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Wrong Track

by Stephen Smith
Railroaded: The Transcontinentals and the Making of Modern America, by Richard White (Norton, 660 pp., $35)

For all the glory of the transcontinental railroads, it’s not hard to find bad things to say about them. As the first truly national American big businesses, they made quite a few enemies, but on net, they are generally regarded as good things: flawed, but ultimately creatures of productive capitalism. They were corrupt, but wasn’t everything? The owners of the transcontinentals were once vilified as robber barons, but their image has softened with time. They did, after all, lay the groundwork for Silicon Valley, Hollywood, and half of modern North America; how bad could they be?

Very bad, says Richard White, eminent historian of the American West at Stanford University. Reading Railroaded, his account of the Gilded Age expansion of the transcontinental railroads, it’s hard to go a whole page without finding some accusation of theft, corruption, or bad-faith dealing. The railroads White describes were more scam than road, existing more for the personal enrichment of their owners than for the long-term (or even short-term) health of the company, never mind the nation. The transcontinentals stole vast tracts of land from the Indians and prompted ecological disasters; the owners ended up driving both their companies and the economy into the ground. And on top of it all, White claims, we didn’t even need the grain, cattle, or silver that spewed forth from the West.

And yet, as the author writes in his conclusion, “Railroaded is not a kind of Robber Baron [story] redux.” Though he is in some ways harder on the transcontinental titans than even 19th-century novelists were — at least the villains of fiction were competent managers of their evil empires — Railroaded has a profoundly free-market message. The transcontinental railroads were not triumphs of entrepreneurship, White says, but rather triumphs of politics. They used federal (and state, and local) subsidies and the trust they engendered to float bonds for unaccountable and wasteful ventures that would never otherwise have seen the light of day, and we’d have been better off without them.

The transcontinental railroads were not the first subsidized infrastructure projects in the U.S., but they were the first ones to be financed on a nationwide basis. When the 13 colonies won their independence from England, Americans were largely confined to the Atlantic Coast, but state-backed canal and railroad projects soon pushed the frontier westward. Projects such as New York’s Erie Canal were financed by individual states in order to populate their interiors and to direct trade (and with it, they hoped, wealth) to coastal cities, but federal projects were opposed by southern states before the Civil War. This opposition to federal infrastructure spending was in fact enshrined in the Confederate constitution, which specifically forbade Congress to “appropriate money for any internal improvement intended to facilitate commerce.”

But with the South vanquished, the North finally got its chance, and it used the opportunity to conquer the U.S.’s third great region: the West. The Civil War was a time of great financial innovation, as both sides sought to raise funds for war, and when the war was over, such financiers as Jay Cooke, who made his fame (and fortune) selling war bonds for the Union, moved on to selling government-backed railroad bonds. Private investors were too cautious to invest in transcontinental roads on their own, but land grants, subsidies, and bond guarantees sent the market into a fury, chasing profits with the railroads as they stretched westward.

The profits were in the end illusory, and neither the transcontinentals nor their bondholders made it to the 20th century in good health. The railroads’ managers siphoned away vast amounts of money from their companies through insider construction contracts and financing deals, but White argues that even absent the fraud, they still wouldn’t have been profitable (though this is disputed by others). The transcontinentals were the focus of two major panics, one in 1873 and another in 1893, both followed by depressions.

The transcontinental railroads may have given birth to the West, but their children were not happy. The subsidies were bigger out west, and so were the monopolies and grievances. The western railroads were a hotbed of industrial unionism, with the wage cuts following the Panic of 1893 setting the stage for the Pullman Strike a year later, which shut down commerce west of Chicago for weeks. Eugene Debs made a name for himself leading the American Railway Union during the strike, the largest North America had ever seen.

Western farmers, too, had followed the railroads out west and were not happy with what they found. Back east, a dense tangle of major and minor roads yielded a relatively competitive market where the railroads and their prices shifted gradually. But out west, where much of the market was dominated by enormous government-backed roads that followed little prevailing market logic, prices and schedules were in a constant state of flux. Towns were being hurled across the West as rates and schedules changed.

In a particularly strong chapter titled “Spatial Politics,” White explains how farmers’ resentment of unstable market conditions throughout the West bred a new brand of anti-monopoly politics, best embodied in the Grange movement. As with many Gilded Age reformers, the Grange’s victories were limited at the time, but their ideas about regulation would become fixtures of the Progressive Era. The Interstate Commerce Commission, a key Grange victory, was toothless at the end of the 19th century, but it would be resurrected in the 20th as a powerful and overbearing regulator. The commission nearly smothered freight railroading to death until it was rescued in 1980 by the deregulatory Staggers Act, and regional passenger rail still toils under the oppressive rules of the Federal Railroad Administration, which inherited safety regulation from the ICC in 1966.

White makes Joseph Schumpeter and “creative destruction” recurring themes in Railroaded, but only to highlight how different the transcontinentals were from the Schumpeterian ideal. He contrasts Schumpeter’s concept of apolitical entrepreneurs, “unable to take care of [their] political class interest,” with the transcontinental railroad men, whose successes stemmed from their ability to obtain political favors. And in evaluating the economic effects of the transcontinental roads on the citizens who were supposedly benefiting from them, White finds a lot of destruction, but not of the creative kind: The transcontinentals succeeded in moving people, but it’s not clear that the kind of moving they did was at all economically or politically productive.

At the book’s end, White challenges the reader to envision an alternative history in which transcontinental railroads were not subsidized. The Dakotas are his natural experiment: South Dakota had no federal-land-grant roads, whereas North Dakota was served by both the Northern Pacific and the St. Paul, Minneapolis & Manitoba, which later became part of the Great Northern. Settlement in North Dakota was stretched over the length of the Northern Pacific’s route, while South Dakotans and their dense network of smaller, regional railroads were more concentrated in the fertile eastern part of the state. As White puts it, in South Dakota, “farmers paid less for land, settled the better lands more quickly, and avoided marginal arid lands.”

Transcontinental railroads weren’t the only state-favored monopolies in America, but they were the biggest. Eliminating federal railroad subsidies and land grants would not have freed the economy from boom-bust cycles, but it might have softened the blows and resulting political backlashes. And given the modern successes of densely populated nations in Europe and East Asia, it’s not at all clear that having a denser East Coast would have been such a bad thing.

As with all good history books, Railroaded is as much a lesson for the present as it is a story from the past. This passage, in particular, has enduring wisdom:

The Central Pacific and other transcontinental railroads, their bankers, and the syndicates together lured investors, who had first ventured into the financial markets during the Civil War, along the financial gangplank one small step at a time. Investors proceeded from government bonds to government-secured railroad bonds, to convertible bonds, to mortgage bonds vouched for by the same people who sold the government bonds, to a whole array of financial instruments, and from there, potentially, into the drink.

If this sounds familiar, that’s because it’s the vague outline of the theory, often expounded by libertarians and conservatives, that the recent housing bubble was induced by government interventions in the housing market. Politicians loosened lending standards through the market power of the quasi-private entities Fannie Mae and Freddie Mac, the argument goes, and people got mortgages who shouldn’t have gotten them. Looking back on how (relatively) unsubsidized companies such as the Great Northern got swept up in the subsidy-fueled transcontinental mania, it’s hard not to suspect that a similar domino effect was at play in both instances.

Like the railroad bubbles, our recent housing boom was a sprawl-based asset bubble. The transcontinentals sprawled westward, taking people away from the densely populated East and spreading them throughout the rest of the continent. The housing bubble sprawled on a metropolitan rather than continental scale. Sun Belt suburbs and exurbs accounted for much of the housing growth during the boom, as places such as Phoenix and the Inland Empire exploded in population. Prices in both cities and suburbs fell when the bubble burst, but urban markets are showing signs of recovery, while the ’burbs languish. Just as Richard White questioned whether the transcontinental booms were worth it, we should ask our own?

– Mr. Smith is a freelance journalist living in Washington, D.C., who writes about transportation and land-use policy at his blog, Market Urbanism.