Ayn Rand on the History of American Free Enterprise

The idea or possibility of an uncontrolled economy has been entirely forgotten and is now being deliberately ignored.

If a detailed, factual study were made of all those instances in the history of American industry which have been used by Leftists as an indictment of Free Enterprise and as an argument in favor of a government-controlled economy, it would be found that the actions blamed on businessmen were caused, necessitated and made possible only by government interference into business. The evils, popularly ascribed to big industrialists, were not the result of an unregulated industry, but of government power over industry. The villain in the picture was not the businessman, but the legislator, not Free Enterprise, but government controls.

Businessmen were the victims, yet the victims have taken the blame (and are still taking it), while the guilty parties have used their own guilt as an argument for the extension of their power, for wider and wider opportunities to commit the same guilt on a greater and greater scale. Public opinion has been so misinformed about the true facts that we have now reached the stage where – as a cure for the country’s troubles – people are asking for more and more of the poison which made them sick in the first place.

As illustration, I will list below some examples which I have found in the course of my research into the history of just one industry – the American railroads.

One of the Leftist arguments in favor of government controls, is the idea that American railroads were built mainly through the financial help of the government and would have been impossible without it.  Actually, government help to the railroads amounted to 10% of the cost of all the railroads in the country – and the consequences of this help have been disastrous to the railroads. I quote from The Story of American Railroads by Stewart H. Holbrook (pp. 8 – 9): “In a little more than two decades, three transcontinental railroads were built with government help. All three wound up in bankruptcy courts. And thus, when James Jerome Hill said he was going to built a line from the Great Lakes to Puget Sound, without government cash or land grant, even his close friends thought him mad. But his Great Northern arrived at Puget Sound without a penny of federal help, nor did it fail. It was an achievement to shame the much-touted construction of the Erie Canal.”

The degree of government help received by any one railroad, stood in direct proportion to that railroad’s troubles and failures. The railroads with the worst histories of scandal, double-dealing and bankruptcy were the ones that had received the greatest amount of help from government. The railroads that did best and never went through bankruptcy were the ones that had neither received nor asked for government help. There may be exceptions to this rule, but in all my reading on railroads I have not found one yet.

It is generally believed that in the period when railroads first began to be built in this country, there was a great deal of useless “over-building,” a great many lines which were started and abandoned after proving themselves worthless and ruining those involved. The Leftists often use this period as an example of “the unplanned chaos” of Free Enterprise. The truth is that most (and perhaps all) of the useless railroads were built, not by men  who intended to build a railroad for profit, but by speculators with political pull, who started these ventures for the sole purpose of obtaining money from the government. There were many  forms of government help for these projects, such as federal land grants, subsidies, state bonds, municipal bonds, etc. A great many speculators started railroad projects as a quick means to get some government cash, with no concern for the future or the commercial possibilities of their railroads. They went through the motions of laying so many miles of shoddy rail, anywhere at all, without inquiring whether the locations they selected had any need for a railroad or any economic future. Some of those men collected the cash and vanished, never starting any railroad at all. This is the source of the popular impression that the origin of American railroads was a period of wild, unscrupulous speculation. But the railroads of this period which were planned and  built by businessmen for a proper, private, 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 very 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 evil 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 the entire profit of any California farmer or chipper, who had no other railroad to turn to. How was this made 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 coast line of California and forbade any other railroad to enter any port. During these thirty years, many attempts were made by private interests to start 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 quoted as an example of the evils of big business and Free Enterprise. Yet the Big Four were not free enterprises; 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 interference into 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 interference into business that took the blame, it was business. (For a good factual history of the Central Pacific, see The Big Four by Oscar Lewis.)

At the other side of 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 ruthlessness 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 then Vanderbilt stock began to collapse. 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 his 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. His 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 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 as one of the examples of the evils of Free Enterprise by those who advocate government control. 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.”

(For details of this story see Grand Central by David Marshall, pages 60 – 64, and The Road of the Century by Alvin F. Harlow, pages 166 – 173)

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. Holbrook 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 railroads 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 – 36) writes : “In short, by 1870, to pick an arbitrary date, railroads had become, as only too many orators of the day pointed out, a law unto themselves. The 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 whom he blames and call “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 numbers 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. (See The Strategy of Great Railroads by Frank H. Spearman, pages 273 – 276). 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 economics progress when it is left, not to objective demonstration, but to the arbitrary decision of a few men armed with political power.

It is important to note that the railroad owners did not start in business by corrupting the government. They had to turn to the practice of bribing legislators only in self-protection. The first and best builders of railroads were free enterprisers who took great risks on their own, with private capital and no government help. It was only when they demonstrated to the country that the new industry held a promise of tremendous wealth that the speculators and the legislators rushed into the game to milk the new giant for all it was worth. It was only when the legislatures began the blackmail of threatening to pass disastrous and impossible regulations that the railroads owners had to turn to bribery.

It is significant that the best of the railroads builders, those who started out with private funds, did not bribe legislatures to throttle competitors nor to obtain any kind of special legal advantage or privilege. They made their fortunes by their own personal ability – and if they resorted to bribery at all, like Commodore Vanderbilt, it was only to buy the removal of some artificial restriction such as a permission to consolidate. They did not pay to get something from the legislature, but only to get the legislature out of their way. But the builders who started out with government help, such as the Big Four of the Central Pacific, were the ones who used the government for special advantages and owed their fortunes to legislation more than to personal ability. This is the inevitable result of any kind or degree of “mixed economy.” It is only with the help of government regulations that a man of lesser ability can destroy his better competitors – and he is the only type of man who does, or ever has, run to government for economic help.

It is not a matter of accidental personalities, of “dishonest business-men” or “dishonest legislators.” The dishonesty is inherent in and created by the system. So long as a government holds the power of economic control, it will always attract the corrupt type of politician into the legislature, it will always work to the advantage of the dishonest businessman, and will penalize and, eventually, destroy the honest and the able.

The examples quoted are only a few of the more obvious ones; there is a great number of others, all demonstrating the same point. These were taken from the history of a single industry. One can well imagine what one would discover if one went through the history of other American industries in similar detail.

It is time to clarify in the public mind the pernicious confusion which was created by Marxism and which most people have unthinkingly accepted : the idea that economic controls are the proper function of government, that government is a tool of economic class interests, and that the issue is only which particular class or pressure group shall by served by the government. Most people believe that Free Enterprise is a controlled economy serving the interests of the industrialists – as opposed to the New Deal, which is a controlled economy allegedly serving the interests of the workers. The idea or possibility of an uncontrolled economy has been entirely forgotten and is now being deliberately ignored. Most people would see no difference between a businessman such as J. J. Hill of the Great Northern and a businessman such as the Big Four of the Central Pacific. Most people would simply dismiss the difference by saying that businessmen are crooks who will always corrupt the government and that the solutions is to let the government be corrupted by labor unions.

The issue is not between pro–business controls and pro–labor controls, but between controls and freedom. It is not the Big Four against the New Deal, but the Big Four and the New Deal on one side – against J. J. Hill and every honest worker on the other. Government control of economics, no matter in whose behalf, has been the source of all the evils in our industrial history – and the solution is the complete repeal of any and all forms of government interference into production and trade, the complete separation of State and Economics, in the same way and for the same reasons as the separations of Church and State.

One thought on “Ayn Rand on the History of American Free Enterprise

  1. Pingback: The Men Who Built America’s Free Enterprise: The So-Called ‘Robber Barons’ « VINCENTON

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