by Burt Folsom
Meanwhile, Vanderbilt took his payoff money and bought bigger and faster ships to trim the fares on New England routes. He started with the New York City to Hartford trip and slashed the five-dollar fare to one dollar. He then knocked the New York City to Providence fare in half from eight to four dollars. When he sliced it to one dollar, the New York Evening Post called him "the greatest practical anti-monopolist in the country." In these rate wars, sometimes Vanderbilt's competitors bought him out, sometimes they went broke, and sometimes they matched his rates and kept going. Some people denounced Vanderbilt for engaging in extortion, blackmail, and cutthroat competition. Today, of course, he would be found "in restraint of trade" by the Sherman Anti-trust Act. Nonetheless, Vanderbilt qualifies as a market entrepreneur: he fought monopolies, he improved steamship technology, and he cut costs. Harper's Weekly insisted that Vanderbilt's actions "must be judged by the results; and the results, in every case, of the establishment of opposition lines by Vanderbilt has been the permanent reduction of fares." The editor went on to say, "Wherever [Vanderbilt] 'laid on' an opposition line, the fares were instantly reduced; and however the contest terminated, whether he bought out his opponents, as he often did, or they bought him out, the fares were never again raised to the old standards." Vanderbilt himself later put it bluntly when he said: "If I could not run a steamship alongside of another man and do it as well as he for twenty percent less than it cost him I would leave the ship."11
II
In the 1840s, improving technology changed steamboats into steamships. Larger engines and economies of scale in shipbuilding led to changes in size, speed, and comfort. The new steamers of the mid-century were many times bigger and faster than Fulton's Clermont: they were each two decks high with a grand saloon and individual staterooms for first-class passengers. When full, some of these new steamships could hold almost 1,000 passengers, and they also had space for mail and freight. These ships were sturdy and were built to cross the Atlantic Ocean. The New York to England route would be the first to open up the steamship competition; the New York to California line (via Panama) would soon follow.12 Rapid overseas trade was a new concept, and this reopened the debate for federal aid to eager steamboat operators. Fulton was gone, but others like him argued for government subsidies and contracts. Political and market entrepreneurs on both sides of the Atlantic would fight for control of the seas.
Actually, Englishmen, in 1838, were the first to travel the Atlantic Ocean entirely by steam. The open environment was quickly altered when Samuel Cunard, a political entrepreneur, convinced the English government to give him $275,000 a year to run a semimonthly mail and passenger service across the ocean. Cunard charged $200 per passenger and $.24 a letter; the $.24 for the mail didn't cover the cost of Cunard's shipping, and that's one argument he had for a subsidy. He also contended that subsidized steamships gave England an advantage in world trade and were a readily available merchant marine in case of war. Parliament accepted this argument and increased government aid to the Cunard line throughout the 1840s.13
Soon, political entrepreneurs across the ocean began using these same arguments for federal aid to the new American steamship industry. They argued that America needed subsidized steamships to compete with England to provide a military fleet in case of war. Edward K. Collins, a classic political entrepreneur, exploited these arguments with a self-serving plan. If the government would give him $3,000,000 down and $385,000 a year, he would build five ships and outrace the Cunarders from coast to coast. Collins would deliver the mail, too; and the Americans would get to "drive the Cunarders off the seas." Collins appealed to American nationalism, not to economic efficiency. Americans would not be opening up new lines of communication because the Cunarders had already opened them. Americans would not be delivering mail more often because the Collins's ships, like Cunard's, would sail only every two weeks. Finally, Americans would not be bringing the mail cheaper because the Cunarders could do it for much less.14
Once the Senate established the principle of mail subsidy, other political entrepreneurs asked for subsidies to bring the mail to other places. Soon Congress also gave $500,000 a year for two lines to bring mail to California: an Atlantic line to get mail to Panama and a Pacific line to take letters from Panama to California. As in the case of Cunard, Collins and the California operators, all argued that a generous subsidy now would help them become more efficient and lead to no subsidy later.15
Congress gave money to the Collins and California lines in 1847, but they took years to build their luxurious ships. Collins, especially, had champagne tastes with taxpayers' money. He built four enormous ships (not five smaller ships as he had promised), each with elegant saloons, ladies' drawing rooms, and wedding berths. He covered the ships with plush carpet and brought aboard rose, satin, and olive-wood furniture, marble tables, exotic mirrors, flexible barber chairs, and French chefs. The state rooms had painted glass windows and electric bells to call the stewards. Collins stressed luxury, not economy, and his ships used almost twice the coal of the Cunard line. He often beat the Cunarders across the ocean by one day (ten days to eleven), but his costs were high and his economic benefits were nil.16
With annual government aid, Collins had no incentive to reduce his costs from year to year. His expenses, in fact, more than doubled in 1852: Collins preferred to compete in the world of politics for more federal aid than in the world of business against price-cutting rivals. So in 1852 he went to Washington and lavishly dined and entertained President Fillmore, his cabinet, and influential Congressmen. Collins artfully lobbied in Congress for an increase to $858,000 a year (or $33,000 each for twenty-six voyages—which came to $5.00 per ocean mile) to compete with the Cunarders.17
Meanwhile, Vanderbilt had watched this political entrepreneurship long enough. In 1855 he declared his willingness to deliver the mail for less than Cunard, and for less than half of what Collins was getting. Collins apparently begged Vanderbilt not to go to Congress. He may have offered to help Vanderbilt get an equally large subsidy from Congress—if only he wouldn't open the transatlantic steamship trade. But Vanderbilt had told Collins and Congress that he would run an Atlantic ferry for $15,000 per trip, which was cheaper than anyone else could do.18
So in 1855, Collins, the subsidized lobbyist, began battle with Vanderbilt, the market entrepreneur. Collins fought the first round in Congress rather than on the sea. Most Congressmen, former Whigs especially, backed Collins. To do otherwise would be to admit they had made a mistake in helping him earlier; and this might call into question all federal aid. Other Congressmen, especially the New Englanders, had constituents who benefitted from Collins' business. Senator William Seward of New York stressed another angle by asking, "Could you accept that proposition of Vanderbilt['s] justly, without, at the same time, taking the Collins steamers and paying for them?" In other words, Seward is saying that we backed Collins at the start, now we are committed to him, so let's support him no matter what. Vanderbilt, by contrast, warned that "private enterprise may be driven from any of the legitimate channels of commerce by means of bounties." His point was that it is hard for unsubsidized ships to compete with subsidized ships for mail and passengers. Since the contest is unfair from the start, the subsidized ships have a potential monopoly of all trade. But Collins' lobbying prevailed, so Congress turned Vanderbilt down and kept payments to Collins at $858,000 per year.19
Vanderbilt decided to challenge Collins even without a subsidy. "The share of prosperity which has fallen to my lot," said Vanderbilt, "is the direct result of unfettered trade, and unrestrained competition. It is my wish that those who are to come after me shall have that same field open before them." Vanderbilts strategy against Collins was to charge only $.15 for half-ounce letters and to cut the standard first-class fare $20, to $110. Later he slashed it to $80. Vanderbilt also introduced a new service: a cheaper third-class fare in the steerage. The steerage must have been uncomfortable—people were practically stacked on top of each other�
�but for $75, and sometimes less, he did get newcomers to travel.20
To beat the subsidized Collins, Vanderbilt found creative ways to cut expenses. First, he had little or no insurance on his fleet. He always said that if insurance companies could make money on shipping, so could he. So Vanderbilt built his ships well, hired excellent captains, and saved money on insurance. Second, he spent less than Collins did for repairs and maintenance. Collins' ships cost more than Vanderbilt's, but they were not seaworthy. The engines were too big for the hulls, so the ships vibrated and sometimes leaked. They usually needed days of repairing after each trip. Third, Collins, like Cunard in England, was elitist with his government aid. He cared little for cheap passenger traffic. Vanderbilt, by contrast hired local "runners," who buttonholed all kinds of people to travel on his ships. These second-and third-class passengers were important because all steamship operators had fixed costs for making each voyage. They had to pay a set amount for coal, crew, maintenance, food, and docking fees. In such a situation, Vanderbilt needed volume business. With third-class fares, Vanderbilt sometimes carried over 500 passengers per ship.
Even so, Vanderbilt barely survived the first year competing against Collins. He complained, "It is utterly impossible for a private individual to stand in competition with a line drawing nearly one million dollars per annum from the national treasury, without serious sacrifice." He added that such aid was "inconsistent with the. . .economy and prudence essential to the successful management of any private enterprise."21
Vanderbilt met this challenge by spending $600,000 building a new steamship, immodestly named the Vanderbilt, "the largest vessel which has ever floated on the Atlantic Ocean." The Commodore built the ship with a beam engine, which was more powerful than Collins' traditional side-lever engines. In a head-to-head race, the Vanderbilt beat Collins' ship to England and won the Blue Ribbon, an award given to the one ship owning the fastest time from New York City to Liverpool. By 1856, Collins had two ships—half of his accident-prone fleet—sink (killing almost 500 passengers). In desperation, he spent over a million dollars of government money building a gigantic replacement; but he built it so poorly that it could make only two trips and had to be sold at more than a $900,000 loss.22
Even Collins' friends in Congress could defend him no longer. Between Collins' obvious mismanagement and Vanderbilt's unsubsidized trips, most Congressmen soured on federal subsidies. Senator Judah P. Benjamin of Louisiana said, "I believe [the Collins line] has been most miserably managed." Senator Robert M. T. Hunter of Virginia went further: "the whole system was wrong;. . .it ought to have been left, like any other trade, to competition." Senator John B. Thompson of Kentucky said, "Give neither this line, nor any other line, a subsidy. . . . Let the Collins line die. ... I want a tabula rasa— the whole thing wiped out, and a new beginning." Congress voted for this "new beginning" in 1858: they revoked Collins' aid and left him to compete with Vanderbilt on an equal basis. The results: Collins quickly went bankrupt, and Vanderbilt became the leading American steamship operator.23
And there was yet another twist. When Vanderbilt competed against the English, his major competition did not come from the Cunarders. The new unsubsidized William Inman Line was doing to Cunard in England what Vanderbilt had done to Collins in America. The subsidized Cunard had cautiously stuck with traditional technology, while William Inman had gone on to use screw propellers, and iron hulls instead of paddle wheels and wood. It worked; and from 1858 to the Civil War, two market entrepreneurs, Vanderbilt and Inman, led America and England in cheap mail and passenger service.24
The mail subsidies, then, actually retarded progress because Cunard and Collins both used their monopolies to stifle innovation and delay technological changes in steamship construction. Several English steamship companies experimented with iron hulls and screw propellers in the 1840s, but Cunard thwarted this whenever he could. According to Royal Meeker,
The mail payments made it possible for the Cunard company to cling to an out-of-date and uneconomical type of steamer. Both the Admiralty and the Post Office departments refused to permit mail steamers to use the screw propeller until long after other lines had adopted it. ... Without government aid to inefficiency, the Cunard Company would have been compelled to adopt improvements in order to compete with other and more progressive lines.
Cunard also refused to introduce a third-class rate. So, when William Inman came along in the 1850s with his iron ships and third-class fares, he practically knocked Cunard out of business. After 1850, Inman and other newcomers kept the pressure on Cunard. They experimented with oscillating cabins (to reduce the impact of the swaying of the ship), compound engines (to increase the ship's speed and decrease its fuel consumption), and twin propellers. Cunard's subsidy kept him from having to innovate and protected him from errors of judgment that would have ruined his competitors.25
In America, Collins, like Cunard, chose wood and paddle wheels for his ships. Americans were slower to turn to iron ships because their costs of iron construction were higher than those in England. Still, American engineers had been experimenting with iron hulls and screw propellers during the 1840s, partly because iron was more durable in handling the big engines built after 1840. Collins apparently considered using iron, but he was no innovator. So he ended up using wood hulls for his powerful engines, and his ships were not as safe or as seaworthy because of that. With Collins using wood, American steamship operators feared switching to iron. They had little margin for error because their chief competitor was subsidized. Yet in 1851, Vanderbilt became one of the first Americans to build and run iron ships (he used them on his California route). But it wasn't until Collins' subsidy expired in 1858 that Americans began experimenting with iron hulls in a serious way.26
This delay in experimenting with iron meant that iron ships could not be much of a force during the Civil War. John Ericsson, who in 1862 built the iron-hulled Monitor, had been promoting the advantages of iron ships since 1843. But in 1847, when Collins decided to use wood for his subsidized fleet, only Vanderbilt dared to risk more experiments with iron hulls. The irony here is that one of the central arguments for subsidizing Collins was that his fleet would be usable in case of war. Yet his outmoded wooden ships—even the ones that didn't sink—would have been helpless against ironclad opponents. And we wouldn't have needed them anyway because Vanderbilt gave his 5,000-ton ship, the Vanderbilt, as a permanent gift to the United States during the Civil War. He even offered to personally sink the Confederate's Merrimac, asking only that everyone stay "out of the way when I am hunting the critter." He never got the chance; and, partly because of the Collins subsidy, the U.S.never got the chance to blockade Confederate ports with an iron fleet. Who knows whether or not that would have shortened the war? It certainly would have relieved those who feared that the Confederates would buy iron ships from England. And it would have relieved the Secretary of War, Edwin Stanton, who worried that the Merrimac would go on a rampage, sail up the Potomac unmolested, and blow the dome off the Capitol.27
Vanderbilt was also cast as a market entrepreneur in his battle for the steamship traffic to California. Two California lines—the U.S. Mail Steamship Company and the Pacific Mail Steamship Company—started mail delivery in 1849 with $500,000 per year in federal aid. As happened with Collins, these mail contracts were not opened for bidding; they were a private deal between the Post Office and the two steamship companies. At first the two lines charged company rates: $600 per passenger from New York to California, via railroad over Panama. As the gold-rush traffic increased, Vanderbilt became convinced that more gold could be made in steamships than in the hills of California—even without a subsidy. Vanderbilt chose not to challenge the subsidized lines directly through Panama; instead he built a canal through Nicaragua. It took Vanderbilt a year to deepen and clean out the San Juan River in Nicaragua, but it was worth it because the Nicaraguan route was 500 miles shorter to California. So Vanderbilt agreed to pay the Nicaraguan government $1
0,000 a year for canal privileges. He then slashed the California fare to $400 and promised all passengers that he would beat the rival steamships to the gold fields. He even offered to carry the mail free. After a year of rate-cutting the fare dropped to $150; yet Vanderbilt and his competitors apparently were still making money.28
Such a development tells us a lot about the subsidy system. The California lines originally got a half-million dollars a year from the government; then they charged people $600 to get to California. Yet Vanderbilt, with no outside aid, ran a profitable line to California by charging passengers only $150 and carrying the mail free. He hoped that doing this would expose his subsidized opponents and end their federal aid. But the California lines, like Collins, artfully pleaded to Congress for a subsidy even larger (which they needed to beat Vanderbilt). And they got $900,000 a year to compete with the more efficient Vanderbilt.29
In the next stage of the subsidy saga, Vanderbilt had his canal rights revoked by the Nicaraguan government in 1854. Behind this movement was William Walker, an American with a bizarre mission. Walker shipped a small army into Nicaragua, overthrew the existing government, proclaimed himself the president and revoked Vanderbilt's canal rights. Since Vanderbilt's canal company was chartered in Nicaragua, the American government was technically not obligated to help him. So the enraged Vanderbilt put his ships on the Panama route, instead. There he competed head to head against the California mail carriers. He then cut the fare to $100 ($30 for third class) and swore he would beat the subsidized California lines and any new line in Nicaragua that Walker might help establish.30
The operators of the California lines were typical political entrepreneurs: they did not want to compete with a market entrepreneur like Vanderbilt. So they bought him out instead by paying him most of their subsidy if he promised not to run any ships to California. Vanderbilt demanded and received $672,000, or 75 percent, of the $900,000 annual subsidy. But more than this, he wanted his Nicaragua canal back. So he dabbled in Central American politics and helped get Walker overthrown. Unfortunately for Vanderbilt, his canal had been permanently destroyed during Walker's coup; but since he had the pay-off money from the California lines, he ended up with a profit anyway.31