Bankrupt Myth of the Robber Barons

, Sean Grindlay, Leave a comment

Today’s history textbooks typically depict the Industrial Revolution in the United States as a period dominated by “robber barons”—unscrupulous businessmen who earned vast fortunes on the backs of weary workers and naïve consumers.

Challenging this view is Dr. Burt Folsom (pictured), a professor of history at Hillsdale College in Michigan. Too often, he says, textbooks fail to distinguish between what he calls “economic entrepreneurs”—self-made industrialists whose hard work and ingenuity helped make the United States the superpower it is today—and “political entrepreneurs”—well-connected businessmen who used their political clout to extract money and privileges from taxpayers while contributing little to economic progress.

History shows that economic entrepreneurs routinely outperform their government-subsidized counterparts, Dr. Folsom says, but historical examples of this principle are frequently excluded from today’s textbooks.

The question of free enterprise versus government intervention is not a new one. “If we go back … 160 years ago, to the 1840s, we see in the United States a tremendous debate on whether or not we should use the government in the area of developing our economy,” Folsom told students last month at Accuracy in Academia’s annual Conservative University conference.

In those days, the exciting new technology—“the high-tech Internet of the age”—was the steamship, an invention which had dramatically shortened the time needed to travel between Europe and America, Folsom said. “Just as the Internet brings the world closer together and allows you to get in touch with people all over the world and do transactions more quickly, the steamship did the same thing.”

In the early 19th century, however, the U.S. lagged well behind European nations in its deployment of the steamship and other technologies, Folsom said. Americans were split on how best to catch up with European industry. Many argued for the free-market approach: “Turn entrepreneurs loose to see what they can invent and create,” as Folsom summarized it.

Others believed that government support was necessary to bridge the technology gap between America and Europe: “How do we expect our entrepreneurs to catch up with them if they’re way ahead of us? What we need to do is give a subsidy or some kind of government support to get our entrepreneur up, and then let him compete, with that subsidy!”

In the debate over steamships, Folsom noted, the latter argument won the day. In 1847 a man named Edward Collins persuaded Congress to grant him more than three million dollars to build a fleet of steamships, plus hundreds of thousand of dollars a year in subsidies.

As his steamship service grew, Collins discovered that his costs were greater, and revenues less, than expected. But rather than streamlining his business, the well-connected businessman persuaded Congress to grant him a larger subsidy, Folsom said. Each year, Collins would ask for just a bit more money to help him get on his feet, and Congress would comply.

Then, in 1855, an entrepreneur named Cornelius Vanderbilt went to Congress with an offer to run a steamship line for half of what Collins was receiving in subsidies, Folsom said. Having already so invested so much in Collins, and skeptical of Vanderbilt’s ability to do the job, Congress declined his offer.

Vanderbilt, nonetheless, decided to challenge Collins even without a subsidy and began operating his own steamship service. Since the cost of each voyage was largely fixed, Vanderbilt reasoned that he could offer lower fares if he made full use of his ships’ capacity. Thanks to this and other innovative strategies, Folsom noted, Vanderbilt’s service surpassed Collins’ in popularity and soon began to turn a profit.

Collins, rather than cut costs, told Congress that he would need an even larger subsidy—because he was losing business to Vanderbilt! Amazingly, Congress complied, Folsom reported. But even with the increased subsidies—including $1 million to build a new ship—Collins’ line faltered. One of his ships crashed into an iceberg, killing 450 passengers, and another one set sail and never returned.

After spending several years and millions of tax dollars on Collins, Congress eventually voted to cut the subsidies, Folsom said, and Collins’ line soon went bankrupt while Vanderbilt’s prospered.

Unfortunately, Folsom pointed out, Congress did not learn much from the ordeal. Not long after Collins went out of business, Congress began awarding subsidies to businessmen promising to build a transcontinental railroad. Four transcontinental railroad companies took dozens of millions of taxpayer dollars only to produce substandard lines, engage in rampant corruption, and, eventually, go bankrupt.

James J. Hill, in contrast, received no such subsidy yet built a railroad stretching from St. Paul to Seattle, Folsom said. The line operated more efficiently than its subsidized counterparts and never went bankrupt.

“The combination of the railroads plus the steamships did dent the thick skulls of some of the people pondering this question,” Folsom noted. “And what we have in the late 1800s in the United States is a period of relatively limited government, hardly any examples of federal subsidies—the occasional protective tariff here or there, but you don’t see any direct federal subsidies.”

The result, Folsom pointed out, was a period of economic expansion in the late 1800s that transformed the United States into an industrial powerhouse and raised Americans’ standard of living immeasurably.

And, contrary to what history textbooks may say, the entrepreneurs who made that happen—such as Vanderbilt, Andrew Carnegie, and Herbert Dow—were not “robber barons,” Folsom insisted. “The real robber barons were the ones trying to use politics and get a subsidy to be successful.”

Sean Grindlay is the managing editor of Campus Report.