Killing the Railroads

__"Scientific Mismanagement" by Phillip Longman, in Audacity (Summer 1997), 60 Fifth Ave., New York, N.Y. 10011.__

In 1910, the railroads in the eastern United States petitioned the Interstate Commerce Commission (ICC) for a 10 percent, across-the-board increase in freight rates. With most of the nation’s commerce dependent on rail transportation, the ICC, in effect, was making "high-stakes industrial policy," observes Longman, author of The Return of Thrift (1996). Its actions, he contends, show "the limits of useful government regulation of the economy."

In 1887, in response to complaints that the railroads’ "robber baron" owners had discriminated, charging more in regions where they faced less competition, Congress established the ICC. It was to provide regulation of the railroads by disinterested "experts." From the start, Longman says, "the ICC committed itself to order and science." The commission was not in thrall to the industry it was regulating; nor was it bent upon giving in to political pressures. Yet the commissioners frequently found it hard to resist "the irresponsible demands of broad special interests," such as Midwestern farmers, to hold down rates. In the absence of a free market, the ICC "experts" had no objective basis for assigning a value to railroad services, Longman argues. As a result, the commissioners embraced "shifting subjective standards of what were ‘fair’ and ‘equitable’ rates— standards that [they] could neither consistently apply nor defend in the face of intense popular pressure for low tariffs."

Thanks to inflation and the ICC’s rulings, he says, real railroad rates, which had been falling slowly since the 1870s, "began a steep and dramatic decline after 1897." Even as the railroads’ costs soared, the average price they could charge for moving a ton of freight one mile dropped nearly 24 percent. This further stimulated demand for rail services, leading the railroads to make huge capital investments in track and freight cars. Because they were prevented from raising rates, they had to borrow, thus "shifting more and more of the cost of rail services from current to future users."

In opposing the 1910 petition for a rate hike, future Supreme Court justice Louis D. Brandeis, the crusading lawyer representing the freight-shipping interests, conceded that the railroads needed more money. But he claimed that if they would adopt the "scientific management" ideas of another "expert," industrial engineer Frederick W. Taylor, they could save $1 million a day. Brandeis’s headline-making assertion was utterly unfounded, Longman says. Railroad work was very different from manufacturing. But the ICC turned the railroads down.

"By the middle teens," Longman writes, "the financial condition of many major systems... had become desperate." After America entered World War I, in 1917, the nation’s rail system was overwhelmed, with soaring volume and plummeting net profits. The government soon took over the system.

"Though railroads reverted back to private ownership after the war," Longman writes, "the pattern of meddlesome and inefficient rate-regulation continued for another 60 years." Air freight and trucking bit deeply into the railroads’ markets; service deteriorated. Finally, in 1980, "alarmed by a series of huge railroad bankruptcies in the Northeast and Midwest," Congress stripped the ICC of its power to set freight rates. "The dramatic resurgence of the [freight] rail industry since then," Longman concludes, "underscores just how costly the ICC regulation of this industry had been."