Interstate Commerce Commission (ICC)

Origin of the ICC

The construction of railroads in the mid-19th century was rapid and speculative, resulting in considerable overbuilding; multiple lines connected population centers, often with significant overcapacity. Railroads competed to steal market share from rivals, setting rates below actual costs, that is, engaging in “cutthroat competition.” The goal was to drive competitors out, so that rates could be raised to supracompetitive [Page 1183]levels, that is, permitting the collection of monopoly rents. Thus, shippers faced frequently varying transportation costs.

In addition, geography, the technical characteristics of goods, and market conditions led to price discrimination across shippers, localities, and commodities. Secret rebates went to the largest shippers. Railroads faced competition over longer hauls, at least in the shipment of bulk commodities, from barge traffic. But that was often not the case over short segments, for example, to rural areas away from major water routes. Hence, railroads created long-haul/short-haul differentials in their rates, charging more for shorter runs than for the longer runs that faced competition.

So-called “value-of-service” pricing set higher rates for shipment of “higher-valued” manufactured goods. Such goods had fewer shipping alternatives than did bulk commodities that could go by barge. Bulk commodities were more sensitive to shipping costs because such costs were a relatively higher part of their final price than for manufactured goods. Thus, elasticity of demand for rail transport was higher for bulk commodities than for manufactured goods. The railroads took advantage of this by charging higher rates for manufactured goods.

Shippers of bulk commodities, such as farmers; small shippers paying higher rates than larger competitors; producers in interior locations without a competitive means of transport; and manufacturers paying higher shipping rates bristled at such discrimination by the railroads. Even some railroad managements were unhappy about the instability in the industry and their inability to create steady, predictable rate conditions and shipping traffic that consistently met capacity.

Thus, for different reasons, there was considerable support for regulation that would eliminate the abuses and stabilize the industry. Initial attempts at regulation at the state level—many in partial response to the Granger movement of farmers centered in the Midwest—met failure as railroads bribed legislators and “captured” the regulation in a number of states. Historians now recognize that support for regulation came from multiple groups with the diverse interests noted above, that is, from farmers, merchants, and shippers in river towns; manufacturers and eastern, including New York, merchants; independent oilmen in Pennsylvania chafing against the competitive disadvantage they faced because of the high rebates extracted by Rockefeller's Standard Oil for large shipments; and so on.

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