Not long ago the television show Silicon Spin glumly reviewed the latest news of the cellular phone industry. The guests concluded that even if tech stocks, especially telecoms, had hit bottom, it would be 2003 before the experts thought the majority of them could again struggle back to profitability. Virtually all the problems, they concluded, stemmed from the industry's rapid advance into broadband at a time that the market did not yet exist.
On the heels of the Silicon Spin analysis, the Wall Street Journal, focusing on a pair of telecoms called Qwest and Level 3 Communications, came to a similar judgment. The Web was "overbuilt," resulting in a "fiber glut" that "underlies much of the uncertainty plaguing the telecom sector."1 Claiming that only 2.6 percent of the capacity was actually in use, the Journal bleakly concluded that "much of [the fiber] may remain dark forever."
What was interesting in both the Journal and the Silicon Spin analyses was the comparison with the railroads in the nineteenth century and the argument that both the Web and the railroads were "built ahead of demand." It behooves investors-let alone anyone concerned with the future of high-tech America-to learn if telecoms indeed do have a similar historical pattern to that of the railroads, and if so, how they also differ.
America's first railroad construction came through private financing, although it didn't take long before the state governments got involved. Economic historians have argued that the capital demands of the railroads dwarfed those of any other industry. While that might have been true in the 1850s, it was not the case in the 1830s or 1840s. Founders of many early roads had simple objectives, often merely linking a single city to a river, or even building a shortcut between a long and difficult bend in a single river, as was the case in Alabama.
After the canal craze of the 1830s, in which many state governments subsidized construction by guaranteeing the canal companies' bonds, the precedent was set for the states to support railroads. A number did so enthusiastically, especially in the south. Still, private capital dominated the construction of the best-and most viciously fought-over-roads. Cornelius Vanderbilt's New York and Harlem Railroad, then later the Erie, attracted the attention of journalists and the general public, because of the titanic struggles between Vanderbilt and a bevy of opponents, including Jim Fisk, Jay Gould, and Daniel Drew.
Until that point, the extent of most governments' involvement with the railroads took the form of legislators' and aldermen's taking bribes in return for granting, or withholding, various rights to cross certain territory. This, in turn, allowed those with substantial railroad stock to manipulate the market in railroad securities. Of course, for every buyer there must be a seller, and to the dismay of Fisk, Gould, and Drew, the Commodore often would not be (pardon the pun) railroaded: quite the contrary, Vanderbilt sent his own agents into the securities market to sell when his opponents tried to drive prices up, or to buy when they tried to drive them down. His massive transactions often disrupted the schemes of stock manipulators, and in the process he taught the silent partners in Albany lessons they never forgot.
By the Panic of 1857, most railroads relied on private investment. The depression of that year put many of them into bankruptcy, however. Ironically, while economists have for years thought that the origins of that panic lay in disruptions of the wheat market or foreign instability, it turns out that the Dred Scott decision-which overthrew the Missouri Compromise and opened up all territories to slavery-so terrified investors that the bonds of east-west roads collapsed. (Significantly, none of the roads running predominantly north and south collapsed, because their future business and traffic would have been relatively unaffected by the decision. …