The Great Railroad Revolution (8 page)

In the United States the procedure was different, and, perhaps inevitably in a nation that had only come into being in 1776, no clear system had been devised by the time the first railroads were being debated in the 1820s. Consequently, aspiring railroad entrepreneurs faced a battle to persuade legislatures to allow them to build their lines. The power to grant the necessary charters belonged to the states rather than the federal government, and the inadequate legal system had to grow quickly with the railroads in order to meet their needs. Anyone seeking to start a business and form a corporation had to obtain a charter, which placed certain obligations on the new company. In the case of the railroads, these related to such matters as fares, the nature of the services, the location of the track, and even the speed of the trains. The states, too, had rights over any company to which they granted a charter, including the assumption that they could ultimately revoke the charter and run the company directly. It was only later, as the railroad companies grew and became more powerful, that this right was challenged and eventually set aside.

While obtaining a charter was a difficult and expensive process, the crucial legal requirement for the railroads was to obtain “eminent domain,” which was the right to take over whatever property was needed in return for fair compensation. This put the US railroads in a much stronger position than their British counterparts, since it gave them a general power to take over any land rather than only particular plots specified in the acts obtained by British promoters. The right of eminent domain in US law had a long history, born of the necessities of a new and expanding nation. It started with mill owners who flooded land upstream by building dams but were granted the right to do so, despite the damage caused to landowners, because they created wider benefits for the general public. Once established, this principle was extended to turnpike promoters and
canal owners on the same basis—that the public advantage outweighed the drawbacks for the few unlucky proprietors whose land happened to be in the wrong place.

The railroads faced an uphill struggle to persuade the courts to give them this power because, initially, they were by no means universally welcomed. They faced opposition from canal owners and turnpike operators, who rightly saw them as major competition, and there were other vested interests lined up against them as well. Tavern owners and stagecoach drivers were two such groups, but many farmers resented the incursion of tracks across their land. Moreover, there was a debate about whether the railroads were really for public use and were of sufficient benefit to justify the granting of such a widespread power as “eminent domain.” The early railroads were crude affairs, covering only short distances at slow speeds, and with no guarantee of trains reaching their destination. The canals and turnpikes had more obviously widespread benefits and, significantly, were open to all comers to travel on their own conveyances, whereas the railroads not only provided the cars and locomotives but also insisted on rigid schedules. These early-nineteenth-century objections to the granting of legal powers to the railroads offer an interesting parallel to the reluctance of twenty-first-century Americans to leave their much-loved automobiles at home and take the bus or train. American suspicion of the railroads' intentions, therefore, started early in their history, and such feelings are at the root of much of the antagonism toward them documented in later chapters of this book.

Nonetheless, the railroads were granted eminent domain in various court cases, notably in New York, which established the principle thereafter. The courts recognized the early railroads as a major technological breakthrough, promising immense economic benefits in opening new territories and allowing the rapid transportation of goods, people, mail, and, of course, troops in time of war. One crucial New York case, in 1837, captures the mood of the era and reveals the arguments put forward for the development of railroads generally:

Railroads are not only of great public use in the ordinary business transactions of the citizen, but they may be more advantageously used than turnpike roads for national purposes; . . . they tend to annihilate
distance, bringing in effect places that are distant near to each other: tending in their magic influence to the extension of personal acquaintance, the enlargement of business relations, and cementing more firmly the bond of fellowship and union between the inhabitants of the States. Next to the moral lever power of the press should be ranked the beneficial influence of railroads in their effects upon the vast and increasing business relations of the nation, and promoting, sustaining and perpetuating the happiness, prosperity and liberty of the people.
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This sort of rationale was followed in other US state supreme courts that considered the grants of eminent domain to the early railroads, which were thus spared the British experience of negotiating for rights-of-way with each individual owner. In the United States, it was simply a matter of selecting a route, assessing the damage caused to private owners, and paying them. This process, which amounted to the legal confiscation of land, was a much cheaper method of acquiring for railroad development than in Europe, where land had to be purchased at considerable expense from the owner, representing a significant proportion of the cost of building a railroad line. This was one of the reasons US railroads were less expensive to build than those on the other side of the Atlantic and was a key factor in their remarkably rapid growth.

The legal arrangements were part of a complex relationship between the state and the nascent railroads that was to prove troublesome for both sides, particularly when it came to money. Ostensibly, the railroads were supposed to be private businesses, as befitted the American ethos. But, in fact, the idea that they were an entirely private enterprise is one of the great myths of railroad history. The railroads couldn't be funded by purely private means. The economics and practicalities of railroad development made that impossible, and the reality was very different. The desire to make the railroads a privately owned enterprise, given the already-established American suspicion of government involvement, was always a vain hope. The railroads were such a large and complex enterprise and so capital-hungry that, almost invariably, they were forced to seek various types of support and, in many cases, funding from either local or the federal government.

Raising capital was a perpetual struggle for the railroad promoters. Unlike in Europe, where railroads usually connected existing settlements, even ones that were quite far apart, in America the railroads were often being built from, as an English wit put it, “nowhere-in-particular to nowhere-at-all.” Unsurprisingly, there was little capital available from parsimonious bankers in New York or Boston to fund such enterprises: “A banker might be more than willing to foot the bill for a railroad between Boston and Worcester or between New York and Philadelphia, but a railroad between two log cabin villages in Indiana was something altogether different.”
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Furthermore, the banking system in Europe was more developed and was expanding swiftly to cater to the needs of the railroads, which were fast becoming the biggest industry. In America, mostly still agrarian and mercantile, there was a shortage of capital for the building of new lines.

Therefore, while the promoters may, mostly, have been private individuals, the role of the state—and, particularly, of the individual states—was absolutely crucial for the majority of early railroads. Notionally, the government was not supposed to become involved in the business of providing what were known as “internal improvements,” infrastructure projects such as new turnpikes, canals, and railroads. In practice, neither the federal government nor the states could avoid becoming embroiled, and most of the early railroad schemes had some sort of government support. In many cases, states recognized that the local railroads were so important to their economy and their development that the railroad companies had to be supported. This meant that, far from being an example of raw capitalism in which investors were risking all their money, the railroads were a hybrid, a mix of private and public interests. It was, in modern parlance, a public-private partnership, where both the capital outlay and the risks were shared.

In what has been called “a typical manifestation of shifty American pragmatism,” a host of devices, ranging from the entirely legal to the distinctly dubious, were developed to fund the construction of railroads. State support for the construction of canals had been widespread, and therefore the pattern had already been set. The railroad companies, however, were given privileges through their charters that were far more favorable than those granted to any other corporations. Not only did they acquire rights over land through eminent domain, but they were also given unprecedented tax
exemptions and money-raising opportunities. Freedom from taxation was the most obvious advantage, but railroad companies were also permitted to hold lotteries and create special banks to tap into the savings of even modestly affluent citizens. Crucially, too, many states granted monopolies that prevented rivals from building parallel lines. Although this idea was put forward as a way to prevent the inefficiency and waste of duplication, in practice it put the beneficiary in a very strong position to exploit both local businesses and people. Most notoriously, the Camden & Amboy, stretching across New Jersey, was given the monopoly for rail transportation over the whole of the state, described by one rail historian as “a very foolish action of the New Jersey legislature.”
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The spectrum of railroad funding covered a wide range of approaches, from state subsidy to wholly private financing. At the subsidized end of the spectrum was Pennsylvania, a state that adopted an interventionist role vis-à-vis its railroads—almost in the mold of a European government—unlike some of the other states, which adopted a more hands-off approach. Pennsylvania appointed an “internal improvements commission” that was originally established to oversee canal traffic but then played a key part in the state's development of the railroads. The commission determined the route of all the early railroad lines in the state, sold the bonds to fund construction, and then oversaw the construction of the lines. According to historian Sarah H. Gordon, in the early days, “the state controlled such matters as the speed of the trains, tolls to be charged for the use of the track, safety considerations such as the need to enclose all lamp and lantern flames, and the order of priority of different types of trains using the track.”
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Support for the railroads was offered even by states in the Northeast, where—unlike in many midwestern and southern states—private capital was plentifully available. For example, in 1833 Massachusetts provided the bulk of the cost of constructing the Western Railroad, providing a vital link between two other railroads, with a $4 million loan and direct investment of $600,000. This kind of support was commonplace, but it often came at a price. The state lawmakers in New York, which loaned the Erie Railroad $3 million, forced the railroad to go through a sparsely populated region, the southern tier, along the border with Pennsylvania, hoping that it would stimulate economic growth there. New York was, in fact, a serial
supporter of the railroads, and by 1846 had advanced $9 million to ten different railroad companies.

In the Midwest the perceived need for railroads, together with a lack of private capital, stimulated states—such as Michigan and Illinois—into building railroads themselves. In the absence of a developed banking sector, railroad promoters in these states did not have any access to capital, and therefore the state was the principal source of funds. In Michigan, even before the state was formally constituted, its lawmakers were agitating for building lines. After Michigan entered the Union in 1837, work started on three state railroads, but they lost money and were eventually privatized in 1846 on, inevitably, unfavorable terms for the state. Having spent $3.5 million on the construction of 150 miles of railroad, the State of Michigan sold the lines for half that sum to a group of Massachusetts and New York money investors.

Illinois, prompted by Stephen A. Douglas, later a senator, who, like many early promoters, was both forward looking and self-serving, drew up a grandiose plan envisaging the construction of 1,300 miles of line together with canals and turnpikes, all to be funded by the state. This was a remarkably ambitious scheme given that at the time, Illinois's population consisted of a few thousand people living in villages and farms, with no settlement worthy of being called a city. Rather fortuitously, the plan was delayed by the financial panic of 1837, but nevertheless ended up costing the state a fortune. Railroad construction became a moneymaking venture for numerous state employees who found there were rich pickings to be had from setting themselves up as “surveyors,” “land buyers,” and “estimators” and thereby obtaining lucrative contracts from the state. Illinois thus found itself with a few miles of railroad but a big debt. By the late 1840s, however, much of the state's plan for railroad construction had been completed by private companies. These privatizations were not without their critics. For example, Lorenzo Sherwood, a prominent Texas lawyer and politician, was furious about the takeover of lines by private corporations intent only on making a profit and argued that publicly owned railroads carried more tonnage at less cost. These sentiments would be echoed far more widely in later years, as mergers made the railroad companies more and more powerful.

In the South, the pattern of railroad development was very different, as lines were deliberately prevented from crossing state boundaries in order to ensure that each state could retain control of its own railroads. The South's railroads were therefore mostly short and built to a lower standard than elsewhere. For the most part, they ran from cotton plantations to ports with little provision for passengers. Because of the lack of private capital, the southern states, according to one railroad historian, “lavished their funds on railroads in a positively shameless manner.”
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Some, such as Georgia, even raised money through lotteries. The states seemed to be always at hand to ensure key projects were realized. Whereas the pioneering Charleston & Hamburg was built with a minimum of state aid, a mere $100,000 loan, its branches required far more substantial support, amounting to several million dollars, from the State of South Carolina. As in the Midwest, the states of the South were not averse to building lines themselves if they were seen as economically vital. In the 1840s, the State of Georgia built the 137-mile Western & Atlantic Railroad between Atlanta and Chattanooga and ran it successfully, whereas in Virginia the state constructed a line through the Blue Ridge Mountains and leased it to the Virginia Central Railroad. Indeed, Virginia had a policy of taking 60 percent of the share capital of all railroads in its area, whereas Louisiana, adopting a similar policy, took only 20 percent. Even the pioneering Baltimore & Ohio had been dependent on government funds, having obtained money from both the State of Maryland and the City of Baltimore, and only in 1896 did the railroad become entirely controlled by private interests.