Pacific Railway Act Creates Land Grant System Enabling Massive Railroad Speculation and Corruption

President Abraham Lincoln signs the Pacific Railway Act, authorizing extensive land grants in the Western United States and the issuance of 30-year government bonds to the Union Pacific Railroad and Central Pacific Railroad companies to construct a transcontinental railroad. While the act becomes possible only after southern states’ secession removes their opposition to a central route, it establishes a land grant system that operates from 1850 to 1871, granting 129 million acres to railroads from federal lands plus an additional 51 million acres from states, along with various government subsidies. Congress eventually authorizes four transcontinental railroads and grants 174 million acres of public lands for rights-of-way. The massive land grants, ostensibly to incentivize railroad construction serving the public interest, instead enable enormous speculation and corruption as railroad companies and speculators control the best farmland and charge more than intended, making land more expensive for actual farmers seeking to settle the West.

The land grant system creates perverse incentives and opportunities for fraud that persist long after the 1871 end of new grants. Most western railroads establish profitable land departments and bureaus of immigration with European offices by 1868, selling land and promoting foreign settlement—not to serve public interest but to maximize private profit from publicly granted lands. Speculators rather than railroads often control the best farmland, charging prices that exceed even railroad rates and defeating the program’s ostensible goal of facilitating affordable western settlement. The government’s payment-by-mile structure incentivizes unnecessary route lengthening to increase compensation, directly rewarding inefficiency and waste. These land grants continue to incite political contests in Congress and state legislatures and trigger legal disputes in western communities long after 1871, as the consequences of distributing vast public resources to private corporations without adequate oversight or accountability mechanisms play out over decades.

The most notorious manifestation of railroad land grant corruption emerges in the Credit Mobilier scandal: Union Pacific investor Thomas C. Durant creates Credit Mobilier of America, a seemingly independent contractor that is actually owned by Union Pacific investors, which then charges extortionate fees for construction work, swindling the government out of tens of millions of dollars. Durant insists on unnecessarily lengthening the original route to increase per-mile government payments, directly profiting from waste. After the railroad’s completion, Durant’s corrupt schemes become a public scandal, with Congress investigating not only Durant but also fellow Senators and Representatives who benefited from his dealings. The Pacific Railway Act and subsequent land grant system exemplify kakistocracy through the massive transfer of public resources (land, bonds, subsidies) to private corporations with minimal oversight, creating opportunities for speculation that enriches elites while disadvantaging actual settlers, and establishing a pattern where tax dollars finance private infrastructure that generates profits for investors while producing corruption scandals that persist throughout the Gilded Age.