How the State Got Railroaded | Eastern North Carolina Now

    Publisher's note: This article appeared on John Hood's daily column in the Carolina Journal, which, because of Author / Publisher Hood, is linked to the John Locke Foundation.

    RALEIGH     If you want a better understanding of why politicians do what they do, you have to look underneath the surface. You can't just accept what they say, or the earliest and most superficial account of their actions. You have to probe deeper.

    For example, if you look only at the surface of the practice of occupational licensing, you might come to the conclusion that the state regulates cosmetologists, appraisers, auctioneers, locksmiths, and the like in order to protect consumers. But the more you study the matter, the more it becomes clear that occupational licensure is usually the result of lobbying by the industries themselves, not by consumers, in order to exclude potential competitors and thus boost the incomes of those already in the business.

    While doing some research on the history of two-party competition in North Carolina, I recently finished reading a book on antebellum politics that gave me a deeper understanding of one of the biggest state controversies of the 19th century: the creation of the state-funded North Carolina Railroad.

    Chartered in 1849, the North Carolina Railroad wasn't the first railroad line in the state. It wasn't even the first railroad to receive taxpayer subsidy, and to generate political controversy as a result. In the early 1830s, business interests in Wilmington wanted to build a railroad to connect its port with Raleigh, the state capital and a growing commercial center. In 1834 they convinced the state legislature to charter a new corporation, the Wilmington and Raleigh Railroad, so they could begin raising private funds for the venture.

    However, as Rutgers University scholar Thomas Jeffrey relates in his book State Parties and National Politics: North Carolina, 1815-1861, Raleigh business leaders weren't interested in the line to Wilmington. They wanted to build their own railroad north to connect with the larger port at Norfolk and the lucrative markets of Richmond and Petersburg. They got their charter for the Raleigh & Gaston Railroad in 1835. Legislators from the southeast then had the Wilmington line rechartered as the Wilmington & Weldon Railroad, which would now stretch up the coastal plain and make its own connection to the Virginia rail system. Kicking a bit of dirt in the eyes of the Raleigh crowd, the Wilmingtonians even convinced lawmakers to make state government a minority investor in the enterprise, while blocking the state from purchasing stock in the Raleigh & Gaston.

    North Carolina was hardly the only state to go into the railroad business during the 1830s. Thanks in part to high federal tariffs and in part to speculation in western lands fueled by monetary inflation in Britain, the federal treasury was flush with cash. Most Democrats wanted to use the federal surplus to cut taxes, primarily tariffs. Most Whigs, who favored protectionist tariffs, wanted to distribute the surplus to states to fund railroads and canals. The Whigs prevailed, at least at first, demonstrating the timeless appeal of "free money from Washington." Many state politicians also believed that using their own state surpluses to buy railroad stock or guarantee railroad bonds was a risk-free way of stimulating growth and development. Fiscal conservatives, usually but not always Democrats, expressed concern about these ideas but were outvoted.

    Then the bubble burst in 1837. Over the next several years, many railroads proved to be financial fiascoes, including the two main projects in North Carolina. The Wilmington & Weldon struggled for years to cover its costs, and didn't eke out a profit until the 1850s. The Raleigh & Gaston faced even bigger problems. After the 1837 crash, it ran out of funds. Powerful backers then convinced the legislature to guarantee two bond issues that would end up paying for 50 percent of the railroad.

    When the trains began running in 1840, there wasn't nearly enough revenue to cover expenses and debt service. The fiscal conservatives were vindicated. Thanks in part to the political blowback, Democrats recaptured the legislature from the Whigs in 1842. Then the Raleigh & Gaston defaulted on its bonds, so the state had to step in to cover the railroad's debt service. It amounted to more than a fifth of North Carolina's state budget in 1843 and 1844. Demonstrating that politicians really have no shame, Whigs then ran successfully against Democrats in the legislative and gubernatorial elections of 1844 by blaming them for the state's fiscal woes.

    In most states, the cautionary tales of the 1830s and early 1840s convinced legislators and the public that government railroad subsidies were a bad idea. Some states even amended their constitutions to forbid the practice. But in North Carolina, there were still powerful interests who sought government aid for new projects. During the 1848-49 session, a mostly Whig coalition in the legislature chartered a new line, the North Carolina Railroad, to run east-west from Goldsboro to Salisbury, and eventually on to Charlotte. The idea was to connect the growing Piedmont economy with the port at Wilmington (via the Wilmington & Weldon) and a new port to be developed near New Bern. John Motley Morehead, a former governor and Whig fixer, was a key force behind the project and would serve as the first president of the North Carolina Railroad. He and his partners also stood to make a great deal of money by developing the new port at what would become Morehead City.

    The North Carolina Railroad project was hardly a slam dunk, however. For one thing, Piedmont business interests had their own idea. They wanted to build a north-south railroad to connect directly with the Virginia network running to Norfolk and the South Carolina network running to Charleston. While the North Carolina Railroad would be funded mostly by state government - two-thirds of the cost at first, eventually three-quarters - the proposed Danville-Charlotte line would be entirely private. All it needed was a charter.

    It never got one. Easterners of both parties blocked the Danville-Charlotte charter and rallied to the North Carolina Railroad project to make sure the Piedmont couldn't bypass the East's merchants and ports. Furthermore, Morehead and his legislative allies adjusted the path of the North Carolina Railroad through the Piedmont so it would go through the hometowns of key legislators they needed to sway. In the end, the state-funded North Carolina Railroad passed the state house -- but only by a single vote.

    Whigs and easterners had gotten what they wanted. But it wasn't what most North Carolinians wanted. In 1850, voters reacted to the North Carolina Railroad controversy by electing the state's first Democratic governor in 14 years and put Democrats back in charge of the legislature. While the Whigs were to enjoy somewhat of a comeback later in the decade, it was due in part to their willingness, yet again, to run against tax hikes that occurred during Democratic rule but had been caused by the railroad subsidies and other policies previously supported predominantly by Whigs.

    Was it all worth it? The conventional wisdom within North Carolina is that the North Carolina Railroad was critical to the state's economic development. This is a characteristically parochial claim. Most states, including most Southern states, didn't follow North Carolina's lead. Instead, they let private companies build out their rail networks with private funds. And they did just fine. During the 1840s and 1850s, as American rail mileage grew by a factor of 10 and railroads truly became a national transportation network, most of the needed capital came from private investors. Only one-quarter of pre-Civil War investment in U.S. railroads came from government, and much of that occurred before 1840.

    Decades of modern scholarship about transportation and economic growth during the 19th century have demonstrated that government railroad subsidies were rarely useful and often counterproductive. One 2001 study examined whether American states such as New York and Michigan with constitutional prohibitions against government investment in railroads ended up with less-extensive rail networks than states such as North Carolina that allowed government investment. After adjusting for population, the study found that non-subsidy states produced at least as much railway mileage during the period as subsidy states did. The author concluded that "state enterprise mostly crowded out private enterprise" in railroad development. One of the most-influential economic historians of the 19th century, Albert Fishlow, had drawn a similar lesson decades earlier. In his seminal 1965 work American Railroads, Fishlow concluded that to the extent governments subsidized the industry, their efforts mostly led "to excess and wasteful construction."

    Naturally, defenders of the North Carolina Railroad tried to characterize their critics as shortsighted fools who didn't favor economic development. Josiah Bridges, a Franklin County Democrat, defended his unsuccessful 1850 attempt to rework the railroad's charter this way: "I am as much in favor of internal improvement as any man here, provided the system be conducted by individual enterprise. But ... when the people are to be taxed to accomplish any system the benefits of which are not, and cannot be, equally distributed throughout the whole state, I feel bound to record my vote against it."

    As the abortive attempt to charter the Danville-Charlotte line through the Piedmont shows, by the 1850s railroads had become a viable enterprise that no longer lacked for private investment. What the North Carolina Railroad had to offer was profits for political insiders, pork for lawmakers, and guaranteed business for eastern merchants and ports. It was a successful manipulation of the legislative process to serve special interests at the expense of the common good.

    Now, consider current political controversies in Raleigh. We have some auto dealers trying to block competition from Tesla. We have some auto insurers with large market shares trying to block competition from others. We have repeated schemes to claim "free money from Washington" and offer a variety of subsidies and carve-out to politically favored companies or industries.

    History is instructive.