The Failures of a “Government Enterprise” A periodic series on government trying to run businesses at GregoryBresiger.com

The Anniversary No One Celebrates in New York:
Generations of Transit Disaster—-the New York City Subways, Part 2.

The subways weren’t always a mess. But certainly the system, which began in New York City in 1904, has been enfeebled over the past 75 years by the persistent tinkering of government, through politicians and their authorities. The pols use the latter as a cover when people become angry over lousy service, which has been worsening since the government took greater control.

Complete government ownership and operation of the subways—-2015 marked the 75th anniversary of the ouster of the last private management companies—has turned a once great system into a nightmare. That’s even though in its first years of the system it was called “an engineering marvel” and people came from around the world to admire it.

Unfortunately, problems today are myriad. They include delayed maintenance, a lack of political accountability, an ancient signaling system, angry transit unions threatening to shut down the city—and sometimes doing so as in the illegal 1966 strike that crippled the city’s economy for weeks and another one a few years ago—and the problem of almost every other business operated by governments: relentless red ink.

What happened to the subways, which were once regarded as a transportation jewel? And why did the private management companies eventually sell in 1940?

Government price controls—the fare could never be raised above a nickel in the 36 year era of private management companies—drove the owners of private management companies to destruction as do price controls in every business that the government regulates to death. So the subways ran huge deficits in the 1930s after the first 15 years or so of running in the black (1904-1919).

By the end of the period of the private management companies, the government was “exploiting” private management companies by its price controls, wrote one historian who did a financial review of a private management company. Yet private management subway companies were once highly profitable.

The Subways Once Did Make Money

Speaking of one of them, the IRT, a subway historian Clifton Hood wrote that the subways—which included the elevated (el) trains that preceded the opening of the subway system—were, “a goldmine” in the first years. That’s because private management was economic; it sought to make money at the same time it provided good service. The former never happens today. The latter is debatable, with outer borough, long-distance riders often seemingly disagreeing with some Manhattanites who only ride the subways for a few stops and say the system is fine.

Still, the private management companies sought to make money in their first years by controlling costs. That’s something that hasn’t been happening for generations. The private sector built lines in the most profitable areas first and planned the less potentially profitable lines later.

This was similar to how many railroads were built in the United States in the 19th century—-freight service came first because it was more profitable. Passenger service was secondary because its potential profitability was less. However, many subway historians have been critical of the private management companies for this practice.

But the initial success of the subway system inevitably led to problems as pols—some corrupt, such as 1920s Mayor Jimmy Walker and his Tammany Hall gang, and some well meaning, the “good government reformers,” or what some would call the “Goo-Goos”—constantly complained that private management companies were making too much money. (In retrospect profits were actually a good thing for the health of the system. How can any business renew itself without plowing back some profits into improvements? Without profits, there is no money for improvements). These profits led to calls for reform against the “greedy” private management companies.

Increased politicization of the subway system followed. Pols and regulators imposed rules, controlled prices and eventually killed the private management companies. The pols and the reformers showed private management companies the door, taking complete control of the system in 1940. Some 75 years later, after generations of government control, most people, including many of today’s Goo-Goos, agree the system has many problems, but their solutions make no sense.

Why?

They have been tried many times before: New government commissions and authorities along with more taxes, tolls and bond referendums. They are trying to cure the drunk by just giving him one more drink.

An Engineering Marvel

The subway system wasn’t always bad. It was built and had its golden era in its first decades. That’s when private management companies, responsible to stockholders as well as riders—the Interborough Rapid Transit Company (IRT) and the Brooklyn Rapid Transit (BRT), which later became the BMT—operated the first subways under the terms of the dual contract between the two companies and the city.

The subway system began with 28 stations on October 27, 1904. The next 15 years or so was a period when the system expanded and worked. Indeed, remarkable as it may sound to today’s embattled riders, the subways were praised by riders, some of whom rode them for fun. The original system was called “an engineering marvel” in Robert Caro’s landmark biography of Robert Moses, “Powerbroker.” Caro also said that New Yorkers were once “proud” of their subways. That’s something that would seem unthinkable to many of the city’s embattled riders.

The success of the system also helped develop the city’s economy in the early 20th century just as private railroads helped the country prosper in the 19th century. The subways changed the nature of work in New York City. People no longer needed to live close to work or at work. They could move out of densely populated slums areas in lower Manhattan and still keep their jobs. They could live in what were then virtually suburban parts of the city, upper Manhattan and the then pastoral Bronx. The subways were also popular because the fare was low.

The nickel fare subways were widely admired in the first twenty years or so. People came from around the world to ride and study them. They were amazed and awed by them (As a child growing up in the Bronx in the 1950s, I explored every line because each seemed different. In those days, before I started using them for work, I ignored the shaking cars and the delays).

So why did things breakdown on the subways? And why, by the late 1930s, were private management companies, ready to sell, whose leading figures, such as Mayor LaGuardia criticized them and called for a government takeover. By the way, the mayor, like most other mayors, didn’t ride subways. Still, the same as countless succeeding mayors and governors, he promised riders a golden era when he piloted the first train after the IRT was bought by the city.

This era, the city’s rulers promised, would include great line extensions, such as the infamous Second Ave Subway line—-now 75 years late—and the extension of the IND lines from Jamaica to the city line in Queens. And the system would be unified under city control—the city had started a competing system in the 1930s, the IND, that immediately lost lots of money—and it would provide economies of scale that would ensure the subways would make lots of money.

The latter promise, after some 75 years of red ink, now sounds comical. But luckily for pols, both yesterday and today, these promises are usually long forgotten along with countless other worthless promises. I will discuss some more of those broken promises and how they destroyed a once great system in the next segment of this periodic series.

(Editor’s note: This is an abbreviated version of a scholarly essay entitled “Generations of Transit Disaster: The New York City Subways” that is appearing in the fall issue of “The Journal of Private Enterprise.”)

About The Author

Gregory Bresiger

Gregory Bresiger is an independent business journalist from Queens, New York. His Personal Finance articles have appeared in publications such as The New York Post & Financial Advisor Magazine. He is the author of the eBooks “Personal Finance For People Who Hate Personal Finance” and “MoneySense”.