The Railroads, Laissez-Faire Economics, and the Basis of Regulation

As the railroads spread out from the East, they connected with other lines, north and south, and created interchange points between them. For the first time, goods began to be moved from origins far distant from their destinations. Markets that at one time had been local now became regional and even national. Manufacturing, meatpacking, farming, and the cattle business were becoming interdependent, and America was beginning to depend on transportation—the railroads—as the lifeblood of its commerce.

The railroads wielded vast economic power. Like government, they possessed the power of eminent domain. They set passenger fares as they wished. Freight rates varied according to the whim of the railroads, and were often discrimina­tory and unevenly applied.

Farmers, in particular, were at the mercy of the railroads in marketing their produce. Grain ele­vators were necessary as storage facilities for farm­ers, and these often were owned by the railroads.

Various states, in response to petitions from its citizens, enacted laws designed to curb the excesses of the railroads. But the railroads ran from state to state, and generally considered them­selves immune from attempts at local regulation. These laws, therefore, were uniformly ineffective and were ignored or legally challenged by the rail­roads. It was not until shippers as a group began to assert influence on a national level that the Con­gress did eventually begin to address the problem.

In the United States, governmental authority to regulate lawful enterprises must be based on con­stitutional principles. In 1887, although these prin­ciples were not well defined, it was clear that the national government in Washington had express Constitutional authority to regulate commerce between the states. So it was that Congress that year debated the first regulation of transportation.

Historically, governmental regulation has been grounded on two primary concepts:

1. Economic necessity

2, Legal authority

The concept of economic necessity pre­sumes (1) that there are certain businesses that are necessary in the public interest (e. g., trans­portation companies, gas companies, electric companies, etc.); (2) that these types of compa­nies should be required to serve all of the public without discrimination; and (3) that these compa­nies should be stable and be able to make a rea­sonable, but not too large, profit. To assure that these conditions exist, the government has under­taken to regulate them. This regulation controls entry into the business (which controls competi­tion, expertise, and financial stability), the rates that are charged the public, and to some extent the manner in which the business is operated.

In the United States, most businesses are run under the principles of private enterprise. While businesses that are considered necessary in the public interest are mostly privately owned, they are considered to be “quasi-public,” that is, oper­ated in the public interest. From 1887, when the regulation of transportation began, the federal government considered interstate transportation to be a quasi-public undertaking, thus a legiti­mate object of regulation.

The second basis of regulation is legal. The legal basis of regulation is founded in the U. S. Constitution and the laws that are enacted by Congress. With regard to transportation, the com­merce clause of the Constitution is most often invoked to authorize regulation of companies conducting business among the states (interstate commerce). The commerce clause is based, in part, on the realization that the people of the vari­ous states must be guaranteed equal access to a necessary service. It is also recognized that, in matters between the states, the presumed impar­tiality of the federal government should make it, and not the states, the arbiter of the law.

Once enacted pursuant these constitutional principles, regulation is implemented through either the common law or statutory law.

• Common law is the law that has resulted from judicial decisions derived from litigated cases between individual parties. This law is con­tained in written opinions of judges and is referred to as “judge-made” law. The common law that existed in England before the American Revolution was applied in the American colo­nies, and after independence was won and the United States Constitution was adopted, Eng­lish common law continued to serve as legal precedent in the new United States.

• Statutory law is the law that Congress or the state legislatures have enacted by vote of elected representatives in those bodies. On the federal level, this law is codified in the United States Code, a sequentially numbered series of volumes that contain all current federal statutory law. The United States Code is kept updated by means of supplements published on a regular basis. Some statutes provide for the creation of federal agencies, like the Fed­eral Aviation Administration or the Interstate Commerce Commission, to administer the mandates set down in the statute. Such agen­cies are given rulemaking authority, which means they may conduct public hearings and make rules having the force of law to govern the manner in which the affected business or activity is conducted, like the Federal Avia­tion Regulations, for example.