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Nov. 16, 2006 - Freedomain Radio - Stefan Molyneux
25:10
512 The Myth of a Robber Baron

The victors wrote the history, and they weren't consumers!

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Good evening, everybody. Hope you're doing well.
It's Steph. We're going to talk about the Robert Barons, for a slight change of pace from the theology and relationship stuff of late, back to a little bit of economics, which is a great pleasure of mine.
And overall, the important thing to understand about the Robert Barons, who are a group of 19th century entrepreneurs in the American system, Who are characterized as sort of evil prayers upon the poor and the working man and so on.
The excesses of frontier capitalism that resulted in such horrors for the working classes and the middle classes that a government had to step in and restrain people from the horrible predations of things like company towns and the people like Rockefeller and Cornelius Vanderbilt and Grenville Dodge, Leland Stanford, Henry Villard, James Hill and all the other Great 19th century railroad operators.
What happens is that you get this phrase, robber barons, which is put in to intimate that these people were, you know, sort of far above us in the sort of aristocratic baron sense and also were low-down dirty thieves and so on.
And this is, of course, essential.
For the mythology of the benevolence of government to continue to be believable, which of course it isn't once you learn anything about the history, but it is what is considered or what is required for government to be believable as a protector is for there to be a great danger, right?
So we've had a whole series of great dangers.
We've had the robber barons, we've had the Huns in World War I, And then we've had the capitalists in the 1920s, the stock market crash, because capitalism, as you know, is so extreme and swings so wildly, without the correcting hand of the government, it all goes to hell in a handbasket.
And then we had the Nazis, and then we had the Cold War, and then we had the Iran-Iraq thing, the Middle East keeps popping up, and then we now, of course, have the, after the fall of Russia, we have the war on terror.
There's a constant need to manufacture external threats.
It's a perpetual threat. And one of the things that needed to be talked about in the progressive movement was people needed to be turned against each other, right?
You always need to make up enemies so that people will flock to you for protection and then you get to take their money, right?
I mean, it's exactly the same as if a fire insurance company or a company that sold fire insurance We're setting fires in the neighborhood, and then everybody needs fire insurance, so they make a lot of money.
And, of course, the fires that they set are always on houses that they're not currently insuring, right?
Because otherwise that wouldn't make much economic sense.
So the victors always end up writing the history, and the government was the victor of the 19th century in America, as it has been the victory around the world pretty much throughout history.
But you had an enormous rise in living standards, of course, throughout the 19th century, and you had enormous increases in productivity and personal wealth And this didn't bode well for government control, right?
Because then it's like the priest coming and saying, I'm going to come and save you.
If you don't have any sense of guilt or original sin, you're going to logically say, save me from what, right?
So... So the government wrote the history, and of course the first thing that the brutes need to do is to make up the enemies that they saved you from so that they can continue to take your money.
If you can get people to be afraid of freedom by making up that there are these sort of robber barons, if you can get people to be afraid of freedom, the total cost of ownership for your taxpayer livestock goes down considerably.
So the way that you go about doing this, of course, is you conflate two types of economic individuals, right?
You conflate, and of course, one is only very loosely termed an economic individual.
But what you do is you basically say, okay, well, there are these two types of individuals, which everybody knows, sort of, in reality, there's the, you know, the rapist and the seducer, right?
I mean, that's, economically speaking, that's what occurs in these sort of modern state corporate fascistic environments that really grew out of the progressive movement in America in the And the rapist is the man who uses the power of the state to steal from his fellow man under the guise of some sort of social good or some sort of whatever, whatever, right? But they winch around or leave around the guns of the state to point at competitors and consumers to steal their money, right?
That's the economic rapist.
And then the economic seducer is the man who puts his best products and efforts out into the marketplace and entices you Through good prices or good features to partake of his wares, right?
So in one, the force is used, right?
And in another, a voluntary exchange is used.
And if you can conflate these two, of course, if you can cause people to fail to distinguish between the rapist and the seducer, then, of course, it is much easier to control people and make them frightened of what's going on.
Now, the also-rans in business have a great temptation in the form of the government, right?
So if you lose out to a competitor, normally what you should do is go and work for that guy.
You know, if some guy beats your ass in business, you should go work for him or you should go into another field.
But it's a huge attack on your net worth and net gain to have this kind of predation occur against you when you are in competition with someone.
You know, it's disruptive and it's harmful and so on.
And in any sort of free society, it would be like, you know, hey, take your lumps and go work for the other guy or come up with some other idea or innovate or improve or whatever.
But certainly it would not be that you could get, then get to hire a private army and, you know, if you're a Netscape, you don't get to hire a private army and go smash and enslave and kill the programmers at Microsoft, right?
That would be a sort of ludicrous thing to do.
But of course, this is exactly what does happen in the form of the state when you begin levying enormous fines on On Microsoft, you don't kill people, but you certainly drive them out of their productive line of work, and we don't know where Microsoft might be if it didn't have the shackles of the DOJ around it as IBM did for about 13 years in the 80s to the 90s.
So when you go to the government, and the government of course is always eager to help you, because the government will take a good cut of the killings that you're about to get going in the marketplace.
So the government will curtail and fine, and the lawyers are very happy to help you because they get big fat commissions for doing these antitrust things.
And so the government is very jealous of any other group that gains any kind of power, even economic power.
The government is very jealous of any significant and sustained rise in the standard of living because what happens is people begin to no longer need the government, right?
They can afford their own protection.
They don't need to worry as much about the poor.
The need for the government begins to go down, right?
So as soon as society begins to do really well, as it did in the post-war period, the government will smash it so that people say, hey, you know, my leg's broken.
I guess I need to go see the doctor again, right?
Of course, it was a doctor creeping around your bed with a mallet to break your legs, right?
So the winners write the history, and the winners out of the 19th century were the government and the special interest groups who attacked the capitalists.
This is also, I'm having a look, I've read recently the book, How Capitalism Saved America by Thomas J. DiLorenzo, D-I-L-O-R-E-N-Z-O, which was sent in to me by a kind listener and an excellent book, very enjoyable to read.
And so he points out, you know, in Chapter 7, he points out that you have these two types of entrepreneurs in capitalism, right?
The entrepreneurs, he calls them a market entrepreneur, He succeeds financially by selling some newer or better or less expensive product on the free market without government subsidies, direct or indirect political control of the state apparatus and so on.
And he pleases the consumer and so on.
But the political entrepreneur succeeds primarily by influencing government to subsidize his business or industry or to enact legislation or tariffs or whatever that harms his competitors.
And so you can either, in his example, he says in the mousetrap industry, for instance, you can be a market entrepreneur by making better mousetraps and thereby convincing your customers to buy more of your mousetraps and less of your competitors.
You can lobby Congress to prohibit the importation of all foreign-made mousetraps.
In the former situation, the consumer voluntarily hands over his money for the superior mousetrap.
In the latter case, the consumer, not given anything better in return, pays more for existing mousetraps just because the import quota has reduced supply and therefore driven up prices.
Now, in the world, and of course in the American economy as well, there's always been this sort of mixture of market and political entrepreneurs, the political connivers and manipulators versus the sort of self-made men and women.
And... So it's a very large difference between these two kinds of groups.
But if you can get people to think that they're the same people, basically, then you really know the people are then afraid of freedom.
People are then afraid of voluntary interaction, just as they are and should be afraid of state and government manipulations.
So I'm going to read a little bit from his book because it's a very instructive example which comes out.
It sounds like something directly out of Atlas Shrugged.
But there's this thing, How to Build a Railroad, and I hope you won't mind because you should definitely buy and read the book.
It's very interesting. His conclusions aren't great, but definitely the history is very instructive and important.
So he's got a section here that says, most business historians have assumed that the transcontinental railroads would never have been built without government subsidies.
The free market would have failed to provide the adequate capital, or so the theory asserts.
The evidence for this theory is that the Union Pacific and Central Pacific railroads, which were completed in the years after the war between the states, received per mile subsidies from the federal government in the form of low interest loans as well as massive land grants.
But there need not be cause and effect here.
The subsidies were not needed to cause the transcontinental railroads to be built.
We know this just because, just as many roads and canals were privately financed in the early 19th century, a market entrepreneur built his own transcontinental railroad.
James J. Hill built the Great Northern Railroad, quote, without any government aid, even the right of way, through hundreds of miles of public lands being paid for in cash, as Hill himself stated.
Quite naturally, Hill strongly opposed government favors to his competitors.
Quote, This may sound quite by today's standards, but it was still a hotly debated issue in the late 19th century.
James Hill was hardly a baron or an aristocrat.
His father died when he was fourteen, so he dropped out of school to work in a grocery store for four dollars a month to help support his widowed mother.
As a young adult, he worked in the farming, shipping, steamship, fur trading, and railroad industries.
He learned the ways of business in these settings, saved his money, and eventually became an investor and manager of his own enterprises.
It was much easier to accomplish such things in the days before income taxation.
Hill got his start in the railroad business when he and several partners purchased a bankrupted Minnesota Railroad that had been run into the ground by the government-subsidized Northern Pacific NP. The NP had been a patronage reward to financier Jay Cooke, who in the war between the states had been one of the union's leading financiers.
But Cook and his NP associates built recklessly.
The government's subsidies and land grants were issued on a per mile of track basis, so Cook and his cohorts had strong incentives to build as quickly as possible, which only encouraged shoddy work.
Consequently, by 1873, the NP developers had fallen into bankruptcy.
The people of Minnesota and the Dakotas, where the railroad was being built, considered Cook and his business associates to be derelicts at best and thieves at worst, writes Hill biographer Michael P. Malone.
It took Hill and his business partners five years to complete the purchase of the railroad, the St.
Paul, Minneapolis, and Manitoba, which would form the nucleus of a road that he would eventually build all the way to the Pacific, the Great Northern.
He had nothing but contempt for Cook and the NP for their shady practices and corruption, and he quickly demonstrated a genius for railroad construction.
Under his direction, the workers began laying rails twice as quickly as the N.P. crews had, and even at that speed he built what everyone at the time considered to be the highest quality line.
Hill micromanaged every aspect of the work, even going so far, Even going so far as to spell workers so they could take much-needed coffee breaks.
I don't know what that means. His efficiency extended into meticulous cost-cutting.
He passed his cost reductions on to his consumers in the form of lower rates because he knew that the farmers, miners, timber interests, and others who used his rail services would succeed or fail along with him.
His motto was, quote, We have got to prosper with you, or we have got to be poor with you.
In keeping with his philosophy of encouraging the prosperity of the people residing in the vicinity of his railroad, Hill publicized his views on the importance of crop diversification to the farmers of the region.
He didn't want them to become dependent on a single crop and therefore subject to the uncertainties of price fluctuation as the southern cotton farmers were.
Hill also provided free seed grain and even cattle to farmers who had suffered from drought and depression, stockpiled wood and other fuel near his train depots so farmers could stock up when returning from a delivery to his trains, and donated land to towns for parks, schools, and churches.
He transported immigrants to the Great Plains for a mere ten dollars if they promised a farm near his railroad, and he sponsored contests for the beefiest livestock or the most abundant wheat.
His model farms educated farmers on the latest developments in agricultural science.
All of this generated goodwill with the local communities and was also good for business.
Hill's rates fell steadily, and when farmers began complaining about the lack of grain storage space, he instructed his company managers to build large storage facilities near his rail depots.
He refused to join in attempts at cartel price-fixing, and in fact, quote,"...gloried in the role of rate-slasher and disruptor of price-fixing pooling agreements," writes historian Burton Folsom.
After all, he knew that monopolistic pricing would have been an act of killing the goose that lays the golden egg.
In building his transcontinental railroad from 1886 to 1893, Hill applied the same strategy that he had in building the St.
Minneapolis, and Manitoba, careful building of the road combined with the economic cultivation of the nearby communities.
He always built for durability and efficiency, not scenery, as was sometimes the case with the government-subsidized railroads.
He did not skimp on building materials, having witnessed what harsh Midwest winters could do to his facilities and how foolish it was for the NP to have ignored this lesson.
The solid granite arch bridge that hilt built across the Mississippi River was a Minneapolis landmark for many years.
Burton Folson describes Hill's compulsion for excellence, quote, Hill's quest for short routes, low grades, and few curvatures was an obsession.
In 1889, Hill conquered the Rocky Mountains by finding the legendary Marius Pass.
Lewis and Clark had described a low pass through the Rockies back in 1805, but later no one seemed to know whether it really existed or not, or if it did, or where it was.
Hill wanted the best gradient so much that he hired a man to spend months searching the western Montana for this legendary pass.
He did in fact find it, and the ecstatic Hill shortened his route by almost one hundred miles.
Hill's Great Northern was, consequently, the best constructed and most profitable of all the world's major railroads, as Michael P. Malone points out.
The Great Northern's efficiency and profitability were legendary, whereas the government subsidized railroads, managed by a group of political entrepreneurs who focused more on acquiring subsidies than on building sound railroads, were inefficiently built and operated.
Jay Cook was not the only one whose government subsidized railroad ended up in bankruptcy.
In fact, Hill's Great Northern was the only transcontinental railroad that never went bankrupt.
James Hill v. The Real Robber Barons.
By the summer of 1861, after the Battle of I Manassas, it was apparent to all that the war between the states was going to be a long-drawn-out campaign.
Nevertheless, in 1862, Congress, with the Southern Democrats gone, diverted millions of dollars from the war effort to begin building a subsidized railroad.
The Pacific Railroad Act of 1862 created the Union Pacific and the Central Pacific U.P. and C.P. railroads, the latter to commence building in Sacramento, California, and the former in Omaha, Nebraska.
For each mile of track built, Congress gave these companies a section of land, more of which would be sold, as well as a sizable loan, $16,000 per mile for track built on flat prairie land, $32,000 for hilly terrain, and $48,000 in the mountains.
As was the case with J. Cook's Northern Pacific, these railroads tried to build as quickly and as cheaply as possible in order to take advantage of the governmental largesse.
Where James J. Hill would be obsessed with finding the shortest route for his railroad, these government-subsidized companies knowing that they were paid by the mile, sometimes built winding, circuitous roads to collect for more mileage, as Burton Folsom recounts.
Union Pacific Vice President and General Manager Thomas Durham stressed speed, not workmanship, writes Folsom, which meant that he and his chief engineer, former Union Army General Grenville Dodge, often used whatever kind of wood was available for railroad ties, including fragile cottonwood.
This, of course, is in stark contrast to James Hill's insistence on using only the best quality materials, even if they were more expensive.
Durant paid so many lumberjacks to cut trees for rails that farmers were forced to use rifles to defend their land from the subsidized railroad builders.
Not for him was the Hill motto, We have got to prosper with you, or we have got to be poor with you.
Folsom continues. Since Dodge was in a hurry, he laid track on the ice and snow.
Naturally, the line had to be rebuilt in the spring.
What was worse, unanticipated spring flooding along the lower fork of the Platte River washed out rails, bridges, and telephone poles, doing at least $50,000 damage in the first year.
No wonder some observers estimated the actual building cost at almost three times what it should have been.
In 1869, after seven years of construction, the two subsidized railroads managed to meet up at Promontory Point, Utah, amidst much hoopla and celebration.
What is often not mentioned, however, is that, after the big celebration, both of the lines had to be rebuilt, and even relocated in places, a task that took five more years.
We've never seen that before, have we?
The wasteful costs of construction were astounding.
The subsidized railroads routinely used more gun power to blasting their way through mountains and forests on a single day than was used during the entire Battle of Gettysburg.
With so much tax money floating around, the executives of the CP and UP stole funds from their own companies in order to profit personally, something that would have been irrational for James Hill or any other private market entrepreneur to do.
For example, the UP managers created their own coal mining company, mining coal for $2 per ton and selling it to themselves for $6 per ton, pocketing the profits.
This crooked scam was repeated in dozens of instances and would be exposed as the credit immobilier scandal.
That was the name of one of the companies run by the executives.
With virtually everything riding on political connections as opposed to creating the best quality railroad for consumers, the UP and CP executives naturally spent an inordinate amount of time on politics as opposed to business management.
While James J. Hill detested politicians and politics and paid little attention to them, things were very different with the UP, Folsom explains, quote, In 1866, Thomas Durant wined and dined 150 prominent citizens, including senators and ambassador and government bureaucrats.
Along a completed section of the railroad, he hired an orchestra, a caterer, six cooks, a magician to pull subsidies out of a hat, and a photographer.
For those with the ecumenical palates, he served Chinese duck and Roman goose.
The more adventurous were offered roast ox and antelope.
All could have expensive wine, and for dessert, strawberries, peaches, and cherries.
After dinner, some of the men hunted buffalo from their coaches.
Durant hoped all would go back to Washington, inclined to repay the UP for its hospitality.
Well, I'm sure you know where all of this goes overall, and I hope that Mr.
DiLorenzo doesn't mind a little bit of an excerpt there.
But, of course, what happens, Hill begins to compete overly with these guys, and a blizzard of regulations comes out, and the other railroad gets crippled, and then the UP goes bankrupt in 1893, and the Great Northern, which was the Hill's one, was still going strong.
James Hill had been free to build and operate his railroad any way that he wanted, any way that he deemed was most efficient and most profitable.
He prospered while most of his subsidized competitors went bankrupt.
One point or another.
And here's another interesting thing.
Having completed the Great Northern, he then got into the steamship business in order to facilitate American exports to the Orient.
As usual, he succeeded, increasing American exports to Japan sevenfold from 1896 to 1905.
And this, of course, occurred to do it.
He cut his freight charges from 90 cents to 40 cents per 100 pounds.
And all of that worked beautifully.
He really opened up.
And this is the kind of economic genius that just can open up an entire country or an area of the country.
And what happens is, despite the quality in services and reduced costs that he brought, he would have been fairly lumped in with the political entrepreneurs who were fleecing the taxpayers and the consumers.
The public eventually began complaining for the monopoly pricing and corruption that were inherent features of the government-created and subsidized railroads.
One regulation always leads to another.
The federal government responded to the complaints with the Interstate Commerce Act of 1887, which was supposed to ban rail rate discrimination, the latter with the Hepburn Act of 1906, which made it illegal to charge different rates to different customers.
What these two federal laws did was to outlaw Hill's price cutting by forcing railroads to charge everyone the same high rates.
This, of course, is all done in the name of consumer protection, giving it a truly Orwellian aura.
And so the government subsidized railroads then benefit at Hill's expense, because he's the one who cuts the prices the most, right?
So price fixing always supports those who are inefficient at the expense of those who are efficient.
And the Interstate Commerce Commission was created.
It soon created a bureaucratic monstrosity that attempted to micromanage all aspects of the railroad business, hampering its efficiency even further.
And it's just wretched, of course.
What happens is that all the railroad men of the late 19th century, they all went down in history as robber barons.
Although this did not apply to the guys who didn't take, like James Hill, who didn't take a cent of public money.
And you can go through this over and over again, and I won't, but you may want to buy this book, How Capitalism Saved America, because you can very easily see that you have political entrepreneurs, basically fascist, corporatist, state mongers, those who use the power of the state to benefit themselves, and you have entrepreneurs.
And what happens is there's an enormous amount of destruction and waste that occurs, and the people get really mad, and you've got increasing amounts of violence and corruption and predation.
Now here you have gunfights, of course, between the railroads and the people who wanted to protect their trees.
And people get kind of sick of it.
And then what happens is they demand that the government do something about it, because, of course, by this time, everyone had gone through a generation of state schooling, and so imagined that the government was nothing but sheer benevolence on a stick.
And so then the government whips up a frenzy about all of this stuff, and it's all the previous administration, and the same way that the Democrats at some point in the current election cycle might end up whipping up a frenzy about the corruptions that go on in war.
And then there's more controls and so on.
And basically, the entrepreneurs who are beneficial to the consumer are all lumped in with these state-sucking, ghastly leeches.
And then you have this myth of the robber barons that there was all of this excess that came out of the free market that government control was required to regulate and to turn to the benefit of the consumer.
When, of course, it is the, as Harry Brown, as the beloved Brown used to say, government is only good at one thing, which is breaking your leg and then saying, hey, you know, let me tax you so that I can give you a crutch.
So I hope that you'll have a look at that book.
It's very interesting. We could do a lot on the robber barons, but I'm sure you get the general idea.
So, again, How Capitalism Saved America by Thomas J. DiLorenzo.
Worth having a look at, and you may want to refer it to people who think that the robber barons were anything other than state-created ogres out of anti-capitalist fairy tales.
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