Like many pernicious elements of our political economy, today’s railroad industry is a product of the deregulatory era of the 1970s and 1980s. Though responding to real regulatory shortcomings, railroad deregulation ended up releasing railroads from almost all of their historical obligations to serve the public.
The Congress that brought the railroads under federal control at the end of the 19th century wanted to check the monopoly power that a few railroads and financiers had over the U.S. economy. With the Interstate Commerce Act of 1887, Congress responded to the farmer-labor coalition agitating against the power of private corporations like the railroads and brought the nation-spanning transportation networks under the control of the Interstate Commerce Commission (ICC). At the time, there was neither long-distance trucking nor air freight. Other than minor competition from canal barges, transport meant rail.
The rules of the ICC could be complicated, but a few key features emerged from this era, bolstered by additional Progressive Era legislation. A railroad could not discriminate between similarly situated shippers, meaning that a railroad couldn’t favor similarly situated businesses, and railroads had to post their prices publicly, with those prices subject to ICC oversight.
By the mid-20th century, however, railroads struggled to stay profitable. The freight trucking industry began to grow, helped significantly by federal investments in the national highway system. The railroads had no such federal subsidy, and had to invest their own revenues in system maintenance. Though railroads carried most, almost 70 percent, of all freight after World War II, by 1975 its share dropped to 37 percent. The ICC frequently required railroads to provide service to unprofitable routes. For a universal service, cross-subsidy and service to unprofitable routes made sense as national policy, but the railroads were still privately owned and needed to book profits. By the late 1970s, bankrupt railroads ran 21 percent of all U.S. track.
In response, Congress and the Carter administration deregulated the freight railroad industry with the Staggers Rail Act of 1980, which deregulated the railroad industry in at least two key ways. First, railroads did not have to submit rates, or prices, to the ICC anymore. Instead, they could enter into private contracts with shippers and give different shippers different deals, including volume rebates to big businesses. This reversed one of the original reforms of the Progressive Era. Economic historian Marc Levinson argues that railroads’ abilities to bargain and offer volume discounts to large retailers helped facilitate the growth of big-box retailers like Walmart, which could secure advantageous volume discounts, unlike smaller retailers.