The First U.S. Transcontinental Railroad: Expected Profits and Government Intervention

Construction of the first transcontinental railroad, financed with large federal subsidies, is an important event in American history. Were the subsidies necessary to induce private investment in the railroad? The ex-ante investment decision examined uses contemporary reports and a simulation model to show that investors expected the railroad to be profitable. Evidence also shows that the railroad created political conflicts in Congress between the North and South. The secession removed the South as a disputant in Congress, reducing short-term political conflict but not long-term conflict. Subsidies reduced political risk, rather than transport market failure, and encouraged private investment.