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.
This plan for a cartel governance structure which Albert Fink proposed in 1876 and formalized in 1879 is precisely what the Federal government implemented in 1887 with the passage of the Interstate Commerce Act under the supervisory of the Interstate Commerce Commission (ICC). This act was the first Federal government regulatory commission of railroads.
The procedure for this agency was simple, keep down competition. Through the use of the government and in the name of “humanity”, “public welfare” “democracy” and any other enlightenment buzzwords you can think of, regulation was used to suppress competitive market practices.
This regulation was largely put in place by the railroads themselves to protect their own interests (of course some shippers and farmers were also in favor of regulation if it protected their own interests, which never ended up being the case. Regulatory monopolies always lead to higher prices and worse service), but broadly it hurt consumers as a whole and especially the development of the railroad industry itself.
When the ICC first came in they started setting freight rates (recall that in those days they were constantly experiencing downwards price pressure) they pushed rates to the level that J. P. Morgan desired.
This is the essence of the welfare state. A system by which big business groups use the government to establish cartels and call it “regulation”, “free trade”, “consumer protection”, “anti trust”, “democracy” and any number of things to win favor with the general public.
Most people mistakenly believe that big business is always against government regulation, but historically the opposite is true. If you go through the hearings that led to the formation of the ICC, you would find that all bills presented by the railroads were different versions of the cartel legislation, with different railroads jockeying for a higher rating in the regulatory power totem pole. They key here was they all wanted rates to go up, they all wanted to outlaw competition, they all wanted government regulation, they all wanted to outlaw undercutting, they all wanted to outlaw price discrimination, every bit of it was planned and placed by the railroads themselves. Only a very small minority of railroad operators advocated for a free market system.
One of these men was James J Hill who successfully built a transcontinental railroad without subsidy, the Great Northern Railroad, and in this he successfully out competed Northern Pacific Railroad which had lots of subsidy. Another one these men was Jay Gould, there is an excellent book on his life by Julius Grodinsky called Jay Gould: His Business Career. More on Gould later.
After 100 years, the ICC was finally dissolved in 1996 due to the fact that all railroads were going bankrupt due to the imposed regulatory overhead.
The Civil Aeronautics Authority Act
As a more modern example, similarly, a Civil Aeronautics Board (CAB) was formed with The Civil Aeronautics Authority Act of 1938 to oversee regulatory cartels and was eventually dissolved in 1985 due to similar reasons. The CAB did not oversee airline safety, but rather explicitly designed to regulate commerce.
As with the ICC, the goal with the CAB was to keep down competition. The airlines got together and worked to cut the supply curve of air travel to the left, keeping out new competitors by limiting the throughput of the market service. In the case of airlines, they actually assigned routes to particular airlines.
Rates were fixed at a high level and flight routes were monopolized and rationed out to each airline. In other words, one particular airline was only allowed to fly a route from Boston to Chicago.
In those days, Pan Am, for example, had a total monopoly of the entire Pacific, no other airline was allowed to fly transpacific routes.
The first thing the CAB said was that small airlines were not allowed to fly on a schedule. They were only allowed to depart once the flight was full. This meant that passengers had to purchase a ticket when traveling on small airlines without any clear indication of what time they would be taking off. This was a tremendous and intentional competitive disadvantage to smaller airlines. Small airlines were only allowed to fly small routes, these were known as “feeder” lines.
Even at the disadvantage of being “non sched” (non scheduled), smaller airlines were still able to out compete large airlines, in those days up through the 1950s there was no such thing as “1st class” on planes. Everything was 1st class and airfare was extremely expensive. One had to practically be a millionaire to fly anywhere. In those days, also, they also used to weigh passengers with their luggage and charge them by the pound. Smaller feeder airlines were able to out compete larger airlines by simply charging lower fares than larger airlines (resulting in absurdly non direct travel routes for consumers taking advantage of lower cost travel options).
Eventually the CAB outlawed these smaller (slightly illegal) feeder airlines entirely. By that time, the competition forced by these smaller airlines onto the larger airlines had already resulted in cutting of fares across the board as well as the introduction of the 1st class and coach distinction. Rates at this point became fixed, so as was the case with railroads, airlines began competing on quality (through luxurious foods) rather than on fare.
To clamp down on such practices, the International Airline Travel Authority issued a decree that no airline traveling to Europe could serve anything except sandwiches! Individual airlines used to undercut this by serving deluxe meals served on top of slices of bread and refer to it as an “open sandwich”. The market always finds a way.
After 50 years of such anti competition legislation, the airlines became so inefficient and monopolized (causing an enormous ballooning of operating costs) that they could not make a profit. With the deregulation movement in the 1970s these restrictions began to ease up until the CAB was eventually dissolved entirely 1985.
Many opposed this deregulation movement, in particular those whose salaries would be negatively impacted by a dissolution of the monopolistic regulations. However, this ultimately resulted in a massive shift in the industry resulting in better service and lower prices for consumers, and actual profits for the airlines (hopefully they didn’t mess that up again somehow in the meantime with more regulation).
There is some Federal safety regulation to this day with the Federal Aviation Administration (FAA) but not as much overall regulation as during the days of the CAB. Fortunately, no such regulation has captured the American trucking industry, which is why it has enabled unprecedented distribution of and access to consumer goods across the nation.
