Friday, July 18, 2008

No government subsidies for the transcontinental railroad

A common error when discussing government financing of the Central and Union Pacific Railroads is that it is mistakenly thought to include government subsidies, forgetting that 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 didn't attempt 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.

Central Pacific Railroad First Mortgage Bonds Advertisement, Fisk and Hatch, 1867


Anonymous Anonymous said...

Same misconception is displayed in this editorial which correctly warns about the impending multi-governmental "global warming" boondoggles.

7/30/2008 10:59 AM  
Blogger CPRR Discussion Group said...

From: Neil Reynolds

Thanks for forwarding this reference. I'm familiar with the argument but (for me, at least) it is not persuasive. This justification for the lavish grant grants rests on the assumption that the government (the public) benefited as much as the railways from the increase in land values that the railways produced. But any benefit of this kind would have been very short-lived. In other words, the railways would have been built a few years later without subsidies. None of these subsidies would have been necessary had the government simply allowed ordinary demand for rail decide the when and the where of railway services. Here's the proof: JJ Hill's railway (without subsidies) increased land values in precisely the same way.


8/01/2008 10:13 AM  
Blogger CPRR Discussion Group said...

No doubt that at least some of the land grant transcontinental railroads would have been built later without government involvement. However, efforts to build a transcontinental railroad had been unsuccessful since the 1830's and 1840's as private financing could not be obtained. The railroad would not have been built in the 1860's either, while both Democrats and Republican platforms of 1860 stated a determination to go forward, and with Theodore Judah's persuasive skills, a need to proceed at that time apparently was the national consensus.

If the government received a net benefit, not a net cost, as it apparently did then their assistance (necessary or not, premature or not) should not be regarded as a "subsidy."

8/01/2008 10:25 AM  
Blogger CPRR Discussion Group said...

In the 1860's there was widespread doubt that building a transcontinental railroad was feasible (it was therefore called a "swindle"), and the costs and time to completion were such large looming unknowns that they would terrify potential investors. How do you know that JJ Hill's railway would have been funded without the existence of the prior successful construction projects to provide a basis for estimating feasibility, cost, and time to completion? Even the initial Pacific Railroad Act government inducements were not sufficient to obtain the required private financing, and had to be increased in revisions of this law to get the first transcontinental railroad built.

8/01/2008 11:52 AM  
Blogger CPRR Discussion Group said...

See additional discussion.

12/23/2008 12:23 PM  
Blogger CPRR Discussion Group said...

Same misconception is displayed in this article.

12/23/2008 12:46 PM  
Blogger CPRR Discussion Group said...

Free market advocates need to address 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.

12/23/2008 1:15 PM  
Anonymous Anonymous said...

Wendell Huffman notes that "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."

6/22/2012 6:05 AM  

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