The Railroad Commission of 1887 That Became the Model for Every Federal Agency

Washington has a recurring fairy tale. Once upon a time an industry grew powerful and misbehaved, a wise commission was created to tame it, and everyone lived happily ever after. Please note the part that always goes missing: what happens in year thirty, when the commission and the industry are on a first-name basis and the customers are not invited to dinner.

The first commission of its kind was the Interstate Commerce Commission, and it ran the whole story from beginning to end, which makes it the most useful case study in the history of American government. It was born in 1887, it was abolished in 1995, and the stretch in between contains every lesson conservatives have been trying to teach about agencies. It is a history worth telling in order.

The problem the act was written to solve

In the decades after the Civil War the railroads were the first truly national business. They were also, in many towns, a monopoly. A farmer in Kansas had one line to carry his grain, and the line set the price.

That produced real abuses, and conservatives should say so without squirming. Railroads charged more per mile on short hauls where they faced no competition than on long hauls where they did. They granted secret rebates to favored shippers. They formed pools to divide traffic and hold up rates. Farmers organized in the Grange and in the 1870s several Midwestern states passed rate laws. The Supreme Court upheld one of them in Munn v. Illinois in 1877, holding that businesses "affected with a public interest" could be regulated.

Then came the limit. In Wabash, St. Louis & Pacific Railway Co. v. Illinois in 1886 the Court held that a state could not regulate rates on shipments that crossed state lines, because that was the business of Congress under the Commerce Clause. Which meant the states could not act, and Congress had not. A regulatory vacuum was an invitation, and Congress accepted it.

The Interstate Commerce Act of 1887

President Grover Cleveland signed the Interstate Commerce Act on February 4, 1887. The act required that rates be "reasonable and just." It banned unjust discrimination between shippers, banned rebates, and barred charging more for a short haul than a long one over the same line in similar circumstances. And it created a five-member commission, the Interstate Commerce Commission, to enforce all this.

Three features of that design became the template for what followed.

• It was independent. The commissioners were appointed by the President with Senate consent for fixed terms, and the statute allowed removal only for inefficiency, neglect of duty or malfeasance in office, which is the arrangement the post on Humphrey's Executor Created a Fourth Branch the Constitution Never Mentions examines in constitutional detail.
• It was multi-member and bipartisan. No more than three of the five could belong to the same party.
• It mixed functions. It investigated complaints, held hearings like a court, and issued orders like a legislature.

That mixture is exactly what Madison warned about in Federalist 47. But it was new, it was popular, and it was aimed at a villain everyone disliked. Few people thought about the structure.

The first fight: courts take the teeth back

The first version of the commission was weaker than its authors intended, and the weakness did not come from the railroads alone. It came from the courts. In 1897 the Supreme Court held in the Maximum Freight Rate case (Interstate Commerce Commission v. Cincinnati, New Orleans & Texas Pacific Railway Co.) that the act did not give the commission power to set rates in advance. It could say a past rate was unreasonable. It could not say what the rate should be going forward. In the same year, in Interstate Commerce Commission v. Alabama Midland Railway Co., the Court read the long-haul and short-haul clause narrowly.

This is the first thing to notice about agencies: they do not arrive with their powers fully formed. They acquire them, and they acquire them by asking Congress for more. The ICC's reputation as a toothless watchdog was a campaign document, and the campaign worked.

The Hepburn Act of 1906

Congress answered with the Hepburn Act of 1906, which gave the commission power to set maximum rates, after a hearing, when it found existing rates unjust. It also extended the commission's reach to pipelines, express companies and sleeping-car companies and made its orders binding unless a court set them aside. Theodore Roosevelt pushed hard for the act.

This was the pivot of the whole history. Before 1906 the commission was a referee. After 1906 it was a price-setter. A government body now decided what a railroad could charge, and therefore what a bushel of wheat would cost to move, and therefore, in a long chain, what a loaf of bread cost in Philadelphia.

You can defend that on emergency grounds. But follow the logic one step further than its defenders do. If a commission can set the price of rail service, then the commission must understand the railroads' costs, their investment needs and their routes. The railroads, naturally, understand those things better than any commissioner, and they will say so at length in every hearing. The people who know the most about the regulated business are the people in the regulated business, and that is the beginning of capture.

Capture: the regulator and the regulated get comfortable

The story of the railroads' attitude toward the commission is one of the most instructive ironies in American government. Even before the act was twenty years old, some railroad men figured out that the commission could be an asset.

Richard Olney, who became Grover Cleveland's Attorney General in 1893, had been a railroad lawyer. In a letter he wrote in 1892, before he held that office, to a railroad executive who wanted the commission abolished, he argued that the commission could be of great use to the railroads, because it satisfied the public clamor for supervision of the railroads while that supervision was almost entirely nominal. The words are paraphrased here from a letter historians have long cited, and the exact text is worth looking up. The point is clear enough: a regulator that calms the public and does not much bother the industry is a bargain.

The 1900s and 1910s then added to the tools. The Mann-Elkins Act of 1910 gave the commission power to suspend proposed rate increases. In 1920 the Transportation Act went further: it told the commission to set rates that would give the railroads a fair return, which is a remarkable instruction for a regulator, since it makes the commission responsible for the industry's profits. It also let the ICC approve consolidations.

Now consider the incentives. The commission, in effect, was responsible for the health of the railroads. Railroad health meant railroad rates that covered costs. Competitors who might undercut those rates were a threat to stability. A regulator charged with stability will see competition as a problem.

That is how the economists' model of capture works, and the ICC was one of the cases that taught it. The commission did not corrupt anyone with envelopes of cash. It is simpler than that: the people who appear before an agency every day shape its sense of what is normal.

The trucks arrive, and the ICC protects the railroads from them

In the 1920s and 1930s the truck began to carry freight over the new highways, and the railroads hated it. Congress responded with the Motor Carrier Act of 1935, which put interstate trucking under the ICC.

Think about what that meant in practice. A trucker who wanted to haul freight between two cities had to apply to the ICC for a certificate showing that "public convenience and necessity" required the service. Existing carriers could object, and they did. Rates had to be filed and approved. The system gave incumbents a veto over competitors and gave the commission a list of rates to ratify.

The result was a regime in which new trucking companies had to prove they were needed, which means they had to convince the people already in the market that the market needed them. That is not how a free economy handles a new idea. Economists across the political spectrum eventually concluded that the system raised prices and wasted trucks driving empty return trips, because carriers were limited in what freight they could haul and in which direction.

The decline: Penn Central and the question of what regulation had done

By the 1960s and 1970s the railroads were in trouble. Passenger service was shrinking, track was deteriorating and the industry was losing freight to trucks. In 1970, the Penn Central Transportation Company, the product of a big merger the ICC itself had approved, filed for bankruptcy. It was the largest corporate bankruptcy in the nation's history up to that time.

Congress responded in the 1970s with a series of rescue laws, including the Regional Rail Reorganization Act of 1973, which set up the planning that led to Conrail, and the Railroad Revitalization and Regulatory Reform Act of 1976, which created it. And a bipartisan consensus began to form that the regulatory system was not saving the railroads. It was strangling them.

Deregulation in 1980

Two laws signed in 1980, both under President Jimmy Carter, a Democrat, dismantled much of the system.

• The Staggers Rail Act of 1980 let railroads set many of their own rates, allowed them to sign confidential contracts with shippers, and made it far easier to abandon unprofitable lines.
• The Motor Carrier Act of 1980 relaxed the entry rules for trucking, so new carriers no longer had to prove public necessity to their own competitors, and loosened rate controls.

This is the part of the story conservatives like to tell and should tell fairly, because the credit belongs to both parties. Senator Edward Kennedy, a liberal Democrat, pushed trucking deregulation in the late 1970s. Economists of the left and right had been arguing that the ICC regime harmed consumers. The Carter administration agreed. Freight rail, which everyone had predicted would collapse, recovered, and the railroads that survived became leaner.

Notice what the deregulation did and did not do. It did not abolish the commission. It reduced what the commission did. The agency kept existing, with fewer functions, for fifteen more years.

The abolition: ICC Termination Act of 1995

In 1995 Congress passed the ICC Termination Act, and the commission closed with the year. Its remaining functions went to a new body, the Surface Transportation Board, which began work when the act took effect on January 1, 1996, and to other parts of the Department of Transportation.

One hundred and eight years after the Interstate Commerce Act, Congress had actually shut an agency. This is rare enough to be remarkable. The tale of the abolition is evidence in two directions. It shows that agencies can be ended when their original purpose is gone and when a coalition forms to do it. It also shows how long that took, and how little of the work it replaced. Even the Termination Act sent the remaining functions to a successor, and a successor board still exists. The same pattern shows up in the post on Every Agency Should Have to Justify Its Existence Again, the Texas Sunset Way, which describes a state that tried to build the sunset into its law.

The steelman: was the ICC a failure?

Stated at its strongest, the case for the ICC runs like this. One: the railroads really did abuse their power in 1887, and the states could not stop them. Two: the commission's early record of ending rebates and publishing rates did reduce the worst discrimination. Three: regulation of any natural monopoly is hard, and the ICC's failures are the failures of its time and its tools. Four: later deregulation succeeded because the technology and the market had changed, and in 1887 they had not.

All four points have force. The 1887 abuses were real. But the argument that follows from the facts is narrower than the argument its defenders want. It supports a rule against discrimination and a body to enforce it. It does not support a permanent commission with the power to set prices, approve entry and guarantee returns. The first is law. The second is management, and management by government of a private business is where the trouble starts.

Five lessons from the life of one agency

1. Agencies are created to solve a specific problem, then outlive it. The conditions of 1887 were gone by the 1950s, and the commission's work had not changed.
2. Powers accumulate. The ICC started with narrow authority and gathered more in 1906, 1910, 1920 and 1935.
3. Capture happens by routine. The regulated industry shows up every day with expertise and a stake. The public shows up occasionally, if at all.
4. Regulators come to protect incumbents. The truck certificate system made new competition prove itself to the old guard.
5. Reform needs a bipartisan coalition and a decade. Deregulation worked because liberals and conservatives agreed on the evidence.

The post on Big Companies Can Afford Regulation, Which Is Why Some of Them Ask for More runs the same pattern across modern industries, and Departments, Commissions, Corporations and Who Really Controls Each One explains where the commission model sits in the larger organization of the federal government.

What the Founders would ask

The Founders did not know railroads, but they knew monopolies, and they knew the temptation to entrust a few men with the economic life of the whole country. They would ask the questions the Constitution forces. Who authorized this? Under what clause? Who answers to the voters when the rates go up? In 1887 the answer to the first was the Commerce Clause, which really does give Congress power over interstate commerce. But the answer to the third was: nobody in particular. A body appointed for fixed terms and shielded from removal does not answer to anyone in the day-to-day sense, and that is the design feature Wilson admired and Madison would have distrusted.

None of that means government should not act against an abuse. It means the act should be a law, written by Congress, that courts enforce and that voters can repeal. The better lesson of the ICC is to prefer clear rules to standing price-setters, and to build in an end date, so that every agency has to explain, after a period of years, why it should keep existing. If one had been built into the 1887 act, the country would have saved decades.

The case in brief

1. The Interstate Commerce Act of February 4, 1887 created the first independent regulatory commission, responding to real railroad abuses that the states could not reach after Wabash in 1886.
2. The commission gained rate-setting power in the Hepburn Act of 1906 and further powers in 1910, 1920 and, for trucks, 1935.
3. Over time it protected the industry it regulated, most visibly in trucking, where newcomers had to prove public necessity to incumbents.
4. The Staggers Rail Act and Motor Carrier Act of 1980 deregulated much of the field with bipartisan backing, and the ICC Termination Act of 1995 abolished the commission after 108 years.
5. The lesson is to prefer clear statutory rules to permanent price-setting bodies, and to build sunset dates into agencies at the start.

What you can do: ask your member of Congress, through the contact tools at your representatives page, whether any agency that oversees your industry or your job has a sunset date, and if it does not, whether the member would support one.