The Myth of the Robber Barons (1993)
Format: Trade paberback
Publisher: Young Americans Foundation
ISBN 0963020315

The steam engine was a technical innovation the equivalent of the Internet today, noted author and professor Burt Fulsom at Accuracy In Academia's June 2003 Conservative University. When Columbus discovered America, a trans-Atlantic voyage took almost three months. That remained unchanged until the 1830s - almost 400 years. Steam power changed the travel time to two weeks. A round trip was then a month, reduced from 6 months.

"That was the high-speed Internet in those days - a month. Could you imagine," Fulsom asked [to the audience's chuckles], "a month to download something?"

How did America undertake to encourage this promisingly vital industry? "Let's subsidize it!" Fulsom exclaimed, adding that Edward Collins (1802-1878) went to Congress in the late 1840s and said, "I can do it - I volunteer to receive the subsidy [snickers]. By my calculations I will need $385,000 (over $7 million today). Here's my plan: I will take four ships - two starting in Liverpool, England and two in the U.S. One will leave Liverpool and one will leave New York harbor at the same time." The other two will be sent a week later, thus facilitating weekly trade.

This, Collins argued, will benefit America by facilitating trade and emergency supplies in the time of war. "I hope that no more subsidies will be needed [chuckles] after the initial $385,000. We will be able to challenge England's shipping industry. One more thing, I’ll need $3 million ($55 million today) to build the four ships [laughter]." He had zero ships, Fulsom noted. "But if you increase my fleet by four, I'll be ready to go [more laughter]."

Fulsom related that Congress heard this proposal and reasoned, "How else can we catch Great Britain [namely the subsidized Cunard]? Here's a guy who's going to go out there and do it." They approved the funding. Off Collins went, Fulsom continued, running the shipping schedule according to plan. He charged $200 [over $3,700 today] per passenger. After a year, he asked Congress for another $400,000. "I have to re-caulk all my ships," Fulsom said, gesticulating animatedly, "passenger numbers were less than expected." The next year, the request was $500,000; the following year, $600,000. After that it became a game, remarked Fulsom – "I wonder if next year Collins will be self-sufficient?"

Fulsom then told of Cornelius Vanderbilt (1794-1877), a man already in the steam ship business who never received a subsidy in his life. Vandy observed Collins' activities and announced that he would go to Congress and offer to do the same for half price. Collins asked for $700,000. Vanderbilt asked for $350,000 – less than what Collins asked the first year.

"How many think," Fulsom asked the audience, "that Congress went with Collins?" Most hands went up. Congress' reasoning was, Fulsom suggested, that they had invested so much in Collins already. He had proved himself capable of doing the job whereas Vanderbilt was an unknown quantity.
Collins was pleased that he prevailed in Congress until he returned to New York harbor only to find another company's ship loading passengers. Fulsom noted that she was "modestly named Vanderbilt [chuckles]." With no subsidy, Vanderbilt was charging $100 per passenger, further reducing the fare to $50, then $35 ($650 today). Collins was still charging $200.

In contemporary interviews, Vanderbilt explained that he could afford the lower rate because at what he was charging, his ships were filling up [in both the outgoing and return trips] to capacity. Collins' ships, on the other hand, were not so full. Vanderbilt sold food at a profit aboard ship to the passengers, Fulsom added, thus offsetting costs. Additionally, young people [called 'runners'] would receive a commission or a reduced fare for each passenger they could persuade [on each side of the Atlantic] to buy a ticket.

Vanderbilt also introduced Third Class fares, noted Fulsom. Vanderbilt made a profit while cutting into his competition’s business. The next year, Collins asked Congress for $850,000 in order to cope with this new competition.

"How many think Congress agreed to give Collins more money?" Fulsom asked. [Slightly more than half raised their hands - they were correct.] Sen. [William Henry] Seward (Whig-NY) exhorted, "how could we abandon our friends in their time of need, facing such cutthroat competition?" The opponents replied, "yes help your friends with taxpayer dollars, not your money, right?" The vote was closer – "that’s the good news," observed Fulsom. Collins’ request was granted.

In one respect, Collins exceeded Vanderbilt - at speed. Collins could do the trip in 12 days, Vanderbilt in 13. Vanderbilt's ships were slower because he figured out the optimal speed for fuel [coal] efficiency, which was slightly slower than Collins. With no subsidy, Vanderbilt had to conserve fuel to make a profit. Collins consequently advertised, 'if your time is important come aboard - if not go with Vanderbilt.' In response, Vanderbilt sped up a little bit, thus applying more pressure to Collins, suggested Fulsom.

Titanic is not the first large passenger liner to sink in the North Atlantic, Fulsom noted. Collins' [paddle-wheel driven] Arctic has that honor. After an 1854 collision [near Cape Race, Newfoundland with the French propeller-driven steamship SS Vesta], she sank at a cost of 285-351 lives [including Collins' wife and two of his children]. In [May of 1856], Collins' Pacific left Liverpool for New York. "She still has not arrived," pointed out Fulsom [nor have the 186-286 souls who were aboard].

Thus, with Collins’ fleet reduced by half, he went to Congress in a Special Session’ to ask for more money to make up for these losses. He couldn’t ask for enough for two ships – Pacific might show up [laughter]. He asked for $1 million. "How many think," asked Fulsom [to mutters of ‘oh, no!’], "that he got the million?" A two-to-one audience ratio voted 'no.' Once again, Fulsom related, Collins got the money.

Hastily, Collins began building a new ship -- too hastily, Fulsom added. On her first trip across the Atlantic [in 1858], Adriatic began taking on water. Below decks, passengers found themselves having to bail during the voyage to England. Upon reaching Liverpool, conveyed Fulsom, passengers for the return trip refused to board [laughter]. Collins found himself with the choice of making expensive repairs or selling the ship at a loss. He chose the latter, selling Adriatic [to the North Atlantic SS Co.] for a $990,000 loss [more laughter].

So Collins went to Congress to ask for more money. "How many think," Fulsom again asked, "that Congress voted to give him the money?" A majority of the audience said ‘no.’ Fulsom told the assembled students [to their relieved applause] that Congress finally refused Collins the funding. He was allowed to go bankrupt as would any other privately funded venture, noted one Senator. A total of $11 million [about $204 million today] was spent on Collins' steamship line - 5 percent of the U.S. debt, Fulsom added.

This was an "exciting lesson" vis-a-vis government relations with business, Fulsom argued. Do we grow the economy with subsidies or do we let private companies compete with each other and let the most competitive enterprises win the markets? "I'd like to tell you that the US government learned the lesson from this experience [chuckles] and that we'd never have to go through anything like that for a hundred years."

History is a wonderful subject, Fulsom continued, but it doesn’t make one optimistic about human nature. The next generation went through the same thing again with the transcontinental railroads. One group contended 'let private concerns build the railroads.' Others retorted, 'oh no, we need the government' to help build [what became the Union Pacific, Central Pacific and the Northern Pacific] railroads. As Fulsom related, the first two received $60 million in subsidies and 60 million acres in free federal land.

James J. Hill's (1838-1916) Great Northern was built with no subsidy, Fulsom noted. The subsidized railroads went bankrupt from time to time, some of them eight times in a decade. Great Northern, however turned a profit, even when the national economy was in poor shape. Running from St. Paul Minn. to Seattle Wash., Hill's railroad was, Fulsom argued, the best-built and most efficient railroad of its time. That generation had to re-learn the lesson, attested Fulsom, that entrepreneurs should be 'turned loose' allowing their creativity to flourish.

It is not possible to plan (via government power, added Fulsom) such innovation as efficiently - there is no way to predict who will succeed. Generous government backing has not, Fulsom contended, proven to assure success. Nothing illustrates this more than the pursuit of powered flight.

[Smithsonian Institution President] Samuel Langley (1834-1906) wrote the definitive work on glider flight, ["Story of Experiments in Mechanical Flight"]. Some argued to subsidize his research. Fulsom explained that it was widely believed that no one knew more than Langley about the subject. Being behind in this technology could put the US at a military and economic disadvantage, it was argued. "Therefore," said Fulsom, "the lessons of earlier generations had to be ignored for the sake of national security."

The War Department consequently gave him $50,000 [$1 million today] to develop a motorized aircraft. [The catapult launches were stressful on the structures, often damaging the aircraft before takeoff could occur. Two late 1903 attempts resulted in Langley’s Aerodrome flying "like a handful of mortar," one nearly drowning the pilot in the Potomac.]

A week after Langley's second failure, the Wright Brothers' Flyer successfully took off [under its own power and flew for 12 seconds in Kill Devil Hill near Kitty Hawk, N.C.]. Fulsom added this was accomplished "using $2000 of their own money." Langley’s response: "I could have done it better if I had more money." [derisive laughter] Langley died before he could either get the funding, Fulsom added, or be denied [never having achieved flight].

Fulsom continued, "what we see in American history again and again when we turned our entrepreneurs loose – and we began to see that more and more as we saw the failures of the subsidized businesses – the US became a major power."

Steel and oil - two "crucial hard-hitting industries" of a hundred years ago- were not subsidized, Fulsom explained. Carnegie's US Steel and Rockefeller's Standard Oil were second to none. Oil production was such that America was not only self-sufficient; two-thirds of the world's exported oil was produced here.

Fulsom argued, "we had the best oil, steel and auto industries, thus contributing to the twentieth century being the American Century." Ford, Vanderbilt, Hill, Rockefeller, Carnegie and others had amassed fortunes for themselves providing quality services and/or products at the lowest prices. In the process, Fulsom went on, they created millions of jobs and built this country into a power that is still the envy of world.

Fulsom recalled that while serving on the Texas State Textbook Commission, he never saw any reference to the Vanderbilt story in any college-level course material. He asked the audience if any of them had been taught this story in class. One attending student raised his hand. Fulsom responded excitedly, "That’s wonderful! That's great - we're making progress! [laughter] The Hill story you will occasionally hear on the transcontinentals," Fulsom added. "The Wright Brothers’ story is told, but not the part about how they were privately financed while their failed rival was subsidized."

Fulsom recalled that during the process of working on his Ph. D. in history [specifically concentrating on economic history], he was only taught one of the above stories. All of the material that he discussed in his lecture, he learned after receiving his doctorate. He went on to say that he didn’t think that his professors were hiding these stories from him specifically – 'Fulsom is here, let’s not tell him.' Imagine formulating public policy, especially whether or not to subsidize without this kind of historical knowledge, Fulsom offered.

If this history were widely known, Fulsom  argued, debate favoring subsidized ventures wouldn’t go anywhere. When we start taxing to support these subsidies another dynamic comes into play, added Fulsom. An example: during the 1920s, the top tax rate was cut from the low seventy percentages to the low twenties. Federal revenue increased by over thirty percent. Treasury Secretary Andrew Mellon [founder of Gulf Oil and ALCOA] offered this explanation: "seventy percent of nothing is nothing, twenty-four percent of something is something." No one is going to invest if over seventy percent of a successful investment goes to the government, Fulsom contended.

Textbooks do not inform students that starting in 1932, Hoover raised the top income tax from Mellon’s 24 percent to 63 percent. In the middle of the Depression, Fulsom remarked, they were in effect telling entrepreneurs, 'we'd sure appreciate if you built a factory and create jobs. Of course, we’re going to take five eighths of your income…' FDR subsequently raised the top level to 79 percent. "I wonder why the Great Depression continued," mused Fulsom.

Many said that the top rate only applied to those with incomes over $100,000 - that’s not very many people, Fulsom commented. "Those at that level are the entrepreneurs," he added. "Not very many people have that much money to invest and those who do, you want out there starting and growing businesses. At a nearly eighty percent tax rate," Fulsom declared, "you can’t very well do that." Roosevelt responded to this by declaring 'the rich are letting this country down' and penalizing them with a 90 percent tax rate. In 1941 he proposed a rate of 99.5 percent for the second $100,000 of a person’s income. That would leave $500, the rest going to Washington, Fulsom pointed out.

Finally it seemed, offered Fulsom, that Congress saw that the Emperor had no clothes. One congressman stood up and stated, "we have a 3 percent state income tax…" [laughter] The proposal was quietly shelved. In April 27 1942, FDR issued an Executive Order mandating a 100 percent tax for incomes above $25,000. "That's a real incentive for entrepreneurs," Fulsom scoffed. The Republicans won dramatically in the 1942 congressional elections [laughter, applause] and repealed the tax. Fulsom added that he would like to give the GOP credit, but the tax rate was still at 90 percent.

Arthur Schlesinger does a periodic poll of other professional historians asking who they think is the best American president in history. Year after year, FDR is overwhelmingly chosen as the favorite. "That is where we are," Fulsom remarked. He has gone before many groups issuing a challenge: "Show me a textbook that says that FDR instituted a 100 percent tax rate and I'll eat the textbook… [Fulsom patted his flat stomach] You may be able to tell from my thin, trim physique that I've so far had a textbook-free diet!" [chuckles]

Wanting of such critical information about our past, the American people are vulnerable for any "wild subsidy scheme" in the future when in fact we have many test cases in history showing what were the results.
"It is with a gleam in my eyes that I turn you loose on your professors… next year, bring up this information and watch the fun!"