STATE REGULATION OF RAILWAYS IN THE

UNITED STATES.

FROM 1830 until 1862 the powers of the Federal Government, in regard to internal improvements, were strictly construed. The developing railway enterprise of the country had, therefore, to look to the State governments for charters and for assistance. Although the Federal government did from time to time, when loose constructionist views were in the ascendant, make grants of land in aid of railway enterprise, it was always careful to indicate the predominating power of the State government in connection with railroad chartering. In the various grants made, prior to 1862, the aid was given not directly to the railroad but to the state. The state might, then, apply such assistance to the furtherance of the enterprise.

Under such conditions the body of law concerned with railways was a creation of the State Legislatures. In the United States, as in England, it was at first believed that railroad enterprise would be under the pervasive control of competition. And the various clauses, providing for regulation, contained in the earlier railroad charters of the United States bear a marked resemblance to those contained in the contemporaneous legislation of England.

The charter legislation of the Eastern States, in which the earliest railroad development is to be found, contained, in general, two sets of regulative provisions. (1) those concerned with rates, (2) those concerned with state purchase.

In regard to rate regulation a diversity of practice manifests itself. As early as 1827 a railway charter of New York, that of the Ithaca and Owego, applied the canal idea of competition. Persons providing suitable means of transport might, subject to the tolls and general regulations of the railroad, make use of the road-bed.1 The practice of New York was by no means uniform.

17.

1 See charter of the Ithaca and Owego Railroad, Laws of New York, 1827, p. See also evidence of Mr. Simon Sterne before the Senate Committee on Inter

At times ton-mile rates were prescribed.1 At others the determination of the rates was in the discretion of the directors.2 In general the earlier acts provided for maxima only, no provision for legislative regulation of rates being contained.3

In a very short time, however, some modifications of this policy, or rather lack of policy, appeared. Along with the acts which leave the regulation of rates in the discretion of the directors go acts providing for regulation by the legislature. An act of Maryland, passed in 1828, provided that at the expiration of twentyfive years from the passing of the charter the legislature might legislate on the matter of rates. In 1829 Maryland provided that when the dividend exceeded 10 per cent., on the cost of construction, in any given year, the excess over this figure was to be paid over to the state. And the directors were also required to so reduce rates that they should not in future produce in excess of a 10 per cent. dividend. In 1830 Massachusetts provided for a quadrennial revision of rates, by the legislature, when the dividend exceeded 10 per cent. In the following year it was provided that the revision should be decennial. It was further provided that the rates should not be so reduced as to produce less than a 10 per cent. dividend." Iso far as the legislation of New York took any action it was in the direction of prohibiting rates which

5

state Commerce, p. 53. See also charter of Baltimore and Susquehanna Railroad, Laws of Maryland, Chap. LXXII., Sec. 20, act passed Feb. 13th, [1828; and also charter of Baltimore and Ohio Railroad, Ibid., act passed Feb. 28, 1827.

1 See charter of Ithaca and Owego, Laws of New York, Chap XII., Sec. 11, 1828-a further amending act.

2 See act empowering Orange and Sussex Canal Company to construct a railroad, Laws of New York, 1828, Chap. CLXIX., Sec. 5.

3 E.g., Laws of New York, 1828, Chap. CCXXXVIII., Sec. 11 (charter of Great Ausable Railroad); Massachusetts Public Acts, Chap. XXVI., Sec. 6, approved June 12, 1829 (charter of Worcester Railroad); Acts of New Jersey, act passed Jan. 21, 1831, Sec. 10 (charter of Paterson and Hudson River Railroad); Laws of North Carolina, 1832-33, Chap. XXV., p. 22 (charter of Portsmouth and Roanoke); and also the acts referred to in the preceding footnotes.

4 Laws of Maryland, Chap. CLXXXVII., act passed March 14th, 1828 (charter of the Elkhorn and Wilmington Railroad). It was further provided that the rates should not be so reduced as to give a dividend below 6 per cent.

5 Laws of Maryland, Chap. CXXXIX., Sec. 15, act passed Feb. 25th, 1829 (charter of the Baltimore and Washington). It was provided in Sec. 17 of this act that if, at the end of two years after the completion of the road, it appeared that the tolls authorised in the act did not give a dividend of 6 per cent. on the whole of the capital stock, they might be so increased by the President and Directors as to bring the dividend up to 6 per cent. But the rates were not to be increased by more than 50 per cent.

Laws of Massachusetts, 1830, Chap. XCIII., Sec. 10 (Charter of Franklin Railroad).

7 Ibid., 1831, Chap. LVII., Sec. 5.

would produce more than 12 per cent.1 or 14 per cent. No method of revision by the legislature was indicated.

It will be noticed that the policy, above outlined, bears a marked resemblance to that enacted in England. The railroad legislation of Canada bears also a marked resemblance to the policy of the Eastern States.1

The earliest railroad charter, containing a "state purchase clause, was enacted by New York in 1828.5 The legislature was given the option, within a period of fifteen years from the completion of the road, to purchase it on the payment of the cost of construction together with 14 per cent. additional thereon." New Jersey, in 1831, declared that the State had a right to assume ownership of a road, fifty years after its completion, on payment of the cost of construction and equipment. The most consistent policy, in this regard, was that of Massachusetts. At first it was enacted that any road, at any time after ten years from its completion, might be purchased on payment of the cost of construction together with 10 per cent. thereon. A later act made the term, within which purchase might not take place, twenty years; it further defined the phrase "cost of construction" by stating that this was also to include the cost of keeping the road in repair.9

The later provisions for State purchase, contained in the English acts, were undoubtedly influenced by the provisions looking to this policy contained in the American acts.10

In the period 1830-1850 a feverish interest in the development

1 E.g., Laws of New York, 1828, Chap. CCCIV., Sec. 17 (charter of Hudson and Berkshire Railroad). See also laws of same year, Chap. CCLXXVI., Sec. 11 (Salma and Port Watson Railroad).

2 E.g., Laws of New York, 1828, Chap. CCCXL., Sec. 11 (Geneva and Canandaigua Railroad).

3 Cf. Cohn Untersuchungen über Englische Eisenbahnpolitik, Band 1, p. 35, an the Regulation of Railways Act of 1844.

4 Cf. my article in Journal of Political Economy for June, 1898. An early Chapter in Canadian Railway Policy.

5 Laws of New York, 1828, Chap. XXII., " An Act to amend an Act to incorporate the Mohawk and Hudson Railroad Company."

6 Ibid., Sec. 3.

7 Acts of New Jersey, Act passed Jan. 21, 1831, Sec. 17 (charter of Paterson and Hudson River Railroad).

8 Massachusetts Public Acts, 1830, Chap. XCIII., Sec. 14 (charter of the Franklin Railroad). Revised Statutes of Massachusetts, 1836, Chap. XXXIX., Sec. 84, stated that the provision for state purchase applied in all charters granted.

9 Massachusetts Public Acts, 1831, Chap. LV. (charter of the Boston and Taunton Railroad).

10 Some of those interested in railway policy in England declared that English practice had granted charters of too long duration, and that the American system was to be preferred. E.g., Hansard Debates, Vol. XXXIII., pp. 977-988, speech delivered by Mr. Morrison, M. P. for Inverness, May 17th, 1836.

of transportation was shown by the different States. Pennsylvania, Ohio, Illinois and Michigan became interested in transportation schemes which were to be under State management. The Western States were enabled, through the action of Congress, to set aside grants of land in aid of railway enterprise.1 Undue optimism prevailed with reference to the quick returns to be obtained from railroad construction. A time of failure came about 1850 and the States veered to the other extreme. The earlier attitude had been attributable to the fact that the State could, on its corporate credit, obtain capital on better terms than were obtainable by private enterprise. The disastrous outcome of these experiments led at once to the provisions, in the constitutions subsequent to 1850, which limited the power of the States to incur indebtedness.3

It was now thought that the matter of railroad construction might, advantageously, be left to individual enterprise. As a corollary from this point of view an individualistic attitude towards railroad enterprise came into existence.

The regulative provisions, already passed in review, exerted little appreciable influence upon the problem of railway regulation. The great desire was for rapid construction. Increase of railroad facilities, not regulation, was what was held in mind. In general there was a belief in the efficacy of competition. The limitations of the competitive principle, consequent upon the large investment of fixed capital, were not appreciated. Railroad charters were lavishly granted. These charters, like the bank charters of the period, were granted, not with a view to the needs of the community, but simply as perquisites. The idea became prevalent that railroad chartering was attended by bribery. And there were many facts to substantiate this opinion. The effect of this was seen in the provision of the New York Constitution of 1846 which required the legislature to pass general Railroad laws. The outcome of this was the legislation of 1850 which provided, in substance, that any twenty-five persons might, on filing articles with the Secretary of State, be incorporated as a railroad company with all the general powers attaching to such a company. The

1 For details see Congressional Grants in Aid of Railways, by J. B. Sanborn,

Bulletin of University of Wisconsin, August, 1899.

2 For details see Adams' Public Debts, pp. 325-331.

3 Adams, op. cit., pp. 340-41 and 377-99.

4 Constitution of 1846, Article VIII., Sec. 1.

5 A condensed statement of the content of the law will be found in an article by Mr. Simon Sterne in Lalor's Cyclopedia of Political Science, Vol. III., p. 501. See

adoption of such a policy meant that the legislative body gave up even the semblance of regulative policy. The example of New York has influenced the general policy of the States of the Union.

The general adoption of this legislative policy had a great deal to do with the creation of the evils which, at a later date, gave force to the demand for a regulative policy.1 The legislatures had given up the power to regulate. The railroads were considered a panacea for social ills; they practically prepared their own charters; there was no supervision.2 Along with this attitude there went a lavish subsidy policy. Up to 1870 at least $185,000,000,00 of county and municipal bonds had been issued in aid of railroad enterprises. It is probable that this does not measure all the aid that was extended.

The policy of unregulated individualism held power until about 1870. Since then there has been a policy of regulation.

In the period 1860-1870 the railroad mileage of the country increased from 30,626 to 52,922. The Central West had been. opened up and population was being pushed into the further West. A community had grown up which was absolutely dependent upon railroad transportation. In the section adjacent to the Great Lakes there is the alternative transport by water. And the effect of this is seen in the fact that the ton-mile rates of the railways, in the North Western States, are much higher than the rates of those situated in the territory east from Chicago and north of the Ohio river.5 With the extension of the railroad system the fertile wheat lands of the North West were brought

also evidence of Sterne before the Hepburn Committee of the New York Legislature, 1879, pp. 78-118.

1 Cf. Stickney, The Railway Problem, p. 200. This presents a slightly prorailway point of view; but it will be seen from the next footnote that it was not held by railroad men alone. Cf. also Report of the Senate Committee on Interstate Commerce, Vol. I., p. 74.

2 This is a condensation of the statement by Larrabee in his volume, The Railroad Question, p. 125. His statement is all the more significant since he was one of the leaders in the Granger movement in Iowa. See also pp. 126-127 and 129-131 of the same work. A similar position will be found in the evidence of Mr. J. W. McDill, a member of the Iowa Commission, before the Senate Committee on Interstate Commerce, pp. 943-44.

p. 7.

Professor H. C. Adams in Introduction to Dixon's State Railroad Control,

Cf. Poor's Railroad Manual.

5 Cf. statements in U.S. Statistical Abstract. For details concerning the influence of water competition on rail rates see Statistics of Lake Commerce, House Document No. 277, Fifty-fifth Congress, Second Session, and Report of the Committee on Canals of New York State, 1899.