The Great Transcontinental Railroad Scam

This week marks the 140th anniversary of the completion of the nation’s first transcontinental railroad, the Union Pacific-Central Pacific, which famously linked up at Promontory Point, Utah on May 10, 1869 with the driving of the ceremonial golden spike. During the late 19th century, a total of five transcontinental lines were constructed to the West Coast, an amazing feat for the time period.

Most Americans have heard the story of these astonishing engineering exploits but not the real truth behind it. It is a tale of the utter failure of government subsidization of business but also the roaring success of unfettered capitalism, a part of the saga often ignored in history textbooks.

The first discussion of a transcontinental railroad began soon after the United States acquired California, during the Mexican War of 1846-1848. But with the ongoing struggle between North and South, a fight over constitutional principles as much as slavery, neither side could agree on anything concerning funding for a rail line or a path for its construction. However, with the secession of the conservative South, the federal government began financing a railway to the West Coast with passage of the Pacific Railroad Act in 1862.

To construct the first four lines, the government provided hundreds of millions of dollars in loans and freely granted over 150 million acres of land, an area nearly as large as the state of Texas, to various railroad corporations. Many historians and authors, including those charged with writing textbooks for college students, heap praise on the government’s role in providing the necessary capital for these Herculean endeavors.

Stephen Ambrose writes in his book, Nothing Like It In The World: The Men Who Built The Transcontinental Railroad, 1863-1869, that “Government aid…took many forms. Without it, the line could not have been built, quite possibly would not have been started.”

In The National Experience, major historians John M. Blum, Edmund S. Morgan, Willie Lee Rose, Arthur M. Schlesinger, Jr., Kenneth M. Stampp, and C. Van Woodward, note that “Since such huge sums were far more than private American investors could supply, promoters turned to foreign investors and to local, state, and federal governments.”

Alan Brinkley, in The Unfinished Nation: A Concise History of the American People, contends that “Subsidies from federal, state, and local governments (along with foreign loans and investments) were vital to this [railroad] expansion, which required far more capital than private entrepreneurs could raise by themselves.”

And finally, in a two-volume work, The Growth of the American Republic, authors Samuel Eliot Morison and Henry Steele Commager make a similar contention. Of the transcontinental lines the authors write: “Certainly very few of the western railroads could have been built by private capital alone without the generous aid from federal, state, and local governments.” This was possible because Washington took a new view of the Constitution, “having abandoned the embarrassing strict construction theories that bothered an earlier generation.” Such an assertion should come as no surprise, for the bias within this particular book should be readily apparent. Upon examining this work, one finds that a portrait of FDR graces the opening pages, which remains in later versions published years after the president’s death in 1945.

However, each of these statements might possess a certain degree of truth, if it were not for the impressive accomplishment of railroad titan James J. Hill. Hill built the fifth and final transcontinental line of the 19th century, the Great Northern, which ran from St. Paul, Minnesota to Seattle, Washington. Though it took longer, he constructed his line without any government aid whatsoever. None of these works discuss Hill, or his achievement, in any degree of detail.

Hill was a supreme capitalist and ran his railroad corporation as such. He did not rely on the government to supply him with capital or land. Burton W. Folsom, Jr., in a great little book, The Myth of the Robber Barons, quotes from a letter Hill wrote to one of his rivals. “Our own line in the north was built without any government aid, even the right of way, through hundreds of miles of public lands, being paid for in cash,” the conservative Hill wrote. He also disliked the fact that Congress granted millions in subsidies to his competitors, providing them with an unfair advantage. “The government should not furnish capital to these companies, in addition to their enormous land subsidies, to enable them to conduct their business in competition with enterprises that have received no aid from the public treasury.”

To get his railroad constructed, Hill decided to develop the frontier as he went along. He transported settlers and supplied them with grain, seed, and livestock, all to help them get started and to set the stage for the development of a capitalist economy in the west.

Of this Morison and Commager write that the “day of land grants and federal subsidies was past,” and “Hill saw that the Great Northern Railway…could reach the Pacific only by developing the country as it progressed.” The authors then quote Hill’s explanation of his plan for the Northwest: “We consider ourselves and the people along our lines as co-partners in the prosperity of the country we both occupy and the prosperity of the one should mean the prosperity of both, and their adversity will be quickly followed by ours.”

Though these authors might not admit it, they are actually acknowledging that capitalism worked! Their unintended praise of Hill’s capitalism continued: “Construction costs were low, the financial management was skillful and conservative, and the Great Northern was the one transcontinental line that managed to weather every financial crisis.”

Echoing a similar sentiment, authors Blum, Morgan, Rose, Schlesinger, Jr., Stampp, and Woodward write in The National Experience that “Built more carefully and solidly than its competitor, financed more soundly, and integrated more thoroughly in the economy of the region it served, Hill’s Great Northern was the only transcontinental railroad to pull through the Panic of 1893 and the depression that followed.”

Unlike the other lines, Hill chose the most economical routes, insisted on using only the very finest steel rails, not the cheaper iron, as well as the best timbers. His work was slower, but also less costly and much more efficient, for it was his money he was using, not someone else’s. It is for these reasons that his company survived every panic and depression, while the other lines all went bankrupt, a fact that many historians never bother to inform their students or readers. In fact, many textbooks never mention Hill at all.

However, there are historians and economists who will tell the absolute truth about Hill and his Great Northern. In addition to Folsom, Professor Thomas J. DiLorenzo, in his book How Capitalism Saved America, discusses the transcontinental lines in great detail, pointing out that not only did all the lines but Hill’s go bankrupt, most of them were rife with corruption, culminating in the Credit Mobilier scandal during Grant’s administration. These corrupt railroad corporations were actually bribing members of Congress to keep the government off their backs and continue the subsidies, giving out passes to ride the lines free of charge as well as company stock. Dozens of members of Congress, as well as Grant’s vice president, were tangled up in the scam.

Today, we find ourselves in a serious economic predicament, to which the government has chosen to heavily regulate the economy, engaging in everything from bailing out corporations to taking over businesses and banks. And with the new massive growth of government has also come new allegations of corruption. History teaches us that such massive government undertakings will always end up as a corrupt disaster. The building of the five 19th century transcontinental railroads provides ample proof that government intervention into the economy will eventually fail and the only success is pure, unbridled capitalism.


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