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Union Pacific Railroad, The A case in premature enterprise Robert William Fogel
The Union Pacific Railroad A Case in Premature Enterprise by Robert William Fogel
Hard Cover NAME written on inside front cover
138 pages
Copyright 1960
CONTENTS
PREFACE9
LIST OF TABLES 14
I. THE PARADOX OF PREMATURE ENTERPRISE .17
II. A REINTERPRETATION OF THE CONGRESSIONAL DEBATE ON CONSTRUCTION AND OWNERSHIP 25 How the Issue Presented Itself
The Whitney Plan
1852-1860: The Persistence of Quasi-Government Enterprise
The Dominance of Pragmatism
Toward an Eclectic Conclusion
III. THE DOUBLE IRONY OF THE ACTS OF 1862 AND 1864 51
The Factual Background
The problem of funds
The construction contracts
The Ames-Durant conflict
The Profit
The Nature and Extent of the Risk Faced by the Promoters The Fundamental Deficiency in the Acts of 1862 and 1864
IV. THE QUESTIONS OF PUBLIC POLICY91
The Social Rate of Return
The Efficiency of the Acts of 1862 and 1864
APPENDIX A: THE BOND TRANSACTIONS OF 1869-1870 111 APPENDIX B: DOCUMENTATION ON THE DISCOVERY AND ADOPTION OF THE EVANS PASS ROUTE117
SELECTED BIBLIOGRAPHY 120
INDEX 125
LIST OF TABLES
TABLEPAGE
I. The Wilson Committee's Estimate of the Profit of the Promoters Taken at the Face Value of the Securities of the Union Pacific Railroad 66
II. Estimate of the Profit of the Promoters on the Assumption That They Drained All of the Uncommitted Cash of the Union Pacific67
III. Estimate of the Upper Limit of the Profit of the Promoters70
IV. Bonded Debt of the Union Pacific 72
V. Estimate of the Capital Invested by Promoters. . 73
VI. Union Pacific Earnings and Interest on Funded Debt, 187287
VII. The Rate of Return on the Book Value of the Union Pacific 95
VIII. The Rate of Return on the Cash Expenditure on Construction 96
IX. Estimated Social Return on Construction Expenditure 102
PREFACE
This study differs from previous histories of the Union Pacific in four main respects:
First, it suggests that the progress of legislation on a Pacific railroad was marked not by a headlong flight from proposals for a government enterprise but by the difficulty Congress exhibited in breaking away from such schemes.
Second, it introduces a considerable amount of new material controverting the traditional explanation of the ruin of the railroad company. The new material includes a detailed summary of the difficulties faced by the promoters in raising the private capital needed for construction; neglected abstracts of the books of the Union Pacific and the Credit Mobilier which provide a new basis for estimating the cost of the road and the profit of the promoters; and various considerations bearing on the nature and extent of the risk faced by the promoters. This material makes it possible to quantify the market's evaluation of the probability that the Union Pacific Railroad Company would fail and to project a " justifiable " profit against which the actual profit of the promoters can be judged.
Third, it tests the economic wisdom of the government's decision to intervene in the building of the railroad by estimating the social rate of return on the construction expenditure and by evaluating the efficiency of the particular method of financing projected by Congress.
Fourth, it draws on formal economic theory in the determination and analysis of historical facts. Interest theory is combined with the theory of a " fair game " to deduce, from the market price of the railroad's first-mortgage bonds, the market's evaluation of the probability that the Union Pacific would fail. The theory of rent forms the basis for the estimation of the social rate of return on the capital invested in the railroad. The concept of present value is used in the determination of the relative efficiency of the various proposals that were put forth for the financing and construction of a Pacific road.
By and large, economic historians have rejected the pleas that have been made for a greater use of theory in the study of history. This rejection has been justified on the basis of the static character, the timelessness, the simplifications of many economic models. However, these limitations of economic models do not create a presumption against the applicability of theory to historical problems. To rule out the use of formal theory in the study of history, it is necessary to demonstrate the existence of a superior alternative. Yet the alternative of a purely factual presentation of economic history does not exist. As Professor Machlup has stressed, many things presented as facts are really disguised (and often quite thinly disguised) theories.1 For example, the frequently met statement that the promoters of the Union Pacific engaged in profiteering is not a factual statement but a judgement based on an assumed relationship among the size of the profit of the promoters, the size of their investment and the degree of risk that they faced. Indeed, once the historian passes beyond the random collection of facts to the selection and linking of facts, theory is inevitably involved. The only real alternative to the use of formal theory in historical presentations is a reliance on implicit or casual theory; that is, the choice is not between theory and something else but between different kinds of theory. The advantage of formal theory over casual theory is that the former is more explicit in its assumptions and more systematic in its development.
Theory can be as helpful in the determination of facts as it can be in the explanation of them. The research worker in economic history rarely has the good fortune to find the evidence bearing on a given question to be a neat collection of unequivocal, consistent items. On the contrary, he is, as a rule, faced with conflicting and mutually exclusive items all of which claim the title of " fact." Thus, in the case of the Union Pacific we find a number of contradictory statements from reliable contemporary sources concerning the extent of the risk that confronted the promoters of the railroad. In cases such as this, theory can frequently be of great service by revealing the internal consistency or inconsistency in an alleged set of facts, thereby providing a logical foundation for choosing between conflicting observations.
Formal theory is not a magic wand. Not all problems in economic history lend themselves to theoretical manipulation. It is impossible to foresee the particular circumstances under which various theoretical constructs will be of use. However, if the limitations of theory are recognized, if theory is used to analyze specific problems rather than to buttress grandiose generalizations, and if the assumptions of the analysis are formulated on the basis of a careful consideration of the available institutional and empirical evidence, theory may be of much greater use in the study of economic history than has been generally realized.
Many topics that might have been dealt with in a more general history of the Union Pacific have been omitted or treated in a cursory manner. No attempt was made to discuss the protracted debate on routes or to record the almost endless maneuvers on the various bills that preceded the Pacific Railroad Acts of 1862 and 1864. The bribery aspects of the Credit Mobilier affair are alluded to only in passing. The history of the physical progress of construction is limited to the minimum required to understand the problem of funds. Restricted treatment of these and other questions was necessary to sharpen the focus on the questions of public economic policy posed by premature enterprise and to avoid repeating what is already well known.
My first debt is to Professor Carter Goodrich of Columbia University who suggested the topic of this study and supervised my work on it. His detailed criticisms improved both the style and content of the pages that follow. My obligation to Professor Goodrich extends beyond the limits of this volume. His discerning, suggestive lectures and reading notes on American economic history stimulated my desire to work in this field and provided me with an invaluable foundation for further study.
I am also indebted to Professors James K. Kindahl and Edwin S. Mills of The Johns Hopkins University for many extended discussions (in the case of Dr. Kindahl, on almost a daily basis) over a period of six months. These discussions were particularly helpful in clarifying some of the theoretical considerations involved in the calculation of the " justifiable " profit of the promoters and the estimation of the social rate of return on the Union Pacific investment. Professors G. Heberton Evans, Jr. and Simon Kuznets of The Johns Hopkins University read a late draft. Their suggestions clarified several ambiguous formulations. Mr. James Weinstein read and helped edit a number of drafts of the first two chapters. The final draft was edited by Mr. Aldo J. Fortuna. I am grateful to my wife for her constant encouragement and for enduring the slings and arrows of protracted research.
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