This article is the first chapter in an exploration of American economic history since the Civil War. The victory of industrialization and the free labor system following the Civil War was less triumphant and evident than many economists and economic historians assert. This series will redress this narrative, and explore the role that the state, the masses, and technology played in shaping the American economy and American history.
This series will span over a century of American history following the Civil War. The series begins with the railroad industry and its role in precipitating the Panic of 1873. The rest of the series will examine the Greenbacks and the populist movement, the Progressive era, the Great Depression, the New Deal and its critics, and the Petrodollar economy. I don’t claim to put forth a definitive or comprehensive economic history of the United States. Rather, the goal of this series is to question the prominent portrait of post-Civil War America, and emphasize actors and events which undermine this deterministic narrative
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(The Central Pacific's engine Jupiter and the Union Pacific's engine No. 119 meet on May 10, 1869, at Promontory Summit, Utah.)
On May 10th, 1869, the final spike was placed in the rails at Promontory Summit, Utah, ceremoniously marking the completion of the transcontinental railroad. It was the celebration of technological achievements, the closing of the frontier, and the triumph of free labor — the celebration of an emerging American empire. This highly curated photo above epitomized the myths and deceptions of the railroad industry. Nothing better exemplified the optimism and corruption of the Reconstruction period better than the railroads. Emerging out of the ruins of the Civil War, the railroad promised to rebuild a fractured nation and expand manifest destiny to its logical conclusion. For all the hope it provided, the railroads, just like the recovering nation, was mired in corruption, cronyism, burgeoning bureaucracy, and economic turmoil. What then is the legacy of the railroads?
Credit, Corruption, and Government Largesse
Perhaps even the term “transcontinental railroad” is a misnomer. The first transcontinental railroad, and those that followed, spanned that part of the continent from the Missouri River to the Pacific Coast. Two companies undertook the task. The Union Pacific built westward from Omaha and the Central Pacific eastward from Sacramento to a meeting point in Utah. The photo mirrors the construction of the railroad, with Central Pacific workers on the left, and the Union Pacific workers on the right.
Semantics aside, the history of the transcontinentals was not one of capitalist industriousness. The railroad corporations either failed or were rescued by the United States government through the forgiveness of loans, or the nationalization of the roads. It was not capital which built the railroads, but credit.1 The transcontinentals were institutional anarchies. The founders of railroad corporations parasitically leached immense profits from their corporate hosts and left them for dead. What the railroad barons did best was make money with other people’s money.
“The markets these entrepreneurs used and exploited were historical; they comprised particular practices, most with active state involvement: subsidies, regulations, military protection, and so on. In this book there is no such thing as a market set apart from particular state policies, institutions, and social and cultural practices. The question is not whether governments shape markets; it is how they shape markets.”2
(John Gast, American Progress, 1872.)
The Pacific Railroad act of 1864 encapsulated the extent to which the railroads depended on the aid of the state as well as the ineptitude of the United States government. The 1864 act lent the railroad companies $50 million worth of government bonds for thirty years. The government guaranteed both the interest and the principal on the bonds. Furthermore, Congress reduced its own claim on railroad property to a second mortgage and allowed the Union and Central Pacific to issue $50 million first mortgage bonds, thus doubling the debt of the roads. Comically, the law was so sloppily and ambiguously drawn that the courts later decided that the railroads did not have to pay the interest as it accrued. They had to pay the government only the total amount of simple interest owed when the bonds matured.
The historian Richard White underscores just how remarkable this court interpretation proved to be for the railroads:
“The United States was paying 6 percent interest on these bonds semiannually. At the end of the thirty-year period the Union Pacific would reimburse the government for this simple (not compound) interest and the face value of the bonds. This simple interest would amount to roughly $49 million, which, with principal, amounted to a total debt of $77,000,000.”3
Furthermore, the United States made semiannual payments of $810,000 in interest on the bonds. Invested at a simple interest rate of 6 percent, the total commercial value of the court decision came to $43,000,000 over thirty years.
In addition to bonds, each railroad received a land grant of ten alternating sections on both sides of every mile of track (about 12,800 acres per mile). While not of immediate use for railroad construction, railroads were able to sell the land to settlers which helped pay off their mortgage bonds and other debts while also creating new customers and revenue.
While the railroad corporations benefited from government largesse, there were also other vital sources of investment. Entrepreneurs and their bankers peddled financial instruments ranging from government bonds to second mortgages in their effort to lure investors from the United States, Great Britain, and Germany who sought high returns with little regulation. The standardization of the annual stockholder report allowed the railroads to carefully curate the finances of the railroads, and convince European investors — isolated from the physical construction of the railroads – to continue to invest.
Railroad companies' primary concern was always extracting as much money as they could. Deciding where to lay tracks, how much to pay laborers, or the actual task of constructing the railroad came secondary. The leaders of both the Union Pacific and Central Pacific understood that an unbuilt railroad traversing through unsettled land would not prove to be a profitable endeavor until much after its completion. Therefore, both companies shifted their focus to making money not from the railroad itself but from its construction. Both railroad companies formed construction companies which, in name, were separate from the railroad companies, but were entirely managed and controlled by them.
These construction companies were little more than a sham, used by the railroads to peddle stocks and bonds at prices. Between 1862 to 1873, the Central Pacific succeeded in turning an investment of $275,000 into a corporation which was capitalized at more than $135,000,000.4 The most infamous construction company was the Crédit Mobilier. Created by the Union Pacific, the Crédit Mobilier received lucrative contracts, used those funds to purchase railroad stock in the Union Pacific, and finally redistributed the stock to their shareholders (which were mostly themselves) as dividends of about 50 to 100 percent annually.5 The Crédit Mobilier became Union Pacific’s largest stockholder. A construction company only nominally, the Crédit Mobilier functioned primarily to launder Union Pacific stock. Most importantly, the Crédit Mobilier functioned to court congressional favor. The Crédit Mobilier, unlike the Union Pacific, was a private company, and thus wasn’t held to the same level of public scrutiny. Therefore, bribes, through the forms of stocks, could be peddled from railroad companies to politicians through the Crédit Mobilier. White notes that “the men running the Union Pacific Railroad had sold stock in the Crédit Mobilier to leading representatives, senators, and the vice-president of the United States below market prices.”6
Chinese Labor and the Myth of the Free Wage System
One can’t discuss the construction of the railroads without emphasizing the role of Chinese migrants. Chinese labor proved to be simultaneously indispensable, but also expendable. Chinese laborers, through the larger system of contracts and imported labor, provided a cheaper alternative to American labor in the construction of the railroad. 15,000 to 20,000 Chinese migrants laid the tracks of the Western half of the railroads. Chinese workers made up most of the workforce between roughly 700 miles of train tracks between Sacramento, California, and Promontory, Utah. Undermining the vision of the free labor system, railroad companies imported Chinese laborers through a vast network of small firms and labor contractors in China. These laborers didn’t have economic or physical mobility, but were confined to working on the railroads and living on tents beside the tracks until the end of their contracts. Chinese contract laborers undermined wages of predominantly white laborers in the West, inflaming racial tension and resentment from these white Americans.
(Chinese railroad laborer)
Following the construction of the transcontinental railroad in 1869, Chinese workers dispersed throughout the United States, in many cases continuing to assist in the country’s accelerating railroad construction. Chinese workers continued to endure hazardous working conditions and hostilities from white laborers. White resentment and indignation began further exacerbated as Chinese laborers searched for work throughout the country. Through threats, violence, and — beginning with Nevada in 1871 — legislation, a process of excluding Chinese laborers from railroad operations began.7 Men such as Leland Stanford, who garnered much of their wealth through the exploitation of Chinese labor, eventually found themselves advocating for the exclusion of Chinese laborers. White capitalists such as Stanford embraced the exclusion of Chinese as a "strategy of scapegoating, and replacing class struggle with racial conflict."8 Chinese exclusion occurred in response to white discontent, but only after vital infrastructure for the development of the American West had been completed.
Booms and Busts: The Panic of 1873
The railroad’s recklessness eventually caught up with them, and the fallout fundamentally altered the American political landscape. In 1873, following a period of economic overexpansion due primarily to the railroad boom, the U.S. Congress passed the Coinage Act of 1873. Whereas prior to the Act the United States had backed its currency with both gold and silver, its passage moved the United States to an effective adoption of the gold standard. Not only did this depress silver prices, but it additionally decreased the domestic money supply, significantly raising interest rates.
The first domino to fall was Jay Cooke & Company, a prominent railroad financier. When country bankers tried to withdraw their funds for the seasonal harvest, Cooke and his partners were unable to meet the call. Furthermore, the tightening money market meant that Cooke was incapable of borrowing money needed to meet the demand of withdrawals. On September 18th, 1873, Cooke’s New York branch shut its doors, and soon after other branches followed.9 These failures triggered the Panic of 1873, a depression which paralyzed the American economy. Credit, which built the railroads, tightened, and the railroad industry suffered as a result.
(A railroad conductor rescuing Columbia, the female figure of America, out of the ruins)
Following the collapse of the House of Cooke until the end of 1873, twenty-five railroads with $150,233,250 in outstanding bonds defaulted. Seventy-one railroads defaulted with a bonded debt of $262,366,701 in 1874, and another twenty-five having $140,448, 214 in outstanding bonds defaulted in 1875.10 Furthermore, railroad stock prices fell by 60 percent between 1873 and 1878.11 Ultimately, the Panic of 1873 didn’t end the railroad craze, but only delayed it temporarily. Both the Union Pacific and the Central Pacific survived, and they continued to construct railroads and wield significant political and economic power.
While the Union Pacific and Central Pacific constructed the infrastructure necessary to integrate the United States, they embodied the crookedness of the Gilded Age. They manipulated credit and government aid into personal fortunes, undermined the free-wage system through exploitative contracts and imported labor, and in the process nearly destroyed the American economy. Ultimately, the effects of the crash and the railroad’s corruption and recklessness fundamentally altered the political landscape of the post-war era, and incited a wave of reform. The Greenbacks, the precursor to the populist movement, emerged from the Panic, and will be the subject of the next article in this series.
Richard White, Railroaded: The Transcontinentals and The Making of Modern America (New York, NY: W.W. Norton & Co., 2012), xxv.
Richard White, xxv.
Richard White, 23.
Richard White, 35.
Mark W. Summers, The Era of Good Stealings (New York, NY: Oxford University Press, 1993), 50-51.
Richard White, 64.
Gordon H. Chang, Shelley Fisher Fishkin, Hilton Obenzinger, and Roland Hsu. The Chinese and the Iron Road: Building the Transcontinental Railroad, 290.
Gordon H. Chang, Shelley Fisher Fishkin, Hilton Obenzinger, and Roland Hsu, 251.
Henrietta Melia Larson, Jay Cooke: Private Banker (New York, NY: Greenwood Press, 1968), 409.
Richard White, 84.
Samuel Rezneck, “Distress, Relief, and Discontent in the United States during the Depression of 1873-78,” Journal of Political Economy 58, no. 6 (1950): 494–512, https://doi.org/10.1086/257012, 495.