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This chapter reinterprets Louis Brandeis's role in the crisis of progressive era railroad regulation. While others have implicated Brandeis in the crisis, the essay shows how he identified fatal flaws in Interstate Commerce Commission (ICC) ratemaking and proposed a coherent alternative. Brandeis showed how rate-of-return regulation made false promises to measure the objective value of railroad property and gave the railroads perverse incentives to increase costs. Drawing on the work of scientific manager F. Lincoln Hutchins, Brandeis proposed to replace valuation with a benchmarking system by which railroads could compare their performance. Drawing on his work in Massachusetts natural gas, Brandeis proposed to set rates according to a system of ‘sliding scales’, in which railroads received higher dividends when they provided lower rates. In theory, Brandeis's system was superior to rate-of-return regulation because it provided railroads with incentives to improve and information, unavailable from the firm or the market, about how to improve.

This chapter examines the Compromise of 1877 between Republicans and Southern Democrats involving railroad subsidies that would extend Thomas Scott's Texas and Pacific Railroad into their districts in exchange for making Rutherford Hayes president. Initially documented by C. Vann Woodward in Reunion and Reaction: The Compromise of 1877 and the End of Reconstruction (1954), the Compromise of 1877 involved not only the removal of federal troops from the South but also promises of federal aid to railroads. The compromise collapsed after Hayes became president and refused to provide railroad subsidies to the South. This chapter considers how the collapse of the Compromise of 1877 led Texas Democrat John Reagan to introduce a bill that culminated in the creation of the Interstate Commerce Commission. It also explores the ramifications of railroad regulation championed by Reagan for American state formation.

This book examines the regulatory state, a specific type of state authority that initially emerged in the late nineteenth century, and its ramifications for American politics. In particular, it considers the implications of high levels of voter ignorance for democratic politics and the autonomy of modern states as well as the role of political and media elites in the creation of the American state's bureaucratic regulatory authority. Focusing on the period 1860s–1890s, the book shows that this bureaucratic regulatory authority can be traced to the Treasury Department and the Interstate Commerce Commission. It also proposes a theory of the state that challenges widespread assumptions regarding the nature of political power in modern democracies. To support its case, the book explores the impact of conflicts over the gold standard on party ideology and state formation, along with the politics of free silver and inflationary demands for the free coinage of silver at the ratio of 16 to 1. Finally, it discusses the influence of railroad regulation on state formation.

This book has explored the origins of discretionary regulatory authority in federal bureaucracies, suggesting that it was a consequence of the regulatory debates that ensued when the Civil War came to an end. It has shown that the American regulatory state was a reaction against populist agitation that focused first on monetary policy and then on railroad regulation. It has also considered how the Democratic Party's ideological shift led certain Republicans to endorse bureaucracy to insulate regulatory decisions from public opinion. This concluding chapter discusses the informational problems that existed in the nineteenth century and how they have been exacerbated by certain political conditions in contemporary America. Finally, it examines how voter ignorance and the vast scope of public decisions have resulted in state autonomy in democratic societies.