Okay, railroads were the first big business, so we're going to concentrate on railroads for a while.
With railroads, you have a double situation, so to speak.
You have a double situation.
It's true in general, but this is particularly true in railroads, which are the first large-scale industry.
Namely, you have a fantastic progressive increase in standard of living at full transportation costs and all that.
And along with it, you have the government stepping in very heavily to subsidization and later regulation and messing things up.
So you have a double effect here. In other words, there are two things happening in a railroad situation.
One is a tremendous competitive, a cheapening of course, a competitive improvement standard of living, an increase in competition.
and on the other hand, tremendous subsidies in part of the government, plus later on attempts at merger and finally, railroad regulation.
And we'll see why railroad regulation came in later.
As I mentioned before, the Lincoln administration was a heavily railroad-oriented administration,
One of the first things they were committed to was a huge subsidization program to the
new transcontinental railroads, which they proposed to build across the west.
The subsidization of, first of all, in a homesteading system, which I already mentioned, was a libertarian
What you have is the right of way is granted. In other words, if somebody wants to build a railroad across a thousand miles of nothing, the property would get, in a homesteading law kind of set up, would be whatever it uses.
In other words, it's right-of-way. It was then owned right-of-way.
It means the tracks, the bed in which the track is embedded and stuff, and the station terminals and whatever.
So it's actually the shoulders, it's actually a few feet on each side of the track.
That would basically be what the railroad would own in an libertarian free market setup, homesteading setup.
And some railroads were indeed built that way, as you might as well see.
One great transcontinental railroad was built in a purely free market,
and it did not go bankrupt like almost all the others did.
And it competed very well with the rest of it. It was called the Great Northern. That comes a little bit later.
At any rate, this is not the way it was done.
The Republicans wanted a very heavy subsidization and privileging to the railroads.
So, instead of just giving them the right of way, they gave the railroads, first of all they gave them, as we'll see in more detail later,
they gave them a huge amount of loans, basically interest-free loans, heavy, heavy subsidies, per mile of track and cash,
In addition to that, the government, this is bad enough in the sense that there's a huge
subsidy here.
So, of course, this becomes the most, first of all, they gave the railroad the best land in the West.
Second of all, in addition to giving them all this land, they closed, the U.S. government closed for settlement all land on each side up to about 60, sometimes 100 miles.
Closed off. Nobody was allowed to settle to 100 miles on either side of the track.
So in other words, obviously everybody wants to get to the railroad station because that's the, you know, there's not much going on on the west here except the railroad and the rest is Indian country or whatever, or barren, so that's because the choice is land, the government closed off for settlement, didn't allow anybody to settle anyplace, anyplace except buying land from the railroads. In other words, railroads get this free land from the government and then resell it to the settlers at a high price, essentially a monopoly price, so to speak.
especially because the government kept out of the settlement for many years
everything on each side for many miles, 80 miles or so on each side of the railroad
fantastic subsidization
and because of this an enormous amount of crookery also took place
in addition to this sort of boodle
what was often called the robber barons came and the robber barons, the robbery
came about because it was an open channel by the federal government, and we'll see how that was done.
The amount of the, there's differences in whichever place you go to to get the data,
how many millions of miles of acreage was handed out by the federal government to the railroads.
I guess it depends on which some of it was given back.
It was around 220 million acres, enormous amount.
especially considering that the other land wasn't worth much, and a huge amount, much more than that, was kept out of circulation for many years
forcing people, if they want to get on this thing, to settle to buy land at a high price on the railroad
as a result of this and other things, we'll see as we go along, the farmers begin to start griping about the railroad
the later gripes are much more irrational, the trade rates are too high, which they obviously weren't, and they were falling all the time
The basic gripes came about by the 1870s, by the late 1860s, early 1870s, the so-called
anti-monopoly movement among the western formers, they had very good grievances, they had the
oldest land was being kept out of circulation, the railroad had this free gift of land, and
the oldest land was held out of circulation, and this land was untaxed by the local government,
so he had set up a local government, the railroad land was tax-exempt, even while being held
I don't blame the former for griping, I'd be griping too. It wasn't a socialistic or status type of gripe, the anti-monopoly movement. It was really essentially an attack on railroad privileges.
Basically there were four big transcontinental railroads which got the big bulk of the subsidies and the grants and the loans.
The two big grants in the beginning, the first big grant was the Union Pacific, which started
I believe in Omaha, Nebraska, and went west, and then the central Pacific, which started
from San Francisco, and went east to join it, and this is the UPCP, this is the famous
golden spike, I think it was 1869, where they met in Utah, and they drove the golden spike
So this is very heavily subsidized, the Union Pacific, Central Pacific, we'll see, the Northern Pacific, which begins around the west of Chicago, I think, and goes to Portland, another very heavily subsidized, this got about 44 million acres, plus a lot of money,
a lot of money subsidy, 44 million acres, all of these I think went bankrupt, not too long,
the big land-grant boom was making, Union Pacific got its first big round in 1862, the
others a few years later, and the whole thing collapsed in 1872, so it was actually in the
panic of 1873, most of them went bankrupt, so it was about 10 years of a fantastic boom,
and uh... so the except... well let's see, this is uh...
uh... I'm...
I didn't uh... I shouldn't have looked at the map, it's somewhere near Chicago,
somewhere west of Chicago. Yeah.
Well, the use is to give the railroad a fantastic increase in price. In other words, if you'd like to settle somewhere here, you can't do it because it's kept out of use by the government.
The government, remember, owns all the land automatically, okay? It means you have to go to the railroad land and buy it for a very high price.
This benefits the railroad. It's an extra privilege to the railroad. The railroads are getting subsidies about three ways.
They're getting a big land grant. They're getting land taken out of circulation.
So they have to go to the settlers, have to settle on railroad land, buy the land at a high price in railroads, instead of going here for nothing, really.
And so it's part of the monopoly situation, plus they got a huge amount of loans per mile of track, you know, financial, outright cash loans or grants.
So these are the two big Transcontinental ones, and then there was the Southern Pacific, which starts in Los Angeles.
and continuing something somewhere in Texas, that wasn't sort of Transcontinental I guess.
Okay, so this is Northern Pacific got the most amount of land, it got 44 million acres
and I think the other three got 44 million, of course this is about half each of this
So all these three together got about 44 million, so about 88 million just for those big four, so to speak.
I shouldn't call them the big four, the big four is also named the Central Pacific leadership.
At any rate, those are those big four transplant on railroads.
This is originally Central Pacific. Very soon, Central Pacific merges with Southern Pacific and basically takes it over under the name Southern Pacific.
The Union Pacific, one interesting phenomenon here, which I only found out about a couple of years ago, I was reading more about this.
General McGrenville Dodge was the main entrepreneur of the Union Pacific, and as soon as the Civil
So the war starts. He gets himself appointed a general in the American Army, the Northern Army of course, and he takes a whole bunch of troops, federal troops, takes it out of the war, and uses the troops to do what?
They knew what the route was going to be, of course. All the insiders knew. By the way, another thing they did is the insiders, the top entrepreneurs and vice presidents knew what the route would be. They often bought land along the way and sold it to the railroad at a very high price.
All right, anyway, the General Dodge takes a whole bunch of soldiers and uses a huge army and uses it to destroy all the Indians en route of this genocidal massacre of the Indians in order to clear the route for his own goddamn railroad, which would be granted to him in 1862.
This is his army function. I think it's an interesting example of the use of the army as a...
What does it mean? It means, you see, one of the things you have to realize about business and government
is the use of businessmen, the use of government by businessmen to socialize costs.
In other words, to take their costs and impose them, because nobody wants to spend, pay out costs,
to take the course and impose them on the taxpayer, whatever it amounts to, to use the army, what the hell, they can take the army, they are conscripts anyway, use them to kill all the Indians en route, so it's to clear the path for Union Pacific, then as soon as he clears the path, he gets out of the army and becomes the head of general of Union Pacific, isn't it, another thing these guys, I'll give you some examples as we go along, everybody was on the take,
All the congressmen were on the take. There was a Union Pacific group in Congress, headed, I think, by Congressman Oakes Ames of Massachusetts, and he was the leader of what was known as the Union Pacific faction.
What he did is, everybody was on a take when Grant comes in in 1864, 1868, his entire administration was on a take.
His personal secretary, his vice president, his head of the senate, the head of the house, the whole gang was on a take.
They were really on the take for both the Union Pacific and the Northern Pacific.
Randemsdorf was not on the take. Randemsdorf was drunk most of the time, and he knew what was going on.
You could say he was honest, but he cared one way or the other.
Everybody else was on the take, and the whole gang was involved with this thing.
What they would get is this. Not only would they get actual money and cash from the railroads,
both in three cases, the Central Pacific, Union Pacific, and Northern Pacific,
The top managers would form construction companies, their own construction companies. In other words, the railroads were a big business. They had a huge amount of stockholders and a huge amount of bondholders. They were the only really big corporation.
Most of the banks invested about 10% of the stock. The rest of it was private investors. Many of them were English.
also, you know, a lot of small investors, it was on the stock market, there was no stocks,
no manufacturing companies around the stock market yet, they were all private partnerships,
they weren't big enough to have corporations, but the railroads were big enough now to be
incorporated, so you had a huge number of stockholders, the inside managers not only
had a lot of stock, but they also had, they formed their own construction companies, one
of them I think was Central Pacific, it's called the Credit Mobilier, I'll get to that
So each, they form these construction companies which are formed by the only stockholders of these construction companies were the top, the top stockholders of the railroads.
They then, they went into the construction business. They built the railroads and sold the railroads then to the railroad.
In other words, the Central Pacific, the Union Pacific Instruction Company constructed the railroad with huge, by the way, huge grants of money, subsidies from the government.
being per mile, in many cases, of track, and then they sell it to the railroad. They sell it at a very high price.
The estimates are about, the price is about double what they would have been charged in a free market.
In other words, double the cost, the basic price in a free market.
So essentially these guys fleece their own stockholders and bondholders, essentially robbing the, yeah, the government, based on government subsidies.
Yeah, not all the owners, the top owners, the few insiders, right? Yes, exactly. The situation is, but let's say you want to form a big corporation, okay? You're a 2% shareholder, you and two other buddies. Then you form another corporation, you're the president, you then
You hire another corporation headed by yourself and your buddies which have 100% of the share to sell all the equipment.
It's all at a very high price and essentially you're fleecing your other shareholders.
What amounts to is robbery of the other shareholders by the few insiders.
It was of course illegal then but there was no prosecution because the government was in on this stuff.
So as a result you have a very low profit rate to the railroad and eventual bankruptcies and much of this.
Well, that was part of it, sure. I mean, the fact that it was overbuilt, heavy subsidies, yeah, that was part of the cause.
It was hard to say mismanagement. They didn't care about management. They just wanted to milk the whole situation.
I'll give you some examples of all of this. I'm just going to give you an overall picture.
Yeah, you know, I'm going to give you an overall picture of this.
I'm going to give you an overall picture of this. I'm going to give you an overall picture of this.
situation. I'll give you some examples of all of this. I'm just going to give you an overall picture.
Yeah, Union Pacific was a credit mobilier scandal. The, let's see, I'll get the, give you some examples
here. The, for example, both for Union Pacific and Central Pacific, they got special federal
Government Loans, 30-Year Bonds, they were paid by, in the Union Pacific case, the Central
Credit Mobilier, Central Pacific, it was the Credit Finance Corporation, it was called,
okay, Credit Mobilier and the Credit Finance Corporation, and the, so to say, this financial
and what happened, by the way, is the congressmen, what they got was not just cash, the congressmen, the senators, the vice presidents, all that, they got shares, free shares, not on the railroad, but on the construction company, in other words, they got the senators and the congressmen, the vice presidents, they got free, you know, a thousand free shares of credit mobile, how will the railroad, the railroad is not going to take it to the chin and all this.
Notice it was a robber-baron era, but it was a robbery only really facilitated and permitted by the fact that there were these huge government subsidies and the whole thing was tied in together.
For example, Credit and Finance Corporation, which was the Central Pacific's construction company, got, they sold the,
They sold the constructed railroad for $79 million to the Central Pacific. It was really only worth, the free market was worth, say, $36 million, so it was more than double.
The $79 million one was owned by the top four people who were the main owners of the Central Pacific. They were the sole owners of the construction company, whereas the actual Central Pacific had a lot of shareholders and bondholders.
So that was the way it was done. In the case of Union Pacific and the Credit Mobilier, the normal cost of the normal value was $44 million and they sold it to the Union Pacific for $94 million. Again, more than double, slightly more than double.
again that was the top people owned it plus of course the congressmen and senators
get there a little so now by the way Oakes Ames I shouldn't mention about
Oakes Ames the Union Pacific cheerleader in the what was his shtick in addition to
being on the take he had a special interest in the Union Pacific he was a
shovel manufacturer in real life this is what I meant first down I told him it's
important to know what these guys do in the real world in addition to being
Congressmen. He manufactures shovels. Who do you think got the shovel contract for the
construction company to build Union Pacific? One guess. It was Oaks Ames. He's selling
shovels at a handsome price to Union Pacific for which he got the contract. So Union Pacific
hand on the take, all right, distributing stock of the credit mobilier, the construction
company, the vice president, the vice president-elect, the democratic house leader, speaker of the
house, James Blaine, who ran for president one year, was called a continental liar from
the state of Maine, James Garfield, senator from Ohio, later to be president, another
very interesting character we'll deal with a little bit later, called Pig Iron Kelly,
He was a congressman from the Pittsburgh area, Eugen D. Kelly. He was known as Pig Iron because
he was blatantly and obviously the representative in Congress of the Pig Iron interests, iron
and steel were the big companies around the Pittsburgh area, always calling for tariffs
The way Ames put it, I like the way he put it by the way, Oakes and Ames, and he was explaining why he gave a lot of free shares of top credit mobility stock to congressmen. He said, quote, we want more friends in this congress. There's no difficulty in getting them to look after their own property. I like that. That's kind of an interesting way of putting it.
Of course, taxpayer is suffering from this, and of course, the other railroad men.
The Northern Pacific, well, first of all, I should talk about the Central Pacific.
The Central Pacific is another interesting group.
It was run, Union Pacific, let's say, was Oaks Ames and the Grenville Dodge.
The Central Pacific, which hooked up with it from San Francisco, was run by the so-called Big Four,
which had the sole owners of the construction corporation
interesting characters, the families of the big four, the four people
are still dominant in California even to this day, which is pretty amazing
the big quartet was Charles Crocker, he was the contractor
All over California there's still the Cocker Bank everywhere, the same family.
Carlos Huntington was sort of a dominant guy.
Huntington.
The major...
He also dealt with Washington a lot.
Mark Hopkins is again another big figure in California.
The famous Mark Hopkins Hotel in San Francisco, which is the top of the mark, the famous landmark in San Francisco, looking over the bay and all that.
He was the real managerial type. He took care of the actual running of the railroad.
And Leland Stanford, another, of course, key figure, founder of Stanford University, and he wanted the state politics.
State politics, he was a governor, he became governor of California, made sure that the
central pacific is taken care of, to put it mildly, when Stanford ran for governor, the
story is, and I think there's no reason to doubt it, Phil Stanford, his brother, stood
outside the polling place in San Francisco, scattering gold coins for the masses as they
went up to vote, right now apparently the vote, somebody was telling me what the vote
In terms of the Philippines' current elections, the running figure is 50 bucks a vote, which is enormous.
Of course, that's about a monthly wage. Weekly wage or monthly wage in the Philippines? Anyway, big.
So several hundred is equivalent to about 500 bucks here or something like that. More than that.
Anyway, so, scannering gold coins, which meant a lot then, and of course you can say it was a secret ballot.
There's, you know, no way of checking it. On the other hand, you know, you've got a lot of coinage, some gold coins in your pocket, you feel your, you know, Mr. Stanford is worth your vote.
At any rate, the sort of stuff they did was that the, for example, the idea, they were going along the sierras, and what happens in California is you're zipping along pretty nicely, and suddenly you reach the high sierras, big mountains there, how do you get around them?
Well, they had a 40 miles north of this road, there was a 1% grade, it was across the mountain.
Right here there was a 2% grade, which was much costlier, of course, much more difficult.
And they figured, in any other, in a free market railroad, they would have gone 40 miles,
would have saved a lot of money by taking the 1% grade.
Here they said, well, we're getting paid per mile by the government, and we want money fast.
You keep laying track, a certain number of miles, you get the money. They wanted the money.
And so they went, they didn't care because their costs were recouped by the government.
In other words, it's like a cost plus operation. Who cares about the cost? They want the money fast?
Uncle Sam is going to pay for the cost? Let's do it. So as a result, you have situations like that.
Another thing they did is they, at one point they got to the, they got to the,
They came to the roof of the Sacramento Valley Railroad, somewhere around here.
It would have been simple to just buy the road, the short railroad.
Instead of that, they built another road right alongside it. What's the point? It was costlier.
They didn't care. They wouldn't get subsidized, you see, if they bought the other railroad.
The subsidy is per mile of track. A construction company gets a subsidy.
They don't get subsidized from the government for buying something.
So they said, what the hell?
So, once you see how the market efficiencies are being skewed by governmental incentives,
where the incentive is not to be efficient, not to make profits or avoid losses,
the incentive is to get the money from the government.
And whatever conditions are laid down, that's what you do.
As one guy put it, quote,
it was cheaper to build at the government expense than to buy a railroad already existing.
In other words, at your own expense.
So, let that be a lesson, an analysis of contemporary, past or whatever economic history.
The estimated waste in this thing was about 75 percent, so the estimates are the cost of the track and laying it and so forth is about 75 percent higher than it should have been if they had really done this on free market incentives, if the government weren't paying for it.
As far as the central Pacific goes also, the great story here, in order to get his, this contract, in order to get this money from the government,
Carlos P. Huntington goes to Washington, takes a train or whatever, I don't know how he gets there anyway, gets to Washington,
he takes a bag with him of $200,000 in cash, you have to realize $200,000 in those days was enormous, I mean it's equivalent, I don't know what equivalent it is now, maybe $20 million or something.
And nobody knows how he spent it. All they know is after lobbying and seeing big
shops in Washington, he left with a bag empty. He wasn't a gambling type and so
that's it. He disposed of $200,000 of hard cash to the politicians to
get this deal. Anyway, later on they say they bought Southern Pacific, they
changed the name of Southern Pacific and Southern Pacific, which was then the
combined, I guess they connected up, really ran California politics for a long, long time. Decades, virtually. California is essentially, in many ways, a Southern Pacific state.
As far as the Northern Pacific goes, that had several entrepreneurs and finally gets into the hands by 1869 of the fabulous Jay Cooke.
We've already talked about Jay Cooke as making millions out of the Civil War through his bond deals,
was to be the monopoly underwriter of government bonds, which he still was now, after the war was over.
And also by setting up a bank, a national banking system which requires pyramid-ing credit on top of government bonds,
so the banks have to buy bonds from Cook.
Anyway, he's in great shape anyway. He gets control of the Northern Pacific by 1869 and he starts running that.
Jay Cook, by the way, was known as a tycoon those days.
I think the first guy on which the word tycoon was applied to.
Everybody had an epithet, sort of the way that people worked in those period.
That was his epithet. He was a tycoon.
What he did was, he started selling, because he had his own construction company and stuff.
He decided to sell bonds to push north of the Pacific.
Also to try to get people settled there.
This area is bad enough to schlep up here, this whole northern area.
It's cold and it's miserable and all that.
He's trying to get people to settle in this rotten area.
He hires a whole bunch of propagandists.
He used the same techniques that he used when he was selling government bonds.
Hire a whole bunch of pamphleteers to write about how wonderful it is
and send it distributed in Europe and whatever.
He had, for example, a guy named Sam Rokerson who wrote a bunch of pamphlets,
hopped up pamphlets about the glories of this area.
and he said, I think one of the phrases was, the climate is like Paris and April, this is the climate of Wyoming and North Dakota, tell them anything, tell the suckers anything, get them up there, you see why the farmers are all irritated and they finally schlep up there and they find it a little bit different, a little bit different situation, so Northern Pacific had a take, they had big shot stockholders who were granted stock freely,
company, construction company, vice-presidents, Schuyler Colfax, the Brotherhood Hayes, who
was later president, secretary of treasury, and of course they had Chief Justice Salmon
Chase, oh by the way, before I get to him, they also had Reverend Henry Ward Beecher,
he was probably the most distinguished minister in the United States, the New York Protestant
minister, actually he came from Brooklyn, and he was on the take, he was paid by the
Northern Pacific to talk about the glories of the Northwest and all that, be sure to
Settled there, things like that, like pamphlets. They had propaganda meetings for the area and things like that.
Chief Justice, who is now Chief Justice of the United States, Salmon P. Chase, and not only is he still on the take from the Northern Pacific,
but he wants Jay Cook, he comes to Cook, and he urges Cook, remember, Cook has financed Chase's whole career, in fact, virtually.
He comes to Cook privately and says, make me a secret partner of Cook and Company, which is a big investment bank.
It's not supposed to be done. If you're a Supreme Court justice, it's supposed to be a little bit above the back.
It's supposed to be a secret partner of some damn investment bank, which is running half the country anyway.
Cook says, I mean, Cook says it's too risky, but he's a very greedy guy, Chase, let's face it.
His appetite was enormous.
But he was also a secret stockholder of the Northern Pacific
And in addition to that, Chief Justice Chase, his private secretary, President Grant, was on the team, he was also a secret stockholder of the Northern Pacific, General Porter, General Horace Porter
Speaker Blaine was giving some trouble. I told you about Blaine. He was on the payroll of the Southern Pacific.
He was giving the Northern Pacific some trouble in getting their stuff.
So finally, Jay Cooke's brother Henry was a journalist and a full-time aide, a long-time aide of Chief Justice Chase at this point.
And a friend of President Grant goes to Grant and he convinces Grant that Grant is very much a favorite of the Northern Pacific
And so he gets Grant to be a favorite of the Northern Pacific
And then what Jay Cooke does, he gives, in order to buy the favor of Speaker Blaine, he gives him a long term, a very big long term loan
long term loan, low interest, a quote loan unquote, that takes care of Blaine's stubborn opposition, southern pacific board opposition
they say in politics by the way, a friend of mine is, I mean one of the big things by the way in politics now, crooked politics now and local politics is the cable, the cable stuff
you know of course the Brooklyn, I'm not saying Brooklyn still hasn't got cable, it's outrageous
What happens is, the reason why many cities still don't have cable is that they're fighting over who gets the local monopoly, monopoly franchise, instead of committing free competition, each one is fighting for the monopoly.
My friend who lives in Tucson, Arizona is a big observer of local politics, so they finally, cable was going to come to Tucson.
There were two cable companies that were fighting for the monopoly franchise, a very lucrative monopoly.
So, a couple of city councilmen, city councilmen take a vote, a couple of city councilmen asked and pleaded for a secret ballot.
Which company should get it?
It was an outrageous secret ballot. The reason why they wanted a secret ballot, they wanted a take from both companies.
They didn't want to be found out by either one.
And so, they were very embarrassed when the vote was public.
And they had to vote one way or the other.
So, which is one of the definitions of an honest politician. I think this is a George Washington Plunkett, the famous old Tammany leader.
The definition of an honest politician is one who stays bought.
So, if you make your contract with a briber, you stick to it.
If you don't stay bought, then you're in big politics. You're usually in big trouble.
Okay, so the, now Jay Cooke and Company, here's Jay Cooke owning North of the Pacific and all that as a major leader.
Jay Cooke and Company gets of course from North of the Pacific, the fiscal agency, you know, it gets the power, the sole power to underwrite bonds and stocks issued by North of the Pacific.
They charge a 12% commission, which is about double the usual commission.
So here's one example of how Cook fleeced his fellow stockholders.
You get your investment banker for your own railroad, except you own most of your bank,
but you only own a small portion of your railroad. If you can fleece the bank,
you're shifting funds quietly but illegally from your fellow stockholders, your comrades,
Stockholders and bondholders, to yourself and a couple of other guys in the bank
So anyway, so Cook put on, as I said, a big propaganda campaign
First of all to buy Northern Pacific bonds, second of all to settle in the North and Northwest of the United States
And he had traveling agents and so forth and so on
One of the traveling agents who he brought over for this thing later becomes president of the Northern Pacific
The German, a fairly wealthy German, Henry Millard, comes over and later becomes the same president.
Jay Cooke and Company, it doesn't always happen, in fact it very rarely happens in history,
Justice Triumphs, it's pretty rare. The case of Jay Cooke, however, Justice Triumph, and I'm happy to record that, to show that life can be beautiful, sometimes.
Here's Jay Cooke, the monopoly underwriter, multi-millionaire, the tycoon, owner of the Northern Pacific, creator of the national banking system, the top investment banker and so forth and so on.
He's, of course, his cut quarters in Philadelphia.
Jay Cooke goes bluey.
He does it because the Northern Pacific is now beginning to collapse.
And he's getting loans out, it's overextended.
All these railroads are very inefficient. You have to realize they'll run badly,
because nobody cared about how they were running. They just want to fleece it as much as possible.
And from an engineering point of view, they're all in terrible shape.
From an entrepreneurial point of view, they're in terrible shape.
So here's Cooke trying to get loans and bingo comes the panic of 1873
and uh...
which was much of which was brought about by Cooke's own inflationary
manipulations through the banks and
government bonds etc.
Cooke goes bankrupt. He's one of the great pieces of poetic justice ever.
Going bankrupt at your own creation more or less. In other words, here he is, he's responsible for the Northern Pacific
He's responsible for the inflationary boom of the late 60s and early 70s.
He's responsible for the big public debt, which comes in, and the whole bank credit expansion.
And when the collapse comes, as it always does come, he gets it in the neck.
In the end of Jay Cooke.
The fall of the House of Cooke, as it was called.
And he sets up these lying pamphlets about how the climate is in the Northwest, all the rest of it.
he finally gets it
what happens is one of the, he gets it, and who replaces him, well what happens is
he's of course the Republican
very wrapped up with the Republican Party, very wrapped up with Chase
Salmon P. Chase, with the Lincoln administration and the Grant administration
and when he falls, he's topple
his place is now taken in investment banking by
from another Philadelphia firm called Drexel Morgan & Company
and uh... this is the beginning of the famous rise of J.P. Morgan
fame and fortune
uh... Anthony Drexel was a famous Philadelphia
banking, financial and banking investor
and family, the Drexel Biddle family, which is still around, the Biddles are still
functioning
yeah, the same stuff, right
Morgan was the son of a British banker and uh...
Junius Morgan, Morgan was younger than I think than Drexel and very soon took over. He was obviously a dominant force
and finally winds up as J.P. Morgan and company. But anyway, this is the result of the rise of J.P. Morgan
who becomes a dominant figure in American politics
also, as we'll see later, and
from 1873 on. In other words, the panic of 1873 and the collapse of Cook
allows room for new faces, so to speak, in the situation.
Morgan is essentially a democrat, was involved in a democratic party
although he became also from a
New England wing of republican parties, we'll see later on
Okay, so all these, Velard, after Cook goes bankrupt
Velard becomes
The head of the Northern Pacific tries to run it
and doesn't do very well, and finally
again the costs are excessive and so forth, but this time
by 1873, with 1872, 1873, is the end of the railroad land grants, I mean that's it
at the end of the grant administration with a panic
the massive land grants are over, so now the Northern Pacific has to sort of make it on its own
and couldn't do it
and it goes bankrupt around the late seventies
and you know it goes into bankruptcy
bankruptcy in the state railroad doesn't mean the whole track is destroyed, it means the whole reorganization and whatever
coming in
the last
transcontinental railroad to make it
doing it purely, almost without any government subsidy at all, certainly with no grants, no loans or all the rest of it
a really heroic
Action. This was so-called Great Northern, which started up in Duluth, Minnesota, way
up in northern Minnesota, and skirted the Canadian border, sometimes on the American
side, sometimes on the Canadian side, something like that, and comes into Seattle. And notice
all these, even though there are only a few passengers on the railroads, they all compete
with each other. If you're going to send shipments out to California, the west coast or over
of the East, you can take any one of these routes. And so they're all really in competition.
So of course, this is called the Great Northern. The Great Northern was completed around the
1870s, I believe, and it was, of course, mostly in competition with the Northern Pacific.
And this was organized by an entrepreneur, James J. Hill, the last of the great railroad
He was a very interesting character. He's one of these people who fit the complete Horatio-Alger picture, which is the so-called stereotype, Horatio-Alger stereotype.
He was born in Canada, poor. He was born in a log cabin. He was actually born in a log cabin, which is not something, even though it sounds great, it's not something to really hope that you're born in.
He came from a Scotch-Irish farm in Ontario. He became a clerk. He was uneducated. Most of these people were uneducated.
He becomes a clerk, comes to the age of 18, emigrates to St. Paul, Minnesota, and becomes...
He starts getting interested in... He starts buying out small bankrupt railroads and starts integrating them and making them more efficient.
He was an extremely efficient construction person, and he was also, his first railroad was called St. Paul, Minnesota, Manitoba, a small railroad, and what he went for, I think he was also short and thin, a lot of these guys were quite short, these big entrepreneurs then, Rockefeller was quite very short,
I mention that because there are not too many short entrepreneurs these days. They were short.
At any rate, he specializes in low rates, cheap freight rates.
Freight is a big thing. The passengers are, from an economic point of view, didn't mean much for these companies.
And a large volume and being competitive. And so he's very efficient.
and Ray Fischer and Ray Roth, always outcompeted the North Pacific and made good profits, there was no phony construction company,
the whole thing was on the up and up. It was kind of a heroic thing, James J. Hill, and so I, it's a good counter image.
And he, and by the way, when he encouraged immigration, but he knew the area, he raised wheat in this area in Manitoba,
and he knew what the climate was like, he didn't have to lie to the public, because he was actually there.
None of these guys, these pamphleteers, were somewhere sitting in Philadelphia, and they didn't know what was going on in the Northwest.
Okay, let's take a ten minute break and we'll be back with...
Let's turn this stuff off.
Okay, the anti-monopoly movement, at least the late 60s and early 70s, focused on these problems with land grants and the land
and call for the later 1880s, we're talking about railroad rates which were not really a problem, but this one zeroed in on things like demanding no future land grants to the railroads which they accomplished in 1873, demanding forfeiture of the unused land grants, a lot of these land grants are simply there, unused yet, waiting for a price to get higher, demanding they be forfeited and demanding also a tax
The relaxation of the railroad lands and a forced sale of them, those weren't really accomplished so much, but at least they ended the new land grants.
Another large racket that occurred in this whole period was what happened to Indian land?
Lands are supposed to be homesteaded, except the maximum size, as I said, is 160 acres.
But any land that the Indians got kicked out of was sort of up for grabs. There's no homesteading applied to it.
There's a lot of finagling going on with taking them and selling them to huge blocks to speculate and order railroads.
So railroads got a lot of extra land that way.
One of the famous examples of that was the Cherokee Tract in southeastern Kansas,
like a whole quarter here or something, almost, in southeastern Kansas.
The Cherokees were kicked out, the landing gets opened up, what's going to happen to it?
And it was sold by the Federal Government in 1868 to a guy named James F. Joy, who was also known as the Railroad King, at least in Illinois, Iowa and now Kansas.
James Joy was the head of the Kansas City, Fort Scott and Gulf Railroad.
It was sold to him for, by the way, there were settlers there, I shouldn't mention this, a whole bunch of settlers on this land.
They were disregarded. The whole thing was sold with joy.
This is a little bit like the South American or Asian case where people are living there and they're forming a land and all of a sudden this guy's now the owner.
And it sold to him very cheaply and he takes, I think it was sold to him for a dollar an acre,
and he resells it for about $2 an acre to settlers, so he's getting a big profit on no investment, almost no investment.
The reason why he got this big deal, Senator James Joy, is the land was sold to him by the Secretary of the Interior.
The Secretary of the Interior, of course, is in charge of the public domain. It still is.
So it's a powerful position. In those days, of course, it meant running the whole West.
and Secondary Interior then allows this deal to take place with Jim Joy. Who was the Secretary of the Interior?
And we know the name of the Secretary of the Interior, Orville Browning, as it were, in the light.
But most historians stop there. Many historians say, well, all right, Senator Browning, Secretary Browning.
But also so happens that Browning was a brother-in-law of Jim Joy.
Now the light becomes even clearer as to why this occurred.
He also, Browning, had represented before he became Secretary of the Interior
and after he left the Secretary of the Interior ship, he represented Joy as his lawyer
and we have a very close relationship between Jim Joy and the type, the Railroad King as he was called
and Browning, Railroad King
Another similar situation happened to another part of Kansas, the Osage-Pribe land. That was about 8 million acres.
Before continuing the railroads, I just want to talk a little bit about the land situation.
uh... land question
the uh...
Frederic Jackson Turner
was a famous thesis around 1900 or so
called the Turner Thesis
about the importance of the frontier in American history, a land question of the frontier, the fact that there's always a frontier out there
and uh... there's been a lot of arguments back and forth
about it
basically it has a great deal of sense to it
uh...
One of the factors of the frontier provided was called a safety valve. In other words,
people didn't like it in the east, they nipped out west,
find fame and fortune and all sorts of things.
And so what you have is an enormous
expanse of free land, or more or less free land, once you get there and so forth.
There's differences on that.
Lots of land available, and this is extremely important in American history.
It distinguishes America from, say, Europe,
and many other, most other areas, namely the enormous amount of land.
and enormous ratio of land to labor. So the, so if you have a huge amount of land per labor,
per labor, then you have different, all sorts of different economic, sociological, whatever
in production. For example, a kind of agriculture we have in the United States is very different
from, let's say, in Europe because you don't try to, I mean, at least until recently, certainly
during the 19th century, you don't try to economize on land, there's lots of land,
there's land coming out the yang-yang, as my mother-in-law used to say, lots of land,
there's not enough people to till it, so in other words, people become very expensive,
labor is scarce, scarcer, and land is very abundant, so the kind of farming methods are
those which are determined by that kind of situation, in other words, you have, you economize
It relies on labor and not on land. It uses lots of land because land is not very scarce.
So the land-labor ratio is very high. On the other hand, in Europe, if you've ever been
to Western Europe, for example, everything is till, it's intensive agriculture. There's
very little land per person, lots of people and very little land. So the land-labor ratio
is very low in Europe, as a result, so European agriculture is not as intensive, in other
words the very careful cultivation, every square foot practically is cultivated, in
fact it's very charming, if you go to the Alps, you're up in the highest region of
the Alps almost, there's up there and there's lots of cows and there's cows with bells
and so on and that kind of things like that. Cabins and things going on and lots of people
and lots of telling and I find it very charming. You go to the Rockies or whatever, of course
there's nobody there. No people, no nothing. No cultivation. So what you have is extensive
cultivation in the United States. In other words, lots of land and therefore there's
no intensive methods. So European agriculturalists would come to the United States and say the
terrible technology here, the agriculture is very backward. But it wasn't that it was
was backward. It's not as if America didn't know about intensive agriculture. It was not
economically unnecessary to have intensive agriculture. You don't have to worry about
land. What you worry about is labor. So this determines very different kinds of methods,
technological methods in agriculture. It would have been ridiculous to have intensive agriculture
in the United States when there's plenty of land around. There's very few people and plenty
of land. It was a very different kind of agriculture. Extensive agriculture. You don't try to form
from every square foot, things like that.
So it all depends on what you've got, what resources you've got and the responses accordingly.
I don't know, by the way, there's still a lot of argument, I know very little about
Indian agriculture.
There's still a lot of argument about Indian agriculture.
There's one set of economists who claim that Indian agriculture is uneconomic because the
cow is sacred and therefore the cows are never killed.
On the other hand, another contending group which claims that cows have an important agricultural function.
It's not economically weak or whatever.
So I don't want to get into this argument because I know very little about it.
There's a contending that it's not obvious.
I'll put it that way.
So, another thing is that the, of course, it becomes a little more intensive now, but
even in this situation, even later on, you still have a much more extensive agriculture
in the United States.
Also, the kinds of, sociologically different, in other words, usually European farmers are
in villages, they're all located in villages, as a model.
They all live together. In other words, you have a village with lots of people in it.
It's a farming village. And the farms are out here somewhere, either right behind your
house or a couple of miles out. Everybody's got their plot. And of course, there are commons
and everything, but even with individual plots. So everybody's sort of together here in the
village. They go out in the daytime and farm and come back. In the United States, we have
lots of land and very few people. The settlement patterns are very different. Everybody, as
As you know, they have an isolated farm. You have a family farm that's out here. You've got lots of land out there. There's another farm way the hell out here.
Such a much more lonely existence, individualistic existence, sociologically, than in Europe.
Villages are just trading villages. You have a few people in supermarkets or whatever, general stores.
But every individual is physically, spatially wide apart.
whereas in Europe they're clustered together and forming villages.
I suppose you could say it makes it more individualistic.
America's farmers are more individualistic, I suppose that's true.
So Turner talked about the individualism of the farmer, the frontier,
talked about it being more democratic, I'm not so sure about that, but that's at least an aspect of it.
Another aspect he did not talk about, because it was so ingrained in him, he didn't think about it much,
about it much, although it's in there if you look at it, mainly most of these people were
Yankees as I pointed out, and they were all pietists in addition to being individualistic,
and most of them had come from rural New England, they all wanted outlaw liquor and crush Catholics
and things like that, including Turner, it was so ingrained as himself a lost pietist
that he didn't think twice about it.
So I think it is important, also it was a safety valve, people could get out of it as
a depression or a recession in New York or Philadelphia, all right, the heck with it,
you find a farm somewhere. And a lot of that was being done. In contrast to that, a lot
of people didn't like the fact that people couldn't have a safety valve. So a lot of
Eastern landowners, let's say you're a fairly large landowner in Massachusetts or in the
South, you don't want workers, a farm worker, say, leaving and schlepping them, Wisconsin
and set up a farm, you want them working here so you can have a cheap labor supply. So there's
This has always happened in the Industrial Revolution in England, for example.
The main opponents of the Industrial Revolution were the landlords.
They didn't want their farm workers leaving the farm and going off to a factory somewhere.
It means they haven't got the farm workers. It means they have to pay more for higher wages.
And so they're constantly trying to cripple the development of every industry in England.
The first status legislation, post-socialistic legislation, I quote,
were put in essentially by Tory landlords who wanted to keep the farm workers on the farm.
They didn't want to have these available, have factories available to them so they could
move.
There's a similar sort of process here by Easterners and Southerners particularly, one
of the limit land development in the West, keep out homesteaders, keep out settlements,
they have to stay here and work.
Again, remember labor was particularly scarce in the United States.
I might have mentioned this before, but slavery in the South, slavery was probably essentially
the large-scale plantation ownership development, and they felt that if they weren't here on
the plantation, they'd leave somewhere, which they undoubtedly would have.
At any rate, but in the 1862, the Homesteading Act in 1862, you have a breakthrough in that,
you have a move toward Western development, and even though in some cases it wasn't homesteading,
it still was enough on the land distribution, the United States avoided the whole feudal
and Land Setup. As a matter of fact, Louis Hartz, a historian at Harvard, wrote a famous
book in 1948, I think, called The Liberal Tradition. And basically what he said was,
the difference in the United States, the reason why the United States never had a Marxist
party, never had a, always had a, was essentially a liberal capitalist, is because we avoided
the whole feudal land setup. And I think that's totally true, and it's a broad statement.
In cases where we had a sort of a few lands sold, interestingly enough, for example, when the United States conquered Mexico and grabbed the whole southwest from Mexico,
there were a lot of Spanish land grants, and in some cases, the Spanish land grants were usually seized by the U.S. government or California government, however it is,
and you got huge land amassed, huge land acreage, but they usually, again, washed out.
They didn't stay there because there was nobody there, they wanted to settle in, they wanted to subdivide it and sell it.
and sell it, so eventually it was washed out. Fortunately, we didn't have this problem.
There was one interesting thing, there were a lot of Spanish land grants which we decided
to honor in Texas, and the United States grabbed it anyway, and they still have the deeds there,
the whole New Mexican rebellion movement, where the people have their, they have the
The Bees given to their ancestors, here it is, I own 100 acres, most of it is owned by the American Park Service, so forest service, so there's an obvious clash, the Bees are there and they're not being honored by the United States government.
At any rate, but basically we have a land system which is more or less free and open, and that's
the result, resulting from this lack of a fixed, of a tight feudal land system.
In Utah, also particularly, the Mormons settled Utah in a very homesteading fashion, so what
in Europe, of course, water is generally considered superabundant. There's no such thing as a
Water shortage in Holland or something like that. Plenty of water to use it to have more
landfill. So the European, the question is who owns water? Who owns what water? The way
the common law developed in Europe, the so-called riparian system, R-I-P-A-R-I-A-N, where you
have a river, say, you own, let's say you have a house or a land right on this river,
You own this part of the river, you own this chunk of the river extending into it, just
because you happen to live next to it, that's the so-called riparian scheme, obviously it's
not a very good way of allocating river resources, you can lock up this whole river thing, nobody
worried about it, they didn't think about rivers being a scarce resource, except when
it comes to polluting upstream, downstream, whatever, aside from that, there wasn't too
much problem there, when you got into the same law that applied to the eastern United
you still have a Italian water system, water ownership, it means essentially you can't do much of anything if there's some way of getting around this
in the west we always have a big water shortage, water scarcity
in the west for example it says river, look at a map it says river, there's nothing there, just a dry depression
in only a couple of months a year they actually have water running through it
so as a result of this very different kind of water system they hit out there
where they have the methodical appropriations.
They have more or less a homesteading system in rivers.
It worked pretty well.
Unfortunately, what happened was,
it's not pure private ownership.
What happened is if you don't use your 3%,
let's say you have the first 3%,
the second 3% or whatever,
if you don't use it, the ownership reverts
back to the state government,
which can then hand it out in some other way.
So as a result, you can't really sell your rights to it.
It's not a full private property situation.
There's an approach toward it, but it really doesn't meet the whole thing. As a result, it doesn't work too well,
especially when you're trying to change uses.
So, for example, in California, at constant wars, of course, who gets, there's water on the Colorado River, which goes
through Nevada and down Arizona or something, and who gets it? So, Los Angeles, of course, is built out of a desert.
They need lots of water. Well, shouldn't they get water? Los Angeles is getting water from Northern California, from the Colorado River, and they're accused by the other guys
of Stealing Their Water, constant political fights. They wouldn't have to do that if you own 3% down here of say the flow, you should be able to sell it to Los Angeles, why not?
Sell the rights to it, there'd be no problem, but you can't do it, it reverts back to the Arizona government of the Northern California government.
Government. So it becomes a political football instead of simply a market phenomenon. There
are of course attempts now to try to make it a full appropriation system with full rights
to buy and sell. That would eliminate the whole water, most of the water crisis between
different governments, different regions, et cetera, et cetera. As a matter of fact,
right now you have a series of fantastic multi-billion dollar boondoggles. They just completed the
Central Arizona project in Arizona, which takes water from the Colorado River and brings
at the Southern Arizona. It costed, I don't know, umpteen billion dollars to the taxpayer
for many years. What they do is they send the water in here, then the orders are extremely
scarce, right? Instead of charging a high price, the market price of the farmers, they
charge a very low price. They subsidize very cheap water, way below the price that cost
the taxpayer, and they make the farmers use all of it. You don't use it or lose it. You
You get the cheap cheap water except you have to use all of it and when they encourage them
to grow these crops, which they can't sell except at a very low price, the government
then buys, they pay the farmers not to produce it, unbelievable situation, they take weed
or something or cotton or whatever they're growing there, they pay the farmers, they
subsidize the farmers to buy the water at a very cheap rate, this encourages fantastic
waste of the water at a cheap cheap rate, then they grow the crops that they can't sell
The government buys it back or pays them more money not to grow the crops, so they pay them
twice, once to irrigate the crops and two, not to grow them.
Of course, the farmers love it, farmers getting paid three ways or at least two ways, paid
to produce the stuff and then pay not to produce, double.
And of course, the government, the Agriculture Department loves it, they're getting all these
dams and the Interior Department, they're getting lots of people, lots of employees,
they're getting, building their empire, they're getting lots of money from the taxpayer, the
The only people who don't love it are the poor consumers and taxpayers who are paying for the nose for this.
Paying for scarce water, to waste scarce water, and then paying not to grow the crops, which are being subsidized to grow.
Totally nuts out of the system.
But it's not so nuts out of the point of the federal government and the point of the state governments are in on a take, and the farmers.
Those three groups love it.
The people who are against the farm, the tax payers, don't know much.
I don't know much. The free-market economists are against it and the environmentalists are against it.
So you have a coalition, a growing coalition in the west of free-market economists and environmentalists.
They say, Jesus, you're wasting water, you're killing wildlife, whatever it is.
So you have an interesting new coalition of these groups here.
Okay, I'll get back to water a little bit later on land, but the
continuum of the railroads,
By the mid-1880s, every large town in the United States had at least two railroads, sometimes more than that.
For example, between St. Louis and Atlanta, there were 20 competing railroad groups, lots of competition.
Don't forget there were no roads, so you have to always understand that.
And the railroad rates kept going down, as I said last time, all the time, constantly, especially in spurts.
There were five so-called trunk lines. Trunk lines are the big five railroads which went
from the eastern seaboard of Chicago, basically. Several of these transcontinental roads going
from Chicago or Omaha or something to the west. They had the basic lines going from
on the Eastern Seaboard of Chicago. You had B&O, Baltimore and Ohio, which went from Baltimore
to Chicago, and Pennsylvania Railroad, which went from Philadelphia, New York Central,
which went from New York up to Hudson, and there was also Erie Railroad, and there was
Also, Grand Trunk, which went all the way up Canadian border, I think, to Boston, so,
and they were very fiercely competitive, realized they compete, of course, even though they don't
go to the same places, they compete, Philadelphia merchants are competing with New York merchants
and so forth for the Chicago market.
So, they were, and they're, as we'll see, they were constantly trying to have cartels
to try to stop this.
One interesting thing is when they had a cartel, they were trying to figure out how to price
What should pricing be based on? For example, Baltimore, Ohio and Pennsylvania have the
shortest routes, the shortest mileage. So they claim you should base rates on distance.
Those of us who have shorter roads should charge a lower price. If you have a higher
and longer road, you should charge a higher price. Obviously, they want to screw the competitors
New York Central, which had a longer route, said, no, no, it should base pricing on the
cost of operation.
It turned out that New York Central had easier grades, so that there was less cost to build
the actual track, and they had denser traffic, they had lower operating costs, so they were
arguing for that.
Of course, there's no way to resolve this argument, except on the free market, you just
charge whatever you get away with and the competitors can let you get away with.
If you're trying to have a cartel, these become very important, trying to figure out, well,
What should we base the pricing on? Well, there's no way, there's no rational way, quote-unquote, to decide between this.
And Grand Trunk, which is always on the edge of bankruptcy anyway, with the shakiest shape, and eventually it did go bankrupt,
they said it should only charge the cover operating costs.
It shouldn't have to cover construction costs, as they're obviously, or they hardly cover anything.
Anyway, there was a series of rate wars between these Grand Trunk lines in 1876, which, so all rates fell.
It was touched off by the completion of the Baltimore-Ohio Railroad in 1874, which starts
the big series of rate wars.
So for example, between 1876 and 77, just in that one year, to give you an idea, first-class
Freight Rates from the east of Chicago, and there were several classes, a bunch of like
four or five classes, so first class charged higher rates than the fourth class, let's
say, excuse me, lower rates than fourth class, the first class freight rates fell from 75
The Eastbound rate, going from Chicago eastward, fell from a $1.00 weight to $0.50 to $0.50
So the passenger rates were cut in half. They didn't worry that much about passengers as passengers are a very small amount of portion of the income, but that was cut in half too.
By the way, one way that the railroads curried favor of the government, this is all throughout, railroads were the way to travel and big shots of the government got free passes, railroad passes.
The Railroad Pass, if you're a senator, a governor, whatever, immediately you get an automatic pass, which finds you to be more friendly, benevolent, though the railroad gives you a pass.
So you had this railroad system, I'll now give you a, excuse me, first class with the highest rate, then we've got lower from then on.
I'll give you, to give you more, a broader view here of freight rates, take May 1865 when we're taking this whole period, and the end of 1888.
We have a freight rate from New York to Chicago, westbound freight rate from New York to Chicago.
And this is a standard freight rate for different classes.
First class, second class, third, and fourth class.
And this is $2.15, I guess per 100th weight again, went down to $0.75, $1.80 went down
to $0.65, $1.06 went down to $0.50, $0.96 went down to $0.35.
This is a little bit overdrawn because prices went down during this period, so there's a deflation, but even with that, even correcting for that, it still was a big drop, and it was still a huge drop in even real freight rates, much less money freight rates.
Another thing they did as part of the competitive process, not only did they cut the freight rates, they also cut the classification, one way of competing.
You keep the freight rates the same, but you declassify products.
In other words, one way of competing was, you keep the rates the same.
Mine might be the same, but something you move stuff from first class to second class and from second to third.
You lower the classification, you're really making it cheaper while the rates remain the same.
That's why nowadays we have, you quote, don't increase the income tax, but you have inflation.
Everybody's waffled into a higher tax bracket and you pay a bigger proportion.
so you increase the income tax without saying you have a tax increase
by the way the latest nonsense is just yesterday
this is totally also irrelevant to our course here
but it is no it isn't because it is modern economic American economic history
Reagan has always been saying he's not going to have any tax increase well he's
had over the years he's had a revenue
enhancement so the revenue has done a tax increase
he's had closing of the loopholes doesn't call a tax increase and now he
has something he said, well, he's not going to increase taxes, he's just going to find
new revenue sources.
Now, you tell me what the difference is between a tax increase and finding a new revenue source.
We're just tapping new revenue sources.
That's not increasing tax.
You keep your pledge not to increase taxes by calling it, by saying it's not a tax review,
just in rhetoric.
You do it in reality, you don't do it in rhetoric, you think you've accomplished something.
All right, that's, so, but in those days, things were going, getting cheaper all the
And they're getting cheaper officially and also unofficially by having lower classifications of freight.
In addition to that, railroads are so competitive they would have special rates.
In other words, you have as railroads, you have shippers, everybody else is a shipper.
If you were a railroad, you were shipping things, you were shipping freight.
And railroads are so anxious for shippers' business that they would have special rates
or rebates from the official rate.
Rebate meant a discount.
If you get my business, I'll give you a 10% cut off the list.
See, in business, you don't want to cut the list, and if you cut the price of the list,
it's a real commitment.
It's a big, open commitment.
I mean, you have a list price, you're cutting whatever it is, Coca-Cola or whatever it is.
You don't like to cut the price, you hope that maybe it will go up again soon.
So we really need to cut, you have special discounts for customers, different kinds of customers, new customers, old customers, whatever.
And when the big, as we'll see later, when the big charge came of Standard Oil was having special rebates,
one of the big quote monopoly things about Standard Oil, special rebates from railroads for shipping and stuff.
and stuff, it's true they have special rebates, but everybody else had special rebates, all
the other oil companies had rebates, everybody had rebates, the whole world had rebates,
the whole world lived off, in other words, not only did the official rates go down, not
only were classifications going down, but every shipper was getting a rebate, some were getting
more than others, some less than others, every shipper was getting discounts.
There was a famous storage, George, Professor Stiegler, who later got to know about Plas
The famous study of the steel rail caper, for many years, economists claim, there was something very peculiar about steel rail prices, say from 1900 to 1940 or whatever it is, for 40 years, steel rails remained fixed.
This is the price of steel rails. They continue, they've always been fixed, whether they have a boom or a depression or whatever, the price of steel rails were fixed.
Any theories were invented to try to explain this. Why should prices be fixed? It doesn't make any sense.
We know the prices go up, the demand increases, we know they go down as supply increases.
Why do prices remain fixed? Well, this is a crazy theory we've concocted to figure this out.
Well, Stiegler pointed out, and has been pointed out for other things,
before you try to explain a phenomenon, you have to really make sure the phenomenon exists, right?
Before you invent a theory to explain something, you have to be sure the thing actually exists.
How do they know that steel rails were fixed in price?
Because the list price remained the same.
If you're an economist, economic historian, you're lazy,
you look at the list price and say, well, that's it.
If you go out on the real world, however,
very almost none of these things were sold at list prices.
The interesting, important thing is what was the price,
what was the real price for real transactions?
So somebody went, I think it was Stiegler who went out
and made a study about what actually the prices were
over the years.
It turned out nobody sold at a list.
If you had a boom period, it sold like 5% down from lists,
and the Depression that sold 30% of that.
So the overall price was fluctuating all the time.
It just, they weren't recorded in the books,
meaning the official price books, price list books.
So what you're trying to find out is what the actual price is.
And as I say, discount walk lists is a time-honored method
of sale and business, especially in a business
that's uncertain what's gonna happen
and you figure, well, you'll give a discount.
So, and remember in a cartel, the thing which breaks the cartel, as I mentioned last time,
is secret price cutting, secret rebates.
You're giving secret rebates when you don't want your cartellists, your fellow cartellists
to find out you're screwing them here.
You're giving a secret, you're breaking your agreement by giving a special rebate or a
list.
But these things are not even, it's secret.
They were done all the time.
In addition to competing by cutting rates, you have to realize the whole emphasis in
these days, of course, the emphasis is, how do you have a hidden price increase?
In those days, the emphasis was to have a hidden price fall.
Prices were falling all the time because there was tremendous competition, a tremendous increase
in production.
It was a wonderful time for the consumer to be alive.
So in addition to prices being cut, quality of service kept going up, they kept giving
you extra deals.
One thing which the railroads began to do is, for example, give you special discounts if
you fill up the railroad car, which is obviously why they have a railroad car. There's an obvious
reason for that. They try not to send the car out until it's fully loaded. And so if
you can have a shipment which fills up the whole car, you're in great shape. If on the
other hand, you only have a third of the car, you have to wait until somebody else has stuff
for the other two thirds. And so they started charging lower rates. If you can fill the
And that's one reason why if you have a high-quantity shipper, you can get a lower rate because
you can fill a car up and get it out there.
No railroad wants to have a car sitting around a lot.
So that's another thing, discounts are given for that.
So obviously, with standard oil, we'll get to standard oil later on, but with standard
oil, that's filling up lots of cars with oil, you're obviously going to get a lower rate
because I can guarantee a fully loaded car, a mirrored car.
So for example, New York Central at one point
had 6,000 rebates, 6,000 rebates to shippers,
and it was called special contracts or special rates.
Sometimes the railroad would start paying for storage,
and it's another thing, who pays for storage?
The shipper pays, the railroad pays.
Well, it's up to, you know, it's a contractual situation.
As the railroads were battling for business, they started taking over the storage fees.
So one way, of course, of having hidden increases, if you have government, say, regulation of
rates, and you want to have an increase, they don't allow you, an increase is reclassifying
class rates upward.
You keep the same rate up later on, like in the 20th century.
We haven't raised our fares in 30 years, except for what used to be third class is now first
class, buddy.
Okay, that's one way of doing it, without doing it officially, without raising officially.
In the 19th century, it was the other way around, it was cutting rates.
Okay, so what you had then, is the first big business, was a highly competitive industry, and...
Oh, another thing I should say is that the...
I'm not going to go into this in detail, but the South was always belly-acking about this.
Why were freight rates in southern railroads higher than in northern railroads?
Always complaining about this.
Felt it was something sinister, some plot against the south.
Wasn't any plot at all.
It was economically very easy to understand.
First place, they had no through lines in the south.
In other words, the railroad lines in the north were long through lines,
either from the east of Chicago or on west, you know, transcontinental lines.
The south had short railroads.
They didn't have any real trunk lines.
And actually it was short rail, they couldn't have big discounts, they had short routes,
they had a high fixed cost and a terminal cost and therefore they're going to have higher
costs, they're going to have higher, undoubtedly going to have higher rates.
And another thing about the South was they had a triangular pattern, they developed trade,
they would buy food, let's say a grain from the Midwest, they'd sell cotton to the East,
As a result, the cars would be empty going both ways here. The South would have nothing much to sell in the West.
Railroad cars would be empty. And they wouldn't have much this way. So in other words, they were half full.
And so they couldn't get the quantity discount. They'd be paying higher rates because the cars were half empty, empty on the other route.
Empty on the way back. And unfortunately, that's the way it was. It was not a plot. Good economic reasons for this.
to this, it wasn't, quote, discrimination, unquote.
Anyway, in response, so we have then
a very competitive railroad system,
very productive, very competitive,
even overbuilt in some cases,
have a tremendous drop in freight rates throughout.
As a result of this, from the very beginning,
starting in the late 1860s,
railroads were desperately attempting to have a cartel,
trying to get a cartel, trying to raise their rates.
And since they were the first big business, they were the first cartellists.
And there's a great book on this by Coco, who wrote our book on time of conservatives.
You're interested in this area.
It's called Railroads and Regulations.
I don't think it's in, it might be in paperback even.
Anyway, I recommend it for those of you who are interested in going into this.
And he talks about this in detail.
The Railroads, the best way to try to form a cartel, headed by J.P. Morgan,
and who now becomes after the early 70s, these are the top, and even before that was important,
the top railroad investment banker.
And trying to form a cartel, cutting shipments, getting quotas and raising the rate, they
try to do it, every one of them is a flopperoo, every one of them flopperoo very quickly.
I'll mention it, there's a couple of them, a couple of leading flopperoos here.
They couldn't do it, they had internal price cutting and external, new sources of new
New railroads coming in, very simply, they try to have, you set a freight rate between
here and here, you have two or three railroads, they fix the price and cut the shipment, a
new railroad will come in and undercut them, at the end of it, they have better equipment,
they'll be newer.
So these two things would broke every railroad cartel, by the way railroad cartels are called
pools, railroad pools for some reason, pooling their resources.
In one case, kind of charming, in some cases, one guy would own, let's say there are two
railroads here, and I think in one case we'll get to what happened.
One guy would own both railroads, the managers are different, the sales vice president in
each railroad, they didn't want people, if you're a sales manager, your whole life is
based on how much you can sell.
They disobeyed the orders of the owner.
They started undercutting the cartel in order to pick up more for their railroad, more business
for their Railroads. Charming. Here they are. One guy owns these two railroads. He orders
them to keep the price up and cut the shipment, and they both violate it anyway. They both
go ahead and start giving discounts and pick up shipments. He's a sales manager of his
own thing. That's his ego. His life is wrapped up in that, and he violates it anyway. So
you have a competition. Even one guy owns both railroads.
One charming case of this is, in one case, one of the most important cartels was called
the Iowa Pool.
There's a very good book on this by Julius Grodinski called the Iowa Pool.
One of the top, he's dead now, one of the top railroad historians.
And the conditions for a cartel were great.
If you're interested in having a cartel, it couldn't have been better than these conditions.
Because what you had was really three railroads competing for the top Illinois-Iowa business here.
So you have, and two of them I think were owned by one guy.
This is Illinois here. This is Iowa.
The important thing is to try to get to the Eastern Terminus of the Union Pacific in the
Omaha.
Omaha is up here.
Omaha is a twin city with Council Bluffs, which is on the Iowa side of this thing.
I think the Terminus was in Council Bluffs.
The thing is, what the Iowa pool dealt with was the Chicago-Omaha market, which becomes
extremely important.
The point is, how do you get from Chicago to Council Bluffs?
One way, there are basically three railroad routes.
One was this one.
I guess this is sort of the shortest coming like that.
This is a Chicago and Northwestern railroad.
The other one, sort of like this, coming up like that, this is a Chicago, Rock Island
and Pacific.
This is the famous Rock Island line that the great folks saw in that.
You have the Rock Island line, you have the Chicago Northwestern, and another one called the Burlington line, another one went like this, goes down like that, Burlington and Missouri, and Chicago, Burlington and Quincy, these two roads just went up like this.
If you had three alternative routes, this one which hooks up here, and these two.
So they figured if you have a cartel of these three routes, you're going to be in great
shape.
You can not only raise the rates, you can also raise the rates of the Union Pacific.
You can screw Union Pacific on that side, and here's Union Pacific with a transcontinental
Chicago Railroad, you make them pay to transfer them to the Chicago route. You raise the rate
and cut the shipment. That was the idea of the Iowa Pool.
Chicago, Burlington and Quincy and the Burlington and Missouri, these two lines here, this thing
here was owned by our pal James Joy, the railroad king. Remember the guy who got the Cherokee
Robert E. Lans, his brother-in-law and secretary of the Interior. He was the owner of these
two railroads here, the Burlington system. And he was essentially invested in by the
Boston Capitalists, Boston Group, the Forbes Group, and he also controlled a couple of
other railroads in this area, and this is the Burlington system. The Rock Island Line was
I was owned by John Tracy. I also owned the Chicago Northwestern. There was one guy, John Tracy, who essentially controlled or owned these top two in the news here, Chicago Northwestern, Rock Island, and Jim Joy owned the Burlington system.
They were two people, they could just work on a cartel, you could think it would be easy as pie.
And that's what they did, they formed a pool and
let's see, I think in
1870 I believe
and it lasted
officially for about 15 years, actually it collapsed in not too many years,
in a few years, late 70s.
and they say you'd think it'd be duck soup to do this and if there was cheating between these two,
as I say, one of these sales vice presidents, sales managers would cut it anyway, even though John Tracy owned both of these roads because they had their,
there were all sorts of problems in that, they could never get, there was cheating between the two, there was secret price cutting and all the rest of it,
And of course they kept asking for higher rates from Union Pacific to permit the stuff to go on in Chicago or come in from Chicago.
So finally what happened, to cut this thing short, we're going to have to leave in a minute, is that it's kind of interesting.
What essentially happened was that Union Pacific got together and decided to crush the cartelists here by creating their own new railroad system,
system, by getting together a whole bunch of little railroads and a whole Altoona system,
Olten system, coming from St. Louis, so like here, coming from about here, before you get
to Omaha, and down around here and up from St. Louis, and up to Chicago, and by forming
this thing, either by creating a new railroad or buying old ones and merging it, Union Pacific
undercut the whole cartel and broke the whole thing. It took them about seven or eight years
to do it. So in addition to the internal cheating with these two companies, three companies,
two of which were owned by the same guy, eventually the Union Pacific simply created, got together
a fourth system, created a fourth new system which got to butt the other three. That was
the end of it. That was the end of the Chicago pool. It was kind of heroic. That's the market
in action. When the free market is in action, even if you have a couple of roads, it seems
It used to be in great shape to have a cartel. You can't really continue it for very long.