Speculative Bubbles and Railroad Practices
- During speculative bubbles, investors overbuilt new technologies, as railroads did in the 1870s--1880s.
- Railroads suffered from mismanagement and outright fraud.
- Speculators such as Jay Gould entered the railroad business for quick profits and made their millions by selling off assets and watering stock.
- Railroads competed by offering rebates (discounts) and kickbacks to favored shippers while charging exorbitant freight rates to smaller customers such as farmers.
- They formed pools, where competing companies secretly fixed rates and shared traffic.
Financial Panic and Railroad Bankruptcy
- A financial panic in 1893 forced a \frac{1}{4} of railroads into bankruptcy.
Banking Consolidation and Stabilization
- Pierpont Morgan and other bankers quickly moved in to take control of the bankrupt railroads and consolidate them.
- With competition eliminated, they could stabilize rates and reduce debts.
Post-Consolidation Landscape
- By 1900, 7 giant systems controlled nearly \frac{2}{3} of the nation\'s railroads.
- The consolidation made the rail system more efficient; however, the system was controlled by a few powerful men.