Government Regulation of Railroads

I

Introduction

Government Regulation of Railroads, regulation by state and federal governments of the rates, service, operation, finance, construction and abandonment, and consolidation of railroads in the United States. See also Railroads.

II

State Regulation

The railroad industry initially used the corporate form of organization under charters granted by the legislatures of one or more states. These charters, the means by which state regulation was applied, contained provisions relating to rates, safety, financial administration, and service. Charter regulation failed, primarily because of inflexibility.

About 1850 state regulation began to take statutory form. The midwestern states, under pressure from the powerful fraternal agrarian association, the National Grange, took the lead in this type of regulation by enacting what were known as Granger Laws, which imposed regulation in the fields of rates, service, administration, and corporate structure. The Granger movement grew out of a number of grievances the farmers had against the railroads. Many farmers considered freight rates on agricultural commodities and return rates on manufactured commodities excessive. They were antagonized further by so-called long-and-short haul abuses, in which carriers charged more for a shorter than for a longer haul; by rebates, the granting of preferential rates by carriers to favored individuals; and by the many losses suffered by agricultural interests on investments in carrier securities. The Granger movement centered in Illinois, Iowa, Minnesota, and Wisconsin.

State regulation by statute failed, as had regulation by charter, as a result of inflexibility and lack of uniformity. The states therefore turned to regulation by commissions, initially in an advisory or supervisory capacity only. During the 1870s the state commissions were transformed into genuine regulatory bodies. The legislation creating the commissions in Illinois and Minnesota, for instance, forbade discrimination in rates and service and gave the commission power to fix maximum rates and standards of service and to enforce its orders.

---

---

In 1877 the Granger Laws were upheld as constitutional in the often-cited case of Munn v. Illinois, in which the U.S. Supreme Court ruled that it was a proper exercise of the police power for a state to regulate a business “clothed with a public interest.”

In 1886 the Supreme Court in the Wabash case invalidated an Illinois law that purported to regulate rates for transportation constituting a part of an interstate movement. The Court held that, under the commerce clause of the U.S. Constitution, regulation of interstate commerce may be imposed only by the U.S. Congress. The clause specifies that “The Congress shall have power...to regulate commerce with foreign nations and among the several states and with the Indian tribes.” The decision of the Court led to federal regulation of interstate commerce.

III

Federal Regulation

Regulation of railroads by the federal government originated with the passage in 1887 of the Act to Regulate Commerce, or Interstate Commerce Act. With amendments, that law is currently the principal vehicle of federal regulation. It sought to deal with certain basic problems that had developed under unrestricted competition. Among its provisions were prohibitions against, and penalties for, undue preference, discrimination, rebates, and pooling; requirements that rates and charges be just and reasonable and that rate schedules be published and adherence to them be mandatory; a long-and-short haul rule prohibiting greater charges for a short haul than for a long haul over the same route in the same direction; and creation of the five-member Interstate Commerce Commission, or ICC, charged with enforcement of the act. In 1897 in the Maximum Freight Rate case, the Supreme Court decided that the act did not confer on the ICC power to prescribe rates. The Court in 1897 likewise weakened the long-and-short-haul clause in the Alabama Midland case.

Safety regulations began with the Federal Safety Appliance Act of 1893. It required the installation of power brakes on all cars, and of automatic couplers. The act was amended in 1903, 1910, and 1958 to extend its application.

IV

Early 20th-Century Regulation

The Elkins Act (1903) strengthened the law with respect to personal discrimination (in rates and service) and rebates. It also contained the important commodities clause, prohibiting railroads from transporting goods and products that they owned; and a provision that orders of the ICC should take effect not less than 30 days after their issuance, as prescribed by it, unless set aside by court order. In 1906 the Hepburn Act gave the ICC power to set maximum rates and to establish joint rates, divisions, and through routes. It also clarified the power of the ICC to award reparations and rendered such an accessorial service as storage subject to the act. The Hours of Service Act, passed in 1907, established limits on the amount of continuous service to be performed by employees engaged in, or connected with, the movement of any train.

In 1910 Congress passed the Mann-Elkins Act, which gave the ICC power to suspend proposed changes in rates, to prosecute inquiries on its own initiative, and to establish freight classifications. The long-and-short haul clause also was strengthened by this act.

From December 1917 to March 1920, during and after World War I, the government operated and controlled the railroads under the Federal Control Act. This came about for a variety of reasons, including depleted financial resources of the railroads due to rate cuts ordered by regulatory commissions, poor conditions of roadways and equipment amid wartime traffic loads, and inability of railroads to coordinate their operations because of antitrust laws. Among the results of government control was standardization of locomotive designs and labor contracts.

The Transportation Act of 1920 dealt with many phases of regulation. The most important provision was the rule of rate making, which directed the ICC to fix a level of rates sufficient to produce a fair return on the entire railroad investment. The act also provided for the so-called recapture of earnings in excess of a prescribed rate of return; that is, for the taking over of such earnings by the government. These recaptured earnings were to be put into a fund from which loans were to be made to assist financially weak carriers. Moreover, the commission was empowered by the act to override state action in cases in which the state had fixed the level of intrastate rates so low as to discriminate against interstate commerce. In addition, the act relaxed restrictions on pooling and acquisition of other roads, and directed the ICC to formulate a plan for voluntary consolidation of railroads into a limited number of systems in order to strengthen the railroad industry.

In 1926 the important Railway Labor Act was passed. This act provided for the use of labor-management conferences, mediation by a permanently established board, arbitration, and fact-finding in railway labor disputes. See Railroad Labor Organizations.

Many railroads enjoyed some degree of prosperity during the 1920s. These railroads, however, had weak credit structures, which had been badly impaired during the period of federal operation, and too great a degree of enforced competition, requiring maintenance of duplicate facilities, rendered numerous railroads incapable of withstanding the financial depression of the 1930s. Competition from automobiles, buses, water carriers, trucks, and airplanes increased steadily. The closely regulated railroads, which could not obtain authority from state and federal regulatory bodies to adjust their services and rates to meet the new competition, except after long delays, were seriously hurt. Railroads throughout the nation went into receivership.

	More from Encarta
	•  Presidential Myths Quiz •  Coffee break: Recharge your brain