Sunday, April 16, 2017
The Myth of the Robber Barons by Burton W. Folsom
I learned of this book because it is written by a member of Hillsdale faculty, and I have read books written by him before. This short book, The Myth of the Robber Barons by Burton W. Folsom, Jr. is a quick easy read. Although he has done tremendous research, he uses that information in a story-telling manner that makes it easily digestible.
The book is seven chapters, the first six deal with individual personalities and the last is a conclusion. Each of the men described enjoy a reputation for fabulous wealth somewhat tainted by an unearned reputation for unscrupulous dealings.
Folsom begins by differentiating between "market entrepreneurs" and "political entrepreneurs." The former eschews government handouts and works under free market conditions. The latter needs government intervention in order to survive. He starts with Vanderbilt and his contributions to the steamship industry. While Robert Fulton was the first to build and begin a steamship company, he operated under a government-granted monopoly. Another operator hired young Cornelius Vanderbilt to try to break into that market. He ran illegal ferries until the Supreme Court finally struck down the monopoly as unconstitutional. In a free market, Vanderbilt undercut all his competition, drastically lowing rates. Eventually he took on the cross-Atlantic, subsidized mail carriers, where he had competition on both sides of the pond. He found creative ways to cut expenses, including sailing such well-built ships that he did not feel the need to buy insurance. Eventually, the government-subsidized companies could not compete. Their mismanagement was revealed and they went bankrupt. Folsom states, "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." (p. 15) Federal aid appeared to be a curse.
He then moves onto the railroad industry. All schoolchildren learn about the glorious Transcontinental Railroad built by the Union Pacific and the Central Pacific. What they do not learn is that it was a government-financed boondoggle. In fact, Folsom tells the story of James J. Hill who built another transcontinental railroad completely free of government money, that operated both efficiently and profitably. Instead of rushing and acting inefficiently in order to get the job done quickly and maximize government funding, Hill took his time, carefully studied the path of the tracks and used high-quality materials. Therefore his train ran a shorter distance with greater dependability for less money. Folsom calls the Union Pacific's eventual bankruptcy all but foreordained. "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." (p. 22) With his profits flowing in, Hill began buying up failed, subsidized railroads and making them profitable. Hill built slowly, developing the areas around his railroad in order to promote exports that he could ship. He even opened up trade to the Orient. Unfortunately he was caught in the morass of legislation and laws meant to protect the nation from unscrupulous, subsidized businesses. His very successful, self-built company was declared a monopoly and ordered disbanded.
Of course, the railroads could not function without a cheap supply of iron. This is where the Scrantons come in. Looking to produce iron, William Henry joined with his relatives, the Scrantons, and purchased land in northeast Pennsylvania. They faced fierce pushback from the local iron manufacturers and unforeseen poor land conditions. They quickly began to fail. Desperate, they tapped all their friends and family for funds to continue operations. They made the very risky decision to challenge the English and enter into the rail market. Undercutting the British, they got a contract almost impossible for them to fulfill, yet fulfill it they did. However, they knew that in order to continue to succeed, they would have to build up the local infrastructure to make it more amenable to transporting raw and finished materials. In the barren wilderness, they single-handedly developed the town of Scranton. The phenomenal growth of the town attracted other entrepreneurs like the five-and-dime Woolworth's stores. Interestingly, Folsom details the stories of the children of the original entrepreneurs. Some did well with the resources handed to them, but many did not. He makes the case that entrepreneurial spirit is not necessarily in the genes. Wealth does not always follow the families bequeathed it.
Although I know of him in the context of financial investing, apparently Charles Schwab made his fortune in the steel industry. To demonstrate his ingenuity, Folsom tells of a story of an under-performing steel mill. After asking what had been done to motivate the workers and hearing a recitation of various threats, coaxing, and pushing, Schwab asks how many "heats" had been produced that day. After hearing that six had, he simply took some chalk and wrote the number 6 on the floor. When he returned days later, he saw the 6 crossed out and replaced with a 7, and then a 10. He had, in his own unique way, motivated the men and instilled the spirit of competition.
Schwab worked for Andrew Carnegie. He worked tirelessly to make the factories more efficient and earned bonuses and promotions as a result. Unfortunately he did not imitate Carnegie's pension for clean living. Scandal eventually forced him to resign from U.S. Steel. While president of U.S. Steel, he had purchased Bethlehem Steel for his own portfolio. It was to this venture that he turned at his lowest point. This tiny company may have seemed like a radical demotion, but Schwab was determined to turn it around and make it competitive. Schwab even took on his old company and challenged the giant U.S. Steel. His attitude was, "If we are going to go bust, we will go bust big." (p. 73) He was eventually able to make a very profitable company out of Bethlehem Steel. But later in life, he ran out of steam. Once again ignoring the example of Carnegie, he went back to his profligate ways. The man who could single-handedly, through dint of his own hard work and motivational skills, make two companies very successful, died deeply in debt.
John D. Rockefeller rose to the ranks of the fabulously wealthy in the field of oil production. He came from very humble beginnings but showed entrepreneurial promise early on. He was fascinated with the burgeoning oil industry and the ability to produce kerosene from crude oil, but right away, he noticed the appalling waste and fluctuating prices due to overproduction. He and a partner opened an oil refinery and determined to produce the best kerosene at the lowest price, while finding profitable uses for the myriad byproducts, which others threw into the river. Eventually, he decided to take on the Russians, who had all the natural advantages. He beat them at their own game by being more efficient. Although he was shrewd in business, he was quiet man, who "displayed none of the tantrums of a Vanderbilt or a Hill, and none of the flamboyance of a Schwab." (p. 93) His humility impressed all who knew him. Rockefeller was a devoted Christian and family man, who always put God and family before career. He donated tremendous sums of money and still managed to wind up with $900 million.
The final biography Folsom turns to is that of Andrew Mellon. He was a Secretary of the Treasury of whom it was said that 4 Presidents served under. He had the revolutionary idea that too-high taxes would actually reduce revenue. He had made his money in the aluminum industry. His business skills brought him to the attention of President Harding. When asked to serve as Secretary of the Treasury, Mellon took a tremendous pay cut and accepted the challenge of turning around a post-war stagnant economy. Mellon believed that both the rich and the poor were being overtaxed. He saw first-hand that the wealthy were likely to shield their wealth in tax-exempt accounts rather than use it for investment in the economy. He despaired of this misallocation of resources. He advocated for the slashing of taxes, and true to his theories, revenues increased as more available money grew the economy.
Mellon's program had four components: 1. Cut taxes to 25%, the maximum he felt the wealthy would pay before they shielded their money. 2. Cut taxes on low incomes, especially the regressive excise taxes on products. 3. Reduce the federal estate tax in order to discourage the sheltering of wealth in tax-exempt foundations. 4. Introduce efficiency into the government, cutting staff and expenses. He faced stiff opposition from the Progressives who wanted more, not less, government spending and higher taxes on the rich. Mellon's plan worked exactly as he predicted. More tax revenue came from the rich, with lower tax rates, and the lower income people had relief as well. Unfortunately, Mellon's legacy has been repeatedly described as tax cuts for the rich at the expense of the poor. This is the moniker the Progressives had hung on him during his lifetime and it stuck. It's unfortunate because Mellon is someone we could all learn from.
Folsom concludes by stating that the lessons of history will not be learned if we fail to understand what actually happened. Time and again, we see government subsidies retarding a company, leading to waste, fraud, and abuse, and the entrepreneurs that eschewed government handouts succeeding through bare-knuckled efficiency, which always benefited the consumer. History likes to portray these market entrepreneurs as "Robber Barons." Of this history, Folsom points out, "We did have the industrialists, such as Jay Gould and Henry Villard, who mulcted government money, erected shoddy enterprises, and ran them into the ground. What is missing are the builders who took the risks, overcame strong foreign competition, and pushed American industries to places of world leadership." (p. 127) Folsom celebrates these men in a way the history books do not. The "market entrepreneurs made decisive and unique contributions to American economic development. The political entrepreneurs stifled productivity (through monopolies and pools), corrupted business and politics, and dulled America's competitive edge." (p. 132) It is unfortunate that they are all lumped together.