A century ago, Congress conveyed valuable public property to certain entrepreneurs to serve the public interest. In exchange, these entrepreneurs agreed to carry the nation's principal means of communication at fair cost and, of course, serve the national defense.
In 1850, with a commitment to move the mail at fixed rates and freely transport federal troops hither and yon, a swath of public land was granted to the Illinois Central to connect Chicago with Mobile. As with a modern-day scrap over a sports franchise, Chicago went "mano y mano" with St. Louis, while Mobile took on New Orleans as a seaport. Mississippi River traffic, principally steamboats, encountered its first technological competitor.
Railroads were already some 30 years in development. With fewer rivers up-country, a shift to rail-based transportation proved essential to further westward expansion. By 1870, this rail policy helped win the war against slavery, established the supremacy of federal authority, and pumped 131 million federal acres into private hands. Another 27 million Texas acres reserved from federal trusteeship also entered private ownership on similar terms.
Rail Franchises: Priming the Pump
Such grand government giveaways exemplify the "prime the pump" theory of innovation: Use public assets to induce private investment to serve the public interest. A natural corollary is that free markets have short planning horizons, and cannot properly value opportunity. The argument that scale and scope make railroads "natural" monopolies added a dash of legitimacy.