A Lesson from Railroad History
Government tends to corrupt the market
Kevin Schmiesing is research director at the Freedom & Virtue Institute and editor of the Freedom & Virtue Review.
The US government’s increasing involvement in the energy sector—including indirectly related industries such as automobile production—provides opportunity for reflection on the role of government in economic progress and technological advance. One telling chapter in that larger story is the federal government’s effort to promote the development of the American West through the building of transcontinental railroads.
The tale is told memorably by Burton Folsom in a chapter of his 1987 book, The Myth of the Robber Barons1 Goaded by corporate and political interests, the US government in the mid-nineteenth century decided to catalyze the settlement and economic development of the West by subsidizing the construction of railroads that would link the east and west coasts of the nation and provide access to the vast interior. Two railroad companies—the Union Pacific and the Central Pacific—competed for land, funding, and other government benefits as they struck out across the daunting western landscape. The symbolic culmination of this transportation infrastructure building frenzy was the driving of the golden spike at Promontory Point, Utah, in 1869, joining the Union Pacific and Central Pacific lines and uniting the country by completing the first transcontinental railroad.
Left out of this summary are the manifold weaknesses of the transcontinental railroad project. Government payments in cash and land were awarded by the mile, creating a set of incentives that weren’t necessarily conducive to the common good—or even the good of the railroad companies themselves. Engineers and builders emphasized speed and mileage to the neglect of all other considerations, including the selection of efficient routes and the use of durable construction materials and techniques. The shoddy tracks soon needed costly repairs, pushing the railroad companies to rely even more on government largesse—and eventually forcing them into bankruptcy.
But there was a third railroad company that did things differently. The Great Northern, run by James J. Hill, was “the best built, the least corrupt, the most popular, and the only transcontinental never to go bankrupt.” It was also, not coincidentally, the only one that charted a course independent of government support.
Without the corrupting incentive of government subsidies, Hill’s approach emphasized economic feasibility. This meant building more slowly but also more effectively. The Great Northern promoted settlement and agricultural and commercial development as it went, instead of pushing through unsettled territory and trying to draw pioneers along afterward. It also meant laying out routes and building with materials that were designed for long-term durability. Careful planning to achieve manageable gradients and curves made for longer lasting roads and more efficient travel. The Great Northern thus not only built better railroads, it also ran them profitably after they were built.
The chapter on Hill and the Great Northern is but part of Folsom’s larger work, which is a bracing corrective to the dominant narrative—regnant in both popular and academic history—of the exploitive capitalism of the Gilded Age, replete with sinister characters such as J. P. Morgan, Jay Gould, and Cornelius Vanderbilt. The foundation for this dominant narrative was laid by Matthew Josephson’s 1937 book, whose title gave the cast of characters their fetching moniker, The Robber Barons. In his foreword to the 1962 edition, Josephson notes that the term was first used in an 1880 pamphlet issued by Kansas farmers protesting the actions of railroad executives. All the more important, then, was Folsom’s project to clarify, with respect specifically to railroad construction, the distinction between genuine market entrepreneurship and political entrepreneurship. The former succeeds by innovating and increasing inefficiency: by offering better or less expensive goods and services and thereby serving the good of all. The latter succeeds by manipulating government to gain advantage over competitors; its normal outcome is waste and stagnation rather than efficiency and innovation.
Folsom’s book thus modified the Josephson narrative not by denying that there were businessmen who unjustly exploited others for gain, but by pointing out that in this project government was their ally rather than their adversary. While the dominant narrative—including Josephson’s New Deal-era treatment—implies that expanding government intervention in the economy is the solution to the damaging effects of unrestrained business activity, Folsom’s account suggests that the market is a more impartial and therefore more reliable corrective.
While Folsom’s perspective exhibits clear conservative tendencies, there are interesting points of contact with more mainstream histories. The well-regarded Stanford University historian Richard White’s 1991 history of the American West, “It’s Your Misfortune and None of My Own,” is an early example of a general survey using the “new western history” approach, which emphasized previously marginalized groups such as Native Americans.2 Although White does not explicitly draw the same lessons about government and markets, his account corroborates Folsom’s in important ways. The action of the federal government—profoundly important in the development of the West—is also a profoundly ambivalent force. Its military protects settlers, but it also massacres Indians. Its land policies furnish opportunity for impoverished farmers, but they also encourage environmental degradation. And its railroad promotion helps to connect the country and expedite commerce, but it also enriches private individuals at the expense of the common good.
White’s focus is on the other major railroads that dominated the West in the nineteenth century: besides the Union Pacific and Central Pacific, also the Southern Pacific, the Northern Pacific, and the Atchison, Topeka, and Santa Fe. He recounts in gory detail the machinations characterizing the close relationship between these companies and government bodies, with the resulting inefficiency, corruption, and neglect of environmental impact and private property rights. Yet, he also includes a brief section on the Great Northern, “the only railroad built without major government aid” and also “the most successful western railroad.” White is not as uniformly complimentary as Folsom: “In part, profits came from careful management,” he writes, “but they also came from cutting workers’ wages when hard times permitted and from keeping rates high for farmers when they had no other options for shipping their wheat.” Nonetheless, the contrast with the other major railroads is clear. Hill “was a manager and businessman, not a speculator turned railroad builder like Gould,” and he “oversaw his railroad with an exacting eye for detail.” The Great Northern was “from the beginning a well-built, superbly engineered, and conservatively financed line.” These traits were conspicuously absent from the railroads that relied on alliance with government.
As vocal proponents on both the left and right advocate strong involvement by the federal government in economic and technological development, the story of the railroads and the West raises a caution flag. The national state certainly possesses the resources to accomplish impressive feats, to alter the geographical and human landscape in monumental ways. But how optimistic should we be that those ways are to the long-term benefit of our world and the people who inhabit it? The historical record doesn’t inspire confidence.
The book was originally published under the title Entrepreneurs vs. The State (Herndon, VA: Young America’s Foundation). Subsequent editions in 1991 and 1996 carried the new title.
White later expanded his section on railroads into a book-length treatment: Railroaded: The Transcontinentals and the Making of Modern America (New York: W. W. Norton, 2011).