The railroad titans built America, and they deserved every penny they got for it, according to Clarence W. Barron.
The founder and editor of this magazine forcefully countered those who thought that salaries of railroad presidents were too high and that something ought to be done about it. The railroad president, Barron wrote in 1923, “is the guiding force to whom keeping tens of thousands of spike drivers at work is only a detail. The transportation system of the country is the product of the brains and initiative of such as he.”
The early railroads were the internet of their day, connecting people and commerce, compressing time and space. Starting in the 19th century, they turned America’s disparate regions into a connected whole and, in the process, created vast fortunes. As a result, railroads were a central topic in early issues of Barron’s.
Railroads had been generating controversy since the days of Cornelius Vanderbilt, Edward Harriman, and J.P. Morgan. It was the first industry to draw government antitrust scrutiny, setting up the long struggle of free competition versus the public good. A recent House Judiciary Committee report on the market dominance of the FAANGs—
(GOOGL) Google—decried that these companies “have become the kinds of monopolies we last saw in the era of oil barons and railroad tycoons.”
Love them or hate them, the railroads created a template that other nascent industries followed. Telegraph and telephone, automobile and airplane, radio and television, and now the internet—each of these technologies, in its own way, made us ever more tightly connected. Industries that sprang up around these new technological products generated enormous wealth and great power for some. And all of them eventually felt the hand of government regulation.
But first the railroad had to come through.
Railroads dominated the economy in the 19th century as no industry would again; they practically were the industrial economy for decades. Charles Dow’s first stock index, in 1884, contained nine railroads and just two industrial stocks. The FAANGs, which make up about 17% of the
index, can’t compare with the sheer size and dominance of the 19th century railroads.
In its early years, Barron’s produced article after article on the Norfolk & Western, Northern Pacific, Missouri Kansas & Texas, Rock Island, Atchison Topeka & Santa Fe, and more. The magazine spoke of Morgan, Harriman, and their ilk, all by then dead, with reverence. At one point, Barron’s lamented that the current crop of American capitalists “seem puny figures beside the speculative kings of the last century.”
That group did transform the country. In 1805, it took the Lewis and Clark Expedition more than a year to travel from Illinois to the Pacific Ocean. In 1869, when the first transcontinental railroad linked up, the trip from New York to San Francisco was reduced to six days.
Tracks soon ran in every direction. Railroad towns like Cheyenne, Wyo.; North Platte, Neb.; and Billings, Mont., popped up along the tracks as hamlets like Omaha and Denver grew into cities.
Everywhere, forests and prairies were converted to farmland as Americans pulled up stakes and moved westward, and thousands of immigrants who laid the rails settled down and helped change what it meant to be an American.
“The railroad industry’s influence would penetrate every corner of American life,” writes Michael Hiltzik in Iron Empires: Robber Barons, Railroads, and the Making of America. The railroads would come to dominate business, politics, and home life, while creating the financial machine known as Wall Street, which was fueled by railroad bonds.
In 1893, Frederick Jackson Turner declared the end of the American frontier, and it was the railroad that finished it off. Steel rails crossed every frontier, with mileage growing by leaps and bounds—from 30,000 miles of tracks in 1860 to 163,500 miles in 1890.
By the time Turner declared the frontier dead, the golden age of railroads was drawing to a close. Route mileage peaked at 254,000 in 1916 and has been declining ever since.
The Dow Jones Railroad Average peaked in 1913 and wouldn’t regain that level again until 1926. Even so, Barron’s noted that the recovery was based not on growth but on “increased operating efficiency…consolidation and railroad labor peace.” In other words, the industry had matured.
By the 1930s, the automobile had cut into railroad dominance, though it was construction of the Interstate Highway System and growth of affordable air travel in the 1950s and ’60s that finally all but broke the industry. When a rash of railroads, led by Penn Central in 1970, declared bankruptcy, the government stepped in.
In 1971, America’s long-distance passenger lines were combined into federally funded Amtrak; a few years later, the government created Conrail by consolidating freight lines in the Northeast. By the late ’80s, Conrail’s operations had improved so much that it sold stock in an initial public offering. A decade later,
acquired Conrail and split the assets. The railroads entered a competitive new phase.
Railroads were now vying on a level field with trucking and airfreight, all based on shipping containers that move seamlessly from ship to rail to truck to plane. More than ever, efficiency became the byword, led by E. Hunter Harrison.
Canadian National Railway
(CN), Harrison cut operating costs with what he called “precision scheduled railroading.” Hub-and-spoke routes were replaced by straight runs. Scheduled departures reduced the time that trains sat idle. Locomotives pulled longer trains. As head count shrank and trains moved more tonnage with less fuel, CN’s operating costs fell from 75% of revenue to 61%. By the time Harrison stepped down as CN’s CEO in 2009, its stock had risen sixfold.
That year, Warren Buffett’s
(BRK.B) purchased Burlington Northern Santa Fe—and Wall Street took notice of trains again.
Facebook, Apple, and the other FAANGs can only hope for a run like that. Not many industries get a second wind a century after their glory days.
Kenneth G. Pringle is a financial journalist and historian.
Bill Alpert contributed to this report.
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