The Myth of the Robber Barons

If you read your school textbooks at all, do you remember what they taught about the industrial revolution and men like Carnegie, Vanderbilt, and Rockefeller? Burton W. Folsom, Jr., the author of The Myth of the Robber Barons, is willing to bet that while your head drooped into your fist and you fought heavy eyelids, you were told the wrong story.

Folsom found that these key Americans are painted red — cruel, monopoly builders with a zest for poor working conditions and stuffing their pockets. He suggests that there are two sides to every story and begs you listen to the other side of the tale.

As a point of context, it is important to know that Folsom does not deny the presence of corrupt leaders during this period of growth. Instead of idolizing or condemning the whole group, he splits these businessmen into two groups: the political entrepreneurs, the Robber Barons who stifled productivity through monopoly and corruption and dulled competitive edge with politics, and the market entrepreneurs, those men who truly contributed to economic development.

So which story is the real story? I’ll leave that decision to you.

Commodore Vanderbilt and the Steamship Industry

It’s common knowledge that the first steamboat to roam New York waters in the early 1800s was built and operated by a man named Robert Fulton. It’s less widely known, however, that Fulton’s Clermont and fleet were kept afloat by a government-enforced monopoly, which allowed him to control all steamboat traffic in New York for thirty years. This thirty-year monopoly became the obsession of New Jersey businessman, Thomas Gibbons, and in 1817, he hired the young Cornelius Vanderbilt to help with his risky task.

Vanderbilt hoisted a flag up on the mast of Gibbon’s ship that read, “New Jersey must be free” and began sailing passengers from Elizabeth, New Jersey to New York City illegally for sixty days. In 1824, the Gibbons vs. Ogden case finally brought the Fulton monopoly to an end. New Yorkers were so thrilled that they launched two boats named for John Marshall, the Chief Justice of the Supreme Court who ruled against Fulton’s monopoly.

After the case, innovation flooded the industry. While Gibbons and Vanderbilt enjoyed efficient new tubular boilers and fuel, Fulton’s group ignored change and went bankrupt.

With two new ships of his own, Vanderbilt began his solo career by pushing rates to $1 and providing free meals to passengers. Vanderbilt remarked,

“If I could not run a steamboat alongside another man and do it as well as he for twenty percent less than it cost him I would leave the ship.”

Vanderbilt’s effect on the market was best described in a Harper’s Weekly article which read, “Wherever Vanderbilt laid on an opposition line, the fares were instantly reduced; and however the contestant terminated… the fares were never again raised to the old standards.”

As technology grew to support transatlantic steamships, a race for government subsidy began. Edward K. Collins pleaded with Congress for $3million a year plus yearly-added bonuses to build five ships with the ability to outrun the British fleet. Congress agreed to $1 million, but, unfortunately, Collins did not build the five efficient, speedy ships. He built slow, leaky, yet lavish ships… the world’s first floating resort.

By 1855, the ever-efficient Vanderbilt was appalled by Collin’s luxurious fleet. Vanderbilt knew that competing without funding would be nearly impossible, so he asked Congress to share Collins’s stipend with him, and in return, he would establish the cheapest transatlantic route in the world. Folsom humorously notes that Collins begged Vanderbilt not to ask Congress for a share in his funding, but the pleading on both sides was for naught; Congress denied Vanderbilt the subsidiary, but Vanderbilt decided to compete with his personal checkbook.

To stand a chance at beating Collins, Vanderbilt was forced to operate more efficiently than ever. In this crucible of necessity, he created the first 2nd and 3rd class. He built his ships with meticulous care, unlike Collins, who had to repair ships after almost every trip. Vanderbilt still barely scraped by. Reflecting on the first year he said,

“It is utterly impossible for an individual to stand in competition with a line drawing nearly one million dollars per annum from the national treasury.”

The winds changed after a head to head race between Collins’s ship and the new Vanderbilt; Congress finally saw how the “miserably managed” Collins lacked innovation and rebuked his subsidiary.

The New York Times once paralleled Vanderbilt to monopolistic German Barons, often called Robber Barons. The Robber Barons infamously demanded payment from passengers on their rivers, and no one could deny them or escape their control of the price. But after learning about Vanderbilt’s victory over political monopolies, Folsom argues that it becomes difficult to leave him in this category. Folsom says, “[Federal aid is] a curse, not a blessing, even to those who received it.”

James Hill and the Transcontinental Railroads

In the mid 1800s, the West was the final frontier of America. Think of it like the moon in the 1960s; reaching the moon was only possible because the government supported NASA with enormous funding. Similarly, in 1862, Congress passed the Pacific Railway Act, which had only one goal: to build a railway connecting the East to the West as quickly as possible, no matter the cost. To achieve this goal, Congress granted giant subsidiaries and additional loans to the Santa Fe, Union Pacific (UP). Central Pacific (CP), and the Northern Pacific (NP) railways.

The government’s agenda created a rushed schedule and conflicts that cost both dollars and lives. Would lay zig-zagged track to incur more aid and use cheap material. Thomas Durant, a UP official, once remarked to his manager, “You are doing too much masonry this year.”

When winter hit in Nebraska, the UP built right over the snow to keep on schedule. In spring they spent their resources rebuilding the ruined track. Lack of food and Native American attacks were common. As if fighting natives wasn’t enough bloodshed, the CP workers, who were primarily Chinese, and the UP workers, who were primarily Irish, began to attack each other over track disputes.

The problems continued to increase in complexity. A handful of UP stockholders created companies like Wyoming Coal and Mining and Credit Mobilier. Credit Mobilier worked like this: Mobilier charged high material prices to the UP, involved Politicians allowed subsidiaries to cover these costs, and the UP made a fine profit from their corruption. It was fine indeed for those involved until the scandal came to light. Congress had had enough.

It’s easy to blame these companies for their wrongdoings and forget that these are simply the effects of government monopolies. Wasn’t it said earlier that, like the moon, this achievement needed the support of the government? There is proof that the government was never needed; for while the CP and UP bickered over routes, a man named James J. Hill was building his transcontinental railroad without a penny from the federal coffer.

Though poor, Hill had the market entrepreneur spirit from the beginning. In 1838 he left his home in Ontario, Canada and boarded a train for St. Paul to begin his career. Hill dreamed about the Northwest as if it were the Promised Land of the Israelites. His journey there began in 1878 when he and a group of Canadian friends bought the bankrupt St. Paul and Pacific Railroad despite the critics’ scoffing.

Without government funding, Hill had to keep to a strict strategy. Hill spent time surveying the land himself. He built track slowly and primed his land before he went forward; he encouraged immigrants to farm near his land for $10, free cattle, and incentives like abundance awards and livestock contests. To these immigrants he’d say,

“You are now our children, but we are in the same boat with you, and we have got to prosper with you or we have got to be poor with you.”

Because he was obsessed with the straightest paths, lowest grades, and least curves, he hired a man to look for the lost Marias Pass — a legendary pass only whispered about in the journal of Lewis and Clark, which eventually cut his route by one hundred miles.

When Hill came to the Promised Land, the government-backed monopoly was there to meet him. Although he outlasted it, Hill resented the stall the encounter had on his progress:

“It really seems hard when we look back at what we have done in opening the country and carrying at the lowest rates, that we should be compelled to fight political adventurers who have never done anything but pose and draw a salary.”

But Hill didn’t stop when he saw the Pacific Ocean; he created an American wheat and cotton presence in the Oreint. Despite this achievement, The Hepburn Act, which required the publication and equality of all trade rates, almost forced Hill out of the Asian markets. President Roosevelt, the great enforcer of the Sherman Anti-Trust Act, which banned “every combination… in restraint of trade”, persuaded Congress to bust Hill’s corporation and holding company, the Northern Securities Company. Less efficient companies argued that Hill cheated them when he was simply acting as Vanderbilt had — using efficiency to produce the best product at the lowest cost. Folsom points out that without Hill, Americans would have relied on the railways which had inefficiencies literally built into them and they would have never gained the profit from the lucrative Oriental market. Much like Vanderbilt, he should be released from his Robber Baron category and seen as the economic developer that he was.

The Scranton’s and America’s First Iron Rails

The story of America’s independence from English iron and steel imports began when William Henry bought land in the Lackawanna Valley and solicited the support of the Scranton Group (Joseph, George, and Seldon Scranton); together, they hoped to create a great iron and steel manufacturing company. After several failed business ideas, the Scrantons decided to compete with English “T” rail market. Somehow they convinced the Erie Railroad to buy their rail “T”s over the English’s. It was their first great success.

Joseph Scranton stood out as a persevering figure. When he first came to Lackawanna Valley, Scranton said,

“I have no fears of the ultimate success.”

After his success with the Erie Railway, he began to build the city of Scranton around the factory. Immigrants, entrepreneurs, and dreamers flocked to Scranton to make their fortune.

And many did find their fortune. One man bought all the land he could and accumulated $10 million to leave his family after his death. Selden Scranton’s own uncle received the chance to start over at age forty. Innovators like Henry Boies patented a new train wheel and installed America’s first electric trolley system in Scranton. There was plenty of wealth to be created in Scranton.

The inheritors of this great wealth didn’t fair as well. George Scranton’s son was described as “leisurely”. The grandson who inherited the $10 million inheritance lived his life like an F. Scott Fitzgerald character, spending his money on his movie-star wife and trips to Paris.

From these contrasting examples, Folsom conclude that society needs market entrepreneurs to create wealth but that wealth creates leisure and stifles growth. He says,

“And so the cycle goes — which means that if Scranton is typical, then two seemingly contradictory generalizations about the rise of big business are both true. First, a small constantly changing group of entrepreneurs consistently held a large share of the nation’s wealth. Second, the poor didn’t get poorer and the rich didn’t get richer.”

Charles Schwab and the Steel Industry

A manager in one of Charles Schwab’s factories had done everything he could to get his men to work more efficiently. He yelled at them; he persuaded them nicely; he tried it all. After listening to the manager’s dilemma, Schwab walked out onto the production floor, took a stick of chalk in his hand, and chalked the day’s production number down on the floor in a giant curving “6”. The next day, whispers circulated that the big boss had observed them and chalked it. In the days following this incident, and much to the manager’s surprise, the chalked number began to increase: 7 then 10. What had Schwab done to inspire such an upswing in production? Nothing. Charles Schwab simply knew how to entice the competition out of his men.

It was during his time at Carnegie Steel that Schwab learned to be a ruthless businessmen but a kind leader. When Andrew Carnegie retired, Schwab became the president of this company but soon found that there was no room for employee incentives or innovation in the new owner, J. P. Morgan’s, plans.

Schwab left U.S. Steel and, without Carnegie’s guidance, began to drink, gamble, and have affairs. After wrecking his marriage and his relationship with Carnegie, Schwab decided to turn his energy towards a meager company he still owned called Bethlehem Steel.

At the time, Bethlehem Steel was worth just a fraction of U.S. Steel at $9 million, but he was determined to make it the best. Schwab began remodeling Bethlehem Steel by removing the stagnant partners and selecting his new team from workers on the shop floor. Soon his factories were thriving and had patented new, lighter-weight steel that changed the face of the industry. As a result, stocks grew from $20 to $600 per share.

Schwab also played a key role with the ship building in WWI. Franklin K. Lane implored the government to write Schwab a check and let him run the show. When Schwab took the job, he rearranged the faulty profit earnings, production, and the “cost-plus” system into a competition and incentive-driven workplace. He awarded flags and medals as well as bonuses out of his own pocket for outstanding ship builders. Ships were being produced ahead of schedule. After this success, Schwab tried to convince the government to cancel their plans to operate their own armory. They ignored him and suffered when the armory failed within four years.

Schwab is a figure whose personal blunders blind history from realizing his true impact on the American economy. It’s when he was given a chance to make a business great, that we see his brilliance and grit.

John D. Rockefeller and the Oil industry

Our next character was born to a peddler father and stay-at-home-mom with six children. He learned hard work from his father and enduring faith from his mother. Rockefeller said he was trained to work, save, and give from an early age. It was an unusual start for a near billionaire, but a fitting beginning for a man whose business motto was to provide the best product at the lowest price for the whole of his career.

One of his first partners, Maurice Clark, called Rockefeller methodical and detailed to an extreme. Clark said, “If there was a cent due a customer he wanted the customer to have it.” This love of honest business won Rockefeller many business friends. Folsom says this love was so intense that he even dreamed about business. Unrivaled though was his love for God and his family.

Rockefeller and Andrews, a fellow church member, joined forces in 1865 to tackle the rising oil industry. They decided to focus their efforts on refining oil in Cleveland, Ohio. Like Vanderbilt, Rockefeller skipped insurance costs by building quality equipment and winning shipping discounts from powers like Cornelius Vanderbilt himself.

After dabbling in the Southern Improvement Company, a pool of refiners who controlled oil rates, Rockefeller realized that a monopoly system wouldn’t work. Instead he turned to his innate market entrepreneurship once more and bought his own tracts of white oak timber, kilns to dry the lumber, and wagons and horses to haul the oak to Cleveland. Decisions like this allowed him to short the market price of $2.50 a barrel to just $.96 while still producing the best quality.

By 1870, Rockefeller had helped lower prices enough that reading and working became after-dark activities in America. Despite his positive influences, some people hated him. Oil businesses complained that he was forming a monopoly when he began to accumulate other companies, but Rockefeller said himself, “Competitors we must have, we must have.” Since the people were happy with cheap oil, he focused doing what he did best — producing quality oil at the cheapest price.

In the 1880s, many predicted Rockefeller’s downfall because electricity began to play a role in illuminating homes (no one knew the promise that gasoline would hold in the future with autos), the Russians started capturing a foreign market, and the Pennsylvania fields seemed to be drying up. Some senior members of Standard Oil even began to sell their stock.

Instead of selling parts of his company, Rockefeller continued to invest in an area that no one else would go near. The oil in Lima, Ohio was sulphuric and smelled horrible. A chief oil buyer at Standard Oil recalls that Rockefeller disregarded his negative advisors and collected nearly 40 million barrels of sulphurous oil.

After his labs figured out how to purify the oil, Rockefeller pulled out all the stops to meet the Russian challenge. Folsom says, “No small refinery would have had a chance; even a large vertically integrated company like Standard Oil was at a great disadvantage.”

Although Rockefeller may seem like a tyrant, his men loved him dearly. He gave ample praise and little rebuke. If his managers were overworked and tired, he would insist they take a leave of absence until they felt ready to work at full capacity again. He understood clearly that his people were the key to his success.

So how does a man who prioritizes life by God, family, and business end up with $900 million, making him the wealthiest man of his time? Folsom suggests that he truly applied his Christian practices to his work and life; this allowed him to worry less about failure and maintain humility in his success. He was often heard saying, “Early I learned to work and to play. I dropped the worry on the way. God was good to me every day.” He truly lived by these words and was said to be calm when the Sherman Anti-Trust Act came knocking on his door.

In his old age Rockefeller continued to give to the church. During his life, he willingly gave away about $550 million. Most remarkably, he would give the children in his neighborhood dimes, reminding them to work and save. This behavior seems drastically different from versions of his story, which condemn him to the Robber Baron category.

Andrew Mellon and the 1920s

We’ve come to Folsom’s final case he wishes to clear, and it’s worth mentioning that this is no easy task for this next figure. Andrew Mellon is probably the most misunderstood man in American history. Many people blame his tax reduction philosophy for causing the Great Depression when his reforms are actually the reason for American wealth in the 1920s.

Mellon was the grandson of a thrifty Scotch-Irish immigrant, who had come to America to escape the high taxes from the Napoleonic Wars, and the son of Thomas Mellon, a lawyer and avid tax critic. Thomas moved the family to Pittsburgh to practice law, start a bank, and raise his family. When Andrew came along, he was an eager learner when Thomas Mellon gave his children business lessons at the dinner table. Unlike his sociable brother Richard Mellon, Andrew’s demeanor was mouse-like. Someone once said, “When Andrew gave advice, ears strained to listen.” Thomas eventually retired as a proud father and turned his bank over to Richard and Andrew.

Although he was shy of rhetorical skills, Mellon was brilliant when it came to people and ideas. His eye for opportunities in technology and entrepreneurs helped him create Alcoa (Aluminum Company of America) when nobody knew where the future of the new metal was headed. Mellon exhibited this trait again when he spent $15 million of his family’s money to compete with Standard Oil in the south. His new company, Gulf Oil, went on to invent the first corner store and offshore drilling. By 1920, he was worth around $1 billion.

In 1920, President Harding was looking for a new Secretary Treasurer to revamp the stagnant post-WWI economy. It’s not a surprise that, with Mellon’s quiet disposition, he was not thrilled to receive the offer. The story goes that he traveled several hours by train to Harding’s home to speak with the President about the position. When Mellon arrived, there was a line of people waiting to see Harding. In typical Mellon fashion, he never marched past the others or requested to be seen at his appointed time. Instead, Mellon waited humbly in line for hours.

The current state of the government was the result of the Progressive Era (1890–1920), in which the income tax was passed. When WWI broke out, Congress used the income tax to pay for the war in Europe. At the time of his arrival, the top income tax group paid 77% in taxes. In the post-war era, people were becoming less willing to pay these astronomical rates. Woodrow Wilson later said, “There is a point at which in peace times high rates of income and profits taxes discourage energy and produce industrial stagnation with consequent unemployment and other… evils.” Americans were ready for change.

Mellon stumbled upon some vital facts during his study of the existing system. First, Mellon found that the longer the high taxes persisted, the lower household incomes became, which meant less revenue for the government. Second, he discovered that the top bracket was evading high taxes by investing in tax-exempt bonds, drying up the pool the government could tax. It was from these discoveries that he formulated The Mellon Plan, which consisted of four parts: to cut the top income tax rate to 25%, cut taxes on low incomes, reduce the federal estate tax, and promote efficiency in the government.

The plan was passed in 1926 when Coolidge became president; the table below shows how the taxes were redistributed. Notice that when Mellon cut the wealthy’s rates, the group took their money out of bonds and thus created a larger pool and more revenue for the government.

Despite the tax relief and increase in total government revenue, not everyone believed Mellon had the poor’s best interest in mind. College textbooks like American Pageant, The National Experience, and The American Nation still peg Mellon as the Secretary of the Treasury who “[placed] the burden of taxes on lower income groups” and gained from the reductions on the upper class. Few people understand that Mellon lowered the taxes on the poor proportionally more than he did for the wealthy. Finally, when considering his role in the Great Depression, it is important to remember that the periods of high taxes bookending the Mellon Plan, proved to be disastrous for the economy.

Entrepreneurs vs. Historians

Even after hearing these remarkable stories, Historians argue two points about these market entrepreneurs and their hand in the development of the American economy. The first argument is that these men were selfish monopolists. Folsom says, “In these views the cause and effect are clear: the rebates and unfair competition were the main causes of Rockefeller’s success; this success gave him an alleged monopoly; and the alleged monopoly created his fortune. Yet, as we have seen, Rockefeller’s astonishing efficiency was the main reason for his success. He didn’t get the largest rebates until he had the largest business.” These men were simply the best at what they did, and, like in Rockefeller’s triumph over the Russian oil companies in foreign markets, America would not be where it is today without their keen minds for big business.

Secondly, historians suggest that these individuals were mere pawns in the annals of history. That is, If they had not lived, someone else would have taken their place and America’s economy would be similar if not identical without them. To this point, Folsom wonders, why then did their competition not rise to great fame and fortune? It was the particular efficiency and savvy of these brilliant minds that created such wealth. He says, “What is missing are the builders who took the risks, overcame strong foreign competition, and pushed American industries to place of world leadership. These entrepreneurs are a major part of the story of American business.”

We’ve now come full circle, and I’ll pose the original question once again. What do you believe? After hearing the other side of the story, perhaps we can agree with Folsom that, though their reputations are highly disputed, these brilliant minds were key to developing the American economy into the dominant world power it is today.

The Myth of the Robber Barons was originally published in Titans Of Investing on Medium, where people are continuing the conversation by highlighting and responding to this story.
Source link


Leave a Reply

Pin It on Pinterest

Share This

Share this post with your friends!