May/June 1996 | Volume 47, Issue 3
One hundred and eight years of managing a problem that might have been solved at the outset with a single law
In the Roman army the soldiers’ regular rations were principally in the form of large loaves of bread, each one enough for two soldiers for a day. This presented a big problem. As with every standing army before and since, life in the legions was largely a matter of hurry up and wait, and soldiers have a bad habit of fighting among themselves when they’re bored. And with the exception of women and gambling, nothing makes so convenient a casus belli among idle troops as food.
But while the Romans had a genius for military matters, they also had a genius for law. By no means the least of its manifestations was a nifty regulation to prevent quarrels over the daily bread ration. When a pair of soldiers was issued a loaf, the rule called for one soldier to divide it and the other soldier to take his choice of halves.
This is a perfect example of a self-enforcing law, a law so constructed as to make it in everyone’s self-interest to act fairly. One would think that such laws would be used in every possible case, and doubtless they will be as soon as the Kingdom of Heaven on Earth arrives. But pending that event, they are likely to remain very rare. The reason is simple enough: Self-enforcing laws are in everyone’s interest except for one group, the people who make and enforce the laws to start with. Those who work for government—legislators and bureaucrats alike—tend to prefer to manage problems rather than solve them.
The classic example of what happens as a result of this predilection for management, not solution, is the Interstate Commerce Commission (ICC). On December 31 of last year, it finally closed its capacious doors after 108 years of managing a problem that could have been largely solved with a deft law. Indeed, through the immense inertia of politics, the ICC actually outlived by several decades the problem it was created to manage. That problem was the monopoly of overland transportation that railroads enjoyed in the nineteenth and early twentieth centuries and the economic power this monopoly gave them.
In fact, the modern world economy, which began to arise in the middle decades of the nineteenth century, came into being only because, for the first time in history, it became possible to move massive amounts of freight quickly and cheaply over long distances. But nineteenth-century railroads had very peculiar economics. They were quite capital-intensive by the standards of the day and had virtually the same high maintenance costs regardless of whether business was brisk or slow. Railroads therefore were inherently a volume business, because they needed to spread their vast fixed costs over as much traffic as possible. That meant intense competition for market share.
The railroads tried forming cartels to allocate the traffic, but they often broke down, especially in bad times, and price wars resulted on routes where railroads competed with one another. In turn, the price wars meant that the railroads often had to operate at a loss on the trunk lines that ran between major cities, such as Chicago and New York—the biggest trunk line of all—where the competition was at its most ferocious.
In those days, however, railroads not only operated trunk lines but also operated myriad branch lines running off the main ones to smaller cities and agricultural areas. On most of these there was no competition, so the railroads, naturally, made the most of that fact to redress the losses they experienced on the trunk lines.
Just as naturally this wasn’t popular with the farmers and manufacturers living along these monopoly lines. As early as the 1860s railroads had stirred up enormous resentment with their highhanded ways and their tendency to favor the powerful over the weaker with such devices as rebates. States, responding to political pressure, began to introduce regulation. Many states set up commissions to oversee the business, but these often proved ineffective, largely because the railroad lobbyists saw to it that their powers were limited, if not nonexistent.
Indeed, they often became nothing more than covers for permitting railroads to behave as they pleased. One critic complained about the California Railroad Commission, which had been set up precisely to bring the Central Pacific Railroad to heel. “The curious fact remains,” he wrote in 1895, “that a body created sixteen years ago for the sole purpose of curbing a single railroad corporation with a strong hand, was found to be uniformly, without a break, during all that period, its apologist and defender.”
And as railroads amalgamated into vast networks spanning dozens of states, each state’s power to regulate its own portion dwindled. In 1886 the Supreme Court, in Wabash Railroad v. Illinois , ruled that the states had no power over railroads that were carrying goods coming from or going to another state. For all intents and purposes that meant that states could not regulate railroads at all.
After Wabash Railroad v. Illinois , therefore, the fight to change the behavior of railroads moved to Washington. But while the federal government, thanks to the commerce clause, had the undoubted power to regulate what had become a national transportation network, there was a good deal of question about whether it had the ability. After all, Congress was faced with an aroused public on the one hand and the most powerful, not to mention the richest, corporations in the country on the other. In those circumstances politicians will always try to split the difference and make enough people happy to win the next election. The best solution will always rank far behind the most expedient.
What resulted, after a year of intense political sausage making, was, in the words of one historian, “a bargain in which no one interest predominated except perhaps the legislators’ interest in finally getting the conflict . . . off their backs and shifting it to a commission and the courts.”
A railroad commission, similar to those that had failed at the state level, was the only proposal seriously on the table. The rising political left instinctively looked to government, not markets, to protect its interests, and the railroads themselves were not averse to the idea, provided, of course, their own interests were carefully considered. Their economic and political power assured that they would be.
As early as 1884 a vice president of the Pennsylvania Railroad, perhaps the most powerful railroad company in the country, had written that “a large majority of the railroads in the United States would be delighted if a railroad commission or any other power could make rates upon their traffic which would insure them six per cent dividends, and I have no doubt, with such a guarantee, they would be very glad to come under the direct supervision and operation of the National Government.”
In other words, the railroads would have been perfectly happy to have a government-sponsored and -enforced cartel. The anti-railroad forces, of course, wanted a commission that would set rates in the public interest, not the railroads’ interest. The result, in the words of one congressman of the day, was “a bill that no one wants . . . and everybody will vote for.”
The bill required that “all charges . . . shall be reasonable and just” but did not define what that might mean. And the commission that was set up had to use the courts to enforce any orders, a costly and time-consuming process. Even when the law was much strengthened in the Theodore Roosevelt administration and the ICC given the power to set rates, the railroads quickly learned how to manipulate it in their own interests, just as they had the old state commissions. American railroads began their long, slow decline.
The monopoly on long-distance freight hauling was broken in the 1930s by the nascent trucking industry, which from its birth was regulated by the ICC. In the 1970s—the nation’s transportation industry by then a monument to inefficiency—the Carter administration removed most of the commission’s power to set rates. In 1995 it finally expired, having had nothing to do for twenty years. Even The New York Times , hardly the most passionate advocate of free markets, was not sorry to see it go. “As the decades wore on,” a Times editorial that marked its passing noted, “it took as its interest the economic well-being of the industries under its purview. Its regulations jacked up prices and blocked entry by low-priced truckers and joint rail and truck services.” In other words, the ICC had become precisely what the mighty Pennsylvania Railroad had wanted it to be in the 1880s, the leader of a cartel. That is no small part of the reason that both the ICC and the Pennsylvania Railroad are now on the ash heap of history together.
What might Congress, in a perfect world, have done instead? A self-enforcing solution would have been easy to craft. Congress could simply have required that each railroad publish a schedule of its freight rates for each commodity, on a per-mile basis, and that those rates be uniform throughout the railroad’s entire system and for each customer, providing severe penalties for under-the-table rebates.
Then the market forces that determined prices on the trunk lines would have been brought to bear on the branch lines, and the playing field would have been leveled by competition, not bureaucrats. And the inevitable co-opting of the regulators by the regulated would have been avoided for the simple reason that there would have been no regulators to co-opt.