5.3.4. The Midwest, 1865-1900: The Beginnings of the Regulatory State


  • Midwestern states imposed few restrictions on businesses before the Civil War.  Food and product safety laws, workplace safety laws, limits on predatory business practices – all were unknown.  But the first glimmers of what would become the modern regulatory state arose shortly after the war.  
  • General incorporation laws:  Even before the war, as America began the transition from an agricultural to a mixed industrial and commercial economy, many businesspeople chose to operate as corporations because that allowed them to preserve their personal assets in case their business failed.  Before the industrial age, each company had to obtain an individual charter from the legislature.  The wealthy and well-connected often obtained special favors in their charters not available to the less powerful.  Starting in the 1830s, reformers called for elimination of these abuses by enactment of standardized general incorporation laws.  The movement progressed slowly, but by the 1870s all Midwestern states had eliminated special charters laws.
  • Railroad commissions:  With the return of prosperity in the 1860s, railroads in the Midwest began a new round of construction and began merging into powerful regional and national rail systems.  Shippers and passengers complained about high and often discriminatory charges; by the early 1870s, the outcry was loud enough to prompt legislatures in several Midwestern states to enact “Granger laws” creating railroad regulatory commissions.  The commissions’ powers varied:  some were authorized to limit freight and passenger rates, others were merely allowed to collect statistics and report to the legislature. 
  • Railroads challenged the authority of the new commissions, arguing that they had a constitutional right to charge whatever freight and passenger rates they wished.  The issue, which was of national importance, first rose and was fought out in the Midwest.  Illinois, Wisconsin and Iowa supreme courts rejected constitutional challenges to their state’s railroad commissions, and the U.S. Supreme Court upheld their rulings in 1877.
  • Many Midwestern states also created labor bureaus to examine workplace conditions.  However, most bureaus merely collected and reported information and  had no power to improve work conditions.

 

Individual corporate charters abolished

Railroad commission created; powers

Labor bureaus created

Ohio

1851

1867

1877

Indiana

1851

1905

1899

Illinois

1848

1871

1879

Michigan

1850

1873

1909

Wisconsin

1872

1874

1883

Iowa

1846

1878

1884

Minnesota

1857

1871 (commissioner)

1895 (commission)

1887

The dawn of railroad regulation:  the Granger Cases

Minneapolis Eastern Railway Co. v. Warehouse Commission – Minnesota, 1872 (11 Minn. 515); Chicago & Alton Railroad Co. v. People ex rel. Koerner (McLean County Case)Illinois, 1873 (67 Ill. 11); Munn v. PeopleIllinois, 1873 (69 Ill. 80); Attorney General v. Chicago & Northwestern Railroad Co. (Potter Law Case)Wisconsin, 1874 (35 Wis. 425)

  •  Railroads wasted no time challenging the Granger laws and the threat that commissions posed to their autonomy.  The railroads typically argued: (1) that their corporate charters were contracts with the state and that the Granger laws were a one-sided, and thus unconstitutional, attempt to change the bargain; and (2) that they had a right to decide the terms on which they would do business with customers. 
  • Midwestern courts uniformly rejected these challenges.  Minnesota’s supreme court was the first to act:  in Minneapolis Eastern, it held that the state’s traditional broad power to regulate highways included railroads.  In the McLean County and Potter Law Cases,  Illinois’ and Wisconsin’s courts held that the state’s traditional “police power” to regulate public safety and welfare was broad enough to extend to railroad rates.  They also noted that under their state constitutions, all corporations took their charters subject to any future laws the state might enact; thus, the Granger laws did not violate the railroads’ charters.  However in McLean County the Illinois supreme court warned that the state must give the railroads a right to defend the reasonableness of their rates before imposing any rate limits.
  • In Munn, the Illinois supreme court upheld in broad terms a law giving the state extensive power to license grain warehouses and regulate their methods of doing business.  Munn went further than other Granger cases:  the court openly recognized that regulation might damage business by reducing its profitability, but held that did not make the law unconstitutional:  to this extent, public welfare must prevail over private welfare.  In 1877, the U.S. Supreme Court paved the way for the modern regulatory state by affirming the Illinois supreme court’s decision in Munn and similar decisions in Iowa and Wisconsin.



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Grain elevator, Illinois (courtesy Wikimedia Commons)



Chicago, Rock Island & Pacific Railroad engine, 1880s (courtesy Wikimedia Commons)

















“[Corporations] must be permitted to invoke the spirit of justice which prompted the, so far as may be necessary to protect their prop and franchises against the operation of a law that substantially condemns without a trial.”

-Justice Charles Lawrence, in the McLean County case

 “No person can claim that, in the exercise of the proper functions of government, his property shall not be diminished in value … All regulations of trade with a view to the public interests, may more or less impair the value of prop, but they do not come within the constitutional inhibition unless they virtually take away and destroy those rights in which prop consists.  This destruction must be, for all substantial purposes, total.”

-Justice Sidney Breese, in Munn

“It would have been a mockery of justice to have left corporations, counting their capital by millions … subject only to the common law liabilities and remedies which were adequate protection against turnpike and bridge and ferry companies …[The Potter Law] was denounced as an act of communism  … [but t]hese wild terms are are as applicable to a statute limiting the rates of toll on railroads, as the term murder is to the surgeon’s wholesome use of the knife, to save life, not to take it.”  

-Chief Justice Edward Ryan, in the Potter Law Case