Abstract: How Financial Institutions Affect Economic Change: Evidence from the Transportation Sector, 1900-1939
This paper explores relationships between the investment behavior of private and public financial institutions and changes in the structure of the transport sector of the United States, from 1900 through the Great Depression—a period during which the hegemony of railroads was significantly eroded by the emergence of highway-based transport. Primary source data are presented showing changes in the amount and composition of capital (debt and equity) used to finance rail development, 1900-1939, and, concomitantly, the amount of debt and equity held by private financial institutions (banks and insurance companies) in their asset portfolios. This data shows that rail corporations raised more capital through issuance of debt than equity, and that portfolios of private financial institutions were heavily weighted with rail loans. Combined with bank reports and records of receivership reorganizations, the evidence shows that the investment behavior of private financial institutions was directly related to the decline of rail transport and, indirectly, to the rapid rise, 1900-1939, of highway transport as a competitor to rail. This paper also discusses the rise of the federal government as a major financial intermediary, particularly during the 1930's, when the Reconstruction Finance Corporation (RFC) took over much of the rail debt of both financial institutions and rail corporations. The investment behavior of the RFC also directly influenced restructuring of the U.S. transport sector.