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A Tale of Two Railroads

Larry LaBorde
Feb 13, 2006

Around the middle of the nineteenth century with "manifest destiny" on the brain a railroad bill roared through congress. In 1862, with the Southern states out of the way in congress, the Northern interests were able to freely pass one of the largest boondoggles ever run through congress to date in the form of "internal improvements". The Pacific Railroad Act was passed and the Union Pacific Railroad received a federal corporate charter (much like the 2nd National Bank).

The railroad began construction in 1864 and the history books state it was completed in 1869 at Promontory Point, Utah. What they fail to mention is that most of the hastily built track (some thrown down at a rate of almost _ mile per hour) had to be rebuilt for the next five years up to 1874. The UP and the CP both claimed that there was not enough investment capital in the world to finance such an undertaking and therefore the US government would have to subsidize the effort. The US government promptly started throwing money at the project.

Congress, without the South to object, passed a bill to grant subsidies of $16,000 to $48,000 per mile of track laid depending on the terrain difficulty. Ten square miles or 10 sections of land (1 section = 640 acres or a tract of land 1 mile x 1 mile square) was also granted for every mile of track laid. A few years later congress doubled the land grant per mile of track laid and extended favorable loans as well.

But even all these favorable terms were not enough for the executives of the railroads. They spent most of their time lobbying congress instead of concentrating on the construction of the railroad. Credit Mobilier Company was formed by the railroad management team during the construction of the railroad. The railroad management team then contracted out the actual construction of the railroad to Credit Mobilier at outrageous rates (to the benefit of the management team and to the detriment of the other railroad stockholders and taxpayers). Credit Mobilier sold General William Tecumseh Sherman or Kerosene Billy as he is known in the South, land near Omaha at a small fraction of its fair market value. Shortly afterwards the general was quoted as saying that the transcontinental railroad was "the work of giants".

Union Pacific was financially crippled after the construction cost overruns but Credit Mobilier made money hand over fist. Yearly dividends from Credit Mobilier usually were several times in excess of its par stock value. Many members of congress were sold stock in Credit Mobilier on credit and were allowed to pay for it from the yearly dividends that were in excess of the cost of the stock itself. The scandal ran for years until someone got too greedy and blew the whistle. No one went to prison but the Republicans lost many seats in the next election as well as their majority in the house. Both of Grant's vice presidents were involved in the scandal. While President Grant presided over one of the most corrupt US governments he did not seem to profit himself. He died poor with a terminal illness desperately racing death to finish his memoirs to leave some means of financial support for his family.

The Credit Mobilier scandal in 1874 caused congress to pass more bad legislation. In an effort to close the barn door after the horses were already out they passed restrictive legislation that required the railroad to obtain acts of US congress to make normal management decisions. That ultimately sealed the doom of the UP railroad and they eventually went bankrupt in 1893.

Contrast this story with that of the Great Northern Railroad built privately without any government help by James J. Hill. Hill was born a poor boy that saved his money and worked his way up. He first purchased the troubled Northern Pacific railroad in Minnesota in 1873. He worked hard and turned the NP around by paying attention to the details. Hill worked with farmers near his railroad and introduced crop rotation and other progressive farming techniques. Hill felt that his customers had to be successful for his railroad to be successful. He was very much against any type of government subsidies. He felt railroad subsidies from the government were helping his competitors with his own tax dollars. Hill's Great Northern Railroad purchased the land and paid for all the construction costs for its transcontinental railroad. Hill built his railroads properly using the best materials and routes available. His solid granite bridge across the Mississippi river and his search for the legendary low grade Marias Pass through the Rocky Mountains are testaments to his obsessive quest for quality. Hill was always trying to shorten, straighten and level his railroad so that it became the best built and most profitable railroad in the country. Hill's railroad was so efficient that he was able to cut rates year after year.

Compare these two railroads. One built at great expense to the taxpayers that went bankrupt. The other built by private industry that lowered rates for its customers (at least until the Interstate Commerce Commission forced price fixing and Hill could no longer continue to lower rates). Government programs simply tend to promote waste and mismanagement. Why to we continue to pursue wasteful government sponsored/subsidized programs even to this day instead of private solutions? President Jefferson said that government that governs least governs best. Where are the Jeffersons today to fight wasteful government programs? Next time you hear someone talk about national health care or national retirement (social security) or national/government sponsored anything tell them, A Tale of Two Railroads.

Larry LaBorde
Silver Trading Company

Larry lives in Shreveport, LA with his wife Puddy, and sells precious metals at the Silver Trading Company.

Larry can be contacted at You can view his web site at

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"Please note that I am by no means a financial advisor and all investments should only be made after performing your own due diligence." -Larry


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