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73-476 AMERICAN ECONOMIC HISTORY: TOPIC 9
Government Regulation of the Economy
State Regulation of Railroads
The high fixed costs of railroads and the pricing system they
produced, inevitably led to efforts to regulate railroad passenger and freight
rates by the States.
By 1876 most states had passed laws regulating rates inside their
borders. Many of these laws were patterned after the Massachusetts law which
set up a quasi-judicial commission to adjudicate disputes between shippers and
- Munn vs. Illinois
In 1877 the Supreme Court upheld the right of the states to regulate
Chief Justice Waite used the old 17th Century custom in English
jurisprudence that accepted the regulation of a business clothed with a public
interest. "When Private Property is devoted to public use, it is subject to
public regulation." For example, a privately owned wharf.
One of the dissenters, Justice Stephen J. Field, argued that the
regulation of railroad rates was in effect confiscation of private property.
The railroads were being deprived of property without due process of law in
violation of the 5th and 14th Amendments. This argument
later became known as substantive due process.
- Wabash, St. Louis, and Pacific Railroad vs. Illinois
In 1886 the Supreme Court in effect reversed the Munn case
and struck down an Illinois law regulating railroad rates.
The Court argued that State railroad regulation violated the interstate
commerce clause of the Constitution. Only Congress could regulate interstate
In a companion case, Santa Clara County vs. Southern Pacific
Railroad, the Court defined the SPRR as a legal person!
Hence, the 5th and 14th Amendments were applicable.
The Interstate Commerce Act of 1887
All this turmoil led to the passage of the ICA in 1887.
The Act outlawed rebates, drawbacks, and pooling. It required the
railroads to post the rates in every depot and station and required the rates
to be "reasonable and just".
The Act contained a Short Haul Pricing Constraint.
Finally, the act set up a Commission to adjudicate disputes between
shippers and the railroads. The ICC was the first federal government regulatory
The ICA was vaguely written and did not have the independent means
to enforce its determinations.
The actions of the ICC could be appealed to the federal courts and it
took about 4 years to settle any particular point of dispute.
During the first 10 years 90% of the ICC's rulings on rate charges
were reversed in federal court. Consequently, the number of shipper appeals
Elkins Act of 1903
Partly in response to pressure from the railroads, Congress made
it illegal to ask for a rebate.
In the original ICA, railroads
could be punished for giving a rebate but if shippers asked for one,
that was not a criminal act.
Hepburn Act of 1906
Authorized the ICC to set maximum rates and to order railroads to
comply after 30 days.
Set up a system of fast appeals in the Federal Courts.
Instructed the courts to accept ICC rulings until evidence was
massed to the contrary. In effect, railroads were guilty until
Mann-Elkins Act 1910
Federal courts removed from the process. The ICC was empowered to
suspend proposed rate increases.
Railroads were forbidden from acquiring competing lines.
Jurisdiction of ICC expanded to telephone, telegraph, cable, and
Most of the major railroads were bankrupt by 1917. Almost no rate
increases were granted between 1907 and 1917. At the same time, labor costs
increased steadily through this period. With no control over their prices, rising
labor costs, and an explosion in demand, the railroads increasingly went into
debt in order to finance the necessary upgrades to their systems. When the
government nationalized the railroads in 1917 they were mostly bankrupt.
Transportation Act of 1920
To make up for some of the damage, Congress instructed the ICC to
set minimum rates. This was intended to make certain that the
railroads had an adequate income.
ICC granted more authority over entry, exit, and consolidation of
the railroad industry.
Setting minimum rates backfired because the emerging trucking
industry was able skim off much of the high value short haul freight business.
Pools, Trusts, and Holding Companies
The nature of competition in many industries in the latter part of
the 19th Century was extremely fierce. Carnegie's use of railroad cost
accounting to greatly decrease his costs and increase his output was widely
copied in other businesses.
This form of competition produced large output, quick sales,
keen competition, and small profits.
As a result, the inefficient fell by the wayside and the number of
firms within various industries fell sharply.
Pools, Trusts, and Holding Companies were seen as the solution to
the "curse" of cutthroat competition.
The Sherman Anti-Trust Act of 1890
The public was not as enthusiastic about Trusts as the "Robber
Barons" were. The Standard Oil Trust with its ruthless policies towards
small town retailers did much to turn the public sour on these attempts to
The result was "An act to protect trade and commerce against
unlawful restraints and monopolies."
Like the Court's famous struggle to define pornography in the
20th Century -- "I know it when I see it" -- Anti-Trust law
has been a struggle to define very imprecise concepts.
The fundamental problem is that the Anti-Trust laws do not
say what actions are legal!
Consequently, what is legal is simply what has not yet
been found to be illegal! And this changes with the winds of legal
The Federal Trade Commission Act of 1914
The FTC was intended to prevent rather than punish unfair
The Act set up a commission and it outlawed unfair trade practices.
Unfortunately, the FTC Act did not define what a fair trade
The Clayton Act of 1914
The Sherman Anti-Trust Act outlawed an combinations that were
"in restraint of trade."
Were labor unions combinations in restraint of trade? The federal
courts said Yes!
The Supreme Court repeatedly ruled that combinations of labor and
combinations of capital should be treated equally as restraints of trade.
The Clayton Act was hailed as the Magna Carta of the labor movement
in that Congress clearly intended it to say that labor unions were not
However, it was soon undermined by Supreme Court rulings and made a dead letter by
The Wagner Act of 1935 (National Labor Relations Act)
The NLRA declared that employees had the right "to organize and
bargain collectively, through representatives of their own choosing."
Labor was given the right to organize, elect by secret ballot its
own bargaining agents, and bargain collectively.
Interference by employers was prohibited and employees could not
be compelled to join a company union.
The act set up the National Labor Relations Board (NLRB) to
enforce provisions of the act and to arbitrate disputes.
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