Corruption and the Transcontinental Railroad
Building a railroad across America was a remarkable engineering feat. However, the alliance between corporations and government that built the railroad set a precedent for the wasteful and corrupt mismanagement of taxpayer money that flourishes today.
In 1862, President Abraham Lincoln signed the Pacific Railway Act into law, which created two railroad corporations—the Central Pacific and the Union Pacific—that would build a railroad across the continent. Building the railroad was such a key goal of Lincoln and his fellow Republicans that they spent millions of taxpayer dollars on construction at a time when millions were already being spent each day fighting the Civil War.
The Competing Railroads
The Central Pacific (CP) began laying track eastward from Sacramento, California, and the Union Pacific (UP) was to lay track westward from Council Bluffs, Iowa. Eventually the two lines would meet, and this line would connect to the eastern rail networks to become the first transcontinental line.
The railroad companies were given taxpayer-funded government bonds and enormous tracts of land with which to build. The companies soon hired lobbyists to encourage the politicians in Washington to keep the subsidies flowing by exchanging stocks for votes. Since the government was funding construction, the companies were in no hurry to link their lines; in the first two and a half years of work, the UP line was still only 40 miles outside Omaha, Nebraska.
The UP especially benefited from government generosity. Its head, Thomas Durant, had bought land in Nebraska in the hopes that the government would select that site for construction. Those hopes became reality when Durant’s lawyer and chief lobbyist—Lincoln—was elected president in 1860. The Iowa delegation had helped to nominate Lincoln, so when the railway law passed in 1862, Lincoln returned the favor by selecting Council Bluffs as the UP’s eastern terminus.
Capitalizing on Government Generosity
Because the railroad companies were funded by taxpayers, there was less incentive to function efficiently or responsibly. The companies were paid based on the terrain on which they built, with rougher terrain being worth more. So company executives naturally selected roundabout routes on hills and through mountains, even though such routes were neither efficient nor safe. The cheapest supplies were also used, which virtually guaranteed shoddy workmanship and the need for future repairs.
Since work was funded by the government, executives often stole from their own companies for personal gain. Stocks were manipulated, as bosses bought struggling eastern rail companies, spread rumors that the transcontinental line would link to these companies, then sold them when their stock rose. This scheme raised an estimated $5 million.
Executives also spent large sums of money entertaining influential politicians instead of managing their businesses. Meanwhile, members of Congress argued over the route, as nearly every congressman wanted the line to go through his district or state. When the CP and UP came close to linking, they veered away from each other to continue the flow of government money. Congress finally demanded that they link at Promontory Point, Utah.
Perhaps the most tragic aspect of building the line concerned the fate of American Indians along the route. To stop Indian attacks on workers, executives hired hunters to slaughter buffalo, thus depriving the Indians of their primary food and clothing source. Indians responded by intensifying their attacks, and executives called on the government to help. U.S. troops were sent west, and the Plains Indian Wars that ensued led to the near genocide of the American Indian by the end of the 19th century.
The widespread fraud and abuse surrounding the transcontinental line resulted in the greatest scandal of the 19th century. UP executives created a construction company called Credit Mobilier of America, then hired the company to build its portion of the rail line. Since the UP stockholders also owned Credit Mobilier stock, the executives essentially hired themselves to do the work.
The job cost taxpayers $72 million, even though the line only cost $53 million to build. When members of Congress began questioning this shady arrangement, Congressman Oakes Ames was assigned to distribute stock options and free railroad passes in exchange for silence. Those receiving the options included Vice President Schuyler Colfax and future President James A. Garfield.
The press exposed the scandal three years later, forcing Congress to investigate. Over 30 congressmen admitted to receiving stock options. Ames was censured for his role, but nobody else was punished. Technically no laws were broken since Congress conveniently passed no legislation outlawing such shady dealings. Nevertheless, Americans were enraged by this wasteful and unethical abuse of their tax dollars.
The scandal exposed a massive misuse of taxpayer funds by the corrupt alliance of government and business. However, Credit Mobilier was only one of many scandals and abuses perpetrated in the construction of this historic railroad.
Completion and Precedent
Celebrations took place throughout the country when the CP and UP linked at Promontory Point in 1869. Despite all the waste and fraud, this was one of the most remarkable engineering feats of the 19th century. In seven years, about 20,000 workers laid 1,775 miles of track, and coast-to-coast travel was reduced from six months to one week. Railroad executives had been given 23 million acres of land and $64 million in taxpayer money.
Despite the celebrations, the transcontinental railroad was not yet complete because its eastern terminus was at Omaha. Trains had to be ferried across to Missouri River until a bridge finally connected Omaha to Council Bluffs, Iowa in 1872.
Less than three years after the ceremony at Promontory Point, the UP declared bankruptcy due to vast inefficiency and waste. The CP ultimately went under as well. The shoddy workmanship on the line led to continuous repairs to bridges, viaducts, tunnels, rails, ties, and beds.
Following completion of the railroad and the revelations of Credit Mobilier, Congress passed drastic regulations on railroads that made it extremely difficult for private entrepreneurs to run an efficient rail company. Consequently, most government-subsidized railroads went bankrupt because they were bogged down by regulations and handicapped by the inefficiencies of taxpayer-funded “public works” projects.
Many historians have claimed that the great railroads of the late 19th and early 20th centuries could not have been built without government subsidies. However, the entire British railroad system was built with private funds, and the Great Northern Railroad under James J. Hill was a private transcontinental company that prospered when government-funded companies were going under.
As extraordinary as the transcontinental railroad was, it set an unfortunate precedent in which corporations turned to government to subsidize their projects at taxpayers’ expense. This ushered in the era of crony capitalism that still exists today in the form of bank and industry bailouts, and the diversion of taxpayer funds to favored industries. The most recent example is the Solyndra scandal, in which a solar panel company declared bankruptcy after receiving nearly $1 billion in taxpayer money.
Corruption, fraud, waste, and mismanagement still handicap projects undertaken by the government-corporate partnership, and this handicap will continue until the people elect politicians willing to break this dangerous alliance.