by Burt Folsom
Copyright © 2010, 2007, 2003,1996, 1991, 1987 by Burton W. Folsom, Jr.
All rights reserved
Manufactured in the United States of America
Published by Young America's Foundation
F. M. Kirby FreedomCenter
110 Elden Street Hemdon, Virginia 20170
No part of this book may be reproduced in any form by any electronic or mechanical means, including information storage and retrieval systems, without permission in writing from the publisher, except by a reviewer who may quote brief passages in a review.
Library of Congress Cataloging-in-Publication Data
Folsom, Burton W.
(Entrepreneurs vs. the State)
The Myth of the Robber Barons/Burton W. Folsom, Jr. p. cm.
Previously published as: Entrepreneurs vs. the State
ISBN 0-9630203-0-7 (HB) : $19.95. —ISBN 0-9630203-1-5 (PB) : $9.95
1. Capitalists and financiers—United States—History. 2. Competition—United States—History. 3. Free enterprise—History. 4. Steamboats—United States—History. 5. Entrepreneurship—History. I. Title
HG181.F647 1991 338'.04'097309034—dc20
From reviews of THE MYTH OF THE ROBBER BARONS
"THE MYTH OF THE ROBBER BARONS is ... excellent.... In short, this book is the perfect supplement to most standard economic and business history textbooks. This reviewer has adopted it already."
Larry Schweikart, THE HISTORIAN
"I read this book in one sitting. In spite of the easy reading of the text, the book has profound meaning for the nature of business in America, with implications for political philosophy and economic theory. There isn't a businessman in the country who would not profit from the reading of this important book."
Angus MacDonald, BOOK REVIEWS
"Folsom demonstrates the pernicious effects of government involvement in business.... The enormous value of this book is that it enlightens the intelligent reader with the facts about an era that virtually every history book shrouds in falsehoods."
Second Renaissance Books
THE MYTH OF THE ROBBER BARONS "is a lively, well written and informative introduction to the subject. It is a useful source for students of American history."
Ann M. Scanlon, NEW YORK HISTORY
"The subtlest essay makes James J. Hill an American hero as the only man who built a transcontinental railroad without government subsidy.... The most daring attempt at revision is the author's paean to John D. Rockefeller."
Stuart D. Brandes, AMERICAN HISTORICAL REVIEW
"Folsom draws an insightful lesson. Government aid [to railroads] bred inefficiency; the inefficiency raised costs and rates, and angry customers demanded government regulation; the resulting regulation promoted even greater inefficiency...."
Robert Higgs, THE WORLD & I
"Burt Folsom has done a wonderful job.... The picture of economic history printed in this book helps prove that political promotion of economic development is futile."
Carl Watner, THE VOLUNTARYIST
"Folsom presents the subjects as they were, warts and all, avoiding shrill accusation or exoneration of shortcomings."
Tommy W. Rogers, CHRONICLES
"If these stories are correct, then much of the conventional history of American business is off base.... Folsom persuasively describes how government subsidies to 'political entrepreneurs' actually lowered the quality of output."
M. L. Rantala, CHICAGO ENTERPRISE
Contents
Foreword by Forrest McDonald
Preface
CHAPTER ONE
"The greatest anti-monopolist in the country:"
Commodore Vanderbilt and the Steamship Industry
CHAPTER TWO
"Making a difference in the way the world worked:"
James J. Hill and the Transcontinental Railroads
CHAPTER THREE
"Confidence and unity of purpose:"
The Scrantons and America's First Iron Rails
CHAPTER FOUR
"The American spirit of conquest:"
Charles Schwab and the Steel Industry
CHAPTER FIVE
"Refining oil for the poor man:"
John D. Rockefeller and the Oil industry
CHAPTER SIX
"Cutting taxes to raise revenue:"
Andrew Mellon and the 1920s
CHAPTER SEVEN
Conclusion: Entrepreneurs vs. the Historians
APPENDIX
Notes
Index
Bibliographic Essay
Foreword
It is possible to regard this book as light reading, despite the range and depth of the meticulous scholarship on which it is based, because it is written in a pleasant, almost chatty style and is concerned with an array of fascinating characters—bold innovators who created mightily as well as pious frauds who bilked the public on a grand scale. Indeed, though I have studied American economic history for many years, I have found on almost every page information and anecdotes I had not encountered before. The entertainment value of the work is not lessened by the fact that it revises in important ways many misperceptions that historians have imposed upon the record—for instance, the idea that vertical mobility is a myth. Quietly but conclusively, and without interrupting the flow of his narrative, Folsom demonstrates that vertical mobility, both upwards and downwards, has truly been a norm in America: poor men have become rich men and rich men have become poor men, depending upon skill, brains, work, and luck.
But there is considerably more here than some good stories and some significant revisionism. On one level, Folsom shows that the "Robber Baron" school of historians of American business enterprise was partly right and partly wrong but was unable to distinguish which was which. He points out that during the nineteenth and the early twentieth century (and by unmistakable implication, in the late twentieth as well) there were two kinds of business developers, whom he describes as "political entrepreneurs" and "market entrepreneurs." The former were in fact comparable to medieval robber barons, for they sought and obtained wealth through the coercive power of the state, which is to say that they were subsidized by government and were sometimes granted monopoly status by government. Invariably, their products or services were inferior to and more expensive than the goods and services provided by market entrepreneurs, who sought and obtained wealth by producing more and better for less cost to the consumer. The market entrepreneurs, however, have been repeatedly—one is tempted to say systematically—ignored by historians.
On another level, Folsom's study has profound implications for American historiography beyond the immediate subject to which it is addressed. It is commonly held that the Whig Party of Clay and Webster and its successor Republican Party of Abraham Lincoln and William McKinley were the "pro-business" parries, and that the Jacksonian Democrats were anti-business. What comes through here is something quite different. The Whigs and Republicans engaged in a great deal of pro-business rhetoric and in talk of economic development, but the policies they advocated, such as subsidies, grants of special privileges, protective tariffs, and the like, actually worked to retard development and to stifle innovation. The Jacksonian Democrats engaged in a great deal of anti-business rhetoric, but the results of their policies were to remove or reduce governmental interferences into private economic activity, and thus to free market entrepreneurs to go about their creative work. The entire nation grew wealthy as a consequence.
On yet another level, though Folsom's work is balanced, judicious history, addressed to the past (and is unmarred by the shrill accusatory tone that characterizes the writings of anti-
business historians), it has a powerful relevance to current political discourse. In response to the relative decline of the American economy during the last decade or two, many corporate businessmen have joined with leftist ideologues to clamor for a "partnership" between government and business that would involve central planning, protective tariffs, and a host of restrictions upon foreign competitors. What Folsom has to say to them is a common-sense message drawn from endlessly repeated historical examples. Political promotion of economic development is inherently futile, for it invariably rewards incompetence; if incompetence is rewarded, incompetence will be the product; and when incompetence is the product, politicians will insist that increased planning and increased regulation is the appropriate remedy.
Adam Smith forewarned us more than two centuries ago: "The statesman, who should attempt to direct people in what manner they ought to employ their capital, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it."
Forrest McDonald Williamsburg, Virginia April 1987
Preface to the Sixth Edition
I am delighted to welcome The Myth of the Robber Barons to a sixth edition. That it continues to sell well is testimony to the persistence of free market ideas. Special thanks go to the usual culprits: Ron Robinson for his patience and support for almost thirty years; Patrick Coyle for his energy and encouragement; and Dede Hamilton for all the time she takes with this book. Thanks also go to Larry Arnn, Larry Reed, Larry Schweikart, and Joseph Rishel for their advice and counsel. Over the years, I have benefited from suggestions and criticisms from Lee Benson, Roger Custer, Edward Davies II, Thomas DiLorenzo, James R. Edwards, Winston Elliott, Burton Folsom, Sr., Margaret Folsom, Samuel P. Hays, Robert Hessen, Rusty Humphries, Doug Jeffrey, Aileen Kraditor, Forrest and Ellen McDonald, William H. Mulligan, George Nash, James Nesbitt, Glenn Porter, Helen Roulston, Julius Rubin, James Taylor, John Willson, Kirby Wilbur, and my students at Murray State University and Hillsdale College.
In doing research, I needed help; from many libraries and institutions. The Hagley Museum and Library* in Wilmington, Delaware, gave me access to the Scranton papers and other specialized sources. The R. G. Dun Credit Reports in the Baker Library at Harvard University helped me in writing the Schwab and Scranton essays. The Library of Congress and the National Archives provided me with a wealth of sources on entrepreneurs. At the Lackawanna Historical Society, I received wise counsel from former directors Robert Mattes and William Lewis. William W. Scranton was very supportive and has straightened me out on some points about his family history. The libraries at Murray State University, Southern Illinois University, Indiana University, and Hillsdale College have supplied me with most of the secondary sources used in this study.
In the financing and publication of this book, I have received aid and comfort from Young America's Foundation, the Wilbur Foundation, Roe Foundation, Broyhill Foundation, the Bradley Foundation, and from both Murray State University and Hillsdale College.
Finally, I want to thank my wife Anita, for her wise counsel and editing skills, and my son Adam, who has my blog BurtFolsom.com up and running. Anita and Adam make this work worthwhile for me.
Burton W. Folsom, Jr.
Hillsdale, Michigan March 2010
CHAPTER ONE
Commodore Vanderbilt and the Steamship Industry
For two generations historians have been arguing about the effects of entrepreneurs on American industry. Whether the entrepreneurs were Robber Barons, industrial statesmen, or irrelevant to growth still seems to be disputed even after shelves of books have been written on the subject.1 Maybe we can find a useful line of reasoning by looking at one of America's first large-scale businesses, the steamship industry. It was mechanized in the early 1800s; and, during that century, it was in the vanguard of technological change. Steamboating was also highly competitive and soon became large in scale. Furthermore, a look at the steamboat industry allows us to study entrepreneurs in the comparative context of the whole industry. Only then can we see how different entrepreneurs responded to different challenges and who, if any, made creative contributions to industrial growth.2
A key point about the steamship industry is that the government played an active role right from the start in both America and England. Right away this separates two groups of entrepreneurs—those who sought subsidies and those who didn't. Those who tried to succeed in steamboating primarily through federal aid, pools, vote buying, or stock speculation we will classify as political entrepreneurs. Those who tried to succeed in steamboating primarily by creating and marketing a superior product at a low cost we will classify as market entrepreneurs. No entrepreneur fits perfectly into one category or the other, but most fall generally into one category or the other. The political entrepreneurs often fit the classic Robber Baron mold; they stifled productivity (through monopolies and pools), corrupted business and politics, and dulled America's competitive edge. Market entrepreneurs, by contrast, often made decisive and unpredictable contributions to American economic development.3
I
Every schoolchild is taught that Robert Fulton was the first American to build and operate a steamboat on New York waters. When his Clermontsauntered four miles per hour upstream on the Hudson River in 1807, Fulton opened up new possibilities in transportation, marketing, and city building. What is not often taught about Fulton is that he had a monopoly enforced by the state. The New York legislature gave Fulton the privilege of carrying all steamboat traffic in New York for thirty years.4 It was this monopoly that Thomas Gibbons, a New Jersey steamboat man, tried to crack when he hired young Cornelius Vanderbilt in 1817 to run steamboats in New York by charging less than the monopoly rates.5
Vanderbilt was a classic market entrepreneur, and he was intrigued by the challenge of breaking the Fulton monopoly. On the mast of Gibbon's ship Vanderbilt hoisted a flag that read: "New Jersey must be free." For sixty days in 1817, Vanderbilt defied capture as he raced passengers cheaply from Elizabeth, New Jersey, to New York City. He became a popular figure on the Atlantic as he lowered the fares and eluded the law. Finally, in 1824, in the landmark case of Gibbons v. Ogden,the Supreme Court struck down the Fulton monopoly. Chief Justice John Marshall ruled that only the federal government, not the states, could regulate interstate commerce. This extremely popular decision opened the waters of America to complete competition. A jubilant Vanderbilt was greeted in New Brunswick, New Jersey, by cannon salutes fired by "citizens desirous of testifying in a public manner their good will." Ecstatic New Yorkers immediately launched two steamboats named for John Marshall. On the Ohio River, steamboat traffic doubled in the first year after Gibbons v. Ogden and quadrupled after the second year.6
The triumph of market entrepreneurs in steamboating led to improvements in technology. As one man observed, "The boat builders, freed from the domination of the Fulton-Livingston interests, were quick to develop new ideas that before had no encouragement from capital." These new ideas included tubular boilers to replace the heavy and expensive copper boilers Fulton used. Cordwood for fuel was also a major cost for Fulton, but innovators soon found that anthracite coal worked well under the new tubular boilers, so "the expense of fuel was cut down one-half."7
The real value of removing the Fulton monopoly was that the costs of steamboating dropped. Passenger traffic, for example, from New York City to Albany immediately dropped from seven to three dollars after Gibbons v. Ogden. Fulton's group couldn't meet the new rates and soon went bankrupt. Gibbons and Vanderbilt, meanwhile, adopted the new technology, cut their costs, and earned $40,000 profit each year during the late 1820s.8
With such an open environment for market entrepreneurs, Vanderbilt decided to quit his pleasant association with Gibbons, buy two steamboats, and go into business for
himself. During the 1830s, Vanderbilt would establish trade routes all over the northeast. He offered fast and reliable service at low rates. He first tried the New York to Philadelphia route and forced the "standard" three-dollar fare down to one dollar. On the New Brunswick to New York City run, Vanderbilt charged six cents a trip and provided free meals. As Niles' Register said, the "times must be hard indeed when a traveller who wishes to save money cannot afford to walk."9
Moving to New York, Vanderbilt decided to compete against the Hudson River Steamboat Association, whose ten ships probably made it the largest steamboat line in America in 1830. It tried to informally fix prices to guarantee regular profits. Vanderbilt challenged it with two boats (which he called the "People's Line") and cut the standard New York to Albany fare from three dollars to one dollar, then to ten cents, and finally to nothing. He figured it cost him $200 per day to operate his boats; if he could fill them with 100 passengers, he could take them free if they would each eat and drink two dollars worth of food (Vanderbilt later helped to invent the potato chip). Even if his passengers didn't eat that much, he was putting enormous pressure on his wealthier competitors. Finally, the exasperated Steamboat Association literally bought Vanderbilt out: they gave him $100,000 plus $5,000 a year for ten years if he would promise to leave the Hudson River for the next ten years. Vanderbilt accepted, and the Association raised the Albany fare back to three dollars. Such bribery may be wrong in theory, but it had little effect in practice. With no barriers to entry, other steamboaters came along and quickly cut the fare. They saw that it could be done for less, and they saw what had happened to Vanderbilt for doing it. So almost immediate Daniel Drew began running steamboats on the Hudson—until the Association paid him off, too. At least five other competitors did the same thing until they, too, were bought off. It's hard to figure who got the better deal: those who ran the steamboats and were bought out, or those who traveled the steamboats at the new low rates.10
