What was the purpose of the Interstate Commerce Act?

If you ever played the board game Monopoly, you know how annoying it can be when one of your opponents gets control of the railroads. The game has four railroad companies: the Pennsylvania Railroad, the B&O Railroad, the Reading Railroad, and the Short Line. If you own one, you get $25 each time someone lands on a property you own. Then $50 if you own two and $100 if you own three. If you're the lucky person to get all four, you achieved a monopoly, which means you get to charge $200 each time someone lands on the railroad space. Compared to $25, $200 is quite a profit, just for owning all of the railroad spaces!

The game of Monopoly is pretty close to what happened in real life. In the 19th century, people relied on train transportation for personal travel and for transporting hundreds of pounds of goods, from steel to wool to lumber and food. When the railroads decided to band together to create a monopoly, they raised prices exponentially. It got so bad that the federal government had to step in with the Interstate Commerce Act.

Interstate Commerce Act Definition

Interstate Commerce Act- An act passed in 1887 to give Congress the authority to regulate the railroad industry.

Historical Context for the Interstate Commerce Clause

The authority to enact the Interstate Commerce Act comes from the Commerce Clause in the Constitution.

Commerce Clause

Before the Constitution was passed, only the states had the authority to regulate commerce within their own borders, which left interstate commerce (commerce across state lines) mostly unregulated. Found in Article I, Section 8, Clause 3 of the Constitution, the Commerce Clause reads:

[The Congress shall have Power . . . ] To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes;

This short phrase sounds simple enough, but it's been a huge source of controversy in the United States government, mostly around whether it gives Congress too much or too little power.

The Constitutional Convention was split into two camps: the federalists and the antifederalists. The federalists wanted to have a strong federal government to unite the states, while the antifederalists wanted to keep states' authority intact and didn't want to cede too much power to the federal government. In the years following the passage of the Constitution, the federalists favored expanding Congress's power to regulate various industries under the Commerce Clause, while antifederalists pushed back.

Many Southern states pushed back on Congress's ability to regulate interstate trade because they didn't want the federal government interfering with the slave trade. For decades, abolitionists argued that Congress had the authority to regulate (and abolish) slavery because of the Commerce Clause, while slaveholders said that regulating slavery was a power that the Constitution reserved for the states.

Growth of Railroads

The century between the Constitutional Convention in 1787 and the passage of the Interstate Commerce Act in 1887 brought massive changes to the United States. The invention of the railroad revolutionized the world and allowed people to travel like never before. As the United States continued to expand its territory west in the 1800s, the importance of railroads grew.

The first passenger and freight line (meaning it carried both people and trade goods) opened in 1830, around the time that steam engines became common. In 1869, the first transcontinental railroad opened, connecting the East Coast to California. In order to encourage infrastructure development and the expansion of industry, the government provided significant grant funding and land to railroad companies.

Railroads also played an important role in the Civil War (1861-1865): the more industrialized Northern U.S. had a strong network of railroads, which helped the Union Army move troops and goods around strategically, while the lack of an extensive railroad system in the South hampered the Confederate Army.

Public Goods vs. Private Goods

Railroads were one of the first major industries to blur the lines between public goods (controlled by the government) and private goods (controlled by individuals/businesses).

Private companies developed the railroad system and laid down tracks throughout the United States, yet the public at large (including the government) relied on this private service for the infrastructure and functioning of the country.

Today, while most freight hauling is still privately owned, the government has nationalized (or taken ownership of) most passenger transportation through Amtrak (American Travel by Track), which is classified as a government-owned corporation.

Over time, the top railroad companies began to work together to set prices. When people had the option to choose between different railroad lines, the companies had to compete for lower prices, which benefited customers but hurt the companies' bottom lines. When the executives of the railroad companies got together to coordinate prices, they formed a monopoly.

A monopoly is when one business (or group of businesses) controls an entire industry. When one business is in charge, they don't have to worry about competing with other businesses to provide the best quality product to the customer at the lowest price, typically resulting in lower quality and higher prices.

The Granger Movement

Farmers felt the pain of the railroad monopolies forcing higher prices and using price discrimination. Living in rural areas, they had no choice but to pay railroads to transport their goods to other areas of the country where they were in demand.

A group called the Grangers was formed in the 1860s to help provide a space for education, social benefits, and promotion of farmers' needs. By the 1870s, the Grangers shifted their focus to one of the most pressing economic issues for farmers: the corrupt railroad pricing. The federal government wasn't stepping in to regulate the businesses, so the Grangers turned to the state government. The Grangers succeeded in getting legislation passed in several states to fix maximum railroad rates. Unfortunately, many railroads simply ignored these provisions and continued charging exorbitant rates.

Wabash v. Illinois

Illinois was one of the states that passed laws preventing unlawful price discrimination, thanks to the Granger movement.

In 1886, the state took Wabash, St. Louis & Pacific Railway Company to court because it had violated state law by charging different rates to two different companies that were using the same route. However, Wabash claimed that Illinois didn't have the authority to pass the law governing rates in the first place because the route went through different states, making it qualify as interstate commerce. They said that the Constitution (via the Commerce Clause) gave that power only to the federal government.

The case went to the Supreme Court, which ruled that Illinois had stepped outside of its Constitutional authority by passing the law. They affirmed that only the federal government has the power to regulate interstate commerce.

The Wabash v. Illinois ruling might have been seen as a win for the railroad industry and a setback for the anti-monopoly advocates, but it ended up spurring the federal government to take action. As a result of the ruling, the federal government decided it was finally time to step in and regulate the railroad industry. The following year (1887), they passed the Interstate Commerce Act.

Interstate Commerce Act Purpose

The Interstate Commerce Act made some important changes to the railroad industry.

Public Rates

The Interstate Commerce Act required railroads to post their rates publicly. This took away their ability to make secret deals with certain companies and could no longer offer favorable deals to some companies and not others.

Rate Discrimination

The Act also prohibited the railroads from price discrimination, particularly in the form of charging higher prices for shorter distances than longer distances. Railroads now had to provide justified rates based on their actual costs. It also prevented railroad companies from coordinating in order to form a monopoly.

The Interstate Commerce Commission

The Interstate Commerce Act also created the Interstate Commerce Commission (ICC). The ICC was the first independent regulatory review commission and served as the model for the creation of other regulatory review commissions. The ICC reviewed complaints about railroads violating the Act.

Independent regulatory review commissions are government agencies with the sole responsibility of reviewing and monitoring regulations produced by other government agencies, meaning that they should be less biased and more objective with their review.

Effects of the Interstate Commerce Act

The Interstate Commerce Act helped protect consumers and farmers. Although it proved difficult to enforce at times and had some far-reaching implications.

Expanding Power of Congress

The Interstate Commerce Act marked the first time that Congress regulated a specific industry, and it asserted Congress's power to step in and regulate specific interstate industries. While states still maintained much authority in regulating businesses within their states, Congress had been lax in controlling large, national companies. The Interstate Commerce Act showed that if these companies went too far, they risked intervention from the federal government.

ICC Supreme Court Cases

The Interstate Commerce Committee brought 15 cases before the Supreme Court, claiming that the railroads had violated the Interstate Commerce Act. However, in all but one of these cases, the Supreme Court ruled in favor of the railroad company, proving the difficulty of enforcing regulations against industries.

Interstate Commerce Act - Key takeaways

• The Interstate Commerce Act was passed in 1887 and was the first time the federal government stepped in to regulate the railroad industry.
• Throughout the 19th century, as the public became more dependent on railroads for transportation, railroad companies began to work together to create a monopoly.
• The railroad monopoly practiced price discrimination between large companies and small farmers, charging less for long-haul trips and exorbitant prices for short-haul trips.
• The Granger Movement saw farmers and small businesses organizing to lobby state governments to regulate the corrupt prices of the railroad industry.
• After the Supreme Court said that only the federal government could regulate interstate commerce, the Interstate Commerce Act was passed in 1887.