The Hepburn Act of 1906 become law. Sought by Pres. T Roosevelt, at the behest of the original bureaucrat, Henry Carter Adams, who began seeking new power shortly after the ICC was created in 1887. The railroads pervasiveness and the visibility of their sometimes coarse and unscrupulous owners, provided the target for TR, who was every bit as coarse, unscrupulous and detestable and the owners he sought to turn into whipping boys to maintain his public power and persona.

It gave the Interstate Commerce Commission broad new powers, which still didn't satisfy them, as it continued to grow..ultimately stifling innovation, restricting free enterprise and depriving the industry of its vitality.

Sarbanes-Oxley, passed in 2002, and given the mildest of SCOTUS judicial rebukes yesterday, contains provisions that were really recycled Hepburn..

For decades people knew the ICC was a Frankensteinian millstone, causing the slow decrepitude of railroads. Much of what you miss today is gone because of the ICC's systematic strangulation of the railroads. The government, ever eager to protect its mythical status as wise, refused to admit the ligature marks on the patient were its own, until the patient (aka Conrail) was delivered to its fiscal infirmary. The Staggers Act stopped the choking and the last fingers were pried off the neck in 1995, when President Clinton signed the ICC Termination Act. Ironically, today some (primarily the chemical industry, operating through a client agitator artfully but dishonestly named "Consumers United for Rail Equity" would like Act II.

At least this guy recycles..

http://dailycaller.com/2010/06/15/railroad-unchecked-power-hurts-business-and-consumers/

(19th century drivel)


So.. the next time some idiot politician wraps you into a frenzy about an industry, or blithers on about having a boot on somebody's neck.. remember railroad history-and be skeptical. If all you are doing in preservation is engaging in industrial idolatry, then you're missing an opportunity to be the one thing we need, somebody who learns from their passion, not to be seduced into serfdom by others'.

Disclosure: Long NS (ouch).

I think Superheater is right--but incomplete. The thirst for power is not limited to governments; the arguments about unchecked corporate power ring all too true. The potential for abuse of power lives in us all.

There is much to be said for limiting the size of any type organization, both in business and in government. I won't go into the arguments of monopolies driving out competition and fixing prices (those arguments are well known, and well worn), but I would add that a danger of a really large corporate entity is the risk of "too many eggs in one basket." We've seen this demonstrated most recently with the Wall Street business, and I would also argue that this was part of (note--part of) what made the Penn Central flap as serious as it was.

I've commented about it before, and I'll say it again, speaking as an auditor with just under 30 years' experience in dealing with business owners: Half the people in business have no business in business. They are not necessarily bad people, they can be good people, they can be as skilled and as important as brain surgeons (or plumbers, or garbage men--don't laugh, think of how things would smell without either one), but they are not good business people. I've seen too many struggle to make ends meet against competition, some of it from others like themselves, and others engaged against the giants. No doubt readers here know many who have played the enterprise game and lost everything, including their houses.

I'll also add that I am not sure "regulation" is necessarily a real problem in business, as long as everyone plays by the same rules (which was one of several serious problems with the ICC, with much of the trucking industry being unregulated). I have a friend who used to work for the park service in Harpers Ferry, W.Va.; he was one the rangers who dressed in Civil War era clothes and told stories about the town in the Civil War to the tourists.

One of his stories was how Harpers Ferry was a boom town at the time of the John Brown raid in 1859. There were hundreds of government employees in the armory there (which was Brown's objective, by the way) who made $30 a month making muskets at a time when the average American farmer had a cash income of about $125 for a whole year.

Regardless of what you think of the source of this "prosperity," it was still a lot of money coming in, and a lot of business people tried to get some of it, opening up all sorts of businesses of the type you would see then--dry goods merchants, opticians, pharmacists, boot shops and cobblers, and lots and lots of saloons. The business situation was very competitive; supposedly the average life expectancy of a business was about 6 months.

Jump ahead 150 years later to today. Until relatively recently, if you went to talk to someone in the Small Business Administration, they would tell you that half of all business start-ups would fail in the first year, and up to 90% would fail in the first five. (More recently, an alternate pattern has been suggested, with one third failing in the first year, another third disappearing in the first five, and the remaining third making it to ten years, which sounds optimistic to me.) What is interesting about this is that that 50% failure rate in the first year works out pretty close to a 6-month life expectancy in 1859. And in 1859, there was no income tax, no sales tax, no minimum wage law or overtime law, no child labor law, no unemployment tax, no Social Security, no Workers Compensation tax, no building code, no health code--in short, "no nothing"--and if anything, the survival rate was worse then than in our degenerate now.

What this tells me is not that "regulation" is good or bad (although you obviously have to strike a proper balance, and this can be a moving target--tough job!), but that the secret of success in business is where it has always been since ancient times--in the ability and skill of the management as business people, combined with a bit of luck in being at the right place and in the right time. No less a personage than Warren Buffett has admitted as much about himself, and I admire his honesty in this.

At least, that's my "humble opinion."

Speaking as a former auditor (still licensed) and a current bureaucrat..with just under 30 years professional experience...

Regulation is fine as long as it focuses on ensuring contractual enforcement and ensuring disclosure. The problem with the ICC was it went beyond calling balls and strikes; picked up the bat and started whacking at the railroads knees.

Worse, despite all its exacting demands, the ICC continued to insist on accounting methods that weren't in conformity with proper methods, and clearly weren't reflecting economic reality. Remember, it set rates with those ridiculous tariffs it had and systematically starved railroads. Penn Central was a desperate attempt to obtain economies of scale that didn't exist.

An article from the Accounting Historians Journal, from a few years ago. Because the accounting profession grew from railroad needs stateside, these guys write a lot of research on railroads.

http://www.accessmylibrary.com/article-1G1-164636310/end-betterment-accounting-study.htm

There's no doubt that nobody wants to deal with monopolies. However, in business, monopolies are fragile, simply because "economic rents" attract competitors. The ones that persist often do so not with the hindrance of government, but with its aid and protection.

Worse, there is the problem of "regulatory capture" where the regulated industry becomes the obvious pool of recruits for the regulator (or visa versa) and an intellectual monoculture develops.

Veering completely off topic: The Public Company Accounting Oversight Board or "Peekaboo" was created just seven years ago. The board is required to have three non-CPA's among its five members. Yes, too be qualified you must be unqualified.

In the seven years, it has issued 7 new audit standards, (one replaced the abysmal No. 2, and while somewhat abated, hourly rates in the Big 4 doubled in the first year after its existence.) No wonder the head of the AICPA, dominated by the bid 4 took the time to congratulate to congratulate the Supreme Court for letting S-O stand with modification.

Superheater,

Thanks for reminding us of this dark anniversary. It is very important that we do for as George Santayana observed, "Those who cannot remember the past are condemned to repeat it."

To anyone unfamiliar with the subject, I commend the book, "Enterprise Denied: Origins of the Decline of American Railroads, 1897-1917," by Albro Martin.

gbrewer

I'll have to reread that book (it's only been 35 or 40 years).

I have some points of what I hope are respectable disagreement:

1. In real life, some monopollies and oligopollies seem surprisingly sturdy. I have to think it must have been galling to shippers in the 1890s to pay as much to send a car of lumber from Mount Union to Greensburg as it did to send a similar car of lumber from Chicago to New York. Competition got the good rate between Chicago and New York, but what alternative did they really have, and could have, to the PRR in 1900?

2. I won't say the ICC wasn't a drag, especially in later years, but I'm not so sure it was the real energy-drainer some made it out to be. My argument for this is the creative energy and work to gain business the railroad industry put out in the 1930s and 1940s--Super Power steam, diesels, streamliners, really hot hotshots--after decades of being under the control of the ICC. I think the real killer of the industry and the spirit it had came with the government's gross subsidizing of the competition. It meant all the efforts at gaining business were in vain. Doing all the right things and failing anyway is horrible for the spirit and the work ethic. As far as I am concerned, the game is still rigged against railroads; your fuel taxes on gasoline and tolls currently only pay for 51% of all the highway expenditures in America, based on what is essentially cash-flow; the rest comes out of income taxes, property taxes, and so on. And I haven't begun to talk about other costs such as deferred road maintenance, nor external costs which are quite real, such as air pollution and oil wars. And don't talk about it being a bunch of hairsuite environmentalists and peaceniks complaining about these external costs; some very conservative people, including some in the defense arena, have raised these very questions, and in some cases have put the real price of gasoline at $15 per gallon. (Compared to them, I'm very conservative in the sense that I try not to put in everything they do; I put the cost at about $7 per gallon.)

3: Eliminating price as a competitive measure doesn't eliminate competition; instead, the competition goes in different (and more interesting) directions. The New York Central and the Pennsylvania, for instance, charged the same fares on their passenger trains in their territory, but look at the rivalry that resulted between the 20th Century and the Broadway! Similarly, in the freight field, the Nickel Plate and the Lackawanna had to live with the same tarrifs as the NYC and PRR between Chicago and the East; they competed with speed. The airline industry, working in a similar regulated environment, competed with the most advanced equipment they could find and the best service; it may be noted that some of the earliest Boeing 747s carried a small piano bar in the hump at the rear of the cockpit. Under deregulation, the airline industry has become a Greyhond Bus Line with wings; indeed, not too long ago, the air industry briefly floated a proposal for "standsit" facilities on aircraft (this was the same disasterous proposal that had been tested in Philadelphia and Washington on trolley cars in WW II). It is this current condition of the air industry and the memory, though faded (and partially kept alive by the rail preservaton industry), of what travel used to be, that makes a rail revival so attractive to the newest generation.

I don't have the time right now, but I'll get you some numbers on the real cost of the highway system. I do think you'll be interested, and hopefully will even be appreciative.

Take care until then.

I am going to have to respectfully disagree with Mr. J3a-614's assertions that the regulations imposed on the Railroad and airline industry were "beneficial."

If anything, the ICC and it's rate-making powers made it more difficult for the industry to compete in the 1950s and 1960s when they were facing competition against the subsidized airlines and highways. While some railroads could mark out a competitive niche, as in the NKP/DL&W example, in the end, railroad profit margins were very very small. By 1950, a railroad spent most of a year's revenue paying taxes, infrastructure, wages, etc. There was usually less than two weeks a year to make a profit, or improve performance.

After World War II, when railroads tried to innovate, they faced serious problems. First, remember the "Big John" case, which went all the way to the Supreme Court. Southern had developed the unit train idea, and the idea for charging lower rates for bulk cargo. At a time when the industry was facing stiff competition, and trying to reinvent iteself into the industry we see today, the government was trying to block progress.

It is interesting to see how railroads made money in the pre-Staggers Act era. It was why operations such as the North Shore Interurban could make money taking cars from the C&NW interchange and re-delivering them back to the C&NW a few miles away. The Staggers act changed the way railroads thought about making money, and as a result, you saw the resurgence of short line operators, many with great success (Wisconsin Central, Iowa Interstate, etc.). In many ways, the constant "conveyor" of coal I see pass over the MacArthur Bridge every day here in St. Louis is a product of that deregulation. It's allowed railroads to heavily invest in the infrastructure that allows them to do what they do best, long haul transport.

As for airlines, while many bemoan the passing of the "glory days" airline travel has become a lot more accessable to a broader range of people. For example, I travel to Chicago about 2-3 times a month for business. I have several options, Amtrak, driving, bus, or airline. With the airlines, I have at least 3, possibly 4 options to travel, and as such, the prices are always competitive. Back in pre-deregulation days, I could only fly TWA to Chicago, and the ticket would have cost double, if not more. Yeah, it's not glamorous, there is no piano bar up front, and I can't smoke once we reach cruising altitude, but the overall effect is better for me.

Thank you for your response, Mr. Wilkins;

You are absolutely right about the ICC becoming a very serious problem after 1935--1940 or so, and I'll admit I should have mentioned something along those lines in my own post.

This was because the conditions changed. The railroads really were in that monopoly position as a mode in 1900; this was no longer the case by the mid to late 1930s, if not before. In addition, a railroad is a frighteningly expensive thing to build, and at the same time it did turn out to be possible to overbuild the network; the net result was that nobody could make money, and this is a disaster with something as expensive as a railroad can be.

As you noted, the ICC became a real trouble spot, particularly in the postwar era. You are correct, it is better off gone. The main thing to remember, at least as I see it, is that the act may have made sense in 1906; there was no truck line or alternative rail line in places like the Pennsylvania example I used. However, the act became obsolete in a relatively short time became of the introduction of alternatives, specifically autos and trucks, and a subsidized road network.

The real problem was that Congress did not act quickly enought to meet changing conditions. This would happen again later in the postwar era with the railroad excise taxes that were imposed during the war (and I haven't seen anything that really justified those, despite the comments at the time about the need to discourage travel because of the war), and of course the long and tortured road to the eventual retirement of the ICC under the Staggers Act. It continues now with the our oil dependence problem that has turned out to impoverish us and enrich others who do not particularly like us. As 48% of our oil consumption is for gasoline alone (most of which is burned in private autos), and the trucking industry adds another 6%, it becomes painfully apparent that our highway-dominated transportation system is our Achilles heel, and we are going to need, and soon, a means of oil-free transport. This is not being accomplished with our current highway subsidy, whose cash flow analysis alone indicates a 50-cent per gallon subsidy just on direct highway ependitures.

A railroad revival is, I think, the best and fastest way to accomplish true oil independence, particularly with the prospect of railroad electrification, new light rail lines, high speed rail, and yes, in certain places, heritage rail. At the same time, I do not see this happening without some sort of government involvement; private capital does not seem to have the vision it once did, and of course we still seem to be as far as ever from the government deciding it needs to price the road system adequately (which still rigs the game against railroads). A government program, perhaps along the lines of the Reconstruction Finance Corporation (which, interestingly helped pay for the Pennsy's electrification program in the 1930s), may be the only politically possible and practical alternative.

I'm not entirely certain I like this idea, but I'm not sure we can get a proper alternative, which would include pricing gasoline at $7 or more per gallon.

P.S.: Haven't forgotten the promise of numbers, nor the generational post, both will come. . .