However, in Latin America, the locals could not shield the foreigners. British bankers had originally been interested in protecting and encouraging the export of British rails to Argentina in the 1860s. But the impact of foreign capital was bound to be much greater in Argentina, where most of the pampas had been totally unoccupied before the railways, or in Mexico where, as Bernard Moses points out, the railway ‘came as a rival of the half-starved donkey and the not-overfed Indian’.8 The railways had another, psychological, impact. Previously the landowning classes had lived in a state of not caring if ‘a large part of their lands are not under cultivation, and produce little or nothing’.
But before the pampas were settled or the Indian fed came the race to find a railway route across Central America. This became urgent after 1849 with the discovery of gold in California, formerly reachable only by sailing round Cape Horn. The winner was the railway across the Isthmus of Panama, but only after every country had competed for the route. The Hondurans9 offered promoters 1,000 square miles of land as well as a 400-yard stretch each side of the tracks, plus options to buy a further 800,000 acres cheaply. The offer was taken up by one Ephraim George Squier, a dubious promoter who doubled as American consul. Unable to raise the necessary funds in the United States he sold the concession to the British who in 1857 launched the Honduras Inter-Oceanic Railway Company. Originally it was estimated that the route, which would be quicker than its rivals through Nicaragua or Panama, would cost a mere $7 million to yield a net profit of $2 million a year. But by 1873 the country – and the railway – were both bust, though the latter did bring some prosperity to the northern part of the country.
Foreign capitalists bred their own client regimes, served by Western-educated technocrats similar to those who have flourished since the oil crisis of 1973. Typically in Mexico President Porfirio Diaz leaned on the much respected José Limantour, his principal economic adviser. Like his successors in the 1970s, Limantour hoped to attract but control foreign capital. Like a majority of his fellow-countrymen he and his colleagues, the ‘Cientificos’ as they called themselves, were humiliated by the rough treatment brought about by lack of ‘mejoras materiales’. They wanted concrete, physical progress at almost any cost, and the railway was the prime symbol of such progress.
Unfortunately the first line from Mexico City to the port of Vera Cruz was not finished by its European promoters, which set off a reaction in favour of American companies. This was also short-lived, largely because the likes of Jay Gould and Thomas Scott treated Mexico as merely an extension of the American battlefields on which they waged their interminable and costly wars.
As we have seen, Argentina was the classic case of railways determining the very nature of the country. They were foreign-controlled because ‘Argentine interests were not concerned either to invest in or gain control of such undertakings, no matter how freely they might criticise their activities in their newspapers and in the halls of the Congress … it was easier to kick the companies through the agency of the government and more profitable to speculate in land, sell cattle and wool, and institute share-cropping, all of which railways greatly stimulated by opening a way to the markets first of Buenos Aires and then the world … in 1885 a million pounds invested in railway plant in Argentina contributed to the production of more saleable commodities than a million pounds invested anywhere else in the world at that moment in history’.10
The railways into the pampas brought prosperity by supplying Europe with meat and grain. On the return journey up country trains carried cheap manufactured goods imported through Buenos Aires, products which have helped prevent the Argentines from developing efficient manufacturing industries ever since. Another cause of complaint came from the crops they encouraged. In the inland sugar province of Tucuman the only work was seasonal, ill-paid, cutting cane. As James Scobie wrote (in Argentina), ‘The concentration of economic and political power in a few hands, the seasonal aspect of sugar growing, and the masses of transient Indian labourers turned Tucuman into a backwash of poverty and a source of future political discontent’.
Single crop economies dependent on sugar or coffee, or other tropical products whose development was much favoured by the railways, virtually precluded balanced development. The railway map of Honduras showed a fine network of lines serving the banana-growing districts at a time when the capital and other important centres were still miles from the nearest lines. The same applied throughout Central America. In the words of a recent history:11
Railroads were vital to the banana enterprise. If the banana interests had not provided them, railway service for the scantily populated lowlands in Central America would have been delayed for many decades. But the banana did not provide any network ideally suited to serve the overall economic needs of the several national economies. That was not their business. Nevertheless historically railroads and bananas have been so closely associated in the minds of the people of the area, that the banana companies more often have been censured for their failure to provide fully for all railway needs than credited for their considerable contributions to this important field.
The railways did not invent the idea of a single-crop economy (in the eighteenth century the ‘sugar islands’ of the Caribbean were reckoned as valuable as Canada) and a single crop was better than nothing, though you wouldn’t believe the fact if you read some Argentine nationalist commentators: but dependence bred resentment, with fatal long-term consequences for the foreign investors whose biggest, and most visible asset were the railway companies.
Rail conquers the Andes.
Not that the foreigners had done too badly in their time. They had taken a considerable initial profit because bonds were almost invariably issued at a considerable discount. Developing countries therefore never received anything like the amount they nominally borrowed. The Turks received only three-fifths of the £200 million they borrowed between 1845 and 1875, while the Costa Ricans, whose credit was reckoned to be above the average, received only 72 per cent of the proceeds of an issue in the early 1870s. Naturally dissatisfied, they tried more direct negotiations with another firm of bankers.12 In the ensuing disaster the bankers had to take up most of the issue and the Costa Ricans were left owing £2.4 million from an issue from which they received only £700,000, although the president received another £71,000 from the grateful bankers. Borrowers could also suffer when exchange rates moved against them. In 1878 the Companhia Paulista, one of the best-run Brazilian railway companies, took out a twenty-year £150,000 loan. By the time it came to repay, the milreis had halved in value against sterling.
It took nearly a hundred years for the Argentines to grasp the nettle and nationalise their railways fully – with disastrous results. In China – where the conflict between national pride and financial imperialism found its fiercest battleground – the reaction against foreign investment was immediate. At the end of the nineteenth century China was increasingly being carved up into spheres of influence including ‘concessions’ in which individual Western powers held sway over the inhabitants of the oldest civilisation in the world as if they were total savages. All the imperial powers of both the nineteenth and twentieth centuries were involved: Britain, France, Belgium and Germany represented the old imperial order; Russia, the United States and Japan the new.
The occupiers were a force for disunity. They set themselves up against the Chinese, in Han Suyin’s words ‘they were not all racketeers but they all thrived on China’s disunity’. In Riding the Iron Rooster, Paul Theroux, writing in the 1980s, explains why two stretches of line had not been connected because it was not in the interest of the Japanese and the Germans who had built them. Nevertheless each of the European powers thought that it, unlike the others, was loved by the Chinese.
To the sceptical Han Suyin, ‘the truth is, they were all the same’, although filial pride* led her to point out (in The Crippled Tree) that the Belgians were different: ‘Their engineers and technicians in China were hard-working, hon
est and what they promised they did, in record time. They were also exacting towards themselves. The Chinese were not afraid of small, hard-working Belgium.’ In fact, the Belgians needed China as a market for the rails and locomotives on which their economy depended, and in the end even little Belgium proved dangerous: King Leopold II dreamed of a Belgian Empire in the heart of China.
The opening of the first railway in China from Shanghai to Woosung Port, 1876
Inevitably the occupying powers in China disagreed, with the loudest rows involving the longest lines, north and south connecting Peking and Hankow. These lines were naturally perceived by the Chinese as instruments of imperial policy, and in 1898 one Chang Chih-tung wrote that ‘the interest rates on British loans are low, but their injury is great. By using railways above Hankow, and gunboats below, the British will make the entire Yangtze an English possession and overnight the twelve provinces south of the river will be cut off.’ It did not much help when the Belgians gained the coveted contract for the major east-west railways after considerable intrigue, and a wave of anti-Belgian sentiment in Britain. The Chinese paid dear: the Belgians made a substantial profit at the time, and another in 1908 when the Chinese bought back the lines on onerous terms.
All the Chinese contracts were agreed in a squalid atmosphere. The railways’ only native allies, who naturally acquired a bad name as collaborators, followed the traditional pattern, involving nepotism, tax farming, ‘squeeze’, automatic corruption. Not surprisingly the foreigners were faced with an explosive mixture of historic Chinese pride and hatred of foreigners – and thus of the modern techniques they brought with them: the mixture found allies in precisely those groups which in other countries were the promoters’ greatest allies, the modernisers. In China they were totally unprepared to accept outside help – or the outsiders themselves – because of the burgeoning Chinese desire for independence. The pattern became plain when the locals tore up the nine miles of narrow-gauge track which constituted the country’s first railway and threw the rails, carriages and locomotives into the nearest river.
Foreigners believed that only ignorant peasants and self-serving old-time officials opposed the railways, but in fact even the most enlightened would accept them only if they were Chinese-built: phrases like ‘self-built railways’ were key political terms in the Chinese struggle for independence. Unfortunately the Chinese needed the foreigners, and in what was termed the ‘self-reliance period’ between 1881 and 1895 only an average of eighteen miles of track were built each year. As soon as the foreigners were allowed back the figure increased to 345 miles annually between 1895 and the revolutionary year of 1911. But even then less than 6,000 miles of track had been built in all – half the figure for India, smaller and itself not over-supplied with railways.
It was not surprising that the leader of the 1911 revolution, Sun Yat-Sen, was obsessed with railways, nor that the first signs of the upheaval were centred on a railway line. When he was shunted aside after the revolution he was given a nominal job planning them, a task dear to his heart. He envisaged an enormous network, which was considered totally fanciful by his contemporaries, although most of the routes he sketched out have been built since the Communist takeover in 1949. His planned railway network was the heart of an imaginative international aid programme which, if realised, would have anticipated the World Bank by a quarter of a century. He envisaged an international organisation ‘to formulate plans and standardize materials’ which would gain the confidence of the Chinese people. As he pointed out, Manchuria, previously considered a desert, had already been transformed by its railway into the world’s prime source of soya. ‘As Argentina has superseded the United States in supplying the world with meat’, so with the help of 7,000 miles of new railway for this ‘vast and fertile region … the Mongolian pasture will some day take the place of Argentina’.
Naturally the Chinese have always poor-mouthed the foreign-built railways’ contribution to their economic well-being, the denigration helped by the unreliability of the figures. As R. H. Huenemann put it recently: ‘the difficulties involved in gauging the impact of railroads on Chinese incomes are so complex and intractable that we will never have a satisfactory measure of that impact.’13 Nevertheless – and contrary to decades of Chinese orthodoxy – he concluded that ‘Imperial’ railways contributed a net half per cent annually to China’s GNP by 1933, a total less relevant than the fact that ‘it was brought about by investment that the Chinese did not have to finance.’
But, whatever the economic benefits, to the Chinese foreign-built railways represented national humiliation. In Han Suyin’s words, ‘After 1900 the demand that Chinese railways must belong to the Chinese was also a claim to real independence, an end to subjugation. For true independence is not only political, but also economic.’
China was not the only country where the Empire-builders clashed. Conflict, between rival empire-builders as well as between natives and imperialists, was endemic wherever outside finance was involved in railway-building.
‘Imperial’ influence depended on the availability of funds from the imperial country and markets to handle the vast sums involved. And, throughout the nineteenth century, only Britain, France and, much later and to a much lesser extent, Germany, had the spare capital and organisation required. The British investing public was avid for the good ‘stories’ behind any successful financial promotion from anywhere in the world. Most of these involved railways. It was only in the 1880s and 1890s that they were partly replaced as speculative instruments by ‘Kaffirs’, shares in South African mines.
The flows were enormous. By 1914 British investors had £1.6 billion in foreign railways.* Of this £440 million were in ‘Colonial’ railways, while £617 million had been invested in the United States where railroads accounted for four-fifths of the British financial presence. Even today a few ‘foreign railway’ stocks and bonds are still quoted, while names like ‘Antefegasta’ stir memories of former speculative favourites.
The relationship between British investors and banks and most of the recipients of their money was strictly ‘Colonial’. But relations with the United States, the biggest recipient of British capital, was far more complex. As early as the 1830s foreign investors were attracted by railroads radiating from New York or Philadelphia, but even in 1853 foreigners controlled only $52 million out of the $400 million already owed by railroad companies.
The subsequent surge was greatly helped by technical changes, notably the regular steamship services introduced in the 1850s,† and the first Atlantic cable laid in 1866, which linked London and New York into one international financial market. The move was timely: investors had made large gains from buying up federal and railroad paper at depressed prices during the darker hours of the Civil War – a process that had already first been seen during the panic of 1854 and which would be repeated in subsequent crises.
In the decade before and during the Civil War foreign holdings of American railroad paper barely changed, but quadrupled to reach $243 million by 1870, a mere five years after the end of the Civil War. By the 1880s any fall in these securities had a considerable knock-on effect on the whole London market. This is not surprising. In 1867 only ten American railroad companies were quoted in London, their capital a mere £78 million. By 1888 there were 82 companies quoted with £450 million of capital. Already by the 1870s railroads were steadily replacing federal and state borrowers – the federal government was able to repay most of its debts thanks to the balance of payment surpluses generated by ever-increasing exports of railborne grain from the Mid-West.
At the same time American banks were steadily strengthening their position. Before the Civil War the London banks were the senior partners: but the failed 1848 revolution in Germany, like Hitler’s rise to power eighty-five years later, led to a wave of emigration by a mass of largely Jewish financial talent, and this encouraged existing German-born settlers to look to investment in their new country rather than their birthplace. By the 1880s
American banks had achieved parity, although the London branch of some houses, like Rothschild, Baring and Morgan, remained the senior. More typical were Siamese-twin relationships, like the houses of Morton Bliss in New York and Morton Rose in London. Together they mobilised funds, sponsored new railroads, acted as the reputable middleman required not only to back long-term loands but also provide working capital.
By 1890, when London was shaken by the Baring crisis, caused by that house’s over-involvement in Argentine railways, the Americans themselves were becoming major capital exporters. The Dutch had been early on the scene, but rather lost their nerve in the mid-1870s after a spate of railway defaults at home and abroad. But their ill wind blew favourably towards the promoters of the Canadian Pacific, who were able to buy up masses of bonds from the disgusted Dutch, who thus bore the brunt of the early losses inevitable in any major project.
By contrast the French were an ever-increasing force in the markets, the only other investors with capital to spare on the same scale as the British. By the 1850s they had somehow found enough finance and organising capacity not only to build their own network but other people’s as well, so that by 1860 there were very few railways in the rest of Europe not dominated by French capital. The flows accelerated again once the French had recovered their nerve following their country’s defeat in the Franco-Prussian war of 1870. By 1914 it had trebled from its 1880 level of 15 billion francs, with the money still overwhelmingly invested in Europe, above all in Russia, where the French accounted for a third of total investment.14 They had 11.3 billion francs in Russia, an increase of over four billion since 1900; and the complete loss of this investment, the single biggest item in the country’s foreign portfolio,* in the Russian Revolution, not only destroyed the Paris international capital market and deterred French investors from foreign adventures for generations, but it also obscured the fact that Paris’s position had been near-equal to London’s before 1914.
The World the Railways Made Page 19