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Copyright © The Economic History Association 2013 2013 The Economic History Association
The first transcontinental is one of the largest railroads ever built in the United States and was the largest publicly funded work of the nineteenth century. The federal government, through the Pacific Railroad Act of 1862, provided a construction loan and land grants to two private companies, the Central Pacific and the Union Pacific, which built and operated the railroad. Was the Pacific Railroad Act necessary to induce private investment into building the first transcontinental? The purpose of this article is to analyze the ex-ante decision of private entrepreneurs and investors to build the transcontinental and examine the role of government in inducing private construction.
In 1869 the rails of the two companies joined and the completed railroad connected east and west, improving transport time and quality dramatically. In 1860 the same trip between New York and San Francisco that later took a passenger less than a week by rail, took about a month via Panama and at least three months via Cape Horn. The first transcontinental became a symbol of the nation's union after the Civil War, facilitated westward expansion, and generated high positive externalities.1On this evidence, government intervention to promote private construction through the Pacific Railroad Act looks like a great success.
However, the ex-post unaided private rate of return for each of the two railroad companies ranged from 8 to 13 percent and was higher than the opportunity cost (Fogel 1960, p. 97; Mercer 1982, pp. 75-84). Entrepreneurs could have undertaken the project with their own money. Moreover, the project was linked to one of the most visible corruption scandals of the nineteenth century. Entrepreneurs and politicians used construction companies like the Credit Mobilier to appropriate subsidies as profits (U.S. Congress 1872-1873; Hazard 1881; White 1895). Thus, there are also good reasons to doubt the need for and efficiency of the Pacific Railroad Act.
Most economic historians propose that entrepreneurs did not expect the railroad to be profitable; the railroad was "built ahead of demand" or "premature." In this view, the Pacific Railroad Act was necessary to induce private investment, even if it was not efficient (Schumpeter 1939; Fogel 1960;...