For Tech Giants, a Cautionary Tale From 19th Century Railroads on the Limits of Competition

The tech monopoly giants have a lot to learn from the railroad monopolies of the 19th Century during the First Gilded Age, writes Richard White. 

Southern Pacific steam engine No. 1364 in 1891. (Wikimedia Commons)

By Richard White 
Stanford University

Late 19th-century Americans loved railroads, which seemed to eradicate time and space, moving goods and people more cheaply and more conveniently than ever before. And they feared railroads because in most of the country it was impossible to do business without them.

Businesses, and the republic itself, seemed to be at the mercy of the monopoly power of railroad corporations. American farmers, businessmen and consumers thought of competition as a way to ensure fairness in the marketplace. But with no real competitors over many routes, railroads could charge different rates to different customers. This power to decide economic winners and losers threatened not only individual businesses but also the conditions that sustained the republic.

An 1882 political cartoon portrays the railroad industry as a monopolistic octopus, with its tentacles controlling many businesses. (G. Frederick Keller) 
That may sound familiar. As a historian of that first Gilded Age, I see parallels between the power of the railroads and today’s internet giants like Verizon and Comcast. The current regulators – the Federal Communications Commission’s Republican majority – and many of its critics both embrace a solution that 19th-century Americans tried and dismissed: market competition.

Monopolies as Natural and Efficient

In the 1880s, the most sophisticated railroad managers and some economists argued that railroads were “natural monopolies,” the inevitable consequence of an industry that required huge investments in rights of way over land, constructing railways, and building train engines and rail cars.

Competition was expensive and wasteful. In 1886 the Atchison, Topeka and Santa Fe Railway and the Missouri Pacific Railroad both built railroad tracks heading west from the Great Bend of the Arkansas River in Kansas to Greeley County on the western border, roughly 200 miles away.

The tracks ran parallel to each other, about two miles apart. Charles Francis Adams, president of the Union Pacific Railroad, called this redundancy the “maddest specimen of railroad construction of which” he had ever heard. And then his own railroad built new tracks into western Kansas, too.

After ruinous bouts of competition like this, rival railroad companies would agree to cooperate, pooling the business in certain areas and setting common rates. These agreements effectively established monopolies, even if more than one company was involved.

Monopolies as Unfairly Subsidized

Anti-monopolists who opposed the railroads’ power argued that monopolies originated not as a result of efficient investment strategies, but rather from special privileges afforded by the government. Railroads had the ability to condemn land to build their routes. They got subsidies of land, loans, bonds and other financial aid from federal, state and local governments. Their political contributions and favors secured them supporters in legislatures, Congress and the courts.

As stronger railroads bought up weaker companies and divided up markets with the remaining competitors, the dangers of monopoly became more and more apparent. Railroad companies made decisions on innovation based on the effects on their bottom line, not societal values.

For instance, the death toll was enormous: In 1893, 1,567 trainmen died and 18,877 were injured on the rails. Congress enacted the first national railroad safety legislation that year because the companies had insisted it was too expensive to put automatic braking systems and couplers on freight trains.

But a monopoly’s great economic and societal danger was its ability to decide who succeeded in business and who failed. For example, in 1883 the Northern Pacific Railway raised the rates it charged O.A. Dodge’s Idaho lumber company. The new rates left Dodge unable to compete with the rival Montana Improvement Company, reputedly owned by Northern Pacific executives and investors. Dodge knew the game was up. All he could do was ask if they wanted to buy his company.

For anti-monopolists, Dodge’s dilemma went to the heart of the issue. Monopolies were intrinsically wrong because they unfairly influenced businesses’ likelihood of success or failure. In an 1886 report on the railroad industry, the U.S. Senate Select Committee on Interstate Commerce agreed, stating clearly that the “great desideratum is to secure equality.”

Turning to Regulators for Help

To achieve equality, anti-monopolists wanted more government regulation and enforcement. By the late 1880s, some railroad executives were starting to agree. Their efforts at cooperation had failed because railroads treated each other no better than they did their customers. As Charles Francis Adams put it, his own industry’s “method of doing business is founded upon lying, cheating, and stealing: all bad things.”

The consensus was that the railroads needed the federal government to enforce the rules, bringing greater efficiency and ultimately lower rates. But Congress ran into a problem: If an even, competitive playing field depended on regulation, the marketplace wasn’t truly open or free.

The solution was no clearer then than it is now. The technologies of railroads inherently gave large operators advantages of efficiency and profitability. Large customers also got benefits: John D. Rockefeller of Standard Oil, for example, could guarantee large shipments and provide his own tank cars – so he got special rates and rebates. Newcomers and small enterprises were left out.

Some reformers suggested accepting monopolies, so long as their rates were carefully regulated. But the calculations were complex: Charges by the mile ignored the fact that most costs came not from transport but rather from loading, unloading and transferring freight. And even the best bookkeepers had a hard time unraveling railway accounts.

Managing Power

The simplest solution, advanced by the Populist party and others, was the most difficult politically: nationalize the railroad routes. Turning them into a publicly owned network, like today’s interstate highway system, would give the government the responsibility to create clear, fair rules for private companies wishing to use them. But profitable railroads opposed it tooth and nail, and skeptical reformers did not want the government to buy derelict and unprofitable railroads.

The current controversy about the monopolistic power of internet service providers echoes those concerns from the first Gilded Age. As anti-monopolists did in the 19th century, advocates of an open internet argue that regulation will advance competition by creating a level playing field for all comers, big and small, resulting in more innovation and better products. (There was even a radical, if short-lived, proposal to nationalize high-speed wireless service.)

However, no proposed regulations for an open internet address the existing power of either the service providers or the “Big Five” internet giants: Apple, Amazon, Facebook, Google and Microsoft. Like Standard Oil, they have the power to wring enormous advantages from the internet service providers, to the detriment of smaller competitors.

The most important element of the debate – both then and now – is not the particular regulations that are or are not enacted. What’s crucial is the wider concerns about the effects on society. The Gilded Age’s anti-monopolists had political and moral concerns, not economic ones. They believed, as many in the U.S. still do, that a democracy’s economy should be judged not only – nor even primarily – by its financial output. Rather, success is how well it sustains the ideals, values and engaged citizenship on which free societies depend.

When monopoly threatens something as fundamental as the free circulation of information and the equal access of citizens to technologies central to their daily life, the issues are no longer economic.The Conversation

Richard White, is Professor of American History, at Stanford University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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22 comments for “For Tech Giants, a Cautionary Tale From 19th Century Railroads on the Limits of Competition

  1. Blather
    June 9, 2019 at 16:15

    Have you looked at SUCCESSFOOL ways monopolies were beaten? Copy them.

  2. Arizona
    June 9, 2019 at 14:46

    THIS can’t be fixed ,ALL the INTERNET SERVICE PROVIDERS ARE BUYING OFF THE GOVERNMENT,recently a page was put up showing how much money was PAID TO EVERY government offical to look the other way, then the rates were raised into the sky on everyone ,NOTHING WAS SAID as everyones rates were doubled,including mine,MY internet is so slow it won’t download anything with out it buffering,THESE BASTARDS OWN THE WHORES WHO ARE RUNNING THE GOVERNMENT,Honorable,HAHAHA,OH thats funny,GUILTY OF TREASON YEA,honest…not a chance,the US GOVERNMENT ARE ALL THIEVES ,CRIMINALS,AND MURDERS,and there ain’t a man in america who will stand up to stop them,SO NOW,someone, none of you know will destroy it all so we can start again,OUR GOOD LORD,hope all you cowards enjoy hell, its where your going here shortly,YOUR ABOUT TO DIE YOU KNOW,and because your all criminals ,YOU WON’T be warned by the other criminals,hahaha

  3. June 9, 2019 at 12:52

    Refreshingly accurate and in the midst of the emotional content on most of the net, enlightening. It does raise the question of where to draw the line. A certain economies of scale occur with size, but we know from experience this is rarely if ever used to benefit people. Anti combines laws in both Canada and the US are gutted and rarely used, unless for political gain. It’s like the construction company that doesn’t practice safety but has a big sign that says we do. The trouble I think is we assume this model, (hierarchical power) is the only model. Pure capitalism can work but we see, once the power shifts, that everyone loses their moral compass. God’s speed all

  4. Jon E. LaFreniere
    June 9, 2019 at 12:04

    Sir,
    You have provided a clear and appropriate link to the historical challenges to Americans in the past to our present day technically evolving environment. Our liberty and privacy is obviously threatened…. You are not a lone voice in the desert—- These times are dangerous — Chaotic nervousness among people may be a precursor to recurring “cultural mitosis event” that seems to taking form.
    I pray that we find a peaceful solution.

  5. Jim Shaw
    June 9, 2019 at 11:57

    Where John Galt?

  6. Robert Mayer
    June 5, 2019 at 13:36

    Tnx XN & Richard White… Good Content!

    1. As a veteran worker in “phone wars” always wondered why CalGov used Ver. When rates So Higher… Dean Dana 1 x-Ver exec…

    2. Both x-Bells sim: Ver / ATT… Mystery charges… Svc holes… Etc… (AJ Pye: x-Ver)

    3. When sales rep in 70’s bought “farmer leads”… Big Rail predominant… Later learn gov gave 2?mi rite of way rail build incentive

    4. LADWP gov provided util Far Better IMO than So Cal Edison

  7. don N
    June 5, 2019 at 11:06

    [War]lords Enclosed the Commons. Granted Charters to Subjects, for example Britain’s King Charles (or James?) and Massachusets Bay Colony. A condition of receiving a share of the colony – a settlement – was improving it, each parcel of land – and providing benefits to the settlement as a whole and to the “owner” (still the king). Independence seized these returns and directed them to the people through a new system of govt that served the people as sovereign. A colony, a state, a municipality: these are all corporations. Their charters require them to “behave” in the interests of the permit-granting authority: the sovereign (on this side of The Pond that is now – or was – The People.) A representative govt can condition and even revoke the charters of corporations that do not serve our interests. But first we must return to representative govt and stop the diversion to select private interests: our new [war]lords. And rip out all the laws that subvert our sovereignity.

    • don N
      June 5, 2019 at 11:09

      OOPS! posted to wrong article!

  8. Tim
    June 5, 2019 at 04:50

    A wider view might be helpful to the author: all the railway systems in the world that work really well are publicly owned (which is not to say that all publicly-owned systems are in good shape).

    And privatization of publicly-owned systems does not always have such disastrous results as in the UK (where even some Conservatives call for re-nationalization), but I know of no case where this has not resulted in a decline in quality of the service over all.

  9. Jeff Harrison
    June 4, 2019 at 23:52

    Gee. A piece with which it is easy to agree…..

  10. June 4, 2019 at 21:15

    Thanks for this piece. It brings to mind the Upper Midwest progressive revolution c.1918 against the power of that era’s railroads and bankers — power which hit farm families hard.

    A gent named Arthur C. Townley bounced around North Dakota’s back roads in a borrowed Model T. For six dollars (about $140 today) he signed up farm families to join his Non Partisan League, promising to rein in the fat cats. Newspapers hooted, calling these farmers “six-dollar suckers.”

    But in the 1918 elections, the NPL shocked the political establishment. It swept the governorship and both houses of the North Dakota legislature. Among other reforms, in 1919 it swiftly established a state-owned grain storage facility and mill — a huge deal for farmers, giving them greater control over their harvested wheat — and a state-owned bank, the Bank of North Dakota, also serving the public interest.

    Sadly, amid infighting the NPL didn’t last. But a century later the state-owned grain facilities and bank are going strong — ironically, still doing business as essentially socialist enterprises in what is now one of the reddest states in the Union.

    And still serving the public interest.

    https://ilsr.org/how-to-make-a-political-revolution

    https://publicbanking.wordpress.com/2012/11/03/hurricane-sandy-the-great-red-river-flood-how-the-public-bank-of-north-dakota-saved-grand-forks

    • vinnieoh
      June 5, 2019 at 09:07

      Thanks Ira; Ellen Brown writes much about BND but don’t know that I’d ever read just how it came into being. Very instructive comment.

  11. Tom Kath
    June 4, 2019 at 20:56

    Together with the previous article “Reclaiming Billionaire’s Wealth”, there is a very clear and sound argument for nationalising ALL monopolies. However, “Nationalising” may be the wrong dimension. “Owned by society” is probably the concept, which sounds a bit like “Socialism”. Maybe the term “Society” could be refined to include smaller localised groups rather than some globalised concept including all humanity.

  12. nietzsche1510
    June 4, 2019 at 17:11

    competition, what competition? it exists only in the academic manuals. never, ever, did it exist in History; it is another article of faith like those in the religions.

  13. JohnDoe
    June 4, 2019 at 12:33

    The real trouble is that this is not just a problem of infrastructure, those giants hold a huge amount of information and information is power. Nationalizing those corporation would concentrate all the information in few hands, it doesn’t matter whether the hands holding such a power would be public or private, the temptation to abuse that power would be too strong.
    I don’t think that the simple solution can work, trivializing the problems and doing away with all the nuances is the kind of behavior that helped corporations become so powerful, they spent decades proposing simple solution and shortcuts that were always hiding the trap under the guise of the unforeseen issues and backfiring.
    Let’s avoid the shortcuts, regulating and breaking up those giants without going through the nationalization might be difficult, but if it was possible to break up the Bell Company back then I can’t see why it couldn’t be done now.

  14. Pablo Diablo
    June 4, 2019 at 12:19

    Japan has the highest speed internet in the World, and it is free for everyone.

    • nietzsche1510
      June 4, 2019 at 17:21

      do not expect to see something similar in the USA, the land of monopolies & slavery under the guise of “hard working” & taxable at will working American!

    • suspect zero
      June 5, 2019 at 15:01
    • suspect zero
      June 5, 2019 at 15:10

      (redacted)

  15. Eddie
    June 4, 2019 at 12:01

    Professor White: “[Anti-monopolists ] believed, as many in the U.S. still do, that a democracy’s economy should be judged not only – nor even primarily – by its financial output. Rather, success is how well it sustains the ideals, values and engaged citizenship on which free societies depend.”

    When the notions of corporation originally emerged in US, the corporation was granted a charter that had a termination date, usually 20 years. The incorporators had to demonstrate how the entity would benefit society at large, not just corporate shareholders and executives. Anyone with eyes that see realize that these laudable ideas have long since vanished from the world landscape as the disaster capitalists and their stooges in government adopted the Chicago economic paradigm of the corporate state, where profit is the only reason for corporations to exist.

    The time has come for the pendulum of greed to be stymied and the ideals of yesteryear reinstated. We must nationalize and breakup these evil tyrants that run roughshod over the working class.

    • Tiu
      June 4, 2019 at 17:48

      The first step will be to get the government(s) to start working for the people instead of the corporations.

  16. Dennis Rice
    June 4, 2019 at 11:47

    Excellent article. I would send it to my legislators, but I know already they would not read it; nor heed it.

    And the American people who need to read it; alas, it is too academic (lol) for the average American. In fact, it may be too academic for my legislators as well. Just look how blindly they vote!

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