Theodore Roosevelt – Page 2

U.S. President Theodore Roosevelt’s Second Term: The Economy and Securities Markets of 1906-1907

Our last stop on the issues of railroad regulation during President Theodore Roosevelt’s Second Term focused on the June 29, 1906, adoption of the Hepburn Act regarding limits on railroad freight rates and the subsequent reactions that year to this statute. Before we look at the continued controversy over these issues in 1907, we need to review what was happening in 1906 and 1907 in the economy and securities markets and their increasing intertwining with the railroad issues.[1]

1906

In 1906 the economy and securities markets were adversely affected by April’s major San Francisco earthquake destroying two-thirds of the city and leaving over 200,000 residents homeless and by the subsequent increase of interest rates by the Bank of England responding to the outflow of English funds paying earthquake insurance claims. From a peak in January stock market prices had fallen by 18% by July of that year, and after the adoption of the Hepburn Act railroad securities were especially hard hit. By late September stocks generally had recovered about one-half of their losses.

January-February 1907

At the start of 1907, however, the U.S. appeared to be prosperous. Railroads had difficulty finding enough freight cars to meet demand. Banks had a lot of cash. Wages and prices were rising. This redounded to the credit of President Theodore Roosevelt, who had just been awarded the Nobel Peace Prize for ending the Japanese-Russian war.

The U.S. stock market, however, was sending contrary signals. Between September 1906 and March 8, 1907, the stock market slid, losing 7.7% of its capitalization. Indeed, in January John D. Rockefeller predicted that Roosevelt’s policies would result in a depression.

March-May 1907

On March 12^th, reacting to the troubled securities markets and to rumors that President Theodore Roosevelt was planning some new measures against the railroads, J.P. Morgan, the major Wall Street financier and New York Central Railroad Director, met with the President to discuss “the present business situation, particularly as affecting railroads.” According to Morgan, he urged Roosevelt to take some action “to allay the public anxiety now threatening to obstruct railroad investments and construction” and advised the President that “the financial interests of the country are greatly alarmed at the attitude of the Administration towards corporations, and particularly the railroads.” Afterwards Morgan told the press that Roosevelt would soon meet with the heads of four leading railroads to see what might be done to “allay public anxiety.”[2]

This news did not calm the securities markets. The next day (March 13^th) New York Stock Exchange prices collapsed. And on March 14^th, the Dow Jones Industrial Average dropped by another 25%. These two days were sometimes referred to as “the Rich Man’s Panic” since most ordinary people were not stock market investors.

At the markets close that day, the 25 most active stocks on the New York Stock Exchange had a total shrinkage in value since the first of the year of $ 970 million. This was especially true for the following railroad stocks:

Railroad	ShrinkageMillion $	ShrinkagePercentage
A.T. & S.F.	$ 23.5	22.8%
Baltimore & Ohio	$ 30.5	20.0%
Canadian Pacific	$ 34.0	28.1%
Chesapeake & Ohio	$ 11.0	17.5%
M. & St. Paul	$ 21.0	25.3%
Great. Northern. (Pfd.)	$ 87.0	58.2%
Missouri Pacific	$ 21.5	27.8%
N.Y. Central	$ 35.5	19.9%
Norfolk & Western	$ 13.0	19.7%
Northern. Pacific	$113.0	72.9%
Pennsylvania RR	$ 62.5	20.0%
Reading	$ 31.0	44.3%
Southern Pacific	$ 47.0	23.8%
Union Pacific	$117.0	59.9%

After the close of the markets on the 14^th, the U.S. Treasury injected $25 million of cash into New York City banks by buying some of their holdings of U.S. bonds, which calmed the markets for the moment.

Reacting to the market developments of the 14^th, William C. Brown, Senior Vice President of the New York Central Railroad (and my maternal great-great uncle) issued a public statement that said, “The diminishing net earnings of railroads, while alarming, are overshadowed by the apparent hostility as evinced by recently enacted or introduced Federal and state legislation. The growth and development of the country will soon be at a standstill unless transportation facilities can be tremendously increased. Hundreds of millions of dollars should be expended in this direction as rapidly as material can be assembled and men employed. On account of the above conditions confidence has been so shaken that investments of this character are regarded as so hazardous and unattractive as to make it impossible to sell any kind of railroad security except at such discount and rate of interest as to make it prohibitive; and these improvements, so vital to the prosperity of the country, are being greatly curtailed or entirely dropped.”

Brown concluded this statement with a plea for the railroads and the President to cooperate in stopping evils and abuse. In addition, “the President and the press should co-operate with the railroads and with all food citizens in working for a restoration of public confidence, based upon the widest publicity of corporation affairs and absolute fairness, equality, and stability of rates.”

June-September 1907

Troubles, however, were not over. In June the stock of the Union Pacific Railroad—among the most common stocks used as collateral for bank loans—fell 50 points. That same month an offering of New York City bonds failed. In July the copper market collapsed. In August the Standard Oil Company was fined $29 million for antitrust violations. That same month commodity prices declined, Another negative factor that summer was the Bank of England’s imposing a prohibition of English banks buying U.S. finance bills, thereby closing a major source of refinancing for U.S. debtors. In September industrial production also went down. In the first nine months of 1907, stocks were lower by 24.4%.

October-November 1907 (Financial Panic)

The Financial Panic of 1907 started on October 9^th with the failure of two speculators to take over the United Copper Company and the resulting bankruptcies of two brokerage houses, another mining company and a bank. On October 15^th stocks started to tumble, and on October 21^st and 22^nd a run started on New York City’s third largest and supposedly solid trust, the Knickerbocker Trust Company, causing its bankruptcy.This in turn created fear throughout the U.S. and numerous bankruptcies of state and local banks and other businesses. On October 23^rd money was almost unobtainable on Wall Street, call-loan rates had spiked to 125% and the entire U.S. financial system was nearing collapse. To the left is a photo of a crowd of people in front of Manhattan’s Federal Hall, at the corner of Wall and Broad Streets; the New York Stock Exchange is outside the photo to the left.

In response to this crisis, Roosevelt had the U.S. Treasury deposit $25 million in national banks.

The “savior” of the financial system from the Panic, however, was J. P. Morgan, the wealthy Wall Street financier and a New York Central Director. He and other plutocrats (E.H. Harriman, Henry Clay Frick and John D. Rockefeller, Sr.) pledged large sums of their own money, to shore up the U.S. financial system. These efforts had apparently succeeded by October 24^th when the New York Stock Exchange did not have to shut down and stock prices started to rebound.

The next week, however, the panic returned when a major brokerage house threatened to cease operations and the City of New York was on the verge of defaulting on its obligations. J.P. Morgan and his colleagues again came to the rescue with a plan for U.S. Steel to buy the shares of Tennessee Coal and Iron Company then held as collateral by the failing brokerage firm. This plan, however, would go forward only if it had President Roosevelt’s approval. That approval was obtained on November 4^th at a White House breakfast meeting with U.S. Steel’s Chairman (Elbert H. Gary) and one of its founders (Henry Clay Frick). News of this approval immediately was released, and stock prices began to rally.

Additional support for the financial system and stock market was supplied in November when Roosevelt authorized the U.S. Treasury to increase its injection of funds into the banks to $69 million and to sell $150 million of U.S. and Panama bonds.

All of this occurred in the midst of an economic contraction that had started in May 1907 and that did not end until June 1908. The interrelated contraction, falling stock market and financial panic resulted in significant economic disruption. Industrial production dropped more than after any previous bank run, while 1907 saw the second-highest volume of bankruptcies to that date. Production fell by 11%, imports by 26%, while unemployment rose to 8% from under 3%.

Analysis of the Financial Panic of 1907

100 years later (September 2007) two distinguished professors at the University of Virginia’s Darden School of Business (Robert F. Bruner and Sean D. Carr) concluded that the Panic of 1907 “resulted from a powerful convergence of [the following] seven overlapping and interrelated forces—a ‘perfect storm’ in the financial markets:”

The financial system’s architecture was “highly fractionalized, localized, and complex” with networks that allowed quick spread of news and rumors while it also was difficult for all actors to be equally well informed.
Strong economic growth in the U.S. had created a massive demand for external finance, which was met with a significant amount of capital borrowed from European sources.
There were inadequate safety buffers for a system with many small and undiversified banks plus new and lightly regulated trust companies holding riskier assets.
Roosevelt was “on the warpath against anticompetitive business practices” as were many state governments.
Real economic shock from the San Francisco earthquake of April 1906 and the summer 1907 curtailment of acceptance of U.S. finance paper by the Bank of England.
Undue fear, greed and other behavioral aberrations causing a sharp and self-reinforcing shift from optimism to pessimism.
Failure of collective action. Yes, J.P. Morgan led a collective effort that helped dampen the worst of the Panic, but it was insufficient in the overall economy and financial system.

Below is a graph comparing the Dow-Jones Industrial Average for January 1906-October 1907 with the same Average for the Financial Panic of 2008:

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[1] This post is based upon Edmund Morris, Theodore Rex at 476-78, 498-501 (Random House; New York; 2001); Lynch, March 13^th Stock Market Crash (Jan, 31, 2008); Foldvary, The Panic of 1907 (May 1, 2007); Trumblore, J. P. Morgan-Savior-The Panic of 1907; Harvard Univ. Center for History & Econ, The 1907 Crisis in Historical Perspective; The United States, 1904-1914; Wikipedia, Panic of 1907; Bruner & Carr, The Panic of 1907: Lessons Learned from the Market’s Perfect Storm, Financial History (Fall 2007); Stock Collapse Rivals Panics, N.Y. Times (Mar. 15, 1907); Bankers Decry Fear of a Panic, N.Y. Times (Mar. 15, 1907); W.C. Brown’s Appeal, N.Y. Times (Mar. 15, 1907); Stock Crash Over without a Failure, N. Y. Times (Mar. 16, 1907).

[2] As we will see in a subsequent post, the proposed meeting between the President and the four leading railroad executives never happened, and instead the President held meetings individually with quite few such executives in March through May 1907.

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 ).

Coming Soon–The Roosevelts: An Intimate History

A prior post announced the forthcoming Kenneth Burns’ documentary “The Roosevelts: An Intimate History” about Theodore, Franklin and Eleanor Roosevelt to be shown on National Public Television in the Fall of 2014. Now we have the following schedule and details of the seven two-hour episodes:

Date	Title
September 14	“Get Action (1858-1901)”—The early lives of Theodore and Franklin.
September 15	“In the Arena (1901-1910)”—Theodore transforms the office of the presidency while Franklin courts and weds Eleanor.
September 16	“The Fire of Life (1910-1919)”—Theodore leads Progressive crusade that splits his own Republican Party and enables Democrat Woodrow Wilson to become President.
September 17	“The Storm (1920-1933)”—Franklin serves as Governor of New York and becomes Democratic presidential nominee in 1932.
September 18	“The Rising Road (1933-1939)”—Franklin brings same sense of optimism and energy to White House as his cousin Theodore had.
September 19	“The Common Cause (1939-1944)”—Franklin breaks the third-term tradition and tries to persuade reluctant country to enter World War II.
September 20	“A Strong and Active Faith (1944-1962)”—Franklin is determined to see World War II through to victory. Eleanor fights for civil liberties.

In addition, in September the entire documentary will be available on DVD, and Knopf Doubleday will publish an oversized volume of The Roosevelts: An Intimate History containing nearly 800 photographs documenting the lives of Theodore and Franklin Roosevelt and (to a much lesser extent) their wives and families. The author, historian Geoffrey C. Ward, argues that “the similarities and not the differences” between Teddy and FDR are compelling. Both bucked the reins of their parties, though the one remained a Republican for most of his political career while the other redefined Democratic Party politics; both were children of privilege whose sense of noblesse oblige included a fundamental sense of fairness. Both surpassed all that was expected of them and transcended class to embrace an American-ness.

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

President Roosevelt & the Railroads — President Theodore Roosevelt & the Railroads

During President Theodore Roosevelt’s terms in office (09/14/1901—03/04/1909), a prominent national political issue was whether and how the federal government should regulate corporations acting in interstate commerce, especially the railroads.

Prior posts reviewed this issue during Roosevelt’s “first” term (1901-1905) with respect to the Northern Securities antitrust case and the enactment of the Elkins Act regarding railroad freight rebates.

The major developments on this issue in the second term (1905-1909) were congressional enactment in 1906 of the Hepburn Act regarding railroad freight rates and continued public debate over such regulation with the Financial Panic of 1907 in the background. These topics will be discussed in subsequent posts. A major participant in this debate was William Carlos Brown, then Senior Vice President of the New York Central Railway and my maternal great-great uncle.

Theodore Roosevelt’s 1904 Election as U.S. President

The presidential and vice presidential candidates for the Republican Party in 1904 were President Theodore Roosevelt and Charles W. Fairbanks and for the Democratic Party, Alton B. Parker and Henry Davis.

Republican Party’s Nomination of Roosevelt (and Fairbanks)

At the Republicans’ June convention in Chicago, Roosevelt was unanimously nominated on the first ballot, and the leaders of the conservative wing of the Party selected Fairbanks, a conservative Senator from Indiana with close ties to the railroad industry, for the running mate. Roosevelt was not pleased with Fairbanks, but did not think it was worth fighting about.

On July 27th, 54 solemn Republicans went to Roosevelt’s home, Sagamore Hill, in Oyster Bay, New York on the north shore of Long Island,[1] to enact their party’s “most hallowed ritual: a formal notification of nomination to its presidential candidate.” [2]

Roosevelt in a 12-minute speech that day accepted the nomination. He, of course, praised the Republican Party and slammed the Democrats. He had two comments regarding business issues. He stated, “In dealing with the great organizations known as trusts, we [need] . . . to point out that [the laws] . . . actually have been enforced, and that legislation has been enacted to increase the effectiveness of their enforcement.” Roosevelt added, “The problems with which we have to deal in our modern industrial and social life are manifold; but the spirit in which it is necessary to approach their solution is simply the spirit of honesty, of courage, and of common-sense.”

His more formal letter of acceptance of September 12^th reiterated these points and praised the previously mentioned “successful suit against the Northern Securities Company merger,” the enforcement of “the anti-trust and interstate commerce laws, and the action of the last Congress in enlarging the scope of the interstate commerce law [in the Elkins Act], and in creating the Department of Commerce and Labor, with a Bureau of Corporations, [that] have for the first time opened a chance for the National Government to deal intelligently and adequately with the questions affecting society, whether for good or for evil, because of the accumulation of capital in great corporations.”

The Campaign

Roosevelt’s Secretary of State, John Hay, in a letter to American historian and author, Henry Adams, called this campaign “the most absurd political campaign of our time.” Roosevelt did not actively campaign. Instead he issued statements form his front porch at Sagamore Hill, and the Republican Party received large campaign contributions from wealthy capitalists, including J.P. Morgan, the financial leader of Wall Street and a director of the New York Central Railroad; Edward H. Harriman, the president of the Union Pacific Railroad and also a director of the New York Central; and Henry C. Frick, the steel baron.

Roosevelt’s campaign slogan “The Square Deal” reiterated his comment on the settlement of the 1902 coal miners’ strike. He promised to “see it that every man has a square deal, no less and no more.” This pledge summed up Roosevelt’s belief in balancing the interests of business, consumers, and labor. The Square Deal called for limiting the power of trusts (a person having control of a large corporation so that no others can succeed in the economy), promoting public health and safety, and improving working conditions.

The Election Results

The results of the November 8^th election were not close. Roosevelt and Fairbanks had 7,626,000 votes (56.4%); Parker and Davis, 5,084,000 (37.6%). The Electoral College margin for Roosevelt and Fairbanks was even wider: 336 (70.6%) vs. 140 (29.4%); the following map shows the geographical distribution of the electoral votes (Republican in red; Democrat in blue):

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[1] Sagamore Hill is now a National Historic Site, currently closed for renovation.

[2] Edmund Morris, Theodore Rex at 343-64 (Random House; New York, 2001).

Federal Regulation of Railroads During U.S. President Theodore Roosevelt’s First Term (1901-1905): The Elkins Act

As discussed in a prior post, a major issue for President Theodore Roosevelt in his first term was whether and how to enhance federal regulation of railroads and other companies engaged in interstate commerce.

Two accomplishments on that issue stand out: conducting a successful federal antitrust case against the Northern Securities Company, as covered in another earlier post, and pressing for the enactment of a new statute (the Elkins Act) to increase the power of the Interstate Commerce Commission (ICC) over railroad freight rates.

Now we examine the circumstances relating to the enactment of that statute.

Legal Background

In 1887 the Interstate Commerce Act was enacted in response to rising public concern over the growing power and wealth of corporations, particularly railroads. Railroads had become the principal form of transportation for both people and goods, and the prices they charged and the practices they adopted greatly influenced individuals and businesses. In some cases, the railroads were perceived to have abused their power as a result of too little competition. Railroads also had banded together to form pools and trusts that fixed rates at higher levels than they could otherwise command.

This statute created the Interstate Commerce Commission (ICC) and required that railroad rates be “reasonable and just,” but did not empower the ICC to fix specific rates. It also required that railroads publicize shipping rates and prohibited short-haul or long-haul fare discrimination, a form of price discrimination against smaller markets, particularly farmers.

By 1901, however, it was apparent that large shippers were able to obtain discounts or rebates and that the ICC was not effective, and the ICC had notified the administration about abuses within the railroad industry. In addition, a large segment of the population supported efforts to regulate the railroads because so many people and businesses were dependent on them.

President Roosevelt then began advocating for new statutes to remedy these weaknesses:

State of the Union (Annual) Message (December 3, 1901). In his first Annual Message, Roosevelt recommended that the ICC’s 1887 statute be amended to ensure that railroad “rates should be just to, and open to, all shippers alike” and that the ICC had “a speedy, inexpensive, and effective remedy to that end.” Even though the “cardinal provisions of [the 1877 statute] were that railway rates should be just and reasonable and that all shippers, localities, and commodities should be accorded equal treatment,” there are allegations “that established rates are not maintained; that rebates and similar devices are habitually resorted to; that these preferences are usually in favor of the large shipper; that they drive out of business the smaller competitor; that while many rates are too low, many others are excessive; and that gross preferences are made, affecting both localities and commodities.” On the other hand, “the railways assert that the law by its very terms tends to produce many of these illegal practices by depriving carriers of [the] . . . right of concerted action which they claim is necessary to establish and maintain non-discriminating rates.”
Speech in Providence, Rhode Island (August 23, 1902). On August 23, 1902, before a crowd of over 20,000, Roosevelt in a speech said, “The great corporations . . . [or trusts] are the creatures of the State, and the State not only has the right to control them, but it is in duty bound to control them wherever need of such control is shown. . . . The immediate necessity in dealing with trusts is to place them under the real, not nominal, control of some sovereign to which, as its creatures, the trusts shall owe allegiance, and in whose courts the sovereign’s orders may be enforced. In my opinion, this sovereign must be the National Government.”
State of the Union (Annual) Message (December 2, 1902. In his second Annual Message to the Congress, Roosevelt said that “the experience of the past year has emphasized . . . the desirability of the steps” regarding regulation of [interstate] trusts that he discussed in his first state of the union message. In short, “Corporations, and especially combinations of corporations, should be managed under public regulation [by the federal government].”

The Elkins Act [1]

Senator Stephen Elkins — Senator Stephen B. Elkins

In early 1903 the U.S. Department of Justice prepared a bill to remedy the perceived deficiencies in the ICC and submitted it to the Congress. By February of that year Senator Stephen B. Elkins, Republican of West Virginia and a member of the Senate Committee on Interstate Commerce, predicted that Congress would adopt a railroad anti-rebate bill that would satisfy the Administration as well as fair-minded railroad executives. Elkins and his wife, by the way, owned coal mines and a coal railroad, the latter of which in 1902 had been sold, and were friends of railroad interests.

That month (February 1903) what became known as the Elkins Act unanimously was passed by the Senate and approved by the House by a vote of 250 to 6. On February 19^th Roosevelt signed the Elkins Act (An Act to further regulate commerce with foreign nations and among the States, 32 Stat. 847, ch. 708 (1903).) Although it was called the Elkins Act, it really was drafted by the President of the Pennsylvania Railroad, which resented being pressured by shippers to grant rebates. Other railroads supported the measure for the same reason with an estimated 10% of all railroad revenues being paid out in rebates.

The Elkins Act made it a misdemeanor for a railroad and its directors, officers and agents willfully to fail to file with the ICC and publish its freight rates or failure “strictly to observe” those rates. It also was a misdemeanor “to offer, grant, or give or to solicit, accept, or receive any rebate, concession, or discrimination” in such rates. All such misdemeanors were punishable by a fine between $1,000 and $20,000. The ICC alone was not empowered to make these determinations; instead the ICC had to petition a federal circuit court to do so and to enjoin any such violations.

Immediate Reaction to the Elkins Act

President Roosevelt in his Annual State of the Union Message on December 7, 1903, applauded the progress over the last year in the “exercise of supervision over the great [interstate] corporations and combinations of corporations.” This included congressional approval of the Elkins Act that has “secured equal treatment to all producers in the transportation of their goods, thus taking a long stride forward in making effective the work of the [ICC].”

The ICC itself in its Annual Report of December 15, 1903, emphasized that the Act was targeted “to prevent or more effectually reach those infractions of law, like the payment of rebates and kindred practices.” The Act also simplified the method of proving discrimination or rebates by making the violation the charging of a rate less than the published rate. In short, the Act is a “wise and salutary” statute correcting “serious defects in the original [Interstate Commerce Act of 1890] and greatly aided the attainment of some of [its] purposes.” However, the ICC noted that it had “no power to determine what rate is reasonable, and such orders as it can make [about rates] have no binding effect.”

Others criticized the Elkins Act’s failure to grant the ICC power to determine reasonable freight rates and the Act’s elimination of imprisonment for violations whereas the supporters of the measure thought that elimination would encourage firms to testify against each other and thereby encourage compliance with the law. Many merchants started agitating for new legislation granting the ICC power to suspend freight rates on complaint.

I have not found any commentary about the Elkins Act by W. C. Brown, my maternal great-great-uncle and then a Vice President of the New York Central Railway.

However, in an April 18, 1907, speech at the Buffalo, New York Chamber of Commerce, he said, “I am firmly and unalterably in favor of regulation of railroads by the Nation and States.”[2] This comment came after he 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.”

Brown returned to this theme in February 1908, when he said, “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.” [3]

In the New York Central’s annual report for 2009, 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.” [4]

Therefore, it was not surprising for Brown to say in a September 26, 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.”[5]

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[1] This discussion is based upon the Elkins Act; Edmund Morris, Theodore Rex at 206, 429 (Random House; New York; 2001); Kolko, Railroads and Regulation, 1877-1916, at 90-92, 94-102 (Princeton Univ. Press; Princeton; 1965); ICC, Seventeenth Annual Report (Dec. 15, 1903); Theodore Roosevelt Center, The Elkins Act.

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

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

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

[5] This letter (Image (# 93-0659) was provided courtesy of the Library of Congress Prints and Photographs Divisions and Theodore Roosevelt Center at Dickinson State University, http://www.theodorerooseveltcenter.org.The letter’s salutation of “Col. Roosevelt” was a reference to his having served as a Colonel in the U.S. Army’s Rough Rider Regiment in the Spanish-American War, where he was hailed as a hero for leading a charge up San Juan and Kettle Hills in Cuba, and to Roosevelt’s preference to be called “Colonel” by those close to him. Why did he prefer to be called “Colonel” instead of “Mr. President”? I suspect it was his desire to emphasize his personal physical bravery in armed combat.

Federal Regulation of Railroads During U.S. President Theodore Roosevelt’s First Term (1901-1905): The Northern Securities Case

As mentioned in an earlier post, one of President Theodore Roosevelt’s major efforts to enhance federal regulation of railroads in his first term was his Administration’s commencement of an antitrust lawsuit under the Sherman Act against the Northern Securities Company, which combined the stocks of two competing railroads from the Great Lakes and the Mississippi River to Puget Sound on the Pacific Coast.

These two roads were the Great Northern Railway running from St. Paul, Minnesota to Seattle, Washington while the Northern Pacific Railway ran from St. Paul (and separately from Ashland, Wisconsin and Duluth, Minnesota) to Seattle and Tacoma, Washington and Portland, Oregon. In addition, the two of them jointly owned the Chicago, Burlington & Quincy Railroad, which connected St. Paul with Chicago. [1]

The Legal Background

The late 19^th century was an era of “trusts” and of “combinations” of businesses and of capital organized and directed to control of the market by suppression of competition in the marketing of goods and services, the monopolistic tendency of which had become a matter of public concern.

To meet this problem, the U.S. in 1890 enacted “An act to protect trade and commerce against unlawful restraints and monopolies,” 26 Stat. 209, ch. 647 (1890). The statute is commonly referred to as the Sherman Act in recognition of its principal author or sponsor, Senator John Sherman, Republican of Ohio. The statute provided, in part, as follows:

“Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states . . . is hereby declared to be illegal. Every person who shall make any such contract, or engage in any such combination or conspiracy, shall be deemed guilty of a misdemeanor . . . .” (Section 1)

“Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several states . . . shall be deemed guilty of a misdemeanor . . . . ” (Section 2)

The prescribed penalty for such misdemeanors was a fine up to $5,000 or imprisonment not exceeding one year or both. In addition, the circuit courts (n/k/a district courts) were “invested with jurisdiction to prevent and restrain violations” of the statute (Section 4), and persons injured in their business or property by any violations could sue the perpetrators for treble damages and attorneys’ fees (Section 7).

The goal of the Sherman Act was to prevent restraints of free competition in business and commercial transactions that tended to restrict production, raise prices, or otherwise control the market to the detriment of purchasers or consumers of goods and services.

The Formation of Northern Securities

On November 13, 1901 (only two months after Roosevelt became President), J. P. Morgan, who controlled 21 railroads, including the Northern Pacific, and James J. Hill of the Great Northern [2] announced the formation of the Northern Securities Company to be a holding company for the common stock of the two competing railroads, This new combination was the second largest company in the world with annual revenues of $100 million and covering commerce from Chicago to Seattle and extending to China over Mr. Hill’s shipping lines.

A New York newspaper saw the new company as another step toward universal monopoly.

The Commencement of the Lawsuit

On February 19, 1902 (only three months after the formation of the Northern Securities Company), the Roosevelt Administration announced plans to commence the antitrust case alleging that the formation and operation of Northern Securities constituted a restraint of interstate commerce in violation of the Sherman Antitrust Act. In addition to the two railroads, the U.S. planned to sue James J. Hill of the Great Northern and seven directors of the Northern Pacific, including J. P. Morgan and George F. Baker. [3]

The U.S. stock market immediately registered significant declines with similar reactions in London, Paris and Berlin markets. In response, J. P. Morgan starting buying stocks in great quantities and helped to stop a panic.

The next evening Morgan and 12 other wealthy men met with Roosevelt at the White House without discussing the lawsuit, i.e., the elephant in the room. The next morning, however, the subject was broached when Morgan returned alone to the White House for a meeting with Roosevelt and the Attorney General, Philander Chase Knox. Morgan asked why the Government had not just called and asked him to correct any irregularities with the charter of Northern Securities, but Knox merely said the Government wanted to stop the company, not to fix it up. Afterwards Roosevelt said, “Mr. Morgan could not help regarding me as a big rival operator who either intended to ruin all his interests or could be induced to come to an agreement to ruin none.”

Philander Chased Knox — Philander Chase Knox

The Case in the Circuit Court

The bill in equity (or “complaint” in today’s terminology) thereafter was filed with the U.S. Circuit Court for the District of Minnesota.[4] The complaint charged that the Northern Securities was an illegal “combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states” (Sherman Act § 1).

The next April 9^th (1903), the Circuit Court’s four Circuit Judges unanimously upheld the validity of the Government’s complaint (United States v. Northern Securities Co., 120 Fed. 721 (Cir. Ct., Dist. Minn. 1903)) . The court in an opinion by Judge Thayer first entered the following findings of fact as established by the pleadings and evidence:

The Great Northern and Northern Pacific owned railroad lines from Minnesota to Puget Sound that are parallel and competing lines.
These two railroads in 1901 jointly acquired 98% of the capital stock of the Chicago, Burlington & Quincy Railway.
Thereafter in 1901 James J. Hill, J. P. Morgan and six other men, all of whom were defendants in the case and collectively had practical control of the two principal railroads, arranged to place a large majority of the stock of the two railroads in a holding company, Northern Securities, and that was done.
As a result, the control of these two railroads was put into a single person and thereby “destroyed every motive for competition” between them.
Those “who conceived and executed this plan . . . intended . . . to accomplish these objects.”

The court then concluded that the Congress “deliberately employed words of such general import [in section 1 of the Sherman Act] as, in its opinion, would comprehend every scheme that might be devised to accomplish that end.” In addition, the U.S. Supreme Court had held that the Act “applies to interstate carriers of freight and passengers . . .; that [the Act does] not mean in unreasonable or partial restraint of trade or commerce, but any direct restraint thereof; that an agreement between competing railroads . . . [to fix their rates is] a contract in direct restraint of commerce . . .; and [that the Act is constitutional].”

Therefore, the court entered a decree that the defendants had violated section 1 of The Sherman Act and that Northern Securities was enjoined from acquiring additional stock of the two railroads, from voting its holdings of those shares and from exercising or attempting to exercise any control or direction over the two railroads. Northern Securities, however, was permitted to rescind its acquisitions of the stock of the two railroads.

The Case in the Supreme Court

The case then went directly to the U.S. Supreme Court, [4] which on December 14, 1903, heard arguments. Attorney General Knox appeared for the Government and made what many thought was a brilliant argument without any questions from the Justices.

In March 1904, the U.S. Supreme Court, 5 to 4, affirmed the Eighth Circuit and ordered the company dismantled. (Northern Securities Co. v. United States, 193 U.S. 197 (1904).) The Court’s plurality opinion by Mr. Justice John Marshall Harlan and supported by only three of the other Justices concluded that “the evidence . . . shows a violation of the . . . [Sherman Act, which] declares illegal every combination or conspiracy in restraint of commerce among the several states . . . and forbids attempts to monopolize such commerce or any part of it.”

In so concluding, the Harlan opinion emphasized that the Court’s prior decisions had established that “every contract, combination, or conspiracy in whatever form, of whatever nature, and whoever may be parties to it, [that] directly or necessarily operates in restraint of [interstate] . . . commerce” is illegal. Those prior decisions, said the Harlan opinion, also determined that the statute is not limited to unreasonable restraints of trade; that railroads operating in interstate trade are covered by the statute; and that every contract, combination or conspiracy that would extinguish such competition is illegal. (Emphasis added.)

Mr. Justice David Josiah Brewer concurred in the judgment affirming the lower court’s conclusion of antitrust violations, but disagreed with the rationale of the Harlan opinion because of fear that it “might tend to unsettle legitimate business enterprises, stifle or retard wholesome business activities, encourage improper disregard of reasonable contracts, and invite unnecessary litigation.” Instead, said Justice Brewer, the statute only covered “contracts which were in direct restraint of trade, unreasonable, and against public policy.” (Emphasis added.)

A dissenting opinion was filed by Mr. Justice Edward Douglas White and joined by Chief Justice Melville Fuller and Justices Rufus Wheeler Peckham and Oliver Wendell Holmes. This opinion concluded that the constitutional power of the federal government over interstate commerce did not extend to cover Northern Securities Company’s acquisition of the common stock of the two railroads.

Holmes also filed a separate dissenting opinion that was joined by the other three dissenters. Holmes asserted that the antitrust statute only outlawed combinations in restraint of trade, not of competition and that he saw no evidence of an attempt to monopolize some portion of U.S. trade or commerce. He also expressed relief that “only a minority of my brethren [the four Justices who subscribed to the opinion of Mr. Justice Harlan] adopt an interpretation of the [statute] . . . which . . . would make eternal the bellum omnium contra omnes [the war of all against all], and disintegrate society so far as it could into individual atoms . . . . [Such an interpretation] would be an attempt to reorganize society . . . . I believe Congress was not entrusted by the Constitution with the power to make . . . [such a law], and I am deeply persuaded that it has not tried.”

The high court’s action was a major victory for the administration and put the business community on notice that although this was a Republican administration, it would not give business free rein to operate without regard for the public welfare.

W. C. Brown’s Reaction to the Supreme Court’s Decision

Soon thereafter (May 24, 1904), W.C. Brown, my maternal great-great-uncle, in a speech to the Illinois Manufacturers Association that was covered by the New York Times commented on the Supreme Court’s decision. He said, “Propositions looking to the betterment of [railroad] service, having no other object, and impossible of any other result, have been misunderstood and have been fought inch by inch with a perseverance and zeal worthy a better cause.” As a result, Brown continued, it was “not impossible that the language of the majority of the Supreme Court [in the Northern Securities case] may . . . seem to reflect the clamor of the public, rather than the calm, judicial review of a great question.” [5]

Brown added that by “amendment or by judicial interpretation the question of reasonable restraint of commerce, as against any restraint whatever, must become part of the Sherman . . . [Act], and must be considered in its enforcement, or obstacles to commercial and industrial progress are likely to be interposed the gravity of which no one can foresee.” (Emphasis added.)

This commentary was preceded by Brown’s proclaiming that “[e]xcept for the birth of Christ, no event has meant so much to humanity as the U.S. Declaration of Independence;” that the recent U.S. war with Spain was “as holy, as high and unselfish in purpose as ever inspired a people;” and that the U.S. had the “satisfaction of having borne its share of the burden of carrying Christianity, civilization and education to those who sit in the darkness of ignorance and superstition.”

Brown also issued a stern warning that apparently emerged from his growing up in thinly populated Iowa and Illinois and that ignored his presumably elegant life in New York City (and earlier in Chicago). Brown said, “The most serious menace that clouds our national horizon today, ominous now and increasing in size and anger and portent, is the rapid growth of our cities . . . . No man can regard the growth of the great centers of population, with their sinister, dangerous, preponderantly influence in the politics of the State and Nation, without alarm.” He added, “The remedy for this evil and the safety of the Nation was building up, encouraging, and increasing our agricultural population.”

It should also be noted that at the time of this speech, Brown was a Vice President of the New York Central Railway, two of whose directors were defendants in the case: J. P. Morgan, a principal architect and beneficiary of the formation of the Northern Securities Company, and George F. Baker.

Subsequent Supreme Court’s Interpretations of the Sherman Act

Seven years later, in 1911, the approach to interpreting the Sherman act advocated by Justice Brewer and W. C. Brown was in fact adopted by the U.S. Supreme Court. In Standard Oil Co. v. United States, 221 U.S. 1 (1911), the Court, 8 to 1, stated that only combinations and contracts unreasonably restraining interstate or foreign commerce were illegal under the Sherman Act. Justice John Marshall Harlan, the lone dissenter in this case and the author of the Court’s opinion in Northern Securities, said the Rule of Reason was a departure from previous Sherman Act case law, which purportedly had interpreted the language of the Sherman Act to hold that all contracts restraining trade were prohibited, regardless of whether the restraint actually produced ill effects.

Thereafter the Court unanimously reaffirmed the Rule of Reason in two cases: United States v. American Tobacco Co., 221 U.S. 106 (1911) (section 2 of the Sherman Act did not ban the mere possession of a monopoly but only the unreasonable acquisition and/or maintenance of monopoly); Chicago Board of Trade v. United States, 246 U.S. 231 (1918) (agreement between rivals limiting rivalry on price after an exchange was closed was reasonable and thus legal).

Subsequent Supreme Court cases established the concept of per se violations of Section 1 of the Sherman Act. These are “agreements, conspiracies or trusts in restraint of trade” that have been found to have a “pernicious effect on competition” or “lack any redeeming virtue” and include competitors’ agreements to fix their prices or divide markets between them and concerted refusals to deal.

For other alleged violations of section 1 of the Sherman Act, the courts engage in a “rule of reason” analysis to evaluate the intent and purpose of the conduct, the facts peculiar to the business and industry, the history of the conduct and its effect on competition. If the result of this judicial analysis is the conduct unreasonably restrains trade, it is a violation of section 1.

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[1] This post is based upon Edmund Morris, Theodore Rex at 59-65, 87-95, 219, 304-05, 313-16 (Random House; New York; 2001); MIller Center, Theodore Roosevelt: Domestic Affairs; and the other sources cited below.

[2] The James J. Hill House is a St. Paul mansion now open to the public and operated by the Minnesota Historical Society.

[3] J.P. Morgan and George F. Baker were also directors of the New York Central Railway, and I was a beneficiary of Baker’s wealth as a George F. Baker Scholar at Grinnell College, 1957-1961. Morgan’s Manhattan Library is now the Morgan Library & Museum that is open to the public.

[4] As of 1903 nine U.S. circuit courts had jurisdiction over trials of all civil suits initiated by the U. S. Government in different parts of the country, and the circuit court that covered the State of Minnesota (the Eighth Circuit) had four Circuit Judges (Henry C. Caldwell, Walter H. Sanborn, Amos M. Thayer and Willis Van Devanter). As of January 1, 1912, these courts were abolished, and the previously established U. S. district courts assumed jurisdiction over all civil and criminal cases in the federal courts.

[5] W.C. Brown, Address before the Meeting of the Illinois Manufacturers Association, Chicago, Illinois (May 23, 1904); Supreme Court Influenced, N.Y. Times (May 24, 1904).

Federal Regulation of Railroads During U.S. President Theodore Roosevelt’s First Term (1901-1905): Introduction

As previously noted, Theodore Roosevelt and William Carlos Brown (my maternal great-great-uncle) were together on one of Roosevelt’s campaign journeys in the election of 1900. Thereafter during Roosevelt’s first (09/14/1901—03/04/1905) and second (03/04/1905—03/04/1909) presidential terms, these two men also had periodic contacts on railroad issues while Brown was Vice President and Senior Vice President of the New York Central Railroad, one of the most important railroads in the country (02/01/1902 —01/31/1909).

During those eight years, railroads were the first major U.S. industry and made possible the growth of other major industries, including coal, steel, flour milling and commercial farming. They also established major cities like Chicago and with telegraphy transformed communications. (Albro Martin, Railroads Triumphant:The Growth, Rejection and Rebirth of a Vital American Force (1992).)

The importance of the railroads to the U.S. economy affected everyone and prompted much popular dissatisfaction with perceived abuses by the railroads. Roosevelt entered this social and political milieu with a belief that the government should use its resources to help achieve economic and social justice.

He acted on this belief in the fall of 1902 when a miners’ strike threatened a coal shortage in the upcoming winter. Roosevelt called both the mine owners and the labor representatives together at the White House. When management refused to negotiate, Roosevelt told them if the two sides did not talk, he would use troops to seize the mines and run them as a federal operation. Faced with this threat, the owners and labor unions agreed to submit their dispute to a commission and abide by its recommendations. The resulting settlement, Roosevelt said, was a “square deal” or one fair to both sides, and this label soon became synonymous with Roosevelt’s overall domestic program.

As part of this “Square Deal” program or approach Roosevelt advocated increased federal government regulation of corporations acting in interstate commerce, especially the railroads, in both of his presidential terms.

There were two principal developments on this issue in Roosevelt’s first term. The first was his Administration’s commencement in 1902 of an antitrust lawsuit against the Northern Securities Company, which combined the stocks of two competing railroads from the Great Lakes and the Mississippi River to Puget Sound on the Pacific Coast. The second was the Administration’s pressing the Congress in 1903 to enact the Elkins Act to enhance the powers of the Interstate Commerce Commission over railroad freight rates.

These developments will be discussed in subsequent posts while others will investigate this subject during Roosevelt’s second term as President.

Assassination of U.S. President William McKinley and Swearing-in of Theodore Roosevelt as President

As previously noted, William McKinley and Theodore Roosevelt were inaugurated as U.S. President and Vice President on March 4, 1901.

Only six months later, on September 6, 1901, McKinley was shot and wounded on the grounds of the Pan-American Exposition in Buffalo, New York, the day after he had made a major speech advocating an end to American isolationism and promoting his plan to negotiate reciprocal trade agreements with other countries. The shooter was a Polish anarchist, Leon Czolgosz.

McKinley appeared to be recovering when visited by Roosevelt in Buffalo, and after receiving assurances of a complete recovery from McKinley’s doctors, Roosevelt left to join his family on vacation in the Adirondack Mountains in upstate New York.

On September 13th, however, McKinley’s condition worsened with gangrene, and early the next morning he died in Buffalo.

On the 13^th Roosevelt at the vacation cabin received telegrams that were relayed up the mountain by telephone operators, riders and runners. The telegrams advised him that the President’s condition was worsening and that Roosevelt should come to Buffalo as soon as possible. Just before midnight that night Roosevelt started his descent from the mountain by horse and buggy. Around 5:00 a.m. the next day he arrived in the small town of North Creek. He was met by his secretary, William Loeb, Jr., who handed him a telegram. The message was short: “THE PRESIDENT DIED AT TWO-FIFTEEN THIS MORNING.”[1]

Roosevelt immediately boarded a private railroad train to take him south to Albany and then west to Buffalo. At about 7:00 a.m. the train crashed into a hand-car and nearly killed two men, but fifteen minutes later the train was on its way. Around 8:00 a.m. the train briefly stopped at Albany before proceeding west to Buffalo, arriving around 1:30 p.m. on the 14^th.[2]

Two hours later, around 3:30 p.m. Roosevelt along with 50 dignitaries, family members and cabinet officials gathered in the library of the elegant Wilcox Mansion in Buffalo.[3] U.S. District Judge John R. Hazel administered the presidential oath.[4]

Roosevelt "Inauguration" of 1901 — Roosevelt “Inauguration” of 1901

Roosevelt made a brief “inaugural” statement with “characteristic passion, punctuating his words with dental snaps, as if biting the syllables out of the air.” He said, “And in this hour of deep and terrible national bereavement I wish to state that it shall be my aim to continue absolutely unbroken the policy of President McKinley for the peace, the prosperity, and the honor of our beloved country.”[5]

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[1] Edmund Morris, Theodore Rex at 3-7 (Random House; New York; 2001).

[2] Id. at 7-11.

[3] The Wilcox Mansion is now the Theodore Roosevelt Inaugural Historic Site and along with its collection of items from the Pan-American Exposition is open to the public.

[4] Theodore Rex at 11-15.

[5] Id. at 14.