Accounting as a social practice: US railroad regulation,value of service accounting,and regional economic development

Research focus

This study uses an analytical framework developed by Anthony G. Hopwood (1975, 1983) and extended by Peter Miller (1994) for evaluating accounting as a social practice to examine how the US Interstate Commerce Commission (ICC) accepted the value of service accounting to improve economic welfare in underdeveloped regions in the US beginning in the last quarter of the 19th century. The rate system facilitated the redistribution of income and wealth to agricultural and extractive industry producers located primarily in the sparsely populated South and West (Friedlaender, 1969). Although these initiatives were not explicitly authorized in the formative 1887 Act to Regulate Commerce, the ICC’s objectives were consistent with the social beliefs of the Commission’s leaders and bureaucratic staff. These shared perspectives about economic fairness and regional economic integration shaped how accounting knowledge was employed in rail regulations. Historians have long overlooked this federal social welfare initiative, concentrating instead on the effect of such action on the New Deal programs of the 1930s (Rimlinger, 1971).

The focus on railroads is highly relevant because they represented the most efficient mode of transportation for most of this era and made the rise of an urban-industrial economy possible (Chandler, 1977). Because of their central role in national transportation, the railroads promoted allocative efficiency and consumer welfare through the distribution of critical staples like foods and fuels that affected the cost of living. The achievement of these goals was facilitated by accounting measurement methodologies not sufficiently addressed previously by accounting and business historians.

The primary problem confronting the rail industry in setting rates related to the lack of any economically meaningful way to allocate the high joint costs of service to the many categories of freight hauled. The railroads’ burden of high fixed overhead costs was similar to the question of fixed cost overhead distribution that Johnson and Kaplan analyzed in Relevance Lost (1987) for mid-20th century multi-product industrial enterprises. Averages like the ton-mile metric developed in the 1870s by Albert Fink of the Louisville and Nashville Railroad to monitor aggregate revenue or cost trends were viewed as an ineffective tool to establish economically meaningful costs measurement for rate-setting (Seligman, 1887).

The industry’s solution before federal regulation did not involve the development of any system of activity-based overhead costing. Instead, the railroads’ solution focused on the creation of a differential rate system based on the value of service to the consumer rather than the cost of service to the carrier (Ripley, 1912). The value of service represented rate ceilings for particular freight categories determined by a loose standard of ‘what the market would bear’. That is, the rate should be set at a level that enabled shippers to sell their products profitably in end markets. The transportation cost should not be so high as to eradicate opportunities for profitable trade in distant delivery locales. Although not used directly in rate-setting, the cost of service was also critical because it represented the minimum level of revenue that railroads had to earn in order to sustain their basic activities. The revenues derived from charging shippers on the basis of the value of service had to be equal to or greater than the total cost of providing transportation for a railroad to remain economically viable. If the cost of service exceeded revenues determined by the value of service, a railroad would experience an operational loss.

Before the advent of federal regulation in 1887, railroads in England, France, Germany, Italy, and the US had already recognized the criticality of the value of service in rate-setting (Seligman, 1887). Southern and Western American railroads had begun to adopt value of service rates to encourage the economic expansion of their service areas. Achieving this goal was facilitated by maintaining a special subcategory of ‘commodity rates’ in the value of service system (Ripley, 1912). These flat rates made it economically feasible to transport high-volume, low-unit value, price-elastic commodities like coal, cotton, livestock, petroleum, timber, and tobacco. In effect, these rates represented subsidies to interior producers of food, fuel, and raw material staples that helped build up the economies of the South and West.

In addition to commodity rates, the value of service rating system also included several categories of ‘class rates’ for higher value-added goods. Class rates varied depending on the relative value of goods, special handling requirement, and distance. Because expensive equipment and other high value-added manufactures were usually price-inelastic, increased transport costs generally had little impact on end demand. Revenue generated by the higher-class rates effectively subsidized the fixed commodity rates. Moreover, the railroads did not use cost of service accounting in rate-setting at this time because they believed it impossible to allocate the joint overhead costs of operation between the many commodities or classes of goods hauled in an economically meaningful way (Interstate Commerce Commission, 1959; Lorenz, 1916; McPherson, 1912; Meyer, 1905; Ripley, 1912; Seligman, 1887; Sharfman, 1936; Taussig, 1913). After its formation, the ICC continued to use the value of service standard to evaluate rate equity (Interstate Commerce Commission, 1887).

Other nations also used rate policy to subsidize industry, but their goals were unique and responsive to their national political-economic plans. In Australia, for example, there was little cooperation between the rail system in New South Wales that supported the development of the port of Sydney and the system in rival Victoria that sought to strengthen Melbourne (Meyer, 1905). In Germany, the potential for rail efficiency was not fully exploited because the rate structure made railroads into traffic feeders to that nation’s extensive river and canal transportation network (Meyer, 1905). Russian rate policy curtailed the transport of cheaper Siberian grains because of opposition from the politically powerful farmers in western provinces (Meyer, 1905). In the US, commodity rates based on the value of service sought to promote the development of interior regions by subsidizing the transportation of their output of food, fuel, mineral, and forest goods to major population centers in domestic coastal regions and overseas.

The next section explains the relevance of Miller’s (1994) model for evaluating the social purposes of accounting with regard to the nature of the American experience. It also draws on his framework to explore the objectives that differentiate major historiographic schools that seek to explain the ways that accounting has been utilized to foster socioeconomic change. The subsequent section focuses on the value of service as a measurement technology first developed by railroads before national regulation and subsequently incorporated in federal regulatory practice. This strategy was made in order to promote equity and welfare by redistributing income and wealth between various US regions. This use of accounting was not mandated by law. Instead, it was the product of an informal consensus about broad social objectives that unified ICC members, bureaucrats, and their political allies. In the section following, the study evaluates the socio-political and intellectual rationalizations for both inter-regional income redistribution and the selection of specialized accounting practice as the means to achieve policy objectives. The penultimate section explains how the use of accounting as a redistribution tool affected the complex domain of railroad regulation through a series of cases and interpretations. The concluding section summarizes how Miller’s (1994) analytical model serves this study by casting new light on the role of accounting in advancing socioeconomic reform. It also identifies some limitations that might prompt future research opportunities in the history of accounting and railroad operations in a wide swathe of national contexts.

Methodology and related literature

This interdisciplinary study contributes to a broad historical literature that extends the understanding of the role of accounting in organizational evolution (Carnegie et al., 2020) by concentrating on how the value of service measurement helped to reconcile the differing imperatives of economic efficiency that motivated railroad enterprises and the implicit welfare objectives that shaped the policies of government regulatory agencies. The study’s methodological approach draws on the insights of Anthony G. Hopwood (1975, 1983) and Peter Miller (1994) about the role of accounting as a social practice. The significance of accounting goes beyond basic questions of enumerating, classifying, and calculating the value of transactions. It is a communication mode that also influences perceptions of the significance of societal practices and norms. As Miller (1994) notes, this dimension of accounting epistemology has three aspects:

accounting as technology;

Miller’s (1994) notion of accounting as technology involves the creation of basic arrangements for measuring economic phenomena through the design of reliable reports and the definition of recording rules that convey meaningful economic information. Accounting technologies strengthen individuals’ cognitive capacities to document the many events associated with complex business endeavors. Such information may assess the direction, magnitude, variability, and other attributes of economic data over time. The evolution of technical accounting practices has long been a major theme in historical accounting inquiries (Camfferman and Zeff, 2015; Edwards and Boyns, 2013; Garner, 1976; Littleton, 1933; McMillan, 1998; Parker, 1969, 1986; Yamey, 1978). This purpose has also affected the writing of railroad accounting historians who have explained how the changing mode of corporate financial information affected the growth of capital markets (Feeney, 2012; Heier, 2006; Previts and Samson, 2001; Samson et al., 2006; Thompson, 2013).

The second aspect of Miller’s (1994) schema pertains to the ways that accounting could be applied to rationalize social circumstances, conditions, and outcomes. This is evident in several studies that have surveyed how accounting historians have imported sociological and cultural concepts to broaden the intellectual range and social sensitivity of their inquiries (Carnegie, 2014, 2017; Carnegie et al., 2020; Carnegie and Napier, 1996; Fleischman and Radcliffe, 2005; Fowler and Keeper, 2016; Gomes, 2008; Miller and Napier, 1993; Napier, 2006, 2009; Parker, 1999, 2015; Richardson, 2008; Walker, 2008).

The role of accounting as a rationalizing factor appears in the post-modernist critique of its institutional and organizational evolution. Since the 1970s, accounting historians increasingly adopted the critical perspectives and analytical approaches pioneered by social philosophers like Jacques Derrida (Derrida and Caputo, 1997) and Michel Foucault (1970, 1972). The deconstruction of cultural artifacts, including modes of accounting expression, served as an effective methodology for revealing the underlying and often hidden structure of social power and the ways that its authority is rationalized in the modern world.

Similarly, the critical theory of the Frankfurt school affected some accounting historians’ views of how accounting served as a mechanism for rationalizing social dynamics (Bernstein, 1994; Friedman, 1981; Geuss, 1981). This trend of thought was crystallized in the works of Jurgen Habermas (1990 [1983]), Max Horkheimer (1947), and Herbert Marcuse (1964). Leaders of the Frankfurt school studied history to identify any legacy of injustice embedded in contemporary institutions. Such insight had the potential to guide reform initiatives.

Much of the historical literature relating to accounting’s role in social rationalization has concentrated on two issues. One area involved extending our understanding of how accounting knowledge may be used to exercise organizational power (Chiapello and Baker, 2011; Collier and Miranti, 2020; Hoskin, 1998; Hoskin and Macve, 1996; Loft, 1986; Lowe and Tinker, 1977; Miller and O’Leary, 1987; Miranti, 1989; Raffnsøe et al., 2017; Tinker et al., 1982; Tinker and Neimark, 1988; Tyson et al., 2004). A second line of research evaluated how accounting practices have influenced government processes, especially concerning the issues of regulatory capture and ineffectiveness raised by political scientists Marver H. Bernstein and Gabriel Kolko (Acikgoz, 2015; Baker and Quéré, 2014; Bernstein, 1955; Bowden, 2015; Chatov, 1975; Cortese, 2011; Deringer, 2018; Doron, 2016; Kolko, 1965; Kracman, 2019; Martin, 1971; Merino and Mayper, 2001; Merino and Neimark, 1982; Radcliffe et al., 2017; Sivakumar and Waymire, 2003; Soll, 2014; Stevenson-Clarke and Bowden, 2018).

The third panel in Miller’s (1994) analytic addresses the ways that accounting constitutes and reconstitutes the economic domain. From an organizational perspective, accounting provides information useful in ordering a wide array of social functions. Accounting enhances firms’ capacities to plan, coordinate, control, and assess operational activities. It also provides insight into how information structures respond to social and economic flux. The ground-breaking research relating to the rise of the modern industrial corporation developed by Alfred D. Chandler (1977, 1990, 2001, 2004), Louis Galambos (1970, 1983, 2005), William Lazonick (1990, 1991, 1992, 2009), Lazonick and Teece (2012), and David J. Teece (1998, 2009) defined the two unique contexts that shaped the formation of modern accountancy. The first was economic and derived from Joseph Schumpeter’s theory, which emphasized innovation as a driver of growth and vitality in a capitalist society (McCraw, 2007; Schumpeter, 2010 [1943]). The second was sociological and was influenced by the structural formalism and social action theory of Talcott Parsons (1964, 1968, 1977). Chandler (1977) drew on these sources to explain both the rise of giant business enterprise beginning in the 19th century and the concomitant emergence of a new social category, the professional business manager.

These findings also affected the writing of accounting history. Some scholars focused on the role of accounting information in building and coordinating the activities for both large-scale business and government entities (Chandar and Miranti, 2012; Churella, 2013; Gourvish, 1972; Johnson, 1973; Johnson and Kaplan, 1987; Levenstein, 1998; McDonough et al., 2020; Quattrone and Hopper, 2001; Skowronek, 1982; Yates, 1989). Others have concentrated on the rise of accounting professionalization including the growth of practice units and representative associations (Abbott, 1988; Allen and McDermott, 1993; Baskerville et al., 2014; Carnegie et al., 2003; Chandar et al., 2014; Chua and Poullaos, 1993; Edwards and Walker, 2007, 2010; Lee, 2006; Loeb and Miranti, 2004; Miranti, 1990; Poullaos, 1993; Previts and Merino, 1998; Shackleton, 1995; Verhoef, 2013).

The emergence of value of service as a measurement technology

The concept of value of service had been employed in early turnpikes and canals in England and the US. In The Wealth of Nations, Adam Smith (1776) noted that turnpikes usually charged higher tolls not on the basis of cost, but rather on perceptions of what consumers could bear: the finely appointed carriages of the wealthy paid more than humble farmers’ carts. In the 1840s, canal companies also provided lower rates for low value cargoes like coal and agricultural products. Similarly, the early English railways incorporated rate differentials based on the type of freight, similar to those used by the canals. This practice also extended to three tariffs for passenger service that seemed sensitive to the income and habits of commuters. For example, the third class was intended for laborers, and it provided special rates for travel before 8 am and after 6 pm (Acworth, 1905).

Initially, railroads in the US and Europe sought to determine the average revenue or cost of all aspects of rail service. In England, the brilliant scholar Dionysius Lardner suggested in Railway Economy that the determination of rates required the consideration of distance, type of cargo, and the type and number of train cars as a basis for calculating the cost of rail service (Lardner, 1850). After the Civil War, several states in the Midwest US sought unsuccessfully to control rates based on the cost of service prorated on the basis of distance (Hadley, 1885). In his 1875 study, Cost of Railroad Transportation: Railroad Accounts and Governmental Regulation of Railroad Tariffs, Albert Fink, vice president and general manager of the Louisville and Nashville and the Great Southern Railroads, provided an exhaustive analysis of the many cost categories affecting his company’s operation (Fink, 1875). He also defined the important ton-mile classification, which represented the average revenue or cost associated with the movement of one ton of freight one mile (Chandler, 1977).

While the cost of service proved useful in the broad analysis of rail operations, the need to allocate joint costs of operation undermined the utility of this method to provide economically meaningful information when applied to the problem of structuring rates for particular commodities. Railroads generally divided their costs into two broad categories: fixed and operating. In the US and Europe, the fixed costs were estimated to represent about three quarters of total operating cost, and the variable costs about one quarter (Seligman, 1887). Many contemporaries tried unsuccessfully to devise ways to spread these overhead costs in economically meaningful ways (Seligman, 1887). Besides the arbitrariness of allocation methods, the cost of service for a particular commodity in an environment of high fixed cost was not a stable measure because it varied with fluctuations in levels of traffic and distances, as well as the distribution of goods carried.

However, the value of service provided an alternative way to determine rates that avoided the problem of joint cost allocation. This method involved an inclusive rate structure that accommodated a wide range of freight of varying economic worth. The rates for particular goods were set at levels that enabled shippers to sell them profitably at market terminals (Taussig, 1891). Because of these serious barriers to cost calculation, the value of service gained broad acceptance during the latter part of the nineteenth century. As early as the 1850s, leaders of the Great Western Railway in Britain indicated to Parliament that they sought to create a rate structure based on what ‘the market could bear’ (Acworth, 1891). In the US in the 1870s, the Iowa Railroad Commission rejected prorated rating based on transport distance and encouraged adherence to a standard based on ‘what the traffic will bear’ as a means to reach a compromise between shippers and railroads, particularly for the transport of agricultural goods (Hadley, 1885). In Britain in 1891, rail expert Sir William M. Acworth noted that the value of service was ‘… the method of fixing rates all around the world, whether the railways be State-owned or private commercial undertakings’ (Acworth, 1891: 326).

The linkage of the value of service to normative social goals emerged in the 1880s through the theories of Emil Cohn, a professor at the University of Gottingen. Cohn’s thinking about rates reflected the perspective of the German historical school of economics, whose adherents generally believed that economics should be studied from an historical viewpoint, rather than the mathematical and logical approaches characteristic of Anglo-American empirical analysis. Many of these scholars also embraced the belief that government had an ethical responsibility to improve the socioeconomic lot of the nation’s populace, and that history played an important role in defining the direction and goals of public policy.

Cohn began his study of railroad affairs in the 1870s by focusing on the evolution of rail policy in Britain (Cohn, 1883). In the 1880s, Cohn developed a new approach for guiding railway rate determination based on the theory of taxation that supported his social outlook. Broadly consistent with the underlying principles of the value of service accounting, Cohn introduced the notion of Leistungsfaehigkeit (meaning efficiency or capacity), which held that transportation costs, like taxation, should be charged on the basis of what beneficiaries could and should pay. In the railroad domain, the amount that shippers could pay was a function of the value of the goods they transported (Cohn, 1883; Taussig, 1891).

Sir William M. Acworth noted that the universal practice of fixing rates based on the value of service instead of costs reflected a general sensitivity to public welfare based on the implicit ‘… principle of equality of sacrifice by the payers. So regarded “what the traffic will bear,” becomes a principle not of extortion, but of equitable concession to the weaker members of the community’ (Acworth, 1905: 76).

From its inception in 1887, the ICC elected to use the value of service to achieve social equity, although there was no mention of this metric or its application in the 1887 Act to Regulate Commerce. The principal mandates under this Act involved the prohibition of:

unfair discrimination in service or other preferences between individuals, businesses, and areas;

In the agency’s first annual report, the ICC and its bureaucratic staff further indicated how it intended to use the value of service accounting as an operative tool to promote the public interest by improving economic equity and social welfare in underdeveloped regions of the nation:

The public interest is best served when the rates are so apportioned as to encourage the largest practicable exchange of products between different sections of our country and with foreign countries: and this can only be done by making value an important consideration, and by placing upon the higher classes of freight some share of the burden that on a relatively equal apportionment, if service alone were considered, would fall upon those of less value. With this method of arranging tariffs little fault is found, and perhaps none at all by persons who consider the subject from the standpoint of public interest (Interstate Commerce Commission, 1887: 36).

Moreover, the ICC’s first annual report further indicated that the regional equity goal was so important that the long-haul–short-haul rate discrimination prohibition mandated in the Act to Regulate Commerce could be suspended if social justice would be better served by permitting lower rates for long hauls compared to short hauls.

A specific example related to uniform flat rates for the transportation of agricultural goods to supply the needs of growing urban populations. The relaxation of the distance rule made it possible to increase the geographic scope of farming activity that could economically serve major consumption locations. The Commission also noted that such deviation from explicit anti-discrimination rules could provide greater benefit to society through the ability to exploit economies associated with the length of haul, quantity hauled, return freight, and train running costs (Interstate Commerce Commission, 1887).

Value of service and social transformation

Value of service rail rates helped to rationalize, in Miller’s (1994) sense of the word, many of the complex socioeconomic questions affected by the railroads during the last quarter of the 19th century. As the most efficient mode of transportation at that time, railroads operated as major agencies of social and economic change in a continental nation. The railroads facilitated the rise of an industrial and urban society that displaced the predominance of agriculture and small towns in the American social scene. However, railroad control over rates and service also heightened public concerns about whether such power might threaten the preservation of the nation’s legacy of libertarian values first embedded in its constitution in 1789.

The subsidies implicit in the value of service rates helped to rationalize the underlying propositions that supported an influential set of national policy objectives termed the ‘American System’. Initially defined by Henry Clay and based on the ideas of Alexander Hamilton, this system of beliefs was concerned with raising the nation’s economy to a level equivalent to Europe’s economies. In the post-Civil War period, these ideas were popularized by contributors like economist Henry C. Carey and German-American railroad developer and social theorist Friedrich List (Carey, 1867; Collier and Miranti, 2020; List, 1885). One aspect of the American System involved imposing high national tariffs to protect the development of infant industries. Another aspect was the priority given to internal improvements primarily related to transportation facilities that would enable remote interior territories to grow by forming connections to vibrant coastal and world markets.

Value of service rail rates helped to mitigate some of the burden borne by interior agricultural producers. While this group created a great demand for rail service by vastly expanding acreage under development in the decades after the Civil War, they were economically squeezed by steadily falling prices for their output. The total US annual average wheat production was 247 million bushels worth US$257 million from 1865 to 1875. This was equivalent to an average farm value yield of US$12.50 per acre. Although annual production steadily rose to 396 million bushels by 1893, the value of the crop declined to US$213 million. That year, the average dollar per acre return dropped to a period low of US$6.16. It was not until 1912 that the dollar yield per acre for wheat would exceed the 1865–1875 average (United States Bureau of Statistics, 1911). Given this strong trend of diminishing farm prices, it becomes more understandable why railroads and shippers sought to stabilize their businesses through rate concessions. These patterns were not limited to wheat. It also affected other major cash crops like cotton, tobacco, lumber, and provisions.

Value of service could also be used to rationalize concerns about the equity of rates among militant farmer groups in the West and South, who depended heavily on the railroads to transport goods to markets. These farmers generally supported the National Grange, a farm representative organization for promoting state legislation to control railroad rates during the 1870s (Buck, 1965; Miller, 1971). The cross-subsidization inherent in the ICC’s value of service accounting system was appealing because it promoted economic equity between the nation’s diverse regions. Such concerns were highly relevant in a nation that had experienced a destructive Civil War, brought about by the injustices of slavery and by the government’s inability to reconcile the differing economic interests of the industrial North and the agrarian South. In the two decades after the Civil War, this problem became more complex with the development of a third major US region, the West.

The rationalization for the use of the value of service accounting in regulation was also shaped by the perspectives of key ICC bureaucrats responsible for defining regulatory accounting policy. Foremost in this regard was Henry Carter Adams, a professor of economics at the University of Michigan, who served as chief statistician and accountant at the ICC from 1887 to 1911 and thus became a recognized authority on rail regulatory accounting (Adams, 1918). Adams grew up in Iowa and was keenly aware of the importance of railroads to rural America. After graduation from Grinnell College, he completed his doctoral studies under the direction of Herbert Baxter Adams at Johns Hopkins University in Baltimore.

During that period, Johns Hopkins was a bastion of German ethical historicism due to the influence of German-educated faculty like Herbert Baxter Adams. This branch of ethical historicism believed that the state should play an active role in improving the social condition of the nation’s citizenry. Like the contemporary Frankfurt school, the ethical historicists believed that studying the past could help to identify social conditions requiring remediation through government action. This viewpoint differed greatly from the classical economics and laissez faire capitalism that had long predominated in the Anglo-American world (Collier and Miranti, 2020; Donleavy, 2019; Furner, 1975).

Post-doctoral study at the University of Berlin heightened Henry Carter Adams’s appreciation of ethical historicism. There he studied the connections between national railroad capabilities and social welfare as a member of the seminar of welfare economist Ernst Engel, who was also the chief statistician responsible for developing Prussia’s railroad statistical archive. From Engel, Adams learned the importance of food costs in welfare economics (Furner, 1975). Engel’s research found that the improvement of living standards was more sensitive to changing food prices than any other factors affecting family budgets (Desrosières, 1998; Engel, 1857; Timmer et al., 1983). Thus, agencies like railroads were key elements in maintaining national living standards through their impact on distribution costs for food and fuel staples. In his book The Science of Finance, Adams developed the view that much of the economic burden of the nation’s industrialization would initially be borne by agriculture because of the government’s imposition of high tariffs on imports to protect emergent domestic industries (Adams, 1898; Collier and Miranti, 2020). However, through the subsidization implicit in the value of service rates, the ICC sought to offset some of the disadvantages from high tariffs affecting agriculture and extractive industries, especially in underdeveloped interior regions of the US.

A shift in the regional composition of the US Senate membership also rationalized the policy of pursuing just and reasonable rates through the application of accounting constructs like the value of service. The Senate became increasingly reflective of the concerns of Western interests when all thirty-eight new members added to its ranks from 1852 to 1912 came from the pioneering Central and Western states. This political bloc shared a common desire with the twenty-two representatives from the South to advance transportation policies advantageous to constituent agricultural and extractive industries (Collier and Miranti, 2020).

The regional subsidies inherent in the value of service accounting helped to build traffic volume that gradually rationalized the decision of public and private groups to invest heavily in the development of the railroads. Federal, state, and local governments had donated substantial amounts of land to accelerate the rapid development of the Western frontier. The railroads received acreage that was equivalent to about 6.8 per cent of the nation’s total land area. The federal government’s financial contribution of US$175 million accounted for about half of the total construction costs for the transcontinental railroads. State and local governments also provided about the same amount of funding (Fishlow, 1965; Goodrich, 1960). By 1906, the total value of railroad assets was US$17.7 billion, partially financed by funded debt with a par value of US$8 billion and capital stock with a par value of US$6.9 billion (Interstate Commerce Commission, 1907a). That year, total national rail mileage amounted to more than 222,000 miles (Interstate Commerce Commission, 1907a), and total rail freight revenue amounted US$1.64 billion (Interstate Commerce Commission, 1907a), more than double the 1888 level of US$613 million (Interstate Commerce Commission, 1889). Freight originating in the special rate-targeted South and West accounted for about 45 per cent of the tonnage shipped in 1906. Agricultural, livestock, mineral, and lumber producers who benefitted from commodity rates accounted for about 75 per cent of freight tonnage (Interstate Commerce Commission, 1907a).

Public perceptions of rate inequity provided a rationalization for government economic intervention because of the socioeconomic implications of the rising power of great industrial enterprises exemplified by the Standard Oil Company. After concentrating its control over 90 per cent of the refining industry, the oil giant used its great market power to extract secret rebates from leading railroads that undercut competitors in shipping product to market. The public’s concern was not limited to the expanding market power of a giant monopoly, but also related to how such economic power could dominate politics, thereby threatening to undermine the nation’s democratic institutions (Tarbell, 1904: Vol. I, Vol. II).

Value of service also helped to assuage the otherwise conflicting relationship that emerged between regulators and those regulated. During the first two decades of the ICC’s history, the railroads constantly tested their power in the courts (Hoogenboom and Hoogenboom, 1976). However, in the case of value of service rail rates, there was broader agreement. The value of service concept became a best practice in the thinking of rail executives (McPherson, 1912; Noyes, 1905). Like the ICC regulators, railroad managers and their bankers wanted to see faster economic development of the South and the West Although they agreed on the ways to subsidize pioneering territories, the goals of regulators and capitalists were different. The bankers and railroad managers wanted to apply value of service to advance regional development in order to generate greater profits, whereas the regulators wanted to use accounting knowledge to facilitate the redistribution of regional income and wealth and to raise living standards.

Freight rate accounting and value of service also took on new importance as Americans were compelled to develop new rationalizations about national purpose and destiny after the closing of the Western frontier and the recognition of the need to conserve scarce natural resources. In his 1893 article titled ‘The significance of the frontier in American history’, Frederick Jackson Turner explained how frontier expansion, which had long been the source of increasing material abundance and opportunities for settlement for a growing population, had come to a halt in 1890 (Collier and Miranti, 2020; Turner, 1893) when the last of the federal land runs occurred in Oklahoma’s Cherokee Strip.

Frontier closure portended a bleaker future and the need for careful conservation of the dwindling pool of natural resources. The use of accounting knowledge as a mechanism to achieve an equitable and efficient utilization of scarce resources became increasingly important. The government also used its expanding control over the railroads to protect the commonwealth by promoting social equity between regions, raising national living standards, and conserving limited pools of natural endowments.

Reconstituting the regulatory domain

Although the ICC did not receive the power to set transportation rates until the passage of the Hepburn Act in 1906, it did have the authority to reconstitute industry practice in Miller’s (1994) sense of the term by determining whether existing rates were fundamentally fair and equitable. Both before and after the passage of the Hepburn Act, regional railroad associations played key roles in communicating the freight rates set by their member railroads to the ICC. Four of the most important associations included the Official Classification Territory (New York to Chicago north of the Ohio and Potomac Rivers), the Southern Railroad and Steamship Association, the Central Freight Association (St. Louis, Chicago, Pittsburgh, and Buffalo) and the Transcontinental Association (Mississippi and Missouri Rivers to the Pacific Coast) (Potter, 1947; Ripley, 1912). Although prohibited from setting rates in 1890 under the Sherman Anti-Trust Act, the ICC’s continuance of the associations’ basic hierarchy of commodity class rates allowed the cross-subsidization of particular types of freight (Johnson and Huebner, 1911).

Soon after the ICC’s formation, the Senate expressed its concern about the reasonableness of freight rates for agricultural goods east of the Rocky Mountains by calling on the agency to undertake a special examination. The ICC’s subsequent report, ‘Rates and Charges on Food Products’ (1891a) modified the regulatory domain by qualifying how the value of service rates should be applied in consideration of railroads’ financial viability. Although the ICC further committed to the value of service rate-setting, it clarified its limitation within the overall cost structure of rail service. In the adjudication of questions of rate equity, the ICC indicated the need to consider factors that would help to preserve the economic viability of the railroads (Interstate Commerce Commission, 1891a). ‘Charges for transportation services should have a reasonable relation to the cost of production and value of service to the producers and shippers. But should not be so low as on any to provide a burden on other traffic’ (Interstate Commerce Commission, 1891a: 48–49). In this case, the ICC indicated that, among other commodities, the rates to ship wheat and flour from Chicago to New York City above US$0.27 per hundredweight were unreasonable. Similarly, shipments from Kansas to Texas that exceeded US$0.46 per hundredweight for grain and US$0.51 per hundredweight for flour and corn meal were unreasonable (Interstate Commerce Commission, 1891a).

The domain of regulation also benefitted shippers located in interior regions of the US from the subsidies implicit in combined rail-sea rates for the export of staples that many railroads and ocean shippers sought to capture by surreptitiously offering through traffic contracts that seemed inconsistent with the publicly posted land rates that the ICC had the power to monitor for fairness. This was especially true in the case of wheat, where the selling prices of American wheat in foreign markets were sometimes lower than the prices in domestic markets. In 1897, the ICC discovered that European bakers could produce breadstuffs cheaper than domestic bakers because of the low transport costs on shipments of American grain to Liverpool and Antwerp over 3000 nautical miles from New York. Although the ICC sought to end the subsidization of foreign consumers through joint rail-sea rates, the Supreme Court overruled the agency in this case, arguing that regulation should promote and not restrict greater trade.

Some railroads serving the Gulf region kept export rates low to redirect commodity traffic to ports remote from the main North Atlantic trade channels. Moreover, transportation rates through New Orleans and Galveston in the 1880s for the export of cotton, grains, and other agriculture goods from the Central West (the regions contiguous with and west of the Mississippi and Missouri Rivers to the Rocky Mountains) were significantly lower than the rates charged for domestic transit. Although these practices were challenged by the New York Board of Trade and Transportation in 1899, the ICC rejected these complaints and accepted lower export rates if they enabled shippers to meet competition in foreign markets and enabled the railroads to meet competition from water-borne transportation (Collier and Miranti, 2020; Interstate Commerce Commission, 1889, 1901, 1903).

The ICC also reconstituted the domain of regulation on import rates for both commodity and classified traffic (Collier and Miranti, 2020). Lacking authority to regulate ocean-shipping rates because they were associated with activity beyond the legal bounds of the US government, the ICC could monitor the legality of rail charges from the port of entry to an interior delivery point. Initially in 1891, the ICC mandated that imported products should be charged posted rates for transfer in the United States, thus prohibiting special arrangements between the railroads and shipping companies (Interstate Commerce Commission, 1891b). Five years later, the Supreme Court overruled the ICC in the Import Rate Case by allowing the adjustment of domestic transport charges to meet competition in foreign goods markets and/or from cheaper water-borne transportation (United States Supreme Court, 1896).

This framework of oversight benefitted consumers particularly in interior regions, as exemplified in the Pittsburgh Plate Glass Case in which special rates on imported European glass routed through New Orleans could offset the burden of the tariff and be sold competitively with domestic product manufactured in Pittsburgh. The shipping cost of a hundredweight of glass was US$0.75 from Boston to Chicago, a distance of 981 miles, while the rate for shipments of the same weight from Antwerp to Chicago by way of New Orleans, a distance of over 6600 nautical miles, was US$0.32 (Interstate Commerce Commission, 1908). Similarly, cement shipped from Germany 7133 nautical miles distant from Chicago by way of New Orleans, competed successfully against cement produced 779 land miles away in New Jersey (Interstate Commerce Commission, 1903). Other factors facilitated the ability to quote low sea-rail transit rates (Interstate Commerce Commission, 1903). For example, Germany provided low rates on the transport to Hamburg and Bremen of goods manufactured at interior locations (Hough, 1914). Ships often carried some bulky, dense cargo, such as glass, cement, chinaware, sand, and iron for free if these materials could serve as ship ballast European shipping companies dominated these trades through regional rate cartels like the Baltic Conference, which included the Hamburg-American Line and the North German-Lloyd Line. The British Cunard Line enjoyed subsidies to carry the royal mail, and several countries provided subsidies for the construction of ocean shipping (United States Tariff Commission, 1922).

Although high value manufactured products bore much of the rate burden, the ICC reconstituted the part of the regulatory domain pertaining to frontier regions. Most significant in this regard were special rates to benefit the development of the sparsely populated Pacific Coast region. Transcontinental railroads developed low ‘blanket’ rates for transport of iron, hardware, and dry goods to major port cities including San Francisco, Los Angeles, and Portland.

This enabled the railroads to compete with cheaper sea-borne transportation from the East either around Cape Horn or through the Isthmus of Panama. It also enabled the railroads to counter competition from European importation through the Suez Canal or from sea-rail traffic passing through Gulf ports like New Orleans and Galveston. In this case, the railroads could recoup some of their lost revenue under this system by charging higher rates for short hauls from the port cities to inland markets (Johnson and Huebner, 1911).

The ICC staff indicated that the domain of regulation, as defined by the Act to Regulate Commerce, could be reconstituted in cases of long-haul versus short-haul rate discrimination. The lower rates for long hauls in these exceptional situations usually occurred because such transits began and ended in major terminal cities where railroad companies had to meet competition from rival rail or water carriers. Such competitive forces did not exist at intermediary points on a rail line involving shorter distances to terminal points, thus eliminating the pressure to reduce rates. However, proponents of lower rates for long hauls argued that the average cost of such carriage was often low due to spreading the high fixed equipment burden over a high mileage basis. Moreover, the burden of higher short-haul costs for commodity producers was generally more than offset by the flat rates from major terminal points to distant markets. In any event, the enforcement of actions against short-haul discrimination was lax during the ICC’s first two decades. Initially, the ICC decided that railroads were exempt if they could demonstrate that the conditions prevailing for short hauls were substantially different from conditions on long haul. In 1897 in the Alabama Midland Case, the US Supreme Court decided that virtually all circumstances were unique, thus undermining the ICC’s basic criterion for enforcing the prohibition (Hoogenboom and Hoogenboom, 1976).

An important alternative standard proposed by railroads to counter the ICC’s use of value of service and commodity rates to determine transportation equity was the ‘fair return’ doctrine defined in the 1898 Smyth v. Ames Case (United States Supreme Court, 1898). In this case, the Supreme Court indicated that private property used in public service was entitled to earn a fair return on the fair value of its assets so committed. The shortcoming of the court’s dictum was that it did not specify how to measure fairness. Many railroads used the ill-defined total return fair value concept to counter individual ICC findings on the equity of particular rates. This continued after the ICC received the power to determine maximum rates for freight and to prescribe uniform accounting methodologies for financial reporting purposes under the Hepburn Act of 1906 (Interstate Commerce Commission, 1907b).

There was also some militancy to reconstitute the domain of regulation by introducing the cost of service analysis in rate evaluation, but this alternative failed to dislodge value of service for commodity cases. The first serious effort to promote cost of service occurred during the debates related to the 1911 Eastern Advance Rate Investigation. The 1910 Mann-Elkins Act authorized a fundamental change in the process of rate evaluation. Instead of responding to specific consumer rate complaints, the Mann-Elkins Act shifted the burden of proof to the railroads. Henceforth, they were required to take the initiative in requesting and justifying rate changes with the ICC (Hoogenboom and Hoogenboom, 1976). In the Eastern Advance Rate Case, Louis D. Brandeis, a future member of the Supreme Court, argued that rate equity required the railroads of the Official Classification Territory to justify their requests for increases by providing evidence of their actual costs of goods carriage (Interstate Commerce Commission, 1911; Martin, 1971; Oakes and Miranti, 1996). Brandeis was supported in this view by the testimony of Harrington Emerson, a pioneer in standard cost accounting and a prominent leader of the emerging scientific management school (Emerson, 1911). Despite their novel plea, the ICC denied the Official Classification Territory’s request for rate relief.

However, the cost of service option did have a longer-term impact on ICC practice. The federal agency began to study the marginal costs of service. This analysis later gained traction during the Great Depression when the ICC’s scope of authority broadened to encompass interstate trucking and water-borne transportation. Marginal cost analysis helped the ICC to allocate the shrinking demand for services among the three principal interstate transportation modalities: railroads, water carriers, and trucks. Marginal cost analysis did not disrupt the application of value of service in shaping the rate structure for commodity transportation, so food and fuel staples continued to benefit from cross-subsidization.

The subsequent search for a value base led to later legislation, such as the Valuation Act of 1913, to develop a comprehensive analysis of the original and replacement costs of railroads’ physical assets. These values informed practice under the Transportation Act, 1920 to control the consolidation of the rail industry and to maximize the allowable profits for individual companies (Leonard, 1946). These efforts to change the acceptable methods for assessing rate equity did not eclipse the importance of the value of service. Under the 1925 Hoch-Smith Resolution, Congress mandated that the ICC must consider agriculture as a special case in rate-making, thus assuring the continuance of value of service as a means to set rail rates (Sharfman, 1931).

It was not until 1980 that regulatory practice became reconstituted in a way that eclipsed the concept of the value of service with the passage of the Staggers Rail Act of 1980, which essentially ended the ICC’s role in rate regulation (Keeler, 1983). The economies of the South and the West had become more diversified and less dependent on the subsidies to agriculture and extractive industries. Moreover, the cross-subsidies embedded in the traditional rate structures were no longer appropriate as the US made a strong commitment to operating in an environment of greater global free trade. The ending of rigid deregulation provided the railroads the opportunity to negotiate more flexible and advantageous rates. This change paralleled the deregulation of the airline and trucking industries. On 1 January 1996, slightly more than a century after its founding, the ICC ended operations, and its remaining responsibilities were transferred to the Surface Transportation Board.

The application of the value of service during the contemporary period shifted away from welfare to profit-maximizing applications with the abandonment of strong market regulation in the US. It gave businesses the opportunity to price goods or services using information about the value of such goods to the consumer rather than their cost to the provider. Some marketing theorists believed that this approach could help avoid the pitfalls of competing through cost-cutting strategies that had the potential to destroy profitability. Thus, the linking of activity-based cost and value of service metrics may afford the possibility to develop competitive marketing plans that bundle the sale of complementary goods and services (Weigand et al., 2015).

Conclusion

Peter Miller’s (1994) tripartite classification system for evaluating the social practice of accounting as technology, rationalization, and reconstitution provides a useful prism for analyzing the ICC’s complex measurement policies from the late nineteenth to the early twentieth centuries. Value of service rail rates had a material impact on a developing economy that was highly dependent on rail service. From the perspective of Miller’s (1994) concept of accounting as a measurement technology, value of service maximized revenue by segmenting the market into different classes of service and pricing arrangements. This was difficult for the railroads to achieve using cost of service information because of the problem of developing an economically meaningful way to allocate joint overhead. Instead, the railroads and their regulators settled on an approach to establish transport pricing based on what markets could bear. Rates for high-volume, low-unit value commodities, such as food and fuel staples, were set at levels that afforded shippers the opportunity for profitable sales at end markets. These concessions were offset by higher rates for more valuable freight.

Miller’s (1994) second notion of accounting as a medium for the rationalization of institutional and social circumstances seems most evident in the ways that the value of service promoted both railroad growth and social welfare. Value of service helped railroads to grow their businesses in sparsely populated and economically undeveloped territories. Rural producers of primary goods benefitted from access to markets; consumers in urban centers benefitted from abundant supply of reasonably priced staples. Thus, accounting knowledge promoted great inter-regional economic integration and more equitable redistribution of income and wealth.

The significance of the ICC’s accounting experience becomes clearer when considered from the perspective of Miller’s third issue concerning the ways that measurement modifies the social and institutional domain. In this case, the domain was the entirety of the nation served by the railroad enterprise. The application of rail freight rate policy had important implications for the governance of a fast-growing country with a continental scope. A central concern was maintaining national unity through greater socioeconomic integration of its diverse regions. Only two decades before the founding of the ICC, the nation had experienced the costly Civil War brought about by the problem of slavery and the failure to reconcile competing regional economic interests. The ICC’s accounting-based system of subsidies contributed to building national cohesiveness by shifting income and wealth to producers of food and fuel staples in the South and West. This helped to offset the burden of high tariffs on imported goods that were designed to protect the industry of the North and East. Such regional integration also helped urban-industrial America by keeping the costs of living and labor in check. In addition, regional growth translated to growing profits and business sustainability for railroads. The ICC’s accounting-based plans had the long-term effect of establishing greater economic interdependence and unity between the agricultural South and West with the industrial and financial North and East.

As shown by the findings of this study, Miller’s (1994) analytical framework of accounting as technology, rationalization, and reconstitution serves as an excellent guide for expanding the role of accounting in historical inquiry. It encourages widening of the scope of scholarship by emphasizing the social and institutional impact of measurement practices. Considering the factors in this model can help researchers to discover the broader cultural significance of accounting. It also fosters the formation of intellectual linkages with the findings of allied social sciences. Thus, the useful paths identified by Hopwood (1975, 1983) and Miller (1994) provide a strong foundation for the future weaving of more richly textured and informative historical tapestries.

The principal limitations of this study relate to issues of context, agency, contingency, and generality, matters that permeate all historiographic endeavors, but point to opportunities for future research. In this study, context has to do with the danger of rendering a ‘Whig interpretation of history’, first addressed by Herbert Butterfield (1951). This involves the analysis of the past from the perspective of modern belief systems that did not influence the thoughts and actions of historical players. This study uses key transitions in regulatory policy after the Progressive Era ¹ to identify major evolutionary and revolutionary changes, but concerns about misinterpreting earlier theory and practice require more intensive analysis of contemporary accounting guidance and the ways that its core principles were applied in adjudicating conflicts before the ICC and the federal and state courts. Agency also involves the ways that ICC policies affected and were affected by business, political, and social groups, a vast question that can only be addressed in a limited way in an article. This requires more comprehensive study of the relative impact of government regulatory initiatives on society’s many interdependent elements. Such an extension of the scope of research would provide greater insight not only into the question of historical agency, but also the issue of contextual fidelity.

Contingency relates to how outcomes might have differed if alternate policies had been followed. Some notions about the effects of alternative ways of thinking about the applicability of accounting may be seen in the content of subsequent regulatory policies. In 1913, for example, the ICC undertook a comprehensive study of asset costs to assuage persistent public concerns about ‘watered stock’ or asset over-valuation. In the 1920s, accounting was first used to try to control railroad finances. During the 1930s, it was used to control competition between railroads, interstate trucking, and barges. By the 1990s, although accounting was still central to business management, it no longer had a role in rail rate regulation. Each of these modifications represented contingent options that existed during the Progressive Era, but with very low probabilities of adoption at that time. An important question for future research relates to the socioeconomic circumstances that delayed such contingent alternatives from being addressed sooner.

Contingency might also be evaluated by considering how the ICC’s model affected the ways that accounting was used to inform the later proliferation of regulatory agencies that emerged in the US during the first half of the 20th century. One such effort to study the comparative role of accounting in regulation by Collier and Miranti (2019) evaluated the influence of the differing intellectual origins of the ICC model with that of the Securities and Exchange Commission in the 1930s. While similarities existed between systems of public oversight, they were ultimately differentiated by regulatory agency underlying socioeconomic missions and the nature of the historical context in which they emerged.

Generality deals with how the ICC’s experience provides insight into the ways that accounting affected rail governance globally and whether this experience can support what physicists and mathematicians would term a ‘general field theory’. Value of service was widely employed internationally beginning in the mid-nineteenth century, but the structure and operation of these systems varied based on underlying differences in the socioeconomic priorities of individual states. Case studies could identify the intellectual boundaries and ramifications of government’s use of accounting to order activities of major public modalities like the railroads. This body of research could then conceivably support the definition of a qualitative explanatory model. It is also possible that such a scholarly initiative might draw accounting empiricism and historicism closer together. For example, a comprehensive historical record of the drivers of regulatory change might yield empirically testable hypotheses. In these ways, this study’s limitations identify frontiers for future inquiry.