework of monopoly. However, the remedy that competition
supplied for other industries was relatively powerless within a network industry. There
was also no simple means of analyzing a firm that supplied products under a mix of
competitive and monopolistic conditions. Network effects also lead to anomalies such
as discriminatory differences between long haul and short haul rates. In the next section
we examine how economics struggled to reconcile these contradictions.
3 Economic Analysis of Railroads: Three Economists and a Lawyer
Economists were not so blinded by laissez-faire doctrine as to ignore the problems
that railroad presented. The four individuals discussed here identified the problems
and sketched potential solutions.
The first was Lardner (1850). Lardner’s book, “Railway Economy: A Treatise on the
New Art of Transport. . .” is an example of a form much embraced in the early days
of industrial organization, the industry study. Although Lardner’s analytical framework does not embrace the structure-conduct-performance trinity of later industrial
organization, the text treads some of the same pathways.
After an introduction and historical overview of transportation, Lardner examines
the conditions of supply for railroads in almost modern terms. All of these chapters
are filled with statistics from English and Belgian railroads. These statistics cover
all aspects of the operation of the railroads. Lardner also addresses the demand for
both freight and passenger transportation and the relationships between revenues and
expenses of providing transportation. This includes a precocious exercise in marginal
analysis, pointing out that a revenue maximizing tariff may not be profit maximizing
where average costs fall with traffic.
The next significant author to address the question of social control of railroads
was Adams (1878) of the illustrious Adams family. His book, “Railroads, their origin
and problems” covers some of the same ground as Lardner, but is enriched by Adams’
personal experience as a pioneering regulator in his home state of Massachusetts. It
begins by focusing exclusively on the very early era of railroading and does not provide
the degree of statistical detail that Lardner had provided.
3 Indeed economics struggles to analyze such network industries to this day.
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Hadley (1885) writing a decade later, developed somewhat similar views. However, he viewed railroad monopolies as just a special case of a more general tendency
towards “industrial monopoly”. “An industrial monopoly is where the business interests of the parties concerned make competition practically impossible, even when
there is neither law nor natural obstacle to hinder it. And the present age is an age of
industrial monopoly, however we may try to shut our eyes to the fact. We have not
free competition, nor can we fairly expect to have it in the future. Instead of moving
toward it, we are moving away from it. (Hadley 1885, p. 63)”
Thomas M. Cooley’s fame as a legal scholar preceded his appointment as first
chairman of the Interstate Commerce Commission.4 Cooley’s (1884) argument in,
“Popular and Legal Views of Traffic Pooling” is informed by his renowned legal
scholarship and a sophisticated comprehension of economics. Like other authors cited
here, he viewed the railroads as facing the equally disastrous choices between ruinous
competition and unjust discrimination on one hand, and pooling with the threat of
monopoly exploitation on the other hand (Cooley 1884, p2.)
Their varied contributions amount to a biography of the railroad industry in the
first 60 years of its existence. In the balance of this section I examine and contrast
their views in some detail. The discussion below is organized around a series of four
themes:
The first is the failure of competition as an organizing principle for railroads. This
failure had two dimensions. One was that competition did not lead to the construction
of economically efficient networks. The other source of failure was the incessant and
ruinous price warfare where competing rail systems existed.
Lardner (1850, p. 421) argues that the discipline of competition is irrelevant to
the operation of railroads. Unlike public highways which represented the first model
invoked for railroads, traffic on railways requires coordination by some higher authority. In Chandler’s (1977) felicitous phrase, the invisible hand of the market must be
replaced by the Visible Hand of management. The same logic of coordination leads to
an amalgamation of individual railroads into larger and larger, monopolistic enterprises
(Lardner 1850, p. 422). Additionally, Lardner notes, “. . . an expense of an immense
amount is incurred before a single object can be transported (193.)” These expenses
must be recovered by firms in addition to the direct expenses of movement which
Lardner characterizes as, “. . . the most insignificant item of the entire cost (Lardner
1850, p. 193).”
Like Lardner, Adams (1878, p. 81) emphasizes that railroads both “usurped, (. . .)
the more important functions of the highway” and “. . .those who own it have also
undertaken to do the work which was formerly done on the highway.” The consequence
was, “. . .the recognized laws of trade operate but imperfectly (. . .) in regulating the use
made (. . .) by those who thus both own and monopolize them.” Attempts to respond
to this issue constituted the “Railroad Problem.”
4 One of the most shocking results of my research for this paper was to discover that there is no full length
biography of Thomas M. Cooley, 19th Century legal scholar, Michigan Supreme Court Justice, founding
faculty member of the University of Michigan Law School, and first chair of the Interstate Commerce
Commission.
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The Railway Problem
He characterizes the operating principle of American railroad policy thus, “The
efficacy of railroad competition,—expressing itself in the form of general laws authorizing the freest possible railroad construction everywhere and by any one,—at an early
day became almost a cardinal principle of American faith (Adams 1878, p. 117).” At
the same time, he asserts this system was, “. . . founded on a theoretical error.” This
error was the axiom that, “. . .in all matters of trade, competition, if allowed perfectly
free play, could be relied upon to protect the community from abuses.” The effects of
public policy based upon competition, met by promoters who, “. . .seemed to have no
fear of it (competition) (p. 118).” was “. . .roads everywhere.”
Instead (Adams 1878, p. 121) asserts, “The traditions of political economy, (. . .)
notwithstanding, there are functions of modern life, (. . .) which necessarily partake
in their essence of the character of monopolies.” Similarly, Lardner (1850, p. 424)
notes that railway firms were granted, “Powers of an unusually extensive and durable
character. . .” and consequently, “monopoly after monopoly grew up. . .”
Another factor was identified by Hadley (1885, p. 72), was the fact that railroads required, “. . .large permanent investments of capital.” “Until about 1850, it
was assumed that railroad business was subject to the same laws as any other business, and in particular to the so-called law of competition, by whose free action rates
would be brought down to cost of service. It was gradually seen that this assumption
was not strictly true; that in many instances it was very far from the truth.”(p. 40)
Hadley takes it as axiomatic, “. . .competition tends to bring rates down to the basis of
movement expenses. ”(p. 142) He further asserts that, “. . .railroad competition may
exist everywhere, somewhere, or nowhere.” But omnipresent competition is ruinous
and partial competition creates harmful discriminations.
Cooley (1884, p. 4) likewise recognized that not only were the investments large,
they were sunk. Thus he asserts, “Very seldom the whole plant for one business will
be useless for any other.” In contrast, “. . .investment for the purposes of a railroad is
permanent, and is available to a single purpose only.”
At the same time, local interests seek and subsidize the development of railroads
since, “Railroads are a great local convenience. (Cooley 1884, p. 4)” Thus, “. . .roads
are brought into existence for which there is no adequate demand. . .” Acting to increase
the misery, “such roads when constructed remain, and will be operated so long as the
cost of operating can be paid from earnings. (Cooley 1884, p. 5)” These zombie
railroads represent, “hundreds of millions of the capital invested in it is absolutely
sunk. . .” Such sunk capital means that, “. . .the competition it creates instead of being
‘the life of trade,’ is as to this business destructive of the capital invested. . .”
Cooley also highlights the disruptions caused by deliberate mismatching elements
of the rail network to inflict competitive harms on other firms. This is a unique observation in this literature, none of the other authors considered in this paper even suggest
such a competitive response. Of course, a modern literature exists on raising the costs
of rivals as a competitive response.
The next, and politically most potent, theme was the different forms of price discrimination practiced by railroads among their various customers. Such discrimination
included discrimination between the rates per mile charged for long distance shipments
and shipments carried for shorter distances. Of course, localities without effective rail
competition paid much higher rates than similar communities where competition was
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present. These practices were largely responsible for the attempts to regulate the railroads that emerged beginning in the 1870s.
Hadley (1885, p. 108) presents a very serviceable definition of discrimination as,
“A difference in rates not based upon any corresponding difference in cost. . .” For
Adams (1878, p. 118) discrimination was a result of the effects of public policy based
upon competition, met by promoters who, “. . .seemed to have no fear of it (competition)” So that there were “. . .roads everywhere.”
The sunk costs of construction then encouraged endemic economic warfare among
competing lines. However, the effects of competition were perverse. The frenzied
building created a geography of inequality. The railroad centers, “. . .were stimulated
to undue growth from the fact that competition was limited to them (Adams 1878,
p. 118)”. While competition limited the profits at these points, “. . .the corporations
recompensed themselves by extorting from other points. . .the highest profit which
business could be made to pay.” This resulted in, “. . . a system of sudden fluctuations
and inequitable local discriminations (. . .) which was well-nigh intolerable.” (Adams
1878, p. 123)
In fact, Adams (1878, p. 184) asserts that, “But, on the other hand, does not competition in the case of the railroad system, necessarily, while working with excessive
violence, work most unequally?—In fine, is not discrimination, somewhere and against
some one, the logical and inevitable result of every un- controlled railroad competition? And is it not matter of experience, that the fiercer the competition grows, the
harsher the discrimination becomes?”
Hadley (1885, p. 111) notes that there are multiple forms of discrimination present
in railroading, i.e. “. . .between classes of business, localities, or individuals. . .” Each
variety requires a different sort of analysis.
For Hadley, the different rates applied to different categories of goods (his first
form of price discrimination) were well justified. The various classifications applied
to freight were defensible, since rates based upon the value of the goods transported
permitted recovery of the railroad’s fixed costs from high valued traffic. At the same
time, low valued shipments were not faced with rates so high as to make rail shipment
impossible. The result was, “. . .fixed charges must mainly be borne by the line of
business that can best afford to pay them. . . (Hadley 1885, p. 112)”
Hadley also considered local discrimination to be unavoidable. Localities with
alternative transportation routes were likely to have more favorable rates than otherwise
comparable localities without such alternatives. Given the cost structure of railroads,
this second variety of price discrimination appeared inevitable to Hadley.
What is more, discriminatory rates could well be justified since where they make
possible services that would not be economic under uniform rates. Hadley (1885, pp.
115–18.) illustrates this principle with an example of oyster shipments. In this case a
locality could not provide sufficient traffic to justify service by itself. When a nearby
location which had alternative routes to market its oysters was offered a rate below
that of the first community, the service could be offered.
Cooley (1884) attributed discrimination to rate wars. These unreasonable discriminations caused so much bad feeling towards railroads. Rate wars also resulted in
extreme volatility of rates which Cooley argued both undermined the ability of shippers
to plan and encouraged a variety of speculative actions by those in control of railroads
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The Railway Problem
(particularly bankrupt roads.) These speculations, according to Cooley, undermine
faith in railroads and private property in general.
What Hadley (1885) characterized as the third form of discrimination drew near
universal condemnation. Hadley only actually condemned discrimination between
individual shippers based upon preferential treatment. These rates damaged some
competitors on the basis of arbitrary distinctions. Adams (1878, p. 125) recognized
that even where competition existed it, “. . .led to favoritism of the grossest character,—
men or business firms whose shipments by rail were large could command their own
terms...” Such discrimination resulted in reduced competition between non-rail firms.
The third theme of these writers is the development and justifications for the various
cartelization arrangements as an alternative to the endemic price warfare caused by
overbuilding of competing rail lines. Competition was also viewed as an important
source of objectionable geographic discrimination discussed above. These “pools”
suffered the instabilities to which economic theory suggests cartels ought to be prone.
As Adams (1878, p. 179) says of pools and related arrangements, “Capital is trying
to protect itself; . . . The stress of competition has been too great, and in its own way is
resulting in combination.” Hadley (1885, p. 142) put it in these terms, “We have further
seen that competition tends to bring rates down to the basis of movement expenses.”
Hadley (1885, p. 142) continues, “Now railroad competition may exist everywhere,
somewhere, or nowhere. If it exists everywhere, rates are everywhere reduced to the
level of movement expenses, and there is nothing to pay fixed charges. . .” However,
where competition exists somewhere, “the competitive points will have rates based on
movement expenses, and the others will have to pay the fixed charges. This constitutes
discrimination.”
This leaves Hadley’s third option, competition nowhere. “If we have competition
nowhere, this either involves a pool, or amounts to the same thing. We are thus face to
face with the choice between ruin, discrimination, or pools.” However, Hadley (1885,
p. 142) opines, that pooling, “. . . is not altogether satisfactory. The history of pools
has been a checkered one.” Permitting railroads to pool everywhere, while it would
have the positive effect of limiting the harms of insolvency and discrimination would
also increase the potential for abuses.
Adams (1878, p. 180) asserts that these combinations, “are based upon the same
fundamental principles” and “They are directed to the same end, the control of competition.” In other words the experience unchecked competition of created incentives
for railroads to combine.
Adams (1878, p. 189) proposes, “The abuse incident to unhealthy railroad competition must cease; (. . .) The present competitive chaos must be reduced to something like
obedience to law. Yet this apparently can only be effected when the system is changed
into one orderly confederated whole.” In order to validate this departure from competition, Adams (1878, p. 190) insists of the confederation that, “it must be legal; it must
be public; it must be responsible.” In effect, he calls for a government organized and
regulated cartel where, “the machinery for state supervision would come into play in
the form of a special tribunal. . . (p. 200).” The regulator would act along the lines of
the Massachusetts commission upon which Adams served, publicizing the activities,
good or bad, of the consolidated railroads. This was, in Adams’ view the only possible
solution, since resistance to the amalgamation was futile.
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This presents a challenge to public policy since competition has always been
assumed the regulator of business behavior in the public interest. Cooley (1884, p. 3)
notes, pooling represents, “. . .a combination that has for its object to check competition.” and as such, “. . .seems to stand in hostility to the industrial maxim that
‘competition is the life of trade’.” Hadley (1885, p. 77) argues, as Clark (1904) did
a generation later, that potential competition can serve as a check on monopolistic
tendencies.
Cooley (1884, p. 13) noted, “Entering into a pooling arrangement is an admission
that unrestricted competition is destructive. . .” He continues, “. . . but when the pooling
arrangement is departed from and one road begins to cut rates, the others, in self
protection must be suffered to cut also. This is not enforcing the pooling agreement; it
is destroying it.” Cooley (1884, p. 6) asserts, “. . . no pooling arrangement, unless the
aid of the law can be had for its enforcement, can possibly put an end to competition. . .”
He argues that competition cannot be permanently repressed because the interests of
too many parties are tied to their own success in competition.
This leads naturally to the question of whether pools can be entered into legally or are
legally supportable. Cooley (1884, p. 7) cites the, “. . . familiar principle in the law that
contracts in general restraint of trade are void.” This does not mean however that such
contracts would be subject to sanctions, only that they could not be enforced in court.
As he further recognizes, the law distinguishes between reasonable and unreasonable
restraints. Restraints that are “reasonable” will, in fact, be enforceable in court.
The question then becomes whether pooling as a practice is reasonable or unreasonable. Cooley’s (1884) analysis suggests that the answer is not clear given the state
of case law at the time.
Finally, the authors offered varied suggestions based upon the diverse experiences
of railroads in many countries for the nature of government controls to be exercised
over these firms. This included both questions of government subsidization of rail
construction and appropriate regulation of railroads once constructed. Lardner’s concluding (1850, ch. XXII) entitled, “The Relation of Railways to the State” incorporates
his thinking about the roles of market and state in the railroad industry.
This leads to the point that different governments have applied varied approaches
to managing the contradictions that are inherent in railroad technologies. Although
he discusses several of these, most of his remarks are devoted to the conditions of
British railways. Since the US shares the common law legal tradition with the UK,
these observations are also pertinent to the United States.
Lardner (1850, p. 424) illuminates the tensions between the Anglo-Saxon laissez
faire approach to private enterprise and the necessities of curbing monopolistic tendencies; he notes that railway firms were granted, “Powers of an unusually extensive
and durable character. . .” and consequently, “monopoly after monopoly grew up. . .”
The evils of monopoly quickly arose, leading to an outcry for greater public control
that the railways directors naturally resisted.
Lardner (1850, p. 425)answers the firm’s arguments with the germ of the public
interest doctrine subsequently articulated in the United States in Munn v Illinois;
as he notes, railways, “. . .possess almost exclusive control of the intercourse of the
country. . .” and consequently, “. . .involve interests public, political, and social, of the
greatest magnitude. . .”
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The solution Lardner offered was a public body that would standardize financial
reporting and publicize the results of audits that would be conducted on behalf of both
the public and investors. This body would, “. . .supply railroad shareholders, and the
public in general (. . .) with the means of obtaining an assurance of the honesty and
of estimating the ability of the railway management (Lardner 1850, p. 428).” Lardner
follows this discussion with an outline of the accounting system that could promote
these ends. He concludes by emphasizing the importance of publicity to alert public
opinion to both deficiencies in managerial performance and managerial malversations.
In the United States, as Adams (1878) documents these economic failings, combined with the well documented corruption surrounding building and operating railroads resulted in popular demands for regulation of railroads. In the first instance, this
led to the emergence of the Granger movement and the legislation that it inspired.
Adams views the Grangers with certain distaste, as might be expected of the scion of
an old and distinguished family for any form of populism. However, he concedes that
regulation by commission was, “. . . the most important and instructive phase in the
development of the railroad problem (Adams 1878, p.132).”
Adams judged the Granger laws to be failures. The failure was a consequence
of the difficulties arising since, “. . .the country did not contain any trained body of
men competent to do the work. (Adams 1878, p. 133)” The work of implementing
regulation was, “one of great difficulty and extreme delicacy.” This was doubly true
because the expertise in railroad matters naturally resided within the firms, and they
were determined to resist resolutely the authority that had been conferred by the various
state laws.
The experience of the Granger inspired commissions stood in contrast to that of
the Massachusetts Railroad Commission. Adams attributes the success of this commission to three factors. First, it was essentially powerless. The commission could
hold hearings and review the behavior of railroads, but had no means of enforcement.
However, the commission could, and did, aggressively publicize its judgments about
matters brought before it. A second factor was achieved inadvertently by the stability
of the commission’s membership, which allowed the members of the commission time
to gain a thorough familiarity with the issues that they faced. Finally, the approach
adopted by the commission was that of an honest broker, rather than adversarial. This
disarmed the objections of the railroads to the extent that they eventually acceded
to the commission taking a primary role in designing a system of railroad accounting.
Thus Adams, like Lardner before him, saw publicity and honest accounting as
the solution to the incipient monopolistic tendencies of railroads. However, as he
further admits, since the rail systems stretched across state boundaries, a national
solution was required. The railroads tried to provide such a solution through collusion.
Hadley (1885, p. 125–45) also expresses skepticism regarding all attempts to regulate rates whether maximum, minimum, or “reasonable.” His preference, like Lardner
and Adams, was that any national commission adopt the “Massachusetts model” of an
impartial arbiter whose power lay in its ability to appeal to public opinion. However,
he likewise acknowledged the difficulties of the task, “The attempt to legislate for
the shippers without regard to the railroads is as much of a mistake as the attempt
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to legislate for the railroads without regard to the shippers. To reconcile these two
interests—apparently conflicting and yet mutually dependent upon one another—is
one of the most serious problems of modern business or modern politics.” (Hadley
1885, p. 23)
A final contribution of these authors to economics that is not relevant to the debates
about railroad regulation but sheds a light on some future conflicts is the recognition of
the separation of ownership and control. This development had profound implications
for corporate governance. It also offered a glimpse at a public interest rationale for
regulation.
As early as 1850, Lardner recognized that the railways’ capitalization were so
large as to dwarf any entity save the British government itself. That immense
capitalization meant that nearly any British subject could potentially become
an equity or debt holder of one of the railway corporations (Lardner 1850,
p. 428).
Further, fully 80 years before Berle and Means (1933), Lardner (1850, p. 426)
asserted that shareholders were, “liberated from many of the responsibilities and
obligations which attach to (owners of) property of a more permanent character.” The
shareholders were thus at the mercy of directors able to manipulate financial statements to their personal advantage. A third of a century later, Hadley (1885, p. 21),
noted “Railroad consolidation has put the control of the country’s business into the
hands of a few large corporations. The owners may be numerous, the actual managers
are few.”
4 The Impact of Economics on the Interstate Commerce Act
The preceding excerpts illustrate that economists were alert to the unique economic
challenges created by the railroad industry. Operational considerations precluded railroads from operating on the same basis as the public roads they replaced. By their
nature, railroads tended to operate as natural monopolies along their right of way.
It was the case that a large share of the resources used to construct a rail line was
sunk. Under these circumstances, duplicating the facilities of an existing railroad was
economically suicidal.
At the same time, the citizens of localities recognized their vulnerability to
monopoly pricing where a single railroad was their sole transportation supplier. The
result was wasteful subsidization of competitive entry. Such entry, in turn, lead to
debilitating rate wars at competitive points and monopoly pricing at non-competitive
points. In addition, there was great concern expressed in communities where rail rates
appeared to damage the competitive viability of the local enterprises. Not unnaturally,
the rate wars mentioned above gave rise to attempts to pool and maintain rates at a
more remunerative level.
These “abuses” were widely recognized during the 1860s and 1870s. The initial
impulse was for the individual states to regulate railroads. By 1886 30 of the then
38 states had adopted some form of railroad regulation (Cullom Report, US Senate
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1886.) Congress, as is so often the case, showed little inclination or ability to provide
a national alternative to such piecemeal regulation.5
One enduring source of difficulty was the different approaches adopted by the
Senate and House. The Senate bill (Cullom Bill) passed in 1886 called for the creation
of an Interstate Commerce Commission to investigate the alleged railroad abuses and
develop policies to ameliorate them, along the lines of the Massachusetts commission
upon which Adams had served.
In fact, they invoked Adams acknowledged authority in the Cullom report,
“Congress would provide for a commission of men who were at once honest, intelligent, and experienced, whose business it should be to observe this question very much
as a physician would observe the progress of a disease.” (Schartz 1973, p. 31)
Judge Cooley was likewise cited, advocating a solution that is, “likely to be found in
treating the railroad interest as constituting in a certain sense a section by itself of the
political community and then combining in its management the State, representing
the popular will and general interests, with some definite, recognized authority on
the part of those immediately concerned, much as State and local authority are not
combined for the government of municipalities. Something of the sort would neither
be unphilosophical (sic) nor out of accord with the general spirit of our institutions.”
(Schartz 1973, p. 86) The writers previously discussed were thus much cited by the
Senate and generally used to support the idea of a commission that would have powers
much like the Massachusetts railroad commission.
In contrast, the House bill (Reagan Bill) outlawed specific abusive practices and
relied on Federal courts to provide relief without any provisions for a commission. It
generally represented an attempt to specify and enforce the common carrier obligations
enshrined in the common law. In particular, it sought to end “unjust” discriminations.
These differences in approach had not been resolved in previous conference committees. However, in October of 1886, the Supreme Court’s Wabash decision severely
restricted the scope of state regulation by asserting federal jurisdiction when a rail journey had any interstate component (Schartz 1973, p. 309.) This created an atmosphere
where the two houses were more willing to compromise. The House accepted regulation by a commission. In turn, the Senate accepted more restrictive language regarding
the regulation of long-short haul rate differences and railroad pooling arrangements.
Three of the four authors discussed here were cited in the debate over the conference
reported bill which eventually became the Interstate Commerce Act.6 All were, in
fact, cited by the most prominent Senate opponent of the bill, Senator Orville Platt
of Connecticut. Senator Platt’s objections to the long-short haul provisions of the bill
were, “. . .the Senate bill recognized a principle which was sound, and that principle
was that the question of what is a reasonable charge upon freight to a station or from
a station is not to be determined by the question of what is charged for freight to
or from another station. In other words, the question of reasonable freight charges
must vary with the location of the place to or from which the freight is shipped, the
volume and character of the business to be transacted going to and from that place.”
5 During the debates preceding the final passage of the ICA, there were joking references to the institution’s
inability to legislate on the matter.
6 Dionysius Lardner was presumably ignored because his work was nearly 40 years old and British.
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(Schartz 1973, p. 328) This judgment may reflect the Hadley’s discussion of oyster
shipments discussed above, as Platt praises Hadley’s book (Railway Age 1887, p. 69.)
However, Platt’s real target was the prohibition of pooling in Sect. 5. All three of
the authors reviewed above are cited in detail in this section, starting with extensive
quotation from Cooley’s article. The force of Platt’s argument is that pooling need not
be anti-competitive.
Rather, pooling represents a means of escaping the destructive competition that
can result where parallel railroads compete. He quotes C.F. Adams testimony in the
House, “In other words, every abuse in the railroad system, so far as the interstate
commerce of this country is concerned, can be shown to be the direct, the logical,
the inevitable outcome of unregulated and desperate competition, and a mere outward
skin symptom of it.” (Railway Age 1887, p. 68) Of course, Platt was unsuccessful in
eliminating the language he objected to in the Act as finally passed.
5 Conclusion
The preceding clearly indicates that 19th Century economists had a sophisticated grasp
of the special problems which the railroad industry presented for economic analysis.
These economists were not so blinkered by the prevalence of laissez-faire doctrines
to believe that free competition was a panacea for railroad behaviors. The actual
provisions of the Interstate Commerce Act did not reflect the policy recommendations
that Adams, Hadley, and Cooley had embraced.
However, the ICC chaired by Judge Cooley quickly rendered the objectionable long
haul/short haul provisions irrelevant (Railway Age 1887, pp. 202–ff.) Court decisions
likewise quickly rendered the pooling provisions impotent at least where they were
interpreted to control rates. The history of the Interstate Commerce Commission until
the passage of the Hepburn Act in 1906 suggests that no easy answers were available
to resolve the basic conflict over rate regulation.
References
Adams, Jr, C. F. (1878). Railroads: Their origins and problems. Reprint by J.&J. Harper Editions, Harper
& Row, Publishers, New York, 1969, in the series The Allan Nevins Reprints in American Economic
History.
Berle, A. A., & Means, G. C. (1933). The modern corporation and private property. New York, NY: The
Macmillan Company.
Chandler, A. D, Jr. (1977). The visible hand: The managerial revolution in American business. Cambridge:
The Belknap Press of the Harvard University Press.
Clark, J. B. (1904). The problem of monopoly. New York, NY: The Columbia University Press, The Macmillan Company, agents.
Cooley, T. M. (1884). Popular and legal views of traffic pooling vol. 24. Chicago: Railway Review.
Fishlow, A. (1965). American railroads and the transformation of the Ante-bellum economy. Cambridge,
MA: Harvard University Press.
Fogel, R. W. (1964). Railroads and American economic growth: Essays in econometric history. Baltimore,
Maryland: The Johns Hopkins University Press.
Hadley, A. T. (1885). Railroad transportation: Its history and its laws. New York, Boston: G. Putnam’s
Sons.
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The Railway Problem
Lardner, D. (1850). Railway economy: A treatise on the new art of transport. Taylor, Walton & Maberly:
London. American edition: Harper & Brothers, New York. Reprinted by Augustus M. Kelley 1968.
Railway Age. (1887). Light on the law. Chicago, IL.
Schartz, B. (Ed.) (1973). The economic regulation of business and industry: A legislative history of U.S.
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Vinge, V. (1993). The coming technological singularity: How to survive in the post-human era. Winter
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