The Texas Railroad Commission: Understanding Regulation in America to the Mid-Twentieth Century

Published by EH.NET (March 2006)

William R. Childs, The Texas Railroad Commission: Understanding Regulation in America to the Mid-Twentieth Century. College Station, TX: Texas A&M University Press, 2005. x + 323 pp. $35 (cloth), ISBN: 1-58544-452-9.

Reviewed for EH.NET by Gary Libecap, Department of Economics, University of Arizona.

In a time of deregulation and globalization, it is easy to forget that local bureaucratic agencies have often had enormous power in affecting how resources were used, in determining which companies could participate, in authorizing when production could take place and how much could occur, and in fixing the prices that could be charged. The early-to-mid twentieth century United States was a time when state and local regulatory bodies had unparalleled influence in the market. Foreign trade was a small portion of the overall economy and the reach of federal institutions was relatively limited. In many cases, state regulations held supreme, and in no case is this more apparent than in the history of the Texas Railroad Commission (TRC).

The TRC is the ultimate regulatory agency. In its heyday, from the 1940s through the 1960s, the TRC controlled Texas oil production, the largest in the nation, and coordinated its production with that of the other major producing states in order to fix U.S. prices, in conjunction with restrictions on the import of cheaper foreign oil. Under the regulatory regime of the TRC, monthly individual firm output was restricted to limit the losses of common-pool extraction; production quotas were allocated across producing firms in ways that benefited influential, small, high-cost producers; and Texas output was constrained in cooperation with other states through the Interstate Oil Compact Commission (IOCC) to maintain high oil prices. Until superseded by OPEC in 1972, the TRC and the structure of state regulation under the IOCC was a domestic oil cartel. The Commissioners of the Texas Railroad Commission were the most important local government officials in the world.

How did an obscure state agency set up to regulate railroad rates get to be this way? In this well-written, carefully-researched, and very useful book, William R. Childs outlines the development of the TRC. He emphasizes personalities, politics, regional culture, and wariness of federal intrusion, along with an understanding of basic economic forces to provide a nuanced description of the rise of the agency and its important regulatory role.

Childs begins with a description of the rise of the TRC in the 1880s as a commission to regulate railroad rates (as its names suggests). The first four chapters of the book place the TRC into the broader context of a national movement both at the state and local level to regulate the power of one of the country’s first big industries, railroads. Because of their ability to link remote, local markets to national ones, railroads were tremendously important. At the same time, because of their huge size and capitalization, (often) near-monopoly position in the supply of transportation services, and vulnerability in holding fixed, non-deployable assets in railroad tracks, yards, and support facilities, railroads were the center of the development of commission regulation of prices. States and the federal government competed for preeminence within the U.S. federal structure, and Childs describes this early tension. He also outlines the growth of the Texas economy in the post-Civil War period and the interest groups that lobbied for regulation of railroad rates. Personalities played key roles in determining the details of how regulation was written, its exact timing of adoption, and how Texas institutions were linked to those of the federal and other state governments. James Stephen Hogg, Attorney General and Governor of Texas molded the structure of the TRC which was established in 1891. Childs discusses the genesis of the agency in its early years. The National Association of Railroad and Utilities Commissioners coordinated state agencies in their sometimes contentious relationships with the federal government in general and the Interstate Commerce Commission in particular over regulations and rates. One area of conflict was whether intrastate shippers could receive preferential regulation as compared to interstate shippers in order to protect local producers. This led to the well-known 1914 U.S. Supreme Court Shreveport case that strengthened the federal role, but also provided for clearer state regulatory mandates.

Part II of the book moves from the early years of the TRC to expansion of its activities in the post-World War I period, especially into the new area of oil production regulation. The next four chapters describe the TRC and its regulation of oil. Beginning at the turn of the century and accelerating after 1920, new oil discoveries in Texas changed the history of the state and the country forever. With low capital and labor requirements for entry and the prospect for fabulous new riches, individuals rushed to the Texas oil fields during the “gusher” period. Excessive output and capitalization followed. The tragedy of the commons was everywhere and the TRC was called to step in not only to limit these losses, but also to bolster oil prices which cycled from boom to bust. This regulatory intervention made the TRC famous. Childs describes the colorful local characters who became Commissioners, such as Ernest O. Thompson (who served from 1932 to 1965), and who in many ways determined the profits of the country’s most spectacular new industry, petroleum. He outlines the nature of the agency’s price and conservation regulations; its interaction with the New Deal in the 1930s to control “hot oil;” and its maturity as a regulatory agency in the 1950s and 1960s when it was at the height of its power. He also discusses the addition of other regulatory mandates, including control over motor carriers within the state of Texas in 1927 and the molding of the agency’s rulings by powerful constituent groups and federal agencies, as well as by state politicians. Even so, oil regulation and Texas’s huge contribution to it were what made the TRC distinctive. Childs points to the challenges presented by the huge East Texas oil field where small producers ignored commission regulations and produced wildly. Only martial law in 1931-32 brought some stability.

The latter part of the book describes the role of the TRC as part of the IOCC in cartelizing U.S. oil production. As Childs notes, these actions stabilized prices, but they did not effectively conserve U.S. oil stocks. Indeed, by limiting the import of cheap foreign oil, the structure of U.S. regulation, with the TRC at its head, helped to “drain America first,” and insure the dependence of the country on foreign sources of supply today. The conclusion to the volume summarizes key aspects of the development of state regulation as illustrated by the TRC and its impact on the structure of rates, industry development, and the wary collaboration and competition between state and federal regulatory agencies. This is a superb history of the details of regulation and how they fit into the broader macro development of the American economy.

Gary D. Libecap is Anheuser Busch Professor of Economics and Law at the University of Arizona. He currently is completing a book on the Owens Valley water transfer to Los Angeles, 1905-35 and its implications for western water re-allocation today.