Friday, March 9, 2012

The Interstate Commerce Act

The Interstate Commerce Act of 1887 is a United States federal law that was designed to regulate the railroad industry, particularly its monopolistic practices. The Act required that railroad rates be "reasonable and just," but did not empower the government to fix specific rates. It also required that railroads publicize shipping rates and prohibited short haul/long haul fare discrimination, a form of price discrimination against smaller markets, particularly farmers. The Act created a federal regulatory agency, the Interstate Commerce Commission (ICC), which it charged with monitoring railroads to ensure that they complied with the new regulations.

The Act was the first federal law to regulate private industry in the United States. It was later amended to regulate other modes of transportation and commerce.

The Act was passed in response to rising public concern with the growing power and wealth of corporations, particularly railroads, during the late 19th century. Railroads had become the principal form of transportation for both people and goods, and the prices they charged and the practices they adopted greatly influenced individuals and businesses. In some cases, the railroads were perceived to have abused their power as a result of too little competition. Railroads also banded together to form pools and trusts that fixed rates at higher levels than they could otherwise command.

Larger railroads alarmed populist activists by attempting to engage in predatory pricing. In spite of its broad appeal as a means of drumming up support for price regulation, predatory pricing is not a sustainable practice. Even if a competitor is forced out of business, that firm's capital remains intact and may be purchased by a new entrepreneur. The so-called predator cannot engage in such pricing indefinitely.

Railroads often charged more for short hauls than for long hauls. The practice was decried as one that discriminated against smaller businesses, when it was in fact a practice based on scale economies.

Responding to a widespread public outcry, states passed numerous pieces of legislation. Through the 1870s various constituencies, notably the Grange movement representing farmers, lobbied Congress to regulate railroads, but Congress declined to step in. However, in a decision in 1886, Wabash, St. Louis & Pacific Railway Company v. Illinois, the U.S. Supreme Court ruled that state laws regulating interstate railroads were unconstitutional because they violated the Commerce Clause of the Constitution, which gives Congress the exclusive power "to regulate Commerce with foreign nations, and among the several States, and with the Indian Tribes." The following year, Congress passed the Interstate Commerce Act, which was signed into law by President Grover Cleveland on February 4, 1887

The act worked to keep rates and railroad revenue up on routes where competition existed. It did this by attempting to force publicity about rates and make rebates and discrimination illegal. ('Discrimination' meant lower rates for certain customers, e.g. politicians, large customers, sharp bargainers, long haul shippers, shippers in competitive markets, low season travelers.) Railroads saw that competition made it hard to pay their stockholders and bondholders the amount of money promised them, and competition was therefore "bad."

The act also created the Interstate Commerce Commission (ICC), the first independent regulatory agency of the U.S. government. As part of its mission, the ICC heard complaints against the railroads and issued cease and desist orders to combat unfair practices. While the ICC was empowered to investigate and prosecute railroads and other transportation companies that were alleged to have violated the Act, its jurisdiction was limited to companies that operated across state lines. The courts further narrowed the agency's authority. By 1906, the U.S. Supreme Court had ruled in favor of a railroad company in fifteen out of the sixteen cases over which it presided.

The commission later regulated many other forms of surface transportation, including trucking and bus transportation. Congress abolished the ICC in 1995 (see Interstate Commerce Commission Termination Act) and many of its remaining functions were transferred to a new agency, the Surface Transportation Board

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