The lack of regulation allowed railroads to damage the public interest even as they drove one another into mass insolvency. In the 1870s, roughly one-third of the industry, measured by mileage, went bust or ended up in court-ordered receivership. Congress responded to the crisis by creating the Interstate Commerce Commission in 1887, the first federal regulatory agency. The ICC required railroads to charge all of their customers the same, publicly posted prices for the same levels of service. This—along with the Sherman Antitrust Act of 1890—helped eliminate ruinous price wars. It also equalized standards of service among different competing businesses, cities, and regions, so that success and failure in American life no longer depended so much on who happened to get the best deal from the railroads. The regulatory process was bureaucratic and far from perfect, but it worked much better than the anything-goes alternative.
In 1938, the U.S. adopted the same approach for the newly forming airline industry. Before the creation of the Civil Aeronautics Board, airlines faced ruinous competition from new “fly by night” carriers and depended financially on large airmail subsidies from the government. The CAB attacked this problem by enforcing new market rules that required airlines to charge roughly the same price per mile on all routes, thereby preventing price-gouging on routes where they faced little competition and destructive price wars on routes where competition remained strong. Airlines were effectively required to use some of the profits they earned on high-volume, high-margin, long-haul routes to maintain government-mandated service on low-volume, low-margin, short-haul routes, just as the ICC had long required railroads to do. The CAB also limited new entrants so that the airline industry remained modestly profitable and able to finance its technological progress, notably through the expensive conversion to jets in the 1960s and ’70s. In 1962, only 33 percent of Americans over 18 had ever taken a trip on an airplane. By 1977, the number was up to 63 percent.
Yet by the end of the ’70s, Congress and the Carter administration had begun to dismantle both the ICC and the CAB. Many liberal Democrats, including Ted Kennedy and his then-staffer Stephen Breyer, the future Supreme Court justice, reasoned that deregulation would lead to more competition and thus to lower consumer prices—a high priority at a time of galloping inflation. The consumer advocate Ralph Nader joined in, arguing that by creating regulatory barriers to new airlines, the CAB had allowed both airline management and unions to become bloated and inefficient. And so, on the basis of these and other critiques, Congress passed a bill in 1978 doing away with the CAB and the regulatory regime it had enforced.