Popular Law-making / A study of the origin, history, and present tendencies of law-making by statute

by Frederic Jesup Stimson

VIII

REGULATION OF RATES AND PRICES

This, the last method of infringing upon absolute rights of property, has assumed such importance of recent years as to deserve and require a chapter by itself. The reader will remember what precedents we found for the fixing of prices, wages, and rates or tolls in England. It may be convenient for our purposes to use these three definite words to mean the three definite things—prices in the sense of prices of goods or commodities; wages the reward of labor or personal services; and rates (the English word is tolls) for the charges of what we should now term public-service corporations, or in old English law, franchises, or what our Supreme Court has termed "avocations affected with a public interest." The reader will remember that the attempted regulation of prices began early and was short-lived, dating from the Assize of Bread and Beer in 1266, to the Statute of Victuals of 1362, hardly a century, and even these two precedents are not really such, for the first only fixed the price of bread and beer according to the cost of wheat or barley, just as to-day we might conceivably fix the price of bread at some reasonable relation to the price of flour in Minneapolis, and as it was fixed in ancient Greece by the wholesale price of wheat at Athens[1]—not as it now is, from three to four times the cost of bread in London, although made out of the same flour shipped there from Minneapolis; and the two latest statutes expressly say that they fix the price by reason of the great dearness of such articles on account of the Black Death or plague, and the consequent scarcity of labor. Then the Statute of Laborers of 1349 provided that victuals should be sold only at reasonable prices, which apparently were to be fixed by the mayor. With these statutes the effort to fix prices by general statute disappeared from English civilization save, of course, as prices may be indirectly affected by laws against monopoly, engrossing, and restraint of trade; and local ordinances in towns continued probably for some time longer.

[Footnote 1: For an actual report of an indictment and jury trial for forestalling and regrating wheat in the third century B.C., see Lysias's oration, translated by Dr. Frederic Earle Whitaker, in Popular Science Monthly, April, 1910.]

Legal regulation of wages lasted much longer in England; and has reappeared in very recent years, at least in the Australasian colonies, with a beginning of such legislation in Great Britain and Ireland and the State of New York. The first Statute of Laborers merely provides that the old wages and no more shall be given. The next year, however, in 1350, the exact rate of wages was fixed; and this lasted for more than two centuries, to the reign of Elizabeth, the so-called "great" Statute of Laborers consolidating all the previous ones. It is apt to be the case that when a statutory system has reached its full development it falls into disuse; and that is certainly the case here. There is no later statute in England until 1909 fixing directly or indirectly the rate of wages; and it may be doubted whether the justices of the peace continued to fix them for many years under the Statute of Elizabeth. More than three centuries were to go by before this principle reappeared in legislation or attempted legislation; but in Australia,[1] New Zealand,[2] and England[3] there has been recent legislation for a legally fixed rate of wages to be determined for practically all trades by a board of referees, consisting, as such boards usually do consist, of one member to represent capital, one to represent labor, and the third to represent the public or the state. As such third representative almost invariably votes on the side of the greatest number of voters, this practically makes a commission hardly impartial. The working of the system in New Zealand will be found discussed in the Westminster Review for January, 1910. There is an appeal to the courts from the rate of wages fixed by such commission; and it appears that out of four such appeals, in three the decision of the commission was confirmed, and in the fourth set aside; but the workingmen disregarded the judgment of the court and struck for a higher wage—contrary to the whole theory of such legislation, which is to prevent strikes. This strike succeeding, there has, therefore, been no case so far where the increasing rate of wages was checked by any appeal to the courts.

[Footnote 1: So. Australia, 1906, no. 915; 1900, no. 752; Victoria, 1903, no. 1,857; 1905, no. 2,008.]

[Footnote 2: See New Zealand Law of 1900, no. 51; frequently amended since.]

[Footnote 3: 60 and 61 Victoria, c. 37, 9 Edward VII.]

In the British Parliament last year (and the identical bill has been introduced in the State of New York under championship of the Consumers League, as applied to women and children), a bill was introduced,[1] not backed, however, by the government as such, although bearing the name of Lloyd-George, providing in effect that wages might be fixed in this manner in certain definite named trades, and also in such other trades as might be designated from time to time by the home secretary. The economic effect of such measures we are not to discuss. In the United States, except as to public work, they would be probably unconstitutional.

[Footnote 1: Since enacted, see below in chap. XI.]

Coming, therefore, to public work, we use this phrase for all labor contributed directly to the State, to any county, city, town, village, or municipality thereof, to any municipal-owned public-service corporation, gas, water, etc., company, or, finally, and most important, to or under any contractor for the same, or any of them. Some years ago the State of New York adopted legislation to the effect that in all such public employment the wages paid should be the usual rate paid for similar work in the same locality at the same time. As a result of this legislation, many thousands of lawsuits were brought against the City of New York by persons who had done labor for that municipality in the past, complaining that they had not in fact been paid "the prevailing rate," although in fact the work had long since terminated, and they had been discharged, paid in full, and apparently satisfied. Shortly after, the law itself was declared unconstitutional by New York courts. Thereupon the labor interests proposed a constitutional amendment in 1905, to the effect that "the legislature may regulate and fix the wages or salaries, the hours of work or labor, and make provision for the protection, safety, and welfare of persons employed by the State or by any county, city, town, village, or other civil subdivision of the State, or by any contractor or subcontractor performing work, labor, or services for the State or for any city, county, town, village, or other civil division thereof." A very small proportion of the voters of New York took the trouble to vote upon this amendment, although it revolutionized the economic, if not the constitutional, system of the State, so far as property and contract rights are concerned; and it was adopted by a substantial majority. In Indiana there was a statute at one time fixing the rate of wages in public employment at a minimum of not less than fifteen cents per hour, but it was held unconstitutional. It is customary in New England villages to vote annually that the town shall pay its unskilled labor a prescribed rate for the following year, usually two dollars per day. The effect of this has been sometimes to cause the discharge of all but the very most skilful and able-bodied; of those who had, by working at less than full pay, been kept out of the poorhouse; and the selectmen of some towns, notably Plymouth, have refused to obey such a vote. The California Code of 1906 provides a minimum compensation of two dollars per day for public labor, except as to persons regularly employed in public institutions. Delaware has copied the New York statute as to the prevailing rate. Hawaii, in public labor, provides a minimum wage of one dollar and twenty-five cents per day. Nebraska goes further, and provides not only for two dollars per day for public work, but that it must be done by union labor in cities of the first class, while Nevada has a minimum wage of three dollars and an eight-hour day for unskilled labor in public work. On the other hand, the Constitution of Louisiana prescribes that no law shall ever be passed fixing the price of manual labor.[1]

[Footnote 1: This matter will be found further discussed in chap. XI.]

Coming lastly to tolls, or rates of persons or corporations enjoying a franchise, that is to say, a legalized monopoly, or exclusive legislation, or special privilege, such as eminent domain, or the right to occupy the streets; such are, in fact, identical with what we term public-service corporations, the older, the most universal, and certainly the most, if not the only, justifiable example of legal regulation of the returns for the use of property or personal services.

Whatever may be thought of the economic wisdom of attempting to regulate any rate or prices by law (and for a discussion of this subject as to railways, at least, the reader may well be referred to the valuable treatise of Mr. Hugo R. Meyer, "State Regulation of Railways"), such legislation was at least in England constitutional; but in this country, owing to our specific adoption of the principle of property rights and freedom of labor and hence of freedom of contract in our Federal and State constitutions, and as it has been repeatedly decided that to take away the income from property or a reasonable return for labor by legislation is to infringe on the property or liberty right itself, we have a universally recognized constitutional objection which has, in fact, made impossible all regulation of prices and wages, except as above mentioned, and as we are now about to discuss. The first attempt to regulate rates (with the possible exception of some early colonial laws) was the so-called Granger legislation, as shown in the Illinois Constitution of 1870, authorizing a warehouse commission to fix charges for elevating grain, the Act of Iowa of 1874 establishing reasonable maximum rates for railways, a similar act in Wisconsin of the same year relating to railroad, express, and telegraph companies, and in Minnesota; which legislation was all sustained by a divided opinion in the so-called Granger cases headed by Munn v. Illinois, 94 U.S. 113.

In the many years which have elapsed since this famous decision, the clouds have rolled away and the shape and basis of that apex of our jurisprudence been fairly surveyed. It will appear, I think, to any dispassionate jurist to have been rightly decided, at least as to the railroads, though the reasons given by Chief Justice Waite are unsatisfactory and have little logical basis. The true basis of regulation of rates at the common law and in English history was monopoly; either a franchise directly granted by the crown, such as a bridge, ferry, or dock, or one which was geographically, at least, exclusive, like a dock without a franchise. As Lord Ellenborough said in the decision quoted by the Chief Justice himself: "Every man may fix what price he pleases upon his own property, or the use of it; but if for a particular purpose the public have a right to resort to his premises and make use of them, and he have a monopoly in them for that purpose, if he will take the benefit of that monopoly, he must, as an equivalent, perform the duty attached to it on reasonable terms." "If for a particular purpose the public have a right to resort to his premises"—this important qualification from now on seems to have been lost sight of in the majority opinion. Quoting the early precedents such as that statute of William and Mary regulating the charges of common carriers—and our readers will remember many more—and the case of cabmen whose charges are regulated by city ordinances—but they are given stands or exclusive privileges in the streets—the chief justice concluded with the startling proposition that "if they do not wish to submit themselves to such interference, they should not have clothed the public with an interest in their concerns." But the public has an interest, as was afterward pointed out in dissenting opinions, in the price of shoes; yet it has never been supposed that that gave any power of legal regulation of factory prices. A still stronger case is that of inns or hotels, which have always been "a public avocation." They have had to take in all travellers without discrimination; yet there is not a vestige of legislation in the English statute-book regulating the prices to be charged by hotels. Indeed in early times most employments—millers, barbers, bakers—were public in the sense that the man could not refuse a job; yet their prices were never regulated. Yet it was upon this phrase, "public employment" or "private property affected with a public interest," taken from the opinion of Justice LeBlanc in the London Dock Company case, decided in 1810, without its context, that the chief justice built up the whole reason of his decision. The decision in Munn v. Illinois, subject to court review as to whether the rate be confiscatory, remains good law, but the opinion is still open to question; and indeed the most recent decisions of the Supreme Court show a desire to get away from it.

Some writers endeavor to justify, under our constitutions, the regulation of rates by the principle of eminent domain; but this source seems far-fetched and unnecessary. It is, of course, done under the police power; but the precedent for that use of the police power is to be found in the history of English law and statutes. Thus we have noted in the Statute of Westminster I, A.D. 1275, that excessive toll contrary to the common custom of the realm was forbidden in market towns. The very phraseology of this statute indicates the antiquity of the doctrine that tolls must be reasonable; but "toll" was always a technical term, not for ordinary prices of commodities, but for a use or service which was in some way dependent upon law or ordinance. In the very opinion of Chief Justice Waite, he quotes Lord Hale, saying that the king "has a right of franchise or privilege, that no man may set up a common ferry without a prescription time out of mind, or a charter from the king," and so later he quotes Lord Hale as saying that the same principle applies to a public wharf "because they are the wharves only licensed by the king." We also found legislation fixing rents and so on in staple towns, and consequently of the charges of property owners therein, such towns having grant of a special privilege. The early law books are full of cases showing that discrimination and extortion were unlawful, even criminal, offences. And finally, as Chief Justice Waite points out, we find the rates of carriers fixed by law in 1691. Ordinary carriers, not having the right of eminent domain such as express companies, might to-day be considered to have no legal monopoly, and indeed, possibly for that reason, the regulation of charges of express companies has not yet been attempted; but in King William's time it was doubtless considered that the carriers had special privileges on the highways, as indeed they did.

It seems to me, therefore, that the real reason, both logical and historical, for regulation of rates rests on the fact that the person or corporation so regulated is given a monopoly or franchise by some law or ordinance, or at least a special privilege from the State; or at least that he maintains a wharf, a bridge, or a ferry, or other avocation which (really for the same reason) has, from time immemorial, been subject to such regulation. This, indeed, has been the doctrine officially adopted by the Commonwealth of Massachusetts in its legislation—"Where monopoly is permitted, State regulation is necessary." The new "Business" Corporation Act of 1903 makes the express distinction between public-service corporations and all other private corporations for gain: it applies to "all corporations … established for the purpose of carrying on business for profit … but not to … railroad or street railway company, telegraph or telephone company, gas or electric light, heat or power company, canal, aqueduct or water company, cemetery or crematory company, or to any other corporations which now have or may hereafter have the right to take or condemn land or to exercise franchises in public ways granted by the commonwealth or by any county, city, or town." The implication is that such other corporations are not given the entire freedom of action and contract conferred by this Business Corporation Act. Where the State creates a monopoly, it puts the public at the mercy of the grantee of that franchise. Therefore, it is logical and just that it should regulate the rates. The test, however, is not and cannot be, that the man is ready to serve all comers, or even that he is compelled so to do; hotel-keepers, barbers, restaurants, doctors, etc., have never had their charges regulated by law. In early days most tradesmen were compelled to serve any and all, at an equal price, under liability for damages.[1] Mills, indeed, have always been subject to have their tolls regulated; at least, a certain proportion of the grist had to go to the miller; but even if it be held they had no peculiar franchise, the exception is as old as the rule.

[Footnote 1: Holmes J., ex banco, in United States v. Standard Oil
Co., March 14, 1910.]

It is further noteworthy that since the Granger cases themselves, there has been no extension of the doctrine of Chief Justice Waite to other trades or industries, while the extent of the doctrine, that is, the amount of regulation permissible under the Constitution, has been very much limited. Waite's opinion gives no intimation of any constitutional limit whatever, but dozens of the decisions of the Supreme Court since draw the limit this side of the point of confiscation; that is to say, at a "reasonable return," whatever that phrase may mean. It was, indeed, at first extended to semi-private grain elevators on the prairies, to elevators monopolizing the water front of Buffalo, New York, and to floating elevators in New York Harbor, the first and last of which show certainly no element of legal monopoly, while the Buffalo case at most only a geographical one. Still, elevators were the subject of Munn v. Illinois itself.[1] And it has never been extended to a mere de facto or "virtual" monopoly arising only from the accident of trade. Moreover, in matters of interstate commerce, although it might have been argued that such affairs were left absolutely to the plenary power of Congress, which might well, if it chose, pass laws preventing any railroad from engaging in interstate business, except at a certain rate per mile for passengers or freight—or that no vessel should be allowed to carry passengers or freight from foreign countries except at a certain price per head or per ton—yet the Supreme Court seems to have held that even this plenary power over commerce expressly given to Congress in the Constitution, is limited by the ordinary property guarantees of that instrument; possibly because the Fifth Amendment is of later date than the body of the Constitution.

[Footnote 1: We may divide monopolies into legal, geographical, and de facto, or "virtual" monopolies—phrases which sufficiently describe themselves.]

We thus find that the earliest legislation regulating rates was that of the States. It was thirteen years after the Iowa statute above referred to that the Interstate Commerce Act was passed, which was supposed to give a power—afterward denied by our Supreme Court—to the Interstate Commerce Commission to fix rates. It certainly did give them power to find, upon complaint, what was a reasonable rate, which was prima facie evidence in case of appeal. In hundreds of cases actual rates were complained of, in probably many more discrimination was complained of, and, according to Mr. Meyer, the commission was found by the Supreme Court to have decided rightly about half the time. In 1903 came the intelligent Elkins Bill against discrimination, which merely re-enacts the common law, and up to within two or three years has proved the only really effective measure of controlling the rates themselves. In 1906 came the Hepburn Act under Roosevelt, giving general power to the commission to fix rates upon complaint, to make joint rates, extending the statute to the oil pipe-lines, express companies, and sleeping-car companies, and going to the verge of the Constitution in an effort to provide that rates fixed by the commission should take immediate effect. So far as most recent decisions go, however, this great statute has not altered the position of the Supreme Court of the United States as to the constitutional necessity of a reasonable return to the carrier, and perhaps the cardinal question remains to be decided, whether such rate-making power is legislative, and, if so, may under the Federal Constitution be delegated by Congress to any board. Congress merely proclaims that the rates shall be reasonable and without discrimination—both mere expressions of the common law—and leaves the determination of what is reasonable between the Interstate Commerce Commission and the Supreme Court, neither of them legislative bodies. The common law may, indeed, be decided by a judicial body; but it is difficult to see why the alteration of the common law is not legislation. And this criticism applies a fortiori to the Taft Bill just enacted (June, 1910), which gives the Interstate Commerce Commission power to fix rates of their own motion. When, therefore—if the author may venture to repeat his words—the commission fix a "just and reasonable" rate,[1] if they are applying the common law, their act is judicial; if they are fixing other standards, it is legislative.[2]

[Footnote 1: United States Act of February 4, 1887, as amended June 29, 1906, sec. 15.]

[Footnote 2: Stimson's "Federal and State Constitutions of the United
States," p. 53.]

Coming to the States again, this constitutional difficulty does not concern us, for it has been decided that the division of powers into legislative, executive, and judicial must, as to the States, be expressly provided in the State constitutions and is not guaranteed under the Fourteenth Amendment. Broadly speaking, the history of legislation has been as follows: The States have usually exercised their rate-making power through a railroad or corporation commission. New York and Virginia now employ the more comprehensive phrase "public service" or "corporation" commission. The Massachusetts statute, like the Granger statutes, dates from 1874. Just as we found in the Middle Ages in the case of the Black Death in times of famine, so times of panic with us have always produced radical legislation: this, it will be noted, is the year after the great panic of 1873. But the Massachusetts law, the earliest of all, did not and does not authorize any fixing of rates, or even any finding as to what was reasonable upon rates. It extends only to the other conditions of service. The statute is, perhaps, broad enough to permit such a finding as matter of opinion; but it would have no legal effect. The commission, section 15, were authorized to find that a change in rates of fares for transporting freight or passengers was reasonable and expedient, and so inform the corporation and the public, through their annual report. All the Western States, however, did give such power.

As has been said, no constitutional objection has been sustained by the United States Court as to this delegation of power, if it be one; but in later years, possibly dissatisfied with the conservatism of such boards, we find drastic legislation, particularly in the West and South, fixing maximum rates, at least as to passengers (it is obviously difficult, if not impossible, to enact express legislation as to freight rates). Such legislation stands in as strong (or stronger) constitutional position, as rates made by the commission; and only fails when "confiscatory" or when in conflict with Federal legislation. Perhaps the most notable clash between the States and the Federal power has been on this subject in this very last year, where State laws have been annulled and even high State officers enforcing them restrained by injunction of Federal courts. Still, in the legislation of all States, I find as yet none overstepping the limits we have above defined as proper.

The question of the amount of return required by the court is, of course, a most important one. It is a difficult subject, because no fixed rule takes any account of risk to the original investment. It is all very well to say that six or eight per cent, is a fair return on invested capital, or even on "cost of reproduction"; but when, as to original promoters, the chance of even any return was as one against ten of a total loss, fifty per cent. of annual profit would not be more than a "fair return"! The original Massachusetts railway legislation seems to contemplate that ten per cent. should be the normal return on railway stock, for it provides that at any time the commonwealth may purchase any or all its railroads upon the payment of the cost, plus ten per cent. a year profit.

Other than in railroads, the main fixing of rates has been in illuminating gas. Many cities are permitted to legislate on this point. In New York it was decided that they might so do, provided the gas company got a fair return on its capital, not including the value of its franchise; and certainly it would seem to be the height of audacity to claim more. Much as if a boy, presented by his father with hens and the feed to support them, were to demand the capitalization of the value of all future eggs upon going out of business! In Boston, intelligent legislation was adopted—based on good mediaeval principles—which allows dividends at a sliding scale according to the price of gas to the consumer.[1] The great reason, of course, of the cessation of legislative activity on the part of the States, as to railway rates, has been that the great bulk of rates appertained to interstate commerce, or at least must be controlled by the rates of interstate commerce; so only legislation as to strictly local rates remains.

[Footnote 1: It will be remembered that the very earliest Statute of
Bread and Ale (1266) established such a sliding scale.]

The two most important questions, aside from that of an actual extortionate rate (which has hardly ever been claimed) are that of discrimination, and of the long-and-short-haul clause, which is really a derivative of the former. We have found the principle against discrimination time-honored in the common law; but modern statutes wisely recognize that discrimination only exists when two persons or two localities are given different rates under equivalent circumstances. There has, therefore, been great dispute what these words, "similar circumstances and conditions," in the Federal law may mean. There is no doubt that actual differences in cost of service make dissimilar conditions; but does geographical situation, such as is recognized in the long-and-short-haul clause? or still more, the amount of business offering, or the amount of possible competition? Very early the Interstate Commerce Commission and our legislation got to the point of recognizing competition by water; but the competition of other railroads was a thing harder to recognize. Many people think they have a right to a fairly equivalent service at a fairly equivalent cost throughout the United States, and that they have a right to all the advantages of their geographical position. The farmers in Westchester County, about New York, thought they had undoubted reason to complain when the rates on milk were made the same from their farms to the city as from farms in Ohio; pointing out, indeed, that they had bought their farms originally, and paid high prices for the land, for the very reason of its geographical situation close to a great market. Yet in our courts the economic rule has usually prevailed; although no legislation, so far as I have found, recognizes such differences, except under some vague expression such as service or discrimination "under like or similar conditions." Whether legislation will ever come to the point of recognizing the railroad man's shibboleth, "charge what the traffic will bear," is perhaps dubious. And the new Taft Act, in its long-and-short-haul provision, takes a long step in the direction of geographical uniformity and rigidity of rates.

A few examples of modern rate regulation may be given. In 1896 South Carolina fixed a flat passenger rate of three and one-quarter cents per mile. Both South Carolina and Virginia have empowered the railway or public service commission to fix all rates, including telephone and telegraph. Passenger rates are now usually fixed at two cents per mile in the East, or at two and one-half cents in the South or West. In 1907 Kansas and Nebraska arbitrarily reduced all freight rates fifteen per cent. on the price then charged. In 1907 there was some evidence of reaction; Alabama, in an extra session, repealed her law enacted the same year prescribing maximum freight rates, substituting more moderate rates in seven "groups" (which, however, may be changed by the railway commission!), and also enacted a statute directing the commission and the attorney-general not to enforce the earlier law; while the heavily penal Minnesota law was declared unconstitutional by the United States Supreme Court. In the British empire the power to fix rates is, of course, unquestioned; and they are, as to railways at least, generally regulated by law. Canada in 1903 established a railroad commission, and Nova Scotia in 1908 imposed various restrictions as to tolls, still the English word for rates. So in Ontario and Quebec in 1906, and in Tasmania in 1901. In many States, such as Victoria, the railways are owned by the state, in which case, of course, no question as to the right to fix rates can arise.