U.S. state fiscal constraints and railroad development through the nineteenth century

ABSTRACT

Throughout the nineteenth century, U.S. states developed extensive fiscal constraints meant to limit public investment in infrastructure projects, especially railroad aid. These limitations came as a direct result of perceived malinvestment and mishandling of public funds in earlier infrastructure projects that were pursued to promote state and local economic development. However, an important yet under-researched question is to what extent these constraints may have helped or hindered the development of public infrastructure across these states. Overall, the evidence would suggest that in general, more binding constraints that limited the ability of state and local governments to invest in these projects actually led to an increase in railroad mileage. These findings provide important insights both regarding the development of railroads throughout the U.S. and offer a potential counterfactual to some European and Scandinavian experiences, which saw extensive public aid and in some instances nationalisation of railroad lines.

KEYWORDS:

• Fiscal federalism
• railroads
• constitutional constraints
• public investment
• public finance

JEL CLASSIFICATION:

• D22
• D78
• H71
• H73
• N21

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1 Here, fiscal constraints can be thought of as legally binding rules placed on state actors over their ability to tax and spend, which pre-commits both the legal and the political process to some particular budgetary outcome. How these rules are structured, implemented and enforced can have a profound effect on the behaviour of those public agents. These rules can come in the form of statutory or constitutional limits, with the latter relatively less binding on state actors given the relative ease (generally speaking) with which they can be repealed. For a full overview of these issues and fiscal constitutions in general, see Brennan and Buchanan (2000/1980).

2 For comprehensive overviews of U.S. state economic development policy through these periods, see Larson (2001), Ratchford (1941) and Goodrich (1950, 1960).

3 Heavy public involvement was also a direct result of a lack of domestic capital being available. Through state sponsorship and aid it made it relatively easier to obtain international financing and, ultimately, domestic investment as capital markets in the U.S. developed. See Cohen (2009) and Dobbin (1994) for overviews of the interactions between capital markets and railroad development in the U.S.

4 See Hillhouse (1936) for a thorough analysis of U.S. municipal economic development policy through the nineteenth century.

5 See Summers (1984) for a detailed historical account of U.S. Southern economic policy through the Reconstruction period.

6 This information was taken from the National Bureau of Economic Research/University of Maryland State Constitution project, which is a database of most state constitutions and their amendments (Wallis, n.d.). Data are freely available at http://www.stateconstitutions.umbd.edu/index.aspx. For any missing constitutions, a hand search was conducted to complete the rest.

7 Data on state bank capital were taken from Knox (1900) with any missing data interpolated between years. Additionally, population data are only available decennially beginning in 1790, while agricultural employment data are available for 1820, 1840, 1850, 1870, 1880 and 1890. Thus, missing years are also interpolated for those two variables. Both these statistics are taken from the U.S. Census Bureau, which is freely available at www.census.gov. Finally, agricultural data for Nevada were only available from 1870 and after while railroad mileage begins in 1864. Therefore, agricultural employment is assumed to be the 1870 value from 1864 to 1870. This puts agricultural employment at 100% for Nevada in 1864. Although obviously overstated, this one data point does not disproportionately affect the empirical result and is therefore still included.

8 Unfortunately, due to a lack of viable instruments, it was not possible to regress all of the potentially endogenous independent variables together. Thus, they have been combined in the most logically consistent way possible.

9 Columns 16 and 17 are the only specifications in which these variables are statistically insignificant. However, at least in the case of column 17, it would appear that the instruments employed are extremely weak and may be driving the result.