Leland H. Jenks

Railroads as an Economic Force in American Development

Any attempt to discuss the way in which railroads have promoted the rise of the American economy must assume some theory of economic evolution. The following analysis is based upon Schumpeters theory of innovations. Briefly this theory holds that economic evolution in capitalistic society is started by innovation in some production function, that is, by new combinations of the factors in the economic process. These innovations may center in new commodities or new services, new types of machinery, new forms of organization, new firms, new resources, or new areas. As Schumpeter makes clear, this is not a general theory of economic, much less of social, change. Innovation is an internal factor operating within a given economic system while the system is also affected by external factors (many of them sociological) and by growth (which means, substantially, changes in population and in the sum total of savings made by individuals and firms). These sets of factors interact in economic change. “The changes in the economic process brought about by innovation, together with all their effects, and the response to them by the economic system†constitute economic evolution for Schumpeter.

Early History of A Railway Organization

The more deeply scholars probe the evolution of management methods and structure, the earlier are antecedents of modern practice detected. The 1882 report on the Pennsylvania Railroad organization exhibits a highly refined conceptualization of big business administration and must stand as a significant milepost in the history of management. Here are to be found many of the ideas and even some of the terminology to which much more recent birth dates have hitherto been ascribed.

Britain and American Railway Development

Our task here is to inquire into the relations between two familiar sets of phenomena—the economic development of the Western Hemisphere and the involvement of British investors, financiers, engineers, contractors, and financial groups in railways in that area. As a matter of convenience we shall look chiefly at the United States and Argentina, and at the time span of three quarters of a century preceding the First World War. It is no secret that during that period both countries underwent rapid development, whose contours included such matters as the effective occupation of new areas of vast extent; the growth of population, partly fed by immigration; the effective application of technological improvements to the exploitation of natural resources; an increasing complexity of the division of labor; and a rise in productivity and real income per capita, participated in by large segments of the population. During the same period, the Western Hemisphere was normally the outlet for from 40 to 60 per cent of British foreign investment, the United States and the Argentine being two of the countries chiefly affected. We are familiar with estimates that British investments in the United States, on the eve of the First World War, amounted to over 4 billion dollars, approximately 3 billion of which were in railway securities, and that something like half as much was invested in Argentina, with a somewhat smaller percentage directly in rails.

British Experience with Foreign Investments

During the century which culminated in the First World War, Great Britain was the principal source of capital supply for countries that drew upon foreign resources. Until 1940 her claims as creditor remained substantially greater than those of any other nation. Investments grossing from forty to fifty billion dollars have been made in the course of her virtually continuous process of capital outlay abroad. The outstanding total in 1914 amounted to twenty billion dollars, yielding an annual income of about one billion, which was nearly one tenth of the national income of the United Kingdom. This was the result of a process of accumulation which reached its greatest intensity during the periods 1868–1875, 1884–1893, and 1905–1912, when annual public issues of foreign and colonial securities averaged 6 or 7 per cent of those outstanding. During the latter period, at least, more than half of all British investment of new capital was being made abroad.