Author’s note:
This series of blogposts will be my paraphrased notes on a lecture given by Murray Rothbard called “The American Economy and the End of Laissez Faire“. This means the post will contain some word for word transcriptions of Rothbard’s words and some editorializing and rephrasing of my own. I will not distinguish between the two.
Recall the competing trunk lines were the basic lines to/from Chicago and the Eastern Seaboard: The B&O, The Eerie, The Pennsylvania, New York Central. Of these 4 competing lines, the B&O was the last one to be built in 1874. Given that these trunk lines were competing over the same areas of travel through the American heartland, they attempted in 1877 to form a cartel. However, these companies could not agree on a structure for a pricing system and each favored methods of calculating freight rates which were favorable to their own strengths.
Eventually the trunk line cartel formed what was known as the “Seaboard Agreement”, which implemented a quota system designating a fixed share of freight business to each particular rail lines. To enforce these quotas, a system of internal policing within the cartel was necessary, so they set up an official association to run the cartel (note that this was not an illegal practice in those days). They picked a German railroad engineer named Albert Fink who became the first professional cartelist. Eventually Fink became the head of many different railroad cartels, with his job being primarily to police cartel agreements between companies and prevent cheating and price undercutting.
In addition to the help of Fink, J.P. Morgan & Company (who became the primary railroad investment banker after the fall of Jay Cooke) was also getting involved in organizing these affairs through Drexel Morgan & Company (Anthony Drexel). Morgan at this time was heavily invested in railroads and in the underwriting of railroad debt. J. P. Morgan was the son of a wealthy British banker named Junius Morgan, (with J.P. Morgan at this point being the senior partner of the Morgan enterprise).
Among the trunk line cartel there was constant quarreling over the quota system, which presented endless opportunities for it’s downfall. As technology improved and railroads were updated, there was growing demand between the lines for a reevaluation of the freight quotas. Given the already complicated nature of running a railroad company, the additional variable of quotas restraints only served to exacerbate this issues. Every business wants to produce more, every railroad wanted to ship more freight, after all, this was their bottom line, their lifeblood. But every attempt to strive towards improving this bottom line would result in bumping into the guard rails of the cartel quota system.
As was always the case with cartels in this day, the Seaboard Agreement only lasted about 6 months before going bust. Companies would sign these cartel agreements, and immediately begin cheating their counter-parties out of agitation, resulting in frequent dissolution and reconvening on quota agreements.
The Grand Trunk
Ironically, because of the anticipation for higher profits thanks to these trunk line cartels, the Grand Trunk Line expanded it’s operations to enter the competition (Chicago to Boston line). This 5th line entering the fray had no association with the existing trunk line cartel, and in addition, it was poorly managed and constantly on the verge of bankruptcy ever since 1860. The Grand Trunk had managed to stay alive and expand by absorbing smaller, failing railroads and refurbishing their track. In this sense, the Grand Trunk had nothing to lose and was constantly cutting rates to be as competitive as possible.
One might be tempted to think that the trunk line cartel could’ve easily crushed such a vulnerable participant by forcing them into bankruptcy, however, cartels do not have the ability to manipulate markets in this manner. Even if the other 4 trunk lines had been able to force Grand Trunk into bankruptcy through ironclad cartel quota adherence, the assets (tracks and trains) of the Grand Trunk would not simply disappear in a puff of smoke. If you then raise the prices again, after driving a competitor into bankruptcy, a 3rd party could just as easily come along and buy up the bankrupt assets and start the process over again. Thus forcing out competition proved much more difficult for trunk line cartel than one might expect.
With the trunk line cartel already on shaky ground, each company feeling the weight of the quota constraints, the possibility of introducing the Grand Trunk as a 5th competitor in the cartel was also out of the question. All of these factors meant a certain & swift death for the trunk line cartel.
Fink’s Plan
In 1876 Albert Fink said,
“Whether this cooperation [the cartel] can be secured by voluntary action of the transportation company is doubtful. Governmental supervision and authority may be required to some extent to accomplish the object in view.”
Fink had come to the realization that it was impossible for the railroads to maintain a cartel without State & Federal government enforcement of cartel rules and regulations. By 1879 he has worked out this proposal:
“What we need is a Federal law, and a Federal commission of course to regulate it. Doing the following things…somehow to outlaw railroad rate discrimination [changes in rates, classifications, discounts, etc], outlaw secret rebates, and [introduce] compulsory publicity.”
At a first glance this might sound democratic, however, the end goal of “compulsory publicity” was not a better informed public (knowledge of internal business decision making protocols are irrelevant to consumers) but rather giving railroads the ability to better keep tabs on one another in order to enforce cartel agreements and prevent price cutting.
Fink also wanted a Federal commission to enforce regulations and arbitrate disputes & quota systems and for these arbitration to be ratified into law by the Federal government. Fink was certain that this plan was necessary for railroad cartels to ever survive.
