[HN Gopher] One robber baron's gamble on railroads
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One robber baron's gamble on railroads
Author : samclemens
Score : 53 points
Date : 2023-09-24 02:24 UTC (20 hours ago)
(HTM) web link (www.smithsonianmag.com)
(TXT) w3m dump (www.smithsonianmag.com)
| costco wrote:
| This is my favorite period of US history to read about.
|
| > "As a result, the rise of the railroads inspired entirely new
| forms of corporate securities and governance. They also yielded
| stupendous levels of fraud and chicanery, wrote business
| historian Alfred D. Chandler Jr. in his 1965 book, The Railroads:
| The Nation's First Big Business. Railroad owners often made more
| money on construction, land and mineral rights than they did on
| operating the tracks themselves."
|
| To elaborate:
|
| - The people who ran the railroads would also own the companies
| constructing the railroads. They would charge ridiculous fees and
| profit at the expense of shareholders and creditors when they
| inevitably went bankrupt. In the Credit Mobilier case, tens of
| millions of (1860) dollars in government money given to the Union
| Pacific ended up in the hands of the construction company Credit
| Mobilier because construction costs were inflated by a factor of
| 2. Of course, some congressman also secretly had stakes in Credit
| Mobilier. The looting at the Union Pacific puts PDVSA to shame!
|
| - Land grant gamesmanship: "Land grants to railroads were made in
| broad belts along the proposed route. Within these belts the
| railroads were allowed to choose alternate mile-square sections
| in checkerboard fashion. But until they determined the precise
| location of their tracks and decided which sections were the
| choicest selections, the railroads withheld all the land from
| other users"
|
| - The fact that the people running the railroads were often
| promoters and had none of their own money at stake resulted in
| highly inefficient routes being built. They didn't care because
| they got paid either way, and in fact preferred more construction
| even if it made the company less profitable.
|
| - Routinely diluting investors to nothing.
|
| - Bankruptcy plans that favored shareholders and directors over
| creditors (JP Morgan's restructuring plan for the Erie).
|
| The "Erie War" is a combination of a lot of these that is just
| insane: https://en.wikipedia.org/wiki/Erie_War
|
| It's also worth noting that while there were plenty of
| opportunists and promoters there were people who were interested
| in actually building economical railroads like Vanderbilt and the
| lesser known Ned Harriman.
| javitury wrote:
| For those into board games, financial misconduct of early
| american railroad companies inspired the renown game "1830: The
| Game of Railroads and Robber Barons" and the 18xx game series.
| ssss11 wrote:
| Railroads' early days is what I think of in this current early
| days of crypto/blockchain. So many scams, but the innovation is
| there waiting to be utilised well.
|
| "As a result, the rise of the railroads inspired entirely new
| forms of corporate securities and governance. They also yielded
| stupendous levels of fraud and chicanery, wrote business
| historian Alfred D. Chandler Jr. in his 1965 book, The Railroads:
| The Nation's First Big Business"
| dotcoma wrote:
| Would love to better understand the connection between
| railroads and cryptocurrencies, if possible.
|
| Railroads, scams aside, were extremely important for the
| economy for at least 50 years after this scam.
|
| Same with crypto? Really? And NFTs, too?
| legutierr wrote:
| It's relevant that the first railroad bubbles took place
| several decades before the events described in the article.
| Sometimes it takes a long time for capital-intensive
| technologies to be fully deployed, and for economic benefits
| to be fully realized.
|
| In twenty years the use of public blockchains in everyday
| finance and trade will be mundane. Former crypto skeptics
| will explain that their earlier complaints pertained only to
| the crazy things happening in 2020, not the boring & ordinary
| things that crypto is used for in 2040. And meanwhile, nearly
| everything "financial" involving counter-parties will happen
| on-chain.
|
| Why? Because public blockchains eliminate counter-party risk
| for a large number of transactions, provide unparalleled
| transparency, and give anyone with an internet connection
| access to global financial markets, enfranchising billions of
| people who are otherwise locked out due to unsatisfactory
| local conditions. Blockchain tech will make developed
| economies more efficient, and will accelerate development
| world-wide.
|
| If you don't agree that public blockchains actually do
| anything useful, then you'll probably object to the railroad
| analogy. But if you see value in blockchains, then there are
| clear parallels:
|
| * Initial cost of the build-out being funded by early
| investors who might not be around to realize the long-term
| benefits of the technology.
|
| * Speculative energy attracting scammers alongside legitimate
| operators.
|
| * Long-term benefits not being obvious after the first wave
| of investment dies down.
|
| * The true value of the technology only being realized when
| network effects are fully realized, years after the
| technology's introduction.
| no_wizard wrote:
| > Because blockchains eliminate counter-party risk for a
| large number of transactions, provide unparalleled
| transparency, and give anyone with an internet connection
| access to global financial markets, enfranchising billions
| of people who are otherwise locked out due to
| unsatisfactory local conditions. Blockchain tech will make
| developed economies more efficient, and will accelerate
| development world-wide
|
| Saying this doesn't make it self evident. What exact
| counter party risk is eliminated by blockchain technology?
| I know there's alot of hype around the public ledger, but
| what transparency does it provide beyond that? It's not
| like I audit the entire trail of any arbitrary
| transactions, which is usually where things like that come
| into play.
|
| What about fraud?
|
| Also, how's blockchain better than existing and ongoing
| open banking projects? They're enfranchising people
| _today_. Look at all the good micro loans have done in
| developing nations for instance
| legutierr wrote:
| > What exact counter party risk is eliminated by
| blockchain technology?
|
| Some specific examples currently available:
|
| * Atomic swaps, where traded assets are immediately moved
| between accounts upon execution of the trade, eliminate
| the possibility that settlement will not complete.
|
| * Real-time commerce, where merchants accept payments in
| a format that can immediately be turned around and spent,
| without waiting for reimbursement from third-party
| networks.
|
| * Loans backed by on-chain collateral, such that default
| triggers immediate transfer of collateral, eliminates the
| risk that collateral may not be obtainable upon default,
| or that the value of collateral may fall too far before
| the loan is liquidated.
|
| > It's not like I audit the entire trail of any arbitrary
| transactions, which is usually where things like that
| come into play.
|
| Open databases can be digested and analyzed by open-
| source tools, and by trusted independent third-parties.
| Closed databases cannot be analyzed by anyone except for
| the database owner and government authorities. Some
| government authorities are trustworthy, others are under-
| resourced, incompetent or corrupt. Even if you personally
| won't read the full history, you benefit from other
| people being able to do so.
|
| > Also, how's blockchain better than existing and ongoing
| open banking projects? They're enfranchising people
| today.
|
| Problems can have multiple good solutions! Still, open
| API access is different from open access to underlying
| data and algorithms. Open APIs and blockchains can co-
| exist and benefit from each other.
|
| > What about fraud?
|
| Fraud is a complex topic. The traditional financial
| system has seen lots of fraud over the years (think about
| what we witnessed in 2008). Credit card fraud is also a
| rampant problem that is only managed by large financial
| firms heavily surveilling payment networks.
|
| There are fraud vectors that blockchain networks are more
| susceptible to--just like there are other fraud vectors
| that blockchain networks are less susceptible to than
| traditional financial systems.
|
| In my view, the greatest fraud risk in crypto comes from
| the issuance of tokens that are questionable in some way
| --a risk that I think can be eliminated if strong
| controls are implemented regarding the issuance of tokens
| on-chain.
| paulryanrogers wrote:
| Curious what innovation I may be missing in crypto. Can you
| elaborate?
| 300bps wrote:
| Blockchain technology has historically claimed several
| innovations:
|
| 1. Decentralized currency
|
| 2. Immutable ledger
|
| 3. Transparent transactions
|
| 4. Streamlined transactions (no T+2 or T+1 settlement)
|
| 5. Borderless transactions (between people in other
| countries)
|
| 6. Microtransactions (transactions a tiny fraction of a cent)
|
| 7. Smart contracts
|
| These are innovations, the question is do they solve real
| world problems without creating more? For example,
| decentralization is great until you lose your keys or the
| government wants to shut down money laundering.
|
| I have yet to see a real world benefit from blockchain /
| cryptocurrency technology. web3 is the closest to reality but
| I feel like it goes against human nature and the concept of
| decision fatigue. I don't want Netflix to prompt me, "Want to
| watch the next episode for 4 cents?"
| harry8 wrote:
| > I don't want Netflix to prompt me, "Want to watch the
| next episode for 4 cents?"
|
| Neither does netflix. Vast amounts of under-used
| subscriptions paid at a full rate would suddenly get a huge
| discount. At the other end they wouldn't be getting much
| more revenue out of those that watch more than average
| because they'd likely cut down.
|
| There must be plenty of ways of making a microtransaction
| in ways customers don't mind, many of those haven't been
| invented yet. I have no idea why blockchain is necessary
| for microtransactions nor why we all have to pay a
| microtransaction sized spending tax to the owners of the
| payment systems every time we spend our money now. Will
| blockchain fix this? I have my doubts about blockchain but
| damn, someone should. It seems popular amongst the powerful
| that they can cancel someone's ability to raise funds on
| the basis of an accusation alone. Most people hate that
| idea as stated, except for "$that_guy who I've just heard
| of and is clearly a creep so that's fine." Who is it today?
| How did that work out in the past? Maybe it will be more
| like justice this time than before? Who knows?
| pests wrote:
| Where are the innovations? Every bullet point has other
| solutions or a very major asterisk that is always
| conveniently left off.
|
| I've been a big proponent of crypto over the years and
| think its pretty cool technology. I just can't think of any
| problem it solves that isn't better solved by some other
| solution.
| legutierr wrote:
| Is there a better solution for the performance of atomic
| swaps between antagonistic traders each operating in a
| different legal jurisdiction?
| paulryanrogers wrote:
| An antagonist seller can still fail to deliver after
| accepting payment. Unless what's being sold is digital
| and payment embeds flawlessly written smart contracts
| _and_ no one has 51% of mining.
| nawgz wrote:
| Can you elucidate me on how you made that connection? I only
| see the point that both lead to scams, which... Is not very
| insightful.
|
| Railroads are a physical device for logistical transportation.
| This has a very obvious value prop.
|
| Crypto is an "alternative" "financial" "system", which is
| missing the key components of regulation and trust that back
| all functioning financial systems.
|
| Hard to draw the parallel for me.
| ta8645 wrote:
| > missing the key components of regulation and trust
|
| I thought that those are supposed to be the key components of
| crypto. You trust that it is regulated by mathematics, the
| market, and infrastructure, rather than relying on fiat.
| Retric wrote:
| Mathematics alone doesn't interface with the real world
| thus you get crypto exchanges etc. The crypto ecosystem is
| therefore still built on trust not the blockchain.
| PeterisP wrote:
| The key products of the financial system is not transfer of
| money (which crypto provides) but rather credit (with the
| associated issues of trust and enforcement of settlement
| against someone's will) and payment for goods and services
| (with the associated need for fraud prevention on both
| sides of the deal and reversibility of payments).
| Mathematics cannot provide _that_ kind of trust.
| ajb wrote:
| Article doesn't mention this, but the previous year, 1872, the
| there was a massive financial panic due to equine influenza,
| which brought the transport system to a halt. Which could be a
| good reason for overinvestment in "iron horses"
| simonebrunozzi wrote:
| Tangentially related, but if you're into videogames, the really
| old Sid Meyer's "Railroad Tycoon" was a game that made me so
| curious about these barons, and made me learn a lot about trains
| and the 1800s US.
| mitthrowaway2 wrote:
| If only we could be investing so much in railroads once again!
| hackermatic wrote:
| My perception of the history of long-distance American railroads
| (not ones that were built for a specific task like connecting a
| mine to a market) is that many of them -- maybe even most of them
| -- were failures in their first iteration. After going bankrupt
| and ruining a lot of investors, others bought the assets at fire-
| sale prices, and the opportunity to avoid the massive capital
| outlay of actually building the lines is what made them
| profitable in the long run.
| Gibbon1 wrote:
| The first railroad over the Appalachians bankrupted the first
| two groups of investors. The third attempt managed to run a
| line through and it changed the world. Because unfathomable
| amounts of cheap grain from Ohio appeared on the international
| market.
|
| Big issue with rail is there are huge network effects are
| impossible to price in pure market. Which is why except for the
| US and Britain most countries built state owned rail. Britain
| and the US eventually nationalized or quasi nationalize rail.
| And attempts at privatization seem to fail.
| downrightmike wrote:
| Railroads are critical infrastructure and need to be public. They
| are massively mismanaged, inefficient and that's all on purpose.
| AlgorithmicTime wrote:
| [dead]
| kortilla wrote:
| Yes, if there's one thing government does well, it's managing
| things efficiently.
| AlbertCory wrote:
| > It was like selling to crypto investors today
|
| this is like saying that _electricity_ was like crypto.
|
| Railroads had an undeniable economic value. So did all the
| optical fiber that was laid during the dot-com boom. Eventually
| it got used.
|
| https://www.cnet.com/tech/mobile/is-fiber-optic-construction...
|
| I have fiber to my house now. Crypto, on the other hand, is more
| like 8-track tape. Or laser disks.
| louwrentius wrote:
| Gordon says. "We get crashes on Wall Street about every 20 years,
| because that's how long it takes people to forget what happened
| the last time. A generation of new guys think they're as smart as
| they come, and then it turns out that they're human, like the
| rest of us."
|
| Sounds familiar, just can't put my finger on it.
| cjs_ac wrote:
| Antecedents from the UK include the Railway Mania of the 1840s[0]
| and (to a lesser extent) the Canal Mania of the 1790s to
| 1810s[1].
|
| [0]: https://en.wikipedia.org/wiki/Railway_Mania
|
| [1]: https://en.wikipedia.org/wiki/Canal_Mania
| tuatoru wrote:
| The story of the Newry Canal, the first one, is amazing. Over a
| hundred years from first order to construct, to opening.
|
| Much delay, neglect of oversight, scope creep, fraud,
| misaligned interests and lack of drive. I had no idea Wikipedia
| could tell such good stories!
|
| 1. https://en.wikipedia.org/wiki/Newry_Canal
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