The Purpose of the Interstate Commerce Act of 1887

As the United States began its rapid entry into the Industrial Era, it was quickly apparent that government regulation was needed over certain industries. The purpose of the Interstate Commerce Act of 1887 was to provide regulation over the burgeoning railroad industry.

In the aftermath of the Civil War, the United States began to experience the effects of the Second Industrial Revolution, or the Technological Revolution.

With industrialization came an emphasis on railroads. The United States saw rail passage as essential to help open up the west for settlement and development and to spur increased trade with Asia.

By 1869 the first transcontinental railroad across the United States was opened. As the Bessemer process simplified and reduced steel prices, railroads became cheaper to construct; their widespread usage across America spurred increased economic output and activity.

While there were many positives to these developments, the railroads came with some significant drawbacks. Corporate greed, monopolistic power, and corruption were rampant, and public outrage grew over how the railroads were operated.

As a result of public pressure the United States passed the Interstate Commerce Act of 1887 to provide regulation for the railroad industry. A landmark bill, the Interstate Commerce Act challenged assumptions of the federal government’s role in the economy and regulating private industry.

The Rise of Industrialization

Following the Civil War, significant technological advancements led to what is known as the Industrial Era. Several industries were impacted, including steel and oil, which led to massive gains in production within the United States.

Two big advancements in particular helped railroads to steadily take over as the preferred method of travel and shipping. These advancements included a cheaper method of producing sturdier steel rails via the Bessemer Process and the adoption of a standard rail track width gauge.

Steel rails were more durable than iron rails and thus could be laid at longer lengths. The adoption of a standard gauge for track width meant cities around the US were more interconnected, which increased competition for varying rail transport routes.

The results were astounding and once implemented, it was difficult to slow the spread of railroads. Total railroad mileage grew from roughly 35,000 miles in 1865, to 93,262 in 1880, to 149,214 in 1887.1

The Interstate Commerce Act regulation of railroads chart

With the increase in available rail mileage came a marked increase in railway shipping. It’s estimated that eastern trunk lines shipped roughly 11.1 million tons of products in 1865 which increased to about 66.5 million tons in 1885, all while the average rate per ton-mile drastically lowered from $2.90 to $0.64 over that same period.1

Helping the runaway growth of railroads was the freedom of entry into the railroad market. The US was extremely favorable to railroad businesses and allowed many investors to secure charters for railways at minimum standards.

While the growth of railroads was a boon to the US economy and helped the nation rapidly industrialize, the introduction of railroads helped to displace entire populations, cities, and collection points that depended on other forms of shipping transport, like the Erie Canal.2

As a result, merchants in displaced locations, as well as those in cities that were subject to some of less tasteful practices of the railroad industry, began to form interest groups to help unite and bring forward their grievances into the political arena.

What did the Interstate Commerce Act of 1887 do?

The formation of interest groups helped to pressure politicians to make a monumental change in congressional legislation. The Interstate Commerce Act of 1887 was the first legislation to subject a private industry (railroads) to federal regulation from a regulatory body.

There were many practices of railroad companies that drew the ire of interest groups, politicians, and the nation. Collusion between railroad companies to set discriminatory pricing dated back to the 1850s, but the more organized “pooling” of revenues and profits began in the 1870s.1

The decision to pool resources between companies at locations where multiple railroads operated, or “long-haul” routes, led to the formation of cartels that colluded to set favorable pricing for the companies themselves.

Some cartels were more effective than others. Effective cartels stabilized prices between two locations, often at set high rates leading to large profits. Less effective cartels led to massive price instability as railroad companies engaged in price wars, attempting to lure big customers with lower rates.

In many of the more remote locations, only a single railroad operated. As the alternatives to railway shipping were typically inferior, this gave the railroad companies a virtual monopoly on shipping.

This monopoly gave companies the ability to set discriminatory pricing on these so-called “short haul” routes, where the lack of competition allowed them to set high prices, often for those who could least afford it.1

The instability of shipping rates and discriminatory pricing practices led to high levels of public dissatisfaction with the railroads. Formation of interest groups soon followed.

It is interesting to note that although the public wanted to remedy the shipping price instability and intolerable practices among the railroads, they wanted to do so within the framework of private ownership. Unlike in other countries at the time, a vast majority of the public scoffed at the idea of nationalized railroads.1

The Interstate Commerce Act and Small Farmers

A major reason the Interstate Commerce Act was passed was because many small volume shipping customers like small farmers were disproportionately affected by discriminatory pricing. Simply put, many small farmers were being put out of business due to paying higher rates for shipping than large farmers and businesses.

For many small farmers at a distance from major population centers, the only way to get their produce or goods to market was via a single rail line. Many of these more rural markets were only served by a single railroad line and were exposed to monopolistic pricing. As the railroad company was the sole operator, they could charge virtually whatever they wanted.3

While some rate wars on the long-haul routes led to price discounts for large shippers, small farmers did not have the shipping volume to get such favorable rates and consistently paid higher rates.1

First these small farmers and other interest groups petitioned their state legislatures to enact legislation introducing price stability and banning discriminatory pricing.

However, the Supreme Court ruled in the 1886 Wabash, St. Louis & Pacific Railroad Company vs. Illinois case that individual states could not regulate interstate commerce and this power was reserved for the federal government. As virtually all rail lines connected and crossed state lines, the entire railroad industry could be construed as interstate commerce.

It would be up to the United States Congress to introduce a new law regulating the railroad industry. Congress complied to the national uproar and passed the Interstate Commerce Act of 1887.

The Purpose of the Interstate Commerce Act

The purpose of the Interstate Commerce Act of 1887 was to provide federal regulation for the railroad industry. The act also created the Interstate Commerce Commission (ICC). The ICC was the first independent regulatory commission and was used as a model for future federal regulatory efforts.

The Interstate Commerce Act strictly prohibited railroads from discriminatory pricing on short vs long haul routes and outlawed collusion via pooling. Under the law railroad firms were required to publish rates and prevented from offering advantages to larger businesses.

While there was a great amount of trepidation surrounding the implementation of the Interstate Commerce Act, the net effect on railroads was deemed small, but positive.2

The ICC’s ultimate purpose was to provide enforcement over the unjust practices such as price discrimination within the railroad industry. However, the commission’s first issued report suggested that their interpretation of the law would be broad, which mitigated some of the potential negative impacts in the eyes of the railroads.4

Perhaps most importantly, the new law provided stability to railroad shipping prices after years of price instability. This was a priority for both business and the railroad industry itself.

The law itself was wildly inconsistent, promoting competition in some sections and hobbling it in others.

It was understood that short haul pricing constraints by the Interstate Commerce Act would lower incentives to cut rates in competitive long haul markets, but strict enforcement could be very costly for short haul railways. The resulting conundrum led to an ambiguous Section 4 of the law, giving much leeway to the ICC to interpret as it saw fit.3

The Interstate Commerce Act and its purpose would later be strengthened through further acts of Congress, including the Hepburn Act of 1906 and the Mann-Elkins Act of 1910.

While the Interstate Commerce Act would eventually become obsolete with the changing American economy, it served as a model for future implementations of the Commerce Clause as further regulation of private industry was needed.

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To learn more about US history, check out this timeline of the history of the United States.

Sources

1) Hilton, George W. “The Consistency of the Interstate Commerce Act.” The Journal of Law & Economics, vol. 9, [University of Chicago Press, Booth School of Business, University of Chicago, University of Chicago Law School], 1966, pp. 87–113, http://www.jstor.org/stable/724995.

2) Gilligan, Thomas W., et al. “Regulation and the Theory of Legislative Choice: The Interstate Commerce Act of 1887.” The Journal of Law & Economics, vol. 32, no. 1, [University of Chicago Press, Booth School of Business, University of Chicago, University of Chicago Law School], 1989, pp. 35–61, http://www.jstor.org/stable/725379.

3) Gilligan, Thomas W., et al. “The Economic Incidence of the Interstate Commerce Act of 1887: A Theoretical and Empirical Analysis of the Short-Haul Pricing Constraint.” The RAND Journal of Economics, vol. 21, no. 2, [RAND Corporation, Wiley], 1990, pp. 189–210, https://doi.org/10.2307/2555418.

4) Blonigen, Bruce A., and Anca Cristea. “The Effects of the Interstate Commerce Act on Transport Costs: Evidence from Wheat Prices.” Review of Industrial Organization, vol. 43, no. 1/2, Springer, 2013, pp. 41–62, http://www.jstor.org/stable/43550421.

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