This week’s assigned reading was a speech by Dr. Patrick Newman titled Cronyism in America: The Nation's First Big Business. In it, Newman challenges the traditional view that government intervention is primarily intended to benefit the public. He argues instead that much of this intervention is actually cronyism — policies crafted to serve special interests at the public’s expense. According to Newman, the role of the economic historian is to uncover the real motivations behind legislation and identify who truly benefits. He also references his book, which explores the real winners behind these special-interest policies.
One of the key examples he gives is the transcontinental railroad. Newman explains that land grants and subsidies, while intended to stimulate development, led to poorly constructed railroads and enriched political elites. He argues that the railroads could have been built more efficiently through free-market forces alone. At the time, these railroads were America’s first big businesses. They were much larger than typical manufacturers and had enormous political influence. Many railroad companies bribed politicians and employed lawyers as lobbyists.
During the planning of the transcontinental railroad, Congress fiercely debated the route. The key question was whether it should pass through the Republican North or the Democratic South. After Abraham Lincoln won the 1860 election and the South seceded, the decision was made to build the railroad through the North. To ensure Northern California didn’t secede, planners routed the line through that region. The "Big Four" of Sacramento—wealthy businessmen—were eager to profit from constructing the railroad rather than operating it. They sent lobbyists to Washington, D.C., and even gave Congress $66,000 worth of Central Pacific stock. “Lobbyesses” also played a role in bribing government officials, further highlighting congressional cronyism.
Eventually, Congress decided to create its own railroad: the Union Pacific, which was directed by Congressman Oakes Ames. Construction began with the goal of connecting the Union Pacific and Central Pacific lines. Lincoln personally benefited, as the railroad increased the value of his real estate. The Pacific Railway Act of 1862 incentivized construction by awarding 6,400 acres of land for every mile of track built. Congress also provided funding: $16,000 per mile across plains and up to $48,000 per mile in mountainous regions. Union Pacific received $27 million in loans and 12 million acres of land; Central Pacific received $26 million and 9 million acres.
The construction companies, owned by Oakes Ames and the Big Four, overcharged the railroads at taxpayers’ expense. One company, Credit Mobilier, inflated construction costs by 50% and generated returns between 480% and 610%. Ames also bribed other congressmen with shares of Credit Mobilier stock. The results were disastrous: the railroads were poorly constructed, with tunnels that were too narrow, tracks laid over uncleared snow, and roadbeds that were not properly leveled. The construction firms made massive profits, but the railroad companies were left burdened with debt.
Although the railroad was officially completed in 1869, it was in poor condition and required repairs. By the 1870s, politicians became more difficult to bribe, and the railroad companies either couldn’t or wouldn’t repay their government loans. In 1872, the public learned about the widespread corruption and shoddy construction. The Big Four and Central Pacific survived only by destroying their contracts and financial records. In 1874, the Democrats regained control of the House, restoring a two-party system. With subsidies drying up, rival railroads pushed for the Thurman Act, which required Central Pacific and Union Pacific to repay their government loans.
Newman argues that a private transcontinental railroad would have been more successful. He points to James J. Hill, who transformed the St. Paul & Pacific into a profitable railroad without subsidies. Hill’s need to turn a profit made him efficient, disciplined, and focused on quality. He built a shorter route with better materials, and the resulting Great Northern Railway outperformed its subsidized competitors.
Newman concludes by stating how the Union and Central Pacific Railroads as clear examples of cronyism. He maintains that Congress was not necessary to build America’s transcontinental infrastructure and that the private sector could have done it better.
In today’s political climate, Dr. Patrick Newman’s analysis of cronyism in the transcontinental railroad era feels familiar. While the companies and industries have changed, the pattern remains that powerful corporations align with government actors to secure favorable legislation, subsidies, and contracts, often under the guise of serving the public interest. Taxpayer money still flows upward, and genuine innovation or competition is stifled by backroom deals and bureaucratic gatekeeping. Newman’s historical study is a reminder that when the government picks winners and losers, it usually benefits those with the deepest pockets and strongest connections. This kind of public-private collusion continues to breed distrust in institutions and fuels growing frustration across the political spectrum.
