The railroads developed in the East, prior to the Civil War, in stiff competition with one another as well as with the older forms of transportation -- barges, riverboats, and wagons. By the 1860's there arose a political clamor demanding that the railroads move west and tie California to the nation: national prestige was held to be at stake. But the traffic volume outside of the populous East was insufficient to draw commercial transportation westward. The potential profit did not warrant the heavy cost of investment in transportation facilities. In the name of "Public policy" it was, therefore, decided to subsidize the railroads in their move to the West.
Between 1863 and 1867, close to one hundred million acres of public lands were granted to the railroads. Since these grants were made to individual roads, no competing railroads could vie for traffic in the same area in the West. Meanwhile, the alternative forms of competition (wagons, riverboats, etc.) could not afford to challenge the railroads in the West. Thus, with the aid of the federal government, a segment of the railroad industry was able to "break free' from the competitive bounds which had prevailed in the East.
As might be expected, the subsidies attracted the kind of promoters who always exist on the fringe of the business community and who are constantly seeking an "easy deal." Many of the new western railroads were shabbily built: they were not constructed to carry traffic, but to acquire land grants. The western railroads were true monopolies in the textbook sense of the word. They could, and did, behave with an aura of arbitrary power. But that power was not derived from a free market. It stemmed from governmental subsidies and governmental restrictions.
Nothing much has changed since. Except it's gotten worse.
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