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1970

Uncle Sam, the Monopoly Man: Paying for Roads

Wooldridge answers the classic question:  “But who will build the roads?”

Uncle Sam:  The Monopoly Man, “Chapter Seven:  Paying for Roads,” New Rochelle (NY):  Arlington House, 1970, 128-134.

By William C. Wooldridge

Henry Clay once succinctly explained why he favored giving the federal government responsibility for building roads.  His argument has been complicated but not fundamentally changed in our own times.  It is, Clay said, “very possible that the capitalist who should invest his money in [turnpikes] might not be reimbursed three percent annually upon it; and yet society, in its various forms, might actually reap fifteen or twenty percent.  The benefit resulting from a turnpike road made by private associations is divided between the capitalist who receives his toll, the land through which is passes and which is augmented in its value, and the commodities whose value in enhanced by the diminished expense of transportation.”  From “society’s” point of view, capital should but put into roads unless some other investment yields more than three percent.  Such an investor will never put the optimal amount of money into roads, because he can demand tolls only of actual road users, not of local landowners, farmers and others who benefit from improved transportation.  Some economist call this phenomenon “neighborhood effects”—the inability of an investor to recoup from all those who are benefitted by his investment—and it would seem to have particular application to roads, since the advantages of efficient communication ultimately accrue to so many people.

The “three percent annually” mentioned by Clay as a return to investors was no imaginary figure; at the time he spoke the country teemed with investors in private roads who would have been happy to receive a regular three percent dividend on their stock, and observers counted the company that paid that much unusually prosperous.  Two or two and one-half percent probably would have been a more representative figure for the companies that did not leave their investors with a completely empty bag.  Turnpikes, as the private roads were called from the turnstiles that barred their entrance to unpaying travelers, were bad business by any normal standards.

If “society in its various forms” receives a return of fifteen or twenty percent from investment in roads, but capitalists can extract only three percent by charging tolls, too little money will be invested in roads.  Therefore it seemed logical to Henry Clay to have society itself make the investment, through the government.  That logic, plus the demands of the travelling public, has carried the day so successfully that the country’s road system has today become a de facto public monopoly.

Exactly the opposite situation prevailed for most of the important roads of the nineteenth century.  From 1800 to 1830 private investment poured into thousands of miles of turnpikes in the United States, notwithstanding the minuscule return the capital earned, and hundreds of turnpike companies built the roads that carried the rivers of emigration to the old Northwest and the products of the newly settled states back to the seaboard.  For the first third of the century, constructing the roads that were the only means of transportation to and communication with most parts of the West remained a function of private capital.  An occasional exception, like the famous National Road going west from Cumberland, Maryland, was a deviation from the norm.

The history of the grandfather of all the turnpike companies, the Philadelphia and Lancaster Turnpike Corporation, chartered in 1792, has much in common with all the rest.  Pennsylvania had no desire on principle to commit its program of road building to private enterprise, and in fact had resorted, unsuccessfully, to several other expedients before chartering its first turnpike company.  That was the pattern in most of the states where the companies later flourished; in the late 1700’s, the states tried lotteries, forced road service from local landowners, grants-in-aid to localities, and even offers of large acreages to contractors if they would build roads to the interior.  All these measures failed, as well as the routine expedient of levying taxes and spending them on the highways of the states.  None of the states’ financing schemes could begin to supply the volume of capital necessary for the improvements the people were more and more vociferously demanding as they in ever larger numbers pushed to the West.  An economist might have told the states that if the people needed roads that badly, it ought to be a simple matter to levy sufficient taxes to pay for them, but then as now political reality was not always conducive to economic models, particularly when the people using the roads were often using them to leave the states.  In view of the durable consensus on the necessity of publicly financed roads that developed well before the end of the nineteenth century, it is a little ironic that the private road companies should have been chartered only because it proved impossible for the states themselves to raise enough capital to build the roads everyone seemed to want.

There was no shortage of takers for the Philadelphia and Lancaster’s stock.  Capitalized at $300,000, it arranged to sell six hundred of its thousand $300 shares in Philadelphia and the remainder in Lancaster.  In the Philadelphia terminus, 2,276 citizens contended for the honor of purchasing the shares allotted to their city, and the six hundred selected by lot to receive one share apiece considered themselves fortunate.  In this respect, the experience of the Philadelphia and Lancaster was far from typical; many companies succeeded in obtaining charters from the legislature but never sold enough stock to justify beginning construction. Nevertheless, the total amount of capital the American turnpike companies of the nineteenth century were able to raise and put into roads is astonishing.  They sold their stock at a time before British and other overseas investors had taken to plunging heavily in America’s transportation enterprises, and had to extract the money $50 or $100 at a time from farmers and merchants who had a little money set aside but no interest in professional investments.  Most such individuals would take only one or two shares, and the trend in share-pricing reflects the market for the stock; the three hundred dollars a share price of the Philadelphia and Lancaster was soon succeeded by a norm of $50 or $100 a share, and even at the lower prices almost no one bought large blocks of turnpike stock.

None of the companies was capitalized at more than a few hundred thousand dollars; long stretches of road, requiring a million or more dollars for improvement to turnpike standards, were divided up among a number of connecting companies.  Small companies and widespread stock ownership were the only realistic way enough capital could be raised to make major improvements in the wretched transportation facilities available in the states after the Revolution.  The fragmentation was able to accomplish what nothing else could:  building a system of trunk roads, some hundreds of miles long, which linked all the principal entrepots of the eatern seaboard with the watershed of the Ohio River valley.

That was what the turnpike companies collectively accomplished, despite their chronically poor returns, and their seemingly impossibly limited resources.  What they lacked in size they made up in number.  Dozens upon dozens of companies entered the business before the railroad era sapped its vitality, and in some places corporations continued to be chartered into the 1870’s and 1880’s. Eighty-four companies had been incorporated in Pennsylvania by 1821, and they completed construction of 1,807 of the 2,521 miles of pike allotted them; at the peak of the movement, 2,400 miles of turnpike were in operation in Pennsylvania alone.  New York beat even those statistics, with sixty-seven companies by 1807, one hundred thirty-five by 1811, and fully two hundred seventy-eight different companies, operating 4,000 of their 6,000 miles of authorized road, in 1821.

These thousands of miles of private roads were the best roads America had enjoyed up to that time, and the principal arteries for the movement of both goods and people throughout the period of the first great westward surge.  As Henry Clay intimated, they may not have made their owners rich, but from the standpoint of transportation they certainly cannot be faulted, at least not in comparison with any realistic alternatives.  For despite complaints about undermaintenance, they were often, by the standards of the era, superlative roads, eighteen to twenty-two feet wide, graded with a rise in the center to facilitate drainage, rarely permitting inclines of more than three or four degrees, and generally surfaced with gravel or broken stone to a depth of a foot or more.  Such a road could cost $10,000 a mile to build, perhaps not an intimidating figure to a country now accustomed almost as a matter of course to spend a million dollars a mile on its superhighways, but one which represented the mobilization of capital on a scale theretofore unprecedented in the United States.  The Philadelphia and Lancaster is said to have spent, all told, $465,000 on constructing its road (or more properly, improving it, for like most turnpikes, it was built along an older trail), an average of $7,500 a mile.  The result was accounted a masterpiece of the engineer’s art and, more to the point, a boon to the thousands of Conestogas that coursed its length.

The Valley Turnpike in Virginia was still considered an outstanding example of road construction in 1900, sixty-five years after the company was chartered.  During the Civil War it stood up under some unusual traffic—railroad engines hauled along it between nonconnecting spurs by teams of forty to sixty horses.  In the twentieth century it introduced a revolutionary engineering innovation to American road building, asphalt surfacing, a technique which soon became commonplace.  All the Pike’s reputation, however, did not make it profitable, and under the company’s last president, Harry F. Byrd, its shareholders conveyed the road to the state in 1918.  No one ever made any money on the Valley Turnpike, and the characteristically low return to most road company shareholders has already been mentioned. 

It is at first surprising that the companies attracted as many investors as they did, and that the investors kept on pouring money into the roads when no profit could be hoped for; an example is the Valley Pike’s post-1900 investment in bituminous surfacing.  The explanation for this seemingly irrational investor behavior perhaps lies in the interests of the people who bought the stock.  No systematic analysis has been undertaken, but it appears that stockholders and perhaps officers, too, were precisely the people who Henry Clay thought were benefitting from roads without paying for them:  local merchants and property owners.  The University of Virginia Library preserves and 1839 broadside issued by the Valley Turnpike Company to counties that had not met their stock “quotas”; apparently the cost of building the road was distributed fairly precisely along its stretch.  Everyone who enjoyed a turnpike’s so-called external economies paid for them by giving it the use of his money at little or no interest.  No doubt an occasional dreamer hoped to profit on the stock per se, but speculators would probably have dealt in larger than the one-and two-share lots in which most turnpike stock moved, and they would probably have gotten cold feet long before the end of the turnpike movement.  In large part, America’s first passable network of roads was probably financed by just the people who stood to benefit from them indirectly, aided by tolls from the people who used them.  The durability of the turnpike era may be explained by its underlying economic rationality. But naturally the stockholders welcomed the chance to turn the onerous burden of continual maintenance over to the state as soon as the state would assume the responsibility.  Then they could have their roads for free, they thought.

The “turnpike era” of American history is generally said to have drawn to a close in the 1840’s, when railroads began to replace roads as the primary mode of commercial transportation.  A future generation of historians, however, may distinguish another turnpike era in our own times.  They might date it from the opening of the Pennsylvania Turnpike in 1940, and will have to extend it at least to the 1970’s, for turnpikes are still being built, and once again constitute some of the most important arteries of ground transportation in the United States.  The electric eye has replaced the turnstile in many cases, but in other respects today’s turnpikes are near cousins of their predecessors a century ago.

In the crucial area of finance, the family resemblance is particularly striking.  Modern turnpikes are generally built by “authorities,” independent bodies created by a state to finance, construct, and operate the road.  Although there are exceptions, for the most part the credit of the state is not committed to the project.  A contractor, for instance, can look only to the Ohio Turnpike Authority for payment of his bills; he cannot collect from Ohio.  When the Chesapeake Bay Bridge Tunnel Authority recently failed to earn enough money to pay interest on its bonds, Virginia did not rush to the rescue, contrary to the expectations of some people who did not understand the authority’s independent status.  The authorities, then, resemble a corporation organized for the sole purpose of carrying on the pay-road business—a turnpike company.

Sometimes the authorities may even try to realize a profit on their investment, not for shareholders, but for the sake of making capital available for investment in related facilities.  More often, however, authorities are not profit-oriented, and in that respect differ from a free enterprise turnpike company.  Yet regardless of whether it wishes to turn a profit, an authority must raise the capital to construct its road, and, since the people who buy its bonds can look only to the authority’s revenues (that is, to tolls) for payment of interest and principal on their investment, must plan to make money.  No one will buy bonds if the authority looks too public-spirited and not hard-nosed enough.  So even in the absence of shareholders, authorities operate according to considerations that govern the operation of any private company.  Bond issues have supplanted stock issues as the normal form of capitalization, and certain tax considerations are involved, but apart from that, today’s authorities are financial and economic twins of private turnpike companies such as the Philadelphia and Lancaster.

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