POLI 100K, Railroads and American Politics: Topic 10, Railroads and Government Regulation: 1887-1920


State Regulation of Railroads
  1. Under the English Common Law all businesses were public by definition, and all came within the jurisdiction of the legislature. Legislatures had the power to set prices and to regulate business under their police power. Price fixing persisted for many callings well into the 19th Century. For example, innkeepers, tavern keepers, bakers, millers, carriers (porters, couchmen, etc.) had their maximum fees/rates fixed in law.

  2. Early American canal, bridge, and turnpike companies received corporate charters. Because these were intended as monopolies and cheapness was one of the intended attributes, the legislature set the maximum toll which was uniform in distance. Hence, no discrimination against persons or places. Anyone could use the "highway" by paying the toll according to the distance used. A shipper would then pay the toll and a fee to the carrier (wagon, barge, etc.) for services rendered.

  3. However, railroads were very different. The peculiarities of railroad transportation were such that the railroad had to own both the highway and the carriers using the highway! This fact plus the high fixed costs of railroads inevitably lead to discrimination against persons, places, and types of traffic.

  4. 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.

  5. State politicians soon discovered that uniform or prorata freight charges were impractical. Capitalists and entrepreneurs simply moved to another state with more rational regulation. It was recognized quite early that discrimination against types of traffic was essential.

  6. Discrimination against places was a difficult problem to solve. As the oyster example shows, what is "fair" here is not easily determined. Most state regulatory schemes tried to address the problem with some form of the short haul pricing constraint (SHPC). For example, if A, B, C, and D are cities in that order along a railroad line then the rate from A to B, Rab must not exceed the rate from A to D; that is,

    Rab £ Rad.

  7. For example, in the state of Iowa prior to the railroads, the Mississippi river towns were the primary shipping points for farmers' grains. The grains would be loaded on steamboats and sent down to New Orleans for export. With the arrival of the railroads -- the first railroad bridge across the Mississippi was built at Rock Island in 1856 -- the farmers could ship their grain to Chicago and from Chicago it could go to the Atlantic coast via either lake steamer or one of the trunk lines. In the fierce competition for business, it was often the case that the railroad rate from the Iowa interior to Chicago was lower than the rate from the interior to one of the Mississippi river towns! Hence the push on the part of the river town business people for railroad rate regulation within the state of Iowa.



  8. These freight rate discriminations were one of the key reasons for the dislike of the railroads and the visible railroad leaders such as William H. Vanderbilt.




  9. By 1876 most states had passed laws regulating rates inside their borders (intrastate rates). 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.