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CHRISTOPHER D. STONE, ICC: Some Reminiscences on the Future of American Transportation - Ralph Raico, New Individualist Review 
New Individualist Review, editor-in-chief Ralph Raico, introduction by Milton Friedman (Indianapolis: Liberty Fund, 1981).
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ICC: Some Reminiscences on the Future of American Transportation
The Commission . . . can be made of great use to the railroads. It satisfies the popular clamor for a government supervision of the railroads, at the same time that the supervision is almost entirely nominal. Further, the older such a commission gets to be, the more it will be found to take the business and railroad view of things. It thus becomes a sort of barrier between the railroad corporations and the people and a sort of protection against crude legislation hostile to railroad interests. . . . The part of wisdom is not to destroy the Commission, but to utilize it.
—Letter of Attorney General of the United States Richard Olney to Charles E. Perkins, President of the Chicago, Burlington and Quincy Railroad, Dec. 28, 1892.1
DISSATISFACTION WITH the Interstate Commerce Act and its administrator, the Interstate Commerce Commission, has inspired a great number of proposals, currently before the Congress, to revise the transportation regulatory scheme. An understanding of problems which presently beset the transportation industry may be somewhat advanced (they will certainly not be solved) by a few observations on the state of affairs which brought Congress to the juncture of federal regulation, and upon the evolution of the Interstate Commerce Commission as an agency to do the job which Congress wanted done.
By the time the Second Session of the Forty-ninth Congress convened, on December 6, 1886, it had become fairly certain that some sort of railroad regulatory body was going to emerge. Only six weeks before, the Supreme Court’s decision in Wabash, St. Louis and Pacific Ry. Co. v. Illinois2 had voided practically all state regulation in this field upon the grounds that the Constitution vested in the federal government alone the power to legislate upon interstate railroad transportation. The unexpected Wabash decision had thus left the nation without so much as a shell of governmental regulation to point to as an excuse for continued debate.3 In Washington and without, for some years previous, both railroad and anti-railroad interests had been lobbying intimately with Congress; and the imminence now of the first of the federal government’s modern regulatory agencies, so long in gestation, brought both sides to an uneasy bed-watch—for even at this late date, it was uncertain whose child it would prove to be.
Although the coming federal regulatory board, whatever powers might shortly be conferred upon it, symbolized a cross-roads in the relations of government to industry, it would be wrong to suppose that prior to 1886 the federal government had steadfastly refused to intercede in the conduct of the nation’s business affairs. The transportation industry, perhaps more than any other, had been fostered from the start by a series of measures which lay beyond the pale of laissez-faire. The very first tariff act (1789) set a precedent for lower duties to be charged on goods entering the United States in American bottoms. The Embargo Act of 1808 had presented the American shipping industry with a ban on foreign ships in the U.S. coastal trade; and by 1830, Congress had instituted the practice of doling out public funds to ship owners—in the form of handsome mail subsidies—thereby paving the way for the sensational investigations of Senators Gerald Nye and Hugo Black, one century later. State finance of early turnpikes made the business of transportation by wagon feasible on a theretofore unrealizable scale. Public reaction was satisfactory enough “to inaugurate a strong movement in favor of a national system of roads constructed with the aid of the federal government,”4 although the only upshot, to this time, had been partial construction of the Cumberland Road—the “National Pike”—projected from Washington to the Mississippi. The success of the State of New York’s Erie Canal (1808-1825) set off a flurry of publicly financed canal construction, thus drawing the expenses from society in general, rather than from the waterway operators and industrialists who stood most directly in the line of benefit.
But of all the bountiful intrusions upon the sanctity of free enterprise, that which had been accorded the railroads loomed the largest.
Initially (1830-50) the government’s policy toward the railroads had been moderately laissez-faire. It may be assumed that early railroad development roughly paralleled, through time, the probable returns on railroading investment relative to returns elsewhere in the young economy—and thus relative to the economies of, and demand for, transportation by competing modes of carriage.
But at least by the year 1850, agitation for a less modest expansion of the rails had reached a high pitch in the Congress, and it was proposed that the federal government cede to the states vast tracts of public domain to be applied as land grants for otherwise reticent railroad entrepreneurs. Senator Davis of Georgia commented sourly that “the Government seems to me to be becoming a great eleemosynary institution,”5 while in the House, North Carolina’s Representative Venable warned of “Wall Street speculators,” and predicted that, “The House were [sic] asked today to tie together . . . the various sections in a system of log rolling and corruption which would absorb the entire public domain.”6
The government proceeded to offer up an estimated 242,000 square miles of public domain—an area greater by one-fifth than the territory of France—as a lure to further the construction of rails. Seven Western states were to give up from a fifth to a quarter of their birthrights. Gifts and loans by the federal, state, and local governments totalled an additional 700,000,000 nineteenth century dollars. According to one commentator, “The Lone Star state discovered in 1882 that in her youthful ardour she had given away some 8,000,000 acres more than she possessed.”7
The campaign of construction had immediate and dramatic effects. In the decade from 1850 through 1859 over 20,000 milles of rail were built, nearly three times that which had been built in the twenty years preceding. The Civil War slowed construction markedly; but the peace was followed by unprecedented railroading vigor. 1869 saw completion of the Union Pacific-Central Pacific link from the Missouri River (Omaha) to the Pacific (Sacramento). In 1871, a cobweb of rails having been spun in and between the East and Midwest, and a second, third, and fourth transcontinental line having threaded their ways to the Pacific, the land grant program was brought to an end. The country was by this time on the verge of a financial panic and depression sponsored by the “construction mania” itself (1873-78).
Neither the conclusion of the land grant program, however, nor the panic of the seventies, halted economically questionable ventures and the trend towards overcapacity. For though the operation of railroads had proven profitable enough as a legitimate pastime, the truly memorable fortunes were being lavished upon those who promoted new construction with absurdly watered stock, or speculated in any number of the ingenious ways by which railroads were born for purposes of swindle, and not soberly predicated upon the expectation of a sustaining demand. But whatever the sum of the causes, by 1886 the nation looked back to see that with the planting of the roots of a great industrial power, the previous three decades had witnessed a helter-skelter dedication to the establishment of railroad capacity far out of proportion to the foreseeable demands of traffic. In 1886, the country found itself saddled with 7¼ billion dollars invested in railroads and railroad equipment, representing more than one half that year’s gross national product,8 one-fifth the entire wealth of the nation.9 Track was still being laid so fast that by 1890 perhaps 80% of today’s road mileage would be accounted for.10
Once virtual monopolists wherever they chose to build, the railroads were feeling the press of competition. Marginal roads had begun to fail. Even though it was in the interests of the railroads as a group to keep rates high, each individual competitor found himself with significant excesses of rail and rolling stock on hand, which made it tempting to succumb to any rate offer which would utilize capacity, cover direct costs, and make some contribution to overhead. To “stabilize” rates, railroads operating along competing routes made arrangements to divide earnings equally among themselves; such collusive “pooling” (not then illegal) partly obviated the mutually disadvantageous incentive to compete for shippers’ favors. But even where pools existed, they were fraught with suspicions, and railroad managers who wanted to retain prize accounts took to effecting rate reductions through secret rebates—secret from other shippers, who would, if they knew of them, insist upon equal treatment, and secret from other railroads, who would, when they found out, set off a new round of price cutting. The elaborate network of rebates, preferences and suspicions which evolved was, of course, not only inimical to the railroads, but to the majority of the business community as well. Small and average sized businesses saw the hand of their most powerful competitors strengthened, while rational marketing decisions were frustrated by the impossibility of ascertaining the transportation costs which faced one’s rivals.
Pooling, which forestalled but never halted competition’s whittling away at the level of rates, and personal preferences, were but two of the plaints which were agitating the nation towards an inevitable rail reform. Because of the manner in which the duplicated and underutilized rail facilities had spread themselves across the country, certain locations afforded shippers who located there a number of competitive alternatives for the transportation of their wares; whereas other communities were, as a practical matter, wholly dependent upon a single carrier. In cities which were becoming the great hub-like rail centers (as in cities along the waterways and upon the seas), businessmen could play off one railroad manager against another, or against barge and ship owner. Rates not only fell in such centers, but the effect was self-perpetuating. The lower rates in the favored locales held out to new industry the promise of cheap access to raw materials and strategic flexibility in seeking out markets; and the influx of new industry brought still more carriers to their doorsteps. As a result, the industrial map of the nation was being etched in such manner that the fortunes of some centers of commerce were guaranteed—while vast areas were foredoomed to the less rewarding and more menial tasks which running a country call for.11 Inhabitants of the less favored areas viewed this trend with especial indignation since they imagined the high rates they had to pay as in some sense defraying or offsetting those of the favored regions.
THE IMPOTENCE of state legislation to quell discontent had been tempting federal intercession at least as early as 1872, but no concrete legislation had resulted. In March, 1885, the Senate authorized a five man Select Committee on Interstate Commerce (the Collum Committee) “to investigate and report upon the subject of the regulation of transportation.”12
The Collum Committee enjoyed a full presentation of the basic issues which to this day divide the bulk of the public from the bulk of the transportation industry. The “public” rallied around the standard saw of the economics primers, that the evil effects of monopoly (of which collusion is a struggling imitator) are high prices, low output, and, more broadly, a misallocation of resources. From the same fundamental observation on competition and monopoly derives the early railroad executive’s probably unwitting epigram: “the evil effects of competition upon net earnings.”13 Each side wished to resist the onslaught of its own particular evil.
One of the public’s grievances with pooling was, of course, that truly competitive bidding would have given it the benefit of lower rates. On the other hand, the implications of collusion for the transportation dilemma, then and now, go beyond the price of carriage and can only be understood in relation to the misallocation of resources which it was destined to effect. From this point of view, to the extent that collusion succeeded in holding prices up, it prohibited the transportation of certain marginal commodities which might otherwise have been able to enter into commerce; and so restricted the growth of all firms which produced, distributed or utilized them. Further, by interfering with the free market mechanism, price “stabilizing” abetted the overinvestment in railroad capacity which land grants, fiscal subsidies, and speculation by promoters had begun. For to the extent that collusion successfully “stabilized” prices, investment returns from railroading were reduced not by a decline in the level of prices which the public had to bear, but solely by a further division of traffic among the “in” roads and each successive newcomer, whose very reason to enter the industry was the attractiveness of uncompetitively high rates. The result was to decrease the utilization of capacity between given points; where three roads could economically have carried the freight, five sprang up, each lamely operating at 3/5 capacity or less. There was that much less steel for the rest of the economy, that much less land, entrepreneurial skill and mobile capital.
The railroads’ answer to the problem of overcapacity was federal intervention, too—but not the outlawing of pooling. The existing railroads were perfectly willing, as Colonel Fink, their commissar of pooling proposed, to submit to legislation barring the threat of new competitors.14 As for collusive rate making, moreover, here, too, federal power could be brought to the railroads’ own advantage: to prevent the debilitation of pooling they asked that “Congress should legalize pooling, and impose a heavy penalty for any violations of the pooling agreement.”15
This was, no less than the request for the government imposed strictures upon entry, tantamount to a hope that, as the railroads’ own efforts at cartelization were faltering, the sanctions of federal power should come to the rescue of Colonel Fink. In addition, only the federal government (if anyone) could effectively cope with the Achilles heel of collusion: secret rebates, with their ineluctable tendency to reduce rates to a competitive level. Chairman Collum asked the eminent Charles Francis Adams (then president of the mighty Union Pacific), “Suppose Congress were to pass a law, not interfering with pooling, but prohibiting the payment of drawbacks and rebates . . .?” Adams’ answer is instructive.
It would be the greatest boon you could confer, because that would do away with the lack of confidence of which I just now spoke. If you could provide any way by which all passenger and freight agents could be absolutely debarred from making reductions from published rates, and from deceiving each other while doing it, you would be very much more successful than I have been in my limited sphere.16
Indeed, even if price changes were freely allowed, there was good reason to believe that price competition could be discouraged if only the federal government would enforce a requirement that intentions of rate changes be prepublished.17
These requests for government assistance to stabilize the railroads’ faltering cartel sought a common justification: the glut of rail capacity, which all were prepared to concede. But was there such overcapacity that, but for the right to collude, something called “destructive competition” would have “destroyed” the railroads? The railroads tried to create this impression before the Collum Committee, but whatever the proposition may mean precisely, it seems unconvincing as a basis for legislative action. The literal survival of existing facilities (as opposed to their rusting away) would depend upon the railroads’ abilities to cover fixed and variable costs from year to year and this was no widespread problem. Certainly, if demand did not pick up in the coming years faster than competition reduced earnings, some roads would not be able to replenish obsolescent stock and a few roads, undoubtedly, would sell out to other roads at a price reflecting their nuisance value, or go bankrupt and be operated by creditors. But if such were the mandate of the free market, was there any reason to resist it? Is this not the sense in which all competition is by its very nature “destructive”?
IN 1963, IT IS to a large extent true that all the various pleas the railroads made in 1885-87, for Congress to cartelize the transportation industry, have since wended their way into law. But the same shoe, today, must also fit truckers, waterway operators, intercoastal shippers, freight forwarders, and pipeline companies, as a result of which the railroads are feeling the pinch.
Government cartelization did not spring into being with the Interstate Commerce Act of 1887. This first legislation emerged on sort of a middle ground and, partly through judicial evisceration, was not terribly significant in any direction, except to establish the principle of federal surveillance. The original Act applied to carriage wholly by railroad, and partly by railroad, partly by water, where both were under joint control. Pooling was prohibited (rate bureaus, mergers, and joint banking control took its place). The Act declared that all rates must be “just and reasonable” (but the Supreme Court soon pointed out that there was no actual power to amend “unjust, unreasonable” rates). Personal and geographic preferences were prohibited in word (but the Commission turned out to have no power to prescribe non-discriminatory rates). Carriers could not charge more for a short haul than a long haul (the New York, Rochester, Cincinnati problem, n. 11 supra) but the provision contained a loophole which made it little more than a sentiment. Within ten years of its establishment, it might have appeared that the federal commission was destined to be as powerless as its state predecessors.
“The part of wisdom is not to destroy the Commission, but to utilize it.”18
Utilize it the railroads did, and soon. In 1903, the Elkins Act amended the Interstate Commerce Act to close up the loopholes in the anti-rebate provision they had sought. Any deviation from published tariffs (except the most ingeniously contrived) were unlawful. The rail lobby soon organized “the most reckless publicity campaign . . . ever known in the history of railroad control”19 to combat Teddy Roosevelt’s attempts to bring them under effective control. The Hepburn Act of 1906 (which significantly extended the breadth of activities over which the Commission had jurisdiction) gave the rails the provision they had been seeking for thirty days notice in advance of rate changes. Departures from published tariffs now could be punished by imprisonment—for both those giving and those receiving rebates—a move which was another step toward the “stabilization” of rates. The railroads were no longer “allowed” to give free passes, a freedom they had always preferred to be without.
Nonetheless, the most far reaching innovation of the Hepburn Act, vesting the Commission with the power to review maximum rates, might have been detrimental to the railroads, should they have been unable to secure the appointment of commissioners sympathetic to the problems of owning railroad stock. As it turned out, the early attitude of the Commission (certainly until 1918) was such that it granted only a minor fraction of railroad demands. But by the time the railroads had struck back with passage of the Transportation Act of 1920, directing the ICC to maintain rates which would yield a “fair return” (a provision since repealed as unworkable) the sentiment on the Commission had turned congenial enough to grant boosts of 25% to 40%, in some cases more than the railroads themselves had deigned to ask.20 In fact, the Commission had proved itself so over-indulgent that rates had to beat a partial (10%) retreat within two years when traffic balked.
Still, the Commission’s attitude towards maximum rate “control” was such that from 1924 through 1929, freight rates were stabilized at about 165% of the 1913 level, whereas wholesale prices had fallen back to 140% of that same standard. During the depression, with the wholesale price index down 30% from the 1929 level, the Commission’s contribution to the emergency was to continue to grant price increases anyway. In fact, the Commission has not denied in toto a railroad request for a general price increase since 1926.21 Today, authorized carload rates may be as much as 25% more, on the average, than the railroads are finding it profitable, in their discretion, to levy.22 Indeed, the railroads’ major pricing concern today has shifted to seeking lower rates, and the Commission’s power over maximum rates is becoming more and more superfluous.
The year 1920 saw enactment of Colonel Fink’s request that strictures be placed in the path of prospective competitors who seek to enter the business of railroading. The device was the Certificate of Public Convenience and Necessity which, henceforth, would have to be issued before further railroad line capacity could be constructed. Another proviso gave the Commission power to legitimize pooling agreements once more, if the Commission, in its enlightened omniscience, found such collusion “in the interest of better service to the public.” In a similar about-face of policy, the Congress relieved from the operation of the antitrust laws ICC approved mergers and acquisitions of control over a competing road through lease or stock ownership.
The Transportation Act of 1920 had not only resulted in a sudden upswing of rail rates, but the 1920 Act broke ground for a cartelization device even the industry spokesmen of the 1880’s had not deigned to suggest: the Esch-Cummins Bill gave the Commission power to set federally enforceable minimum rates. Perhaps to this, as well as to the extravagantly high maximum rates which the Commission decreed in the same year, can be ascribed the fact that between 1920 and 1924, truck registration in the United States nearly doubled.23 Thus, the artificially high rate structure had a backlash to it, much as it had had in the nineteenth century; but now, with the entry-stalling certificates of public convenience and necessity having closed the doors on rail expansion as an equalizer of investment possibilities, trucks were driving through the windows.
The railroad industry first tried to meet truck competition by advising friends in state legislatures as to the evils of trucks on highways, suggesting a variety of enactments such as would prescribe maximum truck speeds, maximum gross tonnage, and upper limits to truck drivers’ working hours, all of which inured to the respective “safeties” of public and railroad.
But when these and other devices failed, and trucks had asserted themselves as here-to-stay, the railroads took the more enlightened path. The truck industry was so fragmented that truckers couldn’t hold their rates up to non-competitive levels inter se, much less as against the railroads. As a result, both were threatened with competitive pricing. For that reason, the railroads felt that if only the trucks were cartelized, too, the both of them could fight it out with a little more imagination for the interests they shared mutually against the shipping public. By securing passage of the Motor Carrier Act of 1935, the railroads gave the trucks (and indirectly themselves) some of the benefits they had been enjoying: the ICC was to limit entry through certificates of public convenience and necessity, and rates were to be published and adhered to. The Director of the Commission’s new Bureau of Motor Carriers even went on the road to give the truckers fatherly lectures on the elementary economics of collusion.
The Commission wants to work with the industry and wants to work with you operators . . . but we can’t work with the industry if there are 57 varieties of rates in the industry. The result of that is going to be that if you folks don’t get together yourselves in the interest of uniformity of rates, you may get by with it initially but a little later the Commission is going to have to prescribe them for you.24
The Commission not only encouraged unlawful “rate conferences” as between the truckers themselves, but as between truckers and railroaders jointly.25 Nonadherents to the “rate bureau’s” determination might find their low rates cancelled on the grounds that “competitive rate making . . . has resulted in unduly low, depressed, and non-compensatory rates and charges, and instability and unsound economic conditions. . . .”26
Because of the large number of truckers (even despite the certificate requirement) the ICC’s attempts at giving the transportation industry “stability” were less than perfect, and railroad attempts to help out went so far as undertaking (through the medium of Kuhn, Loeb & Co., the railroad bankers) two efforts to consolidate the truckers into a more happily manageable whole.27 Though these efforts were blocked, the Association of American Railroads had been able to announce that the American Trucking Assn., Inc. “. . . has shown a disposition to work constructively with the railroads. . . . In many instances the trucking association has insisted on getting low rates that were bothersome to the rail carriers brought to the rail level.”28
One problem with cartelization is, though those within the cartel can work to mutual advantage, anyone outside the cartel gets a “free ride” in the sense of having a rate umbrella: he can charge as high as the cartel does if it suits his purposes, but if cutting into the cartelists’ volume with lower prices is more profitable, he can do that, too. This threatens injury to the cartel. After 1935, the railroads and truckers (and the pipelines, brought under the ICC in 1906) turned about to see the water carriers in just such a position. In 1940, though there was no public clamor for regulation of the water carriers (and a lot against it) the “industry” brought the watermen “in” to the federal regulatory scheme with a righteous and Orwellian doublethought on the old saw about competition and survival: “If one or more forms of transportation cannot survive under equality of regulation [!], they are not entitled to survive.”29 Thus: rate “stability” for existent barge and ship owners; limits on competition between them, the rails, and truckers; and certificates of public convenience and necessity for prospective competitors. Predictably, freight forwarders were tapped for ICC membership two years later.
HAVING SO MANY modes of transportation entrusted to its protection was destined to put a strain upon the ingenuity of the ICC, even granted a staff which, by 1962, had passed 2000 employees, and a budget which, for the same year, was pre-estimated at $22,000,000.30 Not the least perplexing problem was, of course, how to allocate rates (and, hence, traffic) between the various modes. The dedication to competition which appears elsewhere in the economy—even to the point of banishing electrical industry executives to prison—has never commended itself to the commissars of transport. But what better way to proceed?
In regards to adjusting rates between railroads, motor carriers, water carriers and freight forwarders, Congress’ mandate to the ICC, via the Interstate Commerce Act, was cliche ridden and inscrutable.31 The Commission decided that what it was supposed to do was to keep all of its brood in business. In a typical case, the railroads’ traffic of bulk petroleum had been nearly cut in half by truck competition, and in an effort to regain it, the railroads reduced their rates below those of the truckers. The trucks said that their costs prohibited any further reduction in highway rates. As a result, the Commission cancelled the railroad reduction on the theory that rates must be “so related that they will not be unreasonable, unfair, or destructive . . . and [must] preserve the inherent advantages of both.”32 How was the “inherent advantage” to be proven, other than in the ability and willingness of the railroads to carry the petroleum for less? In other cases, the Commission saw its task to be the exercise of minimum rate power whenever it became necessary “to prevent destructive competition and to stabilize the rates at a level which will permit each mode of transportation to participate in the traffic in a just and reasonable manner.”33 It is tempting to imagine what would have happened had the ICC been created at the time of the nation’s birth, and exercised continuing jurisdiction over the stage coach: would the government have interceded to keep every competitor’s rates above those of Wells, Fargo & Co., to enable that mode to continue participation in the traffic in what the ICC divined to be “a just and reasonable manner”?
Railroad discontent with the Commission’s minimum price policy led to a 1958 amendment which directed that “rates of a carrier shall not be held up to a particular level to protect the traffic of any other mode of transportation. . . .” But there was enough resistance on the part of less confident modes of carriage to continue the amendment to read “. . . giving due consideration to the objectives of the national transportation policy. . . .” The irony is that the National Transportation Policy (1940) is a mandate that the courts and the Commission “preserve a national transportation system by water, highway and rail, as well as other means. . . .” Thus, the second proviso of the enactment is open to construction as cancelling out the first, which is just what the Commission appears to have been doing, as a rule, post 1958. A proposed railroad rate reduction on newsprint was disallowed recently, because “a differential of approximately 10% under the rail rates is necessary to enable the water carriers to be in a position fairly to compete.”34 When the bankrupt New York, New Haven & Hartford Railroad tried to raise a little revenue by meeting the rates of competing cargo ships, the Commission forbade them to maintain a differential of less than 6%.35 This from the agency which, in the eyes of much of the public 75 years ago, was going to emancipate them from excessive and burdensome charges.
Not all transportation has been dragged within the embraces of the ICC scheme. The hauling of bulk commodities by water carrier is exempt from regulation, as is motor carrier transportation of agricultural and fishery products. Similarly, producers who own their own transportation media (private carriage) may operate outside the pale of rate control. In past years, there has been a marked trend towards carriage by unregulated carriers; it has been estimated that since 1946, the ICC regulated fleets have been losing 1% each year of the total intercity freight volume to non-ICC regulated carriers.36 If the present trend continues, private and exempt carriage can be expected to account for 39% of intercity freight not later than 1975.37
The implications of these findings would appear to be, first, the ICC is administering rates so high, that an increasing number of producers are finding it more economical either to buy their own carriers (those producers with sufficient traffic demands) or, where possible under the law, to apply for the services of exempt for-hire carriers. And, second, the striking growth of exempt carriers is powerful testimony that trucks, barges, etc., can be operated profitably at rate levels less than those now being administered by the ICC.38
In fact, one of the most telling commentaries upon the effects of ICC regulation centers about the “agricultural commodities” exemption clause. In 1953, by an interpretation of the statute, a United States District Court in Iowa ruled that eviscerated poultry was such an exempt commodity, and that therefore the ICC could not regulate the rates for the carriage of fresh slaughtered poultry by truck.
The ICC fought the ruling all the way up to the Supreme Court, but without success. A similar ruling with respect to frozen poultry was affirmed by the Supreme Court in 1956. Subsequently, the United States Department of Agriculture undertook a study to compare the transportation rates on unfrozen and frozen poultry, both before and after the respective decisions which freed them from ICC stewardship. The results showed that in 1956-57, poultry firms were paying 33% less for the transport of unfrozen poultry than they had had to pay in 1952, the last full year of ICC control. In the same 1956-57 period, frozen poultry rates had settled 36% below the prices the Commission had been supporting in 1955.39
WHAT MAKES THE ICC’s protectionism especially serious is that today, as in 1887, the transportation industry is marked by overcapacity, which appears to be increasing at an accelerating rate. The so-called “Doyle Panel,” commissioned by the Senate Committee on Commerce to undertake a study of the field, claims that “The social investment (public and private costs) of transportation per unit of transportation performed is growing at a fantastic rate.” By 1975, “transportation social investment will outrun the gross national product.”40
The result of expansion of carrier investment and capacity at a rate that so far exceeds the growth of gross national product has resulted in an excess of transportation capacity that is unequalled in this century except during the major economic depressions of the thirties. Already decreased utilization of transportation plant has reached unusual proportions, and competition between carriers consequently has increased.41
Confronted with such a problem, and armed with experiences which were unavailable to the Collum Committee, some analysts might advocate freer competition to prune out the inefficient and to bring rates to a level which would discourage further superfluous capacity. But like the railroads of the 1880’s, the Doyle Report’s concern goes off along the opposite line of thought, advocating that there be “restraint of cutthroat competition from shipper pressures which is made possible by oversupply of transportation capacity. . . .”42 Though the conclusion may seem paradoxical, it is the reasoning which is truly an affront. “Cutthroat competition” must be prevented, we are told, in order that the industry can meet the capital requirements necessary “to maintain and develop these facilities,”43 i.e., the facilities which, so it is said, are already overdeveloped and too rapidly growing. In other words, read as a whole: we must have non-competitive prices, because under the current and lamented excess of capacity, if competitive pricing were allowed, the lower rates which would surely ensue would make the field less attractive to investors, and so frustrate the maintenance and increasing of capacity.
It is in line with this illogic—and from their inherent senses of “fair play”—that the Commissioners wish to continue to exercise their minimum rate power. And as for unregulated carriage, the fact that many an American business man is rebelling against the ICC’s family has provoked the Commission to spread its protective wings, rather than to surrender power: “The public interest in stable, reasonable and properly regulated rates cannot find expression in the complete absence of control of such a large segment of the bulk carrying trade.” The ICC’s alternative legislative “solution” would be simply to abolish unregulated water carriage and to limit severely the agricultural commodities loophole.44
These views are just symptomatic of a broad range of Commission attitudes which portend a continuing uneconomical investment in transportation capacity—along roads which promise the public no end to uncompetitively high rates.
WRITING IN THE Yale Law Journal a decade ago, Harvard Professor Samuel Huntington suggested that “the ICC should be abolished as an independent agency” for the failure of its outlook to be “as comprehensive as the interests of the whole country.”45 Some years later, his colleague, Louis Jaffe, responded in the same forum that the critics’ “real quarrel” with the administrative agencies, “if they would but recognize and admit it, is with Congress.” Using the Interstate Commerce Commission as an example, he observed:
. . . can anyone find in the legislation of 1935 and 1940 an intention to establish competition as the presumptive norm of transportation regulation? . . . Everyone seems to be agreed that the railroads and the large truckers were the dominant forces in procuring that legislation. Was this in the name of competition? When somewhat later the Supreme Court came close to holding that railroad rate conferences were a violation of the antitrust laws, Congress, immediately immunized them. Was this another indication of a congressional mandate for competition?46
Though Jaffe conceded that “The ICC . . . is, at times, more tender of the railroad interests than even a fair reading of its mandate would require, and it may be less adventurous in permitting new competition than it might be,”47 upon his view, it ought to be recognized that the Commission is generally doing the job which Congress wanted done.
These two views need not be inconsistent. One could agree both with Jaffe—that the ICC staff is not to be blamed for doing the job that “Congress” wanted done—and with Huntington—that the ICC ought to be abolished rather than permitted to continue a job so often irreconcilable with the public interest.
Huntington’s “solution,” however (rather astonishing in the context of his documented cynicism about federal regulation), was to replace the abolished ICC with three new commissions: one, it may be presumed, to be dominated by water interests, one by truckers, and one by the railroads.48 Perhaps a more worthwhile future for transportation regulation would be to divest the ICC at least of the powers discussed in this article, and to explore the withdrawal of federal financial patronage to an already over-invested segment of the economy.
No doubt the problems which deregulation would raise are extraordinarily complex. To take one specific problem (outside the immediate concern of the ICC), permanent federal subsidization of the inland waterways is a fine example of indefensible governmental intrusion. Why should those who do not directly benefit from the waterways pay for those who do? Many have suggested as an alternative that a “user charge” be imposed to make the users of the waterways bear the full expenses of their maintenance. On the other hand, even granted that the present transportation network is the child of economically irrational forces, one must recognize, too, that as the system has developed, patterns of commerce have adjusted themselves to it. The Ohio Valley (with the important Pittsburgh-Youngstown iron and steel district) has in no small way been built upon cheap water transportation. Much of Southern industry, too, has been driven to the banks of the Mississippi by improvidently high rail charges. Until we know more about the repercussions a user charge would have upon such fundamental industrial networks, more about the ability of railroads and trucks to “fill in” with service at comparable cost to users, and more about the competitive implications in the product market of increasing the raw material costs of waterway industry, changes ought to be instituted with some respect for the awesome magnitude of the task.
Nonetheless, the future direction of governmental control is indicated. The transportation industry can and ought to be sheared of its supports, whether they be the meting out of direct subsidies or ICC regulation of prices. Artificial props can be removed gradually, one by one, so that the impact may be gauged without taking an eye off any imagined danger spots. No doubt many persons in the transportation industry will agree with the Doyle Report’s advice that “Experience in the United States . . . with unrestricted competition in ratemaking by carriers has not been happy.”49 But assuming that General Doyle means “not been happy” for the public (rather than for the transportation industry, with which the report appears more tenderly concerned), it ought to be remarked that unrestricted competition has not been widely tried in 75 years. And where it has been tried, as with agricultural exempt commodities, the experience has indeed been “happy”—for the farmers and for the consuming public.
Moreover, since the foundation of the ICC, two other developments have greatly altered the need for regulation. First, the relative railroad power of the 1880’s has considerably diminished. As of a few years ago, an ICC study on percentage distribution of intercity freight traffic revealed that the railroads accounted for 45% of revenue ton-miles; motor vehicles, 22%; the inland waterways (including the Great Lakes), 15%; and oil pipelines, 18%.50 Second, a large body of antitrust law has developed in the interim. It is true that a well oiled transportation lobby has managed to produce some special exemptive legislation (and the Doyle Panel would extend present exemptions to legitimize rate-rigging by every mode of carriage). On the other hand, if only the antitrust umbrella would be repealed, the existence of the antitrust laws would actually make the withdrawal of institutionalized regulation more feasible today than ever before. Antitrust, thoughtfully applied to transportation, could allay many of the past fears about abusive practices and huge amalgamations of power.
Indeed, one can not help but wonder how much substance there is to some of the fears voiced against deregulation. The supposed need for minimum rate regulation is a case in point. Advocates of maintaining the Commission’s power have maintained (1) that if the railroads are allowed to put lower rates in force along waterways and major highway trunk routes, the rates will “have to be” raised in the less competitive areas; (2) that if control is relaxed, the railroads will lower their rates and destroy competing modes of carriage; (3) that, having destroyed competing modes, the rails will raise their rates to a higher level than that which had obtained previously, to the detriment of the public.
The first of these arguments sounds like a restatement of the “recoupment fallacy” so ably and decisively repudiated by Professor Morris A. Adelman of MIT in another context.51 The railroads, generally, are maintaining rates well below the maxima the Commission has allowed them (much less the maxima the Commission probably would allow them on request). If the railroads could make more net revenue in the less competitive areas by raising their rates higher than those which presently obtain, they would have done so already; it is hard to see how rate changes in the competitive areas alter either the feasibility or the profitability of rate advances in non-competitive regions. Thus, it is not credible that “because” the railroads lower their rates to meet water and truck competition, they “will have” to raise them elsewhere. The argument is based on some rather primitive theories about pricing.
The second supposed justification for rate minima is no more compelling: that the railroads will use their potential for better service and lower rates to destroy competing modes. If the underlying assumptions of the argument are correct, the issue so stated is as simple as whether we want to sustain and encourage investment in inefficient transport media by recourse to artificial price supports.
The third argument is the one which demands the most attention although it, too, may well prove dubious. Even if the railroads could lower their prices enough to drive truck competition from select major routes, it is not immediately apparent how the rails could thereafter “simply” recoup their short-term losses with new, higher-than-ever rates. Their ability to do so would be a function of the costs to truckers of reestablishing themselves in the affected area. And trucks, once driven off (the image of “destroyed” is unfortunately misleading), could probably swarm back like flies; higher-than-ever rates would be frustrated by attracting a more-than-ever number of trucks.
Water transportation, however—especially by intercoastal carrier—is subject to certain economies of scale which make the long-run effects of railroad price depressing less amenable to a priori analysis. What is needed is a follow-up study of the actual effects of cases in which lowered rates have driven away intercoastal competitors, to determine whether the railroads have, in fact, been able to enlarge their power over the public. The entire area is, indeed, riddled with a number of intangibles. But even if there proves to be some risk of objectionable price cutting, one may wonder whether the mere possibility justifies the imposition of an objectionable rate umbrella. If there are bona fide victims of “predatory prices” (as opposed to victims of lower prices and their own inefficiency), it would seem as though the established procedures for private antitrust suits would be a solution preferable to the perpetuation of the ICC.
[* ] Christopher D. Stone received an A.B. from Harvard College and an L.L.B. from the Yale Law School. He has been the author of several articles appearing in law reviews and is at present the Law and Economics Fellow at the University of Chicago Law School.
[1 ] Quoted in Josephson, The Politicos (New York: Harcourt, Brace, 1938), p. 526.
[2 ] 118 U.S. 557 (1886).
[3 ] In deed, if not in word, the Wabash decision was a reversal of a series of 1876 decisions popularly known as the Granger cases. See Munn v. Illinois, 94 U.S. 113.
[4 ] S. Rep. 46, Part 1, 49th Cong. 1st Sess. (1888) p. 5.
[5 ]Congressional Globe, 31st Cong. 2nd Sess. (1851) p. 322.
[6 ]Congressional Globe, 31st Cong. 1st Sess. (1850) p. 1887.
[7 ] Sharfman, The American Railroad Problem (New York: Century, 1821), pp. 34-5.
[8 ] U.S. Bureau of the Census, Historical Statistics of the United States (Washington, D.C., 1960), pp. 428, 139. Transport Statistics in the United States for Year Ended December 31, 1961 (Washington, D.C.: ICC, 1962) Part 1 lists “investment in railroad property used in transportation services” today at $35, 132, 559, 881. p. 114, 1, 91.
[9 ] S. Rep. 46, Part 1, 49th Con. 1st Sess. (1886) p. 49.
[10 ] Transport Statistics in the United States, supra n. 8, lists “miles of road owned” as of December 31, 1961, at 187,782 (p. 120, 1. 207). Historical Statistics of the United States, supra, n. 8, lists road owned in 1890 at 163,359 miles (p. 427). The respective figures for all track (including second main track, yard switching tracks, etc.) are 300,551 at present, 208,152 for 1890.
[11 ] In the 1870’s, a Rochester manufacturer shipped his goods destined for Cincinnati first eastward to New York, and from there back westward to Cincinnati via Rochester again, because by such a roundabout passage he was able to save himself 14¢ a hundred pounds; but the effect more than forfeited the natural advantage he might have enjoyed in competing with the easternmost manufacturers for the Ohio market. Complaints of this nature were widespread. And if some discriminatory rates might be ascribed to alternative means of carriage, and the dictates of competition, in the background of still other inequities there seemed to lurk merely an unarticulated scheme to perpetuate certain centers of commerce at the expense of others. Thus, the rate on gloves from San Francisco to Denver was $2.00 per hundred pounds, but if someone were imprudent enough to establish a glove factory in Denver, the rate for him to San Francisco would be $3.00. Jones, Principles of Railway Transportation (New York: Macmillan, 1924), p. 106.
[12 ] The “Collum Report” is S. Rep. 46, Parts 1 (report proper) and 2 (testimony), 49th Cong. 1st Sess. (1886).
[13 ] Haines, Restrictive Railway Legislation (New York: Macmillan, 1906), p. 233.
[14 ] S. Rep. 46, Part 2, 49th Cong. 1st Sess. (1886) pp. 117-18.
[15 ] S. Rep. 46, Part 2, 49th Cong. 1st Sess. (1886) p. 1205 (testimony of Charles Francis Adams) and p. 117 (testimony of Albert Fink). Up to this date pooling had not been made illegal (as the anti-rail elements were now proposing) in the sense that parties to a pooling agreement could not be criminally prosecuted. On the other hand, under the common law, pooling arrangements were unenforceable as contractual obligations. Thus, if the parties to such an agreement were “wronged” by one of their number, they could have no redress in the courts. The result must have been to encourage independent price setting when it seemed more promising than commitment to the pool.
[16 ]Ibid., p. 1210.
[17 ] For one thing, the rationale for an oligopolist to cut prices to select shippers is the short run profits he can make from added volume until the others find out; then they will have to lower their prices, too, and when the rates have resettled, the temporary advantage of the maverick has been lost and road rates are lower all around. A government enforced thirty day public notice of rate reduction would stand competitor roads on guard, so that not even short run profits could be anticipated by the price cutter. Besides, he would, in effect, be standing up and confessing a sin which might bring reprisals. And thirdly, the reduction would have to apply to a general class of goods: well calculated selective price cuts would be hampered. cf. P. W. MacAvoy, “Trunk Line Railroad Cartels and the Interstate Commerce Commission (1870-1900),” p. 28 (unpublished, Univ. of Chicago).
[18 ] Supra, n. 1.
[19 ] Dixon, Railroads and Government (New York: C. Scribner’s Sons, 1922), p. 3.
[20 ] Jones, op. cit., p. 568.
[21 ] Huntington, “The Marasmus of the I.C.C.,” 61 Yale L. J. 467, 482 (1952).
[22 ] Hearings before the Committee on Commerce, United States Senate, on S. 3242 and S. 3243, 87th Cong. 2nd Sess. (1962) p. 345 and chart, p. 359.
[23 ]Historical Statistics of the United States, p. 462.
[24 ]Transport Topics, Dec. 2, 1935, quoted in Wiprud, Justice in Transportation (Chicago: Ziff-Davis, 1945), p. 97.
[25 ] Rates between Arizona, California, New Mexico and Texas, 3 M.C.C. 505, 511 (1937), quoted in Wiprud, op. cit., pp. 97-98. The unlawfulness is ex post facto implied, if it was not always obvious, by Georgia v. Pennsylvania R.R., 324 U.S. 439 (1945) and the subsequent Reed-Bulwinkle Act, exempting railroad rate bureaus from the anti-trust laws. (Public Law 662, 80th Cong.)
[26 ] Ex Parte No. MC-21, Central Territory Motor Carrier Rates, 8 M.C.C. 233, 257 (1938).
[27 ] Wiprud, op. cit., pp. 33-34.
[28 ] Hearings before Senate Interstate Commerce Committee on S. 942, Regulation of Rate Bureaus, 78th Cong. 1st Sess. (1943) p. 747.
[29 ] S. Rep. 433, Part 1, 76th Cong. 1st Sess. (1939) pp. 2-3.
[30 ]Interstate Commerce Commission Activities, 1937-62 (Washington, D.C.: I.C.C., 1962), pp. 18-19.
[31 ] The Commission had been told to consider, e.g., “The facts and circumstances attending the movement of traffic by the carrier or carriers to which the rates are applicable.” See 49 U.S.C. §§15a (2), 316 (i), 907 (f), 1006 (d).
[32 ] Petroleum Products from Los Angeles to Arizona and New Mexico, 280 I.C.C. 509, 516 (1951).
[33 ] Canned Goods in Official Territory, 294 I.C.C. 371, 390 (1955).
[34 ] Newsprint Paper from Tenn. & Ala. to Houston, Tex.; I&S No. 7144; CCH Federal Carrier Cases ¶35,134 (1961).
[35 ] The I.C.C.’s decision was reversed by a three-judge federal court in New Haven on November 15, 1961. New York, New Haven and Hartford Railroad v. U.S., 199 F. Supp. 635. The government currently has an appeal pending before the Supreme Court, Dkt. No. 108.
[36 ] I.C.C. Staff Report, Gray Areas of Transportation Operations (1960), p. 13.
[37 ] Report No. 445, 87th Cong. 1st Sess. (1961) pp. 81-82. (Hereinafter referred to as the “Doyle Report.”) The author does not vouch for the accuracy of any of the Doyle Report’s “findings.” Note that on page 49 the Report seems to contradict itself in claiming that “private and exempt carriage can be expected to account for half of intercity freight not later than 1975.” The Panel asserts on page 7 that since 1916 “the cumulative total of federal expenditures in highways, airways and waterways has come to approximately $23 billion. . . . “On page 166, the Panel sets the “monetary magnitude” of Federal aids to “highway transportation, to navigation, to aviation, and to the merchant marine” at “no less than $33.6 billion” since 1917. The Panel’s chairman, John P. Doyle, is a retired air force general, and as such may not have been trained to trifle over $10 billion here or there.
[38 ] Although it ought to be noted that, to a certain extent, the duties the law imposes upon a regulated common carrier place certain “costs” (broadly defined) upon them which an unregulated carrier escapes. This need not, however, be an argument against unregulated carriage more than an argument against the imposed “costs.”
[39 ] “Interstate Trucking of Fresh and Frozen Poultry under Agricultural Exemption,” Marketing Research Report No. 224 (Washington, D.C.: Dept. of Agriculture, 1958), p. 1. Certain objections to this study ought to be noted. First, it is not immediately apparent why the surveys chose 1952 and 1955, respectively, as the last years of regulation; in one case the District Court’s opinion was selected as the terminal point (rather than the denial of certiorari by the Supreme Court in 1954) and in the other case the date was the Supreme Court’s affirmance (rather than the District Court’s opinion). The reasons should have been explained. Also, there was no “control” experience relating to the rate movements of regulated commodities by truck, during the same period, nor was there an attempt to correlate transport rates with, say, the wholesale price value of these commodities over the periods studied. The sampling of firms was conscientiously broad (those sampled in the 1956-57 period shipped 1.4 billion pounds), but the number of years analyzed deprived the study of some force.
[40 ] Doyle Report. p. 10. Italics in the original.
[41 ]Ibid., p. 8.
[42 ]Ibid., p. 56.
[43 ]Ibid., p. 50.
[44 ]Ibid., p. 134.
[45 ] Huntington, “The Marasmus of the ICC,” 61 Yale L.J. 467, 508 (1952), criticized in Jaffe, Book Review, 65 Yale L.J. 1068 (1956) and Jaffe, “The Effective Limits of the Administrative Process: A Re-evaluation,” 67 Harvard L. R. 1105 (1954).
[46 ] Jaffe, Book Review, 65 Yale L. J. 1068, 1072, (1956).
[47 ]Ibid., p. 1073.
[48 ] Huntington, op. cit., p. 508.
[49 ] Doyle Report, p. 419.
[50 ]Intercity Ton Miles (Washington, D.C.: ICC, Bureau of Transport Economics and Statistics, 1961).
[51 ] Adelman, “Effective Competition and the Antitrust Laws,” 61 Harvard L. R. 1290 (1948).