In 1938, as the United States struggled to emerge from the Great Depression, lawyer Frank Brookes Hubachek stressed the importance of state anti-competition regulation, designed to limit the extent of interfirm rivalry in the marketplace. Hubachek explained that “too intense” competition did not serve the “public interest.”Footnote 1 This lesson came from experience with the small-sum lending industry, which offered loans of three hundred dollars or less to households in need of quick cash. The business had been regulated since the World War I era, when states began adopting versions of a model lending law, known as the Uniform Small Loan Law, which allowed licensed lenders to charge up to 3.5 percent per month on declining loan balances. In exchange for the ability to charge higher rates than those allowed under most state usury laws, licensed lenders agreed to comply with state licensing requirements and subject themselves to supervision by a state administrator.Footnote 2
The earliest versions of Uniform Law encouraged competition between small-sum lenders by setting minimal barriers to entering the business. Lenders that satisfied the law's licensing requirements—namely, submitting an application and posting a bond—could operate so long as they abided by the rules specifying permissible loan terms. The Uniform Law drafters sought to encourage “honest capital” to enter the business, on the theory that “competition and the free flow of capital would produce the best results.”Footnote 3
But, over time, the drafters determined that “competition and natural forces alone would not bring about a distribution of capital in which the supply closely approximated the demand.”Footnote 4 In other words, too much competition encouraged too much lending. Rather than driving down rates of charge, “competitive pressure” had encouraged licensed lenders to engage in “overlending, lending for improvident purposes, excessive and unwise advertising, unjustified and too frequent renewals, offices in towns too small to require them, harsh collection methods, scalping of fees and small overcharges of various kinds.”Footnote 5 Hubachek observed that competition had fostered these “unsound practices” between the birth of the business and the onset of the Great Depression.Footnote 6
Hence, in 1932, Hubachek helped pioneer new licensing rules that limited the free entry of small-sum lenders into the marketplace. Under these rules, which appeared in the fifth version of the Uniform Law, state small-sum lending regulators could not issue a new license to a lender without first finding that allowing the lender “to engage in business will promote the convenience and advantage of the community in which the business of the applicant is to be conducted.”Footnote 7 New York State had already adopted a similar requirement in 1914.Footnote 8
Hubachek prevailed in convincing some lenders and many lawmakers to support the new version of the Uniform Law. Speaking before the lenders’ trade association, Hubachek urged the industry to back the law reform effort rather than wait for lawmakers to impose their own constraints on the business. Failure to address the “evils” of overcompetition, he advised, “is to draw the razor over your own throats—or invite the governments to do so.”Footnote 9 New Jersey was the first state to adopt the convenience and advantage requirement in 1932, followed by New York later that year.Footnote 10
Much has been written about the history of antitrust and other laws devoted to the preservation and encouragement of interfirm competition.Footnote 11 Historians have likewise explored efforts by private business and administrative agencies to control and manage competition, through measures such as price fixing, from the World War I era through the New Deal.Footnote 12 In addition, they have considered the competitive effects of laws designed to ensure that certain businesses meet minimum safety and quality standards, such as licensing and inspection requirements.Footnote 13 They have also situated these legal developments within the development of economic ideas about markets and their governance.Footnote 14
Less attention has been given to explicitly anti-competitive regulations limiting the entry and expansion of competing firms in industries ranging from railroads to small-sum lending across the twentieth century.Footnote 15 This article presents the history of one such regulatory tool: the certificate of public convenience. Unlike licensing rules, which purport to ensure that firms provide a minimum quality of service but may have unadvertised anti-competitive effects, certificate requirements have served no stated purpose other than limiting competition.Footnote 16 The history of certificates therefore offers a direct way to trace prevailing legal practices and ideas about the desirability of competition within certain industries, while disentangling these concerns from those related to ensuring quality standards.
This article tracks the certificate's appearance and later disappearance at the state and federal levels across several industries. It first documents the state-level origins of the certificate, which spread from railroad regulation into other industries, including small-sum lending, between the 1880s and the New Deal.Footnote 17 It then pivots to the federal level, to show how policymakers followed the example of the states by incorporating certificate requirements into federal law, beginning in the 1920s. The article also considers the legality of certificate laws, and why they largely survived legal challenges, before examining the movement to rollback certificate laws that first took hold at the federal level in the late 1970s. As the final section shows, the states also reconsidered their anti-competition laws in the 1980s, but certificate requirements lingered for much longer in the states and remain on the books in many jurisdictions today.
This history yields two major insights. First, it shows how lawmakers used similar techniques in regulating competition in infrastructure and in finance—two arenas of regulatory policy that are not often studied together.Footnote 18 In both arenas, lawmakers deployed certificates to ensure that the total supply of goods and services produced in a community did not exceed the public demand, thereby discouraging unsound competitive practices that could lead to business failures. Second, it also shows that state regulation prefigured legal change at the federal level and then lagged behind it, suggesting that different forces have been at work at each level of governance in devising competition policy over the last century.Footnote 19
The Beginning of “Public Convenience and Necessity” in the States
By the time New Jersey adopted a “convenience and advantage requirement” for licensing small-sum lenders in 1932, existing state laws already subjected other businesses to similar entry restrictions. The move toward anti-competition regulation began with the railroads in 1882, when Massachusetts amended its law to mandate that the state administrators not issue a license for a new railroad or expansion of an existing road unless they found that “public convenience and necessity” required its construction.Footnote 20 The state adopted this provision at the urging of its Board of Railroad Commissioners, a state administrative agency that reviewed applications for new roads. “The history of railroad enterprises shows that needless and useless roads have been constructed from spite, from a desire to control or annoy other railroad companies, and still more frequently from a spirit of mad speculation,” the board observed in 1881.Footnote 21 It later noted that, without the board's review of new railroad construction plans, unnecessary railroads could be built and then fail before the builders could pay off investors, creditors, and the landowners whose property was seized for the road through eminent domain.Footnote 22
Thereafter, New York railroad administrators sought a similar rule for their state, noting that “excessive” construction of roads led to rate-cutting wars between rival railroads, insufficient revenue for roads to engage in basic maintenance and safety precautions, and ultimately “leases, consolidation, or ‘pools,’ designed to secure from the people . . . an ample return upon the entire capital thus in part unnecessarily expended.”Footnote 23 In the administrators’ view, state control of railroad rates imposed a “corresponding obligation” on the state “to protect existing railroads from useless and disastrous competition by unnecessary new [roads].”Footnote 24 Although some competition could yield “public benefits,” it “ought not to be permitted to become ruinous, destructive, and demoralizing.”Footnote 25 The New York legislature granted the administrators’ request for this review power in 1892.Footnote 26
Thereafter, state legislators and industrial reformers embraced the use of entry restrictions in utility regulation more broadly. The National Civic Federation, a coalition of labor and business reformers that supported large-scale industrial combinations, drafted a model bill in 1914 for public-utility regulation that included a “public convenience and necessity” licensing requirement.Footnote 27 In support of its approach, the federation observed that administrative regulation was “inconsistent” with unfettered competition.Footnote 28 State court judges likewise concluded that entry restrictions were justified as a means to control the cost of providing services to the public. “It is for the benefit of the public that the highest efficiency be obtained from a public utility and that it serve the public at the lowest cost,” wrote the Utah Supreme Court. It concluded that “such an end cannot be reached if the community is served by duplicate plants.”Footnote 29 Academics similarly understood the certificate requirement as a means to “to prevent unnecessary duplication of utility properties through the introduction of competition where the public welfare demands the recognition of monopoly.”Footnote 30
Although some public-utility providers initially opposed state regulatory efforts, as in New York State, the industry generally came to support state commission regulation as an alternative to the uncertainty of local and municipal control.Footnote 31 The movement for state legislation crested between 1905 and 1920, when thirty-two states limited the entry and expansion of public-utility providers—such as telephone, electric, and gas suppliers—based on whether state administrators found that a new licensee would serve the “public convenience and necessity.”Footnote 32 States imposed similar restrictions on bus lines operators and other “common carriers” beginning in 1913.Footnote 33 By 1947, forty-seven out of forty-eight states required some common carriers and public utilities to obtain a certificate of convenience and necessity.Footnote 34
Although not considered to be public utilities, financial institutions also became subject to state “convenience and advantage” restrictions on their creation and expansion beginning in the early twentieth century, after a spate of bank failures. New York State began restricting the opening of new banks and existing bank branches in 1908, following the failure of several banks during the panic of 1907.Footnote 35 The change was recommended by a commission of bankers, who were appointed by the governor after the panic to propose legal reforms to avert future bank failures, and was endorsed by both the state banking superintendent and the governor.Footnote 36 The legislature amended the state banking law accordingly. Thereafter, the state banking administrator could not approve a new bank charter without first finding that it would promote the “public convenience and advantage.”Footnote 37
Other states imitated New York. Massachusetts imposed a similar restriction for savings banks later that same year.Footnote 38 Shortly thereafter, in 1909, California likewise adopted a “public convenience and advantage” branch-approval requirement based on New York's model.Footnote 39 In 1911, Kansas similarly granted its banking board the power to deny a bank charter application if “public necessity” did not support the bank's creation. Later that same year, the Kansas board explained the purpose of public-necessity review, in a decision denying a bank charter. “The establishment of additional banks in a town where the business is not such as to demand or justify the establishment of such banks has a tendency to weaken and make unsafe all of the banks in said town,” the board noted. “The division of the business is such that it is difficult for the banks to obtain the amount of deposits necessary in order to earn a return sufficient to pay expenses and a dividend on the capital, and creates a temptation to pay high and unsafe rates of interest on the deposits, and further makes it difficult for banks to loan their money to safe borrowers, and creates a tendency to lend money to unsafe borrowers, the result of all of which is to cause unsafe banking.”Footnote 40 To encourage safe banking, the state charged the board with preventing new banks from entering communities that already had sufficient banking facilities.
More states followed suit a couple of decades later, in reaction to the bank failures of the Great Depression.Footnote 41 As economist Robert P. Shay later observed, legislative reformers in the 1930s commonly blamed “competitive excesses in the 1920's as a cause for difficulties experienced by financial institutions during the Great Depression.”Footnote 42 All states eventually imposed some version of a convenience and advantage requirement for new bank charters, as well as for bank branches in states that allowed branching.Footnote 43 States also incorporated this requirement into their licensing rules for small-sum lenders beginning in 1932, at the urging of attorney Frank Brookes Hubachek.Footnote 44
But most certificate laws did not tell state administrators how to determine what would “promote the convenience and advantage of the community,” leaving bureaucrats to develop their own standards.Footnote 45 For example, the New Jersey state small loans administrator, James M. Sullivan, developed the “Sullivan formula” to assess new small-sum lending license applications.Footnote 46 Sullivan first used U.S. census data to calculate the total number of potential borrower households in the state and then looked to state-level borrowing statistics to determine how many potential borrowers actually used small loans.Footnote 47 He then determined whether any unmet need for credit existed in the community where the licensee planned to locate, based on an assessment of the need for small loans within the community and a survey of the existing lenders located there. The administrator would refuse to grant a new license in any area where he found that existing loan offices already met the community's need for credit.Footnote 48 State banking regulators applied similarly detailed calculations to determine whether to grant new branch or bank applications.Footnote 49
As these administrative procedures show, certificate restrictions were different in kind from licensing rules and other regulations not expressly designed to cap the number of firms operating in a given region. “Under the typical licensing statute any number of applicants may receive authorizations if each of them satisfies applicable licensing criteria,” one scholar observed. “The test is essentially qualitative.” But certificate requirements included a “quantitative dimension.” They resulted in the “exclusion of otherwise qualified applicants from a market because, in the judgment of the regulatory commission, the addition of new or expanded services would have no beneficial consequences or, in a more extreme case, would actually have harmful consequences.”Footnote 50 The law did not distinguish between big and small businesses, nor seek to shelter small enterprises from firms with large market power. Indeed, it favored the growth of existing firms into bigger businesses, by empowering administrators to block the entry of a new firm if an existing company already adequately served the market or had the potential to do so.Footnote 51
Across industries, courts and state administrators cited a common purpose for these rules: to benefit the public by eliminating “wasteful competition.”Footnote 52 For infrastructure, the harmful consequences of competition included “wasteful duplication” of facilities, “ruinous competition” between providers, “cream skimming” of the most profitable customers by new operators that diminished the quality of service given to less-profitable customers by existing providers, discouragement of future investment in the regulated industry, and various negative “externalities” such as environmental harms.Footnote 53 For “motor carriers,” for example, entry restrictions prevented the public streets from being overcrowded and worn down by “over-use.” They also curbed “cut-throat competition” between motor carriers that might discourage these carriers from serving less-profitable routes and cause some to go out of business, thereby thwarting the goal of serving the public's “need for efficient permanent service.”Footnote 54 Likewise, for financial services, competition could lead to overproduction and excessive risk-taking that might, in the case of deposit-taking institutions, imperil the overall safety of the banking system or, in the case of small-sum lenders, subject consumers to predatory practices.
Economic thinking further bolstered the case for certificates. In 1894, economist Richard T. Ely deemed some industries to be natural monopolies: namely, “railways, telegraphs, telephones, canals, irrigation works, harbors, gasworks, street-car lines, and the like.”Footnote 55 Natural monopolies generally supplied a necessary good, occupied valuable land, and could increase the available supply of goods and services without increasing marginal costs.Footnote 56 In these businesses, Ely declared, there could be no competition and “all appearances which resemble competition are simply temporary and illusory” stages preceding combination.Footnote 57
Economists did not claim, however, that banks or licensed lenders were natural monopolies. Rather, their arguments for limiting competition in these markets rested solely on concerns about consumer welfare. Economist Clyde Olin Fisher observed that if the goal of small-sum lending regulation was to protect the “worthy borrower,” then “it is difficult to see wherein it becomes necessary to grant a license to every group which wishes to invade the small loan field in the hope of picking up a few dollars”—especially when “duplication makes necessary a higher interest charge.”Footnote 58 Fisher also drew parallels between the consumer lending and transportation industries in explaining why limits on competition served the public interest in obtaining lower-cost services. Competition among consumer lenders would not “lower rates,” just as “the duplication of railroad lines where one road can handle all the traffic” would not yield “reduced railroad rates.” He explained that “the duplication of companies under a ‘laissez-faire’ policy must cause higher overhead and hence a higher interest charge.”Footnote 59
Of course, certificate laws also benefited incumbent businesses by blunting the threat of competition by new entrants to the industry. But interest group pressure alone cannot account for the spread of these laws at the state level. Indeed, among small-sum lenders, the value of such laws to existing operators was not self-evident in the 1930s. Hubachek had to make the case for law reform to the industry and his pitch focused on how certificate laws could forestall more onerous state intervention in the marketplace, not on the benefits to incumbents. Interest group influence alone does not explain the spread of certificates. Rather, the popularity of certificate laws also reflected then-prevailing concerns about the harm that competition could inflict on the public. Thus, economic thinking and the interests of industry incumbents both pushed in the same direction in the early twentieth century—toward constraints on competition in the markets for financial services and infrastructure.
The Migration to the Federal Level
Certificate requirements migrated into federal laws governing public utilities and financial institutions in the 1930s. It is not surprising that these ideas first took root in the states, given the delayed emergence of the federal administrative state relative to its state and local counterparts. To be sure, a federal administrative state existed prior to the New Deal. Much of the regulatory action remained at the state level, however, until the Great Depression catalyzed the expansion of a national bureaucracy to manage an economy where commerce increasingly moved across state and local borders. The federal adoption of certificates began in 1920, when Congress required railroads to obtain a certificate of convenience and necessity in order to construct new lines or expand existing lines. The provision received no congressional debate, perhaps because lawmakers were already familiar with state certificate laws and saw little reason not to import the same standard into federal railroad regulation.Footnote 60
The spread of entry restrictions then accelerated during the New Deal, when economic thinking on competition aligned closely with the self-interest of industry. By 1932, amid the Great Depression, a rising chorus of businessmen called for the federal government to intervene against the destructive forces of “excessive competition.” As historian Ellis Hawley recounts, trade association leaders, economists, and former government officials likewise praised proposals for regulating production, prices, and entry.Footnote 61 One proposal by the head of a “management engineering” firm sought to require the issuance of certificates of convenience and advantage to those entering an industry already “possessed of excess capacity,” to prevent Americans from continuing to be “crucified on the cross of competition.”Footnote 62
The National Industrial Recovery Act represented the most intense, albeit short-lived, federal effort to control competition. Enacted in 1933, the law required the creation of codes of “fair competition” that would govern maximum working hours, minimum wages, and other conditions of employment in each industry. Although the law did not mention certificates of convenience, several industries included a certificate requirement in their codes of fair competition.Footnote 63 The National Recovery Administration was disbanded in short order, however, after the Supreme Court declared the code system unconstitutional in 1935.Footnote 64
But Congress explicitly imposed certificate requirements for utility providers as part of several New Deal legislative measures, which followed the model of the 1920 federal railroad certificate regime. The Communications Act of 1934 required communications carriers, such as telephone companies, to receive a “certificate of public convenience and necessity” from the Federal Communications Commission (FCC) before constructing new lines or extending existing lines.Footnote 65 Likewise, the federal Motor Carrier Act of 1935 required common carriers engaged in interstate transportation of people or goods to receive a certificate of public convenience and necessity from the Interstate Commerce Commission.Footnote 66 In 1938, Congress vested the authority to grant certificates of convenience for domestic airline carriers in the Civil Aeronautics Authority, later renamed the Civil Aeronautics Board (CAB).Footnote 67 It also applied similar rules to interstate natural gas providers.Footnote 68
As with the 1920 railroad certificate requirement, Congress did not debate these provisions, which one commentator described as “neglected fragments of much larger legislative undertakings.”Footnote 69 The Interstate Commerce Commission (ICC) did, however, explain why it endorsed entry restrictions and included a certificate provision in an early draft of what became the Motor Carrier Act of 1935. In 1928, as part of an investigation into the regulation of motor carriers, the ICC observed that a majority of states required operators of common-carrier motor vehicles to obtain certificates, which protected “the public interest” by “excluding unnecessary and wasteful competition” and preventing “duplication and unnecessary service where existing facilities are sufficient.”Footnote 70 Six years later, the ICC noted that “free-for-all competition has never worked successfully” and warned that “unless competition is brought under greater restraint, it can bring only wide-spread losses to shippers, to communities and sections of the country, to investors in rail, water, and motor facilities, and to the public generally.”Footnote 71 It predicted that a certificate requirement would help bring order to the motor carrier industry, in part by increasing the average size of each carrier operation and decreasing the total number of operators in existence.Footnote 72 Thus, rather than try to prevent industry consolidation, the ICC advocated for certificates as a means to encourage it.
Financial regulation at the federal level followed a similar course during the Great Depression.Footnote 73 In 1933, Congress imposed limits on banks’ payments of interest to depositors in order to lessen “the pressures of rate competition for deposit funds,” which pushed banks to “reach for riskier, higher-yielding loans and investments.”Footnote 74 Congress then amended the Federal Reserve Act in 1935 to require the Comptroller of the Currency to consider the “convenience and needs of the community to be served” before approving a new national bank charter.Footnote 75 It also created the same screening requirement for admission of new state banks to the Federal Reserve System and for coverage of nonmember state banks by the Federal Deposit Insurance Corporation (FDIC).Footnote 76 In explaining the need to limit entry of new banks, the FDIC chairman observed that “many localities” generated a sufficient volume of deposits to support “only one or two banks” and that the entry of additional banks would lead to “speculative and destructive practices.”Footnote 77 The FDIC supported entry restrictions as a means to avoid a “return to the overbanked condition of 1920” and the “growth of excessive banking facilities” that had led to bank failures.Footnote 78
Some small-sum lenders smiled knowingly while witnessing the beginnings of these shifts at the federal level. They proudly observed that their business had anticipated the “social viewpoint of the New Deal” and incorporated it into their governing law. In 1933, one lender encouraged “the business man” to “turn to personal finance for a clarifying illustration of how the principles of the New Deal can work in practice.”Footnote 79 Before an assembly of small-sum lenders, he noted that “personal finance” had already “anticipated the general aims and methods of planned economy,” while also urging his colleagues to “go still further along the path indicated” by measures such as the National Industrial Recovery Act.Footnote 80 And, for the business to really align itself “with the spirit of the times,” he counseled, it should “embrace more wholeheartedly the idea of the certificate of convenience and advantage” that the Uniform Law had introduced in 1932.Footnote 81
Legal Authority to Curtail Competition
Just as state-level certificate laws anticipated federal regulatory developments, legal challenges to state-level certificate laws likewise preceded their expansion at the federal level. Between 1905 and 1937, courts struck down a variety of economic regulations for infringing on individual liberty of contract, which was protected by the due process clause of the Fourteenth Amendment. The period came to be known as the Lochner era, after a U.S. Supreme Court decision invalidating a state law that limited bakers’ working hours on due process grounds.Footnote 82 Courts regularly reviewed legislation to determine if it represented a proper exercise of state police powers or unconstitutional overreaching. The U.S. Supreme Court had occasion to review the legality of state certificate requirements in 1932, just as state and federal legislators were considering applying such rules to additional industries in response to the economic collapse of the Depression.
The question of whether certificate restrictions ran afoul of the due process clause first came before the Court in 1932, in the case of New State Ice Co. v. Liebmann, which concerned the constitutionality of an Oklahoma certificate requirement for businesses engaged in the sale, manufacture, or distribution of ice.Footnote 83 Under the law, the state administrator could not issue an operating license “except upon proof of the necessity for a supply of ice at the place” where the licensee “sought to establish the business” and could deny an application if the existing licensees provided sufficient ice facilities “to meet the public needs” of the community.Footnote 84 As the Court explained, the purpose of the law was “not to encourage competition, but to prevent it; not to regulate the business, but to preclude persons from engaging in it.”Footnote 85
The resulting decision in New State Ice shows how the nature of the industry determined the extent of permissible state control under the jurisprudence of the Lochner era. A majority of the Court struck down the Oklahoma ice law based on the “character” of the ice business. Justice Sutherland, for the majority, explained that the Oklahoma law might be permissible if applied to a business of a certain character, such as a natural monopoly or “an enterprise in its nature dependent upon the grant of public privileges.” But the law was not permissible when applied to businesses engaged in “ordinary manufacture and production.”Footnote 86
This approach tracked the Court's due process decisions from the late nineteenth century through the early 1930s. Under these cases, a business could fall within one of three categories: public utilities, those “affected with the public interest,” and private enterprises. Public utilities were subject to the greatest state control, while private enterprises stood at the other end of the spectrum. As early twentieth-century legal scholars explained, “public service corporations” or “public utilities” were outliers, encompassing “those few businesses where the conditions are monopolistic” and the business held itself out as offering an essential or necessary service to the general public.Footnote 87 A business “affected with the public interest” rested in the middle zone; it could be subject to greater state oversight than a private enterprise but did not have the same universal service obligations or regulatory burdens as common carriers and other public utilities.Footnote 88 (Small-sum lenders, for example, accepted that their business was “affected with the public interest” but vigorously rejected any suggestion that they were utilities.)Footnote 89 Finally, there were run-of-the-mill commercial businesses, such as ice making, which were not subject to the heightened forms of economic regulation that might be applied to enterprises in the other two categories. Although the Supreme Court struck down the certificate law in New State Ice, the decision also affirmed the constitutionality of certificate laws when applied to regulate public utilities or businesses “affected with the public interest.” And courts generally upheld the constitutionality of certificate restrictions so long as they were applied to such businesses.Footnote 90
The constitutionality of certificate laws then became even easier to establish after the Supreme Court revised its approach to due process claims in 1934. That year, in Nebbia v. New York, the Court abandoned the effort to define which businesses were “affected with the public interest.”Footnote 91 And shortly thereafter, in 1937, the Court announced it would no longer subject economic regulations to any form of heightened scrutiny, regardless of the nature of the industry. Constitutional due process required only that an economic regulation be “reasonable in relation to its subject” and “adopted in the interests of the community,” the Court proclaimed.Footnote 92 Legislators merely had to show that a rational basis existed for the rules that they adopted.Footnote 93
Thus, by the 1950s, when certificate rules for small-sum lenders came before state courts, judges easily dismissed due process challenges to their constitutionality.Footnote 94 In one New Jersey case, the objecting applicants argued that the convenience and advantage requirement of the state small loan law violated the “fundamental common right to engage in a lawful pursuit,” protected by the Fourteenth Amendment.Footnote 95 The New Jersey judiciary rejected this claim. It found that the small-sum lending industry was “clothed with a public interest” and was therefore “subject to regulation.”Footnote 96 Moreover, the court concluded, the entry restriction had “a direct and immediate connection with the public interest.”Footnote 97
In the 1950s, the U.S. Supreme Court even went so far as to reprimand the FCC for neglecting to follow congressional intent to curtail competition in certain industries. The Court addressed the parameters of federal competition policy in the case of FCC v. RCA (1953), which arose after the FCC granted an international radiotelegraph service's application to extend its service into a competitor's market. The FCC cited a “national policy in favor of competition” in its decision approving the application. But Justice Frankfurter, writing for the majority, found that the FCC had misinterpreted its mandate from Congress. “That there is a national policy favoring competition cannot be maintained today without careful qualification,” Justice Frankfurter wrote.Footnote 98 In railroads, for example, federal “policy has shifted from one of prohibiting restraints on competition to one of providing relief from the rigors of competition,” he explained. In telecommunications, as in railroads, federal lawmakers did not trust in “competition as the regulating mechanism.” Nor was competition desirable when “considerations severely limit the number of separate enterprises that can efficiently, or conveniently, exist.”Footnote 99 The FCC, therefore, could not grant a certificate of convenience and necessity based on the presumed, but unproven, benefits of increasing competition.Footnote 100 The Court remanded the case.
The Decline of Anti-Competition Regulation at the Federal Level
Although “public convenience and necessity” entry restrictions gradually disappeared at the federal level in the 1970s and 1980s, legal challenges in the courts did not hasten their demise. Rather, their disappearance tracked changing ideas about the proper role of the state and competition in the marketplace, which ushered in a larger legal paradigm shift.Footnote 101 Although many forces converged to encourage this transformation, ideological change combined with interest-group activism accounts for its pervasiveness across industries.Footnote 102 Calls for change accelerated in the 1970s, as both liberal and conservative thinkers decried the existing paradigm of regulation in industries such as aviation and trucking.Footnote 103 Furthermore, the oil crisis, rising inflation, and a mid-decade recession all deepened public anxiety about economic issues and created a window for change.Footnote 104
Economists, most notably Alfred Kahn and George Stigler, provided the intellectual underpinnings for the movement to roll back anti-competition laws, while Senator Edward Kennedy worked within Congress to make the case for regulatory reform.Footnote 105 First, during the Ford administration, Kennedy held hearings on the need for airline regulation, which spawned an internal review by the Civil Aeronautics Board (CAB). A couple of years later, president Jimmy Carter then appointed Kahn as CAB chair; Kahn proceeded to experiment with loosening entry restrictions.Footnote 106
In advocating for reform, Kahn drew on decades of economic research that critiqued regulatory restrictions of competition. Well before Kahn's appointment, in the late 1930s, economists had revised their thinking about “ruinous competition,” which came to be understood as a problem limited to markets with undifferentiated products.Footnote 107 “Passenger air transportation,” Kahn explained in 1970, “does not have the economic attributes of an industry prone to destructive competition.” Moreover, he argued, “freer competition” would provide “enormous potential benefits” to the consuming public.Footnote 108 This analysis resonated with the ascendant Chicago School of economics and conservative critics of the regulatory state, as well as with consumer advocacy groups. The existing airlines and their employees were the major opponents of deregulation.Footnote 109
After Kahn's experiments at the CAB, Congress began removing certificate of convenience requirements. It started with the passage of the Airline Deregulation Act of 1978.Footnote 110 Prior to Kahn's tenure, the CAB and other federal agencies in charge of issuing certificates had curtailed the entry of new providers in regulated markets. In the airline industry, for example, the CAB denied all seventy-nine applications for new domestic airlines that were filed between 1950 and 1974.Footnote 111 But with passage of the 1978 act, domestic airline applicants no longer had to prove convenience and necessity; they were presumed. CAB could deny an application only if it found that the presumption was rebutted.Footnote 112
The process continued into the 1980s and 1990s. Congress lowered regulatory barriers to entry for interstate truckers in 1980, before eliminating “convenience and necessity” review entirely in 1995.Footnote 113 Also in 1995, Congress lowered barriers to entry for railroads and granted the ICC authority to exempt railroads from existing regulatory requirements, including certificates.Footnote 114 For telecommunications, the certificate requirement remained on the books a while longer, but in 1996, Congress exempted line extensions and cable television providers entirely from the certificate requirement and authorized the FCC to “forbear” from enforcing it for other providers.Footnote 115 Three years later, pursuant to this authority, the FCC adopted a rule that conferred blanket authorization for the construction of new domestic communications lines.Footnote 116
In banking, the demise of entry restrictions came about largely through administrative action, with some legislative encouragement. Through the 1960s, federal regulators had frequently cited “insufficient need” as the basis for denials of new bank charters.Footnote 117 The Federal Reserve had likewise refused to allow mergers involving bank holding companies on this basis, policing against the dangers of overbanking or excessive competition. But the tide began to shift when Congress amended the Bank Merger Act in 1966, which made clear the importance of preserving competition within the banking industry and allowed anti-competitive mergers to proceed only upon proof of a countervailing benefit to meeting the “needs” of the community.Footnote 118 The act's express language, affirming the value of competition, suggested that a reduction in competition was not in itself a countervailing public benefit.
The following decade, Congress further muddled the meaning of the “convenience and needs” of the community with its passage of the 1977 Community Reinvestment Act (CRA), which imposed obligations on banks to lend in their communities.Footnote 119 The Federal Reserve then began to equate “convenience and needs” with fulfillment of a bank's fair-lending obligations under the CRA.Footnote 120 And the Office of the Comptroller of the Currency also announced that it would no longer seek to “protect existing competitors from the competition a new bank will provide” as part of its charter application review.Footnote 121 In the 1980s, the Justice Department likewise adopted a more permissive approach to its review of bank mergers, lessening the chance that a merger would be deemed anti-competitive so as to require official consideration of a countervailing benefit to the “convenience and needs” of the community.Footnote 122 The “convenience and needs of the community” requirement remained on the books for some limited purposes, but the language proved sufficiently vague to allow regulators enormous discretion in its interpretation.Footnote 123
State Anti-Competition Laws Linger
Like the federal government, the states also began removing certificate requirements in the last decades of the twentieth century. However, they proceeded in a halting, piecemeal fashion that left numerous entry restrictions in place. In the late 1970s, when the federal rollback began, many states still required certificates for businesses to enter most so-called public-service enterprises: those engaged in the provision of transportation (e.g., railroads, street railroads, motor carriers), communications (e.g., telephone, telegraph, cable television), and gas, electric, and water supply.Footnote 124 They also limited the ability of small-sum lenders and banks to form and grow by requiring proof that a new office would serve the convenience and needs of the community.Footnote 125 States further expanded their certificate requirements in the 1960s and 1970s to limit the construction of new healthcare facilities based on “community need,” partially in response to federal urging.Footnote 126
The lowering and removal of barriers to entry at the state level was most sweeping in the banking arena, perhaps because banks dissatisfied with their home state chartering rules could easily avoid them by pursuing a federal charter or a charter in a different state.Footnote 127 This competition among jurisdictions created pressure on states to make their chartering rules less onerous in order to encourage financial institutions to locate within their borders.Footnote 128 States generally kept the “convenience and needs” standards for new bank charters and banks, but many reinterpreted the meaning of this standard to lower the barrier to entry.Footnote 129 In addition, barriers to interstate bank branching gradually eroded over the 1980s.Footnote 130 Congress then adopted the Riegle-Neal Act in 1994, which removed the remaining federal barriers to interstate branching and encouraged states to allow out-of-state banks to open branches in their jurisdictions.Footnote 131
On the other hand, for industries that were unlikely to move across state lines or seek a federal charter, many states retained certificate requirements. As economists and legal scholars have repeatedly observed, these rules benefit entrenched service providers, who have an interest in lobbying to retain protections from more intense competition.Footnote 132 Recently, a couple of states removed their certificate restrictions for intrastate household movers, in response to litigation by libertarian public-interest groups attacking state licensing rules and certificate requirements on constitutional grounds.Footnote 133 But, under a rational-basis standard of review, these requirements generally have withstood judicial scrutiny.Footnote 134 The majority of states likewise still have some “certificate of need” requirement for new healthcare-facility construction.Footnote 135
The proposed Uniform Consumer Credit Code (U3C), a model state law that would have significantly increased competition in the small-sum lending arena, similarly failed to receive widespread adoption in the states. The U3C, first promulgated in 1968 and revised in 1974, would have eliminated “convenience and advantage” licensing requirements.Footnote 136 But, as one commentator noted, the “vested interests” in the industry did not like this aspect of the law.Footnote 137 Most states accordingly failed to adopt the law and instead retained their existing small loan laws. New Mexico, for example, still includes a convenience and advantage requirement in its small-sum lending regulations.Footnote 138
Conclusion
This history, tracing the flow and ebb of rules requiring certificates of public convenience and necessity to enter certain industries, yields two insights for historians of business and scholars of economic policy. First, by following a single regulatory technique across several industries and through time, it shows the “kinship” between past approaches to regulation of infrastructure and financial institutions.Footnote 139 Although trucking companies and small-sum lenders may seem to contemporary observers to have little in common, lawmakers once understood the two industries as suffering from the same tendencies toward ruinous competition, which necessitated similar regulatory restraints. In both contexts, lawmakers aimed to curb competition not to rein in big business but to discourage unsound business practices that could harm the public or cause companies to collapse. Further comparative study of the regulation of finance and infrastructure over time may yield additional evidence of policy echoes between the two.
Second, by looking at the history of capitalism within federalism, this history illustrates the importance of incorporating states into stories about economic regulation in the twentieth century.Footnote 140 At minimum, it offers a more nuanced periodization of shifts in American competition policymaking. When viewed from the federal level, this story of anti-competition regulation follows a familiar pattern: the tide of regulation flowed in with the New Deal and receded during the Carter and Reagan administrations. But the story looks different when it includes developments in the states. From this vantage point, the narrative begins earlier, in the late nineteenth century, when states began experimenting with regulatory techniques that Congress later copied into federal law.Footnote 141 Also, the end point of the story is later and less well defined: many states have retained their anti-competition rules for some industries even as the tide quickly turned against legal restraints on competition at the federal level in the late 1970s and 1980s.
Beyond illustrating the strange and syncopated rhythms of policymaking in a federalist system, this periodization also suggests different political dynamics at play at each level of government. The states and federal government, beginning at different moments, both eventually imposed certificate requirements on a variety of industries, backed by then-prevalent economic ideas about competition and, sometimes, by the support of entrenched firms. Shortly thereafter, however, the economic consensus shifted to favor eliminating such restrictions in most industries. But it was only at the federal level that these new ideas, coupled with the support of other interest groups, led to the widespread rollback of certificate laws beginning in the 1970s. At the state level, rollback occurred when the regulated firms could easily move across state lines, spurring regulatory competition between the states to lower legal barriers to entry. But state certificate rules have persisted in other corners of the economy. This suggests that the power of entrenched business interests to retain anti-competitive regulation varies significantly across political contexts; it is heightened when governance occurs at the state and local level and in the absence of regulatory competition between jurisdictions.
