The Boy Governor Endorses State Subsidies
On July 12, 1831, President Andrew Jackson, who was no prankster, did something that made many people laugh, some curse, and others rub their eyes in disbelief. He appointed nineteen-year-old Stevens T. Mason to serve as secretary and acting governor of the Michigan Territory.1
Surely, the critics wondered, this was the worst case of political patronage ever seen! But during the next ten years, the youthful Mason often vindicated Jackson’s judgment, becoming so popular that he went from acting governor to elected governor. He had been a child prodigy, a boy genius, and he became a shrewd politician. He plotted the strategy that brought Michigan into the Union; he made deals that defined Michigan’s boundaries on two peninsulas; and he was the mastermind who directed Michigan’s massive canal and railroad building in the 1830s.2
The career of Stevens T. Mason helps answer the question, “Can a state-directed program of internal improvements succeed if it is run by the smartest and most popular man available?”
The Mason story begins in Virginia, on the plantations of a great colonial dynasty. During the 1600s and 1700s, generation after generation of Masons led America from the battlefields of war to the halls of Congress. John T. Mason, the father of Stevens, hobnobbed with senators and even presidents on or near his thousand-acre estate in Loudoun County. The birth of his son Stevens T. Mason III in 1811 on the family plantation seemed to cement the Mason clan to Virginia.3
But John Mason had an adventurous spirit, a desire to move west and make his own success. In 1812, he packed up his family, crossed the Cumberland Gap, and traveled to Lexington, Kentucky. There he practiced law and joined his brother-in-law, William T. Barry, on the board of the Lexington branch of the Bank of the United States.
In this setting, young Stevens Thomson Mason—who was called Tom—was discovered to be a child prodigy. He absorbed knowledge like a sponge and could repeat verbatim highly detailed information months later. Tom breezed through the lesson “A is for apple” and moved into the declension of Latin nouns. Soon he could trace Caesar’s battle routes and recount the history of Virginia. By age seven, he could debate the merits of the Second Bank of the United States with his father’s guests. By age eight, young Tom had completed most of the entrance requirements to enter Transylvania University in Lexington. That year, 1819, General Andrew Jackson passed through Kentucky and visited the Mason family. Tom, who already knew the Battle of New Orleans intimately, astounded Jackson with his depth of knowledge.
Tom avoided the common trap of child prodigies: a haughty spirit and poor social skills. He was shy but also congenial and empathetic. He could listen as well as talk. Everyone—neighbors, family, and slaves—seemed to like him. He spent a year at a private school, and eventually a year at Transylvania University, and this helped him mix with others and set goals. He would be a governor someday, he was told, so he must train to be a leader of men, not just a master of facts.4
As Tom grew older, his father had some business mishaps and sought refuge in politics. John’s brother-in-law, William T. Barry, led the Democratic Party in Kentucky and helped Andrew Jackson carry the state and nation in the hotly contested presidential election of 1828. With Jackson in power, Barry was brought into the cabinet as postmaster general. He used his clout with Jackson to get John Mason appointed to a patronage job, the secretary of the Michigan Territory. Mason, of course, knew nothing about Michigan, but that was fine. He could learn from Lewis Cass, the territorial governor and a strong Jackson supporter.5
John Mason worked at the territorial capital, which was then in Detroit, and Tom, now eighteen, tagged along with his father to help. John was no politician and soon grew bored with his job. Tom, however, flourished. He ran errands, greeted visitors, and copied letters. Governor Cass marveled at Tom’s amazing retentive skills and efficient office work.6
After a year in Michigan, John was restless again and wanted to move to Texas, where he had inherited some land. In July 1831, President Jackson rearranged his cabinet and came up with a stunning solution: Cass would come to Washington as secretary of war; John Mason would go to Texas and seek his fortune; and Tom Mason—age nineteen years, eight months, and twenty-eight days—would be the new territorial secretary and acting governor! Young Tom was clearly overwhelmed, but he went to Washington to meet with the president. Jackson spent several days with him, doting on him, and treating him like a son. “Now Tom write to me,” urged the president. “I’ll back you to the limit, boy. Assert your authority and if you get into trouble, notify me!”7
When Mason arrived in Detroit, he was tactful. Yes, he told the prominent citizens, the president knew that he was only nineteen, but had confidence that Mason could do the job. Moreover, the Constitution of the United States, which allows the president to appoint territorial officers, gave Jackson authority to choose Mason as governor.8
Having answered the legal arguments, Mason asked for advice and guidance. Would wise men help him to lead Michigan? He put this question one-on-one to influential people throughout the territory. For example, he traveled on horseback to Mount Clemens to ask Judge Christian Clemens, a key leader, for his help. Judge Clemens said, “Go to it, boy. Do what is right. Up here, we’ll back you.” And so did many others across the state. “Youth yields to advice,” Mason wrote to the Detroit Free Press, “age seldom or never.” The “Boy Governor,” as he later came to be called, thus turned his age to his advantage. He spent many evenings during the next few years in the fashionable bar at Uncle Ben Woodworth’s Steamboat Hotel, listening to Detroit’s politicians.9
Seven generations of Masons in America had produced four major generals, three ambassadors, five U.S. senators, three governors—and now one acting governor. But Michigan would soon learn that Mason had been studying government and the history of civilization since he was six years old. In fact, his family had contributed greatly to the debate in America about individual liberty and limited government. His great-granduncle, George Mason, wrote the Virginia Declaration of Rights, which became the basis for the Bill of Rights in the U.S. Constitution. The proper sphere of government, as expressed in the Constitution, was to provide for the national defense and to promote law and order. When young Tom Mason applied these family principles to Michigan, he governed well.10
His first crisis was one of national defense—the Black Hawk War. Chief Black Hawk, leader of the Sauk, urged Indians in Michigan to join him on raids against the white settlers. Mason called out the territorial militia, and three hundred men volunteered and marched toward Chicago, where Black Hawk was ultimately captured. The Boy Governor won praise for decisive action to protect his citizens.11
Mason’s second crisis was one of law and order: the cholera outbreak of 1832. As a major port, Detroit was vulnerable to epidemics. No one knew much about disease control, and open sewers flowed through the city. During 1832, a cholera plague blighted Detroit and claimed the lives of 10 percent of its residents. With death and disease everywhere, Mason took swift action. First, he offered the top floor of the capitol building as a hospital. Then he worked day and night to keep the roads to and from Detroit open so that medicine, food, and supplies could reach the ravaged city. When, for example, the town of Pontiac blocked its road to Detroit, Mason ordered the barriers removed. Then Mason galloped into towns throughout the territory opening roads, tending the sick, and securing medicine for Detroit. When winter came and the plague subsided, Michiganians praised the Boy Governor for risking his life to restore order in the territory.12
Mason’s daring leadership in the cholera scare was good preparation as he guided Michigan into statehood. The Northwest Ordinance of 1787 had set up the procedure for the territory, so he ordered a population count. Then he surveyed the boundaries and directed the writing of the state constitution. In the quest for statehood, Mason had to overcome border disputes in which Ohio won control of Toledo, but Michigan gained its upper peninsula from Wisconsin. Finally, in 1835, the Michigan Territory held its first election under its new constitution.13
Mason won the contest for governor, and used his skills and the power of his office to negotiate the best deal for Michigan that he could. The sooner Michigan became a state, the sooner it could receive a share of the surplus that the federal Treasury had remarkably amassed back in the 1830s.14
With his encyclopedic mind, Mason no doubt knew about the government debacle in fur and carefully considered its implications for his administration. Would Mason, as governor, stick to enforcing the laws, or would he move the government into economic development? The event that would shape Mason’s thinking on this subject—and that of millions of other Americans as well—was the digging of a long ditch in western New York.15
In 1825, the Erie Canal opened navigation between Lake Erie on the west and the Hudson River on the east, which flowed into New York City. An astonishing achievement in engineering, the new canal had an enormous impact on American thinking: a channel 363 miles long connected the Great Lakes with the Atlantic coast—and suddenly New York City could easily trade with farms and cities throughout the Midwest. Profits from tolls along the canal flowed into New York’s treasury, and the whole Great Lakes region boomed. And the Erie Canal was funded neither by private entrepreneurs nor by the federal government, but by the state of New York.16
The building of the Erie Canal, and the politics surrounding it, became a landmark event in American economic history. On the subject of transportation, almost all Americans wanted better roads and new canals—“internal improvements” as they were called. Better rivers and roads brought goods to market quicker and cheaper. Trade expanded, cities grew, land values skyrocketed, and prosperity occurred. All of this especially applied to New York’s Erie Canal, which would bring to New York the commerce along the Great Lakes. Building the Erie Canal was a splendid idea. The only question was how to fund it: with federal spending, state spending, or by entrepreneurs?17
New Yorkers had wanted their canal finished as quickly as possible, and in 1811 Congressman Peter Porter from New York argued before Congress for federal spending. The Erie Canal, he insisted, would have national benefits and tie much of the country together in a prosperous enterprise. The Constitution, however, did not empower the federal government to tax all people for a road that mainly benefited one state. Porter’s canal bill failed. But after the War of 1812, New Yorkers brought the bill back, and Congress barely passed it in 1817.18
President James Madison, on March 3, 1817, his next to last day in office, vetoed the Erie Canal bill. “I am constrained by the insuperable difficulty I feel in reconciling the bill with the Constitution of the United States,” Madison wrote. Then he expanded his argument by making two points.
First, “to refer the power in question to the clause ‘to provide for the common defense and general welfare’ would be contrary to the established and consistent rules of interpretation.” He added, “Such a view of the Constitution would have the effect of giving to Congress a general power of legislation instead of the defined and limited one hitherto understood to belong them, the terms ‘common defense and general welfare’ embracing every object and act within the purview of a legislative trust.” Madison, of course, was a leader at the Constitutional Convention, so he knew how restricted the general welfare clause was intended to be.
Second, Madison endorsed internal improvements, but suggested they be undertaken by the states or by private citizens. “I am not unaware of the great importance of roads and canals and the improved navigation of water courses, and that a power in the National Legislature to provide for them might be exercised with signal advantage to the general prosperity.” But because the Constitution does not allow such an expansion of the federal government, “I have no option but to withhold my signature from it, and to cherishing the hope that its beneficial objects may be attained” by other means. Madison wanted the Erie Canal, but not with federal funding.19
After the veto, New Yorkers immediately sprang into action. J. Rutsen Van Rensselaer, a large landowner, suggested private funding to get the canal going, but DeWitt Clinton urged the state legislature to fund the canal immediately through taxes and bonds. Clinton was mayor of New York City and soon to be governor of New York; as a lifelong politician he was prone to seeking political solutions to economic problems. Some New Yorkers, however, balked at the taxes and at the possibility that such a large economic undertaking might fail. State senator Martin Van Buren, Clinton’s chief political rival, decided to back the state funding scheme and swung the state senate behind Governor Clinton. The House approved as well, and in 1817, the state of New York began building the Erie Canal.20
The results were spectacular. The tolls on the increasing traffic on the 363-mile canal paid for its $8.4 million cost of construction, and it was profitable even before it was finished in 1825. According to Cadwallader D. Colden, one of the canal’s promoters, “We see [in 1825] with astonishment, the progress already made in populating regions which only yesterday, it may be said, were uninhabited. Already the whole Canal line is occupied. Almost at every turn in its course the traveler will find a village presented to his view, about which everything indicates, by the newness of its appearance, that it is but the growth of a few months.” As for New York City, it surged into first place as the largest city in the United States. As one observer noted, “If the canal is to be a shower of gold, it will fall upon New York; if a river of gold, it will flow into her lap.” Of the Erie Canal, one of DeWitt Clinton’s friends wrote, “Next to the establishment of American Independence, it is the greatest achievement of the age.”21
After 1825, thousands of New Yorkers filtered into Michigan via the Erie Canal. Governor Mason himself eagerly used the Erie Canal when he had to go to and from Washington to see President Jackson. Almost everyone in Michigan gushed with praise for this new water route, which brought immigrants to their state and took their exports to markets on the east coast. The message seemed obvious: States that wanted to get ahead needed active governments to tax their citizens to build a transportation network.22
To compete with New York, for example, Pennsylvania spent $14.6 million on its Main Line Canal from Philadelphia to Pittsburgh. Maryland and Massachusetts joined in the rush with a variety of state-supported projects. Ohio and Indiana began elaborate canal networks in 1837, just when Michigan entered the Union. Railroads were being built, too, and some states laid tracks and bought locomotives.23
To Governor Mason this was all exhilarating. Maybe the traditional theory of limited government was wrong! Maybe states could be creators, at least in the area of transportation. And after all, it was state governments, not the one in Washington, that were building these canals.24
Even as territorial governor, Mason urged Michigan to lay the foundation for the state to build internal improvements. When delegates met in 1835 to write the Michigan constitution, they—with Mason’s encouragement—wrote the following into law:
Internal improvements shall be encouraged by the government of this state; and it shall be the duty of the legislature, as soon as may be, to make provisions by law for ascertaining the proper objects of improvement, in relation to [roads], Canals, and navigable waters.25
That’s the way Mason wanted it: The new constitution almost required the state to fund internal improvements. “The spirit and enterprise which has arisen among our citizens, if fostered and encouraged by the State, cannot fail to lead to lasting prosperity,” Mason said. By 1837, three weeks before Michigan entered the Union, Mason was more urgent: “The period has arrived when Michigan can no longer, without detriment to her standing and importance as a state, delay the action necessary for the development of her vast resources and wealth.” He was also optimistic: “[W]e cannot fail soon to reach that high destiny which awaits us. I . . . demand immediate legislative action.”26
Mason wanted to proceed wisely. Therefore, he urged the state legislature to create a Board of Internal Improvements, just as New York had done, to survey routes and choose locations. He believed that such a board of experts would avoid “extravagant, unprofitable, and useless expenditures.”27
With Mason leading the cheers, the legislature met and almost unanimously passed an elaborate internal improvements bill. Democrats and Whigs supported it. When the alternate strategy of private ownership came up, Mason recommended that the canals and railroads “should never be beyond at least the partial control of the state.” “Extortion from the public” was what Mason called one bill to charter a private railroad. Most Michiganians seemed to agree. As the Detroit Daily Advertiser noted, “DeWitt Clinton . . . built the [Erie] Canal with the funds of the state. What would be thought of the policy of surrendering that great work to the control of a private corporation[?]”28
The politicians of Michigan, and in many other states as well, could not even imagine building a canal or railroad without “the funds of the state.” The example of the Erie Canal had become the ace that trumped all opposing arguments.29
In following the lead of New York, Governor Mason and many others believed New York was typical. They overlooked the fact that the Erie Canal was a special case: New York had unique advantages for canal building. Granted, the Erie Canal was an engineering marvel, but it was dug across relatively flat terrain; also, the canal connected many strategically located lakes, all of which made the building easier and not so costly. And the route of the Erie Canal had only five hundred vertical feet separating its high and low points. When other states tried to build canals over much hillier terrain, the costs of construction and maintenance skyrocketed.30
Another advantage for New York was the remarkably large population groups connected by the Erie Canal. New York City, the eastern port for the canal, already had strong commercial ties throughout the world and was a funnel for immigration. Lake Erie, the western terminus, had outstanding access to the interior of the nation. The potential was high for large profits from huge amounts of trade along this route.31
The leaders of Michigan, and other states, saw only the profits from the Erie Canal, not its unique advantages. Michigan eagerly copied New York’s example, and if one state subsidy was good, two must be better, and three better yet. Michiganians were so confident their state projects would flourish that they promised to build two railroads from Lake Erie to Lake Michigan, along with a couple of major canals.
Mason calculated that Michigan should spend $5 million to build these projects. At a time when a dollar a day was excellent family income, $5 million was huge. But Governor Mason did not worry. As soon as the anticipated tolls started pouring in—as happened with the Erie Canal—the state could then build even more. The legislature approved the $5 million that Mason suggested, and gave him authority to negotiate a $5 million loan with the lender of his choice under the best terms he could get, as long as he didn’t exceed interest payments of 5.25 percent. The state, in this arrangement, would issue bonds for the $5 million and pay them back as tolls came in from the railroads and canals.32
Bad luck was the first problem to strike. The national economy went into a tailspin—the Panic of 1837—and capital was hard to borrow. Then came distractions. Mason talked with investors and studied the bond market in New York. During his discussions, he became sidetracked in New York City by Julia Phelps, the daughter of a wealthy leather merchant, Thaddeus Phelps. Mason courted and married her in 1838.33
Then came bad judgment. Businesses were failing because of the panic, and most sound investors wanted more than 5.25 percent for their money. Mason finally persuaded the officers of the Morris Canal & Banking Company, a reputable firm, to buy the Michigan bonds. They promised to pay him the $5 million in regular $250,000 installments over several years. Mason gave them the bonds and went back to Michigan with their promise. The Morris Company then turned most of the bonds over to the Pennsylvania Bank of the United States, which then sent them to Europe as collateral for its own investments. Within three years, both the Morris Company and the Pennsylvania Bank went broke, which left Michigan with a $5 million debt scattered among European investors.34
An even greater disaster loomed as construction on the actual projects began. First, builders began a canal in Clinton Township near Detroit and planned to extend the waterway 216 miles west to Kalamazoo. Governor Mason broke ground in Mount Clemens in 1838 to celebrate the Clinton-Kalamazoo Canal. Bands, parades, speeches, and a thirteen-gun salute commemorated the occasion. Then came reality. The Board of Internal Improvements, which Mason appointed to supervise the projects, hired different contractors for each mile of the canal, and these contractors each had different ideas on how to build it. One thing they all did wrong was to make the canal only twenty feet wide and four feet deep—too shallow for heavy freight and too narrow for easy passing.35
After seven years, and only sixteen miles of digging, the ledger for the unfinished canal read: “Expenses $350,000, Toll Receipts $90.32.” With funding scarce, the board decided sometime around 1843 to cut its losses, abandon the canal, and focus on the two railroads. When construction on the canal stopped, some workers went unpaid, and they stole materials from the three locks on the canal. Soon even the completed parts of the canal were ruined.36
The two railroads also had problems. The Michigan Central was to go from Detroit west through Ann Arbor, then on to Jackson, Kalamazoo, and St. Joseph on Lake Michigan. Boats at St. Joseph could then take freight or passengers to and from Chicago. The route went through prosperous wheat farms and the state’s larger cities, but the Central was built with only strap-iron rails, which consisted of thin strips of iron strapped onto wooden rails. These rails were too fragile to carry heavy loads. Rather than switch to the more expensive and durable T-rails, the Board of Internal Improvements chose to run regular heavy shipments over the existing tracks and repair them frequently. Not only was this practice dangerous but it was also more costly to the state in the long run.37
Robert Parks, who wrote a detailed book on Michigan’s railroads, found a deplorable situation on the Central:
[O]verloaded locomotives were run at twice the recommended safe speed. Under the strain of continuous operation and jarring impact of high speed on strap-iron rails, locomotives and cars were shaken to pieces, and the cost of operation mounted dramatically. Rails were broken and timbers crushed under the heavy loads bouncing over their surface.
By 1846, the Central had been extended only to Kalamazoo. It was in financial trouble and did not earn enough to pay for needed repairs or new rails.38
The second railroad, the Michigan Southern, was to parallel the Central in southern Michigan from the town of Monroe to New Buffalo. Financially, the Southern was a stunning failure. It had the same problem as the Central with heavy loads on strap-iron rails. What’s worse, the Southern was poorly built. The roadbed was shaky and the curves too sharp for locomotives.
The port at Monroe, Michigan, on Lake Erie, proved to be too shallow for heavy freight to enter or exit. Also, the small towns west of Monroe sent little traffic on the Southern. By 1846, the tracks had only reached Hillsdale, about halfway across the state, costing more than $1.2 million to build with very small earnings. The railroad did little to move goods or people across the state; instead, it drained capital that could have been used more wisely.39
Michigan spent almost $4 million on the Clinton-Kalamazoo Canal, the Michigan Central, and the Michigan Southern. In addition, the state spent about $70,000 surveying the Michigan Northern Railroad, from Port Huron to Lake Michigan, before abandoning it. The state also spent $47,000 clearing the route for a canal and turnpike near Saginaw. Officials soon quit the project and the materials “either rotted or were expropriated by local residents.”40
Many of these problems occurred after Mason was governor, but he received most of the blame because he had touted the projects and signed the loan. In 1837, he narrowly won reelection as governor, but in 1839 his Whig critics were loud and brutal. Mason chose not to seek a third term. By that year he had begun to consider that the problems with the projects were more than just bad luck or poor management. Maybe the state should never have drifted into economic development. In Mason’s final address as governor, he said:
[T]he error, if error there is, was the emanation of that false spirit of the age, which forced states, as well as individuals, to over-action and extended projects. If Michigan has overtasked her energies and resources, she stands not alone, but has fallen into that fatal policy, which has involved in almost unparalleled embarrassments so many of her sister states. Now, however, the period has arrived, when a corrective should be applied to the dangers which seem to surround her.41
But in a state-supported system, as Mason had begun to realize, this result would have been hard to avoid. The “false spirit of the age” had done its damage. The funding must come through the legislature, and the legislators naturally wanted projects in their districts. Jobs and markets were at stake. Some historians have suggested that if the Michigan Central had been the only project built, the strategy of state funding might have worked. But this was politically impossible. The legislators in the towns along the Central—Detroit, Ann Arbor, and Kalamazoo—needed votes elsewhere to have their railroad built. And the price for these votes was a commitment to build canals in Mount Clemens and Saginaw and a second railroad in Monroe and Hillsdale.42
Mason, being very intelligent, saw this problem early and tried to stop it by centralizing power in a Board of Internal Improvements. That would allow experts, not politicians, to plan the routes, buy the materials, and build the roads. The board’s decisions, however, proved to be just as politically motivated as the legislature’s actions. First, many legislators pressured (and possibly bribed) those on the board. Second, some of the board members secretly made money building the projects.43
The story of Levi Humphrey is a case in point. Mason appointed Humphrey, a seemingly trustworthy Democrat, to the Board of Internal Improvements. However, when Humphrey took bids for constructing the Michigan Southern, he rigged the results to ensure that his friends in the firm of Cole & Clark won the contracts. Cole & Clark then charged three to four times the market price for supplies. When protests reached the legislature, Cole & Clark used some of their profits to bribe witnesses. The Whigs complained loudly, but when they won the governorship in 1839, they did not do much better. In 1840, the board overspent its budget and covered it up by falsifying its records.44
Much of the problem with the board and the politicians points to a distinct tendency of human nature: People do not spend government funds as wisely as they spend their own. If Governor Mason, for example, had been a wealthy industrialist, would he have invested $5 million of his own money with bankers he hardly knew during a national depression? Would any of the legislators have done so?
The spending policies of the board raise similar questions. In 1838, for example, the board had a bridge built over the Rouge River. The problem was that the bridge they decided to build could not carry heavy freight. The Central Railroad, not the builders, lost almost ten thousand dollars that year hauling passengers and freight around the bridge. Since no individual or private company owned the bridge, no one had a direct financial stake in building it well—or even protecting it. The next year an arsonist destroyed the bridge.45
In another example, the board ordered iron spikes for the Michigan Southern in 1841. The contractors, however, only put one spike in every other hole along the track. They stole the rest of the spikes and, when questioned, persuaded the board that the unused spikes were defective. The board simply believed the contractors and left the track partly unspiked.46
The Boy Governor, no longer a boy, left office in 1840 at age twenty-eight. He had served almost nine years as secretary, acting governor, or elected governor. During this time, he had focused so intently on administration that he left office almost penniless.
Mason decided to leave Michigan for New York City, his wife’s home, and seek his fortune there in law and business. As he entered Buffalo, and made his way across the Erie Canal to New York City, he may have wondered why the experiment with an active government worked so much better in New York than in Michigan.
During the next two years, however, if Mason studied local politics, he saw New York repeat Michigan’s experience. New Yorkers were in such euphoria over internal improvements that they committed their state to widening and deepening the canal. Then, under pressure from other parts of the state, New York pledged to build eight branch canals that would feed into the Erie.47
New Yorkers, under the direction of Whig governor William Seward, voted to fund the new canals and the expansion of the Erie by state debt, not by tolls or taxes. Seward argued, in effect, that if we build it, they will come—that the canals will generate settlement, prosperity, and profits wherever they are built. Seward’s economic advisors predicted that revenues would quickly exceed expenses. Mason arrived in New York in 1840, just in time to see Governor Seward struggle with a rise in debt, not revenues. In 1840, New York’s projected $2 million surplus became a $15 million debt instead.48
The branch canals, for example, were a disaster. The state projects in New York, like those in Michigan, had become “the false spirit of the age.” Some of them, like the Black River Canal from Rome to Boonville, were doomed from the start. The Black River Canal was only thirty-five miles, but it ran through the Adirondack Mountains. Engineers had to build 109 expensive locks (the whole Erie Canal had only 83) to get boats and barges up and down the channel, and the costs of construction and upkeep were huge. In a similar way, the Chenango & Binghamton Canal cost three times more to build than it took in from revenues. The Genesee Canal was worse—it ran south to Olean to connect with the Allegheny River, but the costs of construction were seven times what was earned in tolls. The eight branch canals cost New York $9.4 million, and all of them drained more cash than they took in.49
Governor Seward, like Governor Mason, left office under a wave of criticism. New Yorkers were so upset that many wanted to stop construction entirely; others wanted to sell the canals, if buyers could be found, to private investors. Eight banks, which held investments in the canals, had closed, and new taxes had to be imposed. In 1846, the state of New York elected delegates to a state convention that quickly pledged New York would take on no new debt, and would try to retire existing debt as soon as possible. Horatio Seymour, who followed Seward as governor, was so restrained, and even appalled by New York’s financial mess, that he delivered a warning to the nation not to let any federal money be spent for “extravagant systems of internal improvement.”50
Governor Mason must have been amazed at how New York had followed Michigan’s failure. In 1843, five days after Seward left office in disgrace, Mason died in New York City from cholera. Both were casualties of the “false spirit of the age,” but Seward reinvented himself on the slavery issue five years later and won a Senate seat in New York. In 1861, he became secretary of state under President Abraham Lincoln.
Many states other than Michigan joined New York in the canal craze, and all suffered from imitating the example of the Erie Canal. Pennsylvanians, for example, borrowed $14.6 million, almost twice what New York had spent, on a risky Main Line Canal from Philadelphia to Pittsburgh. The expense was greater because the rugged terrain between these two cities was much harder to penetrate than the flatter route between New York City and Buffalo. Furthermore, Pennsylvania also built six expensive canals throughout the state that would connect with the Main Line Canal. The large losses on these projects each year forced the state into default on its bonds, which also damaged American credit abroad. Since Pennsylvania made no effort to connect its canals with the Erie system in New York, a private company built the eighteen-mile Junction Canal to tie the two states together. Finally, in 1857, Pennsylvania sold all of its canals to private ownership for about one-third of what it cost to build them.51
After the canals were sold, the privately owned Pennsylvania Railroad began to return the prosperity to Pennsylvania that was taken away by the Main Line Canal. Philadelphia, which had been the largest city in the nation before the Erie Canal, was about half the size of New York (including Brooklyn) by 1860. Some Pennsylvanians, pondering the failed canals, noticed that the terrain in their state was steeper and more rugged than in New York. Building the Erie Canal on relatively flat land in an area with many lakes had been easier and cheaper than building in Pennsylvania’s somewhat mountainous terrain.52
The Ohio legislature, in 1825, voted funding for two statewide canals that would link their state with Lake Erie. Like Pennsylvania, Ohio also funded other canals throughout the state, many of which, like the Walhonding Canal, were built only as political patronage. The Ohio projects lost so much money that Ohio held a constitutional convention in 1850 to stop the red ink. State funding came to a halt, and Ohioans earnestly sought to turn their projects over to private enterprise. In 1861, the state finally leased their canals to private operators. “Everyone who observes,” one newspaper editor said, “must have learned that private enterprise will execute a work with profit, when a government would sink dollars by the thousand.”53
Indiana had a strategy very similar to Michigan’s. In 1836, Indiana committed to building $10 million in canals, railroads, and turnpikes. By 1840, the state was deep in debt, and the projects were generating much expense and little income. By 1846, Indiana had abandoned its canal system except for the Whitewater and the Wabash & Erie canals, which were finally completed—like those in Michigan—by a private corporation.54
Maryland racked up $15 million in debts by 1840 in funding canals and railroads. The tolls and revenue from these state investments were so small that Maryland didn’t even make annual interest payments for eight years to its foreign creditors, the Baring brothers in London. The Baring brothers, frustrated with Maryland, decided to manipulate Maryland politics to get their money back. They hired American influence peddlers to campaign for the election of candidates for governor and the state legislature in Maryland who favored repayment of the state’s debt. Such political lobbying seems to have helped, and Maryland paid off its debt from internal improvements in the 1850s.55
The story of state government failure goes on and on. In 1837, Illinois voted $10.2 million for various canals, railroads, and state projects—but the only results from these expenses were a massive state debt and twenty-six miles of railroad. In the state legislature, Abraham Lincoln was one of the misguided promoters. In Missouri, voters were so dismayed by their failed state-supported railroads that they passed a constitutional amendment forbidding their state from loaning money for future enterprises.56
By the mid-1840s, Mason had left Michigan, but his “false spirit of the age” speech had reopened the debate on the role of Michigan’s state government in economic development. William Woodbridge, the governor who followed Mason, suggested selling the railroads to entrepreneurs and getting government out of the internal improvements business. At first, many resisted privatization.57
As the number of blunders on the projects began to multiply, however, more pressure came for the state to privatize. John Barry, who was elected governor after Woodbridge, echoed Mason and talked about “the spirit of the times unfortunately [becoming] the governing policy of states.” Barry argued that “in extraordinary cases only . . . should a state undertake the construction of public works.” He continued: “Seeing now the errors of our policy and the evils resulting from a departure from correct principle, let us with the least possible delay correct the one by a return to the other.”58
Thomas Cooley, Michigan’s most prominent lawyer in the 1800s, observed firsthand the way his state ran its railroads. “Doubts were arising in the minds of the people,” Cooley wrote, “whether the state had been wise in undertaking the construction and management” of internal improvements. “These doubts soon matured into a settled conviction that the management of railroads was in its nature essentially a private business, and ought to be in the hands of individuals. By common consent it came to be considered that the state in entering upon these works had made a serious mistake.”59
By 1846, Governor Alpheus Felch, who had followed Governor Barry, carried the day for privatization. “The business of transporting passengers and freight by railroad is clearly not within the ordinary design of state government,” Felch observed. The legislature finally agreed and voted to sell the state’s public works in 1846. The state took bids and sold the Central for $2 million and the Southern for $500,000. As a result, Michigan recovered 90 percent of its investment in the Central and 44 percent in the Southern. If the losses on the canals and other projects are included, the state—through this sale—recaptured about 55 percent of its total investment in internal improvements.60
As a condition of the sale, the new railroad owners had to agree to rebuild both lines with quality rails and extend them to Lake Michigan within three years. It had taken the state nine years to move the lines not much more than halfway across the state; the new entrepreneurs had to rebuild that part and complete the rest in just three years. When they did so, and kept rates competitive, too, Michiganians showed they could learn from history.61
In 1850, Michigan held a state convention to replace the 1835 constitution, which had mandated government support for internal improvements. Instead, the new constitution stated, “The State shall not subscribe to or be interested in the stock of any company, association, or corporation.” Further, “the state shall not be a party to or interested in any work of internal improvement, nor engaged in carrying on any such work” except for the donation of land.62
The public debate that followed showed overwhelming support for the new constitution. “Looking at it as a whole,” said the Grand Rapids Enquirer, “we honestly believe that if it had been adopted at the organization of our [s]tate [g]overnment, our [s]tate would now be out of debt, prosperous, and flourishing.” In November 1850, the voters of Michigan overwhelmingly accepted the new constitution. Michigan, like its neighboring states of Ohio, Pennsylvania, and New York, had learned from its history.63
The story of the Erie Canal and its impact on the nation reveals the dynamics of large government projects.
First, when the state of New York built the Erie Canal, it was a landmark event in American thought. Many citizens believed the state should be active in promoting internal improvements, and perhaps most economic development. The Erie Canal seemed to be proof of the blessings of such government action. It made profits on tolls even before it was completed, and along the Erie line, towns flourished, real estate values skyrocketed, and the prices of goods dropped. New York City became the commercial center of the entire nation.
Second, in analyzing the dramatic success of the Erie Canal, most Americans overlooked New York’s natural advantages. The topography and relatively flat terrain gave New York good options, and by using the Hudson River and the Finger Lakes as part of the route, construction costs were manageable. And the terminus at Buffalo allowed New York to connect the Great Lakes with the Atlantic Ocean, which guaranteed a burgeoning trade with a huge population.
Third, many other states, especially those near the Erie Canal, focused more on New York’s state activism than on New York’s excellent topography. Michigan, Pennsylvania, Maryland, Ohio, Indiana, and Illinois all launched elaborate internal improvement projects at state expense. Politicians asked, “Wouldn’t simply building the canal, or railroad, cause prosperity and settlement to spring forth?” Even Governor Mason, with his brilliant mind, believed that he and his Board of Internal Improvements could plan routes, buy materials, and profitably build two railroads and two canals across Michigan.
Fourth, the government projects in all of these states were massive failures. Even New York, because of its unprofitable branch canals, eventually lost money on its canal system. Governor Mason, when he saw what happened, dubbed the idea of making profits from state-built internal improvements as the “false spirit of the age.”
The reasons for failure were similar in every state. Politicians needed votes in the legislature to pass bills to build these large projects, and only by steering canals and railroads into many districts could those votes be secured. Entrepreneurs, by contrast, have to choose the best routes and build wisely to make a profit. Entrepreneurs try to cut operating expenses and make profits; the state governments, by contrast, created large canal bureaucracies staffed with political appointees, and the higher operating costs from state control were passed on to taxpayers. Incentives matter. Since no private individual or company owned the canals or railroads, no one was fully accountable for mistakes in construction, or even for guarding the projects to prevent theft.
Many economists and historians have tried to defend the Erie Canal and other state projects by stressing their high “social rate of return,” that is, the ratio of costs to the overall benefit to society. For example, canals cut the costs of shipping from 20 cents per ton-mile to less than 3 cents per ton-mile. Those huge savings, many economists argue, cancel out the taxes, corruption, and inefficiencies of state-built projects. And didn’t villages spring up all along the Erie Canal?64
True, the building of internal improvements often sparked trade, cut costs, and helped to settle the country. They could be a wonderful blessing. But they didn’t have to be built by state governments. If they had been built privately by entrepreneurs right from the start, the economic advantages of canals and railroads would still be present, and without the high costs to taxpayers. Sure, the canals would have been built more slowly, but routes could have been straighter and more profitable. In Michigan, for example, the social rate of return on the Michigan Central Railroad was small until 1846, when it was sold to entrepreneurs, who rebuilt it and extended it across the state. In New York and Pennsylvania, the social rate of return on their canal systems sharply increased when a private company built the Junction Canal, which tied the two state systems together.
To summarize, the “false spirit of the age” had initially lured most Americans into believing that state funding was the best method for internal improvements. In the 1830s, voters eagerly endorsed state constitutions that mandated such government action.
But by the late 1840s, the American public had experienced a large dose of reality. The state-run projects were costly failures that left the state governments in debt, which then had to be paid for by the taxpayers. However, the social rate of return on privately built internal improvements seems to have greatly exceeded the return from state projects. At least, that is what most Americans thought by the 1850s. Voters responded as state after state sold railroads and canals to private companies, with much better results for the states’ residents.
As the 1840s gave way to the 1850s, hadn’t the American public learned its lesson about government intervention? Certainly, intervention by state governments for internal improvements had not worked well. But what about the federal government? Would federally operated projects succeed?