Friday, July 18, 2008

No government subsidies for the transcontinental railroad

A common error when discussing government financing of the Central and Union Pacific Railroads is that it is mistakenly thought to include government subsidies, forgetting that the government railroad bonds had to be and were repaid in full with interest, that according to the U.S. Supreme Court the government and the railroads shared equally in the increased value of the land grants, and that the U.S. government got a billion dollar discount on mail and other transportation costs.

So although the CPRR spoke of a "subsidy" in their bond prospectus, the net economic result was that the bonds were a repaid loan (not that the railroad didn't attempt unsuccessfully to avoid repaying), the worthless western lands to the extent they were made valuable by the completion of the railroad (much was so arid that it remained worthless), more of the value went to the government and eventual landowners than to the railroad, and the U.S. government received a financial windfall due to the prolonged subsidy that the railroads provided to the U.S. government for its transportation costs as part of the deal to fund the construction.