Railroad Rate Wars
The rapid expansion after the Civil War added greatly to the number of communities, large and small, served by two or more railroads competing for the traffic between these communities and markets. The fact that many of the points served by competitive railroads were ports intensified competition by involving the water carriers serving the ports.
Competition led to rate cutting by the railroads and water carriers and caused widespread use of rebates. Railroad rebates were special low rates that a railroad carrier charged its favored customers. The intent of a carrier in granting a rebate was usually to discriminate in favor of a particular shipper by giving him a secret rate that was less than that charged his competitors. This practice developed in the mid-1850s and continued because of the spectacular railroad rate wars that took place during the second half of the nineteenth century and that often proved disastrous to carriers and public alike. These costly rate wars led carriers to avoid general rate cuts and to develop the practice of making secret agreements with certain shippers, whereby the shipper would get some form of rate reduction in exchange for his promise to ship his goods over the line offering the concession. Such concessions enabled the favored shippers to undersell their competitors and thus increase their business and the business of the railroad offering the rebates. The public objected bitterly to the practice of rebating because of its obvious unfairness and because the process of building up one shipper at the expense of others promoted the development of monopolies, with all of their attendant evils.
Competition among railroads serving the northern Atlantic ports—Boston, New York, Philadelphia, and Baltimore—resulted in rate wars among the railroads and between the railroads and the Erie Canal. In like manner competition among southern railroads intensified as several railroads reached inland points such as Atlanta. Severe competition occurred between railroads and water carriers at the principal ports on the Atlantic Ocean, Gulf of Mexico, Mississippi River, and Ohio River. Rate wars indeed threatened to demoralize the financial structures of rail and water carriers. In the West rate wars resulted from the multiplication of railroads and the struggle between the railroads and steamboat lines for freight at important traffic centers, such as Saint Louis, Kansas City, and Omaha.
The severity and destructiveness of rate wars was due to several factors: the overbuilding of railroads, the unregulated competition among railroads and between railroads and waterlines, the speculative management of some of these carriers, the inability of the railroads to temporarily suspend service until the excessive competition had abated, and the peculiar ability of railroads or other carriers in impaired financial condition to cause and exaggerate the effects of the rate-cutting contests. These latter carriers were usually bankrupt and had no interest charges to pay. They were not earning enough to pay these charges or dividends on capital stock. Freed of the burden of such charges, they were able to reduce rates in the hope of attracting traffic from their solvent rivals, which were meeting interest charges and sometimes paying dividends. They had little to lose and much to gain either through increasing their traffic and gross earnings or forcing their more vulnerable competitors to yield and divide traffic or earnings.
Railroad rate wars, accompanied by unjust and unreasonable discriminations among persons, communities, and kinds of traffic, led to the development of popular antagonism to railroads after 1870. One result of this popular protest was the enactment by a number of states, particularly the western Granger states, of severe and often restrictive and punitive railroad regulatory legislation and the organization of state regulatory commissions.
Another result of rate wars and their attendant abuses was the demand for federal railroad regulation. The Interstate Commerce Act (1887) prohibited rate discrimination and established a fine of five thousand dollars for each violation; two years later violation of the law was made a penitentiary offense. But it was necessary to prove that a rebate actually resulted in discrimination, and this was difficult to do. Furthermore, juries were reluctant to send men to prison for civil offenses even if proven guilty. Hence the act did not stop the practice of discrimination, and further legislation was necessary. Under the Elkins Act (1903) any departure from a printed rate was considered an offense, thus eliminating the necessity of proving that discrimination existed. At the same time the penalty of imprisonment was dropped, the maximum fine was raised to twenty thousand dollars; the law applied to shippers who received rebates as well as to carriers who granted them. The Hepburn Act (1906) restored the penalty of imprisonment and subjected the receiver of a re-bate to a fine equal to three times the value of the rebates received during the preceding six years. Subsequent acts brought a further tightening of the law.
Bibliography
Chernow, Ron. Titan: The Life of John D. Rockefeller, Sr. New York: Random House, 1998.
Hoogenboom, Ari Arthur. A History of the ICC: From Panacea to Palliative. New York: Norton, 1976.
Martin, Albro. Enterprise Denied: Origins of the Decline of American Railroads, 1897–1917. New York: Columbia University Press, 1971.
