Transcontinental Railroad Tycoons Got Rich Using Government Money

If you needed a railroad to cross 1800 miles of barren countryside, would you ask the Railroad Tycoons to build it? The controversy the swirled around the funding of the Transcontinental Railroad started the day the first spike was hammered in. It continues to this day. In truth, the debate highlights our national discussion about the appropriate role of government in major projects and how it is that the rich get richer.

Why Build a Transcontinental Railroad?

Time required to travel across the US using various modes of travel.
Time To Travel Across the US

California became a US Territory in 1848 with the end of the Mexican-American War. The California Gold Rush started that same year. Between 1848 and 1855 over 300,000 people traveled to California, many of them settling permanently.

As early as 1850, people were discussing the need for a transcontinental railroad from Missouri to California, which would connect the established states with the new territories. Rail lines were already proliferating east of the Missouri, so the benefits were well understood. Rail was, at the time, the quickest and safest way to transport mail, people and all types of supplies.

Incalculable Benefits

The total benefit to the country of the railroad is impossible to calculate. Stephen Ambrose, in his book “Nothing Like it in the World” states:

Together, the transcontinental railroad and the telegraph made modern America possible. Things that could not be imagined before the Civil War now became common. A nationwide stock market, for example. … A continent-wide culture in which mail and popular magazines and books that used to cost dollars per ounce and had taken forever to get from the East to the West Coast, now cost pennies and got there in a few days. Entertainers could move from one city to another in a matter of hours.

How did the railroad impact Douglas City, WY?

The Civil War Made the Funding Possible

Although the idea for a railroad, and even the need, had been around for a long time, no one was ready to take on the monumental task. Finally, in 1862 after the secession of the confederate states, Congress authorized construction of the Union Pacific Railroad. Before that time, the Southern Congressmen would not support the Central Route through Nebraska and Wyoming. Of course, the Northern Congressmen would not support a Southern Route through Texas.

Once they seceded from the Union however, the South could not longer impact the decision and the Central Route was selected. (The Northern Route, as blazed by Lewis and Clark, was deemed unsuitable due to extreme weather and steep mountains).

There were also geopolitical reasons that made this the right time. For example, President Lincoln wanted to make sure that California would see itself as a Union state, even if the Civil War finally succeeded in breaking the country in half. In fact, the name ‘Union Pacific RailRoad’ was designed to declare the Pacific Coast for the North.

How Much Did the Government Spend?

Direct Government Funding

How was the railroad funded? Money came from several directions, some government, some private. While in the middle of a very expensive war, the federal government issued 30-year US Government Bonds at 6% interest. Effectively, of course, this amounts to the government taking out a huge loan.

Income from the bonds was used to pay the two railroads $16,000 per mile on level grade, $32,000 on foothills and $48,000 per mile for mountains. The total bonds amounted to $55,092,192 ($55 Million) in 1865 dollars. This comes out to $792,386,515.89 ($792 Billion) adjusted for inflation in 2017.

Direct government funding
added up to $792 Billion in today’s dollars.

Land Grants

The next means of funding the railroad was a gift of land to the Railroads. Congress granted the railroads a 400-foot right-of-way along the length of the railroad. This was primarily for train stations and maintenance yards. In addition, they were granted alternate sections of lands for 10 miles on each side of the track. The alternate sections were then government lands. The initial cost to the government of these lands was almost zero. No white man owned these lands. The opening of the railroad made the land more accessible and therefore more valuable.

Final Spike of the Transcontinental Railroad was driven at Promontory Point, Utah
Final Spike of the Transcontinental Railroad was driven at Promontory Point, Utah

As the railroads chose where to build their stations, new towns popped up, making the formerly useless land much more interesting to potential buyers. This provided a source of income to the railroads without significantly costing the government. One concern here, of course, was whether anyone actually wanted to buy that land. The Homestead Acts of 1861-1863 were designed to encourage people to move into these new lands in conjunction with the railroads.

In addition to the government funding described above, the railroads themselves took out bonds to encourage those with money to invest in the project.

The Scandal

So if this was all so amazing for the country where is the scandal? Of course there were the classic examples of waste and abuse. Much of the line was cheaply constructed and would need to be upgraded quickly. Was getting it done quickly more important than getting it done right? Perhaps. It was argued that the cost to do it “right” would have exceeded the ability of anyone to pay for it. As income started coming in from fares, upgrades would be possible.

Waste

On a more sinister note was the completely wasted construction:

  • Rails were installed in ox-bows rather than straight lines.
  • Unneeded parallel tracks were constructed.
  • Lines were routed through land owned by the railroad owners rather than along the most efficient path.

Abuse

Then there was the over-billing:

  • Invoices were submitted to the government above the amount spent.
  • Contractors siphoned off materials that the owners had paid for.
  • Surveyors over stated the grade of the road, in order to get paid at a higher rate.

Fraud

The absolute fraud came from the Railroad Tycoons themselves. Thomas Durant, one of the Union Pacific owners, created a company named Credit Mobilier to sell the bonds. Then the Union Pacific, also controlled by Durant, billed Credit Mobilier at extravagant rates. This allowed Durant to siphon off huge sums of money that never did go towards building the railroad.

Durant and Oakes Ames, a US Congressman, agreed to “distribute” stock in the railroad company in exchange for votes that supported funding the railroad. This became the scandal of the century. The New York Sun wrote in September, 1872:

The King of Frauds
How the Credit Mobilier Bought its way through Congress
Colossal Bribery

Through all of the noise of the scandal, Congress established a few things:

Engine Replica at Promontory Summit
  • Congressman Oakes Ames had distributed and used as payoffs huge amounts of Credit Mobilier stock.
  • He lied to Congress about why he passed out that stock.
  • Credit Mobilier had paid out amazing sums as dividends.
  • Union Pacific was so broke it could not or would not pay its contractors.
  • Union Pacific could not explain where all the money had gone!

Public / Private Partnerships – a Bad Idea?

The Transcontinental Railroad project was the largest partnership between government and business up to that time. The abuses and fraud could have been predicted by anyone in business who had worked with partners. As a later president once said, about a completely different relationship, we must “trust, then verify”. The debates that swirled around the project were central to how government would do business in the future. What should the relationship between government and business look like? When is government oversight required? What does that entail? When is regulation required? The debate started to settle some core practices in place today, although we still seem to have these discussions.

Then there is the bribery of Congress. Is it ever valid for a Congressman’s vote to be based on the money they will make because of the vote? Americans have always had a distaste for “buying votes”. And yet, our federal congressman are generally much wealthier after they leave Congress, than before they get there. I wonder why that is?

Clearly some projects, such as the Transcontinental Railroad, are so important that they need government backing to succeed. Not only that, they are so embedded in our society, that they must be done in an organized fashion managed by agencies that can create consistency throughout the project. So, not allowing for Private / Public partnerships is not practical.

Even today, in the 21st century, we feel the tug of war over the appropriate use of government funding, and government intervention as we build our world. Lessons learned?

Learn More About the Transcontinental Railroad

Transcontinental Railroad

Detailed history of the Transcontinental Railroad