Economic Impact of the Railroad: Portugal vs. Europe

Cullen Jones
Econ 30423
Dr. Lovett
December 3, 2013

Railroads first came around in the early 19th century. It is common knowledge that the railroad helped the economy and the people living in that time; but to what extent? This paper will examine the railroad in greater detail to determine how revolutionary the invention actually was. An intricate railway system helped make shipping more economical as well as changed population habits. Sources indicate that these changes could have affected the economy of a country. The railroad became prominent in different countries at different rates and at different times. This paper will also discuss this and try to find any repercussions of a delayed start to the widespread use of the rail road. There is some evidence to support that the railroad affected a countries current economic standing. A primary country that will be observed is Portugal. The statistics and information on Portugal is relevant to what is being discussed. Portugal will be compared to countries like the United Kingdom and Spain to see how each was affected by the railroad. There are a significant amount of difference between the railroad, including how they took on the process of building a system and how that affected the country as a whole.

Economic Impact of the Railroad: Portugal vs. Europe
Cullen Jones
Railroads first came around in the early 19th century. It is common knowledge that the railroad helped the economy and the people living in that time; but to what extent? This paper will examine the railroad in greater detail to determine how revolutionary the invention actually was. An intricate railway system helped make shipping more economical as well as changed population habits. Sources indicate that these changes could have affected the economy of a country. The railroad became prominent in different countries at different rates and at different times. This paper will also discuss this and try to find any repercussions of a delayed start to the widespread use of the rail road. There is some evidence to support that the railroad affected a countries current economic standing. A primary country that will be observed is Portugal. The statistics and information on Portugal is relevant to what is being discussed. Portugal will be compared to countries like the United Kingdom and Spain to see how each was affected by the railroad. There are a significant amount of difference between the railroad, including how they took on the process of building a system and how that affected the country as a whole.

This paper will take an in-depth look at the importance of the railroad during the economic revolution. More specifically, the country of Portugal, and its’ governmental policies, will be compared to other European countries to see why each country had a different approach on the railroad. It is common knowledge that the railroad helped people in their lives, but to what extent? Each region of the world was affected differently and at different rates. The topic presented is of interest because of the huge importance of the invention and widespread use of the railroad. If the railroad never came about, the world as we know it today could have been vastly different. Why, though, did the railroad spawn at different times in different areas? Does this have anything to do with a country’s financial status today? Everyone knows how people say the history repeats itself. Could what the world witnessed with the invention of the railroad be translated into a modern example? Perhaps the widespread use of the electric car or hydrogen fuel and how it effects transportation and shipping will be similar to the effects of the railroad? In a world that is obsessed with alternative energy and economic ways of moving people and goods around, there is no reason why it will not be seen again. The world could use the railroad as an example and apply it to today. The railroad came around in the early 19th century and countries responded differently to it. Portugal, for example, was slow to the start of the railroad. In the mid-nineteenth century, Portugal built its first railway. It was a grand total of thirty-six kilometers long. At this point in time, England was dominating the game with over 10,000 kilometers, France was not far behind with 6,000. Surprisingly, Spain even had over 500 kilometers (Da Silveira, et al.). Why such a big difference? One reason could be the need or lack thereof for a railroad. France obviously was slower to start at constructing a railway infrastructure. A reason for this was because there was not a huge demand for one at the time. France had alternative means of transportation. France possessed a network of intercostal waterways (Mojica and Marti-Henneberg). Countries like Belgium, the USA and the UK showed little in financial savings of shipping costs with the initial construction of the railroad. Less than five percent to be precise. This was mostly because of their access to waterways. They did not save much money because their means of current shipping was relatively cheap. On the other hand, though, countries like Argentina, Brazil and Spain, less developed countries comparatively, showed much larger savings, roughly twenty to thirty percent. Those countries hugely benefited from the railroad when it came to shipping costs (Herranz-Loncán). The somewhat ironic part about this was that the countries in the Iberian Peninsula, countries that lacked navigable internal waterways, were supposed to benefit more from the railroad, yet those were the countries that matured much later in terms of the railroad. This can be viewed by the fact that, even before the turn of the century, France, who had already laid much more track than its neighboring countries, had over eighty percent of its railway in operation, compared to nearly sixty percent of operational track in Spain and Portugal (Mojica and Marti-Henneberg). Specifically, this can be viewed in a town in England called Shildon. The town started with a small population, only about a hundred inhabitants at the turn of the 19th century. Over the next year, there was minuscule growth. The town did produce some coal but imported a fair amount as well. In the early 19th century, this was done by pack mule, a slow and expensive process. At about £.125 per ton per mile, the transport costs made coal expensive for the town. Due to rough terrain, canals were not an option either. In 1825, however, the Stockton and Darlington railway opened, benefitting nearby Shildon. The effects were dramatic. By 1831, the population of Shildon had increased to over 850, and, by 1841, the number was about 2,600. The more dramatic effect was the coal industry and how it benefited from the railroad. Before the railroad, coal cost about eighteen shillings a ton. The initial reaction of the railroad dropped that price to about twelve shillings a ton. This was a large drop and made coal cheaper and more accessible to people throughout Britain. Because of the coal price, output increased from about 16,000,000 tons in the early 19th century to nearly 150 million tons by the later part of the century. The railway itself also led to the need for more coal. With coal needed for trains and steel and iron for tracks, the demand for coal grew significantly (Harbor). Clearly the railroad benefited England. It saved them money in shipping and also stimulated the economy with greater coal production. Population effects were also drastic as a result of the railroad in different areas. Something worth observing, however, is the relationship between urbanization and the expansion of the railway. Relating to the theme of the industrial revolution, the expansion of railroads seemed to concentrate on the city and helped lead to a population increase in city centers. Railways were generally directed toward the major cities (Mojica and Marti-Henneberg). This makes sense though: build the railroads where the people are so they can use them. In Portugal, especially between 1864-1911, urban populations significantly increased. A study was done looking at urban areas in Portugal and the population changes were recorded. For the study looked at here, an urban area consists of one that has a population in excess of five thousand people. Five thousand is significant because it illustrates the small size of Portuguese city centers at the time. The study first observes parishes. Parishes are smaller in terms of population but often are spread out more. Most parishes themselves lacked a train station but had access to one nearby in neighboring parishes. Because of this, the study counts parishes that have a train station as parishes that are within five kilometers of one. Not many of these parishes had access to a railroad at first, but, as time went on, they started to gain access to them. Population increases can be seen as more tracks were built too. At first, average population increases were slow, less than .4 percent a year. As economic performance improved and more areas had access to a railroad, that figure skyrocketed. In the second half of the 19th century, the Portuguese population was increasing at a rate of about .8 percent a year. Figure 1 below better illustrates these effects. This graph splits the country up into three sections, all of which are increasing in population (Da Silveira, et al.).

Figure 1 Source: SILVEIRA, ALVES, LIMA, ALCÂNTARA, and PUIG. "Evolution of the Population by Region." Population and Railways in Portugal, 1801–1930. Vol. 24. Cambridge: Journal of Interdisciplinary History, 2011. 29-52. Print. Ser. 1.

There was a more profound increase in cities that had access to railroads, however. This helped show how trains reinforced the rise in population. Portugal, though, showed less urbanization than the average of Europe. In 1850, urbanization rates were about thirteen percent in Portugal, fairly close to the European average of nineteen. In 1930 however, the average European rate of urbanization had jumped to nearly fifty percent. Portugal was lagging at only twenty four percent. Clearly Portugal was limited in its economic modernization. With a lack of railroads possibly this was the reason? (Da Silveira, et al.). The only problem was that railroads were still not accessible to all large areas. Even still today, forty percent of Spain’s population agglomerations lack access to a rail network. Portugal is similar in such that thirty percent of its agglomerations do not have a nearby railroad (Mojica and Marti-Henneberg). Maybe this had to do with evidence showing low utilization of the network or financial issues that many railroad companies faced. This evidence raises the idea that railroads in Spain were possibly built too early. This is the reason why many railroads faced money problems. Also, this could point out why the economic effect of the Spanish railroad was actually lower than the average social saving (Herranz-Loncán). Portugal was slow to the start and never really picked up afterwards. In Portugal, where trains were slow to be built, railroads did not reach everyone. It took over fifty years for railroads to reach over fifty percent of the population. (Da Silveira et al.). One reason that happened could simply be cost. Railroads came around at different times in different places, one reason being, they are expensive. Investors like the idea of them though. In the later 1800s, investors were crazy about them. They invested in more companies than the economy could handle. Railroads going bankrupt was a regular event too. One reason railroads went bust too often was the high costs associated with the development of a railway company. The entry and exit barriers were extremely high for companies of the time. The companies often found themselves paying large dividends and not saving capital for future projects or provisions. This significantly affected the long-term life of a railroad business (Perelman). Despite this, though, the ones that stayed in business significantly helped the economies of countries. Parishes in Portugal that had access to railroads grew at a faster rate both population, and economic, wise than places that lacked a railroad. (Da Silveira, et al.). Portugal has such a problem with railroads that even the State bought some to keep them from going bankrupt. Even after giving private railroads subsides to help them stay in operation, investors still needed further assistance. This could be an answer to why Portugal was slow at building railroads, simply because they could not afford them. Portugal also faced severe financial problems in the 19th century. The government attempted raising taxes, but riots broke out, which ruled out that option. Another option to raise money was to issue more money. The problem with this was the effects of inflation. With the gold system being recently adopted, that was out of the question. Portugal instead went with borrowing as their option to get more money, both foreign and domestic, in hopes to stimulate the economy. This turned into disaster though. Fearing tax hikes and social turmoil, Portuguese citizens did not respond the way the government had hoped, and Portuguese’ debts started to default, and, in 1892, Portugal went into partial bankruptcy (Mata). Portugal simply lacked the funds to afford more railroads, especially since they were forced to bailout the existing ones, and the early part of the century did not help either. Portugal controlled much of Brazil in the early 1800s. When Brazil became independent, the economy of Portugal was injured. Much of the region was reliant on commercial activities in Brazil, and, when the money stopped coming, they suffered. Eventually, the country recovered, but the impact of Brazilian independence delayed Portugal’s railroad system from being built (Da Silveira, et al.). The United Kingdom and other parts of Europe were having a much more successful time economically. During the 18th century, the British were left in extreme debt and poverty, because of the Napoleonic wars. After twenty five years of fighting the British were struggling. In fact, the government’s debt increased over a multiple of seventy. New taxes imposed on British citizens did not help either. Huge tariffs restricted trade and brought about a new black market for heavily taxed items like sugar and cheese (Donelson). Despite this, however, the railroad still benefited the country. This can be seen in a study done detailing the contribution of railroads to growth in Great Britain from 1830-1910. From 1830-1850, the capital stock growth per worker was 22.8 % per year. Up to and until 1870 in Britain railroads accounted for almost twenty percent of income per capita growth. That was huge, especially compared to later dates from 1850-1910 where this number went down as railroads had become somewhat more common and served more people. (Herranz-Loncán). Overall, the country was in a bad state, and there appeared to be no resolution in sight. The 19th century seemed like it would be equally as bad as the one before (Donelson). In the 19th century, however, things changed. Government spending was cut and became less regulated. In an effort to support economic growth, taxes were reduced, and free trade became prevalent. After witnessing huge crime and the adoption of a black market, the government knew this was necessary (Donelson). The simple economic idea of the Laffer curve can be used in this situation. Basically the curve is a large arch that compares possible taxation rates with taxation revenue. The idea of the curve is that a government can get the same taxation income at two taxation rates except at the maximum point of income at the top of the curve. Laffer says that, when the taxation rate becomes too high, people will stop working or work less or even find other, sometimes illegal, ways of making money. Sometimes, to make more revenue for the government, it is better to reduce taxes. This is exactly what the British government was thinking at this time. When they had high taxes, a black market and illegal activity prevailed. Reducing the taxes incentivized citizens to work more and stimulate the economy, and this helped significantly. The economy grew as well as the population. A new, stronger middle class emerged, and their purchasing power increased significantly. They started buying luxuries that only the rich used to enjoy. The significant increase in the economy also triggered an increase in investment (Donelson). One area of investment that prevailed was the railroad. Compared to Portugal, England’s economy was much better off and had the resources to improve. England was also noted as having less regulated railway investments compared to other countries (Perelman), probably because of the new, more hands-off government approach in that time. As a result, England soared ahead of Portugal and practically every other country of the time. Spain, on the other hand, was slightly different. Unlike the British, the Spanish were not seeing a booming economy. The loss of colonies in the Americas put a damper on their economic growth. As a result, the early parts of the 1800s hosted little economic change. The rest of the century was better but not to the scale of the United Kingdom. Investment at the time from the government was sparse. Most was privatized. What little money the government did have, however, was dedicated mostly to railways. The second half of the century turned out to be much more prosperous. The interesting part about Spain is that a majority of the railroad stakes were held in private hands. The government launched the Railway act in 1848, which stated the general layout of the tracks. However a majority of the financing came from the private sector. Private investments totaled at least eighty percent of the total capital raised for the railroads. Even into the early 20th century, the government still owned very little of the railroads (Mojica and Marti-Henneberg). Compared to Portugal, Spain was miles, literally, ahead in terms of the railroad. From this information, money has obviously been a key factor in this. Spain as well as Britain had amazing financial backing, especially from the private sector. Portugal lacked this and simply could not afford to build an intricate railway system. After the railroad has been built, it helped everyone. The effects boosted the economy nationally. In Spain the railroad helped save the country seven to twelve percent of the GDP in their transportation costs. (Mojica and Marti-Henneberg). People and goods getting around quicker certainly helped the economy. To look at an analogy, picture Spain, Portugal and Britain as people walking. When Spain and Britain get a head start in the railroad, it is like instead of walking they are now driving and leave Portugal in the dust. Their economies start growing at faster rates, leaving Portugal behind attempting to catch up.
Another possible reason for the late arrival of the railroad in some countries could have had something to do with the revenue that was generated from them. As time went on, railroads turned out to be less profitable. There was a fall in revenue per ton per mile over the years. From a high of around 1.88 cents in 1870 to less than 1.00 cent just twenty years later. By the turn of the century, that number was down closer to 0.73 cents. As a result of the high costs of building a railroad and the downturn of revenue, roughly half of the rails built prior to 1900 fell under receivership. Entry and exit barriers were also rather high. Due to the amount of sunk costs once a person entered the business, it was difficult to get out. (Perelman). Again, this is just more evidence that the railroad was not an easy piece of engineering, a reason why some places lacked railroads while others prospered from them. Cleary, financial reasons significantly impacted the start of the railroad. Trains obviously helped many countries become more efficient and more profitable. Does what happened two hundred years ago carry over into today though? Portugal was already in a weak state in the 19th century. In the 1890’s, Portugal was in a financial crisis. This led to the abandonment of the gold standard. They even cut interests payment on domestic and foreign debt (Lains). Could this have been a result of the railroad? Portugal did spend what little money it had on the railroad, possibly making it even more weakened. With constant defaults on railroads, possibly they even made Portugal worse off for the time being. For about ten years, Portugal was banned from international borrowing (Lains). The split up of wealth in the 19th century is also worth observing. The average fortune was higher in the last third of the century than the first two. For agrarian elites, property became a commodity. Eighty percent of a person’s wealth was, on average, in physical property. Compared to only about forty in the first third of the century, this is a huge increase. Where the property was made up the losses came majority from agriculture, down to only about seven percent in the last third compared to thirty four in the first. This was due to the high favorability in investment. Especially in the real estate, mining and railroad business. With a lot of this investing not working out for the best Portugal became financially and economically unstable in the late 19th century (Lains). Entering the 20th century Portugal was not in the best standings.
In the 19th century however there was some good news. Portugal was not affected as much as other countries were by the stock market crash in 1929. This is not to say they were doing better because of the crash but that they were not effected as much. Their international trade was down, especially due to the depression effect of Brazil and Africa. They were also not severely affected by World War II like many other countries were. Growth continued after World War II. Portugal was a founding member of the EFTA (European Free Trade Association). This helped growth in the seventies but due to the government at the time, growth was not as rapid as it could have been (Lains). Today Portugal sits at a GDP of $212.5 Billion. That ranks it at about eighteen out of forty seven countries in the European Union (Portugal). Clearly Portugal is not in too bad of a state today. The real question is, though, did the railroad have anything to do with this? Since Portugal was slower at getting started with the railroad, did that effect its financial situation today? It’s hard to say, but the United Kingdom and France, two of the earliest countries with an intricate railway system, have a much higher GDP. Obviously there are other factors involved, but it is possible that the railroad was one of those. Research shows that investment in railroad supplies new jobs. In Portugal a one million Euro public investment creates about 6.1 new private jobs. A one million Euro investment in railways can result in almost twelve new private jobs. Returns are often good too. A one million Euro investment in railways can return nearly five million Euros in the long run. Depending on the area the investment is in geographically the return can be even more (Pereira and Andraz). Cleary, the railroad helps stimulate the economy, adding new jobs and increasing the GDP. There is evidence to support the idea that the late introduction of the railroad led to Portugal’s current economic standing. Since they started late, they have been playing catchup with the countries ahead of them. To further prove this theory, the economies of the United Kingdom and Spain must be looked at in more detail.
The 19th century fared well for the United Kingdom. With more money and resources they were able to build a large railway network before other countries. Today, the United Kingdom is an economic powerhouse. Does that have to do with the railroad though? Looking at the economy during the 20th century will help answer that question. Britain was hit harder by the great depression compared to Portugal. The United Kingdom’s economy was very traditionally based. Its major products were cotton and mining to name a few. A return to the gold standard weakened the pound, devaluing British goods. Britain was not as competitive in the world market as they had hoped to be. As a result, England lost money, millions became unemployed and strikes became a common occurrence. World War II helped employ more British people but also had its downfalls. Bombings in London certainly did not help either. Over 13,000 people were killed because of them. Not to mention the destruction. Housing became a serious problem. With a lack of housing, the government imitated the housing act of 1946. In the next few years to come, nearly 1 million new homes (Lambert). With so much money being spent on the War and rebuilding after it, possibly this is a reason why railroad development slowed. Today, though, the United Kingdom is booming. With a GDP around 2.58 Trillion and a population of about 63.6 million, The UK is a leader in Europe and is financially better off than Portugal. The real importance of this finding though is weather this relates to the invention of the railroad in any way? At a glance, one could say yes. Portugal was slow to start with the railroad and is still lagging behind other European countries economically especially, the United Kingdom. However, there could be dispute to this. There are so many factors over the years from the invention and widespread use of the railroad until today that could have affected the economic standings of the countries. What is known though, is that the train did improve trade. It made it cheaper and easier. Since England had this technology first and was able to benefit from it first, England was able to move forward quicker sooner and stay ahead. Portugal cannot catch up. It will be very difficult at least for them to see a GDP close to that of England. From these findings, there is enough evidence to say that the invention of the train and its use helped develop a country faster at the time in the 19th century as well as to its current economic status. While there may have been some other factors involved, the railroad certainly impacted the countries that had them.

Works Cited
Donelson, Tom. "Economic History of 19th Century England." Blogcritics.com. Blogcritics, 28 Sept. 2004. Web. 22 Nov. 2013.
Harbor, Mark. "Assess the Contribution of Railways to Britain's Economic Growth in the 19th Century." A Web of English History. The Peel Wen, 26 Oct. 2013. Web. 02 Dec. 2013.
Herranz-Loncán, Alfonso. "Railroad Impact in Backward Economies: Spain, 1850–1913." The Journal of Economic History 66.04 (2006): 883-81.JSTOR. JSTOR. Web. 22 Nov. 2013.
Lains, Pedro. "The Power of Peripheral Governments: Coping with the 1891 Financial Crisis in Portugal*." Historical Research 81.213 (2008): 485-506.World History Collection. Ebsco Host. Web. 22 Nov. 2013.
Lains, Pedro. Why Growth Rates Differ in the Long Run: Capital Deepening, Productivity Growth and Structural Change in Portugal, 1910-1990. Thesis. Portugal / Instituto De Ciências Sociais, Universidade De Lisboa, 2001. Portugal: Universidade De Lisboa, 2002. Print.
Lambert, Tim. "A HISTORY OF ENGLAND IN THE 20TH CENTURY." A HISTORY OF ENGLAND IN THE 20TH CENTURY. LocalHistories.org, 2012. Web. 22 Nov. 2013.
Mata, Maria E. "Economic Ideas and Policies in Nineteenth-Century Portugal." Economic Ideas and Policies in Nineteenth-Century Portugal. N.p., n.d. Web. 22 Nov. 2013.
Mojica, Laia, and Jordi Marti-Henneberg. "Railways and Population Distribution: France, Spain, and Portugal, 1870–2000." Journal of Interdisciplinary History 42.1 (2011): 15-28. World History Collection. Ebsco Host. Web. 22 Nov. 2013.
Pereira, Alfredo M., and Jorge M. Andraz. "On the Economic Effects of Investment in Railroad Infrastructures in Portugal." JOURNAL OF ECONOMIC DEVELOPMENT 37.2 (2012): 79-107. EconLit with Full Text. Ebsco Host. Web. 22 Nov. 2013.
Perelman, Michael. "Retrospectives: Fixed Capital, Railroad Economics and the Critique of the Market." Journal of Economic Perspectives 8.3 (1994): 189-95. EconLit with Full Text. Ebsco Host. Web. 22 Nov. 2013.
"Portugal." Data. The World Bank, 2013. Web. 22 Nov. 2013.

SILVEIRA, ALVES, LIMA, ALCÂNTARA, and PUIG. "Evolution of the Population by Region." Population and Railways in Portugal, 1801–1930. Vol. 24. Cambridge: Journal of Interdisciplinary History, 2011. 29-52. Print. Ser. 1.
Silveria Da, Espinha L., Daniel Alves, Miguel N. Lima, Ana Alcantara, and Josep Puig. "Population and Railways in Portugal, 1801-1930." Journal of Interdisciplinary History 42.1 (2011): 29-52. World History Collection. Ebsco Host. Web. 22 Nov. 2013.