At the turn of the 20th century, the ocean-shipping industry was plagued by a phenomenon known as “ruinous competition.” Carriers engaged in ruthless rate wars, reasoning that even if they moved cargo often at below-average cost, this would at least help defray the high fixed cost of operating a freighter. But the strategy was unsustainable. Years of continuous losses pushed many in the industry to the brink of insolvency. To avoid total collapse, the carriers banded together to form unregulated cartels in order to reduce supply and fix prices.
The cartels provided some stability, but at the public’s expense. They offered secretive rebates to large operators that agreed to ship exclusively on cartel vessels, and they often refused to deal with shippers that did business with competitors. The cartels also engaged in price discrimination, offering steep discounts and rebates to big shippers—and recouping their losses by charging higher prices to smaller shippers that lacked the power to demand favorable terms. The resulting unequal prices and access to transportation services harmed smaller manufacturers, farmers, and ports.
At the same time that cartels were squeezing U.S. shippers, the U.S. government was neglecting maritime policy. Since the end of the Civil War, the United States had refused to allocate public resources to shipbuilding, while foreign governments, especially the British, subsidized their shipping and shipbuilding steeply. By 1901, U.S.-built vessels carried a mere 8 percent of national trade, and U.S. shipyards were left with little business aside from naval contracts.
The combined results of cartelization and government inaction were perilous. After World War I broke out in Europe in 1914, Great Britain, France, and Italy immediately diverted most of their shipping capacity to support their war efforts. Because the United States was so reliant on European shipping, freight rates soared. Foreign lines increased the rate to charter a vessel or ship key goods by about 20 times.
The United States was effectively cut off from the rest of the world. As the maritime historian Salvatore R. Mercogliano noted in Sea History magazine, “The domestic economy went into a recession as goods piled up on the docks and imports stopped arriving in American ports.”