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Published by EH.Net (June 2012)

Richard White, Railroaded: The Transcontinentals and the Making of Modern America. New York: Norton, 2011. xxxix + 621 pp. $35 (hardcover), ISBN: 978-0-393-06126-0.

Reviewed for EH.Net by John Howard Brown, School of Economic Development, Georgia Southern University.

Richard White?s Railroaded is a professional tour de force. This book provides an overview of the development of railroads in United States west of the Missouri River. The timeframe covered is the last third of the nineteenth century. The volume invites reflection on how the nineteenth century experience is related to the travails of our twenty-first century market economy.?

White?s thesis has several distinct themes. The first, and most prominent, theme is that there was no economic rationale for building even one railroad between the great valleys of the west coast and the Missouri basin.? (Or course, the federal government might well have entertained political, and what are now called national security, considerations in the decision to create a transcontinental railroad system.)? In the era of transcontinental railroad building between roughly 1865 and 1895, local populations in this vast region were too small to generate much in the way of paying freight. At the same time, California?s central valley and the Willamette in Oregon were adequately served by steamships and purely local railroads.

This led to the original sin in the creation of these roads. Government land grants were employed as subsidies for construction. Even more important, the U.S. government?s credit was employed to guarantee the creditworthiness of the enterprises. To put this into contemporary economic jargon, an opportunity for rent-seeking was created. The power of human cupidity in service of this opportunity for rent extraction is well documented.

This book lays to rest the fantasy that markets in the late nineteenth-century United States were any sort of libertarian idyll.? As White documents, the great transcontinental railroads recognized the need for ?friends? in government. This rather peculiar friendship was acquired, if not by out-and-out bribery, by substantial material considerations.? Both sides of the transaction were unembarrassed by the naked solicitation and dispensing of such ?tokens? of friendship.

The second major theme of the book is of endemic corruption and insider enrichment. White demonstrates that those in control of these vast honeypots viewed them more as a means to build personal fortunes than railroads. Self-dealing, by setting up a construction company to soak up the largest share of the wealth made available, was routine.?

In addition to the U.S. government, a more or less willing victim, the biggest losers in these frauds were foreign investors in American railroads. It hardly needs emphasizing that foreign (and domestic) investors have suffered a similar fate during the recent sub-prime mortgage initiated debacle.

White?s third theme is the economic, and related environmental, effects of the transcontinental railroad systems. The fourth chapter, ?Spatial Politics,? is a brilliant exposition of the transformation of the economic geography wrought by the coming of railroads. In simplest terms, rail transportation integrated localities out of reach of tidewater into the world economy by making it feasible to ship relatively low valued goods over great distances.

However, in a later chapter, ironically titled, ?Creative Destruction,? White compellingly demonstrates that this integration was not an unmixed blessing.? In fact, from the point of view of the integrity of ecosystems and the natural environment, he labels it an unmitigated disaster.? The transcontinental railroads? thirst for freight drove several successive economic booms with devastating effects on both the native flora and fauna and distant investors.

The first of these involved the trade in buffalo hides.? Cheap transportation provided by the southern transcontinentals was the catalyst for the industrial-scale slaughter of the great southern buffalo herd. The extermination of these beasts was accomplished in a matter of a few years, and the speculators moved on to find the next big thing.

As it happens the next boom is etched into the romantic imagination of American history, the long distance cattle drive, and subsequently, free range ranching.? The original drives were intended not only to move cattle efficiently to market, but also to eliminate parasites that were potentially devastating to other cattle breeds. The rail towns west of the Missouri were appealing precisely because there were few cattle to be infected by the parasites carried by Texas longhorn cattle. This boom was short-lived because longhorns were not very satisfactory beef cattle.

The lure of the vast, unfenced grasslands of the Great Plains soon created industrial-scale ranching. These enterprises were fueled by foreign capital and ?perhaps irrational exuberance.?? The promoters thought natural increase and free grazing would result in vast herds which might be sold with only the expense of gathering them and delivering them to the rails. White takes great pains to note the accounting tricks employed by the cattle companies were as egregious as Enron?s a century and a quarter later. This boom also collapsed quickly when it turned out that Corn Belt farmers could raise higher quality cattle more cheaply than free ranging cattle.? In addition to the excessive mortality of free range cattle, these cattle damaged the fragile riverine ecologies of these semiarid regions.

After the collapse of the cattle boom, the railroads attempted to promote dry farming exploiting the claim that, ?rain follows the plow.? Thus the final boom which White charts was wheat-growing in what later became North Dakota, and throughout the semiarid Great Plains generally.? This industry, too, had its day. This occurred largely, according to White, because freight rates fell even more rapidly than wheat prices. A combination of technical advance and the transcontinental roads? hunger for traffic was sufficient to secure this result.? In addition, the weather was unusually wet on the high plains in the 1880s.? When more normal conditions subsequently returned, farmers abandoned the plains in great numbers.?

What connects these episodes?? All of the booms involved the appropriation of resources that either had not been exploited previously or, as in the case of grazing, were available as a usufruct right. The chapter title where these events are related references Joseph Schumpeter?s (1942), Capitalism, Socialism, and Democracy.? In one sense, this is unfair, since Schumpeter saw ?creative destruction? as the force within the capitalist market system which limited the scope and force of monopoly. Thus for him, creative destruction worked at the level of the individual firm, undermining any transitory monopoly a firm might acquire.? A firm with an established monopoly in a product category inevitably faced challenges from innovators offering improved versions of a product. These innovators threatened the erstwhile monopolist with displacement from its dominant role in the market.

Schumpeter?s optimism about capitalist outcomes was grounded in the notion that competition for monopoly rents must always redound to the benefit of the consumer and society as a whole.? However, he never addressed resources which were outside of the existing scope of the market economy.

Heilbroner (1985) posited that a capitalist economy expands, at least in part, by creating market commodities where none existed before.? Seen in this light, the transcontinental railroads facilitated this commodification process in the high plains and intermountain West. The attendant booms were fueled by an exuberance that, at least in retrospect, appears to have been irrational.?

What lessons do these historical episodes have a century and a quarter later?? Both the Internet boom of the 1990s and the subprime episode of early in this century have roots in the same process of commodity creation. In both, novel forms of property were being created and a ?land rush? atmosphere prevailed. In parallel with the nineteenth century events, the bubbles were driven by irrational exuberance, and the chief victims were not the ?boomers.? Instead, the investors drawn by the promise of easy returns in a transformed economy were the victims.

This suggests that Schumpeter?s framework ought to be extended by recognizing both an intensive and extensive margin in an economy for those struggling for economic rents.? The intensive margin was what Schumpeter analyzed.? Competition within an existing framework of markets functions as the source of creative destruction.? An example of this process was Apple?s introduction of the iPod.? There were already devices offering playback of digital audio files, however, the iPod overwhelmed them because of its superior design.

The extensive margin exists where entirely novel varieties of property rights are being created.? Irrational exuberance plays its part here, because there is no frame of reference for evaluating the claims of insiders. Apple?s creation of the Apple II is an example rent-seeking on the extensive margin. Microcomputers represented an entirely new class of product.? The resulting ?land rush? in the early 1980s was as chaotic as the booms described by White, before it was prematurely ended by IBM?s introduction of its Personal Computer (PC).? Competition in this market then proceeded along what I have characterized as the intensive margin with IBM ultimately exiting, the victim of creative destruction.

White?s history thus demonstrates the essential continuity of American-style capitalism from the latter half of the nineteenth century to the early twenty-first.? Irrational exuberance is not a new phenomenon, rather it seems inherent where technical or legal change creates new opportunities for acquiring property rights.?? Financial shenanigans and ?creative? bookkeeping are likewise not novelties enabled by some uniquely modern depravity.? Finally, a noteworthy role for government in business, and business in government, was not an invention of Franklin Roosevelt and the New Deal.? None of this will surprise economic historians.? However, White?s prose is lively and his presentation highly engaging.? A non-specialist will find this book to be rewarding reading.

References:

Heilbroner, Robert L. (1985), The Nature and Logic of Capitalism, New York: W.W. Norton & Company.

Schumpeter, Joseph (1942), Capitalism, Socialism, and Democracy, New York: Harper and Brothers.

John Howard Brown is an Associate Professor in the Finance and Economics Department at Georgia Southern University.? He recently served as guest editor and author in a special issue of the Review of Industrial Organization memorializing the centennial of the Standard Oil antitrust decision.

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