Not Worth a Transcontinental: Railroading a Nation into Prosperity

 

In an earlier article published here entitled “How the Patriots’ America Became the Progressives’ America” I distinguished between the steady progress Adam Smith expected his laissez faire arrangement to make in The Wealth of Nations and the brute fact that America’s economic history has not been a steady record of economic growth, but rather a recurring series of economic ups followed by pitiless economic downs. That’s hardly progress. My contention was that the long succession of boom-and-bust business cycles caused not by free market activities, but by corporate welfare policies, alone, created the need and demand for social welfare reforms from the Progressive Era to the New Deal and beyond.” In that article I made brief mention of the role the bankruptcy of the Union and Pacific Railroads played in fomenting the devastating, five- year depression that began as the Panic of 1873. This article takes a far-more in-depth look at the events surrounding that fateful Panic.

American capitalism has had its ups and downs, as in the country’s long succession of boom-and-bust, business cycles. Periods of robust economic growth were interrupted by devastating financial panics that struck suddenly in 1792, 1819, 1837, 1857, 1873, 1893, and 2007. And then came the Great Depression of the 1930s, “stagflation” in the late-1970s, the savings-and-loan crisis of 1987, and a sub-prime housing meltdown that sparked a “Great Recession” by 2008.

What went wrong? This is not how Adam Smith’s capitalist experiment was supposed to turn out.

What went wrong? This is not how Adam Smith’s capitalist experiment was supposed to turn out. The truth is, as Samuel Pentengill stated it at the height of the Great Depression, “When it is said that free enterprise has failed, my answer is that we have not permitted it to work”[1]. (in Jefferson The Forgotten Man, 1938, p. 135). It turns out that government does far more harm to a country’s economy not when it regulates and impedes, but when it subsidizes and “promotes” economic growth.

Nowhere is this more evident than in national project to connect the Atlantic and Pacific oceans. The bankruptcy of the Union and Central Pacific railroads (along with the Northern and Southern Pacific roads) in 1873 sparked a financial panic that would last more than half a decade. Without the federal government’s generous cash subsidies and land grants given to the railroads, the economy would not have grown so fast. But it also wouldn’t have tanked so hard, spreading grievous hardship across the land for more than five long years.

In fact, the long succession of financial panics and market crashes were not caused by free market activities. It wasn’t Adam Smith’s laissez faire dream that produced the prolonged suffering. If we would distinguish laissez faire capitalism from what can best be designated as crony capitalism, – the corrupt use of public power to advance the private, pecuniary interests of politically well-connected, pressure groups beginning with many of the nation’s businessmen – we would get a much better handle on what caused the many commercial crises. It was CORPORATE welfare policies, alone, that precipitated the many panics and so sparked the “need” and demand for SOCIAL welfare reform from the Progressive Era to the New Deal and beyond.[2] Here is what led to and resulted from the Panic of 1873:

Federal cash subsidies for each mile completed ranged from $16 thousand (across flat land) to $48 thousand (between mountain ranges).

1862 was a most fateful year. Far more important for the future of the republic than the Civil War battles fought that year was a piece of legislation that passed both houses of Congress and was signed into law. The Union and Central Pacific Railroads were not begun as “risky” commercial ventures organized by far-sighted, free-market entrepreneurs.[3] By 1862, with the South conveniently “out of town” and no longer represented in Congress, northern “capitalist” interests ran riot in Congress. The Pacific Railway Act of 1862 authorized the construction of a transcontinental railroad stretching from Omaha, Nebraska to the Pacific Ocean. Every encouragement was offered by Congress to assure the project’s success. Government grants of cash and land accompanied the project from the start. Federal cash subsidies for each mile completed ranged from $16 thousand (across flat land) to $48 thousand (between mountain ranges). And the Union and Central Pacific corporations would be awarded two miles along the tracks’ right of way. By 1864, the railroads were awarded 20 miles of land on alternating sections upon certified completion of so many miles by certain established dates. In all, the railroads were treated to a total of 12 million acres of land that could be profitably sold, what with that land being so close in proximity to major transportation outlets.

On May 10, 1869, Leland Sanford, standing at the intersection of the final tracks laid by the Union and Central Pacific roads at Promontory Point, Utah, hammered a golden spike into the ground. It was the last spike needed to complete the publicly-financed transcontinental project. The Union Pacific and Central Pacific Railroads were now connected as, by extensions, were the Atlantic and Pacific Oceans. It was a breathtaking engineering achievement and a day full of celebration. Sanford’s blow was to be sent by telegraph to Washington where a magnetic ball was to drop from a pole on the Capital Dome “setting off celebrations in cities and towns across America.” Sanford missed his mark. But an alert telegraph operator slammed his key to mimic a sledgehammer’s boom. Nathan Miller concluded: “So even at the very end, fraud attended the building of the transcontinental railroad – just as it had nearly every step of the way.”[4]

It was later learned that that $450,000 in bribes was handed Congress by interested parties. Representative Elihu Washburn of Illinois went to the well to deplore what he called “the greatest legislative crime in history.”[5] $450,000 proved to be small potatoes. The Grant Administration put the Credit Mobilier of America in charge of construction. It was estimated that cost of constructing the Union Pacific came to $50 million. The cost to America’s taxpayers: $94 million. Facing the threat of a Congressional inquiry, Rep. Oakes Ames of Massachusetts, a Credit Mobilier director, directed a large block of stock into his colleagues’ hands, where it “will do the most good to us.” Such prominent American “statesmen” as James Blaine, James Garfield, and House Speaker Schuyler Colfax were all implicated in the scheme to defraud American taxpayers.”[6]

On Sept. 4, 1872, the New York Sun exposed the Credit Mobilier scandal. “THE KING OF FRAUDS,” the headline screamed. The piece was subtitled “How the Credit Mobilier Bought Its Way Through Congress.” It was, said the Sun, “the most damaging exhibition of official and private villainy and corruption ever laid bare to the gaze of the world. . . .The Vice-President of the United States, the Speaker of the House of Representatives, the chosen candidate of a great party for the second highest office in the gift of the people, the chairman of almost every important committee in the House of Representatives – all of them are proven by irrefutable evidence to have been bribed.”[7]

The railroad industry became the economic spark that set the post-Civil War economy ablaze. It touched off a great commercial/industrial boom and fueled a wild roller coaster ride for the country. Unfortunately, after reaching the peak, it would be all downhill from there.

Completed in 1869, the Union and Central Pacific Railroads declared bankruptcy and fell into receivership by 1872.

Completed in 1869, the Union and Central Pacific Railroads declared bankruptcy and fell into receivership by 1872. Cornelius Vanderbilt didn’t know what to make of this business of building railroads “from nowhere to nowhere at public expense.” But it was another railroad bankruptcy in 1873 that brought down the economic curtain and drove the nation into a ditch it would not completely climb out of for the remainder of the decade. The principal progenitor of that ill-fated project was one Jay Cooke, the preeminent financier and Washington “insider” of the period.

Jay Cooke took up space in the halls of power, making his mark by marketing Civil War bonds to the nation and a good part of Europe. He was the North’s most productive “banker” and was recognized and rewarded for his service. Not much is said about his participation in the First Transcontinental Railroad project. But running along a parallel track, he used his influence to wrest from Congress lucrative land grants for his long-dreamed of Northern Pacific Railroad. Given his track record, many a financial type knew they needed to get aboard before this financial locomotive left the station. This was the iron horse you wanted to place your bet on. It was being engineered by Washington’s great friend and benefactor, the Honorable Jay Cooke.

Cooke did not get all he hoped for from Congress. His Northern Pacific would not receive cash subsidies for any of the miles of track laid. Writing about Jay Cooke’s Gamble, railroad historian John Lubetkin reports that:

Cooke, in the back of his mind, expected Congress to give the Northern Pacific both land grants and . . . upon track certification, at least bond guarantees. It was no more than what had been done for the Central and Union Pacific roads . . . . But the mood of Congress had changed, a northern route served no vital national interest, most of the land was devoid of settlement, many neutral observers felt that a[nother] transcontinental railroad would not be needed for decades and there was strong opposition from Wisconsin, Illinois, Indiana, Ohio Pennsylvania and New York. President Grant was also against cash payments or bond guarantees but told Cooke that he would be neutral. Ultimately, Cooke asked Congress only to amend the Northern Pacific’s charter to let him sell bonds, secured by property mortgages and the 47 million-acre land grant Congress awarded the NP. Even this was difficult; but when it came to distributing cash, stock, jobs, consultancies, waivers of debt, and other gratuities, the honorable Mr. Cooke never hesitated. His financial wand touched senators, congressmen, governors, and the vice president – men who voted or controlled votes and ‘friends’ who simply wanted to be paid off.  . . . . [One political player] noted that Cooke ‘saw in the hungry politician a force which would work against him if he did not pay, and being a man of action he chose to pay for the privilege he would be given.[8]

The collapse of Jay Cooke & Co. in 1873 launched the first full-scale depression of the Industrial Age. For the next 5 years the U. S. economy shrank. Within three years half of the nation’s railroads were in bankruptcy. Half of the country’s iron producing capacity was likewise closed for business and coal production declined precipitously. A piece published in the Washington Post on July 1, 2011, by Francois Furstenberg summed up the impact of Jay Cooke’s crash:

As demand collapsed, businesses slashed payrolls and reduced wages, and a ruinous period of deflation began. By 1879, wholesale prices had declined 30 percent. The consequences were catastrophic for the nation’s many debtors and set off a vicious economic cycle. In the face of economic calamity and skyrocketing unemployment, the government did, well, nothing. No federal unemployment insurance eased families’ suffering and kept a floor on demand. No central bank existed to fight deflation. Large-scale government stimulus was a thing of the distant future.

The failure of Jay Cooke’s bank set off a chain reaction of bank failures. Factories soon began to lay off workers and the country’ economic fortunes tumbled. On Sept. 20, 1873, the stock market closed and remained shut for ten days. Within two months, some 55 railroads were insolvent and another 60 fell into receivership by year’s end. Railroad building had been the nation’s leading industry, providing work for steel mills, lumber mills, coal mines, foundries, carting services, farmers, and ranchers who had to supply food all along the line. Eighteen thousand businesses failed between 1873 and 1875. By 1878, unemployment reached 25%. Building construction was put on hold, workingmen’s wages were slashed, real estate values plummeted, and the market value of corporations declined precipitously.[9]

The patriotic project designed to spur economic growth and bind the nation together proved an unmitigated disaster for the country.

The Great Railroad Strike of 1877 began on July 14. The American Railway Union’s chief demand: Restore the last wage cut or else. In the days that followed, local police, state militia, and federal troops would be called out to stop the violent destruction of railroad property and restore rail service. Violent confrontations between strikers and uniformed officers and troops erupted with dozens dead and wounded in battle. The strikers learned that where class struggle mattered most, American government would take the side of capital and back the propertied classes in their “exploitation” of the workingman. Governors did no less in distributing generous amounts of public land and taxpayer-paid subsidies to so many “patriotic” projects. The Sherman Anti-Trust Act, ratified in 1890 and designed to restrict commerce that acted “in restraint of trade,” was more often used to bust up union-led strikes than curtail rapacious businessmen. Pittsburgh militiaman sent to confront the strikers in 1877 reported that crowds were guided by “one spirit and one purpose among them -– that they were justified in resorting to any means to break down the power of the corporations.”

The patriotic project designed to spur economic growth and bind the nation together proved an unmitigated disaster for the country. It was the source of the corruption, hardship, acrimony and strife that is constantly attributed to capitalism’s recurring booms and busts. Had there been no Railway Act of 1862, so much trouble would have been avoided. In the end, it was “capitalism” that was unjustly blamed for the calamity. As in all earlier and later crises of capitalism, it was not free market activities, but CORPORATE welfare policies that, alone, engineered the dastardly Panic of 1873 and, beginning then and there, created the “need” and demand for SOCIAL welfare reform from the Progressive Era to the New Deal, to today.

 
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Notes:

[1] In Samuel Pettengill, Jefferson The Forgotten Man (NY: America’s Future Inc., 1938) p. 135.

[2]  For the Panic of 1792, see Jerome Huyler, Locke in America:  The Moral Philosophy of the Founding Era (Lawrence, KS. University Press of Kansas, 1995, pp. 279-291).  For an overall examination of the succession of panics, see Robert Sobel, Panic on Wall Street:  A History of America’s Financial Disasters, (New York, Collier Books, 1968),Charles P. Kindleberger, Manias, Panics, and Crashes:  A History of Financial Crises (New York: John Wiley & Sons, 2000), Andrew H Browning, The Panic of 1819:  The First Great Depressio, (Columbia, MI: Columbia University Press, 2019), Jessica M. Lefler, The Many Panics of 1837:  People, Politics and the Creation of a Transatlantic Financial Crisis (New York:: Cambridge University Press, 2013), John Lauritz Larson, Internal Improvements:  National Public Works and the Promise of Popular Government in the Early United States, (Chapel Hill, NC:  The University of North Carolina Press, 2001).  Robert F. Bruner and Sean D, Carr, The Panic of 1907:  Lessons Learned from the Market’s Perfect Storm (New Jersey:  John Wiley & Sons, 2007), Zephyr Teachout, Corruption in America:  From Benjamin Franklin’s  Snuff Box to Citizen United.(Cambridge, MA: Harvard University Press,2014), John Lauritz Larson, Internal Improvement:  National Public Works and the Promise of Popular Government in the Early United States Chapel Hill NC:  The university of North Carolina Press, 2001).

[3] It would be James J. Hill who was first to construct a privately-financed transcontinental railroad without any aid from any government., His Great Northern was the first transcontinental road to turn a profit and be a commercial success.    See Ayn Rand, “Notes on the History of Free Enterprise,” in “Capitalism The Unknown Ideal (NY: New American Library, 1966), pp. 96-103.

[4] Nathan Miller, Founding Finaglers and Other Scoundrels in a Fascinating History of Corruption in America from Jamestown to Teapot Dome (NY: David McKay Company, 1976)   p. 219.

[5] Ibid, p. 220.

[6] Ibid.

[7] Ibid., p. 225.

[8] M. John Lubetkin, Jay Cooke’s Gamble: The Northern Pacific Railroad, the Sioux, and the Panic of 1873, University of Oklahoma Press, 2006. p. 58.

[9] Samuel Rezneck,  (1950). “Distress, Relief, and Discontent in the United States during the Depression of 1873–78” Journal of Political Economy 58 (6): 494–512.