Naked Capitalism: A History Lesson

Nathan Tankus: The Transit Coup – How Robber Barons Got New York City to Bail Out Their Subway Lines

Posted: 15 May 2013 09:50 PM PDT

By Nathan Tankus, a student and research assistant at the University of Ottawa. You can follow him on Twitter at @NathanTankus

Since the Reagan/Thatcher era, it has been common to view politics vs. infrastructure as simply a battle between right wing forces attempting to privatize infrastructure and others trying to defend it. (I covered the latest attack by President Obama on the TVA.) However, this is only the recent history of United States infrastructure policy. Much of America’s public works infrastructure was privately built (with public subsidy of course) by businessmen attracted by the possibility of huge crowds of customers. Transit in New York City was no different. By the 1920′s the two privately owned subway lines were the Interborough Rapid Transit Company (J.P Morgan’s subway) and the Brooklyn–Manhattan Transit Corporation (Chase National Bank’s subway). They were known respectively as the IRT and the BMT. Additionally, Rockefeller owned the elevated railway lines (we’ll get back to this in a future post) but leased them to the IRT. If you have had much experience with New York City subways, you can easily tell that there is a significant difference between the lines built and managed by different companies.

New York City transit was very profitable in the late 19th century to early 20th century. It was the fastest way to travel around the city and served a large and growing industrial sector. Each transit company was given exclusive city franchises and received substantial financial subsidies. The most significant of these subsidies was that the City agreed to pay the construction costs of the new lines. The first subway was built under a contract between the IRT that was signed on February 21, 1900. This became known as Contract 1. Contract 2 was signed with the IRT on September 11, 1901.

After the success of the first two contracts, J.P. Morgan sought to expand his transit system and Chase National Bank became interested in expanding theirs. This would allow both to capture more ownership rents from running the transit system (as well as drive up the value of more of their property by making it more accessible). The next round of negotiations ended in the Dual Contracts of 1913 (signed March 19, 1913), which was the beginning of the end for privately owned subway and railways in New York City, although their owners didn’t yet know it.

Fearing what progressive mayors around the United States were accomplishing (for example, Tim Johnson in Cleveland), the BRT and IRT owners were adamant about fixing a 5 cent subway fare. This quickly became a progressive guarantee of a low fare once labor costs and inflation rose because of the World War I. Additionally, the deals made before the war were based on financial projections from a pre-automobile era. The number of people using their transit systems fell tremendously as cars started to be mass produced and marketed. On the elevated railways, for example, carried 500 million fewer passengers than projected between 1917 and 1922 (Horan 1985).

More profit pressure ensued. Tammany Hall and the Hearst newspapers supported Brooklyn politician John Francis Hylan in his mayoral run of 1917. He proposed and built the Independent Subway System (referred to as the IND), the first municipally-owned subway system. He inveighed against the robber barons, and he won re-election by fighting proposals to raise the subway fare. However, this wasn’t exactly out of the goodness of his heart. Tammany Hall and these oligarchs were in competition over looting the budget and Hylan’s policies should be seen in that light. Additionally, he was silent about the garment industry and the battles it was fighting with unions at the time – suggesting a possible relationship with this industry. His subway policy would make sense in this light. More subways would lower the commute time of workers (by bringing closer subways and less congestion) and the IND would help to prevent a rise in subway fares, which would keep down the cost of living and thus necessary pay of their workers.

All of these factors led to dramatic financial problems for these companies. The BRT went into receivership in 1918, a form of financial reorganization where a person is appointed (often by a court) to run an organization. Usually the organization has failed in some major way to keep up with their obligations. Meanwhile, the IRT had a default in 1921 which required a major reorganization to avoid banktruptcy. In response, both operators did what any good capitalist would do: try to charge higher prices and dump their losses onto government. However, they were unsuccessful during the 1920s. Absorbing losses on the scale the robber barons sought would impinge on the funds available to Tammany Hall’s patronage system. Meanwhile, these companies were massively unpopular and there was enormous political pressure to resist their demands. By the end of the 1920′s it seemed as if they were in the wilderness. Like most things, the Great Depression changed all that.

The failure of Creditanstalt (Lehman Brothers an Austrian bank) in 1931 produced an international financial panic that harmed, among many other things, the municipal bond market. Anticipating Rahm Emanuel’s dictum to never let a serious crisis go to waste, a veritable list of who’s who among New York bankers organized to hold the city for ransom. “Spokesmen for a syndicate of J.P Morgan & Co, National City Bank, Chase National Bank, Kuhn, Loeb, Guaranty Trust, First National Bank, Bankers Trust, and Bank of Manhattan Trust refused to bid on the issue,” that is, a New York City bond offering (Horan 1985, pg 212). Apparently this was a time when bankers had to point a gun to other people to get what they want, rather then themselves. The consortium then went into negotiation with the city over their finances. As you can imagine their interest was as much in getting higher subway fares and municipalization at high prices as it was in making sure they could get paid back. This was not a secret. In a New York Times article, “Bankers to demand rise in subway fare,” this statement appears:

…speedy unification, with provision for a self-sustaining fare, it is understood, is so attractive to these groups as to make them willing, despite the general weakness of the bond market, to undertake the flotation of such city corporate stock and board of transit control bonds as may figure in the unification deal… [these direct negotiations] are taken in some quarters as an indication that the question is closely allied with the city’s general financial situation.

The eventual agreement was a bonanza for the bankers. The city agreed to unify the transit system, increase subway fares, and segregate all tax revenues from the general budget for the purpose of paying off bonds. All these concessions were in exchange for the ability to borrow at higher interest rates than ever before. In order to finance even minimal relief spending, the city was forced to impose a regressive sales tax. As former Roosevelt man A. A. Berle said: “The bankers have virtually stated as a condition of any relief credits they want a sales tax” (letter to president Roosevelt, October 23 1934, cited in Horan 1985). The city finally purchased these bankrupt companies for an enormous $315 million in city bonds. Yet, by the 1970′s the city’s financial problems were blamed on “the fucking blacks and Puerto Ricans,” as a spokesman for the Municipal Assistance Corporation told Robert Fitch.

Thus, the city paid out massive subsidies to major financial interests to build city transit that was massively profitable for a time. Then, when these going concerns turned sour, J.P Morgan, the Rockefellers and the top bankers at Chase National Bank did everything they could to coerce the city into buying the transportation system and the bankrupt companies along with them. The prices they demanded were outrageous and helped bleed the City’s finances dry. In modern times, the descendants of these same interests push (and sometimes succeed) in getting the same infrastructure privatized in the name of “efficiency”. Don’t be surprised if in the future privatized property is nationalized again for many multiples of what was originally paid by governments and what their profit margins would recommend. It seems oddly appropriate given this history that the financial descendents of J.P Morgan and Chase National Bank have merged and are now considered “too big to fail”.

Most of this post and follow up posts are based on two articles in the 1985 issue of Research in Political Economy. I would like to thank current editor of the journal Paul Zarembka for access to them.


Fitch, Robert. “The Family Subway.” Research in Political Economy 8 (1985): 163-200.
Horan, Cynthia. “Agreeing with the bankers: New York City’s depression financial crisis.” Research in political economy 8 (1985): 201-232.
Bankers to demand rise in subway fare. (1932, Mar 28). New York Times (1923-Current File). Retrieved from


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