Two Railroads Across America and the One James J. Hill Built Without Land Grants

There are two ways to build a railroad across a continent. You can ask the government to pay for it, or you can build it from the ground up and make it pay for itself. America tried both within a generation of each other, and the results are on the record.

This post is a comparison, and I will make the argument in the usual order. First, define the terms. Second, state the best case for the subsidy. Third, set out the evidence, table included. Fourth, draw the conclusion. The conclusion is not "government bad, business good." It is narrower and more useful: subsidy changes who gets rewarded, and a railroad built to collect a subsidy is a different animal from a railroad built to carry freight.

Terms and Premises

Let me define what I mean. A land grant was a transfer of public land to a railroad company, in alternating sections along the right of way, which the company could sell to settlers or investors to raise cash. A bond subsidy was a federal loan, in the form of government bonds lent to the company, secured by a lien on the road. Together they made the first transcontinental line a project backed by the national credit.

The argument has four premises.

1. A subsidy pays a company to build track. It does not pay a company to find customers.
2. A company paid by the mile will tend to build miles, and a company paid by the shipment will tend to find shipments.
3. Where insiders control both the company and the construction contract, a subsidy invites self-dealing.
4. A line that must carry its own debt from the first day has strong reasons to build cheap, build straight and build where the traffic is.

If those premises hold, the subsidized railroad will be built faster to a worse standard and be more exposed to scandal, and the unsubsidized one will be built slower to a better standard and be more likely to survive. That is a testable claim. Let us test it.

The Best Case for the Subsidy

Start with the strongest version of the other side. It is a real argument, and its defenders have a point.

In 1860 California was thousands of miles of mountains, desert and plains away from the East, and it took months to travel there by overland route or by sea. The Civil War made the link urgent: the Union wanted the gold of California tied to the government in Washington, and wanted to bind the Pacific coast to the Union firmly. No private investor in 1862 could see a profit in a line across a continent of mostly empty land, and private capital was scarce in the middle of a war. If the nation wanted a railroad to the Pacific, the defenders say, only the government could get it built. And the railroad was built, in seven years, a feat of engineering that gave the country a continent-spanning market.

That argument carries weight. The first transcontinental did get built, it did bind the country together and in the end the government's bonds were repaid. Anyone who tells you the project was a total failure has not read the history. The case for a subsidy to a strategic project in wartime is a case a serious conservative can make.

The question is not whether the subsidy worked in the narrow sense. The question is what it cost, what it taught and whether there was a better way. For that we need to look at the two roads.

The First Line: The Pacific Railway Act of 1862

On July 1, 1862 Lincoln signed the Pacific Railway Act. It chartered the Union Pacific Railroad to build westward from the Missouri River, and it authorized the Central Pacific Railroad of California to build eastward from Sacramento. The act provided two kinds of help: land grants along the right of way, and federal government bonds lent to the companies per mile of track completed. The amounts were larger for the harder terrain, with more per mile in the mountains than on the plains. A revision in 1864 let the companies issue first-mortgage bonds that ranked ahead of the government's lien, making it easier for them to raise private money.

Notice what the formula rewarded. The companies were paid by the mile, which is the only business arrangement in which a detour counts as a raise. The more track they laid, the more bonds and land they received. The incentives pointed toward speed and length, and the temptation was to build quickly and to count miles generously. The Central Pacific's backers, the "Big Four" of Sacramento, Leland Stanford, Collis Huntington, Mark Hopkins and Charles Crocker, got rich. The Union Pacific's insiders did too, by a more dubious method.

The two lines met at Promontory Summit, Utah, on May 10, 1869, where a ceremonial golden spike was driven. The telegraph carried the news across the country. It was a genuine national celebration, and it deserved to be one.

The Crédit Mobilier

Now the scandal. The Union Pacific's leading stockholders created a separate construction company, the Crédit Mobilier of America, and then had the railroad hire it to build the line at inflated prices. In effect the insiders were on both sides of the contract: as owners of the railroad they paid the bills, and as owners of the construction company they collected the money. The profits went to the construction company, while the railroad got the debts.

The scheme became public in 1872, in a newspaper exposé in the New York Sun in the middle of a presidential election year. The congressional investigation that followed showed that Representative Oakes Ames of Massachusetts, a Union Pacific insider, had distributed shares of the construction company to congressmen at favorable terms, presumably out of a shared enthusiasm for rail travel. The House censured Ames and one other member. Several prominent figures were tarnished, and the word "Crédit Mobilier" became shorthand for a certain kind of Washington corruption.

Is this a matter of a few bad men? Partly. But the scandal was structural, and that is the premise. A subsidy paid by the mile creates a pot of money that insiders can divert through a contract they control, and it attracts people who are skilled at getting access to public funds, which is a different skill from running a railroad. Look at how often the pattern recurs, in modern cases like Solyndra to Amtrak, why government picks losers when it picks winners.

The Second Line: James J. Hill's Great Northern

Now meet the other builder. James Jerome Hill was born in Ontario, Canada in 1838, moved to St. Paul, Minnesota, as a young man and worked in the freight and steamboat business. In 1878 he and his partners bought a bankrupt Minnesota railroad, the St. Paul and Pacific. The bargain they struck was to make it pay. Hill reorganized it, expanded it and, in 1889, renamed his system the Great Northern Railway.

His plan was to build west from Minnesota to the Pacific Northwest, across the northern plains and through the Rockies, and he did it without a federal land grant and without government bonds. The line reached the Puget Sound area in January 1893, and its completion was marked without the pageantry of a golden spike. He had financed it by borrowing from private investors and by plowing back the line's own earnings.

Because he had no land grant to sell, Hill had to build traffic. So he did what a good businessman does: he went out and found customers. He recruited farmers to settle along his line, brought families over at low cost and carried their grain. He understood that a railroad is only as good as the freight it carries. His engineers searched for the best route, including a pass through the Rockies that kept the grades low. A line with gentle grades is a line with cheap operations, and cheap operations mean you can charge less and still earn a profit. The result was a line built to last.

The results were dramatic when the Panic of 1893 hit. A banking and credit crisis started in that year, and railroads across the country went into receivership, including some of the most famous. The Union Pacific went into receivership in 1893. The Northern Pacific, another transcontinental with a large federal land grant, failed too. The Great Northern did not go bankrupt. It was one of the few transcontinentals to come through without a collapse.

That is not a coincidence. The line that had been built for traffic survived the panic, and the lines that had been built for subsidy did not.

The Comparison in a Table

Read the table as evidence, and note its limits. The table compares only a few features, and two railroads are a small sample. Other factors matter, including Hill's talent and the different terrain. But the pattern is consistent with the premises.

What the Contrast Teaches About Subsidy

Here is the conclusion in numbered form.

1. Subsidy changes the goal. Paid by the mile, the first line built miles. Paid by the freight, Hill built traffic.
2. Subsidy invites self-dealing. Where a stream of public money flows through a contract insiders control, the money will be diverted. Crédit Mobilier is the nineteenth-century proof.
3. Subsidy weakens discipline. A company that knows the government will carry part of the risk has less reason to economize. A company that must carry its own debt economizes or dies.
4. The unsubsidized line was more resilient. In the panic that tested them, the line built to earn its keep was the line that kept on earning.

Now the fair objection, and I want to state it without a smirk: without the subsidy, the first transcontinental would not have been built in 1869, and Hill's line could not have been built until the country had grown rich enough to afford it. The Great Northern ran through country that the earlier railroads had helped to open. That is true, and the lesson is to avoid overclaiming. Hill was not a lone hero without help. He benefited from the nation's growth, from the earlier lines and from the Northwest's rising population.

But the point holds. The comparison does not show that no subsidy could ever be justified. It shows what kind of project a subsidy produces and what kind of risk it creates. A subsidy to build a road to a strategic goal in wartime is one thing, and a standing policy of paying companies by the mile for projects that markets might fund is another. The first may be defended by the common defense. The second is the habit that earmarks came back, and the conservative argument over pork never ended and taxpayer-funded stadiums are the billion-dollar bet cities keep losing describe.

I should also be fair about Hill. He was no saint of the free market. He was a hard businessman, he fought rivals, and his later consolidation of Northwestern railroads into the Northern Securities Company was challenged under the Sherman Act and, in 1904, the Supreme Court ordered it dissolved. A free-market conservative can note that the question of when a combination becomes a monopoly is a real question. But the issue in this post is how the lines were financed, and on that issue, the record is clear.

The Founding Anchor

There is a Founding argument here, and it is not a minor one. In 1817 Congress passed a bill to use the bonus paid by the Bank of the United States to fund roads and canals. On March 3, 1817, President James Madison, the father of the Constitution, vetoed it. His reason was constitutional: the Constitution listed Congress's powers, and he could not find the power to build roads and canals among them.

Madison's objection is worth reading as a statement of principle, and the debate that followed is the original American argument about subsidy. By 1862, the war had swept most of the old scruples aside, and the Pacific Railway Act relied on the war powers and the need to bind the Pacific coast to the Union. Whatever one thinks of that, the habit of subsidizing internal improvements, once begun, tended to grow. For the earlier battle over federal power and the economy, see Hamilton's Report on Manufactures and the conservative case for tariffs, which gives the other side of the early republic's argument. And the railroads' later regulation is the subject of The Railroad Commission of 1887 That Became the Model for Every Federal Agency.

The Enumerated Powers argument also has a practical edge: a power that must be justified by the text forces a debate each time. A power that is assumed becomes a habit.

Reading the Lesson Without Overreaching

Here is how I would put it to a skeptical friend over coffee. I would not say that government can never do anything useful, because the Union Pacific did get built. I would say that when the government pays for the thing instead of buying the result, the incentives bend, and that the bend shows up in scandal, in poor construction and in failure when the money stops. I would say that the unsubsidized builder, with no cushion, had to be good, and that being good was the whole story of Hill's success.

I would add a point about the railroads' own era. The age of the great railroad builders, which included Hill, Carnegie, Vanderbilt and others, is often called the age of the robber barons. The truth is more complicated, and six myths about robber barons, sweatshops and the age of capitalism tests that label against the record. Some of those builders were genuine entrepreneurs who lowered costs. Others were what we would call rent-seekers, who made their fortunes off the public treasury. The difference between them is the same as the difference between the two roads. For a profile of another builder of the age who put his fortune to a different use, see Andrew Carnegie Went From Bobbin Boy to Steel King and Then Gave It Away.

The Case in Brief

1. The Pacific Railway Act of July 1, 1862 funded the first transcontinental with federal bonds and land grants, and the line was finished at Promontory, Utah on May 10, 1869.
2. The subsidy paid by the mile, and insiders used the Crédit Mobilier construction company to divert the money, a scandal exposed in 1872.
3. James J. Hill's Great Northern reached Puget Sound in 1893 without federal land grants, built for traffic and low costs, and came through the Panic of 1893 without receivership while the Union Pacific and Northern Pacific failed.
4. The lesson is that subsidy changes what a company is built to do and invites self-dealing, while a line that must pay its own way has to earn its keep.
5. The strongest case for subsidy, a strategic wartime link, is real, but it is a narrow exception and not a model for a standing habit.

What you can do: ask your representative to cite the enumerated power for any federal subsidy to a private company, and read the cost of those programs at the national debt clock.