Why Railroad-Led External-MED Worked: City-Building and the Railroad Corporation’s Business Plan

 

The Introduction As Conclusion

The reader may have noticed. I often put my conclusions in the introduction. This is the last module (for now anyway) in Theme 2. The Theme dwelled on Big City External-MED. Its underlying consequence was explaining how American early industrialization diffused, biased to cultures sympathetic to change, entrepreneurialism, innovation–and wealth accumulation as venture capital. In Theme 4 we shall pick up Big Cities once again, focusing on screaming economic and population growth, uncontrollable spread of the Big Cities to an ever-expanding periphery, and to the Rise of Inward-MED, conducted by a bifurcated Big City policy system (machines and businessman mayors) which spawned yet another set of MED EDOs like the chamber, port authority, boards and commissions–and fostered yet more CD wing formation.

Northern and Midwest city-building, agglomeration and economic-base building, followed by infrastructure–primary of which was “connect-the-dots transportation/communication– thrust External-MED into the forefront. External MED confronted the realities of “developmental transportation” as its early sector gazelles sought to use their innovative technologies to link up, and infuse manufacturing into economic bases. Manufacturing itself was not consciously-directed by either public or private EDOs–indeed a entirely new approach to American ED, community development, arose in sequenced phases to counter the shortcomings it created. The ambivalent, dichotomous federal reaction to this culminated only with Illinois’s Douglas/Lincoln’s second version of the Henry Clay American System: transcontinental land-grant railroad corporations and homesteading–and the unpremeditated formation of the northern Big City industrial hegemony–our first urban competitive hierarchy.

Theme 2, of necessity I argue, employed distinctive hybrid (public-private) EDOs to implement this strategy–and they came, during the 1837 (and later 1873) Panic to a seeming fall. As the Twig is Bent suggest how post-1840’s state constitutional gift and loan clauses sharpened and complication the evolution of American ED’s public-private partnership. Out of this, an illogical to be sure, was the successor hybrid EDO: the railroad corporation. The railroad corporation poured the foundations for several key MED strategies beyond connect-the-dots infrastructure: people/business attraction and city/town building. Necessity and the Second American System provided a motivation and the means to bypass state gift and loan clauses–creating most often an empowered municipal government and a behind-the-scenes powerful (tariff, Second American System, and Gilded Age regulation) tide.

As we shall soon see in Theme 3, the South saw precious little of all of this. The West on the other hand was its chief beneficiary.

Hardly mentioned in this Online History is culture–our Two Ships. Early Republic United States waged its own culture war, and it affected ED greatly, in the short-term and to the present. Along with a dominant–not exclusive by any means—Progressive Yankee Diaspora. which shared ground with a New York City (Woodard’s New Netherlands, Elazar’s individualistic) and Philadelphia’s (Warner’s Privatist, Woodward’s, Midlands) northern East Coast Big Cities matured into breeding grounds for industrialization and “finance capital”–diffusing both in their infrastructure-accessed hinterlands.

The Midwest culture war intensified as Tideland refugees, and Woodward’s Scotch-Irish-Greater Appalachians  impacted early Midwestern state constitutions and city-building. Already lagging behind their East Coast parents, Midwestern Big Cities developed more complex policy systems and migratory demographic configurations. Location also imposed its realities, and with immigration demographics exhibited a diverse set of Medium-Sorts along ethnic migration routes. Midwestern policy systems were not warmed over versions of their East Coast counterparts.

Even during the Early Republic Era–certainly the Gilded Age–Big City hegemonic cities were not uniform clones in policy systems or their ED policy outputs. We see strong hints of this as we see how the variation and timing in the ED-relevant reaction to the 1837 Panic, and the focus on people, rather than business, attraction. Boston was not trying to recruit more Irishmen.

We saw in the last module, how the railroad corporation required ethnic passengers and subsequent economic growth to retire their developmental bonds. Midwestern city economic bases were dynamic indeed. In Theme 4 the first auto alley was but only one example of a new string of industrial gazelle sectors. But Detroit and Cleveland, St. Louis and Cincinnati, and a whole host of Big Cities (Indianapolis and Minneapolis come to mind) rested on an agricultural hinterland and took off on their own industrial path. Others became branch or transhipment Cities. Woe betide to them.

And so now we conclude with our last thoughts on First Century External MED. This module (and the last) hints at how states used railroad corporations and devised a semi-formal, complementary public-private city-building, attraction, and infrastructure strategies until late into the Gilded Age. Underneath it was a solid, if distrusting, alliance of private entrepreneurs and political elites–a real growth coalition if you want to see one.

It took little time to check it, however. Progressively-inclined immigrants, railroad abuses and monopolies, and Granger-Populist political movements lend its own distinct character to an industrial state dependent on a huge agricultural economic base. Hints of the fall of railroads are quite evident in Minnesota. The policy politics associated with the Railroad Corporation public private partnership are complex indeed. Railroad city-building started in illinois, spread eventually to Minneapolis, and then in Theme 3 to the South and West

The Big City states found their varied niches in developmental economics, and the private sector perfected their business model–creating in Minnesota, which even today with two/thirds of its residents lodged in the gross Minneapolis-St. Paul metro area, a diversified state economic base characterized by medium-size Big Cities spread to the state’s four corners–and a strong agricultural-tilted industrial economy. .

Railroad Corporation as External MED’s Lead EDO:

The horrific (and as always long-standing) Panic of 1873 slowed Minnesota railroad-led development noticeably. It was only by 1880-1, when three thousand miles of track had been laid in Minnesota, its main lines (for southern Minnesota) were open, and the Pillsbury compromise approved, that the Age of Minnesota Railroad-led Development commenced. The railroad as Minnesota EDO that followed was a circumscribed public-private hybrid, almost like dancing  a one-step forward and a two-step backward waltz with a porcupine. It begins with the state’s constitutional gift and loan clauses.

Minnesota. Article XI, Section 3 opens with the sentence “The state shall not be a party in carrying on works of internal improvements except as authorized by this constitution”. Section 5 provides specific authorization, which includes public debt issued for projects on a “railroad right of way” subject to a not to exceed debt ceiling”. Minnesota gift and loan clauses did not preclude a state (or local) public private financial relationship, but clearly set limitations which, in the political culture that evolved in the late 19th century made such relationships controversial, and fraught with politics and litigation.

On another front, railroads, with its natural monopoly, wasted little time in developing enemies, and sliding into abuses, chiefly excessive freight rates. Oversight, focusing on public safety, commenced in 1871 with the state creation of the Commission on Railroads—an independent agency. In 1874 the Commission was required to be elected. In 1885, however, the legislature reorganized the Commission, renaming it to Railroad and Warehouse Commission, and returning it to a multi-member appointed commission. Its expanded powers included rate discrimination, and could promulgate rules to remove “unjust discrimination in rates, or unequal rate treatment of persons, towns, villages, or locations”. The Commission was given powers to subpoena. Reformed and expanded several times in the 20^th century, it was merged in 1967 into the state Department of Public Service.

As railroads settled the upper Midwest, Central and Western states, it took very little time for farmers and community business to push for rate regulation in particular. The most prominent farmer-based organization, the Grange, was founded in 1867. Interestingly, in 1870’s Minnesota a schism between farmers developed, in which farmers without railroad access opposed the Grange (and vice versa). This reveals yet again, the tension-filled contradictions inherent in developmental transportation infrastructure. As areas were both settled and provided rail access, farmer opposition intensified. Intensely involved in politics, indeed a core element in the Populist Movement of that era, the Grange acquired increased strength in Minnesota in the 1870’s and 1880’s. Minnesota began regulating railroads in the late 1870’s by adopting its version of what today are called “Granger Laws”.

Rate cases went to the Courts, both federal and state (early on the federal Supreme Court deferred decision-making to the state on railroad regulation, but that changed in 1886 Wabash Case, and later in 1890 with Minnesota Rate Case. Rail regulation became the hot button of American politics, a struggle in which the 1887 establishment of the federal Interstate Commerce Commission was only the first inning. It is quite apparent the days of the railroad corporation EDO were numbered, and this phase of American state and local ED short-lived.

The take away from this confusing tale, some say tangent, is that in Minnesota, state issuance of tax-exempt financing to railroad corporations ceased after 1857, and after that time, direct state loans from bond proceeds did not occur because of the 1857 default of $5 million. By the time the matter was resolved in the early 1880’s, both the politics and the financial status of railroads had dramatically changed, rendering further direct loans mute. Railroads in Minnesota were not the blessed event they were in Illinois, and although they were state-chartered in a technical sense, the structure was always controversial, fragile, and railroads were more private and autonomous.

The Business Model: City-building(infrastructure) and Population/Business Attraction

There is research in developmental economics which describes a 19th century as an Age of Railroad Imperialism. India’s Raj-Era railroad imperialism is still decried today.  What we see in the Midwest, and are about to see in the South and West are the American versions. I have tried to take another tack. If having made the decision to “connect-the-dots in 1870, how does one propose it be done. The private railroad corporation, enlisted into a public-private partnership was one alternative and the one chosen in the US. In the Minnesota case study, Minnesota railroads were “developmental” from day one, and were integral and primary actors in the growth of the state. What played out in Minnesota. however, was not the same as played out in Birmingham Alabama–despite their temporal overlap. Nor were they similar in a place like Texas. In any case “railroad colonization” was a widespread American public-private MED strategy.

Minnesota developmental transportation railroads were pretty much financially on their own. How did struggling railroad startups pursue “colonization”–city-building (that’s what it was called in 1860’s) so aggressively? They issued private debt in conventional private markets. That debt prospectus, however, specified a new business model that included city-building and people attraction as the means by which debt would be repaid.

To pay off the private debt they issued to lay track, build stations and bridges, purchase rolling stock, and pay salaries–and create communities, and get people/ businesses into them. Similar in approach to a tax increment financing, future revenues generated were the basis of repayment. The credibility and subsequent performance of the railroad in promoting colonization was essential to financing the post-Civil War railroad corporation faced with a developmental transportation environment.

Banks and investors (often foreign) that lent this money not only advocated colonization, they demanded it. Why? Somebody had to use the lines and become passengers and generate freight from which would come bond repayments. A railroad made sense only if people followed and used the line. It is a mistake to assume attraction marketing, aka boosterism”, by railroads was an interesting sideline, mere boosterism by stupid business. It was just the opposite a vital and necessary element of their business model, and a pillar of their financing and financial vitality. Bonds could be repaid only if the community was successful.

There’s more. The public side recognized that state economic and population growth required working with a railroad to “open up” its wilderness.

States (and local governments) needed people if they were to grow; growth was perceived as a life or death struggle. Either your state or city grew or somebody else would. Transportation infrastructure was a very first step in a growth strategy, and transportation infrastructure into empty lands, meant controlling the property on which the track was laid, and being able to generate income from land adjoining the track.

States such as Minnesota acquired land (usually transferred from the federal government), transferred it to a railroad startup, along with tax abatement on land and property, coupled with additional powers of eminent domain, and delegated to the railroad the power to issue state-tax exempt bond issuance (not backed by state credit or guarantee) so banks/investors would participate. In many cases the state, local governments, and their citizens/residents purchased these bonds. Railroad development required a close and complex public-private partnership, and support and monetary investment from its citizenry–even in Minnesota.

Not fully appreciated, however, was all this partnership created a virtual monopoly for the railroad if successful. That monopolies occurred within a generation or so, while probably not totally surprising, was a risk that could be dealt with later, in order to achieve in a cost-effective and ideologically-congruent manner, development that was an absolute imperative at the time. That it worked so well–until it didn’t–was the congruence of the private business model with public MED goals.

Railroad City-Building

The final destination was not left to chance either. City-building became an element of the railroad EDOs strategy during the 1870’s. Again railroad self-interest prompted a larger, more community-minded partnership. It also helped that unlike upstate New York where railroad routes and community relations bordered on incentive extortion, Minnesota railroads did not employ such tactics—for the simple reason that towns and cities did not yet exist. New York was mature compared to Minnesota which was a “babe in the woods” (to play with a Paul Bunyan metaphor) and accordingly responsibility to plat towns along a prospective route fell to a railroad.

Railroad-led city-building was not restricted to Minnesota by any means. Examples can easily be found in the Central and Southwestern states, but several Minnesota towns (Litchfield, Willmar, De Graff, Groton, and Campbell^[v]) were Minnesota examples of a phenomena labeled as “railroad towns”. The essential element in the definition of a railroad town, at least for me, is the settlement must be owned by the railroad, and that the town was an essential element “of a railway’s strategy to populate and control the territory along its line”.

Make no bones about it, the railroad town definition makes it clear, if not inevitable, the settlement first serves the corporate interests of the railroad. That corporate interest, however, to some degree could be tempered by the needs to promote further growth and economic sustainability. It is also true the monopolistic rail access, particularly if served exclusively by one railroad, led to a serf-like relationship between Railroad Corporation and the town/city. Dynamics associated with a railroad town could apply to jurisdictions other than railroad towns. Accordingly, the following discussion applies to some degree to many Minnesota jurisdictions of this period.

Hundreds of independent towns appeared along the tracks, but they were not instruments of corporate strategy. Countless other towns already existed before the railroad arrived, and sometimes they were successful in directing the rails their way, but in neither of those cases could a railroad company fully develop the potential of the townsite for its own advantage. The railroad’s clear goal was to promote and control business along the line … There was little disagreement over how the system should work … farmers expected that trade-center towns would be created, and merchants expected that there would be a surrounding population to support the trade….. Many railroads made deals with private parties [effectively subsidiaries] who platted and sold the townsites. Railroad survey engineers determined town locations, and then handed over their information to townsite agents who hired surveyors^[vi].

While the grid was usually the starting point for platting, there was considerable variety in its application given the topography and economic base contemplated. A common plat featured the railroad running down the center of the town (effectively the Main Street) and then constructing buildings on either side of the 300’ right of way—the businesses on one side were 300’ apart from the business on the opposite side. This is where the expression “the wrong side of the tracks” came from; typically one of the two sides were composed of “proper and prosperous” businesses, and the other housed the saloons and cheap hotels, and “workforce housing”. Anticipating zoning and industrial districts (parks) by thirty years or so, businesses that required rail sidings or a close relationship with the line were located in a defined area which the railroad could service in a cost-effective manner^[vii]. In any case, railroad towns usually leased, not sold, the location to a business.

In Minnesota, the long term consequences of this platting can be observed by the current plight of Albany Minnesota. The city was incorporated in 1890 by 33 male residents, but the prospective city was bounded completely by the Great Northern and Soo Line Railroads. Present-day Railroad Avenue (the city’s main street) commercial business in almost totally on one side of the street. Because railroads would only lease that side which was on railroad property for thirty days—attractive only to those businesses that needed rail access (livestock, grain mills, later car dealerships), normal commercial/retail businesses located/bought on the other side, off railroad right-of-way. That is the side that serves as Albany’s present-day CBD. Albany is part of the St Cloud metro area and today has a population of almost 2,700—the highest ever in its over 125 year history..

Backlash Against Railroads

As developed in As Two Ships^[viii] the relationship of a town, railroad or otherwise, while not totally one-sided, developed tensions over time. The evolution of a community business elite, including the use of its chamber/board of trade usually tried to establish independence from the railroad, often by adopting its own refined business and people attraction strategy that was targeted to those businesses and groups that the chamber policy makers thought appropriate to local conditions and needs. From this developed the infamous, simplistic, and ideologically-laden “boosterism” that characterizes Third Wave historians.

Duluth and the Iron Range

One of the greatest of railroad robber barons, James Hill, was a Minnesota (St Paul) resident. His railroads extended Minnesota’s reach to the Pacific Coast–carrying his and the Big City industrial hegemony into Washington, Oregon and upper Mountain States and Dakotas. His railroads not only benefited from the ICRR External MED innovation/experience, but improved upon it–creating in the process many of contemporary Minnesota’s sub-state regions, towns and cities. He perfected immigrant people-attraction. He also embraced the full potential inherent in the Douglas-Lincoln land grant/state-chartered railroad corporation as External MED’s lead EDO.

 

Probably the most successful early Minnesota railroad town was Duluth. Duluth got an abortive start after 1854 when treaties with local Indian tribes, a rumor of iron ore, the 1855 opening of a canal at Sault Ste. Marie in 1855, and a road to St Paul prompted a flurry of loggers into the area, and the formation of eleven small settlements. The Panic of 1857 put an end to that—and in 1859 a local history relates that only a handful of residents remained. The 1860 census caught only 71 residents.

Duluth’s savior came in the form of Philadelphia’s Jay Cooke (a robber baron par excellence) convinced/ partially financed a small St Paul railroad to extend to Duluth—an extension that opened in 1870. He did so because he recognized, before anyone else, that in combination with the Sault Ste. Marie canal and the new transcontinental railroad, Duluth’s unbuilt port opened up a modern logistics link from the Pacific to the Atlantic. This awakened St Paul’s James Hill to that reality and he first built his own extension (1871), then acquired the startup in the Panic of 1873. Still, his Northern Pacific facilitated the Duluth’s first agglomeration, a lumber milling complex to produce ties and wood for bridges as he pushed his railroad into Wyoming and Bismarck Montana. By 1870 Duluth was home to over 3,100 residents. That agglomeration, however, was not Duluth’s last—others followed.

Wrap Up and Segue Way

It will be hard for the reader to not realize I think the railroad corporation in this period on the whole did a spectacular job of implementing the core purposes entrusted to it by the states such as Minnesota and Illinois, and federal government: to populate, settle, and jump-start “the American wilderness”–and to create a national industrial, manufacturing economy from coast to coast. It pains me to say this but, If anything, this is probably “first wave” ED”–not the stuff that followed.

Also, to remind a reader of earlier modules, please keep in mind the temporal/physical gap between coastal Big Cities, the growing population centers of the Early Eastern Midwest and the undeveloped “west” (which includes Minnesota in this module). What you see going on in Minnesota is not what’s happening in Philadelphia. A fundamental reality of this history is that American ED/CD/MED includes many versions and styles, different policy systems, and, often unique sociological/demographic/cultural configurations. American ED was not then, and is not now, a one-size-fits-all, coast to coast and everything in between is all the same “ED”. Each strategy and program in each state and city confronts its own realities.

This it did–but not, I would add, to the liking of ED’s Policy World, and probably as alluded above, by most contemporary readers. Truth be told, in the next theme, I will shift my support away from railroads. Railroad EDOs were Anakin Skywalker/Darth Vader-like. In this module we concentrate on the former. I also add, this is the last module in Theme 2 on 19th century External-MED, which like Inward-MED accepts capitalism, and a primary function links states and cities to the evolving capitalist system. As an agent of capitalist economic imperialism, railroads did an excellent job, which also will not play well among many Contemporary Era readers. It will also not play well in my next Theme–so hold your powder and appreciate my intent to describe their role within the context and confines of an approach to ED that stresses its capitalist roots and linkages.

Which brings me to the MED strategy-nexus (paradigm, if you will) that railroad corporations pursued as an 19th century External-MED EDO. City (or town)-building was the bottom floor–on which all else was a logical derivative. It was their MED job to transform a dot on the map into a human economic, political, and sociological community and jurisdiction–and to link it with a regional market area and national economy.

For all practical purposes they started from scratch–and in Minnesota’s case in a short building season that ended when the cold came and snow got deep–it was forest and mountain for the most part. It might be added, that one should probably hyphenate city-building with infrastructure (in all its forms). Infrastructure wears out and constantly “evolves”; it is the MED strategy that overlaps both Inward and External MED, and once installed it needs to be repaired–and modernized to compete with other infrastructures. It is very expensive. The railroad corporation assumed responsibility for a community’s essential initial infrastructure–usually in partnership with the jurisdiction and community.

Think of this practice of MED as Maslow’s hierarchy of needs expressed in economic development. Failure was not only an option; it was the default. As to whether, jobs or people were primary, the answer was “who cares”; a city being built needs both at the same time. People-attraction, Economic base-building and physical planning were one and the same to a city-building railroad corporation–and don’t forget, even during his time, most Americans, and immigrants were agricultural entrepreneurs–homesteaders. Minnesotans learned quickly that agriculture and industrialization could successfully be married, and this will be evident in the case study. That observation is essential to understanding Contemporary Era Minnesota ED.

Finally, there is a reason I believe railroad corporations did so well in these core External MED strategy-nexus: it was compatible with, and essential to, its business plan and its overriding profit goal. This should be an important insight into structuring a solid public-private hybrid EDO. Look for this in the case study when it appears. Profit can build communities as well as destroy them, and in city-building and derivative MED strategies, profit can be your friend–at least until it isn’t. The railroads did recognize community growth and prosperity translated into profit for them–again, until they didn’t.