How the feds crippled a transportation giant
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.