Derailed?

"Give me snuff, whiskey and Swedes, and I will build a railroad to hell."

So stated railroad baron James J. Hill, a man who exerted unparalleled influence on the swath of land lying between Lake Superior and Puget Sound, America's breadbasket. "Work, hard work, intelligent work, and then more work" was his mantra. In 1852, at the age of 14, Hill was forced to plow a path of economic self-sufficiency due to the death of his father. After four years working as a clerk in Canada, the future millionaire moved to Saint Paul to become the bookkeeper of a steamboat company. Exploiting the lack of steamboat service on the Mississippi during winter months, Hill started providing fuel to local customers like Fort Snelling. Upon accruing market power in the local steamboat industry by age 34 and anthracite coal by 36, the young entrepreneur expanded his scope to the railroads.

A Great Boardgame

In 1873, the tech bubble of the 19th century popped. Lasting for the next four years, the recession was precipitated by the bankruptcy of Jay Cooke and Company. A wealthy Philadelphia speculator, Cooke became overextended by capital investments in the incipient Northern Pacific Railway. Of the country's 364 railroads, 89 went broke. One of those was the Saint Paul and Pacific. Realizing that there was still growth potential in this moribund railway, James J. Hill formed a team of investors and purchased the StP&P. Hill was a careful manager, personally scouting new routes and avoiding government regulation by reinvesting a large percent of the company's profit as capital expenditure and charging it as operating expense.

In direct competition with the Northern Pacific, Hill's railroad had a significant hurdle to surmount. To reach larger markets, it was key to stretch the track across the Rockies to the West Coast. The Nothern Pacific became transcontinental in 1883 at Gold Creek, Montana. For Hill's line to span the Rockies, it needed a low-lying route, of which almost none remained. In 1889, Hill's principal engineer, John F. Stevens, mapped the unexplored Marias Pass in northern Montana, thereby providing a navigable path across the Continental Divide. By 1893, Hill had completed the first transcontinental railroad without public money, renaming it the Great Northern Railway.

In the next decades, the Great Northern survived a string of squeezes. First was the Depression of 1893, where Hill's was the only transcontinental railroad that did not go bankrupt. Second was the battle for the Chicago, Burlington and Quincy, a medium-sized railway that provided lucrative access to Chicago markets. Shares of the Northern Pacific, which owned significant stake in the CB&Q, were quietly being cornered by Edward Harriman and the Union Pacific. When Hill found out about the subterfuge, he directed his friend J.P. Morgan to buy every remaining share of UP stock. Morgan acted so swiftly that overnight, the price of the stock traded at over six times its value of the previous day. The crisis was defused with a compromise, but to prevent another stock raid, Hill placed all of his holdings into the consolidated Northern Securities Company. Simultaneously, Theordore Roosevelt ascended to the presidency, and the Sherman Antitrust Act was quickly implemented to break apart Northern Securities. Although Hill lost control of a centralized company, he continued to make acquisitions until his death in 1916.

The year of the Empire Builder's death, railroads reached peak length in America. Beside brief resurgences due to troop transport in the World Wars, the wholesale emergence of the automobile and airplane doomed passenger travel by rails. Overinvestment, supersaturation of the market with competing firms, mismanagement, and new forms of competition crippled freight transport by rail for most of the 20th century. Railroad historian Richard Saunders writes that, "The real problem was that there were fewer and fewer services that railroads could perform as well as their competitors for which anyone would pay enough for the railroads to make a profit."

Another difficulty for the industry was overzealous regulation. As early as the late 19th century, the Interstate Commerce Commission unsuccessfully regulated railroads in an attempt to prevent local price discrimination. Insteady, according to economist Maury Klein, the Interstate Commerce Act "tried both to prevent monopoly by enforcing competition and to outlaw discrimination. ... [H]owever, a policy designed to preserve competition also perpetuated discriminations." Although the result of Hill's and Harriman's mergers at the turn of the 20th century "came remarkably close to the railroad map that emerged in the 1970s," the efficient conglomerates were quickly dismantled by a distrustful public. In 1920, the Transportation Act forced railroads to maintain or expand mileage to foster competition, although the lessons of the previous decades demonstrated that eliminating service is the best course of action for unsuccessful lines. "The act of 1920 bound [the railroads] in a straightjacket of regulation at precisely the time they fell victim to technological revolution. For seventy years, railroads had dominated the transportation industry because no new forms had risen to challenge them. After 1920, however, several new modes appeared on the scene, and older ones like pipelines and water transport were reinvigorated." With the swift advent of the internal combustion engine and light alloys, railroads suddenly faced unpredicted, intermodal competition.

After World War II, the railroads fell off the cliff. It was a surprising decline, due to the artificial boost the War had provided to the industry. But new competition was taking its toll, and high-value freight and passenger transportation were being gobbled up by trucking and air travel. "The Weeks Committee among others discovered in 1955 what some industry people had been shouting since 1920: the railroads had long since ceased to be a monopoly threat and need not be clamped so rigidly in regulatory irons."

For the next 35 years, the shackles were slowly melted away, culminating in the Staggers Act deregulation of 1980. The majority of railroads died in the process, leaving a small band of powerful, consolidated companies. Along with corporate weight loss came the deactivation of a substantial quantity of the nation's tracks.

During the period of deregulation, Great Northern and Northern Pacific merged into Burlington Northern Santa Fe Railroad, the second largest railroad in the nation, and now the largest by market capitalization. Burlington Northern and four other railroads control 93 percent of the revenue of rail freight transport in the United States.

Historically, the railroads have been treated as cyclical industries by the stock market, meaning that short-term up- and downturns in the economy are reflected in the price of railway stock. Recently, this trend seems to be changing. Secular trends like agriculture and coal now trump cyclical markets. The United States has an insatiable demand for coal, and, if anything, the cheap, alternative fossil fuel hedges the railroads in an economic slump.

Legendary investor Warren Buffett just made a three billion dollar bet in BNSF on the long-term railroad forecast. For decades, railroads have run low returns on capital--the most important railroad statistic, since 40 cents per dollar of railroad earnings are spent on capital investment. For the first time in a long while, railroads are getting a return on invested capital of more than the cost of the capital investment, thereby justifying future investment of earnings. The tracks were laid almost a century ago--now it is time for investors to harvest Hill's fruits.

Another reason to like the rails is because of increased fuel costs. Locomotives are far more fuel efficient than their chief transport competitor, trucks. If the price of gasoline continues to trend upward, railroads will continue to benefit at the expense of trucking by running locomotives as diesel-electric powered.

Finally, the United States has an insatiable demand for cheap foreign goods transported to domestic markets via container ship, truck, and train. With container ships now able to carry 8,500 standard 40-foot containers, each with a capacity of 26,500 kg (29.15 tons), the transportion costs of Asian goods have become substantially minimized. Long-distance intermodal land transportation is exclusively dependent on rails, and 15 percent of railroad revenues now come from that source.

For 150 years, the rails rode a roller coaster of boom and bust. Finally, the snuff, whiskey and Swedes are ready; the railroads can finally escape from hell.

Dig It: China Evolves

The Chinese economy is expanding at a breakneck pace. The World Bank recently raised the nation's 2007 GDP growth forecast to 10.4%--meaning that China is soon to displace Germany as the world's third largest economy. From 2005 to 2006, per capita GDP expanded by 17%. As a result of China's manufacturing boom, that most populous of nations will emit more carbon dioxide than the United States sometime this year.

The results of Chinese industrialization roughly parallel the British experience of nearly two centuries ago. According to economic historian Paul Bairoch's calculation, from the beginning to the end of the 19th century, per capita levels of industrialization grew by 6.25 times in the United Kingdom, so that the United States was only 69% as industrialized in 1900, and Germany, 52%. Although Britain's average rate of economic growth through the 19th century pales in comparison to modern China's, the effects of both industrial revolutions on their respective societies and the rest of the world are equally phenomenal.

From 1813 to 1870, with the advent of mechanization and destruction of trade barriers, imports of cotton fabrics into India grew from 1 to 995 million yards. Historian Paul Kennedy writes, "Not only did [the 3rd world's share] of total world manufacturing shrink relatively, simply because the West's output was rising so swiftly; but in some cases [3rd world] economies declined absolutely, that is they de-industrialized, because of the penetration of their traditional markets by the far cheaper and better products of the Lancashire textile factories."

Today, Chinese products are flooding into 1st world markets, driving most of the West's domestic manufacturers abroad. America's largest export is shipping containers. Besides some service sector jobs, the segments of 1st world economies that do not possess a technological or educational advantage are being outsourced to the developing world. One can only imagine the effects of modern free trade policy and low shipping costs if they were dropped into the 19th century--the wealth disparity between Europe and the rest of the world would invariably have widened.

China also echoes Britain in the consumption of raw materials and fossil fuels. According to Kennedy, "Around 1860, which was probably when the country reached its zenith in relative terms, the United Kingdom produced 53 percent of the world's iron and 50 percent of its coal and lignite, and consumed just under half of the raw cotton output of the globe. ... Its energy consumption from modern sources (coal, lignite, oil) in 1860 was five times that of either the United States or Prussia/Germany, six times that of France, and 155 times that of Russia!" Manufacturing societies rely heavily on fossil fuels. Using 2005 statistics, a simple calculation informs the reader that China generates 422 dollars worth of GDP per ton of greenhouse gases emitted, while the United States generates 2111 dollars per ton.







Industrialization is not only reflected in exports and coal consumption, but also in the development of paleontology. In the early 19th century, the developing nations of the West invested heavily in the construction of canals. The Somerset Coal Company was a private canal investor in Britain. To plot potential routes for its waterways, the company sent William Smith to survey the countryside. After examining many different locations, he realized that certain fossils are associated with specific strata. Smith's discovery of index fossils was directly consequent of Britain's industrial revolution--and plays an important role in petroleum geology to this day. Another example that incontrovertibly demonstrates the connection between industrialization and paleontology was the 1878 discovery of 33 Iguanodon skeletons in a Belgian coal mine.

Another aspect of paleontology linked to the growth of a manufacturing society is the emergence of private fossil hunting. In early Victorian England, Mary Anning was such a collector. Combing the beach marls of the resort town of Lyme Regis, Anning harvested a variety of fossils, including ammonites and spectacular icthyosaur specimens, and sold them to vacationers and scholars. Paleontologist Christopher McGowan comments that commercial collecting is an essential service for academics, both then and now. Due to the expansion of the middle class through industrialization, the requisite economic largesse needed for the development of scholastic professions, and the thick manufacturing-related pollution that drove Londoners to the coasts, private fossil collecting arose in 19th century Britain. The fossils unearthed as a result of this phenomenon played an important role in Darwin's construction of evolutionary theory.

Quarrymen were some of the most numerous British fossil collectors, and remain a critical paleontological resource. (In three days, I will be examining evidence of the Cambrian transition of animal life from the ocean to land in rocks excavated from a quarry.) The workers found that fossil collecting was a worthwhile pursuit to supplement their incomes. Many Chinese have come to the same realization today.

China is a hotspot of paleontology. In the last 25 years, foreigners have been granted greater access to China, and the Chinese are able to interact more with the rest of the world. Spectacular fossil localities have been recognized, and paleontologists are pouring in to explore them. Two of the best assemblages are Chengjiang and Liaoning. Paleontologist Michael Benton writes, "The Chengjiang site is rich, having produced more than 10,000 specimens, and the fauna consists of 90 or more species, mainly of arthropods (trilobites and trilobite-like forms), sponges, brachiopods, worms, and other groups, including possible basal deuterostomes, such as the vetulicolians and yunnanozoons, as well as the first fishes." Liaoning has produced bird fossils with easily discernible feather impressions, the oldest known metatherian, and a large collection of other animals and plants. A domestic establishment of paleontologists has bloomed in China to uncover and interpret these finds.

The introduction of modern technology into China allows amateur collectors to sell specimens over the internet. This is an extremely lucrative side-job--so much so that many Chinese fabricate fossils. For example, in 2000, amateur American collectors paid $80,000 for a "missing link" between the dinosaurs and birds which turned out to be an amalgamation of avian specimens. Fake fossils now represent the biggest catagory of sham goods on E-Bay. Evolutionary biologist Alan Feduccia has even heard that there is a fake-fossil factory in Liaoning province. Humorously, the problem of fraudulent fossils also existed in 19th century British paleontology. The deceitful collector Thomas Hawkings sold a collection of doctored ichthyosaurs to the British Museum for top dollar. When the falsification was uncovered, a scandal was unleashed that resulted in an inquiry by the House of Commons.

China's evolution into a manufacturing society is oddly similar to Britain's transition nearly 200 years ago. An interesting parallel lies in the emergence of paleontology with each nation's industrial revolution. Hopefully, the field will fill a new role by providing insight into the future of a warming world.