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2. Regulating the Railroads
1. The Drive for Regulation
Characteristically, it was Albert Fink who saw it first. If the railroads could not form successful cartels by voluntary action, then they would have to get the government to do the job for them. Only government compulsion could sustain a successful cartel. As Fink put it in a letter as early as 1876, “Whether this cooperation can be secured by voluntary action of the transportation companies is doubtful. Governmental supervision and authority may be required to some extent to accomplish the object in view.”1
The railroad men were scarcely averse to calling in government to help solve their problems. As we have seen, the railroads had been hip deep in government subsidy for many years, and particularly since the Civil War. Of the railroad presidents in the 1870s, 80% held political jobs before, during, or after their tenure. Specifically, of 53 railroad presidents in the 1870s, 28 held down political jobs before or during their presidency, and 14 went into them after they left their railroad posts.2
Railroad regulation by the states was renewed after the Civil War, beginning with the establishment of the Massachusetts Railroad Commission in 1869. Historians once thought that these state commissions had been put in by farmers to lower railroad rates, but then it was discovered that much of the agitation for regulation came from groups of merchants in specific localities who were disturbed at the pattern of railroad rates, especially the relative height in their own localities. But far from the state commissions being at all anti-railroad, there is strong evidence that the railroads welcomed the commissions and tried to use them to cartelize. Thus, Charles Francis Adams, Jr., of the patrician Adams family, chief architect of the Massachusetts law and Chairman of the Railroad Commission, was scarcely a pariah in the railroad industry. On the contrary, he went on to become a railroad pool administrator and then to be president of the Union Pacific. Moreover, Chauncey M. Depew, attorney for the New York Central, and William H. Vanderbilt, head of the New York Central, were early converts to the regulatory concept. As Depew later wrote, he had become “convinced of their necessity ... for the protection of both the public and the railroads ...”3
Much has been made of the fact that the New England and New York commissions of the 1870s and 1880s were merely advisory, and could only hold public hearings and encourage publicity, while Illinois and several other Midwestern states gave their commissions compulsory rate-setting powers. In practice, however, there was little difference, and the “weak” state commissions were scarcely voluntary. As the Senate Committee on Interstate Commerce reported in 1887, concerning the Massachusetts Commission, the railroad men obeyed the commission’s edicts because
self-interest admonishes them of the supreme folly of encouraging or engaging in a losing contest with the forces of public opinion as concentrated and made effective through the commission. It is not because the managers, directors, or stockholders personally shrink from public criticism, but because back of the commission stands the legislature and back of the legislature stands the people ...4
But state regulation was proving too diverse and inefficient; in particular, it was impossible to regulate the vitally important through rates, the rates on shipments that extended beyond the boundaries of any one state. And so, while farmers complained that state commissions were too friendly to railroads, railroad men began to turn to federal regulation, to federal cartelization, as the solution. In the summer of 1877, John A. Wright, a director of the Pennsylvania Railroad, wrote in the Railway World that the federal government must “protect” the railroads from speculators competing ruthlessly toward “cutthroat” competition in railway rates. The federal government should not only control railroad investments and charters, but should fix freight and passenger rates, to be enforced “under penalty of criminal prosecution.”5
By 1879, there was general agreement among railroad pool executives, including Albert Fink, that the federal government would have to step in to cartelize railroad freight, for the pools could not succeed without governmental enforcement. In the same year, Joseph Nimmo, Jr., head of the first government railroad statistics department, reported that
At the present time railroad managers appear to be quite generally of the opinion that the only practicable remedy for the evils of unjust and improper discriminations, is to be found in a confederation of the railroads under governmental sanction and control, the principle of the apportionment of competitive traffic being recognized as a feature of such a confederation.6
The Interstate Commerce Act of 1887, regulating the railroads, was one of the first federal regulatory acts in American history. The Act began with a bill introduced in the House by Democratic Representative James H. Hopkins of Pittsburgh, in 1876 at the behest of a group of independent oil producers of western Pennsylvania. The major provision of the Hopkins Bill was the outlawing of railroad rebates. Gabriel Kolko is the first historian to point out that the motives of the Pennsylvania oil men were not anti-railroad. Quite the contrary, they were pro-railroad and anti-Standard Oil. The oil men were peeved at the superior competition of Standard Oil and its ability to get rebates from the railroads. Bested at competition, they turned to use the federal government to hobble their successful competitor. Formed into the Petroleum Producers’ Union the following year, the Union championed the railroads and wailed that Standard Oil was enslaving the giant New York Central, Pennsylvania, and B&O railroads. The railroads were delighted to form an alliance with the weaker oil men, in order to rid themselves of the annoyingly competitive device of rebating; this may be seen in the fact that the Hopkins Bill was apparently written by the attorney for the Philadelphia and Reading Railroad.7
The Pennsylvania oil men quickly organized a massive petition campaign for the Hopkins Bill. Over 2,000 signatures of Pennsylvania oil producers and Pittsburgh businessmen poured into the Congress agitating for the Hopkins proposal. The Hopkins Bill died in committee, but a similar bill, drafted by the Petroleum Producers’ Union, was introduced in early 1878, by Representative Lewis F. Watson of Pennsylvania. Rapidly, nearly 15,000 signatures on petitions poured into the House from Pennsylvania, attacking rebates and railroad rate “discrimination.” The Pennsylvania legislature, followed by Indiana and Nevada, sent similar resolutions to Congress during 1879.
There began almost a decade of jockeying among railroads and other interests on the precise form that federal railroad cartelization would take. The Watson Bill was reported out of the House Commerce Committee headed by Representative John H. Reagan of Texas, and the new Reagan Bill had been amended to outlaw railroad pooling. The Reagan Bill quickly passed the House in December, 1878.8 While happy to see rebates outlawed, the railroads wanted the pool agreements to be enforced rather than prohibited, and this prohibition was their major objection to the Reagan Bill. As Albert Fink testified before the Senate the following year, the railroads wanted to carry out the objective of the Reagan Bill. Fink approved the outlawing of rebates and the requirement to publicize rates (thus having a chilling effect on secret rebates); he also urged a legalized and enforced pooling process, to be governed by a federal railroad commission. Prefiguring the later provisions of the Interstate Commerce Act, Fink suggested the following clauses:
Section 3. That all competing railroad companies shall jointly establish a tariff for all competing points.
Section 4. That the tariff so established shall be submitted to a commission of experts appointed by the Federal Government, and if they find that the tariff is just and equitable and based upon correct commercial principles ... then such tariff shall be approved, and shall become the law of the land, until changed in the same manner by the same authority.
Section 5. In cases where railroad companies cannot agree upon such tariffs, or upon any other questions such as might lead to a war of rates between railroad companies, the questions of disagreement shall be settled by arbitration, the decision of the arbitrator to be enforced in the United States Courts.9
The railroads preferred the Rice Bill of 1879 in the House, and the later Henderson Bill, both written by railroad leader Charles Francis Adams. The bill, which called for a federal railroad commission to legalize and enforce railroad pooling, was endorsed by notables of the Pennsylvania and Erie railroads.
The jockeying in Congress for the next several years was largely over the details of regulation, especially over the railroads’ desire to legalize pooling and to administer the statue by a regulatory commission. In testimony before the House Commerce Committee in 1884, railroad men were overwhelmingly in favor of regulation, particularly if administered by an appointed commission. John P. Green, vice president of the Pennsylvania Railroad, declared that “a large majority of the railroads in the United States would be delighted if a railroad commission or any other power could make rates upon their traffic which would insure them six per cent dividends, and I have no doubt, with such a guarantee, they would be very glad to come under the direct supervision and operation of the National Government.”10
Writing to Massachusetts Representative John D. Long on why the railroads were so insistent on a federal commission, the shrewd Charles Francis Adams pointed out:
If you only get an efficient Board of Commissioners, they could work out of it whatever was necessary. No matter what sort of bill you have, everything depends upon the men who, so to speak, are inside of it, and who are to make it work. In the hands of the right men, any bill would produce the desired results.11
What those desired results were, and why federal regulation was needed, were spelled out in an 1884 article in the Chicago Railway Review by George R. Blanchard, head of the Erie. Clearly, such great pools as even the Joint Executive Committee could not succeed in imposing joint rates on the railroads. Therefore, what was needed was “a national railway commission to cooperate with and not oppose this recognized committee ... their cooperative traffic federations [of the railroads] which are intended, within just limits, to secure uniformity, stability and impartiality among railways, their patrons and the States, should be reinforced, ratified and legalized by an intelligent public conviction.”12
In hearings before the Senate Interstate Commerce Committee during 1885, dozens of prominent railroad men testified, and all but one strongly endorsed at least the principle of federal regulation. Almost all the railroad leaders favored a regulatory commission. In more detail, many called for legalizing of pools and for the outlawing of rebates. In reporting out the regulatory bill by Senator Shelby M. Cullom of Illinois, the Committee pointed to its support among the railroad interests.
In the meanwhile, a former vice president of the Erie Railroad wrote to the Commercial and Financial Chronicle criticizing traditional American adherence to laissez-faire: “It has always been the fashion in this country to argue that the less government we have the better, and that this constitutes the main advantage of this country over Europe. But there are some things that the Government must do if society is to hold together” — in particular, assist the railroads through regulation.13 In turn, free-market adherents were horrified at the unanimity with which railroads and shippers alike were calling “for the same soothing syrup — legislative enactment.”14
By late 1886, the Senate had passed over the Cullom Bill and the House the Reagan Bill. Both bills outlawed rebates; neither gave the federal government the power to fix railroad rates directly. The railroads were in favor of the Senate bill because, unlike the Reagan Bill, it did not explicitly outlaw private railroad pools and, more particularly, because it established a federal commission to work its will in interpreting and enforcing a vague law, whereas the Reagan Bill left enforcement solely to the courts. In a conference of the two houses, Reagan conceded all points to the Senate, except to maintain the prohibition on pooling. The country was given a law vague in all matters except outlawry of rebates and of some rate discrimination in favor of long-haul freight. The power of interpretation and enforcement in the courts was given to a five-man commission. The compromise bill, backed by the railroads, passed both houses overwhelmingly in January 1887 by a vote of 36 to 12 in the Senate, and 219 to 41 in the House.15
The Chicago Inter-Ocean, a leading railroad magazine, summed up the railway men’s case for the Interstate Commerce Act shortly before its passage:
Perhaps the strongest argument that can be presented in favor of the passage of this bill is found in the fact that many of the leading railway managers admit the justice of its terms and join in the demand for its passage. ... The irregularities that have gradually crept into [the railroads] ... got beyond their capacity to manage. …The effort to maintain rates was equally unsuccessful. Then came the last resort — the pool — but that, too, proved impotent. ... And now, acknowledging the inefficiency of their own weak inventions … the managers are content to leave the settlement of the whole matter to the law-making power of the country ...16
With the law passed, “everything depend[ed],” as Adams had said, on who the Interstate Commerce Commissioners would be. The first Commission, in particular, would set the pattern for the future with its interpretations and rulings. Would the railroads, or the shippers, or the farmers, control this commission? Or, more precisely, whom would President Grover Cleveland appoint?
The United States was, politically, in the midst of a new era: in 1884 the Democratic Party had, in the person of Grover Cleveland, captured the presidency for the first time since the Civil War. From now until the late 1890s, the United States would be a genuine two-party country once again, with power shifting easily from one party to the other. We have mentioned above that, in the Panic of 1873, J.P. Morgan had succeeded the fallen Jay Cooke as the nation’s premier investment banker. And since the railroads were the only genuine big business in these decades, this meant the successor as the leading railroad financier. But while Jay Cooke had been a Republican, J.P. Morgan was a Democrat. If we consider that August Belmont, U.S. representative of the powerful European banking house of Rothschild, was treasurer of the national Democratic Party for many years, we can see that such financial powers as Morgan and Belmont wielded enormous influence over the personnel and the policies of the Democratic Party.17
Before the Civil War, the Democratic Party had been the laissez-faire, minimal government party in America. This continued to be the case, although not quite as strongly. But the party was now vulnerable, for if Morgan, Belmont, and financiers or railroad men in their ambit should begin to shift to a statist position in one or more areas, the Democratic Party was likely to follow. And this is in fact what happened.
J.P. Morgan had become the foremost sponsor of railroad pools, and his as well as other railroads had now endorsed the ICC as an instrument of imposed cartelization. The new President, Grover Cleveland, was also generally in favor of laissez-faire, but he had long been in the railroad ambit. When he ran for Governor of New York in 1882, he was known, with considerable justice, as a “railroad attorney” in Buffalo. Cleveland had been an attorney for several railroads, including the New York Central. His pro-railroad appointments to the New York Railroad Commission were consistent with this image.18 Cleveland also had a close long-time relationship with J.P. Morgan. During his administration as President, he frequently consulted with both Morgan and Belmont Jr., and Cleveland’s old law partner, Francis Lynde Stetson, later became the attorney for J.P. Morgan and Co. and one of the most important counselors in the Morgan circle.19
The railroad men therefore regarded Cleveland as safe, and they turned out to be right. Cleveland did not, of course, veto the Interstate Commerce Act. His appointments to the ICC were even more revealing. At the urging of Senator Cullom, Cleveland chose as chairman the distinguished jurist, Thomas McIntyre Cooley. A proponent of strict construction and laissez-faire, Cooley unfortunately chose the railroad industry to make his most conspicuous exception to this general rule. This choice was perhaps not unconnected with his accepting employment, from 1882 on, as administrator and arbitrator in Albert Fink’s Joint Executive Committee railroad pool. In addition, Cooley served since 1885 as a receiver for the Wabash Railroad. As a result of accepting these posts, Cooley had shifted by 1887 to favoring government legalization and control of pooling through a federal commission.
Of the four other commissioners, two were leading railroad men. Augustus Schoonmaker had been associated with Cleveland in New York politics, and then had become a railroad attorney; and Aldace F. Walker was a veteran railroad man who was to resign after two years on the ICC to become head of the major railroad rates association, and eventually to be chairman of the board of the Atchison, Topeka & Santa Fe. The other two members were hack Democratic politicians, one of whom had already been a state railroad commissioner in Alabama. It was no wonder that the Railway Review hailed the appointments: “Fortunately, its present membership is not made up of the stuff that is liable to shrink from doing what it conceives to be its duty ...”20
The Interstate Commerce Commission quickly moved in the direction desired by the railroads. On the one hand, the ICC allowed the railroads themselves to suspend the provision prohibiting discrimination against short-haul rates when it was advantageous for them to be higher, thereby giving the ICC sanction to their practices. Aldace Walker wrote that this policy was “capable of very general application ... and it is a fact that as a prevention of rate wars and destructive competition it is already recognized by intelligent railroad men as better than the pool.”21 On the other hand, the railroad men were anxious to have the ICC follow strictly the prohibition of rebates to shippers, and the ICC eagerly complied. Railroad leaders kept a vigilant eye on violations of the new law by their competitors and enthusiastically turned them into the authorities. As Charles Francis Adams, Jr., now president of the Union Pacific, declared: “... we would welcome the rigid and literal enforcement of every provision of the interstate commerce act.”22
At first, the railroads, under the friendly regime of the ICC, were able to raise rates, but soon, by the end of 1887, the dreaded rebates began again as a few railroads decided to compete vigorously once more. The railroads decided to try to bring pools in by the back door. While pools were technically outlawed, voluntary rate associations, which simply fixed rates without allocating freights and markets, were still legal. Indeed, Professor George Hilton concurs with pro-railroad opinion at the time that the language of the Interstate Commerce Act, taken from the original Cullom Bill, “almost compels” collusive ratemaking on the part of the railroads.23
The ICC was therefore in keeping with the law when, to the delight of the railroads, it decided to give its sanction and imprimatur to the freight rates worked out by the railroad rate associations — in short, to use the federal government to ratify rates decided upon by private railroad cartels. Despite the official outlawry of pools, therefore, the ICC was to serve as a powerful instrument of railroad cartels.
It is no wonder that, very soon after its inception, the Interstate Commerce Act and the ICC were lauded by the railway men, while the merchants’ and farmers’ groups who had high hopes for the ICC quickly came to call for its repeal. Thus, during 1890, numerous merchants and farmers groups called for repeal of the outlawry of pro-long haul discrimination, while the Detroit and Indianapolis Boards of Trade went so far as to call for outright repeal of the Interstate Commerce Act because it protected railroads and raised railway rates.24
But if the ICC looked with favor at cartel rates fixed by rate associations, it had no power to fix or enforce them. As competition resumed and freight rates fell further, the presidents of the leading Western roads were called to New York by the tireless J.P. Morgan to seek ways of maintaining freight rates and enforcing violations of the anti-rebate law. The railroad men met with the ICC commissioners in 1889, and the ICC encouraged the railroads to form what would virtually be a pool agreement. As a result, 22 roads signed an agreement to keep freight rates from falling; and, while no shares of freight were formally allocated between the roads, thus keeping narrowly within the letter of the law, the agreement authorized the railroads to take such steps as may be necessary and legal “to secure to each Company its due share of the competitive traffic.”25 The pool, with its agreement to ration business and thereby allow a raise in rates, was back in all but name. And this time the ICC was there to help enforce it.
The new cartel organization called itself the “Inter-State Commerce Railway Association,” and it avowed that its purpose was “to exercise their power and influence in the maintenance of rates and the enforcement of all the provisions of the Inter-State Law.” It was, in short, merely altruistically interested in law enforcement! The Association pledged itself to enforce the agreement by notifying the ICC of any violation of law. And, to top matters off, and to underscore the incestuous relationship the new Association had with the ICC, Aldace Walker resigned as a member of the ICC to become chairman of the new organization. Gabriel Kolko aptly calls the Association, “in fact nothing more than a massive railway effort to interpret and enforce, with Commission sanction, the Act of 1887.”26
The presidents of the Pennsylvania and New York Central railroads, the representative of the Northwest Railroad Board, and Charles Francis Adams, Jr., were all enthusiastic about the agreement. In imitation, ten major Eastern lines signed a similar agreement in February, appointing the ubiquitous cartelist Albert Fink as its commissioner. Again, the sanctimonious purpose was “to aid in the enforcement of the provisions of the Interstate Commerce Law,” and to inform on all violations to the Commission.27
But even with ICC sanction, the winds of competition proved far too great for the railroad cartels. By the spring of 1889, vehement rate wars in the West had wrecked the Association. Repeated attempts to establish rate associations in the Southwest and to reconstitute the one in the West continued to fail, despite J.P. Morgan’s best efforts and the ICC endorsement. Rates continued to fall, sparked by secret competitive rebates, throughout the 1890s. The railroads continued to try to form and reconstitute rate associations, but all to no avail. In late 1895, 31 major Eastern roads set up the Joint Traffic Association, along almost the same lines as the defunct Inter-State Commerce Railway Association. The U.S. Supreme Court killed the association in October 1898 by calling such agreements illegal pools, following a similar decision the previous year. But it should be noted that the Association had foundered on the rock of competition and rate-cutting before the court’s decision was announced.28
Throughout the 1890s, the railroads agitated for what were called “legalized pools,” but were actually pools that would be legally enforceable. In bills sponsored or written by railroads and submitted to Congress, railroad pools would fix rates, and then the ICC would ratify and enforce them. As the attorney for the B&O, who wrote one of the bills, declared: “we say unhesitatingly we are not afraid for one instant of the intervention of the Commission. We do not want an agreement to go into effect without their approval ...” The railroad point of view was put cogently by A.B. Stickney, president of the Minnesota & Northwestern Railroad, in a book written in 1891:
For a quarter of a century they [the railroads] have been attempting, by agreements between themselves, to make and maintain uniform and stable rates. But as such contracts are not recognized as binding by the law, they have rested entirely on the good faith of each company, and to a great extent upon the capacity as well as good faith of each of the traffic officials and employees. In the past they have not been efficacious, and ... it is too much to hope for any sufficient protection to the rights of owners growing out of such agreements. ... Their alternative protection is the strong arm of the law. Let the law name the rates, and let the law maintain and protect their integrity.29
But despite the enthusiastic support of the ICC, Congress stubbornly refused to pass any such legislation. Now, after 1898, even the rate association route was declared illegal by the courts. As a result, railroad and ICC pressure on Congress for legalized pools intensified still further.
2. Strengthening the Interstate Commerce Commission
And so, by the turn of the century, the railroad leaders had realized that the existing Interstate Commerce Act was not sufficiently powerful to act as a successful cartelizer of the railroad industry. For the first decade of the 20th century, as Hilton states, “the history of the statutory authority of the ICC is best interpreted as an effort to convert the Act of 1887 into an effective cartelizing statute.”30
To aid in this effort, the railroad men were fortunate in the man who succeeded the pro-railroad Shelby M. Cullom in 1899 as chairman of the Senate Interstate Commerce Committee. He was the even more pro-railroad and more vigorous Stephen Benton Elkins of West Virginia, who quickly became the most important Congressional influence on railroad legislation. Elkins had always had his eye on the main chance. During the 1870s he had become the largest landowner in New Mexico by shrewd use of his post as U.S. District Attorney; he then was fortunate enough to marry the daughter of Henry G. Davis, a coal and railroad tycoon in West Virginia. Through this marriage, Elkins became the largest mine owner in the Atlantic area; he and his father-in-law also controlled the West Virginia Central and Pittsburgh Railroad. In short, Elkins’ passion for the interests of the railroads was not unconnected with his own status as railroad owner.31
The railroad cartelists were also fortunate in the sudden accession to the presidency of the United States of Theodore Roosevelt, the preeminent political symbol of Progressivism whose long political career was always close to the House of Morgan.32 By the end of the 1890s, Morgan had gained far more predominance in the railroad industry than he had ever had before, and his drive for cartelization — in general industry as well as railroads — had intensified. It is no wonder that Morgan’s ally Roosevelt would come to be labeled as the railroad men’s “best friend.”33
The first fruit of the new cartelizing drive was the Progressive Elkins Anti-Rebating Act of 1903. Rebates had been outlawed in the Act of 1887, but this mighty instrument of intense competition had continued to flourish, even though hidden, in the form of such devices as false classification and underestimating the weights of freight. Alexander J. Cassatt, president of the Morgan-associated Pennsylvania Railroad since 1899, had long been dedicated to cartels and “stabilization.” His attempt to end Pennsylvania rebates to the powerful Carnegie Steel Co. led to a mighty battle in which Andrew Carnegie and George Jay Gould threatened to build parallel railroads, while Morgan countered with a powerful attempt at monopoly in the steel industry known as United States Steel.34 Cassatt did not hesitate to turn to the secular arm by having his general counsel, James A. Logan, write the Elkins Bill in 1901 to crack down on rebating. Logan told a press conference that if his bill should pass, the railroads would “no longer be subject to the dictation of the great shippers as to rates and facilities.”35 The original Elkins Bill as it passed the Senate also achieved the long-standing railroad objective of legalizing pooling; while the final compromise bill did not officially legalize pools, it did the equivalent by declaring rates jointly arrived at by railroads to be legal, and providing that any joint rate filed with the ICC “shall be conclusively deemed to be the legal rate, and any departure from such rate, or any offer to depart therefrom to be an offense ...”36 The Elkins Act also made corporations as well as individuals liable for violations and provided that both the giver and receiver of rebates could be prosecuted. Thus, not only did the Elkins Act of 1903 greatly strengthen the prohibition of rebates, but it restored the legalization of associated rates that the Supreme Court had knocked down a half-decade before.
The railroads exulted at the passage of the Elkins Act which passed unanimously in the Senate and with virtually no opposition in the House. The Railroad Gazette declared that the law should have been passed five years earlier, and gloated that “all that will be asked of the Commissioners by the public will be that they go ahead and catch every law-breaking rate-cutter in the country.”37
Various merchant and shipper groups were not satisfied with the existing law, and they agitated after 1903 for outright rate-fixing powers to be given to the ICC. They were opposed by other shippers, however, including the National Association of Manufacturers, which reversed itself on the issue. As a result of this split, and of railroad opposition, such bills as the Esch-Townsend Bill were ultimately defeated in Congress.38
A different law, the Hepburn Act, written in the councils of the Roosevelt administration, passed Congress almost unanimously in 1906. As Kolko points out, historians have made a great to-do about the Hepburn Act as an allegedly controversial “reform” measure directed against the railroads while overlooking the fact (a) that the controversies were all minor, and (b) that everyone, especially including the railroads, accepted the principles of the bill and quibbled only over details. An examination of the Hepburn Act reveals why the railroads and railroad journals praised the law. Perhaps most importantly, the Hepburn Act strengthened the Elkins Act against rebating. For one thing, it extended the law to cover express and sleeping-car railroads, private-car lines, and pipe-lines, thus extending the cartel by bringing competing forms of transportation under the same regulation. Secondly, the Hepburn Act outlawed railroads transporting products which they owned themselves, a measure aimed at competing “industrial roads,” such as anthracite railroads, which owned coal mines.39 Third, it required 30 days’ notice for rate changes, which slowed down competitive rate cutting, and rebate penalties were stiffened, with fines equaling three times the value of the rebate, and a possible penalty of two years imprisonment was imposed for violating the law. Fourth, the railroad cartel was expanded by outlawing free passes by railroads to their customers, as well as various other free services to shippers. This, of course, was the equivalent of compulsory raising of rates by outlawing forms of price-cutting. Fifth, if rates arrived at by railroads were challenged by shippers, the ICC had the right to set its own maximum rates, if it found those rates not to be “just, fair, and reasonable.” The ICC’s rulings would be subject to review by the courts, and even though these were to be maximum rates, giving them the force of law made collusion between the railroads much easier, and hence strengthened the cartels.40
Particularly enthusiastic about the Hepburn Act was A.J. Cassatt, head of the Pennsylvania Railroad, who proclaimed his agreement with Roosevelt’s position. The Pennsylvania pointed out, in its 1906 Annual Report, that its aim of achieving the end of rebating having been achieved with the Hepburn Act, and “the maintenance of tariff rates [having] been practically secured,” it could go ahead and sell the stock it had purchased in its competitors.41 G.J. Grammar of the New York Central exulted in the compulsory elimination of the free passes and services. Key railroad leaders such as John W. Midgley (a veteran pool organizer) and Samuel Spencer were anxious to bring private-car railroad lines under regulation. The Railway and Engineering Review crowed over the abolition of the industrial railroads. E.H. Harriman, second only to Morgan in controlling railroads, favored the Hepburn Act. And, upon its passage, George W. Perkins, partner of J.P. Morgan & Co., wrote to Morgan that the new law “is going to work out for the ultimate and great good of the railroads. There is no question but that rebating has been dealt a death blow.”42
The railroads had been so exercised about the rebating problem that the executives of virtually all of the Western roads had met in December 1905, to consider steps to combat the practice. They decided to inform the ICC of all violations of the law.
The Hepburn Act was drawn up by Attorney-General William H. Moody. President Roosevelt had consulted with several railroad leaders, including Cassatt, Midgley, and Spencer. Roosevelt had been converted to the railroad cause, and to the desirability of railroad pools, by his Secretary of the Navy Paul Morton, formerly vice president of the Morgan-controlled Atchison, Topeka & Santa Fe Railroad.43
In his December, 1905 message to Congress, Roosevelt explained his call for railroad regulation in terms of restricting railroad competition, of protecting “good” as against “bad” (that is, particularly vigorous) competitors:
I believe that on the whole our railroads have done well and not ill; but the railroad men who wish to do well should not be exposed to competition with those who have no such desire, and the only way to secure this end is to give some Government tribunal the power to see that justice is done by the unwilling exactly as it is gladly done by the willing. Moreover, if some Government body is given increased power the effect will be to furnish authoritative answer on behalf of the railroad whenever irrational clamor against it is raised, or whenever charges made against it are disproved.44
Contemplating the growing drive for what would become the Hepburn Act, the Wall Street Journal keenly noted the enthusiasm by the railroad men as well as the growing general business interest in their own regulation:
Nothing is more noteworthy than the fact that President Roosevelt’s recommendation in favor of government regulation of railroad rates and Commissioner Garfield’s recommendation in favor of federal control of interstate companies have met with so much favor among managers of railroads and industrial companies. It is not meant by this that much opposition has not developed, for it has ...
The fact is that many of the railroad men and corporate managers are known to be in favor of these measures, and this is of vast significance. In the end it is probable that all of the corporations will find that a reasonable system of federal regulation is to their interest. ... It is known that some of the foremost railroad men of the country are at this time at work in harmony with the President for the enactment of a law providing for federal regulation of rates which shall be equitable both to the railroads and to the public.45
One consequence of the Hepburn Act indicates, contrary to accepted propaganda, whom the act really injured and whom it benefited. As soon as the act was passed, the New York Central happily complied by abolishing free storage facilities for New York flour merchants, the Chicago and Eastern Illinois Railroad inaugurated charges for switching, and free car service and loading in Philadelphia was abolished. The Railway World happily reported that:
notwithstanding the fears of many that railroads would be hurt by the operation of the law, no complaint has been heard from railroad men against its general provisions. On the contrary, the complaints are coming from the shippers, who were supposed to be the chief beneficiaries of the law.46
In 1910, Congress passed the Mann-Elkins Act completing the trilogy of cartelizing railroad acts passed during the first decade of the 20th century. The original bill of the Taft administration would have legalized railroad agreements to fix freight rates — a measure that the railroads had long yearned for. The roads could not get this provision through Congress, and they had to accept the clause that the ICC might suspend and review railroad rate changes.
In point of fact, the railroads welcomed governmental review and approval of rates provided this power were used primarily to prevent rate reductions rather than increases. To insure this, the railroads welcomed the achievement of an old demand in the Mann-Elkins Act: the creation of a new, special Federal Court of Commerce with the power to review all ICC rate decisions on appeal. It was expected by everyone that the new Commerce Court would be solidly pro-railroad, and so it proved to be. The chairman of the Commerce Court was the previous chairman of the ICC, Martin A. Knapp, who had long opposed competition in railroads and favored legalized pooling enforced by the government, and he now reaffirmed this stand, as well as calling for higher railroad rates.47
Also a force for cartelization was another provision of Mann-Elkins, reestablishing the original prohibition, in the Interstate Commerce Act, of rate discrimination for long-haul over short-haul traffic — a clause that had been nullified in the Supreme Court’s Alabama Midland Railway decision in 1897. By restoring this prohibition, Congress strengthened railroad cartels by preventing competitive rate reductions for long-haul traffic.
Professor Hilton trenchantly sums up the effect of the Mann-Elkins and other acts:
The investigation and suspension procedures established in 1910 and recognized for decades, were a powerful inhibition to promiscuous rate reduction, and the Mann-Elkins Act’s revision in Section 4 of the Act of 1887 restored its effectiveness against the practice of charging more for a shorter haul than for a longer haul. Without an effective Section 4, the Commission was unable to put down rate wars in which a railroad cut rates between points which it served in rivalry to parallel railroads below the level of rates to intermediate points.
Basically, what the legislation of 1903, 1906, and 1910 did was rectify the adverse judicial decisions of the 1890s and otherwise patch up the Commission’s statutory body of authority so that it could accomplish what Congress had set out to do in 1887: stabilize the railroad cartels without pooling.48
But the railroads were getting worried about the performance of their creation, the ICC, as witness their eagerness to place as many rate-setting powers as possible in the Commerce Court. For the organized shippers, with their interest in lower rates, were growing in political strength. They had managed to block important pro-railroad Taft administration provisions in Congress, and they grew in influence after 1910. In consequence, the ICC repeatedly rejected rate increases urged by the railroads after 1910, and, after the Supreme Court emasculated the powers of the Commerce Court in 1912, the shippers persuaded Congress to abolish the latter the following year.49
But despite their uneasiness at shipper influence on the ICC, for the nation’s railroads there was no turning back. They were strongly committed to federal government regulation, and the stronger the better.50 For one thing, federal regulation was bound to be more uniform, and therefore more effective in imposing a nationwide cartel, than state regulation, and probably it would be more enthusiastically pro-cartel. In the summer of 1914, the newly formed Railroad Executives’ Advisory Committee, including most of the nation’s railroads and headed by Frank Trumbull of the Chesapeake & Ohio, called for comprehensive federal control of the country’s railroads along the lines of federal control of the banks in the new Federal Reserve Act.51 E.P. Ripley, president of the Santa Fe Railroad, called explicitly for a partnership between the federal government and the railroads. In return for control over rates, the government would guarantee all railroads a fixed minimum rate of profit. This, opined Ripley, “would do away with the enormous wastes of the competitive system ...”52 Daniel Willard, head of the Baltimore & Ohio, called for speeding up the process of federalizing railroad regulation, and likened this need to the recent federal regulation embodied in the Federal Reserve and Federal Trade Commission acts.
The shippers had managed to block railroad rate increases before the ICC in 1910 by arguing for greater “efficiency” and “scientific management” on the part of the railroads. The railroad leaders, in their subsequent agitation for enlarged and comprehensive federal regulation, turned the tables by linking the typically progressive concept of “efficiency” with imposing uniformity and eliminating “competitive waste.” More specifically, this would come through cooperative, i.e., cartel-like, reductions in service and in railroad traffic, as well as quota allocations of freight, all in the name of efficient elimination of waste. The role of the federal government was to be as supervisor and enforcer of this cartelizing process. All this was supposed to require, and indeed was meant as the prop for, higher railroad rates.53
All in all, Fairfax Harrison, president of the Chicago, Indianapolis & Louisville Railroad, spoke for the railroad leaders when he declared that the ICC was necessary to assure general increases in rates when profits might be low, and thereby to prop up and increase railway earnings. This would be far better than free competition or the vagaries of state regulation. Trumpeted Harrison: “The day of the Manchester school and laissez faire is gone. ... Personally, I do not repine at the change ...”54
In response, the Republican platform of 1916 duly called for total federal control of railroad regulation. For their part, the Democrats were blazing the same path through the views and actions of President Woodrow Wilson. On September 10, 1914, Wilson wrote to Trumbull that, in view of declining railroad earnings, the railroads must be “helped in every possible way, whether by private co-operative effort or by the action, wherever feasible, of governmental agencies ...”55 The Railway World reported massive business approval of Wilson’s sentiments, and the Railway Business Association passed a resolution hailing the President. J.P. Morgan, Jr. wrote to Wilson expressing his gratitude for the Trumbull letter.
Moreover, in response to a request from Trumbull, President Wilson, in his December 1915 message to Congress, urged an inquiry into a comprehensive grappling with the nation’s railroad problem. Trumbull enthusiastically wired Wilson that “I am confident that you will do for the railroads of this country as much as you have already done for the banks.”56 At the subsequent hearings of the Congressional Joint Committee headed by Senator Francis G. Newlands, established in July 1916, the major railroad position was delivered by Alfred P. Thom, chief counsel of the Railroad Executives’ Advisory Committee. Thom not only called for exclusive federal regulation of the railroads, but also for their protection. He urged the model of the Federal Reserve System, with regional ICC’s, ICC setting of minimum as well as maximum rates, and the compulsory federal incorporation of all railroads as well as exclusive federal regulation of railroad security issues.
President Wilson called for strengthening of the ICC along similar lines in August 1916 — as well as advocating higher rates — and repeated his request in his December message to Congress. As we shall see below, the coming of America’s entry into World War I in April 1917 paved the way for the culmination of this, as well as other aspects of the progressives’ cartelizing programs for American industry. During the war, the railroad cartelists, viewing the “nationalization” of their industry, couldn’t have been happier.57
- 1. Gilchrist, “Albert Fink and the Pooling System,” pp. 32–33.
- 2. Ruth Crandall, “American Railroad Presidents in the 1870’s: Their Backgrounds and Careers,” Explorations in Entrepreneurial History (July 15, 1950), p. 295. Cited in Kolko, Railroads and Regulation, p. 15. [Editor’s remarks] For the dominance of railroad interests in the presidential administrations of the post-Civil War years, see Philip H. Burch, Jr., Elites in American History: The Civil War to the New Deal (New York: Holmes & Meier Publishers, Inc., 1981), pp. 15–67.
- 3. Kolko, Railroads and Regulation, pp. 16–17.
- 4. Kirkland, Industry Comes of Age, p. 120.
- 5. Kolko, Railroads and Regulation, p. 14.
- 6. Ibid., pp. 26–27.
- 7. Ibid., pp. 21–22.
- 8. [Editor’s footnote] The motivation behind the Reagan bill has not been sufficiently explored until recently. Railroad tycoon Thomas Scott’s fledging empire, the Texas & Pacific and the Pennsylvania, was involved in heated conflicts with other large railroad giants in the 1870s. The former was wrestling with Collis P. Huntington’s Central Pacific for control of transportation from California to the South, and the latter against the Erie and New York Central for Standard Oil’s lucrative oil shipments. Scott wanted federal subsidies to strengthen the Texas & Pacific in order to compete with Huntington. John Reagan of Texas was eager to help Scott in order to get a transcontinental railroad in his congressional district, a goal he long desired. This was mixed in with the election of Rutherford B. Hayes and the Compromise of 1877, in which the Republicans were able to offer vague promises to Southern Democrats — including John Reagan — in the form of subsidies to the Texas & Pacific in return for their admittance for the electoral commission to count the disputed electoral ballots for Hayes. After the election the Republicans reneged, so Scott received no federal subsidies, and Reagan no transcontinental railroad. The subsequent Reagan Bill, which outlawed pooling and interstate rebates to shippers and discrimination, was designed to strengthen Scott’s empire and hamper its rivals connected with Standard’s de facto railroad cartel. The prohibition of rebates and rate discrimination applied only to interstate trade, shrewdly designed to cripple the Pennsylvania’s competitors. Moreover, the Texas & Pacific opposed price discrimination in favor of government involvement with rate setting. See Samuel DeCanio, Democracy and the Origins of the American Regulatory State (New Haven, CT: Yale University Press, 2015), pp. 149–79.
- 9. Gilchrist, “Albert Fink and the Pooling System,” p. 40.
- 10. Kolko, Railroads and Regulation, p. 35. See also pp. 26–29.
- 11. On March 1, 1884. Ibid., p. 37.
- 12. Ibid., p. 38.
- 13. In Commercial and Financial Chronicle (July 4, 1885), p. 7. Quoted in Kirkland, Industry Comes of Age, p. 127.
- 14. Commercial and Financial Chronicle (June 6, 1885), pp. 666–68. Quoted in ibid., p. 127.
- 15. [Editor’s footnote] Kolko, Railroads and Regulation, pp. 43–44; George W. Hilton, “The Consistency of the Interstate Commerce Act,” Journal of Law and Economics (October, 1966): 103–07. For a survey of the diverse opinions on government regulation by railroad leaders and other businessmen, see Edward A. Purcell, Jr., “Ideas and Interests: Businessmen and the Interstate Commerce Act,” Journal of American History (December 1967): 561–78; DeCanio, Democracy and the Origins of the American Regulatory State, pp. 173–74. That the Erie and New York Central opposed the Reagan bill because it would weaken their position relative to the Pennsylvania, or that the Union Pacific, Central Pacific, and Southern Pacific were opposed to a rival transcontinental railroad, is not surprising. In addition, some railroads opposed the ICC because they were not fully satisfied with the results, and it is not a stretch to assume that since some railroads thrived at breaking rate agreements and cartels, others opposed the measure as well.
- 16. January 2, 1887. Quoted in Kolko, Railroads and Regulation, p. 41.
- 17. [Editor’s footnote] Burch, Elites in American History, pp. 50, 60, 87, 115.
- 18. See Benson, Merchants, Farmers, and Railroads, pp. 181–82, 187–88, 200. [Editor’s remarks] Cleveland’s first presidential administration was also dominated by railroad interests, even more so than the preceding Republican regimes. Burch, Elites in American History, p. 91.
- 19. [Editor’s footnote] For more on the Cleveland-Morgan connection, see Chapter 7 below, pp. 199–200.
- 20. Railway Review (April 16, 1887): 220. Kolko, Railroads and Regulation, pp. 47–49.
- 21. Aldace F. Walker to Joseph Nimmo, Jr., November 22, 1887. Quoted in ibid., p. 52.
- 22. Speech in December 1888. Ibid., p. 57.
- 23. Hilton, “The Consistency of the Interstate Commerce Act,” pp. 108–09.
- 24. Kolko, Railroads and Regulation, pp. 50–53.
- 25. Ibid., pp. 57–59.
- 26. Ibid., p. 60.
- 27. Ibid., p. 61.
- 28. Ibid., pp. 72–73, 83. On railroad competition up to the early 1890s, see also Julius Grodinsky, Transcontinental Railway Strategy, 1869–1893: A Study of Businessmen (Philadelphia: University of Pennsylvania Press, 1962), pp. 312–429. On the ICC as an attempt to enforce railroad cartelization, see MacAvoy, The Economic Effects of Regulation, pp. 110–204.
- 29. Quoted in ibid., Railroads and Regulation, pp. 74–75, 77. [Editor’s remarks] Some critics of Kolko have argued that since many railroads were just trying to get the government to enforce their voluntary cartel agreements and uphold contracts that they mutually agreed upon, they were not nearly as interventionist as Kolko and others have portrayed them. See Robert L. Bradley, Jr. and Roger Donway, “Reconsidering Gabriel Kolko: A Half-Century Perspective,” Independent Review (Spring 2013): 570–71, 573. It is important to note that, at least from Rothbard’s perspective, the free market does not enforce promises unless some goods have already been physically exchanged. This includes cartel agreements, which are explicitly dealt with in Rothbard, Man, Economy, and State, p. 181. See also Murray Rothbard, The Ethics of Liberty (New York: New York University Press, 2002 ), pp. 133–48. Therefore, the drive for railroads to get the government to enforce their cartel arrangements does constitute as an intervention.
- 30. Hilton, “Consistency of the Interstate Commerce Act,” p. 110.
- 31. Kolko, Railroads and Regulation, pp. 90–91.
- 32. For more on the Roosevelt-Morgan connection, see Chapter 7 below, pp. 203–28.
- 33. Kolko, Railroads and Regulation, p. 155.
- 34. ([Editor’s remarks] Gabriel Kolko, The Triumph of Conservatism (Glencoe, IL: The Free Press, 1963), p. 32.) For more, see Chapter 3 below, pp. 98–100.
- 35. Kolko, Railroads and Regulation, pp. 94–97.
- 36. Ibid., p. 100.
- 37. Railroad Gazette (February 20, 1903): 134. Quoted in ibid., p. 101. The importance of the Elkins Act, which has been rather neglected by historians, is underscored by George Hilton as revealing “the overall framework of regulation” of the railroads. George W. Hilton, “Review of Albro Martin, Enterprise Denied,” Bell Journal of Economics and Management Science (Autumn 1972): 629. ([Editor’s remarks] The above article is a trenchant critique of Albro Martin’s Enterprise Denied, a book on railroads which criticized parts of Kolko’s thesis. Rothbard earlier praised the article in “Recommended Reading,” Libertarian Forum (December, 1972): 6. See Albro Martin, Enterprise Denied: The Origins of the Decline of the American Railroads, 1897–1917 (New York: Columbia University Press, 1971). However, as shown below, Rothbard does agree with some aspects of Martin’s thesis, such as that after 1910 the railroads drowned under the ICC’s regulations.) Even Chandler, who is generally unsympathetic to the cartelizing interpretation of railroad legislation, concedes that the railroads overwhelmingly supported the Elkins Act, although he fails to realize that the Act strengthened the ICC and legalized joint railroad rates. Chandler, The Visible Hand, p. 174.
- 38. [Editor’s remarks] Kolko, Railroads and Regulation, pp. 103–06, 118–20. There has been much discussion over the railroad opposition to regulation in 1904 and 1905. Some have argued, contra Kolko, that the railroads were unanimously opposed to any new regulation. See Martin, Enterprise Denied, pp. 111–14; Richard H.K. Vietor, “Businessmen and the Political Economy: The Railroad Rate Controversy of 1905,” Journal of American History (June, 1977): 50–53. However, Kolko argued that the railroad opposition, especially in the Senate Committee meetings, was mainly directed against the Esch-Townsend Bill, which allowed the ICC to fix definite rates, and in speeches and railroad journals they were more sympathetic to other types of regulation. Kolko, Railroads and Regulation, pp. 117–44.
- 39. The Railway and Engineering Review spoke for most railroad opinion in hailing the provision of the new law outlawing industrial railroads: “... the ‘Industrial Roads’ will go out of business. They ought never to have been allowed to begin it.” Railway and Engineering Review, Sept. 15, 1906, p. 714. Quoted in Kolko, Railroads and Regulation, p. 150. [Editor’s remarks] Ibid., pp. 144–51.
- 40. See Hilton, “Review of Albro Martin, Enterprise Denied,” p. 269. [Editor’s remarks] Hilton’s controversial argument regarding the cartelizing effect of maximum rates seems to have been that the railroads could push for a higher maximum rate, and by making this rate official, downward price cutting from it could be deemed illegal.
- 41. Quoted in Kolko, Railroads and Regulation, p. 147.
- 42. Perkins to Morgan, June 25, 1906. Quoted in ibid., p. 148. [Editor’s remarks] Harriman favored the act relative to more hostile regulation. By late 1906, his clout with Roosevelt had significantly deteriorated. See Chapter 7 below, pp. 223–28.
- 43. Ibid., pp. 111 and 125. We know, too, that Roosevelt’s chairman of the Bureau of Corporations James R. Garfield, was consulting during 1905 with two powerful corporate attorneys: Victor Morawetz, of the Atchison, Topeka & Santa Fe, and Francis Lynde Stetson, personal lawyer for J.P. Morgan. Probably, Morawetz and Stetson were most influential in beginning the drive for what later would become the Federal Trade Commission, but railroad matters “might” also have been discussed. Ibid., p. 113.
- 44. Ibid., p. 115.
- 45. Wall Street Journal, December 28, 1904. Quoted in ibid., p. 120.
- 46. Railway World, August 29, 1906, p. 729. Quoted in ibid., p. 150.
- 47. [Editor’s footnote] Ibid., p. 199.
- 48. Hilton, “Review of Albro Martin, Enterprise Denied,” p. 630. As Kolko points out, the Supreme Court’s decisions of the late 1890s, striking down various rate regulations and refusing to sanction cartel agreements, were not, as most historians have believed, “pro-railroad” decisions. On the contrary, they were examples of the Court clashing with the railroads. Kolko, Railroads and Regulation, pp. 80–83.
- 49. [Editor’s footnote] Ibid., pp. 195–202.
- 50. [Editor’s footnote] Therefore, despite repeated efforts, the ICC was a failure for the railroads and was ultimately captured by the rival shipping interests. Robert Higgs has aptly characterized the situation of growing shipper power thwarting the railroads’ efforts:
Not infrequently, however, business support for regulatory harmonization at the federal level gave birth to an unmanageable offspring. Like Dr. Frankenstein’s monster, the newly created federal regulatory agencies often stopped heeding their business progenitors’ voice. Within twenty years, for example, the ICC had fallen under the sway of shipper interests, and by refusing to approve reasonable rate increases, the commission proceeded to compress the railroad companies in a merciless cost-price squeeze. So severely had the railroad firms suffered in the decade after 1906 that during World War I they collapsed, financially exhausted, into the loving arms of the U.S. Railroad Administration; afterward, under the terms of the Transportation Act of 1920, they found themselves reduced to little more than regulated public utilities.Robert Higgs, “Regulatory Harmonization: A Sweet-Sounding, Dangerous Development,” in Against Leviathan: Government Power and a Free Society (Oakland, CA: Independent Institute 2004 ), p. 76.
- 51. [Editor’s footnote] Kolko, Railroads and Regulation, pp. 219–20. For more on the origins of the Federal Reserve, see Chapter 14 below, pp. 463–78.
- 52. Traffic World, October 31, 1914, p. 798. In Kolko, Railroads and Regulation, pp. 215–16.
- 53. See K. Austin Kerr, American Railroad Politics, 1914–1920: Rates, Wages, and Efficiency (Pittsburgh: University of Pittsburgh Press, 1968), pp. 16, 22–24.
- 54. Fairfax Harrison, “Speech Before the Transportation Club of Indianapolis,” March 31, 1911 (1911), p. 1. In Kolko, Railroads and Regulation, pp. 206–07.
- 55. Railway Age Gazette, September 11, September 18, 1914, pp. 462, 506. In ibid., p. 213.
- 56. Frank Trumbull to Woodrow Wilson, December 7, 1915. In ibid., p. 223.
- 57. [Editor's footnote] See Chapter 12 below, pp. 379–82, 394–96.