Sunday, March 3, 2013

Railroaded: The Transcontinentals and the Making of Modern America by Richard White

Source of book: Borrowed from the Library

One of the great things about reading history is that one can gain a perspective that often gets lost in the immediacy of the now. This book is a great example of this.

Clocking in at 517 pages, plus appendices and extensive end notes, this book was a pretty long read. However, it is well written, and much less dry than it could have been.

My number one take-away from this book: our current politicians and corporate insiders are rank amateurs compared with the true professionals of the Gilded Age. Our corruption looks like chump change compared to what went on then, and our worst corporate offenders are completely incompetent at lining their own pockets compared to this era of the American past.

For all the (legitimate) complaints about inequality in our present time, it is good to note that the true age of inequality and fantastic fortunes was in fact the Gilded Age. (This New York Times chart is pretty amazing. It lists the 30 wealthiest Americans, adjusted for inflation. The list is dominated by Gilded Age figures, many of which were associated with the railroads. Likewise, on a worldwide basis, dictators throughout history and Gilded Age magnates fill most of the list.)

The Gilded age dates roughly from the 1870s to the turn of the century, and is, among other things, the era in which the United States expanded its control over more territory and at a faster pace than ever before. The Transcontinental Railroads were a significant factor in this expansion. However, as this book shows, they were also instrumental in the rise of the modern corporation - and all the good and ill that resulted - and in the rise of the modern independent press and labor unions as well.

Plenty of books have been written about the actual construction of the railroads, and they are fascinating. That story is well worth reading. This book takes a look at the inner dynamics of the process, from finance to corruption, from labor disputes, to the eventual bankruptcy of most of the roads. You will not read much about the engineering feats, or the driving of spikes. You will read about bribes, dirty dealing, creative finance, strikes, and the personalities of the major players. Financiers Jay Cooke and J. P. Morgan. Influential politicians such as Salmon Chase and Roscoe Conkling. Railroad magnates Jay Gould, Collis Huntington, Charles Frances Adams, Edward Harriman, and Leland Stanford.

While these stories alone would make this book worth reading, I also thought that the author did an amazing job at making the basics of corporate finance - and the corrupt shenanigans that looted the railroads - both clear and understandable. How do stocks and bonds work? Why would one use subsidiary corporations? What difference does a government guarantee of loans make in real life? These are all in this book, and much more clear than most financial writing, far better than anything you will find in newspapers and magazines these days.

When I was a young teen, probably early high school, my mother became concerned that I failed to understand the downsides of capitalism. I would amend that now to say the downsides of corporatism and government favoritism (these are so often confused these days). So, she encouraged me to read Frank Norris’ The Octopus, which tells in fictional form many of the abuses of the Southern Pacific Railroad. (Side note: at the time, I lived in Los Angeles, but now live in California’s San Joaquin Valley, the setting of the book.)

While The Octopus had its flaws, it did lead to a better understanding of the problems of monopoly and government favoritism.

The first thing to understand about the building of the various western railroads is that they were not done by private individuals, using their own money, or built in response to customer demand. Rather, they were initiated by a government policy, heavily subsidized through loan guarantees and breathtaking land grants. They were supported up to and including the eventual bankruptcies of most by government bailouts. And, like modern financial institutions, their troubles resulted in significant financial collapse in the rest of the economy. As such, they make a good parallel with the modern banking system. However, after reading this book, I again must conclude that the railroad debacle was far worse, and far more sinister than the more recent case. Perhaps most damning: while insiders made some money off of the banks and bailouts, it was insignificant compared to the fortunes made by the fortunate railroad insiders at the expense of both the government and the railroads themselves. As the author puts in the introduction, “The best way to understand the transcontinentals’ simultaneous failure as businesses and success as sources of individual fortunes for insiders is to regard them not as new businesses devoted to the efficient sale of transportation but rather as corporate containers for financial manipulation and political networking.”

I found it amazing that throughout the book, vast sums of money changed hands between the railroad lobbyists and various politicians, while both sides maintained that they were utterly upright, and had done nothing wrong. The relationships “were a kind of Victorian financial seduction full of high minded declarations of principles, real patriotism and sacrifice, mutual reassurances of rectitude, and dubious dealings.”

What did the railroads gain from the United States Government? First of all, they probably would never have been able to attract investment had the loans not been guaranteed by the government. (Shades of Fanny Mae and Freddy Mac, to be sure.) However, the most amazing subsidy was the land grants. (I read about these in The Octopus, but never grasped the scope.)

The government agreed to grant alternate sections of land to the railroads, on the sides of their right-of-way. The author uses the excellent illustration of a checkerboard. The railroad got the dark squares. Except that it extended 10 miles on each side of the railroad. The railroad would receive 12,800 acres for every mile it built.

To show the breathtaking scope of this grant, if one were to add together all of the land granted to all of the railroads into a single state, it would be the third largest state. Larger than either California or Montana, and only barely smaller than Texas. And this was just given away to the railroads as an inducement to build. (The author notes that a similar plan was used in Canada and Mexico - the pattern was the same.) Of course, this is even worse when one realizes that much of this land was stolen from the Native Americans by force and fraud.

Also disturbing was the way that the insiders in each railroad looted the corporations for their own profit. Most of the insiders (I use the term as it best describes the controlling shareholders and founders) contributed very little of their own money. They would found the railroad corporation, then found a second company (or companies in some cases) that would then contract to build the lines. These secondary companies would charge double the actual cost, collecting half in cash, and the rest in railroad stocks and bonds. Then, as the railroads would receive income, it would go to pay the bond interest and dividends, this enriching the insiders while making the railroads themselves financially shaky.

Since the railroad bonds were in many cases guaranteed by the government, there was little if any risk to the insiders. Again, this was the beginning of the scheme whereby the risk of loss was public (through government guarantees) while the profits accrued to private individuals - primarily the insiders. Fanny Mae and Freddy Mac are the best modern examples of this problem. However, while some individual investors made some money (and AIG didn’t fail like it should), the amount of benefit was miniscule compared with the vast fortunes that Jay Gould and Collis Huntington (the richest of the bunch) and others were able to make out of the scheme.

One of the reasons that the Gilded Age magnates were able to utilize the largesse of the government was that there was little in the way of free press. Many newspapers were easily controlled, either by a political party or a wealthy corporation or individual. However, in 1846, a consortium of seven New York newspapers banded together to centralize the gathering and dissemination of foreign news. This group eventually became the Associated Press, which in turn became the most significant independent news source, and a significant counterpoint to the power of the railroads. (Also interesting - and odd - was the fact that William Randolph Hearst, of all people, was also a fairly independent voice that often went against railroad power. Who knew that a “yellow journalist” would embrace such a role?)

The other significant counterweight to the power of the railroads was the newly formed labor unions. The chapter on the unions and the strikes of the 1890s was fascinating to me.

First, the theory behind labor at that time was that a democracy required individuals “each with a moral right to control his own labor.” The union was a response to the amalgamation of power within the corporation. By combining the force of individuals, there would be an effective counterweight to the corporate power.

I am generally on the conservative side of the political spectrum, at least as the spectrum exists today. However, I have mixed feelings about unions in general. If unions these days resembled the unions of the Gilded Age, I probably would be on their side most of the time. I do believe that there should be a strong counterweight to the power of capital, and organized labor at that time accomplished some amazing things, from workplace safety to the standard eight hour day.

In our modern times, however, unions are on the decline in the private sector. Some of this is due to the fact that unions have fundamentally changed the nature of labor relations, and many large corporations are fearful enough of unionizing that they seek to keep employees happy to prevent it. (Walmart is an example, as is Whole Foods.) At the lower end of the economic scale, the rise of undocumented labor has gutted the leverage of the unions, since the threat of deportation outweighs the advantage of organization. Thus, those that most need the power of a union are not really able to use it.

The one area of unionization that has grown is that of government unions. My opinion of these is somewhat colored by my father’s days working for the Federal Government, in which the union primarily functioned as a free defense for incompetent and lazy employees. The problem is that there is no counterweight to the union. In the private sector, the corporation itself (and the shareholders) profit from squeezing labor. There is a strong incentive to profit at the expense of workers. In the governmental situation, the decision makers (the elected officials) do not gain from keeping labor costs low. If anything, they gain from campaign contributions, which come from organizations. Government unions are a powerful organization (here in California, the prison guard’s union is a major player in lobbying for criminal laws and penalties), but there is no corresponding organization to represent the taxpayers. Thus, mostly middle and upper middle class workers reap the benefits of unions these days, with those lower on the socioeconomic ladder unable to do so. It just seems backwards to me.

One more thing really stood out in the story of the labor disputes: blacks and other minorities were not able to join the union, and were looked on as the enemy.

Lots of interesting stuff here. I have a friend (and fellow musician) whose grandfather (or great grandfather?) was a “coolie,” a Chinese laborer on the Central Pacific Railroad. He helped build the section from Sacramento, California, to Ogden, Utah. Chinese labor was crucial to the western section of the railroad, but they were loathed by most whites. The rhetoric often parallels that used against blacks from the civil war on, and also the rhetoric used against Latino labor these days. Most appalling was the claim that Chinese women, by virtue of the fact that they were often kept as prostitute sex slaves, were a threat to virtuous white boys. However, there were also the usual claims that they degraded the labor market, undercut prices (presumably because they preferred to eat, but whatever), and were a subhuman class compared to the virtuous white man, providing for his family.

I found it interesting that, while the Chinese were the main target (including some thoroughly awful laws) in the West, the list of “undesirables” targeted by the unions included blacks, Italians, Jews (surprise, surprise), Eastern Europeans, and my ancestors, the Scandinavians. (Yes indeed. My ancestors, Scandinavian and German Mennonite, immigrated in the 1890s, and settled along the route of the Great Northern Railroad and others. Interesting historical fact: at that time, fully 15 percent of the residents of the United States were immigrants. It has never been that high since, and is now far below that number.)

If this book is available at your library, I highly recommend reading it. In general, it avoids being preachy or partisan. It lays out the facts with minimal attempts to correlate the past to the present. The book is well researched and documented, and contains significant content from the writings of the major players in the transcontinental railroads. This is one of the better non-fiction books I have read in the last several years, and I have read some good ones. This one will shed some much-needed light on a significant time in history, one whose consequences and rhetoric still dominate our politics today.

Note on the wealthiest Americans in history:

Out of the list of 30, 26 made their fortune in the 1800s, 22 of them during the Gilded Age. Jay Gould and Collis Huntington and several others profited directly from the graft associated with the transcontinentals, several others profited off of easter railroads, and others such as George Pullman indirectly benefited from the railroads. Others got rich in the financial markets, which also benefited from the railroad subsidies, such as J. P. Morgan.

The modern names on this list were more likely to make their money without government subsidies. Beginning with Henry Ford, and including Sam Walton and Bill Gates, these men built their businesses by bringing affordable goods to the masses. Warren Buffett is the possible exception, as he made his fortune in financial markets rather than the direct production or sale of goods.

I also recommend keeping an eye on Buffett for a modern-day railroad issue. If the Keystone Petroleum Pipeline is not approved, that oil will move by railroad. (The rate has increased significantly over the last couple of years.) The road that moves most of this traffic is the Burlington Northern Santa Fe Railroad. Whose controlling shareholder is...wait for it...Berkshire Hathaway. Just something to watch.

Note on further reading:

There are two works of fiction that I want to read regarding the railroads. The first is Mark Twain’s The Gilded Age, which gave its name to the era. I own this book, so I have no excuse not to read it in the near future. (Ok, other than the fact that I have a huge pile of books on my list.)

The second is The Way We Live Now, a book considered by some to be Anthony Trollope’s masterpiece. I am a huge fan of Trollope, and intend to collect all of his novels. I don’t own this one yet, but I’ll try to find a good used hardback somewhere. It will be interesting to see how a Brit handles an American issue.

  Previous Mark Twain reviews:

Tom Sawyer
Pudd’nhead Wilson

Previous Anthony Trollope reviews:

Dr. Thorne
He Knew He was Right
The Barchester Chronicles (TV miniseries)

Note on The Octopus:

The main flaw of the book is not its over-the-top sensationalism, although that is annoying. Like much of early Twentieth Century realist writing, it does take itself just a bit too seriously. The real problem is that it portrays both the CEO of the railroad and the local railroad agent as supernaturally competent, sinister figures. While there is no doubt that the railroads caused the hardships described, and that the profit motive certainly led to the attempt to squeeze every penny out of the farmers, the actual history of the railroads reveals that they were badly mismanaged, and that even after the fact no one could figure out what they actually made or spent. The books were so badly kept that it is a wonder the railroads ever survived. Scott Adams’ observation in The Dilbert Principle (one of the best books about corporate incompetence ever written, in my opinion) that the only reason the corporate world works at all is that the incompetence cancels itself out is the only possible explanation.

Note on Collis Huntington:

After reading this book, I have little good to say about either Leland Stanford or Collis Huntington, the two figures that dominated the railroads in my home state of California. (The Central Pacific and the Southern Pacific.) However, both of them left behind significant legacies that at least partially make up for their looting of the Federal Government and California farmers. Stanford founded Stanford University in honor of his son, who died young while on a European trip.

Huntington, after the death of his first wife, married the much younger Arabella, who may have borne his illegitimate child. After Collis’ death, Arabella would go on to marry Collis’ nephew Harry, who had a fortune of his own from Los Angeles real estate and cable car ventures. Unlike Collis, who preferred to live back east, Harry and Arabella purchased land in the Pasadena area, and proceeded to make an extensive collection of books and art. This collection and their estate is now the Huntington Library and Gardens. If you are ever in the area, this is a great place to visit. We try to go every year. We take advantage of the monthly free days, so, in essence, we are taking back just a little of the looted funds. The library is amazing, and they often have great traveling exhibits. (Also, this is the home of Thomas Gainsborough’s Blue Boy, and Thomas Lawrence’s Pinkie, which are impressive in person.)  I also love the Copley, Sargent, and Cassatt works. A highlight from a couple of years back was William Blake’s illustrations of Paradise Lost. And, one could spend several days just exploring the extensive and beautiful gardens.

The one great legacy of the Gilded Age was the fact that many of the wealthy established foundations for the support of the arts that endure today. Of the moderns, I am most impressed by Bill Gates for his use of his money to attempt to make the third world a better place.

My lovely wife at the Huntington Gardens, 2012

 My youngest, playing at the Children's Garden, 2012. This is a great place to take the kids.

My older daughters, with some beautiful delphiniums, Huntington Gardens, 2012.

Spring flowers. There is no end to spectacular horticulture at the Huntington - particularly during the spring.

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