150 Years of Boondoggles

Today is the 150th anniversary of the pounding of the gold spike that represented completion of the first transcontinental railroad. Union Pacific, which now owns the complete route, plans to bring its newly restored Big Boy steam locomotive to Ogden to recreate, with 4-8-4 locomotive 844, the joining of the UP and Central Pacific in 1869. Numerous museums and history societies are planning exhibits and meetings.

While it would be fascinating to watch the Big Boy operate, you'll have to excuse me for otherwise being unenthused about this event. As I see it, the first transcontinental railroad was the biggest boondoggle in nineteenth-century America, and one that -- as later railroads proved -- we could have lived without. Unfortunately, it is still being cited as an example of why twenty-first century America should do even more foolish things like build high-speed rail.

Railroads were the high-tech industry of the mid-1800s. They revolutionized both passenger travel and freight movement and mode it possible to farm and extract resources in remote locations. Yet, like today's high-tech industries, many planned and some actual railroads were little more than securities schemes to separate naive investors from their money. The first transcontinental railroad did so on a grand scale, relying not on naive investors but a gullible Congress willing to give away tax dollars and resources.

The story is told in detail in Railroaded: The Transcontinentals and the Making of Modern America by Stanford University historian Richard White. To entice investors into building a continuous line from the Mississippi River to the Pacific shore, Congress agreed to give the railroads 10 square miles of land for every mile of track. In addition, it would loan builders $16,000 a mile for construction on flat lands and $48,000 a mile in the mountains.

The leaders of the Central Pacific (which built from California) and Union Pacific (which built from the Mississippi) quickly realized that immediate profits could be made by contracting construction out to themselves. They created separate companies that built the railroads as cheaply as possible, then billed the government the full amount of the available loans. The railroads were committed to eventually repaying the loans, but that responsibility belonged to a different set of investors, while a narrow inner circle of each railroad's leaders owned the highly profitable construction companies.

The Central Pacific even went so far as to hire a geologist who claimed that the Sierra Nevada Mountains started just outside of Sacramento, many miles away from the real mountains, so they could collect the full $48,000 a mile for that segment. Using techniques like this, the people who owned the construction companies earned millions of dollars in profits before the railroads were even completed.

Later, when people became suspicious about the loans, the companies bribed the vice president, secretary of the treasury, and important members of Congress to shut them up. Eventually, some unbribed Congressmen held a hearing and subpoenaed the Central Pacific's books to find out how much it really spent on construction. Charles Crocker, who was treasurer of both Central Pacific and its construction contractors, appeared at the hearing to announce that the books had mysteriously gone missing. He thought that maybe his partner, Mark Hopkins, had accidentally thrown them out. Hopkins wasn't there to testify, having conveniently passed away a few years before the hearing.

Altogether, the Central and Union Pacific railroads received $55 million in loans (about a billion dollars in today's money) and 19.5 million acres of land. Although they were supposed to sell this land to actual settlers, they ended up keeping much of it because, even with the railroad nearby, few were willing to try to farm in the mountains or Great Basin. Although the land was not immediately valuable, by the mid-twentieth century the lands the railroads still owned were probably more valuable than the railroads themselves.

Congress learned its lesson and gave no more loans to railroad construction in the nineteenth century. But it still gave land grants to the Northern Pacific, Atlantic & Pacific (Santa Fe), and Southern Pacific to build more transcontinental railroads. As if to demonstrate that it was too soon to build a transcontinental railroad, the Union Pacific, Northern Pacific, and Santa Fe all went bankrupt in 1893. The Central Pacific escaped bankruptcy because of its access to Nevada silver mines, while the Southern Pacific almost went bankrupt but was saved only when its leader, Colis Huntington, illegally diverted funds from the Central Pacific, which he also controlled, to the SP.

Both UP and SP eventually repaid the loans (by which time most of the people who had become millionaires from the construction scam were dead). But the terms of the loans were so vague that they were able to convince the courts to allow them to pay a lot less than they would have paid if they had paid the interest rates paid by the government on the bonds it sold to finance the railroads. By one estimate, they saved at least $56 million in interest charges -- about $1.5 billion in today's dollars.

In 1893, the year most of the railroads that had received land grants went bankrupt, the Great Northern Railway completed its line from St. Paul to Seattle. Built without any subsidies, the railway was built in segments, with each segment financed by the profits from the previous one. First (under the name of St. Paul, Minneapolis & Manitoba Railway), it went from St. Paul to the Red River Valley of Minnesota and North Dakota, which was soon producing at least a quarter of the wheat grown in the United States. Then it continued to Minot, North Dakota, opening up even more wheat land.

Then, in 1887, the Great Northern build 640 miles of track from Minot to Helena (and soon after Butte), Montana, giving it access to mines that were then paying monopoly prices to the Northern Pacific (in Helena) and Union Pacific (in Butte). Finally, having changed its name to Great Northern in 1890, it built from Great Falls to Seattle, finishing in January, 1893.

That was just weeks before the economic panic that sent some 200 other railroads into bankruptcy. Great Northern survived that panic because it had been built to haul freight, not to get land grants or construction loans. It was able to earn a profit in the greatest American recession before the Great Depression even though it had to compete with other companies that didn't have to repay their creditors because they were in receivership.

Great Northern showed that a transcontinental railroad didn't have to be a boondoggle. Considering the productive farmlands in Nebraska, Kansas, and California, plus the valuable minerals in Colorado and Nevada, a transcontinental could have been built on the UP-CP route, following the Great Northern model, without government subsidies. It just wouldn't have been completed in 1869.

Nor is there any reason to think that building the railroad early helped promote economic prosperity along its route. The Wyoming and Nevada segments of the rail route remain some of the most desolate regions of the country. Nor was it vital to keeping the country together. There were plenty of railroads connecting the North and South, but they hardly prevented the Civil War. Nor was anyone in California talking about seceding the union if they didn't get a railroad connection to the rest of the country.

Scandalous profits, corruption, and bribery all seem to be a part of mega follies like the first transcontinental railroad. We should remember it today not as a hallmark of American enterprise but as an example of what not to do.