Fall, 1999 Railroads Topic 4 Part 2 Page

45-855 Railroads, The First Big Business: Topic 4 Part 2

Railroads as Big Business (Cont.)

The Early Railroads

Earliest Steam Railroads – The first regularly scheduled public steam train ran on the Stockton & Darlington Railroad in England on 27 September 1825. The first regularly scheduled public steam train to run in the U.S. was in Charleston, South Carolina on 25 December 1830. However, that August, the Tom Thumb made a 13 mile run from Baltimore to Ellicott’s Mills pulling a single car carrying the Directors of the B&O. Almost a year later, on 9 August 1831 the DeWitt Clinton pulled a train between Albany and Schenectady, New York. In another landmark, the John Bull went into service on the Camden & Amboy on 12 November 1831.

The Early Railroad Corporate Charters – Railroads were a unique form of "highway" and no one knew when they first began as businesses how they were to so sharply diverge from turnpikes and canals. When the B&O first opened for business anyone was allowed to use the tracks for a fee. Wagons equipped with the proper wheels and pulled by horses were used on the tracks. It soon became obvious to everyone that this model was not going to work. Even with occasional sidings, wagons met going in opposite directions and there was nowhere to "pull over" as there was on a canal or on a turnpike. It quickly became apparent that railroads had to both own the right-of-way (the highway) and the rolling stock used on the highway.

Railroad corporate charters were granted by the States. In the beginning, this required special legislation but later on general laws were enacted that set up a formal administrative procedure to grant articles of incorporation. The transcontinental "Pacific" railroads were the only ones to receive charters from the Federal Government.
Recall that a Corporation is a fictitious person created by law and endowed with many of the functions of a human being. Normally a corporation is an aggregate of persons and has an existence independent of its members. It may possess property and a treasury distinct from its members, and debts due to or by the corporation are not debts due to or by the individuals composing it. Corporations can sue and be sued and they can be criminally prosecuted, fined, and dissolved by the sovereign. In U.S. law the Supreme Court has extended portions of the Bill of Rights to corporations (e.g., within limits, freedom of speech).
The early railroad charters were very loosely written and gave the corporation great leeway. The charters usually set the number of directors, the amount of capital stock (this was oftentimes way out of line with the size of the railroad), the borrowing authority (usually very vague and subject to great abuse in the 19^th Century), annual reports, the description of the route along with the required crossings.
Most importantly, and the reason why railroads were very unusual, the State would grant the railroad the power of eminent domain (that superior dominion of the sovereign power over property within the State which authorizes it to appropriate it for public use). Without such power, the railroad could not construct its line over the best possible route without being blackmailed by property owners. However, it was a two edged sword as it made the railroads politically vulnerable to those who lived along its right-of-way.

The Railroads Eclipse the Canals – By 1840 there was about 3000 miles of railroad trackage in the United States – almost the same mileage as the canals. By the Civil War about $1.2B (1909 $$) had been invested in the railroads of which about 25 to 30 percent was government funds. By 1849 freight receipts exceeded passenger receipts.

The Railroad Decade: 1850-1860

Between 1850 and 1860 22,500 miles (36,000 km) of railroad line were built increasing the total mileage from 7,500 in 1850 to 30,000 in 1860 (in kilometers 12,000 and 52,000 respectively). Of the total built in this decade, 10,000 miles (16,000 km) were built in the Midwest.
In 1849 Chicago only had one short line. By 1854 Chicago was the leading rail center in the U.S. In 1856 a railroad bridge is built across the Mississippi river at Rock Island between Iowa and Illinois allowing the shipment of Midwestern grains directly to Chicago via rail.

Before 1850 the great majority of the agricultural products of the Mississippi valley went south through New Orleans (see above). By 1860 the railroads had largely taken over this traffic from the Mississippi river and the western canals. By 1860 Illinois, Indiana, and Wisconsin replace Pennsylvania, New York, and Ohio as the leading wheat growing states.
The railroads quickly become the dominant form of transportation. Reasons:

Greater Speed – For the first time in human history man is able to travel faster than a galloping horse on land.
Open Year Around – Railroads could run in the rain, snow, ice and cold. Consequently, goods could be shipped year around anywhere in the country so that businesses could now run year around as well.
Less Transshipment – Before the railroads, getting a shipment of supplies for a dry goods business in Cleveland, Ohio was a formidable task. The goods first had to be purchased from wholesalers in New York City. Then transportation to Cleveland had to be arranged. Typically this meant shipping the goods up the Hudson River on a steamboat to the entrance of the Erie Canal. The goods would then be transferred to a canal boat for shipment to Buffalo. From Buffalo they would be transferred to another steamboat for the trip across the lake to Cleveland. If the business was inland from Cleveland, they the goods would have to be unloaded in Cleveland and transferred to wagons for the journey inland. Arranging these complicated shipments – my example is a simple one – was a job for experts. Both James J. Hill and John D. Rockefeller were commission merchants early in their illustrious business careers.

Concentrated Responsibility – This is just another aspect of the previous point. Shippers could deal with a single freight agent and arrange to ship their goods over long distances.

As the railroads grew ever larger, they captured an increasing percentage of the freight business and their productivity grew by leaps and bounds. In the 1830s freight rates were about $.075 per ton mile and passenger rates were about $.05 per mile. By 1859 these rates had fallen to $.0258 and $.0244 respectively. During this period the 8-wheel freight car is introduced, rail weights increase from 13.5 pounds per foot to 59.5 pounds per foot (still iron rails – steel rails began to be used extensively in the 1870s), locomotives got larger, and overall, the capital/output ratio goes form 10:1 to 5:1.
By 1860 on the eve of the Civil War rail passengers could travel from St. Louis to Boston in 48 hours or from New York to Charleston, South Carolina, in 62 hours.