How did they make money?

Here's a thought, in almost 200 years of railroad operations in the U.S., the VAST MAJORITY made lots, and LOTS of money. Otherwise, there would no longer be any railroads at all.

"James J Hill" of St Paul with the Great Northern Railway and the Northern Pacific is a good example of how they made a lot of money.  Then there is the tycoon of all of them Cornelius Vanderbilt.  Bottom line, very good business men.

The NYC could move tonnage at a cost to the railroad at  less than 1 cent per ton, per mile. So clearly they made money.

Pat

Until the 1920s or '30s, there were few automobiles and over-the-road trucks, and they were primitive. There also was no Interstate highway system until the 1950s, so the railroads were the fastest, most reliable and, in some cases, the only way to transport goods and people. They dominated the shipping business and their sales volume was large enough for them to operate at a profit - at least for freight.

MELGAR

@Hot Water posted:

Here's a thought, in almost 200 years of railroad operations in the U.S., the VAST MAJORITY made lots, and LOTS of money. Otherwise, there would no longer be any railroads at all.

Maybe its my 19th century focus, but a large number of them didn't make money.  At least not enough to cover their construction and financing costs.  The AM&O went into receivership in the 1870s.  It was reorganized as the N&W in the early 1880s only to go bankrupt a decade later.  Railroads that didn't produce enough revenue to cover their operating and maintenance costs seem to be rarer, but there are examples of those too.

"why do railroads always seem to be on the brink of collapse?"

I don't think Norfolk Southern, UP and BNSF are on the brink of collapse.  Passenger service in most countries is subsidized as a public service and national defense strategy, except in the USA.  Freight service has always been profitable for most railroads throughout history and passenger service was profitable until the advent of the interstate highway system, as noted above.

Lots of things are cheaper today than in the past, not just TVs.  Travelling from NYC to LA is much cheaper as a percentage of the average income than it ever has been.  Cell phones didn't exist.  Long distance and international telephone communications are vastly less expensive than in the past.  Corrected for inflation, food has never been cheaper.  Medical care simply wasn't available in any meaningful way to most folks in the past.  Penicillin is much cheaper now than in the 1950s, and drugs that improve the quality of life and prolong life are available for the first time.  How do you place a value on curing a patient with acute or chronic leukemia as opposed to them dying within a month, year or two?  The fact is, for the vast majority of people, life has never been better in the history of mankind.  And our country has never been richer.  This is also true in some low income countries.

Some very good points have been made in the above posts. Also, the presidents of some of the larger railroads (like New York Central and Union Pacific) by the end of the 19th Century and beginning of the 20th Century, were considered "Robber Barons," because of the cut-throat and unethical tactics they used so their railroads would make more money, adding to their already huge profits.

Another factor back then, is that railroads would use their most profitable routes to help subsidize the less profitable ones, similar to what the old Greyhound Corporation did for most of the 20th Century. That way, smaller towns on less-traveled routes still had bus service. Not like that today. Now, like many railroads did, if a route wasn't profitable, they cut it, leaving no service for the people along that route. Airlines do the same thing today with unprofitable cities.

I don’t think Warren Buffett would be involved if it was “ a charity “.

Don't forget that the Interstate Commerce Commission (in existence until 1995) required  railroads to maintain service on many unprofitable routes, so the companies weren't just doing it from the goodness of their hearts. The ICC also had jurisdiction other common carriers engaged in interstate commerce, including bus companies and telephone/telegraph companies.

Railroads were initially children of the 'robber barrons'

@Landsteiner posted:

...Corrected for inflation, food has never been cheaper...for the vast majority of people, life has never been better in the history of mankind.  And our country has never been richer…

Careful, Neil. Your “true identity” is starting to show.

Another angle to look at it from is that in its prime the railroad industry was so profitable that railroads were the subject of heavy government regulation. Many of them kept making amounts of money that kept them solvent despite that. Then after WWII the government began subsidizing automobiles, highways and airports while maintaining the belief that railroads were cash cows that could still bear the regulation they were under and stay in business. It took the largest corporate bankruptcy of all time up to that point (Penn Central) to get the government’s attention and make them realize that things had changed, and the profitability of a railroad was not automatic.

"Most of the big railroads of the day were built with Government money plus they were also giving a lot of land along the right of way. Anytime the government starts giving away money everyone figures out a way to get some of it.   The Great Northern was one of the few built with private funds."

That's not true of the New York Central or the Pennsylvania, for example, or the Erie of many others. Government bonds and land grants were important to completing the first transcon because they were built through largely unpopulated, commercially undeveloped territory without any immediate prospects of online revenue sources at the time of construction, and the country particularly needed a direct rail connection with California in the aftermath of the Civil War. There was a lot of financial manipulation by Credit Mobilier in the case of construction of the Union Pacific in particular, of course. However, it's doubtful that these original western roads would have been built without government guarantees and funds but, like the Interstate Highway System, construction opened up commerce and population growth in their wake.

What most people miss in Railroading is the vast capital outlays for equipment/infrastructure and labor. Today the other add in is fuel. Railroading has always been feast or famine .

@CALNNC posted:

So, with one or two man crews, reliable diesel locomotives, flexibility in work rules, why do railroads always seem to be on the brink of collapse?

Not sure what you're talking about here. The railroads aren't on the brink of collapse at all. They make substantial money, enough to make good profits while spending a tremendous amount of money on their infrastructure.

According to the Association of American Railroads, each year freight rail companies invest an average of $23 billion to maintain and modernize their privately owned networks, investing six times more than the average U.S. manufacturer. The average U.S. manufacturer historically spends about 3% of revenue on capital expenditures. The comparable figure for U.S. freight railroads between 2012 and 2021 averaged more than 18%, or six times higher.  Most of the  freight railroads own, build, maintain, operate and pay for their infrastructure with little or no government assistance. Is business good? The U.S. Department of Transportation expects total freight demand to grow 30% by 2040.

@CALNNC I think it was just simpler back then. Each car generated revenue if things went well and some portion of that revenue went on to become profit after paying the bills. There was also a lot of trickery that could be done with ease back then. My understanding is that the Youngstown and Southern electrified it's railroad back in the day to get out of paying certain taxes. It seems to me that a profit was easier to turn back then because everything was on paper and nobody was calling ahead or sending a video/audio clip of what happened. A telegraph was how fast info moved. Mr Durant could tell you about the advantages of slower moving info haha

I hope this doesn't wind up getting more political than it already has. I find the business practices of yesteryear to be very fascinating! I highly recommend Meet You In ****: Andrew Carnegie, Henry Clay Frick, and the Bitter Partnership That Changed America by Les Standiford. It was extremely interesting and gave me a bit of a feel for business practices and norms a century or so ago. It's an eye opening read to how good we have it now in many respects.

Railroads must be a profitable business. Or else they never would have put four of them on the Monopoly game board!

From my understanding, one key challenge for the railroads was the (subsidized) building of the interstate highway while railroads have to pay their own maintenance for the rails.

Speaking strictly freight, I'd say the remaining freight railroads are doing well for large volume and weight products (autos, coal, etc).  LCL (Less than carload) where they will load a new bike onto a boxcar is long gone.  In the next era, with climate concerns, could the railroads electrify and start running more freight and just leave last mile delivery to the Amazon and other delivery trucks?  Theoretically sure, but would take a different mindset.  I think it would be a more efficient system.

For passenger rail, mass transit is a popular way to get around in Europe and Asia that is easy to use and affordable.  Subway/light rail is gaining popularity in North America.

Trucking also enjoys the advantage that some of the true costs (pollution, congestion, accidents) are sometimes imposed on everyone else and not borne directly by the enterprise. Railroads have less opportunity to do that.

The key to making a lot of money is often privatize profits and socialize costs.

Railroads such as the N&W and C&O made lots of money by moving coal from the mountains to tide water.  They were and still are the only practical way to move tons of bulk stuff overland.  Santa Fe, SP and UP moved tons of agriculture products from CA to the eastern destinations.

Major railroads are still profitable because they have figured out how to move more and more tonnage with fewer and fewer people and equipment.  It is all about being efficient.  NH Joe

As stated by many previously in this thread the US Railroads of 2024 can't be directly compared to those of 1874 or 1924.  Their segment of the total transportation system in the US is VERY different.  Things have drastically changed in this country and the rest of the world over the last 200 years.

As an example in 1874 moving freight or people from NY to CA there were 2 ways to do it (in a timely and direct manner).  Overland which meant a Train (period) or via Ship "Round the Horn".  There was no Panama Canal, National Highway System and Motorized Vehicles, Airports and Airplanes.

BTW for shorter distances it really wasn't that much different 150 years ago.  Trains or horse drawn carts and carriages.  Intercity paved roads were non existent in 99% of the US.

At that time the railroads had a pretty clear Monopoly and so the Government stepped-up and decided they needed to be regulated.  Problem was as the landscape of transportation evolved the government regulation didn't keep up.  "I know that is hard to believe."

The modern railroad has evolved to serve the remaining segments of the overall transportation system that fit it best, so it can remain profitable.  Without getting in politics (textbook definition), that is how a free market economy is suppose to work.

One other historical note and one of my favorite quotes;  America built Railroads and the Railroads built America.

Just crossing the little Appalachian Mountains was a major hurdle.   Then you ran into that pesky Mississippi River and if that weren't enough you had to deal with the Rockies, Grand Canyon, Death Valley and the Sierra Nevada's... YIKES!

Demand for goods, when goods competition was minimal, were just as high near the factories as they were remotely.  People wanted these goods and paid the price to get to them.  Not rocket science, just supply and demand.  Plus labor was cheap, so markups and transporation cost still allowed a decent retail price and large corporate profits.  Eventually, manufacturing moved to the destinations that grew populations that supported it.

This is a great topic because it begs for a wizard accountant historian to analyze and summarize balance sheets of expenses and revenues for railroads during the different eras they operated in. An expert like this could give us financial insight into evolution of markets, industries, freights, and technology. From a layman’s point of view, I can catch glimpses of how balance sheets may have driven observable events.

One of the things I find fascinating about this hobby is the way it can put models in your hands that tangibly demonstrate the blistering pace of technological progress in locomotive design. Every ten years or less the leading main line locomotives were dethroned as state of the art because of leaps in pulling power, speed, and efficiency. This did not happen because railroads thought it was a fun hobby. What drove progress was the incentive of profit. Costs per pound of shipping freight by rail plunged over the decades. As MainLine Steam quotes above – “America built Railroads and the Railroads built America.” Whoever could haul more and deliver it faster with less cost was going to make more money than the competition. Railroads continually innovated to deliver goods to people cheaper, opening up new markets, fueling industry and jobs.

In the Midwest and West, the railroads got land from government subsidies, built a railroad for hundreds of miles, and then sold land to farmers at a cheap rate. Once the farmers were growing crops, the railroads made sure they controlled the grain elevators and warehouses so the farmers were paid less than a fair amount for their crops - and then gouged them for shipping their produce to market.

There was really no alternative, until farmers got control of state legislatures and put in laws requiring a fair determination of quality and value of the farm crop, and controlled shipping rates.

BTW Great Northern never took federal subsidies or land grants, but did take some state subsidies.

The historian Maury Klein has written extensively about American railroads and their financial, economic, and social impact. One of his excellent and very readable works is Unfinished Business: The Railroad in American Life. He has also written biographies of Harriman and Gould and has written several volumes on the Union pacific.

@B Smith posted:

The historian Maury Klein has written extensively about American railroads and their financial, economic, and social impact. One of his excellent and very readable works is Unfinished Business: The Railroad in American Life. He has also written biographies of Harriman and Gould and has written several volumes on the Union pacific.

Is that the same Maury Klein who founded K-Line?  Thank you.

@B Smith posted:

The historian Maury Klein has written extensively about American railroads and their financial, economic, and social impact. One of his excellent and very readable works is Unfinished Business: The Railroad in American Life. He has also written biographies of Harriman and Gould and has written several volumes on the Union pacific.

Thanks for this reference. Looks like a great collection of essays. So much of we take for granted as given today had to be built through hard work and perseverance rather than inevitability.

"Is that the same Maury Klein who founded K-Line?  Thank you."

No, the historian I mentioned is Maurice Nickell (Maury) Klein Ph.D., whereas the founder of K-Line was a man named Maury D. Klein.

The 19th century was pretty great for tycoons:
Primitive safety regulations,
Primitive pay regulations,
Free land for the right-of-way,
Limited or often No competition,
... and almost No taxes (corporate taxes are a 20th century invention)

Actually, the 21st Century is even better for tycoons, despite taxes, government regulation, and other changes.

@B Smith posted:

Actually, the 21st Century is even better for tycoons, despite taxes, government regulation, and other changes.

Lot of truth in that.  Gates, Buffett and Bezos seldom get the "robber baron" title even though there is plenty of evidence for it.    And taxes and regulatory costs are pass through, to the end consumer.

Since this is a RR making money thread, Buffett is doing quite well with owning railroads and all that entails cost wise. 

Very interesting topic. The railroads of yore were the technology giants of today. There was minimal government regulations and the railroad powerbrokers also owned stock in the commodities that supplied materials, steel, coal, etc. Also, there were no unions and manpower was cheap and expendable.  In my area, if you worked for the Reading Railroad, you got two days off-a month! There wasn’t any time and half for overtime and you didn’t “blow up” at 12 hours. If you were on the extra board, and didn’t get an assignment, you didn’t get paid anything; oh well, maybe tomorrow.

Tycoons such as Rockefeller and Carnegie held sway over the railroads. Rockefeller received “rebates” from the oil he shipped and he received money for the oil that his competitors shipped. Carnegie, had been the Harrisburg to Pittsburgh PA PRR superintendent early in his career. As a steel magnate he owned a lot of stock in the railroads who wanted his steel rails. Carnegie built libraries and other public structures but it was on the backs of folks who worked in the mills. They were paid on a sliding scale which always tipped towards profit. So, they all made their fortunes.

Jay

Has anyone noted that the original poster has never returned to this thread, after 7 days?

@Hot Water posted:

Has anyone noted that the original poster has never returned to this thread, after 7 days?

Hmm . . . Yes, and interesting. A lot of informative responses in this thread.

@Hot Water posted:

Has anyone noted that the original poster has never returned to this thread, after 7 days?

Well, to be fair, I personally will read--but not always (often?) take the time to respond to--topics I start (here and elsewhere).