Very interesting book and great review, Ken!!
I fail to see any real difference between the practices described and utilized in the Iowa Pool and the rate equalization imposed by the ICC as a result of the outcry over such practices.
George Hilton has contended that the ICC was set up to be a cartel from the very beginning. I would imagine that a main goal of setting up the cartel was to prevent wasting of limited capital from overbuilding of parallel between such points as Chicago and Omaha - and the ICC was -um- successful in preventing that from happening in this case…[}:)]
- Erik
Erik,
The Iowa Pool was a cartel. Yes there are those who argue that the ICC was set up, at least in part, to stabilize the existing ratemaking cartels.
Having a cartel does not prevent new entrants into a cartelized market. The cartel will choose to admit the new entrant, or not. IIRC the ultimate failure of the Iowa Pool was caused by too many new entrants, including, I think, the MILW and IC.
The ICC did not get control over entry, that is the ability to block construction of new lines, until the Transportation Act of 1920, by which time it was almost a moot point. Control of entry is NOT the same thing as a cartel.
Mac
Mac,
Good point - lost track of the of the Transportation act of 1920 (certificate of public interest, convenience or necessity). Though with the USRA, the effective blocking of new construction began in 1918, with WW1 putting a crimp in construction starting in 1917. RR mileage in the US peaked in 1916.
One downside of cartels or government rate regulation that works in the same way as a cartel is that it discourages innovations to reduce cost, one example being containerization. Granted there is a role in regulation to prevent cost reduction at the expense of safety.
- Erik
I’m familiar with George Hiltons’ view that the original regulatory system was actually supported by some major railroads (particularly the Penssylvania) to shore up their cartels. That’s certainly a plausible view (the requirement of the early regulatory systems that all rates be published in public tariffs would have a tendency to prevent “cheating” by cartel members, an activity which usually will undermine cartels that aren’t enforced by the government). If so, however, it was a very short-sighted strategy, as the original regulatory system was expanded over a few decades into a monster that could not possibly have been in the railroads’ interests.
To my knowledge, the Iowa pool was intended to limit competition between the incumbent roads, and thus allow higher rate levels than may have otherwise prevailed. This did not prevent “overbuilding” parallel lines. It had the opposite effect - the higher profit levels made possible by the pool encouraged the building of parallel lines, which eventually undermined the pool. Hilton himself makes this point in his book on narrow gauge railroads (which, among other things, has an excellent discussion of the economic organzation of the rail industry in the late 19th century). Also, keep in mind that regulatory systems that developed in the 19th century did not generally regulate construction of new railroads - they regulated business practices of exisiting railroads. In the 19th century, there were few legal barriers to construction of new railroads. The same was true at the federal level. The ICC didn’t get control over construction of new rail lines until the Transportation Act of 1920, long after the heyday of rail expansion had ended.
Some good points have been made.
Hilton is certainly not the only economist to contend that the establishment of Federal economic regulation of railroads was “Predatory Regulation”, that is regulation that is designed to protect the producer from competition instead of the consumer from monopoly power.
The facts do seem to support that view. The current book I’m reading is “Railroads – Rates and Regulation” by William Z. Ripley. Ripley was another PhD economist. At Harvard. The book was first published in 1912. (It’s going to take me a while. It’s not light reading and it’s 646 pages.)
The first chapter of the book, which is all that I’ve read so far, is a “Historical Survey.” In that chapter Ripley references a chart on page 413 which shows the changes in average railroad freight rates over the years. From (as near as I can tell from the graph) an average level of $0.0192 per ton-mile in 1874 to an average level of $0.01100 in 1886, the year before the ICC was established.
[quote user=“greyhounds”]
Some good points have been made.
Hilton is certainly not the only economist to contend that the establishment of Federal economic regulation of railroads was “Predatory Regulation”, that is regulation that is designed to protect the producer from competition instead of the consumer from monopoly power.
The facts do seem to support that view. The current book I’m reading is “Railroads – Rates and Regulation” by William Z. Ripley. Ripley was another PhD economist. At Harvard. The book was first published in 1912. (It’s going to take me a while. It’s not light reading and it’s 646 pages.)
The first chapter of the book, which is all that I’ve read so far, is a “Historical Survey.” In that chapter Ripley references a chart on page 413 which shows the changes in average railroad freight rates over the years. From (as near as I can tell from the graph) an average level of $0.0192 per ton-mile in 1874 to an average level of $0.01100 in 1886, the year before the ICC was established.
[quote user=“Falcon48”]
You’re reading Ripley? I did it once, and had to go through years of therapy to recover.
Seriously, be careful of his data on “average” rates. “Averages” can disguise a lot of things, particularly in an industry that differentially prices. Rail rates between competitive points were a lot lower per ton mile than rail rates between non-competitive points. To anyone familiar with modern airline pricing, that’s not particularly remarkable today. But, back in the 19th century, it gave a lot of popular supprt to the notion that railroads were gouging poor farmers and that regulation was needed to correct these abuses.
As I mentioned in my prior post, I think it’s entirely plausible that some (maybe most) major railroads supported the early regulation efforts in order to better enforce their cartels (according to Hilton, much of the original Federal Interstate Commerce Act was actually written by Pennsylvania RR lawyers). But, in my view, the regulation movement quickly got away from them. The regulatory system that developed by the first decade of the 20th centrury could not possibly have been in the railroads’ interests. And the expanded system enacted in 1920 and subsequent years was a major reason that the rairlaods were not able to respond more effectively to truck competition, which they could have done had the regulatory system permitted them to develop into integrated, intermodal transportation companies.
The canals the railroads were competing against in the late 19th and early 20 centuries were, for the most part, not very effective competition. They were mostly obsolete, horse drawn affairs with small, slow, low capacity vessels. Many of them had been built with government support just as the railroads made them obsolete ( I will refrain from ma
I always thought rather than intent, it was damage control. The railroads tried to make the most of a very bad thing (Progressive era regulation in the form of the ICC) and perhaps succeeded for a few years. But, in the long run, they failed miserably indeed.
Glen Brewer