1 New York: Crown Publishers, 1947, pp. 8-9.
commercial purpose were the ones that survived, prospered, and proved unusual foresight in the choice of their locations.
Among our major railroads, the most scandalous histories were those of the Union Pacific and the Central Pacific (now called Southern Pacific). These were the two lines built with a federal government subsidy. The Union Pacific collapsed into bankruptcy soon after its construction, with what was, perhaps, the most disgraceful scandal in the history of any railroad; the scandal involved official corruption. The road did not become properly organized and managed until it was taken over by a private capitalist, Edward H. Harriman.
The Central Pacific—which was built by the “Big Four” of California, on federal subsidies—was the railroad which was guilty of all the evils popularly held against railroads. For almost thirty years, the Central Pacific controlled California, held a monopoly, and permitted no competitor to enter the state. It charged disastrous rates, changed them every year, and took virtually the entire profit of the California farmers or shippers, who had no other railroad to turn to. What made this possible? It was done through the power of the California legislature. The Big Four controlled the legislature and held the state closed to competitors by legal restrictions— such as, for instance, a legislative act which gave the Big Four exclusive control of the entire coastline of California and forbade any other railroad to enter any port. During these thirty years, many attempts were made by private interests to build competing railroads in California and break the monopoly of the Central Pacific. These attempts were defeated—not by methods of free trade and free competition, but by legislative action.
This thirty-year monopoly of the Big Four and the practices in which they engaged are always cited as an example of the evils of big business and free enterprise. Yet the Big Four were not free enterprisers; they were not businessmen who had achieved power by means of unregulated trade. They were typical representatives of what is now called a mixed economy. They achieved power by legislative intervention in business; none of their abuses would have been possible in a free, unregulated economy.
The same Central Pacific is notorious for a land deal which led to the dispossession of farmers and to bloody riots in the late 1870’s. This is the incident which served as the basis for the anti-business novel, The Octopus, by Frank Norris, the incident which caused great public indignation and led to hatred of all railroads and of all big business. But
this deal involved land given to the Big Four by the government—and the subsequent injustice was made possible only by legislative and judicial assistance. Yet it was not government intervention in business that took the blame, it was business.2
At the other side of the scale, the railroad that had the cleanest history, was most efficiently built in the most difficult circumstances, and was responsible, single-handed, for the development of the entire American Northwest, was the Great Northern, built by J. J. Hill without any federal help whatever. Yet Hill was persecuted by the government all his life—under the Sherman Act, for being a monopolist (!).
The worst injustice has been done by popular misconception to Commodore Vanderbilt of the New York Central. He is always referred to as “an old pirate,” “a monster of Wall Street,” etc., and always denounced for the alleged ruthless-ness of his Wall Street activities. But here is the actual story. When Vanderbilt began to organize several small, obscure railroads into what was to become the New York Central system, he had to obtain a franchise from the City Council to permit his railroad, the New York and Harlem, to enter New York City. The Council was known to be corrupt, and if one wanted a franchise, one had to pay for it, which Vanderbilt did. (Should he be blamed for this, or does the blame rest on the fact that the government held an arbitrary, unanswerable power in the matter and Vanderbilt had no choice?) The stock of his company went up, once it was known that his railroad had permission to enter the city. A little while later, the Council suddenly revoked the franchise—and the Vanderbilt stock began to fall. The aldermen (who had taken Vanderbilt’s money), together with a clique of speculators, were selling the Vanderbilt stock short. Vanderbilt fought them and saved bis railroad. His ruthlessness consisted of buying his stock as fast as it was being dumped on the market, and thus preventing its price from crashing down to the level that the short-sellers needed. He risked everything he owned in this battle, but he won. The clique and the aldermen went broke.
And, as if this were not enough, the same trick was repeated again a little later, this time involving the New York State Legislature. Vanderbilt needed an act of the legislature to permit him to consolidate the two railroads which he owned. Again, he had to pay the legislators for a promise to
JFor a good factual history of the Central Pacific, see Oscar Lewis, The Big Four, New York: Alfred A. Knopf, 1938.
pass the necessary bill. The stock of his company went up, the legislators started selling it short and denied Vanderbilt the promised legislation. He had to go through the same Wall Street battle again, he took on a frightening responsibility, he risked everything he owned plus millions borrowed from friends, but he won and ruined the Albany statesmen. “We busted the whole legislature,” he said, “and some of the honorable members had to go home without paying their board bills.”
Nothing is said or known nowadays about the details of this story, and it is viciously ironic that Vanderbilt is now used as one of the examples of the evils of free enterprise by those who advocate government controls. The Albany statesmen are forgotten and Vanderbilt is made to be a villain. If you now ask people just what was evil about Vanderbilt, they will answer: “Why, he did something cruel in Wall Street and ruined a lot of people.”8
The best illustration of the general confusion on the subject of business and government can be found in Holbrook’s The Story of American Railroads. On page 231, Mr. Hol-brook writes:
Almost from the first, too, the railroads had to undergo the harassments of politicians and their catchpoles, or to pay blackmail in one way or another. The method was almost sure-fire; the politico, usually a member of a state legislature, thought up some law or regulation that would be costly or awkward to the railroads in his state. He then put this into the form of a bill, talked loudly about it, about how it must pass if the sovereign people were to be protected against the monster railroad, and then waited for some hireling of the railroad to dissuade him by a method as old as man. There is record of as many as thirty-five bills that would harass railroads being introduced at one sitting of one legislature.
And the same Mr. Holbrook in the same book just four pages later (pages 235-236) writes:
In short, by 1870, to pick an arbitrary date, railroads had become, as only too many orators of the day
•For details of this story, see David Marshall, Grand Central, New York: McGraw-Hill (Whittlesey House), 1946, pp. 60-64, and Alvin F. Harlow, The Road of the Century, New York: Creative Age Press, 1947, pp. 166-173.
pointed out, a law unto themselves. They had bought United States senators and congressmen, just as they bought rails and locomotives—with cash. They owned whole legislatures, and often the state courts. … To call the roads of 1870 corrupt is none too strong a term.
The connection between these two statements and the conclusion to be drawn from them has, apparently, never occurred to Mr. Holbrook. It is the railroads that he blames and calls “corrupt.” Yet what could the railroads do, except try to “own whole legislatures,” if these legislatures held the power of life or death over them? What could the railroads do, except resort to bribery, if they wished to exist at all? Who was to blame and who was “corrupt”—the businessmen who had to pay “protection money” for the right to remain in business—or the politicians who held the power to sell that right?
Still another popular accusation against big business is the idea that selfish, private interests restrain and delay progress, when they are threatened with a new invention that might destroy their market. No private interest could or ever has done this, except with government help. The early history of the railroads is a good illustration. The railroads were violently opposed by the owners of canals and steamship companies, who were doing most of the transportation at the time. A great number of laws, regulations, and restrictions were passed by various legislatures, at the instigation of the canal interests, in an attempt to hamper and stop the development of the railroads. This was done in the name of the “public welfare” (!). When the first railroad bridge was built across the Mississippi, the river steamship interests brought suit against its builder, and the court ordered the bridge destroyed as a “material obstruction and a nuisance.” The Supreme Court reversed the ruling, by a narrow margin, and allowed the bridge to stand.4 Ask yourself what the fate of the entire industrial development of the United States would have been, if that narrow margin had been different—and what is the fate of all economic progress when it is left, not to objective demonstration, but to the arbitrary decision of a few men armed with political power.