It Ain’t So, Joe

Vice President Joe Biden is an affable fellow, which sometimes makes his tendency to exaggerate the truth somewhat amusing. However, Biden’s latest tall tale is as unamusing as it is wrong.

From the New York Daily News:

“Every single great idea that has marked the 21st century, the 20th century and the 19th century has required government vision and government incentive,” he said. “In the middle of the Civil War you had a guy named Lincoln paying people $16,000 for every 40 miles of track they laid across the continental United States. … No private enterprise would have done that for another 35 years.”

I’ll go straight to the 19th century railroads issue by referencing the work of two Cato scholars who probably know a little bit more about the topic than Joe Biden.

First, Randal O’Toole discusses railroads and land grants in his book Gridlock: Why We’re Stuck in Traffic and What to Do About It:

Early American railroads were built almost entirely with private funds. These railroads provided such superior transportation that by 1850 they had put most toll roads and canals out of business. Individual states still competed with one another for business—and may have offered various favors to the railroads serving those states…. For the most part, however, no federal and few state subsidies went to railroads in the eastern United States.

The Pacific Railway Act provided land grants and low-interest loans to the companies completing the railroad from Council Bluffs, Iowa to California. Later laws provided land grants (but no low-interest loans) for railroads from St. Paul to the Puget Sound, Los Angeles to New Orleans, Los Angeles to St. Louis, and Portland to San Francisco. In total, about 170 million acres were granted to the railroads, but Congress eventually took back about 45 million acres for nonperformance, leaving the railroads a maximum of about 125 million acres.

Congress expected that the railroads would sell the land to help pay for construction. In many instances, there was no immediate market for the land. Much of it was not farmable, and the United States had a surplus of wood so there was little market for timberland. In the latter half of the 20th century, the energy and timber resources on lands granted to the Northern Pacific, Southern Pacific, Sante Fe, and Union Pacific railroads proved very profitable. But this did not help them build the railroads in the first place.

In January 1893, the Great Northern Railway completed its route from St. Paul to Seattle without any land grants (except a small grant to a predecessor railroad) or other federal or state subsidies. The railway competed directly with the Northern Pacific, and to some extent with the Union Pacific, which served some of the same territory. The Great Northern’s builder, James J. Hill, knew that the other railroads had been built primarily for the subsidies, and as a result, they were poorly engineered and often followed circuitous routes. Hill built the Great Northern along the most direct route his engineers could find, so his operating costs were far lower than competitors’.

When the economic crash of 1893 took place a few months later, the Northern Pacific, Union Pacific, and almost all other western railroads went into receivership…Many people predicted that the Great Northern would not be able to compete and would follow the others into bankruptcy. But Hill managed to stay out of receivership, and the Great Northern remained the only transcontinental built in North America without government subsidies that never went bankrupt.

By 1930, American railroad mileage peaked at about 260,000 miles…only 18,700 of these miles were built with land grants or other federal subsidies.

Second, Jim Powell writes about government corruption and 19th century railroad subsidies in his book on Teddy Roosevelt, Bully Boy: The Truth About Theodore Roosevelt’s Legacy:

Whenever politicians interfered in the railroad business, however, corruption and inefficiency inevitably occurred. The most dramatic case involved construction of the first intercontinental railroad. Railroad lawyer Abraham Lincoln supported the project, and he made it a priority after he became president in 1861…

Stephen Ambrose and other historians have faulted private markets for lacking the capital or the imagination to build the transcontinental railroad. Certainly it was true that private entrepreneurs and financiers did not see the point or risking huge sums to build a railroad across a vast, empty, and sometimes mountainous terrain. Private entrepreneurs and financiers added value by developing the rail network bit by bit, supporting the expanding freight business. The process was gradual. Grandiose schemes like the transcontinental railroad drained resources from some regions to benefit special interests.

There was no money to be made from operating a railroad through a desolate wasteland, yet the federal government rewarded railroad contractors with big subsidies: a thirty-year loan at below market interest rates; twenty sections (12,800 acres) of government-owned land for every mile of track; and an additional subsidy of $48,000 for every mile of track laid in mountainous regions.

Thomas Durant, Oakes Ames, and other officers of the Union Pacific Railroad, which went a thousand miles west from Council Bluffs, Iowa, started the Credit Mobilier company in 1867 and retained it to do the construction. Credit Mobilier distributed to shareholders profits estimated at between $7 million and $23 million, depleting the Union Pacific’s resources. In an effort to stop congressional investigations, the officers bribed Speaker of the House James G. Blaine and other congressmen with Credit Mobilier stock. Seldom modest about their thievery, congressmen voted themselves a 50 percent pay raise. The Union Pacific Railroad fell deep into debt, without enough revenue from passengers or shippers, and went bankrupt in 1893.

It is not surprising that Joe Biden, an individual who has spent his entire career in government, possesses a child-like devotion to the federal government’s capabilities. Biden is a major proponent behind the Obama administration’s misbegotten plan to build a national system of high-speed rail. That Biden stands to achieve historic notoriety for helping facilitate this latest government boondoggle is only fitting.

See Cato essays on federal transportation subsidies and the Department of Transportation timeline, which notes the Credit Mobilier scandal:

1872: The New York Sun exposes the Credit Mobilier scandal, perhaps the largest business subsidy scandal of the 19th century. Credit Mobilier is a construction company financially controlled by the leaders of the Union Pacific Railroad that makes huge profits at taxpayer expense. Congressman Oakes Ames (R-MA), who is an agent of Credit Mobilier and part-owner, distributes shares of the firm’s stock to members of Congress at a discounted value. In return, those members treat Credit Mobilier favorably in a variety of ways, such as by voting to appropriate funds for the firm. The scandal illustrates the corruption that usually results when the government intervenes in the economy and subsidizes businesses.