Too big to fail

Often unneeded, corrupt, and inept, Gilded Age railroad giants, fattened by federal subsidies, eventually fell and triggered depression

(Greg Klee/ Globe Staff)
By Buzzy Jackson
Globe Correspondent / June 5, 2011

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“Overbuilt, prone to bankruptcy and receivership, wretchedly managed, politically corrupt, environmentally harmful, and financially wasteful, these corporations nonetheless helped create a world where private success often came from luck, fortunate timing, and state intervention. Profit arose more from financial markets and insider contracts than from . . . ’’ Can you fill in the blank here? “Financial products,’’ perhaps, à la Lehman Brothers? “Mortgage-backed securities,’’ as in the case of AIG? Or is this all about Enron and its fraudulent energy business? No, the final word in this sentence is “transportation.’’ We’re talking about the transcontinental railroads of the late 19th century.

Welcome to a scathing and wonderful new book about American business and its crimes more than 100 years ago: “Railroaded: The Transcontinentals and the Making of Modern America.’’ Stanford University professor Richard White, one of our country’s greatest historians, has written a book that will entertain and outrage readers with scenes of corporate greed and mismanagement and the federal bailouts that enabled them. Even as the railroads went bankrupt, their owners grew rich, all subsidized by the US government. Think of “Railroaded’’ as Michael Lewis’s “Liar’s Poker,’’ set in a Gilded Age just as fantastically sick as the bond-trading offices of Salomon Brothers in the freshly-deregulated 1980s.

White’s argument is simple yet surprising. It was not the success of the transcontinental railroads that transformed America; it was their failure. These railroads — which, incidentally, were not even transcontinental (they stopped at the Missouri River and let the existing railroads take over from there to the Atlantic) — were poorly conceived and often terribly run. When they failed — and almost all eventually did — they brought the entire economy down with them, as in the case of the Panic (and resulting multiyear depression) of 1873, which was, in White’s words, “Above all . . . a railroad depression.’’ The sources of their failure, incompetence and greed, were obscured from the public. The Central Pacific Railroad’s annual report for 1873 assured its investors that its prospects were “never brighter’’ even as it paid its debts with money earmarked for taxes and workers’ wages. White is straightforward in his assessment of the Central Pacific’s policy: “Everyone agreed to lie.’’

White is not arguing that transcontinental railroads should never have been built; instead he asks, “[W]hy were so many of these railroads built at a time when there was so little need of them?’’ Yes, building railroads through land not yet settled by Euro-Americans (though long home to Native Americans) did bring new American farms and towns into existence, but many of those settlements lay in climate zones good for railroads but terrible for farmers. Thousands of bankruptcies and broken dreams followed.

White uses the two Dakotas, North and South, as a case study of how the American West might have developed without federally-subsidized railroads. The transcontinentals ran only through North Dakota, where the railroad corporations were given public lands for free as a “right of way’’ and then charged settlers to live on them. In South Dakota, the “government aided settlers, not railroads, while securing a more efficient railroad network and denser settlement. . . . Farmers paid less for land [in South Dakota], settled the better lands more quickly, and avoided marginal arid lands.’’ That’s how capitalism is supposed to work, isn’t it: business emerges to meet demand? Not when it came to the transcontinentals. White doesn’t disagree with the idea that “railroads defined the age’’ of an emerging modern America, but he has a different explanation for that belief: They were, like so much in the Gilded Age, corrupt.

Don’t pick up “Railroaded’’ expecting a romance of steam engines, lonesome whistles blowing, or poetic vistas glimpsed from the sliding doors of a boxcar. This is a story about the dark arts of accounting and the seemingly paradoxical fact that the transcontinental railroads were simultaneously “unsuccessful and powerful.’’ Don’t look for a Darwinian model of business, either. White demonstrates “how the unsuccessful and the incompetent not only survived but prospered and became powerful. . . . it was the triumph of the unfit, whose survival demanded the intervention of the state, which the corporations themselves corrupted.’’

The phrase “too big to fail’’ irked most Americans when we heard it used to explain why taxpayers had to pay for the greed and incompetence of Wall Street in the early 2000s. “What were the results of a world dominated by large, inept, but powerful failures whose influence could not be avoided?’’ White asks. In “Railroaded,’’ he provides answers to the 19th-century version of the same problem that plagues us today. Yet here we are again.

Buzzy Jackson is the author of “Shaking the Family Tree: Blue Bloods, Black Sheep, and Other Obsessions of an Accidental Genealogist.’’ E-mail her at

RAILROADED: The Transcontinentals and the Making of Modern America
By Richard White
Norton, 660 pp., illustrated, $35