Wednesday, June 29, 2011

Review of American Railroads as Investments by Salomon Frederik van Oss

Wandering through the library stacks today, I picked up a fascinating volume from 1892: American Railroads as Investments by Salomon Frederik van Oss.

As you know, I am fascinated by the history of railroad financing. The 1876 railroad bond repudiation happened when a substantial fraction of state guaranteed railroad bond proceeds were stolen and split between bond underwriters, construction companies, and Republican state legislators. When the Democrats subsequently took control of the legislature, they told the bondholders to pound sand because the losses were due to a corrupt graft scheme, which is perfectly fair under a theory of odious debt.

The book supports my theory about the graft in railroad projects:

"In the early days of railroading it was not unusual for railroad companies to enter into contracts with construction companies which built the lines at excessive cost,"
and the construction companies were often owned or run by executives of the railroad company. As Van Oss observes,
"By 1870 nearly 130,000 miles of track had been laid [in the U.S.]. No trifling proportion of this mileage was superfluous and built less because it was wanted than because to numerous unprincipled persons the building of a railway afforded opportunities of amassing wealth at the expense of those who provided the money."
There was an amazing amount of corruption associated with railroads. Van Oss claims that the successful Chicago meatpackers "owe[d] their greatness to their still in 'working' railroad managers." Railroads, in turn, used free passes to bribe judges, police, legislators, and reporters.

Being connected to a rail line was a life or death matter for small towns, and railroads used this to extort municipal guarantees on the construction of their lines. Henry George said that "a railroad company approaches a small town as a highwayman a victim." Remember that railroads were building on grants of public land, so don't get all Dagny Taggart here.

Final observation: cheaper railroad transportation (meaning lower rates for shipping grain) raised the value of western land but at the cost of land values in the east, as far away as England.



PD said...

Odious Debt = very interesting concept.

CP said...

It's a great theory that gives lenders an incentive to pay more attention to their sovereign loans.

"The lenders have committed a hostile act against the people, they cannot expect a nation which has freed itself of a despotic regime to assume these odious debts, which are the personal debts of the ruler."

I think we will be entering a period, worldwide, where this concept becomes important.