The Myth of the Robber Barons

by Burt Folsom

  Congress was astonished when it learned what the California lines were doing with their $900,000 subsidy. In 1858 Senator Robert A. Toombs of Georgia said that he admired Vanderbilt: his "superior skills," Toombs said, had exposed the whole subsidy system. "You give $900,000 a year to carry the mails to California; and Vanderbilt compels the contractors to give him $56,000 a month to keep quiet. This is the effect of your subventions. . . . [Vanderbilt] is the kingfish that is robbing these small plunderers that come about the Capitol. He does not come here for that purpose." Toombs' conclusion: end the mail subsidies.32

  Many people, though, were more critical of Vanderbilt than of the subsidies. They looked at Vanderbilt's tactics, instead of his influence on the market. One court later called Vanderbilt's actions "immoral and in restraint of trade." The New York Times compared Vanderbilt to "those old German barons who, from their eyries along the Rhine, swooped down upon the commerce of the noble river, and wrung tribute from every passenger that floated by."33 From Vanderbilt's standpoint, the California lines were the ones "in restraint of trade." Their subsidies gave them an unfair advantage over all competition, and they used this advantage to charge monopoly rates to passengers. As for the "swooping" metaphor, Vanderbilt "swooped down" and "wrung tribute" from the subsidized lines, not from "every passenger." Every passenger, in fact, paid lower fares to California because Vanderbilt’ competition had slashed the fares permanently.34 And, of course, if there had been no government subsidy, there would have been no Vanderbilt payoff. Vanderbilt ran his California lines as a personal investment and charged passengers less than one-fourth the fare that the subsidized lines had been charging. Congress, however, had committed its support for political entrepreneurs. And the annual $900,000 subsidy proved to be so large that the California lines could give three-fourths of it to Vanderbilt and still make money. Without Vanderbilt, this political entrepreneurship might have gone on much longer.

  This clash between market and political entrepreneurs changed the competitive environment of American steamboating. Between 1848 and 1858, the American government paid the two California lines and Edward Collins over eleven million dollars to build ships and carry mail. Vanderbilt, by contrast, engaged these men in head-to-head competition free of charge. Largely because of Vanderbilt, Congress, in 1858, ended all mail subsidies. Afterward, Vanderbilt and others carried the mail only for the postage; and the passenger rates after 1858 were still competitive: only $200 to California, far below the original monopoly rate of $600. 35

  Vanderbilt’s victory marked the end of political entrepreneurship in the American steamship business. We didn't end up with perfect free trade, but we were closer to it than we ever had been. In this environment, Americans found railroads to be more profitable investments than steamships. So, after the Civil War, Vanderbilt and others sold their fleets and spent their money building railroads. The percentage of American exports carried on American ships dropped from sixty-seven to nine percent from 1860 to 1915, but that was no problem. England's comparative advantage in shipping lowered America's cost for freight, mail, and passenger service throughout these years. And since the English were anxious to buy America's grain, Vanderbilt took his steamship profits and built his New York Central Railroad over one thousand miles out to Chicago and other midwestern cities. When Vanderbilt shipped midwestern grain to New York and had it boarded on English ships to be sold in Liverpool, both countries were finally doing what they could do best. By Vanderbilt’s death in 1877, he had been a central figure in America's industrial revolution, both in steam and in rails. He also was worth almost $100 million, which made him the richest man in America.36 This study of American steamboating focuses on the market and the impact different entrepreneurs had on the market. If we look at the issue this way, we can sort out two distinct groups: political and market entrepreneurs. Robert Fulton, Edward Collins, and Samuel Cunard cannot be lumped with Thomas Gibbons, Cornelius Vanderbilt, and William Inman. They are two separate groups with different attitudes toward innovation, technology, price-cutting, monopolies, and federal aid. In the steamship industry, political entrepreneurship often led to price-fixing, technological stagnation, and the bribing of competitors and politicians. The market entrepreneurs were the innovators and rate-cutters. They said they had to be to survive against subsidized opponents. Some of them were personally repugnant (Vanderbilt disinherited his son and placed his own wife in an asylum; Gibbons tried to horsewhip one of his rivals), but they advanced their industry and cut passenger fares permanently. Since Vanderbilt ended up as the richest man in America, perhaps the federal aid was a curse, not a blessing, even to those who received it.

  CHAPTER TWO

  James J. Hill and the

  Transcontinental

  Railroads

  The story of the building of the transcontinental railroads makes for good reading. It has a sound plot: four railroads get charters and subsidies to build across the country. It has suspense: the Union Pacific and Central Pacific frantically race across plains and over mountains to complete the railroad. It has an all-star cast: U.S. Presidents, army generals, and political adventurers confront Indians on the warpath, politicians on the take, and thousands of Chinese and Irish workers. The story tells of the agony of defeat—Indian raids and winter storms—and the thrill of victory with the meeting of the Union and Central Pacific in Utah and the final hammering of the golden spike. Finally, there is celebrating as the story ends: Western Union telegraphs the event across the nation, and revelers sound the Liberty Bell from Independence Hall.

  Over the years historians have told this story and described the drama, but they have often criticized the main actors and their exploits. The grab for federal subsidies seems to have led to greed and corruption; but—and this is the key point—most historians say there was no way to get the happy ending to the transcontinental story without federal aid. "Unless the government had been willing to build the transcontinental lines itself," John Garraty typically asserts, "some system of subsidy was essential."1

  But there is a nagging problem in this argument. While some of this rush for subsidies was still going on, James J. Hill was building a transcontinental from St. Paul to Seattle with no federal aid whatsoever. Also, Hill's road was the best built, the least corrupt, the most popular, and the only transcontinental never to go bankrupt. It took longer to build than the others, but Hill used this time to get the shortest route on the best grade with the least curvature. In doing so, he attracted settlement and trade by cutting costs for passengers and freight. Could it be that, in the long run, the subsidies may have corrupted railroad development and hindered economic growth? The transcontinental story is worth a more careful look. It may have a different ending if we move Hill from a cameo role to that of a leading actor.

  The dream of a transcontinental had excited promoters and patriots ever since the Mexican War and the acquisition of California. Congress spent $150,000 during the 1850s surveying three possible routes from the Mississippi River to the west coast. In 1862, with the Southern Democrats out of the union, Congress hastily passed the Pacific Railroad Act. This act led to the creating of the Union Pacific, which would lay rails west from Omaha, and the Central Pacific, which would start in Sacramento and build east. Since congressmen wanted the road built quickly, they did two key things. First, they gave each line twenty alternate sections of land for each mile of track completed. Second, they gave loans: $16,000 for each mile of track of flat prairie land, $32,000 per mile for hilly terrain, and $48,000 per mile in the mountains.2

  The UP and CP, then, would compete for government largess. The line that built the most miles would get the most cash and land. The land, of course, would be sold; and this way the railroad would be financed. In this arrangement, the incentive was for speed, not efficiency. The two lines spent little time choosing routes; they just laid track and cashed in.

  The subsidies shaped the UP builders' strategy in the following ways. They moved west from Omah
a in 1865 along the Platte River. Since they were being paid by the mile, they sometimes built winding, circuitous roads to collect for more mileage. For construction they used cheap and light wrought iron rails, soon to be outmoded by Bessemer rails. And Thomas Durant, vice-president and general manager, stressed speed, not workmanship. "You are doing too much in masonry this year," Durant told a staff member; "substitute tressel [sic] and wooden culverts for masonry wherever you can for the present." Also, since trees were scarce on the plains, Durant and his chief engineer, Grenville Dodge, were hard pressed to make railroad ties, 2300 of which were needed to finish each mile of track. Sometimes they shipped in wood; other times they used the fragile cottonwood found in the Platte River Valley; often, though, they artfully solved their problem by passing it on to others. The UP simply paid top wages to tie-cutters and daily bonuses for ties received. Hordes of tie-cutters, therefore, invaded Nebraska, cut trees wherever they were found, and delivered freshly cut ties right up to the UP line. The UP leaders conveniently argued that, since most of Nebraska was unsurveyed, farmers in the way were therefore squatters and held no right to any trees on this "public land." Some farmers used rifles to defend their land; and, in the wake of violence, even Durant discovered "that it was not good policy to take all the timber."3

  The rush for subsidies caused other building problems, too. Nebraska winters were long and hard; but, since Dodge was in a hurry, he laid track on the ice and snow anyway. Naturally the line had to be rebuilt in the spring. What was worse, unanticipated spring flooding along the Loup fork of the Platte River washed out rails, bridges, and telephone poles, doing at least $50,000 damage the first year. No wonder some observers estimated the actual building cost at almost three times what it should have been.4

  By pushing rail lines through unsettled land, the transcontinentals invited Indian attacks, which caused the loss of hundreds of lives and further ran up the cost of building. The Cheyenne and Sioux harassed the road throughout Nebraska and Wyoming: they stole horses, damaged track, and scalped workmen along the way. The government paid the costs of sending extra troops along the line to help protect it. But when they left, the graders, tie-setters, tracklayers, and bolters often had to work in teams with half of them standing guard and the other half working. In some cases, such as the Plum Creek massacre in Nebraska, the UP attorney admitted his line was negligent: it had sent workingmen into areas known to be frequented by hostile Indians.5

  As the UP and CP entered Utah in 1869, the competition became fiercer and more costly. Both sides graded lines that paralleled each other and both claimed subsidies for this mileage. As they approached each other the workers on the UP, mostly Irish, assaulted those on the CP, mostly Chinese. In a series of attacks and counterattacks, with boulders and gunpowder, many lives were lost and much track was destroyed. Both sides involved Presidents Johnson and Grant in the feuding. With the threat of a federal investigation looming, the two lines finally compromised on Promontory Point, Utah, as their meeting place. There they joined tracks on May 10, with hoopla, speeches, and the veneer of unity. After the celebration, however, both of the shoddily constructed lines had to be rebuilt and sometimes relocated, a task that the UP didn't finish until five years later. As Dodge said one week before the historic meeting, "I never saw so much needless waste in building railroads. Our own construction department has been inefficient."6

  After the construction was completed, many were astonished at the costs of construction. The UP and CP, even with 44,000,000 acres of free land and over $61,000,000 in cash loans, were almost bankrupt. Two other circumstances helped to keep costs high. First, the costs of building a railroad, or anything else for that matter, were abnormally high after the Civil War. Capital and labor were scarce; also, even without the harsh winters and the Indians, it was costly to feed thousands of workmen who were sometimes hundreds of miles from a nearby town. Second, the officers of the Union and Central Pacific created their own supply companies and bought materials for their roads from these companies. The UP, for example, needed coal, so six of its officers created the Wyoming Coal and Mining Company. They mined coal for $2.00 per ton (later reduced to $1.10) and sold it to the UP for as high as $6.00 a ton. Even more significant, the Credit Mobilier, which was also run by UP officials, supplied iron and other materials to the UP at exorbitant prices. What they didn't make running the railroad, they made selling to the railroad.7

  Many people then and now have pointed accusing fingers at the UP with its Credit Mobilier and its wasteful building. But this misdirects the problem. If we look at the subsidies instead, we can see that they dictated the building strategy and dramatically shaped the outcome. Granted, the leaders of the UP were greedy and showed poor judgment. But the presence of free land and cash tempted them to rush west, then made them dependent on federal aid to survive.

  No wonder the UP courted politicians so carefully. In this arrangement they were more precious than freight or passengers. In 1866, Thomas Durant wined and dined 150 "prominent citizens" (including Senators, an ambassador, and government bureaucrats) along a completed section of the railroad. He hired an orchestra, a caterer, six cooks, a magician (to pull subsidies out of a hat?), and a photographer. For those with ecumenical palates, he served Chinese duck and Roman goose; the more adventurous were offered roast ox and antelope. All could have expensive wine and, for dessert, strawberries, peaches, and cherries. After dinner some of the men hunted buffalo from their coaches. Durant hoped that all would go back to Washington inclined to repay the UP for its hospitality. If not, the UP could appeal to a man's wallet as well as his stomach. In Congress and in state legislatures, free railroad passes were distributed like confetti. For a more personal touch, the UP let General William T. Sherman buy a section of its land near Omaha for $2.50 an acre when the going rate was $8.00. In case that failed, Oakes Ames, president of the UP, handed out Credit Mobilier stock to congressmen at a discount "where it would do the most good." It was for this act, not for selling the UP overpriced goods, that Congress censured Oakes Ames and then investigated the UP line.8

  The airing of the Credit Mobilier scandal—just four years after the celebrating at Promontory Point—soured many voters on the UP. Others were annoyed because the UP was so inefficient that it couldn't pay back any of its borrowed money. Just as the UP was birthed and nurtured on federal aid, though, so it would have to mature on federal supervision and regulation.

  In 1874, Congress passed the Thurman Law, which forced the UP to pay 25 percent of its net earnings each year into a sinking fund to retire its federal debt. Because the line was so badly put together, it competed poorly and needed the sinking fund money to stay afloat. Building branch lines to get rural traffic would have helped the UP, but the government often wouldn't give them permission. President Sidney Dillon called his line "an apple tree without a limb," and concluded, "unless we have branches there will be no fruit." Congress further squashed any trace of ingenuity or independence by passing a law creating a Bureau of Railroad Accounts to investigate the UP books regularly. Of these federal restrictions, Charles Francis Adams, Jr., a later president, complained: "We cannot lease; we cannot guarantee, and we cannot make new loans on business principles, for we cannot mortgage or pledge; we cannot build extensions, we cannot contract loans as other people contract them. All these things are [prohibited] to us; yet all these things are habitually done by our competitors." The power to subsidize, Adams discovered, was the power to destroy.

  John M. Thurston, the UP's solicitor general, saw this connection between government aid and government control. The UP, he said, was "perhaps more at the mercy of adverse legislation than any other corporation in the United States, by reason of its Congressional charter and its indebtedness to the government and the power of Congress over it."9

  When Jay Gould took control of the UP in 1874, his solution was to use and create monopoly advantages to raise prices, fatten profits, and cancel debts. For example, he paid the Pacific Mail Ste
amship Company not to compete with the UP along the west coast. Then he raised rates 40 to 100 percent and, a few weeks later, hiked them another 20 to 33 percent. This allowed him to pay off some debts and even declare a rare stock dividend; but it soon brought more consumer wrath, and this translated into more government regulation and, eventually, helped lead to the Interstate Commerce Commission, which outlawed rate discrimination.10

  It is sad to read of the UP struggling for survival in the 1870s and 1880s, only to collapse into bankruptcy in 1893. Yet if s hard to see how its history could have taken any other direction, given the presence of government aid. The aid bred inefficiency; the inefficiency created consumer wrath; the consumer wrath led to government regulation; and the regulation closed the UP's options and helped lead to bankruptcy.

  The Central Pacific did better, but only because its circumstances were different. Its leaders—Leland Stanford, Collis Huntington, Charles Crocker, and Mark Hopkins—were united on narrow goals and worked together effectively to achieve them. These men, the "Big Four," focused mainly on one state, California, and used their wealth and political pull to dominate (and sometimes bribe) California legislators. Stanford, who was elected Governor and U.S. Senator, controlled politics for the Big Four and prevented any competing railroad from entering California. Profits from the resulting monopoly rates were added to windfall gains from their Contract and Finance Company, which was the counterpart of the Credit Mobilier. Unlike the UP leaders in the Credit Mobilier scandal, the Big Four escaped jail because the records of the Contract and Finance Company "accidentally" were destroyed. Without records, it was left to Frank Morris to tell the story of the CP monopoly in his novel, The Octopus. It was almost 1900 before privately funded railroads could muster the financial strength and the political muscle to take on the entrenched CP (later renamed the Southern Pacific) in California politics.11