Did 'We' Decide to Build Railroads?

Did 'We' Decide to Build Railroads?
February 11, 2013

Clifford Thies

Clifford F. Thies is the Eldon R. Lindsay Professor of Economics and Finance at Shenandoah... (read full bio)

President Obama said, in his second inaugural address, “Together we determined that a modern economy requires railroads.” Actually, “we” determined that “a modern economy” requires canals, not railroads. We turned to railroads and to a mostly market-oriented approach to developing the country’s transportation infrastructure after the massive failure of the initial determination.

While not the first canal in the country, the Erie Canal was the country’s first great canal. The Erie Canal was 364 miles when opened, the second longest canal in the world following only the Grand Canal of China. The Erie Canal was indeed a state enterprise, the brainchild of an ambitious and talented politician, DeWitt Clinton.

Construction of the Erie Canal was financed by debt. And, guess what? The canal paid for itself. Toll revenue in excess of operating cost was a little more than necessary to pay off the bonds.

Would that the story of government transportation projects ended with the Erie Canal. But, excited by the Erie Canal, New York and several other states embarked on new canal projects. New York undertook the construction of four additional canals. Pennsylvania started what it called “The Main Line,” consisting of a railroad from Philadelphia to Columbia, a canal thence to Hollidaysburg, a series of inclined planes to Johnstown, and then a second canal to Pittsburgh. Maryland began the Chesapeake & Ohio Canal. Virginia, a canal from the James River westward. And don’t get me started with the canals and other transportation projects of Ohio and the other states of the Midwest.

These projects ended in varying degrees of disaster, and contributed to the Panics of 1837 and ’39 and to the depression that continued for up to ten years in many states. New York got off relatively cheap. When the additional canals started losing money, New York raised taxes in order to cover the deficit. Pennsylvania did worse, and defaulted on its state debt. Other states did even worse.  Most notable was Mississippi, which repudiated its bonds rather than reconcile with its creditors.

Following what has been called the Canal Extravaganza, the country turned to railroads and to a mostly market-oriented approach to developing transportation infrastructure.

During his first term in office, President Obama refereed to the role of the federal government in the construction of the “inter-continental railroad.” The transcontinental railroad from Omaha, Nebraska, to Sacramento, California, was indeed constructed with special assistance. Part of the assistance was in the form of a land grant. But, there was less to the land grant than meets the eye.

There was nothing particularly unusual about land grants to railroads. The first federal land grants to railroads were made in 1850. These land grants were all in much the same form: alternating sections of land, with the federal government doubling the price of the sections it retained. Furthermore, the railroad land grants were part of an overall policy of the federal government to transfer land to private ownership.

But, by 1850 the opening of the west had become part of the sectional dispute of the country. Until then, the South had been excited about westward expansion. But, after, it opposed western expansion. The newly-organized Republican Party made opening the west a part of its platform. “Free men, free soil, and Fremont,” was their election slogan of 1856.

In 1862, after the representatives of the South left the Congress, the Republicans passed legislation for the transcontinental railroad. It provided a land grant, under the usual rules. It also provided a bond guarantee. The guarantee enabled the two companies – the Union Pacific starting at Omaha, and the Central Pacific starting at Sacramento – to sell their bonds at a lower interest rate than they would have had to pay without the guarantee.

Some people argue that the cost of the guarantee was justified by the potential value of the road for the defense of California. Here’s what I say: it was the exception to the rule.

The second transcontinental railroad, the Northern Pacific, also had a land grant but did not have a bond guarantee. Unfortunately, the Northern Pacific went bankrupt, several times actually. But, the bankruptcies were merely private affairs, mostly involving the exchange of old securities were exchanged for new securities in accordance with their priority of claim. For example, the mortgage bonds of the old company might be exchanged for preferred stock of the new company. Also, the managers of the old company might be removed, and replaced by new managers.

Eventually, the Northern Pacific became the second transcontinental. And, soon thereafter there was a third, and then a forth, and then a fifth. In the meanwhile, back east, the railroad network was being added to, double-tracked in places, out-fitted with bigger, more powerful engines, and improved in a myriad of ways, hardly any of which was any doing of the government, state or federal.  And then there came James J. Hill.

Among the men who developed the railroad network of the country, one of the more fascinating was James J. Hill, the Empire Builder, President of the Great Northern. When Hill took over the Great Northern, it was a north-south road. As though he were Hercules himself, Hill re-oriented the road to an east-west road, and extended it to its natural terminus in Portland and Seattle. “A land bridge,” he called it, connecting the Pacific to the heartland of this country, developing the economic potential of the states along the route. And, he did all this with neither a land grant nor a bond guarantee.

The most important insight of Hill was that his railroad would suffer or prosper together with those along its route. He therefore sought to make the farmers and others along its route more productive, pioneering what we would call sustainable agriculture in the harsh conditions of the northern tier of the country. Toward the end of his life, he reflected on his accomplishments. “Most men who have really lived have had, in some share, their great adventure. This railway is mine.”

The complexity of actual history doesn’t serve the purpose of progressives in convincing us to turn our lives over to them. So, they extol the few instances where state enterprise worked out o.k., and ignore the totality of the experience with state enterprise; and, they either dismiss the success of private enterprise or attribute that success to government.

Empire Builder? Why, you didn’t build that.

Clifford Thies

Clifford F. Thies is the Eldon R. Lindsay Professor of Economics and Finance at Shenandoah... (read full bio)