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Land Grants to American Railroads: Social Cost or Social Benefit?

Published online by Cambridge University Press:  11 June 2012

Lloyd J. Mercer
Lloyd J. Mercer
Affiliation:
Assistant Professor of Economics, University of California,Santa Barbara
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Abstract

Every schoolboy knows that a large fraction of the American public domain was granted to pioneer railroads in the nineteenth century. But was the federal land-grant policy socially beneficial? Professor Mercer provides one imaginative answer based upon an analysis of the economic issues involved and estimates of the private and social rates of return on the investment in the subsidized railroads.

Type
Research Article
Information
Business History Review , Volume 43 , Issue 2 , Summer 1969 , pp. 134 - 151
Copyright
Copyright © The President and Fellows of Harvard College 1969

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References

1 The Central Pacific system discussed here includes the Central and Southern Pacific Railroads and lines leased and operated by them. The Union Pacific system includes the Union Pacific Railway Company and leased lines operated by it.

2 Morison, Samuel Eliot, The Oxford History of the United States, 1783–1917 (London, 1927) II, 348–349.Google Scholar Essentially the same statement is in Morison, and Commager, Henry Steele, The Growth of the American Republic (New York, 1942), II, 108.Google Scholar

3 Miller, William, A New History of the United States (London, 1958), 267.Google Scholar

4 Fielding, R. Kent and Campbell, Eugene E., The United States: An Interpretative History (New York, 1964), 319.Google Scholar

5 Shannon, Fred A., “Comment on the Railroad Land Grant Legend in American History Texts,” Carstensen, Vernon, ed., The Public Lands (Madison, 1963), 159.Google Scholar

6 Shannon, Fred A., America's Economic Growth (New York, 1940), 363.Google Scholar

7 Morison and Commager, Growth of the American Republic, 112–113.

8 Clark, Dan Elbert, The West In American History (New York, 1937), 552.Google Scholar

9 David Maldwyn Ellis, “Comment on the Railroad Land Grant Legend in American History,” The Public Lands, 148.

10 Supporters of the land grant policy at least implicitly hypothesized that the rate of return on the pioneer railroad investment to the private owners would be less than the market rate of return without the land grants, at least equal to the market rate with the land grants, and that the rate of return to society would exceed the market rate.

11 Soule, George, Economic Forces in American History (New York, 1952), 106.Google Scholar

12 Carment, Harry J. and Syrett, Harold C., A History of the American People Since 1865 (New York, 1958), II, 93.Google Scholar

13 Daggett, Stuart, Chapters On The History Of The Southern Pacific (New York, 1922), 58–59.Google Scholar

14 Craven, Avery and Johnson, Walter, The United States: Experiment in Democracy (Boston, 1947), 443.Google Scholar

15 Beard, Charles A., Beard, Mary R., and Beard, William, The Beards' New Basic History of the United States (Garden City, N.Y., 1960), 271.Google Scholar

16 Handlin, Oscar, The History of The United States (New York, 1968), II, 22.Google Scholar

17 Krooss, Herman J., American Economic Development (Englewood Cliffs, N.J., 1966), 302.Google Scholar

18 This is true from an economic standpoint and not only a “strictly legal” standpoint as maintained by some. Cf., Charles S. Morgan, “Problems in the Appraisal of the Railroad Land Grants,” The Public Lands, 165–169.

19 Fogel, Robert W., The Union Pacific Railroad: A Case in Premature Enterprise (Baltimore, 1960).Google Scholar

20 Ibid., 96, 102.

21 Fogel's results on this point have been misinterpreted. Cf. North, Douglass C., Growth and Welfare in the American Past: A New Economic History (Englewood Cliffs, N.J., 1966), 135.Google Scholar After citing the rates of return estimated by Fogel, North states: “Clearly in this case the social rate of return indicates that railroad construction contributed to economic growth, and the land grants helped to increase the private rates of return to make it worthwhile to construct the railroad.” (Italics added).

By Fogel's estimation the Union Pacific was a profitable enterprise without the land grant subsidy. He does not estimate the private rate of return with the land grant subsidy. Hence it is impossible on the basis of his estimates to determine the extent to which the land grant affected private profitability.

22 The life of railroad equipment of the period is usually estimated as 20 years while that of structures is placed at 50 years. The remaining component of the capital stock, track, had a much shorter life span. Equipment and structures apparently represented more than half of the value of total investment in railroads of the period. The bulk of the original investment in the Union Pacific Railroad occurred in 1868 and 1869. Thus, a more accurate approximation to the life of the original investment in this railroad would be a period ending in the late 1880's.

23 See the Appendix for more detailed explanation.

24 For detailed explanation of the construction of the variables used in the computation of the net receipts stream see, Mercer, Lloyd J., “The Central Pacific System; An Estimate of Social and Private Rates of Return for a Land-Grant Aided Railroad System,” Ph.D. Dissertation, University of Washington, 1967Google Scholar, appendices to Chapters III and IV. The same methods and data sources are used in computation of the private rates for the Union Pacific system.

25 U.S. Federal Coordinator of Transportation, Public Aids to Transportation (Washington, 1938), II, 60.Google Scholar

26 U.S. Bureau of the Census, Historical Statistics of the United States, 1789–1945 (Washington, 1949)Google Scholar, Series LI-14, pp. 232–233.

27 Alfred Cowles, 3rd and Associates, Common Stock Indexes, 1821–1937 (Bloomington, Indiana, 1938), 404.Google Scholar

28 See Appendix for explanation.

29 All comments here which depend on the estimated social rate of return strictly apply only to the Central Pacific system, although there is a strong presumption that the relative magnitude of the social rate of return will be comparable for the other major land-grant aided systems.

30 Provided that income distribution would have been similar in both cases.