There is a difference between then and now?

By divorced one like Bush

The following from Robert’s post got me thinking about railroads.

“There have been three big banking booms in modern U.S. history. The first began in the late nineteenth century, during the Second Industrial Revolution, when bankers like J. P. Morgan funded the creation of industrial giants like U.S. Steel and International Harvester. The second wave came in the twenties, as electrification transformed manufacturing, and the modern consumer economy took hold. The third wave accompanied the information-technology revolution.”

I talked about what was the same in the “second” wave then as today in my Taxation Rhetoric posting. As far as I’m concerned it had little to do with financing great industrialization and more with our first big flirt with financialization which is why we got the financial regulation in the 30’s.

As for the third wave, I believe there was the reporting of stupid money chasing anything with a dot com skirt on. Before that, in the 80’s we had “greenmail”, a smaller housing bubble and Milken et al. This got me thinking about the railroads and stories about how people would start building parallel lines just to get the big boys to buy them out. Early versions of greenmail? Stupid money chasing anything with a train. This was the biggy of the “first” wave.

So I went looking in order to write up something real to respond to Robert’s post and found that today is just like yesterday except that yesterday we actually got something when the people’s money was being used to line a private pocket.

Historical Handbook Number Forty
1969

This publication is one of a series of handbooks describing the historical and archeological areas in the National Park System administered by the National Park Service, U.S. Department of the Interior. It is printed by the Government Printing Office and may be purchased from the Superintendent of Documents, Washington, D.C., 20402, Price 60 cents

Both companies therefore resorted to a favorite device of 19th-century railroad builders—a construction company with interlocking directorate free of Government regulation…

The 1864 Act made the United States “virtually an endorser of the company’s bonds for the full amount of its own subsidy,” and now both the U.P. and the C.P. could draw on double the amount of subsidy granted for each mile of completed road.

The Union Pacific’s construction company was the Crédit Mobilier of America. In 1864 Durant bought the Pennsylvania Fiscal Agency, a corporation loosely chartered by the Pennsylvania Legislature to engage in practically any kind of business, and renamed it the Crédit Mobilier. The directors and principal stockholders of this company were virtually the same as those of the Union Pacific. Greatly simplified, the process worked like this: The Union Pacific awarded construction contracts to dummy individuals, who in turn assigned them to the Crédit Mobilier. The Union Pacific paid the Crédit Mobilier by check (i.e., cash, for the benefit of Congress), with which the Crédit Mobilier purchased from the Union Pacific, at par, U.P. stocks and bonds, which it then sold on the open market for what they would bring. The construction contracts were written to cover the Crédit Mobilier’s loss on the securities and to return generous profits. In this manner the directors and principal stockholders of the Union Pacific, in their opposite role as directors and stockholders of the Crédit Mobilier, reaped large profits as the rails advanced.

The Big Four used an almost identical device to build the Central Pacific. Although in practice continuing to share in the management of the Central Pacific, Crocker resigned from the directorate and formed the construction firm of Charles Crocker and Company, in which Stanford, Hopkins, and Huntington were the only stockholders. The connection between the two companies was too obvious, and in 1867 the Big Four organized the Contract and Finance Company, with Crocker as president. Acting for the Central Pacific, they awarded to this company the contract for building the road from the California line to the junction with the Union Pacific, as well as for supplying all materials, equipment, rolling stock, and buildings. The chief advantage of the Contract and Finance Company over the Crédit Mobilier, as railroad historian Robert E. Riegel pointed out, “was that it was able to get its accounts into such shape that no one has ever been quite able to disentangle them.”

It all sounds so deja vu. But, unlike our $1 trillion and climbing paranoia driven military program we invested in today, these guys got us a real asset that paid dividends and they did it in 4 years instead of the 10 years planned for while lining their pockets.

Such techniques not only pushed the railroad to completion in record time, but also made its financiers extremely wealthy men. The Union Pacific cost about $63.5 million to build, of which about half represented the Government s loan. The best estimate of profits gained is about $16.5 million, although the enormity of this figure emerges only when it is understood that at no one time did invested capital exceed $10 million. Profits thus amounted, not to 27-1/2 percent, but to more than 200 percent. The Central Pacific’s figures are more difficult to arrive at, mainly because many of its books were “accidentally” destroyed by fire during the Congressional investigation of the Crédit Mobilier, The best authority, however, places the cost of construction at $36 million. The company received land grants and Government bonds valued at $38.5 million, while Stanford admitted that $54 million in Central Pacific stock transferred to the Contract and Finance Company in payment of construction contracts represented virtually net profit.

Alas, there was a price to pay, a lesson that should have been learned. It took 1929 to actually learn it.

There was an inevitable reckoning. Both railroads were burdened with inflated capitalization that meant decades of high rates and operating losses. The Crédit Mobilier investigation in 1872, moreover, brought the railroads bad publicity that strained relations with the public and the Government for many years and produced hostile legislation. Nevertheless, almost all railroad historians, while deploring the financial buccaneering of the Pacific Railroad builders, agree that only through such methods could the railroad have been built without far more liberal Government aid.

Did you catch that? We either put up the money or we let the private sector do it at a higher cost? Another lesson we seem to not want to learn (health care anyone?).
And, how did our governmental department view all this creative financing in 1969?

Their methods were those of the 1860’s, employed by most of their contemporaries in business—practices condemned as thoroughly unethical by today’s standards. Thus the truly great achievement of hese men has been tarnished by the judgment of a later generation. They were, in fact, the first victims of the revulsion against such methods that swept the country during the early 1870’s.

It’s just heart breaking that they only got 200% on their money.

See, it’s always there. ALWAYS, THERE. And, just like 1969, we hear cries that the perpetrators are victims. Just simple mistakes made. Of course, that would imply some lessons were learned. That we are repeating again today, yesterday, puts the lie to the entire argument of victum and mistake. Yet, as I said, we got something for all this personal self interest with the peoples money in the past, unlike today’s privatization of the: military, health care, schools, roads, utilities, environment. All failing, all in need of major capital investment. All representing investment made, value lost.
Munsey’s Magazine 1903 reprint:

The money invested in the railways that we had in operation in 1880 was comparatively a few millions. Today the railway systems of the United States represent an investment of three billions and a yearly earning capacity of hundreds of millions.

In today’s money, that 1903 railroad investment has a value of:

$757,220,398,593.20 using the Consumer Price Index
$604,412,640,969.90 using the GDP deflator using value of consumer bundle
$3,333,116,883,116.90 using the unskilled wage
$4,369,728,261,008.50 using the nominal GDP per capita
$16,503,666,443,504.30 using the relative share of GDP

What a shame we let ourselves be talked into the “creative destruction” of the rail system, an asset that represents $3.3 trillion dollars in unskilled wages. That’s a lot of labor just gone. It represents a relative share of GDP bigger than our actual current GDP! It makes you think about who has managed their wealth better; the US? or Europe who did not creatively destroy their original investment, but built upon it and thus saved themselves from having to generate as much income as we have had to in order to have our now killing us (war for oil?, pollution, resource waste, etc), personal transportation system. I guess that is why we don’t get to have 6 weeks vacation for all, we have to work to rebuild what we had. Can you say Rat Race?

Can we broaden the discussion now?

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