State Regulators and Pragmatic Federalism in the United States, 1889-1945

by William Childs

Steam Passenger Train, Illinois Central Railroad, ca. 1924. (Industrial Life Photograph Collection, Baker Library Copyright 2002, President and Fellows of Harvard College; all rights reserved.)

During the first two decades of ICC regulation, state and national commissioners attempted to shape a regulatory system that muted the constitutionally based conflict between the states and the national government in the regulation of business. Each group supported increased powers for the other. By 1910, both the state and national commissions held considerable authority to regulate, but the division of power between state and national commissions remained unclear.

In the 1870s and 1880s, the states led the way in establishing regulatory commissions. Massachusetts and some midwestern states, in response to a complex mix of railroad, shipper, and passenger complaints about rates and poor train service, devised regulatory controls over railways. As railroad systems grew and engaged in more interstate commerce, however, policy makers discovered that state regulations could not control all of the railways' actions effectively. In 1887, after over a decade of discussion, Congress passed the Interstate Commerce Act and established the ICC. The ICCs first chair, judge Thomas Cooley, realized that the nascent agency held less power (many states had more access to railway records and much more control over rate levels and service requirements than did the ICC) and had much less experience than the state commissions. A constitutional scholar familiar with the work of state regulators, Cooley predicted that not only would this circumstance bring jurisdictional conflicts between state and national regulators; it also meant that the state commissioners could be valuable sources of information for the ICC. Cooley promoted the idea of an association of regulators that could address the jurisdictional issues and act as a clearing-house for new ideas on regulation.

Cooley's efforts resulted in the establishment in 1889 of the National Association of Railroad Commissioners. (In 1917, to reflect the expansion of state regulatory duties, the members changed the name to the National Association of Railway and Utilities Commissioners, or NARUC.) 12  Membership was restricted to commissioners and staff of the state commissions and of the ICC. The state commissions paid irregular dues to support organizational and lobbying efforts, and, for the first two decades, members met annually at the ICC building in Washington, D.C.

The Villard "Gold Spike" Excursion. Opening of the Northern Pacific Railroad, Sept. 8, 1883. (Henry Villard Collection, Baker Library Copyright 2002, President and Fellows of Harvard College; all rights reserved.)

NARUC evolved into a professional association through which state regulators promoted states' rights beliefs, a state-Federal cooperative approach to regulation, and new regulatory tactics. It became one of several important institutions (including the ICC, other national regulatory agencies, the Federal courts, Congress, and business trade associations) to influence the development of modern regulation. In this sense, NARUC members did not directly represent the business interests of their home states. Occasionally, they invited leaders of business trade associations to address the annual convention, but when matters of jurisdiction between the states and the national government surfaced, the state regulators subsumed the business interests within the strategies of protecting the viability of states' rights and their own jobs. 13 

The attempts of NARUC members to make their organization effective met with mixed success. They established numerous committees, which by 1910 numbered at least sixteen. A partial list of those somewhat awkwardly named committees suggests the wide-ranging issues that concerned the state regulators: Legislation; Shippers' Claims on Common Carriers; Railway Service and Railway Accommodations; Railroad Statistics; Rates and Ratemaking; Uniform Classification; Car Service and Demurrage; Safety Appliances; Amendment of Act to Regulate Commerce; and Delays Attendant Upon Enforcing Orders of State Railway Commissions. Generally, these committees attempted to indicate how regulators in the various states could coordinate their actions. If every state commission approached demurrage (use of railway cars), shipper and passenger claims, and rate-making in similar ways, the regulatory system would encounter fewer conflicts and delays and thus serve the interests of shippers, passengers, and railways alike. As the ICC gained more influence, moreover, these attempts to standardize regulation expanded to include efforts to wed state and national procedures. The operations of the NARUC committees, however, did not go smoothly, for committee members often were too busy at home to prepare reports in time for publication before the annual convention. Nonetheless, the work of these committees, the discussions at the national meetings, and ad hoc experiments among the states led to efforts to harmonize regulatory activities in America. One notable experiment involved "joint meetings" of representatives from two or more commissions to discuss rate and other regulatory issues, such as standardization of reporting forms and common rules on railway operations. NARUC members improved regulation in other ways. After they publicized the problems associated with railway free passes and rebates (the discriminatory practice of charging favored shippers less than others for similar hauls), state legislatures changed the laws to eliminate these problems. As many states took on new regulatory burdens associated with the modern utilities, NARUC extended the joint-meeting approach and cooperation to the regulation of these businesses. When new Federal agencies appeared, NARUC added their commissioners and staffs to the organization's membership rolls. 14 

The first decade of the twentieth century witnessed an extraordinary amount of activity on the state and national levels, as policy makers attempted to deal with the economic changes railroads had brought to the economy. State politicians launched a "crusade" against the railroads. They were responding to a long list of complaints by passengers and companies that shipped goods on the railroads. These included discrimination in rates and service; inefficient freight and passenger services; train wrecks; and, lack of employee courtesy. Other forces fueled this campaign: the consolidation of the railway industry into seven systems aroused fears of concentrated economic power; ICC investigations revealed that railway managers had engaged in questionable financial manipulations; and President Theodore Roosevelt worked behind the scenes and in public to eliminate discriminatory practices like rebating. The attacks against the railroads broadened to include new utilities: telephones and the producers and distributors of electricity and natural gas. The rash of legislative activity responded to Americans' uneasiness with the size of the new enterprises, their growing pervasiveness in American life, and their impact on older businesses and economic practices. 15 

Shipping agricultural implements on the Illinois Central Railroad, ca. 1924. (Industrial Life Photograph Collection, Baker Library Copyright 2002, President and Fellows of Harvard College; all rights reserved.)

Led by Wisconsin and New York, between 1905 and 1907 fifteen states either remodeled existing railway commissions or established new ones; by 1908, thirty-nine states had regulatory agencies that were broadly authorized to co-manage operations of the railways and the new utilities. 16  The sheer scale of the regulations continued a trend in which state commissions worked closely with railway and utility managers and their customers to broker agreements outside the contentious arenas of legislatures and state and Federal courts. The regulators and the various economic interests discussed a range of issues, including rate regulation and passenger service, and together devised controls to eliminate the problems. It was in the daily interaction between regulators, business managers, passengers, and shippers that the essence of American regulation was to be found. 17 

Little of this state activity, however, was coordinated. As the economy continued to grow nationally in scale, differences in state laws prompted discussion by policy makers on how to reconcile the requirements of a free-flowing national economy with the constitutional features of the federal political system. Some policy experts supported the idea of government ownership of the railways and other utilities; others, especially state regulators active in NARUC, argued that uniform state laws and/or a cooperative framework in which state and national regulators worked together would solve the constitutional dilemma; still others, including many railway executives, who desired predictability and efficiency, pushed to strengthen the regulatory authority of the ICC. 18  Even as more states increased their control over other businesses, state and national policy makers continued discussion on the problems of railway regulation in a federalist system. The dynamics of state-Federal regulatory interactions were in flux, and it was not preordained that regulatory authority and power would be centralized in the ICC.

Government ownership never gained a strong following among state or national regulators. 19  Instead, policy makers debated the proper relation between state and national regulation. While the states added powers to their commissions, state and national regulators also discussed strengthening the authority of the ICC in order to make railway regulation more effective. The NARUC membership was divided on this issue. On the one hand, the states supported many of the national approaches because, if enacted, they would strengthen the state regulatory commissions; with powers lodged in the ICC similar to those the states already had, the railways could not continue to undermine and delay the regulatory process. On the other hand, the states did not want to give away all of their police powers, for that would abrogate the constitutional concept of states' rights. Most state regulators wanted to maintain state authorities but also to develop a cooperative relationship with the ICC that would smooth over the basic conflicts facing all railway regulators. NARUC president C. C. McChord emphasized in 1908: "From every standpoint it is desirable that State laws regulating railroads should, as far as practicable, conform to Federal laws upon the same subject, but especially is it desirable as one means toward preventing the Federal Government from attempting to extend its jurisdiction over subjects which more properly come within the domain of State regulation." If more state laws conformed to the national law, McChord continued, then the clamor for extension of national regulation would die down. Despite misgivings among the membership, NARUC supported increased powers for the ICC during the first decade of the twentieth century. 20 

Three issues—reasonableness of rates, jurisdictional conflict between the state commissions and the ICC, and delays in the regulatory process—joined other problems, particularly poor train service, to bring forth an intensified movement for reform of regulation. For the most part, ICC and state regulators led the movement, although railway shippers and passengers, business executives, and politicians also participated. While a minority in each of these interest groups opposed extending regulation, most realized that the railways were taking advantage of the jurisdictional issue to avoid dealing with the rate and service issues. In response, Congress enacted three important laws, all amendments to the Interstate Commerce Act of 1887, and created several other programs that shaped the evolution of national administrative regulation of the railroads. These major initiatives, which included the Elkins Act of 1903, the Hepburn Act of 1906, and the Mann-Elkins Act of 1910, gave the ICC many new powers, most of which the state commissions had been administering over the intrastate operations of the railroads. New authorities included jurisdiction over express and sleeping-car companies and private railways and the authority to end rebating, fix maximum rates, and initiate investigations on their own motion. The ICC had gained new members (from five to seven) and more funds to hire examiners. By 1910, the ICC held comprehensive authority to regulate most of the railways' interstate operations, while most of the states held comprehensive authority to regulate intrastate operations. Not all national and state authorities matched perfectly (for example, not all reporting forms or rate-making actions were the same), and there was still confusion over when the ICC might act to affect intrastate operations, but the preceding seven years of legislative activity had gone far towards harmonizing state and national controls over the nation's railways. 21 

In fact, the commission's workload increased substantially once shippers realized that the agency held the power and the inclination to redress their complaints against interstate railroads. The expanding volume of business at the ICC, however, resulted in many problems for the railways, shippers, and state commissions. Despite the congressional activity, conflict over rates, jurisdiction, and court delays continued to stifle effective regulation. Nonetheless, because the new authorities given the ICC did not remove the shared-powers approach of the U.S. Constitution, the ICC and members of NARUC continued to exchange information and to discuss ways in which they could cooperate to overcome these conflicts. 22 

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Excerpted with permission from "State Regulators and Pragmatic Federalism in the United States, 1889-1945," Business History Review, Winter, 2001.

William Childs is associate professor of history at The Ohio State University.

From Business History Review