The Union Pacific Railroad: A Case in Premature Enterprise

The Union Pacific Railroad: A Case in Premature Enterprise

The Union Pacific Railroad: A Case in Premature Enterprise

The Union Pacific Railroad: A Case in Premature Enterprise

Excerpt

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.

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