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Railroads

The invention of the steam engine and the building of the Erie Canal and the railroads were both important pieces of infrastructure which made land in western parts of the US significantly more valuable. Passengers and goods could make the trip in much shorter time and with less expense and danger.

If you've played the board game Monopoly, you have some notion that railroads played an important role in 19th and 20th century America -- and that transportation is absolutely vital to our economy.  But an important part of American history -- one we all heard in high school history but perhaps were too young to understand the full significance of -- was the landholdings of the railroads, which few realize continue today.  Southern Pacific, for example, owns a great deal of property, some of it quite valuable today.

Henry George: What the Railroad Will Bring Us [Californians, and particularly San Franciscans]  (1868)

UPON the plains this season railroad building is progressing with a rapidity never before known. The two companies, in their struggle for the enormous bounty offered by the Government, are shortening the distance between the lines of rail at the rate of from seven to nine miles a day -- almost as fast as the ox teams which furnished the primitive method of conveyance across the continent could travel. Possibly by the middle of next spring, and certainly, we are told, before mid-summer comes again, this "greatest work of the age" will be completed, and an unbroken track stretch from the Atlantic to the Pacific. ...

What is the railroad to do for us? -- this railroad that we have looked for, hoped for, prayed for so long? ...

After the first impulse which settled California had subsided, there came a time of stagnation, if not of absolute decay. As the placers one after another were exhausted, the miners moved off; once populous districts were deserted, there are probably but few of us who once flourishing mining towns fell into ruin, and it seemed to superficial observers as though the State had passed the acme of her prosperity. ...

Through this period we have passed. Although the decay of portions of the mining regions still continues, there has been going on for some time a steady, rapid development of the State at large -- felt principally in the agricultural counties and the metropolis, but which is now beginning to make itself felt from one end of the State to the other. To produce this, several causes have combined, but prominent among them must be reckoned the new force to which we principally and primarily look for the development of the future -- railroads.  ...

...  Yet the growth of San Francisco has hardly commenced -- growing now with greater rapidity than ever, her greatest growth will date from the completion of the railroad next year. The San Francisco of the new era will be a city compared with which the San Francisco of the present is only a little village.

Look for a moment at the geographical position of this city, and all doubt as to her future rank will be dispelled. There is in the whole world no city -- not even Constantinople, New Orleans, or Panama -- which possesses equal advantages. From San Diego to the Columbia river, a stretch of over 1000 miles of coast, the bay of San Francisco is the only possible site for a great city. For the whole of the vast and rich country behind, this is the only gate to the sea. Not a settler in all the Pacific States and Territories but must pay San Francisco tribute; not an ounce of gold dug, a pound of ore smelted, a field gleaned, or a tree felled in all their thousands of square miles, but must, in a greater or less degree, add to her wealth.  ...

Considering these things, is it too much to say that this city of ours must become the first city of the continent; and is it too much to say that the first city of the continent must ultimately be the first city of the world? And when we remember the irresistible tendency of modern times to concentration -- remember that New York, Paris and London are still growing faster than ever -- where shall we set bounds to the future population and wealth of San Francisco; where find a parallel for the city which a century hence will surround this bay? ...

For years the high rate of interest and the high rate of wages prevailing in California have been special subjects for the lamentation of a certain school of local political economists, who could not see that high wages and high interest were indications that the natural wealth of the country was not yet monopolized, that great opportunities were open to all -- who did not know that these were evidences of social health, and that it were as wise to lament them as for the maiden to wish to exchange the natural bloom on her cheek for the interesting pallor of the invalid?

But however this be, it is certain that the tendency of the new era -- the more dense population and more thorough development of the wealth of the State -- will be to a reduction both of the rate of interest and the rate of wages, particularly the latter. This tendency may not, probably will not, be shown immediately; but it will be before long, and that powerfully, unless balanced and counteracted by other influences which we are not now considering, which do not yet appear, and which it is probable will not appear for some time yet.

The truth is, that the completion of the railroad and the consequent great increase of business and population, will not be a benefit to all of us, but only to a portion. As a general rule (liable of course to exceptions) those who have it will make wealthier; for those who have not, it will make it more difficult to get. Those who have lands, mines, established businesses, special abilities of certain kinds, will become richer for it and find increased opportunities; those who have only their own labor will be come poorer, and find it harder to get ahead -- first, because it will take more capital to buy land or to get into business; and second, because as competition reduces the wages of labor, this capital will be harder for them to obtain.

What, for instance, does the rise in land mean? Several things, but certainly and prominently this: that it will be harder in future for a poor man to get a farm or a homestead lot. In some sections of the State, land which twelve months ago could have been had for a dollar an acre, cannot now be had for less than fifteen dollars. In other words, the settler who last year might have had at once a farm of his own, must now either go to work on wages for some one else, pay rent or buy on time; in either case being compelled to give to the capitalist a large proportion of the earnings which, had he arrived a year ago, he might have had all for of himself. And as proprietorship is thus rendered more difficult and less profitable to the poor, more are forced into the labor market to compete with each other, and cut down the rate of wages -- that is, to make the division of their joint production between labor and capital more in favor of capital and less in favor of labor.

And so in San Francisco the rise in building lots means, that it will be harder for a poor man to get a house and lot for himself, and if he has none that he will have to use more of his earnings for rent; means a crowding of the poorer classes together; signifies courts, slums, tenement-houses, squalor and vice.

San Francisco has one great advantage -- there is probably a larger proportion of her population owning homesteads and homestead lots than in any other city of the United States. The product of the rise of real estate will thus be more evenly distributed, and the great social and political advantages of this diffused proprietorship cannot be over-estimated. Nor can it be too much regretted that the princely domain which San Francisco inherited as the successor of the pueblo was not appropriated to furnishing free, or almost free, homesteads to actual settlers, instead of being allowed to pass into the hands of a few, to make more millionaires. Had the matter been taken up in time and in a proper spirit, this disposition might easily have been secured, and the great city of the future would have had a population bound to her by the strongest ties-a population better, freer, more virtuous, independent and public spirited than any great city the world has ever had. ... read the whole article

Henry George: The Common Sense of Taxation (1881 article)

Or, take the case of the railroads. That railroads are a public benefit no one will dispute. We want more railroads, and want them to reduce their fares and freight. Why then should we tax them? for taxes upon railroads deter from railroad building, and compel higher charges. Instead of taxing the railroads, is it not clear that we should rather tax the increased value which they give to land? To tax railroads is to check railroad building, to reduce profits, and compel higher rates; to tax the value they give to land is to increase railroad business and permit lower rates. The elevated railroads, for instance, have opened to the overcrowded population of New York the wide, vacant spaces of the upper part of the island. But this great public benefit is neutralized by the rise in land values. Because these vacant lots can be reached more cheaply and quickly, their owners demand more for them, and so the public gain in one way is offset in another, while the roads lose the business they would get were not building checked by the high prices demanded for lots. The increase of land values, which the elevated roads have caused, is not merely no advantage to them — it is an injury; and it is clearly a public injury. The elevated railroads ought not to be taxed. The more profit they make, with the better conscience can they be asked to still further reduce fares. It is the increased land values which they have created that ought to be taxed, for taxing them will give the public the full benefit of cheap fares.

So with railroads everywhere. And so not alone with railroads, but with all industrial enterprises. So long as we consider that community most prosperous which increases most rapidly in wealth, so long is it the height of absurdity for us to tax wealth in any of its beneficial forms. We should tax what we want to repress, not what we want to encourage. We should tax that which results from the general prosperity, not that which conduces to it. It is the increase of population, the extension of cultivation, the manufacture of goods, the building of houses and ships and railroads, the accumulation of capital, and the growth of commerce that add to the value of land — not the increase in the value of land that induces the increase of population and increase of wealth. It is not that the land of Manhattan Island is now worth hundreds of millions where, in the time of the early Dutch settlers, it was only worth dollars, that there are on it now so many more people, and so much more wealth. It is because of the increase of population and the increase of wealth that the value of the land has so much increased. Increase of land values tends of itself to repel population and prevent improvement. And thus the taxation of land values, unlike taxation of other property, does not tend to prevent the increase of wealth, but rather to stimulate it. It is the taking of the golden egg, not the choking of the goose that lays it.

Every consideration of policy and ethics squares with this conclusion. The tax upon land values is the most economically perfect of all taxes. It does not raise prices; it maybe collected at least cost, and with the utmost ease and certainty; it leaves in full strength all the springs of production; and, above all, it consorts with the truest equality and the highest justice. For, to take for the common purposes of the community that value which results from the growth of the community, and to free industry and enterprise and thrift from burden and restraint, is to leave to each that which he fairly earns, and to assert the first and most comprehensive of equal rights — the equal right of all to the land on which, and from which, all must live.

Thus it is that the scheme of taxation which conduces to the greatest production is also that which conduces to the fairest distribution, and that in the proper adjustment of taxation lies not merely the possibility of enormously increasing the general wealth, but the solution of these pressing social and political problems which spring from unnatural inequality in the distribution of wealth. ... read the whole article

Henry George: Political Dangers (Chapter 2 of Social Problems, 1883)

[08] But to the changes produced by growth are, with us, added the changes brought about by improved industrial methods. The tendency of steam and of machinery is to the division of labor, to the concentration of wealth and power. Workmen are becoming massed by hundreds and thousands in the employ of single individuals and firms; small storekeepers and merchants are becoming the clerks and salesmen of great business houses; we have already corporations whose revenues and pay-rolls belittle those of the greatest States. And with this concentration grows the facility of combination among these great business interests. How readily the railroad companies, the coal operators, the steel producers, even the match manufacturers, combine, either to regulate prices or to use the powers of government! The tendency in all branches of industry is to the formation of rings against which the individual is helpless, and which exert their power upon government whenever their interests may thus be served.

[15] We are steadily differentiating a governing class, or rather a class of Pretorians, who make a business of gaining political power and then selling it. The type of the rising party leader is not the orator or statesman of an earlier day, but the shrewd manager, who knows how to handle the workers, how to combine pecuniary interests, how to obtain money and to spend it, how to gather to himself followers and to secure their allegiance. One party machine is becoming complementary to the other party machine, the politicians, like the railroad managers, having discovered that combination pays better than competition. So rings are made impregnable and great pecuniary interests secure their ends no matter how elections go. There are sovereign States so completely in the hands of rings and corporations that it seems as if nothing short of a revolutionary uprising of the people could dispossess them. Indeed, whether the General Government has not already passed beyond popular control may be doubted. Certain it is that possession of the General Government has for some time past secured possession. And for one term, at least, the Presidential chair has been occupied by a man not elected to it. This, of course, was largely due to the crookedness of the man who was elected, and to the lack of principle in his supporters. Nevertheless, it occurred.

[16] As for the great railroad managers, they may well say, "The people be d--d!" When they want the power of the people they buy the people's masters. The map of the United States is colored to show States and Territories. A map of real political powers would ignore State lines. Here would be a big patch representing the domains of Vanderbilt; there Jay Gould's dominions would be brightly marked. In another place would be set off the empire of Stanford and Huntington; in another the newer empire of Henry Villard. The States and parts of States that own the sway of the Pennsylvania Central would be distinguished from those ruled by the Baltimore and Ohio; and so on. In our National Senate, sovereign members of the Union are supposed to be represented; but what are more truly represented are railroad kings and great moneyed interests, though occasionally a jobber from Nevada or Colorado, not inimical to the ruling powers, is suffered to buy himself a seat for glory. And the Bench as well as the Senate is being filled with corporation henchmen. A railroad king makes his attorney a judge of last resort, as the great lord used to make his chaplain a bishop. ... read the entire essay

Henry George: Concentrations of Wealth Harm America (excerpt from Social Problems)  (1883)

Sources of Great Wealth

An acquaintance of mine died in San Francisco recently, leaving $4,000,000, which will go to heirs to be looked up in England. I have known many men more industrious, more skilful, more temperate than he -- men who did not or who will not leave a cent. This man did not get his wealth by his industry, skill or temperance. He no more produced it than did those lucky relations in England who may now do nothing for the rest of their lives. He became rich by getting hold of a piece of land in the early days, which, as San Francisco grew, became very valuable. His wealth represented not what he had earned, but what the monopoly of this bit of the earth's surface enabled him to appropriate of the earnings of others.

A man died in Pittsburgh, the other day, leaving $3,000,000. He may or may not have been particularly industrious, skilful and economical, but it was not by virtue of these qualities that he got so rich. It was because he went to Washington and helped lobby through a bill which, by way of "protecting American workmen against the pauper labor of Europe," gave him the advantage of a sixty-per-cent, tariff. To the day of his death he was a stanch protectionist, and said free trade would ruin our "infant industries." Evidently the $3,000,000 which he was enabled to lay by from his own little cherub of an "infant industry" did not represent what he had added to production. It was the advantage given him by the tariff that enabled him to scoop it up from other people's earnings.

"Beneath all political problems lies the social problem of the distribution of wealth."

This element of monopoly, of appropriation and spoliation will, when we come to analyze them, be found largely to account for all great fortunes....

Take the great Vanderbilt fortune. The first Vanderbilt was a boatman who earned money by hard work and saved it. But it was not working and saving that enabled him to leave such an enormous fortune. It was spoliation and monopoly. As soon as he got money enough he used it as a club to extort from others their earnings. He ran off opposition lines and monopolized routes of steamboat travel. Then he went into railroads, pursuing the same tactics. The Vanderbilt fortune no more comes from working and saving than did the fortune that Captain Kidd buried.

Or take the great Gould fortune. Mr. Gould might have got his first little start by superior industry and superior self-denial. But it is not that which has made him the master of a hundred millions. It was by wrecking railroads, buying judges, corrupting legislatures, getting up rings and pools and combinations to raise or depress stock values and transportation rates.

So, like wise, of the great fortunes which the Pacific railroads have created. They have been made by lobbying through profligate donations of lands, bonds and subsidies, by the operations of Credit Mobilier and Contract and Finance Companies, by monopolizing and gouging. And so of fortunes made by such combinations as the Standard Oil Company, the Bessemer Steel Ring, the Whisky Tax Ring, the Lucifer Match Ring, and the various rings for the "protection of the American workman from the pauper labor of Europe."

Or take the fortunes made out of successful patents. Like that element in so many fortunes that comes from the increased value of land, these result from monopoly, pure and simple. And though I am not now discussing the expediency of patent laws, it may be observed, in passing, that in the vast majority of cases the men who make fortunes out of patents are not the men who make the inventions.

Through all great fortunes, and, in fact, through nearly all acquisitions that in these days can fairly be termed fortunes, these elements of monopoly, of spoliation, of gambling run. The head of one of the largest manufacturing firms in the United States said to me recently, "It is not on our ordinary business that we make our money; it is where we can get a monopoly." And this, I think, is generally true.

 The Evils of Monopolists
Consider the important part in building up fortunes which the increase of land values has had, and is having, in the United States. This is, of course, monopoly, pure and simple. When land increases in value it does not mean that its owner has added to the general wealth. The owner may never have seen the land or done aught to improve it. He may, and often does, live in a distant city or in another country. Increase of land values simply means that the owners, by virtue of their appropriation of something that existed before man was, have the power of taking a larger share of the wealth produced by other people's labor. Consider how much the monopolies created and the advantages given to the unscrupulous by the tariff and by our system of internal taxation -- how much the railroad (a business in its nature a monopoly), telegraph, gas, water and other similar monopolies, have done to concentrate wealth; how special rates, pools, combinations, corners, stock-watering and stock-gambling, the destructive use of wealth in driving off or buying off opposition which the public must finally pay for, and many other things which these will suggest, have operated to build up large fortunes, and it will at least appear that the unequal distribution of wealth is due in great measure to sheer spoliation; that the reason why those who work hard get so little, while so many who work little get so much, is, in very large measure, that the earnings of the one class are, in one way or another, filched away from them to swell the incomes of the other.

That individuals are constantly making their way from the ranks of those who get less than their earnings to the ranks of those who get more than their earnings, no more proves this state of things right than the fact that merchant sailors were constantly becoming pirates and participating in the profits of piracy, would prove that piracy was right and that no effort should be made to suppress it.

I am not denouncing the rich, nor seeking, by speaking of these things, to excite envy and hatred; but if we would get a clear understanding of social problems, we must recognize the fact that it is due to monopolies which we permit and create, to advantages which we give one man over another, to methods of extortion sanctioned by law and by public opinion, that some men are enabled to get so enormously rich while others remain so miserably poor. If we look around us and note the elements of monopoly, extortion and spoliation which go to the building up of all, or nearly all, fortunes, we see on the one hand now disingenuous are those who preach to us that there is nothing wrong in social relations and that the inequalities in the distribution of wealth spring from the inequalities of human nature; and on the other hand, we see how wild are those who talk as though capital were a public enemy, and propose plans for arbitrarily restricting the acquisition of wealth. Capital is a good; the capitalist is a helper, if he is not also a monopolist. We can safely let any one get as rich as he can if he will not despoil others in doing so.

There are deep wrongs in the present constitution of society, but they are not wrongs inherent in the constitution of man nor in those social laws which are as truly the laws of the Creator as are the laws of the physical universe.  They are wrongs resulting from bad adjustments which it is within our power to amend. The ideal social state is not that in which each gets an equal amount of wealth, but in which each gets in proportion to his contribution to the general stock. And in such a social state there would not be less incentive to exertion than now; there would be far more incentive. Men will be more industrious and more moral, better workmen and better citizens, if each takes his earnings and carries them home to his family, than where they put their earnings in a "pot" and gamble for them until some have far more than they could have earned, and others have little or nothing.  ...   Read the entire article

Louis Post: Outlines of Louis F. Post's Lectures, with Illustrative Notes and Charts (1894) — Appendix: FAQ

Q12. How would the single tax be assessed on a railroad which passed through a farm worth (without its improvements) $30 an acre?
A. According to the value, not of the adjacent farms, but of the total right of way, much as the value of a navigable river might be determined if it were private property.

... read the book

Bill Batt: How Our Towns Got That Way   (1996 speech)

The Corruption of Economics
As I explained, classical economics emerged from a school of thinkers known as the Scottish moralists in the latter part of the 18th century. There ultimately evolved three major schools of economic thought a century later, one the continuing tradition of Adam Smith through J.S. Mill, a second being the aggressive and emerging school of Marxism, and the third a proposal for two-factor economics being pressed largely by interests in America. Marxism was never a major force in United States; the primary challenge to the classical tradition came from what has since come to be known as neo-classical economics.

Professor Gaffney has for the first time shown how powerful economic interests in American society essentially bought the leading figures of the newly-established American Economics Association with all the blandishments that can be used to influence academicians. Leading scholars were induced to change definitions of terms so that special interests would be advantaged. What were those interests? Primarily the railroad industry, which at the time was probably the most powerful political force in America. By changing definitions and conflating the land factor into capital, it was no longer essential for land rent to be paid in taxes, and the railroads, holders of some of the most valuable land in the nation, were thereby able to escape their full duty. This is an astonishing story, one never fully spelled out until now, and it explains both how the academic community was beholden to powerful interests and how many of the social problems we see today could have been avoided.

The classical tradition of economic thought was ably synthesized and represented by one dominant figure of the age: Henry George. All but forgotten today, perhaps in good part due to the assiduous disparagement of his economic foes, one should note that he was more widely known in his time in America than anyone except Thomas Edison. His 1879 book, Progress and Poverty, sold more copies throughout the world than any book till that time except the Bible. Born in Philadelphia the son of a publisher of religious books, he traveled to California as a young man to make his fortune as a journalist. But what he saw in land speculation and the exploitation of labor soon led him to study the classical economists and to write his ideas down. Upon publication of his book he shortly became known throughout the world, and traveled and lectured widely as a social reformer for the rest of his life. By the time he died he had become so famous that he almost won the mayoralty of the city of New York. He ran twice, losing to Tammany Hall the first time in what was probably a corrupt election (but beating the third-place finisher, Theodore Roosevelt) in 1886, and died four days before a second election he might have won in 1897. As a spellbinding orator and lucid writer, he captivated the world with his vision of societies made more just by a proper understanding of economics. Gaffney shows that it was George, not Marx, that was the primary threat to dominant interests in end-of-century United States. He had to be stopped, and he was.

In classical economics, the definition of capital grew out of labor mixed with earlier capital. Land, by conventional definition, was not capital, nor was it a component of wealth. Rather land was its own category. Conflating land into capital allowed land rent to be hidden and diluted in ways so that the unearned increment arising from social improvements fell to speculators rather than being returned to society in rent. The failure of society to recapture the appropriate level of land rent from titleholders led also to depression of labor wages at the margin, creating poverty and artificial scarcity of labor where otherwise it could be relieved. Hence the title of George's book, Progress and Poverty. George recognized that the value of any land parcel arose out of its social activity, not from anything which a titleholder might have done to it. He recognized that many, perhaps most, titleholders in land were speculators, reaping the benefit of others' investments, and selling out at last when their price was met. Hence it made sense that society had a right to a return on what it had brought about, as well as from the fact that those titles could never be other than leaseholds. That land rent, shortly confused by use of the words "single tax," was, to George, the rightful return to society.

The railroad barons of the 19th century were not just coincidentally the land barons. They also had strong holds on the founding and growth of the major American universities of the period, some of which carry their names. Johns Hopkins, Andrew Dickson White, Daniel Gilman, John D. Rockefeller, George Leland Stanford, Nicholas Murray Butler were all as attached to various universities in the country as they were to powerful railroad interests. They were able, through their control of universities either as actual presidents or as benefactors, to influence the dominant figures responsible for establishing the American Economic Association in 1885. The actual intrigue is too complex to be recounted here: who got appointed and promoted, who was funded in research, which were given endowed chairs, who got stock options, and so on. The preoccupation with defeating Henry George, Gaffney shows, was a paramount preoccupation of all of these figures. The central figures were:

  • Francis Walker, first president of the AEA, then President of MIT and Director of the Census Bureau.
  • Richard Ely, also founder of the AEA, and professor of economics at University of Wisconsin and later Northwestern, there granted his own Institute with railroad money.
  • John Bates Clark, Professor of Economics at Columbia University, and whose patron was Julius Seelye, President of Amherst College and then Smith College.
  • E.R.A. Seligman, Chairman of the Economics Department at Columbia University and scion of a wealthy banking family.

These figures are even today the honored founders of an esteemed profession. So great was their victory over rival schools of thought that they are a century later seen as paragons of clear thinking and virtue. The intrigue and the inside deals are long forgotten. The lineage to contemporary scholarship continues in a "chain unbroken from Seelye to Clark to Johnson to Knight to Stigler, Friedman, Harberger and now thousands of Chicago-oriented economists." Indeed, when Henry George ran for mayor of New York in 1897, it was against the wealthy patrician Seth Low, President of Columbia University, who had recently recruited Clark to come to Columbia. To really understand the academic tension of the period, one must look at the published papers, the speeches and debates, the newspaper articles, and the citations at the end of those articles. These, even more than the interlocking directorates of faculty appointments, explain how much George was opposed, perhaps more feared. Was it for the falsity of his views? Clearly not, as few critics then or since then have managed to strike a knock-out blow against his theories. Rather, it was the threat George represented to powerful interests that required him to be defeated, and in doing so they succeeded but only in the short run, as they were within decades victims of their very successes. Today we see that the railroads have failed in this country for lack of traffic. It will soon be evident why.

There were many arguments to be made for the classical tradition, the result of which would be to rely upon payment of rent of land according to its value to society. George recognized that land value is largely a function of how society has elected to invest in any general neighborhood; there is no argument for any one titleholder to reap the reward of what others have invested. Gaffney points out that, from the standpoint of economic theory, the framework had the following virtues:

  • It reconciled common land rights with private tenure, free markets and modern capitalism, a growing and persistent problem as the industrial society took hold.
  • It enabled the lowering of taxes on labor without raising taxes on capital.
  • It reconciled equity and efficiency. It constituted a progressive tax because land is concentrated so much among the wealthy and because the tax cannot be shifted. It was efficient because it is neutral among different land-use options.
  • It constituted no disincentive to business location or population settlement. In this way it encouraged the most efficient land use and discouraged sprawl.
  • It created jobs without inflation, and raised government revenue without any penalty upon its base.
  • It strengthened public revenues and at the same time promotes economy in government.

Those economists who today still persistently hold to the view that there is something special about land that make it unwise to treat as a form of capital are known as Georgists. They represent a small minority of the economics profession, but, little known as they are, they are among its most esteemed members.

Two-factor economics, however, had advantages to influential individuals and special interests. Land speculators who were positioned to profit from knowing where locational values would increase, or were in a position to cause those increases, could quickly and easily reap a private gain. Simply by holding title to parcels of real property, without doing anything at all to increase their value, one could quickly turn a profit. This is because the increment of unearned increases resulting from social investments were left for owners to reap rather than recovered by society. In three-factor economics, land rent reverted to society in an automatic and efficient manner. When a railroad magnate like George Leland Stanford extended the Southern Pacific track to the east of Los Angeles on land that he was granted by the government, all he then needed to do was to sit back and wait for the land sales to give him a return on that which was made more valuable by his investment in the line. All across America, land speculators learned that capturing monopoly titles to tracts of land allowed them to quickly and easily turn a "profit" on their investment yet hardly raising a finger. ...

The Costs of Poor Taxes

Society pays a price for not adopting taxes which follow the principles developed over the centuries. Here I want only to show how the resulting distortions that arose in the use of land ultimately caused the railroads to fail in being able to serve society. While in the short term the railroads certainly saved themselves from having to pay taxes on their vast land holdings, the most valuable of which were right around their own investment in tracks and stations, they ultimately lost the frequency of traffic which that tax structure would have induced. This is because the population and improvement densities needed to make public transit traffic economically viable did not come about. Taking the long view of society, George Kennen notes in one of his books that:

The railway. . . was capable of accepting and disgorging its loads, whether of passengers or freight, only at fixed points. This being the case, it tended to gather together, and to concentrate around its urban terminus and railhead, all activity that was in any way related to movements of freight or passengers into or out of the city. It was in this quality that it had made major and in some ways decisive contributions to the development not only of the great railway metropolises of the Victorian age particularly of such inland cities as Moscow, Berlin, Paris, and Chicago but even certain of the great maritime turnover ports, such as London and New York.

The automobile, on the other hand, had precisely the opposite qualities. Incapable, in view of its own cumbersomeness and requirements for space, of accepting or releasing large loads at any concentrated points anywhere, but peculiarly capable of accepting and releasing them at multitudes of unconcentrated points anywhere else, the automobile tended to disintegrate and to explode all that the railway had brought together. It was, in fact, the enemy of the concentrated city. Thus it was destined to destroy the great densely populated urban centers of the nineteenth century, with all the glories of economic and cultural life that had flowed from their very unity and compactness.... read the whole article


Bill Batt: Fallacies of the Slippery Slope Argument
Some explanations reflect downright corruption. The earliest cars manufactured in this country and in Europe were electric; streetcars also were largely electric powered until a conspiracy of the automobile and petroleum industry exerted its force to ensure that fossil fuel powered motor vehicles would dominate our transportation and land use patterns.15 Our motor-vehicle-dependent and urban sprawl configurations can be explained by powerful interests continually pressing for policies to make us so. One might even conclude that the decision to drive on the right side of the road was equally as much a defining moment.
15 This is an untold story. A trial was held in a Chicago federal court in 1949, resulting in an indictment of GM, Firestone, Standard Oil, Phillips Petroleum, and Mack Trucks among others. Their crime was in forming a holding company called National City Lines which proceeded in the preceding decade to buy up the public transportation services in dozens of US cities, and then scrapping them so that people would then become more automobile dependent. The corporations were fined $5,000 each, and the CEOs of each one $1. See United States Senate, Committee on the Judiciary, 93rd Congress, 2nd Session, “American Ground Transport: A Proposal for Restructuring the Automobile, Truck, Bus, and Rail Industries,” by Bradford C. Snell, February 26, 1974 (Washington: US Government Printing Office, 1974); and Jonathan Kwitney, “The Great Transportation Conspiracy,” Harper’s Magazine, February, 1981.

And I hope that you will forgive me for mentioning another great conspiracy in American history, the subject of my Torch presentation about four years ago. That story recounted how the American railroad industry, in collusion with the banks, induced the founders of the American economics profession to change definitions and formulas so that they would be relieved of taxation on their land holdings and speculation would be rewarded.16 This dividing line between classical and neoclassical economics is responsible I believe for many of our economic problems today — economic cycles, an inequitable tax structure, poverty and unemployment, urban sprawl and the gutting of urban centers. Only now is this economic ideology, almost sacrosanct for a century, falling apart and seen for what it is.  ... read the whole article


Bill Batt: How the Railroads Got Us On the Wrong Economic Track

Professor Gaffney has for the first time shown how powerful economic interests in American society essentially bought the leading figures of the newly-established American Economics Association with all the blandishments that can be used to influence academicians. Leading scholars were induced to change definitions of terms so that special interests would be advantaged. What were those interests? Primarily the railroad industry, which at the time was probably the most powerful political force in America. By changing definitions and conflating the land factor into capital, it was no longer essential for land rent to be paid in taxes, and the railroads, holders of some of the most valuable land in the nation, were thereby able to escape their full duty. This is an astonishing story, one never fully spelled out until now, and it explains both how the academic community was beholden to powerful interests and how many of the social problems we see today could have been avoided.

The classical tradition of economic thought was ably synthesized and represented by one dominant figure of the age: Henry George. All but forgotten today, perhaps in good part due to the assiduous disparagement of his economic foes, one should note that he was more widely known in his time in America than anyone except Thomas Edison. His 1879 book, Progress and Poverty, sold more copies throughout the world than any book till that time except the Bible. Born in Philadelphia the son of a publisher of religious books, he travelled to California as a young man to make his fortune as a journalist. But what he saw in land speculation and the exploitation of labor soon led him to study the classical economists and to write his ideas down. Upon publication of his book he shortly became known throughout the world, and travelled and lectured widely as a social reformer for the rest of his life. By the time he died he had become so famous that he almost won the mayoralty of the city of New York. He ran twice, losing to Tammany Hall the first time in what was probably a corrupt election (but beating the third-place finisher, Theodore Roosevelt) in 1886, and died four days before a second election he might have won in 1897. As a spellbinding orator and lucid writer, he captivated the world with his vision of societies made more just by a proper understanding of economics. Gaffney shows that it was George, not Marx, that was the primary threat to dominant interests in end-of-century United States. He had to be stopped, and he was. ...

The Costs of Poor Taxes

Society pays a price for not adopting taxes which follow the principles developed over the centuries. Here I want only to show how the resulting distortions that arose in the use of land ultimately caused the railroads to fail in being able to serve society. While in the short term the railroads certainly saved themselves from having to pay taxes on their vast land holdings the most valuable of which were right around their own investment in tracks and stations they ultimately lost the frequency of traffic which that tax structure would have induced. This is because the population and improvement densities needed to make public transit traffic economically viable did not come about. ...

In classical economics, the definition of capital grew out of labor mixed with earlier capital. Land, by conventional definition, was not capital, nor was it a component of wealth. Rather land was its own category. Conflating land into capital allowed land rent to be hidden and diluted in ways so that the unearned increment arising from social improvements fell to speculators rather than being returned to society in rent.

The failure of society to recapture the appropriate level of land rent from titleholders led also to depression of labor wages at the margin, creating poverty and artificial scarcity of labor where otherwise it could be relieved. Hence the title of George's book, Progress and Poverty. George recognized that the value of any land parcel arose out of its social activity, not from anything which a titleholder might have done to it. He recognized that many, perhaps most, titleholders in land were speculators, reaping the benefit of others' investments, and selling out at last when their price was met. Hence it made sense that society had a right to a return on what it had brought about, as well as from the fact that those titles could never be other than leaseholds. That land rent, shortly confused by use of the words "single tax," was, to George, the rightful return to society.

The railroad barons of the 19th century were not just coincidentally the land barons. They also had strong holds on the founding and growth of the major American universities of the period, some of which carry their names. Johns Hopkins, Andrew Dickson White, Daniel Gilman, John D. Rockefeller, George Leland Stanford, Nicholas Murray Butler were all as attached to various universities in the country as they were to powerful railroad interests. They were able, through their control of universities either as actual presidents or as benefactors to influence the dominant figures responsible for establishing the American Economic Association in 1885. ... read the whole article


Weld Carter: An Introduction to Henry George
In addition, George differentiated sharply between land itself and the products -- or wealth, as he termed them -- which labor made from the land. "In producing wealth, labor, with the aid of natural forces, but works up, into the forms desired, pre-existing matter, and, to produce wealth, must, therefore, have access to this matter and to these forces -- that is to say, to land. The land is the source of all wealth. It is the mine from which must be drawn the ore that labor fashions. It is the substance to which labor gives the form."

George saw, as between land and products, certain elementary differences. "In every essential, land differs from those things which... [are] the product of human labor. ...It is the creation of God; they are produced by man. It is fixed in quantity; they may be increased illimitably. It exists, though generations come and go; they in a little while decay and pass again into the elements."

Having noted these differences, George proceeded to use them as the basis for his examination of related areas of economics, such as speculation. When asked how speculation worked, George responded that a distinction must be made between speculation in land and speculation in products.

Writing of industrial depressions, he said, "When, with the desire to consume more, there coexist the ability and willingness to produce more, industrial and commercial paralysis cannot be charged either to overproduction or to overconsumption. Manifestly, the trouble is that production and consumption cannot meet and satisfy each other .

"How does this inability arise? It is evidently and by common consent the result of speculation. But of speculation in what?

"Certainly not of speculation in things which are the products of labor ...for the effect of speculation in such things, as is well shown in current treatises that spare me the necessity of illustration, is simply to equalize supply and demand, and to steady the interplay of production and consumption by an action analogous to that of a fly-wheel in a machine."  In other words, the tendency of speculation in products is to increase the demand for products and therefore to increase the price of products. This increased price will induce more production, which, increasing the supply, will tend to lower the price. Throughout this cycle, there has been a stimulating effect on production in general.

He continued, "Therefore, if speculation be the cause of these industrial depressions, it must be speculation in things not the production of labor, but yet necessary to the exertion of labor in the production of wealth -- of things of fixed quantity; that is to say, it must be speculation in land." 

How can this be? How can speculation in land cause industrial depression? George explains, "...that there is a connection between the rapid construction of railroads and industrial depression, anyone who understands what increased land values mean, and who has noticed the effect which the construction of railroads has upon land speculation, can easily see. Wherever a railroad was built or projected, lands sprang up in value under the influence of speculation, and thousands of millions of dollars were added to the nominal values which capital and labor were asked to pay outright, or to pay in installments, as the price of being allowed to go to work and produce wealth. The inevitable result was to check production. .." 

The tendency of speculation in land is similar to that of speculation in products; it increases the demand for land and thereby increases the price of land. However, here the similarity ends. The supply of land is fixed; as successive units of land become priced beyond the level at which labor and capital can profitably engage in production, an increasing (though artificial) scarcity of land develops. "The inevitable result was to check production."

So, according to George, another difference between land and products is that speculation in products tends to stimulate production, whereas speculation in land tends to check production.  ... read the whole article


  Mason Gaffney: Economics in Support of Environmentalism

And yet, the urban price influence of Los Angeles extends over 89 miles east-south-east clear to Temecula and Murrieta and beyond, at which point, however, it meets demand pushing north from San Diego. Urban valuation fever thus affects much more land than can ever actually be developed for urban use. Regardless, most owners come to imagine they might cash in at a high price, with high zoning, at their own convenience, with public services supplied by "the public," meaning other taxpayers. This is the meaning of "floating value."

If their land is downzoned for farming, open space, or habitat, they regard it as a "taking," and plead the 14th Amendment. Once we buy into the Sanctity (Holiness, Sacredness) of private property, we owe them. If we think of the public's buying large quantities of it to preserve habitat or open space, the price is already high above its aggregate value, and the new demand will push the price higher yet.

Here is a case showing how this works. The Los Angeles Metropolitan Transit Authority (MTA) needed the old Union Station, northeast of downtown in a run-down neighborhood, as the centerpiece of its new, integrated mass transit system. With the decline of interurban passenger rail traffic, the old station was unused. The owners, mainly Southern Pacific, asked more than MTA offered, so MTA invoked its power of eminent domain and condemned the land. The case went to judgement, and in 1984 the court awarded SP an amount about twice the going price for land in the area. The court's reason was that the coming of mass transit would raise values around the new central station, and SP should be paid as much as neighboring landowners would be able to get after the station was built.

Thus, land originally granted to SP to help subsidize mass transit was used instead to obstruct and penalize mass transit. Private property had become an end in itself, Holy and Sacred, a welfare entitlement, rather than a means to an end. MTA (the taxpayers) had to pay a price for land based on the unearned increment that its own construction and operation was expected to create in the future.

Later, MTA was to stint on subway construction, resulting in subsidence on Hollywood Boulevard, but there was no stinting on paying off SP for doing nothing: the award came to $84.7 millions. This is how the 14th Amendment works in practice, making private property an end, sanctified for its own sake, rather than a means to a higher end. It makes landowners the spoiled children of the national family, inflating the cost of every program that entails acquiring land. It means there is no chance that the public, whether through government or the Nature Conservancy, can preserve more than token areas of habitat by buying it: it would bankrupt us.... read the whole article


Mason Gaffney: Sounding the Revenue Potential of Land: Fifteen Lost Elements
Rail and utility adjunct landholdings, i.e. other than their ROW. (These are state-assessed, not on local tax rolls; are assessed as acreage, usually, which means underassessment; anyway, taxes are passed on to ratepayers in the rate-regulation process. Vast holdings by rails, e.g. 10% of Chicago; 5% of Milwaukee; vast SP holding south of Market Street in San Francisco, and statewide. Hydrocarbon holdings by regulated utilities.)...   Read the whole article


Mason Gaffney:  Who Owns Southern California?
... A second kind of holder is the out-of-state American, individual or corporate.

The Union Pacific Railroad is headquartered in New York. Upland (U.P. Land) Industries is its real estate management division. Oil is its major asset, but here we look at its local surface holdings. These include:
  • 420 acres Vintage Industrial Park, between Etiwanda Ave & Wineville Ave [Riverside Press-Enterprise, 6/86].
  • 570 acres in Mira Loma near Space Center.
  • 30 acres undeveloped land near Riverside Airport
  • 156 acres in Fontana [Riverside Press-Enterprise, 9/86].
  • 300 more acres south of Van Buren, and south of San Sevaine Industrial Center [Riverside Press-Enterprise, 4/88]. ...
Santa Fe-Southern Pacific (SFSP), headquartered in Chicago in its own building, was a near-merger of two of California's largest landholders. SP alone was already the largest before the attempted merger, and had been, from the age of railroad "robber barons" (Stanford, Crocker, Huntington and Flood), beneficiaries of vast federal land grants in California. The U.S. Government even acquired a key right-of-way, the Mesilla Valley route, from Mexico to give the SP (the "Gadsden Purchase," 1853). In 1988 SP, (or some part of it, along with the name) was sold to Philip Anschutz, Denver oil man, who is liquidating some lands.

SFSP holdings now include:
  • Rights-of-way, including the right to preempt intersections on demand. These are key assets that might be used for mass transit, but have long been withheld from such use. (In January, 1991, SP did agree to sell 85 miles, including the Peninsula commuter line, to Santa Clara, San Francisco and San Mateo Counties, for $290 millions. Sante Fe, on the other hand, is holding out for over $1 billion for some mileage in L.A. and Riverside Counties.) The rights-of-way give their owners preferential access to our great ports, built and improved at public expense. Growing Pacific Basin trade, and evolving container-shipping techniques, keep the tracks busy night and day. 
  • Railyards. Wherever there are stations there are railyards, usually just off the central business district. Riverside yards are small; Bloomington and San Bernardino yards cover hundreds of acres. Union Station in Los Angeles., with yards, covers about 70 acres east of Sunset/Olvera, and is about to be redeveloped, and made the focus of mass transit in Los Angeles. (LAT, 5/88) Just northeast of downtown, this land has the potential of rising to downtown value levels. (See Appendix 1, The Union Station Condemnation.) The L.A. Produce Market Mission Bay Development, San Francisco, is 208 acres of old yards just south of San Francisco's central business district, where land sells for over $1,000 per square foot. 158,000 acres of farmland, west side of San Joaquin Valley, watered by California Water Project under heavy subsidy.
  • Timberland, 520,000 acres, largest timberland owner in Calif. This land is as good as tax exempt under California's Timber Preserve Zone Act, which SP itself lobbied through.
    • 20 acres in the San Diego central business district, near old Santa Fe depot Pacific Design Center,
    • West Hollywood, 17 acres
    • 350 acres shoreline in the East Bay, off Berkeley, Emeryville,
    • Alameda 716 acres,
    • Fremont 450 acres,
    • Chula Vista, waterfront 85 acres,
    • San Jose, railyard near downtown Torrance,
    • Park del Amo 1 Market St., San Francisco,
    • old Southern Pacific headquarters, 264,000 square foot building, prime site surrounded by higher, newer buildings
    • San Jose, office complex, 440,000 square feet.
By comparison the local holdings of SFSP seem petty, yet they are locally important and even overwhelming. They include:
  • Perris, 88 acres business park, plus
  • another 100 acres Corona, prime land for business, range of $8 per square foot (recently sold)
  • Fontana, 400 acres
  • Ontario, 500 acres
  • Cucamonga, 280 acres
  • Redlands, 300 acres
On the improved urban lands, SPSF has 8 million square feet in building floorspace, of which 4 million square feet are in California. These buildings include:
  • 1 Market Street, San Francisco, old SP headquarters: 264,000 square feet, 10 floors (low for the district);
  • Pacific Design Center, West Hollywood;
  • San Jose, 440,000 square feet in an office complex, plus
  • 85 acres of railyard near downtown;
  • Chicago headquarters, 371,000 square feet, 17 floors.
  • Torrance, Park del Amo.
Some of the lands of SPSF are oil-bearing, in several states. (TPE, 9/87; LAT 11/87)

The value of SF & SP lands is hard for Wall St. to know because so much of it is undeveloped or underdeveloped. Estimates range from $2 billion to $9 billion. Tax assessments understate values for several reasons. Traditionally, SF & SP devoted major legal effort to holding down assessed values below market. Assessors tend anyway to undervalue vacant acreage, perhaps because of such pressure. In 1988 SFSP was in courts all over California opposing reassessments which county assessors claimed were triggered by the attempted merger of 1983.

Local real estate people know local values, but Wall St. looks more at current earnings -- except when corporate raiders go to work on "asset plays." SP has long been noted for having latent values yielding no current earnings. They have now bid up the stock to 30 times earnings. For perhaps the first time in its history SFSP is now a "motivated seller," to fend off the raid. In 1987 the "Henley Group" was a threat. So was Olympia and York, a large developer specializing in urban real estate, and in 1987 considered a major threat.

SPSF recently sold off much of its Corona holdings. It took the indirect route of a stock market raid to pry loose these surplus lands -- an indication of market failure. It remains to be seen if the new owners will put the land to good use, or continue to hold it simply as an idle "store of value."

Overall, SFSP lands are estimated to be 2.4 million acres in California, or 4.8% of the privately held land area. Nationwide holdings are 5.2 million acres . 28,500 acres of this are developed C&I land. (Riverside Press-Enterprise, 9/87; L.A. Times, 11/87.) ...  Read the whole article

 




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