The American railroad network during the early 19th century: private versus public enterprise.

At the founding, the United States were a bunch of experiments in self-government (note the use of the plural). Each state was very much free to determine its own destiny. Many states directed economic development through state enterprises, loan guarantees, and direct subsidies, mostly in banks and in canals and other transportation projects. Almost all of these interventions proved to be failures. These failures forced state governments to raise taxes and sell off their money-losing ventures. In some cases, states were forced into default. Many states then amended their state constitutions to prohibit state enterprises and loan guarantees, and to restrict government borrowing. It was, thus, almost entirely as private enterprise that the railroad network of the country was developed.

Post--New Deal revisionist history correctly tackled the "myth" that the early economy of the United States was characterized by laissez-faire, documenting the role of the states in directing early economic development (e.g., Handlin and Handlin 1969 [1947], Hartz 1968 [1948], Heath 1954, Pierce 1953, and Prumm 1954). Dunlavy (1994: 18-19) summarizes this revisionist history thusly:

The core of the old myth, to be sure, remains unchallenged: throughout the antebellum period, the federal executive remained comparatively weak, while the federal legislature inclined toward stalemate. Precisely because of its peculiar, fractured structure, moreover, the American state does not neatly fit with conventional understanding of an interventionist state. But the cumulative effect is clear: it has become impossible to speak of laissez-faire in the antebellum American context. This revisionist history, while correctly arguing that the country was not founded, ideologically, on laissez-faire, misleadingly argues that the development of the economic potential of the United States was due to, or even helped by, state intervention. The fact is that the state interventions were disasters, and it was from out of those disasters that there came a principled commitment, embodied in amendments to state constitutions, to laissez-faire.

This paper reviews the history of state interventions in banking, canals, and other modes of transportation during the antebellum period, and then looks, econometrically, at the development of the U.S. railroad network. Using state-level data observed decennially, from 1840 to 1860, it finds that the states that spent themselves into debt did not advance the development of their railroad networks, but that those that adopted amendments to their state constitutions restricting borrowing, investment, loan guarantees, and the like did.

As the first half of the 19th century unfolded, almost all of the states of the North became committed to laissez-faire. They opposed state-owned banks and supported balanced budgets and private enterprise. As a result, the North attracted labor and capital and grew in population and industry. Almost all the Southern states, however, remained committed to mixed economies, part slave and part socialistic, with many states having state-owned banks, weak currencies, and liberal debtor-relief laws. Thus, it could be said that, with the growing fear by the South of Northern domination, the antebellum period came to an end.

State Interventions

In the banking industry, state intervention assumed several forms. In the South and the West, many state governments established state government--owned banks (Hawk 1973 [1934]: 352-58). While some of these state banks, such as those of Missouri and South Carolina, conducted themselves on a conservative basis, most proceeded speedily to inflation, corruption, and failure. In 1819, the Bank of the State of Tenness...

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