How the feds crippled a transportation giant

12/07/2010

Here’s an interesting contrast to how the federal government has changed during the past century: Many Americans have expressed chagrin over Washington recently lending General Motors and Chrysler billions of dollars to help keep the automakers afloat. By comparison, a century ago the feds effectively brought the locomotive-manufacturing industry to its knees with heavy-handed legislation that ultimately cost thousands their jobs and did significant permanent damage to the US economy.

While the recent bailouts of GM and Chrysler are relatively fresh in most people’s minds, what happened in the first decade of the 20th century is obscure history to most. But it’s no less instructive in how government has the power to giveth and the power to taketh away.

A bit of background: The manufacture of steam locomotives was in its heyday during the period from 1898-1907.

Baldwin Locomotive Works, the nation’s pre-eminent locomotive maker, built nearly 16,900 engines during that 10-year period alone, not bad for a company that started with production of a single locomotive in 1831 at the dawn of the railroad age.

By 1907, Baldwin was one of the largest manufacturing operations in the world, with 18,000 employees turning out seven locomotives a day, some weighing more than 300,000 pounds.

But the beginning of the end for Baldwin had already taken place, due in no small part to government interference.

One the key blows to Baldwin and the railroad industry as a whole was the Hepburn Act, which was passed in 1906. Trust busting President Teddy Roosevelt directed the passage of the act, which revitalized the Interstate Commerce Commission and authorized greater governmental authority over railroads.

The Hepburn Act, which didn’t pick up steam until midway through 1907, gave the ICC the power to set maximum railroad rates. 

The most important provision gave the ICC the power to replace existing rates with “just-and-reasonable” maximum rates, with the ICC to define what was just and reasonable. The Act made ICC orders binding, so railroads had to either obey or contest the ICC orders in federal court.

The limitation on railroad rates depreciated the value of railroad securities, a factor in causing the Panic of 1907.

What it meant to Baldwin was that railroad carriers stopped ordering new locomotives. Once the effects of the Hepburn Act began to felt, orders fell precipitously, from 2,655 in 1907, to just 617 the next year. Baldwin cut its workforce from 18,500 in 1907 to 4,600 in 1908, nearly all in the Philadelphia area.

The problem with the ICC’s actions, beyond the fact that it was interfering with private business, was that it continued to reject carriers’ request for rate increases, even while railway traffic increased. Increased traffic meant an increased need for not only more infrastructure and rolling stock, but also engines.

Without revenue from needed rates increases, railroad companies were hindered when it came time to purchase capital-intensive locomotives, and Baldwin felt the pinch.

“Comparing 1910 with the flush times of 1907, railway traffic had increased by 10 percent while earnings had actually declined. But the regulators were unmoved,” John K. Smith writes in his seminal work, The Baldwin Locomotive Works, 1831-1915. “The ICC rejected requests renewed requests for rate relief in 1914 and again in 1915.

“By that time the carriers were confronting a grim financial situation. Profit margins steadily declined between 1907 and 1914, although railway traffic increased by almost 25 percent over the same period. The lines face record demands for transportation services, but without adequate profits they could not modernize their systems to meet that demand efficiently,” Smith writes.

In 1907, Smith adds, the nation’s railroads stood on a pinnacle of profits and achievement, but by 1917 these same companies were so broken down that the federal government had to nationalize the system as an emergency measure during World War I.

In the five years before the impact of the ICC’s actions began to be felt, Baldwin produced more than 11,000 locomotives; in the five years after, it manufactured just over 6,500, a drop of 41 percent.

While Baldwin did enjoy a brief resurgence during the Great War as it contributed to the Allied effort, the glory days of 1898-1907, or of other periods in the second half of the 19th century were never to be repeated.

Certainly, the fault wasn’t all the government’s. Baldwin’s inability to produce a winning diesel locomotive design once the railroad industry was ready to move to that technology following the Great Depression hurt the company greatly, for example.

But it’s hard not to imagine that had the “trust busters” not stuck their noses into the private businesses of the railroads and dictated just how much profit private companies were entitled to make, companies like Baldwin might have been able to better adapt to changing times and technology.

About these ads

5 Responses to “How the feds crippled a transportation giant”

  1. Waldo Says:

    There was another time when this sort of depredation took place in the US. Post WW2, Robert Moses, the “master builder of New York”, warred on commuter trains and bus companies in favor of government subsidized highways. Robert Caro’s bio, The Power Broker” details it all, including how when postwar communities like Levittown started spring up, he’d get them expressways – but build the center medians just narrowly enough to prevent commuter rail from reaching those big new rider pools. General Motors scurried about on the side – buying up muni bus and streetcar companies and then shutting them down. Cities like Portland, OR that have successfully built new light rail systems are stuck with the expensive irony of putting down new track on old routes where the rails were torn up.

    So now we’ve got out Cold War interstate system and clogged roads everywhere – and nobody wants to spend any money on keeping it up.


    • I know that you have mentioned “The Power Broker” before and it looks like something I need to pick up.

      From what I understand, the government essentially agreed to keep its hands off General Motors regarding antitrust concerns as long as GM didn’t exceed the 50 percent threshold in terms of the American auto market (which it apparently came close to reaching in the ’50s and ’60s).

      So I don’t find it surprising that automakers were able to essentially rip up the infrastructure of competing forms of transportation and no one said a word.

      I thought you might find this blogger’s views on passenger service interesting, even if he sees things quite differently: ttp://www.coyoteblog.com/coyote_blog/2010/11/the-seen-and-unseen-passenger-rail-edition.html

  2. Waldo Says:

    The Power Broker is one of the best- and most searing bios of the last century. Caro is an unstoppable researcher, and managed to find Moses’ brother, whom the great man had ignored and covered up the existence of for decades. As a history of transportation policy from the 1920s through the 1970s it is without peer. The end date is important because it was when the GOP came in in 1980 that the infrastructure rot really started to set in and the annual bills to kill Amtrak became a congressional norm.

    In the meantime, China and the Eu are eating our dust when it comes to fast trains. Tom Toles had a cartoon the other day showing an air traveler stripped named and being hung by a toe so TSA could see if he had a push pin in his mouth, while in the next panel Yosemite Sam approached the Amtrak Wild West Train, which bore a big sign reading “Guns Welcome.”

  3. Waldo Says:

    You’re right about the coyoteblog: he’s wrong.

    Amtrak is hobbled by delays because Congress required freight rail be given priority- meaning passenger trains have to sit on side rails while slow cargo trains- despite the admirable PR campaign of CSX- lumber by. States and the feds have also failed train service by not dealing with the thousands of grade-level crossings and other track improvements that would improve all forms of service by letting them go at the speeds they are built for. On the Portland-Seattle Acela runs it’s a event when you get a stretch where the train can do 70 mph. That’s not a train failing, it’s the same sort of village idiot mantra that chants taxes needlessly need to be cut and cut and cut but that leads to crumbling dams and collapsing interstate highway bridges. And poor public transit service.

    But in the Northwest and Northeast even the current Amtrak alignments are valuable. I used to be able to leave Seattle for Portland in the morning, do my business, and be home for dinner. And the trains were not running empty.

    For the foreseeable future passenger rail in the US will be in corridors.What coyoteblog fails to recognize- busy sliming “intellectuals and snobs”- is that the kind of high speed rail we see elsewhere in the world simply doesn’t run on regular trail tracks. You build new, long, very straight lines for them- which will clear those annoying passenger trains from the sacred freight lines and so burn his/her straw railroad argument that passenger rail forces freight onto the highways.

    You’d think conservatives would like high speed rail more. They could probably still travel armed, and restoration of it (remember “Reardon metal” tracks?) was a major theme of Atlas Shrugged.

  4. mnault Says:

    Interesting comments but I don’t believe politics has as much to do with it as you say. If there was a way for somebody to make money at it, an entrepreneur would be going after it.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s