Economics and the Railroads

Topics: Economics, Economic growth, Robert Fogel Pages: 5 (733 words) Published: October 7, 2013

Steamboats, roads, and canals lowered trans costs
They were very “un-American”
Too labor intensive – too time consuming
Canal trips were very slow and building was very
U.S. felt the need for speed

RR building began around 1830
1840s construction picked up, but mainly in East
sort of like beginning of steamboat vs. sail
quicker and more reliable than canal
1850s brought acceleration in building
$110 million capital expenditures in 1854
3% of GDP
huge for one industry
tonnage shipped on RR passed tonnage on canals

The overall failure of canals was caused by the rise of the RR
Paradox: cargo rates were higher on RR than canal
RR was faster
RR less affected by weather, less seasonal

Railroads and Economic Growth

Since RR got going in the 1840s and Rostow targeted takeoff
For 1840s, big emphasis on RR and takeoff

Rostow was not the first
Since late 1800s, aura of INDESPENSIBILITY formed
around railroads
1867: “RR third most tremendous and farthest reaching
engine of social revolution”
This was before RR’s supposed “Gilded Age” of 1890s
RR became, in many people’s minds, became chief agent of
Economic and social transformation

Early doubters:
Too crude and dangerous
Too fast!
Would never transplant canals

By 1890s doubters were gone.
RR had taken on “revolutionary” status

RR obviously lowered shipping costs
Otherwise it would not have succeeded
But here are some other claims:
Triggered rapid growth of internal market
Improved national productivity through specialization
Improved communication
Stimulated production through linkages
Determined life or death (profits or losses)

In other words, RR was INDISPENSABLE
to U.S. econ growth
Rostow simply added to the aura
Robert Fogel decided to measure how important RR was
How much did it affect U.S. output?
How much higher was GDP with RR than w/o RR?

Social Savings

Actual GNP 1890 – GNP 1890 w/o RR
Fact counterfactual

Explicit counterfactual
Transportation system without RR
Lots more canals and roads would have been built
Must assume that most of the investment that went
Into RR would have gone into canals and roads
Social savings in cargo = 4.7% of 1890 GNP
S.S. in passenger traffic = 2.6%
Total social savings = 7% of GNP
GNP would have been 7% lower in 1890 w/o RR
7% = 2 years of expansion
Impact similar to 2-year recession
Very important, but not indispensable

“Indispensable” says gap between RR and alternatives was big
big enough to show up in GNP difference

Victory of RR does not indicate margin of victory
Indispensability says margin was big and important
Small margin is all that is necessary for big shift
Massive shift in investment
Profits or losses to firms
Especially at edge of settlement
Conclusion that RR was necessary does not follow
from switch to RR
To be “necessary,” gap must have been big

Fogel’s estimates of social savings says gap was not all that big

RR may have been #1 contributor to growth – no argument there
But canals could have been #1 w/o RR
Transportation improvements were crucial
Maybe even indispensable
But one mode of transportation was not

Again, economic growth is multi-faceted
Many sources adding incremental gains

Transcontinental Railroads
Government subsidized
Canals and early railroads were built with big state subsidies Transcontinentals were built with federal government help
Subsidies in the forms of land and loans
Government gave what it had most of – LAND
Railroad companies were given land to use and sell
And huge loans, which were hardly repaid at all
The rewards were for building the rails fast
Bonuses for miles laid – shortest route was avoided
The result was extremely poor quality -- had to be rebuilt
They operated with high costs
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