Illinois Case Study on 1837 Internal Improvements plus Relevant Sections of Elgar Chap 3

Illinois Case Study on 1837 Internal Improvements plus Relevant Sections of Elgar Chap 3

Draft Journal Pre-1900 Big City MED/Illinois/Lincoln/Wallis

Original Submission to Elgar: September 2016

December 2016 Chapter 3: Early Republic

 

 

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Draft Journal Pre-1900 Big City MED/Illinois/Lincoln/Wallis

 

Lincoln, Internal Improvements, and Illinois post-1839 Default

There are at least three themes floating through this concluding case study. The easiest to identify is Lincoln’s personal role and commitment to S&L internal improvements (this is not his only major link to S&L ED, however. As Two Ships describes his role as corporate attorney for Illinois Central RR, and his deep involvement in protecting its privileged tax abatement). The reader might conclude S&L internal improvements was a life-long political priority, with probable personal commitment^[i].

Secondly, this case study observes the collapse of the state-chartered corporation triggered by the six-year long Panic of 1837. The refinements necessary to understand this collapse suggest a partial rethinking of the role state-chartered corporations played—or, at least, recognition that state-chartered corporations and internal improvements varied meaningfully among states in that collapse. The final theme is a summary of why this case study fundamentally shaped the contours of our present-day Contemporary Era, and profoundly affected the evolution of our history. The state constitutional gift and loan clauses that followed this fiscal collapse fundamentally altered the structure and even the nature of future ED public-private partnerships.

Lincoln/Douglas and the 1837 Illinois Internal Improvement Act

Let’s start with Abe. Biographers, from people who knew him and over 150 years after, are consistent in asserting “internal improvements” were central to Lincoln’s Whig/Republican agenda, and to him personally. Lincoln escaped from his father and rural poverty by seizing several employment opportunities related to river-canal internal improvements. He actually worked for the better part of two years on constructing an Illinois internal improvement canal by the time he was 21. He lost the job because Andrew Jackson vetoed further funding for the project in his battle to end Henry Clay’s American System program.

His first campaign for elective office (1832) centered on approval of additional internal improvements (he lost). Elected in 1835 to the state legislature he pressed hard to make Springfield the state capital, and to adopt the Governor’s proposed vast financial commitment to make massive internal railroad and canal improvements that would draw trade, grain, and settlers from St. Louis to central and southern Illinois. Reelected, Lincoln was elected by fellow Whigs as their floor (majority) leader^[ii].

In that position, although in the minority to the Democrats, he is credited with leading and successfully negotiating passage of the 1837 Illinois Internal Improvements Act (which also confirmed Springfield as the state capital). The bill was bipartisan, and an important Democrat ally was Stephen Douglas who pushed his own set of favored railroads and counties. The Act was (1) pork barrel 101, (2) incredibly divisive, and (3) its approval passed just minutes before the 1837 Panic hit. The Governor vetoed the legislation, and Lincoln led a difficult overturning of the veto. The Act went into effect.

A contemporary legislator observing the legislative process commented:  “It was at that session that the subject of internal improvement became the all-absorbing question of the day. There was not a railroad at that time in the state of Illinois, nor was there any road in Indiana touching the line of our state”. Another legislator, a friend of Lincoln, claimed “We ran perfectly wild on the subject of internal improvements. Every member wanted a road in his county/town–a great many of them got one, and those counties through which no road was authorized … were to be compensated in money [$200,000] which was to be obtained by a loan from Europe—or God knows where”. Lincoln was able in the policy stampede to add a clause making Springfield the state capital.

Infrastructure bonds were ultimately collateralized by state lands which would increase in value due to canal/railroad proximity—and which were subject to higher property tax rates. The vehicles for project implementation were state-chartered corporations, empowered to exercise development-related ED powers, and enjoy favorable PILOTs. These corporations would be required to conform to legislative-criteria (which it turned out were contradictory) in order to be eligible for project funding. The legislature created two public EDOs to regulate and oversee the legislation. Cost estimates were later judged low, and a relatively low face value ($10 million) of bond-issuance was authorized. . Both Lincoln and Douglas voted against any state-wide referendum to approve/ratify the Act. The Act comprised 63 sections, specified projects throughout the state. Projects include several major rail line initiatives, many smaller canals/feeder rail, and roads/bridges. It is not clear to me that legislators had a clear sense of what they had passed.  Said and done this was “pork” and infrastructure combined.

Lincoln is quoted as saying “he held it to be the duty of Government to extend its fostering aid in every Constitutional way, and to a reasonable extent any enterprise of public utility required such assistance [state-chartered corporation] in order to the fullest development of the natural resources and to the most rapid and healthful development of the State”. Douglas stated “So strong was the feeling of popular opinion in its favor that it was hazardous for any politician to oppose it”. Local communities across the state met in a public meeting and approved resolutions “instructing” their representative to vote for the Act—which Douglas goes on to say “I did not feel at liberty to disobey. I accordingly voted for the bill under these instructions”. Both quotes were made subsequent to state default^[iii].

This sorry experience did nothing to dissuade either Lincoln (as President) or Douglas (as Congressman and Senator) for proposing, voting for and securing approval of future internal improvements. Douglas was a confirmed railroad supporter. The latter opposed Jacksonian Democrat Presidents (Polk, Tyler and Pierce) who vetoed such projects. Lincoln wasted little time securing approval for the Pacific Railway Act of 1862 which authorized the development and construction of the 1912 mile transcontinental railroad built by three private companies created by federal legislation (Union Pacific, Central Pacific, and Western Pacific RR) over public lands, financed in considerable measure by U.S. (and state/local) bonds. Face value of the bonds was about $125 million. The railroad opened for business in May 1869. No taxes were levied during construction. Each company was paid $16,000 per mile built (then-current dollars) with bonus allocations for tunnels and mountains. Permanent land grants were made to the corporations, and a 400 ft. right of way was also included  and additional acreage was awarded at stations” for subsequent commercial development to the benefit of the railroad. To ensure passenger traffic, but more importantly foster settlement, Homestead Act(s) were approved between 1861 and 1863. Three years after the transcontinental railway opened for business (1872), the Union Pacific went bankrupt, and the Credit Mobilier scandal erupted.

OOPs-It Didn’t End Well

Within weeks of Illinois Internal Improvement Act passage, the Panic hit, and banks were reluctant to purchase bonds. The state itself inserted conflicting definitions of what an eligible state-chartered corporation could be, adding an additional barrier to a project acquiring Act funds. Most Internal Act projects were never funded at all. Those that closed failed during the six-year Panic, usually leaving behind holes dug in the ground. Only one major project successfully survived to its grand opening.  Almost all bonds were purchased by foreign lenders. By 1842 Illinois had about $15 million in outstanding debt—most of which came from earlier canal projects. Annual interest cost was about $800,000 and total state revenues were less than $100,000. The state legislature refused to increase taxes—and that lend to default. In the years that followed, several bills tried to repeal the Internal Improvement’s Act, but all failed. As far as the 1840’s it was mostly a wasted decade for Illinois internal improvements.

Illinois’s core problem was collateral for bond issuance were land values, both before and after project completion. The Panic destroyed the prospect for any short/intermediate term increase in either. Say, it another way, the project financing collapsed because of the Panic. To be sure, some projects included in the Act were, if not on the verge of insider corruption, were unbelievable schemes that likely were doomed from the start. The Panic got the blame for poor due diligence in some cases. The legislative and public opinion stampede that produced the bill won no prizes for due diligence or long-term policy analysis, but it demands some explanation why such a stampede.

Still, the core cause of Illinois (and Northwestern state) internal improvement defaults were: “Northwestern states [Illinois, Indiana, and Michigan] were counting on rising land values to service debts, not on completion of canals and realization of toll revenues”. Failed project construction meant inevitable default”^[iv].. In the Northwestern states, much of the project land came from land that would be transferred from federal ownership to state. The feds prohibited any imposition of property tax on such land for five years. The prohibition expired in 1836, and was viewed as a windfall by Northwestern lawmakers.

The opportunity to defend themselves from Maryland and other state railroads, and to catch up with internal improvements, seemed too good to miss. They “jumped into internal improvements with both feet”. They did so following the earlier devised Indiana model of infrastructure financing: “These states [Northwestern listed above] hoped to service debts with the revenue proceeds of an expanding tax base…. All three states instituted ad valorem property taxes and increased tax rates”^[v]. The weakness in this very responsible approach to infrastructure financing was the non-recognition of the substantial risk of our “developmental infrastructure” project construction. Projects had to be completed to generate expected project revenues. The Panic played havoc with that assumption of risk. The one Illinois rail project that survived to grand opening, for example, did not default.

To be sure the badly written act, especially in its poor definition of eligible state-chartered corporations, ironically saved the State from funding ridiculous and corrupt projects, but inhibited many others from acquiring any funding from the Act. In short, seen through the lens of current history, the state-chartered corporation got the blame for these Northwestern defaults, when the real blame lay elsewhere. Indeed, state borrowing for purposes other than internal improvements did not abate after 1837, but increase, albeit at a lower rate. Why? Let’s enlarge our focus to the other states which also were engaged the great infrastructure race of the 1830’s.

The “bigger picture”, Illinois after all was a mere backwaters corner of the Big City hegemonic north/Midwest, the scale of default was worse—and different than that of the southern and Northwestern states. Pennsylvania was the state copied by Maryland, New York, Massachusetts and Ohio. In 1828 when Pennsylvania started to issue its debt and engage in the infrastructure race with New York’s Erie Canal. The state of Pennsylvania provided key financing through bond issuance. There was, however, a problem: the state could not decide between competing transportation modes and chose to develop a hybrid infrastructure composed of both. Believing rail too risky they started construction (1826) on a “mongrel” transportation system composed of network of canals and some rail (the Pennsylvania Mainline) to Pittsburgh. Baltimore’s private entrepreneurs, however, unimpressed with canals that froze in the harsh winters, and believers of new rail engine technology, put their money into the startup “Baltimore and Ohio Railroad of Baltimore City” (1827). The race was on.

Pennsylvania decided the state should take the lead, but it did not raise taxes to cover interest payments for bond debt. Instead, it borrowed new money and used these borrowed funds to pay interest costs. It expected to pay off the entire bondage when projects came on line and generated state revenues. That was expected to be 1835.At that point taxes were to be imposed. Why the reluctance of levy ad valorem property taxes. The financial success of the Erie Canal, bonds were paid off using canal tolls, and indeed New York suspended its non-business property taxes because such tolls were a windfall. Why generate citizen uproar, if it were not necessary.

The problems was more the result of the failure of the project financing model, than the corruptive shortcomings of the state-charter corporation. Because historical attention was focused, not on southern or Midwestern defaults, but on defaults in Pennsylvania, Maryland and New York, where improper and corruption allegations were widespread and impactful, the culprit became defined as the state-chartered corporation’s faulty public-private relationship and poor accountability by the legislature^[vi].

The debate in these states was profoundly affected by more partisan politics which were infused with Yankee cultural definitions of public-private relationships—and resulted in more strident and aggressive legislation designed to separate public and private decision-making into its individual spheres (withdraw public officials from state-chartered board), and to delink public funds—more importantly use of credit and direct loans/grants, often subjecting them to public referendums requiring two-thirds majorities. Indeed, in several instances the States effectively, removed themselves from this type of infrastructure-lending, leaving the hot potato entirely in sub-state governmental hands. In such cases, the state thrust upon local governments the responsibility, subject to state guidelines, for infrastructure—and other MED financial relationships with private business.  Future hybrid or public-private partnerships were from that point on, look with skepticism, if not outright opposition by the courts, lawmakers, and public opinion.

Today one might think poorly of state-chartered corporations, much as one thinks of an old disreputable uncle. A rogue to be sure, and one that had his day in the sun, but judged in this morning’s sunlight a not very commendable character. What is clear is that our rogue uncle does not conform to contemporary values and priorities, but in our case he built the canals and railroads and connected the dots. They did so without benefit of prior experience, yet they certainly had their faults. We could—and did—do better by moving to other forms of public-private partnerships. We learned from defaults, probably not from their corruptions, and the trains ran on time for a couple of hundred years after.

 

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Chapter III

Early Republic Economic Development

 

Most economic developers today probably attend the “church of what’s happening now”. History, however, preaches its own version of “old-time religion. The idea that whatever happened before the Civil War can’t possibly affect me today is one this history challenges. True, the 1800-1865 “context” seems vastly different from today—this is the period described of great population movements into the nation’s interior, displacing Native Americans, forcibly compelling African-Americans into the new “cotton belt”, approving state constitutions and municipal incorporation charters, and building cities from scratch. Industrialization and the industrial city developed during his period, but Early Republic values, structures, processes, forms of government and institutions persisted, sometimes with increasing irrelevance and dysfunctionality. In many ways, pre-Civil War Early Republic institutions, politics and governance reflected a teen-age-like transition to something else.

 

Despite this “context” a whole lot of economic development was going on. In particular, pre-Civil War ED employed ED tools —important tools like tax abatement, loans to business, and eminent domain– that we still use today. These classic tools were instrumental in forming early jurisdictional economic bases, enhancing viability of newly-created cities, and preserving hinterland hegemony so vital for urban growth. Their widespread use since the founding of the Republic strongly hints that despite incessant controversy and criticism, such tools possess a durability that must frustrate their critics.

 

Even more surprising is that cities and states were involved in a vigorous debate concerning vital questions, such as the role of the federal government in state/sub-state economic development, and if and how, government could “partner” with the private sector to achieve economic development goals. At the end of this period, a state court decision (see Dillon’s Law below) cemented, perhaps forever, the place, role, and inherent power of sub-state cities, towns, and villages in our federal system. That decision did more to shape America’s sub-state policy process than any other court decision since.

 

The rise of new cities and what seemed at the time a life and death competition among older coastal cities demonstrated the importance of a Chapter One driver of ED policy/strategy: the competitive urban hierarchy. In this era competition among cities was so instinctual one can be forgiven for believing competition is a gene in the urban DNA. Inland city-building simply crushed the older and previously isolated Eastern seaboard hierarchy. A new one slowly emerged, and the fledgling and volatile new hierarchy begat even more urban competition. Access and trade were prerequisites for urban growth and that required transportation infrastructure. Municipalities (and states) needed to connect their city to the adjacent city, routing trade and people through their community, not somebody else’s. Using the transportation mode du jour, cities competed to develop continental-scale hinterlands.

 

Such infrastructure, however, was light years beyond the bureaucratic capacity, political consensus and tax base of municipal/state government. Frankly, the tools that were available (government bonds, eminent domain, tax abatement) and the almost complete lack of economic development structures (EDOs) that could make it happen meant that ED strategies, tools—and structures—had to be fabricated. Either government itself would have to do it—and it could not–or the private sector logically would have to be involved. How? Experimentation, innovation and corruption followed. If transportation infrastructure was to “happen”, a partnership with the private sector was essential. This partnership necessarily meant some structural vehicle that linked private expertise, risk-taking entrepreneurship, and financing with public powers such as bonding, tax abatement and eminent domain had to be devised. In the Early Republic that was the infamous corporate charter which created a hybrid public-private EDO that financed, constructed and operated the infrastructure. The problem was the corporate charter worked—to a point—and then it didn’t. That is a major element of this chapter—and for economic development.

 

ED functions as the bridge between government and the private economy. That the corporate charter delivered a decidedly mixed bag—a decent transportation infrastructure was installed, but charter corporations were prone to conflicts of interest and outright corruption, and demanded governmental fiscal sophistication. Many went bankrupt in the first major depression that occurred in the late 1830’s and early 1840’s.  Après le Panic of 1837, le corporate charter Deluge. The reaction to the corporate charter affected greatly the subsequent evolution of most state and local ED.

 

 

Sticking the Federal Nose into Sub-state Policy-Making

 

By Washington’s second administration (1794) the so-called Hamilton Plan (strong executive-led federal government, a pro-manufacturing finance system, a National Bank) assumed center stage. By 1796, however, the Washington “unity” administration splintered into a Jefferson-led, legislative-focused, agrarian, and state-rights Democrat-Republican Party (D-R’s) that directly challenged Hamilton/Washington Federalists. The Federalists struggled under Adams and lost control of the federal government (forever) to Jefferson in 1800–leaving the federal government in the hands of Tidewater/Deep South-based Jeffersonian D-R’s. Perhaps, Jefferson’s most important economic development action was the Louisiana Purchase from which fifteen states emerged[vii].

 

After the War of 1812, and a weak attempt at New England succession from the federal Union (Hartford Convention), the dominant Federalist Party collapsed and merged into a unstable two-wing Democratic-Republican Party. The two-wing D-R Party presided over a short-lived “era of good feelings (1816-1828). And then Andrew Jackson was elected President (1828)—and no one had good feelings after that. Jackson, a complex character, a Deep South slave-owner/planter with Greater Appalachian values, a strong believer in state’s rights, cheap money, anti-bank but an equally strong proponent of the Constitution and the Republic, Jackson was his own paradigm and enigma. His effect on contemporary economic development, however, was profound—his concept of urban governance, the weak mayor system limited governmental capacity and policy effectiveness for nearly a hundred years. The reaction to his economic failings created a wave of state legislation that continues to affect economic development to this very day.

 

Most of the infrastructure-related events described below occurred after the War of 1812 and were generated by D-R factions led by Henry Clay. Federal involvement in local ED largely ceased with the Jackson Administration (1828-36), and the Panic (Depression) of 1837. Not until Lincoln did the feds resume an activist role in state/sub-state ED. In the interim states assumed a greater role, producing a decidedly mixed bag of policy outputs. The Whig Party formed after 1840 as an alternative to the dominant Jacksonian Democrats. The history briefly describes these federal infrastructure initiatives. The nature of these initiatives and the reaction to them reveals a lack of consensus regarding the role of the federal government in matters of sub-state economic development during the pre-Civil War years. Importantly, post 1861 federal ED-related initiatives bridged that now infamous ED public/private chasm by using, instead of the corporate charter, the modern private business corporation as its primary EDO.

 

Early Republic Federal Government and “Internal Improvements”

A predominately agricultural economic base, ensured that most of America remained rural hinterland, pockmarked by (today’s standards) remarkably small urban centers. In 1790 only five per cent of Americans lived in urban areas (defined as 2,500)[viii]. By 1860, however, the urban share of the population increased to a whopping twenty percent. Despite an emerging industrialization, America in this Era is best thought of as a developing nation, without a land-based transportation infrastructure, dependent on water-borne commercial trade. We lacked a meaningful financial/investment system and consequently, we were deeply reliant on foreign direct investment. Each of these factors affected sub-state economic development activities, and also generated a federal attempt to overcome the isolation of rural America by making it more accessible for trade and population mobility. The man most associated with these initiatives was Henry Clay.

 

Henry Clay (D-R) was arguably the most prominent national “economic developer” in the pre-Civil War period if only because of his longevity on the national political scene. A transplanted Virginia slave-owning planter, Clay moved to Kentucky and was elected to the House of Representatives at 34 (1811). On the first day of his first term on the Hill (1812), he was elected Speaker. Reelected to the Speaker for the next four terms, he remained in either House or Senate until 1852; he ran unsuccessfully for President six times. Relevant to us was Clay’s “American System” federal policy platform.

 

The American System was a three-pronged federal economic development program: (1) a protective tariff intended to nurture the emerging manufacturing sector startups, and shield them from British dumping and low cost imports; (2) a (second) national bank that would inhibit inflated  ion, establish a strong national currency, provide lending to firms, and foster interstate commerce; and (3) provide federal subsidies to roads, canals and “other internal improvements” to strengthen access to rural cities/ towns which dotted the American landscape”. The American System was controversial, and while in office, Jackson sparred and fussed with Clay over much of it—refusing to charter the National Bank and denying funds to the National Road.      The Bank’s death contributed mightily to the Panic of 1837.

 

The tariff, however, equaled slavery in is divisive political effects on the body politic. Tariff debate exposed stresses among competing industry sectors and the contrasting North/South economic bases. The Southern export-based agricultural economy required as close to free trade as could be wrung from the North, which wanted a tariff to protect its fragile new manufacturing sectors. Free trade or tariff protectionism considerably impacted industry sectors/life cycles and have consistently created the potential for zero-sum decision-making among the nation’s regions and states/cities. The various tariffs associated with Clay’s American System were not the first, and would not be the last, example of polarizing regional economic development conflict triggered by tariffs. On balance, BTW, the North came out the better.

 

The National Road anticipated the Eisenhower interstate highway system by more than150 years. The National Road (Route 40) commenced in Washington D.C. By 1818 it reached Wheeling (West) Virginia and eventually got as far as Vandalia, Illinois. The Feds provided subsidies, off and on, through 1835 when states took over. “So many towns sprang up along it that it became known as the Main Street of America”. (Reynolds, 2008, p. 12) The National Road opened up the central Mid-West as the railroad did for the American West some forty to sixty years later.

 

 

 

 

Economic Development Tools

 

Tax abatement and eminent domain have generated more paper, debate, bad feelings, and produced more cost-benefit studies than any other ED tool. Eminent domain is linked to the infrastructure strategy and tax abatement to the business attraction/retention. They both by definition involve private property. Therein lies the core problem—cross over a “fault line”, a policy no-mans-land between Privatism and Progressivism. Progressivism is uncomfortable, to put it mildly, with assisting private business, preferring instead to provide tax abatement (think earned income tax credit and progressive income tax rates) to people—poor people. Policy analysts call it redistributive public policy-which, guess what, Privatists are seldom thrilled about.

 

In life, the core issue is “qui bono” (who benefits): business, society or the disadvantaged. Everybody supports “their” tax abatement or eminent domain—not the other guy’s. During the pre-Civil War years, both ED tools were prominent, used pervasively—actually they were essential– to the ED strategies pursued by states and jurisdictions. They were used by business corporations or hybrid public/private EDOs—either an experiment or a stupidity depending how one views the concept of a “private” EDO.  That is a point behind this section: to explain the Early Republic basis for tax abatement and eminent domain for the benefit of private enterprise. The conclusion that follows is “like it or not, it’s legal”. And it’s a part of our ED heritage. Here’s why.

 

Business Tax Abatement: Economic Development’s Oldest Tool

Tax Abatement is as old as the hills, the Seven Hills of Rome for example. That is the first lesson our history teaches concerning tax breaks. How long have state/municipal-level tax differentials been used in America? The U.S. Supreme Court in the 1871 Wilmington Railroad v. Reid decision traced tax incentives to a North Carolina 1790 exemption incorporated in the Dismal Swamp Canal Company charter. [We did not make this up[ix]]. Vermont between 1812 and 1830 exempted local manufacturing firms from state/local taxes (Bruchey, 1968, p. 128)—so did most other states. In a later chapter an even earlier dates will be cited.

 

Another example involves our saintly Abraham Lincoln. In January, 1856, Lincoln argued before the Illinois Supreme Court that the Illinois Central Railroad didn’t have to pay taxes to McLean County. He argued the company charter limited the payment of taxes solely to the State of Illinois. Lincoln won the case[x]. Tax abatement is apple pie America.

One might wonder if some Constitutional clause stops tax abatements dead in their tracks. Obviously not! The power to grant tax abatements stems from the power to tax. If a jurisdiction can tax—the jurisdiction can exempt from taxes. One power is inherent to the other. The federal Supreme Court decision, Mobile and O.R.R. v. Tennessee (1894) sustained state tax exemption for a particular railroad by recognizing, first, the legislature’s constitutional authority to grant an exemption, and second, ‘that such an exemption might confer either total or partial immunity from taxation, and extend for any length of time the legislature might deem proper.” (Benjamin, 1980, p. 663). It has not yet been overturned.

 

Oher articles of the Constitution might offer hope. Constitutional clauses requiring federal and state “uniformity” and the equal protection clause are regarded as the next best hopes to limit tax abatement. The “uniformity clause” provides “all Duties, Imposts and Excises shall be uniform throughout the United States“. Most state constitutions mirror this language. Court decisions over the years, however, have created a distinction between direct taxes and “indirect taxes” (duties, fees). The Supreme Court has consistently held that the uniformity clause does not apply to direct taxes[xi]. Property and sales taxes are direct taxes. Benjamin (Benjamin, 1980, p. 663) observes that most state court decisions “apply the federal standard and require only that all tax laws apply generally throughout the state, subject to any exemptions which the legislature may deem necessary“.

 

For example, a 1978 Supreme Court, decision confirms the power of Congress to “pin-point spending in various localities of intense unemployment and underemployment so that it may choose to concentrate on urban poverty or rural poverty or that it may attack certain sources of poverty without challenging others” and that “Congress must be free to provide tax incentives to businesses located in the poorest neighborhoods so long as those incentives do not violate the uniformity clause by being totally or partially unavailable to any qualified community“[xii]. How specific or narrow can an exemption be? Justice Cardozo’s ruled that abatements may be as “narrow as the mischief“[xiii].

 

Next the Equal Protection clause (Fourteenth Amendment) applies only to the states and not to the federal government. That means state/local tax exemptions could potentially be challenged under the equal protection clause. Precedence, however, allows state legislatures broad discretion, bordering on deference, in determining what is taxable or tax exempt. So long as “they and the classification upon which they are based be reasonable, not arbitrary, and apply to all persons similarly situated”. Wheeling Steel, Allied Stores v. Bowers a state may grant exemptions primarily on the basis of residence when public policy factors are also present[xiv]. As to whether non-exempted taxpayers (or business competitors) equal rights are violated by tax abatement, Courts have consistently struck down cases that pursued this argument[xv].

 

Tax Abatement in the Nineteenth Century

If the Supreme Court is correct, the first recorded tax exemption was allowed in Washington’s first year in office. Banks, insurance companies and railroads were the first recipients. Some were intended to launch startups, particularly finance companies and banks; railroads could obtain perpetual abatements. Some abatement was partial; others total. Most states used corporate charters to convey tax abatement. Once granted, it was hard to claw back; tax abatements were interpreted as a contract that could not be breached. Early Republic state-wide tax differentials favoring manufacturing firms were common throughout the nineteenth century. Manufacturers were the gazelles of the day. Post-Civil War economic developers wanted these fast-growing, job-creating firms and they were willing to pay up to get them to locate in their state and city. New York, almost certainly not the first state, abated its capital stock tax for manufacturers starting in the 1880’s. Pennsylvania, not keen to lose firms to New York, followed suit within a year. Cities played the game as well, Louisville Kentucky in 1913, for example, abated all local taxes for manufacturing firms for five years—then had to argue before a state appeals court as to how to define manufacturing (making popcorn at a movie theatre was manufacturing in that case). Tax abatement, it seems, was woven into our national fabric long before the turn of nineteenth century.

 

What’s yours is mine: Delegation of Eminent Domain to Private Corporation

I am also interested in outlining the context in which eminent domain, despite its controversy, became a core tool in the profession; it did so due to its centrality in the development-redevelopment process.  Eminent domain is NOT just another tool in the economic developer’s toolbox. Government taking of property for public purposes is one thing. Taking of property from one individual/corporation and transfer of such property to another individual/corporation is doubly a serious matter. On its face government taking away one person’s private property and giving it to another private person is just wrong. The matter is thrice complicated when a private entity is permitted use of eminent domain to achieve its purposes, including profit.

 

Eminent domain, despite the Constitution’s Fifth Amendment forbidding federal/state government from taking private property without “just compensation”, has been, with rare exceptions, a matter of state law. Today there exist fifty-one (including federal government) separate processes with which to conduct eminent domain. Sub-state units of government can add their own provisions and strictures. Each state has constructed its own history, precedents and processes.

 

Eminent domain has never been restricted to government. Private entities have been delegated these powers by government. Historically, “natural monopolies” (water supply/ distribution, intercity-intra-city transportation, energy and communication networks) have exercised eminent domain subject to regulations and process required by government. They still do so today—although the “naturalness” of natural monopolies is increasingly questioned. Many “natural monopolies” are infrastructure and initial installation and subsequent modernization of such infrastructure are long thought of as “legitimate” in ED. Delegation of eminent domain to private entities has been an important to urban infrastructure as well as urban development/redevelopment. Without eminent domain a road system, canal, railroad, streetcar, water pipe, sewer, electric, cable or telephone wire “can’t get from here to there”.

 

In the nineteenth century infrastructure-based strategies were much-used ED strategies, and private entities were delegated eminent domain powers. This reality underscores one of our history’s themes: forge a hybrid EDO combining private resources/expertise with public powers/accountability. When, in this and future chapters, I refer to canals, railroads, “the tangle of pipes and wires”, streetcars, subways, water systems/filtration, electrification, street lights, and even roads and bridges, it implies that we are also including use of eminent domain by a private entity. During the nineteenth century, private entities were delegated public powers, including eminent domain, by state and local government through charters and franchises (our hybrid EDOs). “The private companies built the infrastructure and supplied nondiscriminatory service in exchange for ‘the opportunity to earn a competitive return’” (Saxer, 2005, p. 61).  By first decades of the twentieth century this delegation of public powers exploded.

 

Western state constitutions, as they were initially approved, were especially aggressive in permitting eminent domain for the management and exploitation of natural resources. Water infrastructure and mining (oil and gas, forestry) were critical to Western development, and if they required the taking of private land for the community’s greater good, then so goes it. Transportation infrastructure, the transcontinental railroads in particular, built cities, and railroads required control over the land on which they laid track. Hence the most outrageous aspect of eminent domain in these years was the widespread delegation by state governments of eminent domain authority to a private entities—and it wasn’t only by western states.

 

Legislatures in many Eastern and Midwestern states delegated eminent domain authority to private transportation and manufacturing companies in order to promote economic expansion in a country with little surplus capital. State courts generally upheld this delegation on the grounds that the needs and wants of the community at that time were served by economic expansion. Thus the companies’ use of eminent domain was for a public rather than a private purpose … from a very early time in the Interior West, private natural resource development took on the mantle of public use…. Courts in those states …recognized virtually no judicial authority to balance the purported needs of the private condemning authority against any countervailing economic, land use, or social concern (Klass, Summer 2008, pp. 21-2)

 

Federal court preference in eminent domain was to defer to states. When the federal courts conducted constitutional reviews of state actions relevant to eminent domain in private hands, both appeal courts and the Supreme Court give deference to state delegation of eminent domain authority to private actors based on the Court’s acceptance that “different states had different economic needs based on their population, natural resources, and other economic drivers” (Klass, Summer 2008, pp. 22-3).

 

Nineteenth century tax abatement and delegation of eminent domain to private entities is an excellent introduction, not only to critically important ED tools, but to the predominant ED strategy of the 19^th century—it was the Age of Infrastructure. That strategy gained momentum as it became tied to the last of our Chapter One drivers of ED policy: competitive urban hierarchy. To make it all work cities and states experimented to develop an effective and accountable EDO capable of implementing the ED infrastructure strategy.

 

Competitive Hierarchies: Transportation Infrastructure and Economic Development

 

Early Republic America was not urban by today’s standards. Port cities were America’s most populated centers. Ignoring a growing coastal trade, Eastern city ports were the logistical connection to European trade and export—as well as the processing center for maritime resources (fish, whaling). In the first census (1790) Salem, Newport, Providence and Marblehead were among the nation’s ten largest cities (Gloucester was 11^th). Each had between 5,000 and 9,000 residents.

 

The 1810 South held 32% of the nation’s population—by 1860 that fell to about 26%. The 1810 Northeast’s share nearly 57%, but by 1860 it declined to less than 37% (Yankee Diaspora). The [Mid]-West, 13% in 1810, grew into the nation’s most populous region (nearly 38%) by1860. Growth of major cities was uneven. The 1810 top five were: New York (including Brooklyn) 105,000, Philadelphia 97,000 (consolidated), Baltimore 46,500, Boston 34,000, and Charleston 25,000. By 1860, New York (and Brooklyn) 1,079,000, Philadelphia (consolidated city/county) 565,500, Baltimore 212,400, Boston 177,800 and New Orleans, 168,700 (just ahead of Cincinnati and St. Louis). Underneath the top ten, population in the Mississippi Valley had exploded, completing replacing the late eighteenth century small port cities. Change was reflective of domestic migration and immigration. Where were the critics of sprawl when we really needed them?

 

At the start of the century small hinterland towns and cities were less bastions of wealth than small commercial and processing centers, living off an agricultural economy. Transportation being what it was, trade (and competition) among non-port cities was minimal. Rather, each city carved out a hinterland from which it extracted all it could. Second and third tier cities, little more than villages by today’s standards, sprinkled throughout each state served similar, but smaller scale purposes. During the course of the early nineteenth century, however, these cities and small towns increasingly became linked, first by roads, then by steam/riverboats and finally canals. These early transportation infrastructures, conceived by many at the time as necessary for national unification, created larger market areas, and jobs that attracted residents. Transportation infrastructure put an extra spark into internal migration and population mobility; access to larger markets spawned manufacturing and commercial firms–the industrial city gathered momentum.

 

Transportation Infrastructure and Economic Development Tools

But it always comes down to money. How were states and cities supposed to pay for this expensive transportation infrastructure? Jeffersonian governments lacked access to capital and refused to tax themselves. The chief source of federal tax revenues was custom fees levied from imports. Even if banks were willing to lend (they were not), lending reserves were too small. Back in colonial days, the traditional source of investment capital came from England. With independence English capital became British foreign direct investment (FDI). British FDI would remain a mainstay for nineteenth century Americans, but British capital was volatile, expensive and uncertain. During the first two decades of the Early Republic we were drifting toward war, engaged in war, or immediate post-war with Great Britain.

 

The obvious alternative to FDI was American private capital. But American capital mostly consisted of savings from small homeowners held in small loosely-regulated, largely unknown and unrated state banks. Business capital was held in family-controlled firms or clumsy, illiquid business partnerships. The corporation, a new flexible form of business structure only “appeared on a modest scale in the 1850’s notably in the railroad industry” (Trachtenberg, 2007, p. 4). Not only was a source of capital in question, but transportation infrastructure, the strategy du jour, lacked a necessary finance tool.

 

Needed was a tool that could find and access capital as well as “house” and pay management/expertise necessary to build and operate the infrastructure. Sophisticated expertise-management and on-going maintenance of the transportation infrastructure were required, making the investment dependent on quality engineering and management expertise over extended periods of time—and “guaranteeing” the security of the investment capital through that period. It wasn’t sufficient to simply raise capital; someone had to lay tract, buy trains and make them run on time—without draining public coffers. Since rights of way and land acquisition were the first steps, considerable sums of money were needed upfront.

 

So transportation infrastructure project financing required financing similar to today’s construction loans. Such loans have no collateral assets and must be made on the developer’s past history—which for toll roads, canals and railroads were nonexistent. Secondly, at the time of original financing the proposed project connected two geographies that had yet to develop;—say it another way, “there was no there “there”, and the here, “here” was not all that great either. Venture capital-like financing is not available to infrastructure because the “profit” that results typically accrues to public jurisdictions and residents/businesses (free riders)—not investors. These were the seeds of a public/private partnership in which “Government typically played the role of the “pioneer” or infrastructure venture capitalist (Bruchey, 1968, p. 135), a role which, in the end, was supported by public opinion. Also, construction of land-based infrastructure without eminent domain was impossible; that power could only come from government. Tax abatement served as an operating subsidy, while potentially providing what today would be thought of as a future tax increment. Still missing was a hybrid EDO (HEDO), combining both public and private, that could conduct/operate the project.

 

Lacking our hindsight Early Republic city/state decision-makers searched even deeper into colonial history and borrowed from an earlier public/private HEDO, the Virginia Company, a joint stock company chartered by the royal government to found Jamestown in 1607 (we could also have used the 1621 Dutch West Company that founded New York City). The HEDO they devised is today known as “the corporate charter”.

 

To succinctly restate our argument (1) it was necessary to install a transportation infrastructure for economic and urban growth; (2) the private sector for various reasons couldn’t do it on its own dime; (3) if it were to be done, then the public side had to bring certain of its powers (credit, tax funds, loans, eminent domain, and tax exempt bond issuance) into a vehicle or structure (HEDO)  that combined the public powers with private “powers” of expertise, management, construction, and future delivery of the infrastructure service–along with some measure of accountability; (4) the vehicle initially used was the corporate charter (s medieval private corporation entrusted public powers to accomplish a share purpose seldom-used previous to 1790 (examples such as British East India or Jamestown Company); (5) the corporate charter was used to incorporate our early banking system, insurance companies, and even manufacturing firms; in transportation (canals and railroads) it got the job done, in this instance infrastructure was built; (6) and then the problems arose, public outcry followed, and state legislative action essentially stripped  public powers from the charter-corporation. Thus began a search for an effective and accountable public/private entity that could employ private expertise, skills and relationships while using public powers to build and operate infrastructure and other public/private purposes. This search persisted for over a hundred years.

 

American economic development, whatever else it does, operates within a capitalist economy; ED serves as the nexus, a bridge, between private and public. This nexus requires an organizational form, a structure, sufficient to accommodate private interests and public purpose, with some measure of accountability. That nexus is central to our profession, for certain of our ED strategies such as infrastructure, and critically important tools such as bonding, credit, eminent domain, and tax abatement. The hybrid EDO, our HEDO, is the sine qua non of the so-called private-public partnership. The problem, as this and future chapters will reveal, is that it is easier said than done.

 

By nature a HEDO builds in tensions, potentially conflicting goals, and needs sustained oversight inherent in a public-private “joint” venture. Our history, however, demonstrates an EDO that bridges public and private almost always crosses over a “Progressive-Privatist fault line. For those uncomfortable with capitalism itself, the greed of its entrepreneurs and finance capital, fearful of its concentration or size, who believes capitalism to be a steroidal generator of inequality, or is simply distrustful of profit as the chief criterion of operation, an HEBO becomes a Bosch-like “Garden of Earthly Delights” potentially, if not actually, containing every evil and corruption known to mankind. That is not to say Progressives do not possess their version of a HEDO, a philanthropy comes to mind—as does a South Shore Bank.

 

The Corporate Charter

The corporate charter is misunderstood today, in that most readers assume it to have been a pure private businesses—not so in 1800. “Corporation” in the Early American Republic was the opposite of today’s modern business corporation (which developed in the 1850’s) —then corporation was a public (municipal) corporation—a city, town, village (Frug, 1999). Advocates for Colonial/Early Republic finance, insurance and transportation infrastructure pushed the envelope to create a HEDO along the lines discussed above—a “charted public/private corporation”. Our 1789 American Republic inherited a few colonial “corporate charters” and so the “corporate charter”—as a hybrid economic development structure within which critical economic development tools were lodged, was not entirely novel in 1800. Corporate charters were approved at the discretion of the state legislature, for purposes alleged to be in the public interest. The charter created a semi-private, usually tax-exempt, corporation operated and controlled by private investors and management. The corporation was empowered to own, construct, manage, lease and operate the infrastructure /transportation mode within a specified geography. In most cases, eminent domain and issuance of tax-exempt bonds (or public lottery) was tossed in as well.

 

Dr. Peter Galie uncovered the earliest example of the corporate charter. He reports New York’s “first foray into government stimulus to create jobs dates back to 1790”. The New York State legislature incorporated the “New York Manufacturing Society” and authorized the state treasurer to use public funds to purchase shares in the corporation—a practice which today is flatly illegal in every state. The Society’s purposes, as expressed in its preamble, were “to establish manufacturies (firms), and furnishing employment for the honest industrious poor”, purposes characterized by the legislature as “patriotic”. (Galie, 2012, pp. 2009-10)

 

The preamble for many such incorporations established that corporate charters were both a “corporation and a body politic”. “Among the privileges [included in these charters] were monopoly rights of way, tax exemption, the right of eminent domain, and the right granted to nonbanking corporations to hold lotteries in order to raise needed capital…”[xvi]  (Bruchey, 1968, p. 130). Elaborate regulations establishing some measure of accountability were usually included in these charters (boards of directors, liability, permitted sources of financing and financial standards). Charters defined and limited the scope of action permitted the corporation. The most common beneficiaries of state-approved corporate charters were “insurance companies, commercial banks, canal, dock and highway companies all concerned with the growth of cities and the expansion of internal trade”. (Trachtenberg, 2007, p. 6) It is not unreasonable to assert “these business corporations were no more exclusively profit-seeking associations than were the chartered joint stock companies with which the English had” (Bruchey, 1975).

 

In their day, corporate charters were viewed as appropriate instruments of public policy. “From more than a generation, from the Revolution to the Panic of 1837, Americans had accepted state intervention in the economy as a legitimate, indeed essential function of government…. Invoking the public interest as justification, the states … consciously sought to stimulate economic growth through positive government action. They subsidized agriculture and industry, invested directly in private enterprise, constructed vast transportation systems at public expense, lent the public credit to private “entrepreneurs, and granted special legal privileges to [charter] corporations” (Gunn, 1988, p. 1). Although they would attract their fair share of corruption —and ultimately many would come to a bad end– these “mixed enterprises” combined public purpose and powers with private expertise and profit in an awkward and uncomfortable tension to develop an infrastructure necessary for urban existence and growth. This awkwardness was apparent at that time. To understand this awkwardness a situation confronted by George Washington may be helpful. George, our first President was an active and devoted canal-investor.

 

Knowing Washington’s interest in canal-building, the Virginia legislature granted Washington, then a private citizen, in 1784-85 (during the Articles of Confederation), 150 shares of the James River and Potomac canal companies “in return for his services to the state and [his dedication] to the cause of canal-building” (Wood, 2006, p. 44). This gift threw Washington into a total dither—should he accept them or not? As Wood describes Washington’s reaction, it is clear the decision was a very serious matter to Washington, critical to his personal integrity and appropriateness. Accordingly, Washington widely sought reaction and advice. Personally, he deeply believed in canal-building, not only to make money, but also to unify the nation by making travel and commerce easier. But he also believed to accept the shares would seem a public gift—a gift which compromised his most treasured asset, his “disinterestedness” (no conflict of interest). “Few decisions in Washington’s career caused more distress than this one”. Thomas Jefferson convinced him to decline the shares “donating” them “instead to the college that eventually became Washington and Lee” (Wood, 2006, pp. 44-5).

 

Despite their awkwardness by today’s standards, these infrastructure-related municipal/state hybrid public/private organizations were genuine economic development-related essential to legitimate urban public purposes. That the structure itself was clumsy and inherently faulty is also accurate. Such is hindsight. But, corporate charters could raise necessary capital, house the expertise, and build, manage, and operate the intended project—and that was needed at the time. Robert Lively observed:

 

… A ‘persistent theme in the nation’s economic development’ has been ‘the incorrigible willingness of American public officials to seek the public good through private negotiations … its obverse: the equally incorrigible insistence of private citizens that government encourage or entirely provides those services and utilities either too costly or too risky to attract unaided private capital [is also true]. It was especially on the undeveloped frontiers of the nation that capital needs and development needs conjoined most pressingly. Social overhead capital, especially in transport, was a frontier need and a prerequisite for economic development. (Lively, 1955)

 

Previous to 1789 colonial governments had issued only six such charters. From 1780 to 1801, however, state governments issued more than 300 business corporation charters[xvii]. “Fully two-thirds of them were established to provide inland navigation, turnpikes and toll bridges”; also thirty-two were issued to develop water supplies and four for harbor development [docks]. (Bruchey, 1968, p. 129). State approval, however, masked who really led the drive for state charters: municipalities. Louis Hartz (Hartz, 1948) observed that “state investment at its height was of minor significance compared with investments by cities and counties”.

 

Henry Pierce (Pierce, 1953) stated that 315 municipalities “pledged approximately $37,000,000 toward the construction of (New York’s) roads between1827 and 1875”. Primm’s study of Missouri in the 1850’s (Primm, 1954) asserted cities and counties along the railroad routes bought most of the stocks of the state-assisted railroads—i.e. the state issued the bonds and the cities and counties bought them. Milton Heath (Heath, 1948) reported cities and counties financed $45 million railroad bonds in the pre-bellum south. Bruchey concluded Baltimore, Cincinnati and Milwaukee subscribed to stock, purchased railroad bonds, or guaranteed the indentures of railroad companies. In some instances, he asserts outright grants were made (Bruchey, 1968, p. 135). A specific example of this type of involvement is Baltimore City as cited by Dilworth: “the Maryland Assembly authorized Baltimore City to purchase up to 5,000 shares in the company …. The City used property tax revenues to finance the railroad. (Dilworth, 2011, p. 153).

 

The infrastructure projects were themselves a combination of sections built by state/municipality directly, and by the corporation indirectly. For example, Carter Goodyear calculated that  nearly 75% percent of total investment (about $188 million) in canal construction in New York, Pennsylvania, Ohio, Indiana, Illinois and Virginia (between 1815-1860) was financed by state/municipal governments thru these corporate charters. (Goodrich, 1961). The usual financing involved the state/municipality issuing bonds, purchased by foreign investors.

 

Corporate Charters Jumpstart Manufacturing

A little known, Early Republic corporate charter dimension was that charters provided state/municipal venture capital to startup sectors such as manufacturing. Bruchey’s Pennsylvania state charter study (Bruchey, 1968, p. 129) reported that 8% of that state’s charters (1790-1860) were issued to manufacturing firms. Between 1808 and 1815, Pennsylvania issued more charters to joint stock companies engaged in manufacturing than to all public utilities combined. This overlaps very nicely with the drift to, and including, the War of 1812 when the principal source of American private capital, British capital, was more costly or not available. States/local jurisdictions “stepped up to the plate” providing the missing capital to grow their manufacturing base.

 

Pennsylvania was not alone. “the strength of the American desire for economic development, the scarcities of capital funds in the early years following independence, and the sharpness of competition from foreign suppliers [of capital], manufacturing was endowed with a quasi-public and not private character, and given numerous encouragements by the state”.  In the bastion of Progressivism, an 1818 Massachusetts corporate charter reads “Be it enacted by the Senate and House of Representatives in General Court assembled that the following named individuals hereby are constituted a corporation and body politic for the purpose of erecting a flour mill”. Between 1824 and 1840, [mid] western and southwestern states issued $165,000,000 in bonds to provide banking capital to manufacturing firms. (Bruchey, 1968, pp. 129-30). Not infrequently, states guaranteed private corporation bonds–such indebtedness ultimately secured by taxes, not on the revenues and profitability of the corporation. What’s more, it appears that states played a secondary role, compared to municipalities, in financing start up financing to private corporations. Bruchey again reports that between 1830 and 1890 no fewer than 2200 laws passed by states authorized municipalities to provide local assistance to such entities. (Bruchey, 1968, p. 135)

Roads, Steamboats and Canals

Reynolds (Reynolds, 2008, pp. 12-18) asserted the first half of the nineteenth century witnessed three waves of transportation innovation: (1) road and turnpike construction 1790-1810; (2) the steamboat and canal-building 1811-1830; and (3) post-1830 steam (1826, John Steven’s, New Jersey) locomotive innovative and railroad construction.

 

Excepting the National Road, roads and turnpikes previous to 1825 were privately financed and state-chartered. The first turnpike (1795), Pennsylvania’s Philadelphia to Lancaster Turnpike, initiated a “craze” among states to construct toll roads. By 1816 “turnpikes linked the major cities in the Northeast and formed a roughly continuous line from Maine to Georgia”. New York, Pennsylvania and New England were the most energetic builders.

 

Although turnpikes were sometimes macadamized, they were usually crude roads, dotted with tree stumps, (and) forded swamps with … sawed logs. Every six to ten miles was a tollbooth that charged between ten and twenty-five cents. Investor optimism fed the turnpike boom. Before 1830, turnpike companies evidently won more state corporate charters than any other kind of private business…. With the rise of canals and railroads, turnpikes became increasingly unattractive for carriers of freight. (Reynolds, 2008, p. 13)

 

Water transportation proved more durable for commercial trade. Steamboats (and canals) developed simultaneously with toll roads, linking Atlantic coastal trade with hinterland internal trade. Robert Fulton did not invent the steamboat. Fulton made his fortune commercializing an existing innovation. Fulton started a steamboat route between New York City and Albany in 1807. Mark Twain asserted the greatest impact of steamboats was felt on the Mississippi where the steamboat became a national institution and a powerful commercial/consumer transportation mode for mid-central, western, and southern states. Steamboats made city connections to rivers economically necessary, fostering both canals and waterfronts.

 

In 1816 America had 100 miles [xviii] of canals–by 1840 3000. The 360 mile Erie Canal, DeWitt Clinton’s “eighth wonder of the world” (or “Folly” or “Big Ditch”–Jefferson thought it “a little short of madness”) (Reynolds, 2008, p. 15) was the inspiration for the subsequent canal craze. Connecting New York City to the Great Lakes (transshipment nexus being Buffalo) the canal opened up in 1825 rich agricultural lands of the upper Midwest to Atlantic coast ocean and coastal commerce–reducing transportation costs by 90%. The Erie Canal, a state-financed project (designed, lobbied, then dug by a state commission) cost seven million; financed by state bonds, it took seven years to complete.

 

The Erie Canal dramatically demonstrated to other cities that they “could conquer the barriers that limited their development through a strategy which promised tremendous potential for commercial growth … [that] large sums of money could be easily raised for public works by utilizing state credit …. When states shared interests in economic development similar to those of cities, the state could promote programs to aid urban development through sale of state bonds”. (Kantor, 1988, p. 49). Other New York canals followed in short order: Oswego, Chenango, Cayuga-Seneca, the Champlain, and Delaware and Hudson. Ohio constructed two major canals: between Cleveland and Portsmouth (the Ohio River) and Cincinnati and Toledo. Pennsylvania’s Main Line (1826) connected Philadelphia to Pittsburgh. Virginia, Indiana, New Jersey, Maryland, Illinois also completed important canals. Canals, it seems, were another example of the infamous herd-like, copy-cat imitation that repeatedly characterizes diffusion of economic development tools and strategies throughout our history (Goodrich, Canals and American Economic Development, 1961).

 

Henry Clay embraced the strategy as a key element of his American System platform. So in 1825 Congress approved several canal-related bills (Rivers and Harbors Act, General Survey Act). Included in the former legislation was a funding authorization to the Corp of Engineers which was entrusted with a significant role in “internal improvements”. From that point forward, federal involvement in canals and other infrastructure was possible. Federal involvement, however, was always quite controversial. Previous to Jackson (who hated federal involvement and regarded infrastructure as a purely state affair) there had been several presidential vetoes of federal involvement in various internal improvements. The Supreme Court’s Gibbons v. Ogden (1824) decision, however, paved the way for federal involvement in interstate commerce—and legitimized a possible national role in state and local internal improvements.

 

Railroads and the Competitive Urban Hierarchy

Early transportation infrastructure (roads) meant access into a city’s hinterland—hinterlands were the source of domestic migrants, raw materials and agricultural products to process and export domestically and internationally. By the 1810’s or so the combination of domestic migration, immigration and transportation innovation facilitated significant city-building in the nation’s interior. New cities grew rapidly, presenting both opportunity—and rivals for control of the hinterland in between. Distances were greater, as were trade volumes; water-borne transportation couldn’t satisfy demand. Railroads could. Success in canal-building inspired a novel (1820’s), horrifically expensive transportation innovation: the steam locomotive. Not unlike today’s rocket ship to Mars, the locomotive offered opportunity and risk and as a public investment generated substantial skepticism as an alternative to water transportation.

 

The founding of many hundreds of cities/towns each decade stimulated competition among cities, and necessitated linkage with some form of transportation infrastructure. New urban areas competed, but also offered opportunities for new markets. “City development and prosperity were tied to important transportation improvements that permitted easier, faster, and cheaper commercial penetration of the sprawling new nation …. Transportation innovations and …commercializing the city hinterland could spell the difference between stagnation and prosperity …. With the introduction of each transportation breakthrough, cities and the political leaders faced the prospect of fierce competition with other cities, old and new, to win economic domination over their regions … political decisions could not help but be influenced by the rise of regional rivalries for economic growth.” (Kantor, 1988, p. 40)

 

The Erie Canal engendered considerable apprehension in Baltimore, Philadelphia and Pittsburgh that New York (New York City) would steal the Ohio hinterland and exploit the agricultural production of the northern Great Lakes areas. Philadelphia, the nation’s second largest city in 1830, felt further threatened by rival Baltimore (3^rd largest city with only 200 fewer residents) (Angel Jr., 1977, pp. 111-16). Fearing Baltimore would establish a trade route into Ohio, Philadelphia, believed it held an advantage of better Ohio access through Pittsburgh—that meant the State of Pennsylvania would issue bonds, not the municipalities. Baltimore on the other hand was dependent on local investor/banking institutions and surrounded by hostile states that placed barriers on Maryland-owned infrastructure that crossed state lines.

 

The state of Pennsylvania provided key financing through bond issuance. There was, however, a problem: the state could not decide between competing transportation modes and chose to develop a hybrid infrastructure composed of both. Believing rail too risky they started construction (1826) on a “mongrel” transportation system composed of network of canals and some rail (the Pennsylvania Mainline) to Pittsburgh. Baltimore’s private entrepreneurs, however, unimpressed with canals that froze in the harsh winters, and believers of new rail engine technology, put their money into the startup “Baltimore and Ohio Railroad of Baltimore City” (1827). The race was on.

 

B&O laid track across Maryland while experimenting with new locomotives; for example in 1830, the famous little engine that could, the “Tom Thumb”, ran a test run on the B&O. In 1837 the B&O crossed the Potomac at Harper’s Ferry Virginia. By that time the city of Baltimore had established a commission to work with the railroad, and in 1836 the city purchased $3 million dollars of B&O stock and another $1 million in the related Baltimore & Susquehanna Railroad. Because neither Pennsylvania nor Virginia wanted Baltimore to succeed, roadblocks were placed in B&O’s path. The B&O did not reach Wheeling until 1853—twenty five years after construction had started. Post-Civil War acquisitions by which the B&O acquired key Ohio rail lines ultimately provided back door access to Pittsburgh—in the 1880’s!

 

Philadelphia proved no more successful than Baltimore. Pennsylvania spent nearly $100 million dollars on its Main Line canal/railroad system—a project directed by a private chartered corporation. (Bruchey, 1968, p. 132). Its choice of a mixed canal-rail infrastructure produced a dismal failure. Construction was faster than the B&O, but the disadvantages of two infrastructures, more expensive (rail) and closed in winter (canal), compelled numerous break-bulk transshipment points that slowed passage, making it yet more expensive.  Philadelphia, while it “beat” Baltimore, lost out to the more important competition: Erie Canal that handled more traffic and hauled heavier cargoes. Western farmers used the Erie Canal, and New York City became the end-point for Midwest grain. Had Philadelphia chosen an all-rail four season route it would have been more competitive.

 

Railroad competition never really abated, it only got worse. Cities needed railroads and would do almost anything to acquire or improve railroad access. An example of rather extreme municipal involvement is Cincinnati’s 1869-73 ownership and operation of a railroad to Chattanooga, Tennessee. Authorized by the state legislature, the municipal-owned railroad was an “effort to shore up the city’s economic decline relative to faster-growing cities such as St. Louis, and Chicago. (Dilworth, 2011, p. 258) Suffice it to say, every major, and not so major, city of the period buried in its scandal closet an outlandish railroad dependency story. If a city did not connect to other cities, its future was obvious.

 

But as we are fond of saying, all good things must sooner or later come to an end. The “end” of corporate charters came after the incredible number of scandals and private/municipal bankruptcies that followed the Panic of 1837. Over a decade and a half five states temporarily defaulted and one outright repudiated some of its debt.

 

A wave of revulsion against state (and municipal) participation internal improvements swept over the Old Northwest and between 1842 and 1851 all six of its states bound themselves constitutionally not to make loans to improvement enterprises. In addition, Michigan, Indiana, Ohio and Iowa also prohibited stock ownership, Maryland, Michigan and Wisconsin prohibited state works, and Ohio, Michigan and Illinois abandoned their extensive programs in state construction. Pennsylvania sold part of its state stock in 1843, Tennessee virtually abandoned her improvements program, and in early 1840’s Virginia somewhat checked hers. (Bruchey, 1968, p. 134)

 

This constitutes the first phase passage of state constitutional “gift provisions”. We will return to these “gift provisions” in later in the chapter because they left an indelible mark on the profession and the practice of economic development. These constitutional provisions theoretically meant corporate charters were unconstitutional, reopening the search for a hybrid public/private EDO. The next experiment worked a bit better—at the expense of public accountability.

 

The geography of railroad competition expanded hugely with the Lincoln’s decision to open up the West with homesteading land grants. The Homestead Act and Transcontinental Railroad legislation[xix] applied lessons learned from the 1850’s Illinois settlement managed through contract by the Illinois Central Railroad. In this manner ICRR put meat on the bones of ED attraction and recruitment for the next one hundred fifty years. It is from the ICRR that chambers copied their attraction campaigns; it is from the ICRR the South learned how to hijack northern firms and ironically to counter the South, northern and Midwestern cities copied the South.

 

The Illinois Central Railroad and ED Attraction

To learn from the ICRR necessitates moving beyond the railroad’s activities. Railroads were land speculating monopolists that controlled prices, gouging homestead farmers which, in turn, triggered a semi-revolutionary Populist Movement that fractured American politics for more than a generation. Railroads held literally for ransom individual towns and cities, threatening to bypass their city unless sums of money were paid. Ward cites that by 1875 300 municipalities in NEW YORK alone had paid sums to railroad companies to be included in their network. Cheyenne’s Board of Trade in 1870 paid $280,000 as did Denver, and a small city of 7,000 in California (Los Angeles) (Ward, 1998, pp. 23-4). Eventually the Interstate Commerce Commission, a major Progressive reform, was established (1887) to deal with these railroad abuses. To learn what we can about our history, however, we need to put these abuses momentarily aside and appreciate ICRR’s path-breaking ED innovation.

 

Illinois badly needed settlers. So the Illinois legislature authorized land grants for individual sale and contracted with the Illinois Central (ICRR) Railroad, to structure/operate the program. (Ward, 1998, p. 11) Stripped to its essentials, state government delegated to the ICRR management of its people and business attraction, and city-building economic development strategies. ICRR launched an extensive advertising campaign across the Eastern states and Europe starting in 1854. Its tools included: mass promotional circulars, advertisements in major newspapers and trade journals, editorial support by newspapers, a promotional handbook, advertising on street cars, recruitment agents in immigrant entry areas, and agents distributed throughout Europe (especially in Canada, Scandinavia and Germany). “By the early 1860’s, the ICRR’s internal US campaigns … (promised) homes for the industrious in the garden state of the West.” ICRR’s success spurred other neighboring states, Iowa in particular, to start their own people attraction efforts. ICRR also pioneered the art of “town site promotion”. First, it set up (apparently semi-illegally) specific town land development corporations (little EDOs) throughout Illinois; each attracted investors to fund infrastructure and costs for each town. The land was platted and sold in individual lots or bundles of lots. One ICRR land development corporation at its southern most terminus, Cairo, sold a bundle to a certain Charles Dickens, in an Ebenezer Scrooge moment. (Ward, 1998, p. 21)

 

The ICRR model was in essence government contracting with a private corporation to devise and manage its core economic development strategies. The railroad was given access to the necessary tools (land grants, tax abatement, eminent domain, public financing), and then left to its own devices. The railroad recruited through sophisticated promotional programs, city-building followed. Privatist to its core, the ICRR program achieved spectacular success in filling up the Illinois countryside

 

Big City-Building

McDonald (McDonald, 2008, p. 6) posits two factors that combined to create America’s first cities: the invention of large scale production methods and the transportation revolution.

 

Factories with economies of scale were developed in several industries–textiles, apparel, iron, tools, ordnance, wagons, lumber, and food products such as flour and so on. The transportation revolution (on the other hand) was first based on the steamboat, and a few years later, the railroad. Production to build the railroads and companies to run them became major parts of the economy. These two factors made it economical to house large manufacturing enterprises at the transshipment points.

 

Sounds great to any budding economist, but something was missing—the entrepreneur that could make it happen. So we must add to the mix those individuals who actually put the drivers of growth together: the city-builders. In some quarters of the profession city-builders are viewed as extremely questionable characters, with an exceedingly dark side. To them city-builders are greedy SOB’s seeking personal profit. Nineteenth century city-building, it is often alleged, was engineered by businessman who made a fortune hawking land and lots, often acquired by bribing state or territorial governments, and sold to down trodden masses (mostly pioneers and immigrants). Toss in railroads and robber barons and the picture is pretty dismal—or conventionally capitalist which is synonymous with dismal. All told, it is not too far from the truth—except that maybe there is another way to look at it.

 

My king of early nineteenth century city-builders is Chicago’s William B. Ogden (Boorstin, 1967). To be sure, Ogden is … how do we say it? Complicated! But interweaving McDonald’s model with Ogden’s activities we can reconstruct American city-building most fantastic success: Chicago. The original sin of Privatist city-building is that it is unplanned and capitalistic. Chicago’s 1830 population (0) presented an opportunity to plat grids, install infrastructure, develop advertising hoopla, and by hook or crook attract businesses and residents—making in the process a personal fortune. Here’s how it happened.

 

Chicago, initially a seventeenth century fort, took off after the Black Hawk War (1832). Glenn Hubbard, a trader with the American Fur Company, arrived and then recruited a number of entrepreneurs/ businessmen from Western New York to plat and market the area to settlers. Included among Hubbard’s early transplants was a lawyer from Delaware County New York, William B. Ogden. Hubbard’s team was helped greatly by Chicago’s first innovation, balloon frame housing construction devised by New Hampshire-born George Washington Snow in 1832. Snow transported Michigan logs to the treeless plains of Chicago, fashioned them into Chicago’s first industry sector: housing construction. Balloon frame construction minimized lumber and construction time, resulting in an affordable, quality product that attracted new settlers. By the decade’s end the fledgling settlement grew to about 4,000. More was needed to achieve “take-off”, however. This is where Ogden came in.

 

It really helped if the prospective resident could get to Chicago easily–which meant transportation infrastructure was king. So McDonald was at least half-right. Someone had to install/finance the transportation infrastructure, however. That was Ogden. Ogden, elected as Chicago’s first mayor in 1836, persuaded the federal government to build piers on Lake Michigan at the mouth of the Chicago River where Ogden had conveniently established a marine shipping company with routes to Buffalo. Next, Ogden connived with East Coast investors to convince the state of Michigan into building the Illinois and Michigan Canal—this canal opened up Chicago’s hinterland and Ogden soon had grain to ship to New York. On return, the ships brought back new settlers to Chicago.

 

Ogden put his money where his mouth was, and personally provided funds needed to build present day Archer Avenue. He then subdivided and marketed the Bridgeport neighborhood (Mayor Daley’s future home). Recognizing, without a plan or an economic textbook that he had to also provide jobs through industry, Ogden then set about stealing somebody else’s sectors and jobs. Today we call it business recruitment. Ogden in 1845 saw potential in Cyrus McCormick’s mechanical reaper. The reaper, invented in Virginia (1831), was first manufactured in Cincinnati where it caught Ogden’s attention.  McCormick was recruited with financing from Mayor Ogden to Chicago in 1847 (Barone, 2013, p. 71). Ogden thoughtfully tossed in tax abatement and a site into the McCormick’s incentive package. In following years, Ogden, in true Yankee style, also founded the Chicago Lyceum, Chicago Historical Society, Chicago Orphans Society, the first University of Chicago, and Northwestern University.

 

Ogden’s Privatist city-building efforts mushroomed Chicago’s population, 4,000 in 1840, to 112,000 by 1860. In 1870, Chicago was the nation’s fifth largest city (299,000), on its way to become the nation’s second largest city (1.1 million) by 1890. Ogden, sadly, lost much of his wealth in the Great Chicago Fire of 1871 and with all the irony imaginable, he moved to New York City where he died (and is buried) in 1877. The Great Fire and Ogden’s departure, however, did nothing to stop Chicago’s explosive Gilded Age growth.  At the turn of the century, Chicago was home to a wee bit less than 1.7 million residents. Jon Teaford glorifies the city-building success that was Chicago:

 

In 1830 Chicago was a frontier trading post with a few log structures, a few muddy paths, and a few dozen inhabitants. Seventy years later it was a city of 1.5 million people, with a waterworks pumping 500 million gallons of water [daily] … and a drainage system with over 1,500 miles of sewers. More than 1,400 miles of paved streets lighted by 38,000 street lamps … and 925 miles of streetcar lines carried hundreds of millions of passengers each year … over 2,200 acres of city parkland, and a public library of over 300,000 volumes …. In a single lifetime Chicago residents had transformed a prairie bog into one of the greatest cities of the world. (Teaford, 1984, p. 217)

 

 

Gift and Loan Clauses: Regulating the Public/Private Partnership

 

Why is this section one of the most important?

After 1837 many states enacted state constitutional (and local) reforms that reshaped American economic development public/private relationships. They continue to strongly affect the configuration and operation of our contemporary economic development practice. Why is it so important? First, state/local governments were committed to building transportation infrastructure and a strong state-level financial system (banks) to open up and finance economic growth. Hybrid public-private corporations were the chief EDO entrusted to implement those sub-state economic development strategies. Gift and loan clauses reconfigured that hybrid EDO. Secondly, core tools of economic development (eminent domain, tax abatement, loans/grants/tax-exempt bond financing) must conform to any redefinition of the public/private relationship, In an Age  of Infrastructure, gift and loan provisions struck at the heart of economic development of that era.

 

The Panic began in 1837; economic growth did not resume until 1842—making the Panic one of the longest in our economic history. Before it was over eight states (Arkansas, Illinois, Indiana, Louisiana, Maryland, Michigan, Mississippi, and Pennsylvania—and one territory, Florida) defaulted. Four states repudiated at least some of their debt (Arkansas, Florida, Michigan and Minnesota (Wallis, September 2004). In effect, America had one of its worst binges of state bankruptcies—a public debt crisis of the first magnitude. The principal cause of these state defaults usually centers on state/local debt associated with our infamous canal and railroad infrastructure-related corporation charters. Scandals associated with bankruptcies of charter infrastructure corporations, the inside “crony politics’ capture the media, and the public’s attention. They were the problem that had to be fixed—or so it seems today.

 

While not every state defaulted, after the Panic nearly every state over the following decades amended their state constitutions to insert some form(s) of a “gift and loan” clause that limited the use of state funds for private corporations and individuals. As new states entered the Union these statutes were included in their initial constitutions so that by the turn of the twentieth century all states, it is asserted (Tarr, 1998, pp. 110-13), had incorporated a form of gift and loan clause into their state constitutions. Yet as we shall discover, the clauses did little to stop public financing of private transportation infrastructure. They certainly changed its “form” (HEDO), the old-style corporate charter was left behind—in its place was new forms of public financing channeled to a new purely private organization: the modern corporation which first appeared in 1850’s railroads (Chandler Jr., 1977). That shift will prove to be one of the two or three most critical themes developed in this history. Kelo (eminent domain) is but a recent example of how controversial these laws can be in contemporary economic development. Rather than halting state or local investment in private transportation corporations, gift and loan clauses simply resulted in such assistance being provided in different forms. Absent in the future was the corporate charter. In its place in the 1850’s) was that railroads evolved from a “public/ private” corporation into a purely private “corporation” shorn of any public purpose.

 

From 1866 to 1873 “state legislatures approved over eight hundred proposals to grant local aid to railroad companies. New York, Illinois, and Missouri together authorized over $70 million worth of aid” (Tarr, 1998, p. 114). Evidently, the first wave gift and loan provisions did nothing but change the form of state/local financial interaction with railroads. The second wave of gift and loan clauses did not materially affect state/ local involvement with railroads (and mining) corporations either. Such subsidies remained characteristic of Western and Mountain state economic development until the twentieth century. Over the next fifty years American cities and states struggled and experimented to find a suitable, effective and accountable structure or rules (conflict of interest, lobbying, etc.) that regulated this most critical of economic development relationships.

 

“Blame” for Failure of the Corporate Charter

The causes behind each state’s debt crisis and state reaction to the crisis vary. One wonders if corporate charters, or more precisely public financial relationships with railroads, were as much scapegoat as causal factor in the state fiscal crisis. First, there was a huge regional variation within each phase. The South’s debt crisis concerned defaulted plantation land sales by inadequately capitalized state-chartered banks. The Mid-Atlantic/Midwest was closely linked to railroad infrastructure—but not canal which had been retired successfully the 1840’s (Wallis, September 2004, p. 7). Secondly, the reform gift and loan statutes differed among states regarding the types of financial activities allowed or rejected, and the level of government reformed (mostly state, local was left untouched). Often states cleaned up their own fiscal act by restricting state-level private relationships, while offloading the problem of infrastructure financing and urban competition to the localities. Public relationships with railroads continued after state-level gift and loan provisions were enacted–only at the municipal level.

 

Finally, further reflection suggests states themselves were complicit in the bankruptcies by incurring debt repayment obligations and failing to earmark revenues to pay for them—or—by identifying revenues that proved insufficient (especially in a Panic) to pay off troubled debt. Over time, the corporate charter attracted more than its fair share of the blame—a factor that does not absolve the admittedly faulty and tenuous sustainability of that HEDO structure. But the 1840’s gift and loan provisions phase was as much about states dealing with the consequences of their own poor decisions in fiscal management as with public financing of private institutions.

 

Railroad charters were the problem. In the heavily tracked Northeast, Maryland and Pennsylvania defaulted, but New York, Massachusetts and Ohio, each of which had earmarked tax receipts to pay off transportation debt managed to avoid default (New York just barely) (Wallis, September 2004, pp. 8-11). Pennsylvania, and to lesser degree Maryland had invested heavily in rail transportation corporations, but never raised or earmarked taxes, instead relying as a pay as you go approach. Both defaulted. Conventional interpretation of gift and loan clauses relies heavily on the Pennsylvania, Connecticut and New York cases. In these states gift and loan initiatives were directly linked to railroad-chartered transportation debt. Whatever the merits or failings of railroad-related corporate charters, the two states that defaulted made no adequate provision to counter-balance their financial liabilities. Pay as you go is inherently vulnerable to events that created large-scale fiscal distress such as Panics that reduced tax revenues.

 

In essence, state debt for transportation-related corporate debt was made more risky by faulty legislative fiscal behavior. Their solution, reflected in subsequent gift and loan clauses, restricted the state from these relationships and debt instruments, but permitted counties and municipalities to enter into such corporate-related debt—provided it was approved by public referendum. These legislatures “freely authorized counties and municipalities to incur debt to aid railroad construction and these units did so eagerly”. (Pinsky, January 1963, p. 278) Galie reports New York State 1(845) corporate charter debt was about 20% of total debt, but perception of corruption as a motivating factor in railroad charter-related debt prompted gift and loan reform in its new 1846 constitution —such restrictions applying only to the state (Galie, 2012, pp. 211-15).

 

The South with fewer miles of railroad track, did not have issues with railroad-related charters. In 1861 the North had almost 22,000 miles of track, the South barely 9,000. Southern states were bastions of Jacksonian low-tax ED; accordingly, southern state (and local) transportation infrastructure languished—roads were toll-funded, and canals and railroads few and far between. Southern Jacksonian governments, being less supportive of internal improvements financing, rather used gift/loan clauses to check business influence on planter-dominated state legislatures. (Schlessinger Jr., 1999, pp. 227-28). Schlesinger, quoting Carter Goodrich, quips Jacksonian opposition “was based on a desire to keep business out of government … rather than a desire to keep government out of business” [economic development] (Schlessinger Jr., 1999, p. 228).

 

Florida, Louisiana, Mississippi, Arkansas and Mississippi defaulted, not because of transportation infrastructure—but because one hundred percent of their defaults were state-chartered “plantation” banks. Every southern state that subsequently repudiated debt did so because of bank defaults, not transportation corporation defaults. (Wallis, September 2004, pp. 10-15). Spurred on by Jackson’s closing of the Second Bank, poorly capitalized plantation banks made thousands of essentially unsecured loans to farmers and land seekers. Southern banks acquired state funds through backdoor lobbying that closely resembled what today would be labeled “crony capitalism” (Wallis, September 2004).  Agricultural-induced bank defaults caused southern state gift and loans clauses. Post Panic State legislators believed these investments resulted from a too cozy relationship with business, not the inadequacies of transportation-related corporate charters or public funding of infrastructure per se. It may be as Gunn suggests (Gunn, 1988, p. 21) that corporate charters themselves were less the factor than political and ideological change in the state legislature that altered the previous mindset supportive of the business-railroad charter[xx].

 

That reality was abundantly clear when southern pre-Civil War state constitutions were replaced by Reconstruction state constitutions, and approved by a Reconstruction-era Congress. Those constitutions embraced wholeheartedly state-led economic development and aggressively facilitated state involvement in transportation infrastructure finance (the benefits of which were intended to fall to northern-owned railroads). Those constitutions were in turn repudiated by Redeemer (see Chapter 7) state constitutions that included the most strict gift and loan state and local restrictions regarding public-private projects found nationally. The intent was to curtail northern investment and southern governmental complicity in that investment, and to maintain low taxes, and preserve agriculture as the dominant sector in southern economies. The South did not define their public/private financial interrelationships, or HEDOs in the same way as the North.

 

As to the Midwest, most of Michigan, Minnesota, Indiana and Illinois’s defaulted debt resulted from post-1836 “loans” (Wallis, September 2004, p. 34 Table 3) for transportation infrastructure and an expectation that future property tax receipts from homestead land sales[xxi] generated by the infrastructure would pay off the debt. A handful of years later and the Panic, however, got in the way. Indiana, for example, started funding its Mammoth canal system in 1836, following that with financing for railroads to connect the canals. Construction began in 1837 and the state cut current property taxes in anticipation that the new infrastructure would generate more taxes. That revenue deficiency need not have been fatal, but states were reluctant to increase taxes to compensate for revenue deficiencies. Ohio raised taxes—and avoided default.

(Wallis, September 2004, p. 17). In short, as faulty as were chartered transportation corporations, the new and inexperienced Midwestern state legislatures contributed mightily to their fiscal disaster. The lessons they learned shaped their gift and loan clauses to address a different set of issues—limits on debt issuance as a percentage of tax base, for example (Scheiber, 1969).

 

Types of Gift and Loan Clauses and Sub-State ED Systems

The most common gift and loan clause (the “credit” clause) precluded “the credit of the state shall not in any manner be given or loaned to or in aid of any individual, association or corporation” (Pinsky, January 1963, p. 228). This reform prevented the most common form of state/corporate debt when the State issued the bond and transferred/ donated it directly to the private corporation who then sold the state bond and kept the proceeds. What was not affected was issuance of a state bond which was then “swapped” or exchanged for railroad corporation stock which was regarded by both the legislature and courts as a form of permissible joint venture. Hence to close this type of relationship, a second gift and loan clause was necessary (a “stock” clause). Neither of these two clauses precluded loans, gifts of land, or grants financed directly from current appropriation. This meant a third clause (current appropriations clause) had to be approved.

 

The problem for economic developers is that variation among states in the choice of which combination of gift and loan clauses to employ, led to current day variation in our individual state ED-relevant legal requirements—and the EDOs affected by them. “As the twig is bent” suggests these 1840 decisions, incorporated into state constitutions or interpreted by subsequent judicial decisions led to individualistic state ED requirements regulating who and what private/public arrangements are suitable. From the “mélange” of nineteenth century state gift and loan clauses, an important element of economic development, its core tools and structures which related to public/private relationships, would be reshaped to reflect whatever each state incorporated into their gift and loan clauses. This is an important explanation why we currently have fifty “different” state economic development systems.

 

At the turn of the century, some form of public aid limitation had been incorporated into the constitutions of a large majority of states. … Although the public aid limitations took certain common forms, the pattern which has emerged throughout the country is not uniform. The constitutional movement of the nineteenth century was an extremely pragmatic one; each change in each state was a direct reaction to the specific evils which had manifested themselves in that and perhaps neighboring jurisdictions. Some constitutions, therefore, contain only a credit clause, others join to it a stock clause, and still others have all three. The potential for diversity is further intensified by the fact that any or all of these restrictions may apply only to the state, to counties, to cities and towns, or to a specified combination of these. (Pinsky, January 1963, p. 280)

 

Accordingly, Pennsylvania and other states that relied on current appropriations to pay debt obligations were among the most restrictive in terms of future public/private partnerships. From a subsequent Pennsylvania Supreme Court decision, the concept of “public purpose” emerges. If a state could not tax for that purpose than it could not issue a debt for it. Other states copied it—and it was later included in the federal 14^th Amendment—but interpreted by the federal Supreme Court as subject to local determination. (Pinsky, January 1963, pp. 281-82)  Many Midwestern states, chose to remove themselves from funding local transportation projects, but left municipalities free to pursue them with municipal resources. New York did the same. Southern state gift and loans originated and evolved in an environment totally different from post 1837 Northeastern states.

 

The “credit” clause which was predominant in all regions reflected a shared belief that no longer should state legislatures consider private corporations as “public”, as public instrumentalities, but should regard them as private and profit-seeking—with all the risks that speculative ventures entailed. That clause especially marked the effective end of corporate charters as a hybrid EDO.

 

Dillon’s Law

 

We’ve saved the best for last! “Dillon’s Law”, an Iowa state judicial ruling, issued by, of all people, Judge Dillon[xxii] in 1868.The decision is easily the most important single judicial decision affecting sub-state economic development. Dillon’s Law remains substantially in effect today.

 

According to Dillon’s Law, states are preeminent over local government in that in the American constitution, states and federal government alone possess sovereignty or the inherent legal right of existence. The American Constitution did not mention cities except to leave them to the States. Cities, counties and towns must be created and empowered by the state if they are to exist, and function[xxiii]. Dillon Law reflects a five hundred year tradition that harkens back to London England. Augmented by subsequent judicial interpretation, sub-state units of government lack sovereignty and are mere sub-divisions of the higher government (states). Previous to Dillon’s decision, States, and state constitutions, dealt with sub-state entities by either issuing “special” charters for each jurisdiction or a general charter specific to population levels. Included in each charter were key elements of the municipal corporation such as form of government, types of taxes allowed and a number of fiscal and governance processes. Through state charters, the weak mayor-Jeffersonian government became the default municipal government of newly-admitted states and newly created cities.

 

The decision by Iowa Justice Charles Dillon was subsequently adopted by other states and over time hardened into an informal national precedent. Dillon’s Law was explicitly confirmed by a 1907 federal Supreme Court decision, Hunter versus Pittsburgh. Hunter v. Pittsburgh stated Dillon’s Rule was binding on all states and cities unless the state enacted specific legislation to modify Dillon’s Rule. The Hunter ruling succinctly upheld that sub-state jurisdictions, no matter their size, are merely “creatures of the state“. Thirty nine states have since incorporated Dillon’s rule into their state constitution.

 

Dillon’s rule applied a very wide definition of state powers over sub-state governments. According to Dillon’s Law any delegated powers to a sub-state unit of government must be expressed literally in words or “fairly applied or indispensable to powers expressly granted”.  Sub-state jurisdictions, as a sweeping generalization, could not assume the right to take action in any matter without the state expressly allowing it. The city could not approve structural reform of its government without state legislative approval—nor could it create many types of EDOs and many ED programs and tools. Understanding this fundamental state-sub-state relationship will explain a great deal of Chapter 4’s description of “home rule”, individual city “charter reform”, and the late 19^th century struggle to change the form of municipal government. It will also help understand why state governments are constantly an important factor in local programs and initiatives, such as streetcars, utility franchises, and subways.

 

The rise of the industrial city imposed substantial change upon municipal governments, but to cope, they were required to secure state approvals, which were not always forthcoming. How cities dealt with this consumes many future pages.  Dillon’s Law, in that it makes change so difficult, time-consuming, costly, and requires unwanted compromises, makes evident why structures and structural relationships are so enduring, retaining for centuries the values and philosophy of bygone civilizations, not so gone with the wind. Dillon’s Law can perpetuate medieval governance traditions, merely substituting state government for the King of England. It also explains how our fifty states developed their own unique ED sub-state policy system.

 

Dillon’s Law provided the legal foundation for the State’s dominance over the sub-state ED policy systems. States will define, approve, and implement various economic development structures, strategies and tools in their own distinctive ways, reflecting their own configurations of political culture and the politics du jour—ensuring there is indeed no single goal or nationwide one-size fits all economic development approach. Identically named economic development structures, such as an industrial development agency, will have different powers and tasks, and different relationships with other actors because of State-created variation.

 

 

 

December 2016 Chapter 3: Early Republic

Most economic developers today probably attend the “church of what’s happening now.” History, however, preaches its own version of “old-time religion.” The idea that whatever happened before the Civil War can’t possibly affect me today is one this history challenges. True, the 1800–65 “context” seems vastly different from today. This is the period described of great population movements into the nation’s interior: displacing Native Americans; forcibly compelling African-Americans into the new “cotton belt”; approving state constitutions and municipal incorporation charters; and building cities from scratch. Industrialization and the industrial city developed during his period, but Early Republic values, structures, processes, forms of government and institutions persisted, sometimes with increasing irrelevance and dysfunctionality. In many ways, pre-Civil War Early Republic institutions, politics and governance reflected a teenage-like transition to something else.

Despite this context, a whole lot of economic development (ED) was going on. In particular, pre-Civil War ED employed ED tools—important tools like tax abatement, loans to business and eminent domain— that we still use today. These classic tools were instrumental in forming early jurisdictional economic bases, enhancing viability of newly created cities and preserving hinterland hegemony so vital for urban growth. Their widespread use since the founding of the Republic strongly hints that, despite incessant controversy and criticism, such tools possess a durability that must frustrate their critics.

Even more surprising is that cities and states were involved in a vigorous debate concerning vital questions such as the role of the federal government in state/sub-state economic development and if, and how, government could “partner” with the private sector to achieve economic development goals. At the end of this period, a state court decision (see Dillon’s Law below) cemented, perhaps forever, the place, role and inherent power of sub-state cities, towns and villages in our federal system. That decision did more to shape America’s sub-state policy process than any other court decision since.

The rise of new cities and what seemed at the time a life-and-death competition among older coastal cities demonstrated the importance of a Chapter 1 driver of ED policy/strategy: the competitive urban hierarchy. In this era competition among cities was so instinctual one can be forgiven for believing competition is a gene in the urban DNA. Inland city-building simply crushed the older and previously isolated Eastern seaboard hierarchy. A new one slowly emerged, and the fledgling and volatile new hierarchy begat even more urban competition. Access and trade were prerequisites for urban growth, and that required transportation infrastructure. Municipalities (and states) needed to connect their city to the adjacent city, routing trade and people through their community, not somebody else’s. Using the transportation mode du jour, cities competed to develop continental-scale hinterlands.

Such infrastructure, however, was light years beyond the bureaucratic capacity, political consensus and tax base of municipal/state government. Frankly, the tools that were available (government bonds, eminent domain, tax abatement) and the almost complete lack of economic development structures (EDOs) that could make it happen meant that ED strategies, tools—and structures—had to be fabricated. Either government itself would have to do it—and it could not—or the private sector logically would have to be involved. How? Experimentation, innovation and corruption followed. If transportation infrastructure was to “happen,” a partnership with the private sector was essential. This partnership necessarily meant some structural vehicle had to be devised that linked private expertise, risk-taking entrepreneurship and financing with public powers such as bonding, tax abatement and eminent domain. In the Early Republic that was the infamous corporate charter, which created a hybrid public–private EDO that financed, constructed and operated the infrastructure. The problem was the corporate charter worked, to a point—and then it didn’t. That is a major element of this chapter—and of economic development.

ED functions as the bridge between government and the private economy. That the corporate charter delivered a decidedly mixed bag—a decent transportation infrastructure was installed, but charter corporations were prone to conflicts of interest and outright corruption, and demanded governmental fiscal sophistication. Many went bankrupt in the first major depression that occurred in the late 1830s and early 1840s: Après le Panic of 1837, le corporate charter Deluge. The reaction to the corporate charter affected greatly the subsequent evolution of most state and local ED.

 

<a>STICKING THE FEDERAL NOSE INTO SUB-STATE POLICY-MAKING

 

By Washington’s second administration (1794) the so-called Hamilton Plan (strong executive-led federal government, a pro-manufacturing finance system, a national bank) assumed center stage. By 1796, however, the Washington “unity” administration splintered into a Jefferson-led, legislative-focused, agrarian and state-rights Democratic-Republican Party (D-Rs) that directly challenged Hamilton/Washington Federalists. The Federalists struggled under Adams and lost control of the federal government (forever) to Jefferson in 1800—leaving the federal government in the hands of Tidewater/Deep South-based Jeffersonian D-Rs. Perhaps, Jefferson’s most important economic development action was the 1803 Louisiana Purchase from which 15 states emerged.[xxiv]

After the war of 1812, and a weak attempt at New England secession from the federal Union (Hartford Convention), the dominant Federalist Party collapsed and merged into a unstable two-wing Democratic-Republican Party which presided over a short-lived “era of good feelings (1816–28). And then Andrew Jackson was elected President in 1828—and no one had good feelings after that. Jackson, a complex character—Deep South slave-owner/planter with Greater Appalachian values, a strong believer in state rights, cheap money, anti-bank but an equally strong proponent of the Constitution and the Republic—was his own paradigm and enigma. His effect on contemporary economic development, however, was profound: his concept of urban governance, the weak mayor system, limited governmental capacity and policy effectiveness for nearly 100 years. The reaction to his economic failings created a wave of state legislation that continues to affect economic development to this very day.

Most of the infrastructure-related events described below occurred after the war of 1812 and were generated by D-R factions led by Henry Clay. Federal involvement in local ED largely ceased with the Jackson Administration (1828–36) and the Panic (Depression) of 1837. Not until Abraham Lincoln did the feds resume an activist role in state/sub-state ED. In the interim states assumed a greater role, producing a decidedly mixed bag of policy outputs. The Whig Party formed after 1840 as an alternative to the dominant Jacksonian Democrats. The history briefly describes these federal infrastructure initiatives. The nature of these initiatives and reaction to them reveal a lack of consensus regarding the role of the federal government in matters of sub-state economic development during the pre-Civil War years. Importantly, post-1861 federal ED-related initiatives bridged that now infamous ED public/private chasm by using, instead of the corporate charter, the modern private business corporation as its primary EDO.

 

<b>Early Republic Federal Government and “Internal Improvements”

A predominantly agricultural economic base ensured that most of America remained rural hinterland, pockmarked by remarkably small urban centers (by today’s standards). In 1790 only 5 percent of Americans lived in urban areas (defined as 2500).[xxv] By 1860, however, the urban share of the population increased to a whopping 20 percent. Despite emerging industrialization, America in this era is best thought of as a developing nation, without a land-based transportation infrastructure, dependent on water-borne commercial trade. We lacked a meaningful financial/investment system and, consequently, were deeply reliant on foreign direct investment (FDI). Each of these factors affected sub-state economic development activities, and also generated a federal attempt to overcome the isolation of rural America by making it more accessible for trade and population mobility. The man most associated with these initiatives was Henry Clay.

Democratic-Republican Henry Clay was arguably the most prominent national “economic developer” in the pre-Civil War period, if only because of his longevity on the national political scene. A transplanted Virginia slave-owning planter, Clay moved to Kentucky and in 1811 was elected to the House of Representatives at 34. On the first day of his first term on the Hill (1812), he was elected Speaker. Reelected as Speaker for the next four terms, he remained in either House or Senate until 1852; he also ran unsuccessfully for President six times. Relevant to us was Clay’s “American System” federal policy platform.

The American System was a three-pronged federal ED program which included:

<nl>

1.<em>a protective tariff intended to nurture the emerging manufacturing sector startups and shield them from British dumping and low-cost imports;

2.<em>a (second) national bank that would inhibit inflation, establish a strong national currency, provide lending to firms, and foster interstate commerce; and

3.<em>providing federal subsidies to roads, canals and other internal improvements to strengthen access to rural cities/towns which dotted the American landscape.</nl>

 

The American System was controversial and, while in office, Jackson sparred and fussed with Clay over much of it—refusing to charter the National Bank and denying funds to the National Road. The bank’s demise contributed mightily to the Panic of 1837.

The tariff, however, equaled slavery in is divisive political effects on the body politic. Tariff debate exposed stresses among competing industry sectors and the contrasting North/South economic bases. The southern export-based agricultural economy required as close to free trade as could be wrung from the North, which wanted a tariff to protect its fragile new manufacturing sectors. Free trade or tariff protectionism considerably impacted industry sectors/life cycles, and has consistently created the potential for zero-sum decision-making among the nation’s regions and states/cities. The various tariffs associated with Clay’s American System were not the first, and would not be the last, example of polarizing regional economic development conflict triggered by tariffs. On balance, by the way, the North came out the better.

The National Road anticipated the Eisenhower interstate highway system by more than150 years. The Road (Route 40) commenced in Washington DC; by 1818 it had reached Wheeling (West) Virginia, and eventually got as far as Vandalia, Illinois. The feds provided subsidies, off and on, through 1835 when the states took over: “So many towns sprang up along it that it became known as the Main Street of America” (Reynolds, 2008, p. 12). The National Road opened up the central Midwest as the railroad would for the American West some 40–60 years later.

 

<a>ECONOMIC DEVELOPMENT TOOLS

 

Tax abatement and eminent domain have generated more paper, debate and bad feeling, and produced more cost-benefit studies than any other ED tool. Eminent domain is linked to infrastructure strategy, and tax abatement to business attraction/retention. They both by definition involve private property, wherein lies the core problem—crossing a “fault line,” a policy no man’s land between Privatism and Progressivism. Progressivism is uncomfortable, to put it mildly, with assisting private business, preferring instead to provide tax abatement (think earned income tax credit and progressive income tax rates) to people—poor people. Policy analysts call it redistributive public policy—which, guess what, Privatists are seldom thrilled about.

In life, the core issue is qui bono (who benefits?): business, society or the disadvantaged. Everybody supports “their” tax abatement or eminent domain—not the other guy’s. During the pre-Civil War years, both ED tools were prominent, used pervasively—actually they were essential to the ED strategies pursued by states and jurisdictions. They were used by business corporations or hybrid public/private EDOs—either an experiment or a stupidity depending on how one views the concept of a “private” EDO. That is a point behind this section: to explain the Early Republic basis for tax abatement and eminent domain for the benefit of private enterprise. The conclusion that follows is “like it or not, it’s legal.” And it’s a part of our ED heritage. Here’s why.

 

<b>Business Tax Abatement: Economic Development’s Oldest Tool

Tax abatement is as old as the hills, the Seven Hills of Rome for example. That is the first lesson our history teaches concerning tax breaks. How long have state/municipal-level tax differentials been used in America? The U.S. Supreme Court in the 1871 Wilmington Railroad v. Reid decision traced tax incentives to a North Carolina 1790 exemption incorporated in the Dismal Swamp Canal Company charter. (We did not make this up.)[xxvi] Between 1812 and 1830 Vermont exempted local manufacturing firms from state/local taxes (Bruchey, 1968, p. 128)—so did most other states. In a later chapter an even earlier dates will be cited.

Another example involves our saintly Abraham Lincoln. In January 1856 Lincoln argued before the Illinois Supreme Court that the Illinois Central Railroad didn’t have to pay taxes to McLean County. He argued that the company charter limited the payment of taxes solely to the State of Illinois. Lincoln won the case.[xxvii] Tax abatement is apple pie America.

One might wonder if some constitutional clause stops tax abatements dead in their tracks. Obviously not! The power to grant tax abatements stems from the power to tax. If a jurisdiction can tax, then the jurisdiction can exempt from taxes. One power is inherent to the other. The federal Supreme Court decision Mobile and O.R.R. v. Tennessee (1894) sustained state tax exemption for a particular railroad by recognizing, first, the legislature’s constitutional authority to grant an exemption; and, second, “that such an exemption might confer either total or partial immunity from taxation, and extend for any length of time the legislature might deem proper” (Benjamin, 1980, p. 663). It has not yet been overturned.

Other articles of the Constitution might offer hope. Constitutional clauses requiring federal and state “uniformity” and the equal protection clause are regarded as the next best hopes to limit tax abatement. The uniformity clause provides that “all Duties, Imposts and Excises shall be uniform throughout the United States.” Most state constitutions mirror this language. Court decisions over the years, however, have created a distinction between direct and indirect taxes (duties, fees). The Supreme Court has consistently held that the uniformity clause does not apply to direct taxes.[xxviii] Property and sales taxes are direct taxes. Benjamin (1980, p. 663) observes that most state court decisions “apply the federal standard and require only that all tax laws apply generally throughout the state, subject to any exemptions which the legislature may deem necessary.”

For example, a 1978 Supreme Court, decision confirms the power of Congress to “pin-point spending in various localities of intense unemployment and underemployment so that it may choose to concentrate on urban poverty or rural poverty or that it may attack certain sources of poverty without challenging others,” and that “Congress must be free to provide tax incentives to businesses located in the poorest neighborhoods so long as those incentives do not violate the uniformity clause by being totally or partially unavailable to any qualified community.”[xxix] How specific or narrow can an exemption be? Justice Cardozo ruled that abatements may be as “narrow as the mischief.”[xxx]

Next the equal protection clause (Fourteenth Amendment) applies only to the states and not to the federal government, which means that state/local tax exemptions could potentially be challenged under the equal protection clause. Precedence, however, allows state legislatures broad discretion, bordering on deference, in determining what is taxable or tax exempt. So long as “they and the classification upon which they are based be reasonable, not arbitrary, and apply to all persons similarly situated.” According to Wheeling Steel, Allied Stores v. Bowers, a state may grant exemptions primarily on the basis of residence when public policy factors are also present.[xxxi] As to whether non-exempted taxpayers’ (or business competitors’) equal rights are violated by tax abatement, courts have consistently struck down cases that pursued this argument.[xxxii]

 

<b>Tax Abatement in the Nineteenth Century

If the Supreme Court is correct, the first recorded tax exemption was allowed in Washington’s first year in office. Banks, insurance companies and railroads were the first recipients. Some were intended to launch startups, particularly finance companies and banks; railroads could obtain perpetual abatements. Some abatement was partial and others total. Most states used corporate charters to convey tax abatement. Once granted, it was hard to claw back; tax abatement was interpreted as a contract that could not be breached. Early Republic state-wide tax differentials favoring manufacturing firms were common throughout the nineteenth century. Manufacturers were the gazelles of the day. Post-Civil War economic developers wanted these fast-growing, job-creating firms—and they were willing to pay up to get them to locate in their state and city. New York, almost certainly not the first state, abated its capital stock tax for manufacturers starting in the 1880s. Pennsylvania, not keen to lose firms to New York, followed suit within a year. Cities played the game as well, Louisville Kentucky in 1913, for example, abated all local taxes for manufacturing firms for five years—then had to argue before a state appeals court as to how to define manufacturing (making popcorn at a movie theater was manufacturing in that case). Tax abatement, it seems, was woven into our national fabric long before the turn of the nineteenth century.

 

<b>What’s Yours Is Mine: Delegation of Eminent Domain to Private Corporation

I am also interested in outlining the context in which eminent domain, despite its controversy, became a core tool in the profession; it did so due to its centrality in the development–redevelopment process. Eminent domain is not just another tool in the economic developer’s toolbox. Government taking of property for public purposes is one thing; but the taking of property from one individual/corporation and transfer of such property to another individual/corporation is a doubly serious matter. On its face government taking away one person’s private property and giving it to another private person is just wrong. The matter is thrice complicated when a private entity is permitted use of eminent domain to achieve its purposes, including profit.

Eminent domain, despite the Constitution’s Fifth Amendment forbidding federal/state government from taking private property without “just compensation,” has been, with rare exceptions, a matter of state law. Today there exist 51 separate processes (including federal government) with which to conduct eminent domain. Sub-state units of government can add their own provisions and strictures. Each state has constructed its own history, precedents and processes.

Eminent domain has never been restricted to government. Private entities have been delegated these powers by government. Historically, “natural monopolies” (water supply/distribution, inter-/intra-city transportation, energy and communication networks) have exercised eminent domain subject to regulations and process required by government. They still do so today—although the “naturalness” of natural monopolies is increasingly questioned. Many “natural monopolies” are infrastructure and initial installation, and subsequent modernization of such infrastructure are long thought of as “legitimate” in ED. Delegation of eminent domain to private entities has been an important to urban infrastructure as well as urban development/redevelopment. Without eminent domain a road system, canal, railroad, streetcar, water pipe, sewer, electric cable or telephone wire “can’t get from here to there.”

In the nineteenth century infrastructure-based strategies were much-used ED strategies, and private entities were delegated eminent domain powers. This reality underscores one of our history’s themes: forge a hybrid EDO combining private resources/expertise with public powers/accountability. When, in this and future chapters, I refer to canals, railroads, “the tangle of pipes and wires,” streetcars, subways, water systems/filtration, electrification, street lights, and even roads and bridges, it implies that we are also including the use of eminent domain by a private entity. During the nineteenth century, private entities were delegated public powers, including eminent domain, by state and local government through charters and franchises (our hybrid EDOs): “The private companies built the infrastructure and supplied nondiscriminatory service in exchange for ‘the opportunity to earn a competitive return’” (Saxer, 2005, p. 61). By the first decades of the twentieth century this delegation of public powers exploded.

Western state constitutions, as they were initially approved, were especially aggressive in permitting eminent domain for the management and exploitation of natural resources. Water infrastructure and mining (oil and gas, forestry) were critical to Western development; and, if they required the taking of private land for the community’s greater good, then so goes it. Transportation infrastructure, the transcontinental railroads in particular, built cities, and railroads required control over the land on which they laid track. Hence the most outrageous aspect of eminent domain in these years was the widespread delegation by state governments of eminent domain authority to private entities—and it wasn’t only by western states.

<quotation>

Legislatures in many Eastern and Midwestern states delegated eminent domain authority to private transportation and manufacturing companies in order to promote economic expansion in a country with little surplus capital. State courts generally upheld this delegation on the grounds that the needs and wants of the community at that time were served by economic expansion. Thus the companies’ use of eminent domain was for a public rather than a private purpose … from a very early time in the Interior West, private natural resource development took on the mantle of public use … Courts in those states … recognized virtually no judicial authority to balance the purported needs of the private condemning authority against any countervailing economic, land use, or social concern. (Klass, 2008, pp. 21–2)</quotation>

 

Federal court preference in eminent domain was to defer to states. When the federal courts conducted constitutional reviews of state actions relevant to eminent domain in private hands, both appeal courts and the Supreme Court gave deference to state delegation of eminent domain authority to private actors based on the courts’ acceptance that “different states had different economic needs based on their population, natural resources, and other economic drivers” (Klass, 2008, pp. 22–3).

Nineteenth-century tax abatement and delegation of eminent domain to private entities are excellent introductions not only to critically important ED tools but also to the predominant ED strategy of that time—it was the Age of Infrastructure. That strategy gained momentum as it became tied to the last of our Chapter 1 drivers of ED policy: competitive urban hierarchy. To make it all work, cities and states experimented to develop an effective and accountable EDO capable of implementing the ED infrastructure strategy.

 

<a>COMPETITIVE HIERARCHIES: TRANSPORTATION INFRASTRUCTURE AND ECONOMIC DEVELOPMENT

 

Early Republic America was not urban by today’s standards. Port cities were America’s most populated centers. Ignoring a growing coastal trade, eastern city ports were the logistical connection to European trade and export—as well as the processing centers for maritime resources (fishing, whaling). In the first census (1790) Salem, Newport, Providence and Marblehead were among the nation’s ten largest cities (Gloucester was 11th). Each had between 5000 and 9000 residents.

The 1810 South held 32 percent of the nation’s population, but by 1860 that fell to about 26 percent. The 1810 Northeast’s share was nearly 57 percent, but by 1860 it had declined to less than 37 percent (Yankee Diaspora). The (Mid)-West, 13 percent in 1810, grew into the nation’s most populous region by 1860 (nearly 38 percent). Growth of major cities was uneven. The 1810 top five were: New York (including Brooklyn) 105,000; Philadelphia 97,000 (consolidated); Baltimore 46,500; Boston 34,000; and Charleston 25,000. By 1860 figures were: New York (and Brooklyn) 1,079,000; Philadelphia (consolidated city/county) 565,500; Baltimore 212,400; Boston 177,800; and New Orleans, 168,700 (just ahead of Cincinnati and St. Louis). Below the top ten, populations in the Mississippi Valley had exploded, completely replacing the late eighteenth-century small port cities. Change was reflective of domestic migration and immigration. Where were the critics of sprawl when we really needed them?

At the start of the nineteenth century small hinterland towns and cities were less bastions of wealth than small commercial and processing centers, living off an agricultural economy. Transportation being what it was, trade (and competition) among non-port cities was minimal. Rather, each city carved out a hinterland from which it extracted all it could. Second- and third-tier cities, little more than villages by today’s standards, sprinkled throughout each state served similar but smaller-scale purposes. During the course of the early nineteenth century, however, these cities and small towns increasingly became linked, first by roads, then by steam-/riverboats and finally by canals. These early transportation infrastructures, conceived by many at the time as necessary for national unification, created larger market areas, and jobs that attracted residents. Transportation infrastructure put an extra spark into internal migration and population mobility; access to larger markets spawned manufacturing and commercial firms—the industrial city gathered momentum.

 

<b>Transportation Infrastructure and Economic Development Tools

But it always comes down to money. How were states and cities supposed to pay for this expensive transportation infrastructure? Jeffersonian governments lacked access to capital and refused to tax themselves. The chief source of federal tax revenues was custom fees levied from imports. Even if banks were willing to lend (they were not), lending reserves were too small. Back in the colonial days, the traditional source of investment capital came from England. With independence English capital became British foreign direct investment (FDI). British FDI would remain a mainstay for nineteenth-century Americans, but British capital was volatile, expensive and uncertain. During the first two decades of the Early Republic we were drifting toward war, engaged in war or immediate post-war with Great Britain.

The obvious alternative to FDI was American private capital. But American capital mostly consisted of savings from small homeowners held in small loosely regulated, largely unknown and unrated state banks. Business capital was held in family-controlled firms or clumsy, illiquid business partnerships. The corporation, a new flexible form of business structure, only “appeared on a modest scale in the 1850s notably in the railroad industry” (Trachtenberg, 2007, p. 4). Not only was a source of capital in question, but also transportation infrastructure, the strategy du jour, lacked a necessary finance tool.

What was needed was a tool that could find and access capital as well as “house” and pay for management/expertise necessary to build and operate the infrastructure. Sophisticated expertise-management and ongoing maintenance of the transportation infrastructure were required, making the investment dependent on quality engineering and management expertise over extended periods of time—and “guaranteeing” the security of the investment capital through that period. It wasn’t sufficient to simply raise capital; someone had to lay track, buy trains and make them run on time—without draining public coffers. Since rights of way and land acquisition were the first steps, considerable sums of money were needed upfront.

Transportation infrastructure project financing thus required financing similar to today’s construction loans. Such loans have no collateral assets and must be made on the developer’s past history—which for toll roads, canals and railroads were nonexistent. Also, at the time of original financing the proposed project connected two geographies that had yet to develop; say it another way—“there was no there “there,” and the here “here” was not all that great either. Venture capital-like financing is not available to infrastructure because the “profit” that results typically accrues to public jurisdictions and residents/businesses (free riders)—not investors. These were the seeds of a public/private partnership in which “Government typically played the role of the ‘pioneer’” or infrastructure venture capitalist (Bruchey, 1968, p. 135), a role which, in the end, was supported by public opinion. Also, construction of land-based infrastructure without eminent domain was impossible; that power could only come from government. Tax abatement served as an operating subsidy while potentially providing what today would be thought of as a future tax increment. Still missing was a hybrid EDO (HEDO), combining both public and private, that could conduct/operate the project.

Lacking our hindsight, Early Republic city/state decision-makers searched even deeper into colonial history and borrowed from an earlier public/private HEDO, the Virginia Company—a joint stock company chartered by the royal government to found Jamestown in 1607 (we could also have used the 1621 Dutch West Company that founded New York City). The HEDO they devised is today known as “the corporate charter.”

To succinctly restate our argument:

<nl>

1.<em>It was necessary to install a transportation infrastructure for economic and urban growth.

2.<em>The private sector for various reasons couldn’t do it on its own dime.

3.<em>If it were to be done, then the public side had to bring certain of its powers (credit, tax funds, loans, eminent domain and tax-exempt bond issuance) into a vehicle or structure (HEDO) that combined the public powers and private “powers” of expertise, management, construction and future delivery of the infrastructure service—along with some measure of accountability.

4.<em>The vehicle initially used was the corporate charter—a medieval private corporation entrusted public powers to accomplish a shared purpose seldom used previous to 1790 (examples include British East India or the Jamestown Company).

5.<em>The corporate charter was used to incorporate our early banking system, insurance companies and even manufacturing firms; in transportation (canals and railroads) it got the job done—in this instance infrastructure was built.

6.<em>And then the problems arose—public outcry followed, and state legislative action essentially stripped public powers from the charter-corporation.</nl>

 

Thus began a search for an effective and accountable public/private entity that could employ private expertise, skills and relationships while using public powers to build and operate infrastructure and other public/private purposes. This search persisted for over 100 years.

American economic development, whatever else it does, operates within a capitalist economy; ED serves as the nexus, a bridge between private and public. This nexus requires an organizational form, a structure sufficient to accommodate private interests and public purpose, with some measure of accountability. That nexus is central to our profession for certain of our ED strategies (such as infrastructure) and critically important tools such as bonding, credit, eminent domain and tax abatement. The hybrid EDO, our HEDO, is the sine qua non of the so-called public–private partnership. The problem, as this and future chapters will reveal, is that it is easier said than done.

By nature a HEDO builds on tensions, potentially conflicting goals, and needs sustained oversight inherent in a public–private “joint” venture. Our history, however, demonstrates that an EDO that bridges public and private almost always crosses over a “Progressive–Privatist fault line. For those uncomfortable with capitalism itself, the greed of its entrepreneurs and finance capital, fearful of its concentration or size; who believe capitalism to be a steroidal generator of inequality or are simply distrustful of profit as the chief criterion of operation, a HEDO becomes a Bosch-like “Garden of Earthly Delights” potentially, if not actually, containing every evil and corruption known to mankind. That is not to say Progressives do not possess their version of a HEDO; philanthropy comes to mind—as does a South Shore Bank.

 

<b>Corporate Charter

The corporate charter is misunderstood today, in that most readers assume it to have been a pure private business—not so in 1800. “Corporation” in the Early American Republic was the opposite of today’s modern business corporation (which developed in the 1850s). Back then corporation was a public (municipal) corporation—a city, town, village (Frug, 1999). Advocates of colonial/Early Republic finance, insurance and transportation infrastructure pushed the envelope to create a HEDO along the lines discussed above—a “charted public/private corporation.” Our 1789 American Republic inherited a few colonial “corporate charters” and so the corporate charter—as a hybrid economic development structure within which critical economic development tools were lodged—was not entirely novel in 1800. Corporate charters were approved at the discretion of the state legislature for purposes alleged to be in the public interest. The charter created a semi-private, usually tax-exempt, corporation operated and controlled by private investors and management. The corporation was empowered to own, construct, manage, lease and operate the infrastructure/transportation mode within a specified geography. In most cases, eminent domain and issuance of tax-exempt bonds (or public lottery) were tossed in as well.

Dr. Peter Galie uncovered the earliest example of the corporate charter. He reports that New York’s “first foray into government stimulus to create jobs dates back to 1790.” The New York State legislature incorporated the “New York Manufacturing Society” and authorized the state treasurer to use public funds to purchase shares in the corporation—a practice which today is flatly illegal in every state. The Society’s purposes, as expressed in its preamble, were “to establish manufacturies [firms], and furnishing employment for the honest industrious poor,” purposes characterized by the legislature as “patriotic” (Galie and Bopst, 2012, pp. 2009–10).

The preamble for many such incorporations established that corporate charters were both a “corporation and a body politic”: “Among the privileges [included in these charters] were monopoly rights of way, tax exemption, the right of eminent domain, and the right granted to nonbanking corporations to hold lotteries in order to raise needed capital” (Bruchey, 1968, p. 130).[xxxiii] Elaborate regulations establishing some measure of accountability were usually included in these charters (boards of directors, liability, permitted sources of financing and financial standards). Charters defined and limited the scope of action permitted the corporation. The most common beneficiaries of state-approved corporate charters were “insurance companies, commercial banks, canal, dock and highway companies all concerned with the growth of cities and the expansion of internal trade” (Trachtenberg, 2007, p. 6). It is not unreasonable to assert that “these business corporations were no more exclusively profit-seeking associations than were the chartered joint stock companies with which the English had” (Bruchey, 1975, p. 130).

In their day, corporate charters were viewed as appropriate instruments of public policy:

<quotation>

From more than a generation, from the Revolution to the Panic of 1837, Americans had accepted state intervention in the economy as a legitimate, indeed essential function of government … Invoking the public interest as justification, the states … consciously sought to stimulate economic growth through positive government action. They subsidized agriculture and industry, invested directly in private enterprise, constructed vast transportation systems at public expense, lent the public credit to private “entrepreneurs, and granted special legal privileges to [charter] corporations.” (Gunn, 1988, p. 1)</quotation>

 

Although they would attract their fair share of corruption—and ultimately many would come to a bad end—these “mixed enterprises” combined public purpose and powers with private expertise and profit in an awkward and uncomfortable tension to develop an infrastructure necessary for urban existence and growth. This awkwardness was apparent at that time. To understand this awkwardness a situation confronted by George Washington may be helpful. George, our first President, was an active and devoted canal investor.

Knowing his interest in canal-building, in 1784–85 (during the Articles of Confederation) the Virginia legislature granted Washington, then a private citizen, 150 shares in the James River and Potomac canal companies “in return for his services to the state and [his dedication] to the cause of canal-building” (Wood, 2006, p. 44). This gift threw Washington into a total dither—should he accept the shares or not? As Wood describes Washington’s reaction, it is clear the decision was a very serious matter to him, critical to his personal integrity and appropriateness. Accordingly, Washington widely sought reaction and advice. Personally, he deeply believed in canal-building, not only to make money but also to unify the nation by making travel and commerce easier. But he also believed that to accept the shares would seem a public gift—a gift which compromised his most treasured asset, his “disinterestedness” (no conflict of interest). “Few decisions in Washington’s career caused more distress than this one.” Thomas Jefferson convinced him to decline the shares, “donating” them “instead to the college that eventually became Washington and Lee” (Wood, 2006, pp. 44–5).

Despite their awkwardness by today’s standards, these infrastructure-related municipal/state hybrid public/private organizations were genuinely ED-related, essential to legitimate urban public purposes. That the structure itself was clumsy and inherently faulty is also accurate. Such is hindsight. But corporate charters could raise necessary capital, house the expertise and build, manage and operate the intended project—and that was needed at the time. Robert Lively observed:

<quotation>

A “persistent theme in the nation’s economic development” has been “the incorrigible willingness of American public officials to seek the public good through private negotiations” … its obverse: the equally incorrigible insistence of private citizens that government encourage or entirely provides those services and utilities either too costly or too risky to attract unaided private capital [is also true]. It was especially on the undeveloped frontiers of the nation that capital needs and development needs conjoined most pressingly. Social overhead capital, especially in transport, was a frontier need and a prerequisite for economic development. (Lively, 1955; quoted in Bruchey, 1968, p. 133)</quotation>

 

Prior to 1789 colonial governments had issued only six such charters. From 1780 to 1801, however, state governments issued more than 300 business corporation charters:[xxxiv] “Fully two-thirds of them were established to provide inland navigation, turnpikes and toll bridges; also thirty-two were issued to develop water supplies and four for harbor development [docks]” (Bruchey, 1968, p. 129). State approval, however, masked who really led the drive for state charters: municipalities. Louis Hartz (1948) observed that “state investment at its height was of minor significance compared with investments by cities and counties” (in Bruchey, 1968, p. 133).

Henry Pierce (1953) stated that 315 municipalities “pledged approximately $37,000,000 toward the construction of (New York’s) roads between1827 and 1875.” Primm’s (1954) study of Missouri in the 1850s asserted that cities and counties along the railroad routes bought most of the stocks of the state-assisted railroads—i.e. the state issued the bonds and the cities and counties bought them. Milton Heath (1948) reported that cities and counties financed $45 million of railroad bonds in the pre-bellum south (see Bruchey, 1968, p. 133). Bruchey concluded that Baltimore, Cincinnati and Milwaukee subscribed to stock, purchased railroad bonds or guaranteed the indentures of railroad companies. In some instances he asserts that outright grants were made (Bruchey, 1968, p. 135). A specific example of this type of involvement is Baltimore City, as cited in Dilworth (2011, p. 153): “the Maryland Assembly authorized Baltimore City to purchase up to 5,000 shares in the company … The City used property tax revenues to finance the railroad.”

The infrastructure projects were themselves a combination of sections built by state/municipality directly, and by the corporation indirectly. For example, Carter Goodrich calculated that nearly 75 percent percent of total investment (about $188 million) in canal construction in New York, Pennsylvania, Ohio, Indiana, Illinois and Virginia (between 1815 and 1860) was financed by state/municipal governments through these corporate charters (Goodrich, 1961). The usual financing involved the state/municipality issuing bonds purchased by foreign investors.

 

<b>Corporate Charters Jumpstart Manufacturing

A little-known Early Republic corporate charter dimension was that charters provided state/municipal venture capital to startup sectors such as manufacturing. Bruchey’s Pennsylvania state charter study (1968, p. 129) reported that 8 percent of that state’s charters (1790–1860) were issued to manufacturing firms. Between 1808 and 1815, Pennsylvania issued more charters to joint stock companies engaged in manufacturing than to all public utilities combined. This overlaps very nicely with the drift to, and including, the war of 1812 when the principal source of American private capital, British capital, was more costly or not available. States/local jurisdictions “stepped up to the plate,” providing the missing capital to grow their manufacturing base. Pennsylvania was not alone:

<quotation>

the strength of the American desire for economic development, the scarcities of capital funds in the early years following independence, and the sharpness of competition from foreign suppliers [of capital], manufacturing was endowed with a quasi-public and not private character, and given numerous encouragements by the state. (Bruchey, 1968, p. 130)</quotation>

 

In the bastion of Progressivism, an 1818 Massachusetts corporate charter reads: “Be it enacted by the Senate and House of Representatives in General Court assembled that the following named individuals hereby are constituted a corporation and body politic for the purpose of erecting a flour mill.” Between 1824 and 1840, mid-western and southwestern states issued $165 million in bonds to provide banking capital to manufacturing firms (Bruchey, 1968, pp. 129–30). Not infrequently, states guaranteed private corporation bonds—such indebtedness ultimately secured by taxes, not on the revenues and profitability of the corporation. What’s more, it appears that states played a secondary role, compared to municipalities, in startup financing to private corporations. Bruchey again reports that between 1830 and 1890 no fewer than 2200 laws passed by states authorized municipalities to provide local assistance to such entities (Bruchey, 1968, p. 135).

 

<b>Roads, Steamboats and Canals

Reynolds (2008, pp. 12–18) asserted that the first half of the nineteenth century witnessed three waves of transportation innovation: (1) road and turnpike construction 1790–1810; (2) steamboat and canal-building 1811–30; and (3) post-1830 steam locomotive innovation (1826, John Steven’s, New Jersey) and railroad construction.

Excepting the National Road, roads and turnpikes previous to 1825 were privately financed and state chartered. The first turnpike (1795), Pennsylvania’s Philadelphia to Lancaster Turnpike, initiated a “craze” among states to construct toll roads. By 1816, turnpikes linked the major cities in the Northeast and formed a roughly continuous line from Maine to Georgia. New York, Pennsylvania and New England were the most energetic builders.

<quotation>

Although turnpikes were sometimes macadamized, they were usually crude roads, dotted with tree stumps, [and] forded swamps with … sawed logs. Every six to ten miles was a tollbooth that charged between ten and twenty-five cents. Investor optimism fed the turnpike boom. Before 1830, turnpike companies evidently won more state corporate charters than any other kind of private business … With the rise of canals and railroads, turnpikes became increasingly unattractive for carriers of freight. (Reynolds, 2008, p. 13)</quotation>

 

Water transportation proved more durable for commercial trade. Steamboats (and canals) developed simultaneously with toll roads, linking Atlantic coastal trade with hinterland internal trade. Robert Fulton did not invent the steamboat. Fulton made his fortune commercializing an existing innovation, starting a steamboat route between New York City and Albany in 1807. Mark Twain asserted that the greatest impact of steamboats was felt on the Mississippi, where the steamboat became a national institution and a powerful commercial/consumer transportation mode for mid-central, western and southern states. Steamboats made city connections to rivers economically necessary, fostering both canals and waterfronts.

In 1816 America had 100 miles of canals; by 1840 it had 3,000.[xxxv] The 360-mile Erie Canal, DeWitt Clinton’s “eighth wonder of the world”—or “Folly” or “Big Ditch” (Jefferson thought it “a little short of madness”) (Reynolds, 2008, p. 15)—was the inspiration for the subsequent canal craze. Connecting New York City to the Great Lakes (the transshipment nexus being Buffalo), in 1825 the canal opened up the rich agricultural lands of the upper Midwest to Atlantic coast ocean and coastal commerce—reducing transportation costs by 90 percent. The Erie Canal, a state-financed project (designed, lobbied, then dug by a state commission), cost $7 million; financed by state bonds, it took seven years to complete. The Erie Canal dramatically demonstrated to other cities that they:

<quotation>

could conquer the barriers that limited their development through a strategy which promised tremendous potential for commercial growth … [that] large sums of money could be easily raised for public works by utilizing state credit …. When states shared interests in economic development similar to those of cities, the state could promote programs to aid urban development through sale of state bonds. (Kantor and David, 1988, p. 49)</quotation>

 

Other New York canals followed in short order: Oswego, Chenango, Cayuga-Seneca, the Champlain, and Delaware and Hudson. Ohio constructed two major canals: between Cleveland and Portsmouth (the Ohio River) and Cincinnati and Toledo. Pennsylvania’s Main Line (1826) connected Philadelphia to Pittsburgh. Virginia, Indiana, New Jersey, Maryland and Illinois also completed important canals. Canals, it seems, were another example of the infamous herd-like, copy-cat imitation that repeatedly characterizes diffusion of economic development tools and strategies throughout our history (Goodrich, 1961).

Henry Clay embraced the strategy as a key element of his American System platform. So, in 1825 Congress approved several canal-related bills (Rivers and Harbors Act, General Survey Act for example). Included in the former legislation was a funding authorization to the Corp of Engineers, which was entrusted with a significant role in “internal improvements.” From that point forward, federal involvement in canals and other infrastructure was possible. Federal involvement, however, was always quite controversial. Prior to Jackson (who hated federal involvement and regarded infrastructure as a purely state affair) there had been several presidential vetoes of federal involvement in various internal improvements. The Supreme Court’s Gibbons v. Ogden (1824) decision, however, paved the way for federal involvement in interstate commerce—and legitimized a possible national role in state and local internal improvements.

 

<b>Railroads and the Competitive Urban Hierarchy

Early transportation infrastructure (roads) meant access to a city’s hinterland—hinterlands were the source of domestic migrants, raw materials and agricultural products to process and export domestically and internationally. By the 1810s or so the combination of domestic migration, immigration and transportation innovation facilitated significant city-building in the nation’s interior. New cities grew rapidly, presenting both opportunity and rivals for control of the hinterland in between. Distances were greater, as were trade volumes; water-borne transportation couldn’t satisfy demand. Railroads could. Success in canal-building inspired a novel (1820s), horrifically expensive transportation innovation: the steam locomotive. Not unlike today’s rocket ship to Mars, the locomotive offered opportunity and risk; and, as a public investment, generated substantial skepticism as an alternative to water transportation.

The founding of many hundreds of cities/towns each decade stimulated competition among cities, and necessitated linkage with some form of transportation infrastructure. New urban areas competed but also offered opportunities for new markets.

<quotation>

City development and prosperity were tied to important transportation improvements that permitted easier, faster, and cheaper commercial penetration of the sprawling new nation … Transportation innovations and …commercializing the city hinterland could spell the difference between stagnation and prosperity … With the introduction of each transportation breakthrough, cities and the political leaders faced the prospect of fierce competition with other cities, old and new, to win economic domination over their regions … political decisions could not help but be influenced by the rise of regional rivalries for economic growth. (Kantor and David, 1988, p. 40)</quotation>

 

The Erie Canal engendered considerable apprehension in Baltimore, Philadelphia and Pittsburgh that New York (New York City) would steal the Ohio hinterland and exploit the agricultural production of the northern Great Lakes areas. Philadelphia, the nation’s second largest city in 1830, felt further threatened by rival Baltimore, the third largest city with only 200 fewer residents (Angel Jr., 1977, pp. 111–16). Fearing Baltimore would establish a trade route into Ohio, Philadelphia believed it held an advantage of better Ohio access through Pittsburgh—that meant the State of Pennsylvania would issue bonds, not the municipalities. Baltimore on the other hand was dependent on local investor/banking institutions, and surrounded by hostile states that placed barriers on Maryland-owned infrastructure that crossed state lines.

The state of Pennsylvania provided key financing through bond issuance. There was, however, a problem: the state could not decide between competing transportation modes, and chose to develop a hybrid infrastructure composed of both. Believing rail too risky, it started construction (1826) on a “mongrel” transportation system composed of a network of canals and some rail (the Pennsylvania Mainline) to Pittsburgh. Baltimore’s private entrepreneurs, however—unimpressed with canals that froze in the harsh winters, and believers in new rail engine technology—put their money into the startup of Baltimore City’s Baltimore and Ohio Railroad (B&O, 1827). The race was on.

B&O laid track across Maryland while experimenting with new locomotives; for example, in 1830 the famous little engine that could, the Tom Thumb, ran a test run on B&O. In 1837 B&O crossed the Potomac at Harper’s Ferry Virginia. By that time the city of Baltimore had established a commission to work with the railroad, and in 1836 the city purchased $3 million dollars of B&O stock and another $1 million in the related Baltimore and Susquehanna Railroad. Because neither Pennsylvania nor Virginia wanted Baltimore to succeed, roadblocks were placed in B&O’s path. B&O did not reach Wheeling until 1853—25 years after construction had started. Post-Civil War acquisitions by which B&O acquired key Ohio rail lines ultimately provided back door access to Pittsburgh—in the 1880s!

Philadelphia proved no more successful than Baltimore. Pennsylvania spent nearly $100 million dollars on its mainline canal/railroad system—a project directed by a private chartered corporation (Bruchey, 1968, p. 132). Its choice of a mixed canal–rail infrastructure produced a dismal failure. Construction was faster than B&O; but the disadvantages of two infrastructures, more expensive (rail) and closed in winter (canal), compelled numerous break-bulk transshipment points that slowed passage, making it yet more expensive. Philadelphia, while it “beat” Baltimore, lost out to the more important competition: the Erie Canal that handled more traffic and hauled heavier cargoes. Western farmers used the Erie Canal, and New York City became the end-point for midwest grain. Had Philadelphia chosen an all-rail four-season route it would have been more competitive.

Railroad competition never really abated; it only got worse. Cities needed railroads and would do almost anything to acquire or improve railroad access. An example of rather extreme municipal involvement is Cincinnati’s 1869–73 ownership and operation of a railroad to Chattanooga, Tennessee. Authorized by the state legislature, the municipal-owned railroad was an “effort to shore up the city’s economic decline relative to faster-growing cities such as St. Louis, and Chicago” (Dilworth, 2011, p. 258). Suffice it to say, every major (and not so major) city of the period buried in its scandal closet an outlandish railroad dependency story. If a city did not connect to other cities, its future was obvious.

But, as we are fond of saying, all good things must sooner or later come to an end. The “end” of corporate charters came after the incredible number of scandals and private/municipal bankruptcies that followed the Panic of 1837. Over a decade and a half five states temporarily defaulted and one outright repudiated some of its debt.

<quotation>

A wave of revulsion against state (and municipal) participation internal improvements swept over the Old Northwest and between 1842 and 1851 all six of its states bound themselves constitutionally not to make loans to improvement enterprises. In addition, Michigan, Indiana, Ohio and Iowa also prohibited stock ownership, Maryland, Michigan and Wisconsin prohibited state works, and Ohio, Michigan and Illinois abandoned their extensive programs in state construction. Pennsylvania sold part of its state stock in 1843, Tennessee virtually abandoned her improvements program, and in early 1840’s [sic] Virginia somewhat checked hers. (Bruchey, 1968, p. 134)</quotation>

 

This constitutes the first phase passage of state constitutional “gift provisions.” We will return to these gift provisions later in the chapter because they left an indelible mark on the profession and the practice of economic development. These constitutional provisions theoretically meant that corporate charters were unconstitutional, reopening the search for a hybrid public/private EDO. The next experiment worked a bit better—at the expense of public accountability.

The geography of railroad competition expanded hugely with Lincoln’s decision to open up the West with homesteading land grants. The Homestead Act and Transcontinental Railroad legislation applied lessons learned from the 1850s Illinois settlement managed through contract by the Illinois Central Railroad (ICRR).[xxxvi] In this manner ICRR put meat on the bones of ED attraction and recruitment for the next 150 years. It is from the ICRR that chambers copied their attraction campaigns; it is from ICRR that the South learned how to hijack northern firms; and, ironically, to counter the South, northern and Midwestern cities copied the South.

 

<b>Illinois Central Railroad and ED Attraction

To learn from ICRR necessitates moving beyond the railroad’s activities. Railroads were land-speculating monopolists that controlled prices, gouging homestead farmers which, in turn, triggered a semi-revolutionary Populist movement that fractured American politics for more than a generation. Railroads literally held for ransom individual towns and cities, threatening to bypass them unless sums of money were paid. Stephen Ward (1998, pp. 23–4) states that by 1875 300 municipalities in New York alone had paid sums to railroad companies to be included in their network. Cheyenne’s Board of Trade in 1870 paid $280,000, as did Denver and a small city of 7000 in California (Los Angeles). Eventually the Interstate Commerce Commission, a major Progressive reform, was established (1887) to deal with these railroad abuses. To learn what we can about our history, however, we need to put these abuses momentarily aside and appreciate ICRR’s path-breaking ED innovation.

Illinois badly needed settlers, so the Illinois legislature authorized land grants for individual sale and contracted with ICRR to structure/operate the program (Ward, 1998, p. 11). Stripped to its essentials, state government delegated to the ICRR management of its people, its business attraction and its city-building economic development strategies. ICRR launched an extensive advertising campaign across the eastern states and Europe starting in 1854. Its tools included: mass promotional circulars; advertisements in major newspapers and trade journals; editorial support by newspapers; a promotional handbook; advertising on streetcars; recruitment agents in immigrant entry areas; and agents distributed throughout Canada and Europe (especially in Scandinavia and Germany). “By the early 1860s, the ICRR’s internal US campaigns … [promised] homes for the industrious in the garden state of the West” (Ward, 1998, p. 14). ICRR’s success spurred other neighboring states, Iowa in particular, to start their own people-attraction efforts, and it also pioneered the art of “town site promotion.” First, it set up (apparently semi-illegally) specific town land development corporations (little EDOs) throughout Illinois; each attracted investors to fund infrastructure and costs for each town. The land was platted and sold in individual lots or bundles of lots. One ICRR land development corporation at its southernmost terminus, Cairo, sold a bundle to a certain Charles Dickens, in an Ebenezer Scrooge moment (Ward, 1998, p. 21).

The ICRR model was in essence government contracting with a private corporation to devise and manage its core economic development strategies. The railroad was given access to the necessary tools (land grants, tax abatement, eminent domain, public financing), and then left to its own devices. The railroad recruited through sophisticated promotional programs; city-building followed. Privatist to its core, the ICRR program achieved spectacular success in filling up the Illinois countryside.

 

<b>Big-City-Building

John McDonald posits two factors that combined to create America’s first cities: the invention of large-scale production methods and the transportation revolution.

<quotation>

Factories with economies of scale were developed in several industries—textiles, apparel, iron, tools, ordnance, wagons, lumber, and food products such as flour and so on. The transportation revolution (on the other hand) was first based on the steamboat, and a few years later, the railroad. Production to build the railroads and companies to run them became major parts of the economy. These two factors made it economical to house large manufacturing enterprises at the transshipment points. (McDonald, 2008, p. 6)</quotation>

 

This sounds great to any budding economist, but something was missing—the entrepreneur who could make it happen. So we must add to the mix those individuals who actually put the drivers of growth together: the city-builders. In some quarters of the profession city-builders are viewed as extremely questionable characters, with an exceedingly dark side. To them city-builders are greedy SOBs seeking personal profit. Nineteenth-century city-building, it is often alleged, was engineered by businessman who made a fortune hawking land and lots, often acquired by bribing state or territorial governments and sold to downtrodden masses (mostly pioneers and immigrants). Toss in railroads and robber barons and the picture is pretty dismal—or conventionally capitalist, which is synonymous with dismal. All told, it is not too far from the truth—except that maybe there is another way to look at it.

My king of early nineteenth-century city-builders is Chicago’s William B. Ogden (Boorstin, 1967). To be sure, Ogden is … how do we say it? Complicated! But, interweaving McDonald’s model with Ogden’s activities, we can reconstruct American city-building’s most fantastic success: Chicago. The original sin of Privatist city-building is that it is unplanned and capitalistic. Chicago’s 1830 population (zero) presented an opportunity to plat grids, install infrastructure, develop advertising hoopla and, by hook or by crook, attract businesses and residents—making in the process a personal fortune. Here’s how it happened.

Chicago, initially a seventeenth-century fort, took off after the Black Hawk War (1832). Glenn Hubbard, a trader with the American Fur Company, arrived and then recruited a number of entrepreneurs/businessmen from western New York to plat and market the area to settlers. Included among Hubbard’s early transplants was a lawyer from Delaware County New York, William B. Ogden. Hubbard’s team was helped greatly by Chicago’s first innovation, balloon frame housing construction devised by New Hampshire-born George Washington Snow in 1832. Snow transported Michigan logs to the treeless plains of Chicago and fashioned them into Chicago’s first industry sector: housing construction. Balloon frame construction minimized lumber and construction time, resulting in an affordable, quality product that attracted new settlers. By the decade’s end the fledgling settlement grew to about 4,000. More was needed to achieve “take-off,” however. This is where Ogden came in.

It really helped if the prospective resident could get to Chicago easily, which meant transportation infrastructure was king. So McDonald was at least half right. Someone had to install/finance the transportation infrastructure, however. That was Ogden. Ogden, elected as Chicago’s first mayor in 1836, persuaded the federal government to build piers on Lake Michigan at the mouth of the Chicago River, where he had conveniently established a marine shipping company with routes to Buffalo. Next, Ogden connived with East Coast investors to convince the State of Michigan to build the Illinois and Michigan Canal. This opened up Chicago’s hinterland, and Ogden soon had grain to ship to New York. On return, the ships brought back new settlers to Chicago.

Ogden put his money where his mouth was, and personally provided funds needed to build present-day Archer Avenue. He then subdivided and marketed the Bridgeport neighborhood (Mayor Daley’s future home). Recognizing, without a plan or an economic textbook, that he had to also provide jobs through industry, Ogden then set about stealing somebody else’s sectors and jobs. Today we call it business recruitment. Ogden in 1845 saw potential in Cyrus McCormick’s mechanical reaper. The reaper, invented in Virginia (1831), was first manufactured in Cincinnati, where it caught Ogden’s attention. McCormick was recruited to Chicago in 1847 with financing from Mayor Ogden (Barone, 2013, p. 71). Ogden thoughtfully tossed tax abatement and a site into McCormick’s incentive package. In the following years Ogden, in true Yankee style, also founded the Chicago Lyceum, Chicago Historical Society, Chicago Orphans Society, the first University of Chicago and Northwestern University.

Ogden’s Privatist city-building efforts mushroomed: Chicago’s population, 4,000 in 1840, rose to 112,000 by 1860. In 1870 Chicago was the nation’s fifth largest city (299,000), on its way to becoming the nation’s second largest city (1.1 million) by 1890. Ogden, sadly, lost much of his wealth in the Great Chicago Fire of 1871 and, with all the irony imaginable, he moved to New York City where he died (and is buried) in 1877. The Great Fire and Ogden’s departure, however, did nothing to stop Chicago’s explosive Gilded Age growth. At the turn of the century, Chicago was home to a wee bit fewer than 1.7 million residents. Jon Teaford glorifies the city-building success that was Chicago:

<quotation>

In 1830 Chicago was a frontier trading post with a few log structures, a few muddy paths, and a few dozen inhabitants. Seventy years later it was a city of 1.5 million people, with a waterworks pumping 500 million gallons of water [daily] … and a drainage system with over 1,500 miles of sewers. More than 1,400 miles of paved streets lighted by 38,000 street lamps … and 925 miles of streetcar lines carried hundreds of millions of passengers each year … over 2,200 acres of city parkland, and a public library of over 300,000 volumes … In a single lifetime Chicago residents had transformed a prairie bog into one of the greatest cities of the world. (Teaford, 1984, p. 217)</quotation>

 

<a>Gift and Loan Clauses: Regulating the Public/Private Partnership

 

<b>Why Is this Section One of the Most Important?

After 1837 many states enacted state constitutional (and local) reforms that reshaped American economic development public/private relationships. They continue to strongly affect the configuration and operation of our contemporary economic development practice. Why is this so important? First, state/local governments were committed to building transportation infrastructure and a strong state-level financial system (banks) to open up and finance economic growth. Hybrid public–private corporations were the chief EDO entrusted to implement those sub-state economic development strategies. Gift and loan clauses reconfigured that hybrid EDO. Second, core tools of economic development (eminent domain, tax abatement, loans/grants/tax-exempt bond financing) must conform to any redefinition of the public/private relationship. In an Age of Infrastructure, gift and loan provisions struck at the heart of economic development of that era.

The Panic began in 1837; economic growth did not resume until 1842—making the Panic one of the longest in our economic history. Before it was over eight states (Arkansas, Illinois, Indiana, Louisiana, Maryland, Michigan, Mississippi and Pennsylvania) and one territory (Florida) defaulted. Four states repudiated at least some of their debt (Arkansas, Florida, Michigan and Minnesota (Wallis, 2004). In effect, America had one of its worst binges of state bankruptcies—a public debt crisis of the first magnitude. The principal cause of these state defaults usually centers on state/local debt associated with our infamous canal and railroad infrastructure-related corporation charters. Scandals associated with bankruptcies of charter infrastructure corporations, the inside “crony politics,’ capture the media’s and the public’s attention. They were the problem that had to be fixed—or so it seems today.

While not every state defaulted, after the Panic nearly every state over the following decades amended their constitutions to insert some form(s) of “gift and loan” clause that limited the use of state funds for private corporations and individuals. As new states entered the Union these statutes were included in their initial constitutions, so that by the turn of the twentieth century all states, it is asserted (Tarr, 1998, pp. 110–13), had incorporated a form of gift and loan clause into their constitutions. Yet, as we shall discover, the clauses did little to stop public financing of private transportation infrastructure. They certainly changed its “form” (HEDO); the old-style corporate charter was left behind and in its place were new forms of public financing channeled to a new purely private organization: the modern corporation, which first appeared in 1850s’ railroads (Chandler Jr., 1977). That shift will prove to be one of the two or three most critical themes developed in this history. Kelo (eminent domain) is but a recent example of how controversial these laws can be in contemporary economic development.[xxxvii] Rather than halting state or local investment in private transportation corporations, gift and loan clauses simply resulted in such assistance being provided in different forms. Absent in the future was the corporate charter. In its place in the 1850s was that railroads evolved from a “public/ private” corporation into a purely private “corporation” shorn of any public purpose.

From 1866 to 1873 “state legislatures approved over eight hundred proposals to grant local aid to railroad companies. New York, Illinois, and Missouri together authorized over $70 million worth of aid” (Tarr, 1998, p. 114). Evidently, the first wave of gift and loan provisions did nothing but change the form of state/local financial interaction with railroads. The second wave of gift and loan clauses did not materially affect state/ local involvement with railroad (and mining) corporations either. Such subsidies remained characteristic of western and mountain state economic development until the twentieth century. Over the next 50 years American cities and states struggled and experimented to find a suitable, effective and accountable structure or rules (conflict of interest, lobbying, etc.) that regulated this most critical of economic development relationships.

 

<b>“Blame” for Failure of the Corporate Charter

The causes behind each state’s debt crisis and state reaction to the crisis vary. One wonders if corporate charters, or more precisely public financial relationships with railroads, were as much scapegoat as causal factor in the state fiscal crisis. First, there was a huge regional variation within each phase. The South’s debt crisis concerned defaulted plantation land sales by inadequately capitalized state-chartered banks. The Mid-Atlantic/Midwest was closely linked to railroad infrastructure—but not canals, which had been retired successfully in the 1840s (Wallis, 2004, p. 7). Second, the reform of gift and loan statutes differed among states regarding the types of financial activities allowed or rejected and the level of government reformed (mostly state; local was left untouched). Often states cleaned up their own fiscal act by restricting state-level private relationships while offloading the problem of infrastructure financing and urban competition to the localities. Public relationships with railroads continued after state-level gift and loan provisions were enacted—but only at the municipal level.

Finally, further reflection suggests that states themselves were complicit in the bankruptcies by incurring debt repayment obligations and failing to earmark revenues to pay for them—or by identifying revenues that proved insufficient (especially in a Panic) to pay off troubled debt. Over time, the corporate charter attracted more than its fair share of the blame—a factor that does not absolve the admittedly faulty and tenuous sustainability of that HEDO structure. But the 1840s gift and loan provisions phase was as much about states dealing with the consequences of their own poor decisions in fiscal management as with public financing of private institutions.

Railroad charters were the problem. In the heavily tracked northeast, Maryland and Pennsylvania defaulted; but New York, Massachusetts and Ohio, each of which had earmarked tax receipts to pay off transportation debt, managed to avoid default (New York just barely) (Wallis, 2004, pp. 8–11). Pennsylvania, and to a lesser degree Maryland, had invested heavily in rail transportation corporations, but never raised or earmarked taxes, instead relying on a pay-as-you-go approach. Both defaulted. Conventional interpretation of gift and loan clauses relies heavily on the Pennsylvania, Connecticut and New York cases. In these states gift and loan initiatives were directly linked to railroad-chartered transportation debt. Whatever the merits or failings of railroad-related corporate charters, the two states that defaulted made no adequate provision to counter-balance their financial liabilities. Pay as you go is inherently vulnerable to events that created large-scale fiscal distress, such as Panics that reduced tax revenues.

In essence, state debt for transportation-related corporate debt was made more risky by faulty legislative fiscal behavior. The solution, reflected in subsequent gift and loan clauses, restricted the state from these relationships and debt instruments, but permitted counties and municipalities to enter into such corporate-related debt—provided it was approved by public referendum. These legislatures “freely authorized counties and municipalities to incur debt to aid railroad construction and these units did so eagerly” (Pinsky, 1963, p. 278). Galie and Bopst (2012, pp. 211–15) report that New York State’s 1845 corporate charter debt was about 20 percent of total debt; but perception of corruption as a motivating factor in railroad charter-related debt prompted gift and loan reform in its new 1846 constitution—such restrictions applying only to the state.

The South, with fewer miles of railroad track, did not have issues with railroad-related charters. In 1861 the North had almost 22,000 miles of track, the South barely 9,000. Southern states were bastions of Jacksonian low-tax ED; accordingly, southern state (and local) transportation infrastructure languished—roads were toll funded, and canals and railroads few and far between. Southern Jacksonian governments, being less supportive of internal improvement financing, rather used gift/loan clauses to check business influence on planter-dominated state legislatures (Schlesinger Jr., 1999, pp. 227–8). Schlesinger, quoting Carter Goodrich, quips Jacksonian opposition: “was based on a desire to keep business out of government … rather than a desire to keep government out of business” [economic development] (Schlessinger Jr., 1999, p. 228).

Florida, Louisiana, Mississippi, Arkansas and Mississippi defaulted not because of transportation infrastructure, but because 100 percent of their defaults were state-chartered “plantation” banks. Every Southern state that subsequently repudiated debt did so because of bank defaults, not transportation corporation defaults (Wallis, 2004, pp. 10–15). Spurred on by Jackson’s closing of the Second Bank, poorly capitalized plantation banks made thousands of essentially unsecured loans to farmers and land seekers. Southern banks acquired state funds through backdoor lobbying that closely resembled what today would be labeled “crony capitalism” (Wallis, 2004). Agricultural-induced bank defaults caused Southern state gift and loans clauses. Post-Panic, state legislators believed these investments resulted from a too cozy relationship with business, not the inadequacies of transportation-related corporate charters or public funding of infrastructure per se. It may be, as Gunn suggests (1988, p. 21), that corporate charters themselves were less the factor than political and ideological change in the state legislature that altered the previous mindset supportive of the business–railroad charter.[xxxviii]

That reality was abundantly clear when Southern pre-Civil War state constitutions were replaced by Reconstruction state constitutions, and approved by a Reconstruction-era Congress. Those constitutions embraced wholeheartedly state-led economic development and aggressively facilitated state involvement in transportation infrastructure finance (the benefits of which were intended to fall to Northern-owned railroads). Those constitutions were in turn repudiated by Redeemer state constitutions (see Chapter 7) that included the most strict gift and loan state and local restrictions regarding public–private projects found nationally. The intent was to curtail northern investment and southern governmental complicity in that investment, and to maintain low taxes and preserve agriculture as the dominant sector in southern economies. The South did not define its public/private financial interrelationships, or HEDOs, in the same way as the North.

As to the Midwest, most of Michigan, Minnesota, Indiana and Illinois’s defaulted debt resulted from post-1836 “loans” (Wallis, 2004, p. 34 Table 3) for transportation infrastructure and an expectation that future property tax receipts from homestead land sales generated by the infrastructure would pay off the debt.[xxxix] A handful of years later and the Panic, however, got in the way. Indiana, for example, started funding its Mammoth canal system in 1836, following that with financing for railroads to connect the canals. Construction began in 1837, and the state cut current property taxes in anticipation that the new infrastructure would generate more taxes. That revenue deficiency need not have been fatal, but states were reluctant to increase taxes to compensate for revenue deficiencies. Ohio raised taxes—and avoided default (Wallis, 2004, p. 17). In short, as faulty as were chartered transportation corporations, the new and inexperienced Midwestern state legislatures contributed mightily to their fiscal disaster. The lessons they learned shaped their gift and loan clauses to address a different set of issues—limits on debt issuance as a percentage of tax base, for example (Scheiber, 1969).

 

<b>Types of Gift and Loan Clauses and Sub-State ED Systems

The most common gift and loan clause (the “credit” clause) precluded “the credit of the state shall not in any manner be given or loaned to or in aid of any individual, association or corporation” (Pinsky, 1963, p. 228). This reform prevented the most common form of state/corporate debt when the state issued the bond and transferred/donated it directly to the private corporation, which then sold the state bond and kept the proceeds. What was not affected was issuance of a state bond which was then “swapped” or exchanged for railroad corporation stock, which was regarded by both the legislature and courts as a form of permissible joint venture. Hence, to close this type of relationship, a second gift and loan clause was necessary (a “stock” clause). Neither of these two clauses precluded loans, gifts of land or grants financed directly from current appropriation. This meant a third clause (a “current appropriations” clause) had to be approved.

The problem for economic developers is that variation among states in the choice of which combination of gift and loan clauses to employ led to current-day variation in our individual state ED-relevant legal requirements—and the EDOs affected by them. “As the twig is bent” suggests that these 1840 decisions, incorporated into state constitutions or interpreted by subsequent judicial decisions, led to individualistic state ED requirements regulating who and what private/public arrangements are suitable. From the mélange of nineteenth-century state gift and loan clauses, an important element of economic development—its core tools and structures which related to public/private relationships—would be reshaped to reflect whatever each state incorporated into its gift and loan clauses. This is an important explanation of why we currently have 50 “different” state economic development systems.

<quotation>

At the turn of the century, some form of public aid limitation had been incorporated into the constitutions of a large majority of states … Although the public aid limitations took certain common forms, the pattern which has emerged throughout the country is not uniform. The constitutional movement of the nineteenth century was an extremely pragmatic one; each change in each state was a direct reaction to the specific evils which had manifested themselves in that and perhaps neighboring jurisdictions. Some constitutions, therefore, contain only a credit clause, others join to it a stock clause, and still others have all three. The potential for diversity is further intensified by the fact that any or all of these restrictions may apply only to the state, to counties, to cities and towns, or to a specified combination of these. (Pinsky, 1963, p. 280)</quotation>

 

Accordingly, Pennsylvania and other states that relied on current appropriations to pay debt obligations were among the most restrictive in terms of future public/private partnerships. From a subsequent Pennsylvania Supreme Court decision, the concept of “public purpose” emerges. If a state could not tax for that purpose then it could not issue a debt for it. Other states copied it—and it was later included in the federal 14th Amendment—but interpreted by the federal Supreme Court as subject to local determination (Pinsky, 1963, pp. 281–2). Many midwestern states chose to remove themselves from funding local transportation projects, but left municipalities free to pursue them with municipal resources. New York did the same. Southern state gift and loans originated and evolved in an environment totally different from post-1837 northeastern states.

The “credit” clause which was predominant in all regions reflected a shared belief that no longer should state legislatures consider private corporations as “public,” as public instrumentalities; instead they should regard them as private and profit-seeking—with all the risks that speculative ventures entailed. That clause especially marked the effective end of corporate charters as a hybrid EDO.

 

<a>Dillon’s Law

 

We’ve saved the best for last! “Dillon’s Law” is an Iowa state judicial ruling, issued by, of all people, Judge John Dillon in 1868.[xl] The decision is easily the most important single judicial decision affecting sub-state economic development. Dillon’s Law remains substantially in effect today.

According to Dillon’s Law, states are preeminent over local government in that, in the American Constitution, states and federal government alone possess sovereignty or the inherent legal right of existence. The American Constitution did not mention cities, except to leave them to the states. Cities, counties and towns must be created and empowered by the state if they are to exist and function.[xli] Dillon’s Law reflects a 500-year tradition that harkens back to London, England. Augmented by subsequent judicial interpretation, sub-state units of government lack sovereignty and are mere sub-divisions of the higher government (states). Previous to Dillon’s decision, states, and state constitutions, dealt with sub-state entities by either issuing “special” charters for each jurisdiction or a general charter specific to population levels. Included in each charter were key elements of the municipal corporation such as form of government, types of taxes allowed and a number of fiscal and governance processes. Through state charters the weak mayor–Jeffersonian government became the default municipal government of newly admitted states and newly created cities.

The decision by Iowa Justice Charles Dillon (John’s nephew) was subsequently adopted by other states, and over time hardened into an informal national precedent. Dillon’s Law was explicitly confirmed by a 1907 federal Supreme Court decision, Hunter v. Pittsburgh, which stated that it was binding on all states and cities unless the state enacted specific legislation to modify Dillon’s Law. The Hunter ruling succinctly upheld that sub-state jurisdictions, no matter their size, are merely “creatures of the state.” Thirty nine states have since incorporated Dillon’s Law into their state constitution.

Dillon’s Law applied a very wide definition of state powers over sub-state governments. According to Dillon’s Law any delegated powers to a sub-state unit of government must be expressed literally in words or “fairly applied or indispensable to powers expressly granted.” Sub-state jurisdictions, as a sweeping generalization, could not assume the right to take action in any matter without the state expressly allowing it. The city could not approve structural reform of its government without state legislative approval; nor could it create many types of EDO and many ED programs and tools. Understanding this fundamental state/sub-state relationship will explain a great deal of Chapter 4’s description of “home rule,” individual city “charter reform” and the late nineteenth-century struggle to change the form of municipal government. It will also help us understand why state governments are constantly an important factor in local programs and initiatives such as streetcars, utility franchises and subways.

The rise of the industrial city imposed substantial change upon municipal governments, but to cope, they were required to secure state approvals, which were not always forthcoming. How cities dealt with this consumes many future pages. Dillon’s Law, in that it makes change so difficult, time-consuming and costly, and requires unwanted compromises, makes evident why structures and structural relationships are so enduring, retaining for centuries the values and philosophy of bygone civilizations—not so gone with the wind. Dillon’s Law can perpetuate medieval governance traditions, merely substituting state government for the King of England. It also explains how our 50 states developed their own unique ED sub-state policy systems.

Dillon’s Law provided the legal foundation for the state’s dominance over the sub-state ED policy systems. States will define, approve and implement various economic development structures, strategies and tools in their own distinctive ways, reflecting their own configurations of political culture and the politics du jour—ensuring there is indeed no single goal or nationwide one size fits all economic development approach. Identically named economic development structures, such as an industrial development agency, will have different powers and tasks and different relationships with other actors because of state-created variation.

[i] There are surprisingly many major sources detailing Lincoln’s personal involvement in ED. One is the recent, Sidney Blumenthal’s, Volume 1, A Self-Made Man (Simon & Schuster, 2016), but the very best is a 1922 book, reprinted/revised in 2003: Jesse W. Weik (author) and Michael Burlingame, the Real Lincoln: a Portrait (University of Nebraska Press).

[ii] BTW northern Illinois, i.e. Chicago was unsettled at this time. Cook County did not even exist and Chicago was incorporated as a town in 1833, and a city in 1837–and at this time housed only a few thousand. The Act pertained to central and southern Illinois almost exclusively.

[iii] Jesse W. Weik (author) and Michael Burlingame, the Real Lincoln: a Portrait (University of Nebraska Press).

[iv] John Joseph Wallis, Richard Sylla, and Arthur Grinath III, “Land, Debt, and Taxes: Origins of U.S. State Default Crisis 1839 to 1842, www.frbatlanta.org/-/media/documents/news/conferences/2011/…/Wallis.pdf

[v] Wallis, et al., pp. 12-3

[vi] Peter Galie, and Christopher Bopst, “Anything Goes: A History of New York’s Gift and Loan Clauses”, Albany Law Review, Vol. 75, No. 4,(2012), pp. 2005-90

Perhaps, the sub-state-related federal initiative that consistently and deeply affected sub-state economic development in the pre-Civil War period was foreign trade, boycotts and federal tariff policy. This history treats these policy areas gingerly—not because they are not relevant, but because the topic is its own book. Foreign policy and national trade policy are primary to the evolution of a jurisdictional economic base—and war’s impact on just about everything speaks for itself. For better or worse, we will not focus on pre-Civil War trade and tariff policy. These two policies provided a foundation for both the South’s and North’s strategy to develop its economic base. They also triggered inter-regional conflict that through most of this period exceeded that generated by abolition and slavery.

[viii] In 1820 12 cities were greater than10000–more than two-thirds of the nation’s urban population (New York and Philadelphia constituted one-third). In 1860, 101 cities were greater than 10000, and 8 more than 100,000.

[ix] Wilmington R.R. v. Reid, ,Volume 80 U.S. (13 Wall) 264 (1871)

[x] Lincoln billed the railroad for his services ($2000); they refused to pay. Lincoln sent a new bill for $5000 that the railroad also refused to pay. So Lincoln sued the railroad. An appeals court granted Lincoln a $4800 judgment; still the railroad refused to pay. Lincoln sued to seize a locomotive engine and cars. The railroad paid Lincoln $4800. Lincoln deposited the proceeds into his 1858 Lincoln-Douglas Senate election fund. Ill-gotten tax abatement proceeds partially financed the election that launched Lincoln’s drive to be President.

[xi] The court ruled, for the federal government only. Progressive rate income taxes do not trigger uniformity provisions so long as they apply “generally” throughout the United States. Federal income tax exemptions for manufacturing do not apply to any one firm in one place but to all manufacturing firms.

[xii] Rhode Island Chapter, Associated General Contractors of America, Inc. v. Kreps, 450 F, Sup 338 (D.R.I.)

[xiii] Williams v. Mayor and City Council, 289 U.S. 36 (1933). The Court ruled uniformity “does not forbid the creation of reasonable exemptions in furtherance of the public good”, supporting local real property tax reductions. The Court held “Furtherance of the public good is written over the face of this statute from beginning to end as its animating motive”; Translation: Good intentions, even if bad law, are sufficient to prove a legislature acts to further the public good.

[xiv] Wheeling Steel, Allied Stores v. Bowers 358 U.S. 522 (1959)

[xv] Virgo Corp. v. Paiewonsky 384 F.2nd 569 (3d Cir. 1967), cert denied, 390 U.S. 1041 (1968)

[xvi] “Lottery” compares to general public investing in public debt such as a bond. Using lotteries a significant portion of public infrastructure were financed, not through taxes, but citizen “investment”. The general public willingly purchased these infrastructure bonds.

[xvii] Bruchey’s overview of 1790-1860 Pennsylvania’s charter issuance reveals total of 2,333 business charters/special acts were approved: 64% were transportation, 11% insurance, 8% manufacturing, 7% banking, 3% gas, 3% water, and 4% miscellaneous.

[xviii] George Washington (1784) was an investor-owner of the Patowmack Company which attempted to connect the Potomac with western territories. The company went bankrupt. The early canals were short, and constructed in the South. The Great Dismal Swamp Canal (Virginia/North Carolina) opened in 1805 (Washington was involved with it as well) is allegedly America’s oldest presently-operating canal—it later become the starting point for the Inter-coastal Waterways Canal (Reynolds, Waking Giant, op. cit. p. 15).

[xix] Ward, Selling Places, op. cit. p.11 the “federal government determined to encourage railroad construction in the largely unpopulated interior by endowing it to companies with large land grants. These subsidies went much further than necessary for tracks and other railroad requirements. They were intended for settlers, to provide a source of income for the railroads, and to motivate more intensive settlement.

[xx] Gunn’s argument, while drawn from New York State, was meant to apply to other states.

[xxi] Michigan defaulted because the majority of its defaulted debt was caused by Morris Bank’s transportation loans were refinanced to British investors who later forced Morris into bankruptcy.

[xxii] John Dillon was a noted jurist specializing in state-local relationships. His Municipal Corporations (1872) is still a cornerstone book of municipal law. “Municipal corporations (which include cities, towns and villages) owe their origin to, and derive their powers and rights wholly from the (state) legislature. It breathes into them the breath of life, without which they cannot exist“. Dillon’s decision opposed “the Cooley Doctrine” which stressed a degree of municipal independence and self-determination. The reader can visit a fountain memorial to Judge Dillon in Davenport Iowa. Justice Dillon’s nephew, a certain Charles Dillon Stengel, is better known as “Casey” Stengel, a former Yankee catcher and first New York Met manager.

[xxiii] Frug presents an argument asserting this line of reasoning was incorrect—that it left cities without power, unable to cope with citizen demands. Frug develops a line of juridical reasoning which supports city powers and freedoms independent of the State

[xxiv].<em>Perhaps the sub-state-related federal initiative that consistently and deeply affected sub-state economic development in the pre-Civil War period was foreign trade, boycotts and federal tariff policy. This history treats these policy areas gingerly—not because they are not relevant, but because the topic is its own book. Foreign policy and national trade policy are primary to the evolution of a jurisdictional economic base—and war’s impact on just about everything speaks for itself. For better or worse, we will not focus on pre-Civil War trade and tariff policy. These two policies provided a foundation for both the South’s and the North’s strategy to develop their economic base. They also triggered inter-regional conflict which through most of this period exceeded that generated by abolition and slavery.

[xxv].<em>In 1820, 12 cities had populations greater than 10,000—more than two-thirds of the nation’s urban population (New York and Philadelphia constituted one-third). In 1860, 101 cities were greater than 10,000, and eight more than 100,000.

[xxvi].<em>Wilmington R.R. v. Reid, ,Volume 80 U.S. (13 Wall) 264 (1871).

[xxvii].<em>Lincoln billed the railroad for his services ($2000); they refused to pay. Lincoln sent a new bill for $5000 that the railroad also refused to pay—so Lincoln sued the railroad. An appeals court granted Lincoln a $4800 judgment; still the railroad refused to pay. Lincoln sued to seize a locomotive engine and cars. The railroad paid Lincoln $4800. Lincoln deposited the proceeds in his 1858 Lincoln–Douglas Senate election fund. Ill-gotten tax abatement proceeds partially financed the election that launched Lincoln’s drive to be President.

[xxviii].<em>The court ruled for the federal government only. Progressive rate income taxes do not trigger uniformity provisions so long as they apply “generally” throughout the United States. Federal income tax exemptions for manufacturing do not apply to any one firm in one place, but to all manufacturing firms.

[xxix].<em>Rhode Island Chapter, Associated General Contractors of America, Inc. v. Kreps, 450 F, Sup 338 (D.R.I.)

[xxx].<em>Williams v. Mayor and City Council, 289 U.S. 36 (1933). The Court ruled that uniformity “does not forbid the creation of reasonable exemptions in furtherance of the public good,” supporting local real property tax reductions. The Court held: “Furtherance of the public good is written over the face of this statute from beginning to end as its animating motive.” Translation: Good intentions, even if bad law, are sufficient to prove a legislature acts to further the public good.

[xxxi].<em>Wheeling Steel, Allied Stores v. Bowers 358 U.S. 522 (1959).

[xxxii].<em>Virgo Corp. v. Paiewonsky 384 F.2nd 569 (3d Cir. 1967), cert denied, 390 U.S. 1041 (1968).

[xxxiii].<em> “Lottery” compares to general public investing in public debt such as a bond. Using lotteries, a significant portion of public infrastructure was financed not through taxes, but through citizen “investment.” The general public willingly purchased these infrastructure bonds.

[xxxiv].<em>Bruchey’s overview of 1790–1860 Pennsylvania’s charter issuance reveals that a total of 2333 business charters/special acts were approved: 64 percent were transportation, 11 percent insurance, 8 percent manufacturing, 7 percent banking, 3 percent gas, 3 percent water and 4 percent miscellaneous.

[xxxv].<em>George Washington (1784) was an investor-owner of the Patowmack Company which attempted to connect the Potomac with western territories. The company went bankrupt. The early canals were short, and constructed in the South. The Great Dismal Swamp Canal (Virginia/North Carolina), opened in 1805 (Washington was involved with it as well), is allegedly America’s oldest presently operating canal; it later become the starting point for the Intercoastal Waterways Canal (Reynolds, 2008, p. 15).

[xxxvi].<em>Ward (1998, p. 11): “[the] federal government determined to encourage railroad construction in the largely unpopulated interior by endowing it to companies with large land grants. These subsidies went much further than necessary for tracks and other railroad requirements. They were intended for settlers, to provide a source of income for the railroads, and to motivate more intensive settlement.”

[xxxviii].<em>Gunn’s argument, while drawn from New York State, was meant to apply to other states.

[xxxix].<em>Michigan defaulted because the majority of its defaulted debt was caused by Morris Bank’s transportation loans which were refinanced to British investors who later forced Morris into bankruptcy.

[xl].<em>John Forrest Dillon was a noted jurist specializing in state–local relationships. His Municipal Corporations (1872) is still a cornerstone book of municipal law: “Municipal corporations (which include cities, towns and villages) owe their origin to, and derive their powers and rights wholly from the (state) legislature. It breathes into them the breath of life, without which they cannot exist.” Dillon’s decision opposed the “Cooley Doctrine,” which stressed a degree of municipal independence and self-determination. The reader can visit a fountain memorial to Judge Dillon in Davenport Iowa. Justice Dillon’s nephew, a certain Charles Dillon Stengel, is better known as “Casey” Stengel, a former Yankees catcher and first New York Mets manager.

[xli].<em>Frug (1999) presents an argument asserting that this line of reasoning was incorrect—that it left cities without power, unable to cope with citizen demands. Frug develops a line of juridical reasoning which supports city powers and freedoms independent of the state.