Thursday, August 18, 2005

Question: Role of Government in RR Construction Funding

Was the payment for the Transcontinental Railroad the best idea (part government, part private companies)?

8th grade essay in FL


Blogger CPRR Discussion Group said...

There was a national consensus to build a railroad to the Pacific to fulfill manifest destiny, as shown by the party platforms of both the Democrats and Republicans. The goal was partly economic – to foster domestic and international trade – but also partly a military and political goal to create a coast to coast nation, at a time before building the railroad entirely with private funding was fully justified economically. If you except this premise, the involvement of the government in funding the project using land grants and bonds was essential at the time. However, in the same way that you pay (not the bank) when you get a construction loan to build a new house, the transcontinental railroad project wasn't actually paid for by government, because government funding was in the form of bonds that had to be and were repaid by the railroads, not as grants funded by taxes. Similarly, the land grants were not subsidies because the government retained half the land (in a checkerboard pattern) and the project was to make the worthless wilderness grant lands valuable for both the railroads and the government as land owners as a result of building the railroad. Actually, the project was a billion dollar windfall for the government, just based on the discounted transportation costs for carrying the mail. Perhaps others might have a different opinion.

8/18/2005 7:30 PM  
Blogger CPRR Discussion Group said...

For further information about financing the cost of the transcontinental railroad, see "the $64,000 question."

8/19/2005 11:34 AM  
Blogger CPRR Discussion Group said...

From: "Wendell Huffman"

In my opinion, the primary reason it took so long to build a Pacific railroad (that is, the only reason it wasn't built in the 1850s) was the issue of how it was to be financed. And even then, it wasn't so much a question of how it was to be financed but, rather, who was going to control the financing.

There was no way to do it without government involvement for the simple reason that the federal government held title to most (if not all) of the land over which the railroad would pass. To my knowledge, every plan ever presented to congress from 1845 to 1862 involved the donation to the railroad company of right-of-way and alternate sections for some distance on either side of the railroad. It was originally felt that the value given to that land by the railroad itself would enable the company to generate all the money it needed for construction by selling said land (and at the same time enable the government itself to make money by selling their own adjacent sections). Indeed, it was such a good plan that there ensued fifteen years of fighting by various parties who wanted to cash in on the project.

The issue of slave state vs. free state did not really enter into the equation until 1854 following Stephen Douglas' "popular soverignity" compromise in the Kansas-Nebraska legislation and the 1857 Dred Scott nullification of the slavery restriction of the Missouri Compromise – and by implication that of the Land Ordinance of 1787. But all that, of course, led to the Civil War, which is ultimately what ended the haggling over control of financing and routes, and which also introduced the need for direct government loans for construction of the railroad.

The issue of the government's loan to the company for railroad construction was apparently a result of the realization that increased land value alone would not generate money fast enough to pay for the railroad as fast as the Civil War situation demanded. The Republican-led federal government recognized that speed of construction on the Pacific railroad was as essential to the preservation of California and Oregon within the Union as the Civil War was in maintining the Union in the East. And California gold, and Nevada silver, were essential to pay for the war; it was essential that California (in particular) not secede from the Union.

In other words, the government loans to the railroad companies for the construction of the Pacific railroad were not intended merely to build the railroad. Rather, they were intended to preserve the Union by assuring the completion of the Pacific railroad within the perceived time limitations.

—Wendell Huffman

8/19/2005 11:39 AM  
Blogger CPRR Discussion Group said...

The U.S. Supreme Court cites historian P. Gates, History of Public Land Law Development 345-346 (1968), that railroad land grants were not subsidies:

" ... donating alternate sections or one half of the land within a strip along the line of the project and reserving the other half for sale. ... the price of the reserved sections was doubled so that it could be argued, as the Congressional Globe shows ad infinitum, that by giving half the land away and thereby making possible construction of the road, canal, or railroad, the government would recover from the reserved sections as much as it would have received from the whole."

8/28/2005 11:19 AM  
Blogger CPRR Discussion Group said...

Andrew Dow wrote ...
Subject: Subsidies, and suchlike

" ... Am I not right in thinking that the railroads were meant to pay for the land, after a period. And did they not do so? ... "

12/03/2005 9:41 AM  
Blogger CPRR Discussion Group said...

No and No. The idea of the land grants was quite different, and did not represent a subsidy. The government gave the railroads half of the almost worthless land in alternating squares, and kept the other half. When the railroad was completed, the government's half of the land was made valuable, just like the railroad's half. Tax revenues also increased due to increased economic activity. So the net result was a government windfall, not a subsidy to the railroad. Land grants were not a zero sum game – everyone (government, railroad companies, businesses generally, and the traveling public) became much richer. What the railroads (CPRR & UPRR) were meant to repay – and did repay in full with interest – were the loans (government bonds). The government also got a huge windfall in discounted transportation costs for mail, etc, lasting most of a century and worth a billion dollars.

12/03/2005 9:53 AM  
Blogger CPRR Discussion Group said...


Using the example of the Central Pacific and Union Pacific Railroads, land grants were given (with no monetary payment from the railroads to the government) to the railroads (based on mileage completed and accepted by government inspectors), but in addition the railroads received government 30-year bonds which they were expected to repay with interest – and did. Further, in return for the government support, the railroads were to move government freight at reduced rates – which they also did. Finally after WW II a law was passed relieving the railroads of the obligation to move government freight at reduced rates. Economic historians have calculated that the return the government received on its investment in support of the railroads was very high, and would make most private corporations green with envy. In other words, the government (that would be us tax payers) received/saved much more money in the deal than the railroads received, even allowing for time payments/interest/inflation.

Government land grants and support for other lines (Northern Pacific, Southern Pacific, Atlantic & Pacific, etc.) varied somewhat from what the Central Pacific and Union Pacific received (generally lower levels of support), but the general pattern was the same, including the obligation to move government freight at reduced rates.

Kyle K. Wyatt
Curator of History & Technology
California State Railroad Museum
111 "I" Street
Sacramento, CA 95814

[from the R&LHS Newsgroup.]

12/03/2005 10:19 AM  
Blogger CPRR Discussion Group said...

Subject: Land Grants

... I have tracked down a paper (23 pages) on Land Grants, written by Robert Selph Henry in the Mississippi Valley Historical Review, in 1945. As you probably know, Henry was a public relations specialist and a senior official in the Association of Amercian Railroads. The paper does not cover the entire subject, but was written to correct the erroneous statements about land grants in no less than 37 school textbooks. A shame that is was ever required.

... It is very informative and underlines my thoughts that over the years railroads (and railways in this country) have too often been misrepresented by people who care not for accuracy or fairness. ...


12/30/2005 8:05 AM  
Anonymous Anonymous said...

See U.S. should do what it's always done – innovate discussing similarities between building a transcontinental railroad and achieving energy independence.

4/07/2007 6:59 PM  
Blogger CPRR Discussion Group said...

Ronald Bailey at Reason argues that:

"The fact that government subsidies were not necessary for building a transcontinental railroad was proved when James J. Hill built the highly profitable Great Northern Railway from Minnesota to Seattle completely without them or land grants."

2/05/2008 6:34 PM  
Blogger CPRR Discussion Group said...

Also see this additional discussion.

8/01/2008 12:53 PM  
Anonymous Anonymous said...

"James J. Hill ... is a great story because while the federal government is literally throwing money at the Union Pacific and Central Pacific, he builds a transcontinental railroad without a dime of government money. In the process, he has to take every precaution that it’s profitable: he keeps his depots close to his endpoints to minimize transporting supplies; he learns agriculture and breeding, then gives away land to farmers, so that he’ll have future customers; he never builds on inclines if he can help it, even if the terrain is ugly. It paid off: In the Panic of 1873, he’s the only one who doesn’t go broke among the transcontinental." —Dr. Larry Schweikart quoted in the Philadelphia Bulletin

12/12/2009 5:38 PM  
Blogger CPRR Discussion Group said...

See additional discussion.

3/08/2010 6:58 AM  
Anonymous Anonymous said...

See, The Central Pacific Railroad and the Railroad Land Grant Controversy by Heywood Fleisig in "The Journal of Economic History," Vol. 35, No. 3 (Sep., 1975), pp. 552-566.

5/17/2010 1:19 PM  
Blogger CPRR Discussion Group said...

"The [transcontinental railroad] connection saved the government $7 million — worth $120 million today — a year on mail delivery ... "

12/07/2010 11:10 PM  
Blogger CPRR Discussion Group said...

"The funding that supported the building of a transcontinental railroad by the Union Pacific and Central Pacific railroads came in the form of bonds backed by federally owned public lands that came into the possession of the federal government from the Louisiana Purchase and the Mexican War. ... The federal government, under the terms of the Pacific Railroad Act, provided the bonds—which is to say, the loan guarantees—but it provided no operating funding, no management oversight, and no ongoing regulatory bureaucracy."

2/10/2012 3:37 PM  
Anonymous Anonymous said...

Also see related article again pointing out that Abraham Lincoln actually was not the father of big government.

10/04/2012 1:10 PM  
Anonymous Anonymous said...

See related discussion.

2/02/2022 9:14 AM  
Anonymous Anonymous said...

Correction: "If you except this premise" above should read "If you accept this premise" (mistaken homonym substitution is a big problem, especially with dictation software)

2/14/2022 6:00 AM  

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