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.
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:
- It was necessary to install a transportation infrastructure for economic and urban growth.
- The private sector for various reasons couldn’t do it on its own dime.
- 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.
- 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).
- 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.
- 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 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.
The 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).10 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:
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 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:
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)
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:11 “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 between 1827 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.
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:
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)
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).
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.
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, 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 3,000.12 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 statefinanced 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:
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)
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.
Ron W. Coan 