One robber baron’s gamble on railroads

https://www.smithsonianmag.com/history/robber-baron-gamble-railroads-brought-down-bank-plunged-us-into-first-great-depression-panic-1873-180982877/

by samclemens • 3 years ago

81 102 3 years ago

smithsonianmag.com

ssss11• 3 years ago

Railroads’ early days is what I think of in this current early days of crypto/blockchain. So many scams, but the innovation is there waiting to be utilised well.

“As a result, the rise of the railroads inspired entirely new forms of corporate securities and governance. They also yielded stupendous levels of fraud and chicanery, wrote business historian Alfred D. Chandler Jr. in his 1965 book, The Railroads: The Nation’s First Big Business”

paulryanrogers2• 3 years ago

Curious what innovation I may be missing in crypto. Can you elaborate?

300bps• 3 years ago

Blockchain technology has historically claimed several innovations:

1. Decentralized currency

2. Immutable ledger

3. Transparent transactions

4. Streamlined transactions (no T+2 or T+1 settlement)

5. Borderless transactions (between people in other countries)

6. Microtransactions (transactions a tiny fraction of a cent)

7. Smart contracts

These are innovations, the question is do they solve real world problems without creating more? For example, decentralization is great until you lose your keys or the government wants to shut down money laundering.

I have yet to see a real world benefit from blockchain / cryptocurrency technology. web3 is the closest to reality but I feel like it goes against human nature and the concept of decision fatigue. I don't want Netflix to prompt me, "Want to watch the next episode for 4 cents?"

nawgz• 3 years ago

Can you elucidate me on how you made that connection? I only see the point that both lead to scams, which... Is not very insightful.

Railroads are a physical device for logistical transportation. This has a very obvious value prop.

Crypto is an "alternative" "financial" "system", which is missing the key components of regulation and trust that back all functioning financial systems.

Hard to draw the parallel for me.

ta8645• 3 years ago

missing the key components of regulation and trust

I thought that those are supposed to be the key components of crypto. You trust that it is regulated by mathematics, the market, and infrastructure, rather than relying on fiat.

dotcoma2• 3 years ago

Would love to better understand the connection between railroads and cryptocurrencies, if possible.

Railroads, scams aside, were extremely important for the economy for at least 50 years after this scam.

Same with crypto? Really? And NFTs, too?

legutierr4• 3 years ago

It's relevant that the first railroad bubbles took place several decades before the events described in the article. Sometimes it takes a long time for capital-intensive technologies to be fully deployed, and for economic benefits to be fully realized.

In twenty years the use of public blockchains in everyday finance and trade will be mundane. Former crypto skeptics will explain that their earlier complaints pertained only to the crazy things happening in 2020, not the boring & ordinary things that crypto is used for in 2040. And meanwhile, nearly everything "financial" involving counter-parties will happen on-chain.

Why? Because public blockchains eliminate counter-party risk for a large number of transactions, provide unparalleled transparency, and give anyone with an internet connection access to global financial markets, enfranchising billions of people who are otherwise locked out due to unsatisfactory local conditions. Blockchain tech will make developed economies more efficient, and will accelerate development world-wide.

If you don't agree that public blockchains actually do anything useful, then you'll probably object to the railroad analogy. But if you see value in blockchains, then there are clear parallels:

• Initial cost of the build-out being funded by early investors who might not be around to realize the long-term benefits of the technology.

• Speculative energy attracting scammers alongside legitimate operators.

• Long-term benefits not being obvious after the first wave of investment dies down.

• The true value of the technology only being realized when network effects are fully realized, years after the technology's introduction.

glompers• 3 years ago

Regardless of importance or of scams, the article was quoting an author, Richard White, who had brought that connection up. While his book may offer better understanding, or at least marshal more evidence, I think it's important to note that generations of small-time European investors had already experienced the ups and downs of democratized investment opportunities back in Europe without America coming along to pioneer that sort of direct marketing.

I am also skeptical of White if he is implying that access to capital was a central limiting factor in the Civil War; a more focused problem was that by far the largest industrial complex in the South was located in Baltimore, Maryland. Since neither opponent, whatever its funding, was in a position to be building new cities during the conflict, the de jure loss of its largest city limited the Confederacy's production of war materiel. In fact in a counterfactual USA where the robber baron Gilded Age had been the first Renaissance of a seceded CSA, I can imagine that a lot of the period's economic development and chicanery which occurred in Philadelphia, New York and New Jersey would have been located in Maryland and of course Virginia.

Cooke had donated millions of dollars to Grant’s winning re-election bid for the presidency in 1872. Before that, Cooke had grown immensely wealthy by building an investment network that sold more than $1.6 billion in Civil War bonds to small-time investors across the North. Grant had lauded him for ensuring the Union’s successful campaign against the Confederacy, which had far less capital.
Cooke later harnessed his pioneering direct-to-consumer investment concept to offload bonds in a scheme selling the latest technology—railroads—to the next generation of individual investors. “It was like selling to crypto investors today,” says historian Richard White, author of Railroaded: The Transcontinentals and the Making of Modern America. “These investors were basically living off of the promises of famous people they had trusted before.”

ajb2• 3 years ago

Article doesn't mention this, but the previous year, 1872, the there was a massive financial panic due to equine influenza, which brought the transport system to a halt. Which could be a good reason for overinvestment in "iron horses"

dredmorbius8• 3 years ago

Horses and railroads were complements rather than substitutes.

Long-haul travel moved via ships, barges, or canals, with a cost advantage of roughly 20:1 over a horse and wagon. In particular, the Erie Canal was absolutely instrumental in opening up the interior of the US, connecting the Hudson River and East Coast to the Mississippi-Ohio-Missouri-Red river systems. A single horse could draw a barge of 20--40 tonnes, vs. a maximum of about one tonne on a cart or carriage. Significant political resistance to railroads came from canal operators.

The Mississippi river itself was effectively the first inland highway of the US, serving as a transportation corridor from Canada to the Gulf of Mexico, from Ohio to Montana, from Virginia (west of the Continental divide) to Texas and Oklahoma Territory.

What railroads could not offer was "last mile" delivery, for which horse-drawn drayage was the only viable option through the first decade of the 20th century. Trains increased demand for, and use of, horses, until automobiles ultimately displaced the latter.

It's possible that investors hadn't drawn this connection in the 1870s, but the reality was that rail and horses reinforced one another.

ajb2• 3 years ago

Very interesting, thanks!

mitthrowaway2• 3 years ago

If only we could be investing so much in railroads once again!

cjs_ac• 3 years ago

Antecedents from the UK include the Railway Mania of the 1840s[0] and (to a lesser extent) the Canal Mania of the 1790s to 1810s[1].

[0] https://en.wikipedia.org/wiki/Railway_Mania

[1] https://en.wikipedia.org/wiki/Canal_Mania

tuatoru• 3 years ago

The story of the Newry Canal, the first one, is amazing. Over a hundred years from first order to construct, to opening.

Much delay, neglect of oversight, scope creep, fraud, misaligned interests and lack of drive. I had no idea Wikipedia could tell such good stories!

1. https://en.wikipedia.org/wiki/Newry_Canal

javitury• 3 years ago

For those into board games, financial misconduct of early american railroad companies inspired the renown game "1830: The Game of Railroads and Robber Barons" and the 18xx game series.

hackermatic• 3 years ago

My perception of the history of long-distance American railroads (not ones that were built for a specific task like connecting a mine to a market) is that many of them -- maybe even most of them -- were failures in their first iteration. After going bankrupt and ruining a lot of investors, others bought the assets at fire-sale prices, and the opportunity to avoid the massive capital outlay of actually building the lines is what made them profitable in the long run.

Gibbon12• 3 years ago

The first railroad over the Appalachians bankrupted the first two groups of investors. The third attempt managed to run a line through and it changed the world. Because unfathomable amounts of cheap grain from Ohio appeared on the international market.

Big issue with rail is there are huge network effects are impossible to price in pure market. Which is why except for the US and Britain most countries built state owned rail. Britain and the US eventually nationalized or quasi nationalize rail. And attempts at privatization seem to fail.

fbdab103• 3 years ago

That is surprising to me. I would have thought there was already a robust shipping network through the Mississippi river.

Eventually, I would expect the amortized costs of a rail network to beat river barges, but that would take a significant time.

WalterBright3• 3 years ago

attempts at privatization seem to fail

Heavy regulation is the usual culprit.

MoreSEMI• 3 years ago

In the case of the US I think you mean Amtrak is nationalized? But that’s passenger rail. The us has a private freight rail system, which is from what I understand, is one of the best in the world.

rasz• 3 years ago

Sounds like first Atlantic telegraph cable

https://www.filfre.net/2022/01/a-web-around-the-world-part-2...

https://www.filfre.net/2022/02/a-web-around-the-world-part-3...

louwrentius• 3 years ago

    Gordon says. “We get crashes on Wall Street about every 20 years, because that’s how long it takes people to forget what happened the last time. A generation of new guys think they’re as smart as they come, and then it turns out that they’re human, like the rest of us.”

Sounds familiar, just can’t put my finger on it.

AlbertCory5• 3 years ago

It was like selling to crypto investors today

this is like saying that electricity was like crypto.

Railroads had an undeniable economic value. So did all the optical fiber that was laid during the dot-com boom. Eventually it got used.

https://www.cnet.com/tech/mobile/is-fiber-optic-construction...

I have fiber to my house now. Crypto, on the other hand, is more like 8-track tape. Or laser disks.

dredmorbius8• 3 years ago

LaserDisk and 8-Track both had beneficial uses and customers.

AlbertCory5• 3 years ago

Not like railroads, though.

simonebrunozzi• 3 years ago

Tangentially related, but if you're into videogames, the really old Sid Meyer's "Railroad Tycoon" was a game that made me so curious about these barons, and made me learn a lot about trains and the 1800s US.

em-bee• 3 years ago

and if you are into FOSS games there are OpenTTD and Simutrans

downrightmike4• 3 years ago

Railroads are critical infrastructure and need to be public. They are massively mismanaged, inefficient and that's all on purpose.

AlgorithmicTime• 3 years ago

They're not, really, though. US freight rail is remarkably efficient and cheap.

panick21_7• 3 years ago

The US freight rail gets way to credit. The have been letting the waste majority of infrastructure decay. They continue to have a smaller and smaller share of the total transport market. They derail trains at an astonishing rate.

They are very profitable doing a small number of things. But an increase amount of actual transport needs has been moving to trucks (on federal subsided highways).

Given that those railroads have almost no competition from personal transit and that the US as a country is perfect for railroading, the overall market share the railroads have is astonishing small.

And the borders between the 4 monopolies causes lots of problems.

If a central authority took control and stopped with the attitude of cut everything out that isn't highly profitable, the US could leverage its rail road infrastructure far better. And would save money from fewer truck on the road (and the inherent green house effect).

The railroads profits alone could finance a nation wide rail electrification program.

kortilla• 3 years ago

Yes, if there’s one thing government does well, it’s managing things efficiently.

UIUC_06• 3 years ago

Not original quote:

If the government ran the Sahara, within five years there'd be a shortage of sand.

malermeister2• 3 years ago

Look at the places with the best railway infrastructure. Almost all of them are government run.

panick21_7• 3 years ago

With existing railroad infrastructure, even if its managed badly on behave of the public the outcome is gone better.

The reality is in most of the world, including all the places with the best railway infrastructure the government is managing or tightly controlling the rail road.

When I see cities of millions in the US not even have a railroad you really have to ask yourself if the perceived inefficiency of government can make things better anyway.

balderdash2• 3 years ago

Oh like Amtrak?

gascoigne2• 3 years ago

Yes. Like the Amtrak in the North East Corridor. Where Amtrak actually has none of the limitations imposed by the freight carriers, and actually runs in the interest of the public good.

Guess what? It's also the only part of Amtrak that's ever made a profit.

bryananderson3• 3 years ago

The inability of Americans to see that anything beyond America even exists is really something to behold

costco• 3 years ago

This is my favorite period of US history to read about.

"As a result, the rise of the railroads inspired entirely new forms of corporate securities and governance. They also yielded stupendous levels of fraud and chicanery, wrote business historian Alfred D. Chandler Jr. in his 1965 book, The Railroads: The Nation’s First Big Business. Railroad owners often made more money on construction, land and mineral rights than they did on operating the tracks themselves."

To elaborate:

- The people who ran the railroads would also own the companies constructing the railroads. They would charge ridiculous fees and profit at the expense of shareholders and creditors when they inevitably went bankrupt. In the Credit Mobilier case, tens of millions of (1860) dollars in government money given to the Union Pacific ended up in the hands of the construction company Credit Mobilier because construction costs were inflated by a factor of 2. Of course, some congressmen also secretly had stakes in Credit Mobilier. The looting at the Union Pacific puts PDVSA to shame!

- Land grant gamesmanship: "Land grants to railroads were made in broad belts along the proposed route. Within these belts the railroads were allowed to choose alternate mile-square sections in checkerboard fashion. But until they determined the precise location of their tracks and decided which sections were the choicest selections, the railroads withheld all the land from other users"

- The fact that the people running the railroads were often promoters and had none of their own money at stake resulted in highly inefficient routes being built. They didn't care because they got paid either way, and in fact preferred more construction even if it made the company less profitable.

- Routinely diluting investors to nothing.

- Bankruptcy plans that favored shareholders and directors over creditors (JP Morgan's restructuring plan for the Erie).

The "Erie War" is a combination of a lot of these that is just insane: https://en.wikipedia.org/wiki/Erie_War

It's also worth noting that while there were plenty of opportunists and promoters there were people who were interested in actually building economical railroads like Vanderbilt and the lesser known Ned Harriman.

Also lots of interesting parallels to how privatization in post Soviet states unfolded. Arguably, in the long run (in both cases), the more "rational" operators who weren't just looting and bankrupting ended up with control of the major assets. Though you could also say that in the case of Russia guys like Deripaska got their start from looting.

WalterBright3• 3 years ago

They also yielded stupendous levels of fraud and chicanery

The Washington State ferry system runs at stupendous levels of losses.

For example, the diesel ferry boats are aging out. The idea is to replace them with electric ferries. Any sane organization would just go buy an electric ferry boat. But not Washington, oh noooo. They have to design their own special electric ferry boat. It gets worse. The boats also must be built in the state, to make the local unions happy. This means that the boat builder gets to charge monopoly prices, which are in the stratosphere.

It's even worse than the local light rail system, where special rail cars had to be "custom designed for the Pacific Northwest" (whatever that means), and so naturally had to cost a fortune.

Nobody was ever able to explain why the PNW needed custom rail cars, and the local media would never even ask the question. Would standard rail cars melt in the rain? Nobody knows.

lightedman• 3 years ago

A huge chunk of PNW is wet salty air. That corrodes things pretty badly. This isn't as bad of a problem in southern coastal cities like Los Angeles because the air ends up being drier, even close to the ocean.

Regular rail cars don't last a long time under PNW conditions.

TMWNN• 3 years ago

It's even worse than the local light rail system, where special rail cars had to be "custom designed for the Pacific Northwest" (whatever that means)

It's the railroad version of "artisanal"

8bitsrule• 3 years ago

The article is overly-hard on Jay Cooke. He was just getting started on the NPR when ...

The 1873 Depression started with the Vienna Stock Exchange. Article completely fails to mention Oakes Ames, the Lincoln-recruited boss of the Union Pacific Railroad, which precipated the Crédit Mobilier scandal (i.e. charging the US $94M for the $50M railroad.)

Today a monument to Ames and his brother still exists on the empty open plains of southern Wyoming: a 60x60x60-foot granite pyramid, 20 miles from Laramie. The UP board hired 85 men to build it in 1875; President Hayes attended the dedication ceremony.

https://en.wikipedia.org/wiki/Ames_Monument

dredmorbius8• 3 years ago

NPR here is the Norther Pacific Railway. Usually abbreviated simply as NP. And surviving today as BNSF (the Burlington Northern Santa Fe Railroad).

Not the somewhat later broadcast operation.

hyperthesis• 3 years ago

When you owe the bank enough money, and you can't pay... you don't have a problem. The bank has a problem.

teddyh• 3 years ago

“When a man owes you a hundred dollars, you have power over him. When a man owes you a million dollars, he has power over you.”

— <http://freefall.purrsia.com/ff200/fv00123.htm>

analog31• 3 years ago

Another version: If you owe the bank a dollar, you're a debtor. If you owe the bank a million dollars, you're a partner.

mediumsmart• 3 years ago

Here is real journalism about these kind of humans.

https://archive.org/details/historyofgreatam01myer

dredmorbius8• 3 years ago

Care to give us a capsule review and reason for recommending that here?

One robber baron’s gamble on railroads

Related Stories