On This Day: American Railroads Become Regulated

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On June 29, 1906, Congress passed the Hepburn Act, which essentially strengthened government regulation of the railroad industry. The Hepburn Act’s strict regulations forced railroad companies to follow provisions and pay penalties for violations set by the government through the Interstate Commerce Commission (ICC).

It was perhaps the most important piece of legislation regarding railroads in the 20th century, since it directly affected so many aspects of American transportation by extending ICC jurisdiction over bridges, terminals, ferries, sleeping cars, express companies, and oil pipelines. Though over a hundred years have passed, the Hepburn Act remains significant for a few reasons.

Government regulation curbed corporate greed and corruption in the railroad industry, but is also frequently blamed for crippling America’s booming early-twentieth century railroads. With regulated prices/rates, the value of railroad securities depreciated drastically, and even caused a financial crisis on Wall Street in 1907.

The government heavily utilized the railroads during World War I and World War II, but with the rise of cars, the interstate highway system, and other modes of less regulated transportation like trucking, the railroad industry never regained the popularity of its early 20th century glory days.

Today, railroads are a solid second, if not third, or fourth, to all other modes of domestic transportation or shipping we choose to use. Was it government regulation that killed the railroad industry?

Derailing Monopolies

The Hepburn Act passed during President Theodore Roosevelt’s administration and was just one of many Progressive era reforms meant to rid the nation of government and corporate corruption, inefficiently, and waste. The intention of regulation was to protect consumers/passengers from wealthy businessmen who controlled pricing and dictated all aspects of the railroad industry.

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During this time, the U.S. railroad industry was the country’s second largest employer, only second to the agriculture sector. Regulation of the railroad industry had started in the late 1880s, but was of increasing concern to Roosevelt who was particularly passionate to fight against the monopolistic practices of railroad companies. J.P. Morgan and Cornelius Vanderbilt amassed their wealth through the railroad industry and worked with other industry leaders to reorganize, consolidate, and control rail lines.

The leaders of the railroad industry could raise rates as they saw fit to increase their profits, offer free rates to loyal shipping companies, and essentially control the market. By 1906, over two-thirds of the railroad industry was controlled by just seven entities. Seen as a compromise between free market and government control, government regulation would eliminate the power these wealthy companies and businessmen held over the railroad industry and protect consumers/passengers.

An Inevitable End to Railroads or A High-Speed Comeback?

With strict regulation and government oversight plus the growth of the auto industry in the 1950s, most passenger railroad companies found themselves unable to turn a profit and were filing for bankruptcy by the late 1960s. By 1965, there were 85% less privately operated passenger trains than there were in 1929. If it weren’t for the Rail Passenger Service Act in 1970, which created Amtrak, passenger trains might have gone extinct. Though Amtrak is run as a for-profit company, it’s never turned a profit in its over 40 years in business, and the government continues to spend over $1 billion a year to fund its operations. While it’s easy to think of railroads as America’s transportation of the past, anyone who has travelled to Europe or Asia and used their high-speed or bullet trains knows that America has fallen behind in its railroad infrastructure.

But there seems to be some hope for America’s railroads. California broke ground earlier this year on a $68 billion high-speed rail project set to take 14 years. It will connect Los Angeles and San Francisco in less than three hours. Funding is still incomplete, but if the train is successful (and, more importantly, profitable), it might just motivate America’s leaders and businessman to get its railroad industry back on track.

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