Question

During the nineteenth century, the U.S. Congress encouraged railroad companies to build transcontinental railways across the Great Plains by giving them land grants. At that time, the federal government owned most of the land on the Great Plains. The land grants consisted of the land on which the railway was built and alternating sections of 1 square mile each on either side of the railway to a distance of 6 to 40 miles, depending on the location. The railroad companies were free to sell this land to farmers or anyone else who wanted to buy it. The process of selling the land took decades. Some economic historians have argued that the railroad companies charged lower prices to ship freight because they owned so much land along the tracks. Briefly explain the reasoning of these economic historians.

Short answer

Economic historians argue that railroad companies charged lower prices for freight because they were able to subsidize freight costs with the profits from selling land acquired through grants. They had an additional income stream, and thus, could afford to balance the costs of freight differently, leading to lower shipping charges.

Step-by-step solution

Understand the Situation

Comprehend the historical context and the economic circumstances. From the 19th century, the U.S. Congress gave land grants to the railroad companies to incentivize the construction of transcontinental railways. These grants allowed the railway companies to own significant lands along the railway tracks which they were subsequently allowed to sell.

Understand the Claim

The economic historians argue that the railroad companies could afford to charge lower prices for shipping freight due to their land ownership along the tracks. Now, to explain this, we must delve into the principles of economics.

Reasoning of Lower Freight Charges

The railroad companies used the profits they earned from selling the land grants to subsidize the cost of shipping freight. This means they didn't heavily rely on the revenue from shipping freight alone for their operation and maintenance. They had an alternative source of income (i.e., from the sell of lands). So, they could afford to charge lower prices for shipping freight as compared to if they didn't own the lands. This reasoning is grounded on the economic principle that when businesses have multiple income streams, they can balance costs and benefits differently.

Key concepts

Transcontinental Railways

The dawn of transcontinental railways in the 19th century marked a transformative period in American economic and social development. Envisioned to bridge vast distances and facilitate movement between the east and west coasts, these railways became symbols of progress.

The construction of such massive infrastructure projects required enormous capital. To solve this, the U.S. Congress passed laws granting vast stretches of land to railroad companies. This ambitious plan, through its sheer scale, changed the geographical and economic landscape of the United States.

The advent of the transcontinental railway also had immediate effects on local economies. It reduced travel time tremendously, which previously could take months by wagon to mere days by rail. The movement of people and goods became more efficient, enabling economic activities that were previously unfeasible due to the distances involved.

Land Grants and Railroad Companies

The relationship between land grants and railroad companies was mutually beneficial and strategic. Land grants acted as an incentive for railroad companies to take on the risky and expensive endeavor of building railway lines across the Great Plains.

The grant system effectively transferred ownership of alternating blocks of land, sometimes up to 40 miles wide on either side of the track, from the government to the railroads. Companies could then sell this land to settlers, investors, and businesses, creating new communities and opportunities along the routes.

Moreover, these land sales became a significant financial resource for the railroad companies. By owning land with increased value due to the presence of the railway, companies could reduce dependence on freight revenue, as further elaborated by economic historians analyzing the period's pricing strategies.

Economics of Transportation Infrastructure

Transportation infrastructure like railways plays a pivotal role in the economic network of a nation. Its economics are characterized by significant initial investment costs and long-term returns.

In the case of the transcontinental railroads, the income from land sales provided an alternative revenue stream as explained by the economic historians. This diversified income approach allowed railway companies to offer competitive freight charges, fostering economic growth and encouraging further development along the railway routes.

Such pricing strategies also facilitated the movement of goods at cheaper rates, promoting trade and commerce which were critical to the United States' burgeoning economy of the late 19th century. The ability to move vast quantities of goods across the country efficiently and affordably was a fundamental catalyst for economic expansion.