I added that “Evil” part myself, but I’m certain it’s true.
The author has a lot of ground to cover, and he covers it quckly. Footnotes and text run concurrently and , to me, it was like reading two papers at once. But wading through it, the author makes really good observations and points as to how Federal Regulation stopped the railroad industry from competing with trucks, diverted important high revenue freight to highway movement, and inevitably lead to the Penn Central debacle.
He also observes that there was significant “cross subsidization” between shippers (and railroads) under regulation. There is no reason a railroad would “cross subsidize” any shipper unless forced to by the government. They forced it. Today it’s gone, like the regulation. But some shippers sure want it back.
The government literally prohibited railroad productivity improvements, by stifling domestic containerization. It would be interesting if someone could quantify how much this hurt the US economy, because it hurt a bunch.
All this could only lead to financial disaster when a competing mode, such as trucks, developed. (Disaster as in Penn Central). The trucks would take the “good” business and leave the “bad” on the rails. This left the railroad forced to primarily sell only freight below average costs and was a big cause of the railroad collapse of the late 60’s onward.
Please read footnote #24 on page 11. Malcomb McLean was a follower, not a leader. (McLean of Sea-Land fame, the man often credited with developing containerization) The Pennsylvania Railroad was putting containers on ships 25 years before he did it. Of course, they had to get around the damn Federal Economic Regulations to do it.
Thanks for posting this link. I’m pleased to see Dr. Churella continuing to delve into received wisdoms of railroad history and exposing their weaknesses.
If nothing else, this article is an object lesson about government regulation, and how well intentioned motives often result in unforseen consequences. Something to remember when trying to replace “market forces” with “Intellegent(?) Design”.
It is symptomatic of government regulation how it took the ICC years to make a final decision while the world outside Washington continued to change. When they reached a conclusion all of the railroads were “weak roads” thanks to the Depression. Also, the motor carrier industry had grown like kudza and seeped into many markets unthought of in the mid-20s. The ICC was just trying to do two things, follow the dictates of Congress to insure everyone who might want to ship had rail service and give everyone a fair hearing. Congress could not forsee the future and a fair hearing is a really good idea. People operating in a modern market economy can’t forsee the future either but they can adjust to change much faster.
Good read… I am finally getting an understanding of the why’s and wherefore’s of how railroads handle freight, and how government regulation is NOT a good thing in general. I wonder what would have happened to the PRR if it had been able, without regulation, to develop it’s business model as it saw fit? Makes me wonder.
I wouldn’t go that far, not all government regulations are bad. the meat packing industry ring any bells? also regulation is needed for the media also, one man shouldn’t be in control of so much of the public airwaves- coughRupert Murdoch*cough. I do agree that the regulation of the rails wasn’t run right though. These folks at C.U.R.E are just trying to improve their bottom line at the expense of the railroads. I think americans take for granted the many governmental bodies that protect us from over zealous corporations in pursuit of the almight dollar.
Deregulation can be a bad thing as well. President Reagan cost American taxpayers hundreds of billions of dollars when he deregulated the Savings and Loan industry.
I wonder if the PRR could have grown like Canadian Pacific, from a Railway they added a trucking company, a logging company, a mining company, a petroleum company, a steamship company and an airline.
Yes, CPR turned itself into an integrated transportation company, something the author laments never existed here in the US. What a difference an International Boundary can make. It was pretty natural for a corporation to go that way. A train, truck, ship, plane, whatever, are just machines that produce the same thing. They’re tools. Why should a company be prohibited from using the most efficient tool?
They seemed to have understood that in Ottawa. Washington was stuck on dumb.
I think it’s important to keep in mind that the author is focused on economic regulation, not safety regulation (such as meat inspection). It’s one thing to tell a trucking company what they can charge, where they can run, what they can haul, etc. These things are economic regulation and are less than benificial. It’s quite another thing to tell the trucker he has to drive on the right side of the highway. That’s safety.
One final note about ecnomic regulation. In the Great Depression one of the things that made things worse was all the bank failures in the US. Not one bank failed in Canada. The US, at least generally, didn’t allow branch banking. Each bank was in its own little world. When the economy of that little world got sick, so did the bank. Many failed making things worse.
Canada had no such restriction. Banks spread their risks across the natiion.
One key to the Candian landscape was the use of Crown Corporations to “regulate” business. Canda had a period of over enthusiastic railroad constructing as we did south of the border. The solution was for the government to take over the “weak” railroads and create the Candian National. Just imagine in the US what would have happened if the weak railroads had been merged into one govenment owned system vs. a private system. It might have been BM+NH+RUT+MEC+ERIE+LV+CNJ+BO+WM+SAL+LN+FEC+MO+CA+CIL+
NKP+WAB+MILW+SOO+CGW+CRIP+MSL+NP+WP+TP+MP+DRGW+WP+ATSF
vs.
PRR+NYC+CO+NW+SOU+ACL+IC+CNW+CBQ+GN+SP+UP+SSW+MKT
It would have been very interesting in an economy much larger than Canada’s.
A top contender in the “goof bowl” has to have been the “Crows Nest Pass” rates. I’ll probably get some detail wrong - but this these are the essentials of the situation.
In the early part of the 20th century the CP sought Canadian Government assisstance for the construction of a line over Crows Nest Pass. The government agreed with the provision that the railroad roll back freight rates on grain to the 1906 levels. This seemed to be no big deal at the time, the railroad agreed, and the line was built.
The problem developed when Canadian farmers had enough clout to keep the rates at the 1906 levels though, IIRC, the 1970’s with no inflation adjustments. You can imagine the results.
If you’ve ever wondered why there are those covered hoppers rolling around that say “Canada” or “Alberta” on their sides, it’s because the railroads couldn’t justify buying new equipment for the 1906 rates. So the government further subsidized the farmers by buying them railcars to use.
My point is not that Canada does economic regulation better, sometimes they’re better, sometimes they’re worse. My point is that any government economic regulation is going to have all kinds of unforseen consequences. Governments generally can not respond quickly to these consequences and things can go from bad to worse in a hurry.
And no, I’m not against all economic regulation. I am very much in favor of bank auditors. I just think such regulation should be minimal, because when the Feds start doing things like setting freight rates bad things happen. Bad things as in the destruction of the Pennsylvania and New York Central railroads.
Cross subsidization is rampant today under the Staggers/STB partial deregulation. It’s called “differential pricing”. It’s called charging some customers (usually domestic producers) >180% R/VC while others (usually foreign importers) <180% R/VC. It is by every credible measure cross subsidization.
When and if Ken ever acknowledges this fact, we can start a dialogue on how best to remedy this overt disparity, including the “no action” alternative. My choice would be anti-trust action to finally break up the antiquated integrated model, but others might choose an actual enforcement of standing Staggers Act caveats which ostensibly promote intramodal competition.
Then there’s those who think everything is hunky-dory, blinders firmly affixed over eyes, fingers embedded into eardrums, voice in constant “I’m not listening, I’m not listening…” droning mode. Which brings us back to the forum’s version of the Saturday morning cartoons…
“Canadian banking system during the Great Depression?”
What on earth?
Canada favored rather larger banking corporations. Much like the ICC forcing the PennCentral to absorb the New Haven, the Canadian government routinely forced stronger banks to absorb weaker banks to avoid “failure.”
Perhaps the ICC was only following the Canadian “model” practiced during the Depression. According to the poster, it works!
Branch banking had nothing to due with solvency. There was nothing inherently more stable about Canadian banks as a result of branch banking. Most Canadian banks during the Great Depression were in fact “insolvent” but “Government Regulators” simply turned a blind eye to avoid actual “failure,” plus the Canadian system had a government-required double liability system that provided a form of deposit insurance in those days – and a powerful incentive not to “fail.”
The Canadian system had no bank failures in that time period not because of lack of government intervention or regulation, but instead because the government was all over it. The system could not afford a failure. It was a much more regulated system. This was because the banks were larger.
Banks in the U.S. were simply allowed to fail if they became insolvent. This market-based approach, the poster suggests, was the result of government economic regulation. Notwithstanding the rhetoric, he obviously doesn’t like genuinely market based approaches.
The poster does not understand his own analogy: the Canadian banking system was highly regulated – albeit more informally – and banks were not allowed to fail, precisely because of the larger size of the banking corporations. The poster seems to be arguing the analogy that because of the size of US rail corporations, we should follow the Canadian depression era banking model. Well, OK …
The Canadian system was much like Japan’s in the modern era – co
BN had a trucking company [Burlington Northern Transport], through its Burlington Northern Resources was heavily into mining, lumbering, real estate development, owned oil wells, and it operated a freight airline – Burlington Northern Air Freight, begun in the regulated era of 1972.
Differential pricing may or may not be cross subsidization. Some shippers are located in areas where there is relatively small amounts of rail traffic. I would expect those shippers to pay more for shipping product than a shipper that was located on a heavily trafficked route. Why? Because the fixed costs become a much larger percentage of the overall cost of doing business.
Now, does cross subsidization take place? I’m fairly confident that it does, although I do not have any proof of it. I just want to point out that not all differential pricing is necessarily cross subsidization.
Cross-subsidization has been around long before Staggers. Prior to May 1, 1971, the ICC would deny passenger train discontinuances on the basis that the profits made in freight operations could cover the passenger train losses even if the passenger trains were virtually empty. Freight rates in the ICC era were often tied to the value of the commodity being shipped, finished goods were billed a higher rate than raw materials. Perhaps some utilities were on the receiving end of cross subsidization but are unwilling to admit it.
Differential pricing exists everywhere in the transportation business. I’m sure that the airfare for my vacation last summer that I paid four months in advance was appreciably lower than what was charged to the business traveler who bought his tickets the day before he traveled. Cross-subsidization may or may not be involved, differential pricing definitely is involved.
If only that were reliably true. But some of the highest R/VC ratios are forced upon shippers who are located right on some of the most heavily trafficked mainlines. Not a lot of extra fixed costs there, yet they are paying a higher rate standard than some of those shippers who are located on lighter trafficked lines. Clearly, rate disparity is not a function of mainline proximity so much as it is a function of relative captivity. And because the rate disparity is borne of relative captivity, in those cases it is quite clearly cross subsidization.
Or, perhaps rates are a function of capacity. In the real world, when something gets too crowded, you raise the price.
If a line goes from A to B to C and is at or near capacity, any shipper wanting a ride from A to B or B to C better expect to pay the A to C rate - or better!
Rates are driven by demand not costs. The railroad, like any other business, will raise their prices to the point when returns start to diminish. If the rates do not cover the cost they need to get the costs down or exit the business and find another way to make their investors happy.