The United States Since The Civil War by Charles Ramsdell Lingley

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The most constant grievance was discrimination--that the roads varied
their rates for the benefit or detriment of especial types of freight,
of individuals and of entire localities. Through business between
competing points was carried at a low figure, while the roads recouped
themselves by charging heavily in towns where competition was absent.
Shippers complained that rates between St. Paul and Chicago, for
example, where competition existed were hardly more than half the
charges to places at a similar distance where a single road was in a
position to demand what it pleased. Manufacturers in Rochester could
send goods to New York City and reship them to Cincinnati, back
through Rochester, for less than the rate direct to their destination.
Yet the direct haul was seven hundred miles shorter than the indirect.
Secret arrangements were commonly made with favored shippers by which
they secured lower rates than their competitors. When it became
evident that transportation cost entered into the price of
substantially everything which the ordinary citizen consumed, and when
it was considered that a slight rise in railroad rates might easily
amount to a heavy tax on a shipper or an entire region, it was seen
that uniformity of rates was a matter of the utmost concern.

In brief, then, it was complained that the growth of the
transportation system had placed enormous power in the hands of a
small group of men, many of whom had indicated by their selfishness,
arrogance and questionable practices that they ought not to be
entrusted with so great a measure of authority.

The best example of the American railroad president after the war was
Commodore Cornelius Vanderbilt. Vanderbilt began his career by
ferrying passengers and freight between Staten Island and New York
City. Later he turned his attention to shipping, in which he made a
fortune, and planned the operation of steamships on a large scale.
Becoming interested in railroading, he clearly perceived the
importance of the western trade and the necessity of consolidation.
Vanderbilt was a man of vision, a man who combined magnitude of plan
with the vigorous grasp of the practical details necessary for the
realization of his ambitions. He was buoyant, energetic, confident,
ambitious, determined, despotic. Unhampered by modern conceptions of
public duty, undeterred by the hostility of powerful opponents, with
eyes fixed upon the combination and control of a great transportation
system, Vanderbilt entered courageously upon bitter struggles for
supremacy which involved the misuse of the courts, the control of the
New York state legislature and a thousand charges of corrupt influence
and bribery, but he welded railroads together, replaced wood and iron
with steel, and constructed tracks and terminals. At his death in 1877
he left a huge fortune and bequeathed to his successors a great,
consolidated railroad enterprise, skillfully and successfully
administered. The great weakness of Commodore Vanderbilt and his
associates, and of those who later imitated his work was their
fundamental conception of the railroad as a private venture. Success
consisted in bigness, great profits, crushing or buying out
competitors, and administering the business for the best good of the
few owners, regardless of the interests of the region through which
the railway passed. Vanderbilt and many of his contemporaries were men
of business sagacity and foresight, but their ethical outlook was
restricted and their sense of public responsibility not well
developed.

So considerable a list of grievances naturally bestirred the people to
seek relief at the hands of their legislators. Two lines of action
were followed. In Massachusetts, as early as 1869, a state commission
was formed with purely advisory powers. Under the able leadership of
Charles Francis Adams it attained great influence and worked
effectively for the elimination of railroad abuses through conference
and the weight of public opinion. In Illinois, on the other hand,
reliance was placed upon compulsory action. The state constitution of
1870 declared the railroads to be public highways and required the
legislature to fix rates for the carriage of freight and passengers,
and to pass laws to correct abuses connected with the railways and
grain warehouses. In compliance with the constitution the state passed
the necessary legislation and placed their execution in the hands of a
commission with considerable power. Other western states followed the
Illinois model.

On the national scale the agitation for government action began with
the minor parties. In 1872 the Labor Reformers demanded fair rates and
no discrimination; in 1876 the Prohibitionists called for lower rates;
in 1880 the Greenbackers stood for fair and uniform rates; four years
later they urged laws which would put an end to pooling,
stock-watering and discrimination, and in the same year the
Republicans promised an act to regulate commerce if they were elected.
The most effective force behind the demand for railroad regulation was
the Patrons of Husbandry, better known as the "Grange." This society
was founded by O.H. Kelley, a government clerk in Washington, in 1867.
Its initial purpose was the organization of the agricultural classes
for social and intellectual improvement, but later it engaged in the
effort to correct transportation abuses and to arouse cooperation
among the farmers in other ways. The movement grew astonishingly,
especially in the Middle West, where its membership reached nearly
759,000 in 1875.

Transportation conditions in the West had not reached the relatively
stable situation which characterized those of the East. In the West
much new work was being done, with the attendant evils of construction
companies and unnecessary and speculative undertakings. Much of the
railroad stock was in the hands of eastern investors whom the western
farmers pictured as living in idle ease on swollen incomes, careless
of the high rates and unfair discriminations under which the farmer
groaned. The constantly falling prices, which influenced the West in
so many other ways, served to heighten the discontent with any abuse
which increased the farmer's burden. Moreover, the western states had
contributed huge amounts of land to help build the railways and they
were not minded to give up the hold which their generosity had
justified.

Impelled, then, by such force as the Grange and similar organizations
supplied, the western states proceeded to the adoption of laws whose
purposes ordinarily included railroad rate-making by the legislature
or by a commission, the doing away with such abuses as discrimination,
and the prohibition of free passes. The railroads promptly opposed the
laws and carried the battle to the courts. The so-called "Granger
Cases" resulted. Three of these were representative of the general
trend of the decisions.

The famous case Munn _v._ Illinois, which was decided by the Supreme
Court in 1876 was possibly the most vital case in the history of the
regulation of public service corporations after the Civil War. The
legislature of Illinois, in conformity with the state constitution of
1870, had passed a law fixing maximum charges for the storage of grain
in warehouses. The owners of a certain warehouse refused compliance
with the law on the ground that it was contrary to the Constitution
and hence null and void. They argued that when the state fixed rates
it deprived the owners of the right to set higher charges and so, in
effect, deprived them of their property, in defiance of that portion
of the Fourteenth Amendment forbidding a state to "deprive any person
of life, liberty, or property, without due process of law."

On examination of the history of the control of such enterprises, the
Court found that it had been customary in England for many centuries
and in this country from the beginning, to regulate rates on ferries,
charges at inns, and similar public enterprises, and that it had never
been thought that such action deprived persons of property without due
process of law. In other words, the established common law, at the
time of the passage of the Fourteenth Amendment, did not look upon
rate regulation as a deprivation of property. The Court, therefore,
declared the Illinois warehouse law constitutional, and in doing so
made the following statement:

Property does become clothed with a public interest when
used in a manner to make it of public consequence, and affect
the community at large. When, therefore, one devotes his
property to a use in which the public has an interest, he, in
effect, grants to the public an interest in that use, and must
submit to be controlled by the public for the common good,
to the extent of the interest he has thus created.

While the Munn case was before the Court, the case Peik _v._ the
Chicago and Northwestern Railway Company was raising a question which
struck at the heart of the chief practical impediment in the way of
state control of transportation. The central question in the
litigation was whether the legislature of Wisconsin could lawfully
regulate rates on railroads inside the state. Since the bulk of the
traffic on most roads crosses state borders at one time or another in
its transit, the regulation of rates within a state normally affects
interstate commerce. But the regulation of interstate commerce is
vested in Congress by the terms of the Constitution. The railroad was
quick to take advantage of the division of power between the states
and the nation. Indeed, when fighting state legislation, the roads
earnestly emphasized the exclusive power of Congress over interstate
commerce; but when fighting national regulation, they equally
deprecated any interference with the reserved rights of the states.
Acting in accordance with its established practice, the Court decided
that the state was authorized to regulate rates within its borders,
even though such regulation indirectly affected persons outside, until
Congress passed legislation concerning interstate commerce. Obviously
this decision allowed the states to work out their railroad problems
unhampered, and constituted one of the chief victories for the
Grangers.

In 1886, however, the Court overturned some of the principles which
had been established in the Munn and Peik cases. The new development
came about in connection with the Wabash railroad. It appeared that
the road had been carrying freight from Peoria, Illinois, to New York
for smaller rates than were charged from Gilman to New York, despite
the fact that Peoria was eighty-six miles farther away. Since Illinois
law forbade a road to levy a greater charge for a short haul than for
a long one, a suit was instituted and carried to the Supreme Court.
The company held that the Illinois legislation affected interstate
commerce and hence trenched upon the constitutional power of Congress.
This time the Court upheld the road. It decided that the
transportation of goods from Illinois to New York was commerce among
the states, that such commerce was subject to regulation by Congress
exclusively, and that the Illinois statute was void. It seemed, then,
that state regulation was a broken reed on which nobody could safely
lean, and attention thereupon turned to the federal government.

Congress had already been discussing federal regulation intermittently
for some years. The so-called "Windom Report" of 1874 had advised
federal construction and improvement of transportation facilities in
order to lower rates through competition, but no action had resulted.
In 1878 the "Reagan bill" had proposed government regulation, and from
that time the subject had been almost continuously before Congress. In
1885 the Senate had appointed a select committee of five to
investigate and report upon the regulation of freight and passenger
transportation. The committee was headed by Shelby M. Cullom, who had
been a member of the legislature of Illinois and later governor, in
the years when the railroad and warehouse laws were being put into
effect. It endeavored to discover all shades of opinion by visiting
the leading commercial centers, and by consulting business men, state
commissioners of railroads, Granger officials and others. After a
somewhat thorough investigation, the committee expressed its
conviction that no general question of governmental policy occupied so
prominent a place in the attention of the public as that of
controlling the growth and influence of corporations. The needed
relief might be obtained, the committee thought, through any one of
four methods: private ownership and management, with a greater or less
degree of government oversight; government ownership and management;
government ownership with private management under public regulations;
partial state ownership and management in competition with private
companies. The widespread opposition to state ownership of railroads,
the commission thought, seemed to point to some form of government
regulation and control of the existing situation.

Impressed with the magnitude of the abuses involved, and the
hopelessness of regulation through state laws, the committee presented
a bill designed to bring about regulation on a national scale through
a federal agency. The resulting law was the Interstate Commerce Act of
February 4, 1887. It provided that all railway charges should be
reasonable and just; forbade the roads to grant rebates, or to give
preferences to any person, locality or class of freight, or to charge
more for a short haul than for a long one except with the consent of
the proper authorities; it made pooling unlawful; and it ordered the
companies to post printed copies of their rates, which were not to be
altered except after ten days' public notice. The act also created an
Interstate Commerce Commission of five members to serve six-year
terms, into whose hands the administration of the measure was placed.
Persons who claimed that the railways were violating the provisions of
the law could make complaint to the Commission, or bring suit in a
United States Court. In order that the Commission might know the
condition of the roads, it was given power to call upon the carriers
for information, to demand annual reports from them, and to require
the attendance of witnesses. If the railroads refused to carry out the
orders of the Commission, they could be brought before a United States
district court.

In forbidding pools, the Act committed the railroads to the policy of
enforced competition, a policy which was commonly accepted at the time
as the best one for the public interest. Such experts, however, as
Professor A.T. Hadley and Charles Francis Adams, Jr., raised important
objections. They cited the rate wars to indicate the results of
competition and declared that railroads ought to be monopolies. If two
grocery stores are established where trade enough exists for only one,
they asserted, the weaker competitor can close his doors and the
public loss is not heavy; but in the case of the railways a weak
competitor must continue business even at disastrously low rates
because all his interest charges continue and the depreciation on his
property is extreme. The construction of an unnecessary road and its
subsequent operation at a loss, its failure or its abandonment,
constitute a great drain upon the public. Such objectors contended
that pooling combinations did away with many of the evils of
cut-throat competition, and they accordingly urged that the carriers
be permitted to make such arrangements, under whatever government
regulation might be needed to prevent unreasonable charges. By such
means the available business of a region might be fairly divided among
the roads entering it, without resort to competitive rate-cutting and
its consequent evils.

The passage of the law was looked upon with much hostility on the part
of the railroad interests. James J. Hill thought that the railroads
might survive, although the country would be ruined, and he predicted
that Congress would shortly be called in special session to repeal the
act. More important than mere hostility was the constant opposition
and evasion which characterized the attitude of the carriers toward
the operation of the law. Discriminations were commonly practiced and
hidden away in accounts under false or misleading headings. Rebates
were given and received, a fact which was due in no small degree to
the shippers themselves. A large shipper might demand advantageous
rates and threaten to turn his trade over to a rival road. As the
arrangement would be secret, and the likelihood of discovery small,
the temptation to break the law was correspondingly great.

The good results of the passage of the law were disappointingly
slight. To be sure, the Commission was gaining experience,
administrative precedents were being established and injustice was
somewhat less common than before. The first chairman was Judge T.M.
Cooley, a noted lawyer whose appointment was considered an admirable
one. Most important of all, the principle of government regulation was
established. Nevertheless, progress was so slow as to be almost
invisible. The courts hampered the activities of the Commission. When
cases arose involving its decisions, they allowed a retrial of the
entire case from the beginning, permitting the introduction of facts
which had been designedly withheld by the carriers in order to
undermine the influence of the Commission, and sometimes they reversed
its findings and so dulled the effectiveness of its labors. Eleven
years after the Act was passed the Commission declared that abuses
were so constant that the situation was intolerable; a prominent
railroad president made the charge that "good faith had departed from
the railway world"; and an important authority on railroad affairs
declared that the Commission had become an impotent bureau of
statistics.

BIBLIOGRAPHICAL NOTE

More study has been made of railroad regulation and the technical side
of railroading than of the history of transportation and the effects
of the roads on the political and economic life of the people. An
excellent single volume is John Moody, _The Railroad Builders_ (1919),
which devotes attention to the important personages of railroad
history, discusses the growth of large systems and contains valuable
maps; the best concise account of the history of the railways is W.Z.
Ripley, _Railroads: Rates and Regulation_ (1912). Chap. I; W.Z.
Ripley, _Railway Problems_ (rev. ed., 1913), is reliable; E.R. Johnson
and T.W. Van Metre, _Principles of Railroad Transportation_ (1916),
has some excellent chapters and several informing maps; C.F. Carter,
_When Railroads were New_, (1909), is a popular account; C.F. Adams,
_Chapters of Erie_ (1886), exposes early railroad practices; H.G.
Pearson, _An American Railroad Builder_ (1911), presents the career
of J.M. Forbes as a railroad president; A.T. Hadley, _Railroad
Transportation_ (1886), is a classic, early account. Consult also E.R.
Johnson, _American Railway Transportation_ (1903); Frank Parsons,
_Heart of the Railroad Problem_ (1906); C.F. Adams, Jr., _Railroads:
Their Origin and Problems_ (1878, rev. ed., 1893); "A Decade of
Federal Railway Regulation," in _Atlantic Monthly_ (Apr., 1898). On
the personal side, the following are valuable: E.P. Oberholtzer, _Jay
Cooke, Financier of the Civil War_ (2 vols., 1907); J.G. Pyle, _Life
of J.J. Hill_ (2 vols., 1917); _Memoirs of Henry Villard_ (1909). On
the subject of land grants and regulation: L.H. Haney, _Congressional
History of Railways_ (2 vols., 1910); S.J. Buck, _The Granger
Movement_ (1913), and the same author's _The Agrarian Crusade_ (1920),
are best on the relation of unrest among the agricultural classes to
the railroad problem. The "Cullom Report" is in Senate Reports, 49th
Congress, 1st session (Serial Number 2356), in 2 vols., and is a mine
of information on early abuses. The most important Granger cases are
in _United States Reports_, vol. 94, p. 113 (Munn _v._ Ill.), and vol.
118, p. 557 (Wabash case).

* * * * *

[1] For example, an investor might contribute $100 in cash to an
enterprise. The "paid in capital" or "actual" capital would, then be
$100. He might receive in return $100 in stock and $100 in bonds, in
which case the "nominal capital" would be $200; the additional $100
would be "water." If the enterprise paid interest on the bonds, and
dividends on the stock, it would, of course, be paying a return on the
water. The practice of stock-watering did not end with the days of
Gould and Drew.

[2] In this connection Professor Farrand mentions the statement of a
railroad magnate that "in Republican counties he was a Republican, and
in Democratic counties he was a Democrat, but that everywhere he was
for the railroad." _Development of the United States_, p. 290.

CHAPTER X

EXTREME REPUBLICANISM

That the election of 1888 differed from its predecessors since 1865 was
due chiefly to the independence, courage and political insight of
President Cleveland. Hitherto campaigns had been contested with as
little reference to real issues as conditions rendered possible.
Neither party had possessed leaders with sufficient understanding of
the needs of the nation to force a genuine settlement of an important
issue. That 1888 saw a clear contest made it a memorable year in recent
politics.

It will be remembered that the tariff act of 1883 had been satisfactory
only to a minority in Congress, because it retained the high level of
customs duties that had been established during the Civil War. The
congressional election of 1882 had resulted in the choice of a
Democratic House of Representatives and had offered another opportunity
for downward revision. Early in 1884, therefore, William R. Morrison
presented a bill making considerable additions to the free list and
providing for a "horizontal" reduction of about twenty per cent. on all
other duties as levied under the act of 1883. The measure was defeated
by four votes. Opposed to it were substantially all the Republicans and
forty-one Democrats, most of them from the industrial states of New
York, New Jersey, Pennsylvania and Ohio. The Democratic tariff plank of
1884, as has been seen, was practically meaningless, but the election
of Cleveland, and the choice of a Democratic House gave another
opportunity for revision. Again Morrison attempted a reduction, and
again he was defeated by Samuel J. Randall and the other protectionist
Democrats.

The entire matter, however, was about to receive a new and important
development at the hands of President Cleveland and John G. Carlisle,
who was the Speaker of the House during the four years from 1885 to
1889. Carlisle was a Kentuckian, a man of grave bearing, unflagging
industry and substantial attainments. His tariff principles were in
accord with those of the President, and his position as Speaker enabled
him to determine the make-up of the Committee on Ways and Means, which
would frame any tariff legislation. Cleveland had expressed his belief
in the desirability of tariff reduction in his messages to Congress of
1885 and 1886, basing his recommendations on the same facts that had
earlier actuated President Arthur in making similar suggestions. His
recommendations, however, had received the same slight consideration
that had been accorded those of his Republican predecessor. He
therefore determined to challenge the attention of the country and of
Congress by means of a novel expedient.

Previous presidential messages had covered a wide variety of
subjects--foreign relations, domestic affairs, and recommendations of
all kinds. Departing from this custom, the President made up his mind
to devote an entire message to tariff reform. His project was startling
from the political point of view, for his party was far from being a
unit in its attitude toward reduction, a presidential campaign was at
hand, and the Independents, who had had a strong influence in bringing
about his success in 1884, sent word to him that a reform message would
imperil his chances of re-election. This type of argument had little
weight with Cleveland, however, and his reply was brief: "Do you not
think that the people of the United States are entitled to some
instruction on this subject?"

On December 6, 1887, therefore, he sent to Congress his famous message
urging the downward revision of the tariff. The immediate occasion of
his recommendation, he declared, was the surplus of income over
expenditure, which was piling up in the treasury at a rapid rate and
which was a constant invitation to reckless appropriations. The portion
of the public debt which was payable had already been redeemed, so that
whatever surplus was not expended would be stored in the vaults, thus
reducing the amount of currency in circulation, and making likely a
financial crisis. The simplest remedy for the situation seemed to
Cleveland to lie in a reduction of the income, and the most desirable
means of reduction seemed to be the downward revision of the tariff, a
system of "unnecessary taxation" which he denominated "vicious,
inequitable, and illogical." Disclaiming any wish to advocate free
trade, he expressed the hope that Congress would turn its attention to
the practical problem before it: