How Government Distorted The Railroad Industry In The 19th Century

See Tracks Across America. JOHN STEELE GORDON reviews the books Railroaded by Richard White and Union Pacific: The Reconfiguration by Maury Klein. From the WSJ, 6-17. Excerpts:

"As Mr. White notes, with no laws to govern their behavior, railroad managers often acted in their own self-interest rather than in the interests of stockholders. It would be Wall Street, not government, that would, near the end of the 19th century, impose what are now called Generally Accepted Accounting Principles and demand quarterly and annual reports certified by independent accountants. Such demands brought the era of buccaneer capitalism to a swift end.

The transcontinental railroads, though, did not have their origins in entrepreneurship. They were the child of politics. When California was admitted as a state in 1850, it was 1,500 miles from the nearest American settlements. From the Eastern states, it took months to travel there by either land or by sea. The federal government was eager to tie the state firmly to the Union. But no railroad company was going to build tracks across vast stretches of land empty of settlers, and no settlers were going to take up land claims until there was a railroad to move their products to eastern markets.

To get the railroads built, government offered lavish subsidies. Much of the money ended up in the hands of the companies' top managers and their political friends. After Congress in 1862 mandated the construction of railroads from the Missouri River to the Pacific, for instance, the men who ran the Union Pacific set up a construction company, gave it a fancy French name, Crédit Mobilier, and then hired it—wildly overpaying—to build the railroad. To make sure that no one in Congress objected, many members were offered stock in Crédit Mobilier. Not that they had to pay for it: The lawmakers were allowed to delay payment until the stock paid out its prodigious dividends.

The result of all this self-dealing in the industry, naturally, was shoddily built railroads that were saddled with huge debts. Many of them collapsed into bankruptcy and had to be reorganized by people like J.P. Morgan and E.H. Harriman, who are barely mentioned in "Railroaded.""