The Myth of the Robber Barons: A New Look at the Rise of Big Business in America

160 Pages·1991·0.83 MB·English

by  Burton W. Folsom

Copyright © 2010, 2007, 2003,1996, 1991, 1987 by Burton W. Folsom, Jr.
All rights reserved
Manufactured in the United States of America
Published by Young America's Foundation F. M. Kirby FreedomCenter
110 Elden Street Hemdon, Virginia 20170

No part of this book may be reproduced in any form by any electronic or
mechanical means, including information storage and retrieval systems, without
permission in writing from the publisher, except by a reviewer who may quote
brief passages in a review.
Library of Congress Cataloging-in-Publication Data Folsom, Burton W.
(Entrepreneurs vs. the State) The Myth of the Robber Barons/Burton W.
Folsom, Jr. p. cm.
Previously published as: Entrepreneurs vs. the State ISBN 0-9630203-0-7
(HB) : $19.95. —ISBN 0-9630203-1-5 (PB) : $9.95

1. Capitalists and financiers—United States—History. 2. Competition—
United States—History. 3. Free enterprise—History. 4. Steamboats—United
States—History. 5. Entrepreneurship—History. I. Title HG181.F647 1991
338'.04'097309034—dc20
From reviews of THE MYTH OF THE ROBBER BARONS
"THE MYTH OF THE ROBBER BARONS is ... excellent.... In short, this
book is the perfect supplement to most standard economic and business history
textbooks. This reviewer has adopted it already."
Larry Schweikart, THE HISTORIAN
"I read this book in one sitting. In spite of the easy reading of the text, the
book has profound meaning for the nature of business in America, with
implications for political philosophy and economic theory. There isn't a
businessman in the country who would not profit from the reading of this
important book."
Angus MacDonald, BOOK REVIEWS
"Folsom demonstrates the pernicious effects of government involvement
in business.... The enormous value of this book is that it enlightens the intelligent
reader with the facts about an era that virtually every history book shrouds in
falsehoods."
Second Renaissance Books
THE MYTH OF THE ROBBER BARONS "is a lively, well written and
informative introduction to the subject. It is a useful source for students of
American history."
Ann M. Scanlon, NEW YORK HISTORY
"The subtlest essay makes James J. Hill an American hero as the only man
who built a transcontinental railroad without government subsidy.... The most
daring attempt at revision is the author's paean to John D. Rockefeller."
Stuart D. Brandes, AMERICAN HISTORICAL REVIEW
"Folsom draws an insightful lesson. Government aid [to railroads] bred
inefficiency; the inefficiency raised costs and rates, and angry customers
demanded government regulation; the resulting regulation promoted even greater
inefficiency...."
Robert Higgs, THE WORLD & I
"Burt Folsom has done a wonderful job.... The picture of economic history
printed in this book helps prove that political promotion of economic
development is futile."
Carl Watner, THE VOLUNTARYIST
"Folsom presents the subjects as they were, warts and all, avoiding shrill
accusation or exoneration of shortcomings."
Tommy W. Rogers, CHRONICLES
"If these stories are correct, then much of the conventional history of
American business is off base.... Folsom persuasively describes how government
subsidies to 'political entrepreneurs' actually lowered the quality of output."
M. L. Rantala, CHICAGO ENTERPRISE
Foreword
It is possible to regard this book as light reading, despite the range and
depth of the meticulous scholarship on which it is based, because it is written in
a pleasant, almost chatty style and is concerned with an array of fascinating
characters—bold innovators who created mightily as well as pious frauds who
bilked the public on a grand scale. Indeed, though I have studied American
economic history for many years, I have found on almost every page information
and anecdotes I had not encountered before. The entertainment value of the work
is not lessened by the fact that it revises in important ways many misperceptions
that historians have imposed upon the record—for instance, the idea that vertical
mobility is a myth. Quietly but conclusively, and without interrupting the flow of
his narrative, Folsom demonstrates that vertical mobility, both upwards and
downwards, has truly been a norm in America: poor men have become rich men
and rich men have become poor men, depending upon skill, brains, work, and
luck.
But there is considerably more here than some good stories and some
significant revisionism. On one level, Folsom shows that the "Robber Baron"
school of historians of American business enterprise was partly right and partly
wrong but was unable to distinguish which was which. He points out that during
the nineteenth and the early twentieth century (and by unmistakable implication,
in the late twentieth as well) there were two kinds of business developers, whom
he describes as "political entrepreneurs" and "market entrepreneurs." The former
were in fact comparable to medieval robber barons, for they sought and obtained
wealth through the coercive power of the state, which is to say that they were
subsidized by government and were sometimes granted monopoly status by
government. Invariably, their products or services were inferior to and more
expensive than the goods and services provided by market entrepreneurs, who
sought and obtained wealth by producing more and better for less cost to the
consumer. The market entrepreneurs, however, have been repeatedly—one is
tempted to say systematically—ignored by historians.
On another level, Folsom's study has profound implications for American
historiography beyond the immediate subject to which it is addressed. It is
commonly held that the Whig Party of Clay and Webster and its successor
Republican Party of Abraham Lincoln and William McKinley were the "pro-
business" parries, and that the Jacksonian Democrats were anti-business. What
comes through here is something quite different. The Whigs and Republicans
engaged in a great deal of pro-business rhetoric and in talk of economic
development, but the policies they advocated, such as subsidies, grants of special
privileges, protective tariffs, and the like, actually worked to retard development
and to stifle innovation. The Jacksonian Democrats engaged in a great deal of
anti-business rhetoric, but the results of their policies were to remove or reduce
governmental interferences into private economic activity, and thus to free
market entrepreneurs to go about their creative work. The entire nation grew
wealthy as a consequence.
On yet another level, though Folsom's work is balanced, judicious history,
addressed to the past (and is unmarred by the shrill accusatory tone that
characterizes the writings of anti-business historians), it has a powerful
relevance to current political discourse. In response to the relative decline of the
American economy during the last decade or two, many corporate businessmen
have joined with leftist ideologues to clamor for a "partnership" between
government and business that would involve central planning, protective tariffs,
and a host of restrictions upon foreign competitors. What Folsom has to say to
them is a common-sense message drawn from endlessly repeated historical
examples. Political promotion of economic development is inherently futile, for
it invariably rewards incompetence; if incompetence is rewarded, incompetence
will be the product; and when incompetence is the product, politicians will insist
that increased planning and increased regulation is the appropriate remedy.
Adam Smith forewarned us more than two centuries ago: "The statesman,
who should attempt to direct people in what manner they ought to employ their
capital, would not only load himself with a most unnecessary attention, but
assume an authority which could safely be trusted, not only to no single person,
but to no council or senate whatever, and which would nowhere be so dangerous
as in the hands of a man who had folly and presumption enough to fancy himself
fit to exercise it."

Forrest McDonald Williamsburg, Virginia April 1987
Preface to the Sixth Edition
I am delighted to welcome The Myth of the Robber Barons to a sixth
edition. That it continues to sell well is testimony to the persistence of free
market ideas. Special thanks go to the usual culprits: Ron Robinson for his
patience and support for almost thirty years; Patrick Coyle for his energy and
encouragement; and Dede Hamilton for all the time she takes with this book.
Thanks also go to Larry Arnn, Larry Reed, Larry Schweikart, and Joseph Rishel
for their advice and counsel. Over the years, I have benefited from suggestions
and criticisms from Lee Benson, Roger Custer, Edward Davies II, Thomas
DiLorenzo, James R. Edwards, Winston Elliott, Burton Folsom, Sr., Margaret
Folsom, Samuel P. Hays, Robert Hessen, Rusty Humphries, Doug Jeffrey,
Aileen Kraditor, Forrest and Ellen McDonald, William H. Mulligan, George
Nash, James Nesbitt, Glenn Porter, Helen Roulston, Julius Rubin, James Taylor,
John Willson, Kirby Wilbur, and my students at Murray State University and
Hillsdale College.
In doing research, I needed help; from many libraries and institutions. The
Hagley Museum and Library* in Wilmington, Delaware, gave me access to the
Scranton papers and other specialized sources. The R. G. Dun Credit Reports in
the Baker Library at Harvard University helped me in writing the Schwab and
Scranton essays. The Library of Congress and the National Archives provided
me with a wealth of sources on entrepreneurs. At the Lackawanna Historical
Society, I received wise counsel from former directors Robert Mattes and
William Lewis. William W. Scranton was very supportive and has straightened
me out on some points about his family history. The libraries at Murray State
University, Southern Illinois University, Indiana University, and Hillsdale
College have supplied me with most of the secondary sources used in this study.
In the financing and publication of this book, I have received aid and
comfort from Young America's Foundation, the Wilbur Foundation, Roe
Foundation, Broyhill Foundation, the Bradley Foundation, and from both
Murray State University and Hillsdale College.
Finally, I want to thank my wife Anita, for her wise counsel and editing
skills, and my son Adam, who has my blog BurtFolsom.com up and running.
Anita and Adam make this work worthwhile for me.
Burton W. Folsom, Jr.
Hillsdale, Michigan March 2010
CHAPTER ONE
Commodore Vanderbilt and the
Steamship Industry
F
or two generations historians have been arguing about the effects of
entrepreneurs on American industry. Whether the entrepreneurs were Robber
Barons, industrial statesmen, or irrelevant to growth still seems to be disputed
even after shelves of books have been written on the subject.1 Maybe we can
find a useful line of reasoning by looking at one of America's first large-scale
businesses, the steamship industry. It was mechanized in the early 1800s; and,
during that century, it was in the vanguard of technological change.
Steamboating was also highly competitive and soon became large in scale.
Furthermore, a look at the steamboat industry allows us to study entrepreneurs in
the comparative context of the whole industry. Only then can we see how
different entrepreneurs responded to different challenges and who, if any, made
creative contributions to industrial growth.2
A key point about the steamship industry is that the government played an
active role right from the start in both America and England. Right away this
separates two groups of entrepreneurs—those who sought subsidies and those
who didn't. Those who tried to succeed in steamboating primarily through
federal aid, pools, vote buying, or stock speculation we will classify as political
entrepreneurs. Those who tried to succeed in steamboating primarily by creating
and marketing a superior product at a low cost we will classify as market
entrepreneurs. No entrepreneur fits perfectly into one category or the other, but
most fall generally into one category or the other. The political entrepreneurs
often fit the classic Robber Baron mold; they stifled productivity (through
monopolies and pools), corrupted business and politics, and dulled America's
competitive edge. Market entrepreneurs, by contrast, often made decisive and
unpredictable contributions to American economic development.3
I Every schoolchild is taught that Robert Fulton was the first American to
build and operate a steamboat on New York waters. When his
Clermontsauntered four miles per hour upstream on the Hudson River in 1807,
Fulton opened up new possibilities in transportation, marketing, and city
building. What is not often taught about Fulton is that he had a monopoly
enforced by the state. The New York legislature gave Fulton the privilege of
carrying all steamboat traffic in New York for thirty years.4 It was this
monopoly that Thomas Gibbons, a New Jersey steamboat man, tried to crack
when he hired young Cornelius Vanderbilt in 1817 to run steamboats in New
York by charging less than the monopoly rates.5
Vanderbilt was a classic market entrepreneur, and he was intrigued by the
challenge of breaking the Fulton monopoly. On the mast of Gibbon's ship
Vanderbilt hoisted a flag that read: "New Jersey must be free." For sixty days in
1817, Vanderbilt defied capture as he raced passengers cheaply from Elizabeth,
New Jersey, to New York City. He became a popular figure on the Atlantic as he
lowered the fares and eluded the law. Finally, in 1824, in the landmark case of
Gibbons v. Ogden,the Supreme Court struck down the Fulton monopoly. Chief
Justice John Marshall ruled that only the federal government, not the states,
could regulate interstate commerce. This extremely popular decision opened the
waters of America to complete competition. A jubilant Vanderbilt was greeted in
New Brunswick, New Jersey, by cannon salutes fired by "citizens desirous of
testifying in a public manner their good will." Ecstatic New Yorkers
immediately launched two steamboats named for John Marshall. On the Ohio
River, steamboat traffic doubled in the first year after Gibbons v. Ogden and
quadrupled after the second year.6
The triumph of market entrepreneurs in steamboating led to improvements
in technology. As one man observed, "The boat builders, freed from the
domination of the Fulton-Livingston interests, were quick to develop new ideas
that before had no encouragement from capital." These new ideas included
tubular boilers to replace the heavy and expensive copper boilers Fulton used.
Cordwood for fuel was also a major cost for Fulton, but innovators soon found
that anthracite coal worked well under the new tubular boilers, so "the expense
of fuel was cut down one-half."7
The real value of removing the Fulton monopoly was that the costs of
steamboating dropped. Passenger traffic, for example, from New York City to
Albany immediately dropped from seven to three dollars after Gibbons v.
Ogden. Fulton's group couldn't meet the new rates and soon went bankrupt.
Gibbons and Vanderbilt, meanwhile, adopted the new technology, cut their