Interstate Commerce: Regulation and Deregulation

views updated

INTERSTATE COMMERCE: REGULATION AND DEREGULATION

In many ways the methods of transportation in the United States in the early nineteenth century would have been familiar to the medieval European. Overland transport was still largely by foot and four-legged beasts over poorly maintained roads. Mass amounts of freight could not be moved efficiently over very long distances. But by the mid-1800s growth of a national railway system began to profoundly alter the country forever.

Although a few horse-powered railroads began operating in the United States in the early 1800s, steam-powered locomotives were not used until the 1830s. By the 1850s railroads were under construction in all states east of the Mississippi (many for only short distances), with most activity in the Northeast. Expansion of the rail network continued, peaking in the 1880s.

With rail lines crisscrossing the nation, the question of who would control rates and monitor practices had become crucial. Meanwhile the railroads, operating without oversight by any effective regulatory body, set their own standards and practices, which resulted in many abuses.

From the start, railroads were capital-intensive and demanded high-cost maintenance regardless of the fluctuations in the amount of business. The large amounts of money needed created the conditions for consolidation and merger, or at least for coordination of markets and services offered. This need for greater organization stemmed from railroads' increasing dependence on higher volumes of business to spread these fixed costs over as much traffic as possible. In addition, railroads often attempted to form cooperative "pools," or cartels to keep rates high. However, consistent and effective cooperation was not always feasible between competitors. Price wars did occur on lucrative high volume lines, such as links between Chicago and New York. Prices were frequently inflated on smaller branch lines with less competition. Rural areas tended to pay higher rates to subsidize higher volume lines connecting urban centers. This sometimes drove smaller customers out of business. The railroad's political power was also increasingly evident with the rise in corrupt and discriminatory practices mostly at the state level.

Consequently, the public, especially farmers and small independent manufacturers, became disenchanted with the railway companies. The platform of the Farmers' Alliance movement (1880–1896) included a reform of transportation costs, which led state legislatures to begin passing legislation to create commissions to oversee railroad business. These commissions were generally ineffective because of the railroad's pervasive economic and political power. As railway networks continued expanding across state lines, an individual state's power to regulate railroads diminished.

Thus, in the early days of the republic most trade did in fact occur within the borders of each state, but as systems of transportation and communication emerged in the nineteenth century, an increasing percentage of all economic transactions involved interstate commerce. Many states, particularly in the Midwest, had set up regulatory boards, but because the rail companies operated between states, enforcing state laws proved cumbersome and impractical. This meant that the role of Congress in overseeing the affairs of the economy was bound to grow.

For most of the nineteenth century, however, the U.S. Supreme Court assumed a very conservative posture and discouraged Congress from attempting to expand its authority in the economy. The Constitution itself actually offered guidance on this somewhat ambiguous point. Although it gave the states the power to regulate trade within their own borders, the so-called "commerce clause" of Article I gave Congress the power to "regulate Commerce . . . among the several states," i.e., trade that crosses the border between two states. Interstate commerce is the term used to refer to such trade.

Thus, the Supreme Court ruled in 1877, in the case of Munn v. Illinois, that the state regulatory boards had jurisdiction over the railroads. But less than a decade later, in the case of Wabash, St. Louis and Pacific Railway Company v. Illinois, the high court invalidated its earlier decision and proclaimed that only the U.S. Congress has the right to regulate interstate commerce. In issuing this decision the Court cited Section 8, Article 1 of the U.S. Constitution (1790), which states that "Congress shall have the power . . . to regulate commerce with foreign nations, and among the several states, and with the Indian tribes."

Thus, inevitably, as the country became more complex and interconnected, and as the railroad companies grew from small, local concerns into interconnected systems of rich and powerful corporations, the fight over regulation of interstate lines moved to Congress. As time went on, railroad interests actually preferred dealing on the federal level rather than fighting the same war in all the state legislatures. In addition, the railroads' feared the "ruinous competition" of the unregulated capitalist environment. Far from being free market capitalists, their goal was to become a government-sponsored cartel that would insure them a rational process of setting rates and a guaranteed profit. Thus, both the railroads and the anti-railroad forces pushed for regulation.

Finally, in 1887 Congress passed the Interstate Commerce Act, the first broadly regulatory act designed to establish government oversight over a major industry. Patterned after earlier state regulatory laws, the act created the Interstate Commerce Commission (ICC), the nation's first regulatory agency. The agency's original charge was to regulate railroad rates through court orders and to prohibit discriminatory practices including rebates to selected customers. The act originally provided for a commission of five, which eventually expanded to eleven.

The stated purpose of the ICC was to protect consumers and shippers from the monopolistic freight rate policies of the railroad industry, to control which companies gained entry into that industry, and to foster an efficient national transportation system. Other legislation expanded the scope and function of transportation regulation. Congress added telephone, telegraph, and cable service oversight to the ICC in 1888, followed by railroad safety in 1893. However, the ICC remained largely ineffective. During the President Theodore Roosevelt's (1901–1909) administration, the ICC's authority was substantially strengthened. Discriminatory practices against short haul routes were ruled illegal in the Elkins Act of 1903. The Hepburn Act of 1906 gave the ICC the authority to enforce approved rates without court orders and it also added pipelines to ICC oversight. The Sherman Anti-Trust Act of 1890 and the Clayton Act of 1914 further strengthened the federal government's role in interstate commerce by outlawing monopolies and business practices that tended to "restrain trade."

In 1902 President Theodore Roosevelt (1901–1909) persuaded Congress to create the Bureau of Corporations to inspect the financial books of any business involved in interstate commerce. In 1906 the powers of the ICC were expanded to include the regulation of oil pipelines, and in 1935, under the Motor Carrier Act, they were expanded again to include the trucking industry. The Transportation Act of 1920 further changed the ICC's charge from merely approving rates to actually setting them. The ICC now determined appropriate profit levels of railroads. It also granted the right to operate and it organized mergers. In 1938 the federal government was given regulatory power over the domestic airline industry and in 1940 and 1942 over the inland waterways and freight forwarding industries, respectively.

The monopoly of railroads in freight hauling came to a close in the 1930s with emergence of the trucking industry, which was also added to ICC responsibilities in 1935. In three Supreme Court decisions between 1936 and 1942 the commerce clause was reinterpreted to permit Congress to regulate virtually all commerce that had a national impact, even intrastate (within a state's borders) commerce. However, as the railroads failed to generate sufficient capital to meet increasing volumes, their political power declined, beginning in the 1910s. The ICC then sought rate stability to ensure the industry's survival and profitability.

During the Great Depression (1929–1939), the ICC assumed a publicly unpopular role of guaranteeing rates of return on railroad capital by raising freight rates despite declining freight volumes. No rate reductions occurred during the 1930s—a bitter pill for industries needing long-distance hauling of bulky commodities. In 1940 Congress added water carriers such as barges to ICC oversight; in 1970 Amtrak's passenger rail service was also added to ICC oversight by the Rail Passenger Act. The ICC thus had oversight over all surface common carriers.

By 1970, however, it was clear that federal regulation of interstate commerce had created its own problems, and Congress began deregulating such industries as airlines, railroads, freight carriers, household moving companies, and inter-city buses. Finally in 1996 Congress eliminated the Interstate Commerce Commission altogether.

The ICC's original goal had been to ensure the public "reasonable and just" rates that did not constitute a monopoly. The Interstate Commerce Act did not define exactly what that meant except that rate setting should not be used to suppress competition. Through the years ICC critics accused the agency of favoritism to the railroad industry by establishing high rates and discouraging lower priced competition. Others argued the railroads' monopolistic powers had so diminished by the 1930s that the ICC was no longer needed.

Other regulatory agencies took over some of the ICC's territory. In 1934 the Federal Communications Commission (FCC) assumed responsibility for telephones, telegraphs, and cable services. The newly formed Department of Transportation in 1967 took over safety concerns. Still, by the 1960s the ICC had 2,400 employees and its annual budget in the 1970s was $30 million. President Jimmy Carter's (1977–1981) administration greatly diminished the commission's powers to set rates by the 1976 Railroad Revitalization and Regulatory Reform Act. In December of 1995, through the ICC Termination Act, the ICC ended with some of its staff and functions transferred to the Surface Transportation Board.

See also: Hepburn Act, Interstate Commerce, Interstate Commerce Act, Mann-Elkins Act, Munn v Illinois, Sherman Anti-Trust Act, Clayton Anti-Trust Act, Wabash Case