Misconstruing History, with Professor Biden
Government incentive helped build the transcontinental railroad ... but not without wasting tens of millions, enabling massive fraud, and running the Union Pacific company into the ground, ruining its shareholders.
November 7, 2010 - 12:00 am
The following excerpt describing one of the ripest fruits of that earlier policy is taken from an essay by New Yorker financial columnist James Surowiecki, and presented by PBS as one of the features surrounding its film on the transcontinental railroad:
An Attractive Deal
The Crédit Mobilier scam was born out of a simple reality: in the 1860s, the U.S. government wanted a transcontinental railroad more than investors did. While a railroad across the Rockies had a glorious air to it, the project also carried an enormous amount of risk, and risk is generally something investors prefer to avoid. As a result, when Congress chartered the two companies — the Union Pacific and the Central Pacific — that would build the transcontinental railroad toward each other, it had to make the deal as attractive as possible. (Hundreds of thousands of dollars in bribes, by all indications, also had something to do with the legislators’ largesse.) By the time construction on the Union Pacific really got going (after an initial attempt quickly ground to a halt), the Union Pacific had been given huge land grants for each mile it completed, mineral rights on the land, and hefty subsidies for construction. The result was that what had previously looked a fool’s errand suddenly became a seemingly sure thing.
Paying Themselves to Build It
Not sure enough for the men who controlled the Union Pacific, though. There was still the chance, after all, that even with the subsidies and land grants, running the railroad might not be a profitable endeavor. In fact, Thomas Durant, who was vice-president of the UP in its early days, was convinced that all the real money to be made was in constructing the road, not operating it. So Durant and his fellow promoters came up with a seemingly foolproof plan: instead of paying outside contractors to build the railroad, the UP’s biggest stockholders would just pay themselves. They took over an ephemeral construction company, the Crédit Mobilier of America, which just happened to win the contract to build 667 miles of Union Pacific railroad. The Crédit Mobilier charged the railroad tens of millions of dollars more than the actual cost of construction, all of which went right into the pockets of the men who were supposedly running the Union Pacific. By the time they were done, they’d cleared at least $23 million (and perhaps considerably more), and the UP was on the verge of bankruptcy. Everyone who had invested in the railroad but not the construction company found themselves with nearly worthless securities on their hands.
And so it went at perhaps the largest shovel-ready, government-financed project in American history. Perhaps if they’d known how much it would cost them, taxpayers would have preferred to wait 35 years for private enterprise to provide the shovels.