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.
The
Future
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
Ben,
ReplyDeleteI liked this the first time I read it, as you well know. I find a third reading even better.
This is exceptionally good, especially the closing remarks.