The history of American transportation can be told in terms of two central issues: the role of transportation in economic development and the effectiveness of government regulation, so pervasive in transportation, in solving the classic economic problem, the allocation of resources. The continuance of railroad passenger services, the division of transportation functions between the competing types of carriers, the financial stability of the transportation companies are simply components of the more abstract problem of resource allocation, that is, achieving the optimum size and composition of the transportation sector of the economy. Regulatory failure here is obviously more significant than the occasional instances of favoritism so popular with congressional investigating committees and newspaper reporters, although it hardly makes for as interesting reading.

The role of transportation in economic development is more relevant to nineteenth-century history than to contemporary American affairs. However, the United States is engaged in competition with the Soviet Union to foster the economic development of various non-industrial countries, and, perhaps, the history of American economic growth in which transportation was so significant might deepen our insight into the problems facing these so-called underdeveloped nations.

At the outset of the nineteenth century America was, in current terminology, an under-developed country; foreign trade involved the exchange of agricultural goods for European manufactures, the rich were merchants and landowners, and the poor were farmers and agricultural laborers, the colonial past and the resulting fervent nationalism of a new nation were ever present, capital was scarce; in sum, all the characteristics of the contemporary nations of Asia, Africa, and South America. In two respects, however, America was much more fortunate; it had a stable political system and was under-populated relative to land and other natural resources.

Transportation was the most significant strategic, innovation in the economic growth that converted America into an industrialized nation. An innovation can best be defined as a radically new method of production -- a change in technology, in business organization, in the product itself, or in the extent of the selling or supplying market -- and economic growth consists largely of incorporating such innovations into the economy. Strategic innovations, however, are distinguished by a capacity to induce innovations in other industries and in this way can precipitate the sustained growth characteristic of an industrialized economy. Currently the development of the electric power or the iron and steel industry may serve as strategic innovations, for each can lower costs in a wide sector of manufacturing so as to permit the building of entirely new industrial complexes.

Similarly, transportation innovation in America, by halving the real cost of land transportation from 1820 to 1860 and again from 1860 to 1900, permitted the development of new industries and, more significantly, the regions where much of the American population now live. For example, when the Erie Canal reduced the cost of transporting wheat from Buffalo to New York from three times to a quarter of its New York market price, Buffalo became a center of wheat farming. And as transportation costs declined, wheat farming for the Eastern market became commercially feasible progressively farther west. By 1860 the all-rail rate from Chicago to New York for wheat was the same fraction of the New York market price as for Buffalo traffic thirty years earlier, and by 1900 this same proportion of the transportation cost to the New York market price applied to shipments from anywhere in the United States. At the same time, the new sources of supply contributed to the halving of the real cost of wheat in New York from 1810 to 1860 and again from 1860 to 1900. Eastern manufacturers likewise benefited from the creation of a national market. To take one example of this process, in 1817 the price of a single pane of Eastern window glass in Cincinnati was $14. By 1861, with lower transportation costs, the same window glass sold for $1.87, and glass windows were so common as to be no longer a mark of distinction.

For a strategic innovation to initiate economic growth, it must be created ahead of the demand for its services. For example, commercial farming in the Middle West would have never developed without the prior existence of cheap transportation to the Eastern and European markets. Still, by normal commercial standards, it would have been folly to build a railroad into a trafficless wilderness, particularly since even the smallest railroad involves a substantial capital outlay. This dilemma, no demand for transportation without the prior existence of railroads and no transportation without the prior existence of some demand, was solved initially by earlier innovations in canal and river transportation.

The Erie, which in 1823 connected New York City with the Great Lakes by way of the Hudson, was the first and most important of the canals. Constructed by the state of New York, the canal was a momentous undertaking for the times: twelve times longer than any previous American canal with a complex set of locks and aqueducts which were important advances in engineering practice. Similarly, it was the :first venture in America with thousands of employees, and the first requiring large amounts of capital, $7 million, obtained by issuing state bonds. The canal was built in the hope that its existence would sufficiently accelerate the settlement of the farm lands of upper New York State and Ohio so as to provide an adequate volume of traffic. Thus a state government had the faith to gamble on the profits of economic development by building ahead of demand, Likewise, a state government was able to raise the large amounts of capital required in a capital-poor country. The Erie Canal proved a commercial success, recouping its cost through toll revenues in only a few years. More significantly, the Erie Canal made New York the major seaport of the East Coast, and Ohio, Indiana, and Michigan integral parts of the world wheat market.

The success of the Erie prompted nationwide imitation. Merchants in rival seaports, Boston, Baltimore, and particularly Philadelphia, persuaded their state governments to establish competing canals in order to expand their trade with the Middle West. But geography did not favor these latecomers. Similarly, none of the numerous canals built from 1830 to 1840, the Ohio system, the Indiana system, the Boston and Worcester, ever developed the traffic of the Erie. Even the Erie itself became a losing venture with the construction of unprofitable branches that drained off earnings. As a result, little of the $200 million expended on canal construction was ever recovered, and by the late thirties Indiana, Ohio, Pennsylvania, and New York all had burdensome state debts incurred in building canals. It was with this experience and not with the wisdom of the founding fathers that the American belief in the folly of state enterprise began.

River transportation became significant earlier and remained so longer than the canals. Here nature provided a free roadbed and in the Mississippi furnished a long river system into the American heartland. With the invention of the steamboat, the Mississippi was a reliable and cheap source of two-way transportation for the lower South and Middle West. Steamboat traffic grew rapidly, and by the 1840 s New Orleans was only slightly outranked by New York as a seaport.

Thus both the canals and rivers began the creation of a national economy with an established demand for transportation that the railroads might serve. But the railroads were not serious contenders for long-haul traffic until the 1850 s, and not until after the Civil War did railroad competition markedly reduce the importance of inland water transportation. Beginning with the 1870's, the railroads became nearly synonymous with domestic transportation for the next sixty years. . .