Journal of Real Estate Finance and Economics, 16: 2, 191±204 (1998)
# 1998 Kluwer Academic Publishers
Railroad Development and Land Value
School of Public Policy, University of Chicago, Chicago, IL 60637
MARY ESCHELBACH GREGSON
Department of Economics, Knox College, Galesburg, IL 61401
Land owners in the rural Midwest experienced signi®cant capital gains during the late 1840s and early 1850s. A
primary catalyst of increasing land values was the construction of new railroads. Land in close proximity to new
railroads became more valuable because of decreased transportation costs. We use a straightforward model of
land price determination to estimate the impact on land values of distance from the railroad. The estimates allow
us to infer a lower bound for capital gains attributable to the construction of railroads in Knox County, Illinois,
during the 1850s. Knox County landowners reaped capital gains of more than $270,000Ð9% of the value of land.
Key Words: capital gains, railroads
Landowners of the mid±nineteenth century worked, competed, rallied, and sometimes
schemed to convince railroads to build nearby. Successful railroad promotion brought
them cheaper transportation and access to wider markets. Participation in national and
international markets raised the expected value of their crops, and higher crop values at the
farm gate, of course, were re¯ected in the price of land.
The effect of railroads on land prices was clearly understood by contemporaries. For
example, a ®gure from an 1851 issue of De Bow's Review pegs the capital gains from a
short rail line at $0.25 per acre for land close to market and at $2.75 per acre for land
originally out of the feasible market area.
It was for these gains for their constituents that
local and state politicians competed. It was for these gains that local landowners approved
bond subscriptions. It was for these gains that eastern investors and western merchants
risked private fortunes. It was these gains that made the difference between prosperity and
obscurity for many small cities in the Midwest.
In a recent article, Peter Lindert (1993) showed that land values in the United States
grew particularly rapidly during the railroad boom of the 1850s, creating one of the largest
land booms in national history. Real capital gains averaged 3.72% per year. Capital gains
per year on farms in the East North Central census region were even higher: real land
values increased more than 60% in the region including Indiana, Illinois, Michigan, Ohio,
and Wisconsin (Lindert, 1993).
The progress of land prices in the Midwest is well documented. For example, in
McDonough County in west-central Illinois, land values ¯uctuated with the business cycle
during the early settlement process. From the mid-1840s values rose steadily and
settlement progressed rapidly, at least until the Panic of 1857. Similar movements in land