Interstate Commerce and the Railroads
Interstate commerce in early days.
Interstate Commerce.—During the years which immediately followed the Revolutionary War the several states were free to make their own regulations for the encouragement and control of commerce. Accordingly they began to compete with one another for trade, each trying to increase its own prosperity at the expense of the others. This led to ill-feeling, of course, and finally to retaliation. One state would offer inducements to bring vessels into its ports; the others, in self-defence, held out even greater inducements. This rivalry soon got to the point where it looked as if some of the states might come to blows.[[160]] So, when the framers of the national constitution met at Philadelphia in 1787, they gave particular attention to the problem of ending this unwholesome rivalry by placing the regulation of all interstate and foreign commerce under a single, central authority.
The constitution places interstate commerce under federal control.
The national constitution, therefore, transferred this regulating power from the states to Congress, by vesting in it the power “to regulate commerce with foreign nations, and among the several states, and with the Indian tribes”. This is a very important provision in the supreme law of the land, and it has had a far-reaching influence in building up the commerce of the United States. One can realize what might have happened if every state had been left at liberty to put duties upon goods imported from other states and to bestow all sorts of advantages upon its own merchants. Under such an arrangement a closely-knit, unified country would have been impossible, for freedom of trade within a nation is an indispensable factor in bringing the whole people into close and friendly relations. The adoption of this clause in the national constitution meant that all trade, from one end of the land to the other, could be carried on freely, without let or hindrance, subject only to such uniform regulations as Congress might provide.
This control is now very extensive.
In the days when the national constitution was adopted, the carriers of commerce were few and primitive. Trade between different states was conducted by wagon and sailing vessels; there were no railroads, steamships, street cars, motor trucks, telegraphs, telephones, or parcels post. The cost of transporting goods was so great that it did not pay to ship them far. Goods were made almost wholly for the local market. But when the constitution endowed Congress with the power “to regulate commerce” it gave to this body a right which has been sufficiently broad to cover all the great developments of the past hundred years. Whatever comes within the term “commerce”, no matter howsoever carried on, is within the purview of Congress if it concerns more than a single state.
A large part of the commerce of the United States today does concern more than a single state. The great railroads traverse several states, sometimes a dozen or more of them. Goods sent from New York to Los Angeles pass through ten or twelve states on their journey. Even street car lines sometimes cross the state boundaries. To the trader a state boundary means nothing; it is only a mark on the map. Trade moves wherever the chance of profit appears. It pays no attention to political divisions within the country.
What interstate commerce includes.
Interstate commerce, then, includes all agencies of trade among the states: steamships, sailing vessels, railroads, street railways, motor trucks, telegraphs, telephone systems, oil pipelines, power lines, and all passengers, goods, messages, or anything else carried by them. All persons who have to do with such things are engaged in interstate commerce. But interstate commerce does not include the manufacture of goods in any state, even though they be intended for sale in other states. Commerce does not begin until the product is finished and started on its way. Once started on their way, with a destination in another state, the goods pass under the supervision of the national government. Passengers traveling from Chicago to St. Louis, or goods shipped from one of these cities to the other, or messages exchanged between them by telegraph, for example, are under the supervision of the national government from start to finish. Illinois and Missouri have nothing to do with them.
Railroads and steamships were at first not regulated.
How Interstate Commerce is Regulated.—For many years after the constitution was adopted there was no need for the regulation of interstate commerce because so little of it was carried on. Not until the era of steamships and railroads did commerce develop to a point where any strict regulation was necessary. The earliest railroads, moreover, were short lines constructed and operated wholly within single states. They were built by corporations under charters granted by the states. Frequently these charters were given for an indefinite term, and they placed no limits upon the rates which the railroad might charge for the transportation of passengers and goods. The chief concern of the people in those days was to get railroads built. As time went on, however, the state authorities became more strict in granting charters for the construction of railroads and, finally, most of them established commissions to protect passengers and shippers from unreasonable rates.
Meanwhile, however, another development was going on, namely, the consolidation of these small railroads into trunk lines or long stretches of railway. The reason for this consolidation was the opportunity to make larger earnings from through traffic and at the same time to give better service. The opening-up of the West led to the building of new trunk lines and to further consolidations, especially during the years immediately following the Civil War. In this way single railroads spread themselves far outside the territory of a single state; their tracks ran into many states. |But this freedom from control was abused.| The corporations controlling such trunk lines became big and powerful. They fixed rates to suit themselves and often favored one section of the country at the expense of others, or gave to large shippers an undue advantage over the smaller.[[161]] Where there was but one railroad in any district everyone was at its mercy. Exorbitant rates could be charged. On the other hand, where there were competing lines between two cities the rivalry of the roads often forced the rates down to a point where goods were carried at a loss. Sometimes the competing roads, realizing the folly of this competition, formed a “pool” or agreement to share the traffic proportionately, and then each put up its rates to a high level. These practices were inimical to the best interests of commerce. They gave rise to so much complaint that Congress eventually responded by placing the interstate railroads under government regulation. This it did by the Interstate Commerce Act of 1887.
The beginnings of federal regulation.
The Interstate Commerce Act of 1887.—By the provisions of this act and the various amendments which have been made to it during the past thirty-five years, all corporations engaged in interstate commerce (which includes not only railroad companies, but express, sleeping car, telegraph, and telephone companies) must maintain reasonable rates; must make these rates public; and must not discriminate in favor of any locality or shipper. The formation of “pools” is illegal; the granting of free passes to other than railroad officials is forbidden; and all the important activities of the railroads are subject to governmental supervision. These various provisions were not all enacted in 1887. The legislation of that date merely made a substantial beginning. Several amending laws, passed from time to time during the past thirty-five years, have steadily extended the scope of regulation and have also endeavored to secure greater safety in the operation of the railroads.
Organization and work of the I. C. C.
The Interstate Commerce Commission.—Congress realized in 1887 that it was not enough to pass a regulatory law; it must also provide some means of enforcing the regulations. So a board, known as the Interstate Commerce Commission, was established and it has now become one of the most powerful regulating bodies in the world. At the outset it had five members; now it has eleven. They are appointed by the President. The commission’s function is, in general, to see that the national laws relating to carriers of interstate commerce are strictly observed. It fixes the maximum rates, hears complaints, adjusts disagreements, and prevents discrimination. In the case of the railroads its powers have recently been widened by the provisions of the Transportation Act of 1920, as will be seen presently.
Methods by which railroads consolidated.
Railroad Consolidation and the Sherman Act.—There are at least three ways in which railroad consolidations have been effected in the United States. The first and simplest method has been outright purchase, one railroad buying up another. The second is by lease, one road leasing another for a long term of years, thus becoming the virtual owner. The third is by forming what is commonly called a “holding company” which steps in and takes the controlling ownership of both roads. In this case neither road buys or leases the other, but both put themselves into the control of a new corporation which proceeds to have the lines operated as though they formed a single road. The objection to these consolidations is that, in many cases, they stifle competition and create a monopoly.
The Sherman Act.
So Congress in 1890 enacted the Sherman Anti-Trust Act, a measure which although it was not primarily aimed at the railroads, prohibited all combinations in restraint of trade or commerce among the several states. |The Northern Securities Case.| For several years, however, this law was left unenforced, but in 1904 it was invoked in the Northern Securities Case to dissolve a combination of two great railroads, the Northern Pacific and the Great Northern, both of which had passed into the control of a holding company. The Supreme Court held the consolidation to be illegal and ordered that the roads should be restored to a competitive basis. The same process was applied to various other roads which had been merged in the years following 1890 and a general “unscrambling of omelets” took place.
Railroad competition, however, is often wasteful and actually results in higher rates. To consolidate two or more small railroads into a larger one may actually cheapen rather than increase the cost of transportation. The practical problem is to permit consolidation in such cases while preventing it in others. This was what the Supreme Court was endeavoring to do by a flexible enforcement of the Anti-Trust Act when the World War broke out and created new problems.
Government operation of the railroads,1917-1920.
The Railroads in War Time.—In 1917, when the United States entered the war, it seemed advisable that Congress should place in the hands of the President a wide range of authority in connection with the mobilization and transportation of troops and war supplies. By virtue of these powers President Wilson, in the closing days of the same year, took over the operation of all the important railroads in the country and placed them in charge of a director-general appointed by himself. The question of compensating the owners of the railroads was settled by providing that they should receive an annual payment equal to the average net earnings of the three preceding years. It was also stipulated that the railroads should be given back to their owners in as good physical condition as when they were taken over, this return to be made within twenty-one months after the close of the war.
How this plan worked.
During the whole of the years 1918-1919 the railroads were operated by the government. From the standpoint of profit-making, government operation did not prove a success. The cost of labor and materials rose enormously during the war and continued to rise after the fighting ended. But passenger and freight rates were not proportionally increased, hence there was a large deficit which had to be paid out of the government treasury. The service given to the public by the railroads while they were operated by the government, moreover, was not very satisfactory; although in partial explanation of this it must be remembered that the carrying of troops and supplies during 1918 placed a great strain upon the whole transportation system.
The Plumb Plan.
But if government operation was not altogether satisfactory to passengers and shippers, it was popular with the railroad employees. They were much more generously treated under government operation than they had been when the roads were in private hands. Some of their leaders accordingly brought forward a plan which proposed that the roads should not be handed back to private operation but should be purchased by the government and managed by joint boards representing the government, the employees, and the public. This proposal was commonly known as the Plumb Plan. It had the support not only of the railroad brotherhoods, or organizations of railroad employees, but of other labor bodies as well. Congress, however, did not fall in with this scheme and decided to deal with the railroads in an altogether different way.
The return of the railroads to private operation.
The Transportation Act of 1920.—The railroads were returned to private operation in the spring of 1920 under the provisions of the Transportation Act. This legislation gave the Interstate Commerce Commission complete authority over the fixing of railroad rates but stipulated that they should be high enough to enable the railroads in each section of the country to earn a net income of five and one-half per cent on their valuation and a further amount, not to exceed one-half of one per cent for improvements at the discretion of the commission for two years from March 1, 1921.[[162]] The act contained two new and very important provisions. |The Railway Labor Board.| It stipulated that a Railway Labor Board should be established, consisting of nine members appointed by the President. This board has the function of adjusting disputes between the railroads and their employees concerning wages or conditions of labor.[[163]] It also contained provisions allowing the consolidation of railroads in each section of the country with the consent of the Interstate Commerce Commission.
The importance of the railroads to industry.
The Future of the Railroads.—The railroads are the commercial arteries of the nation. Some idea of their importance may be gained from the fact that the railroads of the United States carry a billion passengers each year and nearly two billion tons of freight. Their mileage is greater than that of the railroads in the whole of Europe. If all the tracks of American railroads were placed end to end, they would girdle the earth eight or ten times. They represent a huge investment of capital—nearly twenty billions—or nearly as much as the entire national debt. It is true that a good deal of our commerce is now carried on by steamships, canal boats, motor trucks, and electric railways, but we still place greater dependence upon the railroads than upon all these other carriers put together. Reasonable freight rates and good service are essential to the progress of industry. This being the case, it is imperative that there should be governmental control in the interests of passengers and shippers. On the other hand the railroads, to perform their service adequately, must be assured a sufficient revenue and given due scope for the exercise of private initiative.
Motor competition.
The railroads have been compelled, in recent years, to face a new form of competition, that of motor cars and motor trucks. These have a great advantage in that they use highways which have been built entirely at the public expense, whereas the railroads have to buy the land on which their tracks are laid and pay the cost of maintaining their roadbed. The use of the public highways for freight-carrying by heavy motor trucks imposes a heavy cost upon the taxpayer for the repair of roads.[[164]]