The Railroads: Finance
The Railroads: Finance
“The Most Developing Force.” Charles Francis Adams decided to devote his public career to studying and writing about railroads because over the middle decades of the nineteenth century they became, as he put it, “the most developing force and largest field of the day.” After a burst of construction over the 1850s, in which the nation’s railroad mileage grew from 8,879 to 30,626, the railroads emerged as a key industrial infrastructure, and at the same time as the country’s biggest business and one of the era’s most pressing public policy issues. In other words, the new economy was not only carried by railroads; it was driven by railroads. As sources of transportation they pinned together the new agricultural and industrial landscape, and as businesses they themselves led many of the transformations reworking the national economy. By the time of the Civil War the railroads dwarfed other American businesses in capital, labor, and geographic scale of operation. Thus the development of a rail network required the pioneering of new business methods of finance and management.
Federal Land Grants. Up to 1850 federal construction or funding of internal improvements such as roads and canals remained politically controversial. But federal policy shifted in 1850, when Congress authorized a federal grant of some 3.7 million acres of public land to the states of Illinois, Mississippi, and Alabama to help promote and finance railroad construction. Specifically, the grant allocated a two-hundred-foot right-of-way corridor, and alternating parcels of land on either side ofthat corridor. This grant, converted into mortgages secured by the land, became the chief source of capital for the Illinois Central and other railroads. It was the first grant of its kind, and it set a precedent; other federal land grants followed in 1852, 1853, 1856, and 1857—grants that dispensed land totaling close to 18 million acres.
The Appetite for Capital. Congress started committing federal assistance for railroad construction in the 1850s in part because the railroads then being projected from the eastern seaboard into the continent were substantially larger than earlier railroads, and they needed huge amounts of capital—more than American businesses had ever raised before. In 1850 the nation’s largest railroad, connecting Worcester and Albany, cost $8 million. This figure far surpassed the investment required to capitalize the factories of this period: by comparison, all but the largest textile mills and ironmaking or metal-working factories were less than $1 million each. But even the Worcester and Albany’s price tag paled in comparison to the money needed to finance the east-west trunk lines of the early 1850s. Railroads such as the Erie or the Pennsylvania cost tens of millions of dollars, and the smaller new western railroads in the Northwest still ate up substantial amounts of capital—over $10 million apiece.
New Financial Markets. Earlier railroads had survived by drawing largely on local sources of capital;
most of the money that built a line came from farmers and other businesspeople up and down the route or at either terminus. But local sources could not satisfy the intensive capital requirements of constructing, maintaining, and operating the new railroads. New sources of capital had to be found, and new ways of mobilizing that capital. In thé 1850s railroad finance came to rely on bond issues marketed in the eastern cities of the United States and abroad in Europe. By 1859 American railroad corporations had floated bonds worth more than $1.1 billion—$700 million of it from the previous decade alone.
New York. It was over this decade, in response to these financial pressures, that New York City became the financial capital of the nation and the New York Stock Exchange assumed essentially its modern form. Organized in 1817, the New York Stock and Exchange Board (as it was originally called) remained for decades a small-scale operation attended by a few dozen brokers, handling a few hundred trades a week. But as the investment market in railroad and municipality securities multiplied, activity at the Board accelerated. Soon the weekly volume of trade was registering not in the hundreds, but in the hundreds of thousands. In 1863 it took on its modern name—the New York Stock Exchange—and in 1865 it opened its first permanent headquarters at the corner of Broad and Wall streets, making the term “Wall Street” synonymous with high finance. Certain investment-banking partnerships began to specialize in railroad finance. Brokers began to develop modern speculative techniques: selling “long” and “short” positions in stocks, and dealing in puts and calls. Some speculators proved espcially adept at manipulating this new marketplace, acquiring (and sometimes losing) vast sums, as well as notorious reputations. A generation of “Robber Barons,” businessmen who became wealthy through exploitation, came to the forefront—men such as Daniel Drew, Jim Fisk, and Jay Gould, the “Mephistopheles of Wall Street.”
Postwar. The Civil War checked the pace of railroad building, but only temporarily; the coming of peace released a burst of pent-up construction. Between the end of the war and the depression of 1873, thirty-five thousand miles of track were laid—more than doubling the nation’s total railroad mileage. Some of this new construction reached into new territories, but other projects paralleled existing railroads, competing for traffic or financial leverage. Railroad construction became a dangerous, high-stakes game as speculators contended with each other and with railroad managers for control. Still, over this period the railroad network pushed deeply into the western and southern parts of the country. By the middle of the 1870s railroads were beginning to explore ways to check increasingly destructive rate wars. Meanwhile, two of the largest railroads, the Pennsylvania and the Baltimore and Ohio, had assembled the nation’s first self-contained trunk and feeder systems on a regional scale.
Alfred D. Chandler Jr., The Visible Hand: The Managerial Revolution in American Business (Cambridge, Mass.: Harvard University Press, 1977);
George Rogers Taylor, The Transportation Revolution, 1815-1860 (New York: Rinehart, 1951).
The growth of the Pennsylvania Railroad—the largest U.S. railroad in the 1870s—gives a good impression of how large the scale of railroad business was starting to become. It was not yet typical, but it was a sign of things to come. After an aggressive five-year program of expansion beginning in 1869, the Pennsylvania owned or controlled railroads and canals capitalized at $398 million, earning net profits (in 1873) of $25 million. The company owned almost one thousand miles of railroad outright and, through financial leverage, controlled another five thousand miles. Outside of the United States, only two other countries —Britain and France—contained more mileage than the Pennsylvania. The system as a whole encompassed a transportation empire extending from the Hudson River to Massachusetts, and from the Great Lakes to the Potomac. Moreover, for a short period of time, the Pennsylvania organized overseas shipping and steamship lines, mining operations, and steelworks; though the company eventually pulled back to concentrate on running its vast railroad operations. Over this period the company employed more than 50,000 workers, and needed over 1,000 managers to supervise them.