EARLY RAILWAY FINANCIERING.
To form an adequate conception of the financial arrangements
of the early railway lines it is necessary to consider various
peculiarities of the period extending from 1830 to 1840.
The success of the Erie Canal, completed in 1825, had created
a strong popular feeling in favor of state aid to internal improvements,
and at the same time had made a number of states more favorably
disposed to large grants of money, in the shape of appropriations,
loans, or stock subscriptions, to canals and river improvements,
than to railways. Canals and river improvements, indeed, found
much favor from a number of legislators at times when they would
not seriously consider propositions to aid the construction of
railways.
The friends of the latter class of improvements, however, were
very persistent in their efforts, and finally secured
STATE AID, IN VARIOUS SHAPES,
for some of the lines that Were being constructed, especially
such as were believed to be of state significance, from a considerable
number of commonwealths.
As years progressed, with large annual expenditures for canals,
railways, and other internal improvements, the burden of state
debts rapidly increased, and the growing pressure of this burden
was so much intensified by the panic of 1837 that shortly after
1840 a great fall occurred in the price of the bonds of a number
of states, which represented, in a large degree, the cost of canals
and railways.
Closely interwoven with this subject was the
SYSTEM OF STATE BANKING
then pursued. After the refusal of Congress to recharter the
United States Bank each commonwealth chartered all the banks located
within its boundaries. Nearly all these banks were authorized
to issue paper money. A few of them were granted banking privileges
chiefly for the purpose of enabling them to provide means for
constructing railways. The amount of specie in the country was
comparatively limited, and the credit of many of the banks was
at such a low ebb that their notes could not be passed or used
at places distant from the point of issue unless a heavy discount
was paid.
The real foundation of a large proportion of the entire financial
system of the country was the credit of the various states, represented
by state bonds which had been sold in the financial marts of this
and other countries, and this credit was steadily being weakened
after the panic of 1837, partly by the commercial collapse which
then occurred; partly by the folly, corruption, and extravagance
intermingled with a number of the canal and railway projects;
partly by the excess of imports over exports, and partly by abuses
of the rickety system of state banking. The final result was a
terrible financial explosion, which broke many of the banks, deranged
nearly every branch of business, reduced the revenues of the struggling
railway companies, and which was specially injurious to a number
of the lines which had been constructed with money obtained from
stockholders and loans, and without any aid whatever from state
governments.
It was a fortunate circumstance that a considerable proportion
of the early railway mileage was undertaken by
CAPITALISTS WHO RECEIVED NO AID WHATEVER FROM ANY
OF
THE STATE GOVERNMENTS,
and the success of a few of such lines, despite the follies
and failures briefly referred to above, together with the ability
of some of the railway lines which had received aid in the shape
of state loans to meet the corresponding interest obligations,
had an important effect in promoting the revival of confidence
in railway enterprises.
It was an exceedingly difficult thing, requiring an immense
amount of persistent effort, to secure the money necessary to
construct any lengthy or extensive line, without state aid. The
most notable achievement of that kind, during the period under
consideration, was the completion of the Delaware and Raritan
Canal and the Camden and Amboy Railroad and its branches, by the
United Company of New Jersey, not only without advances from New
Jersey, but under conditions which ensured the payment of a considerable
sum, annually, into the treasury of that state, and the establishment
of these enterprises on a basis which rendered them profitable
to their owners and afforded satisfactory security to their creditors.
About one-half the original cost of these works was contributed
by stockholders, and the remaining half, or about $3,000,000,
raised by a loan negotiated in England by Commodore Stockton.
It was the largest sum that had then been advanced by foreign
capitalists to any American transportation company that was not
backed by state credit. Another fact relating to this enterprise,
which had an important bearing on subsequent railway development,
was that it was the railway branch of their undertaking which
made the profits and sustained their credit, inasmuch as the canal,
although one of the best ever constructed, scarcely paid more
than its operating expenses during the ten years which followed
its completion.
DEMORALIZING EFFECTS OF THE CONSTRUCTION OF INTERNAL
IMPROVEMENTS BY STATES.
Of the general effect of state advances to construct improvements,
during an era when New Jersey pursued the opposite policy of entrusting
similar works to incorporated companies alone, Commodore R. F.
Stockton, writing in May, 1864, in defence of the New Jersey system,
said:
"The experience of several states in the management of railroads
and canals has proved that politicians could not do as well for
the state with the public works as they could do for themselves.
New Jersey, although importuned by many to take charge of the
Delaware and Raritan Canal and the Camden and Amboy Railroad,
seems to have determined to give herself ample time to reflect
upon the policy of managing the railroad and canal through the
instrumentality of politicians, or leaving them, as at present,
in charge of incorporated companies. I will venture to say, however,
without claiming to be a prophet, that it will probably be a far
distant day when the state of New Jersey will find it conducive
to the public welfare for her to assume the proprietorship and
management of any railroad or canal; although I well know that
every railroad charter granted by the legislature reserves to
the state the right to take the railroad provided for on payment
of cost. And this brings me to a brief reference to some of those
moral and political considerations, which much more than the question
of dollars and cents, determined the action of New Jersey in 1830
and 1831. In 1830 the people of New Jersey were for the most part
an agricultural people; there was not then any city but Newark,
which had grown to be beyond a respectable village, and Newark
was only a thriving manufacturing town; the farms were small,
and wealth was confined to a very limited number; the habits,
tastes, and manners of the people were plain and frugal, and morality
and virtue held in high esteem. The rapid growth of wealth and
corruption in the neighboring states had not contaminated the
simplicity and republican equality which everywhere prevailed
in New Jersey. But the public men and reflecting minds in New
Jersey had perceived the demoralization and deterioration of virtue
which already began to be flagrant in those states in which lavish
expenditures for internal improvements, and vast state patronage,
incidental to state management of public works, had taken place.
Particularly they had marked the headlong and reckless precipitancy
with which corrupt demagogues had plunged the noble state of Pennsylvania
into the vortex of enormous debt. This career of profligacy and
crime was viewed in New Jersey with horror and disgust. . . .
Had New York, Pennsylvania, Ohio, Virginia, and Indiana adopted
the policy of New Jersey they would not probably have been the
scenes of such stupendous profligacy as have characterized their
legislatures within the last quarter of a century."
The companies which were probably next in importance to the
New Jersey companies in establishing the fact that railways, unaided
by state loans or appropriations, could be made profitable undertakings,
if they were judiciously located, were some of the
EARLY MASSACHUSETTS AND NEW YORK LINES,
and notably the Boston and Lowell, which was reported to be,
at the time of its completion, the best-constructed line in the
United States, and a line doing an unusually large amount of profitable
freight and passenger business. As it ran between Boston, the
leading New England seaport, and Lowell, a manufacturing centre
of rapidly increasing importance, it probably bore a closer resemblance
than any other early American line to the phenomenally successful
English line between Liverpool and Manchester, and derived from
this resemblance the most important elements of its success. Early
New York lines, which now form part of the New York Central system,
were built wholly by private capital, and most of the early New
England lines were also placed on a profitable basis soon after
their completion. The stock of the New Castle and Frenchtown sold
at a considerable advance on par value soon after it went into
operation, and equal good fortune attended the South Carolina
Railroad, which at the outset had only received state aid to the
limited extent of a loan of $100,000.
Neither Massachusetts nor New York, commenced granting state
aid to railways at a period as early as it was granted in some
of the other states, but they were finally induced to extend such
assistance to a limited amount some years after their legislatures
had turned a deaf ear to the first appeals of enthusiastic projectors.
Before 1842 Massachusetts had loaned credits to railway companies
to the extent of $5,555,000, of which $4,205,000 was to secure
the extension of the Western (now part of the Boston and Albany)
to the North river, which was intended to obtain, by connections
with the lines then rapidly being united, which parallel the Erie
Canal, and now form part of the New York Central, a through rail
connection with Buffalo, and thus an important share of the growing
trade of the Western states. Exclusive of this loan of credit
to railways, the other funded debt of Massachusetts was only $1,365,500,
and in 1840 she had 383¾ miles of railway completed, which
had cost $15,329,192 an average of $40,024 per mile, and which
was constructed mainly by the money provided by stockholders who
were nearly all receiving dividends ranging from five to seven
per cent., the average rate being 7½ per cent.
In New York, shortly after 1840, the system which began with
a loan of state credit of $3,000,000 to the New York and Erie
Railroad, had extended to loans aggregating $2,285,700 to ten
other companies, the largest item of which was $800,000 to the
Delaware and Hudson Canal.
IN PENNSYLVANIA
there were, in 1839, two railways which had been constructed
outright by the state, and were then operated by it to the extent
of keeping up the roadway and furnishing motive power, while private
individuals or companies supplied the cars used. They were the
Philadelphia and Columbia and the Allegheny Portage, which formed
important links in the main line of railways and canals connecting
Philadelphia and Pittsburgh. The state also owned a small amount
of railway stock; one of the lines it aided was the Cumberland
Valley, and another the Franklin; but these outlays represented
a comparatively trivial investment, or only a few hundred thousand
dollars, and the thirty-eight companies which at that time had
either completed or were constructing railway lines were obliged
to secure nearly all the capital they expended from stockholders
or creditors. So far as railways were concerned there had been
expended upon their construction in Pennsylvania, up to the end
of 1839, $18,050,450, of which sum $5,850,000 bad been expended
by the state on its state railways, and all the remaining outlay,
except a few hundred thousand dollars represented by state stock
subscriptions or appropriations, had been provided by private
companies.
Although the state railways of Pennsylvania failed to prove
profitable ventures to the commonwealth, they did not form a burden
of considerable magnitude, but her large outlay for canals, much
of which was wholly unremunerative, a number of the canals even
failing to pay operating expenses, were leading influences in
precipitating the collapse of credit which resulted from a failure
to provide for the prompt payment of interest on her state bonds,
that led to a decline in the price of those bonds to little more
than one-third of their face value. They were quoted in 1842 at
40, and at one time were sold at 33 cents on the dollar. As Pennsylvania
had a larger state debt than any other commonwealth (but by no
means as large a debt in proportion to population and intrinsic
wealth as some of the western and South-western states), her temporary
failure to meet interest obligations was one of the most serious
of many contemporaneous shocks to American credit. But the manly
action of her citizens and legislators, after they fully comprehended
the situation, in providing by an onerous tax system for the payment
of her debts did much to restore confidence in American securities.
MARYLAND,
like Pennsylvania, suffered much more severely from investments
in canals than in railways. Of a total debt of more than fifteen
millions of dollars, more than seven millions had been sunk in
the Chesapeake and Ohio Canal, and one million in the Susquehanna
and Tide-water canals. Unlike Pennsylvania, she had agreed to
advance considerable sums, in the shape of state bonds, to railways
managed by railway companies, but as she took the precaution to
provide that these bonds should not be sold for less than their
par value, many of the bonds had not been disposed of before the
crash came. The portion of the state debt in 1842 which represented
bonds given to aid railways, some of which had been sold, while
others were not disposed of, was as follows: Baltimore and Ohio
Railroad, $3,697,000 (of this, $3,000,000 bad not been sold);
Baltimore and Washington, $500,000; Baltimore and Susquehanna
(now the Northern Central), $2,223,731.65; Eastern Shore, $151,744.13;
Annapolis and Elk Ridge, $219,378.41. The state bonds of Maryland
were quoted in 1842 at 60.
VIRGINIA
adopted the policy of subscribing for two-fifths of the stock
of all her chartered railways as soon as the other three-fifths
of the stock supposed to be necessary to secure construction were
subscribed by private individuals. Under this system, 369 miles
of railway were in operation in 1839, and 28 miles in course of
construction. The total cost of all lines was $5,451,000, an average
of $14,772 per mile. The most expensive line extended from Richmond
to Petersburg, 22½ miles in length. It had cost $31,111,
per mile. The state debt of Virginia in 1842 was $6,994,307, which
was incurred principally for improving the navigation of rivers,
turnpikes, railroads, and canals. None of her state bonds were
reported to be in the market in 1842.
NORTH CAROLINA
was comparatively slow in commencing railway operations. Aside
from the completion of a short line called the Experimental, 1½
miles in length, leading from Raleigh to stone quarries, she had
no completed railways before 1840; but early in that year two
roads were finished, the Raleigh and Gaston, 84½ miles
in length, and the Wilmington and Raleigh, leading from Wilmington
to Weldon, 161 miles in length. The latter road was reported to
be the longest line completed by a single company that had been
built in the United States. It was also distinguished by having
an uninterrupted straight line of 47 miles in length. As the state
of North Carolina had no debt in 1842, it presumably furnished
little or no financial aid to the railways constructed within
her boundaries. They were cheap roads, the total cost of her 247
miles being $3,163,000, and the average cost $12,806 per mile.
IN SOUTH CAROLINA
a peculiar policy prevailed. In one important respect it resembled
the course pursued in New Jersey, inasmuch as all the railway
operations within the state were to be undertaken by one company.
It built the Charleston and Hamburg, without any other state aid
than a loan of $100,000; but when branches were commenced, one
of which led to Columbia, the state capital, additional state
assistance was granted. This was supplemented by further aid,
or a promise of it, to the amount of several millions of dollars,
when the project of constructing an extension to Cincinnati and
Louisville was organized. It took the shape of a new company,
to be called the Louisville, Cincinnati and Charleston, which
theoretically or actually became the purchaser or possessor of
the property of the South Carolina Railroad. The scheme was vigorously
agitated, but did not materialize with the rapidity anticipated,
probably on account of the neglect or refusal of the adjacent
states of North Carolina, Tennessee, and Kentucky, through whose
territory the line was to run, to respond to the appeals made
to them for state aid.
IN GEORGIA
the state had largely or wholly provided for the construction
of one railroad, and others were undertaken by private companies,
to which banking privileges had been accorded for the purpose
of assisting them to raise the necessary capital. This last device
had been proposed in Massachusetts, at a comparatively early period,
to promote the construction of the Western Railroad, in which
her citizens were deeply interested, but it had been rejected
in that state mainly on account of political reasons. In Georgia
it was probably more successful than in any other state, and under
it the operations of the Georgia Railroad and Banking Company,
and the Central Railroad and Banking Company, of Georgia, were
vigorously prosecuted.
SOUTH-WESTERN AND WESTERN STATES.
In south-western localities, and notably in Mississippi and
Louisiana, where railway operations Were coupled with banking
privileges, the combination seems to have been particularly unfortunate,
as some of these institutions figured prominently in lists of
broken banks.
Aside from these experiments, Indiana and Michigan each undertook
the construction of short state railways, and Michigan commenced
the construction of three lines which were to have an aggregate
length of 486½ miles, and to cost $6,446,000, and this
state temporarily operated a line of about 38 miles in length
by furnishing not only the roadway and motive power, but also
the cars and agencies, so that Michigan acted in the fullest sense
as a common carrier for her citizens. Indiana and Illinois plunged
heavily into debt for internal improvements, and Illinois was
specially rash in attempting the construction of a number of railway
lines which she was unable to finish. One of the results of these
ventures, and other untoward events, was that in 1842 Indiana
bad a state debt of $15,000,000, which was selling at 20 per cent.
of par value; Illinois, a state debt of $17,643,601, which was
selling at 18 per cent. of par value; and Michigan, a state debt
of $5,611,000, which was selling in 1842 at 20 per cent. of par
value.
The aggregate amount of
ALL THE STATE DEBTS IN 1842
was $207,564,915, and their market value in that year was $105,184,595,
being a depreciation of 46-one-sixth per cent. State bonds then
furnished favorite subjects for speculation at stock boards very
much as railway securities do now. Railway stocks were only dealt
in to a moderate extent, but even then the few stocks that were
frequently bought and sold were subjected to noticeable fluctuations.
Niles' Register, of August 8th, 1840, gives the following table
of changes in the New York market in that year:
A large proportion of the state debts were contracted for the
purpose of constructing canals and railways, but the outlay for
canals was considerably greater than the sums advanced by the
states to the railways, and the ultimate losses on canal investments
were much larger. It was estimated in 1842 that from 1820 to 1838
the legislatures of the several states had authorized debts aggregating
$60,201,551 for canals, nearly all of which became unremunerative
as an investment, while they authorized debts for railways amounting
to $42,871,084, a large portion of which proved remunerative as
an investment.
EFFECTS OF STATE AID.
With so many elements of danger environing the financial system
of the country, including broken banks, depreciated state credit,
commercial derangements, and unprofitable operations of a number
of the private canal and railway companies, the pioneer railway
projectors were reared in a stern school. In view of the great
possibilities of state aid, which existed during the third decade
of the nineteenth century, it is not surprising that they made
many adroit and earnest appeals to the legislatures of a number
of commonwealths for financial assistance.
One of the lessons which many of the events of the epoch helped
to enforce was that the best method of advancing railways was
to prove that they could be made paying institutions, without
state aid, if they could be assured of reasonably just treatment
from state legislatures.
The roads which depended upon their own resources from the
outset were relieved of embarrassing obligations, and, as a rule,
all the early railways which were started on a sound basis, judiciously
located, well managed, and which were not subjected to peculiar
misfortunes, became finally successful, although the outlook at
the end of the fourth decade was by no means encouraging. Charles
Ellet, jr., in a work published shortly after 1840, in commenting
upon the railways then completed, and in course of construction
or extension, said that "some few have thus far sustained
themselves, and distributed considerable dividends. The receipts
of some others are sufficient to keep them in repair, and pay
the interest on the loans incurred for their construction; but
of the balance, having an aggregate length of some two thousand
miles, the capitals may be regarded as positively sunk, and many
of the companies as insolvent." He contended that a principal
cause of the failures was a disproportion between the character
of the works completed and the labors to be performed, and said
that "they make costly roads, build expensive superstructures,
rear extravagant edifices to contain their cars and engines, run
heavy locomotives, and use carriages almost as capacious as dwelling
houses, to carry as many passengers as could, without much inconvenience,
be drawn in a hand-cart. If railroads do not sustain themselves,
it is not because they are railroads, but because great roads
have been constructed where little ones only are required. . .
. The power contrived to turn a grist mill would make but small
dividends if applied to turn a churn."
In a number of instances where state aid was of vital consequence,
and where political or partisan considerations, and special deference
to the views and designs of men who represented state governments,
deeply affected practical management, the general results through
a series of years were unsatisfactory. There were necessarily
many secret proceedings in connection with the construction and
operation of all the state works, whether canals or railways,
and if the veil could be lifted which hides the real nature of
some of the transactions of by-gone eras it would be easier to
explain why extensive state supervision, control, or interference
created obstacles to the complete success of some of the promising
early lines. It is difficult to find any one who was actually
familiar with the practical operation of state works, who does
not, when questioned in regard to them, either speak in terms
of contempt or disparagement, or shrug his shoulders, and say
that partisan considerations were paramount in some important
affairs.
Transport Systems
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