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1. Railroads: The First Big Business and the Failure of the Cartels

1. Subsidizing the Railroads

Railroads were the first Big Business, the first large-scale industry, in America. It is therefore not surprising that railroads were the first industry to receive massive government subsidies, the first to try to form substantial cartels to restrict competition, and the first to be regulated by government.1

It was the decade of the 1850s, rather than as once believed, the Civil War, that saw the beginnings of America’s epic story of rapid and remarkable growth.2 The railroads, leading the parade, had spurted ahead of canals as the major form of inland transportation during the 1840s. In the 1850s the railroads established a formidable transportation network as far west as the Mississippi. During the 1860s, the railroads reached westward across the Continent, spurred by massive federal land grants, which eclipsed state government subsidies in this crucial period.

The Republicans had proved able to use their virtual one-party control of Congress during and immediately after the Civil War, to enact the nationalist and statist economic program they had inherited from the Whigs, a program which included massive subsidies to business in the form of protective tariffs to industry and land grants to railroads. Before the Civil War, the Democratic Party, roughly the laissez-faire party since its inception in the late 1820s, had clearly been the permanent majority of the country: the Democrats were only out of the presidential office for two terms in over three decades. But with the Democrats demoralized, seceded from the Union or branded as traitors, the Republicans saw their golden opportunity and drove through their program.3

One example of the way in which the railroads fed at the public trough during the 1860s is the case of the 800,000 acre Cherokee tract in southeastern Kansas. The tract was grabbed from the Cherokees by the federal government, and then sold, in one chunk, to James F. Joy, known as “The Railroad King,” and head of the Kansas City, Fort Scott, and Gulf Railroad. The sale to Joy, negotiated in secret, was a curious one, since he was not the high bidder for the land. There was a great deal of protest when it was discovered that the sale made no provisions for settlers some 20,000 strong, who had already homesteaded the land. Finally, the government, which had sold the land to Joy at $1.00 an acre on generous credit terms, allowed the settlers to buy their land from Joy for an average sum of $1.92 per acre in cash.

Joy’s highly favorable treatment at the hands of the federal government may have been related to the fact that Secretary of the Interior Orville H. Browning, the director of the public lands and the man who had negotiated the sale, was James Joy’s brother-in-law. Not only that: Browning had been Joy’s attorney, and was soon to be so again. And the man employed by Joy to negotiate with Browning over the Cherokee land was none other than Browning’s own law partner. A cozy little group!4

Of nearly 200 million acres of valuable land in the original federal grants, almost half were handed over to the four large transcontinental railroads: Central Pacific, Southern Pacific, Union Pacific, and Northern Pacific.5 The typical modus operandi of these railroads was as follows: (1) a small group of inside promoters and managers would form the railroad, putting up virtually no money of their own; (2) they would use their political influence to get land grants and outright loans (for the Union and Central Pacific) from the federal government; (3) they would get aid from various state and local governments; (4) they would issue a huge amount of bonds to sell to the eager public; and (5) they would form a privately-held construction company, issuing themselves bonds and shares, and would then mulct themselves as managers of the railroad (or rather, mulct railroad shareholders and bondholders) by charging the road highly inflated construction costs.

The Central Pacific was founded by four Sacramento merchants — “The Big Four”: Collis P. Huntington, the dominant partner; Mark Hopkins, the inside man who managed the books; Charles Crocker, who ran the construction work; and Leland Stanford, who took care of the political end by becoming Governor of California. Stanford saw to it that the state and local governments in California along the route kicked in substantial aid to the Central Pacific. One example of his methods occurred when the people of San Francisco voted on a $3 million bond issue to be contributed to the Central Pacific Railroad. To make sure that the people voted correctly, the Governor’s brother, Philip Stanford, drove to the polls and distributed gold pieces to the voters, who duly obliged their benefactors.

The four founders had the idea of launching the railroad. But how to do so with only the paltry sum of $200,000 between them? The partners understood where the economics of the business truly lay — in obtaining a lucrative federal charter for the road. Collis Huntington took the $200,000 with him to Washington in his trunk, and when he was through lobbying in Washington, his money was all gone — in a mysteriously unrecorded manner — but the charter for the Central Pacific Railroad was theirs. The charter was the key, for it not only handed nine million acres in land grants to the road, but it also agreed to pay a subsidy in government bonds, amounting to $26 million to serve as a first mortgage on the railroad. Once the charter was received, money would be pouring into the railroad from federal and state governments, and from the sale of stocks and especially bonds to the public.

The profits siphoned off by the four founders came largely through their creation of the Credit and Finance Corporation as a separate construction company for the Central Pacific, a company which had the sole right to purchase all material and actually to construct the road. The CFC was wholly owned and directed by the four founders of the Central Pacific, and the founders, as heads of the railroad, made sure to pay munificent and extravagant sums to themselves as the construction company, thereby fleecing the shareholders and bondholders of the railroad. The railroad paid a total of $79 million to the CFC for the construction work, funds acquired from governments and investors, and it has been estimated that over $36 million was in excess of reasonable cost for the construction. Typical of the great waste in construction was the time when the burgeoning Central Pacific encountered the small, already existing Sacramento Valley Railroad along its route. The economic course would have been to simply buy the Sacramento Valley road; instead, the Central Pacific built its own, longer line around it in a twisting and senseless route. The reason: “because it was cheaper to build at the government expense than to buy a railroad already existing ...”6

The same device was used for the Union Pacific, which, laying track westward from Omaha, joined the Central Pacific in Utah. In this case, the insiders’ construction company was the Crédit Mobilier, the federal land grants to the railroad totaled 12 million acres, and the bond subsidy was $27 million. The inside directors running the Crédit Mobilier charged the Union Pacific $94 million for constructing the road, when $44 million was the estimated true cost.

This time, the distributor of the largesse to Congressmen and other government officials to induce them to vote for chartering the road was Republican Representative Oakes Ames of Massachusetts. Ames distributed the stock of the real profit-maker, the Crédit Mobilier, judiciously to key members of Congress in advance of the vote, either giving them the stock outright or charging them next to nothing. They became known, unsurprisingly, as the “Railway Congressmen.” As Ames put it, he distributed the stock “where it will do most good for us.” For, “we want more friends in this Congress. There is no difficulty in getting men to look after their own property.” The payoff list included the “Christian Statesman” Vice President Schuyler Colfax of Indiana, James G. Blaine of Maine, Secretary of the Treasury George S. Boutwell, future president James A. Garfield of Ohio, Senator Henry Wilson of Massachusetts, and a dozen other Congressmen, including James Brooks of New York, House minority leader, as a sop to the Democrats. As for Oakes Ames himself, he not only received some stock for his trouble, but his shovel manufacturing firm surprisingly received the Crédit Mobilier contract for shovels in constructing the railroad.7

The railroad financier with closest ties to the Republican administrations was the redoubtable banker, Jay Cooke, head of Jay Cooke & Co. A small Philadelphia financier at the outset of the Civil War, Cooke had the vision to found his banking house and to wangle from the federal government a monopoly on underwriting the massive bond issues floated during the war. To sell them to the gullible public, Cooke launched the first modern propaganda campaign for selling the bonds, employing thousands of subagents and such slogans for the credulous as “A national debt a national blessing.”

Cooke obtained the highly lucrative monopoly underwriting concession from Washington through his influence on Secretary of the Treasury Salmon P. Chase. Cooke’s journalist brother, Henry, was a long-time aide of Chase, from the latter’s tenure of Governor of Ohio. Henry then followed Chase to Washington. After extensive wining and dining of Chase, and after demonstrating his propaganda methods in selling government bonds, Jay Cooke won the coveted concession that was to make him one of the richest men in America and his new Jay Cooke & Co. by far the leading investment bank. Cooke became widely known as “The Tycoon,” and the phrase “as rich as Jay Cooke” became a popular saying.

Cooke found many ingenious ways to expand the market for his bonds. He bribed financial reporters and Congressmen extensively, and he demanded kickbacks in bond purchases from every war contractor and military supplier. Particularly adroit was Cooke’s success in taking Chase’s plan and persuading Congress to transform the American banking system. The notes of state chartered banks, which constituted all the banks in the country before the onset of the Civil War, were taxed out of existence by the federal government, to be replaced by the notes of a few newly chartered, large-scale national banks. The legal structure of the national banks, in turn, was such that the amount of bank notes they could issue was based on how many federal bonds they held. Hence, by lobbying for a new, centralized banking system dependent upon government bonds, Cooke assured himself a huge increase in the market for the very bonds over which he had acquired a monopoly.8

Considering Cooke’s credentials, it is no wonder that the biggest land bonanza of all the railroad charters, the Northern Pacific, enjoying its federal gift of 47 million acres, should have fallen into the hands of the Tycoon, in 1869.

Before launching actual construction of the Northern Pacific, Cooke lobbied in Washington in 1870 for a new charter, which provided for Jay Cooke & Co. to be the sole fiscal agent of the railroad, and for Cooke’s bank to receive the enormous fee of 12% as well as 20% in Northern Pacific stock, for all bonds it was able to sell.

Thus, Cooke did not need a separate construction company to mulct the other shareholders and bondholders of the railroad, as did his counterparts in the Central and Union Pacific boondoggles; for he already had his private banking house in place. Cooke’s handsome charter was aided by the fact that America’s leading politicians rushed to help the Northern Pacific in return for shares of its stock. Cooke’s old friend, the now Chief Justice of the U.S. Supreme Court, Salmon P. Chase, even offered to become president of the Northern Pacific at a “good salary.” Other powerful stockholders brought in by Cooke were: Vice President Schuyler Colfax, future President Rutherford B. Hayes of Ohio, and Secretary of the Treasury Hugh McCulloch. President Ulysses S. Grant’s wholehearted favor was assured by the influence of his old friend and advisor Henry Cooke, and of his private secretary, General Horace Porter, who offered his friendly services to Cooke in return for a handsome bribe.

The payoff to Northern Pacific was opposed by a rival group, who sought similar favors for a new Southern Pacific Railroad. The major backer for the Southern Pacific group was Speaker of the House James G. Blaine, of Maine, one of the powers of the Republican Party. To persuade Blaine of the error of his ways, Jay Cooke & Co. granted the Speaker a sizable personal loan based on collateral that was not investigated with the bank’s usual care.

With the charter firmly in tow, Jay Cooke geared up a mammoth propaganda machine such as he had used to successfully sell government bonds in the Civil War. Traveling agents were hired, and newspapermen were systematically bribed to sing the praises of the Northern Pacific and of the climate along its prospective route. The purpose was twofold: to induce the general public to buy Northern Pacific bonds; and to induce settlers to immigrate to the Northwestern territories along the route. The migrants would have to buy the land granted to the railroad and to become customers of the railroad after it was built. Favored stockholder Henry Ward Beecher, the most celebrated minister in the country, wrote blurbs for the railroad in his Christian Union; and Cooke’s hired pamphleteers had the fertile imagination to claim the climate of the future states of Minnesota and Montana to be “a cross between Paris and Venice.”9

By the early 1870s, however, the bonanza era for the railroads and their promoters had come to an abrupt end. The reasons were threefold. In the first place, there was a general revulsion at the way in which the railroads had been able to outdo each other in feeding hugely at the public trough. 1871 was the year of the last federal land grant to the railroads, for the decade of the 1870s saw a widespread “antimonopoly” movement, which also succeeded in slowing down state and local aid to new railroads. In some states, new constitutions prohibited government loans to corporations (which, in those days, meant mainly railroads).

The revulsion against public partnership with railroads coincided with the second reason, the renaissance of the Democratic Party. For the eager mercantilism of the 1860s reflected the virtual absence in Congress on the political scene of the traditionally laissez-faire party. By the early 1870s, the Democratic Party had recouped its fortunes, only to have the presidential election purloined from Samuel Tilden in 1876. From the early 1870s to the mid-1890s, the Democratic Party was to be almost as strong as the Republicans, often controlling at least one house of Congress if not so often the presidency itself. Apart from their ideological affinities, the Democrats could be expected to make political capital out of Republican corruption, so much of which had centered on the railroads.

The third reason for the end of the railroad bonanza was the shocking bankruptcy and collapse of the mighty Jay Cooke in the Panic of 1873.10 One problem with massive government aid is that it subsidizes inefficiency, and the far from completed Northern Pacific was increasingly in huge financial arrears. Also, the Tycoon’s touch in selling bonds was no longer so magical as it had been in peddling government securities. Led by the powerful Rothschilds, European bankers and investors stayed away in droves from Northern Pacific bonds — a striking contrast to the general enthusiasm of European investors in American railroads during the latter half of the 19th century. Meanwhile, at home, the brash new firm of investment bankers, Drexel, Morgan & Co., headed by Cooke’s Philadelphia rival, Anthony Drexel, and by young John Pierpont Morgan of New York, acted against Cooke and helped bring about the failure of Cooke’s U.S. government bond issue in early 1873. Half a year later, all of these factors combined to cause the failure and bankruptcy of Jay Cooke & Co., precipitating the Panic of 1873. As a result, Cooke was now succeeded by J.P. Morgan as the nation’s leading investment banker.11 Since Morgan was a Democrat, his ascension symbolized the important political shift returning the country to a genuine two-party system.

2. The Rationale of Railroad Pricing

The “anti-monopoly” and later movements that wanted government to do something about the railroads arose partly in response to the outrageous handouts that government had granted to the roads. The healthy demand of the protestors was to stop or rollback the subsidies: the former successfully stopped the land grant process, while the latter focused on a demand for local governments to tax unused land that the railroads had received as a bonus and were holding off the market. Many of the protestors went further, however, and demanded various forms of regulation to hold down railroad rates, especially for freight, which was economically far more significant than passenger service.

The public demand for rate regulation, when not based on self-interest (as will be seen below), reflected a profound ignorance of the basic economics of railroad pricing. The idea that rates were in some sense “too high,” or that railroads were monopolies, ran against the hard fact that railroads were tremendously and even fiercely competitive, and that the consuming public was being served, not only by land-based transportation across the Continent,12 but also by continued, competitive, and substantial lowering of freight rates.

Railroads competed between the same cities and towns, they also competed with each other between regions, and they competed with canals and coastal shipping. Obviously, as in any other commodity pricing, the prices of railway rates were set by the degree of competition in the various areas. Along routes where railroads competed directly with canals or coastal shipping, freight rates were forced lower than where such competition did not exist. There was intra-railroad competition between regions developing between the several transcontinental railroad routes. There was also fierce competition between the five competing “trunk lines” between the Eastern cities and the Midwest — The Erie, Baltimore & Ohio (B&O), Pennsylvania, New York Central, and Grand Trunk. It is interesting that, in their public arguments, the various railroads argued that rates “should” be set in accordance with whatever pricing “theory” benefited the particular road. Thus, the Baltimore & Ohio and Pennsylvania railroads, which were the shortest of the five trunk lines, argued that rates should be set according to distance, which of course would allow them to undercut their competitors. The New York Central, which had the lowest costs of operation (easier grades, denser traffic, etc.) argued that rates should be determined solely by operating costs. And the Grand Trunk, weak and perpetually teetering on the edge of bankruptcy, claimed that prices should only be high enough to cover operating costs, ignoring dividends and interest.13

There was also vigorous competition between railroads serving the same cities. By the mid-1880s, indeed, there was scarcely a large town in the United States that wasn’t served by two or more railroads. For one example, there were in this period no less than 20 competitive railway routes between St. Louis and Atlanta.

Complaints by customers (farmers, merchants, and other shippers) and by the general public about freight rates generally centered around the railroad practice of multiform pricing, of charging one shipper different rates from another. In each case, the shippers paying higher rates denounced the action as “price discrimination” stemming from some sort of conspiracy indulged in by the railroads. But in each case, there were sound economic reasons for the pricing practice. The complaints may be grouped into several categories.

(1) Continuing complaints that railroads were charging lower, proportional, per-mile rates for long-haul as compared to short-haul traffic. But such pricing was the result, not of some demonic conspiracy against the short-haul areas, but of the economics of the situation. In the first place, railroads had high fixed terminal costs — the costs of loading and unloading at the two terminals for each shipment — which were incurred regardless of the length of the trip. These would tend to yield lower rates for longer hauls. Secondly, the Western railroads, in particular, were built far ahead of traffic and therefore had to keep freight rates low in order to induce farmers and others to develop the region. This would account for lower “through,” long-haul interstate rates from West to East.

The Eastern farmers, hit hard by the competition from the West, were of course more disposed to rail about conspiracy than to consult the economic reasons for the differences in freight rates. They complained about the resulting loss of their “natural” markets in the Eastern cities. Similar bitter complaints about higher rates were indulged in by Eastern merchants and agricultural-based manufacturers, who saw themselves outcompeted by products made further west. Thus, millers in Rochester denounced the lower freight rates enjoyed to their New York City makers by the millers in Minneapolis.

(2) One would think that the Western farmers, at least would be delighted by the lower rates on long-haul through traffic from West to East. But true to both human nature and the political value of pressure and complaints, the Western farmers, too, claimed to be unhappy. They protested the higher local rates they had to pay, as well as the discounts that railroads gave to large as compared to small shippers.

The rationale for granting discounts for large shipments should be familiar to the current reader. Larger orders reduce the risk of producing or shipping a desired minimum volume; and larger orders are less costly to process, since there is a certain fixed cost for writing out and processing any given order.

(3) As indicated above, railroad rates will naturally tend to be lower where competition is fiercer, either with other roads in the same town, other regions, or with other forms of transportation. Thus, New York City, with many competing railroads, paid far lower rates per mile on grain shipped from Chicago than did Pittsburgh, which was only served by one railroad, the Pennsylvania. Worchester, Massachusetts merchants paid more for their Western grain than did the merchants from more distant Boston. Naturally, the result was continued grumbling from cities which considered themselves disadvantaged.

(4) The most intense and persistent griping over alleged geographical freight rate “discrimination” has been Southern charges that the South has always been forced to pay substantially higher freight rates than other regions, particularly the East. In a notable article, the eminent historian David M. Potter has explained these persistently higher Southern rates by demonstrating their economic rationale.14

Potter uncovered several reasons for the higher freight rates in the South. In the first place, the density of population is greater in the East, the lower density of traffic in the South imposing higher costs. Secondly, the principal shipment from the South has been cotton. Railroads early realized that they had to “classify” commodities when deciding on freight rates; for heavy, bulky commodities selling at a low cost per unit weight could not afford to pay the high freight rates per ton-mile that lighter-weight, more specialized consumer commodities could afford. Hence, if they were to move these bulky commodities at all, the railroads had to classify the bulky commodities such as coal, wheat, livestock, ore, or cotton into lower rate categories than, say, groceries or clothing. Hence, to make up for the low rates which the Southern railroads had to charge for cotton, they had to set comparatively high rates on other, higher-grade goods, including Northern goods that were shipped southward.

Thirdly, it was the peculiarity of Southern rail traffic that there were for a long time no trunk roads for long-haul traffic from the South to the Eastern markets. Instead, the railroad traffic was local, carrying produce from the interior to the coastal ports, thence to ship by the coastal trade. Local traffic meant higher freight rates. Indeed, the stiff water competition in much of the South — one the coastal route, by river boats on the large and small rivers — meant unusually lower railroad rates on the competing routes, and correspondingly higher local rates where this competition was absent.

Fourthly, even after trunk lines were built, the only through traffic was triangular: shipping foodstuffs from the Midwest to the South, and cotton from South to East. This meant one-way traffic, a costly process which meant little or no return shipments to reduce overhead costs. Again, the result was higher through rates in the Southern trade.

(5) Particularly troubling to critics was the practice of railroads in granting “rebates” off freight rates to their shippers. It was charged that the practice was discriminatory and monopolistic and was used to grant special privileges to favored shippers, such as Standard Oil.

What the critics failed to realize was that, far from being in some way “monopolistic,” granting rebates was precisely the major way by which railroads competed with each other and with other forms of transportation. The practice of giving discounts off list price to attract or hold customers is a common one in industry now, and there are few accusations that the custom is either monopolistic or discriminatory. The point is that business firms, understandably, do not like to cut prices. If they are forced, by competition, to cut prices, they try at first not to change their lists, but instead, hoping such cuts will be temporary, grant off-list discounts to their customers. The price-cutting process begins with one or two customers, either to gain new customers or to keep them from shifting to a competitor.

If the discounts cannot be sustained, they will disappear and the list will be maintained; but if the general trend turns out to be toward lower prices, the discounts or rebates will spread, especially as other customers tend to find out and demand similar treatment. In short, lower prices will tend to manifest themselves through the spread of discounts off-list.15

There is another reason for the prevalence of rebates: that businesses are often willing to charge less in return for a definite order. As one railroad man explained in U.S. Senate hearings on the widespread use of rebates: “A man may say, ‘I can give you so much business.’ If you can depend on that you may make definite arrangements accordingly.”16

We can see, then, that pricing in the business world, in contrast to the neatly determined quantities and charts of the economics textbooks, is a continuing process of discovery — of trying to figure out what the best and most profitable prices may be in any given situation.17 This is particularly true of railroads, which have had to price literally thousands of items over a myriad of different routes and conditions.

Perhaps this complexity of the discovery process accounts for the fact that railroad rebates, far from being confined to a few large shippers such as Standard Oil, were widespread during the latter half of the 19th century for petroleum refining as well as in most other industries. Such rebates were one of the major ways in which railroads competed with each other. Thus, the New York Central typically had six thousand cases of “special contracts,” or rebates, outstanding; and in California, rebates were granted on virtually every contract. Reductions off list could easily go as far as 50%.

(6) At once the most important and the most absurd charge was that railroad rates were “too high” in the decades after the Civil War. There is, first of all, the lack of any rational and non-arbitrary standard to determine how high or how low the price “should have been.” But, apart from that, one of the remarkable phenomena of these decades was the continuing and massive fall in freight rates over the years. It was an era that ushered in a new age of cheap transportation over vast distances.

Generally, the railroad rates fell, as did other prices, during recessions, but did not rise nearly as much during succeeding booms. As a result, the trend was rapidly downward. These were glorious decades in America when the increased supply of goods and services emanating from our own Industrial Revolution lowered most prices. As in all of the 19th century except for periods of wartime inflation, the general trend of prices was downward. But even in relation to other falling prices, the fall in railroad freight rates was truly remarkable.

The fall in rates took several forms. One was an outright and evident fall in nominal rates. Over the decades, these nominal rates fell by one-half to two-thirds. Thus, the price for shipping wheat from Chicago to New York fell from 65 cents per 100 pounds in 1866 to 20 cents thirty-one years later.  Dressed beef shipments between the two cities fell from 90 cents per 100 pounds in 1872 to 40 cents by the end of the century. In westbound traffic from New York to Chicago, the most expensive, or Class 1 goods, fell in price from $2.15 per 100 pounds in the spring of 1865, to $.75 at the end of 1888. Class 4 goods fell, during the same period, from $.96 to $.35.

The most remarkable rate cuts occurred during the great rate wars of 1876–77, between the great trunk lines, soon after the completion of the Baltimore & Ohio route to Chicago in 1874. Class 1 rates fell, in those two years, from $.75 to $.25 per 100 pounds, while class 4 rates fell to $.16. Eastbound freight rates from Chicago to New York dropped phenomenally by 85%, from $1.00 to $.15. Passenger rates were cut in half in this brief period.

Apart from the outright reductions in rates, real freight rates were also lowered by improving the services supplied by the railroads, such as providing storage or carting services without charge. One particular method of lowering freight rates without nominally doing so was by systematically re-classifying commodities from higher to lower-paying categories. Thus, the nominal rates in each class could remain the same, but if goods were transferred from higher to lower rate categories, the real effect was to lower the cost of railroad transportation. For example, before 1887, two-thirds of all the items shipped westward in trunk-line roads were bracketed into high class 1 to class 3 categories; after that year, reclassification in 1887 left only 53% of the items in these highest three classes.

That same year, a huge increase was granted by the trunk lines in the number of types of items that were entitled to lower rates for being shipped in full carload lots. Before that year, only 14% of westbound items on the trunk lines were entitled to discounts in carloads; afterwards, fully 55% of the items were entitled to the same privilege. Hence, real freight rates fell because more items could now obtain quantity discount privileges.18

Overall, railroad rates had fallen far below the wildest dreams of the Grangers and the other anti-railroad movements of the 1870s. Albert Fishlow, indeed, estimates that, by 1910, “real freight rates [had fallen by] more than 80 percent from their 1849 level, and real passenger charges 50 percent.”19

One particularly piquant group of complainers against the railroads were the railroad investors themselves. Often mulcted by unscrupulous promoters and inside managers (as in the case of the major transcontinental roads), induced by eager local, state, and federal governments to over-expand and wastefully manage their operations, the railroad owners found, over the decades, a none too munificent rate of return sinking even lower. Thus, around 1870, railroad bond yields averaged about 6% while stock dividends were approximately 7%; by the end of the century, average bond yields had sunk to 3.3% and dividends to 3.5%. In addition to this virtually 50% drop, only 30–40% of railroad stock paid any dividend at all during the 1890s.20 Railroad bankruptcies and reorganizations were extensive during the same decade.

3. The Attempts to Form Cartels

Early in the career of large-scale railroads, some railroad men sought a way out from the rigors of competition and competitive price-cutting. What they sought was the time-honored device of the cartel agreement, in which all the firms in a certain industry agree to raise their selling prices. If the firms could be trusted to abide by the agreement, then all could raise prices and every firm could benefit.

The general public conceives of price-raising and price-fixing agreements to be as easy as a whispered conversation over cocktails at the club. They are, however, extremely difficult to arrange and even harder to maintain. For prices have been driven low by the competition of supply and production; in order to raise prices successfully, the firms will also have to agree to cut production. And there is the sticking point: for no business firm, no entrepreneur, and no manager  likes to cut production. What they prefer to do is expand. And, if the businessman is to agree, grudgingly, to cut production, he has to make sure that his competitors will do the same. And then there will be interminable quarrels about how much production each firm is supposed to cut. Thus, if several firms are, collectively, producing 1 million tons of Metal X and selling it at $100 a ton, and the firms wish to agree to raise the price to $150 a ton, they will have to agree on how far below the million tons to cut production, and who should cut how much. And such agreements are at best very difficult to arrive at.

But this is only the beginning of the headaches in store for our cartelists. Generally, they will agree on quota production cuts under the output of a base year, usually the current year of operation. So, if the cartel is being formed in the year 1978, firms A, B, C, etc. may each agree to cut its output in 1979 20% below the previous year. But very quickly in the cartel agreement, and more and more as time goes on, human nature is such that each businessman and manager is thinking as follows: “Darn it, why am I stuck with the maximum production based on 1978 production? This is now 1979 (or 1980, etc.) and now we have installed such-and-such a new process, or we have such-and-such a hotshot product or salesman, that I know, if our company were all free to compete and to cut prices, we could sell more, pick up a larger share of the market, and make more profits, than we did that year.” As 1978 recedes more and more into the past, and 1978 conditions become more obsolete, each firm chafes increasingly at the bit, longing to be able to cut prices and compete once more. A firm might petition the cartel for an increased quota, but other firms, whose production would have to be cut, would protest bitterly and turn down the request.

Eventually, the internal pressures within the cartel become too great, and the cartel falls apart, prices tumbling once more. A characteristic pattern of cartel breaking is secret price-cutting. The restless firm, anxious to cut prices, decides to try to have its cake and eat it too. While its boobish fellow-producers keep sticking to the agreed cartel price of, say, $150 a ton, our hypothetical firm approaches a few customers whom it is anxious to keep, or others whom it is eager to acquire. “Look, because you’re such a great person and your firm is such a good one, I’m going to let you have our metal for $130 a ton. In return, I want you to keep quiet about it, so that your and our competitors won’t find out about the deal.” For a few months, this will work, and the firm will be reaping extra profits at its competitors’ expense. But, truth will get out, and eventually the word spreads to the firm’s other customers and competitors about the secret price-cut. Other customers will demand similar treatment, the competitors will self-righteously denounce our firm as a “rate-buster,” a “cheat,” and a traitor, and the cartel will dissolve in intensified competition, price-cutting, and intra-industry recriminations.

That is one inexorable way in which a cartel will break up: from internal pressure, pressures arising from the firms within the cartel. But there is another, equally formidable, source of insurmountable pressure to crack the cartel: external pressure, from outside the cartel. For here is the cartel in our hypothetical metal industry. Outside firms, outside investors, clear-sighted entrepreneurs seeking profits, look at this industry and see that a cartel has been formed, its price has gone up by 50%, and consequently, the industry is now enjoying unaccustomed profits. To extend our hypothetical case, suppose that the cartel has raised its profits from 5% to 15%. Outside investors say: “Aha! These fellows have a good thing going. Why shouldn’t I, who am not bound in any sense by the cartel agreement, nip into this industry, build a new plant and a new firm, and undercut the cartel? I could sell at $130 a ton, and besides, I could build an entirely new plant with the latest equipment and the latest processes, while these fellows would have to compete possessing older and partially obsolete plants.” And so, the higher price and the higher profit rates acts as an umbrella and a lure to tempt new and possibly more competitive firms into the industry.

How will the cartel meet the challenge of new and dangerous competitors? If it wishes to keep the high cartel price, it will have to draw the new firm into the cartel, by assigning the firm a production quota of its own. But that would mean that the old firms, each of which detests the idea of cutting production in the first place, would have to cut still more — and all for the benefit of a new and unwelcome interloper. It is unlikely that the new firm could be absorbed into the cartel, and therefore the likely event is a breakup of the cartel, with prices tumbling down again. Except that this time the permanent result will be a menacing new competitor which might well out-compete and drive out some of the existing firms. And even if the new firm is absorbed into the cartel, the success can only be temporary, since more new firms will continue to be attracted to the industry, and the problem will begin all over again. Eventually, the cartel will bust up, from the external pressure of new entrants into the industry.

Thus, every cartel, every voluntary agreement by competing firms to raise prices and cut production, will inexorably break apart from internal and/or external pressures. A cartel cannot long succeed on the free market.21

In every industry that has ever attempted the cartel device, the story has been the same repeatedly confirming the above basic economic insight. In the case of the railroads, the plot repeats itself, except that the cartels were called “pools,” production was freight shipments, prices were freight rates, and price-cutting took the form of secretly increasing rebates to shippers.

The first important railroad pool was the Iowa Pool, formed in 1870.22 The twin cities of Omaha, Nebraska — Council Bluffs, Iowa were the eastern terminus of the great new transcontinental Union Pacific-Central Pacific route to California. The rail route from Chicago westward to Omaha therefore took on enormous importance. There were three major competing routes between Chicago and Omaha: the most northerly, the Chicago and Northwestern; the Chicago, Rock Island, and Pacific (“The Rock Island Line”); and the most southerly “Burlington System” (among other things, interconnecting the Chicago, Burlington, and Quincy with the Burlington and Missouri railroads). As luck would have it, the three competitors were controlled by two businessmen and their associates. The entire Burlington System was controlled by James F. Joy, the “Railroad King,” backed by a group of Boston capitalists. Meanwhile, John F. Tracy, backed by numerous capitalists, including Dutch finance, controlled both the Chicago and Northwestern and the Rock Island Line.

With only two businessmen controlling the three competing lines, conditions seemed ripe for a cartel. Both men were eager for the experiment, since both Joy and Tracy had overborrowed in order to acquire their holdings and were in shaky financial shape. And so, in late 1870, Tracy initiated the formation of the Iowa Pool, which tried to prop up freight rates by reducing aggregate traffic and by pooling half the earnings of the three lines and equally dividing the Pool — thereby greatly reducing the incentive to engage in competitive profit-seeking or price-cutting.23

Despite the seemingly favorable conditions, and the long official life of the cartel (until 1884), the Iowa Pool was plagued with grave difficulties from the very beginning and broke up after only four years. Competitive rate-cutting, breaking the agreement, occurred early and on many levels. There was, first, severe rate-cutting even within the Burlington System and within the Tracy holdings — the sales managers and managerial heads of each railroad understandably wishing to increase the profits of their own organization. There was also vigorous competition and rate-cutting between the Burlington and the Tracy railroads, with charges of “cheating” rife between the various parties. But intra- and inter-organizational rivalry did not complete the competitive picture in the Iowa Pool. For the entire transcontinental railroad system was also in vigorous competition with the Pacific Mail Steamship line, which sailed between the East and West Coasts with overland carriage across Panama. In 1870 there was also an agreement between the Steamship line and Union Pacific to prop up freight rates and allocate an agreed division of traffic between railroad and steamship: in effect, to impose maximum shipping quotas on each mode of transportation in order to raise freight rates. By 1873, however, a rate war developed between the steamships and the railroads, helping to push the entire Pool into collapse a year later.

Another important factor in the breakup of the Pool was the intervention of the Union Pacific. For one of the first actions of the Iowa Pool was the demand of the Union Pacific a higher share of the transcontinental, Chicago-San Francisco railroad income. Angered, the Union Pacific decided to crush this demand by dealing with the individual members of the Burlington System, and also by shifting more business to the St. Louis rather than the Chicago terminus. All this competition, from within and without the Pool, led to its collapse after only four years of turbulent operation.24

The next important pool was an attempt to cartelize trunk line railroads insofar as they were making shipments in the burgeoning new petroleum industry. Ever since the first oil well had been drilled in Titusville, Pennsylvania, in 1859, crude oil had been extracted from western Pennsylvania oil fields and refined largely in Cleveland. At the behest of Thomas A. Scott, head of the Pennsylvania Railroad, in 1871 three great trunk lines, the Pennsylvania, the Erie, and the New York Central formed the South Improvement Company. In order to raise freight rates, the company allocated maximum quotas of oil shipments among themselves. The Pennsylvania was to obtain 45% of oil shipments, while the Erie and the New York Central were each allocated 27.5% of the oil freight. To make sure that the railroads stuck to their agreement, a group of oil refiners was brought into the pact, the refiners being pledged to act as “eveners” to insure that each railroad would not exceed its quota of petroleum freight.

What were the refiners to get in return for providing such essential service to the railroad cartel? They were to obtain freight rebates up to 50%. Furthermore, they were promised a subsidy amounting to a rebate on all oil shipments made by refiners outside the South Improvement Company agreement. And since the refiners within the group were acting as eveners for all petroleum shipments made by these railroads, they received waybills for these shipments and were therefore able to police the honesty of the railroads in keeping the subsidy agreement.

Oil refining was a highly competitive industry, and so, despite the fact that the South Improvement pool meant higher freight rates, some refiners were willing to join the pool in order to gain a rebate-and-subsidy advantage over their competitors. Besides, they might succeed in cartelizing oil refining as well. The complying refiners were led by the largest oil refiner in the industry, John D. Rockefeller’s Standard Oil Company of Ohio (SOHIO). Originating in 1867 as the partnership of Rockefeller, Flagler & Andrews Co., SOHIO was formed as a $1 million corporation three years later. While Rockefeller was hardly averse to achieving a monopoly, he was skeptical of the success of the cartel and entered it only with reluctance. The South Improvement Pool, indeed, turned out to be still-born; when news of the agreement leaked out, angry pressure by the other refiners and by crude oil producers forced the dissolution of the cartel. As will be seen below in Chapter 3, John D. Rockefeller then turned to the merger route in an attempt to achieve a monopoly in oil refining.25

The first important Eastern pool was formed in August 1874. Competition between the great East-Midwest trunk lines had been intense during the Panic of 1873, with a consequent decline in freight rates. The three major trunk lines — New York Central, Erie, and Pennsylvania — were also worried about the imminent completion of a new competition in the Baltimore & Ohio, which would clearly send rates down further. As a result, the presidents of the three trunk lines met at Saratoga, New York, at the home of New York Central’s William H. Vanderbilt, and hammered out an agreement to keep up freight rates, and to appoint two regional commissions to enforce the agreement.

But the trunk line agreement soon dissolved from pressures both within and outside the cartel. John W. Garrett, president of the B&O, decided to keep out of the agreement in the hope of outcompeting the other roads and picking up a larger share of the freight business. Externally, the Grand Trunk of Canada took advantage of the pact to open up a new northerly trunk line route from Chicago to Boston via Canada. The result was a speedy collapse of the agreement, and bitter rate wars between the trunk lines followed during 1875 and particularly 1876.26

Desperate, the trunk lines called in Albert Fink, German-born engineer and former vice president of the Louisville & Nashville Railroad who had become the foremost theoretician, promoter, and manager of railroad pools. By 1873, Fink was urging for the railroads to raise and equalize their rates, and to do it through cartel agreements and divisions of the traffic. Fink was fresh from forming the Southern Railway and Steamship Association in the fall of 1875, in which 32 railway lines formed such an agreement, naming Fink himself as commissioner of the Association with power to supervise the agreement.

In 1877, the trunk lines decided to call in Fink to help them try again. In April, the four largest trunk lines signed the Seaboard Differential Agreement, fixing eastbound freight rates to Philadelphia and Baltimore at 2 and 3 cents per 100 pounds less than to New York or Boston. On westbound traffic, differentials on some freight was the same; on others, it was as much as 6 and 8 cents per 100 pounds. The Seaboard Agreement reflected a shift of power from New York to Baltimore and Philadelphia, with Vanderbilt’s New York Central and the Erie forced to agree to maintain freight rates higher than the Pennsylvania Railroad, which had its eastern terminus in Philadelphia, or the B&O, which ended in Baltimore. The agreement was engineered by Philadelphia financier Anthony J. Drexel and J.P. Morgan of Drexel, Morgan, and Co., a major stockholder as well as creditor of the Baltimore & Ohio. Pressure was also put on by allied English bankers, headed by Morgan’s father Junius S. Morgan.

In July 1877, a reinforcing agreement between the four trunk lines allocated quotas of all westbound freight from New York: the Erie and the New York Central to receive 33% each, the Pennsylvania 25%, and the remaining 9% to the B&O. Moreover, the railroads established a Trunk Line Association, headed by Albert Fink, to regulate and supervise the pool and rate agreements. August of the following year, the trunk lines and major Western railroads expanded the cartel idea to form a Western Executive Committee to fix and raise rates and pool freight; and in December, at the suggestion of the ubiquitous Fink, the Trunk Line Association and Western Executive Committee formed a Joint Executive Committee to supervise the entire integrated agreement, headed again by Albert Fink. Fink and the Joint Executive also supervised regional subcommittees in all the major cities included in the agreement. By 1881, pooling of freight was extended to eastbound traffic as well.

And yet, this mightiest and continuing attempt to create a voluntary railroad pool proved, like its predecessors, to be a dismal failure. From the beginning, the Grand Trunk line of Canada kept cutting rates, and the completion of the Grand Trunk line to Chicago made matters worse. Furthermore, rate cutting by railroads within the cartel kept plaguing Fink and the railroads, largely through secret rebates which Fink could not detect until it was too late and much damage had been done to the rate structure and the relative shares of the market. Competitive rebates to shippers were concealed by such deceptive devices as billing freight from more distant points than actually used, under-recording of weight, and spurious classification of freight into cheaper categories of freight rates than had been agreed. Fink tried to counter these practices with a system of freight inspection, but lacking coercive police power, there was little that he could do.

As early as February 1878, Fink attempted to blacklist all railroad executives granting secret rebates; but, a month later, the division of freight between Detroit and Milwaukee was already collapsing in competitive rate and shipping wars. In 1878 and again in 1880 severe rate wars and competition for freight broke out between the trunk lines themselves.

From the beginning of the agreement, the merchants and shippers of New York had been understandably unhappy at the fixed competitive disadvantage that New York was suffering in relation to Philadelphia and Baltimore. Finally, in 1881, under pressure from these merchants and their Boards of Trade, the New York Central broke ranks and initiated a fierce rate war; in three months during 1881, freight rates were cut in half, East and West. Fink tried desperately to stem the tide by gaining an agreement to raise rates to the pre-rate war level and to try to crack down on zealous railroad sales managers (freight agents and freight solicitors) who engaged in secret rebates in order to gain sales. But all this was in vain. In March 1882, Fink and the Joint Executive tried once more, appointing a Joint Agent at every important traffic center, with the power to examine all the railroads’ books and bills of lading. But by the end of the year, this attempt had collapsed as well.

One of the major reasons for the failure of Fink and the trunk cartels was the truly heroic activities of one of the most maligned railroad financiers of this era: Jay Gould. In his search for profits, Gould was inadvertently the people’s champion by his inveterate activities as “traitor” and “rate-buster,” as wrecker of railroad cartels.27 Ever alert to profits to be made from undercutting railroad pools and cartels, Gould would either break the agreement from within or build external railroads to compete with the bloated and vulnerable railroad pool.

Thus, it was Gould who initiated much of the Eastern rate wars of 1881–1883 by building the West Shore Railroad in New Jersey as well as the Delaware, Lackawanna and Western in New York to compete directly with the New York Central.28 In his fascinating re-evaluation of Jay Gould, Julius Grodinsky demonstrates how this “disturber of the peace” benefited the public and shippers by continually building new railroads and breaking railroad pools and rate agreements. Gould performed this function repeatedly in the Middle-West and West, as well as the East. Grodinsky also points out that the extensive rate wars initiated by Gould in the 29

All in all, by the mid-1880s the railroads generally were in the position that Gabriel Kolko describes for the Eastern trunk cartelists by 1883:

By this time the Joint Executive Committee was merely an empty piety without real power or meaning. Fink warned the railroad men that they would lose money by their policies — which they very well realized — but he was unable to obtain their cooperation. There were too many parties, too many potential areas of friction, for successful control to come via voluntary agreements.30

In 1884, the freight rate structure was in collapse, and the Trunk Line Association “did little more than stand by helplessly.” During that year, Charles Francis Adams, Jr., scion of the famous Massachusetts family, and one of the leaders of the Trunk Line Association, wrote that one of its meetings

struck me as a somewhat funereal gathering. Those comprising it were manifestly at their wit’s end. ... Mr. Fink’s great and costly organization was all in ruins. ... They reminded me of men in a boat in the swift water above the rapids of Niagara.31

The trunk lines struggled to another agreement in late 1885, but it was again to collapse the following year. And the railroad associations in other regions of the country were doing no better. Alfred Chandler’s conclusion is apt: “By 1884 nearly all the railroad managers and most investors agreed that even the most carefully devised cartels were unable to control competition.”32

  • 1. Since this book is not meant to be a history of late 19th-century industry or of railroads, we do not discuss here fully the land grants and other subsidies to railroads. What we are interested in is an historical analysis of the development of railroad regulation and other manifestations of statism.
  • 2. See Ralph Andreano, ed., The Economic Impact of the American Civil War, 2nd ed. (Cambridge, MA: Schenkman, 1967).
  • 3. [Editor’s footnote] For more on the political history of the country and the free-market orientation of the Democratic Party in the 19th century, see Chapter 4 below, pp. 109–21.
  • 4. See Paul W. Gates, “The Homestead Law in an Incongruous Land System,” The American Historical Review (July 1936): 672–75.
  • 5. See Alfred D. Chandler, Jr., ed., The Railroads: The Nation’s First Big Business (New York: Harcourt, Brace & World, 1965), pp. 49–50. 
  • 6. Matthew Josephson, The Robber Barons: The Great American Capitalists, 1861–1901 (New York: Harcourt, Brace & World, 1962), p. 88. [Editor’s remarks] Ibid., pp. 78–89; Chandler, ed., The Railroads, p. 50.
  • 7. [Editor’s footnote] Josephson, The Robber Barons, pp. 78, 89–93, 164; Chandler, ed., The Railroads, p. 50. One of the promoters of the Union Pacific was Grenville M. Dodge. Dodge, who previously was helpful in getting Iowa Republicans to support Abraham Lincoln for president in 1860, later was promoted to an army general in the Civil War and was tasked with removing the Indians from the Union Pacific’s land. Part of the railroad’s costs were subsidized in this manner. Murray Rothbard, “Bureaucracy and the Civil Service in the United States,” Journal of Libertarian Studies 11, no. 2 (Summer 1995): 39–41.
  • 8. [Editor’s footnote] Josephson, The Robber Barons, pp. 53–58. For more on Jay Cooke and the 1863 and 1864 National Banking Acts, see Murray Rothbard, “A History of Money and Banking in the United States Before the Twentieth Century,” in A History of Money and Banking in the United States: The Colonial Era to World War II, Joseph Salerno, ed. (Auburn, AL: Mises Institute, 2005 [1982]), pp. 132–47; Patrick Newman, “Origins of the National Banking System: The Chase-Cooke Connection and the New York City Banks,” Independent Review (Winter 2018).
  • 9. [Editor’s footnote] Josephson, The Robber Barons, pp. 93–99. For a comparison between the inefficient government sponsored transcontinentals created by the 1862 and 1864 Pacific Railway Acts with the more private Great Northern operated by James J. Hill, see Burton Folsom, Jr., The Myth of the Robber Barons: A New Look at the Rise of Big Business in America (Herndon, VA: Young America’s Foundation, 2007 [1987]), pp. 17–39. The main drawback of the government sponsored transcontinentals was that they were not funded through market savings but instead government loans and land grants, and were thus not disciplined by profit and loss. By granting subsidies, the government diverted resources away from where consumers would have spent their money (and hence valued more highly). See Murray Rothbard, Man, Economy, and State with Power and Market (Auburn, AL: Mises Institute 2009 [1962]), pp. 946–53, 1040–41. That transcontinental railroads still would have been created can be seen through Hill’s Great Northern, built after buying the previously subsidized and bankrupt St. Paul & Pacific Railroad, which received a land grant far smaller than the other transcontinentals. 
  • 10. [Editor’s footnote] For more on Jay Cooke, the inflationist bent of the railroads, and the Panic of 1873, see Rothbard, “A History of Money and Banking,” pp. 148–56. For the background behind the Panic of 1873 and evidence that the length and severity of the ensuing depression was exaggerated, see Patrick Newman, “The Depression of 1873–1879: An Austrian Perspective,” Quarterly Journal of Austrian Economics (Winter 2014): 485–97.
  • 11. ([Editor’s remarks] Josephson, The Robber Barons, pp. 165–73.) Since Morgan and August Belmont, the Rothschilds’ agent in New York, were generally allied, we may speculate that the Rothschilds’ rebuff to the Northern Pacific bonds may have been part of a successful cabal to bring down Jay Cooke and replace him with Morgan in the American banking firmament. On the Morgan-Belmont-Rothschild alliance, see Stephen Birmingham, “Our Crowd”: The Great Jewish Families of New York (New York: Pocket Books, 1977). ([Editor’s remarks] Ibid., pp. 39, 44–45, 73, 94, 131, 152–57). Morgan had other important European connections. His father, Junius, was an American-born banker at the London branch of George Peabody & Co.
  • 12. It is difficult for the modern reader to comprehend that, before the advent of the railroads, there was literally no way to move over land apart from unsatisfactory local dirt roads. Hence, before the mid-19th century, transportation had to take place over water, and centers of population and production had to be locally nearby.
  • 13. See Edward C. Kirkland, Industry Comes of Age: Business, Labor, and Public Policy, 1860–1897 (New York: Holt, Rinehart, and Winston, 1961), pp. 77–79.
  • 14. David M. Potter, “The Historical Development of Eastern-Southern Freight Relationships,” Law and Contemporary Problems (Summer 1947): 420–23.
  • 15. [Editor’s footnote] Rothbard’s reasoning for why firms prefer to engage in secret price discounts rather than publicly stated price cuts is an illuminating explanation for why many prices may appear “stickier” than what they actually are. The historical price data which supposedly look stable over long periods of time may not be the actual prices which transactions are conducted at. Hidden price increases can also occur through reclassifications of goods in pricing categories or charging for previously free services. In his class lectures on this point, Rothbard mentioned the work of George Stigler. See George Stigler and James Kindahl, The Behavior of Industrial Prices (New York: NBER, 1970); Murray Rothbard, “The Railroading of the American People” in The American Economy and the End of Laissez-Faire: 1870 to World War II, 75:00 onward. Of course, prices are not perfectly flexible, but neither are they as rigid as commonly believed.
  • 16. Kirkland, Industry Comes of Age, p. 84.
  • 17. [Editor’s footnote] Rothbard’s emphasis on pricing as a discovery process is a major [Editor’s footnote] Rothbard’s emphasis on pricing as a discovery process is a major theme in Austrian economics. The argument is that competition, far from being accurately captured in the staid end state model of perfect competition where buyers and sellers have no influence on prices and possess perfect information, is actually better described as a dynamic interactive process where rivalrous buyers and sellers have to appraise the pertinent market data, make speculative forecasts, and continually adjust their behavior. The market process, or the actions of entrepreneurs engaging in economic calculation to allocate scarce resources, is one of equilibration rather than equilibrium. Markets are efficient and welfare enhancing even if they are not in perfect competition or general equilibrium. See Murray Rothbard, Man, Economy, and State, pp. 687–98, 720–39; Dominick T. Armentano, Antitrust and Monopoly: Anatomy of a Policy Failure, 2nd ed. (Oakland, CA: Independent Institute, 1990), pp. 13–48, and the sources of other Austrians cited therein. Rothbard later in his life did criticize the discovery procedure paradigm and preferred to characterize entrepreneurs in the market as appraisers and uncertainty bearers instead of discoverers. See Murray Rothbard, “The End of Socialism and the Calculation Debate Revisited,” in Economic Controversies (Auburn, AL: Mises Institute, 2010 [1991]), pp. 845–48. For an analysis of the railroad industry which uses the perfectly competitive benchmark and therefore ignores the above argument, see Robert Harbeson, “Railroads and Regulation, 1877–1916, Conspiracy or Public Interest?” Journal of Economic History (June 1967): 230–42. For an Austrian perspective on the “natural monopoly” concept of which railroads were frequently assumed to be, see Chapter 9 below, p. 288. 
  • 18. Kirkland, Industry Comes of Age, pp. 79–80, 83–84, 93–94. 
  • 19. Albert Fishlow, “Productivity and Technological Change in the Railroad Sector, 1840–1910,” in National Bureau of Economic Research, Output, Employment and Productivity in the United States After 1800 (New York, 1966), p. 629.
         [Editor’s remarks] The Grangers were a farmer protest movement that advocated restrictive railroad regulation, among other interventions. The economic suffering of farmers in the late 19th century was overblown. In general, the real price of freight for western farmers was roughly constant throughout this period, and their terms of trade improved. Nor were they crippled by rising real interest payments, in fact, interest rates were competitive, most farmers did not take out mortgages, and mortgages that were taken out were short term and anticipated future deflation. Farmer anger was mainly due to their income rising less than other groups, and the increased competitiveness and changing environment they operated in. See Charles Morris, The Tycoons (New York: Owl Books, 2005), pp. 115–17; Susan Previant Lee and Peter Passell, A New Economic View of American History (New York: W.W. Norton & Co, 1979), pp. 292–301.
  • 20. Kirkland, Industry Comes of Age, p. 71.
  • 21. [Editor’s footnote] Rothbard elsewhere argued that even if a cartel was able to successfully restrict output and raise prices, this is not evidence that there is an overall restriction in production, since the cut down in an industry’s production releases nonspecific factors and allows them to be absorbed by other industries, who can now increase their production of goods. The sustainable higher price of the cartel is evidence that the industry overproduced, and the resources are more highly valued in other industries. The fact that time and time again, most cartels were not successful is evidence that consumers valued the resources more highly in the cartelized industries than elsewhere. Rothbard, Man, Economy, and State, pp. 638, 690. Governments can sustain cartels by forcibly weakening the internal and external mechanisms that break them. For a survey of the various ways in which government intervention cartelizes markets, see ibid., pp. 1089–1147. As will be extensively shown below, virtually all of these were enacted during the Progressive Era.
  • 22. See Julius Grodinsky, The Iowa Pool: A Study in Railroad Competition, 1870–1884 (Chicago: University of Chicago Press, 1950). There were fitful attempts to organize railroad pools in the mid and late 1850s, including one by the trunk lines, but they broke up quickly and with little effect. See Alfred D. Chandler, Jr., The Visible Hand: The Managerial Revolution in American Business (Cambridge, MA: The Belknap Press of Harvard University Press, 1977), p. 135.
  • 23. More specifically, the railroads pooled 50% of their freight receipts and 55% of their earnings from passenger traffic.
  • 24. [Editor’s footnote] Grodinsky, The Iowa Pool, passim; Gabriel Kolko, Railroads and Regulation: 1877–1916 (Princeton, NJ: Princeton University Press, 1965), p. 8.
  • 25. [Editor’s footnote] Allan Nevins, Study in Power: John D. Rockefeller, Industrialist and Philanthropist (New York: Charles Scribner’s Sons, 1953), vol. 1, pp. 95–131; Kirkland, Industry Comes of Age, p. 84. Also see Chapter 3 below, pp. 93–98.
  • 26. See D.T. Gilchrist, “Albert Fink and the Pooling System,” Business History Review (Spring 1960): 33–34; Kolko, Railroads and Regulation, pp. 8–9.
  • 27. Interestingly enough, Gould has been maligned by left-wing historians as well. Thus, the perfervid Matthew Josephson refers to Gould as “Mephistopheles,” and speaks of “A Jay Gould [who] flies about preying upon the rich debris ...” Josephson, The Robber Barons, pp. 170, 192.
  • 28. On the trunk lines, Fink, and Gould, see Gilchrist, “Albert Fink and the Pooling System,” pp. 34–46; Kolko, Railroads and Regulation, pp. 17–20. [Editor’s remarks] Lee Benson, Merchants, Farmers, and Railroads: Railroad Regulation and New York Politics, 1850–1887 (Cambridge, MA: Harvard University Press, 1955), pp. 39–54; Paul W. MacAvoy, The Economic Effects of Regulation: The Trunk-Line Railroad Cartels and the Interstate Commerce Commission Before 1900 (Cambridge, MA: The MIT Press, 1965), pp. 39–109. For the Joint Executive Committee, significant price wars occurred in 1881, 1884, and 1885. The long run trend of the official grain rate declined from 40 cents per 100 pounds at the beginning of 1880, to 30 cents in early 1883, to 24 cents in mid-1886. See Robert H. Porter, “A Study of Cartel Stability: the Joint Executive Committee, 1880–1886,” Bell Journal of Economics (Autumn 1983): 311.
  • 29. Gould filled the image of the self-made man that fitted so many of the entrepreneurs of these decades, including Rockefeller and James J. Hill. Gould was born poor in upstate New York, taught himself surveying, and went on to become a brilliant speculator and corporate financier. See Julius Grodinsky, Jay Gould: His Business Career, 1867–1892 (Philadelphia: University of Pennsylvania Press, 1957).
  • 30. Kolko, Railroads and Regulation, p. 20. [Editor’s remarks] Ibid., pp. 7–20.
  • 31. Quoted in Gilchrist, “Albert Fink and the Pooling System,” p. 46.
  • 32. Chandler, The Visible Hand, p. 142. [Editor’s remarks] Ibid., pp. 137–43.