by Burt Folsom
To sum up, then, we need to divide industrialists into two groups. First, were market entrepreneurs, such as Vanderbilt, Hill, the Scrantons, Schwab, Rockefeller, and Mellon, who usually innovated, cut costs, and competed effectively in an open economy. Second, were political entrepreneurs, such as Edward Collins, Henry Villard, Elbert Gary, and Union Pacific builders, all of whom tried to succeed primarily through federal aid, pools, vote-buying, or stock speculation. Market entrepreneurs made decisive and unique contributions to American economic development. The political entrepreneurs stifled productivity (through monopolies and pools), corrupted business and politics, and dulled America's competitive edge.23
The second point is that, in the key industries we have studied, the state failed as an economic developer. It failed first as a subsidizer of industrial growth. Vanderbilt showed this in his triumph over the Edward Collins' fleet and the Pacific Mail Steamship Company in the 1850s. James J. Hill showed this forty years later when his privately built Great Northern outdistanced the subsidized Northern Pacific and Union Pacific. The state next failed in the role of an entrepreneur when it tried to build and operate an armor plant in competition with Charles Schwab and Bethlehem Steel. The state also seems to have failed as an active regulator of trade. The evidence in this study is far from conclusive; but we can see problems with the Interstate Commerce Commission and the Sherman Anti-trust Act, both of which were used against the efficient Hill and Rockefeller.
A third point is that the relative absence of state involvement— either through subsidies, tariffs, or income taxes—may have spurred entrepreneurship in the 1840-1920 period. One of the traditional arguments cited by some businessmen, especially the political entrepreneurs, is that a tariff or a subsidy given to a new industry will help that industry survive and eventually flourish against foreign competition. What really happened, though, is that, when Collins and Cunard got subsidies from their governments, they did not become efficient steamship operators; instead, they became lavish wastrels and soon came back asking for larger subsidies, which they then used to compete against more efficient rivals.
In the case of protective tariffs, neither George Scranton or John D. Rockefeller needed them in establishing their steel and oil companies. The Scranton group very profitably built America's first large quantity of rails in a time of a low tariff on British iron imports. Also Rockefeller never needed a tariff (though a small one did exist) on his way to becoming the largest oil producer in the world.
The American government also resisted the temptation to tax large incomes for most of the 1840-1920 period. Low taxes often spur entrepreneurs to invest and take risks. If the builders can keep most of what they build, they will have an incentive to build more. It is true that the state lost the revenue it could have raised if it had taxed large incomes. This was largely offset, however, by the philanthropy of the entrepreneurs. When the income tax became law in 1913, the most anyone had to pay was seven percent of that year's income. Most people paid no tax or only one percent of their earnings. In the years before and after 1913, however, John D. Rockefeller sometimes gave over 50 percent of his annual income to charitable causes. He almost always gave more than ten percent. Hill, Vanderbilt, the Scranton group, and Schwab were also active givers. Sometimes they gave direct gifts to specific people. Usually, though, they used their money to create opportunities that many could exploit. In academic jargon, they tried to improve the infrastructure of the nation by investing in human capital. A case in point consisted of the many gifts to high schools and universities, north and south, black and white, urban and rural. Cheap high-quality education meant opportunities for upwardly mobile Americans, and was also a guarantee that the United States would have quality leadership in its next generation. Vanderbilt University, the University of Chicago, Tuskegee Institute, and Lehigh University were just some of the dozens of schools that were supported by these five entrepreneurs.
Libraries were also sources of support. Not just Andrew Carnegie, but also Hill and Rockefeller were builders and suppliers of libraries. The free public library, which became an American institution in the 1800s, gave opportunities to rich and poor alike to improve their minds and their careers.
Finally, America has always been a farming nation: Rockefeller attacked and helped conquer the boll weevil in the South; Hill helped create dry farming and mixed agriculture in the North. America's cotton and wheat farmers took great advantage of these changes to lead the world in the producing of these two crops.
All of these men (except for Schwab) tried to promote self-help with their giving. They gave to those people or institutions who showed a desire to succeed and a willingness to work. Rockefeller and Hill both paid consultants to sort out the deadbeats and the golddiggers. They sympathized with the needy, but supported only those needy imbued with the work ethic.
Each entrepreneur, of course, had his own variations on the giving theme. Vanderbilt, for example, plowed a series of large gifts into Vanderbilt University and helped make it one of the finest schools in the nation. He almost never gave to individuals, though, and said if he ever did he would have people lined up for blocks to pick his pockets. Schwab, by contrast, was a frivolous giver and had dozens of friends and hangers-on who tapped him regularly for handouts. Rockefeller concentrated his giving in the South and the Midwest; the Scranton group and Schwab focused on the East; Hill gave mainly in the Northwest.
Even without an income or an inheritance tax, these entrepreneurs, and others, had trouble handing down their wealth to the next generation. This was true in part, of course, because they gave so much of it away. As we have seen with the Scranton group, though, most entrepreneurs did not have sons with the same talents the fathers had. Vanderbilt's son William was a worthy successor, but the rest of his children showed little aptitude for business. Hill's three sons did not come close to matching their father's accomplishments; one son, Louis, followed his father as president of the Great Northern, but Louis' career was lackluster. The Oregonian of Portland called him "impulsive"; not so much a railroad man, but "a painter of some ability."24 Charles Schwab and his wife were childless, which was probably fortunate because he squandered over $30 million and died a debtor. Rockefeller's only son, John D. Jr., became a full-time philanthropist. Granted, the senior Rockefeller's five grandsons were all multimillionaires, but their economic influence was much less than that of their grandfather. Sometimes the descendants of these original entrepreneurs parlayed their family names and what was left of their fortunes into political careers. During the 1960s, two of the grandchildren of John D. Rockefeller and one of the great grandchildren of Joseph Scranton were governors of New York, Arkansas and Pennsylvania.25
If we seriously study entrepreneurs, the state, and the rise of big business in the United States we will have to sacrifice the textbook morality play of "greedy businessmen" fleecing the public until at last they are stopped by the actions of the state. But, in return, we will have a better understanding of the past and a sounder basis for building our future.
Notes to Chapters
Notes to Chapter One
Commodore Vanderbilt and the Steamship Industry
1The literature on the "Robber Barons" controversy is extensive. For a good description of the various arguments, see Glenn Porter, The Rise of Big Business, 1860-1910 (Arlington Heights, 111.: AHM Publishing Corporation, 1973).
2No recent historian has systematically traced the history of the American steamship industry. Two older histories are David B. Tyler, Steam Conquers the Atlantic (New York: D. Appleton-Century Co., 1939); and John G. B. Hutchins, The American Maritime Industries and Public Policy, 1789-1914 (Cambridge, Mass.: Harvard University Press, 1941).
3Modern historians have usually de-emphasized entrepreneurs in describing American industrial development. For a more detailed look at this dichotomy between political and market entrepreneurs, see my book Urban Capitalists (Baltimore: Johns Hopkins University Press, 1981). See also Maury Klein,
"The Robber Barons," American History Illustrated (October 1971), 13-22.
4Fulton's monopoly rights are dearly spelled out in a pamphlet entitled The Right of a State to Grant Exclusive Privileges in Roads, Bridges, Canals, Navigable Waters, etc. Vindicated by a Candid Examination of the Grant from the State of New York to and Contract with Robert R. Livingston and Robert Fulton for Exclusive Navigation (New York: E. Conrad, 1811). For a good description of the steamboat monopoly, see Maurice G. Baxter, The Steamboat Monopoly: Gibbons v.Ogden, 1824 (New York: Alfred A. Knopf, 1972), 3-25. See also John S. Morgan, Robert Fulton (New York: Mason/Charter, 1977), 178-88.
5Baxter, Gibbons v. Ogden, 25-26; and Robert G. Albion, "Thomas Gibbons" and "Aaron Ogden," Dictionary of American Biography, 20 vols. (New York: Charles Scribner's Sons, 1928-37). 7:242-43; 8:636-37 (hereafter cited as DAB). The best studies of Vanderbilt are Wheaton J. Lane, Commodore Vanderbilt: An Epic of the Steam Age (New York: Alfred A. Knopf, 1942); and William A. Croffut, The Vanderbilts and the Story of Their Fortune (Chicago: Belford Clarke, 1886). A more recent study of the whole Vanderbilt family is Edwin P. Hoyt, The Vanderbilts and Their Fortunes (Garden City, N.Y.: Doubleday, 1962).
6Chief Justice Marshall's written decision has been reprinted in John Roche, ed.John Marshall: Major Opinions and Other Writings (Indianapolis: Bobbs-Merrill, 1967), 206-25. A lively account of the Gibbons v. Ogden case is in Albert J. Beveridge, The Life of John Marshall, 4 vols. (Boston and New York: Houghton, Mifflin and Co., 1916-19), 4:397-460. See also Baxter, Gibbons v. Ogden, 37-86; David W. Thomason, "The Great Steamboat Monopoly," American Neptune 16 (January and October 1956), 23-40, 279-80; George Dangerfield, "Steamboats' Charter of Freedom: Gibbons vs. Ogden, "American Heritage (October 1963), 38-43, 78-80; and Robert G. Albion, The Rise of New York Port (New York: Charles Scribner's Sons, 1939), 152-55. For a newer study, see Erik F. Haites, James Mak, and Gary M. Walton, Western River Transportation: The Era of Internal Development, 1810-1860 (Baltimore: Johns Hopkins University Press, 1975).
7David L. Buckman Old Steamboat Days on the Hudson River (New York: Grafton Press, 1907), 53-55.
8Lane, Vanderbilt, 43-49; Morgan, Fulton, 179, 187; and Albion, New York, 152-55.
9ane, Vanderbilt, 47, 50-51.
10Albion, New York, 154-55; and Lane, Vanderbilt, 56-62.
11Harper's Weekly, March 5, 1859, 145-46; Lane, Vanderbilt, 50-84, 231; Albion, New York, 156-57.
12Sailing ships (called "packets") and clipper ships were still competitive carriers of freight (not passengers) before 1860. Their reliance on wind, not coal, made them cheaper, if not faster. During the 1850s, clipper ships captured a lot of trade to the Orient. The most thorough account of steamships is William S. Lindsay, History of Merchant Shipping and Ancient Commerce, 4 vols. (London: Sampson, Marston, Low, and Searle, 1874). See also Hutchins, The American Maritime Industries, 348-62.
13For a good history of the Cunard line, see Francis E. Hyde, Cunard and the North Atlantic, 1840-1973 (Atlantic Highlands, N.J.: Humanities Press, 1975). See also Tyler, Steam Conquers the Atlantic 142-45; Royal Meeker, History of the Shipping Subsidies (New York: Macmillan, 1905), 5-7; Hutchins, American Maritime Industries, 349; and Lindsay, Merchant Shipping, 4:184. For an excellent critique of shipping subsidies, see Walter T. Dunmore, Ship Subsidies: An Economic Study of the Policy of Subsidizing Merchant Marines (Bostons: Houghton, Mifflin and Co., 1907), esp. 92-103.
14Congressional Globe, 33rd Congress, 2nd session, 755-56. Cunard later began weekly mail and passenger service. See also Tyler, Steam Conquers the Atlantic, 136-48; and William E. Bennet, The Collins Story (London: R. Hale, 1957).
15For a defense of mail subsidies, see "Speech of James A. Bayard of Delaware on the Collins Line of Steamers Delivered in the Senate of the United Staes, May 10, 1852" (Washington: John T. Towers, 1852). See also Thomas Rainey, Ocean Steam Navigation and the Ocean Port (New York: D. Appleton and Co., 1858). For other views of the subsidies, see Lindsay, Merchant Shipping, 4:200-03; Hutchins, American Maritime Industries, 358-62; and Dunmore, Ship Subsidies, 96-103.
16French E. Chadwick, Ocean Steamships (New York: Charles Scribner's Sons, 1891), 120-22; John H. Morrison, History of American Steam Navigation (New York: W. F. Sametz and Co., 1903), 420-23; and N. A., "A Few Suggestions Respecting the United States Steam Mail Service" (n. p., 1850), 9-17.
17Tyler, Steam Conquers the Atlantic, 202-14; and George E. Hargest, History of Letter Post Communications Between the United States and Europe, 1845-1875 (Washington: Smithsonian Institution Press, 1971).
18Congressional Globe, 33rd Congress, Appendix, 192. See also Lane, Vanderbilt, 143-44.
19President Franklin Pierce vetoed the Collins subsidy bill. He argued that the effect of such a "donation . . . would be to deprive commercial enterprises of the benefits of free competition, and to establish a monopoly, in violation of the soundest principles of public policy, and of doubtful compatibility with the Constitution." Congressional Globe, 33rd Congress, 2nd session, 1156-57. But Congress got the whole subsidy back for Collins later in a Navy appropriations bill. See Tyler,Stem Conquers the Atlantic, 225-29; Lane, Vanderbilt, 143-48; Hutchins, American Maritime Industries, 367; Dunmore, Ship Subsidies, 92-103; and Roy Nichols, Franklin Pierce (Philadelphia: University of Pennsylvania Press, 1958), 377. For Seward's comment, see Congressional Globe, 33rd Congress, Appendix, 301.
20New York Tribune, March 8, 1855; Lane, Vanderbilt, 147-48, 150.
21Lane, Vanderbilt, 147-48. In a letter to the New York Tribune, March 8, 1855, Vanderbilt complained that the Collins subsidy was "paralyzing private enterprise, and in fact forbidding it access to the ocean."
22Lane, Vanderbilt, 148-51, 167; Tyler, Steam Conquers the Atlantic, 238-41.
23Congressional Globe, 35th Congress, 1st session, 2826, 2827, 2843. See also Tyler, Steam Conquers the Atlantic, 231-46; James D. McCabe, Jr., Great Fortunes (Philadelphia: G. MacLean, 1871); and Meeker,Shipping Subsidies, 156.
24Lane, Vanderbilt, 151-56; and Meeker, Shipping Subsidies, 5-20.
25Meeker, Shipping Subsidies, 10-11; Henry Fry, The History of North Atlantic Steam Navigation (New York: Charles Scribner's Sons, 1896), 42-53, 77-78, 81; and Hyde, Cunard, 27-34.
26Robert Macfarlane, History of Propellers and Steam Navigation (New York: George P. Putnam, 1851); Tyler, Steam Conquers the Atlantic, 117-18,138-42; Lane, Vanderbilt, 93-94.
27Congressional Globe, 33rd Congress, Appendix, 354-55; Tyler, Steam Conquers the Atlantic, 128-32, 138-42; Lane, Vanderbilt, 175-78.
28Earnest A. Wiltsee, Gold Rush Steamers (San Francisco: Grabhorn Press, 1938), 50-89; Lane, Vanderbilt, 85-107; Hutchins, American Maritime Industries, 359-60.
29Hutchins, American Maritime Industries, 359-63.
30Lane, Vanderbilt, 108-38; Wiltsee, Gold Rush Steamers, 112-51.
31Lane, Vanderbilt, 123-24,135; and William D. Scroggs, "William Walker," DAB, 19:363-65.
32Congressional Globe, 35th Congress, 1st session, 2843-44. 33Lane, Vanderbilt, 124, 136.
34In 1855, with Vanderbilt paid off, the California lines raised the New York to San Francisco fare from $150 to $300. They also doubled the steerage fare from $75 to $150. Many passengers—real and potential—were angry, but one point needs to be made. This fare was only one-half of what it was before Vanderbilt arrived. The effect of Vanderbilf s competition was to shrink the fare from $600 to $150; when he left, it was still only $300.
For the California lines to have raised the fare any higher would have probably meant two things: first, a decline in the number of passengers wanting to go to California; second, the appearance of a new rival ready to cut fares and capture what traffic was left. Since the California lines had only one-fourth of their subsidy left, they could ill-afford the arrival of another Vanderbilt, so they kept the fares moderately low. See Wiltsee,Go/rf Rush Steamers, 21-26, 55-56, 139-42, 149.
35Meeker, Shipping Subsidies, 156.
36Harry H. Pierce, Railroads of New York: A Study of Government Aid
, 1826-1875 (Cambridge, Mass.: Harvard University Press, 1953), 14-16; George Rogers Taylor, The Transportation Revolution (New York: Harper and Row, 1951), 128-31; Julius Rubin, Canal or Railroad? Imitation and Innovation in
Response to the Erie Canal in Philadelphia, Baltimore, and Boston (Philadelphia: American Philosophical Society, 1961); Douglass C. North, Growth and Welfare in the American Past (Englewood Cliffs, N.J.: Prentice-Hall, 1974). After the Civil War, Vanderbilt sold his steamships and began building the New York Central Railroad from New York to Chicago. Vanderbilt again had to battle political entrepreneurs (this time city councilmen and state legislators) in New York who demanded bribes from Vanderbilt before they would approve of a right-of-way for his railroad. But Vanderbilt never took his eyes off the main task: building the best railroad and delivering goods at the lowest possible prices. He spearheaded America's switch from iron to steel rails, standardized his railroad's gauge, and experimented with the four track system. He improved roadbeds and rolling stock and cut his cost in half in seven years—all the time maintaining an eight percent dividend to stockholders.
Notes to Chapter Two
James J. Hill and the Transcontinental Railroads
'John A. Garraty, The American Nation: A History of the United States, 7th ed. (New York: Harper Collins, 1991), 497.
2James F. Stover, American Railroads (Chicago: University of Chicago Press, 1961), 67; Henry Kirke White, History of the Union Pacific Railway (Chicago: University of Chicago Press, 1895).
