Interstate Commerce Commission (ICC)

Reactions to the Hepburn Act Regarding Railroads’ Freight Rates, July-December 1906

As discussed in a prior post, the Hepburn Act, which became law on June 29, 1906, empowered the Interstate Commerce Commission (ICC), upon complaint, to replace a railroad’s increased freight rates if the ICC determined found them to be “unreasonable” with what the ICC decided were “just and reasonable” rates.

This statute presented a new problem for the railroads. How could they justify any such increase in freight rates to the public at large, including major shippers, and thereby deter any complaint and, if challenged, justify the new rates to the ICC?

This post examines the reactions to the new Act in the last half of 1906 and President Roosevelt’s Annual Message to the Congress on December 3, 1906. Subsequent posts will look at developments on the issue of freight rates in 1907 and 1908.

Public Reactions to the Hepburn Act

On August 16^th, Melville E. Ingalls, the Chairman of the Big Four Railway and a Cincinnati bank president, said at a public meeting of bankers that “the greatest menace to American business and banking interests is found in the various trade laws, particularly the Hepburn and the Sherman [Antitrust] acts.”[1]

Later that same month William Jennings Bryan, the unsuccessful presidential candidate in 1896 and 1900, in a speech to a crowd of 10,000 at New York City’s Madison Square Garden impliedly argued that the Hepburn Act did not go far enough. Bryan said, “I have reached the conclusion that there will be no permanent relief on the railroad question from discrimination between individuals and between places, and from extortionate rates, until the railroads are the property of the Government and operated by the Government in the interests of the people.”[2]

Bryan’s suggestion was rejected the next day in a New York Times editorial saying that the newspaper was “entirely confident that the Interstate Commerce [A]ct, the [Sherman] Anti-Trust [A]ct , . . ., the Elkins Anti-Rebate [A]ct, and the Hepburn [Act] . . . , the enforcement of which measures has been wonderfully facilitated by recent decisions of the Supreme Court, . . . supply adequate remedies . . . [to] protect the people from [railroads’] . . . insolence and their rapacity, and put a stop to unfair [rate] discrimination. . . . Mr. Bryan’s new doctrine of public ownership for the railroads . . . is [a] revolution . . ., and incalculable disaster would attend [such a revolution].” Moreover, the editorial stated the newspaper did “not believe that either the Democratic Party, or any great part of the membership of either party, is ready to accompany [Bryan] upon this perilous adventure in radicalism and centralization.”

Similar negative reactions to the Bryan proposal were expressed by leaders of the Democratic Party and most other newspapers. The New York Evening Post, however, said it thought the public ownership idea “will probably attract more voters, . . . than it will affright.”

Another indirect attack on the Hepburn Act from a different perspective was made on November 10, 1906, by James J. Hill, the President of the Great Northern Railway.[3] In what the New York Times called “an indignant outburst” against public agitation against America’s railroads.[4] Hill complained that the railroads were considered “outlaws” and that they had “not been getting justice in this country.” In the 1904 election “the two great political parties [were] preaching the doctrine of the operation of the railroads by the Government . . . . Is that the way to get men to put more money in the country’s railroads?” Hill pleaded for “a halt to this treatment of the railroad.”

Hill also admitted that the entire country was “suffering from want of transportation facilities to move its business without unreasonable delay. The prevailing idea with the public is that the railways are short of cars, while the fact is that the shortage is in tracks and terminals to provide a greater opportunity for the movement of the cars.” He continued, “The traffic of the country is congested beyond imagination. The commerce of the country is paralyzed, which, continued, means slow death.”

To remedy this situation, Hill asserted, “will cost at least [a total of $ 4 billion to $ 5 billion or $1 billion] per year for five years. Why, there is not money enough [or] . . . rails enough in all the world to do this. [It also is impossible to get the labor to do this work.]”

Soon after Mr. Hill’s speech, two separate investigations of railroads in which Mr. Hill had major interests were announced:

On November 20^th the ICC said it was opening an investigation into the impact on railroad freight rates by Hill’s control of the Great Northern, the Northern Pacific and the Burlington railways.[5]
On November 28^th, the Minnesota Attorney General said he was considering bringing charges against the Great Northern for alleged duplicate issues of capital stock and, therefore, “watering” of stock in connection with its building new branch lines for a subsidiary.[6]

President Roosevelt’s Annual Message to Congress (December 3, 1906)

On December 3, 1906 President Theodore Roosevelt delivered to the Congress his written Annual Message. It echoed Hill’s sense of railroads being unjustly attacked and impliedly criticized Bryan’s public-ownership proposal. Roosevelt said “the men who seek to excite a violent class hatred against all men of wealth. They seek to turn wise and proper movements for the better control of corporations and for doing away with the abuses connected with wealth into a campaign of hysterical excitement and falsehood in which the aim is to inflame to madness the brutal passions of man kind.” Such men are “sinister demagogues and foolish visionaries.”

The President, however, commended the Congress on taking “long strides in the direction of securing proper supervision and control by the National Government over corporations engaged in interstate business.” In particular, he said, the “passage of the [Hepburn] railway rate bill [was] . . .an important advance.” In the upcoming congressional session, “it may be best to wait until the laws have been in operation for a number of months before endeavoring to increase their scope, because only operation will show with exactness their merits and their shortcomings and thus give opportunity to define what further remedial legislation is needed.”

In addition, Roosevelt said the Hepburn Act “has rather amusingly falsified the predictions, both of those who asserted that it would ruin the railroads and of those who asserted that it did not go far enough and would accomplish nothing. During the last five months the railroads have shown increased earnings and some of them unusual dividends; while during the same period the mere taking effect of the law has produced an unprecedented, a hitherto unheard-of, number of voluntary reductions in freights and fares by the railroads.”

Nevertheless, Roosevelt continued, there will “ultimately be need of enlarging the powers of the [ICC]. . . to give it a larger and more efficient control over the railroads.” Such enhanced control will “prevent the evils of excessive overcapitalization, and will compel the disclosure by each big corporation of its stockholders and of its properties and business, whether owned directly or through subsidiary or affiliated corporations. This will tend to put a stop to the securing of inordinate profits by favored individuals at the expense whether of the general public, the stockholders, or the wage-workers.”

Indeed, said Roosevelt, adoption of such measures is the “best way to avert the very undesirable move for the governmental ownership of railways.

Roosevelt also expressed disagreement with the Supreme Court’s March 1904 interpretation of the Sherman Antitrust Act in the Northern Securities case as barring all combinations of businesses. He said, “It is unfortunate that [the Sherman Act] should forbid all combinations, instead of sharply discriminating between those combinations which do good and those combinations which do evil.” Therefore, he urged Congress to give serious consideration to amending the Sherman Act to do just that.[7]

On other issues affecting the railroads, Roosevelt called for the “passing [of] the bill limiting the number of hours of employment of railroad employees. The measure is a very moderate one, and I can conceive of no serious objection to it.” Another measure he supported was improving the recent “employers liability law” so that it placed “the entire ‘risk of a trade’ upon the employer.”

Conclusion

President Roosevelt’s Annual Message did not end the public (and private) debate about federal regulation of railroads, and especially their freight rates. It merely was a prelude to continued debate in 1907 and 1908 as we will see in future posts.

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[1] Trade Laws Denounced, N.Y. Times (Aug. 17, 1906).

[2] This discussion of Bryan’s speech and the reactions it provoked is based upon the following: Bryan’s Stand: End the Trusts, N.Y. Times (Aug. 31, 1906); 10,000 Swelter as Bryan Speaks, N.Y. Times (Aug. 31, 1906); Overflow Meeting Had a Small Crowd, N.Y. Times (Aug. 31, 1906); Editorial, Mr. Bryan’s New Party, N.Y. Times (Aug. 31, 1906); Leaders Oppose Bryan’s Public Ownership Plan, N.Y. Times (Sept. 1, 1906); Newspapers Views, N.Y. Times (Sept. 1, 1906); From the New York Evening Post, N.Y. Times (Sept. 1, 1906).

[3] Hill, as previously discussed, was the co-creator of the Northern Securities Company and a co-defendant in the U.S. successful antitrust case against the creation and operation of that company.

[4] Justice for Railways, Demanded by J. J. Hill, N. Y. Times (Nov. 11, 1906).

[5] Hill’s Three Roads To Be Investigated, N.Y. Times (Nov. 21, 1906).

[6] May Attack Hill Stocks, N.Y. Times (Nov. 28, 1906).

[7] A New York Times editorial said this call for changing the Sherman Act Roosevelt’s “wisest counsel” in the Message. (Editorial, President’s “Coherent Plan,” N.Y. Times (Dec. 5, 1906).) As it turned out, there was no need for such an amendment when nearly five years later the Supreme Court ruled that the original Sherman Act only banned “unreasonable” combinations and restraints of trade.

Federal Regulation of the Railroads in U.S. President Theodore Roosevelt’s Second Term (1905-1909): The Hepburn Act

During President Theodore Roosevelt’s second term in office (03/04/1905—03/04/1909) there were two major developments regarding federal regulation of railroads: congressional enactment of the Hepburn Act regarding railroad freight rates in 1906 and public controversy over proposed increased freight rates in 1907-1908 with the Financial Panic of 1907 in the background.

This post examines the circumstances surrounding the Hepburn Act.[1] Other posts will discuss the Panic of 1907 and the controversy over freight rates.

Background

As discussed in a prior post, in 2003 the Elkins Act was adopted to increase the power of the Interstate Commerce Commission (ICC) to combat rebates on railroad freight rates. By late 1904, however, critics were saying although this Act apparently had substantially reduced rebates, it had facilitated railroads’ establishing collusive pricing. It had not produced lower rates. In short, it had not produced benefits to farmers and other shippers.

The ICC itself expressed similar views in its Nineteenth Annual Report on December 14, 1905. It said, “various devices for evading the [Elkins Act] . . . have [been] brought into use, but the actual payment of rebates as such has been . . . established by convincing proof, on which prosecutions have been commenced and are now pending. More frequently the unjust preference is brought about by methods, which may escape . . . [the Elkins Act], but which plainly operate to defeat the purpose [of the statute]. . . . [T]his type of evil has by no means disappeared and . . . is liable to increase unless effectively restrained.”

Roosevelt’s Advocacy of Additional Railroad Regulation

President Roosevelt, recognizing the flaws in the existing set of laws regulating railroads, set about advocating for new laws to enhance such regulation in his second term.

Indeed, he did so in his December 6, 1904, Annual State of the Union Message after he had been re-elected, but before he had been inaugurated for his second term. With respect to the “great corporations,” he stated, “the need for the Government to act directly is far greater than in the case of labor, because great corporations can become such only by engaging in interstate commerce, and interstate commerce is peculiarly the field of the General Government . . . . The National Government alone can deal adequately with these great corporations.” He continued, “Great corporations are necessary, and only men of great and singular mental power can manage such corporations successfully, and such men must have great rewards. But these corporations should be managed with due regard to the interests of the public as a whole. Where this can be done under the present laws it must be done. Where these laws come short others should be enacted to supplement them.”

Later in this Annual Message Roosevelt said, “it is necessary to put a complete stop to all rebates. Whether the shipper or the railroad is to blame makes no difference; the rebate must be stopped, the abuses of the private car and private terminal-track and side-track systems must be stopped, and the [Elkins Act] . . . which declares it to be unlawful for any person or corporation to offer, grant, give, solicit, accept, or receive any rebate, concession, or discrimination in respect of the transportation of any property in interstate or foreign commerce whereby such property shall by any device whatever be transported at a less rate than that named in the tariffs published by the carrier must be enforced.” He added, “the most important legislative act now needed” is to vest the ICC “with the power, where a given rate has been challenged and after full hearing found to be unreasonable, to decide, subject to judicial review, what shall be a reasonable rate to take its place; the ruling of the Commission to take effect immediately, and to obtain unless and until it is reversed by the court of review.”

Nearly 10 months later in a speech in Raleigh, North Carolina Roosevelt said, “The management of the . . . intricate web of railroad lines which cover the country, is a task infinitely more difficult, more delicate, and more important than [the management of the wagon roads]. . . .[The] Government . . . [must] exercise a supervisory and regulatory right over the railroads; for it is vital to the well-being of the public that they should be managed in a spirit of fairness and justice toward all the public. Actual experience has shown that it is not possible to leave the railroads uncontrolled. Such . . . a lack of system is fertile in abuses of every kind, and puts a premium upon unscrupulous and ruthless cunning in railroad management; for there are some big shippers and some railroad managers who are always willing to take unfair advantage of their weaker competitors, and they thereby force other big shippers and big railroad men who would like to do decently into similar acts of wrong and injustice, under penalty of being left behind in the race for success. Government supervision is needed quite as much in the interest of the big shipper and of the railroad man who want to do right as in the interest of the small shipper and the consumer.”

At Raleigh Roosevelt added that the U.S. needs “an administrative body with the power to secure fair and just treatment as among all shippers who use the railroads and all shippers have a right to use them.” There are abuses by the railroads according to Roosevelt. “Rebates are not now often given openly. But they can be given just as effectively in covert form; and private cars, terminal tracks, and the like.” Congress must grant the ICC or another government agency the “power to make its findings effective, and this can be done only by giving it power, when complaint is made of a given rate as being unjust or unreasonable, if it finds the complaint proper, then itself to fix a maximum rate which it regards as just and reasonable, this rate to go into effect practically at once, that is within a reasonable time, and to stay in effect unless reversed by the courts.” Moreover, the ICC needs to have the power “to make a full and exhaustive investigation of the receipts and expenditures of the railroad, so that any violation or evasion of the law may be detected.”

In the December 5, 1905, Annual State of the Union Message Roosevelt returned at length to federal regulation of the railroads. He introduced the topic with these words:

“The first thing to do is to deal with the great corporations engaged in the business of interstate transportation. As I said in my [last Annual] Message . . ., the immediate and most pressing need, so far as legislation is concerned, is the enactment into law of some scheme to secure to the agents of the Government such supervision and regulation of the rates charged by the railroads of the country engaged in interstate traffic as shall summarily and effectively prevent the imposition of unjust or unreasonable rates. It must include putting a complete stop to rebates in every shape and form.”

Roosevelt continued. A “competent administrative body [must have] the power to decide, upon the case being brought before it, whether a given rate prescribed by a railroad is reasonable and just, and if it is found to be unreasonable and unjust, then, after full investigation of the complaint, to prescribe the limit of rate beyond which it shall not be lawful to go the maximum reasonable rate, . . . this decision to go into effect within a reasonable time and to obtain from thence onward, subject to review by the courts. It sometimes happens at present, not that a rate is too high but that a favored shipper is given too low a rate. In such case the Commission would have the right to fix this already established minimum rate as the maximum; and it would need only one or two such decisions by the Commission to cure railroad companies of the practice of giving improper minimum rates.”

This “proposal is not to give the Commission power to initiate or originate rates generally, but to regulate a rate already fixed or originated by the roads, upon complaint and after investigation. A heavy penalty should be exacted from any corporation which fails to respect an order of the Commission. I regard this power to establish a maximum rate as being essential to any scheme of real reform in the matter of railway regulation.”

“The law should make it clear so that nobody can fail to understand that any kind of commission paid on freight shipments, whether in . . . [the form of an immediate reduction of the rate] or in the form of fictitious damages, or of a concession, a free pass, reduced passenger rate, or payment of brokerage, is illegal.”

Roosevelt also cautioned “that these recommendations are not made in any spirit of hostility to the railroads. On ethical grounds, on grounds of right, such hostility would be intolerable ; and on grounds of mere national self-interest we must remember that such hostility would tell against the welfare not merely of some few rich men, but of a multitude of small investors, a multitude of railway employees, wage-workers ; and most severely against the interest of the public as a whole.”

Moreover, according to Roosevelt, “on the whole our railroads have done well and not ill; but the railroad men who wish to do well should not be exposed to competition with those who have no such desire, and the only way to secure this end is to give to some Government tribunal the power to see that justice is done by the unwilling exactly as

it is gladly done by the willing.” In addition, a government determination of “reasonable” rates would aid railroads against “irrational clamor” and unfounded claims.

The Hepburn Act

To carry forward this top priority of the President’s agenda, Roosevelt in early 2006 chose a junior Senator, Jonathan Prentiss Dolliver of Iowa, [2] to draft the legislation. However, Senator Elkins, who had sponsored the prior bill on such rates in 1903, was not supportive of the President’s proposal and also was upset that the President had chosen Senator Dolliver of Iowa to draft the legislation.

On January 27^th Senator Dolliver, apparently recognizing considerable resistance to the bill in the Senate, took the unusual step of sending his bill to the House before Senate action. The House Committee on Interstate and Foreign Commerce quickly and favorably reported the bill to the full House, which on February 8^th passed it with only seven negative votes. The bill would authorize the ICC to set reasonable rates whenever the actual rates were justifiably challenged and give railroads 30 days to appeal such decisions to the courts; it also would require the railroads to adopt a uniform and public form of bookkeeping.

Obtaining Senate approval of the bill, however, was more difficult. Conservative Senators opposed the legislation and, acting on behalf of the railroad industry, proposed amending the proposed legislation to give federal courts the power to review and reverse any ICC determination of rates. Roosevelt, however, resisted and took his case to the people and succeeded in pressuring the Senate to approve the legislation without this judicial review feature.

The fight in the Senate was not yet over. In order to obtain sufficient votes for passage of the bill, Roosevelt (a Republican) for five weeks secretly had backed an amendment proposed by Democratic Senators Joseph Weldon Bailey Sr. (Mississippi) and Benjamin Ryan Tillman, Jr. (South Carolina) that would limit judicial review of ICC orders on unreasonable rates to questions involving the ICC’s authority and the constitutional rights of the railroads. On May 4^th, however, when it was apparent that the Tillman-Bailey Amendment did not have the necessary votes, Roosevelt, without notice to Bailey and Tillman and much to their consternation, announced at a hastily called press conference that the President supported a “broad” judicial review amendment proposed by Republican Senator William Boyd Allison (Iowa); this amendment had no limits on the scope of such judicial review, leaving it to the courts to decide the scope of review.

Thereafter, on May 18^th the Senate approved the Hepburn bill, with the Allison amendment, with only three negative votes. A subsequent conference committee reconciled the two versions of the bill with the approval of the two houses of Congress.

On June 29, 1906, Roosevelt signed the Hepburn Act (“An Act to amend an Act entitled ‘An Act to regulate commerce,’ approved February fourth, eighteen hundred and eighty-seven, and all Acts amendatory thereof, and to enlarge the powers of the Interstate Commerce Commission”), 34 Stat. 584 (1906). The following are the significant provisions of the Hepburn Act:

The ICC was empowered to replace existing rates with “just-and-reasonable” maximum rates with the ICC to define what was “just and reasonable.”
The ICC orders were made binding upon issuance unless and until a federal court overturned them.
Anti-rebate provisions were toughened.
Free passes were outlawed.
The penalties for violation were increased.
The ICC was granted the power to prescribe a uniform system of railroad accounting, to require standardized reports and to inspect railroad accounts.

The Act is known as the Hepburn Act because the Chairman of the House Committee that first approved the bill was Congressman William Peters Hepburn, Republican from Clarinda, Iowa.[3]

Interestingly the town of Clarinda was the home of some of the in-laws of my maternal great-great-uncle, William C. Brown, who owned a home and a farm there as well. It would be interesting to know whether Hepburn and Brown had any social or political interactions in Clarinda or in Washington, D.C.

Reactions to the Hepburn Act

Scholars consider the Hepburn Act the most important piece of legislation regarding railroads in the first half of the 20th century.

William C. Brown, then a Vice President of the New York Central Railway, shared this opinion. He said in February 1908, “The Hepburn law has released the railroads from a helpless condition of rebates and preferential rates, and its value can hardly be overestimated, both to the railroads and to the great majority of the public which did not participate in, nor profit by such practices.”[4]

More generally he said on that occasion, “The principle of the control and regulation of railroads by the nation and the several States has been accepted in good faith by the railroads, and they have entered upon the task of adjusting their operations to the changed conditions resultant upon laws recently enacted.” His only caveat was railroads’ needing “a fair and impartial hearing and the . . . right to appeal to the courts to prevent injury or to secure redress of injustice.”

Similar comments were made by Brown in an April 18, 1907, speech at the Buffalo, New York Chamber of Commerce: “I am firmly and unalterably in favor of regulation of railroads by the Nation and States.”[5] This comment was after Brown in his speech had stated that “the railroads were being operated intelligently, skillfully, vigorously to the last limit of capacity. Yet almost any other business has offered higher and more certain returns than railroads, and it will be impossible for railroads to raise needed capital unless such investment will be reasonably attractive and secure resulting from assurance of reasonable cooperation and protection. This will be difficult in light of extreme hostility and indiscriminate agitation that has resulted in unjust and harmful legislation in many states.”

In the New York Central’s annual report for 1909, Brown said, “Governmental regulation of railroads, within proper limitations, is of benefit to the public, to the railroads, and to those who hold their securities.”[6]

Therefore, it was not surprising for Brown to say in a September 24, 1910, letter to “My dear Col. Roosevelt,” after Roosevelt was out of office, “During your term as President, as you know, I steadfastly supported your ideas in regard to Corporations.”[7]

Even though there was not major public controversy over the details of the Hepburn Act after its passage, there was considerable public and private debate over whether this Act would allow the railroads to increase their freight rates as we will see in subsequent posts.

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[1] This post is based upon the cited sources plus Edmund Morris, Theodore Rex at 375-77, 417-34, 422-24, 426-28, 433-35, 438-39, 442-44, 446-48, 506 (New York; Random House; 2001); Blum, Theodore Roosevelt and the Hepburn Act: Toward an Orderly System of Control in Morison (ed.) The Letters of Theodore Roosevelt (Cambridge, Mass.; Harvard Univ. Press; 1952); Miller Center, President Theodore Roosevelt: Domestic Affairs; Hoogenboom & Hoogenboom, A History of the Interstate Commerce Commission—From Panacea to Palliative at 38-40, 47-57 (1976); Hoogenboom, Hepburn Act, in Bryant (ed.), Railroads in the Age of Regulation, 1900-1980 at 198 (New York; Bruccoli Clark; 1988); Kolko, Railroads and Regulation, 1877-1916 at 107-48 (Princeton; Princeton Univ. Press; 1965); Wikipedia, Hepburn Act; Tillman Discloses Roosevelt Secret, N.Y. Times (May 13, 1906); Allison Amendment in Bill, N.Y. Times (May 13, 1906).

[2] Dolliver was a lawyer in Fort Dodge, Iowa before election as a progressive Republican to the U.S. House of Representatives in 1888, where he served until 1900. He then was appointed to fill a vacant seat in the U.S. Senate, where he served until his death in 1910. Dolliver gained national attention for his prowess as an orator. One example of this skill was his explanation of Iowa’s traditional allegiance with the Republican Party: “Iowa will go Democratic when Hell goes Methodist.”

[3] During the Civil War, Hepburn had helped organize a company of the Iowa Volunteer Cavalry, which elected him as captain. He advanced to the ranks of major and eventually lieutenant colonel and gained recognition for his valiant service in the War. After the War he moved to the small southwestern Iowa town of Clarinda, where he was the editor and part owner of the local newspaper and practiced law, including representation of the Burlington Railroad. Hepburn served in Congress, 1881-1887 and 1893-1909, and became a national leader of progressive Republicans. The Hepburn Act was the culmination of his legislative work on transportation issues and his most prominent accomplishment in the House. In addition, he co-sponsored the Pure Food and Drug Act and supported the annexation of Hawaii, the construction of the Panama Canal and reducing the power of the Speaker of the House.

[4] Praises Rebate Law, N. Y. Times (Feb. 2, 1908).

[5] William C. Brown, Remarks at Chamber of Commerce, Buffalo, New York, April 18, 1907).

[6] Regulations Help Railroads Along, N. Y. Times Mar. 13, 1910).

[7] Letter, William C. Brown to Theodore Roosevelt (Sept. 24, 1910) (image # 93-059 provided courtesy of the Library of Congress Prints and Photographs Divisions and Theodore Roosevelt Center at Dickinson State University, www.theodorerooseveltcenter.org ).