In an otherwise excellent article, John Stossel repeats a historical fallacy that is one of my pet peeves. He says:
The railroad didn’t make economic sense at the time, so the government subsidized construction and gave the companies huge quantities of the best land on the continent. [emp added]
This is one of those assertions that gets repeated endlessly until it becomes widely viewed as unquestionable fact. Indeed, it does seem self-evident because one need only look at a map of the 19th century land grants to see that the grants covered vast stretches of land that today are some of the most productive and valuable agricultural lands in the world.
There is just one problem. Most of that land today, and even more so in the late 19th century, is valuable for only one reason:
It has a railroad running though it.
There is nothing intrinsically valuable about land no matter how fertile. Land only has value if people can farm it, mine it, lumber it, build on it or pay good money just to look at it. In order to do any of those economic activities people have to (1) be able to get to the land themselves, (2) bring in supplies and tools to carry out some economic activity and (3) ship the resulting products to market at a price the customer will pay.
Prior to the railroad, any farmlands, timberlands or mineral deposits were valueless if a heavy wagon could not carry a load from the site to navigable water within a day. It’s no coincidence that even today, the most valuable real estate in the world sits around natural ports linked to inland water ways, e.g., Manhattan. Prior to railroads, this reality lead to strange economic paradoxes such as it being cheaper in 1830 to ship coal to New York from 3,000 miles away in England than to ship coal mined just a couple of hundred miles away in Appalachia.
Looking again at the land grant maps with an eye towards geography reveals that the vast majority of lands “given” away to railroads had no significant navigable waterways linking them to distant markets. For example, the largest land grant ran across modern day North Dakota, Montana and Idaho, none of which have any significant navigable waterways. Even places that look to modern eyes like they should have had water transport, e.g., Michigan or northern California, didn’t. Although Michigan is surrounded by the Great Lakes on three sides and had coast ports that rivaled those built on saltwater, the interior of Michigan was originally ruggedly wooded with no navigable waterways. Even dirt roads and farms had to be laboriously hacked through dense hard wood forest. A day’s ride inland from the Great Lakes and people found themselves in a transportation desert. On the west coast, there is not a major usable harbor between San Francisco and Portland and no navigable rivers. One of the most verdant areas of earth just sat there largely unusable before the railroad.
When the land grants were “given” to the railroads, the federal and state governments didn’t own vast tracts of “valuable” land. They owned vast tracts of worthless land. The land would only become valuable if someone built a railroad, but investors wouldn’t risk building a rail line unless it lead to valuable land that generated trade the railroads could carry at a profit.
It was a classic chicken and egg dilemma. No economically productive land, no railroad. No railroad, no economically productive land.
The land had to pay because railroads back then were tremendously expensive to build. It took the equivalent of modern billions in investment to create a useful rail line of just a hundred miles and the risk of failure was very high. In the modern world, probably only deep sea drilling rigs cost as much and pose as great a danger of failure. During the Civil War, railroads were still so expensive that most states only had one or two rail lines across the entire state. Sherman burnt Atlanta because a whopping four rail lines lead into the city making it the transportation hub of the entire Confederacy!
Because of the great expense and long payoff times, it was mathematically impossible for anyone to fund a railroad out into the unsettled boonies and make a profit. “Build it and they will come” didn’t pay for railroads. Without land grants, railroad investors would have to build the entire line out into the wilderness, then operate the line at a loss for years until the people who settled the land (only after it had a railroad) started shipping goods back to market. That could take years or decades. Covering the cost of that much capital for that long of a time would have made the necessary price for shipping the land’s eventual output far too high to make the output salable at all.
The land grants solved this problem by giving investors something they could sell at a profit as soon as the railroad finished construction. They could even sell speculators the possibility to buy the land if the government transferred ownership. Everyone knew the land would be valuable if it had a railroad, so once people saw the land could possibly have a railroad, rights to the formerly worthless land became valuable enough to be sold to fund the development of the railroad that made the land valuable.
The railroad land grants worked the same economic alchemy as the Homestead Act, transferring economically worthless land into private hands who turned it into land of great economic value. The property of the American heartland and that of America in general exist because of the positive development feedback loop the railroad land grants jump started.
It is true that there there were a lot of government abuses associated with the development of the railroads. There always are when government and land ownership collide. Most of those abuses occurred east of the Mississippi on long settled land when corrupt officials used eminent domain to steal people’s land and hand it to railroads. Usually, they did so under the same “economic development” excuse that Kelo made the law of the land today. The land grants weren’t a major part of the corruption for the simple reason that the land granted had no value without major private investment. Since no one could make money off land grants without risking a great deal of their own money, corrupt politicians shied away.
Ever since the time of the railroad land grants, people have tried to use them as an example of supposed large scale economic intervention by the state in the 19th century, or to justify big government spending or intervention today. However, the land grants differed from modern interventions and modern spending precisely in that they cost neither the government nor private citizens anything. The government didn’t have to raise taxes or spend any money. The government didn’t regulate or control anything. The government didn’t take from one group of citizens to give to another. All the government did was to promise to sign a piece of paper transferring ownership if, and only if, private investors ponied up the modern equivalent of billions to successfully build a railroad. It was if anything, a devolvement of government power and intrusion.
If that is all the government action it took to increase private investment in “green” technology (or whatever the latest fad will be when you read this) fiscal conservatives and libertarians would be giddy supporters. The conventional story of the railroad land grants gets the story exactly backwards and draws the opposite moral as it should.
That’s why I’m peeved.