Back on Track

Railroads Triumphant: The Growth, Rejection, and Rebirth of a Vital American Force, by Albro Martin, New York: Oxford University Press, 428 pages, $22.95

Every now and then economic events yield one of those startling coincidences that illuminate fundamental choices. Example: While planners in the former Soviet Union discover that a quarter of the grain harvest rots in the field or sits on railroad cars somewhere, the Burlington Northern Railroad announces an innovative system to allocate empty grain cars—always scarce at harvest time—according to transferable futures contracts. Completing the irony, B.N. recently agreed to help the Russians create a new distribution system.

U.S. railroad managers know about restructuring a Sovietized industry, for that has been their principal mission since Congress substantially deregulated the railroads (and most of the trucking industry) 11 years ago. The politicians acted only when seven Northeastern railroads went bankrupt and the problem threatened to metastasize nationwide. But warning signals—car shortages, track deterioration, anemic earnings—had been flashing for decades.

How did we come to have a railroad problem? Harvard Business School professor Albro Martin posed that question 20 years ago in Enterprise Denied: Origins of the Decline of American Railroads 1897–1917. Martin took a hard look at the Hepburn Act of 1906 and the Mann-Elkins Act of 1910, which revived the Interstate Commerce Commission after several Supreme Court decisions had drastically limited that agency's powers. He did not like what he saw in these triumphs of Progressive thinking over railroad power and arrogance: dishonest debate, gleeful expropriation, and a willingness to "pay any price, even emasculation itself…to cut this haughty servant down to size."

With these statutes, Congress moved to freeze railroad rates just as general price inflation was awakening from a 30-year slumber. Concurrently, antitrust challenges were hurled at the railroads: In 1904, the Supreme Court ordered dissolution of the combination of the Great Northern, Northern Pacific, and Burlington railroads, and President Theodore Roosevelt acted to break up Union Pacific and Southern Pacific. Newly emboldened state regulators piled on additional burdens.

The result: Railroad earnings swooned and an intensive rebuilding of the system, underway since 1897, ground to a halt. In one tumultuous decade, America's railroads went from hope to despair and were nationalized on the eve of the nation's entry into World War I amid newspaper headlines threatening food riots in Northeastern cities and exhaustion of coal supplies in freezing rural villages. Once war came, sadly, there was no going back.

The reception accorded Enterprise Denied illustrates Thomas Kuhn's contention that when the facts contradict prevailing theory, the facts will be ignored until accumulated embarrassments spur an intellectual upheaval. Here, the crisis is yet to come; interpretation of the railroads' troubled relationship with the state remains dominated by 1960s revisionists, who, following Gabriel Kolko, assert that its leitmotif is an unremitting effort by the railroads to obtain through government intervention the rate stability that always eluded private cartels.

Never mind that Edward H. Harriman, eyeing the Hepburn Act, counseled other Union Pacific directors to cut back on planned improvements and divert the money to sharply increased dividends. ("If we don't," Harriman warned, "the government will take it away from us.") Or that the market value of railroad securities imploded following the act's passage. Never mind Erie Railroad President Fred Underwood's 1910 outburst, "It would be well for the railroads of this country to go on strike against the politicians." Who cares about his anguish? Sympathetic figures these dour, dedicated men were not, and class analysis takes no account of their frustration.

At last Martin rejoins the fray with publication of Railroads Triumphant. Now professor emeritus at Bradley University, Martin brings the railroad industry's saga up to date and positively rejoices in what he sees as the industry commences its second decade in the free market: substantial consumer benefits ($48 billion a year in logistics expert Robert V. Delaney's estimate, covering both rail and truck transportation) and renewed entrepreneurship in America's first modern business.

Without sacrificing the passion and drama that have always enlivened railroading, Railroads Triumphant builds on a couple of analytical insights first expressed in Enterprise Denied. One is that this nation's would-be industrialists inherited a large territory free of artificial trade barriers—a tremendous arena in which to sort out comparative economic advantages of cities and regions, surely, but one that required what used to be called "the annihilation of space and time" for the process to work. Martin reminds us that not everyone welcomed universal freight and passenger transportation, however.

Railroads wanted all the freight traffic they could handle profitably, and they would extend the same rate to producers located far from the market that they gave those located closer in, in order to get everyone's business. If they faced competition anywhere along their lines they would meet it, while trying to maintain higher rates elsewhere. In this way, railroads created markets and multiplied consumers' competitive sources of supply. Few industries ever did more for the public, but the beneficiaries were scattered while the concentrated losers—those whose locational advantages had been swept away—muttered that railroads should charge by the mile.

Thus did railroad managers learn early on that their business entailed complexities that defied explanation and affronted common intuitions. They resigned themselves to the likelihood that the public would always feel free to impose superficial notions of fairness without regard for the consequences and acquired the habit of conducting commerce under the table by granting rebates from the published rates. This did not sit well with Americans; Roosevelt savaged the practice as "unmanly" in 1904. But we may ask why it was necessary in the first place.

The subterranean nature of early railroad competition creates a problem for historians, and it is precisely here that revisionist analysis jumps the track. If one were to measure the morals of, say, 1880 Dodge City by consulting temperance league manifestos, Sunday sermons, and the public comments of politicians and businessmen, one would conclude that Dodge City's piety was great indeed. So it is with the railroads' perennial attempts to "stabilize" competition.

Let's look at the reality, says Martin: steadily falling rail rates throughout the last three decades of the 19th century. Rebates, rate bureaus, and all, the rate structure that emerged from the period deserves to be considered an artifact of what F. A. Hayek called the spontaneous order. Lacking any discernible rationale, it instead presented an inviting target for Progressives eager to "scientifically" regulate everything from commercial to sexual intercourse. What they overlooked was a more important logic, that of perpetual compromise among shifting economic forces too numerous and subjective for any individual to comprehend, much less plan.

There runs through this work an argument that bigger might have been better, that Americans have paid dearly for their unreasoning suspicion of economic power. Many people casually assume that fewer sellers always means higher prices, but economies of scale matter, and some of our most intractable economic problems have been caused by government's protecting small, inefficient producers (witness the perennial "farm crisis").

After aiding railroad construction with eminent-domain powers, land grants, and financing, government proved unwilling to countenance the creative destruction required to consolidate fragmented railroads in step with integration of the nation's economy. Too much was at stake, at least until the 1970s. Once the rail industry hit rock bottom, Burlington Northern was free to reassemble what the Supreme Court had torn asunder; Union Pacific could restore the direct access to San Francisco that was denied when T. R.'s trustbusters broke up UP/SP; and Southern Pacific, which now reaches Chicago on the direct route, could quit hauling Oregon lumber eastward via El Paso and Pine Bluff.

What railroad consolidation offered all along was actually competition on a higher plane of efficiency and specialization. This is why Fred Underwood boiled with rage: The New York Central and Pennsylvania railroads would survive no matter what, but Erie, struggling to create a niche as the leading fast-freight hauler between Chicago and New York, needed to complete the massive reconstruction Underwood had begun in 1905. Financial panic and Mann-Elkins cut short those plans, and Erie remained a weak competitor thereafter. Its magnificent line across western Ohio and Indiana, doggedly rebuilt as Woodrow Wilson girded for war, is but a sad memory now.

Today, specialization is the name of the game. The least-utilized portion of the railroad network has been spun off to shortline and regional railroads that emphasize personal service and typically operate without unions or high overhead. Railroads differentiate themselves by the freight car technologies they promote (trailers on flatcars? trailers with rail wheels attached? stacked containers?), the commercial arrangements they prefer (retail to the customer vs. wholesale to major ship lines and trucking companies), and the way they operate in general. I suspect few railroaders feel "triumphant," for in this brave new world it is possible to fall flat on your face. Who has triumphed with deregulation? The public.

William D. Burt is president of a railroad-terminal services company in Binghamton, New York.