Saturday, December 13, 2008

Bailouts In History: The Railroads and J.J. Hill

Transportation bailouts have been tried before in the U.S. and failed miserably.

During the 19th century, few businesses were considered as vital as the railroads. In a developing country that stretched 3,000 miles wide and over 1,000 miles from North to South with no major highways, cost-effective long-haul transportation was essential. Then, as now, many in the Federal Government decided that if it was essential, it was essential the Feds have a hand in it.

Railroad subsidies were common. Land, capital, and much else was on the table for the asking, provided the right palms were greased, of course. The result: lines started but never finished, route selections made on the basis of politics not potential return, bankruptcy, and endemic corruption.

One entrepreneur, aided by his partners, eschewed government subsidies: James Jerome Hill. Beginning in the 1878 Depression with the purchase of the St. Paul and Pacific Railroad (renamed the Great Northern in 1890), Hill built a transcontinental railroad with all private capital. It was worth $725,000 and had 10 miles of track. By 1885 it had grown to a value of $25 million and tied together half the country. Often laying track at the unheard of rate of a mile per day, by 1893 he reached Seattle, prompting the transformation of that small town into a metropolis.

Granted, he had some advantages over businessmen today. While his competitors tried very hard to put him out of business, the legislative and social environment presented only modest barriers. He had no UAW to contend with. Best of all, unlike the majority of corporate executives today, he genuinely knew how to create and run a business. He didn't become a success the Peter Keating way, by flattery, political correctness, and politicking.

During several economic downturns, Hill's businesses stayed afloat, and even turned modest profits — all with no government handouts. Where no markets existed, he created them. Among many innovations, he bought up thousands of acres of timber land and sold them to Frederick Weyerhauser, starting a huge wood and paper business that continues today. He lowered rates 50% below other railroads.

By contrast, his coddled competitors — with subsidized lines through highly populated areas — went belly up right and left.

It's a pity that today's auto executives and politicians have probably never heard of J.J. Hill and wouldn't approve of him if they did. The lessons his life and work provide are the only thing that could save them and us from the destructive decisions now being made in Washington.

[Hat tip: Gods of the Copybook.]

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