Crédit Mobilier as a Model for High-Speed Rail

“History reminds us that at every moment of economic upheaval and transformation, this nation has responded with bold action and big ideas,” President Obama told Congress on February 24. “In the midst of civil war, we laid railroad tracks from one coast to another that spurred commerce and industry.”

Obama, who wants to make the construction of a national high-speed rail network his “signature issue,” no doubt sees this as a model. It was a poor choice.

Aside from the simple factual issue that most of the first transcontinental railroad was built after, not during, the war, most of Obama’s audience would have forgotten that its construction caused for one of the first and biggest financial swindles of the nineteenth century. That scandal was the result of a simple fact: such a railroad made no economic sense in the late 1860s.

To entice someone to build it, the federal government offered subsidies in the form of land grants and loans of $16,000 to $48,000 per mile (depending on terrain) for the actual cost of construction. Politics, not economics, determined the route, so most of the land for hundreds of miles was worthless (and remained so for a century after the railroad was complete). The loans were valuable only to the contractors who built the rail line, as the railroad itself would have a difficult time generating enough business to ever repay them.

So the directors of the Union Pacific Railroad came up with a scheme to profit from construction. They created a separate company, called Crédit Mobilier (cleverly named after a similar scandal in France). Run by the same people who nominally owned the railroad, this company was given the contracts to build the line. To take full advantage of the government loans, they overcharged for construction up to the limit of the loans, earning enormous profits for the company directors.

To keep the scheme going, the company freely used shares to bribe members of Congress who must have been fully aware of the plot. After the rail line was complete, the Union Pacific conveniently went bankrupt, thus avoiding the need to repay the loans. (Supposedly, the reorganized company eventually repaid the loans, though probably not the interest.)

Two decades later, James J. Hill proved that the way to build a transcontinental railroad was in stages, not all at once, with the profits from each stage paying for construction of the next. Hill’s Great Northern Railway was the first transcontinental in North America to be built without subsidies and the only one (except the Southern Pacific) never to go bankrupt. It helped that, unlike the Union Pacific’s line, most of the GN’s route was across fertile farm or forest land.

So now Obama wants to build a new rail empire. Like the Union Pacific, this one will require huge subsidies. Like Crédit Mobilier, contractors will make huge contributions to Congressional campaigns to keep the money flowing. The rail lines will never cover their operating costs, much less capital costs, and so will either go bankrupt or be forever subsidized by taxpayers. And just as the economic benefits of the Union Pacific were invisible for several decades, the environmental benefits of high-speed rail will be negligible or negative.

One difference: while transcontinental railroads eventually did make economic sense, high-speed rail never will.