Government did not necessarily mandate free bags but government did regulate the airlines through the Civil Aeronautics Board.

Decades later, we are seeing fallout from deregulation in all forms including airline policies exclusive to one airline but not the other, new organizational structures including mergers, buyout, etc. I'm not saying deregulation is good or bad. Airlines are just coping right now and are trying new forms of making a profit after being hit in the last few years with the sudden rise in fuel costs.

The ancillary revenue thing is a reaction to many airlines refusing to price flat rate fares in an extremely volatile pricing and economic environment.