1997 American Economic History Topic 9 Page

73-476 AMERICAN ECONOMIC HISTORY: TOPIC 9

Government Regulation of the Economy

State Regulation of Railroads
1. 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.
2. 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 the railroads.
Munn vs. Illinois
1. In 1877 the Supreme Court upheld the right of the states to regulate railroad rates.
2. Chief Justice Waite used the old 17^th 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.
3. 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 5^th and 14^th Amendments. This argument later became known as substantive due process.
Wabash, St. Louis, and Pacific Railroad vs. Illinois
1. In 1886 the Supreme Court in effect reversed the Munn case and struck down an Illinois law regulating railroad rates.
2. The Court argued that State railroad regulation violated the interstate commerce clause of the Constitution. Only Congress could regulate interstate commerce.
3. In a companion case, Santa Clara County vs. Southern Pacific Railroad, the Court defined the SPRR as a legal person! Hence, the 5^th and 14^th Amendments were applicable.
The Interstate Commerce Act of 1887
1. All this turmoil led to the passage of the ICA in 1887.
2. 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".
3. The Act contained a Short Haul Pricing Constraint.
4. Finally, the act set up a Commission to adjudicate disputes between shippers and the railroads. The ICC was the first federal government regulatory agency.
Enforcement Problems
1. The ICA was vaguely written and did not have the independent means to enforce its determinations.
2. 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.
3. 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 fell sharply.
Elkins Act of 1903
1. Partly in response to pressure from the railroads, Congress made it illegal to ask for a rebate.
2. 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
1. Authorized the ICC to set maximum rates and to order railroads to comply after 30 days.
2. Set up a system of fast appeals in the Federal Courts.
3. Instructed the courts to accept ICC rulings until evidence was massed to the contrary. In effect, railroads were guilty until proven innocent!
Mann-Elkins Act 1910
1. Federal courts removed from the process. The ICC was empowered to suspend proposed rate increases.
2. Railroads were forbidden from acquiring competing lines.
3. Jurisdiction of ICC expanded to telephone, telegraph, cable, and wireless companies.
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
1. 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.
2. 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
1. The nature of competition in many industries in the latter part of the 19^th 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.
2. This form of competition produced large output, quick sales, keen competition, and small profits.
3. As a result, the inefficient fell by the wayside and the number of firms within various industries fell sharply.
4. Pools, Trusts, and Holding Companies were seen as the solution to the "curse" of cutthroat competition.
The Sherman Anti-Trust Act of 1890
1. 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 "manage" competition.
2. The result was "An act to protect trade and commerce against unlawful restraints and monopolies."
3. Like the Court's famous struggle to define pornography in the 20^th Century -- "I know it when I see it" -- Anti-Trust law has been a struggle to define very imprecise concepts.
4. The fundamental problem is that the Anti-Trust laws do not say what actions are legal!
5. Consequently, what is legal is simply what has not yet been found to be illegal! And this changes with the winds of legal fashion.
The Federal Trade Commission Act of 1914
1. The FTC was intended to prevent rather than punish unfair trade practices.
2. The Act set up a commission and it outlawed unfair trade practices.
3. Unfortunately, the FTC Act did not define what a fair trade practice was.
The Clayton Act of 1914
1. The Sherman Anti-Trust Act outlawed an combinations that were "in restraint of trade."
2. Were labor unions combinations in restraint of trade? The federal courts said Yes!
3. The Supreme Court repeatedly ruled that combinations of labor and combinations of capital should be treated equally as restraints of trade.
4. 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 illegal combinations.
5. However, it was soon undermined by Supreme Court rulings and made a dead letter by the 1920s.
The Wagner Act of 1935 (National Labor Relations Act)
1. The NLRA declared that employees had the right "to organize and bargain collectively, through representatives of their own choosing."
2. Labor was given the right to organize, elect by secret ballot its own bargaining agents, and bargain collectively.
3. Interference by employers was prohibited and employees could not be compelled to join a company union.
4. The act set up the National Labor Relations Board (NLRB) to enforce provisions of the act and to arbitrate disputes.