Cronyism

CHAPTER 2

RAILROADING THE NATION

“We have drawn the elephant. Now let us see if we can harness him up.”Thus telegrammed the lobbyist of the Central Pacific Railroad to his associates after President Lincoln signed the 1862 Pacific Railway Act. It distills the spoils-driven mentality of special interests during the Republican implementation of the American System. Contending railroads, manufacturers, and bankers fought intensely over who would receive the lucrative rewards, who would be left out in the cold, and who would face hostile regulation. Historians have described the eat-or-be-eaten environment during the Civil War and following decades as the “Great Barbecue.”During this free-for-all, the transcontinental railroads—the nation’s preeminent big businesses—fought for lavish land grants and monetary subsidies that caused them to be poorly managed and less disciplined by profit and loss. As time passed their lobbying battles for largesse turned into intense struggles because of public backlash and countervailing farmer and merchant groups’ advocacy for rate regulations. By the 1880s the subsidized transcontinental railroads stumbled along, suffering from banking panics and more-efficient privately built railroad competition.

Granting the Public Domain

At the outbreak of the Civil War a transcontinental railroad linking the Midwest to the Pacific Ocean was still unprofitable because of the lack of settlers, farmers, and merchants. In the words of one critic, “There is no travel from the Pacific Coast to justify it. Here are 1800 miles of railroad through an uninhabited country.”The market deemed useful the allocation of land, workers, and equipment only to the gradual development of regional lines on the Pacific coast and in the Midwest, with settlement extending these systems farther over time. But the appeal of a massive railroad increased if Congress provided monetary subsidies and free land. Fortunately for railroad promoters, there were many sympathetic Republicans in Congress who believed that the government could be a wise steward of economic development and that a transcontinental railroad was militarily needed to keep the Union intact.

News of the war caused Californians to contemplate secession. This was not a minor threat: California refused to accept legal tender greenbacks in payments, a striking repudiation of the Union’s new currency. Southern Californians even envisioned an alliance with the Confederacy and a potential transcontinental route to San Diego. Republicans wanted to keep California in the Union and partnered with northern Californians who sought a transcontinental railroad from San Francisco to the interior.

Four Sacramento merchants recognized the lucrative political situation: Leland Stanford, Collis P. Huntington, Mark Hopkins, and Charles Crocker—the Big Four. The politician of the group (and later founder of the university bearing his son’s name), Stanford, had lobbied for a railroad plank at the 1860 Republican convention. After Lincoln secured the presidency, the Big Four incorporated the Central Pacific Railroad of California in June 1861. Huntington became the railroad’s vice president, Hopkins its treasurer, and Crocker its head of construction. Stanford simultaneously served as governor of California and president of the Central Pacific in 1862 and 1863. After receiving the charter, the Big Four quickly dispatched their chief engineer, Theodore Judah, to lobby in Washington. As clerk of both the House’s and Senate’s Pacific Railroad Committees Judah distributed $66,000 of Central Pacific stock to pliable “Railroad Congressmen” to secure their political support.

Thanks to Judah’s efforts it became clear that the Central Pacific would build the transcontinental rails from the West Coast to somewhere in the interior, but Congress still fought over whether the Central Pacific would link up with a new company or an existing line. The frontrunner for existing companies was the Kansas-chartered Leavenworth, Pawnee, & Western Railroad (later known as the Kansas Pacific). It doled out an astronomical $4 million in stock to politicians and managed to elevate lobbyist John Usher to be assistant secretary of the interior. But sometimes money can’t buy everything. The Kansas Pacific failed to receive Congress’s blessing because the projected route remained too close to the Confederate border and raids could handicap construction.

Recognizing that the Kansas Pacific was falling out of favor, other railroad interests pressed ahead for the federal loot. Notably, the financier Thomas Durant stepped up to the plate in the spring of 1862. Durant lobbied for a mountain of financial assistance to a newly chartered railroad. He teamed up with Huntington, who soon supplanted Judah as the Central Pacific’s Washington lobbyist. Described by his contemporaries as “a shark in voracity for plunder,” over the years Huntington was known to lobby using any means necessary, including seductive female “lobbyesses.”

Durant and Huntington’s efforts resulted in the Pacific Railway Act of 1862, “a majestic booty, an elephantine plunder” that Lincoln signed into law in July.It chartered the Union Pacific, the first federal corporation since the Second Bank of the United States in 1816. Capitalized at $100 million, the Union Pacific would construct the railroad westward from a terminus to be decided by the president and connect somewhere with the eastward-building Central Pacific. As a sop to the owners of the Kansas Pacific, that railroad could also build westward from its own terminus and link up with the Union Pacific. For every mile of track the railroads received alternating sections of land for ten miles on each side (6,400 acres). Like the Illinois Central in the 1850s, the transcontinentals received free land they could sell to land speculators. To further subsidize construction, the federal government issued bonds that the railroads could sell to investors to raise money, in effect taxpayer-backed loans which the railroads promised to repay to the government at a later date. They received $16,000 worth of bonds per mile over plains, $48,000 per mile over the Rocky Mountains and the Sierra Nevada, and $32,000 per mile between the ranges. This generous assistance was the price Republicans needed to pay for California’s “continued loyalty to the Union.”

The Union Pacific and the Central Pacific soon discovered that subsidies often came with strings attached. Notably, Congressman Thaddeus Stevens, who owned the Caledonia Iron Works in Pennsylvania, inserted a clause in the Pacific Railway Act requiring the transcontinentals to use only American iron. This stipulation from the manufacturing lobby was the opening shot in the railroads’ battles with other special-interest groups. The act also mandated that the railroads carry government mail and troops at a substantial discount and required congressional approval to build branches, thereby reducing their ability to profitably transport the cargo consumers wanted. Furthermore, the Union Pacific’s federal charter required that each individual investor could acquire no more than $200,000 of stock, which hindered fundraising because the federal charter also mandated that it needed to sell $2 million in stock before commencing construction. Lastly, the Union Pacific needed President Lincoln to choose the eastern terminus.

In the face of such restrictions, the railroads devoted their energies to acquiring more taxpayer assistance. The Central Pacific led the drive, starting construction in January 1863, before the Union Pacific. Railroad president Stanford used his governorship to jawbone California into providing $10,000 for every mile the Central Pacific built in California and persuaded Placer County, Sacramento, and San Francisco to cough up over $1 million combined. Infamously, when the people of San Francisco voted on the subsidy, Stanford ordered his brother Philip to bribe voters. Thanks to the Stanford brothers, San Francisco voted to provide $600,000—though the city would not see the railroad for nearly a decade.

The Big Four also knew how to maximize federal subsidies. They decided not to purchase the Sacramento Valley Railroad for $285,000 but to build a parallel track, since $150,000 in federal subsidies meant that construction would cost only $250,000. At the same time, Stanford convinced President Lincoln and federal surveyors that the Sierra Nevada started twenty miles closer to Sacramento than previously thought, which increased the federal subsidies by nearly $800,000 over using the state supreme court’s definition of where the mountains began.

The Union Pacific experienced tougher sledding because Congress’s restrictions on fundraising delayed construction, although Durant did manage to circumvent the individual investor restriction and acquire majority control through proxies. With that control, he appointed himself vice president of the railroad (its president was a front man). But Lincoln had still not chosen the terminus. Fortunately, Durant knew someone who could help: Grenville Dodge, a man soon to become the Union Pacific’s chief engineer. Lincoln had met Dodge in 1859 while inspecting real estate he acquired in Council Bluffs, Iowa; Dodge recommended the location as a good start for a transcontinental railroad. In November 1863, after asking Dodge again and receiving the same answer, Lincoln designated the eastern terminus to be around the twin cities of Omaha, Nebraska, and Council Bluffs. Predictably, the decision boosted the value of the president’s real estate holding. With financing procured and a terminus decided, the Union Pacific formally began construction in December.

Having primed the congressional pump, Durant and the Big Four noticed that if they did not get more subsidies then potential rivals would. During 1863, Cyrus Holliday, president of the Kansas-chartered Atchison, Topeka & Santa Fe Railroad, successfully lobbied for a three-million-acre grant to build a southwestern transcontinental. The state’s politicians expected repayment in kind: a year later, Holliday stepped down as the railroad’s president so the sponsor of the bill, Senator S. C. Pomeroy of Kansas, could take the helm—while remaining a US senator. In addition, Congress gave away another three million acres, which the “Railroad King” James Joy and his Chicago, Burlington & Quincy Railroad scooped up.Joy built westward with feverish rapidity and used his connections with the Department of the Interior to steal eight hundred thousand acres of settler and Cherokee land. The Union Pacific and the Central Pacific faced the threat of subsidized competition.

Durant and Huntington worked hard bribing Congress. With an army of lawyers Durant spent $437,000 of Union Pacific funds—including $18,000 to entertain congressmen at the extravagant Willard’s Hotel. For his part, Huntington gave away bonds to “friends of influence.”Both groups found an ally in Massachusetts Congressman Oakes Ames. This millionaire “King of Spades” knew how to join politics with business: he served on the House Pacific Railroad Committee and owned Oliver Ames & Sons, a prominent shovel company crucial to the railroad industry.With the backing of President Lincoln, Ames turned into a major force in the Union Pacific, and the shovel maker’s brother even became company president.

The Pacific Railway Act of 1864 was signature legislation in the Great Barbecue feast. The government gave the Union Pacific and the Central Pacific twice as much land as in the 1862 act (12,800 acres per mile of track versus 6,400 acres), along with all the iron and coal on the land. The railroads’ bonds now totaled $24,000 per mile on plains, $64,000 per mile between the mountains, and $96,000 per mile on the Sierra Nevada and Rocky Mountains. The new amounts were monumental boodle for big businesses: during construction the Union Pacific gobbled up $27 million in loans and twelve million acres (roughly the size of New Hampshire and New Jersey combined), while the Central Pacific received $26 million and nine million acres (equivalent to Maryland).

Durant, Ames, and the Big Four were now eager to purloin public funds. Their racket was simple: they would siphon away the taxpayer assistance by secretly owning construction companies that expensively built the transcontinental railroads. Union Pacific insiders set up Crédit Mobilier, while the Big Four established the Contract & Finance Company. These two construction firms overcharged the transcontinentals (i.e., the government and hapless investors) for building expenses. Thus, while taxpayer assistance flowed into the railroads, profits flowed out of the construction companies and into the pockets of the elites. It was the epitome of cronyism. Crédit Mobilier was particularly egregious in its bilking. The company overcharged the Union Pacific so much that it paid stockholders annual dividends between 50 and 100 percent and generated a whopping 480–610 percent profit for the promoters from 1864 to 1869. According to even the most conservative of estimates, Crédit Mobilier’s expensive construction increased profits by 49 percent during this time, from $11.1 million to $16.5 million.

During their lobbying Durant and Huntington encountered adverse legislation: a proposal to construct the Northern Pacific Railroad, a rival transcontinental close to the Canadian border. Introduced by Congressman Stevens, the proposed route had the backing of Oregon and Minnesota congressmen. Despite the efforts of the Union Pacific and the Central Pacific to stop the bill, Lincoln signed it in 1864. While Congress granted the Northern Pacific an immense forty-seven million acres (approximately the landmass of New England), Durant and Huntington managed to deprive the railroad of monetary subsidies. In other words, they lobbied to deny their competitor the same privileges they worked so hard to acquire for themselves.

Soon enough, best friends became foes, and the Union Pacific and the Central Pacific turned against each other. As Dennis Drabelle explains, “Each side regarded the other not as a proud partner in carrying out a noble endeavor . . . but as a rival for grabbing subsidies from Uncle Sam.”It was all about the money, and too much was at stake: the constructors realized that in their race to the country’s interior every track laid on government land by one railroad meant the loss of a land and bond giveaway for the other.

In the scramble the Union Pacific suffered the first blow. In 1866, Congress was in another giveaway mood, dispensing a combined twenty-eight million acres to the new Atlantic & Pacific and the Southern Pacific Railroads to build southern transcontinentals. Recognizing the lucrative environment, the Central Pacific and the Kansas Pacific closed in on the Union Pacific. Senator William Stewart of the new state of Nevada—the Big Four’s muscle on the Pacific Railroad Committee—demanded that Congress give the Central Pacific authority to build further east into Nevada and the Utah Territory. At the same time, the Kansas Pacific bribed congressmen with stocks and bonds so it could grab additional subsidies and build westward into Colorado. Both actions threatened the Union Pacific.

Congressman Ames realized he needed to enlist politicians “to prevent any legislation that will injure us.”He sold some of them Crédit Mobilier stock, with the astounding dividends paying off the purchase. “We want more friends in this Congress,” said Ames, for congressmen bribed with Crédit Mobilier stock will understand “we should not be interfered with.”Known purchasers included congressman and future president James Garfield of Ohio and Speaker of the House and future vice president Schuyler Colfax of Indiana. Ames’s corruption paid off. The House Pacific Railroad Committee buried a proposal to regulate railroad rates on the Union Pacific and the Central Pacific, and the House decided not to establish a regulatory committee over the transcontinentals.

With the construction companies running and politicians paid off, the race to build accelerated. The infusion of taxpayer funds weakened the railroads’ profit-and-loss accountability, and the subsidies encouraged them to build unnecessarily winding and mountainous routes that entitled them to additional assistance to funnel through their construction rackets. In their haste to collect, land surveyors graded land quickly while construction crews recklessly threw track on uncleared snow, failed to properly level the roadbed, built unaligned rails with weak burnettized cottonwood, and dug narrow tunnels. Replicating the success of Crédit Mobilier, Union Pacific officials siphoned off government funds through the Wyoming Coal and Mining Company, a new front that overcharged the railroad $3.50 per ton of coal compared to a $2 market price. The Union Pacific even enlisted the military to hastily clear out Indians, further socializing construction costs on the taxpayers’ dime. It bought off the man in charge of the Indian removal, General William Tecumseh Sherman, brother of Ohio senator John Sherman, by selling him choice land near Council Bluffs at a below-market price. As Crédit Mobilier and the Contract & Finance Company prospered, the Union Pacific and the Central Pacific stumbled along, digging deeper into debt with the government while taking out risky loans from banks.

By April 1869, the Union Pacific and the Central Pacific had actually built duplicate tracks in the Utah Territory to scoop up more subsidies and extend past each other. When President Ulysses S. Grant demanded that the railroads choose a meeting point, Huntington met with Ames, Dodge, and Durant in the nation’s capital. The Central Pacific maintained the upper hand because Huntington had called on Senator Stewart to publicly criticize the Union Pacific and Crédit Mobilier. Distracted with this threat, the Union Pacific begrudgingly agreed to join tracks at Promontory Point in Utah, a location favorable to the Central Pacific. In return for his services, Stewart received fifty thousand acres of lucrative California land from Huntington.

In May, the lines met, completing the long-awaited transcontinental railroad to the Pacific Ocean. In truth, it was just the rough draft: while the government exulted over its massive public works boondoggle and insisted that it constituted a wise investment in the public interest, the real situation was quite different. Isaac Morris, one of the few honest government examiners, reported that the hastily built Iowa-to-California track remained only two-thirds complete due to needed rebuilding and repairs. It was the worst railroad he had ever traveled on: “There is a vast difference between getting rails down so that cars can pass over them and finishing a road,” he wrote.The government subsidies and incentives did not produce a high-quality railroad, only a poorly built one. Unfortunately, congressmen, flush with pride, buried the report. Legislators were not interested in having the public know that they had allocated the people’s resources poorly.

The promoters thought they could ride the coattails of their shoddily built railroad by obtaining a transcontinental monopoly, but competition lurked in the background. Barely a week after the lines met in Promontory Point, Jay Cooke of Jay Cooke & Co. in Philadelphia made a contract with the Northern Pacific to finance construction. Cooke was the nation’s premier banking crony. He had lobbied for the 1863 and 1864 National Banking Acts that created a quasi-central-banking system of national banks, the National Banking System. The laws increased the pyramiding of bank reserves in New York City and benefited national banks on Wall Street—especially those associated with Cooke. Cooke diversified his empire by agreeing to build the Northern Pacific and tightened his grip in January 1870 with a monopoly on its bond sales. Cooke was eager to build the railroad, having purchased nineteen thousand acres near the projected eastern terminus in Minnesota. He developed great visions for the congressional land grants, especially since his brother Henry, a friend of President Grant, believed Congress would eventually add monetary assistance.

By 1870 it appeared as if Cooke, the other transcontinental railroad promoters, and railroads in general controlled all facets of the US government. Northern states provided generous assistance to their local lines, such as the $3 million Massachusetts gave to the Boston, Hartford & Erie Railroad. In the Reconstruction South, corrupt Republican-controlled governments jacked up taxes and poured the money into fraudulent railroad boondoggles. Contemporaries across the country watched helplessly, noting how “the galleries and lobbies of every Legislature . . . are thronged with [railroad] men seeking to procure an advantage.”Railroad dominance seemed unstoppable.

Defending the Spoils

Railroads looked to continue their supremacy in the years ahead. But not all was well, for the 1870s brought the land-grant mania to an end. During the rest of the Great Barbecue the tide shifted: railroad infighting ramped up, and lines increasingly had to protect their spoils from those who paid them to ship goods and from avaricious politicians. The subsidized railroads, previously feasting at the Great Barbecue’s dinner table, suddenly appeared on the menu. Plagued by mismanagement, insatiable capital needs, constant repairs, incessant competition, and customers with their own crony interests, railroads sought government protection for themselves and from others. On the other hand, a privately built transcontinental, disciplined by market forces and without taxpayer guarantees, found longer-lasting success.

The 1870s opened with continued optimism among crony transcontinental railroad interests. Jay Cooke, financier of the Civil War, firmly believed he could induce President Grant and Congress to provide loans to facilitate the Northern Pacific’s construction. With plenty of experience under their belt, Jay and Henry knew how Washington worked: pay the power brokers. The list was endless.

After Jay financed 10 percent of Grant’s 1868 presidential campaign, Henry provided prominent politicians, including Speaker of the House James Blaine of Maine, low-interest loans from the First National Bank of Washington, DC, along with fancy wine and cigars. Henry played cards with the president, an activity that only increased after Grant appointed him the first governor of the District of Columbia. Jay even gave Grant’s brother Orvil a no-show job at the Northern Pacific. For good measure, Cooke shored up Ohio’s support by selling its governor, Rutherford B. Hayes, choice land in Minnesota at “a great bargain.”

Cooke partnered with others coveting subsidies, particularly the Kansas Pacific and a proposed transcontinental that would stretch from Louisiana through Texas to California. Thomas Scott, vice president of the Pennsylvania Railroad—the nation’s largest corporation—soon controlled this sop to the war-torn South. Scott envisioned the Texas & Pacific Railway as an integral part of a railroad system that would connect Pennsylvania to the West Coast. Significantly, the “Pennsylvania Napoleon” allied with Cooke, as Jay Cooke & Co. helped market his railroad’s debt.

To Cooke’s dismay, however, Henry reported that other factions had opened the spigots and bought their own politicians: “We have interests ramifying in many directions, and hosts of enemies to hit us a blow.”The Union Pacific and the Central Pacific once again lobbied against monetary subsidies to the Northern Pacific. Because the government was now expecting interest payments on the loans given to them, the railroads especially wanted their competitor to receive zero taxpayer funds. Furthermore, the investment bankers J. P. Morgan and Anthony Drexel of the soon-to-be-formed Drexel, Morgan & Co. (1871) in New York opposed the Northern Pacific’s subsidy program. They instructed the Philadelphia Public Ledger, a paper co-owned by Drexel, to attack the Northern Pacific. The Texas & Pacific also faced resistance because the Big Four had recently acquired the Southern Pacific and did not want a competitor in Arizona.

Cooke fought back. One of his lobbyists countered the Union Pacific and the Central Pacific by threatening a resolution that placed them under direct government oversight if they defaulted on interest payments. Cooke handled his investment banking rivals by bribing the Philadelphia Evening Bulletin and the Washington Chronicle for good publicity. Still, resistance was too deep: Cooke failed to receive any monetary subsidies and only acquired a middling land grant in the Washington Territory in May 1870. The Texas & Pacific fared better in March 1871 because of southerners’ support, but the House Pacific Railroad Committee cut the proposed twenty-six million acres in half and denied the railroad monetary assistance.

This grant to the Texas & Pacific was the last of Congress’s giveaways to the transcontinental railroads in the Great Barbecue. In many ways it marked the turning point of their political strength because of a striking reversal of fortune in the 1870s. Policy grew more hostile as railroad infighting accelerated while other special-interest groups gained influence and politicians demanded a bigger cut. Instead of lobbying for new privileges, the transcontinentals now had to lobby to defend their old ones. Hopkins summed it up to Huntington, reminiscing about how “when we commenced, eleven years ago, Congress and Legislation were gentle steeds. Bless me how they rear and tear now.”

The catalyst for the railroads’ decline in standing was the Crédit Mobilier scandal of 1872, when newspapers exposed the construction racket and how “Hoax” Ames bribed fellow congressmen with stock.The public fumed after learning that the scandal implicated Vice President Colfax, vice president elect Henry Wilson, House Speaker Blaine, and other Republican leaders. But they exploded in wrath when Congress penalized Ames with just a censure, a slap on the wrist. The Big Four fanned the flames by torching the Contract & Finance Company’s books to shield the Central Pacific from investigation. Cooke had planned to lobby for additional subsidies but stopped when Henry informed him how Crédit Mobilier had led to a “demoralization of Congress.”

The Crédit Mobilier fire quickly turned into the Panic of 1873 inferno. Thanks to subsidies and renewed credit expansion under the National Banking System, the booming railroad industry borrowed from banks to more than double its mileage between 1865 and 1873. But no more, as the panic, though mild for the overall economy, ushered in hardship for the railroad malinvestments. It was a stunning illustration of how the railroads had overexpanded beyond the public’s supply of savings and misallocated scarce factors of production. The proximate cause was Jay Cooke and the Northern Pacific. Blocked from selling bonds in Europe because of J. P. Morgan’s British connections, Cooke recklessly borrowed from his bank to finance his hastily built and poorly constructed railroad. In August 1872 the Northern Pacific owed $1.5 million to Jay Cooke & Co.; the following August the debt reached $7 million. In September, the New York branch of Jay Cooke & Co. failed. The unexpected downfall of the Cooke empire sank railroad stocks. Cooke, Scott, Huntington, and other indebted railroad magnates unsuccessfully lobbied Congress to issue greenbacks to bail out their overextended companies.

The Panic of 1873 ignited a minor political revolution after the long-exiled Democratic Party captured the House in the 1874 midterms and made Michael Kerr of Indiana, a free-market Bourbon Democrat, Speaker of the House. With the slavery question settled, northern Democrats returned to some semblance of their anticrony heritage. But it was a halfhearted return, for many Democratic farmers in the West and South joined regional Republicans in demanding the regulation of rates railroads charged to ship their goods between locations. These agrarian shippers formed the Grangers, the preeminent organization for American farmers. Grangers understandably compared many privileged railroad owners to medieval “robber barons” and “money sharks.”However, Grangers sought to combat them by granting new forms of cronyism. Their regulatory campaigns were orchestrated by powerful merchants and large landowners who were upset that they paid higher transportation rates than rivals who produced in more convenient geographical locations. In other words, the Granger regulations were designed to force railroads to charge the same price for all shippers, regardless of where they produced, to benefit their own businesses. As farming and mercantile shippers formed new influential constituencies in the Democratic and Republican parties, their calls for rate regulations threatened the revenue streams and hence the profitability of the transcontinentals.

In this new environment the once mighty Union Pacific and Central Pacific suffered blow after blow. The Union Pacific barely survived bankruptcy as its stock price sank from $100 to $14, while the Central Pacific faced rate-control threats in California. The politicians bought by the railroads either lost reelection or broke with them. As the Union Pacific’s control passed to the railroad baron Jay Gould, the Big Four managed to keep control of the Central Pacific. Still, not all was well for the Big Four. Even though the rival Northern Pacific remained moribund, Scott’s Texas & Pacific resumed lobbying efforts, and this was a problem, for a subsidized Texas & Pacific would jeopardize the Big Four’s Southern Pacific.

The great subsidy battle between Scott and Huntington in the mid-1870s illustrates the brutal nature of the Great Barbecue: special interests must incessantly kill rivals or risk being killed by them. Scott wanted monetary aid to finance construction, and Huntington would be damned if that happened. The battle to buy politicians in 1874 alone was rumored to cost $4 million—no wonder Huntington complained that the year’s congressmen were “the hungriest set of men ever got together.”With the firm backing of disgruntled southern Democrats looking for their own subsidized transcontinental, Scott maintained the advantage. He boasted around two hundred lobbyists, many of them former politicians, to dole out free passes and other goodies to congressmen. Still, in the post–Crédit Mobilier world, the Pennsylvania Napoleon couldn’t get what he desired.

Scott found an opening in the contested 1876 presidential election between Samuel Tilden, a prominent Bourbon Democrat and railroad lawyer, and the Republican Hayes. The election ended in electoral gridlock, and Congress established a special board to decide the outcome right before the inauguration. Scott delivered a radical proposal: enough southern Democrats would swing to Hayes and give him the presidency if he subsequently pushed Congress to grant monetary assistance to the Texas & Pacific. Scott’s plan formed one component of the so-called Compromise of 1877 that ended the Reconstruction South, and Hayes’s close supporters offered their assurances to Scott and his men. Scott pulled out all the stops to woo Hayes—he let the president-elect travel to the inauguration on his private railroad car.

The partnership between Scott and Hayes worried Huntington. In May, he learned from his lobbyists “confidentially that President Hayes will favor subsidizing a Southern Pacific Rail Road” and that “the fight promises to be active again.”To thwart his nemesis, Huntington—without government authorization—began constructing the Southern Pacific deep into Arizona to block off the Texas & Pacific. Scott counterattacked by having Secretary of War George McCrary order Huntington to cease construction. Huntington responded by personally visiting Hayes and promising the new president that he could build a southern transcontinental without additional subsidies. Hayes agreed and allowed the Southern Pacific to continue. The Scott-Hayes bargain was no more: in January 1878 Congress voted against subsidizing the Texas & Pacific.

Poor Scott was devastated by this double cross—the only subsidy he could wrangle from the Hayes administration was getting McCrary’s troops to quell striking workers on the Pennsylvania Railroad in the summer of 1877. But if the Great Barbecue was going to kill Scott, he would make sure it also killed Huntington. In 1878, Scott and the Chicago, Burlington & Quincy, an opponent of the Union Pacific, lobbied for the Thurman bill. This proposed legislation ordered the Union Pacific and the Central Pacific to divert 25 percent of their net earnings into a fund for the government loans they tried so hard to avoid paying. Huntington complained that Scott sought to “derive advantage from an undesired collision” between the government and the Central Pacific Railroad, but his and Gould’s lobbying efforts failed to stop the Thurman Act.

Scott’s revenge enormously burdened the two companies because they now had to give to the government money that was needed to build branch lines and improve efficiencies to compete against other railroads. Thus, the monetary subsidies ended up injuring the transcontinentals twofold in the long run—first by encouraging them to construct inefficiently and then by siphoning away revenues into government coffers. The Central Pacific lessened the blow by diverting traffic to the Southern Pacific, and the latter soon became the main company that owned the former. The damage to the Union Pacific was irreparable, however, and Charles Francis Adams Jr., who became its president in 1884, “soon discovered that its position in Washington had changed radically.”

New government agencies, particularly the Bureau of Railroad Accounts, hit the two railroads hard, subjecting them to withering testimonials and mountains of bureaucratic paperwork. The Union Pacific’s lobbying power over the Pacific Railroad Committees in Congress wilted. The politicians that represented Granger farmers and shippers in the West and South in the 1880s, known as the Populists a decade later, posed additional problems. They hounded the railroads to repay their loans and threatened harsh rate regulation or nationalization. Republican senator Preston Plumb of Kansas also shook the Union Pacific down, demanding that it pay “money,—and ‘big money’” if it wanted to survive in Congress.As Burton and Anita Folsom perceptively write, “The power to subsidize, Adams discovered, was the power to destroy.”When another credit-induced railroad boom ended in the Panic of 1893, the Union Pacific declared bankruptcy.

During this time, the other major transcontinental—the Northern Pacific—stumbled along. Ironically, Cooke’s old adversary, J. P. Morgan of Drexel, Morgan & Co., became the railroad’s banker. Morgan also joined the board of directors in 1883, the same year construction to the West Coast was finished. But Morgan’s victory with the Northern Pacific was short-lived, for the railroad started to face intense competition from James J. Hill’s Great Northern Railway. Contrary to the belief that transcontinentals could only be completed with government loans and land grants, the Great Northern demonstrated how free enterprise can build internal improvements more efficiently than the government- and taxpayer-subsidized businesses.

In 1878, Hill raised $5 million to purchase the subsidized St. Paul & Pacific Railroad in Minnesota, which had received a 2.5-million-acre land grant before promoters mismanaged it into bankruptcy. The market value of the land then became capitalized into the price Hill paid for it. Hill envisioned the St. Paul & Pacific forming the basis of a private transcontinental, which critics considered impractical. The profit motive and the lack of taxpayer assistance drove Hill to construct and operate a railroad that became far more successful than the Northern Pacific. He bought land incrementally instead of feverishly building with free land. He used quality steel rails to minimize repair costs. He paid settlers to farm nearby land to ensure long-run demand. Instead of building a scenic route like the Northern Pacific, Hill strove for efficiency and built a shorter route over the Rocky Mountains. While the government-backed Northern Pacific, which was not as conscientious of its bottom line, declared bankruptcy during the 1893 panic, the market-oriented Great Northern, which finished construction to the Pacific coast that year, did not.

However, the nature of cronyism is that everyone must contend with the political hustle—if not to curry favor, to avoid legislative threats and remove roadblocks. Hill was no exception, donating to Democrats to lower Republican tariffs on rails. Most notably, he lobbied Congress in 1886 to open twenty million acres in the Dakota and Montana territories to the Great Northern and its settlers. The land was legally occupied by Blackfeet and other Indian tribes in government reservations but was settled only sparsely by the tribes, meaning that Hill should have been able to move in and privately develop his railroad. In fact, the Indians did not oppose giving the Great Northern the right to develop the land. But the Northern Pacific and the Union Pacific, covetous of their nearby monopoly on rail services to silver and copper mines, lobbied to block Hill’s entrance. Democratic president Grover Cleveland vetoed the access measure, deeply angering Hill. The Great Northern counterattacked, lobbying the administration again and getting the measure passed months later. Hill returned the favor by donating $10,000 to Cleveland’s unsuccessful 1888 reelection bid.

Comparing the construction and operation of the Great Northern with the Northern Pacific, Union Pacific, and Central Pacific illustrates how government spending tends to produce less efficient outcomes than free enterprise. With the subsidized railroads, the promoters exploited taxpayer giveaways to hastily build shoddy railroads that collected the government’s cash and land. Much of this assistance was surreptitiously diverted to construction companies and then into the coffers of promoters and politicians. Government officials failed to realize that by giving away free money and resources to “play investor,” they distorted the incentive structure of businessmen and encouraged them to try and grab as much assistance as possible rather than effectively manage their companies. Government edict cannot not match the profit-and-loss signals of the market, which incentivize businesses to operate transportation companies that are long lasting and provide benefits to consumers and investors, because they are on the hook if their enterprises fail. Hill, who had to rely on private funds, produced such a transcontinental.

Some economic historians argue that even if the government subsidies produced poorly managed railroads, they still spurred economic development by increasing the value of nearby land and budding farms, towns, and cities.While the transcontinentals did stimulate growth along these lines, the analysis ignores the opportunity cost. Market investors did not deem a transcontinental profitable around the time of the Civil War, estimating that it was a better use of scarce funds to produce alternative forms of transportation that consumers would spend enough money on to make feasible, such as regional railroads and steamships. In other words, the economic development in the middle of the country that the transcontinentals encouraged was premature, and the taxpayer assistance directed resources away from promoting other land and water routes. When market actors did deem a transcontinental profitable without government money, as Hill did in the late 1870s and early 1880s, they built one of far higher quality and at lower cost.

Government subsidies may have come and gone by the 1890s, but railroad cronyism survived by changing forms. When the Northern Pacific declared bankruptcy in 1893, Hill moved to acquire it. He worked with Morgan to combine the railroads, with their 1896 agreement focusing on “avoiding competition and aggressive policy.”Morgan, the preeminent railroad banker, schemed to reduce railroad competition over routes and rates, and leading railroads increasingly desired government restrictions to control markets. It was the next stage in the evolution of railroad cronyism.

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Theodore Judah, quoted in John F. Stover, American Railroads, 2nd ed. (Chicago: University of Chicago Press, 1997), 67.

Vernon Louis Parrington, Main Currents in American Thought: An Interpretation of American Literature from the Beginnings to 1920, vol. 3, The Beginnings of Critical Realism in America, 1860–1920 (New York: Harcourt, Brace, 1927), 23.

F. A. Pike, Congressional Globe, Part II, 2nd Session, 37th Congress, April 17, 1862, 1707.

Arthur M. Johnson and Barry E. Supple, Boston Capitalists and Western Railroads: A Study in the Nineteenth-Century Railroad Investment Process (Cambridge, MA: Harvard University Press, 1967), 197; and Richard White, Railroaded: The Transcontinentals and the Making of Modern America (New York: W. W. Norton, 2011), xxiv–xxvii, 17, 460–61.

Quoted in Dennis Drabelle, The Great American Railroad War: How Ambrose Bierce and Frank Norris Took on the Notorious Central Pacific Railroad (New York: St. Martin’s Press, 2012), 19.

Dee Brown, Hear That Lonesome Whistle Blow: The Epic Story of the Transcontinental Railroads (New York: First Owl Books, 2001), 45–48, 62, 78; Philip H. Burch Jr., Elites in American History, vol. 2, The Civil War to the New Deal (New York: Holmes and Meier, 1981), 23–24; Dan Butler, “Leland Stanford,” in Encyclopedia of American Business History and Biography: Railroads in the Nineteenth Century, ed. Robert L. Frey (New York: Facts on File, 1988), 377–78; Dan Butler, “Theodore Judah,” in Frey, Encyclopedia, 214; Drabelle, Great, 18–19; Richard Kreitner, Break It Up: Secession, Division, and the Secret History of America’s Imperfect Union (New York: Little, Brown, 2020), 251–60; David Lavender, The Great Persuader: The Biography of Collis P. Huntington (New York: Doubleday, 1970), 98–100, 107; Robert B. Mitchell, Congress and the King of Frauds: Corruption and the Credit Mobilier Scandal at the Dawn of the Gilded Age (Roseville, MN: Edinborough Press, 2019), 12; Heather Cox Richardson, The Greatest Nation on Earth: Republican Economic Policies during the Civil War (Cambridge, MA: Harvard University Press, 1997), 176, 178, 194–95, 198; Murray N. Rothbard, “A History of Money and Banking in the United States before the Twentieth Century,” in A History of Money and Banking in the United States: The Colonial Era to World War II, ed. Joseph T. Salerno (Auburn, AL: Ludwig von Mises Institute, 2005), 127–29; Don Snoddy, “Union Pacific Railroad,” in Frey, Encyclopedia, 396; and White, Railroaded, 17–18.

Emily Briggs, “The Dragons of the Lobby,” February 1869, in The Olivia Letters (New York: Neale, 1906), 93; and quoted in Kathryn Allamong Jacob, King of the Lobby: The Life and Times of Sam Ward, Man-about-Washington in the Gilded Age (Baltimore: Johns Hopkins University Press, 2010), 108.

Matthew Josephson, The Robber Barons (New York: Harcourt, Brace, 1962), 79.

Kreitner, Break, 452. Brown, Hear, 47–48; Burch, Elites, 2:16; Drabelle, Great, 20–21; Mark L. Goldstein, Before the Gilded Age: W. W. Corcoran and the Rise of American Capital and Culture (Washington, DC: Georgetown University Press, 2023), 80; Johnson and Supple, Boston, 198–99; Alec Kirby, “Thomas C. Durant,” in Frey, Encyclopedia, 111–13; Maury Klein, Union Pacific, vol. 1, 1862– 1893 (Minneapolis: University of Minnesota Press, 2006), 148; Richardson, Greatest, 177–78, 184–87; Aaron M. Sakolski, The Great American Land Bubble: The Amazing Story of Land-Grabbing, Speculations, and Booms from Colonial Days to the Present Time (New York: Harper and Brothers, 1932), 284–93; and Snoddy, “Union,” 394.

Brown, Hear, 48–49, 51–52; Burch, Elites, 2:57–58; Burton W. Folsom Jr. and Anita Folsom, Uncle Sam Can’t Count: A History of Failed Government Investments, from Beaver Pelts to Green Energy (New York: Harper Collins, 2014), 89–90; and Klein, Union, 1:23.

Brown, Hear, 49–51; Stuart Daggett, Chapters on the History of the Southern Pacific (New York: Ronald Press, 1922), 43; Drabelle, Great, 26–27; Roland De Wolk, American Disruptor: The Scandalous Life of Leland Stanford (Oakland: University of California Press, 2019), 81–83; Lavender, Great, 130–33, 136–37; and Richard Rayner, The Associates: Four Capitalists Who Created California (New York: W. W. Norton, 2008), 49–50.

Brown, Hear, 52–54; Thomas J. DiLorenzo, Lincoln Unmasked: What You’re Not Supposed to Know about Dishonest Abe (New York: Crown Forum, 2006), 110–11; Gary Ecelbarger, The Great Comeback: How Abraham Lincoln Beat the Odds to Win the 1860 Republican Nomination (New York: St. Martin’s Press, 2008), 47–49; Folsom and Folsom, Uncle, 75; Kirby, “Durant,” 112–13; Klein, Union, 1:20–21, 23–27; Richardson, Greatest, 187–93; and Murray N. Rothbard, The Progressive Era, ed. Patrick Newman (Auburn, AL: Mises Institute, 2017), 59.

Paul W. Gates, “The Homestead Law in an Incongruous Land System,” American Historical Review 44, no. 4 (July 1936): 673.

Mark Hopkins to Collis P. Huntington, February 16, 1864, quoted in White, Railroaded, 22.

Quoted in Mitchell, Congress, 14.

Brown, Hear, 52–54, 58; Folsom and Folsom, Uncle, 76; William S. Greever, “Atchison, Topeka and Santa Fe Railway,” in Frey, Encyclopedia, 15; William S. Greever, “Cyrus K. Holliday,” in Frey, Encyclopedia, 182–83; James Hipp, “Oakes Ames,” in Frey, Encyclopedia, 12–13; Jacob, King, 10–11, 105–6; Johnson and Supple, Boston, 204, 224–25; John Lauritz Larson, “James Frederick Joy,” in Frey, Encyclopedia, 209–10; Mitchell, Congress, 13; Rothbard, Progressive, 42; and White, Railroaded, 32, 60–61.

Brown, Hear, 58; Klein, Union, 1:30; Lavender, Great, 154–56; Rayner, Associates, 60; Richardson, Greatest, 202; Rothbard, Progressive, 43–44; and White, Railroaded, 24–26.

Brown, Hear, 58; Christopher J. Calton, “Monstrous Monopolies and Vicious Competition: The General Incorporation Movement in Nineteenth-Century America” (PhD diss., University of Florida, 2023), 213–16; Lavender, Great, 411; Richardson, Greatest, 207; Rothbard, Progressive, 43–45; and White, Railroaded, 26–35.

Drabelle, Great, 52.

Brown, Hear, 211; Lavender, Great, 154; Richardson, Greatest, 202; Rothbard, Progressive, 46; and White, Railroaded, 24.

Oakes Ames to Oliver Ames, December 8, 1867, quoted in Klein, Union, 1:143.

House Report 77, “Credit Mobilier,” 42nd Congress, 3rd Session, February 18, 1873, 7, quoted in Mark Wahlgren Summers, The Era of Good Stealings (New York: Oxford University Press, 1993), 51–52.

Brown, Hear, 58, 66, 76, 187–88; Thomas Donaldson, The Public Domain: Its History, with Statistics (Washington, DC, 1880), 271; Johnson and Supple, Boston, 216; Klein, Union, 1:80, 144–45, 168; Lavender, Great, 170–74, 194, 211, 220–21; Mitchell, Congress, 26–27, 29–31, 35–36; Summers, Era, 50–52; and White, Railroaded, 35.

Brown, Hear, 61–65, 91–96, 110, 183–85; Thomas J. DiLorenzo, “The Culture of Violence in the American West: Myth versus Reality,” Independent Review 15, no. 2 (Fall 2010): 229–36; Drabelle, Great, 37, 46, 49, 55; Burton W. Folsom Jr., The Myth of the Robber Barons: A New Look at the Rise of Big Business in America (Herndon, VA: Young America’s Foundation, 2007), 18, 20–21; Julius Grodinsky, Transcontinental Railway Strategy, 1869–1893: A Study of Businessmen (Philadelphia: University of Pennsylvania Press, 1962), 1–3, 10, 21; Klein, Union, 1:32, 329; and Lavender, Great, 199.

Isaac Morris, Condition of the Union Pacific Railroad (US Congress, 44th, 1st session, House of Representatives Executive Document 180; Washington 1876), 9–11, quoted in Brown, Hear, 185.

Brown, Hear, 101–25, 184–85; Lavender, Great, 199, 240–42; and Rayner, Associates, 84, 100–103.

Brown, Hear, 211; Henrietta M. Larson, Jay Cooke, Private Banker (Cambridge, MA: Harvard University Press, 1936), 200–202, 248, 260, 273–74; Patrick Newman, “The Origins of the National Banking System: The ChaseCooke Connection and the New York City Banks,” Independent Review 22, no. 3 (Winter 2018): 383–401; and Joseph Rishel, “Jay Cooke,” in Encyclopedia of American Business History and Biography: Banking and Finance to 1913, ed. Larry Schweikart (New York: Facts on File, 1990), 141.

Shelby Cullom, Congressional Globe, 40th Congress, 3rd Session, January 27, 1869, 652.

Eric Foner, Reconstruction: America’s Unfinished Revolution, 1863–1877 (New York: Harper and Row, 1988), and Summers, Era, 95, 154–55, 157–58.

Rutherford B. Hayes, February 20, 1870, quoted in Charles Richard Williams ed., Diary and Letters of Rutherford Birchard Hayes, vol. 3, 1865–1881 (Ohio State Archaeological and Historical Society, 1924), 89.

New York Daily Herald, March 11, 1872, 6. Burch, Elites, 2:59; Albert J. Churella, The Pennsylvania Railroad, vol. 1, Building an Empire, 1846–1917 (Philadelphia: University of Pennsylvania Press, 2013), 382, 419–20; Foner, Reconstruction, 467; Jeremiah D. Lambert and Geoffrey S. Stewart, The Anointed: New York’s White-Shoe Law Firms (Guilford, CT: Lyons Press, 2021), 25; Larson, Cooke, 274–75; Lavender, Great, 282–85; M. John Lubetkin, Jay Cooke’s Gamble: The Northern Pacific Railroad, the Sioux, and the Panic of 1873 (Norman: University of Oklahoma Press, 2006), xvii, 235; Ellis Paxson Oberholtzer, Jay Cooke: Financier of the Civil War (Philadelphia: George W. Jacobs, 1907), 2:168; Summers, Era, 48–50, 55, 110–12, 138, 181–82; and George Thayer, Who Shakes the Money Tree? American Campaign Finance Practices from 1789 to the Present (New York: Simon and Schuster, 1973), 35.

Henry Cooke to Jay Cooke, February 3, 1872, quoted in Summers, Era, 54–55.

Vincent P. Carosso, The Morgans: Private International Bankers, 1854–1913 (Cambridge, MA: Harvard University Press, 1987), 137, 140–41, 146; Churella, Pennsylvania, 1:419–20; Klein, Union, 1:274–76; Larson, Cooke, 275, 288–95; Scott Reynolds Nelson, A Nation of Deadbeats: An Uncommon History of America’s Financial Disasters (New York: Alfred A. Knopf, 2012), 165–66; Oberholtzer, Cooke, 2:181; Summers, Era, 59; and Mark Wahlgren Summers, Railroads, Reconstruction, and the Gospel of Prosperity: Aid under the Radical Republicans, 1865–1877 (Princeton, NJ: Princeton University Press, 1984), 170–72.

Mark Hopkins to Collis P. Huntington, February 4, 1873, quoted in Margaret Susan Thompson, The “Spider Web”: Congress and Lobbying in the Age of Grant (Ithaca, NY: Cornell University Press, 1985), 266.

“Justice to Hoax Ames,” New York Daily Herald, January 24, 1873, 6.

Henry Cooke to Jay Cooke, February 11, 1873, quoted in Summers, Era, 237.

Brown, Hear, 187–89, 213, 215; Lavender, Great, 292–93; Lubetkin, Gamble, 62–64, 74–75, 164, 167–69, 235, 269–72; Patrick Newman, “The Depression of 1873–1879: An Austrian Perspective,” Quarterly Journal of Austrian Economics 17, no. 4 (Winter 2014): 484–97; Rothbard, Progressive, 47–49; Irwin Unger, The Greenback Era: A Social and Political History of American Finance, 1865–1879 (Princeton, NJ: Princeton University Press, 1964), 221–22; and White, Railroaded, 50, 63–65, 73, 81–84.

Charles Francis Adams Jr., Railroads: Their Origin and Problems (New York: G. P. Putnam’s Sons, 1886), 145, quoted in Brown, Hear, 276.

Lee Benson, Merchants, Farmers, and Railroads: Railroad Regulation and New York Politics, 1850–1887 (Cambridge, MA: Harvard University Press, 1955), 24–25, 59–60, 256–57; Mitchell, Congress, 161–62, 166; Thompson, Congress, 180–203; White, Railroaded, 110–11; and C. Vann Woodward, Reunion and Reaction: The Compromise of 1877 and the End of Reconstruction (New York: Oxford University Press, 1991), 61, 128.

Collis P. Huntington to David Colton, November 20, 1874, quoted in Lavender, Great, 305.

Brown, Hear, 190–92; Churella, Pennsylvania, 1:422–23; Jacob, King, 101; Klein, Union, 1:370–71; Lavender, Great, 301–2, 329–30; and White, Railroaded, 82, 85–86, 107, 117–19, 127.

B. Holladay to Collis P. Huntington, May 2, 1877, and H. D. Morey to Collis P. Huntington, May 5, 1877, quoted in Samuel DeCanio, Democracy and the Origins of the American Regulatory State (New Haven, CT: Yale University Press, 2015), 159.

Collis P. Huntington to J. Garfield, April 12, 1878, quoted in DeCanio, Democracy, 166. Brown, Hear, 199–202; Burch, Elites, 2:73–74, 77, 79–80, 115; Churella, Pennsylvania, 1:423–26; DeCanio, Democracy, 157–63; Foner, Reconstruction, 583–84; Robert Kelley, The Transatlantic Persuasion: The Liberal-Democratic Mind in the Age of Gladstone (New York: Alfred A. Knopf, 1969), 238–92; Klein, Union, 1:381–84, 457, 465–68; Lavender, Great, 315, 326, 329–30; Horace Samuel Merrill, Bourbon Leader: Grover Cleveland and the Democratic Party (Boston: Little, Brown, 1957), 44–47; White, Railroaded, 107, 117, 119, 127, 132; and Woodward, Reunion, 232–37.

Klein, Union, 1:384.

Preston Plumb, quoted in Klein, Union, 1:543.

Folsom and Folsom, Uncle, 80.

Folsom, Myth, 21–22; Klein, Union, 1:375–76, 382, 465–68, 533–34, 537–46; Lavender, Great, 353; and White, Railroaded, 331–33, 347–55, 370–72, 393–98.

Brown, Hear, 265–68; Carosso, Morgans, 249–54; Thomas J. DiLorenzo, How Capitalism Saved America: The Untold History of Our Country, from the Pilgrims to the Present (New York: Crown Forum, 2004), 112–21; Folsom, Myth, 22–32, Michael P. Malone, James J. Hill: Empire Builder of the Northwest (Norman: University of Oklahoma Press, 1997), 31–33, 113, 119–22; Albro Martin, James J. Hill and the Opening of the Northwest (Minneapolis: Minnesota Historical Society Press, 1991), 298–99, 307–8, 338–39, 396; and W. Thomas White, “A Gilded Age Businessman in Politics: James J. Hill, the Northwest, and the American Presidency, 1884–1912,” Pacific Historical Review 57, no. 4 (November 1988): 441–42.

Dave Donaldson and Richard Hornbeck, “Railroads and American Economic Growth: A ‘Market Access’ Approach,” Quarterly Journal of Economics 131, no. 2 (May 2016): 799–858; and Robert W. Fogel, “The Union Pacific Railroad,” in The Reinterpretation of American Economic History, ed. Robert W. Fogel and Stanley L. Engerman (New York: Harper and Row, 1971), 417–25.

Folsom, Myth, 30–31; and White, Railroaded, 17, 20–21, 47–58, 206–7, 211, 460–86, 491, 515–17.

“Memorandum of a Conference Held in London on the 2nd of April 1896,” quoted in Carosso, Morgans, 385.

Carosso, Morgans, 383–86.