Railroad Land Grants: Economically Justified? The American

Railroad Land Grants: Economically Justified?

The American government's land grant policy and provision of subsidies to private railroad companies in the nineteenth century has been the subject of much discussion by historians and economists alike. However, few writers have examined the economic issues involved in the subsidies in detail, leading at times to the wrong conclusions. Lloyd J. Mercer, a Professor of Economics at the University of California (Santa Barbara) is one of the select few who have attempted to carry out an economic analysis of the land-grants policy in order to determine whether the policy was economically justified and socially beneficial. This paper summarizes the professor's article Land Grants to American Railroads: Social Cost or Social Benefit (1969) by identifying the main thoughts of the author followed by a critical analysis of what he has suggested in the article.

Summary

Professor Mercer disagrees with the commonly held view of most historians that the land-grant policy was overly generous and the private individuals and companies who received the grants and subsidies made huge profits by selling the land, manipulating securities and exploiting the farmers. He is more in agreement with those who have argued that the land grants and subsidies were not very profitable but did provide sufficient attraction for the pioneers to venture into the railroad-building project.

The author then uses the internal rate of return (IRR)

method to calculate the real rates of return for two major railroad companies (Central Pacific and Union Pacific), with and without land grants, and the social rate of return. The results of the computation show that there was a small difference of just 1.2 percentage points in the real rate of return to the railroad companies, with and without land-grants, while the social rate of return was substantially higher. The author thus concludes that the land-grant policy of the government, though not perfect, was correct.

Critical Analysis

In my opinion, although a useful addition to the literature available on the U.S. government's land grant policy to the railroads in the 19th century, Professor Mercer's economic analysis of the issue suffers from a major drawback. It fails to recognize the fact that economics is not a precise science like other physical sciences such as physics or chemistry and most economic problems can and do have more than one solution. Similarly, there is no single right method of making an economic analysis since various economic theories, models and tools that are used to analyze a situation contain a number of variables, and simplifications. Hence the results of such economic models are by no means definitive. For example, the internal rate of return, the method used by Professor Mercer to determine the real rates of return to the private railroad companies and the social benefits of the construction of railroads, is just one of the several economic tools for making economic analysis and decisions (other methods for making similar analysis, for example, include, the Net Present Value-NPV and the Profitability Index-PI methods). As a result, Mercer's IRR calculations that he uses to prove his point cannot be considered as a final "proof" of the justification for the government grants of lands and subsidies to the railroad companies.

There are other 'problematic' areas in the benefit and cost analysis made by Professor Mercer too. For instance, it is difficult to put an exact value on the land grants made such a long time ago (19th century) because the relative costs of different items have changed at vastly different rates in the intervening period. The value of the land grants is often quoted as half a billion dollars, but to put the figure in perspective, it is important to remember that the GNP of United States in 1870 was approximately 6.7 billion dollars while its current GNP is approximately 10 trillion dollars. Therefore, the value of the railroad land grants in 1870 was about 13% of the country's GNP at the time.

It is also important to recognize that the issue of land grants is not an exclusively economics problem. It has political overtones as well since, apart from the economic desirability of railroad construction, it was important for the American government to have a railroad system for the military and consolidate its claim over the far-flung territories areas in the West, which made the construction of the railroad a political necessity. It is an environmental problem too as millions of acres of public land given to the railroad companies ended up with timber, mining, and real estate corporations resulting in widespread corporate abuse including deforestation and dumping of toxic waste -- effects of the land grant policy which are visible even today.