The Growth of Railroads in the United States
Bryan Taylor, Chief Economist, Global Financial Data
Railroads have existed in the United Kingdom since 1825 and in the United States since 1830. GFD tracks the entire history of railroads in the United Kingdom, the United States and other countries. The S&P 500 Railroad Index and the Dow Jones Transportation Average have been extended by GFD to the beginning of railroads trading in the United States in February 1830. Between 1830 and 2023, the S&P Railroad Index increased 2000-fold in price. Adjusting for dividends to obtain a total return index, the Dow Jones Transportation Average increased in value 5 million-fold. This works out to an annual return of 4% for the price index and 8.3% for the return index. The inflation rate was 2% between 1830 and 2023. Warren Buffett is a believer in railroads because they play a crucial role in the success of the American economy. Buffett bought the BNSF (Burlington Northern Santa Fe) in 2010 and has profited from his investment.
Today, railroads continue to rise in importance in the American economy, even though the amount of railways in the United States has been declining since World War I as can be seen in Figure 1. Because of the size of the United States, airline travel is more effective for passengers than railroads. The number of passengers on railroads in the United States has been declining since World War II. The 1940s appear as a hump in Figure 2 because Americans favored trains over cars due to gas rationing. In most European and Asian countries, on the other hand, passenger use of the railroads has continued to increase since World War II even though the length of the railroads in use has not.
Figure 1. Length of Open Railways in Kilometers in the United States, 1830 to 2022
Freight, however, has continued to rise over time as has the American economy, though it appears to have leveled off since the 2008 financial crisis, as can be seen in Figure 2. Railroads are part of the intermodal transportation chain that transfers containers from ships to railroads to trucks to delivery with each kind of transportation playing a role at each stage in the chain. Figure 2 illustrates the amount of passenger kilometers and freight ton-kilometers in the United States over the past 100 years. Freight has continued to increase over time while the number of passenger kilometers has risen slightly since 1970.
Figure 2. United States Railroad Passenger-Kilometers and Freight Ton-Kilometers, 1905 to 2022
Railroads as an Investment
Since 1830, railroad stocks have increased in price by 4% per year and total returns, including dividends, have increased by 8.3%. Figure 3 illustrates the behavior of the S&P Railroad Index from 1830 until 2022. The index made minor gains between the 1830s and 1850s. The United States failed to participate in the bubble of the 1840s that was common in Europe because The United States was still expanding as a country and the full impact of railroads on the American economy was not known at that point. The real growth in the index occurred between 1861 and 1864 during the Civil War when the benefits of building a transcontinental railroad and expanding the railway throughout the United States after the war became obvious. The second surge occurred in the late 1870s when there was a dramatic expansion in the scope of the railroads throughout the United States, and Pullman cars made rail travel more attractive.
The third surge in the index occurred in the decade after 1896 when the length of railroads in the United States was reaching their maximum. By 1910, there were few roads left for the railroads to expand into. During World War I, the railroads were nationalized, and it became obvious that the period of railroad expansion was over. Railroad stocks did well during the Roaring Twenties, reaching their highest point in history up until that point, but when the Great Depression hit, railroad stocks collapsed in price and by 1932 had dropped by over 90 percent from their peak in 1929. At its bottom in 1932, the railroad index was below where it had been 100 years before in 1832. Of course, the market bounced back and by 1937 had increased almost fivefold.
After the bottom in 1942, the index has been on a steady rise. The returns to railroads have come from better use of railroads for shipping freight as part of the intermodal container process that allows containers to be transferred from ship to rail to truck. This process began when the White Pass and Yukon Route railway introduced containers to its railways in 1956. Double-stock railroad transport began in 1984 and rail intermodal traffic tripled between 1980 and 2002. This not only has increased the demand for railroads but has made them more efficient.
Figure 3. S&P Railroad Index with GFD Extension, 1832 to 2023
Airplanes have replaced railroads for long-distance passenger travel in the United States, though not in Europe, while automobiles and buses have replaced railroads for local travel. Railroads are primarily dependent on freight for revenues and profits. Amtrak handles passenger travel in the United States because it is not profitable and private railroads are unwilling to lose money on passenger travel. Amtrak has never made a profit and it has consumed over $50 billion in federal subsidies between 1970 and 2020. Amtrak lost $2 billion in 2021.
Freight, on the other hand, continues to be profitable. Kansas City Southern recently merged with Canadian Pacific Railway to form Canadian Pacific Kansas City Ltd., reducing the number of “major” railroads in the United States and Canada to six. This was the first merger of a major railroad in the United States in two decades. Other major railroads include the Union Pacific, CSX (Chesapeake and Ohio), Norfolk Southern, BNSF (Burlington Northern and Santa Fe) and the Canadian National Railway. Of those, three are in the Dow Jones Transportation Average, two are Canadian and one is privately owned. The railroad industry has become very concentrated. In 1969, there were 20 railroads in the Dow Jones Transportation Average. Now there are three. The BNSF and the Union Pacific are the largest.
Railroads have been in existence in the United States for over 190 years. During the 1800s, railroads represented the majority of the capitalization of stocks in the United States. They also represented the majority of preferred stocks and corporate bonds. The value of outstanding railroad bonds was greater than the value of outstanding stocks. Common and preferred railroad stocks grew from $1.2 billion in 1871 to over $8 billion in 1914. The amount of outstanding railroad bonds rose from $1.5 billion in 1871 to over $10 billion in 1914. Together railroad stocks and bonds grew from $2.5 billion in 1871 to $20 billion in 1914.
Primarily because railroads only provide freight services and not passenger services, they are profitable and have increased their profits during the past 70 years. Although the role of railroads has shrunk dramatically during the past 100 years, it would be difficult to imagine an America without them.