Control: The Rate-making Process and how it Was Used to Profit the Railroads

From 1935 until 1980 there existed a rate making process enacted by the railroads which put rate restrictions on trucks. This system relied on advocates who went before Congress and claimed that rate making for trucks (and conveniently not for railroads) was for the good of the people. 

Rate Making

Beginning in 1935, the Motor Carrier Act gave railroad companies better control over the trucking industry. F.E. Williamson, president of the New York Central Railroad, went on the record as saying that the Motor Carrier Act would “establish regulations for rate-making” only for truckers. By way of the Interstate Commerce Commission and subsequently, the railroad owners to whom they answered, the railroad industry was given complete legal control to dictate rates for truckers among other things like working conditions, and other safety measures. 

Tangentially, a part of this rate making process was the power given to the Interstate Commerce Commission to take direct action against any lawsuits or legal issues surrounding this rate making process, thereby cutting out a neutral third party judicial system and enabling the source of rate making control with the power to deny claims against rate making control. 

The Interstate Commerce Commission required trucking companies to provide information on their fare data, charges, and tariffs. This enabled the commission and the railroads by extension to ensure railroad rates were less than trucking rates, ensuring the railroads would continue to control freight shipping and profits. Unfortunately, the profit-grabbing did not stop there. 

Reed-Bulwinkle Proposal

Nearly two decades after the motor carrier Act was passed, further restrictions were enforced upon the trucking industry by way of the railroads and the Interstate Commerce Commission who continually lobbied Congress to pass a new piece of legislation called the Reed-Bulwinkle Act.

The Reed Bulwinkle Act exempted railroads from antitrust prosecution as it applied specifically to the ratemaking procedures used by the Interstate Commerce Commission. Rate conferences, the meetings where rates were fixed for the trucking industry, were now legalized. Those who participated in this “conference method” of rate making were given exemption from the anti-trust violations by Interstate Commerce Commission approval. 

By 1948 the Department of Justice had uncovered a flaw: this type of ratemaking was illegal and violated antitrust laws. The Department of Justice limply objected that these rate making agreements were considered illegal and the antitrust immunity provision in the Reed-Bulwinkle Act only applied to agreements if they were not contrary to the public interest.

Objections Overruled

Not everyone was on board with the Reed-Bulwinkle Act, including the then President of the United States and Senator Burton K. Wheeler, chairman for the Senate Commerce Committee who noted that the government relief offered in this bill “goes too far”. Over the course of several days his testimony was given demanding that the ACT be thrown out of court, particularly given the economic impact it would give for railroads traveling east to west, a differential against the South upwards of 39% economically.  He noted that the railroads were only fixing freight rates to which they all agreed in a system “rigged to keep the South and West in economic bondage”.

That same year, C.W. Harder, the president of the National Federation of Small Business, called on President Truman to veto the bill and the exemptions from antitrust prosecution. In his words the rate making process and the Reed-Bulwinkle Act represented the “soul of communism”.

He further noted that allowing the Reed-Bulwinkle Act to pass would result in “wrapping our nation’s entire transportation system into a tight, strangling Monopoly-cartel combine” which would destroy “protective barriers of free competitive enterprise which… have made this nation the hope and envy of the world today.”

Wendell Berge, Assistant Attorney General, testified before a Senate committee that the Association of American Railroads and their industrial allies were trying to use “unlawful domination and control.” In April of 1946 he pleaded that the Reed-Bulwinkle bill, which at that time had already been passed by the house, be stopped. 

He noted, “this bill is an attempt to legalize and perpetuate the most far-flung and dangerous Monopoly that has yet been foisted on the American economy.” 

Part of his evidence was that the railroad represented a transportation monopoly in conjunction with other basic Industries which fixed transportation prices so that they could maintain the industrial status quo and prevent any new enterprises from competing within their industrial monopoly.

Concerns were noted that this illicit monopoly prevented southern and western regions from developing any competing Industries while concurrently depriving the courts in these respective areas from the jurisdiction they would need to file civil suits against elicit railroad operations. This would establish a “dangerous precedent in antitrust”. 

At the same time, the Department of Justice objected on the grounds that this bill would “destroy the freedom of competition and remove a large segment of the economy from the sphere of economic freedom which is now guarded by the anti-trust laws”. 

Berge explained that by placing control into the hands of the Association of American Railroads to fix Transportation rates, Congress would be giving a private government “the power to determine whether an industry shall grow or be stifled.”

How?

Transportation costs are a fundamental element in the industrial pricing system for any business. Controlling the cost of transportation can dictate competitive success or failure but establishing a fixed rate system overseen by only one industry gives that industry the power over our competitive economy. It gives that one industry power to eliminate competition.  

On record, Berge made his point succinctly: 

“The rail combine through interlocking banking influences has already allied itself with the steel, oil, cement and other combines to erect arbitrary rate blockade against the entry of competitors in the west and south. Enactment of the Bulwinkle bill would permit this unlawful power to go unrestrained and would result in the cartelization of the nation’s economy by a combination of super trusts, resulting in a complete reversal in our system of competitive enterprise.”

Governor Arnall would go on to accuse the railroads of a conspiracy, “instigated in 1934 by powerful Northern Financial interests… at the behest of those interests”, namely, the Association of American Railroads. 

The railroad industry did not only claim to represent the best interest of the economy, and subject the trucking industry to ratemaking, but they also found indirect ways to influence the legal representation given to the trucking industry. For example Edgar S. Idol served as general counsel for the American Trucking Association Inc, but he stated that the Reed-Bulwinkle Act was “plainly evident…imperative if complete chaos and confusion is to be avoided in the motor carrier industry.”  These statements were made after Idol was involved in a great deal of complicated legal transactions which finally came to a head in 1963 when the Commissioner of the Internal Revenue upheld deficiencies having to do with Idol and his wife from the decade prior. Most of these deficiencies represent a tangled web of what could be considered bribes from a specific truck carrier, stock options, and special transportation rights for said specific truck carrier given by the Interstate Commerce Commission. Eventually the Reed-Bulwinkle Act would come to represent a new standard in dominating, monopolistic behavior from the railroad industry.