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The railroad money problem
To build a railroad and make money from it was a decade or multiple decades long endeavor, while the money to pay for it had to be raised in the short term. That duration mismatch is why people reach for the railroads when they talk about AI. The railroad build-out was the biggest of its era.
Rails kept running
The railroads kept operating anyway. They expanded the West, their contribution to GDP was astronomical, and they are still contributing today.
AI's capital curve
AI is working its way down its own capital curve. The tech companies started with free cash flow and blew through the debt markets in about a year. Google is now issuing equity, and Nvidia is putting together a $500 billion arrangement to tap pension funds and insurance floats. People ask whether there will be enough compute and enough electricity. The nearest-term question is whether there will be enough money.
Why did a railroad collapse trigger the 1873 panic?
The Panic of 1873 began in September when Jay Cooke and Company, a bank that had been financing the Northern Pacific Railway, failed. Investors realized that many railroad bonds depended on lines that had not yet earned anything. Credit tightened across the US and Europe, and the depression that followed lasted until about 1879.
How did railroads raise their money?
Railroads sold bonds to investors in the US and Europe, and many received land from the government to sell or borrow against. Historians commonly estimate that federal land grants to railroads totaled well over 100 million acres. Bondholders were paid interest for years before many lines had much traffic.
What happened to railroads after the overbuilding?
Many overbuilt lines went bankrupt, but their track stayed in place and was reorganized under new owners. In the 1890s, J.P. Morgan reorganized several failing railroads into stronger systems, an effort nicknamed Morganization. The reorganized lines kept operating with their debts cut.
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