Economic History Association
Railroads and Regulation, 1877-1916: Conspiracy or Public Interest?
Author(s): Robert W. Harbeson
Source: The Journal of Economic History, Vol. 27, No. 2 (Jun., 1967), pp. 230-242
Published by: Cambridge University Press on behalf of the Economic History Association
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Railroads and Regulation, 1877-1916:
Conspiracy or Public Interest?
Professor Gabriel Kolko in his recent work, Railroads and Regulation,
1877-1916,1 presents an interpretation or the origin, motivation, and consequences of the movement for federal regulation of railroads which differs in important respects from that which has hitherto been generally accepted. Thus it has generally been held that railway regulation was a
response to the demands of farmers and other shippers for protection
against monopolistic and discriminatory tactics on the part of the railroads
and that regulation was bitterly resisted by the latter. Kolko, on the other
hand, holds that regulation was actually welcomed by the railroads as a
means of securing the rate and profit stability which they were unable to
maintain by their own action, and that "the railroads, not the farmers and
shippers, were the most important single advocates of federal regulation
from 1877 to 1916" (p. 3). He concedes that "the movement for federal
regulation of the railroad system was not, in any strict sense, deliberately
initiated by the railroads" (p. 20) and that legislation could not have been
passed without shipper support, but points out that shippers were either
inarticulate or divided with respect to the kind of regulation, if any,
desired, and that the railroads were always able to secure the support
of enough shipper groups to insure passage of the legislation which they
favored. Furthermore, the railroads welcomed federal as opposed to state
regulation, since they regarded the latter as punitive and restrictive and
less amenable to their influence than federal regulation.
On the basis of the foregoing facts Kolko concludes that railway regulation did not represent an effort to "make the dominant economic forces
susceptible to the control and welfare of the large majority of the people,"
but rather that it was "an attempt to create a political capitalism for the
sake of the railroads," which the latter welcomed as a means of solving
their internal economic problems and circumventing effective democratic
control (p. 238). Hence to the extent that federal railway regulation
of this period has been regarded as an aspect of "Progressivism" in politics, the view that this movement represented an attempt to redress the
balance of economic power in favor of the average citizen as against
large business corporations must be revised.
Undoubtedly Kolko has performed a valuable service in correcting
earlier naive and incomplete interpretations of the movement for federal
regulation of railroads. That the railroads supported rather than opposed
the principle of federal regulation is thoroughly documented. Unfortunately, the same cannot be said of Kolko's inference that regulation
favored the railroads at the expense of shipper and consumer interests.
It is not axiomatic that regulation supported by the railways as being in
1 Gabriel Kolko, Railroads and Regulation, 1877-1916 (Princeton: Princeton University Press, 1965).
230
Railroads and Regulation
231
their own interest must necessarily have this effect. This article will consider whether, or to what extent, Kolko's conclusions in this matter are
tenable.
To begin with, it must be pointed out that Kolko either ignores or completely misunderstands the economic characteristics of the railway industry. This is a fundamental flaw which, in the writer's view, vitiates
much of the analysis in the book. Thus Kolko repeatedly emphasizes
that the railway industry during the period studied was a "competitive"
industry; he speaks of "the ultimately competitive nature of the industry"
(p. 3), of "the inherently competitive nature of the industry in
most parts of the country" (p. 7), and of "the basically competitive and
semi-chaotic structure of the railroad industry" (p. 66). In support of this
proposition he cites: first, the fact that "contrary to the common view,"
railroad freight rates, taken as a whole, declined almost continuously from
the 1870's until the end of the century; -second, the recurrent outbreak of
rate wars, although he recognizes that the development of excess capacity
was a contributing factor in this case; and, third, the large and growing
number of railroads during this period. With respect to this last he says:
Between 1900 and 1907, the peak year, the number of operating railroads
increased from 1,224 to 1,564, although 874 totally independent lines existed
in 1900 and only declined to 829 during the following decade. When all lines
are taken into account, it is the diffusionratherthan concentrationof the American railroadsystem that is of greatest significanceto the political behaviorof the
majorrailroads(p. 88. Italics in original).
In analyzing the foregoing argument the first point to be made is that
Kolko nowhere recognizes that the decline in railway costs, resulting
from the continuous and substantial decline in the wholesale price level
and the progress of railway technology from the 1870's to the end of the
century, was at least as important as competition in explaining the secular
decline in the level of railway rates during this period. Moreover, the
declining trend of railway rates during the period in question has long
been a matter of common knowledge among transportation economists.2
Second, and more important, Kolko completely misunderstands the
market structure of the railway industry and its bearing on the market
behavior of the individual carriers. The fact that there were 1,564 railroads in 1907 is of little significance in this connection. In the first place,
a large proportion of these roads were switching and terminal companies
and branch lines not parts of through routes. The fundamental point,
however, is that monopoly and competition can only be analyzed by
reference to the number of firms in a given market, and in the railway
industry this means the number of roads joining a given pair of communities. This means, in turn, that the market for railway transportation ranges
2 W. Z. Ripley, Railroads: Rates and Regulation (New York: Longmans Green &
Co., 1912), ch. xii; and D. P. Locklin, Economics of Transportation(6th ed.; Homewood, Ill.: Richard D. Irwin, Inc., 1966), p. 11.
232
Robert W. Harbeson
from monopolistic to oligopolistic, since the number of roads between
a particular pair of points ordinarily ranges from one to five or six. The
situation is changed only in degree when alternative routes comprising
combinations of roads are considered. Even in what Kolko refers to as an
extreme case, the existence of twenty routes between St. Louis and
Atlanta, ranging in length from 526 to 1,855 miles, the condition is still
one of oligopoly.3
Furthermore, it is elementary that price wars, far from indicating that
the market is "competitive" in the economic sense of "purely competitive," indicate rather the existence of duopoly or oligopoly. Markets of
this sort are characterized by recognized mutual interdependence of
sellers; that is, each seller recognizes that any action which he takes to
change price and output will induce defensive action by the other sellers.
Hence price competition in such markets tends to be inactive, or at least
to take an indirect or restricted form; when sporadically active it takes the
form of price wars and tends to be self-eliminating. The level of prices in
such markets is indeterminate and may range from a monopoly level to
less than variable cost in the short run. What is important from the
standpoint of economic welfare is that in the absence of outside interference the price-cost-output relationship established by individual firms
in such markets will not be like that which characterizes firms in a purely
competitive market.
The foregoing analysis suggests that since the markets for railway
service are monopolistic or oligopolistic some type of control over the
pricing of railway services is essential to the protection of the public
interest, particularly since in the period studied by Kolko railways were
the sole means of intercity transportation except for the limited availability
of water carriers and pipe lines. Moreover, in view of the economic
characteristics of railways and the unique and pervasive relationship of
transportation rates to the functioning of industry generally, the establishment of direct regulation of rates rather than a policy of enforced price
competition was in the public interest. Since railways operate under conditions of decreasing unit costs over a wide range of output, an attempt to
enforce price competition would be futile in the long run, and even if
feasible would not be in the public interest. It would induce wasteful
duplication of investment, prevent the achievement of cost reductions
associated with economies of scale and full utilization of plant, and
encourage unjustifiable discrimination. In view of these considerations railway transportation can not be said to be, in any meaningful sense, an "inherently competitive," industry. On the other hand, if it were in fact
"inherently competitive," as Kolko maintains, the enforcement of price
competition would be the logical policy to adopt in the public interest.
In holding that the railway industry was "inherently competitive,"
3 It is probable that not all of these routes were effectively competitive in the
shipment of all commodities, partly because of the time in transit on very circuitous
routes and partly because some kinds of equipment can not be handled on some
routes due to physical limitations.
Railroads and Regulation
233
Kolko would logically be compelled to take the position that the Act to
Regulate Commerce was adverse to the interests of shippers and consumers, if only because its requirements of adherence to published rates
and advance notice of rate changes circumscribed the play of competitive
forces in railway rate making. The fact that the law also included, inconsistently, a prohibition of pooling he explains as being a necessary concession to secure the support of the more radical antirailroad elements
who favored the Reagan bill as against the Cullom bill during the congressional debates which eventually resulted in the 1887 law. Thus Kolko is
logically impelled to the view that federal railway legislation represented,
in effect, a kind of conspiracy to enforce the cartelization of an "inherently
competitive" industry to the detriment of shippers and consumers, despite
the fact that the railway industry is demonstrably not "inherently competitive" and despite the fact that unrestricted price competition had been,
and would be, demonstrably injurious to the long-run interests of shippers
as a whole no less than to the railroads. That this is nevertheless Kolko's
position is indicated by the fact that he cites the Commission's support of
proposals to legalize pooling, subject to the provision of effective rate
control, as evidence of its prorailroad bias.
In view of the foregoing it is not surprising that Kolko should present
a somewhat slanted interpretation of the Elkins Act of 1903. The original
Act to Regulate Commerce contained provisions prohibiting personal discrimination and requiring adherence to published rates, but because of
restrictive judicial interpretation and for other reasons these provisions
proved to be inadequate to accomplish their purpose. Consequently, in
addition to revenue losses from recurring rate wars, the railroads also
suffered serious revenue losses from widespread resort to what Kolko
refers to as "a surreptitious form of rate cutting" (p. 89), that is, the
granting of rebates, particularly in competing for the business of large
shippers. He points out that the railroads therefore sought legislation
which would both legalize pools and eliminate rebates, and that, fortunately for them, at the same time "the merchants and small shipping
interests began adding to the clamor for railroad legislation. Although
their motives and interests were different, these elements helped make
legislators aware of the need for action, even though the action itself
was directed and controlled by pro-railroad legislators" (pp. 92-93).
However, according to Kolko, the shipper interests would not support the
"blatantly pro-railroad" proposal to legalize pooling, so that in the final
version of the Elkins bill the carriers had to be content with strengthening
the law against personal discrimination. With regard to the key provision
that the published rate is to be "conclusively deemed to be the legal rate"
and any departure therefrom is to be treated as a misdemeanor, Kolko
says, "Such a provision for maintaining rates accomplished the same end
as pools and rate associations; this had been the goal of the railroads for
three decades. The major railroads were delighted with the Elkins Act,
for the legal machinery of the government was now to do what they had
failed to accomplish themselves" (pp. 100-101).
234
Robert W. Harbeson
This statement epitomizes Kolko's point of view with respect to the
Elkins Act. Although an entire chapter is devoted to the background of
this legislation, the shipper interest is referred to only briefly (about one
and one-half pages) and then only as providing the support needed by
the railroads to secure at least partially the latter's goal of further restrictions on competition.4 There is nowhere any reference to the role of
rebates in fostering the Standard Oil and other monopolies, or to the
other economic and ethical evils of personal discrimination which urgently
called for remedial legislation.5 On the other hand, the fact that the railroads actively sponsored this legislation has long been explicitly recognized by students of transportation,6 so that Kolko's emphasis on the fact
that the bill's "real author was the Pennsylvania Railroad" (pp. 95 ff.)
adds only an interesting detail. To an important extent, although not
completely, the interest of the railroads in this legislation coincided with
the public interest however conceived, but from reading Kolko's discussion one would certainly not gain the impression that this was the case
or even that there was an overriding public interest in this matter.7
Similar comments are applicable to Kolko's interpretation of the movement to achieve the dominance of the federal government over the states
in the field of railway regulation. As indicated at the outset, it is Kolko's
thesis that the railways sought federal regulation "on their own terms"
not only to secure the restriction of competition and stability of rates
which they had been unable to attain by their own efforts but also to
secure protection from more radical antirailroad legislation, particularly
at the state level. Beginning shortly after the turn of the century, the
volume of state railway legislation increased rapidly, taking the form of
4 Kolko's view of the role of shippers in the development of regulation is well
expressed in the following:
Shipper sentiment for railroad legislation was often conservativein motive and
variable in direction. The railroadswere always able to find at least some shipper
group willing to help serve as a spokesman for the railroad position, and the
manipulation of the naturally divided shippers is a continuous feature of the history of agitation for national legislation (p. 106).
5 See Locklin, Economics of Transportation,ch. xxi.
6 See, for example, Ripley, Railroads, pp. 206-207; Eliot Jones, Principles of Railway Transportation (New York: Macmillan, 1924), p. 234; I. L. Sharfman, The Interstate Commerce Commission (5 vols.; New York: The Commonwealth Fund,
1931-1937), I, 36; K. T. Healy, The Economics of Transportationin America (New
York: Ronald Press, 1940), p. 389; R. E. Westmeyer, Economics of Transportation
(Englewood Cliffs, N.J.: Prentice-Hall, 1952), p. 117; M. L. Fair and E. W. Williams,
Jr., Economics of Transportation (rev. ed.; New York: Harper and Bros., 1959), p.
445; Locklin, Economics of Transportation,p. 214.
7 It is true that the Elkins Act made the establishment of effective control over
rates more important, since in oligopolistic industries it is easier to raise and maintain
prices by price leadership and tacit collusion when secret price concessions are suppressed. However, while railway earnings and average ton-mile revenue increased as a
result of the elimination of concessions it has not been shown that the Elkins Act
resulted in any significant increase in the level of published rates or in an unreasonable level of earnings, even though at that time the Commission'scontrol over rates
had been rendered largely ineffective by Supreme Court decisions. In any event, effective control over rates was soon to be achieved by the Hepburn Act of 1906.
Railroads and Regulation
235
laws fixing maximum freight rates and/or passenger fares and regulations
relating to the interests of labor and safety of operation. The latter were
especially burdensome because of their diverse and contradictory character. The railroads were able to secure relief from some of this legislation
through the courts, but only after long delays; hence it is not surprising
that they should turn for help to the Interstate Commerce Commission
and to Congress. Their efforts culminated in the Shreveport decision of the
Supreme Court,8 upholding the Commission's action in invalidating intrastate freight rates which discriminated against interstate commerce, and
in the recognition and extension of the principle of the Shreveport Case
in section 13(4) of the Interstate Commerce Act, added by the Transportion Act of 1920. With respect to the effect of the latter, Kolko says,
"The rate-making powers of the states were left in a shambles" (p. 230).
Except for a single passing reference to the fact that at one point the
railroads had the strong support of some important shipper groups and
that "Even the New York Times was sympathetic" (p. 223), Kolko's
discussion leaves the impression that the railroads were almost the sole
beneficiaries of the foregoing action, through frustrating the wishes of
radical farm and labor interests and through securing relief from the
financial and administrative burdens of state regulation. There is no discussion of the merits of such manifestations of "local democracy" as
excess-crew laws and freight rates designed to serve as a protective tariff
for the benefit of local shippers, nor any reference to the national interest
in removing unwarranted financial burdens on interestate shippers along
with other obstacles to the free flow of interstate commerce. Surely Congress, the Interstate Commerce Commission, and the courts did not act
any less in the public interest in providing for the dominance of the
federal government in the field of railway regulation merely because the
carriers supported and benefited by the achievement of this objective.
A very important part of Kolko's argument is that the railways strongly
supported federal regulation because its administration even more than
its content was shaped in their interest. This situation presumably resulted from the fact that from the start, according to Kolko, a majority
of the appointees to the Interstate Commerce Commission had prior railroad contacts and a definite prorailroad bias-a case of guilt by prior
association. Thomas M. Cooley, the first Chairman of the Commission,
was recommended for the post by Senator Shelby M. Cullom, "the author
of the pro-railroad bill" (p. 47). According to Kolko, "The railroads
themselves could not have chosen a more sympathetic regulator . . . for
Cooley completely identified himself with the railroads' interests from at
least 1882 on" (p. 47). Generalizing, he says, "Indeed, it is not unreasonable
to assert that the primary commitment of the major directors of Commission
policy was essentially pro-railroad" (p. 234). Presumably on the basis of
the alleged prorailroad bias of a majority of the commissioners, Kolko
concludes, "The Interstate Commerce Act was a bitter harvest for the
8 Houston East and West Texas Ry. v. U.S., 234 U.S. 342 (1914).
236
Robert W. Harbeson
farmers and merchants" (p. 53) and "railroad regulation essentially represented an internal class affair. The vast majority of farmers and the consumers were powerless and forgotten" (p. 56). In support of these
sweeping strictures he relies principally on three lines of evidence, namely,
(1) the nature of the Commission's procedure, (2) its administration of
the long-and-short-haul clause of the Act, and (3) its policies in connection with the early general rate advance cases. These will be examined in
turn.
With respect to the first of these matters, Kolko condemns the Commission's heavy reliance upon informal settlement of complaints through
investigation and correspondence as being "without authorization in law"
(p. 153) and as prejudicial to the rights of shippers, in that it delayed or
deterred resort to formal complaints and "essentially allowed the roads to
judge themselves" (p. 56); "If the railroad was charitable the shipper was
not greatly inconvenienced by this system" (p. 68). In evaluating these
criticisms it should be pointed out, first, that within the framework established by the statute and by constitutional requirements the Commission
was given broad discretion in developing its practice and procedure,
parallel to the comparable range of discretion accorded to it in connection with substantive determinations; it was recognized that relative freedom in both of these matters is a sine qua non of the administrative
process. Hence the Interstate Commerce Act, in section 17(3), provides
simply that "The Commission shall conduct its proceedings under any provision of law in such manner as will best conduce to the proper dispatch
of business and to the ends of justice." Therefore, contrary to Kolko,
specific approval of the use of informal procedures was not required and
utilization of such procedures would appear to conform to both the terms
and intent of the statute.
Nor is there any better foundation for Kolko's complaint that the interests of the shippers were prejudiced and those of the carriers favored by
reliance upon informal settlement of complaints whenever feasible; on the
contrary, the interests of the shippers would have been seriously prejudiced and, indeed, the whole administrative process undermined if the
Commission had not relied extensively on such procedures. The utilization of informal procedures for handling complaints is very advantageous
to shippers in that it involves far less delay and expense than formal
litigation yet does not in any way impair the shipper's right to resort to
the latter whenever necessary. Moreover, only by utilizing informal
procedures whenever feasible can the Commission's formal docket be
kept within manageable limits and the Commission enabled to deal adequately with difficult and complicated cases without intolerable delay.
Kolko nevertheless ignores the important savings in time and money
which informal settlement of complaints makes possible and holds that
shippers' rights were prejudiced because, at least prior to 1906, formal
litigation was "incredibly expensive and time consuming" (p. 56) and
hence was not in fact available to the average shipper as an alternative
if informal procedures failed to produce satisfactory results.
Railroads and Regulation
237
In order to support his thesis that the Commission was prorailroad,
Kolko implies that the Commission sanctioned, or at least permitted, the
existence of the latter situation as part of a policy to encourage shippers
to rely on voluntary settlement of complaints on terms dictated by the
railroads. Actually, students of transportation regulation have almost
universally recognized that the provision in the 1887 law requiring the
Commission to rely upon the courts for enforcement of its orders was
primarily responsible for the inordinate delay and expense involved in
formal litigation, and that the change in the enforcement provisions made
by the Hepburn Act largely corrected this situation and served to explain
the sudden great increase in the volume of formal complaints after 1906.9
Kolko, on the other hand, in his desire to fasten blame on the Commission, completely ignores, but does not seek to disprove, this explanation,
saying, "A mere change of administrative procedure would have meant a
radical increase in formal complaints long before 1906, and would not
have required new legislation" (p. 153). However, in the light of the
foregoing analysis, and on the basis of a careful scrutiny of Kolko's book,
the writer finds no proof that the Commission's encouragement of informal procedures for settling complaints was intended to have, or has
had, any substantial prejudicial effect upon the interests of shippers. It
is scarcely necessary to add that this negative finding in no way implies
blanket approval of all features of the Commission's practice and procedure, or of their application in particular situations.'0
The second line of evidence relied upon by Kolko to support his thesis
that the Commission had a prorailroad bias is the policy which it followed
in the early years in the administration of section 4 of the Interstate Commerce Act, the so-called long-and-short-haul clause. In order to evaluate
Kolko's criticisms, it is essential to review the exact language of this
section of the law and some of the problems of interpretation and administration which it presented. Essentially, the clause, in its original
form, prohibited charging more for a shorter than for a longer distance,
the shorter being included within the longer distance, "under substantially
similar circumstances and conditions," with a proviso that upon applica9 See, for example, Ripley, Railroads, pp. 460-67; Jones, Principles of Railway
Transportation,pp. 223-25; Sharfman, The I.C.C., I, 23-25; Healy, Economics of
Transportation,pp. 386-87; T. C. Bigham and M. J. Roberts, Transportation,Principles
and Problems (rev. ed.; New York: McGraw-Hill, 1952), pp. 217-18; Westmeyer, Economics of Transportation,p. 114; Fair and Williams, Economics of Transportation,
p. 443; Locklin, Economics of Transportation,pp. 218-20.
The passage of the Expediting Act in 1903 was helpful in reducing delays in
litigation.
10 It is worthy of note that a study some years ago by a distinguished group of
specialists in administrative law, in referring to the work of the I.C.C.'s Bureau of
Informal Cases, commented, "The work of this Bureau has been highly effective in
achieving economies of time and money," and recommended that even parties who
had already filed formal complaints in rate matters be encouraged to make use of
the services of this Bureau. Report of the Attorney General's Committee on Administrative Procedure, Administrative Procedure in Government Agencies (Washington,
D.C.: U.S. GovernmentPrinting Office, 1941), pp 179-80.
238
Robert W. Harbeson
tion to the Commission the carriers may be allowed to depart from the
rule "in special cases, after investigation by the Commission." The question was presented whether this language meant that all departures from
the rule were prohibited except when, upon application, the Commission
granted relief, or whether departures were prohibited only when conditions were dissimilar, with the carriers required to apply to the Commission for relief only when in the first instance they had determined conditions to be dissimilar, or when they were uncertain about the dissimilarity and desired protection. Partly on the basis of an examination of
the legislative history of section 4, but primarily upon a consideration of
administrative practicalities, the Commission adopted the latter interpretation, and for the guidance of the carriers proceeded to announce the
circumstances which might justify them, on their own initiative, in departing from the rule of section 4. In the so-called Louisville and Nashville
Case,1" handed down less than three months after it began operations,
the Commission held that these circumstances were (1) competition of
water carriers not subject to the statute, (2) competition of
foreign or intrastate railroads not subject to the statute, and (3) certain
"rare and peculiar cases" of competition with railroads subject to the
statute where denial of relief would be "destructive of legitimate
competition."
The last of these justifications for departure from the rule of section
4, though sound in principle and intent, proved to be a disastrous loophole; what the Commission intended to be exceptional the carriers interpreted in such a way that it became the rule and hence made section
4 ineffective. After a delay of five years the Commission acted to close
this loophole by holding that the railroads could no longer decide for
themselves that competition between carriers subject to the Act was of
such character as to qualify for relief as a "rare and peculiar case," but
that in all such cases the carriers must adhere to the rule unless, upon
application, the Commission granted relief.12 However, in 1897, in the
Alabama Midland Case,13 the Supreme Court held that competition between carriers subject to the Act no less than other forms of competition
created a dissimilarity of circumstances and conditions and that in such
instances the Commission erred in requiring the carriers to secure prior
permission as a condition of departing from the rule. Since all forms of
competition were thus held to create a dissimilarity of conditions which
might justify the carriers on their own initiative in departing from the
rule of section 4, the effect of this decision was to make this section, for
all practical purposes, a dead letter. The situation was finally corrected
and section 4 made effective by a provision of the Mann-Elkins Act in
1910, which struck out the phrase "under substantially similar circumstances and conditions."
Kolko holds the Commission primarily responsible for the ineffective11
12
13
Re Southern Ry. and SteamshipAssn., 1 I.C.R. 278 (1887).
Trammellv. Clyde SteamshipCo., 4 I.C.R. 120 (1892).
I.C.C. v. Alabama Midland Ry. Co., 168 U.S. 144 (1897).
Railroads and Regulation
239
ness of section 4 prior to 1910 and minimizes the impact of the Alabama
Midland decision. He describes the Louisville and Nashville decision as
a "magnificent triumph for the railroads ....
which effectively guided
I.C.C. policy for the next five years and allowed the railroads to suspend
section 4 when it hurt them and maintain it when it was to their benefit"
(pp. 50-51 ).14 This statement suggests that Kolko is critical of the Commission's decision to permit the carriers to determine in the first instance
whether there was a dissimilarity of circumstances and conditions which
would justify a departure from the rule of section 4. With respect to this
criticism it should be pointed out, first, that since long-and-short-haul
discrimination was a long-established and very widespread feature of
the railway rate structure, a requirement that the carriers remove this
discrimination completely pending Commission action on what would
inevitably have been a vast number of applications for relief would not
only have seriously disrupted commercial relationships but would have
resulted in irreparable injury by delaying, perhaps for years, the granting
of many justifiable applications for relief. These considerations also support the Commission's action following the revitalizing of section 4 by
the Mann-Elkins Act in granting blanket relief in over 5,000 applications
pending decision on the merits of individual cases. Under the circumstances there would seem to be a reasonable presumption that the Commission's action both in 1887 and in 1910 was motivated by administrative
and public interest considerations and Kolko offers no proof to the contrary.
In the second place it should also be noted that the Louisville and
Nashville decision did not give the carriers carte blanche but laid down
guidelines which reflected a clear appreciation of the situations in which
section 4 departures are and are not economically defensible. Even the
"rare and peculiar cases" exception was sound in principle, since there
may be cases of competition between railroads subject to the Act, such
as circuitous lines vs. short lines, which may justify relief. The Commission can not be held responsible for the fact that the railroads made unwarranted use of this provision but it can be justifiably criticized for the
five-year delay in acting to correct this situation. In the writer's view, this
is the only substantial criticism which may properly be leveled against
the Commission's administration of section 4.
There has been general agreement among students of transport regulation that the "substantially similar circumstances and conditions" phrase,
by opening the way for the carriers to abuse the "rare and peculiar cases"
exception and by enabling the Supreme Court to nullify the Commission's effort to close this loophole, was primarily responsible for the in14 It may be noted that, in contrast to this statement, a distinguished jurist has
recently singled out the Louisville and Nashville decision for special commendation,
saying that not only was it decided with exemplary promptness but that "if Cooley
had deliberately set out to write an opinion that would forever be a model for administrators, he could scarcely have done better." Henry J. Friendly, The Federal
Administrative Agencies, The Need for Better Definition of Standards (Cambridge:
HarvardUniversity Press, 1962), p. 29.
240
Robert W. Harbeson
effectiveness of section 4 prior to 1910.15In order to support his opposing
thesis that this result reflected Commission favoritism toward the railroads, Kolko completely ignores this explanation and nowhere so much
as mentions the all-important phrase just referred to. Even in referring to
the amendment of section 4 in the Mann-Elkins Act, he merely says that
the clause was "reworded" (p. 193) but does not mention the fact that
the phrase in question was dropped or that the clause was revitalized as
a result. In the absence of proof to the contrary, and except for the Commission's delay in attempting to close the "rare and peculiar cases" loophole, it must be concluded that the explanation of the ineffectiveness of
section 4 is to be found not in its administration but in the language of
the statute and its judicial interpretation.
The third, and final, line of evidence relied upon by Kolko to support
his thesis that the Commission had a prorailroad bias is the policy which
it adopted with respect to the early general rate advance cases during
the period 1910-1917. The essence of his criticism seems to be that in
determining the reasonableness of proposals for an increase in the level
of rates, as distinct from changes in individual rates, the Commission
gave primary consideration to the financial needs of the carriers and in
so doing came to regard its role as primarily that of a protector of the
railroads, presumably to the neglect of the shipper and consumer interests. And he adds that the railroads recognized that "the I.C.C. had
now formally become a guarantee of relative security and profits"
(p. 216).
With respect to the foregoing criticism it should be pointed out, first,
that even if it so desired, the Commission could not, merely by manipulating rate levels, insure a predetermined level of profits to the carriers
irrespective of the available volume of traffic. Moreover, during the
period studied by Kolko the Commission's power to insure profits was
further limited by its lack of authority to control the building of new
lines and to prescribe minimum rates, by the prohibition of pooling, and
by the fact that railway combinations were subject to antitrust prosecution.
In view of these facts and the fact that a substantial mileage of railways
has recurrently been in bankruptcy, it is a gross and misleading exaggeration to speak of the Commission as a "guarantee of relative security
and profits."
Second, Kolko does not consider the circumstances which led to the
applications for general rate increases or the possible justification of
such increases, though his remark that the Five Per Cent decision of
1914 allowed the carriers to "inflate their rates" (n. 211) suggests that he
15 See Ripley, Railroads, pp. 481-83; Jones, Principles of Railway Transportation,
pp. 228-30; Sharfman, The I.C.C., IIIB, 551-53; R. L. Dewey, The Long and Short
Haul Principle of Rate Regulation (Columbus: Ohio State University Press, 1935),
pp. 76-78; Healy, Economics of Transportation,p. 387; Bigham and Roberts, Transportation, pp. 219-20; Westmeyer, Economics of Transportation,pp. 115-16; Emery
Troxel, Economics of Transport (New York: Rinehart and Co., 1955), p. 362; Fair
and Williams, Economics of Transportation,p. 444; D. F. Pegrum, Transportation,
Economics and Public Policy (Homewood, Ill.: Richard D. Irwin, Inc., 1963), pp.
294-95;,Locklin, Economics of Transportation,pp. 477-79.
Railroads and Regulation
241
doubts the increases were justified. The controlling factor was the steady
and substantial rise in the price level between 1897 and 1914 and its
spectacular rise between 1914 and 1920. After 1910 technological improvements and increases in operating efficiency were no longer able to
offset the effect of these price level changes upon railway costs. At the
same time the railway plant was becoming increasingly inadequate to
handle the growth of traffic, particularly after the outbreak of the war
in Europe, but the level of railway profits was such that the investment
funds necessary to provide an adequate plant could not be secured.
Against these considerations justifying an increase in the rate level must
be set the fact that the carriers' financial problems had been intensified
by the dissipation of revenue through unwise managerial policies and
rate structure maladjustments which the Commission had been unable
to control. Weighing these opposing considerations, the Commission
rejected the 1910 applications for increased rates, granted a 5 per cent
increase in two steps in Eastern Territory in 1914, and granted only a
minor part of the increases requested in 1915 and 1917.16 The over-all
rate of return on book value during the period 1910-1917 varied from
4.12 per cent in 1914 to 6.17 per cent in 1916.17 It is true, of course, that
because of infirmities in the carriers' reported book values these figures
somewhat understate the true rate of return, but when full allowance
is made for this factor, the level of earnings was modest by standards
usually applied to public utilities.
These facts can scarcely be interpreted as supporting Kolko's thesis that
the Commission was unduly concerned with protecting the interests of
the railroads; indeed, the searching and disinterested study by Professor
Sharfman concludes that larger increases should have been granted in
the interest of insuring an adequate transportation system.18 Kolko dismisses the refusal of the Commission to grant all of the rate increases
requested-a circumstance which does not support his thesis that the
Commission had a prorailroad bias-with the statement that what is
important is "the principle enunciated, not each particular application
of that principle" (p. 217). However it is difficult to imagine in what
sense the Commission could be regarded as serving the public interest
if it failed to recognize that the appropriate standard for determining
the reasonableness of a proposed general rate increase is the level of
carrier earnings required to provide an adequate national transportation system. Certainly such a principle is not any less in the public
interest merely because it is also in the interest of the carriers.
The foregoing discussion covers the main points developed in Kolko's
study, although if space permitted there are a number of statements
scattered throughout the book which invite additional critical comment.
16 The cases involved were Advances in Rates, Eastern Case, 20 I.C.C. 243 (1911);
Advances in Rates, Western Case, 20 I.C.C. 207 (1911); The Five Per Cent Case,
31 I.C.C. 351 (1914), 32 I.C.C. 325 (1914); Western Rate Advance Case, 35 I.C.C.
497 (1915); Fifteen Per Cent Case, 45 I.C.C. 303 (1917).
17 Locklin, Economics of Transportation,p. 347.
18 Sharfman,The I.C.C., IIIB, 94.
242
Robert W. Harbeson
As indicated at the outset, Kolko convincingly demonstrates that the
railroads welcomed rather than opposed the principle of federal regulation. However, on the basis of the considerations reviewed in the
foregoing pages, the writer is equally convinced that Kolko fails to
demonstrate that federal regulation over the period 1887-1920 was, in
any positive sense, shaped in the interest of the railroads to the neglect
or detriment of shipper and consumer interests. Only in a negative sense
can this proposition be said to be true, to the extent that the adoption
of proposals for more effective control was delayed or prevented as a
result of the opposition of the railroads. However, two points need to
be made in this connection: First, the opposition of the railroads was
not the only, and perhaps not the most important, reason for the slow
progress toward effective regulation. Second, the significance of the fact
that the railways supported federal regulation in principle is diminished
in proportion to the extent of their opposition to concrete regulatory
proposals, and correspondingly the traditional view of the relation of
the railways to the development of regulation is supported.
Kolko's failure to prove that in any positive sense federal regulation
favored the railroads at the expense of shipper and consumer interests
reflects in part his apparent lack of familiarity with elementary price
theory as applied to the railway industry, in part his failure in some cases
to recognize facts and interpretations which conflict with his thesis, and
in part his tacit acceptance of the erroneous assumption that legislation
which is favored by the railways as being in their own interest must
ipso facto necessarily involve neglect of, or detriment to, the interests of
shippers and consumers. Consequently, his study presents an interpretation of the development of railway regulation which is as inadequate
and distorted as the views which he undertakes to correct. The developments which he cites in support of his thesis-the effective suppression
of personal discrimination, the subordination of state to federal regulation, and the passage of the Transportation Act of 1920-while clearly
beneficial to the railroads, are also recognized by almost all students of
transportation as representing major advances toward the goal of more
effective protection of shipper and consumer interests. Furthermore, it
is noteworthy that in determining the permissible level of earnings, the
area in which the interest of the railways clashes most fundamentally
with that of shippers and consumers, the Commission leaned over backward to avoid any basis for the charge that it was unduly generous to
the railroads.
Kolko may wish to argue that to the extent that the public interest was
served by federal railway regulation this was a case of the operation of
Adam Smith's principle of the "invisible hand," that is, a desirable result
which was an incidental and unintended by-product of concern for the
financial welfare of the railways. Whether or not this view be accepted,
the important fact is that the public interest was served by federal
railway regulation, at first very imperfectly, but slowly and painfully
with increasing effectiveness over the period covered by this study.
ROBERT W. HABBESON,
University of Illinois