The Railroads: Expansion and Economic Transformation in the Midwest

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The Railroads: Expansion and Economic Transformation in the Midwest

Wider Markets. Before the middle of the nineteenth century, the economic highways of the nation lay along its waterways: the coastlines and rivers, and, after 1810, the artificial rivers carved into the land in the form of canals. But by 1850 the railroads were beginning to redraw the economic map, connecting regions along radically new lines, opening overland channels of buying and selling. As the U.S. Senate observed in an 1852 report analyzing the profound impact of the railroads, the cost of overland transportation confined prerailroad, landlocked farmers to tight circles of distribution: estimating the cost of wagon transportation at 15 cents per ton per mile, and the value of wheat at $1.50 per bushel, the Senate calculated that a farmer transporting his crop “with only a common earth road as an avenue” would spend its entire sale value getting it to a market 330 miles away. The railroad, however, could carry a ton of wheat for 1.5 cents per mile—a tenth of the cost. Suddenly the farmer’s potential market orbit leapt outward by a factor of ten.

Midwestern Development. The implications of railroad transportation proved especially significant for settlement and development in the Midwest. Initial settlement over this region had followed riverine paths south—clustering along the water routes that carried ultimately to the Mississippi and the Gulf of Mexico. The great entrepot of the West up until about 1850 was New Orleans, which channeled produce from thousands of river flatboats and steamboats to ocean-going ships bound for Atlantic and European markets. But in the 1840s, the northern midwestern states began building canal and railroad linkage eastward, opening direct connections to the metropolitan markets of the urban Atlantic. In the 1850s the total railroad mileage in Indiana, Missouri, and Iowa climbed from 339 to 6,635 miles. Illinois laid down 2,500 miles of track over this same, pivotal decade. These new lines of transportation quickly rerouted the traffic of midwestern produce to flow east, rather than south. By 1850 Chicago was handling as much grain as Saint Louis, and by 1854 more grain was moving along the Great Lakes than through New Orleans. It was moving in different forms, too: grain traveled through river ports such as Saint Louis in burlap sacks, crossing the levee on the backs of men and mules, to be loaded into flatboats and steamships. Grain flowed through the rising cities of the Midwest, through Buffalo, Milwaukee, and above all Chicago, in railroad cars carrying 325 bushels each, to be sorted, graded, and loaded onto steam-powered conveyor belts to be borne up into grain elevators—into numbered bins where it

waited to be dropped through chutes into other railroad cars or the holds of oceangoing ships.

Chicago. This transformation quickly made Chicago the nerve center and metropolitan hub of the northern Midwest. As the new map of railroad transportation unfolded, the city became a key terminal. In 1852 two lines, the Michigan Southern and the Michigan Central, first linked Chicago to New York, the most important eastern market and Atlantic shipping center. Meanwhile, to the west, a spreading web of smaller railroad lines began drawing in the produce of not only northern Illinois, but Wisconsin, Michigan, Indiana, and Iowa as well. These railroads formed a powerful circulating system with Chicago at its heart: a western network of capillary lines that assembled the products of western farms in bits and pieces, to form the bulk shipments that flowed east along the thicker arteries of the trunk lines. By 1857, only five years after linking itself to New York, Chicago was channeling millions of bushels of grain annually through a dozen grain elevators. By 1877 the New York Central Railroad was running sixteen miles of freight cars daily from Chicago.

New Relations. But the changes wrought by the railroads went well beyond geography. The transformation was also, in economic terms, structural. The key figure in the earlier, prerailroad economic system had been the local storekeeper of a given region, who received produce from area farmers in exchange for food, seed, and manufactured goods (clothing, farming tools and implements, medicines). Typically, little cash changed hands in these transactions; more often, the exchange was effected via barter or store credit. Thus while the farmer operated within a larger market economy—ultimately much of his produce went to distant buyers and sellers—transactions were mediated on a microeconomic scale by personal, face-to-face dealings. In other words, this was still a world of personal connections and ties. With the rise of Chicago and the other urban centers of the Midwest, a

new economic order and a new world of business relations began to form. Farmers getting their crops to market now began to deal, at least implicitly, with a host of faceless figures: railroad managers, grain elevator warehouse men, urban grain merchants, wholesalers and dealers, food processors, and manufacturers. The new path to market was more efficient (railroad transportation and handling by grain elevator sharply reduced the labor costs of shipment, for example), but it was also much more distant and depersonalized.

Commodity Trading. Meanwhile, as the scale of handling, shipment, and storage grew, grain elevator receipts began to trade hands, replacing actual sacks or grain samples and becoming an instrument of exchange that functioned much like currency. In Chicago a new agency, the Board of Trade, became a central way to coordinate and oversee the buying and selling of grain in bulk. The Board, called the Change (or Exchange), quickly assumed the quasi-regulatory authority to grade grain so that it could be stored in common bins (regardless of who originally sold or owned a given bushel). And that transformation in turn facilitated the growth of futures trading—that is, the buying and selling not of grain itself, but of “to arrive” contracts agreeing to supply grain at set future dates at an agreed-on price. So grain trading at the Board became a speculative market, with “bulls” and “bears” betting, alternatively, that prices of a given commodity would rise or fall. The opening of telegraph communication fueled these speculative fires, rapidly flashing long-distance information about the prospects of western crop conditions and the prices at eastern markets.

Railroads and Prairie Consumption. The new channels of production and distribution worked both ways: farmers not only sold to distant, urban markets, they bought from those same markets too. Trains carrying crops to market in Chicago returned to the agricultural heartland of the Midwest carrying lumber, furniture, clothing, toys, musical instruments, newspapers—a wide assortment of consumer goods. Among other items, Midwestern farmers invested heavily in new kinds of farm machinery. By 1851 Cyrus McCormick’s Chicago factory was making over a thousand mechanical reapers a year, and most of them were being bought and used in the Midwest—one-fourth in northern Illinois alone. John Deere was manufacturing more than ten thousand plows annually by the eve of the Civil War. By the 1870s Midwestern farmers were becoming accustomed to using mechanical reapers, harvesters, and binders, as well as increasingly sophisticated plows, mowers, and spreaders. Within a few decades farmers had come to depend on such implements and, by implication, the manufacturers and sellers of this machinery.

McCormick: Rural Distribution. It was the railroads that enabled manufacturers like Cyrus McCormick not only to set up shop, but also to build up a national and ultimately an international network of customers. Reliable year-round transportation permitted factory managers to set up smooth inflows of raw material and outflows of manufactured products, regularizing production itself. On the consumption end, McCormick learned through trial and error how to make the new possibilities of national marketing work. Initially the company relied on territorial agents, each overseeing a district and hiring subagents or dealers to make sales, service and repair machines, and handle credit arrangements for local customers. By the late 1870s McCormick was refining this marketing structure, centralizing control, replacing regional agents with salaried managers, and converting subagents into franchised dealers; competitors soon followed suit.

THE ERIE WAR

The fiercest and most notorious of the financial railroad struggles pitted Jay Gould against shipping magnate Cornelius Vanderbilt, “the Commodore. “Over the 1860s Vanderbilt had invested heavily in railroads, securing financial control over the New York Central, which carried a lucrative traffic between Buffalo and New York City. The main competitive threat to the New York Central came from the Erie, a railroad Gould and his allies had bailed out of financial difficulties in the depression of 1857, then joined the board in order to manipulate its stock price on the New York Stock Exchange. When Vanderbilt moved on the Erie in 1867, Gould (together with Daniel Drew and Big Jim Fisk) maneuvered slyly, issuing thousands of shares of watered-down stock. Once Vanderbilt’s unsuspecting agents bought up the largely worthless certificates, the Commodore was trapped; Gould printed thousands more that Vanderbilt was forced to buy in order to hold up the value of his earlier purchases. Vanderbilt obtained a court injunction and arrest warrants for the Erie gang, driving Drew, Fisk, and Gould across the Hudson to New Jersey, beyond the reach of New York law, carrying $7 million. Both sides lobbied (and freely bribed) the New York legislature in dueling efforts for legislative relief. Eventually the parties negotiated a settlement, in which Vanderbilt swallowed significant losses. When Charles Francis Adams exposed the tawdry affair in a series of articles titled “Chapters of Erie,” he generated a good deal of momentum for reform.