Theme 2: Module 11

Lincoln & Douglas: Case Study in Illinois Railroads and Economic Development 

We have tossed a significant array of External-MED concepts, drivers, events, and personages at the reader. This module tries to “put them altogether” by grounding them in a state of Illinois two-module case study describing its MED-related goings-on in the fifteen year period between 1835 and 1850. There is, however, a second purpose lurking in the background.

That purpose is to apply concrete and specific detail of MED’s multiple moving parts over a generation to demonstrate whether the traditional criticism concerning state-chartered transportation-infrastructure EDOs was responsible for subsequent state bankruptcy.

Remember, an important thread in our Theme 2 is that these state bankruptcies triggered legislative and state constitutional reaction, in the form of gift and locan constitutional clauses, which materially reshaped private-public partnerships to the present day. We have not too subtly countered that state-chartered developmental-EDOs got blame that partially they did not deserve. Specifically, I argue that state defaults differed by region, with the South (to be discussed in Theme 3) and the Midwest states state defaults occurred for different reasons than the northeast-Mid-Atlantic states. What suffered was the “developmental-transportation hybrid EDOs”, a particularly vital form of public-private-partnership was complicated and set back for the remainder of the 19th century.

In this Illinois case study the case is presented that the state policy system, its legislature in particular, was primarily responsible for the default, making misjudgements/institutional incapacity and bad timing in encountering a “perfect storm” created by a major Panic.

In making this case, we also acquaint the reader with state-level MED policy-making during the Early Republic–focusing on its “connect-the-dots External MED approach in its attempt to attract people/city/town-building to Illinois, and counter similar efforts by neighboring states to do the same. Inadvertently, we also catch the disruption caused by sector innovation as all this happened while newly-emerging mode of transportation, railroads, were displacing the previous mode, canals. The reader is free to judge how all these moving parts enter into Early Republic (and any time period’s) policy processes.

Using real, well-known historical leaders, we provide both background to the reader while letting them “feel” how all these concepts and drivers fed into each other to produce S&L MED strategies and programs. In particular, the impact of politics and external realities, as well as the personal goals of the policy-makers, cannot be escaped. The practice of economic development was not then (or now) characterized by policy-making driven rational professional policy actors. S&L ED policy-making–at the intersection of economics, politics, and societal Venn Circles– is inherently a multivariable, rational/ irrational, and often serendipitous affair.

That Lincoln and Douglas were ED advocates, and were national leaders responsible for the use of railroad corporations as the principal EDO in External-MED until the 1890’s, is largely unappreciated today. That there may have been a “dark side” to their involvement is also hinted. This too is yet another “moving part” in MED policy-making.

The larger theme is to show how Illinois “connected its young urban dots”–the case study is tilted to deal with External Janus MED, and is bifurcated between the “before and after” of the 1837 Panic-induced state default triggered by Illinois’s rather chaotic effort to connect its urban dots through internal improvements (canals and railroads).

To this extent, it logically follows our previous module which presents our assessment of the complexity underlying state-chartered corporations, developmental transportation-EDOs, and the “capacity” of the policy system to produce sustainable and effective MED strategies and programs. The next module is the fit conclusion or culmination of the Illinois case study.

Lincoln and Douglas and Politics surrounding approval of the 1837 Internal Improvements Act

There are at least three sub-themes floating through this case study. The easiest to identify is Lincoln and Douglas’s personal role and life-long commitment to External MED, and their professional relationship to the Illinois Central RR[ii]. Tagging along with Lincoln (Whig-Republican) is the lesser-known Stephen Douglas (a Democrat), his famous political competitor in the 1858 Senate-election Lincoln-Douglas Debates (and 1860 Presidential election). Douglas, like Lincoln, was a huge proponent of External MED–and Henry Clay’s American System.

When Andrew Jackson successfully torpedoed the American System, both men were determined to apply it to the Illinois state government. The two, as we shall see, played paramount roles in the 1836-37 state legislative approval of a massive “internal improvements (canal and railroads) legislation–which two years later ended in state default and collapse of most of the state-chartered corporations funded by the legislation.

Secondly, this case study studies the collapse of internal improvement-related state-chartered corporations following the 1837 Panic.. It suggests the state default in the Illinois case resulted from incredible bad timing of the 1837 legislation, the  policy-making chaos, legislative exuberance, if not outright incompetence, the “bubble” policy atmosphere caused by a settlement and land sales boom, and the subsequent and conscious failure of the legislature to raise taxes to pay the debt–preferring default instead–British banks suffered, less so the Illinois taxpayer. T

The state-chartered corporation, whatever its deficiencies, was mostly a bystander–albeit one who fully participated in this legislative process in savory and unsavory ways. In any event, this was not External MED’s finest hour.

John Randolph–Leader of the “Quid” Faction Opposing Federal Involvement in Internal Improvements

The final theme is what happened after the default, in terms of internal improvements and the crisis of the “old order”–a bifurcated national economic system. That will be handled in the next module. This is mostly a Douglas affair–although we will include Lincoln. Missing is a third module that details Lincoln’s “transcontinental railroad/homestead MED-policy revolution. Missing also is the how the federal government’s role in S&L MED was fundamentally altered during the Early Republic Era. I hope to correct these gaps in the future.

Still the next module and the following Minnesota multi-module case study will introduce the larger MED-External issues of homesteading/ city-building. Instead the next module will alert the reader to how state and federal MED policy-making was affected by pre-post Civil War political polarization. Douglas’s, as U.S. Senator, principal rationale for using transcontinental railroads as the principal EDO in External-MED was to better integrate America’s bifurcated regional economic systems through the railroad.

The last topic in this second module will segue to our mini-case study, the ICRR Railroad which innovated a combined strategic approach to Illinois External MED: city-building and attraction. The ICRR played the role as disruptive innovator, pioneer, and policy entrepreneur in American S&L External-MED. In so doing ICRR gave birth to modern American S&L attraction strategy, and injected the railroad as the primary agent/EDO in subsequent state-level city/town-building.

Lincoln/Douglas and the 1837 Illinois Internal Improvement Act

Let’s start with Abe. Biographers, from people who knew him and those writing 150 years later, are consistent in asserting “internal improvements” were central to Lincoln’s Whig/Republican agenda, and to him personally. Lincoln escaped from his father and rural poverty through river-canal internal improvements employment. As a late-teenager, he worked for the better part of two years on constructing an Illinois canal. The 21-year older lost his job because Andrew Jackson, in his battle to end Henry Clay’s American System, vetoed further funding for the project. Lincoln remained a hard-line disciple of Henry Clay, firmly committed to his American System–as did most soon-to-be Whig party adherents. Early Republic MED was a highly-contested battlefield in the bi-regional pre-Civil War dual economic systems.

Lincoln’s first campaign for elective office, (1832) centered on his call for local internal improvements/canals (he lost). Elected to Illinois House of Representatives in 1835 (serving until 1842) he pressed hard to make Springfield the state capital, and adopt the Governor’s proposed vast financial commitment to massive internal railroad and canal improvements. The Governor’s plan hopefully would draw trade, grain, and settlers from St. Louis to central and southern Illinois. It also would counter neighboring Indiana’s massive 1836 Monmouth Internal Improvements legislation. The states were competing for settlers, city-building, and economic growth. The global competitive hierarchy was already at work in prompting S&L MED policy.

Reelected, Lincoln was elected by fellow Whigs as their floor (minority) leader (Sidney Blumenthal, A Self-Made Man, 2016, p. 70ff) [iii].  He served alongside Stephen Douglas, a Democrat floor manager, born in Vermont.

Photo of Lincoln in 1846

Blumenthal aptly describes 1835 Illinois as “a northern state without a North” (p74). When this case study begins, Chicago had less than 4,000 residents and Cook County did not yet exist–making 1835 Illinois as “the most Southern of the free states (Northwest Ordinance), populated largely from the upper South, with the most draconian Black code of any state without slavery” (p.75).

Both Lincoln and Douglas could trace their familial heritage to New England; both married into slave-holding southern aristocratic families. Ironically, Lincoln won the courtship battle with Douglas for Mary Todd. Douglas was the intellectual of the two; he “attended” Canandaigua Academy. The reality was both were self-educated and eventually became apprentice lawyers. In many ways, the two men were mirror images–Douglas a “cotton Whig turned Democrat”, and Lincoln a “real Whig” and future Republican.

When each took office, three-quarters of the Illinois House were in office for the first time, and not one had been born in Illinois. The vast majority were from the South. In later years one became president–beating another, one was in the cabinet, six were U.S. Senators, three future governors, and several Union generals (Blumenthal, p. 88 ). The young future stars of Illinois politics were in this session.

Perhaps the major difference between the two, and an important one, was that Lincoln came from a religiously-evangelistic family, while Douglas became a Mason. During this period anti-Mason sentiment was gathering momentum, and was incorporated into the emerging Whig political party. Always, uncomfortable with slavery, Lincoln was a moderate. Douglas was indifferent to slavery, and an adherent to Clay’s American System; in the context of the era he became a “liberal Democrat”–which in later years proved pivotal in his role as one of America’s “Great Compromisers”–a successor to Henry Clay (a founder of the 1840 Whig Party). Lincoln was 26 in 1835; Douglas was 22 in 1836–the state of Illinois was only 18 in 1835. Talk about “babes in the woods”.

This was a volatile political transition period. Jackson had just left office, and the Democratic-Republican Party was in the process of splitting in two: Whig and Democrat. Slavery, free soil, and in the Midwest and Central States, internal improvements were major defining–and polarizing–partisan issues. In 1836, the Alamo in Texas fell, and the Texan revolt erupted. In essence, 1836-37 was a highly fractious period, with the Democratic-Republican party beginning the split into the Democratic and Whig parties in 1840. In 1837 the worst Panic in American history was to hit.

Illinois & Michigan Canal

Lincoln was deeply committed to a series of internal improvement legislation, including the 1835 Illinois and Michigan Canal Act, and culminating in the granddaddy of all internal improvement acts, the 1837 Act. Previous to the 1835 Act, Lincoln had successfully supported an even-earlier Beardstown and Sangamon Canal Act. Canal-building offered many opportunities.

In anticipation of the Beardstown & Sangamon Act’s passage, Lincoln purchased stock beforehand in the state-chartered canal company, with one dollar down and four dollars “on margin”–it was a Whig endeavor. Lincoln also bought 47 riverfront acres on the canal (in the new town of Huron)–which he had surveyed personally–at the minimum government price of $1.25 an acre (Blumenthal, p. 79).

As majority and minority floor leaders, Douglas and Lincoln are credited with leading and successfully negotiating passage of the 1837 Illinois Internal Improvements Act (which BTW included as a “rider” approval of Springfield as the state capital–a major plank in Lincoln’s electoral platform). The bill was bipartisan, Stephen Douglas who pushed his own set of favored railroads and counties delivered votes from his party, and Lincoln had his own list as well.

                                                 Cartoon Opposing Clay’s American System

 

The Illinois 1837 Internal Improvement Act

The Act was (1) pork barrel 101, (2) incredibly divisive, driven by legislators “greased and swallowed” by log-rolling lobbyists, with “half-horse, half-alligator” legislators literally wrestling on the floor, (3) subtly was laced with the slavery issues–believed by many to encourage anti-slavery settlement, and to add to its aura, (and 4) the Act was approved just minutes before the 1837 Panic hit the papers.

The Governor vetoed the legislation, and Lincoln led a difficult, volatile, and last minute overturning of the veto (this is when he snuck in the Springfield rider). The Act went into effect. Blumenthal describes the contents of the Act, as it reflected the “style” of its policy approval process:

At the time that the shifting of the capital was under consideration, so was the internal improvements bill. It was referred to as ‘the System’ after Clay’s American System. ‘Roads and improvements were proposed everywhere, to enlist every section of the State … Three or four efforts were made to pass a smaller system, and when defeated the bill would be amended by the addition of other roads, until a majority was obtained for it‘. The number of projects grew exponentially, finally to encompass forty-four of the sixty counties, with the other sixteen receiving $200,000 dollar grants … The final bill authorized $14 million to lay 1300 miles of railroad track, clear five rivers, construct bridges, and build the canal connecting the Illinois River to Lake Michigan. … [In the midst of all this] Lincoln confided to [his partner] Joshua Speed that ‘his highest ambition was to become the Dewitt Clinton of Illinois‘. (Blumenthal, p. 91-2)

Indiana Mammoth Improvement Act of 1836–Triggered Illinois Improvement Act of 1837

Both Lincoln and Douglas voted against any statewide referendum to approve/ratify the Act. The Act comprised 63 sections, and specified projects throughout the state. Projects included several major rail line initiatives, many smaller canals/feeder rail, and roads/bridges. It is not clear to me that legislators had a clear sense of what they had passed.  Said and done this was “infrastructure pork” encased  in a Henry Clay American System wrapping.

That Illinois 1835-37 internal improvement policy-making happened in the midst of a bubble is pretty evident. A contemporary legislator observing the legislative process commented:  “It was at that session that the subject of internal improvement became the all-absorbing question of the day. There was not a railroad at that time in the state of Illinois, nor was there any road in Indiana touching the line of our state”.

Another legislator, a friend of Lincoln, claimed “We ran perfectly wild on the subject of internal improvements. Every member wanted a road in his county/town–a great many of them got one, and those counties through which no road was authorized … were to be compensated in money [$200,000] which was to be obtained by a loan from Europe—or God knows where”. Lincoln was able in the policy stampede to add a clause making Springfield the state capital.

Lincoln is quoted as saying “he held it to be the duty of Government to extend its fostering aid in every Constitutional way, and to a reasonable extent any enterprise of public utility required such assistance [state-chartered corporation] in order to the fullest development of the natural resources and to the most rapid and healthful development of the State”. Douglas stated “So strong was the feeling of popular opinion in its favor that it was hazardous for any politician to oppose it”. Local communities across the state met in a public meeting and approved resolutions “instructing” their representative to vote for the Act—which Douglas goes on to say “I did not feel at liberty to disobey. I accordingly voted for the bill under these instructions”. Both quotes were made subsequent to state default[iv].

The opportunity to defend themselves from encroachment by railroads from Maryland and other states and to catch up with internal improvements, seemed too good to miss. The legislature “jumped into internal improvements with both feet”. They did so following by simply copying an earlier model of infrastructure financing recently approved in Indiana: “These states [Indiana, Illinois, Michigan] hoped to service debts with the revenue proceeds of an expanding tax base…. All three states instituted ad valorem property taxes and increased tax rates[vi]. The weakness in this very responsible approach to infrastructure financing was the non-recognition of the substantial risk of our “developmental infrastructure” project construction. Projects had to be completed to generate expected project revenues. The Panic played havoc with that.

Reconstructed New Salem Main St–Early Republic Illinois City-Building

No doubt this reflected the town-building boom between 1835 and 1837. In Central Illinois “as much as one third of all towns ever founded were platted in these few months between the spring of 1835 and the fall of 1837“. In 1835 two million acres sold, and in 1836 three million. In 1831 only 134,000 acres had sold. Between 1830-1835, the population of Illinois doubled (William Walters Jr., Selling Location : Illinois Town Advertisements in 1835-1837 (Department of Geology-Geography, Illinois State University, 2010).

The legislative debate on internal improvements occurred in a land-boom/rush with prices escalating, and high political emotion, with new settlers-voters demanding infrastructure to make their investments worthwhile. The Panic, of course, ended all that–and land sales and city-building quickly collapsed. Towns such as Lincoln’s New Salem became ghost towns when the infrastructure and new growth failed to materialize.

Within weeks of Illinois Internal Improvement Act passage, the Panic hit, and banks were reluctant to purchase bonds. The state had specified conflicting definitions of what an eligible state-chartered corporation could be, adding yet an additional barrier to a project acquiring Act funds. Most Internal Act projects were never funded at all.  Cost estimates were later judged low, and a relatively low face value ($10 million) of bond-issuance was authorized, i.e. bond issuance authorization was not excessive.

The shifting partisan allegiances bedevilled many state policy systems, and further confused the Clay-Jackson Internal Improvements-American System battle. In Illinois, support for internal improvements, however was bipartisan in the Legislature. But in 1837 as the Panic took hold, the Whig-ish Governor–a long-standing proponent of internal improvements–switched and opposed the bill fearing a fiscal disaster. Lincoln (a Whig) & Douglas (a Democrat), and the Legislature, ignored him and overran his veto.

In summary, the reader might consider that state MED policy process reflected the tumult of the time, a land-boom, youth and fiscal inexperience of its political elites, lack of institutionalization of political structures (the legislature), and a rapidly-developing national panic. Moreover, 19th governmental policy processes in practice lent considerable support to the delegation of critical economic development strategies and functions to the private sector. The potential “red flags” inherent in state-chartered corporations, and the potential impact of a Panic on future revenues derived from the canal construction and inflated land sales were easily dismissed in this atmosphere.

The Act’s Aftermath: State Default: Why?

The conventional answer to “why” Illinois in 1839-42 defaulted on its internal improvement bonds is borrowed from that drawn from lessons learned in similar defaults in New York, Pennsylvania, and Maryland: corruption and the implosion of the state-chartered, public-private infrastructure corporations.

I argue the answer is much more complicated in the midwestern states, and Illinois provides an excellent illustration that more fundamental problems caused midwestern defaults. Early on, I suggested that “developmental transportation infrastructure”  necessitates some form of public-private partnership, while conceding that such partnerships are fraught with tensions–agreeing with those harboring concerns about state-chartered corporation’s stability and transparency. These public-private tensions and developmental infrastructure financing are structural in nature, and they were very evident in Illinois. They were, however, not central to the Illinois default.

There was another set of problems–political and institutional–that also played a much larger role in the default. But even they pale when simple bad timing, approval on the eve of the Panic and in the midst of a land-city-building boom, made default almost inevitable. However, horrendous the policy process was in Illinois, the politicians played by the then-accepted rulebook; they included in the 1837 legislation, the necessary property tax increases to pay back loans issued. The financing package approved was essentially identical to that employed in today’s tax increment financing. The Panic destroyed the future revenues to be generated by canal-railroad infrastructure.

The first credit-rating agencies were created in 1841. Lewis Tappen, a major community development philanthropic investor, started it.

What they didn’t anticipate was the Panic itself, the subsequent collapse of the individual projects, the crushing of the land boom, and the huge gap in revenues that inevitably followed. In today’s parlance they were living in a “bubble”. When the bubble popped political/institutional weaknesses reappeared and destroyed any ability of the State to fix the gap by raising taxes. Defaults and scapegoats were preferable. In short, political and institutional factors were critical, but arguably primary was the Panic itself and the unforeseen (negligence?) fiscal consequences.

At this point, the structural tensions inherent in developmental transportation infrastructure become crippling. Illinois infrastructure bonds were ultimately collateralized by state lands, recently granted to them by the federal government, which, it was assumed would increase in value due to canal/railroad proximity and sustained land sales. In the Northwestern states, much of the canal and railroad project land came from land transferred from federal ownership to state. The feds had prohibited any imposition of property tax on such land for five years. The prohibition expired in 1836, and was viewed as a windfall by Northwestern lawmakers. The legislature dutifully approved significant property tax increases on these lands, which have never before been on the tax roll–with little opposition from the voter.

The vehicles for project implementation were state-chartered corporations, empowered to exercise development-related ED powers, and enjoy favorable PILOTs. The legislature created two public EDOs to regulate and oversee the legislation. State-chartered corporations were required to conform to legislative-criteria (which it turned out were contradictory) in order to be eligible for project funding. Poorly-drafted legislation prevented most potential state-chartered corporations from acquiring funds at all, and those that did were, of course, vulnerable to the effects of the Panic.

Lionel Nathan de Rothschild–This is what FDI looked like in 1840

To be sure, some projects included in the Act were, if not on the verge of insider corruption, were unbelievable schemes likely doomed from the start. The Panic got the blame for poor due diligence in some cases, but the legislative and public opinion stampede that produced the bill won no prizes for due diligence or long-term policy analysis. Those loans that closed, eventually failed during the six-year Panic, most by 1842, usually leaving behind holes dug in the ground. Only one major project successfully survived to its grand opening.  Almost all of the few bonds issued were purchased by foreign lenders, making default less costly to Illinois residents and banks. Foreign lenders don’t vote.

By 1842 Illinois had about $15 million in outstanding debt—most of which came from earlier canal projects. Annual interest cost was about $800,000 and total state revenues were less than $100,000. The state legislature refused to increase taxes—-that lend to default. In the years that followed, several bills attempted to repeal the Internal Improvement Act, but all failed.

As far as the 1840’s went, it was mostly a wasted decade for Illinois internal improvements.

Still, the core cause of Illinois internal improvement defaults were: “Northwestern states [Illinois, Indiana, and Michigan] were counting on rising land values to service debts, not on completion of canals and realization of toll revenues”. Failed project construction meant inevitable default”[v].. The Illinois Internal Improvements Act included property tax increases to pay for bond repayments–in this the Legislature was not deficient. That the windfall faltered was due, mostly, to the Panic itself–but also the refusal of the state legislature to raise taxes sufficient to pay the $800,000 deficit.

In the end, the 1837 Illinois Improvement Act fell victim to the fragilities and vulnerabilities of developmental infrastructure in a climate of excessive public expectations, and weak political/governance institutions. The catastrophic default resulted from the failure of the project financing model interrupted by an unseen economic collapse, than the corruptive shortcomings of the state-charter corporation.

The post-default debate in Illinois was profoundly affected by partisan politics which resulted in more strident and aggressive legislation designed to separate and restrict public and private sectors into their individual spheres–attacking a type of public-private partnership which “fused” both sectors in one EDO but not precluding approval of a pure private state-chartered corporation. Public membership on boards of directors were forbidden and the extension of State credit to these partnerships—more importantly direct loans/grants as well–was limited, but not forbidden. In many instances, future bond issuances for public-private ventures were subjected to public referendums requiring two-thirds majorities. In short, Illinois, unlike some states, “reformed”, but did not “burn its bridges” regarding state-chartered corporations.

Illinois’s gift and loan clauses were incorporated into the new 1848 state constitution. In essence, these clauses were intended to “see State Government brought back to its simple and appropriate functions [leaving] railroad, canal, turnpike, and other corporate associations to get along on their own credit [i.e. to raise their own private financing] without any connection or partnership with the State whatever”. Debt restrictions were injected to preclude prolific exuberant bond issuance, and the past “special” state-chartered partnerships were either forbidden or made impractical (G. Alan Tarr, Understanding State Constitutions, 1998, p.112). Illinois further required popular referendums required for any exception to restrictions on State public-private financial relationships.

But also included in the 1848 State Constitution was a preamble to the clauses which “direct(ed) the general assembly to ‘encourage internal improvement by passing liberal laws of incorporation for that purpose’ without mentioning “special privileges” [public powers, abatements], but leaving intact the unwillingness to provide state credit and direct public financing for developmental infrastructure, (G. Alan Tarr, Understanding State Constitutions, 1998, p.112).

That preamble, as we shall see in the next module, reflected behind the scenes intrigue and schemes, and set the stage for Stephen Douglas and the birth of “land-grant transcontinental railroads”.

 

Footnotes

[i] Ward, Selling Places, op. cit. p.11 the “federal government determined to encourage railroad construction in the largely unpopulated interior by endowing it to companies with large land grants. These subsidies went much further than necessary for tracks and other railroad requirements. They were intended for settlers, to provide a source of income for the railroads, and to motivate more intensive settlement.

[ii] There are surprisingly many major sources detailing Lincoln’s personal involvement in ED. One is the recent, Sidney Blumenthal’s, Volume 1, A Self-Made Man (Simon & Schuster, 2016), but the very best is a 1922 book, reprinted/revised in 2003: Jesse W. Weik (author) and Michael Burlingame, the Real Lincoln: a Portrait (University of Nebraska Press).

[iii] BTW northern Illinois, i.e. Chicago was unsettled at this time. Cook County did not even exist and Chicago was incorporated as a town in 1833, and a city in 1837–and at this time housed only a few thousand. The Act pertained to central and southern Illinois almost exclusively.

[iv] Jesse W. Weik (author) and Michael Burlingame, the Real Lincoln: a Portrait (University of Nebraska Press).

[v] John Joseph Wallis, Richard Sylla, and Arthur Grinath III, “Land, Debt, and Taxes: Origins of U.S. State Default Crisis 1839 to 1842, www.frbatlanta.org/-/media/documents/news/conferences/2011/…/Wallis.pdf

[vi] Wallis, et al., pp. 12-3

[vii] Peter Galie, and Christopher Bopst, “Anything Goes: A History of New York’s Gift and Loan Clauses”, Albany Law Review, Vol. 75, No. 4,(2012), pp. 2005-90