What was the impact of the growth of railroads on people of the 19th century?

They were liberating - increasing mobility and speed across the continent - as well as confining: they held the power of economic life and death over many communities, often abusing that power. The railroads played an important role in developing new concepts of management and brought forth giant corporations, but usually accompanied by obscure financial practices and greed. They provided employment for thousands and thousands of workers, but the conditions under which these laborers had to work and live made them revolt and informed the nation of the hardships of the working class. The railroads were also to a great extent responsible for the settlement of the West, but simultaneously helped extinguish the Native American population. They were a prize to be won for each part of the divided nation in the volatile years before the Civil War, yet linked the nation together with the first transcontinental railroad in 1869. They were born and raised on government money, yet eventually became the first and most heavily regulated segment of the private sector[93].

The importance of solving the question whether or not the railroads were the prime stimulus for American economic development fades when focusing on the effect they had on society as a whole. One cannot help but wonder how different America would have looked and functioned had it not been for the railroads.

This essay explains how railroads transformed late-nineteenth century America and shows how their impact was felt differently across class and racial lines.

The railroad, a symbol of both progress and peril, spurred rapid and far-reaching changes in late nineteenth century American society. Supported by government funds, railroad building boomed after the Civil War. There were only 2,000 miles of track in 1850; by 1877 there were nearly 80,000 miles in use. Crossing the wilderness, carrying people and freight at unheard-of speeds, the railroads changed the ways Americans thought and lived. As distant cities and towns were linked together, Americans increasingly identified themselves as citizens of a whole nation, not merely a single state. For the first time, people in different parts of the country could read the same news and buy the same products. Such basic concepts as time and distance took on new meanings—in 1883, the railroads forced America to adopt its first national time zones. The railroads accelerated the pace of the Industrial Revolution. New technologies, such as machine building and iron and steel production, advanced to meet the demands of railroad growth. By providing cheaper and faster freight delivery, the railroads helped create a new national market.

While the completion of the transcontinental railroad paved the way for exponential growth in the population and economy of the West and the nation, it also caused significant harm to many people. The first transcontinental railroad was completed in 1869. Over the next twenty years, railroads carried farmers and ranchers who settled on the Great Plains, soldiers who fought Indians wars, and hunters who killed buffalo for sport and profit. The farmers, ranchers, soldiers, and buffalo hunters, together with businessmen who came to develop the West's mineral and lumber resources, spelled destruction for the Great Plains Indians and their way of life. Working men and women were crucial to the growth of the railroads and the new industrial system, but they shared in few of its rewards. Railway workers labored an average of 12 hours a day, six days a week. Sometimes they worked 16 to 20 hours without a rest. Their average wage was $2.50 a day. Railroad work was difficult and dangerous, and in 1877 a nationwide rebellion of railroad workers brought the United States to a standstill. Eighty thousand railroad workers walked out, joined by hundreds of thousands of Americans outraged by the excesses of the railroad companies and the misery of a four-year economic depression. Police, state militia, and federal troops clashed with strikers and sympathizers, leaving more than one hundred dead and thousands injured. 

Following Donaldson and Hornbeck (2016), a county’s market access is defined as a trade cost–weighted sum over populations in all other counties, and it captures how cheaply goods can be transported from this county to all trading partners. A county has greater market access when it is cheaper to trade with another county, particularly when that other county has a larger population. The expansion of the railroad network across the country reduced trade costs drastically and thus increased counties’ access to other markets. While railroad construction is potentially endogenous and may depend on local economic conditions, changes in county market access are primarily due to changes in the railroad network elsewhere, rather than local railroad construction. The identification assumption is that counties with relative increases in market access would otherwise have changed similarly to nearby counties.

I estimate that the increased county-level market access induced by the expanding railroad network led to a significant increase in county-level wealth inequality. From 1850 to 1870, a one standard deviation increase in county market access leads to a 0.023 point increase in the Gini coefficient and a 3.24 percentage point increase in the real estate wealth share of the top 10%. This finding is robust to using different measures of wealth inequality, controlling for time-varying county characteristics, and adjusting for effects of the Civil War and westward migration.

I then show that a dynamic general equilibrium model featuring heterogeneous households, entrepreneurship, financial frictions, and trade can rationalize this result. Railroads are modeled as a device that leads to a decline in trade costs. I calibrate the model to match data moments in the United States in 1850. I use the calibrated model to study how the expansion of the railroad network affected income, wealth, and inequality. Both income and wealth are higher in the economy with lower trade costs. Lower trade costs lead to larger gains at the top of the distribution, increasing both income and wealth inequality. My calibrated model shows that the empirically observed reductions in average trade costs can explain approximately 60% of the observed increase in the real estate wealth share of the top 10% between 1850 and 1870.

Two key channels drive the differential effect of lower trade costs across the wealth distribution in the model. First, similar to Melitz (2003), the increased exposure to trade induces high productivity entrepreneurs to export, while at the same time forcing less productive entrepreneurs who were marginally profitable before railroads to exit. This selection mechanism reallocates market shares and thus incomes toward more productive (and wealthier) households. Second, financial frictions distort household decisions on the extensive margin by reducing the number of households that choose to be entrepreneurs and exporters. This happens because these choices require high levels of wealth to operate at a profitable scale. Financial frictions also affect household decisions on the intensive margin by distorting their production scale. When trade costs go down, constrained entrepreneurs hoping to take advantage of increased trading opportunities face a relatively steeper cost compared to unconstrained (wealthier) entrepreneurs.

What impact did the railroad have on the economy of the late 19th century?

How did railroads change the US in the late 19th century?

How did the growth of the railroad system during the 19th century affect the US economy?

What impact did railroads have on people's everyday lives?