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

Reconstruction and Strict Regulation: 1900 - 1917

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1. The Reconstruction of the Railroad System: 1900-1915
   
   
   1. During the tremendous expansion of the economy after 1896 the railroad system in the U.S. was almost totally rebuilt in order to keep up with the demands on the system.
      
      
   2. Between 1900 and 1915 railroad mileage increased from 259,000 to 391,000 miles and the number of locomotives increased from 36,000 to 66,000. Heavier steel rails were laid down and most important routes were double and quadruple tracked. Locomotives became bigger and heavier as did the hopper and freight cars. Steel bridges replaced older wooden ones and enormous stations were constructed in almost every major American city.
      
      
   3. The productivity gains were impressive up to about 1910. After 1910 the strict government regulation removed the railroads' ability to control their prices. The railroads had been plowing enormous capital back into their systems so that improvements kept up with traffic demands. Afer 1910 the railroads were increasingly squeezed by higher and higher labor costs, an ever increasing demand for their services, but no ability to raise prices in response.
      
      
   4. "Progressives" believed that freight rates should not be so high so as to generate a surplus for the railroads. If there was a surplus, then the railroads should lower their rates so as to give the surplus back to the "people". It was the responsibility of investors to expand the physical plant. After the investors were paid their dividend, any surplus should go back to the "people". The "Progressives" did not understand the idea that a "surplus" could be reinvested in the company! This forced many railroad leaders like James J. Hill to hide their surpluses in the costs side of their ledgers in order to have the capital necessary to improve their roads.
      
      Investment by American Railroads (From Enterprise Denied, by Albro Martin)
      
      
      
2. 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.
      
      
3. 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!
   
   
4. 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.
      
      
5. The Adamson Act of 1916 (the 8-Hour Day) -- Mandated the 8 hour day on the railroads as of 1 January 1917. This substantially increased the labor costs of the railroads. No rate increase was granted by the ICC to make up for the increased costs.
   
   Average Railroad Operating Ratio (Operating Expenses/Operating Revenue)
   
   
   
6. Most of the major railroads were bankrupt by 1917. Almost no rate increases were granted by the ICC between 1907 and 1917. The railroads applied for rate increases in 1911, 1913, 1914, and 1917, and were only granted some very minor increases in 1914. 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. Finally, but too late, the railroads were granted a rate increase in 1918 equal to what they had asked for over the previous 7 years. But, by 1919, it was too late for the railroads. Capital flowed into the automotive, radio, and electrical industries and it was too late to integrate the motor freight lines into the railroads.
   
   From: "Changes in Industry and the State of Knowledge as Determinants of Industrial Invention," by Jacob Schmookler. In The Rate and Direction of Inventive Activity.
   
   
   
7. 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. The ICC was granted more authority over entry, exit, and consolidation of the railroad industry.
      
      
8. Setting minimum rates backfired because the emerging trucking industry was able skim off much of the high value short haul freight business.