The Elkins Act is a 1903

United States federal law The law of the United States comprises many levels of codified and uncodified forms of law, of which the most important is the nation's Constitution, which prescribes the foundation of the federal government of the United States, as well as ...

that amended the Interstate Commerce Act of 1887. The Act authorized the Interstate Commerce Commission (ICC) to impose heavy fines on

railroads Rail transport (also known as train transport) is a means of transport that transfers passengers and goods on wheeled vehicles running on rails, which are incorporated in tracks. In contrast to road transport, where the vehicles run on a prep ...

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 domesticated animals raised in an agricultural setting to provide labor and produce diversified products for consumption such as meat, eggs, milk, fur, leather, and wool. The term is sometimes used to refer solely to animal ...

and

petroleum Petroleum, also known as crude oil, or simply oil, is a naturally occurring yellowish-black liquid mixture of mainly hydrocarbons, and is found in geological formations. The name ''petroleum'' covers both naturally occurring unprocessed crud ...

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

extorted Extortion is the practice of obtaining benefit through coercion. In most jurisdictions it is likely to constitute a criminal offence; the bulk of this article deals with such cases. Robbery is the simplest and most common form of extortion, ...

by the railroad

trusts A trust is a legal relationship in which the holder of a right gives it to another person or entity who must keep and use it solely for another's benefit. In the Anglo-American common law, the party who entrusts the right is known as the "settl ...

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: Automobiles * Nissan President, a 1966–2010 Japanese ...

Theodore Roosevelt Theodore Roosevelt Jr. ( ; October 27, 1858 – January 6, 1919), often referred to as Teddy or by his initials, T. R., was an American politician, statesman, soldier, conservationist, naturalist, historian, and writer who served as the 26t ...

as a part of his "

Square Deal The Square Deal was Theodore Roosevelt's domestic program, which reflected his three major goals: conservation of natural resources, control of corporations, and consumer protection. These three demands are often referred to as the "three Cs" ...

" domestic program, and greatly boosted his popularity.

Background

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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

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, who introduced a bill in 1902 at the behest of the Pennsylvania Railroad. The law was passed by the

57th Congress The 57th United States Congress was a meeting of the legislative branch of the United States federal government, composed of the United States Senate and the United States House of Representatives. It met in Washington, DC from March 4, 1901, to ...

and signed by President Roosevelt on February 19, 1903. The Act made it a misdemeanor 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

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Albert B. Cummins of

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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 on freight rates, the nature of the railroad industry may have not have permitted perfect competition. Economist Robert Harbeson argues that the price wars prior to the Elkins Act suggest that the railroad industry was more

oligopolistic An oligopoly (from Greek ὀλίγος, ''oligos'' "few" and πωλεῖν, ''polein'' "to sell") is a market structure in which a market or industry is dominated by a small number of large sellers or producers. Oligopolies often result fro ...

. In an industry with decreasing

marginal costs In economics, the marginal cost is the change in the total cost that arises when the quantity produced is incremented, the cost of producing additional quantity. In some contexts, it refers to an increment of one unit of output, and in others it r ...

and high

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, 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 output produced per unit of time. A decrease in cost per unit of output enables ...

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 penalties.

Subsequent legislation

Citing the shortcomings of the Elkins Act,

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began to call for greater regulation of railroad interests, and, in 1906, President Roosevelt signed the Hepburn Act 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 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