Why did the Interstate Commerce Commission succeed?

In 1887 Congress passed the Interstate Commerce Act, making the railroads the first industry subject to Federal regulation. Congress passed the law largely in response to public demand that railroad operations be regulated. The act also established a five-member enforcement board known as the Interstate Commerce Commission. In the years following the Civil War, railroads were privately owned and entirely unregulated. The railroad companies held a natural monopoly in the areas that only they serviced.

Monopolies are generally viewed as harmful because they obstruct the free competition that determines the price and quality of products and services offered to the public. The railroad monopolies had the power to set prices, exclude competitors, and control the market in several geographic areas. Although there was competition among railroads for long-haul routes, there was none for short-haul runs. Railroads discriminated in the prices they charged to passengers and shippers in different localities by providing rebates to large shippers or buyers. These practices were especially harmful to American farmers, who lacked the shipment volume necessary to obtain more favorable rates.

Early political action against these railroad monopolies came in the 1870s from “Granger” controlled state legislatures in the West and South. The Granger Movement had started in the 1860s providing various benefits to isolated rural communities. State controls of railroad monopolies were upheld by the Supreme Court in Munn v. Illinois (1877). State regulations and commissions, however, proved to be ineffective, incompetent, and even corrupt. In the 1886Wabash case, the Supreme Court struck down an Illinois law outlawing long-and-short haul discrimination. Nevertheless, an important result of Wabashwas that the Court clearly established the exclusive power of Congress to regulate interstate commerce. (See Gibbons v. Ogden.)

The Interstate Commerce Act addressed the problem of railroad monopolies by setting guidelines for how the railroads could do business. The act became law with the support of both major political parties and pressure groups from all regions of the country. Applying only to railroads, the law required "just and reasonable" rate changes; prohibited special rates or rebates for individual shippers; prohibited "preference" in rates for any particular localities, shippers, or products; forbade long-haul/short-haul discrimination; prohibited pooling of traffic or markets; and most important, established a five-member Interstate Commerce Commission (ICC).

The law’s terms often contradicted one another. Some provisions were designed to stimulate competition and others to penalize it. In practice, the law was not very effective. The most successful provisions of the law were the requirement that railroads submit annual reports to the ICC and the ban on special rates the railroads would arrange among themselves, although determining which rates were discriminatory was technically and politically difficult. Years later the ICC would become the model for many other regulatory agencies, but in 1887 it was unique. The Interstate Commerce Act challenged the philosophy of laissez-faire economics by clearly providing the right of Congress to regulate private corporations engaged in interstate commerce. The act, with its provision for the ICC, remains one of America’s most important documents serving as a model for future government regulation of private business.

Act of February 4, 1887 (Interstate Commerce Act), Public Law 49-41, February 4, 1887; Enrolled Acts and Resolutions of Congress, 1789-; General Records of the United States Government, 1778 - 1992; Record Group 11; National Archives.

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On February 4, 1887, both the Senate and House passed the Interstate Commerce Act, which applied the Constitution’s “Commerce Clause”—granting Congress the power “to Regulate Commerce with foreign Nations, and among the several States”—to regulating railroad rates. Small businesses and farmers were protesting that the railroads charged them higher rates than larger corporations, and that the railroads were also setting higher rates for short hauls than for long-distance hauls. Although the railroads claimed economic justification for policies that favored big businesses, small shippers insisted that the railroads were gouging them.

It took years for Congress to respond to these protests, due to members’ reluctance to have the government interfere in any way with corporate policies. In 1874 legislation was introduced calling for a federal railroad commission. The bill passed the House, but not the Senate. When Congress failed to act, some states adopted their own railroad regulations. Those laws were struck down in 1886, when the Supreme Court ruled in Wabash v. Illinois that the state of Illinois could not restrict the rates that the Wabash Railroad was charging because its freight traffic moved between the states, and only the federal government could regulate interstate commerce. Continued public anger over unfair railroad rates prompted Illinois senator Shelby M. Cullom to hold the hearings that led to the enactment of the Interstate Commerce Act.

That law limited railroads to rates that were “reasonable and just,” forbade rebates to high-volume users, and made it illegal to charge higher rates for shorter hauls. To hear evidence and render decisions on individual cases, the act created the Interstate Commerce Commission. This was the first federal independent regulatory commission, and it served as a model for others that would follow, from the Federal Trade Commission to the Securities and Exchange Commission and the Consumer Product Safety Commission.

Evolving technology eventually made the purpose of the ICC obsolete, and in 1995 Congress abolished the commission, transferring its remaining functions to the Surface Transportation Board. But while the ICC has come and gone, its creation marked a significant turning point in federal policy. Before 1887, Congress had applied the Commerce Clause only on a limited basis, usually to remove barriers that the states tried to impose on interstate trade. The Interstate Commerce Act showed that Congress could apply the Commerce Clause more expansively to national issues if they involved commerce across state lines. After 1887, the national economy grew much more integrated, making almost all commerce interstate and international. The nation rather than the Constitution had changed. That development turned the Commerce Clause into a powerful legislative tool for addressing national problems.

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In 1887, Congress passed the Interstate Commerce Act, making the railroads the first industry subject to federal regulation. Legislators designed the law, which established a five-member enforcement board known as the Interstate Commerce Commission, largely in response to public demand that the railroads' conduct should be constrained.

In the years following the  Civil War, railroads were privately owned and entirely unregulated. Though each company held a natural monopoly as long as it serviced its own destinations, the railroads became fiercely competitive once they started expanding into each other's markets. They were regarded with distrust by much of the public, who charged them with anything from forming monopolies and wielding corrupt political influence to stock manipulations and rate discriminations. None of the accusations were unfounded.

The first attempt to regulate the railroad industry's practices came in 1871, at the state level. Illinois passed regulatory legislation first, and states across the South and Midwest quickly followed suit. The states, however, were powerless to regulate interstate commerce, and the railroads were expanding their operations across more state borders all the time.

The Interstate Commerce Act sought to address the problem by setting guidelines for how the railroads could do business. However, the task of establishing specific measures was complex, and regulators lacked a clear mission. The law sought to prevent monopoly by promoting competition, and also to outlaw discriminatory rate-setting. Its most successful provisions were a requirement that railroads submit annual reports to the ICC, and a ban on special rates the railroads would arrange among themselves. Determining which rates were discriminatory proved to be technically and politically difficult, though, and in practice the law was not highly effective.

The Hepburn Act of 1906 and the Mann-Elkins Act of 1910 strengthened the Interstate Commerce Commission, stating the government's regulatory power more definitively. The Hepburn Act empowered the ICC to change a railroad rate to one it considered "just and reasonable," after a full hearing of a complaint. The Mann-Elkins Act placed the burden of proof on the railroads; for the first time, they would have to actively demonstrate that a rate was reasonable. With these new powers, the ICC gained almost complete control over rail rates, and therefore much of rail competition.

In the following years, the government continued to strip the railroads of their power. One important piece of legislation, the Adamson Act of 1916, enacted an eight-hour workday for railroad workers. Government control culminated when President Woodrow Wilson seized American railroads in 1918; the once-private industry would now be a tool of the federal government in the war effort. Wilson promised to return the railroads to private ownership after a peace treaty was signed.

The Esch-Cummins Transportation Act of 1920, which returned the railroads to private hands, advocated a sharp reversal on past policies. The federal government, which had once been ardently anti-monopoly, now encouraged mergers, provided the mergers paired strong lines with weak ones. The ICC, in fact, dictated the merger combinations. In addition, Esch-Cummins empowered the ICC to fix minimum rates and dictate extensions and abandonments of routes. The railroad industry, which had long sought to eliminate unprofitable routes, was now saddled with them.

As devastating as the new legislation was, the railroads had a still greater enemy: increased competition from cars, buses, and trucks on an ever-growing network of roads. Passengers were electing more and more to travel by car or bus; freight shippers were increasingly choosing trucks for short- or long-haul jobs. Trucks, buses and cars could take flexible travel routes from point to point; railroads could not.

For 20 years the railroads' situation worsened. Although they were losing business to competing modes of transportation, they were still considered a threat. The Transportation Act of 1940 amended the Interstate Commerce Act to extend its reach to the other industries, but the fact remained that while regulations were not relaxed on railroads, private cars, trucks, and 90 percent of inland water carriers were exempt from government control.

It wasn't until 1958 that the government reversed its policy. Railroads, it was determined, no longer posed a monopoly threat; regulations could be loosened. By this time trucks had usurped much of the railroads' high-value freight traffic, and airplanes had taken the lion's share of long-haul passenger business, as well as the lucrative contract to carry the U.S. mail.

By the 1970s and 1980s, railroads were enjoying freedom they hadn't known since the Gilded Age of the 1870s. Unfortunately, business did not keep pace. In 1971, the government formed Amtrak, a federally-supported corporation, to operate intercity passenger train service. In 1980 the Staggers Act furthered railroad deregulation, but by then, many railroads were operating under greatly reduced circumstances, if they were operating at all.

By 1995, the Interstate Commerce Commission had lost most of its mandate. With deregulation complete, the ICC could no longer set rates, and the commission was dissolved in the ICC Sunset Act. The Surface Transportation Board, under the auspices of the U.S. Department of Transportation, now performs the few regulatory tasks that had remained with the ICC.