Should Government Build the Railroads?
How Michigan's Foray into Public Transportation Networks Caused an Economic Collapse in the State
JUNE 01, 1998 by BURTON FOLSOM
On July 12, 1831, President Andrew Jackson, who was no prankster, did something that made many people laugh, some curse, and others rub their eyes in disbelief. He appointed 19-year-old Stevens T. Mason to be secretary and acting governor of the Michigan Territory.
Granted, Mason was a very intelligent teenager and his family was nationally prominent. But surely, his critics wondered, this was the worst case of political patronage ever seen. During the next ten years, however, the youthful Mason would often vindicate Jackson’s judgment. Mason went from acting governor to elected governor. He plotted the strategy that brought Michigan into the Union, and he made deals that defined Michigan’s boundaries on two peninsulas. Unfortunately, he also launched a gigantic scheme of state-run railroads and canals that almost bankrupted the state. As a result, Michigan voters went to the polls en masse to make their state a haven for free enterprise for the rest of the century.
The Mason story begins not in Michigan, but in New York, along a remarkable ditch that was dug in the 1820s. The Erie Canal, an astonishing achievement in engineering, had a big impact on American thinking. Here we had a canal 364 miles long that connected the Great Lakes with the Atlantic coast—and it was built not by entrepreneurs but by the state of New York. Suddenly New York City could trade with farms and cities throughout the midwest. Profits from tolls flowed into the state, and the whole Great Lakes region was open to settlement and trade.
Shortly after 1825, tens of thousands of New Yorkers and New Englanders filtered into Michigan via the Erie Canal. Governor Mason himself used the Erie Canal eagerly when he had to go to Washington to see President Jackson. Almost everyone in Michigan gushed with praise for this new canal, which brought them immigrants and took their exports. The message seemed obvious: states that want to get ahead need active governments to tax their citizens to build a transportation network.
To compete with New York, for example, Pennsylvania spent $14.6 million on its Main Line Canal from Philadelphia to Pittsburgh. Maryland and Massachusetts joined in the rush with a variety of state-supported projects. Illinois and Indiana began elaborate canal networks in 1837, just when Michigan entered the Union. This was when railroads were being built, and some states began to lay track and buy locomotives.
The State as Creator
To Mason this was all exhilarating. Maybe the traditional theory of limited government was wrong. Maybe states could be creators, at least in the area of transportation. And after all, it was state governments, not the one in Washington, that were building these canals.
Even as territorial governor, Mason urged Michigan to lay the foundation for the state to build internal improvements. When delegates met in 1835 to write the Michigan constitution, they—with Mason’s encouragement—wrote the following into law:
Internal improvements shall be encouraged by the government of this state; and it shall be the duty of the legislature, as soon as may be, to make provisions by law for ascertaining the proper objects of improvement, in relation to [roads], Canals, and navigable waters. . . .
In other words, Michigan’s constitution almost required the state to fund internal improvements.
After this constitution was adopted, Mason publicly supported an activist state government. “The spirit and enterprise which has arisen among our citizens, if fostered and encouraged by the State, cannot fail to lead to lasting prosperity,” Mason said. By 1837, three weeks before Michigan entered the Union, Mason was more urgent: “The period has arrived when Michigan can no longer, without detriment to her standing and importance as a state, delay the action necessary for the development of her vast resources and wealth.” He was also optimistic: “we cannot fail soon to reach that high destiny which awaits us. I . . . demand immediate legislative action.”
With Mason leading the cheers, the legislature met and almost unanimously passed an elaborate internal improvements bill. Democrats and Whigs alike joined in the public support for it. When the alternate strategy of private ownership came up, Mason recommended that the canals and railroads “should never be beyond at least the partial control of the state.” “Extortion from the public” was what Mason called one bill to charter a private railroad. Most Michiganians seemed to agree. The Detroit Daily Advertiser noted that “Dewitt Clinton . . . built the [Erie] Canal with the funds of the state. What would be thought of the policy of surrendering that great work to the control of a private corporation[?]”
The example of the Erie Canal had become the ace that trumped all opposing arguments. And if one state subsidy was good, two must be better, and three better yet. Michiganians were so confident that state projects would flourish that they promised to build two railroads from Lake Erie to Lake Michigan, and a couple of major canals across the state as well.
Bad Luck, Bad Judgment
Mason thought the state should spend $5 million to build these projects. Actually, that was just start-up money. As soon as the anticipated tolls started pouring in—as happened with the Erie Canal—the state could then build more. The legislature approved the $5 million. Then the legislature authorized the governor to negotiate a $5 million loan with the lender of his choice under the best terms he could get, as long as he didn’t exceed 5¼ percent. The state, in this arrangement, would issue bonds for the $5 million and pay them back as tolls came in from the railroads and canals.
Bad luck was the first problem to strike. The national economy went into a tailspin—the Panic of 1837—and capital was hard to borrow. Then came distractions. While in New York to talk with investors and study the bond market, Mason became sidetracked by Julia Phelps, the daughter of a wealthy leather merchant, Thaddeus Phelps. Mason courted and married her in 1838.
Then came bad judgment. Businesses were failing because of the panic, and most sound investors wanted more than 5¼ percent for their money. Mason finally persuaded the officers of the Morris Canal and Banking Company, a reputable firm, to buy the Michigan bonds. They promised to pay him the $5 million in regular $250,000 installments over several years. Mason gave them the bonds and went back to Michigan with their promise. The Morris Company turned most of the bonds over to the Pennsylvania Bank of the United States, which then sent them to Europe as collateral for its own investments. Within three years, both the Morris Company and the Pennsylvania Bank went broke, leaving Michigan with a $5 million debt scattered among European investors.
The Clinton-Kalamazoo Canal
An even greater disaster were the projects Michigan built. First was a canal that was to begin in Clinton Township near Detroit and extend 216 miles west to Kalamazoo. The Clinton-Kalamazoo Canal began with high hopes and much fanfare. Mason broke ground in Mt. Clemens in 1838 to celebrate the start of digging. Bands, parades, speeches, and a 13-gun salute commemorated the occasion. Then came reality. The Board of Internal Improvements, which Mason appointed to supervise the projects, hired different contractors for each mile of the canal, and these contractors each had different ideas on how to build a canal. One thing they all did wrong was to make the canal only 20 feet wide and four feet deep—too shallow for heavy freight and too narrow for easy passing.
After seven years and only 16 miles of digging, the ledger for the unfinished canal read: “Expenses $350,000, Toll Receipts $90.32.” With funding scarce, the board decided sometime around 1843 to cut its losses, abandon the canal, and focus on the two railroads. When construction on the canal stopped, some workers went unpaid and they stole materials from the three locks on the canal. Soon even the completed parts of the canal were ruined.
The Michigan Central Railroad
The two railroads also had problems. The Michigan Central was to go from Detroit west through Ann Arbor, Jackson, and Kalamazoo and on to St. Joseph on Lake Michigan. Boats at St. Joseph could then take freight or passengers to Chicago and back. The route went through prosperous wheat farms and the state’s larger cities, but poor construction and management of the road drained most of its profits each year. The Central was built with strap-iron rails, which consisted of thin strips of iron strapped onto wooden rails. These rails were too fragile to carry heavy loads. Rather than switch to the more expensive and durable T-rails, the Board of Internal Improvements chose to run regular heavy shipments over the existing tracks and repair them frequently. Not only was this practice dangerous, it was more costly to the state in the long run.
Robert Parks, who wrote a detailed book on Michigan’s railroads, found a deplorable situation on the Central:
[O]verloaded locomotives were run at twice the recommended safe speed. Under the strain of continuous operation and jarring impact of high speed on strap-iron rails, locomotives and cars were shaken to pieces, and the cost of operation mounted dramatically. Rails were broken and timbers crushed under the heavy loads bouncing over their surface.
By 1846, the Central had been extended only to Kalamazoo. It had technically been profitable each year, but did not earn enough to pay for needed repairs and new rails.
The Michigan Southern
The second railroad, the Michigan Southern, was to parallel the Central in the southern tier of counties from Monroe to New Buffalo. Financially, the Southern was a stunning failure. It had the same problem as the Central, with heavy loads on strap-iron rails. What’s worse, the Southern was built poorly: the roadbed was shaky and the curves too sharp for locomotives. Monroe, on Lake Erie, proved to be too shallow a port for heavy freight to enter or exit. Also, the towns west of Monroe were too small to send much traffic on the Southern. By 1846, the road had only reached Hillsdale, about half-way across the state. It had cost over $1.2 million to build that far and its earnings were small. The road did little to move goods or people across the state; it drained capital that could have been used more wisely.
Michigan spent almost $4 million on the Clinton-Kalamazoo Canal, the Michigan Central, and the Michigan Southern. The state spent about $70,000 surveying the Michigan Northern Railroad, from Port Huron to Lake Michigan, before abandoning it. It also spent $47,000 clearing the route for a canal and turnpike near Saginaw. Officials soon quit the project, and the materials “either rotted or were expropriated by local residents.”
Many of these problems occurred after Mason’s terms as governor, but he received most of the blame because he had touted the projects and signed the loan. In 1837, he had narrowly won re-election, but in 1839 his Whig critics were loud and brutal. Mason chose not to seek a third term. By that year he had begun to consider if the problems with the projects were more than just bad luck or poor management. Maybe the state should never have drifted into economic development. In Mason’s final address as governor, he said:
[T]he error, if error there is, was the emanation of that false spirit of the age, which forced states, as well as individuals, to over-action and extended projects. If Michigan has overtasked her energies and resources, she stands not alone, but has fallen into that fatal policy, which has involved in almost unparalleled embarrassments so many of her sister states. Now, however, the period has arrived, when a corrective should be applied to the dangers which seem to surround her.
A “false spirit of the age,” Mason said, may have moved states into the “fatal policy” of funding state projects. Michigan had too many railroads and canals and too few people to pay for them. But, as Mason had begun to realize, in a state-supported system this result would have been hard to avoid. The funding must come through the legislature, and the legislators naturally wanted projects in their districts. Jobs and markets were at stake. Some historians have suggested that if the Michigan Central had been the only project built, the strategy of state funding might have worked. But this was politically impossible. The legislators in the towns along the Central—Detroit, Ann Arbor, and Kalamazoo—needed votes from elsewhere to have their railroads built. The price for these votes was a commitment to build canals in Mt. Clemens and Saginaw and a railroad in Monroe and Hillsdale.
Mason actually saw this problem early and tried to stop it by centralizing power in the Board of Internal Improvements. The board’s decisions, however, proved to be just as politically motivated as the legislature’s. Many legislators pressured (and possibly bribed) members and some secretly made money from projects.
The story of Levi Humphrey is a case in point. Mason appointed Humphrey, a key Democrat in the state, to the board. When Humphrey took bids for constructing the Michigan Southern, he manipulated the results to assure that his friends in the firm of Cole and Clark won the contracts. Cole and Clark then charged three to four times the market price for supplies. When the complaints reached the legislature, Cole and Clark used some of their profits to bribe witnesses. The Whigs complained loudly, but when they won the governorship in 1839, they did not do much better. In 1840, the board overspent its budget and covered it by falsifying its records.
The problem was not just corruption; it was human nature. Officials did not spend state money as wisely as they would have spent their own. If Mason, for example, had been a wealthy industrialist, would he have invested $5 million of his own money with bankers he hardly knew during a national depression? Would any of the legislators have done so?
The spending policies of the board raise similar questions. In 1838, for example, it had a bridge built over the River Rouge. The problem was that the bridge they decided to build could not carry heavy freight. The Central, not the builders, lost almost $10,000 that year hauling passengers and freight around the bridge. Since no individual owned the bridge, no one had a direct financial stake in building it well—or even protecting it. The next year an arsonist destroyed the bridge.
In another example, the board ordered iron spikes for the Michigan Southern in 1841. The contractors, however, only put one spike in every other hole along the track. They stole the rest of the spikes and, when questioned, they persuaded the board that the unused spikes were defective. The board did not own the spikes or even have to ride on the rickety railroad that resulted; they simply believed the contractors and left the track partly unspiked.
The Boy Governor, no longer a boy, left office in 1840 at age 28. He had served almost nine years as secretary, acting governor, and elected governor. During this time, he had focused so intently on administration that he had left office almost penniless. He decided to leave Michigan for New York City, his wife’s home, and make his fortune there in law and business. As he entered Buffalo and made his way across the Erie Canal to New York City, he may have wondered why the experiment with an active government worked so much better in New York than in Michigan. During the next two years, however, if Mason studied local politics, he saw New York repeat Michigan’s experience. State legislators in districts outside the Erie Canal area had won eight new canal projects at a cost of $9.4 million. These new canals failed miserably and caused an economic collapse in the state, forcing eight banks to close and new taxes to be imposed.
Pennsylvanians did even worse. They spent $14.6 million on a risky canal from Philadelphia to Pittsburgh. The large losses on it each year helped force the state into default on its bonds. Several other states also defaulted on their internal improvement bonds, which damaged U.S. credit abroad and made Michigan look better. How much attention Mason paid to this we don’t know. He died of scarlet fever on January 5, 1843, at age 31.
Mason was gone, but his “false spirit of the age” speech in 1840 had reopened the debate in Michigan on the role of the state in economic development. Right from the start, the government lost money building and operating the state’s system of canals and railroads. William Woodbridge, the governor who followed Mason, first suggested selling the railroads to entrepreneurs and getting government out of the internal improvements business. At first, many resisted the idea. Legislators wanted railroads in their districts at taxpayer expense; they worried that entrepreneurs would build them elsewhere.
“The Errors of Our Policy . . .”
As the number of blunders on the projects began to multiply, however, more pressure came for the state to privatize. John Barry, who was elected governor after Woodbridge, echoed Mason and talked about “the spirit of the times unfortunately [becoming] the governing policy of states.” Barry argued that “in extraordinary cases only . . . should a state undertake the construction of public works.” He continued: “Seeing now the errors of our policy and the evils resulting from a departure from correct principle, let us with the least possible delay correct the one by a return to the other.”
Thomas Cooley, Michigan’s most prominent lawyer in the 1800s, observed firsthand the way the state ran its railroads. In a history of the state, he wrote, “Doubts were arising in the minds of the people whether the state had been wise in undertaking the construction and management” of internal improvements. “These doubts soon matured into a settled conviction that the management of railroads was in its nature essentially a private business, and ought to be in the hands of individuals. By common consent it came to be considered that the state in entering upon these works had made a serious mistake.”
By 1846 Governor Alpheus Felch, who had followed Barry, carried the day for privatization. “The business of transporting passengers and freight by railroad is clearly not within the ordinary design of state government,” Felch observed. The legislature finally agreed and voted to sell the state’s public works in 1846. The state took bids and sold the Central for $2 million and the Southern for $500,000. As a result, Michigan recovered 90 percent of its investment in the Central and 44 percent in the Southern. If the losses on the canals and other projects are included, the state—through this sale—recaptured about 55 percent of its total investment in internal improvements. This decision helped the state cut its bureaucracy and also avoid bankruptcy.
As a condition of the sale, the new railroad owners had to agree to rebuild both lines with quality rails and extend them to Lake Michigan within three years. It had taken the state nine years to move the lines not much more than half-way across the state; the new entrepreneurs had to rebuild that part and complete the rest in just three years. When they did so, while keeping rates competitive, Michiganians knew they had learned something. They moved quickly to write this discovery into law.
A New Constitution
The next year, 1850, Michigan held a state constitutional convention. The proper role of government was one of the issues. The 1835 constitution, which mandated government support for internal improvements, was changed to include this: “The State shall not subscribe to or be interested in the stock of any company, association, or corporation.” Further, “the state shall not be a party to or interested in any work of internal improvement, nor engaged in carrying on any such work” except for the donation of land.
The public debate that followed showed much support for the new constitution. “Looking at it as a whole,” said the Grand Rapids Enquirer, “we honestly believe that if it had been adopted at the organization of our State Government, our State would now be out of debt, prosperous, and flourishing.” In November 1850, the voters of Michigan overwhelmingly accepted the new constitution. Michigan had learned from its history. The building of railroads and the development of resources—lumber, copper, and chemicals—would be done by private enterprise.