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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.

by
John Rosenberg

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November 7, 2010 - 12:00 am

Recently, Vice President Joe Biden told a roomful of Democratic contributors in New York City — who had paid $1000 for the privilege of hearing him — that:

Every single great idea that has marked the 21st century, the 20th century and the 19th century has required government vision and government incentive.

In the middle of the Civil War you had a guy named Lincoln paying people $16,000 for every 40 miles of track they laid across the continental United States.

No private enterprise would have done that for another 35 years.

Perhaps on another occasion the vice president can describe the “government vision and government incentive” that was “required” for the ideas of, for starters, Darwin, Marx, Freud, and Einstein. Of course, the vice president might simply have meant (it is often difficult to determine his meaning from his words) that every government idea requires government vision, but that tautology would seem to be even emptier than most campaign pronouncements that strain for profundity.

In any event, let us limit our concern now to the one idea he mentioned, the transcontinental railroad. That project, though undoubtedly grand, may have been a more revealing precursor of the fruits of Obama administration public policy than Professor Biden realizes.

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.

John Rosenberg blogs at Discriminations.
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