A Point on the History of Public Investment in US Transportation

In The Wall Street Journal today, writers Larry Schweikart and Burton Folsom make their case against the Obama administration's infrastructure plans.  

As they write:

Railroads are another example of the infrastructure-follows-entrepreneurship rule. Before the 1860s, almost all railroads were privately financed and built. One exception was in Michigan, where the state tried to build two railroads but lost money doing so, and thus happily sold both to private owners in 1846. When the federal government decided to do infrastructure in the 1860s, and build the transcontinental railroads (or "intercontinental railroad," as Mr. Obama called it in 2011), the laying of track followed the huge and successful private investments in railroads.

In fact, when the government built the transcontinentals, they were politically corrupt and often—especially in the case of the Union Pacific and the Northern Pacific—went broke. One cause of the failure: Track was laid ahead of settlements. Mr. Obama wants to do something similar with high-speed rail. The Great Northern Railroad, privately built by Canadian immigrant James J. Hill, was the only transcontinental to be consistently profitable. It was also the only transcontinental to receive no federal aid. In railroads, then, infrastructure not only followed the major capital investment, it was done better privately than by government. [emphasis added] 

A bold point.  However, as one Lord Keynes (probably not his real name) argued in a 2011 post, that's not the whole story of Hill.   "Keynes" points us toward the Wikipedia entry on the St. Paul Paul and Pacific Railroad, which tells a different story.

At the moment, I don't have time to chase down all the quotes herein, or to directly compare the scholarship here, so for the time being, I will simply post both arguments, those of Schweikart/Folsom and those of "Keynes."

As "Keynes" presents the other side:

James J. Hill is often invoked as a hero by apologists for extreme laissez faire, because his railway was allegedly built completely privately, without any government subsidies or land grants. Unfortunately, there some inconvenient facts the free market ideologues leave out when they discuss Hill and the Great Northern Railway:

(1) Hill acquired a pre-existing railway called the Saint Paul and Pacific Railroad (which was originally charted as the “Minnesota and Pacific Railroad” in 1857) as the starting basis for his Great Northern Railway. The Saint Paul and Pacific Railroad existed because of massive government support:

“In 1857, the territorial legislature of the state of Minnesota issued a charter to the Minnesota and Pacific Railroad to build a standard gauge railway from Stillwater in the east to St. Paul in the west .... The railroad received a grant of 2,460,000 acres (1,000,000 ha) of land from the territorial legislature. This was the seventh largest land grant of the 75 given to railroads nationwide between 1850 and 1871. Construction began in the autumn of 1857, and in 1856 the state backed a $5 million bond issue to support the new rail system. But speculators manipulated the nascent railroad’s profits, overcharged it for supplies, and sold off some of its assets. It went bankrupt in 1860, and the new state legislature purchased all of its assets for a mere $1,000. … In 1862, the state legislature reorganized the bankrupt railroad as the St. Paul and Pacific Railroad.
....
But James J. Hill, who ran steamboats on the Red River, knew that the SP&P owned very valuable land grants and saw the potential of the railroad. Hill convinced John S. Kennedy (a New York City banker who had represented the Dutch bondholders), Norman Kittson (Hill’s friend and a wealthy fur trader), Donald Smith (a Montreal banker and executive with the Hudson’s Bay Company), and George Stephen (Smith’s cousin and a wealthy railroad executive) to invest $5.5 million in purchasing the railroad. On March 13, 1878, the road's creditors formally signed an agreement transferring their bonds and control of the railroad to Hill's investment group. On September 18, 1889, Hill changed the name of the Minneapolis and St. Cloud Railway (a railroad which existed primarily on paper, but which held very extensive land grants throughout the Midwest and Pacific Northwest) to the Great Northern Railway. On February 1, 1890, he transferred ownership of the StPM&M, Montana Central Railway, and other rail systems he owned to the Great Northern.”

Saint Paul and Pacific Railroad, Wikipedia.

(2) Hill benefited from government negotiations with Native Americans to obtain the right to build his railway on their land:

“The Great Northern had to stop construction in 1886 to wait for the government’s negotiations for Indian lands. The 1887 agreement over the Sweetgrass Hills gave the Great Northern Railway a 75-foot right-of-way over the Rocky mountains and through Western Montana-plus permission to use all the stone and lumber it needed for construction.” (Holmes, Dailey, and Walter 2008: 175).

Lloyd J. Mercer summarises how Hill’s Great Northern System relied on the acquisition of previous state-subsidised railways with land grants:

“The Great Northern System was an outgrowth of the St. Paul, Minneapolis and Manitoba Railroad, which was formed May 23, 1879, considerably after the end of the land grant era. The St. Paul, Minneapolis and Manitoba was initially formed out of the foreclosed St. Paul and Pacific railroad, which had come into possession of a federal land grant created by an act of March 3, 1857. The unsold portion of that old grant passed to the new company and became the major part of the land grant of the Great Northern System. In 1880–1881 the St. Paul, Minneapolis and Manitoba acquired the charter of the Minneapolis and St. Cloud Railway Company, to which was attached a land grant from the State of Minnesota in the amount of 10 sections per mile. This grant formed the remainder of the land grant of the Great Northern System, which became the beneficiary of efforts to subsidize predecessor railroads that were, unlike the Great Northern, truly pioneer effects.” (Mercer 1982: 59–60).

Mercer (1982: 148) also concludes the acceleration of the “construction and operation [sc. of America’s railways] through subsidization made a positive contribution to nineteenth-century economic growth in the United States. On efficiency grounds government intervention in the timing of the railroad building decision was rational.” James J. Hill was in fact a beneficiary of that government intervention by his acquisition of earlier railways.