Georgia v. the Pennsylvania Railroad

Publication year2011
CitationVol. 16 No. 5 Pg. 0028
The Pennsylvania Railroad
No. Vol. 16 No. 5 Pg. 28
Georgia Bar Journal
February, 2011

A Retrospective

by James M. Thomas

Georgia v. Pennsylvania Railroad, filed 66 years ago in the highest court of the land, was laden with consequences — social, political and economic.[1] Its genesis lay in long-standing public denouncements of rate-making practices in the railroad industry. Allegations of wrongdoing set forth in the original jurisdiction bill of complaint, and the U.S. Supreme Court decision that followed, loudly reverberated in the federal bureaucracy and in the halls of Congress.

Industry and commerce—in the state and region— benefitted from the litigation that exemplified professional excellence at the apex of American practice and procedure. Lead counsel Ellis Gibbs Arnall, then sitting as Georgia's progressive governor, later became one of the South's most successful lawyers and a founding partner of a prominent Atlanta firm that remains in existence today. This article offers a retrospective.

The Setting

In the 1940s, Georgia was largely rural, poor, undeveloped and heavily dependent upon agriculture and its allied industries. Farmers and farm laborers constituted one-third of the work force.[2] At the turn of the decade, per capita income was 57 percent of the national average.[3] Salaries of public school teachers were half the national average.[4]

Economies of the state and much of the region were characterized by exportation of raw materials and importation of finished goods, practically all by rail—an arrangement known as an "extractive economy." The industrialization that had occurred mainly consisted of low-wage, low-value-creating industries that generated little impact on per capita income of Southerners.[5]

Poverty was pervasive. Homeowners resided in 30 percent of occupied housing units, of which only 35 percent were equipped with indoor plumbing. Merely half of all housing had electricity.[6] Travelers, and the few tourists who jostled across the state's defective rural roads, reported a landscape of abject backwardness.[7]

Since Reconstruction, shippers, manufacturers, Southern governors and others blamed Georgia's economic plight on the railroads. They claimed discriminatory freight rates for hauling cargo into, out of and across the region were obstructing commercial expansion. Georgia Gov. Eurith D. Rivers, elected in 1936, and acting through the Southern Governors Conference, became the principal spokesman of this regional crusade.[8]

Rivers was not alone. Gov. Bibb Graves of Alabama declared, "This freight business is the heart of the whole Southern problem."[9] Likewise, Frank Dixon, a former governor of Alabama and chairman for two years of the Southern Governors Conference, concluded in 1944, "Of all the outstanding and inexcusable messes which a policy of laissez faire has brought on an innocent people, the freight rate structure is about the worst."[10]

On Feb. 2, 1939, Gov. Rivers appointed Ellis G. Arnall, a young lawyer from Newnan, Ga., state attorney general. Three years later, Arnall defeated Eugene Talmadge to become the 69th governor and the youngest in America, at age 35. A proponent of economic growth as the path out of poverty, Arnall was sensitive to the issue of discriminatory freight rates.[11]

The Freight Rate Controversy

Before the Civil War, each fledgling railroad set its own rates. In the post-war period, excessive competition and rate cutting prompted Congress to pass the Interstate Commerce Act and create the Interstate Commerce Commission (the ICC). The congressional intent in 1887 was to prohibit excessive and discriminatory rates. The ICC was empowered to enforce the Act.[12]

Within the railroad industry, two key developments converged to create the anticompetitive rates that plagued the South. First, the rail lines organized trade associations, e.g., the American Railroad Association and the Southern Railway and Steamship Association. Second, the lines established geographic "territories" for purposes of setting rates.[13] The Southern Territory encompassed Kentucky and most states in the old Confederacy. The Official Territory included northern states east of the Mississippi and the greater part of the Virginias. Other territories were divided among the remaining states and regions.[14] The Southern Territory contained less than 20 percent of the nation's population, and only slightly more than 12 percent of the work force was laboring in factories. Per capita income was the lowest in the country. The Official Territory, enclave of northern industry, by contrast, contained 51 percent of the population, the greatest number of workers engaged in industrial production, and the highest per capita income.[15]

In 1937, John Alldredge of the Tennessee Valley Authority submitted a freight rates report to the 75th Congress. He disclosed that shippers of manufactured goods by class rates (i.e., rates on finished products, as distinguished from raw materials) paid, on average, 39 percent more in the Southern Territory than their counterparts in the Official Territory, quantities and distances being about the same.[16]

During Gov. Arnall's administration, these rate distortions persisted. He famously cited figures showing that cargo from the West en route to ports on the North Atlantic, e.g. from Alton, Ill., to Baltimore or New York Harbor, paid a first class rate of $1.68 per hundred pounds; but to the port in Savannah the rate was $2.39, though roughly of equal distance. On a carload of work clothes bound for Chicago from Macon—819 miles— the rate was $1.56 per one hundred pounds, as compared to $1.12 for a shipment from Philadelphia to Chicago — 816 miles.[17]

Conspirators, Collusions and the Southern Governors' Case

The rates were rigged. The conspirators, it was believed, colluded to set the discriminatory rates through trade associations. Their misdeeds were achievable because the ICC granted the lines broad powers in rate-making. Each railroad was free to promulgate a schedule of rates and file it with the Commission. The rates then became effective — unless within 30 days some interested party intervened with a written request for suspension, or unless the Commission sua sponte instituted suspension.[18] Gov. Arnall claimed that more than 90 percent of all rate filings became effective without suspension, investigation or other Commission initiatives.[19]

Railroad officials agreed among themselves on rates suitable for ICC filing. Economic coercion was the wrench employed for holding uncooperative rail lines in line. A Southern line that balked was guaranteed to learn that it was bad for business.[20] The governor elaborated:

As a part of the pattern of this unlawful private rate-making machinery there exists what may be termed "economic coercion." This coercion is a subtle thing. It is something apart from physical threats against a railroad which is friendly to the South. Rather it involves meetings of railroads at times and places, where and when it is simply understood that, under the peculiar circumstances, it would not be good for business for a Southern railroad to fail or refuse to conform to the wishes of those present; economic sanctions, such as diversion of business, can be applied too readily.[21]

Arne C. Wiprud, special assistant to the U.S. attorney general, described the collusion even more bluntly:

In no other field of private or semi-public enterprise has such a vast scheme of price-fixing been so boldly conceived and executed. The over-all conspiracy has succeeded in eliminating virtually all competition in the making of rates within and between all forms of public transportation. The ability to manipulate prices arbitrarily is the essence of monopoly power ... .[22]

At the ICC, regulatory challenges of freight rates began as early as 1925.[23] In 1937, the Southern Governors' Conference filed its complaint on behalf of eight Southern states.[24] It became known as the Southern Governors' Case. The complainants averred that existing rates were discriminatory on 14 products; were in violation of the Interstate Commerce Act; and forced southern manufacturers to absorb higher shipping costs in order to compete in Northern markets, thus placing them at an economic and market disadvantage. Counsel for the governors asserted that higher inter-territorial rates were set and intended to protect the markets of Northern firms. They further contended that Northern lines dominated the ratemaking process and that higher rates in the South were unjustified when based on higher costs of service in the South.[25]

On Nov. 22, 1939, in a five-to-four vote, the ICC found for the Southern Governors' on 10 of the 14 products in question. Moreover, the Commission conceded that, "The desirability of rate structures providing reasonably uniform levels of rates from adjacent producing sections of the country to common markets is not open to question ... .'[26] Down south politicians were encouraged.

During pendency of the Southern Governors' Case, Congress joined the fray. Hearings were held, legislation was introduced and the Transportation Act of 1940 became law. It ordered a general investigation of rates on manufactured products,

Ellis Gibbs Arnall, former Georgia governor and cofounder of Arnall, Golden & Gregory.

agricultural commodities, and raw materials within the various territories.[27] The Act, however, came after the Commission's announcement on July 29, 1939, of its own Class Rate Investigation.[28]

The ICC, however, was dilatory. It was June 1941 before the Commission began rate hearings that dragged on for three years.[29] Delay caused the rate reform movement to lose momentum and falter. Gov. Arnall, who had become the section's principal spokesman regarding freight rates, became convinced legal action was mandatory.


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