Interstate Commerce Act of 1887 - Background of The Act

Background of The Act

The act was passed in response to rising public concern with the growing power and wealth of corporations, particularly railroads, during the late nineteenth century. Railroads had become the principal form of transportation for both people and goods, and the prices they charged and the practices they adopted greatly influenced individuals and businesses. In some cases, the railroads were perceived to have abused their power as a result of too little competition. Railroads also banded together to form pools and trusts that fixed rates at higher levels than they could otherwise command.

Larger railroads alarmed populist activists by attempting to engage in predatory pricing. In spite of its broad appeal as a means of drumming up support for price regulation, predatory pricing is not a sustainable practice. Even if a competitor is forced out of business, that firm's capital remains intact and may be purchased by a new entrepreneur. The so-called predator cannot engage in such pricing indefinitely.

Railroads often charged more for short hauls than for long hauls. The practice was decried as one that discriminated against smaller businesses, when it was in fact a practice based on scale economies.

Responding to a widespread public outcry, states passed numerous pieces of legislation. Through the 1870s various constituencies, notably the Grange movement representing farmers, lobbied Congress to regulate railroads, but Congress declined to step in. However, in a decision in 1886, Wabash, St. Louis & Pacific Railway Company v. Illinois, the U.S. Supreme Court ruled that state laws regulating interstate railroads were unconstitutional because they violated the Commerce Clause of the Constitution, which gives Congress the exclusive power "to regulate Commerce with foreign nations, and among the several States, and with the Indian Tribes." The following year, Congress passed the Interstate Commerce Act, which was signed into law by President Grover Cleveland on February 4, 1887.

The act worked to keep rates and railroad revenue up on routes where competition existed. It did this by attempting to force publicity about rates and make rebates and discrimination illegal. ('Discrimination' meant lower rates for certain customers, e.g. politicians, large customers, sharp bargainers, long haul shippers, shippers in competitive markets, low season travelers.) Railroads saw that competition made it hard to pay their stockholders and bondholders the amount of money promised them, and competition was therefore "bad."