Guest post by Ben Carmack
What follows is a part of my recently submitted paper titled "Understanding Railroads," submitted for my transportation engineering course at U of L.
Railroads were built and financed by a combination of public and private support. In the beginning, roads were built with state charters, as in the case of the New Albany and Salem Railroad.[i] Finance would be provided in the form of bonds, both private and government bonds. The amount of capital required to build and operate a railroad was (and is) very high, which meant that it was very difficult for a railroad to make any money. Consequently, railroads relied on government influence and support, but this support was frequently controversial.
Abraham Lincoln, in his legal career, was distinguished as a railroad attorney. One case that he argued is particularly instructive from the standpoint of railroad history. In 1852 Lincoln represented the Alton & Sangamon Railroad in a right of way acquisition case. The road argued that it was not bound to pay damages to an affected property owner for right of way acquisition because the expected rise in value of the land from the construction of the railroad would cover the cost of the acquired right of way. The Illinois Supreme Court ruled in Lincoln’s favor and upheld an Illinois law that allowed such “just compensation,” though that same year the Illinois legislature passed another law which removed “community interests” from the accounting for just compensation. Many states had similar laws.[ii] Lincoln also defended the same railroad in 1851 when a stock subscriber refused to pay for his subscription when the Alton & Sangamon changed its route and built its line far away from property the stock subscriber owned. The subscriber argued that since he was promised economic benefits from the construction of the railroad, the railroad was bound to keep its agreement to build its line close to his lands. Lincoln argued that stock subscribers had to pay the railroad regardless of mitigating circumstances. The Illinois Supreme Court held in Lincoln’s favor, making him one of the most prominent railroad attorneys around, since the case became a major precedent in railroad law.[iii]
Lincoln’s work with railroads influenced his policy positions: he strongly supported building a transcontinental railroad and began working to make it a reality when he became president in 1861. He position was so well known that it was part of the reason why various Southern states decided to secede from the Union after his election as president.[iv] At issue were two very different ways of reading the Constitution: one, devised by Alexander Hamilton and defended by Northern industrialists, argued that the Constitution through implied powers gave the federal government the right to support and build public improvement projects. The other interpretation was devised by Thomas Jefferson and was defended by Southern politicians, plantation owners and farmers. They argued that the Constitution prescribed very limited powers, and the federal government could only exercise those powers enumerated by the Constitution. James Madison, the “father of the Constitution,” made an argument like Jefferson's as president when he vetoed a spending bill for a canal project.[v]
One may see the difference in philosophy in the text of the Constitutions for the Union and the Confederacy. In the federal Constitution, still in effect today, one power given to Congress in Article I, Section 8 is “to regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.” The Confederate Constitution included that language but added, “but neither this nor any other clause contained in the [Confederate] Constitution shall be construed to delegate the power to Congress to appropriate money for any internal improvement intended to facilitate commerce…”[vi]
Legislation for building the first transcontinental railroad was passed not long after Lincoln became president.[vii] The Constitutional issues involved with the road were ultimately settled by the outcome of the War Between the States, won by the Union. Henceforth it has been taken as a given that the federal government has the Constitutional authority to construct public improvements, which is the basis of much of our transportation planning and funding in the U.S.
The intricacies of how the first transcontinental railroad was financed are far beyond the scope of this paper. Suffice it to say that both the Union Pacific and Central Pacific enjoyed tremendous subsidies from the federal government in the form of public land grants (much of the Western territory was not yet settled) and thirty year federally guaranteed bonds. The roads did not even have to pay interest on the bonds during the thirty year period due to the ambiguity of the law authorizing construction and financing of the railroad; the taxpayers picked up the tab.[viii] The ambitious project crossed empty territory where expected traffic would be minimal, let alone turn a profit, and so potential investors were quite reluctant to sign on, even with large government incentives. To get around this difficulty, the owners of the Union Pacific in particular set up the Credit Mobilier corporation as the construction firm to which the Union Pacific would give contracts to construct the railroad.[ix] Because the same men owned both the railroad and the construction company, it was easy to sell stock—the Credit Mobilier would be paid for its services in part with railroad stock.[x]
The Credit Mobilier became infamous during the Grant administration when Congress learned that Congressman/businessman Oakes Ames had sold key members of Congress of both parties as well as the Vice President, Schuyler Colfax, stock in the Credit Mobilier below par, that is at a discount, in exchange for political favors for the railroad. Congress found that a particular piece of legislation regarding the regulation and setting of rates of the Union Pacific was opposed by those same members who had purchased stock from Mr. Ames; Congress concluded that collusion and corruption was the true cause of the opposition, and removed Oakes Ames and several others from office.[xi]
Since the same men owned the Credit Mobilier as owned the Union Pacific, and since the Credit Mobilier was a limited liability corporation, it was quite easy to overcharge for the construction of the railroad and make a handsome profit for the insiders at government expense. By record, the total cost reported to build the road was about $42.825 million, while the Union Pacific paid $93.546 million to contractors to complete the project; if the true value of the Union Pacific stock were taken into consideration (it was worth 30 cents on the dollar on average), the profit margin narrowed to a mere $20.874 million.[xii] Considering that the transcontinental railroad, when completed in 1869, was unable to generate enough revenue to pay its debts, resulting in the Panic of 1873, one may ascertain the true value and profitability of the railroad.[xiii]
What lessons may an engineer learn from the episode of the transcontinental railroad? Engineers are capable of designing just about anything, but whether or not it will actually work is another consideration entirely. In the case of the transcontinental railroad, one finds again and again tales of private corporations profiting from federal largesse and getting bailed out by taxpayers ( a familiar story throughout American history even to the present day). Not only is the transcontinental railroad and the Credit Mobilier scandal a cautionary tale regarding the wisdom of public support of questionable private ventures, it calls into question the whole idea of extensive federal intervention in the economy at all. From Abraham Lincoln to Barack Obama, American politicians talk of “dreaming big,” proper judgment and the Bill of Rights be damned. For the good of country, wise engineers and planners should ask, “Why are we doing this?” “Where is the money going to come from?” “What does the Constitution say?” Sadly, one often finds such questions will make one quite unwelcome and even the subject of derision, though one would think they are surely prudent questions, ones engineers often ask and should ask.
Another federally funded transportation scheme, the national interstate system, is strained by heavy use which depends upon a large supply of cheap fuel. This fuel, however, continues to grow more expensive. The federally subsidized interstate apparatus has fostered an economy that depends upon long distance transport of freight, often to the detriment of local economies and resources. As a result, we are bound to continue to spend more and more because we cannot do without food, clothing and other necessities. The high cost of fuel persists even though the U.S today, for the first time since the 1940s, exports more gasoline than it imports.[xiv] On average, one freight train can replace 250 tractor trailers on our roadways, using far less fuel.[xv] Ironically, railroads today are perfectly capable of making a profit shipping freight, without government assistance, while interstate highways are, for the most part, entirely government run and operated. If some of the massive highway investment were directed to renewing railroad infrastructure, the country could stand to save much on fuel while continuing to ship the freight we need to keep the global economy running. It is certainly worth our serious consideration.
It will do us no good to simply repeat the mistakes of the past. If public money is to be spent on transportation infrastructure, pains should be taken by all involved to make sure that wise investments are being made, and that “bubble economics” is carefully avoided in favor of sound economics which takes into account the benefit of all the people, especially the small, and not only the privileged few insiders.
[i] Perring, Thomas Carter. “New Albany-Salem Railroad—Incidents of Road and Men,” Indiana Magazine of History. Vol. 15, No. 4 (December 1919). Pgs. 342-362. Published online courtesy of the Trustees of Indiana University Bloomington: http://www.jstor.org/stable/27785918
[ii] Ely, James W., Jr. “Abraham Lincoln as a Railroad Attorney,” Indiana Historical Society, 2005 Railroad Symposium: Lincoln and the Railroads, Available: http://www.indianahistory.org/our-services/books-publications/railroad-symposia-essays-1/Abe%20Lincoln%20as%20a%20Railroad%20Attorney.pdf
[iii] Ibid, endnote ii.
[iv] DiLorenzo, Thomas J. “Why the Republican Party Elected Lincoln,” Lew Rockwell.com. Oct. 1, 2003. Available: http://www.lewrockwell.com/dilorenzo/dilorenzo53/html.
[v] Woods, Thomas E., Jr. and Kevin R.C. Gutzman, Who Killed the Constitution? New York: Crown Forum, 2008. pg. 75.
[vi] Thomas, Emory M. The Confederate Nation. New York: Harper & Row, 1979. Pg. 311
[vii] Ibid, endnote iv
[viii] White, Richard. Railroaded: The Transcontinentals and the Making of Modern America. New York: W.W. Norton, 2011. pg. 23
[ix] Crawford, J.B. The Credit Mobilier of America: Its Origin and History. New York: Greenwood Press, 1880. 1969 ed. pg. 14.
[x] Ibid White pg. 28
[xi] Ibid Crawford, pgs. 77-78 and Ibid. White pg. 64.
[xii] Ibid Crawford pgs. 66-67.
[xiii] Ibid White pg. 78.
[xiv] Brady, Jeff. “Gas Pains? U.S. Diesel, Gas Exports Surpass Imports,” National Public Radio, December 29, 2011. Available: http://www.npr.org/2011/12/29/144155269/gas-pains-u-s-diesel-gas-exports-surpass-imports