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Economic History Association Some Economic Issues Relating to Railroad Subsidies and the Evaluation of Land Grants Author(syf 6 W D Q O H \ / ( Q J H U P D n Source: The Journal of Economic History, Vol. 32, No. 2 (Jun., 1972yf S S 3 Published by: Cambridge University Press on behalf of the Economic History Association Stable URL: http://www.jstor.org/stable/2116824 Accessed: 01-03-2017 19:20 UTC JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at http://about.jstor.org/terms Cambridge University Press, Economic History Association are collaborating with JSTOR to digitize, preserve and extend access to The Journal of Economic History This content downloaded from 142.104.160.247 on Wed, 01 Mar 2017 19:20:20 UTC All use subject to http://about.jstor.org/terms Some Economic Issues Relating to Railroad Subsidies and the Evaluation of Land Grants THE federal policy of granting land in aid of railroad construc- tion in the mid-nineteenth century has been the focus of many heated discussions. Both praised and attacked by contempo- raries, it has remained a lively issue in the pages of history books and in journal articles. Several 'land-grant legends" have developed, re- ferring to different problems in the evaluation of these measures. At issue have been the question of the justification for land grants, the value of the benefits provided the railroads, and the determination of whether the government aid did provide net benefits to society as a whole. While the "land-grant legend" has been frequently buried, it has invariably been resurrected in one guise or another.1 In large measure this state of affairs has been due to the failure to specify fully the problems under discussion, and to approach systematically their resolution. This article will not attempt to resolve these issues, but rather will be concerned with a better specification of exactly what should be under discussion and what approaches seem useful at this stage. It will discuss the following questions in turn: (1yf : K \ V K R X O G a subsidy be granted and what is the most appropriate form for the subsidy? (2yf : K D W Z D V W K H Y D O X H R I W K H O D Q G J U D Q W V X E V L G \ " \f What was the size of the optimum subsidy to encourage private In the course of several drafts of this paper I have incurred a number of intel- lectual debts. Helpful comments on earlier drafts were received from Michael Edel- stein, James Ferguson, Carter Goodrich, Frank Lewis, Peter McClelland, Donald McCloskey, Lloyd Mercer, Sherwin Rosen, Richard Thaler, and Harold D. Woodman, and from the members of the University Seminar in Economic History at Columbia University. I have also benefited from conversations with Lance Davis and Douglass North (and from their Institutional Change and American Economic Growthyf D s well as from many discussions on related issues with Robert W. Fogel. Detailed com- ments on style and substance by Paul David and the editor were most useful in the preparation of the final draft. 1 For the most recent such burial announcement, see Eric E. Lampard, "United States: Periodical Literature," Economic History Review, XXIII ( 1970yf / D P S - ard does have enough insight into the academic mind to add a skeptical "but we shall see," clearly expecting attempts to keep the corpse alive. 443 This content downloaded from 142.104.160.247 on Wed, 01 Mar 2017 19:20:20 UTC All use subject to http://about.jstor.org/terms 444 Ermerman investment? (4yf + R Z F D Q W K H V R F L D O G H V L U D E L O L W \ R I W K H O D Q G J U D Q t policy be determined?2 In the historical literature relating to land grants, the rationale for a subsidy paid to the private builders of railroads follows from the concept of "building ahead of demand," to use the Schumpeterian phrase. Carter Goodrich, in his detailed studies of governmental aids, has used the term "developmental construction" to describe the same phenomenon. The image conveyed, which comfortably fits into the rationale for government planning, is that of an area unsettled, but presumably awaiting settlement and requiring governmental aid to undertake the initial transportation construction.3 In more formal economic terminology, the argument is that a change in the supply of transport services would encourage settlement, affecting the de- mand curve for the services of the railroad. Western settlement, then, is regarded as not only a function of the passage of time, but a response to the availability of the means of transportation.4 The empirical relevance of the concept of "building ahead of demand" is rather difficult to test since it depends upon the lag (or leadyf R I V H W W O H U V L Q U H V S R Q V H W R W K H D Q Q R X Q F H P H Q W R I F R Q V W U X F W L R Q . The difficulty is suggested by the fact that the most famous illustra- tions of the concept in the literature were actually quite successful investment projects from the builders' point of view, and success 2 The general preoccupation here will be with land grants to the transcontinental railroad systems. The grants from the federal government can be divided roughly into three categories: aids to transcontinental systems, to midwestern regional rail- roads, and to southern Reconstruction railroads. The shares of total land granted were approximately 77, 15, and 8 percent, respectively, justifying the emphasis on the former. However, the revenues of the Midwestern regional railroads (in the un- discounted current dollar accumulations shown in the Public Aids volumeyf Z H U e almost 2/2 times larger per acre than those of the transcontinentals, and amount to 31 percent of the total of net proceeds shown, as against 66 percent for the trans- continentals. Allowing for the difference in timing of sales, the importance of the regional land grants vis-a-vis the transcontinentals is even larger. U.S. Office of Federal Coordinator of Transportation, Public Aids to Transportation (Washington: G.P.O., 1940yf , , S S . 3 Within the economic development literature this problem has been dealt with in Tibor Scitovsky, "Two Concepts of External Economies," Journal of Political Econ- omy, LXII (1954yf 7 K H F H Q W U D O S U R E O H P R Q H R I S R V V L E O H I D L O X U H L Q W K H V L J Q D O s given by the price system, is attributed to the lumpiness of the investment project, not to technical externalities in the customary sense of that term. 4 For this reason the problem of investment decisions in the presence of "building ahead of demand" is not quite the same as that discussed in Yoram Barzel, "Invest- ment, Scale, and Growth," Journal of Political Economy, LXXIX (1971yf . This content downloaded from 142.104.160.247 on Wed, 01 Mar 2017 19:20:20 UTC All use subject to http://about.jstor.org/terms Railroad Subsidies 445 came without any time lag.5 What Fishlow describes as anticipatory settlement can be logically construed under the name of "building ahead of demand," since, although the chronological sequence sug- gests that the settlement preceded transport change, in fact it was the expected development in transport that encouraged settlement.6 More generally, "building ahead of demand" can be used to describe most investment projects, particularly those which lead to the marketing of new goods and services, though the concept is in- frequently cited as the basis for subsidy except in the transport case. This suggests that other characteristics of the railroad investment, not "building ahead of demand," underlie the case for subsidization. It will be useful, therefore, to briefly run through a check-list of the general cases in which economists can justify the payment of a subsidy. These can be classified by the cost characteristics of the firm receiving the aid (constant, increasing, or decreasingyf D V Z H O O D V W K e degree of perfection or imperfection of capital markets in which the builders obtain the funds for construction. All rationales involve some form of externalities-benefits of the project which cannot be captured by the investors through normal market practices, or systematic discrepancies between private prices and "true" social benefits.8 I shall first discuss the case of perfect capital markets in an 5 As Nathan Miller points out, the toll rates charged by the Erie Canal yielded a profit from operations, and provided a development fund for the state. Nathan Miller, The Enterprise of a Free People: Aspects of Economic Development in New York State During the Canal Period, 1792-1838 (Ithaca: Cornell University Press, 1962yf % X L O G L Q J D K H D G R I G H P D Q G V H H P V P R U H D O R J L F D O V W D W H P H Q W W K D W D S D U W L F X O D r area could not be settled without a transport form-than one which should be chronologically interpreted. However implications for the governmental role do follow depending on whether the tracks precede or follow settlement. In the latter case, investors, already owning land, would be willing to finance the railroad to capture external effects on land values. This, indeed, is a typical pattern for the U.S. as well as for England. In the former case the problems of forming a coalition may be more difficult and thus require intervention by a higher level of government. 6 See Albert Fishlow, American Railroads and the Transformation of the Ante- Bellum Economy (Cambridge: Harvard University Press, 1965yf F K Y L , W K D V E H H n suggested (by Harold D. Woodmanyf W K D W W K L V H Q F R X U D J H P H Q W L V Z K D W - H Q N V K D G L n mind when he referred to the "railroad as an idea." Leland Hamilton Jenks, "Rail- roads as an Economic Force in American Development," THE JOURNAL OF EcoNoMIC HISTORY, IV (1944yf . 7 We shall restrict the discussion of decreasing costs to those instances based upon economies of scale internal to the firm. The case of the decreasing cost industry, with all firms having increasing costs, is thus excluded as not being part of the historical debate. 8 Another explanation of some cases of government construction and ownership has been provided in John Bell Rae, "Federal Land Grants in Aid of Canals," THE JOURNAL OF EcoNoInc HISTORY, IV (1944yf ( D U O \ G L V F X V V L R Q R I D L G V W o canals raised the prospect that they would be so profitable that all taxpayers should This content downloaded from 142.104.160.247 on Wed, 01 Mar 2017 19:20:20 UTC All use subject to http://about.jstor.org/terms 446 Engerman industry consisting of increasing or constant cost firms. This is done merely for heuristic purposes, since most would regard the railroad case as one of decreasing costs. Externalities generated by the railroad improvement can be sub- divided into two varieties. The first refers to benefits obtained by demanders of railroad services in excess of the price paid for these services. The benefits are thus not captured by the railroad in the form of revenues and increase the wealth position of the users. Mercer, in his measurement of social benefits, evaluates the un- captured benefits accruing to passengers, to interregional shippers, and to settlers within the area of construction.9 These benefits could be captured by the railroad via a perfectly discriminating pricing policy, charging each individual the maximum price he would be willing to pay for transport services. This would internalize as rail- road revenue what would otherwise have been an unpaid for benefit for others. Internalizing this external benefit could be effected either by a discriminatory rate structure or, for those in the area of settle- ment, a policy permitting the railroad to sell the land on which bene- fits accrue. Similarly, the uncaptured benefit would be internalized by permitting settlers to build the railroad, making it irrelevant whether they benefit from higher land value or higher railroad returns. It must be noted, however, that in the constant or increasing cost case the project could be undertaken even if unpaid benefits were not captured, since it is possible for the firms in the industry to make normal profits with customary uniform pricing rules. The division of the infra-marginal surplus need not affect the investment decision. However, it could affect the output decision of the railroad, if it were a monopoly provider of the service. In that case internalizing the externality would lead to the socially desired output, which need not occur under non-discriminating monopoly pricing and non-railroad ownership of land. This argument to justify railroad land grants, however, is not found in the literature. The second variety of externality used to justify subsidization of increasing cost industries arises in cases in which non-users of the service obtain some of the benefits. The classic case, of course, relates be permitted to benefit, and not just a select few. Private ownership, with an auction- ing off of the franchise rights, could have achieved these results. 9 Lloyd J. Mercer, "Land Grants to American Railroads: Social Cost or Social Benefit?", Business History Review, XLIII (1969yf D Q G / O R \ G - 0 H U F H U , "Rates of Return for Land-Grant Railroads: The Central Pacific System," THE JOURNAL OF EcoNOMc HISTORY, XXX (1970yf . This content downloaded from 142.104.160.247 on Wed, 01 Mar 2017 19:20:20 UTC All use subject to http://about.jstor.org/terms Railroad Subsidies 447 to the infant industry. This form of aid could be justified if there were external benefits not captured by the firm but accruing to others in the economy.'0 In part, the subsidy goes to firms or individuals who benefit from the infant's learning. These benefits take the form of lowered costs of production, and thus represent a net benefit to the economy. This particular aspect of the infant industry argument-the spillover of learning from one project onto others-has not custom- arily been used to justify railroad subsidies. Another rationale for subsidies, which can be regarded either as an option demand by potential users or else a type of benefit provided to non-users of the railroad which cannot be captured in the course of operations, is also infrequently invoked." In these cases, even if returns from operations yielded insufficient profits, external benefits (for example, a national defense desire to have the railroad available if needed; a patriotic goal of having many railroadsyf Z R X O G M X V W L I \ D L G W R F R Q V W U X F W L R Q , making the return from all demanders sufficient to justify the project. Another argument for subsidies, of a traditional economic source but one seldom found in the historical literature, is that the rate of discount applied to future incomes by the private sector is too high relative to the "true" rate of social time preference. Some subsidy to investors is necessary to increase private investment (of which the railroads would presumably be a particularly profitable typeyf , Q V R - far as the social discount rate was below the market rate, whether due to inappropriate intergenerational foresight or some form of market imperfection, a subsidy to encourage all investments would be socially desirable, but by itself this does not provide any necessary argument for a differential subsidy to be provided for railroad con- struction. In each of the three cases in the preceding paragraph a subsidy might be necessary to justify investment by private individuals. In its absence the discounted future revenues could fall below the discounted future costs. In none, however, do we see a typical situation of "building ahead of demand," as the term is normally 10 This is a necessary, but not a sufficient, condition. For a discussion of this argument see Murray C. Kemp, "The Mill-Bastable Infant-Industry Dogma," Journal of Political Economy, LXVIII (1960yf . 11 For example, the Union Pacific legislation cited "postal, military, and other purposes" as a rationale for government aid. (Option demand refers to the desire to have the service available for potential future use, even if there is no demand at present, as could be claimed for the case of future military usefulness. National pride from a large, modem railroad network is another benefit which would not be captured by private pricing policy of the customary sort.yf This content downloaded from 142.104.160.247 on Wed, 01 Mar 2017 19:20:20 UTC All use subject to http://about.jstor.org/terms 448 Engerman used. For example, the second, option demand, allows for a situation in which private profits from operations by themselves never justify construction. And the first category of cases (in which the externality is in the form of an analogue to consumer surplusyf Q H L W K H U U H O D W H V W o "building ahead of demand" nor does it even provide an argument for subsidy. With non-decreasing cost curves an excess of total benefits over privately captured benefits is not a basis for subsidy. Railroads, however, are generally considered to compose a decreas- ing cost industry, with high initial capital costs and low variable costs per unit of freight carried. A line through a specific geographic area can thus be a "natural monopoly," though a monopoly whose de- mand curve will be affected by other networks which approach its geographic limits. This natural monopoly, which can be established legally by government franchise, poses two different issues in the analysis of price and output decisions. The first concerns the decision of whether the investment should be undertaken by a private entrepreneur, even when provided an exclusive franchise. Investment would occur, when price discrimination was not permitted, if the marginal revenue curve intersected marginal cost at an output level for which the demand curve was above average cost. This, however, would mean too low a level of output would be produced, since there would be units for which the marginal cost of shipping was below marginal benefits. Thus the second problem in the case of the natural monopoly is the production of the socially optimum output. Under the cost conditions described, some form of subsidy would be necessary to get the private entrepreneur to provide the socially appropriate output. The subsidy would not reflect "building ahead of demand," in the usual sense of the phrase, and it would have to be made in a manner that eliminated the social cost of the monopoly pricing decision. Thus, in the natural monopoly case, a subsidy would be paid, not for the purpose of inducing investment, but to induce the private sector to produce the socially optimum output. And as long as the cost conditions existed, a subsidy could be justified as a permanent feature.'2 There is an extensive literature concerning the appropriate form of 12 If paid annually, the subsidy would continue over the life of the investment. However, it could be paid in a lump sum of sufficient present value and with suffi- cient regulatory constraints to induce proper behavior over this lifetime. Regulation by itself could be used to eliminate monopoly profits, but this would not provide the socially optimum output. This content downloaded from 142.104.160.247 on Wed, 01 Mar 2017 19:20:20 UTC All use subject to http://about.jstor.org/terms Railroad Subsidies 449 pricing and subsidy policy to be pursued in such cases.13 Proposed alternatives include discriminatory pricing, a two-part tariff (lump- sum payments to cover fixed costs plus payments of marginal cost for shippingyf R U V R P H J H Q H U D O O X P S V X P W D [ D Q G W U D Q V I H U V F K H P H . While the form of subsidy is usually considered to be a cash payment, it is interesting to examine the characteristics of a land grant as a form of subsidy. If the only reason for the increased value of the land granted is cheapened access to transportation, the discounted price of the land would be equal to the excess of the fare that could have been charged on each commodity unit sent to market above the fare per commodity unit actually charged.14 At issue is who captures this surplus. If the only change due to the railroad was lowered fare per unit shipped (and either the lands were previously held or were sold by the government at an unchanged priceyf W K H O D Q G R Z Q H U Z R X O d receive the benefit in the form of higher wealth. However, if the lands were sold by the government at an auction, the taxpayers would capture this excess, while if sold by the railroad, the railroad would capture it. The purchaser of land might be indifferent to the identity of the seller, but it would have some effect upon the pricing policy of railroads. If the government captured the incremental rent, the railroad would maximize profits by monopoly pricing of fares. This would lower the rental value of land below its optimum, but would yield maximum railroad profits. If, however, the railroad first owned the land and was in effect selling the land to purchasers in addition to charging for freight shipped, profit maximization would occur at optimum social output.15 The land grant permits the railroad to act as a perfect price discriminator, capturing the rent in its pricing of the asset sold rather than on the shipments, which could 13 See the classic article by Alexander M. Henderson, "The Pricing of Public Utility Undertakings," Manchester School of Economics and Social Studies, XV (1947yf ) R U D U H F H Q W D S S U R D F K W K D W I L W V L Q W K H V R F L D O G H F L V L R Q P D N L Q J S U R F H V s with the pricing discussion, see James M. Buchanan, "A Public Choice Approach to Public Utility Pricing," Public Choice, V (1968yf . 14 The usual assumption is that, within any small area, the demand curve faced by producers for export is perfectly elastic at the "world" price less the costs of transport, and the supply of imports is also perfectly elastic, so that lowered trans- port costs do not affect the "world" price. 15 It is assumed that the railroad keeps the implicit contract concerning rates that it makes when selling the land. Actually, it would pay for the railroad to sell at a promise of low rates, but, once the land is sold for the higher price, to raise freight rates to the monopoly level. Note that unexpected rate wars could then provide landowners with windfall profits. This content downloaded from 142.104.160.247 on Wed, 01 Mar 2017 19:20:20 UTC All use subject to http://about.jstor.org/terms 450 Engerman then be priced at marginal cost. Total railroad profits are maximized when both land and freight transport are sold and this form of price discrimination yields the appropriate social output."' Thus the land- grant subsidy could lead the railroad to produce the appropriate output, whereas any other form of aid would require separate determination of optimum output and subsidy payment."7 This sub- sidy would be paid by taxpayers to railroads, with settlers pre- sumably not benefiting.'8 The final set of issues to be discussed concerns the argument that the reason for subsidy was to provide some method to offset private evaluations of the riskiness, or uncertainty, of projects."' This is apparently the best justification for subsidy in the railroad case. It may be that the mean expectation was of a normal return from opera- tions, but that because of uncertainty considerations investors de- manded a risk premium before undertaking investment in a private project. Since bankruptcy in operations was always a possibility, this consideration could deter investment financing of a privately owned project. If it is considered socially desirable that investments of high expected value but of high risk or uncertainty be undertaken (a mat- ter that has provoked debate in recent yearsyf V H Y H U D O W \ S H V R f policies are available to the government. First, actions could be 16 Land grants, with the alternate acreage provision, might still allow for the correct output, with taxpayers obtaining part of the "benefits." There is a problem in evaluating the railroad pricing policy to maximize profits when the grant is for only one-half the adjacent land and when price discrimination is precluded. The output in this case, however, should be closer to the optimum output than it would have been in the absence of the grant. 17 As will be discussed in more detail below, the land-grant policy would make the railroad anxious to accelerate settlement, but that does not mean that it would be willing to part with land at less than its full value for a given fare structure. There would be no advantage to the railroad in foregoing those potential profits, nor is there one for society unless there is another decreasing cost component involved. 18 These decreasing cost considerations raise several issues for the interpretation of state failures to cover costs in earlier years, particularly in the canal era. There was no need for canals to be paying ventures, since some subsidy to cover fixed costs would have been desired, at least for certain pricing policies, and there are circum- stances under which financial failure would have been the appropriate policy. In the analysis of canals undertaken by Harvey Segal the freight-rate used per ton-mile is less than half the resource costs per ton-mile, consistent with (among many other thingsyf G H F O L Q L Q J D Y H U D J H F R V W V + D U Y H \ + 6 H J D O & D Q D O V D Q G ( F R Q R P L F ' H Y H O R S - ment," in Carter Goodrich, et al., Canals and American Economic Development (New York: Columbia University Press, 1961yf S S . 19 The imperfection could also have taken the form of a savings constraint, with the ordering of investments by social profitability differing from that by private profitability. Then a government subsidy could be necessary to provide the appro- priate ordering by social profitability. For the nineteenth-century United States, with international capital inflows, this case seems of limited interest. This content downloaded from 142.104.160.247 on Wed, 01 Mar 2017 19:20:20 UTC All use subject to http://about.jstor.org/terms Railroad Subsidies 451 undertaken that do not affect the expected value of projects, but that reduce the private risk of loss. These actions could entail government guarantee of securities (making investment riskless to the non-local private sectoryf R U W K H X V H R I J R Y H U Q P H Q W U D W K H U W K D n private security issues to finance investment.20 The latter method was used to finance several land-grant roads, with the federal government providing securities in exchange for railroad issues. The government securities were sold to private investors, with the rail- road making payments to the government out of profits. The frequent use of this type of financing suggests that capital market conditions were crucial in determining the extent of the government role. A second device to induce investment would be to provide a non- related subsidy which would not increase the expected value of the transportation project to investors, but would raise the expected income for the package as well as reduce the risk of investor loss by, in effect, diversifying the portfolio. The subsidy could, for example, take the form of an asset of value being offered in conjunction with the railroad security. Thus a bank charter issued to an improvement company would have this diversification outcome, as would a grant of land in an already settled area.21 Similarly a cash grant would clearly increase expected value. (In all these cases the additional asset would have a return that would be uncorrelated with that of the railroad, so that the investment package would also be made less risky.yf 7 K H 8 Q L W H G 6 W D W H V O D Q G J U D Q W V K R Z H Y H U S U R P L V H G D K L J K H r expected return without a large reduction in risk. In the case of land adjacent to the proposed line, the subsidy return would be highly 20 The Public Aids data indicate that the use of government aids was more a function of capital market considerations than of externalities. A large portion of aids was not taxpayer financed, but consisted of a swap of government securities (fed- eral, state, and localyf I R U S U L Y D W H V H F X U L W L H V ) R U H [ D P S O H R I W K H W R W D O O R D Q V D Q d subscriptions described, almost 90 percent entailed government payment in securities rather than in cash or in kind. Of the much smaller total of outright contributions, over 40 percent were made through securities, not cash. (The use of securities as opposed to cash was more frequent on the state than on the local level.yf 7 K H V D P e reliance on security issue rather than taxpayer finance was characteristic of the canal era as well. Harvey H. Segal, "Cycles of Canal Construction," in Goodrich, Canals, pp. 169-215. To evaluate fully the costs of such policies, therefore, it is necessary to know more about the details of canal and railroad debt payments to governmental units. 21 The former method is seen in New Jersey's aid to canal construction, discussed in H. Jerome Cranmer, "Improvements Without Public Funds: The New Jersey Canals," in Goodrich, Canals, pp. 115-66. The latter is found in Canadian land-grant policy, which left the railroad greater flexibility in choosing land than occurred in the United States, permitting land to be selected which was far removed from the location of construction. This content downloaded from 142.104.160.247 on Wed, 01 Mar 2017 19:20:20 UTC All use subject to http://about.jstor.org/terms 452 Engerman correlated with the return from the operations of the railroad. If it was felt that the pace of settlement was such that insufficient traffic would be generated, making the railroad an undesirable investment, the expected future value of land would be low. The addition of an asset, with a return positively correlated with expected return from operations, thus might not sufficiently enhance the desirability of the package, which suggests why land might have been a rather ineffective method of overcoming the market's feelings concerning risk, and explains why the land-grant feature apparently did not raise the valuation of securities issued.22 Land might have been politically the cheapest way to provide a subsidy, but it was clearly not economically the most efficient. If the problem was "building ahead of demand," or building before the private investors thought the time was ripe, the form of subsidy selected was inappropriate. The case for railroad subsidization is not an easy one to make with the use of the conventional economic models. The best rationales are those based upon imperfect capital markets, in which investor uncertainty must be overcome in order to raise private investment funds, or upon the existence of a decreasing cost firm. In the former case, however, Fogel has pointed out that land is not the preferred method of financing construction. The case for a land subsidy can be best made for the decreasing cost firm, in which internalizing the externality in the form of land values results in the appropriate out- put decision. However, land grants of the type used (land adjacent to the railroad lineyf Z H U H Q R W H I I L F L H Q W L Q W K H S U R P R W L R Q R I W K H D S - propriate investment decision. Moreover, neither of the two ra- tionales mentioned in this paragraph describes "building ahead of demand," at least as that concept has been conventionally described. II In order to evaluate the efficacy of government land-grant policy, the value of the subsidy which was provided must be determined. A heated debate in the Mississippi Valley Historical Review in 1945 22 In the case of the transcontinental and other land-grant railroads, the issuance of bonds backed by the grant was delayed, often until almost a decade after the grant was bestowed. For example, the Union Pacific did not issue land-grant bonds until 1869, and the Southern Pacific until 1871. Stuart Daggett, Chapters on the History of the Southern Pacific (New York: Ronald Press, 1922yf D Q G 5 R E H U W : . Fogel, The Union Pacific Railroad: A Case in Premature Enterprise (Baltimore: Johns Hopkins Press, 1960yf . This content downloaded from 142.104.160.247 on Wed, 01 Mar 2017 19:20:20 UTC All use subject to http://about.jstor.org/terms Railroad Subsidies 453 was centered on this issue.23 The proposed evaluations run from the cost of government acquisition to the actual selling price (and that without any discountingyf 7 K H L V V X H K D V U H F H Q W O \ E H H Q G L V F X V V H G E y Mercer, who argued 'that "the value which the land had, before the building and operation of the railroad, was a subsidy.... The value of the land grant beyond this was the capitalization of the stream of unpaid benefits which would accrue to the land owner when the railroad was in operation."24 This distinction between the value the land had before the railroad and its value afterward was justified by arguing that the former amount was presumably the price the government would have received if it had sold the land to the railroad owners, while the latter was "but a capturing by the rail- road of part of the otherwise unpaid benefits it produced." This position is similar to the view taken by Colonel Henry and other ad- vocates of the railroad position in the 1945 articles. The argument about the valuation of land grants has generally been conducted on the assumption that there was perfect foresight about the course of future land values. Whatever historical validity this assumption has, making the assumption permits one to focus on several important analytical points in the debate. The basis of the Mercer argument is that the land would have had some value in the absence of a railroad, and it is at this price that the particular entrepreneurs would have been able to acquire the land from the government.25 After construction (or, more accurately, announcementyf W K H O D Q G Y D O X H V Z R X O G L Q F U H D V H 7 K L V L Q F U H D V H D W - tributable to the transport improvementyf Z R X O G U H S U H V H Q W W K H Y D O X e of a benefit to which the promoters were entitled. Implicit in this argument is that there was only a single interested purchaser buying land from the government at a non-railroad price, and therefore able to benefit from the increase in value which the railroad brought about (since the government had been willing to sell at the non- railroad priceyf , W V K R X O G E H Q R W H G W K D W L Q J H Q H U D O W K H F D S W X U L Q J R f all benefits by entrepreneurs is not considered desirable or necessary for proper investment decisions, but putting that objection aside for 23 See Robert S. Henry, et al., "The Railroad Land Grant Legend in American History Texts," Mississippi Valley Historical Review, XXXII (1945-46yf D Q d 557-76. 24 Mercer, "Land Grants," p. 140. 25 Presumably if purchased in small parcels, and without anyone else being aware of the purpose of such purchases. This content downloaded from 142.104.160.247 on Wed, 01 Mar 2017 19:20:20 UTC All use subject to http://about.jstor.org/terms 454 Engerman the moment, the argument overlooks some of the mechanics of the actual subsidy process. There rarely existed a monopoly of informa- tion on the part of only one group of promoters; in many cases there were several groups of entrepreneurs competing for the franchise rights to build the same or comparable lines. Rather than a purely bilateral situation existing between promoter and government, the government was in the position of a monopoly provider of land, offering land to competing promoters. What the government had to offer was a package consisting of an exclusive franchise and land, and the bidding (in the form of bribery, etc.yf D P R Q J H Q W U H S U H Q H X U V V H t the value of the package.26 This is not to deny that the increased land values were due to a railroad; it is to suggest that if several entrepreneurs were willing to undertake construction, the benefits cannot be attributed to the railroad actually built by one particular group of promoters. The owner of the exclusive rights, the franchise, was the government, and, by establishing the proper pricing policy for land, the government could obtain the incremental benefits for the taxpayer. The difference between pre- and post-railroad values would then accrue to the government, and not to the private promoters. The bid price for a franchise plus land would be sufficient to yield a normal return to promoters from the package. We can visualize two possible cases. First, if the franchise had value-expected profits from operations were positive the price paid for land would have been the expected selling price. However, if the franchise, with whatever conditions imposed, had a negative value, the price bid for land would have been the expected selling price of land less the expected loss from railroad operations, so that the bid for the complete package would have provided for a normal return. Given a sufficiently high value of the land in the absence of a railroad, the promoters would have made a positive bid for the package including the franchise. Thus the maximum value of the subsidy attributable to the land grant would be the selling price of land, while the appropriate valuation of the land would be the post-railroad price of land. While the argument based upon perfect foresight is of interest, it obscures some elements of difference between land and other forms of subsidy. One difference, the correlation with project risk, was discussed above. Another issue, often obscured in the literature, con- 26 Vide the legislative battles for rights to franchises. This content downloaded from 142.104.160.247 on Wed, 01 Mar 2017 19:20:20 UTC All use subject to http://about.jstor.org/terms Railroad Subsidies 455 cerns the allocation of the risk relating to the subsidy between the government and the investors. There was risk in regard to the relative price of land, as well as its absolute price. One difficulty in determin- ing the allocation of risk is that we don't know how the quantity of land granted was decided. A cash provision would be certain in absolute amount, but since it would be affected by changing price levels, it would be uncertain in purchasing power. The land grant presumably was meant to yield a certain cash income to investors, and it might be argued that the independent variable was this cash equivalent, with the quantity of acreage set to yield this amount. To allow for uncertainty, it might be that a larger quantity was provided, thus yielding a larger certainty equivalent for the subsidy. Until more is known about this expected value, and the acreage adjustment, no statements about the distribution of risk between stockholders and the government are possible. The usual assumption (made aboveyf that the risks were borne by the company may not truly reflect the subsidy intended by the two parties. The other uncertainty concerning the land grant, which affects the estimation of the value of the subsidy and the risk borne, arises because the Civil War land grants were given at a time when the price level was expected to decline. The Civil War inflation was considered an aberration which would be overcome in the ensuing years of peace. The choice between a subsidy in cash or one in kind would be affected by these price level expectations (and adjust- ments of risk could be made as described aboveyf 7 K H U L V N R I S U L F e changes could therefore be borne by either party. The subsidy paid in land is akin to a subsidy fixed in terms of constant purchasing power, since the asset value would adjust to changing price levels to yield an anticipated increment in terms of real goods. To provide a similar sum via a cash subsidy there would have to have been a scale written in allowing for the expected price level changes. If, however, the grant was intended as a specified cash amount, irrespective of the price level, then the falling price level reduced the value of the grant, since the payment of a cash sum would have left the railroad better off than the payment in kind. There is one further issue concerning the cash value of the subsidy to which Mercer and others have devoted some attention. This is the relationship between the cash value of the subsidy provided and the cost of construction. If the value of the grant (properly dis- countedyf Z D V V X I I L F L H Q W W R P H H W W K H F R V W R I F R Q V W U X F W L R Q L Q Y H V W R U s This content downloaded from 142.104.160.247 on Wed, 01 Mar 2017 19:20:20 UTC All use subject to http://about.jstor.org/terms 456 Engerman would be perfectly levered, in that they would be able to get by with zero investment, providing no risk capital in exchange for their future income.27 However, Mercer shows that land grants raised the private rate of return by a relatively small amount. As Mercer (and Cochran before himyf S R L Q W V R X W W K H F R Q I X V L R Q L Q W K H O L W H U D W X U H R n this point results from the failure to consider the substantial lag in land sales behind construction.28 By using the ex post data calculated by Mercer in his evaluation of the contribution of the land grants to increasing private returns, it is possible to say something about the value of the land grants to the Central Pacific and to the Union Pacific. As Mercer points out, in both cases the return from the grant, properly discounted, was low relative to the costs of construction, and thus could not be used as a source of bond issue to finance all the costs of construction. His estimates can also be used to calculate the maximum value of the land-grant subsidy. This maximum would be the value of the net proceeds from selling the land. The present value in 1862 of the subsidies to the Central Pacific and the Union Pacific was under $1 per acre (in 1869 dollarsyf W R W D O O L Q J X Q G H U P L O O L R Q , Q F X U U H Q W G R O O D U V W K L V Z R X O G E e equal to less than 10 percent of the federal budget in the year of the first grant, 1862, and is a sum equal to less than one-half the average annual federal expenditures in the 1850's. A crude extrapolation of this subsidy value per acre to all transcontinental roads still leaves the entire program amounting to considerably less than one-half year's peacetime budget in the post-bellnm period.29 This relatively low valuation of $1 per acre does not hold for other lines. For example, the present value of the lands granted to the Illinois Central in 1851 was about $10 per acre.30 However, the 27 In that event the private rate of return, including income from land revenues, would have been infinite when measured from the date the subsidy was received. 28 See Mercer, "Rates of Return," and Thomas C. Cochran, "Land Grants and Railroad Entrepreneurship," THE JOURNAL OF EcoNoMIc HIsToRY, X (1950yf . 29 The extrapolation of a $1 subsidy value per acre would make federal land grants equal to about one-fifth of the government investment in railroads calculated by Goodiich. Goodrich's estimate of the proportion of government investment to total investment, with his suggested addition of the value of land to the total of other aids, is misleading. The latter total does not really provide an estimate of the net amount of government subsidy, but rather of the total of government cash and security aids. Given the importance of the swapping of private for government securities, the proportion of taxpayer subsidy represented by land grants would be higher than the average subsidy implicit in the other categories of aid. See Carter Goodrich, "Internal Improvements Reconsidered," THE JOURNAL OF ECONOMIC HIsTORY, XXX (1970yf . 30 Thus, relative to the size of the federal budget in the year granted, the Illinois Central grant was the most important of the land grants. This content downloaded from 142.104.160.247 on Wed, 01 Mar 2017 19:20:20 UTC All use subject to http://about.jstor.org/terms Railroad Subsidies 457 lower valuation is more accurate for the great bulk of lands provided to the transcontinental, which received land where settlement char- acteristics were more similar to those of the Union Pacific and the Cen- tral Pacific than to the Illinois Central. The difference in value per acre between the Illinois Central and the transcontinental systems reflects not only differences in selling price per acre, but, more importantly, the fact that there was a much longer lag of sales behind the date of the grant for the latter. Whereas the Illinois Central had sold almost 90 percent of its land twenty years after the grant, a similar percent- age was not achieved by several of the transcontinentals until almost fifty years after their grants were received.31 It is these belated sales, rather than the use of selling prices, which make the Public Aids totals for the value of the subsidies too high. The long time taken to realize the proceeds indicates why the grants may have been of limited effectiveness. It might be argued that the lands were arbitrarily kept from sale for prolonged periods, but the general failure to enter into rental contracts would suggest that delays in title transfer of land in productive use were not frequent. Also sug- gestive of the probable absence of inefficient delays are the heavy railroad investment in advertising for settlers. And, as shall be dis- cussed below, there are reasons, such as railroad credit provision, for believing that the land sales were faster as a result of land grants than they otherwise would have been.32 III The most recent study of land-grant policy concludes with a justification of the program, on the basis that the ex post social rate 31 For example, the Union Pacific had sold only 60 percent of its land by 1890, and the Northern Pacific, by far the largest recipient of land, did not sell one-half of its grant until early in the twentieth century. Twenty years after the grant less than 10 percent had been sold. While the Illinois Central was atypical in both selling price and pace of sale, most of the other midwestern lines did achieve sales of over one-half the land in their grants within about 20 years. See Paul W. Gates, The Illinois Central Railroad and Its Colonization Work (Cambridge: Harvard Uni- versity Press, 1934yf 5 L F K D U G & 2 Y H U W R Q % X U O L Q J W R Q : H V W $ & R O R Q L ] D W L R Q + L V W R U y of the Burlington Railroad (Cambridge: Harvard University Press, 1941yf 3 R R U s Manual of the Railroads of the United States (New York: Annual 1868- yf D Q d L. L. Waters, Steel Trails to Santa Fe (Lawrence: University of Kansas Press, 1950yf . It remains a mystery why the transcontinental took so long to sell their land. The lag is inconsistent with the perfect foresight assumption. 32 On the general question of the speed of sales by landowners, see Robert W. Fogel and Jack Rutner, "The Efficiency Effects of Federal Land Policy, 1850-1900: A Report of Some Provisional Findings," in William Aydelotte et al. (eds.yf ' L P H Q V L R Q s of Quantitative Research in History (Princeton: Princeton University Press, 1972yf . Again, however, it is unclear exactly why the railroads did take so long in selling their lands, even if the sales were made at a more rapid pace than would have occurred if the government had been the seller. This content downloaded from 142.104.160.247 on Wed, 01 Mar 2017 19:20:20 UTC All use subject to http://about.jstor.org/terms 458 Engerman of return on land-grant roads exceeded both the market rate and the social rate of return on projects abandoned as a consequence of the diversion of investment from them to the land-grant roads.33 There are some technical problems with this definition, relating to the as- sumptions of capital market perfection and the existence of a mono- tonic relationship between private and social rates of return.34 Putting these points aside, it can be seen that Mercer's criterion does not really provide the test of the desirability of land grants that has been suggested most frequently. Mercer's criterion ignores the dis- tinction between the questions of whether the railroad should have been built and whether, given a positive answer to the first question, the building should have been aided by the provision of land grants. The second question raises the issue of whether the subsidy was optimal, rather than excessive, from the point of view of taxpayers. Mercer's test for the usefulness of land grants is that the social rate of return, including the private return from operations and the increased incomes of the users of the road which were not captured by the railroad, exceed the market rate of return (the measure of the opportunity cost of capitalyf 6 W U L F W O \ V S H D N L Q J 0 H U F H U K D V W H V W H G W K e proposition that the railroads built with land grants were desirable; he has not explicitly tested the proposition that the land grants themselves were desirable. In order to test the latter proposition, one should measure, not the marginal return on the funds invested in the railroad, but rather the marginal return on the funds invested by taxpayers in influencing this particular investment decision by other 33 Mercer, "Rates of Return." This is Mercer's second test, which he considers to be conclusive. The first criterion, relating to the short-fall of the private rate of return to investors below the market rate, is, however, important for determining both the desirability of a subsidy policy and the size of the optimum subsidy. Mercer does point out that his verdict "rests on the further conclusion that land grant policy hastened construction of the system." The sup port for this judgment rests on a statement made by Robert Edgar Riegel, which places the acceleration at ten to fifteen years. Robert E. Riegel, The Story of the Western Railroads (New York: Macmillan, 1926yf 5 L H J H O V H V W L P D W H L V I U H T X H Q W O \ F L W H G E X W L V F O H D U O \ P R U H D Q L P - pression (albeit an educated oneyf W K D Q W K H V S H F L I L F U H V X O W R I W K H W H V W L Q J R I D Q y hyothesis. Not everyone, of course, accepts this possible acceleration of railroad construction as necessarily a desirable condition for the national economy. See, for example, Frederick A. Cleveland and Fred W. Powell, Railroad Promotion and Capitalization in the United States (New York: Longmans, Green, 1909yf S ; and Thomas C. Cochran, "Did the Civil War Retard Industrialization?", Mississippi Valley Historical Review, XLVIII (1961yf Z K H U H L W L V D U J X H G W K D W W K e economy would have been better-off if construction had been delayed. 34 See Peter D. McClelland, "Social Rates of Return on American Railroads in the Nineteenth Century," (Unpublished, Discussion Paper 188, Harvard Institute of Economic Research, April 1971yf . This content downloaded from 142.104.160.247 on Wed, 01 Mar 2017 19:20:20 UTC All use subject to http://about.jstor.org/terms Railroad Subsidies 459 members of the private sector. The latter return may have been sub-marginal for two reasons. First, it may have led to an investment which was not socially profitable even though with the subsidy it was privately profitable.35 The investment would then have created a cost to society, the loss involved in drawing resources away from more profitable uses. However, historians have seldom argued this case. Their suggested test is not that of the waste of resources. Most seem to believe that the railroads themselves were socially profitable. But some believe that the subsidies were unnecessary, and created excess profits for their recipients. The subsidies were thus transfers from general taxpayers to railroad investors, a "giveaway." There may have been no loss to society, but there was a redistribution among its members.36 Mercer's test would show that the land grants were socially desirable even in the second case. His criterion would treat subsidies in excess of the optimal amount necessary to provide for construction as efficient subsidies. It would thus accept situations in which firms that were privately profitable would be deemed worthy of receiving subsidies. What apparently has been of interest to historians is the question of whether the government paid the "optimum subsidy," that amount just necessary to bring about construction.87 Concern with the prospect of excess subsidy is, of course, one reason why the evaluation of the subsidy inherent in land grants has aroused so much controversy. Mercer's tests ignore this aspect of the con- troversy. His tests for the desirability of land grants should have included the following two parts. First, that the social rate of return exceed the market rate. Second, that the market rate exceed the private rate of return on this particular investment, with the subsidy equal only to the difference needed to equate the market rate and the private rate of return to investors. 35 This would happen if land values were high without the railroads and the railroads added little to any intertemporal increase in value, or if the aid took the form of other profitable assets, permitting entrepreneurs to obtain private profits even though the railroads provided no net benefits for society. 36 If government expenditures were held constant, in essence the transaction would amount to an increased tax burden upon the citizens to pay a certain sum to the railroad investors, and since taxation was not lump-sum, some distortions could occur. 37 For an application of this concept to a discussion of the Canadian Pacific, see Peter J. George, "Rates of Return in Railway Investment and Implications for Government Subsidization of the Canadian Pacific Railway: Some Preliminary Re- suits," Canadian Journal of Economics, I (1968yf 2 I F R X U V H X V L Q J W K H H x post data developed by Mercer for the two American transcontinental systems, the "optimum subsidy' would have been zero. This content downloaded from 142.104.160.247 on Wed, 01 Mar 2017 19:20:20 UTC All use subject to http://about.jstor.org/terms 460 Engerman IV The various forms of social benefits anticipated from railroad construction were mentioned above in the discussion of why a subsidy policy was desired. Similarly the evaluation of social costs was considered, in part, in the discussion of the determination of the value of land grants. Yet these descriptions omitted some of the relevant historical issues. Land-grant policy was but one of a set of governmental policies relating to the overall pace of western settle- ment. By the land-grant decision the government was affecting the speed of settlement of the western part of the continent. Similarly, in evaluating costs, it is necessary to consider alternative feasible methods for providing railroad lines.38 Central to any evaluation of these social benefits and costs are answers to several important questions of economic and political history. First, what was the optimum pace of settlement? Should it have been faster or slower than that which occurred, and what were the effects of the government's land pricing and distribution system? Second, what aspects of land-grant railroad behavior are to be considered the outcome of tied legislation, and what can be regarded as actions which would have been undertaken without the legal constraints? And third, are the costs of the apparent failures of the Land Office in regard to delays in the patenting of land to be con- sidered as costs of land-grant policy? The question of the optimum pace of settlement enters into several parts of the historical discussion of land grants. The land-grant practices followed by the government and the railroads had several conflicting effects. The lag imposed on settlement by the withdrawal of large sections of the public domain (not all of which would be turned over to the railroadsyf G X U L Q J W K H W L P H Q H F H V V D U \ I R U I L [ L Q J W K e line and its construction, meant that the land was settled at a slower rate than would have occurred in the absence of such restrictions. This delay was, of course, the basis of many settlers' complaints. These complaints were generally aimed at the railroads, but much of the lag followed from the basic government policy of requiring per- formance before subsidy, and there were frequent delays in Land 38 Robert W. Fogel, in evaluating alternative methods of providing for the con- struction of the Union Pacific, analyzes one important aspect of the issue of social benefits and costs of land-grant subsidies. He considers how construction could have been undertaken at lowest social cost, and concludes that under specified conditions it would have been through government construction. See Fogel, Union Pacific, ch. iv. This content downloaded from 142.104.160.247 on Wed, 01 Mar 2017 19:20:20 UTC All use subject to http://about.jstor.org/terms Railroad Subsidies 461 Office patenting.39 The enforcement of the incentive provision, the delay in presenting rights to title until after construction of specific mileage, meant that the government had to deter settlement if the railroad were to be able to receive any intended subsidy. Without imposed delay the quantity of land turned over to the railroads would have been reduced, and even if the railroads had access to "in lieu" lands, the value of the subsidy would have been reduced. It is clear that the railroads would have preferred a more rapid pace of settlement, and any delays would not be to their advantage if the awareness of construction itself increased land values. Therefore the existence of delays in settlement may have reflected the incentive provisions of the legislation rather than railroad practices.40 Offsetting these forces making for delay are the important contri- butions of the land-grant railroads in spurring settlement. The land settlement schemes of these lines, with their heavy advertising in the east and in Europe, have attracted much attention. It is true that land grants were not necessary to encourage the railroads in land settlement schemes. Whether or not they owned the lands they would benefit from the increased traffic generated by more rapid settlement. However, the land-grant railroads' disposal policy pro- vided some spur to settlement by providing some of the credit with which the land was purchased. Studies of land sales by private indi- viduals indicate the scarcity of credit for land purchases, while the federal government was selling only for cash.4' The railroads com- bined a banking business with their land office business. Therefore it is possible that they transferred land to settlers more rapidly (and at lower cost to settlersyf W K D Q Z R X O G K D Y H E H H Q W K H F D V H L I W K H O D Q d had been distributed under the existing government policies.42 39 For a discussion of the dispute between the settlers and the railroads on this count see Paul W. Gates, History of Public Land Law Development (Washington: G.P.O., 1968yf F K V [ L Y [ Y L . 40 The issue of the extent to which the railroad deferred taking title to land to avoid taxation has recently been studied in the states of Kansas and Nebraska. The author raises the possibility that the railroads may have been taxed appropriately, or even excessively, in these states. Leslie Decker, Railroads, Lands and Politics: The Taxation of Railroad Land Grants, 1864-1897 (Providence: Brown University Press, 1964yf . 41 See, for example, Robert Swierenga, Pioneers and Profits: Land Speculation on the Iowa Frontier (Ames: Iowa State University Press, 1968yf 7 K H + R P H V W H D G $ F t provisions were apparently not important in the land-grant states, and there were restrictions imposed on their usage within the land-grant limits. 42 The government imposition of a double-minimum price on land within the grant limits, whatever its political appeal, could only mean a slower rate of settlement. If all the government sales were at the legal minimum price, this double-minimum This content downloaded from 142.104.160.247 on Wed, 01 Mar 2017 19:20:20 UTC All use subject to http://about.jstor.org/terms 462 Engerman In addition to the provisions relating to land distribution, the land- grant legislation imposed other constraints upon the railroad. There was a "Buy American" clause imposed on iron purchases. This could conceivably have raised private costs of construction, although by the post-bellum years most rails were being produced domestically behind tariff barriers. The provision over which there has been most discussion was that relating to lower prices for government ship- ments of goods and personnel. In conventional measurements of the social savings, the benefits from government shipments are measured in the same manner as those on private shipments. Conceptually, therefore, the pricing arrangement poses no new issues concerning total social benefits. The issue is rather one of the division of bene- fits between the taxpayers and the railroad investors, and the reasons for such an allocation. Although the special government pricing pro- visions have been regarded as some form of quid pro quo imposed by the government upon railroads in exchange for the land grants, the issue of the extent to which such a system of price discrimination would have occurred in the absence of legislation has been raised."' It is possible that the government might have obtained the same ben- efits of lowered rates without the cost to the taxpayers of the land grants, as is suggested by the fact that the non-land-grant lines also extended this pricing arrangement to government traffic.44 The measurement of social costs and benefits of the land-grant policy, therefore, requires a much more complete model of alterna- tive settlement patterns, as well as a better understanding of govern- mental administrative behavior. Land grants may not have been pure redistribution, and they may have had social costs, since they did influence the speed and pattern of settlement. While a policy that entailed redistributive effects only, without affecting allocation and growth, was conceivable, the actual land-grant scheme entailed would also have reduced the extent of redistribution from taxpayers to land pur- chasers. For a convincing argument that the government did not achieve its hoped- for financial ends, see Paul W. Gates, "The Railroad Land-Grant Legend," Tm JOURNAL OF ECONOMIC HIsroRy, XIV (1954yf . 43 See, in particular, David M. Ellis, "Railroad Land Grant Rates, 1850-1945," Journal of Land and Public Utility Economics, XXI (1945yf 7 K L V L V V X e is not considered by Mercer, who does not distinguish the government from other shippers. This is consistent with his procedure of regarding the railroad investors within the group for whom social benefits and costs are measured, and thus putting aside the division between taxpayers and investors. 44 If the railroads were covering total costs on other traffic before the genera- tion of government traffic, there would be no need to alter the other rates, so no additional social costs would be imposed. This content downloaded from 142.104.160.247 on Wed, 01 Mar 2017 19:20:20 UTC All use subject to http://about.jstor.org/terms Railroad Subsidies 463 these additional effects on the efficiency of resource use, and they should be considered in any attempt to measure the benefits and costs to society of land-grant aid to railroads. V The conclusion to be drawn from this analysis is that despite the frequent obituary notices, the "land-grant legend" is still alive. While there have been recent advances in the discussion of the reasons for subsidy and in the measurement of social benefits and costs, we are left with a sufficient number of questions to regard the final evalua- tion of the land-grant policy as still open. STANLEY L. ENGERMAN, University of Rochester This content downloaded from 142.104.160.247 on Wed, 01 Mar 2017 19:20:20 UTC All use subject to http://about.jstor.org/terms