INTRODUCTION

Listen to this sound clip of a train boarding call provided by the Pacific Southwest Railway Museum .

  1. How many of you have traveled on a train?
  2. Where did you go?
  3. Do you do this frequently?
  4. Why do you think very few people travel by train today?

The years after the Civil War until the 1920s are called the 'Golden Age of the Railroad'. Transport by rail was the fastest and easiest way to move people and freight from place to place within the United States. Railroads made it possible for people to settle farther west. They helped farmers and businesses reach new markets. New jobs were created for thousands of workers who helped build and operate the rail lines. And railroad investors got very rich.

Mystery #1: What could cause such dramatic declines in rail service?

Mystery #2: In the 1980s and 1990s, passenger rail service was still struggling but freight service was on the rebound. What helped this part of the rail business return to profitability?

TASK

You are going to take on the role of a detective to solve these railroad mysteries. You will be provided a set of clues that will help you figure out what happened.

PROCESS

To start your investigation, you will have to go back more than a century to the 1880s. Despite all the good things railroads had done for the nation, not everyone was happy with the railroad companies. The industry was viewed by many as a bunch of greedy monopolies. Small towns usually had only one or two rail lines. Since the companies provided the only rail service available, they could charge high shipping rates. The cost of shipping short distances was often higher than shipping long distances. This especially angered farmers and small businesses that needed the railroads to ship their goods.

Rail RoadOther things were happening that further fueled public anger with the railroads. Wealthy investors began buying and merging rail lines. It was difficult to distinguish between welcome efforts to cut costs and more sinister motives such as trying to gain monopoly control and eliminating competitors. Businessmen sometimes used corrupt practices like selling phony rail stock to get what they wanted. Some rival railroads were in collusion, secretly joining together to set higher prices. Railroads gave special rebates or discounts to their most valued shippers such as the big beef, oil and steel companies. Politicians were given free rides on trains in exchange for political favors.

Many citizens demanded that the railroads be forced to change its practices. States like Illinois and Wisconsin passed laws to control shipping rates within their borders, but they were powerless to regulate interstate commerce, and the railroads were expanding their operations across more state borders all the time. Compounding the states’ difficulties regulating the industry, state laws were being struck down by a Supreme Court which tended to favor business interests.

The Federal Government Acts

Congress realized it would have to take action that would give the federal government more power over the rail industry. In Interstate Commerce Act1887, the Interstate Commerce Act was passed which:


  • Required the publishing of railroad shipping rates,

  • Made rebate or special discounts to favored customers illegal, and

  • Prohibited price discrimination against small markets, in other words, railroad lines could no longer charge more for a short haul than a long haul.

The act also created the Interstate Commerce Commission (ICC), the first true federal regulatory agency. The ICC was charged with investigating and hearing complaints about unfair business practices.

Unfortunately, the Commission didn’t have sufficient resources and power to achieve what Congress had intended. Railroads continued giving rebates to favored shippers. Rail companies continued to merge. Large rail companies bought smaller companies and grew even larger. Seven giant rail systems soon controlled two-thirds of the nation’s rails.

In 1890, Congress passed the Sherman Anti-Trust Act which forbid any contract, business combination (in the form of trust or otherwise), or conspiracy that restrained interstate trade. The Act made it illegal for one business or a group of businesses to control a market in one area.

When Theodore Roosevelt became president in 1909, he ordered the Justice Department to file a lawsuit against the Northern Securities Company, the railroad corporation controlling rail lines in the Northwest, using the Sherman Antitrust Act. Three years later, the Supreme Court agreed with the federal government and ordered the corporation be broken up.

With this victory, Roosevelt filed lawsuits against other large corporations. He also pushed for even stronger railroad regulation. Two major railroad laws were passed during his two terms in office, the Elkins Act (1903) and the Hepburn Act (1906)

The Elkins Act was the first attempt to try to correct the weaknesses in the Interstate Commerce Act. It ended the practice of railroads giving rebates to their most valuable customers. Actually, the railroads liked this law because they had become tired of giving special discounts to the large companies.

The Hepburn ActThe Hepburn Act gave the ICC the power to set maximum rates considered "just and reasonable" and the authority to look at the railroads’ financial records. For any railroad that resisted, the ICC’s decisions would be in effect until the end of litigation, this diminished the ability of the railroads to blunt regulation through lengthy court appeals.

When William Howard Taft succeeded Roosevelt as president in 1909, he continued supporting railroad reform. Under his administration, Congress issued the Mann-Elkins Act in 1910. The Act placed the burden of proof for what were "just and reasonable" rates on the railroads, the rail companies now had to prove to the ICC that a rate increase was necessary. It also made the earlier legislation prohibiting higher fees on short over long hauls more effective.

During Woodrow Wilson’s first term as president, more rail legislation was passed, this time to improve the lives of rail workers. The Adamson Act of 1916 established an eight-hour workday and overtime pay guidelines for rail workers who were employed in interstate runs. Rail unions were preparing for a strike and Wilson feared the economy would be crippled. Keep in mind this was before our nation had a long distance trucking system as a shipping alternative! The last thing Wilson wanted was to have economic turmoil at a time when the nation faced the possibility of war in Europe.

When the U.S. entered World War I in 1917, railroads continued to be a serious concern. They were disorganized and lacked the equipment needed for the war effort. Because of regulation and poor decisions by investors, the railroads didn’t have the money needed to buy more equipment and make repairs. Congestion in rail yards was staggering. President Wilson ordered a federal takeover. Duplicate rail services were cut back. Shipping infrastructure , such as terminals and rails were to be shared. New locomotives and cars were built. For the first time there was some standardization of equipment across the country that helped increase rail service efficiency.

Federal control was a temporary solution, the government promised that the railroads would be returned to their former owners within 21 months after a peace treaty and that the properties would be handed back in at least as good a condition as when they were taken over. The government also guaranteed compensation for the use of rail assets during the period of nationalization.

At the end of the war, the government gave the railroads back to their owners through the Esch-Cummins Transportation Act but the 1920 legislation also increased ICC powers over railroads. The Commission could set rates AND dictate routes. The rail industry, which had long sought to eliminate unprofitable routes, was now forced to keep many of them operating. The ICC could also approve or reject railroad mergers. In contrast to the federal government’s anti-monopoly position of the past, however, this legislation encouraged mergers as long as strong lines were paired with weak ones.

Think About It:

Economist generally agree that markets work best when:Locomotive

  1. Markets are reasonably competitive, in other words, there are several buyers and sellers,

  2. Buyers and sellers have access to sufficient reliable information,

  3. Resources are relatively mobile and free to move from one use to another in response to changing conditions, and

  4. Market prices reflect the full costs and benefits of production and exchange.


 

Through regulatory action, the federal government established these controls to remedy the market problems:

  • Required the publishing of railroad shipping rates

  • Made rebates or special discounts to favored customers illegal

  • Prohibited price discrimination against small markets

  • Gave the ICC authority to approve or reject mergers and acquisitions, control prices, and decide what routes could be extended and abandoned

Graph

Clue #1: Ironically, the government reform efforts to increase competition in the rail industry caused new market failures. The mobility of the rail companies was hindered, they could not expand into more profitable service areas or abandon unprofitable ones without ICC approval. In addition, there was no guarantee the rates approved by the ICC would be sufficient to cover operations and it could take a long time to get a rate increase.

 

Companies were forced to continue unprofitable operations. Bankruptcies sometimes occurred with companies abandoning route lines and leaving tracks in disrepair. When companies subsidized losing operations by setting higher prices in other places then buyers of these services paid higher prices as well.

Congratulations! You have your first clue concerning what happened to the railroads! As you analyze the clues that follow, keep track of them by using this worksheet. Your first clue is already filled in for you.

The Railroad Industry Declines

The information on these web pages will help you discover what happened next and gather more clues.

Clue #2: During the Great Depression of the 1930s, production across the nation declined and people lost their jobs. The need to move freight and passenger travel both declined.

  • What do you think happened to rail company profits?

  • Several rail companies went bankrupt, what do you think happened to their rail tracks?

  • What happened to consumer demand for rail service?

Record your answers on your worksheet in the Clue #2 section

Rail CarClue #3: In 1947, the federal government became concerned about passenger train safety. The ICC ruled that passenger trains could not exceed 79 miles per hour without special signaling systems. The railroads complained that the systems were very costly and not needed outside a few congested intercity corridors. Instead of spending the money to comply, many companies dropped plans to develop high-speed intercity services. On your clue sheet, record how these decisions affected the supply of high-speed rail travel?

Clue #4: By 1950, the rail companies had several competitors. The transportation industry was changing.

  • Who are the rail companies' competitors? Click here for an online interactive activity.

  • What advantages do these competitors have over rail travel? Click here for another online interactive activity.

On your clue sheet, summarize how these factors might change consumer demand.

Clue #5: Federal support for auto and air travel is given as another reason why the rail industry had financial difficulties and was unable to remain competitive.

  • How did federal subsidies affect the number of air routes available to passengers?

  • How did highway subsidies change the miles of highways compared to rails across the nation?

  • How would low taxes on gasoline and other policies designed to keep fuel prices low hurt the rail industry? (HINT: Travel by train is more fuel-efficient than airplanes and cars)

Don't forget to fill in your clue sheet! 

The Rail Crisis

By the 1960s, American railroads were in crisis. Freight service was modestly profitable, but passenger service was losing money. Even the best-run rail companies could not earn enough hauling freight to recover the operating losses incurred for passenger service.

The situation was particularly severe in the Northeast, the part of the nation that had given birth to the rail industry. Most of the major rail lines either merged or went bankrupt, some did both. Almost all of what was left of the railroads in the Northeast consolidated to form Conrail.

Congress responded to the problem by creating Amtrak, an intercity passenger train system, in 1970. Amtrak is a quasi-governmental agency that is subsidized by the federal government. Its creation relieved railroads of their federally-mandated responsibility to transport passengers as a priority over freight.

Today, Amtrak provides almost all passenger service in the U.S. It has been especially successful in the congested Northeast Corridor. Unfortunately Amtrak still requires large government subsidies to operate.

Solve Mystery #1: On the back of your worksheet, summarize in one sentence why the rail industry experienced financial difficulties after World War II.

Freight Service Rebounds

For most travelers today, passenger trains are a very, very small part of our lives. But growth in the shipment of freight has helped railroads rebound economically. While the percentage of market share that railroads have in the freight transport market has never returned to its World War II levels, rails now carry more commercial freight more miles than any of its competitors.

Solve Mystery #2: On the back of your clue sheet, list five factors that are credited with helping the railroads return to profitability.

CONCLUSION

Choo-ChooDuring the first half of the 20th century, railroads were the primary means of transporting people and goods within the U.S. Rail companies employed as many as ten percent of all workers. At the end of World War II, railroads provided almost 70 percent of the nation's passenger and freight service. But new competitors were entering the transport industry. Passengers and shippers began to choose the competitors: cars, busses, trucks and planes.

Railroads did not disappear but they did have to adapt to the changes in the transportation industry. Government deregulation made it possible for rail companies to start functioning like every other business in a market economy. Resource efficiencies in rail operations when compared to other modes of transport may help rail companies become even more competitive in the future.

ASSESSMENT ACTIVITY

Assessment will be based on your work in the above activities.

EXTENSION ACTIVITY

  1. Debate whether the federal government should continue to use tax dollars to support passenger rail service, as it now does through Amtrak? In addition to the links already provided in this lesson, visit this Wikipedia article on AMTRAK .
  2. While the U.S. focused its funds on highways and air travel during the second half of the 20th century, Europe and Japan built extensive networks of high-speed, inter-city trains. Research high-speed rail service and determine what factors might make these trains successful in the U.S. A good place to start is this Wikipedia article on High-Speed Rail Service .
  3. Over time, the federal government brought other common cariers of people, goods and information under ICC jurisdiction. Identify these industries and report on the present status of the ICC. These web sites will help you gather the information you need.