Science

Running head: 2.3 – CASE ANALYSIS: FUNDING THE RAILROADS 1

2.3 – Case Analysis: Funding the Railroads

Susan A. Student

Embry-Riddle Aeronautical University

2.3 – CASE ANALYSIS: FUNDING THE RAILROADS

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Abstract Funding the Transcontinental Railroad in the 19th century was a major issue for the United States Government. There were several possible courses of action. Two of these are included here as well as the problems and advantages of each. In conclusion, the rationale for government funding is presented. Keywords: railroads, intercontinental, funding, entrepreneur

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2.3 – Case Analysis: Funding the Railroads

I. Summary

The speculative benefits of a transcontinental railroad were easy enough to articulate:

there was fertile land out west for migrants to farm, gold and silver to be mined in California,

and of course it was a matter of national pride (Ambrose, 2000). According to Ambrose (2000),

the whole country was clamoring for it to be done, yet few were crazy enough to invest as “the

risks of financial failure and ruin were huge” (Union Pacific, n.d. para. 3). Ultimately, funding

was provided by the United States government via the Pacific Railroad Act of 1862, “mostly in

the form of land grants to the railroads; the railroads would sell the unused land to fund the

construction” (Ambrose, 2000, p. 47). Much of the land was all but worthless at the time, but it

was assumed that as transportation cost were reduced, the land would become more valuable

(Garrison & Levinson, 2014; Ambrose, 2000).

II. Problem

The problem is multifaceted. Unfortunately for the railroad companies, they could not

sell most of the land until after the railroad was built, and they could not build the railroad

without the proceeds of the land sales (Ambrose, 2000). Some relief came with the Pacific

Railroad Act of 1864 which doubled land grants and (more importantly) provided the ability to

borrow against the land grants by issuing bonds (Union Pacific, n.d.). However, even with

doubled bonds and the ability to borrow against them, the transcontinental railroad had major

financing difficulties (Ambrose, 2000; Union Pacific, n.d.).

On the other hand, Illinois representative E.B. Washburn (as quoted in Ambrose, 2000)

called the 1864 bill “the most monstrous and flagrant attempt to overreach the government and

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the people…” (p. 94), charging that the Wall Street elites pushing for funding were only out to

profit off the public (Ambrose, 2000). Eglin Air Force Base Archaeologist Benjamin Aubuchon

(personal communication, August 17, 2016) affirms that while the Pacific Railroad Acts were

instrumental in building the transcontinental railroad, many railroad corporations in the

Southeastern U.S. were formed with no intention of following through. In Northwest Florida,

the timber-rich land was usually promptly sold for lumber (or turpentine operations in the early

1900s) as soon as it was acquired, whereupon shareholders pocketed the profits as corporations

went bankrupt, abandoning the vast majority of the proposed railways (B. Aubuchon, personal

communication, August 17, 2016).

III. Significance of the Problem

While the public was eager to see the transcontinental line built, putting taxpayer’s

money behind the project was out of the question (Ambrose, 2000). Offering land grants was

seen as a way to fund construction with little public risk, but some felt that this was still too

much government meddling. Ultimately, those who acted in good faith by attempting to actually

build the proposed railroads had extreme difficulty funding the construction, with many risking

family fortunes and going deep into personal debt (Ambrose, 2000; Union Pacific, n.d.). Yet

others took the public land without providing anything of value in return.

IV. Development of Alternative Actions

Alternative Action 1. The U.S. government could have abstained from providing financial

assistance and allowed free market forces alone to drive development.

Advantages. This alternative would have eliminated the risk of Robber-Baron types

betraying the public trust.

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Disadvantages. Honest entrepreneurs were scarcely able to fund the rails west even with

the Pacific Railroad Acts. While the railroad certainly would have been built at some point, it

would have taken decades longer as it moved incrementally across the nation.

Alternative Action 2. The U.S. government could have limited the number of lines funded. For

example, companies could have bid on one or two lines to California, and maybe one north-south

line. The bidding could have been for the whole line or in sections. More generous land grants

would have better facilitated development and these would be feasible as total lands granted

would be drastically reduced.

Advantages. This alternative would have served to satisfy public demand with reduced

risk of Robber-Barron types betraying public trust. Furthermore, lines could be privately funded

off of the first lines as demand called for it.

Disadvantages. While the distance to California would be crossed more quickly,

privately funded lines with no land grants would have taken longer to spread. Limiting the

number of companies funded could prompt charges of government favoritism.

V. Recommendation

The demand for a transcontinental railroad was clear. It is reasonable to assume a majority of

entrepreneurs will strive to maximize profits by satisfying demand. Therefore, publicly funding

only the lines for which there was very clear public demand coupled with private refusal to

invest would have ensured that funds were used for their intended purposes. For example, if

there had been great demand for railroads in Northwest Florida, entrepreneurs who received the

land grants to build would have been foolish to simply sell the land and back out. This makes

Alternative Action 2 the superior solution to the transcontinental railroad-funding problem.

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References

Ambrose, S. E. (2000). Nothing like it in the world. New York, NY: Simon & Schuster.

Garrison, W. L., & Levinson, D. M. (2014). The transportation experience (2nd ed.). New York,

NY: Oxford University Press.

Union Pacific. (n.d.). Financing. Retrieved from

http://www.up.com/aboutup/history/overview/financing/index.htm

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