Tuesday, July 26, 2011

Government Intervention, James J. Hill and the Great Northern Railway

James Jerome Hill (1838–1916), the Canadian-American railroad entrepreneur, was the businessman behind America’s Great Northern Railway (which before September 18, 1889 was called the Minneapolis and St. Cloud Railway), a very successful private 19th-century railway that ran from Saint Paul (Minnesota) to Seattle (Washington state), which was completed in January 1893.

The level of government involvement in America’s 19th-century railroads is, of course, well known: the first transcontinental railroad (the “Pacific Railroad” or “Overland Route”) was constructed between 1863 and 1869 and involved massive government support with the issuing of 30-year U.S. government bonds to fund its construction and large grants of government-owned land.

James J. Hill is often invoked as a hero by apologists for extreme laissez faire, because his railway was allegedly built completely privately, without any government subsidies or land grants. Unfortunately, there some inconvenient facts the free market ideologues leave out when they discuss Hill and the Great Northern Railway:
(1) Hill acquired a pre-existing railway called the Saint Paul and Pacific Railroad (which was originally charted as the “Minnesota and Pacific Railroad” in 1857) as the starting basis for his Great Northern Railway. The Saint Paul and Pacific Railroad existed because of massive government support:
“In 1857, the territorial legislature of the state of Minnesota issued a charter to the Minnesota and Pacific Railroad to build a standard gauge railway from Stillwater in the east to St. Paul in the west .... The railroad received a grant of 2,460,000 acres (1,000,000 ha) of land from the territorial legislature. This was the seventh largest land grant of the 75 given to railroads nationwide between 1850 and 1871. Construction began in the autumn of 1857, and in 1856 the state backed a $5 million bond issue to support the new rail system. But speculators manipulated the nascent railroad’s profits, overcharged it for supplies, and sold off some of its assets. It went bankrupt in 1860, and the new state legislature purchased all of its assets for a mere $1,000. … In 1862, the state legislature reorganized the bankrupt railroad as the St. Paul and Pacific Railroad.
But James J. Hill, who ran steamboats on the Red River, knew that the SP&P owned very valuable land grants and saw the potential of the railroad. Hill convinced John S. Kennedy (a New York City banker who had represented the Dutch bondholders), Norman Kittson (Hill’s friend and a wealthy fur trader), Donald Smith (a Montreal banker and executive with the Hudson’s Bay Company), and George Stephen (Smith’s cousin and a wealthy railroad executive) to invest $5.5 million in purchasing the railroad. On March 13, 1878, the road's creditors formally signed an agreement transferring their bonds and control of the railroad to Hill's investment group. On September 18, 1889, Hill changed the name of the Minneapolis and St. Cloud Railway (a railroad which existed primarily on paper, but which held very extensive land grants throughout the Midwest and Pacific Northwest) to the Great Northern Railway. On February 1, 1890, he transferred ownership of the StPM&M, Montana Central Railway, and other rail systems he owned to the Great Northern.”

Saint Paul and Pacific Railroad, Wikipedia.
(2) Hill benefited from government negotiations with Native Americans to obtain the right to build his railway on their land:
“The Great Northern had to stop construction in 1886 to wait for the government’s negotiations for Indian lands. The 1887 agreement over the Sweetgrass Hills gave the Great Northern Railway a 75-foot right-of-way over the Rocky mountains and through Western Montana-plus permission to use all the stone and lumber it needed for construction.” (Holmes, Dailey, and Walter 2008: 175).
Lloyd J. Mercer summarises how Hill’s Great Northern System relied on the acquisition of previous state-subsidised railways with land grants:
“The Great Northern System was an outgrowth of the St. Paul, Minneapolis and Manitoba Railroad, which was formed May 23, 1879, considerably after the end of the land grant era. The St. Paul, Minneapolis and Manitoba was initially formed out of the foreclosed St. Paul and Pacific railroad, which had come into possession of a federal land grant created by an act of March 3, 1857. The unsold portion of that old grant passed to the new company and became the major part of the land grant of the Great Northern System. In 1880–1881 the St. Paul, Minneapolis and Manitoba acquired the charter of the Minneapolis and St. Cloud Railway Company, to which was attached a land grant from the State of Minnesota in the amount of 10 sections per mile. This grant formed the remainder of the land grant of the Great Northern System, which became the beneficiary of efforts to subsidize predecessor railroads that were, unlike the Great Northern, truly pioneer effects.” (Mercer 1982: 59–60).
Mercer (1982: 148) also concludes the acceleration of the “construction and operation [sc. of America’s railways] through subsidization made a positive contribution to nineteenth-century economic growth in the United States. On efficiency grounds government intervention in the timing of the railroad building decision was rational.” James J. Hill was in fact a beneficiary of that government intervention by his acquisition of earlier railways.


Holmes, K, Dailey, S. C. and D. Walter, 2008. Montana: Stories of the Land, Montana Historical Society Press, Helena, Montana.

Mercer, L. J. 1982. Railroads and Land Grant Policy: A Study in Government Intervention Academic Press, Inc., New York and London.


  1. Both you and your libertarian opponents are wasting their time determining what degree of government support drives what activities.


    Because there is only one major determiner of all economic activity - the consumer.

    Billions of dollars of subsidies offered for producing a product that nobody wants will NOT result in a successful venture.

    Billions of dollars of subsidies offered for producing a product that people do want to buy will result in a successful venture.

    So what's the point? Why do you guys look at every productive activity as a single autarkic unit in its given locality, where either the presence of laissez-faire policy in the locality or the presence fo activist policy in the locality was responsible for success or failure?

    Business is a product of a multitude of factors that not even the entrepreneur can help, and at every stage of business, it is about subjective interests and preferences. To try to scientifically determine whether subsidy -> failure or subsidy -> success is a pointless endeavour, that ignores the complicated nature of all economic activity.

  2. "Because there is only one major determiner of all economic activity - the consumer."

    To the extent that producer cannot sell commodities that no one wnats, no doubt that is try. It also leads to Keynes' conclusion: effective demand drives output and employment.

    As I have said to libertarians on other blogs: If I labour for 10 hours a day, 7 days a week, for 20 weeks, with the intention of producing saleable goods, it's a waste of time if no one wants to buy - if no one demands - the commodities I produce.

    The obsession that some Austrians (maybe the less sophisticated ones) have with Say's law and the idea that production/supply leads to or causes demand is in fact a notion as wrong-headed as the labour theory of value.

  3. Indeed.

    After all, government intervention did not drive demand for railway transportation. It merely had an influence on its supply.

    Whether there was a benefit on a net basis is what is debatable. Was it worthwhile to reduce the supply of another good just to raise the supply of another? We can be sure there was a cost, and the burden of proof is on proponents of activist government to show that there was a NET benefit, after considering the costs.

    Of course government intervention in the form of taxes used for international aid helped build a few shoe factories in the middle of the Tanzanian desert - the Morogoro Industrial Complex Project by the World Bank. Did those shoe factories ever produce the 2 million shoes they were expected to produce at full capacity? Under Tanzanian heat, the workers found it impossible. Yes, the subsidy created jobs in an extremely depressed region, but all it served to do was transfer resources from an area of high productivity to an area of low productivity.

    Why don't proponents of activist industrial policy discuss THAT? Why shouldn't they be willing to say, "Scrap all these subsidies, tarriffs, and benefits in these particular sectors, because they create no value-addition." Why do they only argue for industrial policy in **general**?

  4. Prateek, I think you misconstrue the purpose and context of the blog post. First, you are correct about subsidies, as far as you take it.

    The point is that (according to non-libertarians) not all "efficient" products/services/infrastructure will come about on a free market. railroads, interstate highways, and infrastructure generally are some of these goods.

    The Great Northern Line is often trotted out as a counterexample by libertarians to demonstrate that infrastructure can be planned and built by private parties.

    LK has just noted that the Great Northern Line was substantially composed of previous, heavily subsidized lines purchased at fire-sale prices. This kind of undercuts the Libertarian version of events.

    I mean if we sold off I-75 and it was privatized and renamed "Comerica FreeWay 1", we wouldn't consider this a strong example of privately created infrastructure.

  5. "We can be sure there was a cost, and the burden of proof is on proponents of activist government to show that there was a NET benefit, after considering the costs."

    Very well: in the case of land grants from public land to railways, we are talking about a tiny faction of public land. What was the "cost" of granting this land (which must have been, what?, 1 or 2% of total public land, maybe even much less) to railway companies?

    Very little, I would say.

    And the benefits were amazing: fast transportation opening up vast tracts of land for settlement, production and exploitation of untapped resources. The positive externalities were vast - new towns, businesses, farms and better lives for people.

    There is in fact a good argument in the specialist literature that if private railays had to pay for land at market value, then the cost of railway would have been prohibitively expensive.

  6. "Why do they only argue for industrial policy in **general**?"

    I am not sure why individual examples of industrial policy failure are supposed to invaildate the general pricinple.

    Do instances of severe private enterprise failure invalidate the general principle of private production of commodities?

    The "general" notion of infant industry protectionism /ISI is confirmed by the history of the 19th century US, Germany, Australia etc., and in the 20th century by the stunning success of South Korea, Japan, and Taiwan.

  7. What you think about ""The Myth of Natural Monopoly" DiLorenzo ???

  8. If there is an activity or product that would be gainful for society in the long term, but which initial investment or maintenance feels unprofitable for the private sector, you will need government subsidies.

    Infrastructure would be very limited if not for government contributing to it's supply. Infrastructure is key in economic development, so it's clear it's economically reasonable for the government to supply it. The same goes for loads of things.

    Some things are simply too big for the private sector to initiate and handle.


  9. Lord Keynes, your analysis of James J. Hill as a political entrepreneur who used the government to his advantage falls short when we consider that the federal government originally owned all of the land in the western United States - and that therefore the only way Hill could have possibly acquired the land for his railroad was by purchasing it either directly from the government or indirectly from a previous corporate landholder (in this case the St. Paul and Pacific Railroad).

    While it is unfortunate that a free-marketeer like Hill had to rely on the government for his land, the fundamental problem is that the government owned the land in the first place, and so Hill would not have been able to build the Great Northern Railroad without purchasing a portion of this land from the federal government. The fact the Hill "benefited" from government land grants should surprise absolutely no one; the very fact that the federal regime controlled the West in the first place and forced budding railroad companies to purchase government land is an indictment of statism, not the free market.

    What distinguishes Hill from the other railroad magnates of his age is the fact that once he had acquired the land for the Great Northern Railroad, he did not continue to lobby the government for financial subsidies, cartel regulations, and other political privileges. For this reason, Hill is rightly remembered by libertarians as a remarkable market entrepreneur whose talents transformed a failed, politically-supported railroad (St. Paul and Pacific) into a thriving commercial success (Great Northern).

  10. The libertarian line about James J Hill is something I used to believe in, until I went and bought some of the books they like to cite, to check whether the story of James J Hill as "economic entrepreneur" instead of "political entrepreneur" is a valid one. I am more skeptical of him now.

    One book that gets cited a lot by right wing libertarians in this area is Gabriel Kolko's "The Triumph of Conservatism: A Reinterpretation of American History, 1900-1916." I learned about this book from reading both Hoppe and Rothbard.

    What startled me is right at the start of Chapter 1, Kolko starts off with a quote from James J Hill about how competition is ruining business in America:

    "Although there was a formal commitment to varieties of laissez faire economic theory in most of the academic world, big businessmen developed their own functional doctrine very much opposed to competition as either a desirable mechanism or as a goal. 'the trust,' wrote James J Hill in 1901, 'came into being as the result of an effort to obviate ruinous competition.'"

    In Kolko's other book, "Railroads and Regulation 1877-1916," I just quickly looked up James J Hill in the index, and Kolko seems to contradict the claim of "pure" market entrepreneurship of Hill. Obviously, situations change over time, so maybe Hill changed his views over time as well.

    I just wanted to throw this tid bit of contradictory evidence into the collection of information:

    "The new agitation for railroad legislation caught many railroad men off guard. Although the Elkins Act did not solve the rebating problem entirely, it had helped end what was equivalent to perhaps a 10 per cent drain on gross railroad revenues until 1903. From 1900 to 1905, railroad income rose for the first time in many years, both in freight revenue per ton mile and revenue per ton. Dividends nearly doubled.

    The great incentive to railroad advocacy of federal legislation in earlier years had been declining rates and CUTTHROAT COMPETITION. In a period of relative prosperity the railroads were less interested in legislation, EVEN THOUGH Cassatt, JAMES J HILL, and others WERE SAID BY SOME CONGRESSMEN TO FAVOR STRONGER LEGISLATION." (117)

    So that might be a place to start a further investigation, to see if James J Hill's views on government regulation changed over time as the industry changed over time??? Who are these Congressman that Kolko is speaking of? Why did they think that James J Hill wanted stronger legislation at this point in time?

  11. Lord Keynes,

    Another interesting quote from Kolko's Railroads and Regulation 1877-1916 that would like to bring to your attention regarding James J Hill:

    Since 1906 the states have been setting rates and imposing regulations "in a degree unparalleled in any previous period." "...the operations of our railroads should be regulated properly by wholesome and fair laws; and quite as necessary that they should not be regulated improperly," James J. Hill concluded in the mildest verdict of all. (167-168)

    I will have to look into this further, so don't take what I say as gospel truth. But if I find more on Hill, I will let you know.