4

James J. Hill vs. Subsidized Railroads

“Dodge, what’s the best route for a Pacific railroad to the West?” Abraham Lincoln, candidate for president, posed that question in 1859 to Grenville Dodge, possibly the best railroad man in the West. The dream of a transcontinental railroad had excited promoters and patriots ever since the Mexican War and the acquisition of California. Congress spent $150,000 during the 1850s surveying three possible routes from the Mississippi River to the west coast. William Seward, who would become Lincoln’s secretary of state, spoke as highly of the Pacific Railroad as he did earlier about the Erie Canal. They were federal and state dollars well spent. Most historians agree. “Unless the government had been willing to build the transcontinental lines itself,” historian John Garraty typically asserted, “some system of subsidy was essential.”1

When Lincoln became president, he moved to have the federal government subsidize the building of the transcontinental railroad. In 1862, with the southern Democrats out of the union, Congress hastily passed the Pacific Railroad Act. This act created the Union Pacific (UP), which would lay rails west from Omaha, Nebraska, and the Central Pacific (CP), which would start in Sacramento, California, and build east. Since congressmen wanted the road built quickly, they did two key things. First, they gave each line twenty alternate sections of land (at 640 acres per section) for each mile of track completed. Second, they gave loans: $16,000 for each mile of track of flat prairie land, $32,000 per mile for hilly terrain, and $48,000 per mile in the mountains.2

President Lincoln was brilliant in his understanding of natural rights, but less perceptive on economics. He had confidence that federal dollars used to build the railroad would be well spent. “If the subsidies provided are not enough to build the road,” Lincoln told Representative Oakes Ames (D-Mass.), “ask double, and you shall have it.” The UP and CP, then, would compete for government largesse. The line that built the most miles would get the most cash and land, which, of course, could be sold. In this arrangement, the incentive was for speed, not efficiency. The two lines spent little time choosing routes; they just laid track and cashed in.3

The subsidies shaped the UP builders’ strategy in the following ways. They moved west from Omaha in 1865 along the Platte River. Since they were being paid by the mile, they sometimes built winding, circuitous tracks to collect for more mileage. For construction the UP used cheap, light wrought-iron rails, soon to be outmoded by Bessemer rails. And Thomas Durant, vice president and general manager, stressed speed, not workmanship. “You are doing too much in masonry this year,” Durant told a staff member, “substitute tressel [sic] and wooden culverts for masonry wherever you can for the present.”

Also, since trees were scarce on the plains, Durant and Grenville Dodge, who became chief engineer, were hard-pressed to make railroad ties, 2,300 of which were needed to finish each mile of track. Sometimes they shipped in wood; other times they used the fragile cottonwood found in the Platte River valley; often, though, they artfully solved their problem by passing it on to others. The UP simply paid top wages to tie-cutters, and daily bonuses for ties received. Hordes of tie-cutters, therefore, invaded Nebraska, cut trees wherever they were found, and delivered freshly cut ties right up to the UP line. The UP leaders conveniently argued that, since most of Nebraska was unsurveyed, farmers in the way were therefore squatters and held no right to any trees on this “public land.” Some farmers used rifles to defend their land; in the wake of violence, even Durant discovered “that it was not good policy to take all the timber.”4

The rush for subsidies caused other building problems, too. Nebraska winters were long and hard, but, since Dodge was in a hurry, he laid track on the ice and snow anyway. Naturally the line had to be rebuilt in the spring. What was worse, unanticipated spring flooding along the Loup fork of the Platte River washed out rails, bridges, and telephone poles, doing at least $50,000 in damage the first year. No wonder some observers estimated the actual building cost almost three times what it should have.5

By pushing rail lines through unsettled land, the transcontinentals invited Indian attacks, which caused the loss of hundreds of lives and further ran up the cost of building. The Cheyenne and Sioux harassed the road throughout Nebraska and Wyoming; they stole horses, damaged track, and scalped workmen along the way. The government paid the costs of sending extra troops along the line to protect it. But when they left, the graders, tie-setters, tracklayers, and bolters often had to work in teams with half of them standing guard and the other half working. In some cases, such as the Plum Creek Massacre in Nebraska, the UP attorney admitted his line was negligent when it sent workingmen into areas known to be frequented by hostile Indians.6

As the UP and CP entered Utah in 1869, the competition became fiercer and more costly. Both sides graded lines that paralleled each other, and both claimed subsidies for this mileage. As they approached each other the workers on the UP, mostly Irish, assaulted those on the CP, mostly Chinese. In a series of attacks and counterattacks, using boulders and gunpowder, many lives were lost and much track was destroyed. Both sides involved Presidents Andrew Johnson and Ulysses Grant in the feuding. With the threat of a federal investigation looming, the two lines finally agreed to meet at Promontory Point. There they joined tracks on May 10, with hoopla, speeches, and the veneer of unity. After the celebration, however, both of the shoddily constructed lines had to be rebuilt and sometimes relocated, a task that the UP didn’t finish until five years later. As Dodge said one week before the historic meeting, “I never saw so much needless waste in building railroads. Our own construction department has been inefficient.”7

After the construction was completed, many were astonished at its costs. The UP and CP, even with 44 million acres of free land and more than $61 million in cash loans, were almost bankrupt. Two other circumstances helped to keep costs high. First, the costs of building were high after the Civil War. Capital and labor were scarce; also, even without the harsh winters and the Indians, it was costly to feed thousands of workmen who were sometimes hundreds of miles from a nearby town. Second, the officers of the Union Pacific and Central Pacific created their own supply companies and bought materials for their roads from these companies. The UP, for example, needed coal, so six of its officers created the Wyoming Coal & Mining Company. They mined coal for $2 per ton (later reduced to $1.10) and sold it to the UP for as high as $6 a ton. Even more significant, the Crédit Mobilier, which was also run by UP officials, supplied iron and other materials to the UP at exorbitant prices.8

Many people then and now have pointed accusing fingers at the UP with its Crédit Mobilier and its wasteful building. But this misdirects the problem. The subsidies themselves dictated the building strategy and dramatically shaped the outcome. Granted, the leaders of the UP were greedy and showed poor judgment. But the presence of free land and cash tempted them to rush west and then made them dependent on federal aid to survive.

No wonder the UP courted politicians so carefully! In this arrangement, politicians were more precious than freight or passengers. In 1866, Thomas Durant wined and dined 150 “prominent citizens” (including senators, an ambassador, and government bureaucrats) along a completed section of the railroad. He hired an orchestra, a caterer, six cooks, a magician (to pull subsidies out of a hat?), and a photographer. For those with ecumenical palates, he served Chinese duck and Roman goose; the more adventurous were offered roast ox and antelope. All could have expensive wine and, for dessert, strawberries, peaches, and cherries. After dinner some of the men hunted buffalo from their coaches. Durant hoped that all would go back to Washington inclined to repay the UP for its hospitality. If not, the UP could appeal to a man’s wallet as well as his stomach. In Congress and in state legislatures, free railroad passes were distributed like confetti. For a more personal touch, the UP let General William T. Sherman buy a section of its land near Omaha for $2.50 an acre when the going rate was $8. Also, Oakes Ames, president of the UP, handed out Crédit Mobilier stock to congressmen at a discount “where it would do the most good.” It was for this act, not for selling the UP overpriced goods, that Congress censured Oakes Ames and then investigated the UP line.9

The airing of the Crédit Mobilier scandal—just four years after the celebrating at Promontory Point—soured many voters on the UP. Others were annoyed because the UP was so inefficient that it couldn’t pay back any of its borrowed money. Just as the UP was birthed and nurtured on federal aid, though, so it would have to mature on federal supervision and regulation.

In 1874, Congress passed the Thurman Law, which forced the UP to pay 25 percent of its net earnings each year into a sinking fund to retire its federal debt. Because the line was so badly put together, it competed poorly and needed the sinking fund money to stay afloat. Building branch lines to get rural traffic would have helped the UP, but the government often wouldn’t give them permission. President Sidney Dillon called his line “an apple tree without a limb,” and concluded, “unless we have branches there will be no fruit.” Congress further squashed any trace of ingenuity or independence by passing a law creating a Bureau of Railroad Accounts to investigate the UP books regularly. Of these federal restrictions, Charles Francis Adams Jr., a later UP president, complained: “We cannot lease; we cannot guarantee, and we cannot make new loans on business principles, for we cannot mortgage or pledge; we cannot build extensions, we cannot contract loans as other people contract them. All these things are [prohibited] to us; yet all these things are habitually done by our competitors.” The power to subsidize, Adams discovered, was the power to destroy.

John M. Thurston, the UP’s solicitor general, saw this connection between government aid and government control. The UP, he said, was “perhaps more at the mercy of adverse legislation than any other corporation in the United States, by reason of its Congressional charter and its indebtedness to the government and the power of Congress over it.”10

When Jay Gould took control of the UP in 1874, his solution was to use and create monopoly advantages to raise prices, fatten profits, and cancel debts. For example, he paid the Pacific Mail Steamship Company not to compete with the UP along the west coast. Then he raised rates 40 to 100 percent and, a few weeks later, hiked them another 20 to 33 percent. This allowed him to pay off some debts and even declare a rare stock dividend; but it soon brought more consumer wrath, and this translated into more government regulation and, eventually, helped lead to the Interstate Commerce Commission, which outlawed rate discrimination.11

The history of the UP’s struggle for survival and collapse into bankruptcy is sad. Yet it’s hard to see how its history could have taken any other direction, given the presence of such lavish government aid. The aid bred inefficiency; the inefficiency created consumer wrath; the consumer wrath led to government regulation; and the regulation closed the UP’s options and helped lead to bankruptcy.

The Central Pacific did better, but only because its circumstances were different. Its leaders—Leland Stanford, Collis Huntington, Charles Crocker, and Mark Hopkins—were united on narrow goals and worked together effectively to achieve them. These men, the “Big Four,” focused mainly on one state, California, and used their wealth and political pull to dominate (and sometimes bribe) California legislators. Stanford, who was elected governor and U.S. senator, controlled politics for the Big Four and prevented any competing railroad from entering California. Profits from the resulting monopoly rates were added to windfall gains from their Contract & Finance Company, which was the counterpart of the Crédit Mobilier. Unlike the UP leaders in the Crédit Mobilier scandal, the Big Four escaped jail because the records of the Contract & Finance Company were “accidentally” destroyed. Without records, it was left to Frank Norris to tell the story of the CP monopoly in his novel The Octopus. Privately funded railroads didn’t appear in California until almost 1900, when they mustered the financial strength and the political muscle to take on the entrenched CP (renamed the Southern Pacific) in California politics.12

In case Congress needed another lesson, the story of the Northern Pacific again featured government subsidies. Congressmen chartered the Northern Pacific in 1864 as a transcontinental running through the Northwest. The NP received no loans, but did get forty sections of land per mile, which was twice what the UP received. Various owners floundered and even bankrupted the NP, until Henry Villard took control in 1881.

Villard had come to America at age eighteen from Bavaria in 1853. Shortly after he arrived, he showed a flair for journalism and wrote compelling accounts of events for his readers, including the Civil War. Villard developed his ability to persuade people to follow him, and he used this talent as a railroad tycoon. He first became interested in the Northwest in 1874, when he was hired as an agent for German bondholders in America and went to Oregon to analyze their investments. He liked what he saw and began to have grandiose visions about a transportation empire in the Northwest. Soon he began buying NP stock and took charge of the stagnant railroad in 1881.13

Villard had many of the traits of his fellow transcontinental operators. First, like Jay Gould, he manipulated stock; in fact, he bought his NP shares on margin and used overcapitalized stock as collateral for his margin account. Second, like the Big Four on the CP, Villard liked monopolies. He even bought railroads and steamships along the Pacific coast, not for their value, but to remove them as competitors. Finally, like the leaders of the UP, Villard eagerly sought the 44 million acres the government had promised him for building a railroad. He would have agreed with Governor Newton Booth of California, who said, “It is easier, more delightful, and more profitable to build with other people’s money than our own.”14

Villard’s strategy, then, resembled that of the other builders. He had an added plus, though, in his skills in promoting and coaxing funds from wealthy investors. “I feel absolutely confident,” he wrote, “that we shall be able to work results . . . that will astonish every participant.” Hundreds of German investors, and others too, heeded the call for funds and sent Villard $8 million to bring the NP to the west coast. Businessmen everywhere were amazed at Villard’s persuasive ways. “This is the greatest feat of strategy I ever performed,” Villard proclaimed, “and I am constantly being congratulated . . . upon . . . the achievement.” So with his friends’ $8 million, and with the government’s free land, Villard pushed the NP westward and arrived in Seattle, Washington, in 1883. His celebration, however, was short-lived because that same year the NP almost declared bankruptcy, and Villard was ousted.15

Why had he failed? First, like the other transcontinental builders, he rushed into the wilderness to collect his subsidies. Villard knew that the absence of settlement meant the absence of traffic, but his solution was to promote tourism as well as immigration. He thought tourists would pay to enjoy the beauty of the Northwest, so he built some of the line along a scenic route. This hiked Villard’s costs because he had to increase the grade, the curvature, and the length of the railroad to accommodate the Rocky Mountain view. Villard also built expensive health spas around the hot springs at Bozeman and in Broadwater County, Montana. He put glass domes around the hot springs and built plush hotels near them to accommodate the throngs of tourists he predicted would come. Despite lavish advertising in the East, though, the tourists went elsewhere and Villard went broke.16

The federal aid and the foreign investors had given Villard some room for error. But he made other mistakes, too. He was so anxious to rush to the coast that he built when construction costs were high. They were much lower three years before and three years after he built. High costs meant high rates, and this deterred freight and immigrants from traveling along the NP. Villard could have cut some of these costs, but as historian Julius Grodinsky has observed of Villard, “What was asked, he paid.” He didn’t bother to learn much about railroads; in fact, during 1883 he seems to have been more interested in leveling six houses in New York City to build a glamorous mansion in which to entertain the city’s elite. He thought he could promote immigration, tourism, scenic routes, and health spas, and use the free land and foreign cash to cover the costs of building the NP.

When his bubble burst, the NP went bankrupt and the German investors were ruined. But not so Villard—from his mansion in New York City, he raised more money and took control of the NP again five years later. The smooth-talking Villard, however, still could not overcome his earlier errors. The poorly constructed Northern Pacific was so inefficient that even the Villard charm could not make it turn a profit. In 1893, the NP went bankrupt again; the Villard era was over.17

Granted, the American Northwest had a sparse population and a rugged terrain. But one man did build a transcontinental through the Northwest. In fact, he built it north of the NP, almost touching the Canadian border. And he did it with no federal aid. That man was James J. Hill, and his story tells us a lot about the larger problem of federal aid to railroads.

Hill, like Astor and Vanderbilt, came from a poor background. He was born in a log cabin in Ontario, Canada, in 1838. His father died when the boy was young, and he supported his mother by working in a grocery for four dollars per month. He lost use of his right eye in an accident, so his opportunities seemed limited. But Hill was a risk taker and a doer. At age seventeen he aimed for adventure in the Orient, but settled for a steamer to St. Paul, Minnesota. There he clerked for a shipping company and learned the transportation business. He was good at it, and he became intrigued with the future of the Northwest.18

The American Northwest was America’s last frontier. The states from Minnesota to Washington made up one-sixth of the nation but remained undeveloped for years. The climate was harsh and the terrain imposing. There were obvious possibilities with the trees, coal, and copper in the region, but crossing it and connecting it with the rest of the nation was formidable. The Rocky Mountains divided the area into distinct parts: to the east were Montana, North Dakota, and Minnesota, which were dry, cold, flat, and, predictably, empty. It was part of what pioneers called “the Great American Desert.” Once the Rockies were crossed, the land in Idaho and Washington turned green with forests and plentiful rain. But the road to the coast was broken by almost uncrossable canyons and the jagged peaks of the Cascade Mountains. Since the Northwest was fragmented in geography, remote in location, and harsh in climate, most settlers stopped in the lower Great Plains or went on to California.

To most, the Northwest was, in the words of General William T. Sherman, “as bad [a piece of land] as God ever made.” To others, like Villard, the Northwest was a chance to grab some subsidies and create a railroad monopoly. But to Hill the Northwest was an opportunity to develop America’s last frontier. Where some saw deserts and mountains, Hill had a vision of farms and cities. Villard might build a few swanky hotels and health spas, but Hill wanted to settle the land and develop the resources. Villard preferred to approach the Northwest from his mansion in New York City. Hill learned the Northwest firsthand, working on the docks in St. Paul, piloting a steamboat on the Red River, and traveling on snowshoes in North Dakota. Villard was attracted to the Northern Pacific because of its monopoly potential; Hill wanted to build a railroad to develop the region, and then to prosper with it.19

Hill’s years of maturing in St. Paul followed a logical course: From investing in shipping, he switched to steamships, and then to railroads. In 1878, he and a group of Canadian friends bought the bankrupt St. Paul & Pacific Railroad from a group of Dutch bondholders. The St. Paul & Pacific story was eerily similar to that of the transcontinentals: federal subsidies, stock manipulation, profit-taking on construction, and bankruptcy. Along one ten-mile section of track were fifteen separate patterns of iron. Bridge material, ties, and equipment were scattered along the right-of-way. When Hill and his friends bought this railroad and announced their intention to complete it, critics dubbed it “Hill’s Folly.” Yet he did complete it, ran it profitably, and soon decided to expand it into North Dakota. It was not yet a transcontinental, but it was in the process of becoming one.20

As Hill built his railroad across the Northwest, he followed a consistent strategy. First, he always built slowly and developed the export of the area before he moved farther west. In the Great Plains this export was wheat, and Hill promoted dry farming to increase wheat yields. He advocated diversifying crops and imported seven thousand cattle from England and elsewhere, handing them over free of charge to settlers near his line. Hill was a pump primer. He knew that if farmers prospered, their freight would give him steady returns every year. The key was to get people to come to the Northwest. To attract immigrants, Hill offered to bring them out to the Northwest for a mere ten dollars each if they would farm near his railroad. “You are now our children,” Hill would tell immigrants, “but we are in the same boat with you, and we have got to prosper with you or we have got to be poor with you.” To make sure they prospered, he even set up his own experimental farms to test new seed, livestock, and equipment. He promoted crop rotation, mixed farming, and the use of fertilizers. Finally, he sponsored contests and awarded prizes to those who raised meaty livestock or grew abundant wheat.21

Unlike Villard, Hill built his railroad for efficiency, not for scenery. “What we want,” Hill said, “is the best possible line, shortest distance, lowest grades and least curvature that we can build. We do not care enough for Rocky Mountain scenery to spend a large sum of money developing it.” That meant that Hill personally supervised the surveying and the construction. “I find that it pays to be where the money is being spent,” noted Hill, but he didn’t skimp on quality materials. He believed that building a functional and durable product saved money in the long run. For example, he usually imported high-quality Bessemer rails, even though they cost more than those made in America. He was thinking about the future, and quality building materials cut costs in the long run. When Hill constructed the solid granite Stone Arch Bridge—2,100 feet long, 28 feet wide, and 82 feet high—across the Mississippi River, it became a Minneapolis landmark for decades.22

Hill’s quest for short routes, low grades, and few curvatures was an obsession. In 1889, Hill conquered the Rocky Mountains by finding the legendary Marias Pass. Lewis and Clark had described a low pass through the Rockies back in 1805, but later no one seemed to know whether it really existed or where it was. Hill wanted the best gradient so much that he hired a man to spend months searching western Montana for this legendary pass. He did in fact find it, and the ecstatic Hill shortened his route by almost one hundred miles.23

As Hill pushed westward, slowly but surely, the Northern Pacific was there to challenge him. Villard had first choice of routes, lavish financing from Germany, and 44 million acres of free federal land. Yet it was Hill who was producing the superior product at a competitive cost. His investments in quality rails, low gradients, and short routes saved him costs in repairs and fuel on every trip across the Northwest. Hill, for example, was able to outrun the Northern Pacific from coast to coast at least partly because his Great Northern line was 115 miles shorter than Villard’s NP.

More than this, though, Hill bested Villard in the day-to-day matters of running a railroad. For example, Villard got his coal from Indiana, but Hill bought coal from Iowa and saved two dollars per ton. In the volatile leasing game, Hill outmaneuvered Villard and got a lower cost to the Chicago market. As Hill said, “A railroad is successful in the proportion that its affairs are vigilantly looked after.”24

Villard may have realized he was outclassed, so he countered with obstructionism, not improved efficiency. One of Hill’s partners alerted him to Villard’s “egotistic stamp” and concluded that “Villard’s vanity will be apt to lead him to reject any treaty of peace that does not seem to gratify his vain desire to obtain a triumph.” Before Hill could build his railroad farther west from Minnesota, for example, the NP refused him permission to cross its line at Moorhead, along the Minnesota–North Dakota border. Local citizens apparently wanted Hill’s line, and he wrote, “I had a letter from a leading Moorhead merchant today offering 500 good citizen tracklayers to help us at the crossing.” Each move west that Hill made threatened Villard’s monopoly. Ironically, Hill sometimes had to use the NP to deliver rails; when he did, Villard sometimes raised rates so high that Hill used the Canadian Pacific when he could.

Villard found that manipulating politics was the best way to thwart Hill. For example, the gaining of right-of-way through Indian reservations was a thorny political issue. Legally, no railroad had the right to pass through Indian land. The NP, as a federally funded transcontinental, had a special dispensation. Hill, however, didn’t, so the NP and UP tried to block Congress from granting Hill right-of-way through four Indian reservations in North Dakota and Montana. Hill gladly offered to pay the willing Indians fair market value for their land, but Congress stalled, and Hill said, “All our contracts [are] in abeyance until [this] question can be settled.” Hill had to fight the NP and UP several times on this issue before getting Congress to grant him his right-of-way. “It really seems hard,” Hill later wrote, “when we look back at what we have done in opening the country and carrying at the lowest rates, that we should be compelled to fight political adventurers who have never done anything but pose and draw a salary.”

In the depression year of 1893, all the transcontinental owners but Hill were lobbying in Congress for more government loans. To one of them Hill wrote, “The government should not furnish capital to these companies, in addition to their enormous land subsidies, to enable them to conduct their business in competition with enterprises that have received no aid from the public treasury.” He proudly concluded, “Our own line in the North . . . was built without any government aid, even the right of way, through hundreds of miles of public lands, being paid for in cash.”

Shortly after Hill wrote this, the Union Pacific, the Northern Pacific, and the Santa Fe, another line, all went bankrupt and had to be reorganized. This didn’t surprise Hill. He gloated, “You will recall how often it has been said that when the Nor Pac, Union Pac and other competitors failed, our company would not be able to stand. . . . Now we have them all in bankruptcy . . . while we have gone along and met their competition.” In fact, the efficient Hill cut his costs 13 percent from 1894 to 1895.

Hill criticized the grab for subsidies, and here is the irony: Those who got federal aid ended up being hung by the strings that were attached to it. In other words, there is cause and effect between Hill’s company having no subsidy and prospering, while the other transcontinentals received aid and went bankrupt. First, the subsidies, whether in loans or land, were always given on the basis of each mile completed, placing the incentive on building quickly. This resulted not only in poorly built lines but in poorly surveyed lines as well. Steep gradients meant increased fuel costs; poor building meant costly repairs and accidents along the line. Hill had no subsidy, so he built slowly and methodically. “During the past two years,” Hill said in 1884, “we have spent a great deal of money for steel rails, ballasting track, transfer yards, terminal facilities, new equipment, new shops, and in fact we have put the road in better condition than any railway similarly situated that I know of.” Hill, then, had lower fixed costs than did his subsidized competitors.

By building the Great Northern without government interference, Hill enjoyed other advantages. He could build his line as he saw fit. Until Andrew Carnegie’s triumph in the 1890s, American rails were inferior to some foreign rails, so Hill bought English and German rails for the Great Northern. The subsidized transcontinentals were required in their charters to buy American-made steel, so they were stuck with the lesser product. Their charters also required them to carry government mail at a discount, and this cut into their earnings. Finally, without congressional approval, the subsidized railroads could not build spur lines off the main line. Hill’s Great Northern, in contrast, looked like an octopus, and he credited spur lines as being critical to his success.

In debating the Pacific Railway Bill in the 1860s, some congressmen argued that even if the federally funded transcontinentals proved to be inefficient, they should still be aided because they would increase the social rate of return to the United States. Some historians and economists, led by Robert Fogel, winner of a Nobel Prize, have picked up this argument, and it goes like this: The UP made little profit and was poorly built, but it increased the value of the land along the road and promoted farms and cities in areas that could not have supported them without cheap transportation. Fogel claimed that the value of land along a forty-mile strip on each side of the UP was worth $4.3 million in 1860 and $158.5 million by 1880. Without the UP, this land would have remained unsettled and the United States would not have had the national benefits of productive farms, new industries, and growing cities in the West. To the nation, then, the high social rate of return justified the building of the UP, CP, NP, and Santa Fe railroads.25

What this argument overlooks is the negative social, economic, and political return to the United States that came with using federal subsidies to build railroads. The gain in social return that Fogel described is only temporary. If the government had not subsidized a transcontinental, then more private investors like Hill would have built them. Subsidy promoters tried to deny this argument at the time, but Hill’s achievement shows that it would have been done, only at a slower (but more efficient) pace. Hill’s success refutes the following statement in Congress by Representative James H. Campbell of Pennsylvania: “This [Union Pacific] road never could be constructed on terms applicable to ordinary roads. . . . It is to be constructed through almost impassable mountains, deep ravines, canyons, gorges, and over arid and sandy plains. The Government must come forward with a liberal hand, or the enterprise must be abandoned forever.”26

Here is a key point: The gain in social return was only temporary, but the loss of shipping with an inefficient railroad was permanent. The UP and NP were inefficient in gradients, curvature, length, quality of construction, repair costs, and use of fuel. This meant permanently high fixed costs for all passengers and freight using the subsidized transcontinentals.

The subsidizing of railroads cost the nation in other ways, too. First, the land that was given to the railroads could not be sold for revenue. Second, the giving of subsidies to one was a precedent for giving subsidies to many. When the government gave 20 million acres to the UP, the NP and others clamored for aid; the result was the giving of 131 million acres of land to various railroads. Third, the granting of all this land and money, too, made for shady business ethics and political corruption. The Crédit Mobilier is an example of poor business ethics, and the CP’s tight control over California politics is a sample of political corruption. Part of this corruption is reflected in the automatic monopolies that subsidized transcontinentals had. When Jay Gould doubled rates along parts of the UP, not much could be done. It took time to build privately financed lines, and, when they were finished, they had to compete with a railroad that had, thanks to the government, millions of acres of free land and large cash reserves.

A final hidden cost of subsidizing railroads is seen in the mass of lawmaking, much of it harmful, all of it time-consuming, by state legislatures, Congress, and the Supreme Court after watching the UP, CP, and NP in action. The publicizing of shoddy construction, the Crédit Mobilier scandal, rate manipulation, and bankrupt health spas angered consumers; and angry consumers pestered their congressmen to regulate the railroads. Much of the regulation, however, had unintended consequences and made the situation worse.

For example, when voters learned of the corruption in building the UP, public outrage led to a congressional investigation. The UP had made no payment on its government loans, so Congress passed the Thurman Law, which forced the UP to pay 25 percent of its annual earnings toward retiring its debt to the government. The problem here is that the shoddy construction of the UP made for high fixed costs, and the lack of spur lines limited its chances for profits. This meant that the UP had to raise rates for passengers and freight to pay back its loans. The rate hikes, though, caused even more public outcry. Many noticed, for example, that the UP and NP were charging more than Hill’s Great Northern, and this led to demands for rate regulation. Congress obliged and, in 1887, created the Interstate Commerce Commission (ICC) to investigate and abolish rate discrimination. Two new problems emerged: First, it was now illegal to give discounts. Hill argued that rate cutting had led to lower rates over the years and that this allowed the United States to capture a larger share of overseas trade. Hill insisted that the ICC law, if enforced (which it eventually was), would hurt railroads in domestic and overseas trade. Second, the ICC law funded thousands of federally funded bureaucrats, who listened to shippers all over the nation and snooped into the detailed records of almost every railroad in the country.27

The issue of foreign trade is important and was hotly disputed during Congress’s debates on the transcontinentals. Advocates of federal aid strongly argued that subsidized railroads would capture foreign trade and increase national wealth. “Commerce is power and empire,” said Senator William M. Gwin of California. “Give us, as this [Union Pacific] Railroad would, the permanent control of the commerce and exchanges of the world, and in the progress of time and the advance of civilization, we would command the institutions of the world.” Yet the UP and NP were so inefficient, they couldn’t even capture or develop the trade of their own regions, least of all the world. If Hill hadn’t built the Great Northern, the United States wouldn’t have captured many Oriental markets.28

In order to compete in the Orient, Hill had studied the opportunities for trade there and marveled at its potential. “If the people of a single province of China should consume [instead of rice] an ounce a day of our flour,” Hill wistfully said, “they would need 50,000,000 bushels of wheat per annum, or twice the Western surplus.” The key, Hill believed, was “low freight rates,” and these he intended to supply. In 1900, he plowed $6 million into his Great Northern Steamship Company and shuttled two steamships back and forth from Seattle to Yokohama and Hong Kong. Selling wheat was only one of Hill’s ideas. He tried cotton, too. Ever the pump primer, Hill told a group of Japanese industrialists he would send them cheap southern cotton, and deliver it free, if they would use it along with the short-staple variety they got from India. If they didn’t like it, they could have a refund and keep the cotton. This technique worked, and Hill filled many boxcars and steamships with southern cotton destined for Japan. Hill’s railroads and steamships also carried New England textiles to China. In 1896, American exports to Japan were only $7.7 million; but nine years later, with Hill in command, this figure had jumped to $51.7 million.29

An even greater coup may have been Hill’s capturing of the Japanese rail market. Around 1900, Japan began a railroad boom, and England and Belgium made bids to supply the rails. In this case, the Japanese may have underestimated Hill: It didn’t seem likely that he could be competitive if he had to buy rails in Pittsburgh, ship them to the Great Northern, carry them by rail to Seattle, then by steamship to Yokohama. Hill was so efficient, though, and so eager for trade in Asia, that he underbid the English and the Belgians by $1.50 per ton and captured the order for 15,000 tons of rails. Hill was spearheading American dominance in the Orient.30

Hill worked diligently to market the Northwest’s exports: wheat from the plains, copper from Montana, and apples from Washington. Without Hill’s low freight rates and aggressive marketing, some of these Northwest products might never have been competitive exports. Washington and Oregon, for example, were covered with western pine and Douglas fir trees. But it was southern pine that had dominated much of the American lumber market. Hill could provide the lowest freight rates, but he needed someone to risk harvesting the western lumber. He found Frederick Weyerhaeuser, his next-door neighbor, and sold him 900,000 acres of western timberland at six dollars an acre. Then Hill cut freight costs from ninety to forty cents per hundred pounds, and the two of them captured some of the midwestern lumber market and prospered together.31

Hill became America’s greatest railroad builder, he believed, because he followed a consistent philosophy of business. First, build the best line possible. Second, use this efficient line to promote the exports of the region—in other words, Hill helped others to prosper, and at the same time Hill flourished. Third, do not overextend; expand only as profits allow. Hill would probably have agreed with Thomas Edison that genius is 1 percent inspiration and 99 percent perspiration. Few people were willing to exert the perspiration necessary to learn the railroad business and apply these principles. Hill criticized the failure of his competitor: “If the Northern Pacific could be handled as we handle our property, it could be made [a] great property . . . but it has not been run as a railway for years, but as a device for creating bonds to be sold.”

The only thing that Hill did seem to fear was the potential for damage when the federal government stepped in to direct the economy. He understood why this happened—why people pressured Congress to involve itself in economic matters. California, isolated on the Pacific coast, wanted the cheap goods that a railroad would bring. So Senator Gwin of California lobbied in Congress for transcontinental subsidies. American steel producers wanted to sell more steel, so they pushed Congress to put a tariff on imported steel. Hill’s problem was that when his rivals were subsidized, and when tariffs forced him to pay 50 percent more for English steel, he had to be twice as good to survive. One way out, which Hill took, was to support those politicians in the Northwest who would fight subsidies and high tariffs, and who would urge Congress to give him the right-of-way through Indian land.32

What Hill ultimately deplored more than tariffs and subsidies were the ICC and the Sherman Antitrust Act. Congress passed these vague laws to protest rate hikes and monopolies. They were passed to satisfy public clamor (which was often directed at wrongdoing committed by Hill’s subsidized rivals). Vaguely written, these laws were harmless until Congress and the Supreme Court began to give them specific meaning. And here came the irony: Laws that were passed to thwart monopolists were applied to thwart Hill.

The ICC, for example, was created in 1887 to ban rate discrimination. The Hepburn Act, passed in 1906, made it illegal for railroads to charge different rates to different customers. This law was partly aimed at rate manipulators like Jay Gould. But it ended up striking Hill, who now could not offer rate discounts on exports traveling on the Great Northern en route to the Orient. Hill had given the Japanese and Chinese special rates on American cotton, wheat, and rails to lure them to American exports. But if the Hepburn Act passed, Hill said, U.S. trade with the Orient would suffer. Hill testified vigorously during the Senate hearings that preceded the Hepburn Act, but was ignored. When the act became law he was furious that he had to publish his rates and give all shippers anywhere the special discount he was giving the Asians to capture their business. Since he couldn’t do this and survive, he eventually sold his ships and almost completely abandoned the Asian trade. Thus, American exports to Japan and China dropped 40 percent ($41 million) between 1905 and 1907.33

Hill may have lost his battle with politicians on the Hepburn Act, but he won his point with them on federal subsidies. All major politicians of the 1860s had argued vehemently that no transcontinental railroad could ever be built without huge amounts of federal aid. Not only did Hill prove them wrong, but he had also made the case that no transcontinental could be profitable, well built, and responsive to customers unless it was built privately and with no federal aid.