THE FOLLOWING RESEARCH WAS WRITTEN FOR ‘PROGRAM ON CORPORATIONS, LAW AND DEMOCRACY’ (POCLAD) IN 1998
Regulatory agencies are the corporations’ response to people’s calls for democracy and self-governance. Corporate officials who once hired Pinkerton’s goons to do their dirty work and protect them from an activist public can now rest assured that much of that burden has been assumed by regulatory agencies. They work as the barriers they were designed to be.
If you’re having trouble getting to sleep, you can count sheep, or read a book about the history of regulatory agencies. It may turn out to be the same thing.
The nation’s first federal regulatory agency, the Interstate Commerce Commission (ICC), was established in 1887. Concerned citizens, having failed to solve their difficulties in more traditional ways, sought the intervention and assistance of the federal government. Over the next three decades, these mavericks worked to defend the ICC’s existence and increase its powers to regulate the railroad corporations.
Who were these pioneers who dared to go where no one had gone before, to urge the formation of and expand the powers of the first federal regulatory agency?
Prominent among them were the Director and General Counsel for several of Vanderbilt’s railroad corporations, including the New York Central Railroad Company, Chauncey M. Depew; the President of the Union Pacific Railroad Company and former chairman of the Massachusetts Railroad Commission, Charles F. Adams; the President of the Minnesota and Northwestern Railroad Company, and President and Chairman of the Board of the Chicago and Great Western Railway Company, A. B. Stickney; the Vice President, General Manager, Director, and President of the Chicago, Burlington & Quincy Railroad Company and later, President of the Burlington & Missouri River Railroad Company, Charles E. Perkins; the Vice President, General Manager, Director, and President of the Pennsylvania Railroad Company, Alexander J. Cassatt; Andrew Carnegie (Man of Steel); the prominent J. P. Morgan, banker, associated with the rise of the International Harvester Company and U.S. Steel Corporation; and 1912 chairman of the national executive committee of the Progressive Party, George W. Perkins.
The role of these and other railroad corporation men has been explored by historians whose research into primary materials led them to things you’ll never read on the back of a cereal box. One such historian, Gabriel Kolko, made use of letters, speeches, testimony before Congressional committees, and trade journal articles in his efforts to piece together the story of what amounts to a regulatory revolution in the U.S.
That such a revolution occurred is historical fact. After a slow start, an alphabet soup of regulatory agencies proliferated like lawyers on the national scene. But that the midwives of this revolution were railroad men and other corporate executives is a reality less widely appreciated, and at odds with current regulatory agency creation myths.
Late nineteenth century railroad companies were troubled by too much competition: waves of fierce rate cutting and rate wars, the use of discriminatory rebates (a form of discount — actually a bribe — used by rival companies to steal each other’s customers), and major bankruptcies. This is hardly the scenario that would have existed had the railroad companies succeeded in fixing prices, establishing monopolies, and controlling the market. But they tried.
Corporate mergers, trusts, pools, and trade associations were all methods through which corporations sought to eliminate competition. Each ran into glitches, however.
Until the late 1880s, many mergers were effectively illegal because most states had laws prohibiting a corporation from owning stock in other corporations. Trusts, an effort to finesse this prohibition, were made technically illegal by the 1890 Sherman Antitrust Act (subject to spotty enforcement and soon rendered nearly useless by judicial monkeywrenching). Pools — sometimes illegal, sometimes not — ultimately failed to maintain price levels for their members because they lacked enforcement powers (to sanction a member that broke ranks and cut prices, for instance.) Trade associations tried to control the market by means of informal price agreements, standards, and licenses, but as with pools, such agreements lacked the force of law.
So, throughout the late nineteenth and early twentieth centuries, mergers, trusts, pools, and trade associations all failed to meet the needs of large corporations eager to crush competition in order to maintain price levels.
Railroad companies wanted to fix rates among themselves, and then enforce these rates. (That is, they wanted legally enforceable price-fixing). They wanted a shield against a tide of public activism that was showing itself in the form of tough state laws, increased populism, calls for government ownership of railroads and other public utilities, and a resurgence of socialist movements.
They wanted the public to pay the costs of coordinating an industry and maintaining quality control (standards, inspection, enforcement), while guaranteeing the railroad corporations a basic (and profitable) rate of return. Despite all of this government investment, however, profits were to go to corporate coffers and stockholder wallets.
Railroad executives wanted the ICC to enforce rates. But enforcing rates did not mean capping rates in order to protect the public. Enforcing rates meant prohibiting upstart companies from offering lower rates and thus undercutting the profits of the established railroad companies. Enforcing rates was a means of protecting large corporations from what John D. Rockefeller called “ruinous competition.”
