- Historic Sites
A Foot In The Door
Grain elevators had false bottoms; freight rates had no ceilings. The farmers raised the roof, and government regulation crossed industry’s threshold
February 1964 | Volume 15, Issue 2
Deplorable as the corruption was, its disclosure merely confirmed what had long been suspected. More immediately damaging were Munn & Scott’s financial misadventures in the summer of 1872. Along with three other speculators, the firm attempted to corner all the wheat pouring into Chicago, hoping to dictate its ultimate price in world markets. For a while the corner worked, as Munn & Scott made huge purchases. The heavy buying, however, pushed the price of wheat so high that the farmers, who normally held some grain in reserve in the hope that its value would rise, shipped their surplus to market. This was the crucial stage, for to secure their corner the speculators would have to buy up all the grain. They turned to Chicago’s banks for a million-dollar loan, but were unsuccessful: their credit was already severely stretched. They had to stop buying, and wheat prices plummeted forty-seven cents in a twenty-four-hour period. Munn & Scott was ruined, its grain receipts thoroughly discredited. To avoid a complete panic, the powerful George Armour & Co. bought the Munn interests and quietly set about purchasing grain to make its receipts good. Munn and Scott themselves went into bankruptcy; the ensuing court proceedings, as summarized in newspaper headlines, told the story of the Chicago elevator business: IRA Y. MUNN ON STAND LAYS BARE ELEVATOR COMBINATION — PROFITS DIVIDED — AGREEMENT IN 1866— A GENERAL POOL — HISTORY OF CONTRACTS WITH NORTHWESTERN RAILWAY BEGINNING IN 1862 AND RENEWED IN 1866.
The sequel came on December 3, 1872, when Munn and Scott were expelled from the Board of Trade.
Although Ira Munn and George Scott passed into oblivion, the regulatory impulse that they and their fellow warehousemen had helped trigger continued unabated. The year 1873 was one of economic panic; grain prices dropped further, and a severe shortage of credit forced numerous mortgage foreclosures. The Granger movement reached floodtide, and its political power was felt in all the midwestern states. Granger votes elected legislators and governors who helped pass laws lowering railroad rates; as the Minnesota governor inelegantly put it, “It is time to take robber corporations by the scruff of the neck and shake them over hell!”
The Granger laws, cursed as communistic in eastern business and financial circles, were a tribute to the political power of organized farmers. But, having failed to prevent the new legislation, the railroads retaliated with a variety of weapons. Their agents fought to repeal or weaken the laws and to persuade the public of their undesirability. They insisted that regulation would discourage further rail construction—an effective point, for even the bitterest foes of “the octopus” wanted increased railroad service at a fair price.
Resistance took other forms as well. In some cases the roads aimed to make the laws backfire: because of technical loopholes they were able to equalize their rates (thus formally ending discriminations) by raising them as much as fifty per cent in areas where they had been low. In other cases, they reduced service and forecast its complete abandonment. Wisconsin customers, for example, were subjected to dilapidated cars and erratic service that the railroads suavely blamed on the unusually harsh regulations of the Potter law—“Potter cars, Potter rails, and Potter time.”
Mostly, however, the corporations put their faith in the judiciary—not the elective state courts where decisions were likely to mirror popular desires, but the United States Supreme Court. The railroads were supremely confident that rate regulation, no matter how moderate, violated the Constitution for at least three reasons. The first was that the laws contravened the federal contract clause by impairing their right to set rates, a right granted by the states’ charters of incorporation. Here the railroads cited the Dartmouth College doctrine of 1819 (see Richard N. Current’s article in the August, 1963, AMERICAN HERITAGE ). (They conveniently overlooked the Supreme Court’s later ruling in the Charles River Bridge Case, which modified the doctrine on the ground that the public also had rights and that these could be bargained away only by an explicit grant. Furthermore, the railroads’ charters had been issued under state constitutions which contained clauses reserving the legislatures’ authority to amend them.) Second, the corporations urged that rate regulation tampered with interstate transportation, thereby impinging on Congress’ plenary power over interstate commerce. Lastly, they argued that public rate-setting was a radical innovation unknown in the American experience. It was, they contended, a confiscation which violated the Fourteenth Amendment’s prohibition against depriving persons of their property without due process of law.
Corporation resistance quickly led to specific cases in the state and lower federal courts. The Chicago warehousemen who had by now succeeded to the Munn & Scott properties continued to defy the Warehouse Act and carried their case to the state supreme court—unsuccessfully. The state, declared the Illinois judges, might regulate all subjects “connected with the public welfare” in order “to promote the greatest good of the greatest number.”