Throttling the Railroads: 2. Aiding the Railroads: 1830-1871

The building of the railroads in the United States was done al­most entirely between 1830 and World War I. Such building as has been done since has consisted mostly of double-tracking, short­ening routes, and building bridges. The first stage of railroading falls between the years 1830-1871, for in this period there was consider­able governmental (Federal, state, and local) aid extended to get the building don. It did not entirely end in 1871; earlier grants were still available to some lines, but at that point governments turned their attention from aiding to regulating, restraining, and con­trolling the railroads. Animosity began to replace sympathy toward them. From the early 1830′s into the 1850′s most of the direct aid and efforts to facilitate their building came from state and local governments. After that, the Fed­eral government became deeply in­volved in fostering railroad build­ing. Since this early involvement had its effects and left a legacy, it will be well to examine into the whys, wheres, and consequences of it.

It is not apparent why govern­ments became as involved as they did in early railroad building. The first decade or so of this activity coincided with the Age of Jackson. The main thrust of the Jackson­ians was against special privileges to certain groups, against govern­ment aid for internal improvements, and in favor of leaving economic activities to the private initiative of the people. Jackson and most of his Democratic suc­cessors were concerned with dis­engaging government from the economy. One might suppose, then, that railroad builders would have been left to their own devices.

So they might have been if many of the Jacksonians had had their way. But the Jacksonian as­cendancy was never so complete, nor were his Democratic follow­ers so completely persuaded of the advantages of laissez-faire. In any case, theirs was a great wave go­ing counter to the still deep-run­ning tide of mercantilism. The Jacksonians (or Democrats) made up only one of the two major political parties of the time. The other party consisted of Whigs, and they were favorably disposed toward such mercantilistic carry­overs as government appropria­tions for internal improvements, the granting of monopolies, and such like.

States and local governments had long been accustomed to char­tering roads, bridges, banks, and other types of semiprivate under­takings. Moreover, the early effort of the Jacksonians appears to have been aimed more at getting or keeping the Federal government out of such activities than chang­ing state policies. The principle was by no means established that government should not intervene in economic activities. If there was a going principle, it was more nearly the one that government at some level should aid, at the least by granting a special charter and frequently by actually subsidizing, in developing transport.

Thoroughfares of Sorts

Early aid to the railroads be­comes more readily understand­able when they are considered as analogous to highways and water­ways. Highways and waterways were usually thoroughfares, open to traffic of all comers, though tolls might sometimes be charged. Governments usually fostered thoroughfares in one way or an­other: sometimes building roads and canals, chartering them, granting them monopolies, and fa­voring them with the use of the power of eminent domain.

Railroad tracks were never thor­oughfares to any extent; from first to last traffic on them was either monopolized or controlled by a single company. Yet they re­ceived many of the aids which thoroughfares received. Looking back on it, one may wonder why they were not treated as private undertakings, as factories were. The answer, in part, is that there was no tradition for roads to be treated in this way, and that railways were early conceived on an analogy with thoroughfares. They were something lying somewhere between a public thoroughfare and a private facility. Much mischief has followed from the ambiguity of this conception.

Of course, government aid to railroad building did not occur simply because of confusion about the nature of railroading. It may, indeed, have been the other way around: the nature of railroading may have been confused to facili­tate government aid. At any rate, governments aided railroads be­cause politicians perceived some advantage to be gained by such promotion. Sometimes that advan­tage was personal and direct, as when they received stock or other emoluments from promoters; at other times, it may have been in­direct by way of facilities gained for some portion or all of their constituencies. Merchants, trades­men, manufacturers, farmers, and what have you, wanted a railroad to and from their communities. The city fathers of one town wanted to gain for their locale a favorable position visa a vis their competitors elsewhere. Much of the history of railroads and gov­ernment intervention can only be correctly construed in terms of commercial rivalries, competing lo­cales, and the pulling and hauling between them for advantage.

Those involved frequently turned to politicians to get them to use government to better their posi­tion. Since these contests are a major part of the context of the story from first to last, it will be useful to introduce them at this point.

Not all towns, nor all locales, nor every region, had the same in­terest in or pressing need for rail­roads. The political pressures were not equalized over the country. The topography varied; the popu­lation was unevenly distributed; and political advantage from pro­moting railroads was much greater in some areas than others. Govern­ment aid to railroads needs to be understood, then, within the his­torical and geographical back­ground of these disparities.

A U.S. Common Market Tempts Government Aid

These United States became po­tentially a great common market with the ratification of the Con­stitution of 1787. States were gen­erally forbidden to place obstacles in the way of commerce. This po­tential market had been extended far beyond the Appalachian Moun­tains by the Treaty of Paris of 1783, by the terms of which Britain recognized the Mississippi River as the western boundary of the United States. The bounds were extended all the way to the Rocky Mountains in 1803 by the Louisiana Purchase.

The key to the commercial opening up of this vast trans-Ap­palachian territory was transport. Who would receive the greatest benefit from such commerce as might develop would depend upon where the terminals of the trade routes were located. Thus it was that government aid for internal improvements, as road building and such like were then called, rather quickly became a major po­litical issue. It was a heatedly de­bated national issue from the early years of the nineteenth cen­tury down to 1830, when Jackson virtually brought such Federal projects to a halt by his veto of the Maysville Road Bill.

Part of the impetus to finding ways to funnel the commerce from the American interior to the East Coast can be explained by the lo­cation of the bulk of the popula­tion and the character of the cities. According to calculations from the census of 1800, the popu­lation center of the United States was only a few miles south and west of Baltimore, Maryland. Most towns of any size were port towns, and, with the exception of New Orleans which was not then in the United States, these were all east of the mountains, on or near the Atlantic. The major port cities were Boston, Newport, New York City, Philadelphia, Baltimore, Norfolk, Wilmington, and Charles­ton.

To Save the Cities

The future growth and domi­nance of these cities was placed in jeopardy by the acquisition and opening up of the territory be­yond the Appalachian Mountains. Particularly was this true of the port cities from Baltimore north­ward. These had a narrow coastal hinterland to draw from within their own states or locales; the tidewater did not run far back, and mountains were relatively close to the sea. New York and Philadelphia were then the metro­politan centers, but anyone look­ing into the future would prob­ably have predicted that they, along with other East Coast cities, would be dwarfed by cities in the Mississippi Valley which would send produce from that vast area to the rest of the world.

New York State, Pennsylvania, and Virginia had more pressing reasons than the other states to be concerned with the Appalachian barrier. Each of these states had considerable territory beyond the mountains within their bounda­ries. This situation was of great­est concern in New York and Pennsylvania. Most of New York lies west of the mountains, and Pennsylvania is cut in two by the Alleghenies. These states had in­ternal political and economic rea­sons for trying to find commercial routes across the mountains in ad­dition to the interests of the coastal cities. Both New York and Pennsylvania built thousands of miles of improved roads in the first three decades of the nine­teenth century. Other areas in­duced the Federal government to undertake the construction of a national turnpike to connect the East with the Midwest.

All this flurry of building had little discernible effect on the flow of commerce. Many of the im­proved roads were commercial flops; it was still less expensive to float goods down the river from Pittsburgh to New Orleans than to haul them in wagons over the mountains. The steamboat opened up new possibilities for the use of the Ohio, Mississippi, and their river tributaries; by its use goods could not only be shipped down­stream but upstream as well. The American cities of the future would probably be St. Louis and New Orleans, with lesser centers at such places as Pittsburgh, Cin­cinnati, and Memphis. A look at a topographical map of the United States should confirm that this was the most likely prospect.

If the traffic in goods had fol­lowed the course of the great in­terior rivers, if it had flowed from the Midwest into the Mid-South as it bade fair to do, the history of the United States would undoubt­edly have been altered. If energy had been concentrated on making the rivers safer, if access to them had been opened up by roads, canals, and smaller streams, they might have served well for an ex­tensive transport. It may be too much of a speculation to think that such a linkage between North and South would have forestalled a civil war. Certainly, the peoples would have been bound closer to­gether by this dependency. Of course, it did not work out that way.

The Canal Era

American ingenuity, eastern in­terests, the accident of state boundaries traversing the moun­tains, the concentration of popu­lation on the eastern side of the mountains with its determinative role in the use of political power, combined to produce a different re­sult. The first major break­through in the effort to link the Midwest to the Northeast commer­cially was the Erie Canal. This canal was projected and built by the government of the state of New York to link Lake Erie to Albany by water. From Albany, traffic could readily flow down the Hudson to New York City. The building of the Erie was an amazing engineering feat in its day. It was completed during the 1820′s, and became very quickly a com­mercial success. It is not too much to say that at the time New York City was saved as the leading port in the United States by the Erie Canal.

Not so, of course, the other port cities of the East; their prospects were dimmed by New York’s tri­umph. So it was that the rush was on in other states to build canals, with similar triumphs envisioned. None of these undertakings was more ambitious than the one in Pennsylvania. It was to connect Pittsburgh with Philadelphia, pro­viding a much shorter route than the one in New York to the Mid­west. Unfortunately for Pennsyl­vanians, the topography between the two points was ill-suited to canal building. Undaunted by this, builders went ahead with the proj­ect. This is how they did it:

From Philadelphia a railroad trav­ersed the eighty-one miles to Co­lumbia on the Susquehanna. From Columbia a canal ascended the Sus­quehanna and then traveled west­ward along the Juniata to Hollidays­burg, where the Allegheny ridge 2,291 feet high had to be surmounted. The device chosen was the Allegheny Portage Railroad, which mounted each side of the ridge with five in­clined planes interspersed with level stretches. Stationary engines pulled the vehicles up the inclines; horses pulled them on the level tracks. In this fashion cars or cradles with canal boats were raised from the Juniata and finally let down on the other side into the Conemaugh at Johnstown, whence a canal contin­ued along the routes of various rivers to Pittsburgh.¹

Even after such an effort, it was not attended with much suc­cess in attaining its object. Most of the Midwestern traffic still went by way of the Erie. There was much more canal building, how­ever. A Chesapeake and Ohio ca­nal was projected to link Virginia and Maryland with the Ohio River, but it was never completed. Several Midwestern states sunk large amounts of funds into canal building in the 1830′s and 1840′s. Indeed, some of them extended their credit so far that when the depression came they forfeited payment or went bankrupt. These failures considerably dampened the enthusiasm in some states for government ventures in subsidiz­ing transportation facilities, and proponents of laissez-faire were strengthened.

The Urge to Subsidize

But if there was ever a notion that dies hard (that is, does not die), it is the notion that government should subsidize or other­wise sponsor some industry or un­dertaking. It dies hard because there are those ready to hand to benefit personally from such aid and who will use their ingenuity to bring forward reasons that will convince the public of some gen­eral benefit forthcoming. So it was, at least, with transportation.

The era of canal building was not over before the era of railroad building began in earnest. Nor can it be said that overmuch had been learned from the debacles in canal building following upon gov­ernment involvement. For cities on the East Coast, the railroad of­fered the possibility of competing with New York City in tapping the Midwest. The railroad might do for Philadelphia and Pennsyl­vania what their canal had not. Thus it was that during "the pe­riod 1840 to 1853, the city and county governments in Pennsyl­vania contributed about $14 mil­lion to railways. Philadelphia alone incurred a debt of over $8 million, about $20 per person, for railways. In 1852, $6,750,000 of the Pennsylvania Railroad’s total capitalization of $9,876,000 had been contributed by local govern­ments."²

Governments in other states en­gaged in some of the same kind of activity. The "merchants of Balti­more had conceived the… ambi­tious enterprise of a railroad across the Allegheny Mountains to the Ohio River. Private subscrip­tions to its shares having proved inadequate to its financial require­ments, resort was had to the city of Baltimore and to the state of Maryland, whose credit therefore was utilized to the extent of $5,000,000."^³ Even New York State inhabitants were soon worried by the railroad, for that mode of transport soon demonstrated its general superiority over canals and inland waterways (not by cheaper rates but because of schedule predictability and year round use). "By 1840, the state of New York had granted its credit in aid of railroad companies to the amount of nearly $4,000,000, and eventually the aid of this character from the state and from counties and municipalities reached the sum of $40,000,000."⁴

Some of the early eastern lines were actually state projects. "In Pennsylvania two of the earliest lines in the state, the Portage Railroad and the Philadelphia and Columbia, were constructed with state money, as was the strategi­cally located Western and Atlantic in Georgia."⁵ More common, how­ever, was financial assistance from states or municipalities to other­wise private building. One his­torian sums up government aid in the East in this way: "The West­ern Railroad in Massachusetts, the Erie in New York, the Baltimore & Ohio in Maryland, and most of the railroads in Virginia were among the rail recipients of state assistanc."⁶

Several Midwestern states also assisted railroad building exten­sively. Ohio adopted a law which committed the state to furnish one-third of the capital for any railroad company. "In 1837, the state of Illinois appropriated over $10,000,000 to public improve­ments; a debt of $34.10 for each person in the stat…. In 1838, the state made an additional ap­propriation of $9,000,000…. Mis­souri spent over $30,000,000 with only $6,000,000 of assets to show for it; Michigan incurred an im­mense liability without adequate security…."⁷

States aided railroads in other ways than by subsidies and loans. As a general rule, railroads were, at the least, chartered by states. Sometimes these charters included monopoly privileges. In some in­stances, exemptions from state taxes would be granted, and they were usually given privileges in the use of eminent domain for the acquiring of land. It is safe to say that virtually all the railroad trackage laid in the country was laid in consequence of some spe­cial privilege not granted to all enterprises.

States Rush In Where individuals Fear to Tread

At the same time, it needs to be emphasized that there were great differences in the character and extent of this aid. Much, probably most, extended only to chartering and allowing the railroads to ac­quire land by eminent domain. Of the rest, there were some loans, land grants, and monetary grants—each of these quite different in character. As to financing, this judgment is undoubtedly correct: "Most of the money for the early railroads came from private in­vestors."

Even so, such government aid left some unpleasant consequences in its wake. Government aid was extended on the grounds that pri­vate investors would not put up sufficient money for building the roads at the time. The meaning of this is that men who have money to invest do not judge such build­ing to have the best prospect for returns, that money can be better used elsewhere. Though private investors may be wrong, they are the experts in the field. Govern­ments are betting against the field when they put up money. Even if government ventures are superfi­cially successful on occasion, the success is frequently marred by unwanted consequences.

In any case, the state aid to rail­roads proved to be the wrong way to get them built. One historian sums up the results to the mid­point of the nineteenth century: "The experience of… states with government-sponsored internal im­provements—the Erie being the sole exception—had ended disas­trously."⁹ Another writer notes that "there was a good deal of fraud and corruption in connec­tion with state aid to railroads, and in later years a number of states repudiated some of their ob­ligations made in connection with railroad construction. Because of the corruption involved and be­cause of the heavy tax burden the people were asked to bear to meet the states’ promises, it later be­came common for state constitu­tions to prohibit the investment of state money in any private enter­prise."¹º

It often turned out that what was not a good investment for pri­vate investors was not a good one for governments. But that is not the whole story. Government in­vestment made such railroad build­ing politically determined rather than economic, turned over the funds to the cleverest lobbyists on occasion rather than to those likely to provide sound manage­ment, led to building at times and to places that would not then be justified, and sometimes saddled these premature undertakings with large debts. By reserving the right to regulate in charters, and by giving aid, states set the stage for intervention and made the status of the railroads before the law am­biguous.

Federal Entry in 1850′s

The debacle wrought by state intervention did not long deter the Federal government from entering the field. The Federal government began the move toward subsidiz­ing in the 1850′s, and then with Southern representatives out of the Congress during the Civil War plunged headlong into sponsoring railroad building. Though some land grants were made in some of the states of the Midwest and South, the most extensive Federal aid was given to the transconti­nental routes. Hence, attention can most profitably be focused on them.

The background to the trans-continentals is this: The United States acquired California from Mexico in 1848. A couple of years before, title to the vast Oregon country had been made certain by treaty with Britain. Almost imme­diately proposals began to be made in Congress for the building of a railroad to the Pacific. There were two main reasons for the matter to come before the national gov­ernment. A transcontinental rail­road would have to go through territory not then organized into states, territory over which the United States government had sole authority. Secondly, it was a project of such dimensions that there was little hope that the states standing to benefit directly from it would undertake its con­struction. The location of the route for such a road was a political is­sue for most of the 1850′s. The pressure for a southern route led to the Gadsden Purchase in 1853, and that for a Midwestern one led to the Kansas-Nebraska Act of 1854. Even so, no project was ac­tually authorized until the war was well under way.

With the South out of the Union, Congress authorized a transcon­tinental railroad that would have its eastern terminus in the Mid­west. Two companies were to build railroads—the Union Pacific and the Central Pacific. To facilitate such building, the government granted lands, made some loans, and enabled them to borrow money with government backing. Subse­quently, lands were granted and aid given for the building of other transcontinentals, the most exten­sive for the Northern Pacific Rail­road.

Clarifying Some Facts

It is important, again, that the extent and character of this aid be made clear. Historians, and others, have frequently exaggerated the extent and implied that the rail­roads got great benefits at the ex­pense of the rest of the country. It is much to the point that the lands granted were worth little to nothing on the market at the time they were granted. The railroads built through them greatly aug­mented their value. The lands were parceled out so that the company got one section and the government kept one in alternating parcels. Thus, the benefits from the appre­ciation of land values due to the railroads were apportioned be­tween the roads and the govern­ment. In the case of loans, they were largely repaid in one way or another over the years (with in­terest). Nor were the Federal land grants extended to most railroads. "Such grants were made in aid of a total of 18,738 miles of railroad line—less than 8 per cent of the total mileage of railroads built in the United States."¹¹

Even so, it does not follow that such aid as was given was pru­dent, and it is certain that there were ramifying consequences which few would have willed. The biggest scandal that occurred in­volved the building of the Union Pacific Railroad; the events sur­rounding this will give an indica­tion of some of these consequences.

The Union Pacific was assigned the task of building the road from the Midwest westward to junction with the line being built eastward by the Central Pacific. To facili­tate this building, the Federal government granted lands, author­ized the use of timber and fill dirt from the public domain, and pro­vided loans by way of government bonds. Initially, these loans were to be secured by a first mortgage against the railroad, but they were later reduced to second mortgage status. Congress required that at least minimal investments be made from private funds before the un­dertaking should get under way.

Credit Mobilier

One might suppose that with all this aid, private financiers would have adjudged the Union Pacific to be a good investment. They did not. The government bonds could only be disposed of at a consider­able discount. One of the men in­volved testified that there were "very few capitalists who had faith enough in the successful prosecution of the undertaking to feel it was safe to invest a dollar in the bonds, or even to take the notes of the company, with bonds as collateral, at 60 cents on the dollar without a large commis­sion." Moreover, as a recent study points out, "the market situation of the Union Pacific’s stock was even weaker than that of the bonds. John Duff asserted that Union Pacific stock could not be sold ‘except to people who would take a risk as they would at a faro-bank.’ "^¹2 True, much of this testimony was self-interested, but other indications are that the fu­ture earnings of the Union Pacific were not then viewed as such that heavy investment was warranted.

Even the directors of the com­pany plowed most of their investment into a construction company—Credit Mobilier—rather than the Union Pacific. They clearly judged that if there was profit to be made, it was from construc­tion rather than from operating the railroad.

An exposé of Credit Mobilier began in 1872 with the publica­tion of damaging letters in the New York Sun, and the matter was brought to national attention by a Congressional investigation. There were two facets to this scandal. The one that probably made the biggest impact at the time was that several members of Congress had bought stock in the construction company at par value. The stock turned out to be worth much more. It was charged that the stock had been sold to them at this price in order to influence votes. The other was that the well-situated directors of the Union Pacific had made an inordinate profit from construction, leaving the parent company ¹n bad finan­cial condition. It is the burden of a recent study to show that the profits were not exorbitant in view of the risks.^¹³ More importantly, this study indicates that even if the construction company had charged much less for construc­tion, the Union Pacific would still have been too deeply in debt to passim make a go of it. The discounting of stocks and bonds made the en­terprise too costly in the first place. Secondly, "it was the un­bearable weight of its obligations to the government that finally forced the road into receivership in 1893."¹4

A Trail of Disaster

Premature railroad building in­duced by government grants left a trail of disaster in its wake. The ramifying consequences are too extensive to be gone into in detail her. They can only be partially suggested. Government aid fos­tered a boom in railroad building that extended beyond those rail­roads receiving it. There was over­building in some areas; many roads were left in shaky financial conditions; there were bankrupt­cies. Hapless settlers were lured by government and railroads to buy farms in the semi-arid West; many would return eastward after years of failure. Unscrupulous fi­nanciers moved into railroading, sometimes made their quick prof­its, then left the railroads in dis­array. Boom towns founded on some illusive prospect of wealth or future greatness were hurriedly built, only to be deserted when the bubble burst. Nor should it be for­gotten that the wholesale slaying of the buffalo and the destructive Indian wars of the 1870′s were offshoots of the railroad boom, along with the influx of home­steaders that disrupted ranching. There is every reason to believe that America would have had such a railroad system as was needed and could have been afforded with­out the government aid and with­out the manifold infelicities that accompanied premature building.

Indeed, most of the railroad track in the country was laid after governments had withdrawn all but minimal aid in nearly all cases. In 1870, there were only 52,000 miles of track; by 1910, it ex­ceeded 200,000 miles. The Federal government did not make new land grants after 1871, though some of those already granted continued to be appropriated. In the 1880′s some of the lands conditionally granted began to be reclaimed by the government.

The railroads generally survived the effects of government aid for premature building. Builders con­tinued to build; systems were knit together; many private entrepre­neurs learned to operate them so as to provide profit for investors and benefits to consumers. Service was greatly improved in the latter part of the nineteenth century and rates were brought down. Goods from the far corners of the United States flowed into cities and Amer­ican ports and thence all over the world.

Governments began to change their policies, too, though it was hardly for the better. They were barely done with fostering prema­ture building with its unwanted consequences when they turned to harassment. Indeed, there had been some harassment by local governments from the beginning, but the pace quickened in the 1870′s, and it was only another decade before the Federal govern­ment would turn its restrictive power on the railroads. It is time now to explore this about-fact.

Next: The Thrust to Regulation

 

—FOOTNOTES—

¹ Edward C. Kirkland, A History of American Life (New York: Appleton­Century-Crofts, 1951, 3rd ed.), p. 236.

^² Gilbert C. Fite and Jim E. Reese, An Economic History of the United States (Boston: Houghton Mifflin, 1965, 2nd ed.), p. 199.

^³ Henry S. Haines, Problems in Rail­way Regulation (New York: Macmillan, 1911), p. 178.

⁴ Ibid., p. 181.

⁵ John F. Stover, American Railroads (Chicago: University of Chicago Press, 1961), p. 30.

⁶ Ibid., p. 31.

⁷ Haines, op. cit., pp. 181-82.

⁸ Stover, op. cit., p. 31.

⁹ Robert S. Hunt, Law and Locomo­tives (Madison: State Historical Society of Wisconsin, 1958), p. 38.

¹⁰ Russell E. Westmeyer, Economics of Transportation (Englewood Cliffs: Pren­tice-Hall, 1952), pp. 47-48.

^¹¹ Robert S. Henry, "The Railroad Land Grant Legend in American History Texts," Issues in American Economic History, Gerald D. Nash, ed. (Boston: D. C. Heath, 1964), p. 324.

¹² Robert W. Fogel, The Union Pacific Railroad (Baltimore: The Johns Hop­kins Press, 1960), p. 76.

^¹³ See ibid.,

¹4 Ibid., p. 88.

 

***

Limited Government: Unlimited Opportunity

History shows that great general prosperity occurs only where something approaching a free economy has been reached, and that prosperity always diminishes as government economic regu­lation increases. A free economy alone offers unlimited oppor­tunity to all.

THOMAS H. BARBER, Where We Are At