July 14, 2020 · 8 min read
I recently came across a fascinating historical document: an 1857 pamphlet outlining a plan to build the US transcontinental railroad.
An aspect of the plan that struck me was its proposal for how to fund the railroad, which was simultaneously capitalist and democratic. It essentially advocated a broad-based, public-spirited, crowdfunding campaign.
Some background. In 1857 there was no transcontinental railroad in the US. The rail went only as far as the Missouri River. The Panama Canal had not yet been built. The West was like a foreign colony. To travel from New York to San Francisco took six months—whether by land, by sea, or a combination—and the journey was hazardous.
Theodore Judah, the author of the pamphlet, was an engineer and one of the railroad’s greatest promoters. He estimated that the railroad would cost $150 million, or about $4.4 billion in 2020 dollars, over about ten years. This was an enormous, if not unheard-of, sum.
The US government could afford the project, but Judah was convinced, for good reason, that they would never greenlight it. This was just before the Civil War, and the tension between North and South was strong. Both sides wanted the railroad, but both wanted the railroad to run through their part of the country and service their cities. Neither side wanted the other one to have the railroad. So they could not agree on where it should be built, and Congressional support for the project was gridlocked.
Because of this, Judah was convinced that the only feasible plan was to build the railroad entirely with private capital:
It is proposed to ask aid of no kind whatsoever from the General or any State Government, but to combine the interest of either the Northern or Southern States, upon their favorite route; to ask for private capital, and confine the sphere of action entirely to one or the other of these sections.
This insures unity of action.
The experience of all legislation in this country, upon a subject of general interest, but arousing sectional prejudices, shows conclusively that the fate of a project of this nature, dependent upon the general will, is most likely to provide an unhappy one.
What about wealthy capitalists? This was not Judah’s preferred option. The plan hints at two reasons why.
First, Europe was still the center of banking at the time. If the money for a project this big were raised from bankers, it more likely be in London than New York. Judah seemed to find this option distasteful, wanting to avoid
money to be borrowed at enormous rates of interest… loans to be negotiated in Europe… first, second or third mortgage bonds to be issued and sacrificed at one-half their value… commissions to be paid to negotiators.
The other clue is contained in his reference to loans, bonds, and interest. I’m not entirely clear on this, but in the mid-1800s, debt seems to have been used for many early-stage, risky and speculative projects which today would be financed by equity. Loans require a schedule of repayment: a good fit for an operating business with predictable cash flows, but not a good fit for a new venture with large and not entirely predictable capital outlays before it can start generating revenue. Whether or not Judah understood this theoretically and explicitly, he understood it at least implicitly:
Can a private company of moonshine speculators—do it? They may—that is, if they can induce simple-minded individuals to invest enough to give them a start, and then, upon the principle of putting in more to save what they have already invested, may drag its slow length along, and in thirty, or forty, or fifty years may build a railroad; but what a railroad! Say twenty millions of its cost has been actually paid in in good faith by the stockholders, then we will find a first mortgage, at eight percent., of say fifty millions of dollars; a second mortgage of fifty millions, at say ten percent; a third convertible mortgage of say fifty millions, at say ten percent., and a floating debt of fifty millions besides. We will find that a few men have become enormously wealthy, that English bondholders own the road, and that it takes all the earnings to pay the interest.
Judah proposed to build the road with equity, not debt, and to raise the funds not from English bankers, and not even from American bankers, but from a broad base of shareholders among the public. In essence, he proposed a 19th-century crowdfunding campaign.
His pitch to the public was not based on a promise of fantastic returns. Instead, he proposed to raise the money from the people who would actually benefit from the railroad: the cities, towns, and states that it would run through:
As has been before stated, the project of a Pacific Railroad is a popular one, and there are thousands—nay, hundreds of thousands—of public spirited, intelligent individuals who would give out and out a moderate sum, in proportion to their means, without ever expecting a return for the same, did they feel confident that this project was a practicable one, and that their money would be invested in the legitimate construction of the road, and not squandered or wasted among speculators.
Send copies [of the plan] to all public spirited men in every town and village, and then call public meetings, at which the report and plan shall be read and discussed, so that it shall be fully understood by the people.
At the time, equity was often sold on a “subscription” basis. The money for the shares of stock was not paid all at once, but a certain percent was made as a down payment, and then installments were paid on a regular schedule, or when called for. (Today, this method has been replaced by the mechanism of raising multiple rounds of capital: Series A, B, C, etc.) Judah suggested 10% down, and then another 10% each year:
Let [a company agent] give good and satisfactory bonds in an amount equal to the amount apportioned to his county, and receive subscriptions requiring at least ten per cent down at time of subscribing. Let a great simultaneous effort be made throughout the whole country at one and the same time. Let popular speakers be employed in behalf of the enterprise. Let it be impressed upon the public that it is a people’s railroad; that is not a stupendous speculation for a few to enrich themselves with. Show them that it is entirely in their hands and under their control; that its officers and managers are to be appointed by them, and hold office only at their pleasure. Explain that every agent in each county is under their eye; that the money which he receives from them is to be deposited as they direct; that his office, books and accounts are to be open at all times to their inspection. When he receives a subscription the name, date and per centage are all matters of record; that each month he shall make a report of all business. Let the papers strive to induce a spirit of emulation between counties and districts, by publishing the various amounts raised in various counties, districts, or by individuals.
He conceived of it as a broad popular enterprise, with everyone chipping in what he was able for the benefit of all—but not as a donation, rather instead as a sound investment that would retain its value, perhaps even to be passed down to heirs:
Let the lecturers show that there is not a man in the whole community who has hands to labor with who cannot afford to take one share of $100, and pay $10 per year, or three cents per day, in upon it; that there is no retail merchant, doing even an ordinary business, who cannot afford to take ten shares and pay in his $100 per year, or thirty-three cents per day. How many of them pay five times that amount for superfluities; let them show that there is money enough thrown away each year in superfluous luxuries to build a Pacific Railroad each year.
Show them that the money is not thrown or even given away; that a receipt or certificate is given to them for each installment, which represents so much money paid, and which ought to be worth its face in all business transactions. A treasurer’s receipt for ten dollars ought to be as good as a ten dollar bill. When the installments are paid in up to the one hundred cents on the dollar, which can be done at any time, they receive one full share of capital stock, which is actually worth $100. If they have children what better heirloom can they leave them than shares of this stock? The road will become profitable even before its completion, but by the time they are old enough to commence in the world for themselves, with their judgments ripened, so they can appreciate and take care of it, here are the shares of stock representing so much money, saved for them, perhaps from earnings which would have been dissipated and thrown away in useless luxuries, &c.
He repeated that he wasn’t fundamentally against the government building the railroad, but he thought it was impossible in the political context of the time (which it was), and he also thought it likely to lend itself to corruption:
It is a great and national treasure, worthy of the attention of our Government, and should in fact be built by them; but, as before mentioned, the proposition carries the elements of its own destruction with it.—What is the difference? If built by Government the people will have to pay for it; in the present case people pay for it.
The difference is here: In this case it is built by the spontaneous free will of those of the people who favor and are willing to pay for it, and who desire to protect the public purse from plunder, believing themselves better able to manage it than their political representatives.
On the other hand, if built by Government it is built by a political party, is a stepping stone to power, and will present upon a grand scale a repetition of the scenes enacted in some of our States, where the State works are used to control the legislation of the State.
A crowdfunded railroad, he thought, would by nature be better managed:
It is then to the interest of every body to keep up the credit of the stock, for every body is then interested in it. Nothing can affect its value but mismanagement. How can this road be mismanaged when the people themselves manage it? If built upon this plan it cannot become embarrassed. It is let to the lowest responsible bidder, for cash; this insures its being built economically. It is paid for in cash as the work progresses; this insures the steady progress of the work, and enables the company to perform their pay of the stipulation of the contract without embarrassment, thereby giving the contractor no cause to present bills for delay, detention, or neglect to pay estimates when due; and as the cash is called in from the stockholders only as wanted to carry on the work, it leaves no enormous fund on hand as a prey for dishonest agents, speculators, &c., but leaves the money in the people’s own pockets until wanted and called for to pay for work already done, or being done.
I find the nature and spirit of this plan interesting for a few reasons.
First, it represents the spirit of 19th-century America: “can-do” and optimistic about progress, unwilling to rely on government, but almost equally suspicious of private elites such as London bankers.
Second, it indicates a motivation and a basis for large-scale private support of projects that is neither charitable nor exactly profit-maximizing.
Third, I think we’ve essentially eliminated this option at least in the US today. Early rounds of equity are virtually always raised on private markets from elite “accredited” investors, in large part to comply with SEC regulations.
I can think of two modern-day analogues to Judah’s plan. One model is Internet-based crowdfunding campaigns, such as on Kickstarter. These are not based on equity, but typically on presales. However, savvy backers know they are taking a risk of never receiving the item they “purchased”, and consider their support to be a self-interested quasi-donation. The other model is based on cryptocurrencies, which have enabled a form of quasi-equity crowdfunding in the form of token sales.
Judah’s plan, however, was not put to the test. A few years later, the Civil War began. With the Southern states seceded, the North finally voted to support a railroad with land grants and bonds. Judah, who had been the biggest promoter of the railroad, tragically died in the early years of the project. Traveling from the West Coast to New York, he had caught yellow fever in Panama—which he had traveled through because the railroad was not yet built.
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