Railroads and American Economic Growth: New Data and Theory∗

This paper examines the impact of railroads on American economic growth. Drawing on general equilibrium trade theory, changes in counties’ “market access” captures the aggregate impact of local changes in railroads. Using a new spatial network of freight transportation routes, we calculate county-to-county lowest transportation costs and counties’ implied market access. As railroads expanded from 1870 to 1890, changes in market access are capitalized in land values with an estimated elasticity of 1 – 1.5. The computed decline in market access from removing all railroads in 1890 is estimated to reduce GNP by 6.3%, roughly double estimates by Fogel (1964). Without railroads, the total value of US agricultural land would have been lower by 73%. Fogel’s proposed extention of the canal network would have only mitigated 8% of the loss from removing railroads. ∗For helpful comments and suggestions, we thank seminar participants at Harvard. We are grateful to Jeremy Atack and coauthors for sharing data from their research. Irene Chen, Manning Ding, Jan Kozak, and Rui Wang provided excellent research assistance. During the 19th century, railroads spread throughout a growing United States as the economy rose to global prominence. Railroads became the dominant form of freight transportation; areas around railroad lines prospered and preferential rates could allow particular companies to dominate sectors. The early historical literature often presumed that railroads were indispensable to the United States’ economy or, at least, very influential in US economic growth. Understanding 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 on railroads’ impact by using a social savings methodology to focus attention on counterfactuals: in the absence of railroads, freight transportation by rivers and canals would have been only slightly more expensive in most areas. Small differences in freight rates can make-or-break individual firms or induce areas to thrive at the expense of others, but the aggregate impact on economic growth may be small. Fogel’s social savings methodology has been widely applied and continues to influence the evaluation of transportation infrastructure improvements. However, many scholars have discussed limitations of the social savings methodology (reviewed in Fogel 1979). One alternative approach is to create a computational general equilibrium (CGE) model, with the explicit inclusion of multiple regions separated by a transportation technology (e.g., Williamson 1974; Herrendorf et al. 2009). Increasingly, econometric studies have exploited local variation in railroad construction and county-level data on population, output, or land values (Haines and Margo 2008; Atack and Margo 2010; Atack et al. 2010; Atack et al. 2011). Similar methods have been used to estimate the impact of railroads in modern China (Banerjee et al. 2010) or highways in the United States (Baum-Snow 2007; Michaels 2008). Given plausibly random variation in the location of transportation routes, these studies estimate the relative impact of transportation infrastructure. General equilibrium effects limit the aggregate interpretation of such estimates, however, because railroads may displace activity from one area to another with little aggregate impact. Railroads are inherently a network technology, and local changes in the network affect all other areas on the network and areas off the network. This paper introduces a new methodology for estimating the aggregate impact of transportation improvements, drawing on recent advances in trade theory and spatial databases to estimate the impact of railroads on the American economy. Following Fogel’s analysis, we focus on the aggregate impact of railroad freight transportation on the agricultural sector in 1890. Drawing on general equilibrium trade theory, counties’ “market access” aggreFor example, the methodology ignores the possibility of increasing returns, market power, or other market imperfections (David 1969).