Socialist Mayor Zohran Mamdani inadvertently praised one of the great accomplishments of capitalism as he was sworn in as mayor of New York City.
He took the oath in one of the original subway stations—a system built and maintained by private management companies as part of a wildly-successful private transportation system that lasted 36 years. It was a showcase that people came from around the world to see.
The no-longer-used City Hall stop—one of some two dozen stops opened in 1904—was incredible. “So superbly engineered and maintained had the system previously been that it took years for the systematic neglect to take its toll,” Robert Caro wrote in his biography of Robert Moses. The system was so good that people came from aboard to experience our subways. But it was more than beautiful.
The private management system, in its first two decades, made money. That’s until it was bankrupted decades later by government regulation and price controls, which never allowed the fare to go over a nickel. These are similar to rent control laws that make New York City’s housing market a horror show for average workers. Still, the privately-managed subway companies—before being ousted by populist pols—accomplished great things for more than shareholders.
This was detailed in the book Tunneling to the Future: The Story of the Great Subway Expansion That Saved New York by Peter Derrick, who worked as an MTA consultant. He wrote that the first subways—the subways run by private management companies—allowed people to move from slums near their workplaces in lower Manhattan to healthier neighborhoods in other boroughs. The private management subway companies did something that even some defenders of capitalism say is impossible: an efficient private management transportation system that made money.
The latter was roughly the first 20 years of the system—from 1904 to roughly the mid-1920s. Indeed, subway historian private/transit critic official Brian Cudahy admits that the construction of these lines would probably have been impossible without private funding because the city was reaching its debt limits. But the excellence of the privately-constructed system was more than financial.
The first subways were considered “an engineering marvel.” New Yorkers had been “once enormously proud” of their subways, Caro wrote. The government took over in 1940. Yet, “so superbly engineered and maintained had the system previously been that it took years for the systematic neglect to take its toll.” But state and city government agencies ruined it and—aided by the media—have since insisted we can never go back to private enterprise because subway lines can’t turn a profit.
“A theory has developed that municipal transportation might not even be expected to pay its way. This theory is merely the outgrowth of government ownership,” wrote economics journalist Henry Hazlitt some 60 years ago in the essay “Socialism, U.S. Style,” as the tide of more government was rising.
“Subways don’t make money,” Nicole Gelinas—a senior fellow with the Manhattan Institute—told me a few years ago. I have even been told by representatives of the so-called laissez-faire group that subway privatization is not an option. (This reminds me of the Austrian economist Ludwig von Mises’s comment: “Even many of the critics of socialism sound like socialists”).
But history doesn’t support Gelinas. Indeed, private subway lines made money in their first years. Private lines lost money later. Their history is similar to private passenger railroads, once profitable and later forced into bankruptcy through overregulation and price controls from the 1920s to the 1960s before a GOP administration gave us Amtrak—a system that has lost billions according to the book End of the Line.
Although the New York City subways were never privately owned, private transportation companies operated in the first 36 years of the subways under a franchise contract. The best was the Interborough Rapid Transit Company (IRT). It generated strong profits from its beginning in 1904, on into the 1920s.
In the IRT’s 1917 annual report, the transportation company reported net income of $23.2 million. That was an increase of about $1.5 million over the previous year. The IRT was also a good investment. It paid about some $7 million in dividends, according to the annual financial report dated June 30, 1917.
Even into the 1920s—when price controls and rising costs because of the inflation of World War I were squeezing profits, with private operators suing unsuccessfully to raise fares—the subways still made money. However, IRT officials warned that, without the ability to raise prices, bad things would happen.
In the US Supreme Court decision of 1929—Gilchrist vs. IRT, a decision that affirmed that the five-cent fare couldn’t be raised to seven cents—court papers documented what the critics have claimed was impossible: The IRT still made money. According to the court papers,
For the current fiscal year ended June 30, 1928, the figures for the first six months are available, and show a net surplus amounting to $3,687,000, which exceeds the surplus for the corresponding six months of the fiscal year before by $1,609,000.
However, after the IRT was repeatedly blocked from ever raising fares, the price-controlled subways inevitably started to lose money in the 1930s. Service quality declined and the city government regulated the subways into red ink.
The IRT—like any business leaving a hostile business environment as socialists take charge of a city—was ready to sell in 1940. The politicians and their union allies took over. Disaster followed and remains to the present day.
