The Towering Boondoggle

Authors: John Steele Gordon

Historic Era: Era 4: Expansion and Reform (1801-1861)

Historic Theme:

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May/June 2000 | Volume 51, Issue 3

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Businesspeople, even very savvy ones, make economic mistakes. In 1899, Asa Candler, the owner of Coca-Cola, thought the soft drink’s future lay with the soda fountain and gave away the bottling rights. In the American folk memory, the Ford Motor Company’s Edsel has become for corporate disasters what the Titanic is for shipwrecks. The reason for these lapses is simple enough. Humans are quirky, and predicting their future behavior, in the marketplace or anywhere else, is hard to do.

But capitalism forces businesspeople to try, and because their own future well-being depends on it, they try very hard. Politicians, however, don’t have to worry about market share or profits; they have to worry about getting reelected. That is why politicians have a far worse record in economic decision making than do businesspeople. Again, the reason is simple: Politicians don’t really make economic decisions; they make political ones.

When politicians do make the sorts of decisions that capitalists should make instead, the results often make the Edsel seem like a good idea in comparison. Consider New York’s World Trade Center. It has been in the news lately because the Port Authority of New York and New Jersey, a joint venture of the two state governments that own the WTC, has been paralyzed. The governors of the two states are locked in a dispute over how much of the Port Authority’s vast pool of development money should be spent in each state. One of the decisions hanging fire is whether or not to sell the World Trade Center. In truth, it should never have been built.

The Port Authority was established in 1921 so that New York and New Jersey could develop to the fullest the potential of New York Harbor, which the two states share. Over the years the Port Authority built bridges, tunnels, airports, and communication and harbor facilities. But it suddenly found itself in the Manhattan real estate business because the chairman of the Chase Manhattan Bank wanted to protect his bank’s investment in its vast new downtown headquarters, completed in the early 1960s, and his family’s real estate holdings. The chairman of Chase Manhattan at the time was David Rockefeller, and he wanted to see downtown New York remade. Fortunately for him, his brother Nelson happened to be governor of New York, and Nelson Rockefeller never saw a megadevelopment project he didn’t want to build.

After a great deal of political horsetrading between the two states, the Port Authority was authorized to build in New York two skyscrapers, each taller and far more spacious than the Empire State Building. In exchange New Jersey’s chronically money-losing Hudson Tubes, a subway system connecting New Jersey with Manhattan, would be taken over by the Port Authority. In theory the profits from the World Trade Center would cover the losses of the Hudson Tubes.

The result was, from an engineering standpoint, a marvel. From an aesthetic one, however, it was at best

a dubious achievement. The view of Manhattan as seen from the harbor had for decades been one of the world’s great vistas. But the huge bulk of the World Trade Center on the western edge made it look as if the entire island were about to capsize into the Hudson.

And, from an economic standpoint, the World Trade Center was an utter disaster. The complex was completed just as the deep recession of the mid-1970s forced New York to the edge of bankruptcy. The vast supply of new office space in the World Trade Center overwhelmed demand in the downtown area. Had the state not been able to force many of its innumerable agencies to take space there, the Twin Towers would have been largely empty. Not until 1993—ironically, the year it was bombed—did the World Trade Center begin to show a profit.

The World Trade Center, of course, is hardly New York State’s only big business mistake. The state has a rich tradition in this regard. The Erie Railway was New York’s World Trade Center of the 1830s. Curiously, it was the result of one of the best economic decisions ever made by the state of New York, the decision to build the Erie Canal. In order to secure the support of legislators from the Southern Tier, as the counties in New York bordering on Pennsylvania are called, Gov. DeWitt Clinton promised them an avenue of their own, once the canal was finished, built by or with the substantial aid of the state.

With the success of the Liverpool & Manchester Railway in England in 1830, the railroad craze was on, and the Southern Tier made it clear that a railroad was the sort or of avenue it wanted. But the success of the canal had changed the politics of New York State. The so-called canal ring, the legislators who came from the areas directly served by the canal, now controlled Albany and wanted no competition for their canal.

As a result, the charter, when it finally made its way out of the legislature, on April 24, 1832, virtually guaranteed an economic basket case. It established an independent corporation to build a railroad running through the Southern Tier but specified that the line must lie wholly in New York State. Because New Jersey occupies the western shore of New York Harbor, that meant that the eastern terminus of the road would have to be about twenty-five miles north, at the village of Piermont, New York. Moreover, because the canal ring wanted no interference with the canal, the western terminus was set not at burgeoning Buffalo but at the small Lake Erie town of Dunkirk, forty miles to the south. Only politicians could have designed what would be, upon completion, the longest railroad in the world, running, almost literally, between nowhere and nowhere.

The Erie was always “burdened with a capital structure that made it easy to manipulate on Wall Street.”

class="body">Furthermore, the legislature required that the Erie have the unusual gauge of six feet and not connect with any out-of-state railroad without the specific permission of the legislature. As a gauge of four feet eight and a half inches became the standard, other railroads quickly fell in line, in order to be able to use off-the-shelf rolling stock, crossties, and such. The Erie, forbidden by its charter to adopt the standard gauge, did not do so until the 1880s, and at huge cost.

As for connecting with other railroads, it seems the legislature feared they might siphon off traffic. That they might equally bring traffic to the Erie was apparently beyond the imagination of the solons at Albany. By 1850, they had finally learned that lesson, and they passed a law requiring all New York State railroads to connect with all possible out-of-state lines. As for the cost of the Erie Railway, with very little experience to fall back on, neither the surveyor of the proposed route nor the original management of the Erie or the politicians who so reluctantly authorized its construction had the faintest idea. This did not stop them from issuing estimates, of course. The surveyor thought it would cost $4,726,260. The management, in its first annual report, predicted a sum not exceeding $6,000,000. The Committee on Railroads of the state assembly, haughtily announcing that it was “discarding estimates founded n conjecture,” came up with a figure, based inevitably on conjecture, of $16,435,875, a number that included double-tracking the entire line.

The committee’s estimate proved to be as erroneous as it was exact. In the end the Erie Railway, with only 60 of its 450 miles double-tracked, took $23,500,000 and seventeen years to construct. In the context of the time, that was staggering. The sum was about what the federal government spent annually in the 1840s, more than three times what the Erie Canal had cost. To raise it, the Erie had to issue just about every form of security existing, from stock to preferred stock to debentures to convertible bonds. Furthermore, it had to be bailed out by the state three times lest the entire enterprise collapse into politically conspicuous failure.

As a result, the Erie from its inception was burdened with a capital structure that made it easy to manipulate on Wall Street, where plenty of people were more than willing to do so. It soon became known, in the memorable phrase of Charles Francis Adams, as the Scarlet Woman of Wall Street. Profitable only in the best of years, the railroad passed through bankruptcy and was reorganized no fewer than six times before losing its corporate identity altogether in the early 1970s.

The Erie at least became a model of how not to build a trunk-line railroad, just as the World Trade Center 120 years later became a model of how not to carry out a major urban development project. Still, the WTC disaster had one wonderful consequence. The dirt from the enormous

The Towering Boondoggle (May/June 2000 | Volume: 51, Issue: 3)

The Towering Boondoggle

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