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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.


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