What was the impact of railroads?

The railroads were the key to economic growth in the second half of the nineteenth century. Besides making it possible to ship agricultural and manufactured goods throughout the country cheaply and efficiently, they directly contributed to the development of other industries. The railroads were the largest single market for steel, which went into their locomotives and track, and they relied on coal as their principal fuel. Because of their size and complexity, the railroads pioneered new management techniques such as the separation of finance and accounting from operating functions and the development of the first organizational charts that clearly showed the chain of command and responsibility. Furthermore, competition among the various rail companies ultimately led to consolidation, which also became a trend in late‐nineteenth century American industry.

Growth and innovation. The decades after the Civil War were a great age of railroad building. Total rail mileage in the United States grew from 53,000 miles in 1870 to just under 200,000 miles at the turn of the century, with most of the new track being laid east of the Mississippi River in the nation's industrial heartland. Along with the railroad boom came solutions to problems that had plagued the industry in the past. Cross‐country scheduling, for instance, became easier in 1883 when the railroads established the Eastern, Central, Mountain, and Pacific time zones across the United States, and shipping delays caused by railroads using different gauge track were resolved in 1886 when almost all the companies adopted a 4‐foot‐8 11/42 inch standard.

The capital needed to purchase and maintain track and rolling stock made owning and operating a railroad an expensive venture. Although subsidies from local, state, and federal governments were important, most of the money needed for expansion came from private investors through the sale of stocks and bonds. Railroads, however, often engaged in stock watering, selling more stock than the company's actual value. In the 1880s and 1890s, railroad financing increasingly came from investment banks such as J.P. Morgan & Company, which were able to assume a management role and push for the consolidation of rail lines as the price for extending credit. Morgan himself was involved in reorganizing several lines, including the Erie and the Northern Pacific, after the Panic of 1893.

Competition and regulation. Competition among railroads led some into bankruptcy, sunk others heavily in debt, and ignited bitter rate wars. To limit competition, lines operating in the same region sometimes worked out an agreement to share the territory or divide the profit equally at the end of the year. This was known as pooling, a process that kept rates artificially high. Lacking such cooperation, the companies used various means to draw customers away from their competitors, such as paying kickbacks or rebates to large customers for using their lines and making up any losses by charging small shippers more. Because of such practices, rates were often lower for a long haul than for a short haul. For example, shipping goods from Chicago to New York, where several companies had routes, was cheaper than sending the same shipment from Buffalo to Pittsburgh, where only one railroad had a monopoly. The unfairness of such rate‐setting practices led to government regulation of the industry.

As early as the 1860s, largely due to pressure from farmers, states began establishing maximum rates and outlawing rate discrimination. In 1886, however, the Supreme Court ruled in Wabash v. Illinoisthat the authority to regulate railroads engaged in interstate commerce rested with the federal government rather than the states. Congress, which had been investigating the railroads for several years, responded to the decision by passing the Interstate Commerce Act of 1887. The legislation provided that rates must be “reasonable” and prohibited pooling, rebates, and long/short haul rate differentials. The Interstate Commerce Commission (ICC), the nation's first regulatory agency, was created with the authority to review rates and investigate the railroads. The Commission had very little real power; it could not compel witnesses to testify, and the courts often rejected its decisions.