Railroads and American Economic Growth : A

This paper examines the historical impact of railroads on the American economy, with a focus on quantifying the aggregate impact in the agricultural sector in 1890. Expansion of the railroad network may have affected all counties directly or indirectly — an econometric challenge that arises in many empirical settings. However, the total impact on each county is captured by changes in that county’s “market access,” a reduced-form expression derived from general equilibrium trade theory. We measure counties’ market access by constructing a network database of railroads and waterways and calculating lowest-cost county-to-county freight routes. We estimate that county agricultural land values increased substantially with increases in county market access, as the railroad network expanded from 1870 to 1890. Removing all railroads in 1890 is estimated to decrease the total value of US agricultural land by 60%, with limited potential for mitigating these losses through feasible extensions to the canal network or improvements to country roads. Further, in the absence of the railroads, population levels and consumer welfare are predicted to decline substantially. ∗For helpful comments and suggestions, we thank many colleagues and seminar participants at Boston University, Brown, Chicago, Colorado, Dartmouth, EIEF, George Mason, George Washington, Harvard, LSE, NBER, Northwestern, Santa Clara, Simon Fraser, Stanford, Stanford GSB, Toronto, Toulouse, UBC, UCL, UC-Berkeley, UC-Davis, UC-Irvine, UC-Merced, UC-San Diego, Warwick, and the ASSA and EHA conferences (including our discussants, Gilles Duranton and Jeremy Atack). We are grateful to Jeremy Atack and coauthors for sharing their data and our conversations. Georgios Angelis, Irene Chen, Andrew Das Sarma, Manning Ding, Jan Kozak, Meredith McPhail, Rui Wang, Sophie Wang, and Kevin Wu provided excellent research assistance. This material is based upon work supported by the National Science Foundation under Grant No. 1156239. Railroads spread throughout a growing United States in the 19th century as the economy rose to global prominence. Railroads became the dominant form of freight transportation and areas around railroad lines prospered. The early historical literature often presumed that railroads were indispensable to the United States’ economy or, at least, very influential for economic growth. Our understanding of the development of the American economy is shaped by an understanding of the impact of railroads and, more generally, the impact of market integration. In Railroads and American Economic Growth, Fogel (1964) transformed the academic literature by using a “social saving” methodology to focus attention on counterfactuals: in the absence of railroads, agricultural freight transportation by rivers and canals would have been only moderately more expensive along most common routes. Fogel argued that small differences in freight rates caused some areas to thrive relative to others, but that railroads had only a small aggregate impact on the American agricultural sector. This social saving methodology has been widely applied to transportation improvements and other technological innovations, though many scholars have discussed both practical and theoretical limitations of the approach (see, e.g., Lebergott, 1966; Nerlove, 1966; McClelland, 1968; David, 1969; White, 1976; Fogel, 1979; Leunig, 2010). There is an appeal to a methodology that estimates directly the impacts of railroads, using increasingly available county-level data and digitized railroad maps. Recent work has compared counties that received railroads to counties that did not (Haines and Margo, 2008; Atack and Margo, 2011; Atack et al., 2010; Atack, Haines and Margo, 2011), and similar methods have been used to estimate impacts of railroads in modern China (Banerjee, Duflo and Qian, 2012) or highways in the United States (Baum-Snow, 2007; Michaels, 2008). These studies estimate relative impacts of transportation improvements; for example, due to displacement and complementarities, areas without railroads and areas with previous railroads are also affected when railroads are extended to new areas. This paper develops a methodology for estimating aggregate impacts of railroads. We argue that it is natural to measure how expansion of the railroad network affects each county’s “market access,” a reduced-form expression derived from general equilibrium trade theory, and then to estimate how enhanced market access is capitalized into each county’s value of agricultural land. A county’s market access increases when it becomes cheaper to trade with another county, particularly when that other county has a larger population and higher One alternative approach is to create a computational general equilibrium model, with the explicit inclusion of multiple regions separated by a transportation technology (e.g., Williamson, 1974; Herrendorf, Schmitz and Teixeira, 2009). Cervantes (2013) presents estimates from a calibrated trade model. Swisher (2014) calibrates a simpler economic model but models the strategic interaction between railroad and canal companies in building networks.