All Commentary
Sunday, May 1, 1988

A Reviewers Notebook: Entrepreneurs vs. The State

Burton W. Folsom, Jr.’s Entrepreneurs vs. The State (Young America’s Foundation, Suite 808, 11800 Sunrise Valley Drive, Reston, VA 22091, 144 pp., $16.95 cloth) is about as neat a job as one could wish. To be sure, the overall thesis of the book is not new. We have had those who, like Matthew Josephson, have pinned the Robber Baron label on practically all of our Nineteenth and early Twentieth Century industrialists. Contrariwise, we have also had those who, like Allan Nevins, Robert Hessen, Louis Hacker, and John T. Flynn, have taken note that the consumer often had the last word if only because would-be monoplists could not be trusted to remain in price- fixing pools. But Folsom, with more clarity than any of the revisionists who have gone before him, has separated the great competitors from the monopolists who depended primarily on State favors. There were “political entrepreneurs” and “market entrepreneurs,” and the dividing lines in retrospect are relatively clear.

Folsom finds it significant that Commodore Cornelius Vanderbilt, who broke the early Hudson River Steamboat Association and took gold-seekers to California by way of Panama and Nicaragua at cheap rates, made money where Robert Fulton and Edward Collins, who sought government grants, could not hack it. Vanderbilt went on to build the New York Central Railroad out to Chicago, becoming the richest man in America by his progressive cutting of passenger fares.

Vanderbilt was not imitated by the first railroad barons who sought to conquer the distances between the Mississippi River and the Pacific coast. As Folsom chattily puts it, the building of the early transcontinental roads makes for good reading. The story has a sound plot: four roads get charters and subsidies to build across the country. There is suspense as the Union Pacific and the Central Pacific race over the plains and mountains to meet at a golden-spike ceremony in Utah. The “all-star east” includes U.S. Presidents, army generals and political adventurers who confront Indians on the warpath, politicians on the take, and thousands of Chinese and Irish workers.

The grab for Federal subsidies happened to be inordinately greedy. Historians have written this off, saying there was no way to get the happy ending without Federal aid. Leland Stanford and Collis Huntington in California, Henry Villard in the Northwest and the Union Pacific Credit Mobilier leaders are all excused for doing such things as “accidentally” destroying records that might have brought jail sentences.

The only trouble with the standard story is that an incorruptible man, James J. Hill, was busy building the Great Northern Railroad from St. Paul to the Pacific without a penny in subsidies at the very time that Henry Villard was going broke in spite of government aid. Where Villard had built swanky hotels and health spas in the wilderness, hoping to attract tourists, Hill sought to develop the land. He built slowly, developing exports as he went West. He imported 7,000 cattle from England and elsewhere, giving them to settlers near his line free of charge. He set up his own experimental farms to test new seed and livestock and the use of fertilizers. As for the railroad itself, he strove for durability and efficiency, not “scenery.” “What we want,” he said, “is the best possible line, lowest grades and least curvature . . . .” In 1889 Hill conquered the Rocky Mountains by finding the legendary Marias Pass where Lewis and Clark had gone in 1805. By rediscovering the Mafias Pass, Hill shortened his route by almost a hundred miles.

New Opportunities

What Hill and Vanderbilt did for railroading, the Scrantons of northeastern Pennsylvania and Charles Schwab of Carnegie Steel did for the iron and steel business. The Scrantons built the country’s first mass-produced iron rails and poured the profits into laying out the modern city of Scranton as a challenge to neighboring Wilkes- Barre. There were tariffs on rails and other iron products, but the Scrantons did not need them.

The history of the Scrantons corroborates the theory that both upward and downward mobility are distinctively American characteristics. As entrepreneurs, the fast generation of Scrantons created something out of nothing. Not all of their descendants hung on to their shares of the family wealth. But because of what the original Scrantons did thousands of Americans had new opportunities in life.

As a steel master Andrew Carnegie was not averse to taking part in price-fixing arrangements. But he had no compunctions about deserting pools where there was a prospect for “scooping the market and running with the mills full.” In his competitive zeal Carnegie had the stalwart support of Charles Schwab, who lowered the costs per ton of finished steel by 34 per cent in a single year by adding sixteen new furnaces to the Homestead, Pennsylvania, plant.

When Carnegie sold his company to J. P. Morgan for $480 million, Schwab went along in the package that resulted in the creation of U.S. Steel, the first billion-dollar company in U.S. history. Morgan was not sufficiently competitive to please Schwab, who wanted to do

things his own way. Accordingly, Schwab left U.S. Steel to go to work for Bethlehem Steel, which he had bought as a private investment. He moved Bethlehem away from its dependency on government contracts, adopting open hearth technology because it could produce better rails than U.S. Steel with its antiquated Bessemer facilities.

John D. Rockefeller, the founder of the Standard Oil Company, figures in the Robber Baron literature as a veritable devil. In actuality he was a pious man who spent many hours each week attending church services. As John T. Flynn has shown in God’s Gold, Rockefeller really meant it when he put the consumer fast. In 1885 Rockefeller wrote to one of his partners, “Let the good work go on. We must ever remember we are refining oil for the poor man and he must have it cheap and good.” Picking up from this, Isabel Paterson said “Standard Oil did not produce kerosene to pour it down the sink.”

Rockefeller made one bad move when he joined a pool called the South Improvement Company, which was prepared to pay not only rebates but also drawbacks on oil that the bigger companies had not shipped. But no oil was ever shipped by South Improvement, which quickly lost its charter. Rockefeller later admitted he had been wrong in thinking pools were an answer to inefficient production. He turned his attention to market entrepreneurship, hiring chemists to extract every dollar possible from each barrel of crude.

Bigness was Rockefeller’s reward for efficiency. But, big as it was, Standard had to meet the challenge of the new gushers tapped by upstart companies in Texas. And it had to fight the Russians for the international market. Summing things up, Folsom thinks the emergence of the market entrepreneur in the period before 1920 is proof enough that we do better when the government lets people keep their own money for their own investments.

“If we seriously study entrepreneurs,” says Folsom, “. . . we will have to sacrifice the textbook morality play of ‘greedy businessmen’ fleecing the public until at last they are stopped by the actions of the state. But, in return, we will have a better understanding of the past and a sounder basis for building our future.”

  • John Chamberlain (1903-1995) was an American journalist, business and economic historian, and author of number of works including The Roots of Capitalism (1959). Chamberlain also served as a founding editor of The Freeman magazine.