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Railroads as an Economic Force in American Development1

Published online by Cambridge University Press:  03 February 2011

Leland H. Jenks
Wellesley College


Any attempt to discuss the way in which railroads have promoted the rise of the American economy must assume some theory of economic evolution. The following analysis is based upon Schumpeter's theory of innovations. Briefly this theory holds that economic evolution in capitalistic society is started by innovation in some production function, that is, by new combinations of the factors in the economic process. These innovations may center in new commodities or new services, new types of machinery, new forms of organization, new firms, new resources, or new areas. As Schumpeter makes clear, this is not a general theory of economic, much less of social, change. Innovation is an internal factor operating within a given economic system while the system is also affected by external factors (many of them sociological) and by growth (which means, substantially, changes in population and in the sum total of savings made by individuals and firms). These sets of factors interact in economic change. “The changes in the economic process brought about by innovation, together with all their effects, and the response to them by the economic system” constitute economic evolution for Schumpeter.

Copyright © The Economic History Association 1944

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2 Schumpeter, Joseph A., Business Cycles (New York and London: McGraw-Hill Book Company, 1939), Vol. I, esp. chaps, iii and viiGoogle Scholar; idem, The Theory of Economic Development (Cambridge: Harvard University Press, 1934), chaps, ii and viGoogle Scholar; idem, The Instability of Capitalism,” The Economic Journal, XXXVIII (1928), 361–86Google Scholar. Cf. the theory of Allyn A. Young, “Increasing Returns and Economic Progress,” ibid., 527–42.

3 Business Cycles, I, 86.

4 These distinctions are hinted at but not developed in Business Cycles, I, 130–36. They are not to be construed precisely as stages or periods, although each was relatively more conspicuous in certain decades than in others.

5 Three types of obstacles to innovation are distinguished in Business Cycles, I, 100: hostility to the new idea, absence of facilitating economic functions, and inhibitions against entering upon a relatively incalculable course. Young in The Economic Journal, XXXVIII (1928), 534, stresses the need to remake human material in terms of new skills and habits and in terms of redistribution of population.

6 Fish, Carl Russell, The Rise of the Common Man (New York: The Macmillan Company, 1927), chaps, iv and vGoogle Scholar.

7 One thinks of the Boston & Lowell, New York & New Haven, Philadelphia & Columbia, Allegheny Portage, the original Baltimore & Ohio, and the lines connecting Albany with Buffalo.

8 The most dynamic set of American innovations consisted in plans to build railways in anticipation of traffic. Haney, Lewis Henry, A Congressional History of Railways in the United States to 1850 (Madison: University of Wisconsin, 1908), p. 31Google Scholar. Congressional land grants were a factor, as in the case of the Illinois Central, the first large system built through sparsely settled territory. Gates, Paul Wallace, The Illinois Central Rail-road and Its Colonization Work (Cambridge: Harvard University Press, 1934)CrossRefGoogle Scholar. Canal building had, however, in the old Northwest, anticipated the railroad less successfully in building ahead of population. Paxson, Frederic L., History of the American Frontier 1763–1893 (Boston and New York: Houghton Mifflin Company, 1924), chap. xxxGoogle Scholar. For early systems and projects, cf. MacGill, Caroline E. et al. , Meyer, Balthasar Henry, editor, History of Transportation in the United States Before 1860 (Washington: Carnegie Institution of Washington, 1917)Google Scholar; Ringwalt, J. L., Development of Transportation Systems in the United States (Philadelphia: The Author, 1888)Google Scholar.

9 The data for these charts are derived from the United States Treasury Department, Bureau of Statistics, Statistical Abstract of the United States, 1900 (Washington: United States Government Printing Office, 1901)Google Scholar; ibid., 1914, p. 637; and ibid., 1937, p. 379. Chart II is adapted from Kuznets, Simon S., Secular Movements in Production and Prices (Boston and New York: Houghton Mifflin Company, 1930), pp. 191, 526–27Google Scholar.

10 This correlation was initially based upon inspection of the mileage data in comparison with the chart in Schumpeter, Business Cycles, II, 465, and the analyses of business conditions in Thorp, Willard Long, Business Annals (New York: National Bureau of Economic Research, 1926)Google Scholar and National Bureau of Economic Research, Recent Economic Changes (New York: McGraw-Hill Book Company, 1929), II, 892Google Scholar. More decisive support is provided by Partington, John E., Railroad Purchasing and the Business Cycle (Washington: The Brookings Institution, 1929)Google Scholar. As Partington includes orders for replacements as well as for original basic construction, he finds that orders of railway capital goods led business-cycle changes as late as 1907. Throughout this period, he finds, railway earnings followed, instead of preceded, changes in purchases.

11 Cleveland, Frederick A. and Powell, Fred Wilbur, Railroad Promotion and Capitalization in the United States (New York: Longmans, Green and Company, 1909), pp. 199200Google Scholar. In the Southern States, and the Mississippi Valley. … all the real estate required for way, and for depots, stations, etc., are generally gratuity to the roads.” American Railroad Journal, XXV (January 3, 1852), 13Google Scholar. Cf. Hedges, James Blaine, Henry Villard and the Railways of the Northwest (New Haven: Yale University Press, 1930)Google Scholar, passim.

12 Gates, The Illinois Central Rail-road, pp. 89, 94–8. Despite its crucial importance, the subject of labor supply has been too frequently neglected by railway historians. Adequate data for labor employed in new construction are available only for a few large lines such as the Central Pacific, Union Pacific, and the Illinois Central. On each of these, upwards of 10,000 men were employed at the peak of construction. Probably a thousand men were needed for every hundred miles. Assuming that twice as many miles were in progress as were completed in any given year, the figure of 200,000 men is reached as the maximum employed at any one time in the construction of these railways. This figure was not attained until the eighties, by which time the census reported 250,000 officials and employees of railroads, presumably engaged directly or indirectly in transportation service.

13 Cf. files of railway periodicals for advertisements of manufacturers and dealers in railway materials and supplies. Ringwalt, Development of Transportation Systems in the U. S., pp. 132–36, 210.

14 For details, cf. Statistical Abstract of the U. S., 1902, p. 380, and corresponding tables in earlier volumes.

15 Keynes, John Maynard, The General Theory of Employment, Interest and Money (London, 1936), chap, xiGoogle Scholar; Kahn, R. F., “The Relation of Home Investment to Unemployment,” The Economic Journal, XLI (1931), 173–98CrossRefGoogle Scholar.

16 Admittedly “money capital” constitutes merely a vehicle or instrumentality, the means of acquiring command over the several factors of production. More commonly it is spoken of as long-term credit or capital funds. But sometimes an instrument becomes so important that it exerts influences by itself and requires consideration on its separate account.

17 These were chiefly railroads built in the thirties and forties. Cf. Stevens, Frank Walker, The Beginnings of the New York Central Railroad (New York and London: G. P. Putnam's Sons, 1926)Google Scholar. Even in these cases, as we know from accounts of the crises of 1854 and 1857, the subscribers carried their shares on bank loans. Cf. Schumpeter, Business Cycles, I, 325–30.

18 Cleveland and Powell, Railroad Promotion and Capitalization, is still the most adequate account for aspects before 1900. Cf. Ripley, William Z., Railroads; Finance and Organization (New York: Longmans, Green and Company, 1915), pp. 1052Google Scholar; Cleveland, and Powell, , Railroad Finance (New York: D. Appleton and Company, 1912), chaps, ii–iv and the very rich bibliographyGoogle Scholar; Adams, Charles F. Jr., “Railroad Inflation,” North American Review, CVIII (1869), 138–44Google Scholar.

19 This paragraph is based upon original research in London and the United States, made possible by a sabbatical from Wellesley College and a grant from the John Simon Guggenheim Memorial Foundation. An introduction to the subject is available in Lewis, Cleona, America's Stake in International Investments (Washington: The Brookings Institution, 1938), chap, iiGoogle Scholar; Ripley, Railroads; Finance and Organization, pp. 1–10; and Jenks, Leland H., The Migration of British Capital to 1875 (New York and London: Alfred A. Knopf, 1927), chap, iii and pp. 169, 255–59 and notesGoogle Scholar. Before the Civil War the share of foreign investors was smaller than it became later. In only a few cases was it an initiating factor in railroad development.

20 Schumpeter, Business Cycles, I, 335.

21 Lewis, America's Stake in International Investments, p. 560.

22 Pennsylvania Central R. R. Co., Annual Reports, passim.

23 Palmer, William J., The Westward Current of Population in the United States (London, 1874)Google Scholar and Quiett, Glenn Chesney, They Built the West (New York and London: D. Appleton-Century Company, 1934), chaps, ii–viGoogle Scholar, throw light upon the career of this neglected enterpriser.

24 Gras, N. S. B., Business and Capitalism (New York: F. S. Crofts and Company, 1939), pp. 246–59Google Scholar, 272–75, indicates the “normal” process by which financial capitalists became involved in industry. He is correct, I believe, in implying that the opportunity and need have not been confined to late phases of the construction moment. From the standpoint of innovation, the emergence of the financial enterpriser in the railroads is not to be identified with the rise of special departments within the organization. The latter, or their heads, may be simply parts of a formally established group functioning as management-enterpriser. See section IV below.

25 Lowenthal, Max, The Investor Pays (New York: Alfred A. Knopf, 1933)Google Scholar.

26 Ringwalt, Development of Transportation Systems in the U. S., pp. 382–85 and Poor, Henry V., Influence of the Railroads of the U. S. in the Creation of its Commerce and Wealth (New York, 1869)Google Scholar are representative of early discussions. “Our new railroads increase the value of farms and open new markets for their products. They lessen the time and cost of travel. They give a value to commodities otherwise almost worthless. They concentrate population, stimulate production, and raise wages by making labor more efficient. Our existing railroads are computed to create more wealth every year than is absorbed for the construction of new railroads.” Commercial and Financial Chronicle, XVI (January 11, 1873), 41Google Scholar.

27 Attempts to use railway data in connection with the study of changes in real income and “productivity” are exemplified by Burns, Arthur F., Production Trends in the United States since 1870 (New York: National Bureau of Economic Research, 1934)Google Scholar and Bell, Spurgeon, Productivity, Wages, and National Income (Washington: The Brookings Institution, 1940)Google Scholar. A brief factual summary of the role of the railways in the economic system after the First World War is provided by the Bureau of Railway Economics, The Railways and Economic Progress (Miscellaneous Series No. 50, Washington, 1929). The theory there suggested that the “economic contribution” of the railways is measured by the volume of their expenditures of all kinds is, however, at variance with the premises of this paper. Incidentally, this is an unusual place to find a theory popularly associated with New Deal economics. On railroad expenditures, cf. Partington, Railroad Purchasing and the Business Cycle.

28 A. C. Pigou, “Comparisons of Real Income,” Economica, New Series, X (May, 1943), pp.93–8.

29 Holmstrom, J. Edwin, Railways and Roads in Pioneer Development Overseas (London: P. S. King and Son, 1934), chap. iGoogle Scholar. Cf. Johnson, E. A. J., “New Tools for the Economic Historian,” The Tasks of Economic History, supplemental issue of The Journal of Economic History, December, 1941, pp. 30–8Google Scholar.

30 General treatments of the economic significance of improved transportation are also found in Locklin, D. Philip, Economics of Transportation (Chicago: Business Publications, 1938), chap, iGoogle Scholar, and Cleveland and Powell, Railroad Finance, chap. i. On comparative costs of service, cf. MacGill, History of Transportation in the U. S. before 1860, pp. 574–82; Haney, Congressional History of Railways in the U. S., chap, iii; Ambler, Charles H., A History of Transportation in the Ohio Valley (Glendale, California: The Arthur H. Clark Company, 1932), PP. 358 ff.Google Scholar; Kelso, Harold, “Waterways versus Railways,” The American Economic Review, XXXI (1941), 537–44Google Scholar.

31 Holmstrom, Railways and Roads in Pioneer Development Overseas, p. 56. Palmer, The Westward Current of Population in the U. S., relates that in 1866 the stage line from the terminus of the Kansas Pacific in Topeka carried six passengers daily to Denver. Two years later, daily trains carried westward one hundred to five hundred passengers daily.

32 Holmstrom, pp. 104–12.

33 United States Interstate Commerce Commission, Statistics of Railways in the United States, 1941 (Washington: United States Government Printing Office, 1943), pp. 159–60Google Scholar.

34 Holmstrom, pp. 265–66, 273.

35 ibid., pp. 271–72.

36 For instance, new financing was sought by the Grand Trunk of Canada in the seventies and the Norfolk & Western in the eighties to make it possible to handle traffic already being offered. It was not always an extension that was involved but more often double-tracks, sidings, rolling stock, and improvements in the right of way.

37 Schumpeter, Business Cycles, I, chap, ii, presents a representative theoretical analysis of this “equilibrium” position to which railway enterprises have been approximating.

38 Campbell, E. G., The Reorganization of the American Railroad System, 1893–1900 (New York: Columbia University Press, 1938)Google Scholar.

39 Oxenfeldt, Alfred R., New Firms and Free Enterprise (Washington: American Council on Public Affairs, 1943), p. 75Google Scholar

40 The degree to which in recent decades public regulation has restricted this opportunity as far as pricing of services is concerned has been the subject of a suggestive inquiry by the National Resources Planning Board. Transportation and National Policy (Washington: United States Government Printing Office, 1942), esp. pp. 87128Google Scholar.

41 ibid., pp. 60–5.

42 ibid., p. 41.

43 An introduction to the sociological theory of organization can be found in Barnard, Chester I., The Functions of the Executive (Cambridge: Harvard University Press, 1938)Google Scholar. Cf. Whitehead, T. N., Leadership in a Free Society (Cambridge: Harvard University Press, 1936), chaps, vi and viiiCrossRefGoogle Scholar. The problem at a lower level of enterprise structure is analyzed in Roethlisberger, F. J. and Dickson, William J., Management and the Worker (Cambridge: Harvard University Press, 1939), chaps. xxiv and xxvGoogle Scholar.

44 Schumpeter, Joseph A., Capitalism, Socialism, and Democracy (New York: Harper and Brothers, 1942), chaps, xi–xivGoogle Scholar.

45 ibid., pp. 96–8. Schumpeter seems to regard this change as more than adaptational. In so far as it is innovational, however, it functions less to develop capitalist structure than to further its incipient transformation into something else.

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