When the private railroad companies that built the subway lines first began service, they expected to reap enormous profits, a portion of which they would share with the city. But their contracts with the city contained one provision that would affect the transit system’s financial viability and the potential for further expansion: the fare had to be kept at five cents per trip for the duration of their 49-year lease agreements.

New York has long regulated the fees that privately owned monopolies, like the early 20th-century railroads, were allowed to charge customers. For example, utility companies could not raise their electric rates without approval from the state. The regulators knew that limiting rate hikes might be politically popular, but if the companies did not have sufficient revenues, they would not be able to properly maintain their equipment and expand their electricity-generating capacity.

In the early twentieth century, however, New York’s politicians took a shortsighted approach to the transit system. Instead of allowing the firms to raise fares, the elected officials raised false expectations that New Yorkers could have high-quality subway service with low fares. The repercussions would last for generations.

The financial health of the private railroads deteriorated after the first lines were extended and new ones built. Although passengers traveled longer distances, the railroads could not recoup their increased operating expenses by charging higher fares. Moreover, in the 20th century’s second decade, automobile use soared and inflation surged. To deal with their red ink, the railroads cut staff, reduced salaries, deferred investments, and cut back on station and train cleaning. As a result of their cost-cutting moves, service became less reliable and the system began to deteriorate.

New York mayors promised that if the city took over the private railroads, a city agency would provide better subway service at lower costs. They also promised to build new rail lines all across the city. New York’s mayor, John Hylan, even said that the city would earn a profit on the nickel fare that could be used to fund new schools, parks, and highways.