Saturday, June 16, 2012

Financier and the Good Subway, I

The HSIB Mass Transit Committee is ever vigilant for misleading stories such as this in Forbes: Infrastructure Socialism and the New York Subway;
At a minimum, government assistance was required to get permission to tunnel under thousands of peoples’ property and/or under city streets. But beyond that, significant government subsidies were evidently needed to induce private companies to enter the market.
The author, Timothy B. Lee believes that that significant subsidy was 35 million (1900) dollars, something like $3 billion today.  However, that is not the proper way to think about the arrangements that created NYC's first subway line.

While the city did float a bond issue to raise the funds to pay the construction costs, the contractor and his financiers were completely responsible for repaying the bondholders and the interest payments on the bonds.  Which they did, from fare box revenue.  The city's politicians who'd made the deal were at great pains to stress to their public that that was the case, as this NY Times story of the groundbreaking ceremonies makes clear; the expiration of a shorter period (fifty years [with an option to renew for another 25]) the city will own this tunnel railroad that will have cost $36,500,000, and which is the key to the rapid transit situation, without the expenditure of a single dollar for construction or interest, it having simply used its credit under carefully guarded guarantees for the time being to the advantage of the lessee, who meanwhile pays the interest as it falls due and provides for the liquidation of the bonds at the expiration of his lease."
That is, the contractor and the investors backing him would build the system for the city, but receive a lease allowing them to operate it for up to 75 years (and hopefully recoup their investment).  The 'carefully guarded guarantees' refer to the hefty sureties that had been put up by the private entrepreneurs; between $5 and $8 million of their own money.

It's easy to call that arrangement a subsidy from the private sector to the public, rather than the way Mr. Lee has it.  A subsidy, without which, there surely wouldn't have been any subway as early as 1904.

And, that's not considering that it was up to the businessmen to fund the equipment; cars, rails, electrical, ventilation, etc with their capital.  Some reports from the day, have that amount as high as another $35 million.

Who was that unmasked man who made it all happen?  His name was August Belmont, Jr (better known for his horse racing legacy), and we'll hear more about him in a later post.

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