Despite one prominent politician's statements to the contrary, the era of Big Government is not over. It is difficult in today's society to imagine a limited government—the government is simply too pervasive. For example, most people, especially businessmen, do not question the government's involvement in prescribing an individual's wages or an employer's hiring policies. They do not examine the rationale behind antitrust laws or governmental micro-management of the workplace. They do not question the right of the government to legislate special privileges and exemptions for certain individuals and businesses.
These examples paint a picture of government usurpation of what have traditionally been management prerogatives. Where once managers could focus on effective business principles, now they must keep in mind the countless edicts and regulations imposed by government. Where once managers had the liberty to enact whatever policies they deemed necessary, now they must wait for regulatory approval. Where once managers judged the success of their management style by reduced costs and increased profit, now their judgment is subject to the oversight of innumerable agencies of government.
In spite of this, the United States' economy is booming. The Dow Jones Industrial Average regularly reaches new pinnacles. America's world economic preeminence is unchallenged. To the degree that other nations emulate us is the degree to which their economies prosper. The Gross National Product is growing, albeit moderately. By all measures, the average standard of living is rising. Even amid such affluence, there exists a feeling of malaise and uncertainty. People constantly question the ability of the Dow Jones to continue its climb and they worry about how long the boom will last. They complain about the increasing portion of America's economy devoted to service. Investors hang on every word Federal Reserve Chairman Alan Greenspan utters.
On the face of it, these three situations—government micro-management, booming economy, and uncertainty about the future—seem contradictory. Common sense would dictate that government meddling should drag the economy down and that a booming economy should make people jubilant. Since this is not the case, we must look deeper to find meaning. In order to resolve the businessman's plight and to understand this perplexing situation, we must look to history.
It is useful to contemplate present problems through a consultation of history—by which I mean the recording of the past. We find that our forerunners experienced the same sort of situations. By evaluating their resolutions, we can forego making the same mistakes and possibly improve on their solution. American history is replete with periods of increasing government regulation and booming economic growth. The post-World War II era is one good example, but it lacks the historical perspective necessary for an objective analysis.
We need look no further than the post-Civil War era. The two major milestones marking the beginning of economic interventionism—viz., the Sherman Antitrust Act of 1890 and the Interstate Commerce Commission in 1887—were in effect. Except for some minor recessions in 1893 and 1907, this was a period of sustained industrial growth. It was also the so-called Gilded Age—a time when the great industrialists roamed the boardrooms and headquarters of America.
Thus, in this paper, I shall examine the effects of government intervention in the economy on the businessmen of this period. In order to delimit the fantastic breadth of this subject, I will focus on the biggest concerns of the time and, more specifically, the entrepreneurs who founded and ran them. The actors are the heavyweights of American industrial history: James J. Hill, John D. Rockefeller Sr., and Charles Schwab. Since many of these businessmen lived through successive waves of government regulation, I will examine both their rise in a system of near-laissez-faire and their fall in a less free economy.
Before we begin an exploration of governmental intervention, we must understand the business environment in which government intervention was undertaken. While commerce was dominated by the many legitimate businessmen—men of integrity like Hill, Schwab, or Rockefeller—there were plenty of scoundrels; men like Jay Gould, Leland Stanford, and James Fisk obtained land grants, government loans, and right-of-ways through influence-peddling. These 'political entrepreneurs,'1 as historian Burton Folsom calls them, flourished not by reducing costs or meeting customer's needs, but through political dealing and unscrupulous stock manipulation. They stifled competition by using various legislatures to put obstacles in the path of their competitors or would-be competitors. They owed their wealth to government handouts rather than productive ability.
During the period in question, there were several ways in which the government affected business. A legislature could subsidize one company with grants or loans. Or: the government could dictate the price at which two parties may transact. Or: it could outlaw combinations of several interests. In other words, government intervention was not always direct and took on many different forms. The rationale behind such government intervention generally fell into one of two categories: promotion of the economy and punishment of unscrupulousness.
By far the most prevalent form of government meddling was assistance to fledgling or foundering enterprises in the form of grants, loans, or subsidies. The most infamous recipients of federal aid were the railroads. That is, except for James J. Hill's Great Northern Railway. The Great Northern was the only transcontinental railroad that never accepted federal assistance and never went bankrupt. It was the least corrupt, best built, and most popular of the transcontinentals. In marked contrast to Hill, the other early railroad builders were not so restrained by integrity. They accepted money from any legislature that would give it, whether state, federal, or both. If a legislature showed any hesitancy about doling out taxpayer money, they bribed, wined and dined, or threatened as many representatives as necessary. They did not develop a region before moving into it, as Hill did. They built tracks as quickly as possible, cutting as many corners as they could, and limited the number of spurs off the main track (since they received no additional money for building them). As the indefatigable Cornelius Vanderbilt said: "Building railroads from nowhere to nowhere at public expense is not a legitimate business."2
It all began in 1862, when Congress passed the Pacific Railroad Act. This Act gave the Union Pacific, building from Nebraska to Utah, and the Central Pacific, building from California to Utah, ten alternate sections of land per mile completed.3 In addition to these land grants, the roads were to get loans in the amount of $16,000 for each mile of plains trackage, $48,000 per mile for mountainous areas, and $32,000 a mile for inter-mountain building.4 In 1864, a second act was passed doubling the roads' land grants and lowering the government's mortgage from first to second position.5 Since the Union Pacific covered eight thousand miles of track and the Central Pacific nearly as much, the money and land was significant. In the end, the Union Pacific had the benefit of $27 million in thirty-year, six-percent government bonds and 12 million acres of land. The Central Pacific garnered $24 million in government bonds and 9 million acres of land.6
The other chartered transcontinental—the Northern Pacific—received twenty sections per mile of trackage in the states and forty sections in the territories.7 It was originally organized by the Civil War bond promoter Jay Cooke, but it soon failed and brought the Panic of 1873 on with it. Henry Villard, a German of considerable charisma, picked up where Cooke left off. Like the Union and Central Pacific, Villard laid his tracks in a straight line as quickly as possible, in order to obtain the land grants. In 1883, the Northern Pacific was near bankruptcy and he was relieved of his duties.
The subsidies aimed at expanding the economy. They actually only succeeded in expanding the wealth of the élite few on the receiving end of government largess. And it was rarely the most productive or most able who got the assistance; it tended to be those businessmen with the best "Washington men" or the most lavish gifts to Congressmen. In other words, the recipients were what philosopher Ayn Rand called "the aristocracy of pull."8 Since they lacked an interest in the success or productivity of their various enterprises, the pull-peddlers spent their aid on boondoggles and lavish mansions.9 And, because they could always appeal to the government for more money if they failed, there was no incentive to succeed.
The remaining previously mentioned measures were intended to right wrongs committed by the pull-peddlers. For example, when the Central Pacific and other transcontinentals began charging exorbitant rates because they held a legally-enforced monopoly, farmers and other freight-producers complained to their representatives. Eventually, the Interstate Commerce Commission was created. Or: when increasing numbers of enterprises combined into larger conglomerates, trying to pool resources and control prices, the newspapers bellowed charges of monopoly and encouraged people to complain to their congressmen. The result was the Sherman and Clayton Antitrust Acts.
As mentioned, the clamor for rate controls resulted in the ICC. In 1874, Jay Gould took charge of the ailing Union Pacific. At that time, the Thurman Law—which forced the railroad to pay 25% of gross revenues to the government in order to retire some of its debt—had just been passed. Of course, lopping off a quarter of revenue had considerable effects which had to be counteracted. So, Gould doubled the rates and, shortly thereafter, raised them another twenty to thirty-three percent—enabling him to pay off some debt and declare a small dividend. The results of such practices were predictable. In 1887, the Interstate Commerce Commission was created. It quickly moved to end the Union Pacific's high rates. This shut down the Union Pacific's last-ditch options and it declared bankruptcy in 1893.
The Interstate Commerce Commission was a reaction to the inefficiencies of a subsidized road. The Commission, however, had to apply its edicts and regulations uniformly. This meant that James J. Hill's Great Northern was subject as well. In 1900, Hill had established the Great Northern Steamship Company. This subsidiary was to carry passengers and freight from the Great Northern's Western terminus of Seattle to the Far East. With the great cost-cutting he had achieved, he could ship wheat from Minnesota to Seattle, for transport by steamship to Japan, and still price it competitively. Trade with the Far East to that time was underdeveloped and Hill saw in his steamship company great promise. He envisioned replacing rice as the staple of the Japanese diet with Minnesota wheat.10 "If the people of a single province of China should consume [instead of rice] an ounce a day of our flour," Hill envisioned, "they would need 50,000,000 bushels of wheat per annum, or twice the Western surplus."11 The Hepburn Act, passed in 1906, prohibited rate discrimination. That meant that Hill had to charge the same shipping rate for travel within Minnesota as he did for travel from St. Paul to Japan. He could either give every shipper the same discount he gave to Oriental trade or he could, and did, give the Oriental trade the same rate as he charged everyone else. The immediate effect was the halving of Oriental-American trade. All told, the Hepburn Act and the ICC forced Hill to sell his steamships, discontinue his foreign trade, and end discounts for long-distance shipping.
By far the most common practice of government punishment was antitrust enforcement. The most significant instance of 'trust-busting' was James J. Hill's Northern Securities. A trust is a legal invention that corresponds with our modern notion of a holding company. Simply put, corporations give their stock to the trustees for holding. The trustees then issue shares of the trust to the owners of the assimilated corporations. It was a very efficient way of exercising centralized control over a disparate amalgamation, while retaining corporate identities and operational practices.
Hill's trust, in Northern Securities v. U.S., was the first major target of the antitrust legislation. After the Union Pacific went bankrupt in 1893, E.H. Harriman purchased it for a song. He learned from the mistakes of Gould and the lessons of Hill. He then set his sights on buying the Northern Pacific, which had been bought by Hill and had recently acquired the Chicago, Burlington, and Quincy—a highly profitable and well-built road that ran parallel to the Union Pacific. Harriman found the thought of a Hill-controlled direct competitor distasteful and set about surreptitiously purchasing Northern Pacific stock. Hill saw the fluctuations in price and heavy traffic of NP stock and concluded that something was on the horizon. With the assistance of financier J.P. Morgan, he created a trust called Northern Securities.12 This way, anyone trying to purchase control of the CB&Q would have to buy out Northern Securities, capitalized at $400 million.13
Theodore Roosevelt, the legendary 'trust-buster,' targeted Northern Securities in 1902. After two years of costly litigation, the Supreme Court reached its decision. Chief Justice John Marshall Harlan, writing for the 5-4 majority opinion, stated, "The act is not limited to restraints of interstate and international trade or commerce that are unreasonable in their nature, but embraces all direct restraints."14 Previously, antitrust had been interpreted to apply only to so-called 'unreasonable' restraint of trade. Justice Oliver Wendell Holmes, in his Supreme Court debut, wrote the dissenting opinion. In it, he wrote these now-famous words: "Great cases like hard cases make bad law." Hill vehemently disagreed with the court's ruling, but complied with the decision and broke up Northern Securities.
Whatever the circumstances, the end result was that the good industrialists—the ones who succeeded through hard work and integrity—were lumped with the dishonest. The laws and regulations designed to avert venal practices were applied equally to both groups. While the ruthless sector simply found a new scheme to bilk the Treasury, the productive sector languished. At the very least, the press and the populace linked these two groups together. There were, however, considerable differences.
All the great industrialists previously mentioned shared an uncommon attention to details and efficiency. James J. Hill, for example, standing on a Dakota siding, spotted an engine numbered 94. From that casual spotting, he walked up the engineer and addressed him by name, further noting that that particular engine had just been in for repairs.15 During the depression of 1893, Hill sent this directive: "Take whatever steps are necessary to reduce track, machinery, stations, and other service to the lowest point possible. Take off all extra gangs everywhere, except those relaying steel. Reduce wages section foremen to forty dollars [a month] east and forty-five west, and of section men to one dollar [a day] east and one dollar and a quarter west …."16 As Hill said, "A railroad is successful in the proportion that its affairs are vigilantly looked after."17 Hill built his railroad at the lowest grade, using the best available steel. He understood that money spent now repaid itself many times over. As the previous quotations indicate, the Great Northern was certainly vigilantly looked after.
Another key aspect of long-range thinking was taking risks whose long-term prospects were good, but entailed short-term risk. For example, Charles Schwab learned of Rockefeller's knack for spotting diamonds in the rough when Rockefeller spent almost $40 million in the Mesabi iron range near Lake Superior. Schwab recalled, "Our experts in the Carnegie Company did not believe in the Mesabi ore fields. They thought the ore was poor …. They ridiculed Rockefeller's investments in the Mesabi." By 1901, however, U.S. Steel purchased Rockefeller's Mesabi investments for $90 million.18 Similarly, Hill's plan to build a transcontinental railroad north of the Northern Pacific was dubbed "Hill's Folly" by his detractors. The foresight in each instance is uncommon.
The economic dislocations and unintended consequences of government intervention in the economy were rather obvious in the post-Civil War era. That is because economic regulation was predominantly rare. Today, however, every facet of economic life is prescribed and dictated. Think of the dislocations and unintended consequences that occur under such a system. For example, the passage of the Americans with Disabilities Act was supposed to guarantee equal access for the handicapped. Instead, it imposed severe economic repercussions on the businesses affected by it. Congress had not intended to produce the economic consequences—one would hope—but they occurred nonetheless. Similarly, the Federal Reserve system was intended to stabilize the banking industry when it was originally conceived and implemented. Today, it is primarily a means of creating money for the government out of thin air, i.e., inflation. It also destabilizes the banking system by allowing the banks to rely on its money reserves in crunch times. These, however, are subjects which necessitate whole books. The point is that the impact of economic regulation is difficult to judge and, to the policy, detrimental.
If the regulations are pernicious enough, the people will lose faith in the economic system. When this happens, malaise ensues. Although the economy is thriving, people feel like it rests on sand. During the post-Civil War era, this precise thing happened. Shortly after the passage of both the Sherman Antitrust Act and the Interstate Commerce Commission, there came about a depression unparalleled in American history. It lasted only four years (1893-7), but was followed less than ten years later by another panic-breeding recession. Today, we have a serious recession every ten to fifteen years. It is endemic to a mixed economy that booms and busts are cyclical.
The lesson is that governmental meddling creates unintended consequences and unnecessary dislocation. It should be vigorously avoided. Furthermore, their example counsels that prosperity is something which comes from commerce and entrepreneurship, not government handouts or privilege. There are two types of entrepreneurs: market and political.19 Finally, it implies that the freer the economy, the more self-correcting it is. If there had not been governmental interference, James J. Hill would have had an incentive to compete directly with the Union Pacific or buy it outright—thus offering better service and better quality that was preempted by regulation. All of these lessons emanate from the very heart of our cultural heritage of rugged individualism and liberty. The message is clear; it is up to us to learn from it.
2 Chamberlain, John. The Enterprising Americans: A Business History of the United States. Harper and Row: 1974, p. 138.
4 Chamberlain, pp. 133-4.
5 Morris, p. 636.
7 Morris, p. 636.
8 Rand, Ayn. "Notes on the History of Free Enterprise." Capitalism: The Unknown Ideal. Signet: 1962, p. 108. This article is a good examination of government interference specifically in the railroad industry.
9 For example, Henry Villard in osephson, p. 247, or Jay Gould—'speculative director' of the Erie Railroad in Folsom, p. 107.
11 Folsom, p. 33.
13 Malone, p. 218.
14 Ibid., p. 223. Emphases Harlan's.
15 Ibid., p. 80.
16 Ibid., p. 152.
17 Folsom, p. 28.
19 Folsom, passim.