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Institute on California and the West Railroaded Workshop, Huntington Library, San Marino, CA, July 9, 2011: taking counterfactual history seriously.

How many economists does it take to change a lightbulb? None, the answer goes. If the lightbulb needed changing, the market would have already done it. Now, with the publication of Richard White's book Railroaded: The Transcontinentals and the Making of Modern America, it appears we will be able to tell the same joke about western historians. That might seem to be an unfair jibe--I am being deliberately provocative in making it--but I would justify this reading of White's book by pointing out that what economists mean today by the term market is generally misunderstood. Most would agree with White's assertion that "there is no such thing as a market set apart from particular state policies, institutions, and social and cultural practices." They also would agree with his follow-on statement: "The question is not whether governments shape markets; it is how they shape markets." (xxv)

Economists generally prefer governments to shape markets by harnessing competitive forces rather than by pursuing an explicit industrial policy, and so it seems does White. The root of all the evils he depicts in his book was government subsidization of the transcontinental railroads: "[W]ithout the extensive subsidization of a transcontinental railroad network, there might very well have been less waste, less suffering, less environmental degradation, and less catastrophic economic busts in mining, agriculture, and cattle raising. There would have been more time for Indians to adjust to a changing world.... The issue is not whether railroads should have been built. The issue is whether they should have been built when and where they were built. And to those questions the answer seems no. Quite literally, if the country had not built transcontinental railroads, it might not have needed them until much later, when it could have built them more cheaply, more efficiently, and with fewer social and political costs." (517)

White argues that history could have turned out differently. If the government had not thrown its largess at the railroads, the United States (and Mexico and Canada) would have been better off. Even the Indians would have been better off. His point is not that the transcontinentals should never have been built. Rather, he claims that if private enterprise had constructed them only when and where they could be justified by calculations of profitability untainted by subsidy, the United States would have been a kinder, gentler place in the late nineteenth century.

It might seem from this last phrase as if I am mocking White's argument, but that is not my intention. White is offering an explicitly counterfactual hypothesis that deserves to be taken seriously. All historical arguments by their very nature imply that history would have turned out differently if the events or factors singled out for emphasis did not occur. Unfortunately, most historians never even think about, let alone attempt to test, the alternative hypotheses that are implicit in their work. White should be applauded for posing his argument in explicit counterfactual terms. In my view, however, he does not take his own argument seriously enough. That is, he does not bring the evidence to bear on the counterfactual that is needed to go beyond the surface of plausibility and truly assess its utility for illuminating the history of the period.

The purpose of my commentary is to suggest how one might work through such an assessment. I first highlight the basic theoretical assumptions that structure White's narrative. I suggest that these assumptions are similar to those that underlie much current economic thinking and argue that a more explicit use of this framework could help to resolve puzzles that the book currently leaves hanging. The remainder of the commentary is devoted to demonstrating how some simple models can illuminate the economics of the transcontinentals and also their effects on American society more generally.

THE PROBLEM OF ASYMMETRIC INFORMATION

At the heart of White's narrative is a set of theoretical assumptions that are essentially the same as those that underpin what is often called the new economics of information/Practitioners reject neoclassical models that depend on the assumption that all economic actors have perfect knowledge of the choices they face. Instead, they postulate that information is scarce and costly to gather and that, as a result, economic actors make decisions on the basis of only partial and highly imperfect knowledge. More importantly, actors usually have unequal access to information--in the terminology of this literature, information is asymmetric--and that creates opportunities for exploitation. If one party to a transaction has better information than another party, he or she can take advantage of the situation. The classic example, of course, is used cars. The seller knows what is wrong with the car, but buyers have much less ability to find out, and so the seller can take advantage of the buyer. (2) White adopts this terminology when he explains that investors had "little reason" to trust railroad promoters. Although "they might not have been able to articulate it," they knew that "information was asymmetric and that the men who ran the transcontinentals knew more about their condition and prospects than they were willing to tell." (69)

Just because one party to a transaction has an informational advantage does not necessarily mean that she or he would make nefarious use of it. Economics is still the dismal science, however, and the view of human nature that is implicit in this literature is that asymmetries of information are always problematic because at least some people will likely exploit them. White pushes this view even further than the economics literature; this is a dismal book, indeed. Almost all the actors in his book lie incessantly:
 Everyone agreed to lie. The utilitarian fictions
 of capitalism are apparent when the annual
 report for the Central Pacific Railroad for
 1873 and the report of the railroad's bankers,
 Fisk and Hatch, to Central Pacific bondholders
 in January of 1874 are compared with the
 less imaginative letters exchanged among the
 Associates. (86)

 To manipulate information railroads bought
 newspapers, but this was only a phase of
 the business. As they grew more sophisticated,
 ... [t]he railroads' everyday means of
 cultivating newspapers were free passes, printing
 contracts, and advertising, often above
 going rates, but they also recruited newspapermen
 as agents and lobbyists and lent them
 money.... Huntington, Scott, and Gould often
 wrote articles or had them commissioned, but
 their value depended on disguising the source;
 the value of a lie depended on the apparent
 rectitude and disinterestedness of the liar. (97)

 In both good times and bad, Villard obfuscated
 and lied. The lies and their contradictions
 were often barely separated in the
 letterbooks. (219)


[ILLUSTRATION OMITTED]

One of the best things about Railroaded is the way White uses his archival research to document the deceits in which Collis Huntington, Henry Villard, and their coconspirators engaged. He is largely content to stop with these demonstrations of duplicity, however, and here he parts company with economists who would push the analysis further. One of the great puzzles of the book, given the extent of the shenanigans that White documents, is why anyone was willing to invest in these railroads. Yet, White tells us, "the bonded debt of American railroads rose from $416 million in 1867 to $2,230 million in 1874 and then, pausing after the Panic of 1873, to $5,055 million in 1890." (68) In the early years, investors may have been reassured by the backing of the federal government and the reputation of railroad promoters like Jay Cooke, but after the scandals of the Grant administration, Cooke's failure in 1873, and the general railroad collapse that ensued, it is difficult to imagine they would have been so gullible a second time, especially as only the wealthier, more economically sophisticated savers were likely to buy such securities anyway.

Economists assume that, though people may have only imperfect and unequal access to information, they are not stupid. They know that others with better information can take advantage of them and act accordingly. In some cases, they will decide that it is simply not worth their while to make an investment or enter into a transaction. In other cases, they may take actions or set conditions that reduce the amount of expropriation and/or the level of risk they face. In still other cases, they may decide that the rate of return is sufficiently high to induce them to invest, even though they know some of their returns will be expropriated and there is significant risk that the whole enterprise will collapse. Of course, because they are operating with imperfect information, they are likely to make errors--to invest too little or too much or take actions which in the end do not reduce risk as much as expected. But the important thing is that they are likely to respond strategically on the basis of their perceived set of payoffs.

White provides glimpses here and there of investors' strategies and of the intermediaries who emerged to make this market work. (3) But this would have been a better book if he had worked more systematically through these possibilities--assessed the extent to which the wealthy shunned investments in transcontinentals (we do not even know what proportion of the outstanding bonds were for this type of railroad), the extent to which they demanded types of securities that reduced their level of risk (not just bonds versus equities but specific features of bonds), and the rate of interest they required before they would hold the roads' securities. It would also have been valuable to compare the returns from these alternative strategies--what the various choices would have yielded investors over different time horizons (both including the disastrous 1890s and not). (4)

THE PERNICIOUS ROLE OF GOVERNMENT

Huntington, Villard, and the other railroad men who populate White's book would have been nothing without the government, "which subsidized [their railroads], secured their rights of way, regulated them, and protected them." (xxiii) Precisely because these men needed the state so badly, they worked to shape it in turn, transforming Congress into "an arena in which the corporations themselves competed" to influence policy in their favor. (512) Here again, White's perspective on government is very similar to that of many economists: Like other human beings, congressmen and other political office holders are likely to exploit informational asymmetries for their own advantage. Because they command the institutions of the state, however, they are particularly well placed to take advantage of these asymmetries to enhance their own wealth or power. This view of officialdom is also general in the culture. Remember the famous poster of Richard Nixon with the caption "Would YOU buy a used car from this man?"

Officials' rent seeking (the term in the economics literature for this self-interested behavior) is potentially much more pernicious than the routine cheating in which other economic actors engage. Because government officials set the rules--"shape markets," in White's words--they can distort the workings of the entire economy. As White sees it, the government policies that created the transcontinental railroads redirected economic activity in a particularly destructive way. Government subsidization of the railroads was an example of "dumb growth." The perverse incentives it created led to excessively rapid settlement that inflicted enormous damage on the environment and generated a tremendous amount of unnecessary suffering. As an alternative, White offers a counterfactual scenario according to which these problems largely could have been avoided if government simply had left the construction of the railroad network to market forces. Private enterprise would have built the transcontinentals later, when they were really needed, and as a result growth would have been smarter. This is not to say that there would have been no lying and cheating. The economy still would have been plagued by asymmetric information. But it would have been largely spared the distortions that the government subsidies perpetrated. (460-66)

TESTING THE COUNTERFACTUAL

This counterfactual argument is certainly plausible, but that does not mean it is necessarily correct. To be worth testing at all, a hypothesis must be plausible on its face, but many plausible hypotheses do not survive rigorous investigation. And this one has not been subjected to examination. The key claim on which White's counterfactual argument depends is that the subsidized transcontinentals were built ahead of demand. Although White asserts the point repeatedly throughout the book, he does not present much evidence for it. (xxvii, 208, 462, 485, 510) Probably the point just seemed too obvious. Long stretches of the transcontinentals ran through mountains and deserts that were not suitable for farming. These lands would never generate much in the way of railroad traffic.

[ILLUSTRATION OMITTED]

The point is not nearly as obvious as it seems, however. As should be clear from White's larger formulation of the counterfactual, the test for building ahead of demand is not whether anyone would farm along the route. Rather, the test is whether private capital would have found it worthwhile to build the transcontinentals at the time they were constructed in the absence of the subsidy. Although White does not present any systematic evidence on this point, other scholars have devised a number of different ways to examine the issue: Was the rate of profit in the early years after construction less than could be earned from alternative investments? Was there a positive correlation between the railroad's rate of return and its age? Did the market's pricing of the company's securities before it was built signal a projection of unprofitability? Did the railroad turn out to be privately unprofitable? (5)

Not surprisingly, these different ways of posing the question have yielded somewhat different answers, as have alternative ways of operationalizing the various questions. The table below reports the results of calculations made by one scholar, Lloyd J. Mercer. By the first two measures, all of the seven transcontinentals Mercer studied were built ahead of demand. Albert Fishlow previously had arrived at a similar result. By the last two measures, however, Mercer found that the Central Pacific, the Union Pacific, and the Great Northern were not built ahead of demand. Robert W. Fogel earlier came to the same conclusion about the Union Pacific's private profitability but not about investors' ex ante projections. More recently, Xavier Durant has presented evidence that investors rationally could have expected a railroad traversing the continent along roughly the route followed by the Central Pacific and the Union Pacific to be profitable. (6)

There is much to learn about the economics of the transcontinentals from considering why these measures yield different results, but there is no space to do that here. Instead, it is more useful and efficient to develop a simple model of a transportation improvement to highlight what is behind these calculations. (7)

Imagine a coastal city, as in Figure I, surrounded by a uniformly fertile hinterland on which farmers produce a single good, say wheat, the price of which is given in world markets. Because the land is uniformly fertile, production costs are everywhere same. Transportation costs are a function of distance. Hence, as one moves out from the city, transportation costs rise and the spread between price and production costs falls. Farmers who live closest to the city earn the most. Profits fall as distance from the city increases, until on the margin of settlement farmers earn zero profits--that is, transportation costs completely absorb the difference between the market price and production costs. The circle in Figure I illustrates what the margin might look like if farmers were dependent on horses and wagons to get their goods to market. Some people might actually settle farther out, beyond the area of feasible commercial agriculture. Because they can engage only in subsistence agriculture, however, there are not likely to be many of them unless they have reason to believe that they will soon be brought within the margin by a transportation improvement, such as the railroad.

The railroad extends the margin of settlement along its route so that the feasible area for commercial agriculture will look something like an ice cream cone (Figure 2). Farmers who do not live directly along the route must use some combination of wagon and rail transportation to get to market, so the farther out one resides, the closer one must be to the railroad to be within the feasible region. Farmers within the old margin of settlement who live near the railroad are the big beneficiaries. Their transportation costs fall and their profits go up. Near the new margin of settlement, farmers earn little profit and so are very sensitive to changes that affect their costs. Thus White misses the point when he criticizes Mercer for considering "a failing farmer in North Dakota selling wheat at a loss in Minneapolis-St. Paul" as someone who benefited from the railroad "as long as he could send his wheat more cheaply by rail than by wagon." That, White sneers, "is like giving a greater economic benefit to suicides who slit their wrists over those who blow their brains out because a knife costs less than a gun." (462) But the farmer who is on the margin of settlement is always going to be on the brink of failure, regardless of his mode of transportation. The difference is that when the transportation was provided by the railroad, the farmer faced a supplier with a great deal of market power. When the railroads' attempts at cartelization were successful, marginal farmers' slim profits turned into losses. Not surprisingly, opposition to the railroad was concentrated on the margin of settlement and moved west when the margin shifted farther out. (8)

In terms of the model in Figure 2, for a railroad to be built ahead of demand, the ball part of the ice cream cone must be small relative to the cone. That is, the revenues that the railroad could earn when farmers switched from wagon to rail transportation within the old feasible area would not be enough to make the railroad initially profitable; it would become profitable only when a sufficient number of settlers moved into the new feasible area. The ball was likely to be small relative to the cone, however, only when the railroad brought about a dramatic fall in transportation costs. The implication of this simple model, therefore, is that railroads were more likely to be built ahead of demand when they were truly important transportation innovations. Of course, in a neoclassical world with perfect information and foreknowledge, private entrepreneurs would know that the railroads ultimately would be profitable and would undertake to build them. In the real world, however, information is imperfect and the future uncertain. Investors could not be sure that the railroads ultimately would pay off, so they might refuse to support them. In purely economic terms, then, this is the justification for a government subsidy.

[FIGURE 1 OMITTED]

[FIGURE 2 OMITTED]

[FIGURE 3 OMITTED]

To calculate whether a subsidy would have been justified on these grounds, one must estimate the cost of railroad transportation relative to available alternatives--in other words, one must undertake Fogel's famous social savings calculation. Here it is important not to misunderstand what Fogel (or others, like Mercer, who have followed in his footsteps) meant by the word "social." The social savings of a railroad in any given year is simply "the difference between the actual cost of shipping goods in that year and the alternative cost of shipping exactly the same bundle of goods between exactly the same points without the railroad." (9) It is a measure of the additional national income that would result from the resources that are freed for other productive uses by the cheaper form of transportation. It is a narrow economic measure, not a broad cost/benefit calculation. It does not attempt to capture any of the things that White would like to see put in the balance. It "has no subtracting of ... the endless disputes over taxes and loss of local revenues from taxes.... There is no consideration of environmental costs or losses to Indians." (491) But it does not purport to be such a calculation.

The particular problem of whether subsidies for the transcontinentals were justifiable on the narrow grounds of the social savings calculation must be modeled a bit differently from the diagram in Figure 2 because land in the West was not uniformly productive. The transcontinentals had to run through hundreds of miles of difficult terrain that never would be farmable and never would generate much traffic for the road. So imagine instead two cities with hinterlands separated by mountains, as in Figure 3. The main market is in the East, so commercial farming in the West is viable only to the extent that farmers can ship their products to eastern markets and still earn a profit. Because of these extra transportation costs, the feasible area of production is smaller in the West than it is in the East, whether farmers have to rely on wagons alone to get their products to the western city or can also ship goods by rail. Hence, in Figure 3 the local railroad only extends the margin of settlement to a point like A.

[GRAPHIC D OMITTED]

There are two alternative ways to transport goods from the western city to eastern markets: by sea or over land. White's counterfactual argument is that the costs of shipping by sea were at least initially cheaper than the costs of shipping over land via the transcontinentals. The latter, he claims, would become an economically viable transportation route only once the level of development in California was high enough to generate sufficient traffic. The little quantitative evidence he provides, however, is not consistent with this view. His Chart D shows that the bulk of the rail traffic to San Francisco was through freight rather than local shipments. Only in the 1890s did the volume of local freight take off. This time pattern is more consistent with the view that the transcontinentals were the engine of growth in California rather than the reverse--that is, it suggests that the railroads encouraged development by reducing transportation costs and shifting the feasible area of commercial agriculture out to a point like B in Figure 3. (10)

Although government subsidies for the transcontinentals may have been justifiable on narrow economic grounds, public policy should take a broader set of considerations into account. White argues that the subsidized railroads caused more environmental damage and human misery than would otherwise have occurred. This assertion is very difficult to test because many different factors are involved in the settlement process, and it is not clear how one can single out any one of them as the root cause of the problems. Alan Olmstead and Paul Rhode have shown, for example, that commercial agriculture on the Great Plains depended on the development of new varieties of wheat that could withstand the harsh climate. (11) The federal government funded most of the necessary research--both directly through experiments conducted at the Department of Agriculture and indirectly through land grants to agricultural colleges. Perhaps it makes as much sense to blame the environmental disasters resulting from the settlement of the plains on government support for agricultural research as it does on subsidies for the transcontinental railroads.

White provides a potential way out of this bind by pointing out that North and South Dakota can serve as "a kind of historical laboratory" for testing the counterfactual argument. "Subsidized transcontinentals built ahead of demand" traversed the northern part of the Dakota Territory, but the southern part had "unsubsidized regional roads built to meet demand." (485) By comparing settlement patterns in the two regions, therefore, one can assess the consequences of the subsidies. This idea is intriguing, but the evidence needs to be analyzed more formally for White's findings to be convincing. To attribute the different settlement patterns to the presence or absence of subsidized transcontinentals, White would have to show that they are not accounted for by other factors (such as soil quality, existing waterways, presence of Indians, and so on). He also would have to show that the location of the transcontinentals was plausibly exogenous--that is, it was not a function of other variables that also were determining settlement patterns. Natural experiments of this sort are the bread and butter of applied microeconomics these days, and practitioners have developed all kinds of techniques that White could have drawn on to control for these kinds of possibilities. (12)

Another problem with the exercise is that the results do not completely fit White's counterfactual argument. Without subsidized transcontinental railroads, he acknowledges, the southern part of the Dakota Territory should have been settled more slowly, but "[i]n fact, the opposite was the case." White finds that settlers moved into the southern counties at nearly twice the rate as into the northern counties that had subsidized railroads. (485-86) This evidence is not consistent with White's idea that without the trancontinentals "there would have been more time for Indians to adjust to a changing world." (517) In this part of this discussion, however, White considers rapid settlement to have been a good thing because it enabled the unsubsidized railroads to operate "more efficiently." (486)

White brings the comparison back on point with respect to the transcontinentals' environmental impact by arguing that farmers in the northern part of the territory were tempted by "the advantages of being near a railway line ... to take greater chances with aridity." The Northern Pacific, he argues, "served as a giant straw sucking people farther west along its line than they otherwise would have gone." By contrast, farmers in the southern counties "paid less for land, settled the better lands more quickly, and avoided marginal arid lands." (485-86) Here the experiment fails, however, because, as White honestly admits, settlers in the southern part of the territory were blocked from moving farther west by the Great Sioux Reservation. (486) Because of this barrier, it is impossible to tell whether the lack of subsidized railroads would have led in reality to less settlement on dry lands and hence to less environmental damage.

In the economic history literature, there is an alternative hypothesis that attributes the environmental catastrophes on the Great Plains more to the way the land was settled than to the fact of settlement itself. Zeynep Hansen and Gary Libecap have demonstrated convincingly that the personal and environmental disasters resulting from drought, including the dust bowls of the 1930s, largely could have been averted if farm sizes had been larger. The theoretical perspective that underlies Hansen and Libecap's analysis is very similar to White's, although I think it would be fair to say that they come to western history from the right rather than the left and thus are as likely to attribute problematic government policies to popular political pressures (in this case, to make land freely available in small parcels) as to monied interests. (13) Their hypothesis--that public policy was the source of the problem--is equally in need of testing, however, and an obvious natural experiment would be to compare farm sizes on public lands subject to the Homestead Act with those on lands initially awarded to railroads, where sales were not limited to 160 acres. If farm sizes in the two areas were similar, that would suggest that the economics of farming was to blame rather than the Homestead Act or other government restrictions on acreage allotments. (14) Systematic comparison of lands granted to railroads with those that remained part of the public domain also could be used to explore White's contentions about the subsidies' detrimental impact on the West.

[ILLUSTRATION OMITTED]

PAST AND PRESENT

As White acknowledges in his introduction, "writing about the Gilded Age" but "living in the early twenty-first century" in the midst of a major financial collapse affected his interpretation of his sources. It made what he was studying "seem more than just ... the unruly youth of corporate capitalism." The "present seemed so nineteenth century" and vice versa. (xxxiv) There is nothing at all wrong, in my opinion, with bringing present-day concerns to the writing of history. The problem is that White's understanding of the history of the transcontinentals seems to be too much a result of his particular view of the current crisis--that it was produced by greedy financiers who manipulated the political process to further their own ambitions.

This explanation for the collapse is plausible, of course, but there are other possible hypotheses, and in some of them, ordinary Americans bear greater responsibility, whether it be for their desire for ever larger houses, their drive to consume rather than save, or their refusal to pay sufficient taxes to run the government. It is difficult for us as participants in these events to sort out the alternative explanations. We do not have all the data, and we are too much products of our own times to see what was going on clearly. When we study the past, however, we can benefit from our distance--our alienation, if you will--from the actors and their beliefs.

My own view is that if we make use of this alienation to better understand the past, we can also improve our purchase on the present. To do so, however, requires that we engage in a conscientious effort to test our ideas against the evidence--to go beyond plausibility, acknowledge that our reasonable arguments could very well be wrong, and devise ways to confront that possibility. The tests can be, but do not have to be, quantitative. What is needed, more than anything else, is the adoption of a mode of thinking that is constantly seeking out alternative ways of making sense of the evidence, as well as methods for deciding which alternative is most likely to be correct. It is this mode of thinking that I am missing in White's book and, indeed, in most historical writing today. Without it we are always ourselves in danger of being "railroaded."

NOTES

Caption source: George A. Cruffet, New Overland Tourist and Pacific Coast Guide (Omaha, NE: The Overland Publishing Company, 1880), 135.

(1) This body of theory is no longer so new. For an early survey, see J. Hirshleifer and John G. Riley, "The Analyfics of Uncertainty and Information--An Expository Survey," Journal of Economic Literature 17 (Dec. 1979): 1375-1421. For a discussion of the utility of this theory for business historians, see Naomi R. Lamoreaux, Daniel M. G. Raft, and Peter Temin, "New Economic Approaches to the Study of Business History," Business and Economic History 26 (Fall 1997): 57-79.

(2) See George A. Akerlof, "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," Quarterly Journal of Economics 84 (Aug. 1970): 488-500.

(3) White suggests, for example, that investors bought railroad bonds because they could earn a much higher rate of return than from alternative securities. He also suggests that bankers helped railroads sell bonds by playing the role of intermediaries, though how bankers built confidence is not completely clear because he portrays them as lying as well. On both points, see White, Railroaded, 378-81.

(4) For one example of a clever attempt to investigate investors' strategies, see Efraim Benmelech, "Asset Salability and Debt Maturity: Evidence from Nineteenth-Century American Railroads," Review of Financial Studies 22 (Apr. 2009): 1545-84,

(5) For the first two, see Albert Fishlow, American Railroads and the Transformation of the Ante-Bellum Economy (Cambridge, MA: Harvard University Press, 1965), chap. 4. For the second two, see Lloyd J. Mercer, "Building Ahead of Demand: Some Evidence for the Land Grant Railroads," Journal of Economic History 34 (June 1974): 492-500. Mercer also posed a fifth test--whether the social return was positive when the private return was negative--but this test is really a measure of whether a government subsidy was justified.

(6) Lloyd J. Mercer, Railroads and Land Grant Policy: A Study in Government Intervention (New York: Academic Press, 1982), chap. 6; Mercer, "Building Ahead of Demand"; Fishlow, American Railroads; Robert William Fogel, The Union Pacific Railraod: A Case in Premature Enterprise (Baltimore, MD: Johns Hopkins Press, 1960); Xavier Duran, "A Model of Formation of Profit Expectations of Theodore Judah and the Expected Private Profitability of the First Transcontinental Railroad" (unpublished working paper, Mar. 2010).

(7) The following exposition is based on Jeremy Atack and Peter Passell, A New Economic View of American History, and ed. (New York: W. W. Norton, 1994), 164-73.

(8) Although railroad freight rates bounced around and depended locally on the extent of competition, even in the West the trend was downward--faster than the contemporaneous fall in agricultural prices. See Robert Higgs, "Railroad Rates and the Populist Uprising," Agricultural History 44 (July 1970): 291-98.

(9) Robert William Fogel, "Notes on the Social Saving Controversy," Journal of Economic History 39 (Mar. 1979), z-y

(10) This evidence is not ideal because the railroads set rates that discriminated against short hauls, but there is no better data in the book.

(11) Alan L. Olmstead and Paul W. Rhode, Creating Abundance: Biological Innovation and American Agricultural Development (New York: Cambridge University Press, 2008), chap. 2.

(12) For an excellent historical example of the use of such techniques, see Richard Hornbeck, "Barbed Wire: Property Rights and Agricultural Development," Quarterly Journal of Economics 125 (May 2010): 767-810.

(13) Zeynep K. Hansen and Gary D. Libecap, "The Allocation of Property Rights to Land: U.S. Land Policy and Farm Failure in the Northern Great Plains," Explorations in Economic History 41 (Apr. 2004): 103-29; and Hansen and Libecap, "Small Farms, Externalities, and the Dust Bowl of the 1930s," Journal of Political Economy 112 (June 2004): 665-94.

(14) The Homestead Act granted settlers up to 160 acres of public land for free if they lived on and farmed the land for five years. This act and subsequent measures that restricted farm sizes applied only to the public domain. The railroads could divide the land in their grants into any size plots they wished. If farm sizes on railroad lands were similar to those on the alternate sections, then the government restrictions were of little importance.

NAOMI R. LAMOREAUX is professor of economics and history at Yale University. She received her Ph.D. in history from the Johns Hopkins University in 1979 and then taught at Brown University from 1979 to 1996 and the University of California, Los Angeles, from 1996 to 2010. She has written The Great Merger Movement in American Business, 1895-1904 and Insider Lending: Banks, Personal Connections, and Economic Development in Industrial New England, edited five other books, and published scores of articles on a variety of topics. Her current research interests include patenting and the market for technology in the late-nineteenth- and twentieth-century United States, business organizational forms and contractual freedom in the United States and Europe in the nineteenth and twentieth centuries, the public/private distinction in U.S. history, and the rise and decline of innovative regions.
WERE THE RAILROADS BUILT AHEAD OF DEMAND?

 Forecast
Railroad Low early Profits not to be Not
 profits increase privately privately
 over time profitable profitable

Central Pacific yes yes no no
Union Pacific yes yes no no
Texas and Pacific yes yes yes yes
Atchison, Topeka
 and Santa Fe yes yes yes yes
Northern Pacific yes yes yes yes
Great Northern yes yes no no
Canadian Pacific yes yes yes yes

Sources: Lloyd J. Mercer, Railroads and Land Grant Policy: A Study in
Government Intervention (New York: Academic Press, 1982),
ch. 6; and Mercer, "Building Ahead of Demand: Some Evidence for the
Land Grant Railroads," Journal of Economic History 34, no. 2 (June
1974): 492-500.
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