The Big Railroad Picture and Gift and Loans
Remind Me Again: Why this Fascination with Railroads?
In Theme 2 and the previous modules of Theme 3, I stress railroads as External MED’s sine qua non 19th Century mission to connect the urban dots, create sizable market area that foster corporate growth, and in so doing expand a city’s economic base by creating jobs for a growing population. In a century in which city/economic base-building was necessarily the first and foundational ED strategy and goal, railroads, in various forms of public/private partnership, evolved into the primary External MED EDO–at least until the 1890’s.
I have briefly outlined in past modules federal/state land sales that occurred after 1877 and how southern railroad development was a major beneficiary. Reconstruction railroad initiatives, while plentiful, did not advance southern railroad development–most of these defaulted so quickly they overlap into the transition Redeemer mid-1870’s.To support this assert consider that East of the Mississippi southern states began the 1870 decade with only 10,600 miles of operating track). The increase by 1880 to 13,250 miles of track were (a bit less than 25% increase) did not constitute any sort of breakthrough as it consisted mostly of replacing existing, but broken lines and track scattered across the South.
The breakthrough was between 1880 and 1980–nearly 14,400 miles were added–more than doubling trackage. Including both east and west of the Mississippi 1880 southern trackage equaled 16,600 miles, and by 1890, 39,100. The national trackage growth rate was 87%; the South’s 136%. West of the Mississippi states tripled trackage miles (211%)  Woodward, the Origins of the New South, p. 120. Not surprisingly, this module will concentrate on that decade.
The breakout year in railroad construction was 1879. Between 1880 and 1890 180 southern railroad startups (mostly small) commenced operations. What kicked it off was the land sales, but the investment was probably more than 2-1 northern/foreign to southern money. Northern and foreign investors in the two years following July 1879, invested $150 million in east of the Mississippi southern railroads. This initial burst of railroad investment culminated in 1882 with a west of the Mississippi transcontinental route finally opened up between New Orleans and San Francisco  Woodward, the Origins of the New South, p. 120-1
The 1880’s were also years of considerable east of the Mississippi consolidation of routes and consequent concentration of ownership. Concentration of ownership was the flip side of efficiency of operations, profitability, and effective integration into the national economy. But concentration yielded decidedly mixed consequences for External MED transportation decision-makers. It weakened the new Redeemer coalition and its newly-established policy system quickly fragmented under attack from small farmers, the Grange, Greenback Party and highland-based hardscrabble soon to be 1890 populists. Anti-railroad, anti-monopolist, anti-subsidy these very restive forces did little to stimulate southern investment–and prompted what we will later describe as the nation’s most strident anti-public/private state constitutional gift and loan clauses. The Redeemer state policy systems adopted these strict construction gift and loan clauses for several reasons: (1) the heritage of Reconstruction-era defaults; (2) the primacy and electoral necessity of low taxes; and (3) the desire to keep northern-controlled railroads/industries out of southern state policy-making.
In this context, post-1880 concentration of railroads led to the creation of several “southern” mega rail lines that with each new acquisition found themselves ever more dependent on non-southern financing, and resulting in (mostly) northern hegemony-based directors added to their boards. As these aggressive, and capital-rich mega lines consolidated, they bought out southern-owned lines, leaving by the end of the decade, the great mass of small lines in the hands of southern ownership, and the mega lines effectively in the hands of northern.
Scores of smaller companies were swallowed up by stronger ones. The Richmond and Danville Railroad … combined by purchase and other methods twenty-six railroads. By 1890 this system had 3,123 miles and linked Washington DC to the Mississippi River at Greenville. In the meantime, the Richmond and Danville had been itself in 1886 brought under the control of the Richmond and West Point Terminal Company which had launched a movement of consolidation to eliminate competition and reorganize failing lines. The next large coup of the Terminal Company was the purchase in 1887 [of the] East Tennessee, Virginia and Georgia Railroad which … combined 1,745 miles of rails. The following year, the Central Railroad and Banking Company of Georgia with 2,361 miles was added…. Together with two steamship companies … the Terminal system included 8,558 miles … the largest system in the South  Woodward, the Origins of the New South, p. 121..
By 1890, more than half of the South’s active railroad mileage was controlled by a dozen railroads (and affiliates). The rest of the mileage was divided up among four hundred or so smaller systems, averaging about forty miles each. Seemingly impressive, the individual railroads which composed the southern railroad system which emerged from this incredible consolidation couldn’t easily link up with each other. The overall southern rail system was described as “a system of branches, with the trunks yet to be built”  Woodward, the Origins of the New South, p. 122. By the time the horrible 1893 Panic hit, it was quite apparent the southern rail transportation system needed further restructuring, reorganization, and more investment and consolidation. As we shall see J.P. Morgan, never one to miss an opportunity, would bring it about.
Northern railroad colonization was not without benefits. Northern investment functioned as a bulldozer, removing obstacles and barriers by the sheer power of its money and organization. For example, a critical weakness of southern railroads was its three-inch differential in rail gauge— i.e. width of the track—between northern and southern railroads. Shipments across regions meant breaking-bulk and transferring goods to a different train. All 13,000 miles needed to be replaced with correct gauge rail. The stimulus to overall rail reconfiguration started with one railroad, the Louisville and Nashville (L&N).
Starting at dawn, May 30, 1886, an initial 2,000 mile Louisville & Nashville RR section was replaced by 8,000 workers in sixteen hours; that same day the same workers adjusted 300 locomotives and 10,000 pieces of rolling stock (Woodward, 1981, pp. 123-4). The rest of the South followed suit and what was a prime impediment to the South’s integration into the national economy fell by the track-side. Why did L&N take this rather dramatic step is explained by yet another benefit/feature of the 1880’s railroad expansion: the development of southern extractive and heavy industry sectors.
As we shall see rail and economic base-building were hand and glove to each other. If the South were to coy and import northern industrialization as the New South advocated, then railroads were the essential first step. The irony or the underside of railroads and the use of northern/foreign investment was that neither the transportation system nor their industrial economic base would be predominately southern-controlled. The iron, steel, and coal industries were the core of an 1880 Gilded Age industrial economy, and the South possessed ample resources, and potential demand for these sectors, and that attracted all sorts of entrepreneurs and investors.
Rail and heavy industry expansion then became a two-way street during the 1880’s. In 1879, Northern and English syndicates heavily invested in Alabama, Tennessee and Virginia mines and furnaces (the 19th Century term for steel mill). L&N was the rail line that a decade earlier, had invested in central Alabama mines, and started laying rail to get that coal to urban centers. Mining and furnace investment prompted (and justified) expansion of rail lines to service it. Birmingham, Ensley, Bessemer, Helena, Aniston and Talladega (Alabama cities) sprang up around these investments.
By 1887, thirty-two furnaces, $30 million investment, were in operation in that larger region. Alabama steel production increased over that decade by 1000%. “By the late eighties, the South was producing far more pig iron than the nation produced before the war; investment in blast furnaces was mounting faster than any northern state; and between 1876 and 1901 pig-iron production increased seventeen times in the South and only eight times in the country at large” (Woodward, 1981, pp. 126-8).
During those years a low-wage southern (mostly white) proletariat acquired industrial experience in the emerging rail and heavy industry sectors. Between 1869 and 1899 the eleven Confederate states annually increased real value-added manufacturing by 7.8% compared to 5.8% nationally—and between 1899 and 1929, the South grew 5% versus 4.4% nationally (Wright, 1986, pp. 61-Table 3-5). The South was slowly industrializing. BUT, these numbers reflect a very low starting base. In 1860, the South possessed 17% of the nation’s manufacturing firms; by 1904, despite the noticeable increase in southern industrialization, the regional manufacturing share fell to 15% (Woodward, 1981, p. 140). The “industrial” gap between North and South had not closed at all, despite significant investment in southern manufacturing–it was, in fact, slightly increasing.
Industrialization, slow and incomplete (vital machine tools sectors, for example, never developed in the South) the south’s labor force remained mired in a low-wage environment, isolated from northern labor markets. Post-Civil War southern industrialization never reached critical mass sufficient to transform the South’s economy or shatter its crushing poverty. In frustration, Northern investment was viewed as investment by a conquering nation. The Civil War was the recent past; Confederate veterans still alive, and “the lost cause movement” raged throughout the South. Through devices like Pittsburgh Plus steel pricing, southern industry served northern firms rather than southern purposes. Profits flowed north—BUT, northern investment poured south. That northern investment, mostly by northern railroad companies, ameliorated a first-rate southern ED deficiency. With access to its own financing and a half-century of managerial expertise northern railroads had installed the critical southern transportation infrastructure. The railroad corporation had become the South’s primary transportation EDO.
By 1890 the South had nearly 40,000 miles of track, half of which was under control of a dozen railroads–and by that time if not owned directly, were virtual subsidiaries of Wall Street moguls J.P. Morgan and Jay Gould. A Connecticut entrepreneur, Henry Bradley Plant, heavily relying on foreign investment (Woodward, p. 126) purchased a number of Georgia, Virginia, Atlanta, and connections to the Mississippi River, and operated the mélange as a “unified system” (New Georgia Encyclopedia). The Panic of 1893 provided an opportunity for Wall Street to take over anything else of value (Woodward, pp. 118-126). Woodward labels Plant as “the great empire builder of the [Birmingham] Alabama mineral region, noting that by 1887 the L&N had invested more than $30 million in mines, furnaces, and rail. Woodward further notes, the L&N “founded towns and scattered agents over the country and abroad to bring in immigrants” (Woodward, pp. 126-7).
The railroad had become the dominant EDO not only in the South, but across the nation–despite any 1887 Interstate Commerce Commission. As a sort of railroad coup de grace, Henry Flager. Founder/lawyer to Rockefeller’s Standard Oil, opened up southern Florida with his coastal railroad and hotels, founding in the process nearly every major city from St. Augustine to a hole-in-the-wall Miami (1895). His investment laid the foundation for Florida’s Gold Coast tourism–an alternative non-manufacturing economic base.
The railroad corporation as an EDO, sounds remarkably out of place in contemporary economic development. It feels “so wrong”. But, hatred of railroads aside, while it may have served larger corporate ends, railroad company installation of the South’s core rail infrastructure took the burden off southern governments. The forms of public/private partnership used in this style of infrastructure development differed from that discussed in previous chapters. Gift and Loan clauses to the contrary, southern states especially (and Western cities in the next chapter) were joint financial partners with railroad corporations through grants, loans, bribery—and delegating public powers of eminent domain, and in some instances, bond issuance to the railroads. In return, aggressive railroad tourism and people promotion followed. In these years it was not so much a problem.
Railroad as a Southern Post-Bellum Hybrid EDO: Second Phase Gift and Loans
As argued in Chapter 3, the 1840’s gift and loan clauses involved canals and railroads in the North, and the chartering of state banks and farm and plantation lending than transportation charters[i]. Railroad corporate charters continued thru the War. Reconstruction policy systems enacted new constitutions, constitutions that included public support for railroads (Summers, 1998). “Every Reconstruction constitution permitted direct subsidies to railroads and other private entities; most authorized the loan of state credits for corporate stockholders … [while permitting general aid to railroads, some like] Arkansas banned special acts of aid and incorporation; … Alabama required two-thirds vote … and North Carolina required that new debts be covered by taxes or state bonds”. (Tarr, 1998, p. 113) A burst of railroad infrastructure development financed with state credit lending and loans followed.
This proved unfortunate in that (1) the Panic of 1873 prompted bankruptcies and (2) Reconstruction’s demise brought “Redeemer” majorities to state legislatures, and a “shift in constitutional direction in the South. If the economic keynote of Reconstruction constitutions was economic revival, the aim of post-Reconstruction constitutions was … ‘to govern as little as possible’”. (Tarr, 1998, p. 113) New constitutions “curtailed state promotional efforts”, “forbade use of public credit for the benefit of individual or corporation” (Florida), “made loans of credit conditional on referendum support by two-thirds of all voters (South Carolina); the 1875 Alabama constitution “eliminated the post of commissioner of industrial resources, and imposed an absolute ban on state, county, and local aid to corporations for internal improvements”; Louisiana and Georgia repudiated railroad bonds. “Those who championed these constitutional changes assumed either that frugal government would attract investment to their states or that agriculture, rather than industry, was basic to their state’s economic revival.” (Tarr, 1998, p. 114) Post-Reconstruction state constitutions seemingly moved counter to contemporary conceptions of southern state economic development/business climate promotion, and corporate subsidies. Instead they support Genovese’s position against Woodward. What gives?
During the 1850s railroads and manufacturing firms increasingly adopted modern forms of corporation (Chandler Jr., 1977) and in that environment, states across the nation enacted tax abatement laws favoring manufacturing to compensate, thus maintaining their favorable manufacturing business climate. Many states in the South did so also. Post-Reconstruction Southern state pushback from Reconstruction era policy systems’ uncommonly close partnerships with railroads/business, accompanied by manufacturing tax differential legislation, therefore, were not as radical as would appear. Redeemer low-tax/low services nexus—and low wage subsistence workforce set the southern business climate apart from the North—not its tax abatement climate—especially considering that several southern states applied business taxes (personal/property income) than the North.
What did happen nationally in the 1870’s was NOT that state and local financial relationships with railroads, port facilities (transportation infrastructure) and private corporations were reduced, but that structural forms and ED tools shifted. During this era, state legislatures increasingly empowered private firms (in transportation and extractive industries especially) to exercise eminent domain. This translated into use of the modern private corporation as a hybrid EDO. The Big City streetcar franchise demonstrates how a modern private corporation were provided public powers and financing, but “regulated” to accommodate public purposes in key transportation/harbor infrastructure. Inter-state and continental railroads were another example. Because government financial/public power relationships with private corporations continued through the nineteenth century, however, structural refinements and new ED tools were required.
The U.S. Supreme Court 1875 Citizen Saving and Loan Association v. Topeka decision led to significant innovation (and change) in a key economic development tool: government bond issuance for infrastructure and private corporations. That decision started American state courts down a long road toward defining “public purposes” for which government debt and appropriation could be linked to private corporations and private activities. This little-known decision repudiated a Topeka municipal bond issuance for an ironworks company by ruling that public funds could only be spent for a “public purpose”. Acknowledging that jobs and revenues created by the ironworks did favorably impact the municipality, the Court said that was counterbalanced by the reality “that no line can be drawn in favor of the manufacturer that would not open the coffers of the public treasury to the importunities of two-thirds of the businessmen of the city or town”. Further the Court held that public funds could only be used “for purposes which taxes can be levied”. If legislatures lacked authority to raise taxes for a purpose, than bonds could not be issued for that purpose. State courts across the land applied this principle in the following decades.
The Topeka ruling set up a firewall of sorts between government financial assistance and private corporations. But by making a link of public funds to taxing authority, an opening was created that had an enormous impact on economic development financing. “The nexus between borrowing [public] money and taxation is the payment of interest” (Gold, 1987); interest payments are ultimately paid by taxing. If, however, interest payments would not be paid by taxes, then public indebtedness could be possible. Into this breach, project revenue bonds (distinct from general obligation bonds) would emerge. In this manner, government, as Briffault has argued (Briffault, 2003), commenced a longstanding “bypass” of much of the Court’s ruling (and G&L clauses), preserving in a different form government and private corporation financing linkages.
[i] Since 1840’s southern constitutional amendments were aimed at banks, Virginia, Missouri and Tennessee used railroad corporation charters in the 1850s. The Tennessee legislature (1853) approved a “patriotic and enlightened policy that laid the foundation of a new system of public improvements” using public subscriptions of $10,000 per mile for railroads. Virginia also in the 50’s, as did Georgia and Texas: Carter Goodrich, “The Revulsion against Internal Improvements”, the Journal of Economic History, Vol. 10, Number 2 (November, 1950), pp. 149-150.