The third article in the series Funding Infrastructure the American System Way. See articles one and two on this site.
By Nancy Spannaus
March 29, 2021—When Abraham Lincoln launched his first political campaign in 1832, he encapsulated his political principles in his typically folksy way:
My politics are short and sweet, like the old woman’s dance. I am in favor of a national bank. I am in favor of the internal improvement system, and a high protective tariff. These are my sentiments and political principles.
By “internal improvement system” Lincoln meant the commitment of the Federal government to ensure the material, moral, and intellectual advancement of the welfare of the country through supporting the building of vital infrastructure such as roads, railroads, canals, and more.[1] And as we shall see, Lincoln never abandoned this Hamiltonian vision when he became President. In his view, the need to fight the Civil War only intensified the need to bind and uplift the nation with federally supported public works.
In this article, I shall emphasize two of Lincoln’s transformative internal improvements: the Transcontinental Railroad and the establishment of the system of Land Grant Colleges. Both of these projects were authorized by Congress in 1862, with Lincoln’s aggressive support, and depended for their funding on both the credit and land grants supplied by the Federal government.
Why did Lincoln, his chief economic advisor Henry Carey, and other Republican leadership believe these projects were essential, and affordable, in the midst of the vast demands to fund the war? Because Republicans those days were convinced – correctly, in my view – that the enhancement of the nation’s productivity which would occur as a result, would far more than pay for itself in enhanced wealth and unity for generations to come. (For more on the principles of the American System of Economics, see Hamilton Versus Wall Street: The Core Principles of the American System of Economics by the author.
The Transcontinental Railroad
Plans for extending a rail line all across the continent had long been under discussion, and contention, when Lincoln became President. Lincoln had been a “railroad man” from the time he served in the Illinois state legislature and saw a properly-routed rail link to be a political and economic necessity. “There (is) nothing more important before the nation than the building of the railroad to the Pacific,” Lincoln is reported to have told the man who eventually became the Union Pacific’s chief engineer, Grenville Dodge, in 1859. It would tie California and Oregon to the Eastern states, build trade links, and contribute to national unity. “No other improvement … can equal in utility the railroad,” he said.
Thus, Lincoln strongly backed the Pacific Railway Act, which was passed in June of 1862. That Act necessarily followed the passage of the Legal Tender Act in February of the year, which established the Greenback system and stabilized the Federal government’s finances, allowing it to issue the bonds which financed the railroad. The Pacific Railway Act authorized the creation of the railroad, guaranteeing rights of way to the Union Pacific and Central Pacific companies, and provided for funding of the construction through land grants and the loan of Federal bonds. The rail companies were then able to issue their own bonds based on the government collateral.
The Federal bond issuances were absolutely essential given the massive investment required to carry out this risky undertaking, which clearly would not pay back its investors for decades, if at all. Payments were performance-based, conditional on the completion of miles of track. Their amounts varied, depending upon the difficulty of the terrain being covered. In addition, an overall deadline of 1874 was set for completion, along with numerous provisions for government oversight and benefits, including subsidies for troop travel. The loans were to be repaid in 30 years, and they were.[2]
While the subsidies to the private companies were a subject of scandal mongering for decades later, the Federal government was not only paid back in full, but, according to some, even made a financial profit on the deal.[3] Even more significant was the fact that the cost of shipping and travel across the country was dramatically reduced by two orders of magnitude ($1000 to $150 is one example). This economic benefit was combined with the increased ability for social integration between East and West.
The Land-Grant Colleges
Educating the nation’s population in both the technical and liberal arts had always been a major goal of the proponents of the American System, which asserts that increasing the productive powers of labor are an indispensable element in promoting economic progress. President Washington tried in vain to get a national university founded, even dedicating a portion of his inheritance to support it. President John Quincy Adams sought unsuccessfully to establish institutions of scientific research, including “lighthouses of the sky” (planetariums).
Lincoln, the self-educated man, succeeded where others failed. A bill to establish land-grant colleges in every state of the Union was vetoed by President Buchanan in 1859; in July 1862, Lincoln signed an updated version, sponsored by Vermont Congressman Justin Morrill, into law.
The scope and impact of this piece of legislation cannot be overestimated. The Act, officially titled “An Act Donating Public Lands to the Several States and Territories which may Provide Colleges for the Benefit of Agriculture and the Mechanic Arts,” aimed to set up institutions of post-secondary school education accessible to the “industrial class” in every state of the Union. These would be funded by Federal land-grants initially, and on an ongoing basis, by the interest on federal government bonds, along with matching payments by the states. The review by the Congressional Research Service provides this summary of the financial requirements:
… each state would receive 30,000 acres of federal land for each member of the Senate and House of Representatives it had in Congress at the time. In cases in which insufficient public land was available, states would instead receive land scrip, or certificates of entitlement to such public lands. Money from the sale of this land or land scrip was to be used to support at least one college with the primary purpose of teaching agriculture and the mechanical arts, to “promote the liberal and practical education of the industrial classes in the several pursuits and professions in life.” The act prohibited states from using the funds for constructing or maintaining buildings.
The CRS also republishes the following excerpt from 1862 Morrill Act:
SECTION 4: “And be it further enacted, That all moneys derived from the sale of the lands aforesaid by the States to which the lands are apportioned, and from the sales of land scrip hereinbefore provided for, shall be invested in stocks of the United States, or of the States, or some other safe stocks, yielding not less than five per centum upon the par value of said stocks; and that the moneys so invested shall constitute a perpetual fund, the capital of which shall remain forever undiminished, (except so far as may be provided in section fifth of this act,) and the interest of which shall be inviolably appropriated, by each State which may take and claim the benefit of this act, to the endowment, support, and maintenance of at least one college where the leading object shall be, without excluding other scientific and classical studies, and including military tactics, to teach such branches of learning as are related to agriculture and the mechanic arts, in such manner as the legislatures of the States may respectively prescribe, in order to promote the liberal and practical education of the industrial classes in the several pursuits and professions in life.”
Lest anyone denigrate this measure as an attempt to set up “cow-colleges” with lower academic standards for the “lower classes,” a list of the institutions the law set up should give them pause. Among the land-grant schools established can be counted Cornell University, Texas A&M, the University of California, Ohio State University, and dozens of other leading research and teaching institutions in the country.
In 1890, Morrill successfully passed an update to the Act which established the Historically Black Colleges and Universities, which enjoyed the equivalent Federal support. Other amendments over the decades have added provisions giving the land-grant colleges and universities responsibility for running agricultural extension services and extensive agricultural research.
Land and Bonds
Once we grant the valuable contributions that these Federal subsidies have made to building out nation’s prosperity, we face the question: Are these methods of support applicable to today? The answer is a resounding yes.
True, the supply of available Federal land is greatly reduced from that in the 1860s. Yet you might be surprised, as I was, that the Federal government still owns about 28% of the nation’s land area. Much of it may be classed unusable, and 12% of the national land area is devoted to what are called “protected areas,” including treasured national parks and forests. Federal land grants, which have financed a huge portion of our national development, however, cannot be ruled out entirely.
But note that the granting of lands for Lincoln’s major projects was integrally connected with a form of financing which is definitely applicable today: the issuance of federal loans, including of government bonds. Just as Hamilton proposed with his National Bank, and Congress instituted with the Second National Bank, these projects put government debt (Treasury bonds) to work financing major public works projects which revolutionized our ability to produce prosperity for people in every state of the Union. They were investments in our future.
There are proposals today that would put government bonds to work creating the trillions of dollars in credit we need to build revolutionary new infrastructure (cf., high speed rail, next generation nuclear plants) and repair our collapsing basic infrastructure, from water systems to education. A study of Lincoln’s creation of a national banking system based on government bonds which financed a virtual take-off of the U.S. economy, would be a good place for skeptics to begin to correct their views.
[1] For an example of Lincoln’s broad perspective, see his speech to the Wisconsin State Fair in 1859, where he concluded: “Let us hope, rather, that by the best cultivation of the physical world, beneath and around us; and the intellectual and moral world within us, we shall secure an individual, social, and political prosperity and happiness, whose course shall be onward and upward, and which, while the earth endures, shall not pass away.”
[2] For a brief overview of the funding, see this summary by the Gilder-Lehmann Institute.
[3] This is asserted by Stephen Ambrose, author of Nothing Like It in the World: The Men Who Built the Transcontinental Railroad, 1863-1869.
Tags: Abraham Lincoln, American System, colleges, Federal bonds, infrastructure, internal improvements, Nancy Spannaus, railroads