Fall, 1999 Railroads Topic 2 Page

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

Why The Business History of Railroads is Important

Railroads were the first big business and they created what we now call an economy. For the first time in history, a person could travel faster than a galloping horse on land. The steam train revolutionized human existence by literally speeding up the pace of life. The most obvious example is travel. In 1800 it took from a week to 10 days to travel from Pittsburgh, PA to New York City (380 miles). By 1860 it took one day. It sped up the pace of business as well. Businesses that shut down during the winter now ran year around. The railroad with its speed and its certainty (the trains ran on schedules) made possible the rise of the factory and its system of mass production and it made wholesaling an important business because merchants did not have to carry so much inventory.

The creation of the modern economy in the United States during the 1840s to the 1890s was due to:

Mass transportation in the form of the Railroads.
Mass communication in the form of the Telegraph.
Cheap Energy in the form of Coal.

About 1890 the United States became the largest economy in the world. By World War I the United States was an economic superpower in the modern sense. In particular, by 1914 the U.S.:
1. Produced 36% of the World’ manufactured goods.
2. Steel output exceeded the combined capacity of the main combatants in World War I (Germany and Britain).
3. Produced more coal than all of Europe combined.
4. Had approximately 352,000 miles (563,000 km) of railroad trackage of which 290,000 miles (464,000 km) was main line trackage.
All this was due to the development of the railroad business. Railroads were fundamentally different from all business and commercial activity that preceded them. The first and most important difference was their sheer size. Prior to the 1830s when the first railroads were constructed, the largest businesses in the world were textile mills. However, even the largest of these mills could be viewed in a few hour walk. The physical scale of even a small railroad made it qualitatively different from all business organizations that preceded it.
1. The railroads were spread out over a vast territory – shops, terminals, stations, warehouses, office buildings, bridges, roadbeds, telegraph lines – all had to be administered and maintained. It was physically impossible for an owner or owners to view all the property in one day or even months for the larger railroads.
2. The flow of coin was unprecedented – the railroads were literally a nickel and dime business! Each day a river of coin was collected from passengers and had to be handled in an efficient and orderly way so it ended up in the Railroad’s bank account and not in the pockets of employees.
3. The coordination was complex. (This was truly solving OR problems on the fly!) Each day stations on the line loaded and unloaded a wide variety of cargoes. This had to be managed and carefully tracked. Cargoes could go from any point on the line to any other point on the line.
4. The complexity of the railroads required an array of specialized skilled workmen – boilermakers, mechanics, and maintenance men. Because the movement of trains had to be tightly coordinated, the railroads required highly disciplined, intelligent workers. Incompetent and/or stupid workers could cause wrecks.
5. These complexities required that complex organizational structures be developed to solve these problems. These complex organizational structures evolved into the modern line and staff form of business organization that most big businesses use to this day. These innovations in business management were transferred by entrepreneurs like Andrew Carnegie to other sectors of the economy in the 19^th Century thereby making industrial production in the United States the most efficient in the World.

A Statistical Portrait of the U.S. 1830 – 1920

Population – During this period the population of the U.S. increased from 12.9 million to 106.4 million (it reached 100 million in 1915) and the land area increased from 1.75 million square miles (4.53 million square kilometers) to 2.97 million square miles (7.7 square kilometers). This translates into 7.4 persons per square mile in 1830 increasing to 35.6 persons per square mile in 1920.

Density and geographic distribution of the U.S. population – People moved steadily inland from the eastern seaboard and up from the Gulf of Mexico (mainly via the Mississippi) from the 17^th Century onward. Before the railroads people mainly used the rivers for transportation and settled either near rivers or the ocean.

A key event (and a harbinger of what was to come) was the completion of the Erie Canal in 1825. Entrepreneurs quickly set up steamboat lines from the terminus of the Canal on Lake Erie to points West – Cleveland and other landings on what is the modern day coast of Ohio, and Detroit, Michigan.
By the opening of the Erie Canal upstate New York and New England were overpopulated. As we will see in the next graph, fertility peaked in 1810 at 1358 children 5 years or younger per 1000 women aged 15-44. Large families were commonplace and because most people were engaged in subsistence farming and did not live in the cities, deaths from deadly diseases such as cholera were low.
The Erie Canal unleashed a flood of people into Ohio, Indiana, Michigan, and Illinois. Robert W. Fogel dubbed this the Yankee Diaspora.

Fertility – Note that after fertility peaked in 1810, it fell steadily all the way up to the beginning of World War II in 1940. The baby boom peak was in 1957 at 722.9 children 5 and under per 1000 women (Whites) – a little over half the 1810 peak.
1. In 1830 it was 1145 children 5 and under and in 1920 it was 604 children 5 and under (Whites).
2. Another measure of fertility is the number of live births per 1000 women aged 15 to 44. This was 240 per 1000 in 1830 and 117.9 per 1000 in 1920 (Whites).

Health – One of the best measures of public health is height. The better the food and the lower the disease level, the taller the people. Consequently, because a professional military establishment usually keeps good records of recruits, economic historians have been able to compile the average male height of several European countries as well as the U.S. from military records. (The data below were compiled by Robert William Fogel and discussed in his great book Without Consent or Contract: The Rise and Fall of American Slavery, pp. 355-362.)

Note that height around the American Revolution in 1775 was 68 inches – 5 foot 8. Then in the 19^th Century – especially after 1830 – it declines dramatically.
In many (if not most) cities, contamination of the water supply by raw sewage was an all too common problem. It was not until later in the 19^th Century that sewage systems were properly isolated from Water systems. It was sanitation that brought the great gains in health. Mass immunization was a less important factor.

Foreign Born – This graph shows only the White population because in 1850 there were only 2015 foreign born Black slaves. The 1808 cutoff in slave imports that was written into the Constitution was rigorously enforced so that by the 1850s almost all the slaves had been born in the United States.

There were always more men than women. Men (the young and daring ones) usually crossed the Atlantic first and if they got a job and established themselves, others followed. This was a very typical pattern of immigration. First the daring, then the timid (or less daring!).
The percentage of foreign born peaked at roughly 8% between 1910-1920.

Urbanization – By 1920 more people lived in urban areas (2500 or more inhabitants) than in rural areas (less than 2500 inhabitants).

Employment – Railroads were the single largest employer before World War I. Agriculture employment peaks in 1910 and declines thereafter.

Gross National Product (1958 $) – After the Civil War when good economic data are available (prior to 1889 only decade averages are shown in the historical records of the Census), the economy increased by a factor of 7 between 1869 and 1917. This translates into an average annual real growth rate of 4.3 percent from 1870 to 1913. During the same period the growth rates of Japan, Germany, U.K., and Canada were 3.3, 2.8, 2.1, and 3.8 percent respectively.

Per Capita Real Income (1958 $) – The best gauge of economic performance is real per capita income growth – this is true economic growth because the average person is getting better off. Real per capita income tripled from 1869 to about 1914 while the population increased a factor of 2.5 -- from about 40 million to about 105 million. By any measure, this is a remarkable achievement. This translates into a per capita income growth rate of 2.2 percent from 1870 to 1913.

Railroad Mileage – Railroad mileage peaked in 1920 at 260,000 miles (418,000 km) of main line track (this does not count sidings and yards). There was also a comparable growth in the rolling stock. In 1876 (the first year when records were kept) there were 385,000 freight cars, 14,600 passenger cars, and 15,600 locomotives. In 1890 the numbers were 1,062,000 freight cars, 21,700 passenger cars, and 31,800 locomotives.

Telegraph Messages – These peak in 1893 and decline thereafter because of the increasing use of the telephone. In 1893 there were 266,000 telephones in the U.S. or 3.9 per 1000 persons. By 1903 there were 2,809,000 telephones or 34.5 per 1000 persons.

Coal Production – The U.S. is the Saudi Arabia of coal. By 1914 U.S. coal production was greater than all of Europe combined.

Coal is a hard form of carbonaceous fuel. Carbonaceous fuel ranges from low carbon/high moisture to high carbon/low moisture – Peat to Lignite to Bituminous Coal to Anthracite Coal.
Bituminous coal burns readily, was used as fuel in industry and to fire steam locomotives, and in the making of Coke.
Anthracite coal is nearly pure carbon, very hard, lustrous, and used as fuel.
Coke – Created by destructive distillation of bituminous coal. When bituminous coal is heated the byproducts of the destructive distillation are coke, ammonia, coal tar, and coal gas (once widely used as an illuminant). Coke is a porous fuel with very few impurities and a high carbon content.

Iron and Steel Production – In 1874 it was estimated that railroads required 150 tons of iron per mile (rails and rolling stock). During the Civil War the Pennsylvania railroad installed some steel rails because of the wear and tear on its mountainous system. By 1880 25-30 percent of railroad trackage was converted to steel rails, by 1890 80 percent, and by 1910 all trackage had been converted to steel. Andrew Carnegie was largely responsible for this changeover because of his innovative management of his iron and steel business. In 1873 steel rails cost $120 a ton and by 1898 the price was down to $17 a ton. All his competitors were forced to copy his business methods and the result was cheap high quality steel.

Manufacturing – By 1914 the U.S. accounted for 36 percent of the manufactured goods in the World. The pace of industrialization was so rapid in the U.S. that the index of manufacturing doubled between 1900 and 1914. Another measure of manufacturing is value added. This is defined as the difference between the value of the manufactured good minus the cost of materials, energy, and contract work (but not depreciation and taxes). Robert Gallman, an economic historian, has calculated that value added increased by a factor of six between 1869 and 1899.

Total Horsepower – One of the keys to creating widespread wealth is cheap, abundant energy.

Before 1840 waterpower was a major source of energy and it determined the location of gristmills and textile mills.
Steam energy became increasingly important in the 19^th Century. The primary fuels were wood and then coal.
1. Thomas Savery and Thomas Newcomen developed the first steam pump using a piston in 1712. It was used to pump water out of mines in England. It was very inefficient and only converted about 1 percent of the thermal energy into mechanical energy.
2. James Watt (1736 – 1819) developed the first efficient and practical steam engine in the 1770s. He invented the condenser – which condensed the steam outside the cylinder so that the cylinder could remain hot at all times – and he invented a rocker-arm assembly that translated the up-down motion of the piston into a circular motion of a flywheel. Thereafter the steam engine was a practical and useful device and it made Watt and his financial backer, Matthew Boulton, very rich.

Corn Production – As the railroads expanded into the Midwest, corn and wheat production exploded. However, for more than 25 years after the Civil War commodity prices fell steadily. This was a period of deflation.

Farmers blamed the falling prices on the railroads, elevator companies, mortgage rates, trusts, and so on.
Their "cure" for the deflation was the "free" coinage of silver. This produced two decades of turmoil in American politics.
In fact railroad rates fell faster than the overall price level throughout this period. Indeed, the number of bushels exchanged for the distance shipped was constant if not falling throughout the period. The railroads were not guilty of "gouging" the farmers.
In 1870 passenger rates were 2.8 cents per mile and freight rates were 2.2 cents per ton-mile. In 1910 the numbers were 1.9 and .75 respectively. These drops are greater than the 25 percent fall in the general price level over the same period.

Currency in Circulation – The graph includes all currency outside the U.S. Treasury – coin, bullion, and paper money. The rate of increase in the amount of currency in circulation closely tracks the increase in population until 1896 when the amount of currency begins to dramatically increase.

If the per-capita level of currency was constant from the late 1860s to 1896, then what caused the deflation? The answer is that the per-capita number of economic transactions was increasing through this period because of the growing number of consumer goods and the increasingly complexity of the economy.
The tremendous jump in currency after 1896 is due to introduction of the cyanide leaching process and substantial gold discoveries in the Yukon Territory, Australia, and South Africa. This substantial increase in the money supply helped to fuel a tremendous spurt of growth into the early 1900s. (Note that if there is slack in the economy injecting money will produce inflation and real growth.)

Electric Energy – The use of electricity began to take off before World War I. The basic principles had been known for some time. Michael Faraday (1791-1867) made a series of discoveries between 1821 to 1831 that lead to an understanding of the principles of electromagnetic induction. This lead to the development of the generator in which mechanical energy is transformed into electrical energy; and the motor in which electrical energy is transformed into mechanical energy.

In 1858 the first generator driven by steam was used at a lighthouse.
In 1870 Z. T. Gramme of France devises a large generator that could be run continuously and he used it to light arc lights on the streets of Paris.
In 1879 Thomas A. Edison develops the incandescent lamp and in 1881 he builds a generating station in New York to provide power for lights.
By 1893 Alternating Current became the standard because there is lower energy loss over transmission lines. However, almost all home appliances – TVs, radios, computers, etc., -- use Direct Current, hence the need for a power supply which converts AC to DC.
By 1919 50 percent of factories were powered by electricity and by 1929 75 percent were powered by electricity.

Motor Vehicle Registrations – Automobile ownership exploded in the early 20^th Century. Indeed, the popularity of automobiles was such that the major public works programs in the 1920s were highway projects. These publicly subsidized rights-of-way hurt the railroads because it resulted in the loss of most of the high-value short-haul freight to the emerging trucking industry.