Brief Economics of the Erie Canal

The Erie Canal was a social and economical success. Although many spent years campaigning for the canal, it was Jonas Platt who recognized that the Canal truly had to be a public, state-sponsored venture. In Bernstein's words:

"Platt took a firm position... that would shape the entire future of the Erie Canal: 'No private corporation was adequate to, or ought to be entrusted with, the power and control over such an important object.' New York State itself would do the financing" (The Wedding of the Waters 132).

Once opened, the Canal earned a net rate of return of about 8% over its first decade, which allowed the State to quickly earn back the $9 million it invested in the Canal (A New Economic View of American History 150). More important than the direct profits were the incredible social returns (or overall returns to society, beyond the simple profits the owners earn). The average social rate of return for canals in the mid-1800's exceeded 50% (A New Economic View of American History 155)! It is the high social rate of return that explains why the Canal truly had to be a government project. Simply put, the Canal was worth far more to society as a whole than it ever would be to a private owner.

To finance the canal, George Tibbits, a state politician, designed a fairly brilliant system that recognized the positive social impact of the Canal. Tibbits' plan included both a toll for using the Canal and a tax on "all real estate located within twenty-five miles of the canal" (Wedding of the Waters 190-191). Tibbits' plan recognized: (1) the companies using the Canal would gain incredible benefits, so they should be taxed (made to pay a toll) and (2) land along the Canal would increase in value, so the land owners should pay for a portion of the Canal as well. The land along the Canal increased in value for a simple reason: practically overnight, it went from being real estate more-or-less in the middle of nowhere to real estate along one of the most significant commercial highways of the era. Although, as Bernstein points out, the tax on adjacent land was never collected, the plan itself was still brilliant and economically sound.