WEBVTT

NOTE The Railroading of the American People

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Okay, railroads were the first big business, so we're going to concentrate on railroads for a while.

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With railroads, you have a double situation, so to speak.

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You have a double situation.

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It's true in general, but this is particularly true in railroads, which are the first large-scale industry.

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Namely, you have a fantastic progressive increase in standard of living at full transportation costs and all that.

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And along with it, you have the government stepping in very heavily to subsidization and later regulation and messing things up.

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So you have a double effect here. In other words, there are two things happening in a railroad situation.

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One is a tremendous competitive, a cheapening of course, a competitive improvement standard of living, an increase in competition.

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and on the other hand, tremendous subsidies in part of the government, plus later on attempts at merger and finally, railroad regulation.

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And we'll see why railroad regulation came in later.

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As I mentioned before, the Lincoln administration was a heavily railroad-oriented administration,

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One of the first things they were committed to was a huge subsidization program to the

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new transcontinental railroads, which they proposed to build across the west.

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The subsidization of, first of all, in a homesteading system, which I already mentioned, was a libertarian

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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.

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In other words, it's right-of-way. It was then owned right-of-way.

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It means the tracks, the bed in which the track is embedded and stuff, and the station terminals and whatever.

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So it's actually the shoulders, it's actually a few feet on each side of the track.

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That would basically be what the railroad would own in an libertarian free market setup, homesteading setup.

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And some railroads were indeed built that way, as you might as well see.

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One great transcontinental railroad was built in a purely free market,

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and it did not go bankrupt like almost all the others did.

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And it competed very well with the rest of it. It was called the Great Northern. That comes a little bit later.

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At any rate, this is not the way it was done.

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The Republicans wanted a very heavy subsidization and privileging to the railroads.

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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,

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they gave them a huge amount of loans, basically interest-free loans, heavy, heavy subsidies, per mile of track and cash,

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In addition to that, the government, this is bad enough in the sense that there's a huge

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subsidy here.

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So, of course, this becomes the most, first of all, they gave the railroad the best land in the West.

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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.

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Closed off. Nobody was allowed to settle to 100 miles on either side of the track.

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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.

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especially because the government kept out of the settlement for many years

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everything on each side for many miles, 80 miles or so on each side of the railroad

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fantastic subsidization

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and because of this an enormous amount of crookery also took place

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in addition to this sort of boodle

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what was often called the robber barons came and the robber barons, the robbery

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came about because it was an open channel by the federal government, and we'll see how that was done.

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The amount of the, there's differences in whichever place you go to to get the data,

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how many millions of miles of acreage was handed out by the federal government to the railroads.

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I guess it depends on which some of it was given back.

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It was around 220 million acres, enormous amount.

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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

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forcing people, if they want to get on this thing, to settle to buy land at a high price on the railroad

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as a result of this and other things, we'll see as we go along, the farmers begin to start griping about the railroad

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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

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The basic gripes came about by the 1870s, by the late 1860s, early 1870s, the so-called

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anti-monopoly movement among the western formers, they had very good grievances, they had the

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oldest land was being kept out of circulation, the railroad had this free gift of land, and

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the oldest land was held out of circulation, and this land was untaxed by the local government,

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so he had set up a local government, the railroad land was tax-exempt, even while being held

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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.

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Basically there were four big transcontinental railroads which got the big bulk of the subsidies and the grants and the loans.

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The two big grants in the beginning, the first big grant was the Union Pacific, which started

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I believe in Omaha, Nebraska, and went west, and then the central Pacific, which started

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from San Francisco, and went east to join it, and this is the UPCP, this is the famous

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golden spike, I think it was 1869, where they met in Utah, and they drove the golden spike

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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,

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a lot of money subsidy, 44 million acres, all of these I think went bankrupt, not too long,

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the big land-grant boom was making, Union Pacific got its first big round in 1862, the

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others a few years later, and the whole thing collapsed in 1872, so it was actually in the

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panic of 1873, most of them went bankrupt, so it was about 10 years of a fantastic boom,

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and uh... so the except... well let's see, this is uh...

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uh... I'm...

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I didn't uh... I shouldn't have looked at the map, it's somewhere near Chicago,

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somewhere west of Chicago. Yeah.

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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.

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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.

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This benefits the railroad. It's an extra privilege to the railroad. The railroads are getting subsidies about three ways.

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They're getting a big land grant. They're getting land taken out of circulation.

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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.

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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.

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So these are the two big Transcontinental ones, and then there was the Southern Pacific, which starts in Los Angeles.

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and continuing something somewhere in Texas, that wasn't sort of Transcontinental I guess.

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Okay, so this is Northern Pacific got the most amount of land, it got 44 million acres

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and I think the other three got 44 million, of course this is about half each of this

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So all these three together got about 44 million, so about 88 million just for those big four, so to speak.

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I shouldn't call them the big four, the big four is also named the Central Pacific leadership.

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At any rate, those are those big four transplant on railroads.

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This is originally Central Pacific. Very soon, Central Pacific merges with Southern Pacific and basically takes it over under the name Southern Pacific.

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The Union Pacific, one interesting phenomenon here, which I only found out about a couple of years ago, I was reading more about this.

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General McGrenville Dodge was the main entrepreneur of the Union Pacific, and as soon as the Civil

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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?

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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.

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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.

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This is his army function. I think it's an interesting example of the use of the army as a...

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What does it mean? It means, you see, one of the things you have to realize about business and government

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is the use of businessmen, the use of government by businessmen to socialize costs.

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In other words, to take their costs and impose them, because nobody wants to spend, pay out costs,

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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,

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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.

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What he did is, everybody was on a take when Grant comes in in 1864, 1868, his entire administration was on a take.

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His personal secretary, his vice president, his head of the senate, the head of the house, the whole gang was on a take.

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They were really on the take for both the Union Pacific and the Northern Pacific.

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Randemsdorf was not on the take. Randemsdorf was drunk most of the time, and he knew what was going on.

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You could say he was honest, but he cared one way or the other.

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Everybody else was on the take, and the whole gang was involved with this thing.

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What they would get is this. Not only would they get actual money and cash from the railroads,

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both in three cases, the Central Pacific, Union Pacific, and Northern Pacific,

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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.

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Most of the banks invested about 10% of the stock. The rest of it was private investors. Many of them were English.

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also, you know, a lot of small investors, it was on the stock market, there was no stocks,

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no manufacturing companies around the stock market yet, they were all private partnerships,

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they weren't big enough to have corporations, but the railroads were big enough now to be

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incorporated, so you had a huge number of stockholders, the inside managers not only

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had a lot of stock, but they also had, they formed their own construction companies, one

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of them I think was Central Pacific, it's called the Credit Mobilier, I'll get to that

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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.

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They then, they went into the construction business. They built the railroads and sold the railroads then to the railroad.

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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.

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being per mile, in many cases, of track, and then they sell it to the railroad. They sell it at a very high price.

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The estimates are about, the price is about double what they would have been charged in a free market.

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In other words, double the cost, the basic price in a free market.

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So essentially these guys fleece their own stockholders and bondholders, essentially robbing the, yeah, the government, based on government subsidies.

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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

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You hire another corporation headed by yourself and your buddies which have 100% of the share to sell all the equipment.

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It's all at a very high price and essentially you're fleecing your other shareholders.

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What amounts to is robbery of the other shareholders by the few insiders.

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It was of course illegal then but there was no prosecution because the government was in on this stuff.

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So as a result you have a very low profit rate to the railroad and eventual bankruptcies and much of this.

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Well, that was part of it, sure. I mean, the fact that it was overbuilt, heavy subsidies, yeah, that was part of the cause.

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It was hard to say mismanagement. They didn't care about management. They just wanted to milk the whole situation.

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I'll give you some examples of all of this. I'm just going to give you an overall picture.

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Yeah, you know, I'm going to give you an overall picture of this.

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I'm going to give you an overall picture of this. I'm going to give you an overall picture of this.

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situation. I'll give you some examples of all of this. I'm just going to give you an overall picture.

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Yeah, Union Pacific was a credit mobilier scandal. The, let's see, I'll get the, give you some examples

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here. The, for example, both for Union Pacific and Central Pacific, they got special federal

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Government Loans, 30-Year Bonds, they were paid by, in the Union Pacific case, the Central

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Credit Mobilier, Central Pacific, it was the Credit Finance Corporation, it was called,

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okay, Credit Mobilier and the Credit Finance Corporation, and the, so to say, this financial

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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.

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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.

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For example, Credit and Finance Corporation, which was the Central Pacific's construction company, got, they sold the,

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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.

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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.

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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.

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again that was the top people owned it plus of course the congressmen and senators

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get there a little so now by the way Oakes Ames I shouldn't mention about

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Oakes Ames the Union Pacific cheerleader in the what was his shtick in addition to

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being on the take he had a special interest in the Union Pacific he was a

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shovel manufacturer in real life this is what I meant first down I told him it's

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important to know what these guys do in the real world in addition to being

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Congressmen. He manufactures shovels. Who do you think got the shovel contract for the

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construction company to build Union Pacific? One guess. It was Oaks Ames. He's selling

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shovels at a handsome price to Union Pacific for which he got the contract. So Union Pacific

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hand on the take, all right, distributing stock of the credit mobilier, the construction

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company, the vice president, the vice president-elect, the democratic house leader, speaker of the

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house, James Blaine, who ran for president one year, was called a continental liar from

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the state of Maine, James Garfield, senator from Ohio, later to be president, another

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very interesting character we'll deal with a little bit later, called Pig Iron Kelly,

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He was a congressman from the Pittsburgh area, Eugen D. Kelly. He was known as Pig Iron because

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he was blatantly and obviously the representative in Congress of the Pig Iron interests, iron

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and steel were the big companies around the Pittsburgh area, always calling for tariffs

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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.

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Of course, taxpayer is suffering from this, and of course, the other railroad men.

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The Northern Pacific, well, first of all, I should talk about the Central Pacific.

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The Central Pacific is another interesting group.

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It was run, Union Pacific, let's say, was Oaks Ames and the Grenville Dodge.

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The Central Pacific, which hooked up with it from San Francisco, was run by the so-called Big Four,

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which had the sole owners of the construction corporation

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interesting characters, the families of the big four, the four people

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are still dominant in California even to this day, which is pretty amazing

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the big quartet was Charles Crocker, he was the contractor

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All over California there's still the Cocker Bank everywhere, the same family.

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Carlos Huntington was sort of a dominant guy.

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Huntington.

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The major...

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He also dealt with Washington a lot.

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Mark Hopkins is again another big figure in California.

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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.

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He was the real managerial type. He took care of the actual running of the railroad.

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And Leland Stanford, another, of course, key figure, founder of Stanford University, and he wanted the state politics.

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State politics, he was a governor, he became governor of California, made sure that the

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central pacific is taken care of, to put it mildly, when Stanford ran for governor, the

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story is, and I think there's no reason to doubt it, Phil Stanford, his brother, stood

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outside the polling place in San Francisco, scattering gold coins for the masses as they

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went up to vote, right now apparently the vote, somebody was telling me what the vote

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In terms of the Philippines' current elections, the running figure is 50 bucks a vote, which is enormous.

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Of course, that's about a monthly wage. Weekly wage or monthly wage in the Philippines? Anyway, big.

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So several hundred is equivalent to about 500 bucks here or something like that. More than that.

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Anyway, so, scannering gold coins, which meant a lot then, and of course you can say it was a secret ballot.

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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.

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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?

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Well, they had a 40 miles north of this road, there was a 1% grade, it was across the mountain.

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Right here there was a 2% grade, which was much costlier, of course, much more difficult.

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And they figured, in any other, in a free market railroad, they would have gone 40 miles,

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would have saved a lot of money by taking the 1% grade.

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Here they said, well, we're getting paid per mile by the government, and we want money fast.

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You keep laying track, a certain number of miles, you get the money. They wanted the money.

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And so they went, they didn't care because their costs were recouped by the government.

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In other words, it's like a cost plus operation. Who cares about the cost? They want the money fast?

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Uncle Sam is going to pay for the cost? Let's do it. So as a result, you have situations like that.

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Another thing they did is they, at one point they got to the, they got to the,

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They came to the roof of the Sacramento Valley Railroad, somewhere around here.

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It would have been simple to just buy the road, the short railroad.

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Instead of that, they built another road right alongside it. What's the point? It was costlier.

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They didn't care. They wouldn't get subsidized, you see, if they bought the other railroad.

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The subsidy is per mile of track. A construction company gets a subsidy.

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They don't get subsidized from the government for buying something.

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So they said, what the hell?

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So, once you see how the market efficiencies are being skewed by governmental incentives,

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where the incentive is not to be efficient, not to make profits or avoid losses,

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the incentive is to get the money from the government.

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And whatever conditions are laid down, that's what you do.

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As one guy put it, quote,

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it was cheaper to build at the government expense than to buy a railroad already existing.

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In other words, at your own expense.

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So, let that be a lesson, an analysis of contemporary, past or whatever economic history.

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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.

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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,

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Carlos P. Huntington goes to Washington, takes a train or whatever, I don't know how he gets there anyway, gets to Washington,

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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.

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And nobody knows how he spent it. All they know is after lobbying and seeing big

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shops in Washington, he left with a bag empty. He wasn't a gambling type and so

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that's it. He disposed of $200,000 of hard cash to the politicians to

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get this deal. Anyway, later on they say they bought Southern Pacific, they

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changed the name of Southern Pacific and Southern Pacific, which was then the

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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.

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As far as the Northern Pacific goes, that had several entrepreneurs and finally gets into the hands by 1869 of the fabulous Jay Cooke.

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We've already talked about Jay Cooke as making millions out of the Civil War through his bond deals,

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was to be the monopoly underwriter of government bonds, which he still was now, after the war was over.

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And also by setting up a bank, a national banking system which requires pyramid-ing credit on top of government bonds,

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so the banks have to buy bonds from Cook.

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Anyway, he's in great shape anyway. He gets control of the Northern Pacific by 1869 and he starts running that.

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Jay Cook, by the way, was known as a tycoon those days.

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I think the first guy on which the word tycoon was applied to.

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Everybody had an epithet, sort of the way that people worked in those period.

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That was his epithet. He was a tycoon.

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What he did was, he started selling, because he had his own construction company and stuff.

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He decided to sell bonds to push north of the Pacific.

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Also to try to get people settled there.

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This area is bad enough to schlep up here, this whole northern area.

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It's cold and it's miserable and all that.

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He's trying to get people to settle in this rotten area.

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He hires a whole bunch of propagandists.

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He used the same techniques that he used when he was selling government bonds.

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Hire a whole bunch of pamphleteers to write about how wonderful it is

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and send it distributed in Europe and whatever.

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He had, for example, a guy named Sam Rokerson who wrote a bunch of pamphlets,

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hopped up pamphlets about the glories of this area.

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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,

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company, construction company, vice-presidents, Schuyler Colfax, the Brotherhood Hayes, who

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was later president, secretary of treasury, and of course they had Chief Justice Salmon

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Chase, oh by the way, before I get to him, they also had Reverend Henry Ward Beecher,

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he was probably the most distinguished minister in the United States, the New York Protestant

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minister, actually he came from Brooklyn, and he was on the take, he was paid by the

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Northern Pacific to talk about the glories of the Northwest and all that, be sure to

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Settled there, things like that, like pamphlets. They had propaganda meetings for the area and things like that.

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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,

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but he wants Jay Cook, he comes to Cook, and he urges Cook, remember, Cook has financed Chase's whole career, in fact, virtually.

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He comes to Cook privately and says, make me a secret partner of Cook and Company, which is a big investment bank.

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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.

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It's supposed to be a secret partner of some damn investment bank, which is running half the country anyway.

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Cook says, I mean, Cook says it's too risky, but he's a very greedy guy, Chase, let's face it.

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His appetite was enormous.

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But he was also a secret stockholder of the Northern Pacific

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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

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Speaker Blaine was giving some trouble. I told you about Blaine. He was on the payroll of the Southern Pacific.

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He was giving the Northern Pacific some trouble in getting their stuff.

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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.

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And a friend of President Grant goes to Grant and he convinces Grant that Grant is very much a favorite of the Northern Pacific

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And so he gets Grant to be a favorite of the Northern Pacific

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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

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long term loan, low interest, a quote loan unquote, that takes care of Blaine's stubborn opposition, southern pacific board opposition

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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

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you know of course the Brooklyn, I'm not saying Brooklyn still hasn't got cable, it's outrageous

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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.

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My friend who lives in Tucson, Arizona is a big observer of local politics, so they finally, cable was going to come to Tucson.

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There were two cable companies that were fighting for the monopoly franchise, a very lucrative monopoly.

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So, a couple of city councilmen, city councilmen take a vote, a couple of city councilmen asked and pleaded for a secret ballot.

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Which company should get it?

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It was an outrageous secret ballot. The reason why they wanted a secret ballot, they wanted a take from both companies.

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They didn't want to be found out by either one.

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And so, they were very embarrassed when the vote was public.

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And they had to vote one way or the other.

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So, which is one of the definitions of an honest politician. I think this is a George Washington Plunkett, the famous old Tammany leader.

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The definition of an honest politician is one who stays bought.

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So, if you make your contract with a briber, you stick to it.

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If you don't stay bought, then you're in big politics. You're usually in big trouble.

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Okay, so the, now Jay Cooke and Company, here's Jay Cooke owning North of the Pacific and all that as a major leader.

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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.

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They charge a 12% commission, which is about double the usual commission.

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So here's one example of how Cook fleeced his fellow stockholders.

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You get your investment banker for your own railroad, except you own most of your bank,

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but you only own a small portion of your railroad. If you can fleece the bank,

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you're shifting funds quietly but illegally from your fellow stockholders, your comrades,

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Stockholders and bondholders, to yourself and a couple of other guys in the bank

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So anyway, so Cook put on, as I said, a big propaganda campaign

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First of all to buy Northern Pacific bonds, second of all to settle in the North and Northwest of the United States

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And he had traveling agents and so forth and so on

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One of the traveling agents who he brought over for this thing later becomes president of the Northern Pacific

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The German, a fairly wealthy German, Henry Millard, comes over and later becomes the same president.

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Jay Cooke and Company, it doesn't always happen, in fact it very rarely happens in history,

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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.

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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.

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He's, of course, his cut quarters in Philadelphia.

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Jay Cooke goes bluey.

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He does it because the Northern Pacific is now beginning to collapse.

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And he's getting loans out, it's overextended.

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All these railroads are very inefficient. You have to realize they'll run badly,

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because nobody cared about how they were running. They just want to fleece it as much as possible.

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And from an engineering point of view, they're all in terrible shape.

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From an entrepreneurial point of view, they're in terrible shape.

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So here's Cooke trying to get loans and bingo comes the panic of 1873

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and uh...

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which was much of which was brought about by Cooke's own inflationary

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manipulations through the banks and

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government bonds etc.

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Cooke goes bankrupt. He's one of the great pieces of poetic justice ever.

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Going bankrupt at your own creation more or less. In other words, here he is, he's responsible for the Northern Pacific

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He's responsible for the inflationary boom of the late 60s and early 70s.

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He's responsible for the big public debt, which comes in, and the whole bank credit expansion.

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And when the collapse comes, as it always does come, he gets it in the neck.

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In the end of Jay Cooke.

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The fall of the House of Cooke, as it was called.

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And he sets up these lying pamphlets about how the climate is in the Northwest, all the rest of it.

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he finally gets it

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what happens is one of the, he gets it, and who replaces him, well what happens is

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he's of course the Republican

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very wrapped up with the Republican Party, very wrapped up with Chase

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Salmon P. Chase, with the Lincoln administration and the Grant administration

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and when he falls, he's topple

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his place is now taken in investment banking by

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from another Philadelphia firm called Drexel Morgan & Company

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and uh... this is the beginning of the famous rise of J.P. Morgan

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fame and fortune

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uh... Anthony Drexel was a famous Philadelphia

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banking, financial and banking investor

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and family, the Drexel Biddle family, which is still around, the Biddles are still

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functioning

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yeah, the same stuff, right

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Morgan was the son of a British banker and uh...

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Junius Morgan, Morgan was younger than I think than Drexel and very soon took over. He was obviously a dominant force

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and finally winds up as J.P. Morgan and company. But anyway, this is the result of the rise of J.P. Morgan

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who becomes a dominant figure in American politics

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also, as we'll see later, and

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from 1873 on. In other words, the panic of 1873 and the collapse of Cook

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allows room for new faces, so to speak, in the situation.

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Morgan is essentially a democrat, was involved in a democratic party

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although he became also from a

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New England wing of republican parties, we'll see later on

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Okay, so all these, Velard, after Cook goes bankrupt

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Velard becomes

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The head of the Northern Pacific tries to run it

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and doesn't do very well, and finally

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again the costs are excessive and so forth, but this time

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by 1873, with 1872, 1873, is the end of the railroad land grants, I mean that's it

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at the end of the grant administration with a panic

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the massive land grants are over, so now the Northern Pacific has to sort of make it on its own

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and couldn't do it

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and it goes bankrupt around the late seventies

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and you know it goes into bankruptcy

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bankruptcy in the state railroad doesn't mean the whole track is destroyed, it means the whole reorganization and whatever

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coming in

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the last

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transcontinental railroad to make it

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doing it purely, almost without any government subsidy at all, certainly with no grants, no loans or all the rest of it

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a really heroic

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Action. This was so-called Great Northern, which started up in Duluth, Minnesota, way

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up in northern Minnesota, and skirted the Canadian border, sometimes on the American

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side, sometimes on the Canadian side, something like that, and comes into Seattle. And notice

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all these, even though there are only a few passengers on the railroads, they all compete

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with each other. If you're going to send shipments out to California, the west coast or over

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of the East, you can take any one of these routes. And so they're all really in competition.

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So of course, this is called the Great Northern. The Great Northern was completed around the

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1870s, I believe, and it was, of course, mostly in competition with the Northern Pacific.

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And this was organized by an entrepreneur, James J. Hill, the last of the great railroad

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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.

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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.

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He came from a Scotch-Irish farm in Ontario. He became a clerk. He was uneducated. Most of these people were uneducated.

374
00:43:28.180 --> 00:43:37.180
He becomes a clerk, comes to the age of 18, emigrates to St. Paul, Minnesota, and becomes...

375
00:43:37.180 --> 00:43:46.180
He starts getting interested in... He starts buying out small bankrupt railroads and starts integrating them and making them more efficient.

376
00:43:46.180 --> 00:44:12.180
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,

377
00:44:12.180 --> 00:44:20.180
I mention that because there are not too many short entrepreneurs these days. They were short.

378
00:44:20.180 --> 00:44:28.180
At any rate, he specializes in low rates, cheap freight rates.

379
00:44:28.180 --> 00:44:33.180
Freight is a big thing. The passengers are, from an economic point of view, didn't mean much for these companies.

380
00:44:33.180 --> 00:44:37.180
And a large volume and being competitive. And so he's very efficient.

381
00:44:37.180 --> 00:44:45.680
and Ray Fischer and Ray Roth, always outcompeted the North Pacific and made good profits, there was no phony construction company,

382
00:44:45.680 --> 00:44:53.680
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.

383
00:44:53.680 --> 00:45:04.680
And he, and by the way, when he encouraged immigration, but he knew the area, he raised wheat in this area in Manitoba,

384
00:45:04.680 --> 00:45:08.680
and he knew what the climate was like, he didn't have to lie to the public, because he was actually there.

385
00:45:08.680 --> 00:45:14.680
None of these guys, these pamphleteers, were somewhere sitting in Philadelphia, and they didn't know what was going on in the Northwest.

386
00:45:14.680 --> 00:45:18.680
Okay, let's take a ten minute break and we'll be back with...

387
00:45:18.680 --> 00:45:22.680
Let's turn this stuff off.

388
00:45:22.680 --> 00:45:32.680
Okay, the anti-monopoly movement, at least the late 60s and early 70s, focused on these problems with land grants and the land

389
00:45:32.680 --> 00:46:02.680
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

390
00:46:02.680 --> 00:46:15.680
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.

391
00:46:15.680 --> 00:46:24.680
Another large racket that occurred in this whole period was what happened to Indian land?

392
00:46:24.680 --> 00:46:29.680
Lands are supposed to be homesteaded, except the maximum size, as I said, is 160 acres.

393
00:46:29.680 --> 00:46:35.680
But any land that the Indians got kicked out of was sort of up for grabs. There's no homesteading applied to it.

394
00:46:35.680 --> 00:46:42.680
There's a lot of finagling going on with taking them and selling them to huge blocks to speculate and order railroads.

395
00:46:42.680 --> 00:46:46.680
So railroads got a lot of extra land that way.

396
00:46:46.680 --> 00:46:56.680
One of the famous examples of that was the Cherokee Tract in southeastern Kansas,

397
00:46:56.680 --> 00:47:02.680
like a whole quarter here or something, almost, in southeastern Kansas.

398
00:47:02.680 --> 00:47:07.680
The Cherokees were kicked out, the landing gets opened up, what's going to happen to it?

399
00:47:07.680 --> 00:47:29.680
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.

400
00:47:29.680 --> 00:47:36.680
James Joy was the head of the Kansas City, Fort Scott and Gulf Railroad.

401
00:47:36.680 --> 00:47:43.680
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.

402
00:47:43.680 --> 00:47:46.680
They were disregarded. The whole thing was sold with joy.

403
00:47:46.680 --> 00:47:53.680
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.

404
00:47:53.680 --> 00:48:04.680
And it sold to him very cheaply and he takes, I think it was sold to him for a dollar an acre,

405
00:48:04.680 --> 00:48:11.680
and he resells it for about $2 an acre to settlers, so he's getting a big profit on no investment, almost no investment.

406
00:48:11.680 --> 00:48:19.680
The reason why he got this big deal, Senator James Joy, is the land was sold to him by the Secretary of the Interior.

407
00:48:19.680 --> 00:48:23.680
The Secretary of the Interior, of course, is in charge of the public domain. It still is.

408
00:48:23.680 --> 00:48:28.680
So it's a powerful position. In those days, of course, it meant running the whole West.

409
00:48:28.680 --> 00:48:34.680
and Secondary Interior then allows this deal to take place with Jim Joy. Who was the Secretary of the Interior?

410
00:48:34.680 --> 00:48:38.680
And we know the name of the Secretary of the Interior, Orville Browning, as it were, in the light.

411
00:48:38.680 --> 00:48:45.680
But most historians stop there. Many historians say, well, all right, Senator Browning, Secretary Browning.

412
00:48:45.680 --> 00:48:49.680
But also so happens that Browning was a brother-in-law of Jim Joy.

413
00:48:49.680 --> 00:48:55.680
Now the light becomes even clearer as to why this occurred.

414
00:48:55.680 --> 00:49:02.680
He also, Browning, had represented before he became Secretary of the Interior

415
00:49:02.680 --> 00:49:07.680
and after he left the Secretary of the Interior ship, he represented Joy as his lawyer

416
00:49:07.680 --> 00:49:14.680
and we have a very close relationship between Jim Joy and the type, the Railroad King as he was called

417
00:49:14.680 --> 00:49:18.680
and Browning, Railroad King

418
00:49:18.680 --> 00:49:37.680
Another similar situation happened to another part of Kansas, the Osage-Pribe land. That was about 8 million acres.

419
00:49:37.680 --> 00:49:44.680
Before continuing the railroads, I just want to talk a little bit about the land situation.

420
00:49:44.680 --> 00:49:46.780
uh... land question

421
00:49:46.780 --> 00:49:48.700
the uh...

422
00:49:48.700 --> 00:49:50.980
Frederic Jackson Turner

423
00:49:50.980 --> 00:49:55.080
was a famous thesis around 1900 or so

424
00:49:55.080 --> 00:49:57.880
called the Turner Thesis

425
00:49:57.880 --> 00:50:04.300
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

426
00:50:04.300 --> 00:50:06.840
and uh... there's been a lot of arguments back and forth

427
00:50:06.840 --> 00:50:07.680
about it

428
00:50:07.680 --> 00:50:10.600
basically it has a great deal of sense to it

429
00:50:10.600 --> 00:50:12.140
uh...

430
00:50:12.140 --> 00:50:16.860
One of the factors of the frontier provided was called a safety valve. In other words,

431
00:50:16.860 --> 00:50:20.180
people didn't like it in the east, they nipped out west,

432
00:50:20.180 --> 00:50:22.840
find fame and fortune and all sorts of things.

433
00:50:22.840 --> 00:50:25.500
And so what you have is an enormous

434
00:50:25.500 --> 00:50:29.900
expanse of free land, or more or less free land, once you get there and so forth.

435
00:50:29.900 --> 00:50:31.660
There's differences on that.

436
00:50:31.660 --> 00:50:35.420
Lots of land available, and this is extremely important in American history.

437
00:50:35.420 --> 00:50:38.060
It distinguishes America from, say, Europe,

438
00:50:38.060 --> 00:50:41.680
and many other, most other areas, namely the enormous amount of land.

439
00:50:41.680 --> 00:50:55.800
and enormous ratio of land to labor. So the, so if you have a huge amount of land per labor,

440
00:50:55.800 --> 00:51:00.360
per labor, then you have different, all sorts of different economic, sociological, whatever

441
00:51:00.360 --> 00:51:03.760
in production. For example, a kind of agriculture we have in the United States is very different

442
00:51:03.760 --> 00:51:08.560
from, let's say, in Europe because you don't try to, I mean, at least until recently, certainly

443
00:51:08.560 --> 00:51:12.240
during the 19th century, you don't try to economize on land, there's lots of land,

444
00:51:12.240 --> 00:51:16.000
there's land coming out the yang-yang, as my mother-in-law used to say, lots of land,

445
00:51:16.000 --> 00:51:20.960
there's not enough people to till it, so in other words, people become very expensive,

446
00:51:20.960 --> 00:51:28.320
labor is scarce, scarcer, and land is very abundant, so the kind of farming methods are

447
00:51:28.320 --> 00:51:33.120
those which are determined by that kind of situation, in other words, you have, you economize

448
00:51:33.120 --> 00:51:39.120
It relies on labor and not on land. It uses lots of land because land is not very scarce.

449
00:51:39.120 --> 00:51:45.120
So the land-labor ratio is very high. On the other hand, in Europe, if you've ever been

450
00:51:45.120 --> 00:51:49.360
to Western Europe, for example, everything is till, it's intensive agriculture. There's

451
00:51:49.360 --> 00:51:55.400
very little land per person, lots of people and very little land. So the land-labor ratio

452
00:51:55.400 --> 00:52:08.960
is very low in Europe, as a result, so European agriculture is not as intensive, in other

453
00:52:08.960 --> 00:52:14.640
words the very careful cultivation, every square foot practically is cultivated, in

454
00:52:14.640 --> 00:52:18.760
fact it's very charming, if you go to the Alps, you're up in the highest region of

455
00:52:18.760 --> 00:52:22.840
the Alps almost, there's up there and there's lots of cows and there's cows with bells

456
00:52:22.840 --> 00:52:27.040
and so on and that kind of things like that. Cabins and things going on and lots of people

457
00:52:27.040 --> 00:52:31.080
and lots of telling and I find it very charming. You go to the Rockies or whatever, of course

458
00:52:31.080 --> 00:52:37.440
there's nobody there. No people, no nothing. No cultivation. So what you have is extensive

459
00:52:37.440 --> 00:52:41.600
cultivation in the United States. In other words, lots of land and therefore there's

460
00:52:41.600 --> 00:52:47.600
no intensive methods. So European agriculturalists would come to the United States and say the

461
00:52:47.600 --> 00:52:52.120
terrible technology here, the agriculture is very backward. But it wasn't that it was

462
00:52:52.120 --> 00:52:56.320
was backward. It's not as if America didn't know about intensive agriculture. It was not

463
00:52:56.320 --> 00:53:00.520
economically unnecessary to have intensive agriculture. You don't have to worry about

464
00:53:00.520 --> 00:53:04.880
land. What you worry about is labor. So this determines very different kinds of methods,

465
00:53:04.880 --> 00:53:10.600
technological methods in agriculture. It would have been ridiculous to have intensive agriculture

466
00:53:10.600 --> 00:53:13.880
in the United States when there's plenty of land around. There's very few people and plenty

467
00:53:13.880 --> 00:53:19.200
of land. It was a very different kind of agriculture. Extensive agriculture. You don't try to form

468
00:53:19.200 --> 00:53:22.440
from every square foot, things like that.

469
00:53:22.440 --> 00:53:27.440
So it all depends on what you've got, what resources you've got and the responses accordingly.

470
00:53:27.440 --> 00:53:37.640
I don't know, by the way, there's still a lot of argument, I know very little about

471
00:53:37.640 --> 00:53:38.640
Indian agriculture.

472
00:53:38.640 --> 00:53:41.160
There's still a lot of argument about Indian agriculture.

473
00:53:41.160 --> 00:53:46.360
There's one set of economists who claim that Indian agriculture is uneconomic because the

474
00:53:46.360 --> 00:53:48.360
cow is sacred and therefore the cows are never killed.

475
00:53:48.360 --> 00:53:54.360
On the other hand, another contending group which claims that cows have an important agricultural function.

476
00:53:54.360 --> 00:53:57.360
It's not economically weak or whatever.

477
00:53:57.360 --> 00:54:00.360
So I don't want to get into this argument because I know very little about it.

478
00:54:00.360 --> 00:54:02.360
There's a contending that it's not obvious.

479
00:54:02.360 --> 00:54:04.360
I'll put it that way.

480
00:54:04.360 --> 00:54:17.560
So, another thing is that the, of course, it becomes a little more intensive now, but

481
00:54:17.560 --> 00:54:22.400
even in this situation, even later on, you still have a much more extensive agriculture

482
00:54:22.400 --> 00:54:23.400
in the United States.

483
00:54:23.400 --> 00:54:29.840
Also, the kinds of, sociologically different, in other words, usually European farmers are

484
00:54:29.840 --> 00:54:34.080
in villages, they're all located in villages, as a model.

485
00:54:34.080 --> 00:54:37.440
They all live together. In other words, you have a village with lots of people in it.

486
00:54:37.440 --> 00:54:41.160
It's a farming village. And the farms are out here somewhere, either right behind your

487
00:54:41.160 --> 00:54:48.160
house or a couple of miles out. Everybody's got their plot. And of course, there are commons

488
00:54:48.160 --> 00:54:52.280
and everything, but even with individual plots. So everybody's sort of together here in the

489
00:54:52.280 --> 00:54:57.520
village. They go out in the daytime and farm and come back. In the United States, we have

490
00:54:57.520 --> 00:55:01.640
lots of land and very few people. The settlement patterns are very different. Everybody, as

491
00:55:01.640 --> 00:55:08.640
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.

492
00:55:08.640 --> 00:55:13.640
Such a much more lonely existence, individualistic existence, sociologically, than in Europe.

493
00:55:13.640 --> 00:55:20.640
Villages are just trading villages. You have a few people in supermarkets or whatever, general stores.

494
00:55:20.640 --> 00:55:27.640
But every individual is physically, spatially wide apart.

495
00:55:27.640 --> 00:55:32.640
whereas in Europe they're clustered together and forming villages.

496
00:55:32.640 --> 00:55:36.640
I suppose you could say it makes it more individualistic.

497
00:55:36.640 --> 00:55:41.640
America's farmers are more individualistic, I suppose that's true.

498
00:55:41.640 --> 00:55:46.640
So Turner talked about the individualism of the farmer, the frontier,

499
00:55:46.640 --> 00:55:51.640
talked about it being more democratic, I'm not so sure about that, but that's at least an aspect of it.

500
00:55:51.640 --> 00:55:56.640
Another aspect he did not talk about, because it was so ingrained in him, he didn't think about it much,

501
00:55:56.640 --> 00:56:00.720
about it much, although it's in there if you look at it, mainly most of these people were

502
00:56:00.720 --> 00:56:07.360
Yankees as I pointed out, and they were all pietists in addition to being individualistic,

503
00:56:07.360 --> 00:56:12.880
and most of them had come from rural New England, they all wanted outlaw liquor and crush Catholics

504
00:56:12.880 --> 00:56:19.400
and things like that, including Turner, it was so ingrained as himself a lost pietist

505
00:56:19.400 --> 00:56:23.160
that he didn't think twice about it.

506
00:56:23.160 --> 00:56:26.840
So I think it is important, also it was a safety valve, people could get out of it as

507
00:56:26.840 --> 00:56:30.600
a depression or a recession in New York or Philadelphia, all right, the heck with it,

508
00:56:30.600 --> 00:56:36.080
you find a farm somewhere. And a lot of that was being done. In contrast to that, a lot

509
00:56:36.080 --> 00:56:39.360
of people didn't like the fact that people couldn't have a safety valve. So a lot of

510
00:56:39.360 --> 00:56:44.080
Eastern landowners, let's say you're a fairly large landowner in Massachusetts or in the

511
00:56:44.080 --> 00:56:49.120
South, you don't want workers, a farm worker, say, leaving and schlepping them, Wisconsin

512
00:56:49.120 --> 00:56:53.000
and set up a farm, you want them working here so you can have a cheap labor supply. So there's

513
00:56:53.000 --> 00:56:57.000
This has always happened in the Industrial Revolution in England, for example.

514
00:56:57.000 --> 00:56:59.500
The main opponents of the Industrial Revolution were the landlords.

515
00:56:59.500 --> 00:57:03.500
They didn't want their farm workers leaving the farm and going off to a factory somewhere.

516
00:57:03.500 --> 00:57:08.000
It means they haven't got the farm workers. It means they have to pay more for higher wages.

517
00:57:08.000 --> 00:57:12.500
And so they're constantly trying to cripple the development of every industry in England.

518
00:57:12.500 --> 00:57:16.500
The first status legislation, post-socialistic legislation, I quote,

519
00:57:16.500 --> 00:57:20.500
were put in essentially by Tory landlords who wanted to keep the farm workers on the farm.

520
00:57:20.500 --> 00:57:24.500
They didn't want to have these available, have factories available to them so they could

521
00:57:24.500 --> 00:57:25.500
move.

522
00:57:25.500 --> 00:57:29.060
There's a similar sort of process here by Easterners and Southerners particularly, one

523
00:57:29.060 --> 00:57:33.380
of the limit land development in the West, keep out homesteaders, keep out settlements,

524
00:57:33.380 --> 00:57:35.220
they have to stay here and work.

525
00:57:35.220 --> 00:57:40.420
Again, remember labor was particularly scarce in the United States.

526
00:57:40.420 --> 00:57:49.500
I might have mentioned this before, but slavery in the South, slavery was probably essentially

527
00:57:49.500 --> 00:57:57.780
the large-scale plantation ownership development, and they felt that if they weren't here on

528
00:57:57.780 --> 00:58:03.140
the plantation, they'd leave somewhere, which they undoubtedly would have.

529
00:58:03.140 --> 00:58:10.540
At any rate, but in the 1862, the Homesteading Act in 1862, you have a breakthrough in that,

530
00:58:10.540 --> 00:58:14.980
you have a move toward Western development, and even though in some cases it wasn't homesteading,

531
00:58:14.980 --> 00:58:18.980
it still was enough on the land distribution, the United States avoided the whole feudal

532
00:58:18.980 --> 00:58:24.860
and Land Setup. As a matter of fact, Louis Hartz, a historian at Harvard, wrote a famous

533
00:58:24.860 --> 00:58:29.660
book in 1948, I think, called The Liberal Tradition. And basically what he said was,

534
00:58:29.660 --> 00:58:32.340
the difference in the United States, the reason why the United States never had a Marxist

535
00:58:32.340 --> 00:58:37.260
party, never had a, always had a, was essentially a liberal capitalist, is because we avoided

536
00:58:37.260 --> 00:58:46.260
the whole feudal land setup. And I think that's totally true, and it's a broad statement.

537
00:58:46.260 --> 00:58:54.260
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,

538
00:58:54.260 --> 00:59:02.260
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,

539
00:59:02.260 --> 00:59:09.260
and you got huge land amassed, huge land acreage, but they usually, again, washed out.

540
00:59:09.260 --> 00:59:13.260
They didn't stay there because there was nobody there, they wanted to settle in, they wanted to subdivide it and sell it.

541
00:59:13.260 --> 00:59:18.460
and sell it, so eventually it was washed out. Fortunately, we didn't have this problem.

542
00:59:18.460 --> 00:59:23.420
There was one interesting thing, there were a lot of Spanish land grants which we decided

543
00:59:23.420 --> 00:59:34.420
to honor in Texas, and the United States grabbed it anyway, and they still have the deeds there,

544
00:59:34.420 --> 00:59:39.180
the whole New Mexican rebellion movement, where the people have their, they have the

545
00:59:39.180 --> 00:59:55.180
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.

546
00:59:55.180 --> 01:00:02.300
At any rate, but basically we have a land system which is more or less free and open, and that's

547
01:00:02.300 --> 01:00:09.700
the result, resulting from this lack of a fixed, of a tight feudal land system.

548
01:00:09.700 --> 01:00:16.380
In Utah, also particularly, the Mormons settled Utah in a very homesteading fashion, so what

549
01:00:16.380 --> 01:00:23.380
in Europe, of course, water is generally considered superabundant. There's no such thing as a

550
01:00:46.380 --> 01:00:52.940
Water shortage in Holland or something like that. Plenty of water to use it to have more

551
01:00:52.940 --> 01:00:58.040
landfill. So the European, the question is who owns water? Who owns what water? The way

552
01:00:58.040 --> 01:01:07.040
the common law developed in Europe, the so-called riparian system, R-I-P-A-R-I-A-N, where you

553
01:01:07.040 --> 01:01:12.120
have a river, say, you own, let's say you have a house or a land right on this river,

554
01:01:12.120 --> 01:01:16.800
You own this part of the river, you own this chunk of the river extending into it, just

555
01:01:16.800 --> 01:01:21.160
because you happen to live next to it, that's the so-called riparian scheme, obviously it's

556
01:01:21.160 --> 01:01:27.080
not a very good way of allocating river resources, you can lock up this whole river thing, nobody

557
01:01:27.080 --> 01:01:32.560
worried about it, they didn't think about rivers being a scarce resource, except when

558
01:01:32.560 --> 01:01:37.040
it comes to polluting upstream, downstream, whatever, aside from that, there wasn't too

559
01:01:37.040 --> 01:01:41.400
much problem there, when you got into the same law that applied to the eastern United

560
01:01:41.400 --> 01:01:48.400
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

561
01:01:48.400 --> 01:01:52.400
in the west we always have a big water shortage, water scarcity

562
01:01:52.400 --> 01:01:58.400
in the west for example it says river, look at a map it says river, there's nothing there, just a dry depression

563
01:01:58.400 --> 01:02:02.400
in only a couple of months a year they actually have water running through it

564
01:02:02.400 --> 01:02:08.400
so as a result of this very different kind of water system they hit out there

565
01:02:08.400 --> 01:02:11.480
where they have the methodical appropriations.

566
01:02:11.480 --> 01:02:15.480
They have more or less a homesteading system in rivers.

567
01:02:16.720 --> 01:02:17.640
It worked pretty well.

568
01:02:17.640 --> 01:02:19.760
Unfortunately, what happened was,

569
01:02:19.760 --> 01:02:21.200
it's not pure private ownership.

570
01:02:21.200 --> 01:02:23.240
What happened is if you don't use your 3%,

571
01:02:23.240 --> 01:02:24.920
let's say you have the first 3%,

572
01:02:24.920 --> 01:02:26.880
the second 3% or whatever,

573
01:02:26.880 --> 01:02:28.720
if you don't use it, the ownership reverts

574
01:02:28.720 --> 01:02:30.520
back to the state government,

575
01:02:30.520 --> 01:02:32.580
which can then hand it out in some other way.

576
01:02:32.580 --> 01:02:34.800
So as a result, you can't really sell your rights to it.

577
01:02:34.800 --> 01:02:36.920
It's not a full private property situation.

578
01:02:38.400 --> 01:02:43.520
There's an approach toward it, but it really doesn't meet the whole thing. As a result, it doesn't work too well,

579
01:02:44.560 --> 01:02:46.560
especially when you're trying to change uses.

580
01:02:46.760 --> 01:02:53.020
So, for example, in California, at constant wars, of course, who gets, there's water on the Colorado River, which goes

581
01:02:54.000 --> 01:02:59.840
through Nevada and down Arizona or something, and who gets it? So, Los Angeles, of course, is built out of a desert.

582
01:02:59.840 --> 01:03:06.840
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

583
01:03:06.840 --> 01:03:20.840
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?

584
01:03:20.840 --> 01:03:27.840
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.

585
01:03:27.840 --> 01:03:32.840
Government. So it becomes a political football instead of simply a market phenomenon. There

586
01:03:32.840 --> 01:03:36.520
are of course attempts now to try to make it a full appropriation system with full rights

587
01:03:36.520 --> 01:03:40.640
to buy and sell. That would eliminate the whole water, most of the water crisis between

588
01:03:40.640 --> 01:03:43.520
different governments, different regions, et cetera, et cetera. As a matter of fact,

589
01:03:43.520 --> 01:03:48.440
right now you have a series of fantastic multi-billion dollar boondoggles. They just completed the

590
01:03:48.440 --> 01:03:53.080
Central Arizona project in Arizona, which takes water from the Colorado River and brings

591
01:03:53.080 --> 01:03:59.360
at the Southern Arizona. It costed, I don't know, umpteen billion dollars to the taxpayer

592
01:03:59.360 --> 01:04:04.080
for many years. What they do is they send the water in here, then the orders are extremely

593
01:04:04.080 --> 01:04:07.920
scarce, right? Instead of charging a high price, the market price of the farmers, they

594
01:04:07.920 --> 01:04:13.680
charge a very low price. They subsidize very cheap water, way below the price that cost

595
01:04:13.680 --> 01:04:20.320
the taxpayer, and they make the farmers use all of it. You don't use it or lose it. You

596
01:04:20.320 --> 01:04:24.120
You get the cheap cheap water except you have to use all of it and when they encourage them

597
01:04:24.120 --> 01:04:29.400
to grow these crops, which they can't sell except at a very low price, the government

598
01:04:29.400 --> 01:04:35.400
then buys, they pay the farmers not to produce it, unbelievable situation, they take weed

599
01:04:35.400 --> 01:04:39.120
or something or cotton or whatever they're growing there, they pay the farmers, they

600
01:04:39.120 --> 01:04:43.360
subsidize the farmers to buy the water at a very cheap rate, this encourages fantastic

601
01:04:43.360 --> 01:04:48.600
waste of the water at a cheap cheap rate, then they grow the crops that they can't sell

602
01:04:48.600 --> 01:04:53.600
The government buys it back or pays them more money not to grow the crops, so they pay them

603
01:04:53.600 --> 01:04:57.880
twice, once to irrigate the crops and two, not to grow them.

604
01:04:57.880 --> 01:05:05.000
Of course, the farmers love it, farmers getting paid three ways or at least two ways, paid

605
01:05:05.000 --> 01:05:07.560
to produce the stuff and then pay not to produce, double.

606
01:05:07.560 --> 01:05:11.040
And of course, the government, the Agriculture Department loves it, they're getting all these

607
01:05:11.040 --> 01:05:13.800
dams and the Interior Department, they're getting lots of people, lots of employees,

608
01:05:13.800 --> 01:05:17.080
they're getting, building their empire, they're getting lots of money from the taxpayer, the

609
01:05:17.080 --> 01:05:22.080
The only people who don't love it are the poor consumers and taxpayers who are paying for the nose for this.

610
01:05:22.080 --> 01:05:30.080
Paying for scarce water, to waste scarce water, and then paying not to grow the crops, which are being subsidized to grow.

611
01:05:30.080 --> 01:05:32.080
Totally nuts out of the system.

612
01:05:32.080 --> 01:05:37.080
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.

613
01:05:37.080 --> 01:05:41.080
Those three groups love it.

614
01:05:41.080 --> 01:05:44.080
The people who are against the farm, the tax payers, don't know much.

615
01:05:44.080 --> 01:05:49.080
I don't know much. The free-market economists are against it and the environmentalists are against it.

616
01:05:49.080 --> 01:05:54.080
So you have a coalition, a growing coalition in the west of free-market economists and environmentalists.

617
01:05:54.080 --> 01:05:58.080
They say, Jesus, you're wasting water, you're killing wildlife, whatever it is.

618
01:05:58.080 --> 01:06:02.080
So you have an interesting new coalition of these groups here.

619
01:06:02.080 --> 01:06:07.080
Okay, I'll get back to water a little bit later on land, but the

620
01:06:07.080 --> 01:06:12.080
continuum of the railroads,

621
01:06:12.080 --> 01:06:22.080
By the mid-1880s, every large town in the United States had at least two railroads, sometimes more than that.

622
01:06:22.080 --> 01:06:29.080
For example, between St. Louis and Atlanta, there were 20 competing railroad groups, lots of competition.

623
01:06:29.080 --> 01:06:35.080
Don't forget there were no roads, so you have to always understand that.

624
01:06:35.080 --> 01:06:41.080
And the railroad rates kept going down, as I said last time, all the time, constantly, especially in spurts.

625
01:06:41.080 --> 01:06:57.040
There were five so-called trunk lines. Trunk lines are the big five railroads which went

626
01:06:57.040 --> 01:07:05.320
from the eastern seaboard of Chicago, basically. Several of these transcontinental roads going

627
01:07:05.320 --> 01:07:09.760
from Chicago or Omaha or something to the west. They had the basic lines going from

628
01:07:09.760 --> 01:07:18.480
on the Eastern Seaboard of Chicago. You had B&O, Baltimore and Ohio, which went from Baltimore

629
01:07:18.480 --> 01:07:25.440
to Chicago, and Pennsylvania Railroad, which went from Philadelphia, New York Central,

630
01:07:25.440 --> 01:07:35.960
which went from New York up to Hudson, and there was also Erie Railroad, and there was

631
01:07:35.960 --> 01:07:43.600
Also, Grand Trunk, which went all the way up Canadian border, I think, to Boston, so,

632
01:07:43.600 --> 01:07:47.080
and they were very fiercely competitive, realized they compete, of course, even though they don't

633
01:07:47.080 --> 01:07:51.120
go to the same places, they compete, Philadelphia merchants are competing with New York merchants

634
01:07:51.120 --> 01:07:54.200
and so forth for the Chicago market.

635
01:07:54.200 --> 01:07:59.960
So, they were, and they're, as we'll see, they were constantly trying to have cartels

636
01:07:59.960 --> 01:08:02.300
to try to stop this.

637
01:08:02.300 --> 01:08:05.140
One interesting thing is when they had a cartel, they were trying to figure out how to price

638
01:08:05.140 --> 01:08:15.780
What should pricing be based on? For example, Baltimore, Ohio and Pennsylvania have the

639
01:08:15.780 --> 01:08:22.620
shortest routes, the shortest mileage. So they claim you should base rates on distance.

640
01:08:22.620 --> 01:08:25.940
Those of us who have shorter roads should charge a lower price. If you have a higher

641
01:08:25.940 --> 01:08:29.900
and longer road, you should charge a higher price. Obviously, they want to screw the competitors

642
01:08:29.900 --> 01:08:35.700
New York Central, which had a longer route, said, no, no, it should base pricing on the

643
01:08:35.700 --> 01:08:36.700
cost of operation.

644
01:08:36.700 --> 01:08:42.100
It turned out that New York Central had easier grades, so that there was less cost to build

645
01:08:42.100 --> 01:08:47.700
the actual track, and they had denser traffic, they had lower operating costs, so they were

646
01:08:47.700 --> 01:08:48.700
arguing for that.

647
01:08:48.700 --> 01:08:51.660
Of course, there's no way to resolve this argument, except on the free market, you just

648
01:08:51.660 --> 01:08:54.980
charge whatever you get away with and the competitors can let you get away with.

649
01:08:54.980 --> 01:08:58.660
If you're trying to have a cartel, these become very important, trying to figure out, well,

650
01:08:58.660 --> 01:09:04.660
What should we base the pricing on? Well, there's no way, there's no rational way, quote-unquote, to decide between this.

651
01:09:04.660 --> 01:09:11.660
And Grand Trunk, which is always on the edge of bankruptcy anyway, with the shakiest shape, and eventually it did go bankrupt,

652
01:09:11.660 --> 01:09:14.660
they said it should only charge the cover operating costs.

653
01:09:14.660 --> 01:09:19.660
It shouldn't have to cover construction costs, as they're obviously, or they hardly cover anything.

654
01:09:19.660 --> 01:09:27.660
Anyway, there was a series of rate wars between these Grand Trunk lines in 1876, which, so all rates fell.

655
01:09:27.660 --> 01:09:34.300
It was touched off by the completion of the Baltimore-Ohio Railroad in 1874, which starts

656
01:09:34.300 --> 01:09:41.820
the big series of rate wars.

657
01:09:41.820 --> 01:09:56.460
So for example, between 1876 and 77, just in that one year, to give you an idea, first-class

658
01:09:56.460 --> 01:10:11.460
Freight Rates from the east of Chicago, and there were several classes, a bunch of like

659
01:10:11.460 --> 01:10:16.740
four or five classes, so first class charged higher rates than the fourth class, let's

660
01:10:16.740 --> 01:10:25.140
say, excuse me, lower rates than fourth class, the first class freight rates fell from 75

661
01:10:25.140 --> 01:10:32.140
The Eastbound rate, going from Chicago eastward, fell from a $1.00 weight to $0.50 to $0.50

662
01:10:55.140 --> 01:11:07.140
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.

663
01:11:07.140 --> 01:11:19.140
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.

664
01:11:19.140 --> 01:11:29.140
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.

665
01:11:35.140 --> 01:11:45.140
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.

666
01:11:45.140 --> 01:12:02.140
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.

667
01:12:02.140 --> 01:12:13.240
We have a freight rate from New York to Chicago, westbound freight rate from New York to Chicago.

668
01:12:13.240 --> 01:12:18.420
And this is a standard freight rate for different classes.

669
01:12:18.420 --> 01:12:26.460
First class, second class, third, and fourth class.

670
01:12:26.460 --> 01:12:39.500
And this is $2.15, I guess per 100th weight again, went down to $0.75, $1.80 went down

671
01:12:39.500 --> 01:12:52.820
to $0.65, $1.06 went down to $0.50, $0.96 went down to $0.35.

672
01:12:52.820 --> 01:13:08.820
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.

673
01:13:08.820 --> 01:13:19.820
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.

674
01:13:19.820 --> 01:13:25.020
You keep the freight rates the same, but you declassify products.

675
01:13:25.020 --> 01:13:28.220
In other words, one way of competing was, you keep the rates the same.

676
01:13:28.220 --> 01:13:33.720
Mine might be the same, but something you move stuff from first class to second class and from second to third.

677
01:13:33.720 --> 01:13:39.020
You lower the classification, you're really making it cheaper while the rates remain the same.

678
01:13:39.020 --> 01:13:43.020
That's why nowadays we have, you quote, don't increase the income tax, but you have inflation.

679
01:13:43.020 --> 01:13:46.820
Everybody's waffled into a higher tax bracket and you pay a bigger proportion.

680
01:13:46.820 --> 01:13:50.580
so you increase the income tax without saying you have a tax increase

681
01:13:50.580 --> 01:13:53.940
by the way the latest nonsense is just yesterday

682
01:13:53.940 --> 01:13:57.700
this is totally also irrelevant to our course here

683
01:13:57.700 --> 01:14:02.100
but it is no it isn't because it is modern economic American economic history

684
01:14:02.100 --> 01:14:04.740
Reagan has always been saying he's not going to have any tax increase well he's

685
01:14:04.740 --> 01:14:07.300
had over the years he's had a revenue

686
01:14:07.300 --> 01:14:10.980
enhancement so the revenue has done a tax increase

687
01:14:10.980 --> 01:14:15.700
he's had closing of the loopholes doesn't call a tax increase and now he

688
01:14:15.700 --> 01:14:18.740
has something he said, well, he's not going to increase taxes, he's just going to find

689
01:14:18.740 --> 01:14:20.380
new revenue sources.

690
01:14:20.380 --> 01:14:25.260
Now, you tell me what the difference is between a tax increase and finding a new revenue source.

691
01:14:25.260 --> 01:14:27.060
We're just tapping new revenue sources.

692
01:14:27.060 --> 01:14:28.540
That's not increasing tax.

693
01:14:28.540 --> 01:14:33.180
You keep your pledge not to increase taxes by calling it, by saying it's not a tax review,

694
01:14:33.180 --> 01:14:34.180
just in rhetoric.

695
01:14:34.180 --> 01:14:38.900
You do it in reality, you don't do it in rhetoric, you think you've accomplished something.

696
01:14:38.900 --> 01:14:42.980
All right, that's, so, but in those days, things were going, getting cheaper all the

697
01:14:42.980 --> 01:14:51.980
And they're getting cheaper officially and also unofficially by having lower classifications of freight.

698
01:14:51.980 --> 01:14:56.980
In addition to that, railroads are so competitive they would have special rates.

699
01:14:56.980 --> 01:15:00.980
In other words, you have as railroads, you have shippers, everybody else is a shipper.

700
01:15:00.980 --> 01:15:04.980
If you were a railroad, you were shipping things, you were shipping freight.

701
01:15:04.980 --> 01:15:15.100
And railroads are so anxious for shippers' business that they would have special rates

702
01:15:15.100 --> 01:15:20.900
or rebates from the official rate.

703
01:15:20.900 --> 01:15:21.900
Rebate meant a discount.

704
01:15:21.900 --> 01:15:25.460
If you get my business, I'll give you a 10% cut off the list.

705
01:15:25.460 --> 01:15:29.180
See, in business, you don't want to cut the list, and if you cut the price of the list,

706
01:15:29.180 --> 01:15:30.180
it's a real commitment.

707
01:15:30.180 --> 01:15:31.180
It's a big, open commitment.

708
01:15:31.180 --> 01:15:36.180
I mean, you have a list price, you're cutting whatever it is, Coca-Cola or whatever it is.

709
01:15:36.180 --> 01:15:40.180
You don't like to cut the price, you hope that maybe it will go up again soon.

710
01:15:40.180 --> 01:15:47.180
So we really need to cut, you have special discounts for customers, different kinds of customers, new customers, old customers, whatever.

711
01:15:47.180 --> 01:15:53.180
And when the big, as we'll see later, when the big charge came of Standard Oil was having special rebates,

712
01:15:53.180 --> 01:16:00.180
one of the big quote monopoly things about Standard Oil, special rebates from railroads for shipping and stuff.

713
01:16:00.180 --> 01:16:03.100
and stuff, it's true they have special rebates, but everybody else had special rebates, all

714
01:16:03.100 --> 01:16:06.940
the other oil companies had rebates, everybody had rebates, the whole world had rebates,

715
01:16:06.940 --> 01:16:11.380
the whole world lived off, in other words, not only did the official rates go down, not

716
01:16:11.380 --> 01:16:15.940
only were classifications going down, but every shipper was getting a rebate, some were getting

717
01:16:15.940 --> 01:16:19.500
more than others, some less than others, every shipper was getting discounts.

718
01:16:19.500 --> 01:16:25.220
There was a famous storage, George, Professor Stiegler, who later got to know about Plas

719
01:16:25.220 --> 01:16:42.220
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.

720
01:16:42.220 --> 01:16:52.220
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.

721
01:16:52.220 --> 01:16:56.220
Any theories were invented to try to explain this. Why should prices be fixed? It doesn't make any sense.

722
01:16:56.220 --> 01:17:01.220
We know the prices go up, the demand increases, we know they go down as supply increases.

723
01:17:01.220 --> 01:17:05.220
Why do prices remain fixed? Well, this is a crazy theory we've concocted to figure this out.

724
01:17:05.220 --> 01:17:09.220
Well, Stiegler pointed out, and has been pointed out for other things,

725
01:17:09.220 --> 01:17:14.220
before you try to explain a phenomenon, you have to really make sure the phenomenon exists, right?

726
01:17:14.220 --> 01:17:19.220
Before you invent a theory to explain something, you have to be sure the thing actually exists.

727
01:17:19.220 --> 01:17:20.960
How do they know that steel rails were fixed in price?

728
01:17:20.960 --> 01:17:22.360
Because the list price remained the same.

729
01:17:22.360 --> 01:17:26.060
If you're an economist, economic historian, you're lazy,

730
01:17:26.060 --> 01:17:28.860
you look at the list price and say, well, that's it.

731
01:17:28.860 --> 01:17:30.420
If you go out on the real world, however,

732
01:17:30.420 --> 01:17:33.360
very almost none of these things were sold at list prices.

733
01:17:33.360 --> 01:17:35.160
The interesting, important thing is what was the price,

734
01:17:35.160 --> 01:17:37.620
what was the real price for real transactions?

735
01:17:37.620 --> 01:17:39.560
So somebody went, I think it was Stiegler who went out

736
01:17:39.560 --> 01:17:42.020
and made a study about what actually the prices were

737
01:17:42.020 --> 01:17:43.200
over the years.

738
01:17:43.200 --> 01:17:45.260
It turned out nobody sold at a list.

739
01:17:45.260 --> 01:17:48.060
If you had a boom period, it sold like 5% down from lists,

740
01:17:48.060 --> 01:17:50.340
and the Depression that sold 30% of that.

741
01:17:50.340 --> 01:17:52.620
So the overall price was fluctuating all the time.

742
01:17:52.620 --> 01:17:55.260
It just, they weren't recorded in the books,

743
01:17:55.260 --> 01:17:58.380
meaning the official price books, price list books.

744
01:17:59.980 --> 01:18:02.900
So what you're trying to find out is what the actual price is.

745
01:18:02.900 --> 01:18:06.300
And as I say, discount walk lists is a time-honored method

746
01:18:06.300 --> 01:18:10.500
of sale and business, especially in a business

747
01:18:10.500 --> 01:18:12.260
that's uncertain what's gonna happen

748
01:18:12.260 --> 01:18:14.460
and you figure, well, you'll give a discount.

749
01:18:14.460 --> 01:18:23.180
So, and remember in a cartel, the thing which breaks the cartel, as I mentioned last time,

750
01:18:23.180 --> 01:18:25.260
is secret price cutting, secret rebates.

751
01:18:25.260 --> 01:18:30.740
You're giving secret rebates when you don't want your cartellists, your fellow cartellists

752
01:18:30.740 --> 01:18:32.700
to find out you're screwing them here.

753
01:18:32.700 --> 01:18:37.220
You're giving a secret, you're breaking your agreement by giving a special rebate or a

754
01:18:37.220 --> 01:18:38.220
list.

755
01:18:38.220 --> 01:18:39.220
But these things are not even, it's secret.

756
01:18:39.220 --> 01:18:42.820
They were done all the time.

757
01:18:42.820 --> 01:18:47.940
In addition to competing by cutting rates, you have to realize the whole emphasis in

758
01:18:47.940 --> 01:18:51.020
these days, of course, the emphasis is, how do you have a hidden price increase?

759
01:18:51.020 --> 01:18:53.540
In those days, the emphasis was to have a hidden price fall.

760
01:18:53.540 --> 01:18:57.140
Prices were falling all the time because there was tremendous competition, a tremendous increase

761
01:18:57.140 --> 01:18:58.140
in production.

762
01:18:58.140 --> 01:19:03.260
It was a wonderful time for the consumer to be alive.

763
01:19:03.260 --> 01:19:07.740
So in addition to prices being cut, quality of service kept going up, they kept giving

764
01:19:07.740 --> 01:19:09.860
you extra deals.

765
01:19:09.860 --> 01:19:13.740
One thing which the railroads began to do is, for example, give you special discounts if

766
01:19:13.740 --> 01:19:21.460
you fill up the railroad car, which is obviously why they have a railroad car. There's an obvious

767
01:19:21.460 --> 01:19:27.060
reason for that. They try not to send the car out until it's fully loaded. And so if

768
01:19:27.060 --> 01:19:30.700
you can have a shipment which fills up the whole car, you're in great shape. If on the

769
01:19:30.700 --> 01:19:35.260
other hand, you only have a third of the car, you have to wait until somebody else has stuff

770
01:19:35.260 --> 01:19:38.860
for the other two thirds. And so they started charging lower rates. If you can fill the

771
01:19:38.860 --> 01:19:46.580
And that's one reason why if you have a high-quantity shipper, you can get a lower rate because

772
01:19:46.580 --> 01:19:49.540
you can fill a car up and get it out there.

773
01:19:49.540 --> 01:19:53.660
No railroad wants to have a car sitting around a lot.

774
01:19:53.660 --> 01:19:57.820
So that's another thing, discounts are given for that.

775
01:19:57.820 --> 01:20:01.980
So obviously, with standard oil, we'll get to standard oil later on, but with standard

776
01:20:01.980 --> 01:20:05.860
oil, that's filling up lots of cars with oil, you're obviously going to get a lower rate

777
01:20:05.860 --> 01:20:09.940
because I can guarantee a fully loaded car, a mirrored car.

778
01:20:16.660 --> 01:20:19.380
So for example, New York Central at one point

779
01:20:19.380 --> 01:20:22.620
had 6,000 rebates, 6,000 rebates to shippers,

780
01:20:22.620 --> 01:20:25.400
and it was called special contracts or special rates.

781
01:20:28.180 --> 01:20:30.340
Sometimes the railroad would start paying for storage,

782
01:20:30.340 --> 01:20:31.620
and it's another thing, who pays for storage?

783
01:20:31.620 --> 01:20:32.820
The shipper pays, the railroad pays.

784
01:20:32.820 --> 01:20:35.320
Well, it's up to, you know, it's a contractual situation.

785
01:20:35.320 --> 01:20:43.820
As the railroads were battling for business, they started taking over the storage fees.

786
01:20:43.820 --> 01:20:47.840
So one way, of course, of having hidden increases, if you have government, say, regulation of

787
01:20:47.840 --> 01:20:52.160
rates, and you want to have an increase, they don't allow you, an increase is reclassifying

788
01:20:52.160 --> 01:20:53.960
class rates upward.

789
01:20:53.960 --> 01:20:59.360
You keep the same rate up later on, like in the 20th century.

790
01:20:59.360 --> 01:21:03.640
We haven't raised our fares in 30 years, except for what used to be third class is now first

791
01:21:03.640 --> 01:21:04.640
class, buddy.

792
01:21:04.640 --> 01:21:08.640
Okay, that's one way of doing it, without doing it officially, without raising officially.

793
01:21:08.640 --> 01:21:13.640
In the 19th century, it was the other way around, it was cutting rates.

794
01:21:17.640 --> 01:21:23.640
Okay, so what you had then, is the first big business, was a highly competitive industry, and...

795
01:21:23.640 --> 01:21:26.640
Oh, another thing I should say is that the...

796
01:21:26.640 --> 01:21:31.640
I'm not going to go into this in detail, but the South was always belly-acking about this.

797
01:21:31.640 --> 01:21:35.080
Why were freight rates in southern railroads higher than in northern railroads?

798
01:21:35.080 --> 01:21:36.600
Always complaining about this.

799
01:21:36.600 --> 01:21:40.040
Felt it was something sinister, some plot against the south.

800
01:21:40.040 --> 01:21:41.000
Wasn't any plot at all.

801
01:21:41.000 --> 01:21:42.760
It was economically very easy to understand.

802
01:21:42.760 --> 01:21:45.720
First place, they had no through lines in the south.

803
01:21:45.720 --> 01:21:51.240
In other words, the railroad lines in the north were long through lines,

804
01:21:52.600 --> 01:21:56.600
either from the east of Chicago or on west, you know, transcontinental lines.

805
01:21:56.600 --> 01:21:58.040
The south had short railroads.

806
01:21:58.040 --> 01:21:59.640
They didn't have any real trunk lines.

807
01:21:59.640 --> 01:22:05.080
And actually it was short rail, they couldn't have big discounts, they had short routes,

808
01:22:05.080 --> 01:22:08.600
they had a high fixed cost and a terminal cost and therefore they're going to have higher

809
01:22:08.600 --> 01:22:11.880
costs, they're going to have higher, undoubtedly going to have higher rates.

810
01:22:11.880 --> 01:22:18.880
And another thing about the South was they had a triangular pattern, they developed trade,

811
01:22:20.720 --> 01:22:27.720
they would buy food, let's say a grain from the Midwest, they'd sell cotton to the East,

812
01:22:27.720 --> 01:22:34.720
As a result, the cars would be empty going both ways here. The South would have nothing much to sell in the West.

813
01:22:34.720 --> 01:22:39.720
Railroad cars would be empty. And they wouldn't have much this way. So in other words, they were half full.

814
01:22:39.720 --> 01:22:47.720
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.

815
01:22:47.720 --> 01:22:53.720
Empty on the way back. And unfortunately, that's the way it was. It was not a plot. Good economic reasons for this.

816
01:22:53.720 --> 01:22:56.760
to this, it wasn't, quote, discrimination, unquote.

817
01:22:59.680 --> 01:23:02.000
Anyway, in response, so we have then

818
01:23:02.000 --> 01:23:03.320
a very competitive railroad system,

819
01:23:03.320 --> 01:23:05.020
very productive, very competitive,

820
01:23:05.020 --> 01:23:06.960
even overbuilt in some cases,

821
01:23:06.960 --> 01:23:10.060
have a tremendous drop in freight rates throughout.

822
01:23:10.060 --> 01:23:11.720
As a result of this, from the very beginning,

823
01:23:11.720 --> 01:23:13.680
starting in the late 1860s,

824
01:23:15.400 --> 01:23:17.400
railroads were desperately attempting to have a cartel,

825
01:23:17.400 --> 01:23:21.180
trying to get a cartel, trying to raise their rates.

826
01:23:21.180 --> 01:23:26.100
And since they were the first big business, they were the first cartellists.

827
01:23:26.100 --> 01:23:30.100
And there's a great book on this by Coco, who wrote our book on time of conservatives.

828
01:23:30.100 --> 01:23:31.260
You're interested in this area.

829
01:23:31.260 --> 01:23:32.860
It's called Railroads and Regulations.

830
01:23:32.860 --> 01:23:35.420
I don't think it's in, it might be in paperback even.

831
01:23:35.420 --> 01:23:40.700
Anyway, I recommend it for those of you who are interested in going into this.

832
01:23:40.700 --> 01:23:47.540
And he talks about this in detail.

833
01:23:47.540 --> 01:23:50.780
The Railroads, the best way to try to form a cartel, headed by J.P. Morgan,

834
01:23:50.780 --> 01:23:55.140
and who now becomes after the early 70s, these are the top, and even before that was important,

835
01:23:55.140 --> 01:23:59.020
the top railroad investment banker.

836
01:23:59.020 --> 01:24:02.740
And trying to form a cartel, cutting shipments, getting quotas and raising the rate, they

837
01:24:02.740 --> 01:24:06.540
try to do it, every one of them is a flopperoo, every one of them flopperoo very quickly.

838
01:24:06.540 --> 01:24:10.020
I'll mention it, there's a couple of them, a couple of leading flopperoos here.

839
01:24:10.020 --> 01:24:16.860
They couldn't do it, they had internal price cutting and external, new sources of new

840
01:24:16.860 --> 01:24:21.380
New railroads coming in, very simply, they try to have, you set a freight rate between

841
01:24:21.380 --> 01:24:25.300
here and here, you have two or three railroads, they fix the price and cut the shipment, a

842
01:24:25.300 --> 01:24:28.540
new railroad will come in and undercut them, at the end of it, they have better equipment,

843
01:24:28.540 --> 01:24:30.180
they'll be newer.

844
01:24:30.180 --> 01:24:35.460
So these two things would broke every railroad cartel, by the way railroad cartels are called

845
01:24:35.460 --> 01:24:42.460
pools, railroad pools for some reason, pooling their resources.

846
01:24:42.460 --> 01:24:49.140
In one case, kind of charming, in some cases, one guy would own, let's say there are two

847
01:24:49.140 --> 01:24:53.220
railroads here, and I think in one case we'll get to what happened.

848
01:24:53.220 --> 01:24:58.460
One guy would own both railroads, the managers are different, the sales vice president in

849
01:24:58.460 --> 01:25:03.540
each railroad, they didn't want people, if you're a sales manager, your whole life is

850
01:25:03.540 --> 01:25:05.460
based on how much you can sell.

851
01:25:05.460 --> 01:25:07.600
They disobeyed the orders of the owner.

852
01:25:07.600 --> 01:25:12.060
They started undercutting the cartel in order to pick up more for their railroad, more business

853
01:25:12.060 --> 01:25:17.260
for their Railroads. Charming. Here they are. One guy owns these two railroads. He orders

854
01:25:17.260 --> 01:25:23.300
them to keep the price up and cut the shipment, and they both violate it anyway. They both

855
01:25:23.300 --> 01:25:26.620
go ahead and start giving discounts and pick up shipments. He's a sales manager of his

856
01:25:26.620 --> 01:25:32.580
own thing. That's his ego. His life is wrapped up in that, and he violates it anyway. So

857
01:25:32.580 --> 01:25:39.980
you have a competition. Even one guy owns both railroads.

858
01:25:39.980 --> 01:25:45.060
One charming case of this is, in one case, one of the most important cartels was called

859
01:25:45.060 --> 01:25:46.060
the Iowa Pool.

860
01:25:46.060 --> 01:25:52.100
There's a very good book on this by Julius Grodinski called the Iowa Pool.

861
01:25:52.100 --> 01:25:58.380
One of the top, he's dead now, one of the top railroad historians.

862
01:25:58.380 --> 01:26:04.100
And the conditions for a cartel were great.

863
01:26:04.100 --> 01:26:08.900
If you're interested in having a cartel, it couldn't have been better than these conditions.

864
01:26:08.900 --> 01:26:16.900
Because what you had was really three railroads competing for the top Illinois-Iowa business here.

865
01:26:16.900 --> 01:26:22.900
So you have, and two of them I think were owned by one guy.

866
01:26:22.900 --> 01:26:32.900
This is Illinois here. This is Iowa.

867
01:26:32.900 --> 01:26:42.540
The important thing is to try to get to the Eastern Terminus of the Union Pacific in the

868
01:26:42.540 --> 01:26:43.540
Omaha.

869
01:26:43.540 --> 01:26:44.540
Omaha is up here.

870
01:26:44.540 --> 01:26:52.100
Omaha is a twin city with Council Bluffs, which is on the Iowa side of this thing.

871
01:26:52.100 --> 01:26:57.100
I think the Terminus was in Council Bluffs.

872
01:26:57.100 --> 01:27:01.620
The thing is, what the Iowa pool dealt with was the Chicago-Omaha market, which becomes

873
01:27:01.620 --> 01:27:02.620
extremely important.

874
01:27:02.620 --> 01:27:18.940
The point is, how do you get from Chicago to Council Bluffs?

875
01:27:18.940 --> 01:27:23.100
One way, there are basically three railroad routes.

876
01:27:23.100 --> 01:27:24.100
One was this one.

877
01:27:24.100 --> 01:27:27.980
I guess this is sort of the shortest coming like that.

878
01:27:27.980 --> 01:27:34.900
This is a Chicago and Northwestern railroad.

879
01:27:34.900 --> 01:27:41.540
The other one, sort of like this, coming up like that, this is a Chicago, Rock Island

880
01:27:41.540 --> 01:27:42.540
and Pacific.

881
01:27:42.540 --> 01:27:53.780
This is the famous Rock Island line that the great folks saw in that.

882
01:27:53.780 --> 01:28:16.780
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.

883
01:28:16.780 --> 01:28:25.340
If you had three alternative routes, this one which hooks up here, and these two.

884
01:28:25.340 --> 01:28:28.780
So they figured if you have a cartel of these three routes, you're going to be in great

885
01:28:28.780 --> 01:28:29.780
shape.

886
01:28:29.780 --> 01:28:37.540
You can not only raise the rates, you can also raise the rates of the Union Pacific.

887
01:28:37.540 --> 01:28:41.660
You can screw Union Pacific on that side, and here's Union Pacific with a transcontinental

888
01:28:41.660 --> 01:28:48.140
Chicago Railroad, you make them pay to transfer them to the Chicago route. You raise the rate

889
01:28:48.140 --> 01:28:53.860
and cut the shipment. That was the idea of the Iowa Pool.

890
01:28:53.860 --> 01:28:59.380
Chicago, Burlington and Quincy and the Burlington and Missouri, these two lines here, this thing

891
01:28:59.380 --> 01:29:07.340
here was owned by our pal James Joy, the railroad king. Remember the guy who got the Cherokee

892
01:29:07.340 --> 01:29:13.740
Robert E. Lans, his brother-in-law and secretary of the Interior. He was the owner of these

893
01:29:13.740 --> 01:29:29.620
two railroads here, the Burlington system. And he was essentially invested in by the

894
01:29:29.620 --> 01:29:37.660
Boston Capitalists, Boston Group, the Forbes Group, and he also controlled a couple of

895
01:29:37.660 --> 01:29:50.140
other railroads in this area, and this is the Burlington system. The Rock Island Line was

896
01:29:50.140 --> 01:30:15.140
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.

897
01:30:15.140 --> 01:30:19.140
They were two people, they could just work on a cartel, you could think it would be easy as pie.

898
01:30:19.140 --> 01:30:23.140
And that's what they did, they formed a pool and

899
01:30:23.140 --> 01:30:27.140
let's see, I think in

900
01:30:27.140 --> 01:30:31.140
1870 I believe

901
01:30:31.140 --> 01:30:35.140
and it lasted

902
01:30:35.140 --> 01:30:39.140
officially for about 15 years, actually it collapsed in not too many years,

903
01:30:39.140 --> 01:30:43.140
in a few years, late 70s.

904
01:30:43.140 --> 01:30:52.260
and they say you'd think it'd be duck soup to do this and if there was cheating between these two,

905
01:30:52.260 --> 01:31:00.820
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,

906
01:31:00.820 --> 01:31:08.340
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,

907
01:31:08.340 --> 01:31:21.340
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.

908
01:31:21.340 --> 01:31:30.340
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.

909
01:31:30.340 --> 01:31:37.340
What essentially happened was that Union Pacific got together and decided to crush the cartelists here by creating their own new railroad system,

910
01:31:37.340 --> 01:31:42.220
system, by getting together a whole bunch of little railroads and a whole Altoona system,

911
01:31:42.220 --> 01:31:50.020
Olten system, coming from St. Louis, so like here, coming from about here, before you get

912
01:31:50.020 --> 01:31:59.520
to Omaha, and down around here and up from St. Louis, and up to Chicago, and by forming

913
01:31:59.520 --> 01:32:03.620
this thing, either by creating a new railroad or buying old ones and merging it, Union Pacific

914
01:32:03.620 --> 01:32:10.460
undercut the whole cartel and broke the whole thing. It took them about seven or eight years

915
01:32:10.460 --> 01:32:14.860
to do it. So in addition to the internal cheating with these two companies, three companies,

916
01:32:14.860 --> 01:32:18.780
two of which were owned by the same guy, eventually the Union Pacific simply created, got together

917
01:32:18.780 --> 01:32:23.060
a fourth system, created a fourth new system which got to butt the other three. That was

918
01:32:23.060 --> 01:32:28.260
the end of it. That was the end of the Chicago pool. It was kind of heroic. That's the market

919
01:32:28.260 --> 01:32:32.260
in action. When the free market is in action, even if you have a couple of roads, it seems

920
01:32:32.260 --> 01:32:38.260
It used to be in great shape to have a cartel. You can't really continue it for very long.