#85 The Railroading of America (The End of Laissez-Faire Part 8)

Read Part 7 of this Series

Author’s note:

This series of blogposts will be my paraphrased notes on a lecture given by Murray Rothbard called “The American Economy and the End of Laissez Faire“. This means the post will contain some word for word transcriptions of Rothbard’s words and some editorializing and rephrasing of my own. I will not distinguish between the two.

As mentioned previously, railroads were the first large scale industry. The railroad revolution brought with it tremendous improvements in standard of living and a fall in the cost of transportation of goods and people. However, as is the case with most revolutions of industry, the government intervened heavily with subsidy and regulation.

The Lincoln administration was a heavily railroad oriented administration, (recall that Lincoln was a wealthy rail lawyer) committed to huge subsidization of a transcontinental railroad program.

Recall in our previous issue #84, we discussed the homesteading principle of land ownership…a natural extension of these principles to railroads would be that a rail company wishing to build 1000 miles of rail road would become an owner of the land on which that rail line and it’s station terminals stood (with perhaps a few feet of buffer on either side of the rail).

Some railroads (for example The Great Northern) were indeed built in this Libertarian fashion, as purely free market enterprises which competed on the marketplace of transportation (coincidentally these were usually the few that did not go bankrupt) and productive land ownership. However, this is not the way Republicans wanted land allocated to the rail industry and thanks to a significant intervention from the Federal government in the industry, it was not common practice.

Instead, special subsidy and privilege were given to railroads in the form of huge interest free loans, heavy subsidies per mile of track (paid in cash), and a huge amount of land in excess of what was needed by the Libertarian homesteading right of way principle. Land was given to railroad companies in 20 square mile sections, meaning that land ownership extended approximately 4.5 miles on either side of the rail.

In addition, the government gave the railroads some of the best land in the West. The US government closed off all land for settlement sometimes up to 100 miles on either side of railroad track. Quite counter intuitive for a project which revolutionized land transportation. In fact, the only ways in which settlers could claim and live on this land close to the railroads, was to buy the land directly from the railroad companies.

Essentially, railroads would receive free or highly subsidized land from the government, get paid to build rail lines that weren’t profitable in a free market, and then sell their excess land to settlers at monopoly prices. Remember that under libertarian principles these settlers would’ve been able to freely make use of this land via the homesteading principle. Because of this, an enormous amount of corruption took place. The ‘Robber Barons’ of the rail industry came about through channels opened by the US Federal government.

As a result of these policies, farmers began to complain (late 1860s-1870s) about the special privileges given to the rail industry. Western farmers organized “anti monopoly movements” over the vast amounts of productive land, freely gifted to the railroad companies, being kept out of circulation and that land granted in this fashion to the rail companies was tax exempt.

The earliest days of these anti monopoly movements were not statist or socialist in flavor, but rather rooted in the very reasonable complaints against the special privilege and subsidy granted to rail companies.

There were 4 big transcontinental railroads that received the bulk of the loans and land grants from the Federal Government. The first big grant was to the Union Pacific in 1862 which started in Omaha, Nebraska and went West. The second was the Central Pacific, also in 1862, which started in San Francisco, California and went East to join the Union Pacific line (aka the UP-CP line) in Utah at a specially marked “golden spike”.

The third grant was the Northern Pacific in 1864, which began just West of Chicago, Illinois and traveled West to Portland, Oregon.

The fourth grant was the Southern Pacific in 1865, which started in Los Angeles, California and continued to Houston, Texas.

In total, 88 million acres of land were granted to these 4 companies by the US Federal Government. The Northern Pacific received approximately 44 million acres in land grants which was the most amount of land received. The other 3 companies received the remaining 44 million acres of land.

General Dodge, a Union general in the Civil War, used Union troops to massacre all of the Native Americans on the perspective Union Pacific rail line route. In late 1866, following the end of the civil war, Dodge was appointed Chief Engineer for the Union Pacific.

This is the darling strategy of the crony capitalists that profited tremendously (and still do in many such cases) from monopoly business…that is, to employ the government to socialize costs in business enterprise.

Both Union Pacific and Central Pacific procured special 30 year bonds from the Federal Government. They were paid by Crédit Mobilier (Union Pacific) and The Contract and Finance Company (Central Pacific).

The Union Pacific faction in congress was headed by Congressman Oakes Ames of Massachusetts. He was a shovel manufacturer in addition to being a Congressman and secured for himself the primary shovel contract with Crédit Mobilier for the building of the Union Pacific. When expressing his reasoning for giving Crédit Mobilier stock away to other congressman Ames said, “We want more friends in this Congress, there is no difficulty in getting them to look after their own property”.

When Grant entered the Presidential office in 1868, his entire administration was “on the take” [receiving money from the monopoly deals granted to the railroads namely Union Pacific and Northern Pacific] including but not necessarily limited to his vice president, the head of the senate and the head of the house, the speaker of the house, James Garfield a senator from Ohio and “Pig Iron” Kelly a congressman from Pittsburg. However, Grant himself was not “on the take” because he was too drunk to know what was going on.

“Pig Iron” Kelly earned his nickname by regularly calling for protective tarrifs and other regulatory measures which would protect his interests in the pig iron business. Additionally, he was able to secure contracts for himself as a pig iron supplier for the railroad projects.

Politicians would receive cash and stock from the railroads. There were a huge amount of stock holders and bond holders for the railroads. Banks held about 10% of the equity, and majority of the rest was held by private investors (many of whom were English). Insiders, top managers for the 4 large transcontinental projects, not only held a lot of the stock but would also form construction companies and grant themselves contracts to build sections of the rail lines at tremendously inflated costs. These insiders also granted politicians stock in their fraudulent construction companies.

For example, although the Union Pacific railroad cost only $50 million to build, Crédit Mobilier billed $94 million and executives pocketed the excess $44 million. Top executives of the Union Pacific owned Crédit Mobilier along with a handful of politicians. Then, part of the excess cash and $9 million in discounted stock was used to further bribe Washington politicians for laws, funding, and regulatory rulings favorable to the Union Pacific.

The Contract and Finance Company constructed the Central Pacific railroad for $36 million and then billed for $79 million. The top 4 people who were the owners of Central Pacific railroad were the sole owners of The Contract and Finance Company. The families of these top 4 executives are still dominant in business in California to this day, they were: Charles Crocker (contractor and founder of Crocker Bank), Collis Huntington (an emissary to Washington, he took a bag of $200,000 in cash with him to Washington and left with it empty), Leland Stanford (founder of Stanford university and eventually became governor of California to take care of the interests of Central Pacific), and Mark Hopkins (a managerial operator, built the Hopkins hotel in San Francisco which overlooks the bay).

Northern Pacific by 1869 had fallen into the hands of Jay Cooke (first covered in issue #81 & #82) after he had made his millions as a monopoly bond underwriter during and after the civil war. Cooke was the first “tycoon” of those days. He hired propagandists to write about how wonderful the Pacific Northwest area was for settlers to promote his rail line and had them distributed in Europe. One of the phrases used was “the climate is like Paris in April”.

Northern Pacific’s insiders included Vice President Schuyler Colfax, later president Rutherford Hayes, Chief Justice Salmon P. Chase, Reverend Henry Ward Beecher (a Brooklyn protestant minister) and General Porter among others.

Recall, Cooke financed Chief Justice Chase’s entire political career…Chase approached Cooke and asked to be made a secret partner of Cooke and Company. Instead, Cooke made him an owner Northern Pacific. Henry Cooke went to Grant and convinced Grant to favor the Northern Pacific line with special privileges.

Regularly, construction decisions were intentionally made if they were costlier (even if they made less sense pragmatically for the business) because the government was subsidizing those costs, per mile of track, on the back-end. Getting more money from the government and getting it faster was the primary concern in construction.

Essentially, railroad executives used government subsidies to fund high paying contracts in their own interests, fleecing the tax payers, the bond holders and stock holders. The ability of these rail executives to line their own pockets with tremendous sums of money never before seen in business, afforded them the opportunity to then purchase more special privileges and legal protections from the federal government by buying politicians to represent their cause.

The estimated waste of the cost for these 4 major transcontinental railroad projects is about 70% over the cost of similar projects on the free market. Hence the name, Robber Barons.

This was all, of course, highly illegal. However, there was no prosecution because so many employees of the government were in on the scandal! As a result, you had very low profit rates for the railroads and a huge amount of profits for the individuals engaged in backroom deals.

By the panic of 1873 most of the rail companies had gone bankrupt following about 10 years of fantastic and unprecedented boom sustained by massive government intervention funded by the tax payer. By 1885, Southern Pacific acquired Central Pacific and took it over under their namesake, and Southern Pacific controlled California politics for generations (if not still to this day to some degree).