Across the Borders: Financing the World’s Railways in the Nineteenth and Twentieth Centuries

Published by EH.NET (September 2009)

Ralf Roth and Gunter Dinhobl, editors, Across the Borders: Financing the World’s Railways in the Nineteenth and Twentieth Centuries. Aldershot, UK: Ashgate, 2008. xxxviii+ 323 pp. ?65 (hardback), ISBN: 978-0-7546-6029-3.

Reviewed for EH.NET by Dan Bogart, Department of Economics, University of California ? Irvine.

Railways were one of the key sectors driving international capital flows during the late nineteenth and early twentieth centuries. In this period, investors subscribed to foreign railway stocks and bonds on a scale that would have been unimaginable in previous generations. The implications for the global economic and political system were enormous. Markets were extended, new sectors and economic regions were developed, and nation states were forged in large part because foreign investors were willing to take the risk of investing in railways far from their home country.

Across the Borders documents the flow, the character, and the timing of foreign railway investment from the mid-nineteenth century to World War I and beyond. In a refreshing approach, specialists on the main capital exporting and importing countries go beyond nationalistic accounts of railway investment and emphasize the interactions between individuals and interests in different countries or continents. Railway buffs will revel in the detailed treatment of entrepreneurs, investors, and the success or failings of individual railways. Economic historians will also benefit from the numerous tables (and detailed sources) describing cross-country capital flows and financial structures. The chapters also offer insights into nature of transaction costs in railway finance.

Several chapters document the volume and direction of capital flows from Western Europe. Not surprisingly Britain is shown to be the leading railway investor by 1913. The British financed railways in the U.S., Western Europe, South America, and colonies like India. The Dutch, French, and Germans also invested heavily in foreign railways but each tended to concentrate their portfolios in particular countries. The Dutch, for example, invested heavily in U.S. railways, while the French and Germans invested in Italy, Spain, Russia, and the Ottoman Empire.

The economic logic and institutions underlying foreign investment in railways are illustrated in several chapters. It is clear that investors were attracted by higher returns on foreign railways, but they were reluctant because of the risk and uncertainty involved. The size of the industries and the income of individuals using railway services were not necessarily known to distant investors in advance of their subscription. Moreover the profitability of railways often depended on the growth of economic activity, which was highly uncertain. Government guarantees on railway securities emerged as a solution. Guarantees offered investors the prospect of a four to six percent return on their capital regardless of the financial performance of the railway. In return the government hoped to reap the fiscal and political benefits from an extensive railway network. The discussion in several chapters suggests that without guarantees investors were unwilling to subscribe or buy shares in private railway companies, especially those operating in emerging markets. Even if this was the case, guarantees should not be viewed as entirely efficacious. A chapter on Brazil illustrates that guarantees could contribute to fiscal problems, as governments were forced to make payments to private railways at unfavorable exchange rates or in periods of economic stringency.

Private railway companies were formed through charters or concessions granted by governments. The chapters illustrate that in countries with more developed economic and political systems the promoters were often domestic capitalists who obtained a substantial portion of their funding from foreign investors. With some exceptions the aim of promoters and investors was to profit from an existing or emerging trade by providing an improved transport service. In less developed countries the promoters were often foreigners with domestic capitalists playing a more minor role. Two chapters on the Ottoman Empire and China illustrate how the ?hunt? for foreign railway concessions was often intertwined with European colonization and their aims to strengthen claims on resources for future exploitation. The chapters also illustrate that domestic political actors had their own objectives in granting foreign concessions. In the Ottoman government courtiers sought to extract rents from granting railway monopolies. In China groups within the imperial and provincial government allied with French and Belgian companies in the hopes of modernizing their economy. More broadly there is a suggestion that political factors played a greater role in the establishment and control of railways in less developed countries. Belgium provides a counter-example to this trend, as Dutch investors were discouraged for political reasons from investing in Belgian railways, but even in this case foreign investment flows were largely directed by economic considerations.

The chapters also illustrate that markets for foreign railway investment were not impersonal. The Pereires and the Rothschilds provided substantial financing for European railways, as did other large banks and wealthy families. Foreign investors were often lured by entrepreneurs like Bethel Henry Strousberg. Strousberg developed a system for evading legal restrictions on corporations in Prussia and developed a vertical trust combining different enterprises. The significance of individuals and social networks is strongly suggested by several authors. Ralf Roth argues that Bethel Henry Strousberg’s most valuable asset was the “trust that his investors had in his business acumen and abilities? (p. 42). Trust was arguably crucial for foreign railway investments because incomplete information was common. Investors were more likely to devote their savings to railway projects if they received the seal of approval from a prominent individual or group. These entrepreneurs, in turn, discovered new projects and monitored their performance. Only a few markets for foreign railway investment achieved some degree of impersonality. Augustus Veenendaal argues that Dutch investors relied on the financial press to obtain information about U.S. railroad projects in addition to receiving reports from Dutch emigrants and promoters.

Several chapters deal with the financial success of foreign railway investments. The general picture was mixed as there were wildly successful and unsuccessful foreign railway projects. What is clear though is that foreign railway investments must have generated similar or greater returns as other investments after adjusting for risk because otherwise the substantial cross-border flows should have stopped.

The effects of railways on economic development are briefly touched upon in several chapters. Railways are credited with increasing exports in the Ottoman Empire, but they are also blamed for increasing foreign competition in interior districts. A related and unresolved issue concerns the net effect of government subsidies like guarantees. If railways had large developmental effects then it may have been worthwhile for governments to subsidize foreign investors. On the other hand, if railways responded to development or if they created political and economic unrest then guarantees should be considered a failed policy.

Dan Bogart is an assistant professor in the economics department at the University of California ? Irvine. His current research analyzes the role of state ownership and railway performance from a comparative perspective.