In Xaxnar’s excellent post The truth about Amtrak, I began a comment that started to turn into its own essay, and I decided not to hijack the discussion and to write a standalone piece instead.
Xaxnar begins:
President Joe Biden has made it a priority to improve and expand the National Rail Passenger Corporation, better known as Amtrak. What is a problem for many people is that Amtrak does not show a profit, except for particular routes. There are repeated calls to privatize it, cut back services, or otherwise try to make the books balance.
Yep. And Amtrak is just one chapter in the sordid saga of U.S. taxpayers and the railroads. A saga that is perhaps best described as The Taxpayer giveth and Washington giveth away.
America had a romance with railroads that equaled its later affair with the automobile. It was embodied in the Iron Horse itself, the steam locomotive that made speedy rail travel possible. But the invention of this marvelous, noisy, smoke-spewing machine brought forth a crowd of connivers and smooth talkers with an aptitude for looting the public purse.
Greased with hefty bribes in the 1850s and ‘60s, Congress gave railroad companies land grants totaling 9% of the continental U.S. and issued them federal bonds, all with the understanding that this investment would provide cheap but excellent rail service for generations to come.
Instead, the subsidized railroad buccaneers set up dummy construction corporations that charged three times the actual cost of building. Because each mile generated more bonds, roundabout routes were commonplace. Substandard construction was the rule. Many lines were so shoddy they had to rebuilt in a few years. Stock was “watered” and manipulated into investment windfalls for a few and debacles for most.
Once the railroads were in place, the corporadoes in charge proceeded to run them without repairs until, clickety-clack, equipment was exhausted and bankruptcies declared. Through it all, townspeople and farmers, who issued their own bond subsidies to lure railroads to their locale, were charged outrageous prices to transport their goods.
Eventually, this scandalous behavior shocked even some of the 19th Century believers in economic free-for-all into creating the nation’s first modern regulatory agency, the Interstate Commerce Commission. But, the flawed ICC, which is a story itself, made matters worse not better, a tradition it continued until the Staggers Act brought on deregulation in 1980.
In December 1917, under the U.S. Railroad Administration, the Feds took over the ruined railroads because they couldn’t keep up the pace as the U.S. sent vast amounts of grain and war matériel to Europe and then troops as well. The government rebuilt deteriorating track and railbeds, ordered 58,000 new passenger cars, 45,000 freight cars, and 1,930 steam locomotives. It not only speeded up deliveries with modern equipment but also made the railroads financially viable again. All told, the taxpayers put up $380 million to bring the railroads up to snuff. That was 10% of the entire $3.8 billion federal budget in 1918. It’s $9.3 billion in 2024 dollars.
After the war, despite objections from Progressives and parts of the left, who argued for retaining public ownership, the government turned the railroads back over to private owners and charged them not a nickel for the investment that restored the railroads to health. The owners immediately demanded the government pay for economic “damage” supposedly caused by federalization. Then they went back to neglecting the lines and stripping away the profitable parts in unregulated businesses.
In 1936, freshman Sen. Harry S Truman was moved to denounce the companies from the Senate floor: “When Jesse James and his gang robbed a train and got off with $3,000 down near Independence, Missouri, it was front-page news in the Independence newspaper. But today those trains are still being robbed. Now it’s not Jesse James and his gang, it’s holding companies formed by lawyers and accountants to strip the railroads of their assets—assets in the form of land grants which this country gave the railroad companies to build and maintain a railroad with.”
Penn Central wasn’t a land-grant railroad, but in its final agony, a generation after Truman’s speech, it acted like one. All part of the long-running pattern.
In 1968, the company’s new manager refused to fix its decaying equipment, but eagerly siphoned its revenue into telecommunications, earth movers, health spas, an oil pipeline, coal properties, and 63,000 acres of prime Florida real estate.
Customer service collapsed. Profits tumbled. When Congress bought the bankrupt railroad in 1973, it was a rusty hulk losing $400 million a year. Nevertheless, the government shelled out $2.1 billion, more than three times Penn Central’s estimated worth. And although Congress got the money-losing railroad, the newly formed Penn Central Corp. got to keep the profitable spin-off companies and title to $1.5 billion in the railroad’s accumulated tax write-offs. The good stuff was stripped away and the taxpayers ripped off.
To repair the long-term economic wreckage left behind by unscrupulous managers, the Feds in 1976 cobbled seven bankrupt railroads into Conrail, bought new equipment and rebuilt track for $3.2 billion ($22.5 billion in 2024 dollars). Operating subsidies accounted for an additional $4.4 billion.
Conrail reduced featherbedding practices by cutting the labor force in half but also gave workers who stayed 15% ownership in the company. It became efficient, its deficits were vastly reduced, and tens of thousands of jobs were saved that would have gone missing if the Penn Central had gone bankrupt without intervention.
But in 1987, despite objections from many liberals, Congress was finally pressured by the Reagan administration and Chamber of Commerce to sell Conrail, which netted the government $1.65 billion, less than a fourth of its investment in the operation. Just a decade later, CSX bought Conrail for $10.2 billion.
Why should the government have sold Conrail in the first place? Why not keep it in government hands, or sell only a piece of it? As South Dakota’s Republican Gov. William Janklow said at the time, “We have public schools, public hospitals, public airports—so why not a public railroad?”