The Barons, the Empire Builder and the Czar

It’s history Thursday! Promoted by Steven D.

When the expanding transcontinental railroads completed the conquest of Native American lands in the Western USA from the 1860s, the owners of these exclusively private companies weren’t exactly popular. The public’s view was that they are selfish money-men seeking to cash out fast while they provide a crap service on shoddily-built infrastructure, seek monopolistic power and blackmail farmers, and buy politicians: the perfect example of the excesses of unfettered capitalism. The public backlash against the railroad Robber Barons led to anti-trust laws (Sherman Act, 1890).

More than half a century later, philosopher and cult leader Ayn Rand sought to re-interpret the Robber Baron era of US railroads by blaming those excesses of capitalism on state meddling, in the form of land grants. Her counter-example was one of the most successful railroad barons in the West: James J. Hill, nicknamed “The Empire Builder”, who built his empire without any land grants.

Reading up on the history of the transcontinental railroads another half a century after, I drew the conclusion that neither of the two views was entirely correct, and see the importance of a different key factor: a general shortage of capital of these private companies. In this respect, the railroad baron I see as most noteworthy and significant is one of the last: E. H. Harriman, nicknamed the “The Railroad Czar”, whose legacy lasts to this day.

What follows is as much about railroads (my speciality) as about US history and capitalism.

(Cont. below the fold.)

The Railroad Robber Barons

Rail construction started out in the early 19th century as a private capitalist affair, but the state got itself involved for strategic interests. In addition to financial support and subsidies, Northern liberals (the Whigs, later the Republicans, most prominently Abraham Lincoln) cooked up land grants. For lines to be built across thinly settled areas recently robbed from Native Americans, private railroad companies would get to sell land around their rail line to settlers.

The idea behind land grants was to lessen the risk prospective investors had to take: the profitability of the rail lines to be built depended on the future arrival of a large number of settlers, a huge bet. However, while the land grants did simultaneously boost rail construction and settlement as intended, there was a fundamental problem: the real estate business provided for by the land grants offered much higher profits than the core transport business of running the railways. Thus, land grants were a fuel for get-rich-quick schemes, highest-level corruption, speculative booms and bankruptcy waves.

However, in spite of trains having a bumpy ride on shoddily-built lines with tight curves and fast-decaying wooden trestles, the common picture that the railroad Robber Barons spent almost nothing and ran away with taxpayer money is quite wrong:

• The two companies building the first transcontinental line both encountered (for their time) extremely difficult geology as they crossed the mountains – above all the hard rocks around Donner Pass from the west and in Echo Canyon from the east –, which consumed a lot of capital. Later, for example the Northern Pacific had to construct major tunnels on three of its four major mountain crossings. They simply didn’t have enough capital for doing things properly along the entire line.
• Much of the real estate the railways got with the land grants in the Rockies was steep mountains and desert and thus worthless for farmers. Only in the Mississippi Basin could they make a real killing.
• Bankruptcies notwithstanding, the state did profit in the end: in addition to the desired-for development (and resulting tax revenue boost), the large government bonds the railroad Robber Barons received were eventually repaid with interest.

But, were there better ways to achieve the same goals?

The Empire Builder

Investor James J. Hill started his own push for the Pacific in vengefulness: he was a partner in Canadian Pacific but stormed off when that company changed the original route plan. He then built a system little-by-little (eventually merging several companies into one, the Great Northern) which loosely paralleled Northern Pacific and also sought to take any potential cross-border US business from Canadian Pacific. While Hill was no different from other capitalists in having nasty fights with unions over horrible labour conditions, his success was also due to micro-management, exemplified by an anecdote about him personally joining the shovelling gang in a snowstorm. Hill kept his finances in such a good shape that he bought the bankrupt Northern Pacific a few years after completing Great Northern, and continued his expansion southward. Today’s Burlington Northern Santa Fe (BNSF), one of the just two major US railroad companies remaining in the Western USA, is the direct successor of Hill’s empire, and his nickname, “The Empire Builder”, is still the name of a Seattle–Chicago AMTRAK train.

Hill undoubtedly stood out among the Railroad Barons as a manager, but to evaluate the effect of land grants, some other facts should be considered:

1. Hill could start his expansion in the North when Northern Pacific already boosted settlement.
2. Hill was quite lucky with geography: Great Northern found one of the lowest crossings of the Continental Divide and could follow easy river valleys on almost its entire route to the Pacific.
3. The Great Northern wasn’t the only major railroad in the West built without land grants. As for the others, they weren’t any less resistant to bankruptcy than those built with land grants, indicating that Hill’s managerial style was personal rather than just a deterministic consequence of placing a rational actor under the ‘right’ circumstances.

To expand on the last point, here is the cautionary tale of a rival.

The best-engineered transcontinental

The Chicago, Milwaukee, St. Paul & Pacific Railroad (short Milwaukee) was a geographically small railroad that grew big in dollars on the once very strong market between the three big cities in its name. This is the company that would later build the locos most deserving of the title of fastest steam locomotive in the word, and built tracks that had the quality necessary. In the early 20th century, the Milwaukee decided to build the last transcontinental line in the USA. This line was like none of the previous in several respects:

• large masonry and concrete bridges built for longevity like on railways in the European Alps,
• a track alignment set out for even loads on mountain sections, and
• two long electrified sections (including all five mountain crossings).

The company rightfully boasted about the best-engineered railroad line across the Rockies. However, let me look at this map cut-out with a European eye:

What you see above must have been a railfans’ El Dorado, with two mountain pass lines with several horseshoe loops, within a dozen miles from each other. However, first, if this had been built in say Italy in the same era, those spectacular curves would have been bypassed by boring but lower-elevation tunnels about 3–4 miles in length. Second, none of this exists any more. To see how that came to be, for the more southern of those two lines on the map, let’s first take a closer look at one of Milwaukee’s specialities, the electrification:

As you can see, the catenary (overhead line) hangs on crumbling wooden poles bending all over the pace. In Europe or Asia, steel or concrete poles are standard since the 1910s. Obviously, even pre-WWI Milwaukee didn’t find the money to build everything for longevity. Much less later. From an operational viewpoint, after the phasing-out of steam engines (which required a depot visit every few hundred miles or so), it would have made sense to electrify the Milwaukee’s transcontinental line throughout, so that the same locomotives could have gone the full distance with each train (eliminating four locomotive changes). This never happened. A renewal of the existing catenary didn’t happen, either. Instead, when the catenary reached the end of its useful age, Milwaukee managers already saving on track maintenance decided to switch to diesels – in 1974, just when the first oil crisis hit. This only ensured permanent lack of competitiveness, and the entire line across the Rockies was abandoned three years later. (The remaining company survived only until 1986 when a Canadian Pacific subsidiary swallowed it.)

The Railroad Czar

Now let’s look at the second of the two Western US survivors of the merger and bankruptcy waves of the last century: Union Pacific (UP), the company that built the western half of the first transcontinental. This company only gained a strong footing around the turn of the 20th century, under the leadership of E. H. Harriman. Harriman wasn’t any more popular in his age than the other Railroad Barons: in terms of seeking a monopolistic position and political influence, he was more voracious than any other, at a time controlling about half of all railroad tracks in the western USA, until the Sherman Act was used against him. (It is an irony of history that most of his empire ended up in a single hand again, under UP, by the end of the last merger wave in the 1990s.)

However, in another aspect, Harriman bucked the trend: in contrast to the penny-pinching approach of his rivals, he was a firm believer in the necessity of massive long-term spending on infrastructure. On all railroads he acquired control of, he initiated the re-alignment of every single mountain crossing with easier grades and curves, the construction of important cut-offs, and the double-tracking of the first transcontinental (which meant a practical new construction on a new alignment on hundreds of miles). His reign lasted only a dozen years, and some of the gigantic work he initiated wasn’t completed until decades after his death in 1909, but Harriman’s successors lived off his investments to this day.

To see this, one just has to look at the railways across the Sierra Nevada. The before-last transcontinental, the Western Pacific, parallels the first transcontinental, but crosses the Sierra Nevada almost 2,000 feet lower, with much less steep and less curvy ramps. Now both are part of UP, so why is it that most freight trains roll across Donner Pass on the first transcontinental? The answer is that the successive owners of the Western Pacific never found the money to double-track its Sierra Nevada crossing (now called the Feather River Route).

To expand on my point, the other non-Harriman transcontinental lines that survived to this day as part of UP or BNSF did so because of some major long-term investment several decades ago, although in more piecemeal fashion:

• The one-time Atchinson, Topeka & Santa Fe (the SF in BNSF) had a similar program of double-tracking, re-alignments and cut-offs, although completion was drawn out until 1960.
• The modern (presently UP-owned) Denver–Salt Lake City route is a consolidation of earlier haphazard networks, completed in 1934 (at the price of severe financial instability for the companies involved). The new sections included the bypassing of North America’s highest railroad pass route with the 6.2-mile (10.0 km) Moffat Tunnel (for which the bonds weren’t fully repaid until the end of 1983).
• Although I wrote Hill had it easy with geography for the most part, even his Great Northern had to scale one major geographical obstacle – the Cascades near its Seattle end – which was done at first on a sub-optimal alignment. Here the line was re-routed in 1929 into the 7.8-mile (12.5 km) New Cascade Tunnel.

The present

The present UP and BNSF are in rather good shape financially (as are their eastern US counterparts). However, they complain at every possible forum about a major investment the government forced them into: the train control system PTC, which Congress deemed necessary to reduce the risk of collisions involving trains transporting hazardous goods. As a counter to this regulation, UP, BNSF & co also claim at every turn that the rise in their transport volumes and profits in recent years was the direct result of the Staggers Rail Act, a deregulation in 1980 that did away with rate controls originally implemented against the Robber Barons. I always find this claim hilarious, for blatantly overlooking some much stronger factors:

• the rise of outsourcing and credit-boosted consumer spending, which gave a massive boost to the import of goods and thus big-volume long-distance port traffic (ideal for railroads),
• the spread of intermodal transport, especially in shipping (which brings all those import goods into the ports),
• the rise of coal mining in the Powder River Basin,
• the end of the oil crises.

Still, to be fair, in spite of all the public moaning, UP is now using the good times for some major investment on its own: four years ago it re-launched the previously stalled double-tracking of its (geographically less difficult) southern transcontinental line (which used to be the Southern Pacific).

Then again, true long-term investment in Harriman’s spirit would look different. Some examples of what’s not happening and probably never will:

• a long tunnel under Donner Pass (for easier grades and less winter trouble),
• the double-tracking the Feather River Route (for the same purpose),
• a second bore for all existing long tunnels for capacity and safety (a long single-bore tunnel is a fire disaster in waiting), and
• electrification (preferred in pretty much every rail-developed country from Europe across Russia and China to Japan for lower operating costs, less vulnerability to energy price changes, higher power and speed even for freight trains).

The broader view

The general difficulty of western US railways in kicking off major long-term infrastructure investment is a systemic problem of private companies: stock markets care about quarterly results not 50 years in the future, banks add a risk premium for the possibility of your company going bust before re-paying a 20-year credit, your penny-pinching rivals will look to beat you on the short term. But, there is another way, which would be familiar to anyone from Europe, Russia or the Far East. Contrary to Chicago School common wisdom, major infrastructure projects can be done at all or at a lower price as public investment (and that even with corruption involved, see China). Outside the rail sector, even the USA made this experience in the few decades under Keynes’s influence: see the interstate highway network or the large hydroelectric dams. Of course, as long as the current anti-public-spending economic dogma lasts, it will never happen; while elsewhere, as long as the IMF and/or the ECB can force governments to implement austerity programmes, such investment will be throttled.

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