CPRR & UPRR went broke and consumed millions of taxpayer dollars vs. debt repaid plus government windfall
FACT CHECK: As explained by Kyle Wyatt below, the Central Pacific Railroad never went into bankruptcy.
By contrast, our understanding is that the Central and Union Pacific Railroads did not receive government subsidies because the government railroad bonds had to be and were repaid in full with interest, that according to the U.S. Supreme Court the government and the railroads shared equally in the increased value of the land grants, and that the U.S. government got a billion dollar discount on mail and other transportation costs. So although the CPRR spoke of a "subsidy" in their bond prospectus, the net economic result was that the bonds were a repaid loan (not that the railroad wasn't accused of attempting – unsuccessfully – to avoid repaying), the worthless western lands to the extent they were made valuable by the completion of the railroad (much was so arid that it remained worthless), more of the value went to the government and eventual landowners than to the railroad, and the U.S. government received a financial windfall due to the prolonged subsidy that the railroads provided to the U.S. government for its transportation costs as part of the deal to fund the construction.
See,
No government subsides for CPRR or UPRR;
Role of government in railroad financing.
"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.
See,
Cost;
Dollars per mile of track;
Railroad Reorganization, 1908.
So which is correct? Did both the CPRR & UPRR go broke and consume millions of taxpayer dollars or was the debt repaid in full plus the U.S. government received a financial windfall due to the prolonged subsidy that the railroads provided to the government for its transportation costs through the mid 20th century?
posted from CPRR Discussion Group at 6:58 PM
20 Comments:
Also, "both went broke during the 1890s and both consumed millions of taxpayer dollars in financing" fails to take into account that (however self serving) both railroads in effect hired themselves to do the construction, via Crocker's company, the Contract and Finance Company, and the Credit Mobilier. So, bankruptcy of the railroad operating companies after much of the money was moved to their construction companies does not mean that the entire enterprise was unprofitable. So if the entrepreneurs got rich and the government got repaid in full it would be incorrect to conclude that bankruptcies imply that the first transcontinental railroad construction projects were ill conceived and unjustified. (It's hard to be sure of the details since legally those construction company records were private and the U.S. government was ultimately unsuccessful in getting full disclosure of the railroad finances especially after the company books disappeared.)
From: "Don Snoddy" ddsnoddy@gmail.com
If you look at the UP reorganization files, it is clear that in addition to buying the right of way from Omaha to Ogden, for $55 million, the government bonds were also paid to the sum of $50 million. See attached for an accurate breakdown prepared by the UP Law Dept in 1902:
Cost of Railroads purchased by Union Pacific, 1902.
—Don Snoddy
From: "Wendell Huffman" wendellhuffman@hotmail.com
Professor Folsom is raking muck.
By the time the railroad was completed in 1869, the Central Pacific had received federal bonds with a face value of $25,885,120. To be useful as anything other than co-lateral, the bonds to be sold to investors for cash. It is possible that some were traded to venders for locomotives or cars. The cash value of the bonds varied with the prospects of the railroad, and in the early days, during the Civil War, with the prospects of the country. Thus, the bonds rarely sold at par, and the company actually received only $18,765,047 in usable cash from their sale.
The bonds were indeed a loan from the government, not a donation. The company was obligated to repay the entire $25.9 million, plus interest, 30 years after issue. The matter of the redemption of the United States bonds was at the heart of the United States Pacific Railway Commission hearing in 1887, and the railroad’s position is outlined in Roscoe Conkling’s summary of that testimony in The Central Pacific Railroad Company in Equitable Account with the United States (New York, 1887). I'm not sure the railroad ever tried to get out of repaying the bonds. The issue of contention was the sinking fund which was set aside for the repayment.
In fact, the Central Pacific was unable to repay the bonds when due. I presume the government had to step up and redeem the bonds, but I do not know what actually happened at that point. In the end, the Southern Pacific (rather than the Central Pacific) repaid the government. As part of this arrangement, the SP traded SP stock for CP stock, which is ultimately how the CP became a SP property. The final settlement was reported in the Annual Report of the Commissioner of Railroads to the Secretary of the Interior for the year ending June 30, 1899. The SP eventually paid to the government $58,812,715 in several installments. The final payment was made in 1909. David Myrick recounts this on page 29 of Railroads of Nevada (Berkeley: Howell-North, 1962).
While the government loaned the Central Pacific bonds, it gave the company every other section of land for 20 miles on both sides of its right-of-way. This amounted to nearly eight million acres. However, little of the Central Pacific’s land grant was attractive to settlers, and by 1880 only 295,886 acres had been sold. At an average price of $3.77 per acre, this yielded barely enough to pay for 18 miles of railroad, at the average cost of $64,000 per mile. In the long run the land grant was more valuable, being leased for mineral rights and grazing. Still, the land was no more valuable to the railroad than the adjacent land was to the govenment, and it was the railroad that gave that land its value (by providing transportation access) and paid the cost of surveying.
I have no idea how the Union Pacific fared in the matter of the bonds and land. They certainly did better in the sale of land as their land was more productive. There were a number of railroads other than the CP and UP which received bonds and land under the various Pacific Railroad Acts. It would be interesting to see how they each resolved their debt. However, the federal government came out pretty good on the CP, making $58 million dollars for essentially doing nothing but print the bonds.
—Wendell
See writings about Central Pacific Railroad debt.
From: kylewyatt@aol.com
The Union Pacific did indeed go bankrupt in the 1890s and was sold in foreclosure and reorganized under bankruptcy laws - even broken up, with most but not quite all parts reacquired and reassembled by EH Harriman. Per Daggett, Railroad Reorganization. pp 256-57, the sale and reorganization of the Union Pacific out of bankruptcy in 1897 included paying the Government bonds, principle and interest, in full and in cash.
On the other hand, the Central Pacific (and related Southern Pacific) never did go into bankruptcy - not in the 1890s and not even in the 1930s. The Central Pacific Railroad WAS reorganized in 1899, becoming the Central Pacific Railway. This reorganization was in part to finance the full payment of its share of the government bonds, principle and interest, but was in the nature of reorganizations that many companies commonly do to further their business goals, and was NOT under bankruptcy laws. Stock and bond holders of the Central Pacific Railroad did not lose their investments under this reorganization, but had their investments converted into securities of the new Central Pacific Railway.
Turning to the Great Northern, it appears to be true that from its organization in 1889 until its merger into the Burlington Northern in 1970, the Great Northern Railway was never reorganized. However, the 1889 formation of the Great Northern was itself a reorganization of several earlier Hill lines to further its expansion. In a similar light, the Southern Pacific Company was organized in 1884 as a holding and controlling entity. Both the Central Pacific Railroad AND the Southern Pacific Railroad were leased to the Southern Pacific Company in 1885. The Southern Pacific Railroad was finally merged into this self-same Southern Pacific Company in 1955, and the Central Pacific Railway (reorganized form the Central Pacific railroad in 1899) was finally merged into the Southern Pacific company in 1959.
I suppose the semantics and economics of "Government subsidies" could be debated – both the government bonds and the land grants - but in the common usage of the time (throughout the latter 19th century) the government generally was considered to have given the railroads subsidies - the eventual repayment of the bonds, the discounts on Government shipments, and the increase in value of adjacent Government lands not withstanding. If nothing else, consider the access to financing that the Government provided, that was not otherwise available at the time, as a subsidy. The Central and Union Pacific railroads, and the other transcontinental land grant railroads could not have been built when they were without that Government support.
[continued below]
Also consider that only two privately financed transcontinental rail lines – in the US AND Canada – did NOT go bankrupt at one time or another (and largely because of said transcontinental construction) – the Great Northern and the San Pedro, Los Angeles & Salt Lake (a subsidiary of the reorganized Union Pacific under Harriman). The Western Pacific (and the Denver & Rio Grande), the Milwaukee Road (referred to as the St Paul Road at the time), the Grand Trunk Pacific, and the Canadian Northern ALL went bankrupt directly because of transcontinental construction (so much for Folsom's seeming argument that somehow private railroad construction avoids bankruptcy). In fact Grand Trunk Pacific (and affiliated Grand Trunk) and the Canadian Northern were such a financial mess that the Canadian Government ended up forming the Government-owned Canadian National to straighten it all out (think Conrail for a somewhat similar US parallel). For that matter, among land grant transcontinental railroads, only the Central Pacific/Southern Pacific (and I think the Canadian Pacific) did NOT go bankrupt at some point or other. In addition to the Union Pacific/Oregon Short Line and the Oregon Railway & Navigation, the Northern Pacific and the Santa Fe/Atlantic & Pacific all went into bankruptcy. Let's face it – large scale railroad construction was risky business, regardless of how it was financed.
So let's revisit Folsom's contention for lines that cross the Rockies (or the extensions of that range). The never-bankrupt Transcontinental railroads include Great Northern, San Pedro Los Angeles & Salt Lake (the Harriman revitalized Union Pacific's subsidiary), Southern Pacific Company (encompassing both Central Pacific and Southern Pacific Railroads) and Canadian Pacific – that's three Government aided lines to two private lines. On the gone bankrupt side we have Union Pacific (encompassing also Oregon Short Line), Northern Pacific, Santa Fe/Atlantic & Pacific, Western Pacific, Milwaukee Road, Denver & Rio Grande (at least one bankruptcy before its role in the Western Pacific), Grand Trunk Pacific, and Canadian Northern - that's four government aided lines to five private lines. Hmm, looks like the odds are poorer for the private roads.
—Kyle
Also see Professor Burton W. Folsom's book The Myth of the Robber Barons: A New Look at the Rise of Big Business in America.
We have long admired the Hillsdale College free market oriented viewpoint and hope to see more discussion of the issue of how to best achieve private funding of great projects with high risk and only long term or diffused profitability that seem a mismatch with the needs of private investors so that the argument will not be ceded to the statists.
In Railroads, Robber Barons, and Unbridled Capitalism BOB ADELMANN writes,
"Remember that political entrepreneurs become wealthy at the taxpayers’ expense and use the power of government to protect that wealth, while free-market entrepreneurs become wealthy only when they successfully meet their customers’ demands."
[Courtesy Google Alerts.]
The same comment regarding the Central Pacific Railroad not ever going bankrupt also applies to the article, Silicon Valley, beware of feds bearing R&D gifts by William F. Shughart II, Special to the Mercury News, 03/16/2011.
The same comment regarding the Central Pacific Railroad not ever going bankrupt also applies to Lincoln Catches up with the War by Steven Bernstein.
In the Pacific Railroad Act of 1862, the Union Pacific received financing from the government in the form of bonds. So in this sense it is true that the government did not subsidize the construction of the railroad via cash subsidies
BUT the UP did receive land grants on a per milage basis. These parcels of land were sold off, where possible, to help finance construction costs.
Credit Mobilier was a device from which shareholders of both UP and CM were able to generate profits at the expense of the UP.
However, large portions of the land grants for the CPRR were arid land not suitable for farming that proved to be worthless.
Also, the government kept half of the land, so that any increased value of the land as a result of completing the railroad went half to the government. If you give away half of something to make the half that you keep much more valuable than the original whole, is the half given away really a subsidy?
Unlike the condition of the UPRR, the CPRR did not "slap together tracks in amazingly shoddy and illogical logistical fashion". To the contrary, inspection at the completion of the road showed that the CPRR was "well and substantially built ... " and was "a first-class railroad and is constructed of the best materials and in a most durable and permanent manner".
Same mistakes yet again in the American Spectator in a commentary by Hillsdale College Professors Burton Folsom, Jr. and Anita Folsom: "the Union Pacific and Central Pacific Railroads went from Omaha to Sacramento, and were heavily subsidized by Washington. Both went bankrupt (the Union Pacific several times)."
Once again, the CPRR was well built with first class construction, was financed without subsidy (just like a home mortgage that must be and was repaid in full with interest is not a bank subsidy for the home buyer; the western land grants were mostly of worthless arid land, and any increase in value was shared 50% with the federal government, which also just the opposite made a billion dollars windfall on the deal in railroad subsidies for the federal government's transportation costs), and the CPRR did not ever go bankrupt.
See related discussion about a new book: Railroaded: The Transcontinentals and the Making of Modern America by Stanford University Professor Richard White.
To: Burt Folsom
Subject: CPRR did not go bankrupt, was not subsidized, and was not of shoddy construction
Dear Professor Folsom,
We are concerned because what is written on our CPRR.org website and our discussion.cprr.net blog and your writings about the first transcontinental railroad disagree and cannot both be correct. We would appreciate your assistance, as the case for freedom is not helped by getting the history wrong.
Our understanding is that the Central Pacific Railroad never went bankrupt, was not subsidized by the federal government, and was not of shoddy construction, for the reasons set forth at,
1) CPRR/UPRR went broke
2) No government subsides
3) Robber barons
4) Role of government.
Your comments or corrections would be greatly appreciated.
From: "Burt Folsom" bfolsom@hillsdale.edu
I will be glad to read this because I want to get the story right. The UP, of course, had several bankruptcies. The CP was different I agree, but I thought the CP went bust in the Panic of 1893. If that information is incorrect, I will be glad to change my argument.
—Burt Folsom
To: "Burt Folsom" bfolsom@hillsdale.edu
Thanks. Will look forward to your comments.
Regarding the Union Pacific, the essence of the Crédit Mobilier scandal was that the UPRR hired its insiders to do the railroad construction (while bribing members of Congress with insider stock), thus siphoning UPRR capital out of the railroad company and into the construction company to be paid out as "profits" to the insiders. With this type of fraud, and with the bonds having been paid in full, how is it possible to infer from a bankruptcy much of anything about the profitability, wisdom, prematurity, etc., of that railroad when bankruptcy could merely be due to the money missing from the railroad that it had indirectly paid to insiders?
Was surprised to see the CBS 60 minutes expose recently that insider securities trading is still legal for members of Congress – guess that nothing much has changed in 150 years.
From: "Burt Folsom" bfolsom@hillsdale.edu
I have written an essay on James J. Hill and the Great Northern. For that essay, I did some work on the Central Pacific. I would be glad to send you that essay (in a book entitled THE MYTH OF THE ROBBER BARONS) and get your critique for my next edition. You could give me your take on the CPRR, and I would be interested in what you have to say.
—Burt
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