The Elkins Act is a 1903

United States federal law The law of the United States comprises many levels of Codification (law), codified and uncodified forms of law, of which the supreme law is the nation's Constitution of the United States, Constitution, which prescribes the foundation of the ...

that amended the

Interstate Commerce Act of 1887 The Interstate Commerce Act of 1887 is a United States federal law that was designed to regulate the railroad industry, particularly its monopolistic practices. The Act required that railroad rates be "reasonable and just", but did not empowe ...

. The Act authorized the

Interstate Commerce Commission The Interstate Commerce Commission (ICC) was a regulatory agency in the United States created by the Interstate Commerce Act of 1887. The agency's original purpose was to regulate railroads (and later Trucking industry in the United States, truc ...

(ICC) to impose heavy fines on

railroads Rail transport (also known as train transport) is a means of transport using wheeled vehicles running in tracks, which usually consist of two parallel steel rails. Rail transport is one of the two primary means of land transport, next to road ...

that offered rebates, and upon the shippers that accepted these rebates. The railroad companies were not permitted to offer rebates. Railroad corporations, their officers, and their employees, were all made liable for discriminatory practices. Prior to the Elkins Act, the

livestock Livestock are the Domestication, domesticated animals that are raised in an Agriculture, agricultural setting to provide labour and produce diversified products for consumption such as meat, Egg as food, eggs, milk, fur, leather, and wool. The t ...

and

petroleum Petroleum, also known as crude oil or simply oil, is a naturally occurring, yellowish-black liquid chemical mixture found in geological formations, consisting mainly of hydrocarbons. The term ''petroleum'' refers both to naturally occurring un ...

industries paid standard rail shipping rates, but then would demand that the railroad company give them rebates. The railroad companies resented being extorted by the railroad

trusts A trust is a legal relationship in which the owner of property, or any transferable right, gives it to another to manage and use solely for the benefit of a designated person. In the English common law, the party who entrusts the property is k ...

and therefore welcomed passage of the Elkins Act. The law was sponsored by

President President most commonly refers to: *President (corporate title) * President (education), a leader of a college or university *President (government title) President may also refer to: Arts and entertainment Film and television *'' Præsident ...

Theodore Roosevelt Theodore Roosevelt Jr. (October 27, 1858 – January 6, 1919), also known as Teddy or T.R., was the 26th president of the United States, serving from 1901 to 1909. Roosevelt previously was involved in New York (state), New York politics, incl ...

as a part of his " Square Deal" domestic program, and greatly boosted his popularity.

Background

Congress A congress is a formal meeting of the representatives of different countries, constituent states, organizations, trade unions, political parties, or other groups. The term originated in Late Middle English to denote an encounter (meeting of ...

passed the Elkins Act as an amendment to the Interstate Commerce Act. Without restrictive legislation, large firms could demand rebates or prices below the collusive price from railroad companies as condition for their business. As a result, it was common practice for railroads to offer competitive lower rates for transport between the large cities with high density of firms than the monopolistic rates between less industrial cities, irrespective of length of travel. Trusts constituted such a substantial portion of a carrier's revenue that the trusts could demand rebates as a condition for business, and the carrier would be forced to cooperate.

Purpose

The ICC had been unable to protect competition and fair pricing. Section 2 of the Interstate Commerce Act prohibits a carrier from offering preferential prices or rebates; however, enforcement of this section was ineffective. Powerful trusts would pay the standard shipping price, but demand a rebate from the carrier. Court cases brought before the commission generally did not result in punitive action, as the ICC was composed primarily of railroad interests. Carriers found guilty of price discrimination, moreover, could appeal the ICC decision to federal courts, delaying punishment for years. The Elkins Act was named for its sponsor, Senator Stephen B. Elkins of

West Virginia West Virginia is a mountainous U.S. state, state in the Southern United States, Southern and Mid-Atlantic (United States), Mid-Atlantic regions of the United States.The United States Census Bureau, Census Bureau and the Association of American ...

, who introduced a bill in 1902 at the behest of the

Pennsylvania Railroad The Pennsylvania Railroad ( reporting mark PRR), legal name as the Pennsylvania Railroad Company, also known as the "Pennsy," was an American Class I railroad that was established in 1846 and headquartered in Philadelphia, Pennsylvania. At its ...

. The law was passed by the 57th Congress and signed by President Roosevelt on February 19, 1903. The Act made it a

misdemeanor A misdemeanor (American English, spelled misdemeanour elsewhere) is any "lesser" criminal act in some common law legal systems. Misdemeanors are generally punished less severely than more serious felonies, but theoretically more so than admi ...

for a carrier to impose preferential rebates, and implicated both the carrier and the recipient of the low price. The Act also abolished imprisonment as a punishment for breaching the law, so a violator could only be fined. By reducing the severity of punishment, legislators hoped to encourage firms to testify against each other, and promote stricter enforcement of the law.

Impact

Following the passage of the Elkins Act, real freight rates decreased only slightly. In 1905, leaders in the regulation movement testified before Congress to identify the reduction in prices that resulted from the Act. Yet, in the first months following the passage of the law, the most pronounced change in railroad pricing was the elimination of rebates. However, later analysis has found that decreases in carrier prices are better attributable to decreases in the costs of operation due to technology advances.Harbeson, Robert. "Railroads and Regulation, 1877-1916: Conspiracy or Public interest?" ''Journal of Economic History.'' Vol 27, No 2 (June, 1967), pp. 230-242. The elimination of rebates led the railroads to seek other methods to compete for business, leading

Governor A governor is an politician, administrative leader and head of a polity or Region#Political regions, political region, in some cases, such as governor-general, governors-general, as the head of a state's official representative. Depending on the ...

Albert B. Cummins of

Iowa Iowa ( ) is a U.S. state, state in the upper Midwestern United States, Midwestern region of the United States. It borders the Mississippi River to the east and the Missouri River and Big Sioux River to the west; Wisconsin to the northeast, Ill ...

to declare, in 1905, that the elimination of rebates simply forces railroads to seek alternative noncompetitive means to secure business. The Elkins Act, thus, was more effective in stabilizing prices and entrenching price

collusion Collusion is a deceitful agreement or secret cooperation between two or more parties to limit open competition by deceiving, misleading or defrauding others of their legal right. Collusion is not always considered illegal. It can be used to att ...

than demonstrably lowering prices. A diverse group of stakeholders publicly supported the Elkins Act. Citizens who supported the law hoped that reducing price discrimination would lower freight prices uniformly, and railroad interests lobbied for the passage of the Act as a means of enforcing collusive pricing. While the Act restricted preferential pricing, it did not specify what constituted a "reasonable" shipping rate; thus, railroads could use the law to entrench a system of collusive prices.

Collusion Collusion is a deceitful agreement or secret cooperation between two or more parties to limit open competition by deceiving, misleading or defrauding others of their legal right. Collusion is not always considered illegal. It can be used to att ...

is unsustainable in a market where it is easy to undercut competitors. However in industries that only have a small number of competitors (e.g. railroads, airlines, or transportation companies operating between two given cities) collusion is far more likely. The result of the Elkins Act was that railroads had a stronger mechanism to protect their collusive prices and corporate trusts were weakened in their ability to gain shipping discounts. Farmers and other railroad users, instead of benefiting from greater competition, were unaffected by the Act. While farmers may have benefited from the establishment of a

price ceiling A price ceiling is a government- or group-imposed price control, or limit, on how high a price is charged for a product, commodity, or service. Governments use price ceilings to protect consumers from conditions that could make commodities proh ...

on freight rates, the nature of the railroad industry may have not have permitted

perfect competition In economics, specifically general equilibrium theory, a perfect market, also known as an atomistic market, is defined by several idealizing conditions, collectively called perfect competition, or atomistic competition. In Economic model, theoret ...

. Economist Robert Harbeson argues that the price wars prior to the Elkins Act suggest that the railroad industry was more oligopolistic. In an industry with decreasing marginal costs and high fixed costs, it would be futile to enforce a price cap. Moreover, he argues, stronger regulation would have prevented carriers from reaching

economies of scale In microeconomics, economies of scale are the cost advantages that enterprises obtain due to their scale of operation, and are typically measured by the amount of Productivity, output produced per unit of cost (production cost). A decrease in ...

Contemporary criticism

In reaction to the Elkins Act, it was argued that the law was drafted by Congress on behalf of the railroads, and that while some railroads curtailed rebates for some customers, for others the practice continued unabated. Congress was criticized for enacting only monetary fines for violations of the law and avoiding imposition of

criminal In ordinary language, a crime is an unlawful act punishable by a State (polity), state or other authority. The term ''crime'' does not, in modern criminal law, have any simple and universally accepted definition,Farmer, Lindsay: "Crime, definiti ...

penalties.

Subsequent legislation

Citing the shortcomings of the Elkins Act, Progressives began to call for greater regulation of railroad interests, and, in 1906, President Roosevelt signed the

Hepburn Act The Hepburn Act is a 1906 United States federal law that expanded the jurisdiction of the Interstate Commerce Commission (ICC) and gave it the power to set maximum railroad rates. This led to the discontinuation of free passes to loyal shippers. ...

to replace the Elkins Act. The Hepburn Act set maximum freight rates for railroads, representing the greater interests of Americans. The regulations of the Hepburn Act strained railroads, which saw new competition from the rise of trucks and automobiles. The

Panic of 1907 The Panic of 1907, also known as the 1907 Bankers' Panic or Knickerbocker Crisis, was a financial crisis that took place in the United States over a three-week period starting in mid-October, when the New York Stock Exchange suddenly fell almost ...

was, in part, a result of the turmoil of the railroad industry that resulted from the Hepburn Act.Martin, Albro (1971). Enterprise Denied: Origins of the Decline of American Railroads, 1897-1917. New York: Columbia University Press.

References