Wednesday, June 14, 2006

"Robber Barons"

In The Progressive Era, William L. Anderson, Ph.D. writes:
"Indeed, some of the so-called robber barons of that age were little more than con men and crooks. They were what the economic historian Robert Higgs calls the 'political entrepreneurs,' men who demanded and received large subsidies from governments and ran inefficient, costly enterprises. For example, the famed transcontinental railway that still is portrayed as a great achievement in U.S. history with the driving of the 'golden spike' at Promontory Point, Utah, in 1869 actually was little more than an exercise in fraud. As Burton W. Folsom Jr. points out in his book The Myth of the Robber Barons, the Union Pacific and Central Pacific railroads received lavish government subsidies to complete the link between Omaha, Nebraska, and Sacramento, California, which meant crossing the physically imposing territories of the Sierra Nevada, the Great Basin, and the Rocky Mountains when there was no economic reason to do so at that time. The vast subsidies given to the two railroad companies created the incentives for shoddy workmanship and inferior rails and crossties, and hurried construction techniques that emphasized length over efficiency. (The railroads were paid by the mile, and they bilked the taxpayers out of every penny they could.) The near-criminal exploits of the UP and CP ..."

Unfortunately, the above mischaracterization seriously detracts from the full article.

Professor Anderson unfairly dismisses the greatest engineering project of the 19th century that reduced cross country travel time from six months to six days, while also reducing the cost by about 90% as "little more than an exercise in fraud" and mistreats great entrepreneurs by calling them mere "crooks." As the Credit Mobilier scandal shows, undoubtedly some in the UPRR management were crooks, but why conclude that that shoddy construction and Congressional bribery was also the essence of the CPRR?

The CPRR's private construction was of first rate quality, as documented by the inspection of the line in 1869, the year that the railroad was completed, without subsidy, at no ultimate cost to federal taxpayers, on budget, and seven years ahead of schedule. This is all the more remarkable while the Civil War was ongoing in an era when manual labor, horses, mules, black powder, and nitroglycerine manufactured on site was all that was available, and every single rail, spike, and locomotive had to be shipped by sea to California. Even with respect to the shoddy ties on the Union Pacific, perhaps a nuanced analysis that takes into account the problem that there was no suitable wood available in that part of the country is in order, noting that the UPRR used the latest technology in an effort to make their inferior cottonwood ties last as long as possible, and that war made acquiring iron rail very difficult and expensive. Also "shoddy workmanship and inferior materials" can represent a sensible way to economize during underfunded construction in order to rapidly complete a project that will generate sufficient operating revenues to later allow improved construction during self-funded rebuilding.

The success of building the 1,659 ft. long summit tunnel through solid rock illustrates that the CPRR construction was more difficult and performed with greater precision than had ever been previously achieved. As Stephen Ambrose wrote, "Lewis Clement had achieved a triumph of the first magnitude in engineering. The Summit Tunnel was 7,042 feet above the sea. This was the highest point reached by the CP. The facings were off by only two inches, a feat that could hardly be equaled in the twenty-first century. Clement had done it with black powder, nitroglycerin, and muscle power."

In "A Great And Shining Road" Professor John Hoyt Williams wrote that

" ... The ... crews worked round the clock ... Then, at one in the morning on May 3, 1867, a great, noisy crumbling took place at the east facing, and light from torches in the west could be seen flickering through the dust. ... The Summit had been pierced. The Sierras had been bested. ... young Lewis Clement, the engineer in charge of Summit Tunnel, strode into the now widened bore a week after the breakthrough, surveyor's instruments in hand. With torchbearers stationed every few yards in the 1,659-foot bore, Clement began his first series of observations in the damp and eerie tunnel. During the preceding two years' work he and his assistants had been measuring under conditions never taught about in engineering schools. They had made their calculations under poor visibility on a wildly uneven tunnel floor, plotting a bore not only divided into four distinct parts, but one that had to gradually rise, descend, and curve as it penetrated from west to east. ... the expected margin of error was large, and if the various bores were seriously misaligned, many months of expensive remedial work would have to be done, delaying the Central Pacific Railroad's progress east. ... As Clement finished his measurements and worked out the geometric statistics at a rude desk near the tunnel mouth, he found his most fervent prayers answered. Summit Tunnel's four bores fitted together almost perfectly, with a total error in true line of less than two inches. The seemingly impossible had been achieved. The longest tunnel anyone had cut through natural granite, cut at a daunting altitude in an abominable climate, had been bored by a small army of Chinese thousands of miles from their ancestral home. The Sierras were truly breached and ... the great race across the continent was on. ... "

Professor Anderson appears to have fallen for the rhetoric of anti-capitalistic mentality when he denigrates the four Sacramento shopkeepers who with no railroad experience had the audacity to bet their entire personal fortunes to build a railroad across the Sierra Nevada mountains in an era when personal liability for business ventures was unlimited. This was an unimaginably difficult task that people at the time thought impossible to such an extent that they falsely accused these men of attempting to perpetrate a "Dutch Flat Swindle." The project was very real and they succeeded brilliantly at no taxpayer expense, and became fabulously wealthy in the process. What's wrong with that?

We say "at no taxpayer expense" because it is our understanding that the first transcontinental railroad involved no federal subsidies. What the U.S. gave the railroads consisted of bonds that had to be repaid with interest at 6%, and that were repaid in full. "Railroad Reorganization: Union Pacific" by Stuart Daggett, Ph.D., Harvard Economic Studies, 1908, states on page 256 that: " ... the government debt was paid off in cash ... both principal and interest were paid in full." Regarding the CPRR and Western Pacific RR, Tutorow, p. 1004 reports that final payment to the government was organized by a commission appointed by an 1898 act of congress, determined to be $58,812,715.48 on Feb. 1, 1899, and that the complex transaction was completed on February 1, 1909 when the last of the government debt was duly paid. As the U.S. Supreme Court decided, the government also provided land grants in a clever strategy of giving away half of almost worthless land (in alternating squares) which became valuable as a result of building the railroad, to the benefit of both the railroad and the government, so the land grants were not really subsidies either. Not only was the transcontinental railroad constructed without federal subsidies, but for providing financing, in addition to interest and repayment of principal, the U.S. government ultimately received both increased value of its western land holdings and more than a billion dollar windfall in the form of discounted freight rates for transcontinental mail and military transport, etc.

More significant than the details, however, is the problem of how to finance enormously difficult great enterprises that cannot be funded by existing markets because the speculative return on investment while anticipated to be astronomical will be too far in the future and/or will not accrue sufficiently to the original investors, and perhaps not even in the lifetimes of potential investors. The first transcontinental railroad and a space program for eventual extraterrestrial human settlement are such examples where most of the financial gain will accrue in the distant future to the settlers and businesses made possible, not to the transportation companies. Similarly how can you privately finance valuable long term basic research, for example, in science and mathematics when such ideas cannot be copyrighted or patented and the knowledge produced is immediately relegated to the public domain? If advocates of the free market for such projects are to be taken seriously, mechanisms to privately own the results, to return profits to the investors, and to successfully fund such enterprises are needed. Merely being against government financing is not sufficient, and people are likely to continue to conclude that the inherent inefficiency and corruption of government projects represent an acceptable tradeoff for the benefits gained. Activities that will vastly enrich future generations are not unworthy ("no economic reason to do so at that time") merely because nobody can figure out any way to achieve short term profitability sufficient to motivate private investment.

In the case of the transcontinental railroad, the goal was to create a transcontinental United States that could be defended militarily, which was impractical without rapid transportation. While investors indirectly benefit from achieving such non-business national goals, lacking the incentives, they certainly will not voluntarily fund them. From 1836 to 1860, a national consensus was reached that building a railroad to the pacific was imperative, as was documented by the platforms of both Democratic and Republican parties, but private market financing of such an enterprise failed. The alternate financing created by former railroad lawyer Abraham Lincoln's signature on the Pacific Railroad Act in 1862 was exactly what was needed, but increased incentives added by subsequent amendments to the Act (Lien of U.S. bonds made subordinate) were found to be needed in order to attract sufficient private capital so that the project could proceed. Thus it was private citizens buying bonds, not federal taxes that funded the Central and Union Pacific Railroads and the incentives were carefully calibrated over a quarter century to determine the minimum needed to get the construction funded, so it is incorrect to call the incentives "lavish." We wonder if the Northern Pacific Railroad could have been privately financed as claimed without first uniting the east and west coasts as a result of building the Central and Union Pacific Railroads, and the demonstration that such construction was possible? (Also note that the Northern Pacific Railroad did receive land grants.)

It seems quite wrong to criticize great men as "political entrepreneurs" and "robber barons" and their efforts as "near-criminal" when such skills apparently were exactly what was needed at the time to unite the country physically, politically, and economically by building the long sought Pacific Railroad. Perhaps it is no accident that the President of the CPRR had to be the Governor of California. Without disagreeing with the proposition that generally government doesn't work, to be critical of events that occurred over a century ago, when to this day no private mechanism has been invented to fund such great enterprises shows remarkable ingratitude, for example, to a man who by his personal efforts not only largely created the 19th century California economy while risking every cent he owned, but then used his enormous personal wealth resulting from the profits of successful unsubsidized railroad construction to create the 20th century California economy by personally founding and funding his Stanford University leading directly to today's "Silicon Valley." We are all the beneficiaries of such heroic entrepreneurs who made possible today's economy and the enormous progress of the past century and a half.