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Burton W. Folsom’s The Myth of the Robber Barons

Copyright © 2010, 2007, 2003,1996, 1991, 1987 by Burton W. Folsom, Jr.
All rights reserved
Manufactured in the United States of America
Published by Young America’s Foundation F. M. Kirby FreedomCenter

110 Elden Street Hemdon, Virginia 20170

No part of this book may be reproduced in any form by any electronic or

mechanical means, including information storage and retrieval systems, without
permission in writing from the publisher, except by a reviewer who may quote
brief passages in a review.

Library of Congress Cataloging-in-Publication Data Folsom, Burton W.
(Entrepreneurs vs. the State) The Myth of the Robber Barons/Burton W.

Folsom, Jr. p. cm.
Previously published as: Entrepreneurs vs. the State ISBN 0-9630203-0-7

(HB) : $19.95. —ISBN 0-9630203-1-5 (PB) : $9.95

1. Capitalists and financiers—United States—History. 2. Competition—

United States—History. 3. Free enterprise—History. 4. Steamboats—United
States—History. 5. Entrepreneurship—History. I. Title HG181.F647 1991
338′.04’097309034—dc20

From reviews of THE MYTH OF THE ROBBER BARONS

“THE MYTH OF THE ROBBER BARONS is … excellent…. In short, this
book is the perfect supplement to most standard economic and business history
textbooks. This reviewer has adopted it already.”

Larry Schweikart, THE HISTORIAN

“I read this book in one sitting. In spite of the easy reading of the text, the
book has profound meaning for the nature of business in America, with
implications for political philosophy and economic theory. There isn’t a
businessman in the country who would not profit from the reading of this
important book.”

Angus MacDonald, BOOK REVIEWS

“Folsom demonstrates the pernicious effects of government involvement in
business…. The enormous value of this book is that it enlightens the intelligent
reader with the facts about an era that virtually every history book shrouds in
falsehoods.”

Second Renaissance Books THE MYTH OF THE ROBBER BARONS “is
a lively, well written and informative introduction to the subject. It is a useful

source for students of American history.”
Ann M. Scanlon, NEW YORK HISTORY

“The subtlest essay makes James J. Hill an American hero as the only man
who built a transcontinental railroad without government subsidy…. The most
daring attempt at revision is the author’s paean to John D. Rockefeller.”

Stuart D. Brandes, AMERICAN HISTORICAL REVIEW

“Folsom draws an insightful lesson. Government aid [to railroads] bred
inefficiency; the inefficiency raised costs and rates, and angry customers
demanded government regulation; the resulting regulation promoted even greater
inefficiency….”

Robert Higgs, THE WORLD & I “Burt Folsom has done a wonderful
job…. The picture of economic history printed in this book helps prove that

political promotion of economic development is futile.”
Carl Watner, THE VOLUNTARYIST

“Folsom presents the subjects as they were, warts and all, avoiding shrill
accusation or exoneration of shortcomings.”

Tommy W. Rogers, CHRONICLES

“If these stories are correct, then much of the conventional history of

American business is off base…. Folsom persuasively describes how government
subsidies to ‘political entrepreneurs’ actually lowered the quality of output.”

M. L. Rantala, CHICAGO ENTERPRISE

Contents

Foreword by Forrest McDonald Preface

CHAPTER ONE

“The greatest anti-monopolist in the country:”
Commodore Vanderbilt and the Steamship Industry

CHAPTER TWO

“Making a difference in the way the world worked:”
James J. Hill and the Transcontinental Railroads

CHAPTER THREE

“Confidence and unity of purpose:”

The Scrantons and America’s First Iron Rails

CHAPTER FOUR

“The American spirit of conquest:”

Charles Schwab and the Steel Industry

CHAPTER FIVE

“Refining oil for the poor man:”
John D. Rockefeller and the Oil industry

CHAPTER SIX

“Cutting taxes to raise revenue:”

Andrew Mellon and the 1920s

CHAPTER SEVEN

Conclusion: Entrepreneurs vs. the Historians APPENDIX
Notes
Index
Bibliographic Essay

Foreword

It is possible to regard this book as light reading, despite the range and
depth of the meticulous scholarship on which it is based, because it is written in
a pleasant, almost chatty style and is concerned with an array of fascinating
characters—bold innovators who created mightily as well as pious frauds who
bilked the public on a grand scale. Indeed, though I have studied American
economic history for many years, I have found on almost every page information
and anecdotes I had not encountered before. The entertainment value of the work
is not lessened by the fact that it revises in important ways many misperceptions
that historians have imposed upon the record—for instance, the idea that vertical
mobility is a myth. Quietly but conclusively, and without interrupting the flow of
his narrative, Folsom demonstrates that vertical mobility, both upwards and
downwards, has truly been a norm in America: poor men have become rich men
and rich men have become poor men, depending upon skill, brains, work, and
luck.

But there is considerably more here than some good stories and some
significant revisionism. On one level, Folsom shows that the “Robber Baron”
school of historians of American business enterprise was partly right and partly
wrong but was unable to distinguish which was which. He points out that during
the nineteenth and the early twentieth century (and by unmistakable implication,
in the late twentieth as well) there were two kinds of business developers, whom
he describes as “political entrepreneurs” and “market entrepreneurs.” The former
were in fact comparable to medieval robber barons, for they sought and obtained
wealth through the coercive power of the state, which is to say that they were
subsidized by government and were sometimes granted monopoly status by
government. Invariably, their products or services were inferior to and more
expensive than the goods and services provided by market entrepreneurs, who
sought and obtained wealth by producing more and better for less cost to the
consumer. The market entrepreneurs, however, have been repeatedly—one is
tempted to say systematically—ignored by historians.

On another level, Folsom’s study has profound implications for American
historiography beyond the immediate subject to which it is addressed. It is
commonly held that the Whig Party of Clay and Webster and its successor
Republican Party of Abraham Lincoln and William McKinley were the “pro-
business” parries, and that the Jacksonian Democrats were anti-business. What

comes through here is something quite different. The Whigs and Republicans
engaged in a great deal of pro-business rhetoric and in talk of economic
development, but the policies they advocated, such as subsidies, grants of special
privileges, protective tariffs, and the like, actually worked to retard development
and to stifle innovation. The Jacksonian Democrats engaged in a great deal of
anti-business rhetoric, but the results of their policies were to remove or reduce
governmental interferences into private economic activity, and thus to free
market entrepreneurs to go about their creative work. The entire nation grew
wealthy as a consequence.

On yet another level, though Folsom’s work is balanced, judicious history,
addressed to the past (and is unmarred by the shrill accusatory tone that
characterizes the writings of anti-business historians), it has a powerful
relevance to current political discourse. In response to the relative decline of the
American economy during the last decade or two, many corporate businessmen
have joined with leftist ideologues to clamor for a “partnership” between
government and business that would involve central planning, protective tariffs,
and a host of restrictions upon foreign competitors. What Folsom has to say to
them is a common-sense message drawn from endlessly repeated historical
examples. Political promotion of economic development is inherently futile, for
it invariably rewards incompetence; if incompetence is rewarded, incompetence
will be the product; and when incompetence is the product, politicians will insist
that increased planning and increased regulation is the appropriate remedy.

Adam Smith forewarned us more than two centuries ago: “The statesman,
who should attempt to direct people in what manner they ought to employ their
capital, would not only load himself with a most unnecessary attention, but
assume an authority which could safely be trusted, not only to no single person,
but to no council or senate whatever, and which would nowhere be so dangerous
as in the hands of a man who had folly and presumption enough to fancy himself
fit to exercise it.”

Forrest McDonald Williamsburg, Virginia April 1987

Preface to the Sixth Edition

I am delighted to welcome The Myth of the Robber Barons to a sixth
edition. That it continues to sell well is testimony to the persistence of free
market ideas. Special thanks go to the usual culprits: Ron Robinson for his
patience and support for almost thirty years; Patrick Coyle for his energy and
encouragement; and Dede Hamilton for all the time she takes with this book.
Thanks also go to Larry Arnn, Larry Reed, Larry Schweikart, and Joseph Rishel
for their advice and counsel. Over the years, I have benefited from suggestions
and criticisms from Lee Benson, Roger Custer, Edward Davies II, Thomas
DiLorenzo, James R. Edwards, Winston Elliott, Burton Folsom, Sr., Margaret
Folsom, Samuel P. Hays, Robert Hessen, Rusty Humphries, Doug Jeffrey, Aileen
Kraditor, Forrest and Ellen McDonald, William H. Mulligan, George Nash,
James Nesbitt, Glenn Porter, Helen Roulston, Julius Rubin, James Taylor, John
Willson, Kirby Wilbur, and my students at Murray State University and Hillsdale
College.

In doing research, I needed help; from many libraries and institutions. The
Hagley Museum and Library* in Wilmington, Delaware, gave me access to the
Scranton papers and other specialized sources. The R. G. Dun Credit Reports in
the Baker Library at Harvard University helped me in writing the Schwab and
Scranton essays. The Library of Congress and the National Archives provided
me with a wealth of sources on entrepreneurs. At the Lackawanna Historical
Society, I received wise counsel from former directors Robert Mattes and
William Lewis. William W. Scranton was very supportive and has straightened
me out on some points about his family history. The libraries at Murray State
University, Southern Illinois University, Indiana University, and Hillsdale
College have supplied me with most of the secondary sources used in this study.

In the financing and publication of this book, I have received aid and
comfort from Young America’s Foundation, the Wilbur Foundation, Roe
Foundation, Broyhill Foundation, the Bradley Foundation, and from both
Murray State University and Hillsdale College.

Finally, I want to thank my wife Anita, for her wise counsel and editing
skills, and my son Adam, who has my blog BurtFolsom.com up and running.
Anita and Adam make this work worthwhile for me.

Burton W. Folsom, Jr.

Hillsdale, Michigan March 2010

CHAPTER ONE

Commodore Vanderbilt and the
Steamship Industry

For two generations historians have been arguing about the effects of
entrepreneurs on American industry. Whether the entrepreneurs were Robber
Barons, industrial statesmen, or irrelevant to growth still seems to be disputed
even after shelves of books have been written on the subject.1 Maybe we can
find a useful line of reasoning by looking at one of America’s first large-scale
businesses, the steamship industry. It was mechanized in the early 1800s; and,
during that century, it was in the vanguard of technological change.
Steamboating was also highly competitive and soon became large in scale.
Furthermore, a look at the steamboat industry allows us to study entrepreneurs in
the comparative context of the whole industry. Only then can we see how
different entrepreneurs responded to different challenges and who, if any, made
creative contributions to industrial growth.2

A key point about the steamship industry is that the government played an
active role right from the start in both America and England. Right away this
separates two groups of entrepreneurs—those who sought subsidies and those
who didn’t. Those who tried to succeed in steamboating primarily through
federal aid, pools, vote buying, or stock speculation we will classify as political
entrepreneurs. Those who tried to succeed in steamboating primarily by creating
and marketing a superior product at a low cost we will classify as market
entrepreneurs. No entrepreneur fits perfectly into one category or the other, but
most fall generally into one category or the other. The political entrepreneurs
often fit the classic Robber Baron mold; they stifled productivity (through
monopolies and pools), corrupted business and politics, and dulled America’s
competitive edge. Market entrepreneurs, by contrast, often made decisive and
unpredictable contributions to American economic development.3

I

Every schoolchild is taught that Robert Fulton was the first American to
build and operate a steamboat on New York waters. When his
Clermontsauntered four miles per hour upstream on the Hudson River in 1807,
Fulton opened up new possibilities in transportation, marketing, and city
building. What is not often taught about Fulton is that he had a monopoly
enforced by the state. The New York legislature gave Fulton the privilege of
carrying all steamboat traffic in New York for thirty years.4 It was this monopoly
that Thomas Gibbons, a New Jersey steamboat man, tried to crack when he hired
young Cornelius Vanderbilt in 1817 to run steamboats in New York by charging
less than the monopoly rates.5

Vanderbilt was a classic market entrepreneur, and he was intrigued by the
challenge of breaking the Fulton monopoly. On the mast of Gibbon’s ship
Vanderbilt hoisted a flag that read: “New Jersey must be free.” For sixty days in
1817, Vanderbilt defied capture as he raced passengers cheaply from Elizabeth,
New Jersey, to New York City. He became a popular figure on the Atlantic as he
lowered the fares and eluded the law. Finally, in 1824, in the landmark case of
Gibbons v. Ogden,the Supreme Court struck down the Fulton monopoly. Chief
Justice John Marshall ruled that only the federal government, not the states,
could regulate interstate commerce. This extremely popular decision opened the
waters of America to complete competition. A jubilant Vanderbilt was greeted in
New Brunswick, New Jersey, by cannon salutes fired by “citizens desirous of
testifying in a public manner their good will.” Ecstatic New Yorkers immediately
launched two steamboats named for John Marshall. On the Ohio River,
steamboat traffic doubled in the first year after Gibbons v. Ogden and quadrupled
after the second year.6

The triumph of market entrepreneurs in steamboating led to improvements
in technology. As one man observed, “The boat builders, freed from the
domination of the Fulton-Livingston interests, were quick to develop new ideas
that before had no encouragement from capital.” These new ideas included
tubular boilers to replace the heavy and expensive copper boilers Fulton used.
Cordwood for fuel was also a major cost for Fulton, but innovators soon found
that anthracite coal worked well under the new tubular boilers, so “the expense
of fuel was cut down one-half.”7

The real value of removing the Fulton monopoly was that the costs of
steamboating dropped. Passenger traffic, for example, from New York City to
Albany immediately dropped from seven to three dollars after Gibbons v. Ogden.
Fulton’s group couldn’t meet the new rates and soon went bankrupt. Gibbons and

Vanderbilt, meanwhile, adopted the new technology, cut their costs, and earned
$40,000 profit each year during the late 1820s.8

With such an open environment for market entrepreneurs, Vanderbilt
decided to quit his pleasant association with Gibbons, buy two steamboats, and
go into business for himself. During the 1830s, Vanderbilt would establish trade
routes all over the northeast. He offered fast and reliable service at low rates. He
first tried the New York to Philadelphia route and forced the “standard” three-
dollar fare down to one dollar. On the New Brunswick to New York City run,
Vanderbilt charged six cents a trip and provided free meals. As Niles’ Register
said, the “times must be hard indeed when a traveller who wishes to save money
cannot afford to walk.”9

Moving to New York, Vanderbilt decided to compete against the Hudson
River Steamboat Association, whose ten ships probably made it the largest
steamboat line in America in 1830. It tried to informally fix prices to guarantee
regular profits. Vanderbilt challenged it with two boats (which he called the
“People’s Line”) and cut the standard New York to Albany fare from three
dollars to one dollar, then to ten cents, and finally to nothing. He figured it cost
him $200 per day to operate his boats; if he could fill them with 100 passengers,
he could take them free if they would each eat and drink two dollars worth of
food (Vanderbilt later helped to invent the potato chip). Even if his passengers
didn’t eat that much, he was putting enormous pressure on his wealthier
competitors. Finally, the exasperated Steamboat Association literally bought
Vanderbilt out: they gave him $100,000 plus $5,000 a year for ten years if he
would promise to leave the Hudson River for the next ten years. Vanderbilt
accepted, and the Association raised the Albany fare back to three dollars. Such
bribery may be wrong in theory, but it had little effect in practice. With no
barriers to entry, other steamboaters came along and quickly cut the fare. They
saw that it could be done for less, and they saw what had happened to Vanderbilt
for doing it. So almost immediate Daniel Drew began running steamboats on the
Hudson—until the Association paid him off, too. At least five other competitors
did the same thing until they, too, were bought off. It’s hard to figure who got the
better deal: those who ran the steamboats and were bought out, or those who
traveled the steamboats at the new low rates.10

Meanwhile, Vanderbilt took his payoff money and bought bigger and
faster ships to trim the fares on New England routes. He started with the New
York City to Hartford trip and slashed the five-dollar fare to one dollar. He then
knocked the New York City to Providence fare in half from eight to four dollars.

When he sliced it to one dollar, the New York Evening Post called him “the
greatest practical anti-monopolist in the country.” In these rate wars, sometimes
Vanderbilt’s competitors bought him out, sometimes they went broke, and
sometimes they matched his rates and kept going. Some people denounced
Vanderbilt for engaging in extortion, blackmail, and cutthroat competition.
Today, of course, he would be found “in restraint of trade” by the Sherman
Antitrust Act. Nonetheless, Vanderbilt qualifies as a market entrepreneur: he
fought monopolies, he improved steamship technology, and he cut costs.
Harper’s Weekly insisted that Vanderbilt’s actions “must be judged by the results;
and the results, in every case, of the establishment of opposition lines by
Vanderbilt has been the permanent reduction of fares.” The editor went on to say,
“Wherever [Vanderbilt] ‘laid on’ an opposition line, the fares were instantly
reduced; and however the contest terminated, whether he bought out his
opponents, as he often did, or they bought him out, the fares were never again
raised to the old standards.” Vanderbilt himself later put it bluntly when he said:
“If I could not run a steamship alongside of another man and do it as well as he
for twenty percent less than it cost him I would leave the ship.”11

II
In the 1840s, improving technology changed steamboats into steamships.

Larger engines and economies of scale in shipbuilding led to changes in size,
speed, and comfort. The new steamers of the mid-century were many times
bigger and faster than Fulton’s Clermont: they were each two decks high with a
grand saloon and individual staterooms for first-class passengers. When full,
some of these new steamships could hold almost 1,000 passengers, and they also
had space for mail and freight. These ships were sturdy and were built to cross
the Atlantic Ocean. The New York to England route would be the first to open
up the steamship competition; the New York to California line (via Panama)
would soon follow.12 Rapid overseas trade was a new concept, and this reopened
the debate for federal aid to eager steamboat operators. Fulton was gone, but
others like him argued for government subsidies and contracts. Political and
market entrepreneurs on both sides of the Atlantic would fight for control of the
seas.

Actually, Englishmen, in 1838, were the first to travel the Atlantic Ocean
entirely by steam. The open environment was quickly altered when Samuel
Cunard, a political entrepreneur, convinced the English government to give him
$275,000 a year to run a semimonthly mail and passenger service across the
ocean. Cunard charged $200 per passenger and $.24 a letter; the $.24 for the mail

didn’t cover the cost of Cunard’s shipping, and that’s one argument he had for a
subsidy. He also contended that subsidized steamships gave England an
advantage in world trade and were a readily available merchant marine in case of
war. Parliament accepted this argument and increased government aid to the
Cunard line throughout the 1840s.13

Soon, political entrepreneurs across the ocean began using these same
arguments for federal aid to the new American steamship industry. They argued
that America needed subsidized steamships to compete with England to provide
a military fleet in case of war. Edward K. Collins, a classic political
entrepreneur, exploited these arguments with a self-serving plan. If the
government would give him $3,000,000 down and $385,000 a year, he would
build five ships and outrace the Cunarders from coast to coast. Collins would
deliver the mail, too; and the Americans would get to “drive the Cunarders off
the seas.” Collins appealed to American nationalism, not to economic efficiency.
Americans would not be opening up new lines of communication because the
Cunarders had already opened them. Americans would not be delivering mail
more often because the Collins’s ships, like Cunard’s, would sail only every two
weeks. Finally, Americans would not be bringing the mail cheaper because the
Cunarders could do it for much less.14

Once the Senate established the principle of mail subsidy, other political
entrepreneurs asked for subsidies to bring the mail to other places. Soon
Congress also gave $500,000 a year for two lines to bring mail to California: an
Atlantic line to get mail to Panama and a Pacific line to take letters from Panama
to California. As in the case of Cunard, Collins and the California operators, all
argued that a generous subsidy now would help them become more efficient and
lead to no subsidy later.15

Congress gave money to the Collins and California lines in 1847, but they
took years to build their luxurious ships. Collins, especially, had champagne
tastes with taxpayers’ money. He built four enormous ships (not five smaller
ships as he had promised), each with elegant saloons, ladies’ drawing rooms, and
wedding berths. He covered the ships with plush carpet and brought aboard rose,
satin, and olive-wood furniture, marble tables, exotic mirrors, flexible barber
chairs, and French chefs. The state rooms had painted glass windows and electric
bells to call the stewards. Collins stressed luxury, not economy, and his ships
used almost twice the coal of the Cunard line. He often beat the Cunarders
across the ocean by one day (ten days to eleven), but his costs were high and his
economic benefits were nil.16

With annual government aid, Collins had no incentive to reduce his costs
from year to year. His expenses, in fact, more than doubled in 1852: Collins
preferred to compete in the world of politics for more federal aid than in the
world of business against price-cutting rivals. So in 1852 he went to Washington
and lavishly dined and entertained President Fillmore, his cabinet, and influential
Congressmen. Collins artfully lobbied in Congress for an increase to $858,000 a
year (or $33,000 each for twenty-six voyages—which came to $5.00 per ocean
mile) to compete with the Cunarders.17

Meanwhile, Vanderbilt had watched this political entrepreneurship long
enough. In 1855 he declared his willingness to deliver the mail for less than
Cunard, and for less than half of what Collins was getting. Collins apparently
begged Vanderbilt not to go to Congress. He may have offered to help Vanderbilt
get an equally large subsidy from Congress—if only he wouldn’t open the
transatlantic steamship trade. But Vanderbilt had told Collins and Congress that
he would run an Atlantic ferry for $15,000 per trip, which was cheaper than
anyone else could do.18

So in 1855, Collins, the subsidized lobbyist, began battle with Vanderbilt,
the market entrepreneur. Collins fought the first round in Congress rather than on
the sea. Most Congressmen, former Whigs especially, backed Collins. To do
otherwise would be to admit they had made a mistake in helping him earlier; and
this might call into question all federal aid. Other Congressmen, especially the
New Englanders, had constituents who benefitted from Collins’ business.
Senator William Seward of New York stressed another angle by asking, “Could
you accept that proposition of Vanderbilt[‘s] justly, without, at the same time,
taking the Collins steamers and paying for them?” In other words, Seward is
saying that we backed Collins at the start, now we are committed to him, so let’s
support him no matter what. Vanderbilt, by contrast, warned that “private
enterprise may be driven from any of the legitimate channels of commerce by
means of bounties.” His point was that it is hard for unsubsidized ships to
compete with subsidized ships for mail and passengers. Since the contest is
unfair from the start, the subsidized ships have a potential monopoly of all trade.
But Collins’ lobbying prevailed, so Congress turned Vanderbilt down and kept
payments to Collins at $858,000 per year.19

Vanderbilt decided to challenge Collins even without a subsidy. “The share
of prosperity which has fallen to my lot,” said Vanderbilt, “is the direct result of
unfettered trade, and unrestrained competition. It is my wish that those who are
to come after me shall have that same field open before them.” Vanderbilts
strategy against Collins was to charge only $.15 for half-ounce letters and to cut

the standard first-class fare $20, to $110. Later he slashed it to $80. Vanderbilt
also introduced a new service: a cheaper third-class fare in the steerage. The
steerage must have been uncomfortable—people were practically stacked on top
of each other—but for $75, and sometimes less, he did get newcomers to
travel.20

To beat the subsidized Collins, Vanderbilt found creative ways to cut
expenses. First, he had little or no insurance on his fleet. He always said that if
insurance companies could make money on shipping, so could he. So Vanderbilt
built his ships well, hired excellent captains, and saved money on insurance.
Second, he spent less than Collins did for repairs and maintenance. Collins’ ships
cost more than Vanderbilt’s, but they were not seaworthy. The engines were too
big for the hulls, so the ships vibrated and sometimes leaked. They usually
needed days of repairing after each trip. Third, Collins, like Cunard in England,
was elitist with his government aid. He cared little for cheap passenger traffic.
Vanderbilt, by contrast hired local “runners,” who buttonholed all kinds of
people to travel on his ships. These second-and third-class passengers were
important because all steamship operators had fixed costs for making each
voyage. They had to pay a set amount for coal, crew, maintenance, food, and
docking fees. In such a situation, Vanderbilt needed volume business. With third-
class fares, Vanderbilt sometimes carried over 500 passengers per ship.

Even so, Vanderbilt barely survived the first year competing against
Collins. He complained, “It is utterly impossible for a private individual to stand
in competition with a line drawing nearly one million dollars per annum from
the national treasury, without serious sacrifice.” He added that such aid was
“inconsistent with the. . .economy and prudence essential to the successful
management of any private enterprise.”21

Vanderbilt met this challenge by spending $600,000 building a new
steamship, immodestly named the Vanderbilt, “the largest vessel which has ever
floated on the Atlantic Ocean.” The Commodore built the ship with a beam
engine, which was more powerful than Collins’ traditional side-lever engines. In
a head-to-head race, the Vanderbilt beat Collins’ ship to England and won the
Blue Ribbon, an award given to the one ship owning the fastest time from New
York City to Liverpool. By 1856, Collins had two ships—half of his accident-
prone fleet—sink (killing almost 500 passengers). In desperation, he spent over a
million dollars of government money building a gigantic replacement; but he
built it so poorly that it could make only two trips and had to be sold at more
than a $900,000 loss.22

Even Collins’ friends in Congress could defend him no longer. Between

Collins’ obvious mismanagement and Vanderbilt’s unsubsidized trips, most
Congressmen soured on federal subsidies. Senator Judah P. Benjamin of
Louisiana said, “I believe [the Collins line] has been most miserably managed.”
Senator Robert M. T. Hunter of Virginia went further: “the whole system was
wrong;. . .it ought to have been left, like any other trade, to competition.”
Senator John B. Thompson of Kentucky said, “Give neither this line, nor any
other line, a subsidy. . . . Let the Collins line die. … I want a tabula rasa— the
whole thing wiped out, and a new beginning.” Congress voted for this “new
beginning” in 1858: they revoked Collins’ aid and left him to compete with
Vanderbilt on an equal basis. The results: Collins quickly went bankrupt, and
Vanderbilt became the leading American steamship operator.23

And there was yet another twist. When Vanderbilt competed against the
English, his major competition did not come from the Cunarders. The new
unsubsidized William Inman Line was doing to Cunard in England what
Vanderbilt had done to Collins in America. The subsidized Cunard had
cautiously stuck with traditional technology, while William Inman had gone on
to use screw propellers, and iron hulls instead of paddle wheels and wood. It
worked; and from 1858 to the Civil War, two market entrepreneurs, Vanderbilt
and Inman, led America and England in cheap mail and passenger service.24

The mail subsidies, then, actually retarded progress because Cunard and
Collins both used their monopolies to stifle innovation and delay technological
changes in steamship construction. Several English steamship companies
experimented with iron hulls and screw propellers in the 1840s, but Cunard
thwarted this whenever he could. According to Royal Meeker, The mail
payments made it possible for the Cunard company to cling to an out-of-date and
uneconomical type of steamer. Both the Admiralty and the Post Office
departments refused to permit mail steamers to use the screw propeller until long
after other lines had adopted it. … Without government aid to inefficiency, the
Cunard Company would have been compelled to adopt improvements in order to
compete with other and more progressive lines.

Cunard also refused to introduce a third-class rate. So, when William
Inman came along in the 1850s with his iron ships and third-class fares, he
practically knocked Cunard out of business. After 1850, Inman and other
newcomers kept the pressure on Cunard. They experimented with oscillating
cabins (to reduce the impact of the swaying of the ship), compound engines (to
increase the ship’s speed and decrease its fuel consumption), and twin propellers.
Cunard’s subsidy kept him from having to innovate and protected him from
errors of judgment that would have ruined his competitors.25

In America, Collins, like Cunard, chose wood and paddle wheels for his
ships. Americans were slower to turn to iron ships because their costs of iron
construction were higher than those in England. Still, American engineers had
been experimenting with iron hulls and screw propellers during the 1840s, partly
because iron was more durable in handling the big engines built after 1840.
Collins apparently considered using iron, but he was no innovator. So he ended
up using wood hulls for his powerful engines, and his ships were not as safe or
as seaworthy because of that. With Collins using wood, American steamship
operators feared switching to iron. They had little margin for error because their
chief competitor was subsidized. Yet in 1851, Vanderbilt became one of the first
Americans to build and run iron ships (he used them on his California route).
But it wasn’t until Collins’ subsidy expired in 1858 that Americans began
experimenting with iron hulls in a serious way.26

This delay in experimenting with iron meant that iron ships could not be
much of a force during the Civil War. John Ericsson, who in 1862 built the iron-
hulled Monitor, had been promoting the advantages of iron ships since 1843. But
in 1847, when Collins decided to use wood for his subsidized fleet, only
Vanderbilt dared to risk more experiments with iron hulls. The irony here is that
one of the central arguments for subsidizing Collins was that his fleet would be
usable in case of war. Yet his outmoded wooden ships—even the ones that didn’t
sink—would have been helpless against ironclad opponents. And we wouldn’t
have needed them anyway because Vanderbilt gave his 5,000-ton ship, the
Vanderbilt, as a permanent gift to the United States during the Civil War. He
even offered to personally sink the Confederate’s Merrimac, asking only that
everyone stay “out of the way when I am hunting the critter.” He never got the
chance; and, partly because of the Collins subsidy, the U.S.never got the chance
to blockade Confederate ports with an iron fleet. Who knows whether or not that
would have shortened the war? It certainly would have relieved those who feared
that the Confederates would buy iron ships from England. And it would have
relieved the Secretary of War, Edwin Stanton, who worried that the Merrimac
would go on a rampage, sail up the Potomac unmolested, and blow the dome off
the Capitol.27

Vanderbilt was also cast as a market entrepreneur in his battle for the
steamship traffic to California. Two California lines—the U.S. Mail Steamship
Company and the Pacific Mail Steamship Company—started mail delivery in
1849 with $500,000 per year in federal aid. As happened with Collins, these mail
contracts were not opened for bidding; they were a private deal between the Post
Office and the two steamship companies. At first the two lines charged company

rates: $600 per passenger from New York to California, via railroad over
Panama. As the gold-rush traffic increased, Vanderbilt became convinced that
more gold could be made in steamships than in the hills of California—even
without a subsidy. Vanderbilt chose not to challenge the subsidized lines directly
through Panama; instead he built a canal through Nicaragua. It took Vanderbilt a
year to deepen and clean out the San Juan River in Nicaragua, but it was worth it
because the Nicaraguan route was 500 miles shorter to California. So Vanderbilt
agreed to pay the Nicaraguan government $10,000 a year for canal privileges.
He then slashed the California fare to $400 and promised all passengers that he
would beat the rival steamships to the gold fields. He even offered to carry the
mail free. After a year of rate-cutting the fare dropped to $150; yet Vanderbilt
and his competitors apparently were still making money.28

Such a development tells us a lot about the subsidy system. The California
lines originally got a half-million dollars a year from the government; then they
charged people $600 to get to California. Yet Vanderbilt, with no outside aid, ran
a profitable line to California by charging passengers only $150 and carrying the
mail free. He hoped that doing this would expose his subsidized opponents and
end their federal aid. But the California lines, like Collins, artfully pleaded to
Congress for a subsidy even larger (which they needed to beat Vanderbilt). And
they got $900,000 a year to compete with the more efficient Vanderbilt.29

In the next stage of the subsidy saga, Vanderbilt had his canal rights
revoked by the Nicaraguan government in 1854. Behind this movement was
William Walker, an American with a bizarre mission. Walker shipped a small
army into Nicaragua, overthrew the existing government, proclaimed himself the
president and revoked Vanderbilt’s canal rights. Since Vanderbilt’s canal
company was chartered in Nicaragua, the American government was technically
not obligated to help him. So the enraged Vanderbilt put his ships on the Panama
route, instead. There he competed head to head against the California mail
carriers. He then cut the fare to $100 ($30 for third class) and swore he would
beat the subsidized California lines and any new line in Nicaragua that Walker
might help establish.30

The operators of the California lines were typical political entrepreneurs:
they did not want to compete with a market entrepreneur like Vanderbilt. So they
bought him out instead by paying him most of their subsidy if he promised not to
run any ships to California. Vanderbilt demanded and received $672,000, or 75
percent, of the $900,000 annual subsidy. But more than this, he wanted his
Nicaragua canal back. So he dabbled in Central American politics and helped get
Walker overthrown. Unfortunately for Vanderbilt, his canal had been

permanently destroyed during Walker’s coup; but since he had the pay-off money
from the California lines, he ended up with a profit anyway.31

Congress was astonished when it learned what the California lines were
doing with their $900,000 subsidy. In 1858 Senator Robert A. Toombs of
Georgia said that he admired Vanderbilt: his “superior skills,” Toombs said, had
exposed the whole subsidy system. “You give $900,000 a year to carry the mails
to California; and Vanderbilt compels the contractors to give him $56,000 a
month to keep quiet. This is the effect of your subventions. . . . [Vanderbilt] is
the kingfish that is robbing these small plunderers that come about the Capitol.
He does not come here for that purpose.” Toombs’ conclusion: end the mail
subsidies.32

Many people, though, were more critical of Vanderbilt than of the
subsidies. They looked at Vanderbilt’s tactics, instead of his influence on the
market. One court later called Vanderbilt’s actions “immoral and in restraint of
trade.” The New York Times compared Vanderbilt to “those old German barons
who, from their eyries along the Rhine, swooped down upon the commerce of
the noble river, and wrung tribute from every passenger that floated by.”33 From
Vanderbilt’s standpoint, the California lines were the ones “in restraint of trade.”
Their subsidies gave them an unfair advantage over all competition, and they
used this advantage to charge monopoly rates to passengers. As for the
“swooping” metaphor, Vanderbilt “swooped down” and “wrung tribute” from the
subsidized lines, not from “every passenger.” Every passenger, in fact, paid
lower fares to California because Vanderbilt’ competition had slashed the fares
permanently.34 And, of course, if there had been no government subsidy, there
would have been no Vanderbilt payoff. Vanderbilt ran his California lines as a
personal investment and charged passengers less than one-fourth the fare that the
subsidized lines had been charging. Congress, however, had committed its
support for political entrepreneurs. And the annual $900,000 subsidy proved to
be so large that the California lines could give three-fourths of it to Vanderbilt
and still make money. Without Vanderbilt, this political entrepreneurship might
have gone on much longer.

This clash between market and political entrepreneurs changed the
competitive environment of American steamboating. Between 1848 and 1858,
the American government paid the two California lines and Edward Collins over
eleven million dollars to build ships and carry mail. Vanderbilt, by contrast,
engaged these men in head-to-head competition free of charge. Largely because
of Vanderbilt, Congress, in 1858, ended all mail subsidies. Afterward, Vanderbilt
and others carried the mail only for the postage; and the passenger rates after

1858 were still competitive: only $200 to California, far below the original
monopoly rate of $600. 35

Vanderbilt’s victory marked the end of political entrepreneurship in the
American steamship business. We didn’t end up with perfect free trade, but we
were closer to it than we ever had been. In this environment, Americans found
railroads to be more profitable investments than steamships. So, after the Civil
War, Vanderbilt and others sold their fleets and spent their money building
railroads. The percentage of American exports carried on American ships
dropped from sixty-seven to nine percent from 1860 to 1915, but that was no
problem. England’s comparative advantage in shipping lowered America’s cost
for freight, mail, and passenger service throughout these years. And since the
English were anxious to buy America’s grain, Vanderbilt took his steamship
profits and built his New York Central Railroad over one thousand miles out to
Chicago and other midwestern cities. When Vanderbilt shipped midwestern grain
to New York and had it boarded on English ships to be sold in Liverpool, both
countries were finally doing what they could do best. By Vanderbilt’s death in
1877, he had been a central figure in America’s industrial revolution, both in
steam and in rails. He also was worth almost $100 million, which made him the
richest man in America.36 This study of American steamboating focuses on the
market and the impact different entrepreneurs had on the market. If we look at
the issue this way, we can sort out two distinct groups: political and market
entrepreneurs. Robert Fulton, Edward Collins, and Samuel Cunard cannot be
lumped with Thomas Gibbons, Cornelius Vanderbilt, and William Inman. They
are two separate groups with different attitudes toward innovation, technology,
price-cutting, monopolies, and federal aid. 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. They said they had to be to survive against
subsidized opponents. Some of them were personally repugnant (Vanderbilt
disinherited his son and placed his own wife in an asylum; Gibbons tried to
horsewhip one of his rivals), but they advanced their industry and cut passenger
fares permanently. Since Vanderbilt ended up as the richest man in America,
perhaps the federal aid was a curse, not a blessing, even to those who received it.

CHAPTER TWO

James J. Hill and the
Transcontinental

Railroads

The story of the building of the transcontinental railroads makes for good
reading. It has a sound plot: four railroads get charters and subsidies to build
across the country. It has suspense: the Union Pacific and Central Pacific
frantically race across plains and over mountains to complete the railroad. It has
an all-star cast: U.S. Presidents, army generals, and political adventurers
confront Indians on the warpath, politicians on the take, and thousands of
Chinese and Irish workers. The story tells of the agony of defeat—Indian raids
and winter storms—and the thrill of victory with the meeting of the Union and
Central Pacific in Utah and the final hammering of the golden spike. Finally,
there is celebrating as the story ends: Western Union telegraphs the event across
the nation, and revelers sound the Liberty Bell from Independence Hall.

Over the years historians have told this story and described the drama, but
they have often criticized the main actors and their exploits. The grab for federal
subsidies seems to have led to greed and corruption; but—and this is the key
point—most historians say there was no way to get the happy ending to the
transcontinental story without federal aid. “Unless the government had been
willing to build the transcontinental lines itself,” John Garraty typically asserts,
“some system of subsidy was essential.”1

But there is a nagging problem in this argument. While some of this rush
for subsidies was still going on, James J. Hill was building a transcontinental
from St. Paul to Seattle with no federal aid whatsoever. Also, Hill’s road was the
best built, the least corrupt, the most popular, and the only transcontinental never
to go bankrupt. It took longer to build than the others, but Hill used this time to
get the shortest route on the best grade with the least curvature. In doing so, he
attracted settlement and trade by cutting costs for passengers and freight. Could

it be that, in the long run, the subsidies may have corrupted railroad development
and hindered economic growth? The transcontinental story is worth a more
careful look. It may have a different ending if we move Hill from a cameo role to
that of a leading actor.

The dream of a transcontinental had excited promoters and patriots ever
since the Mexican War and the acquisition of California. Congress spent
$150,000 during the 1850s surveying three possible routes from the Mississippi
River to the west coast. In 1862, with the Southern Democrats out of the union,
Congress hastily passed the Pacific Railroad Act. This act led to the creating of
the Union Pacific, which would lay rails west from Omaha, and the Central
Pacific, which would start in Sacramento and build east. Since congressmen
wanted the road built quickly, they did two key things. First, they gave each line
twenty alternate sections of land for each mile of track completed. Second, they
gave loans: $16,000 for each mile of track of flat prairie land, $32,000 per mile
for hilly terrain, and $48,000 per mile in the mountains.2

The UP and CP, then, would compete for government largess. The line that
built the most miles would get the most cash and land. The land, of course,
would be sold; and this way the railroad would be financed. In this arrangement,
the incentive was for speed, not efficiency. The two lines spent little time
choosing routes; they just laid track and cashed in.

The subsidies shaped the UP builders’ strategy in the following ways. They
moved west from Omaha in 1865 along the Platte River. Since they were being
paid by the mile, they sometimes built winding, circuitous roads to collect for
more mileage. For construction they used cheap and light wrought iron rails,
soon to be outmoded by Bessemer rails. And Thomas Durant, vice-president and
general manager, stressed speed, not workmanship. “You are doing too much in
masonry this year,” Durant told a staff member; “substitute tressel [sic] and
wooden culverts for masonry wherever you can for the present.” Also, since
trees were scarce on the plains, Durant and his chief engineer, Grenville Dodge,
were hard pressed to make railroad ties, 2300 of which were needed to finish
each mile of track. Sometimes they shipped in wood; other times they used the
fragile cottonwood found in the Platte River Valley; often, though, they artfully
solved their problem by passing it on to others. The UP simply paid top wages to
tie-cutters and daily bonuses for ties received. Hordes of tie-cutters, therefore,
invaded Nebraska, cut trees wherever they were found, and delivered freshly cut
ties right up to the UP line. The UP leaders conveniently argued that, since most
of Nebraska was unsurveyed, farmers in the way were therefore squatters and
held no right to any trees on this “public land.” Some farmers used rifles to
defend their land; and, in the wake of violence, even Durant discovered “that it

was not good policy to take all the timber.”3
The rush for subsidies caused other building problems, too. Nebraska

winters were long and hard; but, since Dodge was in a hurry, he laid track on the
ice and snow anyway. Naturally the line had to be rebuilt in the spring. What was
worse, unanticipated spring flooding along the Loup fork of the Platte River
washed out rails, bridges, and telephone poles, doing at least $50,000 damage
the first year. No wonder some observers estimated the actual building cost at
almost three times what it should have been.4

By pushing rail lines through unsettled land, the transcontinentals invited
Indian attacks, which caused the loss of hundreds of lives and further ran up the
cost of building. The Cheyenne and Sioux harassed the road throughout
Nebraska and Wyoming: they stole horses, damaged track, and scalped workmen
along the way. The government paid the costs of sending extra troops along the
line to help protect it. But when they left, the graders, tie-setters, tracklayers, and
bolters often had to work in teams with half of them standing guard and the other
half working. In some cases, such as the Plum Creek massacre in Nebraska, the
UP attorney admitted his line was negligent: it had sent workingmen into areas
known to be frequented by hostile Indians.5

As the UP and CP entered Utah in 1869, the competition became fiercer
and more costly. Both sides graded lines that paralleled each other and both
claimed subsidies for this mileage. As they approached each other the workers
on the UP, mostly Irish, assaulted those on the CP, mostly Chinese. In a series of
attacks and counterattacks, with boulders and gunpowder, many lives were lost
and much track was destroyed. Both sides involved Presidents Johnson and
Grant in the feuding. With the threat of a federal investigation looming, the two
lines finally compromised on Promontory Point, Utah, as their meeting place.
There they joined tracks on May 10, with hoopla, speeches, and the veneer of
unity. After the celebration, however, both of the shoddily constructed lines had
to be rebuilt and sometimes relocated, a task that the UP didn’t finish until five
years later. As Dodge said one week before the historic meeting, “I never saw so
much needless waste in building railroads. Our own construction department has
been inefficient.”6

After the construction was completed, many were astonished at the costs
of construction. The UP and CP, even with 44,000,000 acres of free land and
over $61,000,000 in cash loans, were almost bankrupt. Two other circumstances
helped to keep costs high. First, the costs of building a railroad, or anything else
for that matter, were abnormally high after the Civil War. Capital and labor were
scarce; also, even without the harsh winters and the Indians, it was costly to feed

thousands of workmen who were sometimes hundreds of miles from a nearby
town. Second, the officers of the Union and Central Pacific created their own
supply companies and bought materials for their roads from these companies.
The UP, for example, needed coal, so six of its officers created the Wyoming
Coal and Mining Company. They mined coal for $2.00 per ton (later reduced to
$1.10) and sold it to the UP for as high as $6.00 a ton. Even more significant, the
Credit Mobilier, which was also run by UP officials, supplied iron and other
materials to the UP at exorbitant prices. What they didn’t make running the
railroad, they made selling to the railroad.7

Many people then and now have pointed accusing fingers at the UP with
its Credit Mobilier and its wasteful building. But this misdirects the problem. If
we look at the subsidies instead, we can see that they dictated the building
strategy and dramatically shaped the outcome. Granted, the leaders of the UP
were greedy and showed poor judgment. But the presence of free land and cash
tempted them to rush west, then made them dependent on federal aid to survive.

No wonder the UP courted politicians so carefully. In this arrangement
they were more precious than freight or passengers. In 1866, Thomas Durant
wined and dined 150 “prominent citizens” (including Senators, an 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 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
that all would go back to Washington inclined to repay the UP for its hospitality.
If not, the UP could appeal to a man’s wallet as well as his stomach. In Congress
and in state legislatures, free railroad passes were distributed like confetti. For a
more personal touch, the UP let General William T. Sherman buy a section of its
land near Omaha for $2.50 an acre when the going rate was $8.00. In case that
failed, Oakes Ames, president of the UP, handed out Credit Mobilier stock to
congressmen at a discount “where it would do the most good.” It was for this act,
not for selling the UP overpriced goods, that Congress censured Oakes Ames
and then investigated the UP line.8

The airing of the Credit Mobilier scandal—just four years after the
celebrating at Promontory Point—soured many voters on the UP. Others were
annoyed because the UP was so inefficient that it couldn’t pay back any of its
borrowed money. Just as the UP was birthed and nurtured on federal aid, though,
so it would have to mature on federal supervision and regulation.

In 1874, Congress passed the Thurman Law, which forced the UP to pay
25 percent of its net earnings each year into a sinking fund to retire its federal
debt. Because the line was so badly put together, it competed poorly and needed
the sinking fund money to stay afloat. Building branch lines to get rural traffic
would have helped the UP, but the government often wouldn’t give them
permission. President Sidney Dillon called his line “an apple tree without a
limb,” and concluded, “unless we have branches there will be no fruit.” Congress
further squashed any trace of ingenuity or independence by passing a law
creating a Bureau of Railroad Accounts to investigate the UP books regularly. Of
these federal restrictions, Charles Francis Adams, Jr., a later president,
complained: “We cannot lease; we cannot guarantee, and we cannot make new
loans on business principles, for we cannot mortgage or pledge; we cannot build
extensions, we cannot contract loans as other people contract them. All these
things are [prohibited] to us; yet all these things are habitually done by our
competitors.” The power to subsidize, Adams discovered, was the power to
destroy.

John M. Thurston, the UP’s solicitor general, saw this connection between
government aid and government control. The UP, he said, was “perhaps more at
the mercy of adverse legislation than any other corporation in the United States,
by reason of its Congressional charter and its indebtedness to the government
and the power of Congress over it.”9

When Jay Gould took control of the UP in 1874, his solution was to use
and create monopoly advantages to raise prices, fatten profits, and cancel debts.
For example, he paid the Pacific Mail Steamship Company not to compete with
the UP along the west coast. Then he raised rates 40 to 100 percent and, a few
weeks later, hiked them another 20 to 33 percent. This allowed him to pay off
some debts and even declare a rare stock dividend; but it soon brought more
consumer wrath, and this translated into more government regulation and,
eventually, helped lead to the Interstate Commerce Commission, which outlawed
rate discrimination.10

It is sad to read of the UP struggling for survival in the 1870s and 1880s,
only to collapse into bankruptcy in 1893. Yet if s hard to see how its history
could have taken any other direction, given the presence of government aid. 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.

The Central Pacific did better, but only because its circumstances were
different. Its leaders—Leland Stanford, Collis Huntington, Charles Crocker, and

Mark Hopkins—were united on narrow goals and worked together effectively to
achieve them. These men, the “Big Four,” focused mainly on one state,
California, and used their wealth and political pull to dominate (and sometimes
bribe) California legislators. Stanford, who was elected Governor and U.S.
Senator, controlled politics for the Big Four and prevented any competing
railroad from entering California. Profits from the resulting monopoly rates were
added to windfall gains from their Contract and Finance Company, which was
the counterpart of the Credit Mobilier. Unlike the UP leaders in the Credit
Mobilier scandal, the Big Four escaped jail because the records of the Contract
and Finance Company “accidentally” were destroyed. Without records, it was
left to Frank Morris to tell the story of the CP monopoly in his novel, The
Octopus. It was almost 1900 before privately funded railroads could muster the
financial strength and the political muscle to take on the entrenched CP (later
renamed the Southern Pacific) in California politics.11

In case Congress needed another lesson, the story of the Northern Pacific
again featured government subsidies. Congressmen chartered the Northern
Pacific in 1864 as a transcontinental running through the Northwest. They gave
it no loans, but granted it forty sections of land per mile, which was twice what
the UP received. Various owners floundered and even bankrupted the NP, until
Henry Villard took control in 1881. Villard had come to America at age eighteen
from Bavaria in 1853. Shortly after he arrived, he showed a flair for journalism;
he won recognition for his writing during the Civil War. In his writing and in his
speaking, Villard developed the ability to persuade others to follow him. He first
became interested in the Northwest in 1874; he was hired as an agent for
German bondholders in America and went to Oregon to analyze their
investments. He liked what he saw and began to have grandiose visions about a
transportation empire in the Northwest. He soon began buying NP stock and
took charge of the stagnant railroad in 1881. 12

Villard had many of the traits of his fellow transcontinental operators.
First, like Jay Gould, he manipulated stock; in fact, he bought his NP shares on
margin and used overcapitalized stock as collateral for his margin account.
Second, like the Big Four on the CP, Villard liked monopolies. He even bought
railroads and steamships along the Pacific coast, not for their value, but to
remove them as competitors. Finally, like the leaders of the UP, Villard eagerly
sought the 44,000,000 acres the government had promised him for building a
railroad.

Villard’s strategy, then, resembled that of the other builders. He had an
added plus, though, in his skills in promoting and coaxing funds from wealthy

investors. “I feel absolutely confident,” he wrote, “that we shall be able to work
results.. .that will astonish every participant.” Hundreds of German investors,
and others too, heeded the call for funds and sent Villard $8,000,000 to bring the
NP to the west coast. Businessmen everywhere were amazed at Villard’s
persuasive ways. “This is the greatest feat of strategy I ever performed,” Villard
proclaimed, “and I am constantly being congratulated …upon…the achievement.”
So with his friends’ $8,000,000, and with the government’s free land, Villard
pushed the NP westward and arrived in Seattle, Washington, in 1883. His
celebration, however, was short-lived because that same year the NP almost
declared bankruptcy and Villard was ousted.13

If we look at Villard’s actions, we can see why he failed. First, like the
other transcontinental builders, he rushed into the wilderness to collect his
subsidies. Villard knew that the absence of settlement meant the absence of
traffic, but his solution was to promote tourism as well as immigration. He
thought tourists would pay to enjoy the beauty of the Northwest, so he built
some of the line along a scenic route. This hiked Villard’s costs because he had
to increase the grade, the curvature, and the length of the railroad to
accommodate the Rocky Mountain view. Villard also created some expensive
health spas around the hot springs at Bozeman and in Broadwater County,
Montana. He also put glass domes around the hot springs and built plush hotels
near them to accommodate the throng of tourists he predicted would come.
Despite lavish advertising in the east, though, the tourists went elsewhere and
Villard went broke.14

The federal aid and the foreign investors had given Villard some room for
error. But he made other mistakes, too. He was so anxious to rush to the coast
that he built when construction costs were high. They were much lower three
years before and three years after he built. High costs meant high rates, and this
deterred freight and immigrants from traveling along the NP. Villard could have
cut some of these costs, but as Julius Grodinsky has observed of Villard, “What
was asked, he paid.” He didn’t bother to learn much about railroads; in fact,
during 1883 he seems to have been more interested in leveling six houses in
New York City to build a glamorous mansion, in which to entertain the city’s
elite. With the NP he thought he could promote immigration, tourism, scenic
routes, health spas, and use the free land and foreign cash to cover the costs.
When his bubble burst, the NP went bankrupt and the German investors were
ruined. But not so Villard—from his mansion in New York City, he raised more
money and took control of the NP again five years later. The smooth-talking
Villard, however, still could not overcome his earlier errors. The poorly

constructed Northern Pacific was so inefficient that even the Villard charm could
not make it turn a profit. In 1893, the NP went bankrupt again and the Villard era
was over.15

Villard’s failure was pathetic but in some ways understandable. The
American Northwest was a tough section for building a railroad. It had a sparse
population and a rugged terrain. Oddly enough, though, one man did come along
and did build a transcontinental through the Northwest. In fact, he built it north
of the NP, almost touching the Canadian border. And he did it with no federal
aid. That man was James J. Hill, and his story tells us a lot about the larger
problem of federal aid to railroads.

Hill’s life could have made good copy for Horatio Alger. He was born in a
log cabin in Ontario, Canada, in 1838. His father died when the boy was young,
and he supported his mother by working in a grocery for $4.00 per month. He
lost use of his right eye in an accident, so his opportunities seemed limited. But
Hill was a risk-taker and a doer. At age seventeen he aimed for adventure in the
Orient, but settled for a steamer to St. Paul. There he clerked for a shipping
company and learned the transportation business. He was good at it and became
intrigued with the future of the Northwest.16

The American Northwest was America’s last frontier. The states from
Minnesota to Washington made up one-sixth of the nation, but remained
undeveloped for years. The climate was harsh and the terrain was imposing.
There were obvious possibilities with the trees, coal, and copper in the region;
but crossing it and connecting it with the rest of the nation was formidable. The
Rocky Mountains divided the area into distinct parts: to the east were Montana,
North Dakota, and Minnesota, which were dry, cold, flat, and, predictably,
empty. It was part of what pioneers called “The Great American Desert.” Once
the Rockies were crossed, the land in Idaho and Washington turned green with
forests and plentiful rain. But the road to the coast was broken by the almost
uncrossable canyons and jagged peaks of the Cascade Mountains. Since the
Northwest was fragmented in geography, remote in location, and harsh in
climate, most settlers stopped in the lower Great Plains or went on to California.

To most, the Northwest was, in the words of General William T. Sherman,
“as bad [a piece of land] as God ever made.” To others, like Villard, the
Northwest was a chance to grab some subsidies and create a railroad monopoly.
But to Hill the Northwest was an opportunity to develop America’s last frontier.
Where some saw deserts and mountains, Hill had a vision of farms and cities.
Villard might build a few swanky hotels and health spas, but Hill wanted to
settle the land and develop the resources. Villard preferred to approach the

Northwest from his mansion in New York City. Hill learned the Northwest
firsthand, working on the docks in St. Paul, piloting a steamboat on the Red
River, and travelling on snowshoes in North Dakota. Villard was attracted to the
Northern Pacific because of its monopoly potential; Hill wanted to build a
railroad to develop the region, and then to prosper with it.17

Hill’s years of maturing in St. Paul followed a logical course; from
investing in shipping, he switched to steamships, then to railroads. In 1878, he
and a group of Canadian friends bought the bankrupt St. Paul and Pacific
Railroad from a group of Dutch bondholders.We don’t know whether or not he
then had the vision to turn it into a privately financed transcontinental. The St.
Paul and Pacific story, like that of the other transcontinentals, had been one of
federal subsidies, stock manipulation, profit-taking on construction, and
bankruptcy. Its ten miles of track were sometimes unconnected and were made
of fifteen separate patterns of iron. Bridge material, ties, and equipment were
scattered along the right-of-way. When Hill and his friends bought this railroad
and announced their intention to complete it, critics dubbed it “Hill’s Folly.” Yet
he did complete it, ran it profitably, and soon decided to expand it into North
Dakota. It was not yet a transcontinental, but it was in the process of becoming
one.18

As Hill built his railroad across the Northwest, he followed a consistent
strategy. First, he always built slowly and developed the export of the area before
he moved farther west. In the Great Plains this export was wheat, and Hill
promoted dry-farming to increase wheat yields. He advocated diversifying crops
and imported 7,000 cattle from England and elsewhere, handing them over free
of charge to settlers near his line. Hill was a pump-primer. He knew that if
farmers prospered, their freight would give him steady returns every year. The
key was to get people to come to the Northwest. To attract immigrants, Hill
offered to bring them out to the Northwest for a mere $10.00 each if they would
farm near his railroad. “You are now our children,” Hill would tell immigrants,
“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.” To make sure they prospered, he even set up
his own experimental farms to test new seed, livestock, and equipment. He
promoted crop rotation, mixed farming, and the use of fertilizers. Finally, he
sponsored contests and awarded prizes to those who raised meaty livestock or
grew abundant wheat.19

Unlike Villard, Hill built his railroad for durability and efficiency, not for
scenery. “What we want,” Hill said, “is the best possible line, shortest distance,
lowest grades and least curvature that we can build. We do not care enough for

Rocky Mountain scenery to spend a large sum of money developing it.” That
meant that Hill personally supervised the surveying and the construction. “I find
that it pays to be where the money is being spent,” noted Hill, but he didn’t
skimp on quality materials. He believed that building a functional and durable
product saved money in the long run. For example, he usually imported high
quality Bessemer rails, even though they cost more than those made in America.
He was thinking about the future, and quality building cut costs in the long run.
When Hill constructed the solid granite Stone Arch Bridge—2100 feet long, 28
feet wide, and 82 feet high—across the Mississippi River it became the
Minneapolis landmark for decades.20

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 Marias 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, if it did, where it was. Hill wanted the best gradient so much that he hired a
man to spend months searching western Montana for this legendary pass. He did
in fact find it, and the ecstatic Hill shortened his route almost one hundred
miles.21

As Hill pushed westward, slowly but surely, the Northern Pacific was there
to challenge him. Villard had had first choice of routes, lavish financing from
Germany, and 44,000,000 acres of free federal land. Yet it was Hill who was
producing the superior product at a competitive cost. His investments in quality
rails, low gradients, and short routes saved him costs in repairs and fuel every
trip across the Northwest. Hill, for example, was able to outrun the Northern
Pacific from coast to coast at least partly because his Great Northern line was
115 miles shorter than Villard’s NP.

More than this, though, Hill bested Villard in the day-to-day matters of
running a railroad. For example, Villard got his coal from Indiana, but Hill got
his from Iowa and saved $2.00 per ton. In the volatile leasing game, Hill
outmaneuvered Villard and got a lower cost to the Chicago market. As Hill said,
“A railroad is successful in the proportion that its affairs are vigilantly looked
after.”22

Villard may have realized he was outclassed, so he countered with
obstructionism, not improved efficiency. One of Hill’s partners alerted him to
Villard’s “egotistic stamp” and concluded that “Villard’s vanity will be apt to lead
him to reject any treaty of peace that does not seem to gratify his vain desire to
obtain a triumph.” Before Hill could move out of Minnesota, for example, the
NP refused him permission to cross its line at Moorhead, along the Minnesota-

North Dakota border. Local citizens apparently wanted Hill’s line; and he wrote,
“I had a letter from a leading Moorhead merchant today offering 500 good
citizen tracklayers to help us at the crossing.” Each move west that Hill made
threatened Villard’s monopoly. Ironically, Hill sometimes had to use the NP to
deliver rails; when he did Villard sometimes raised rates so high that Hill used
the Canadian Pacific when he could.23

Villard found that manipulating politics was the best way to thwart Hill.
For example, the gaining of right-of-way through Indian reservations was a
thorny political issue. Legally, no railroad had the right to pass through Indian
land. The NP, as a federally funded transcontinental, had a special dispensation.
Hill, however, didn’t, so the NP and UP tried to block Congress from granting
Hill right-of-way through four Indian reservations in North Dakota and
Montana. Hill gladly offered to pay the willing Indians fair market value for
their land, but Congress stalled, and Hill said, “All our contracts [are] in
abeyance until [this] question can be settled.” Hill had to fight the NP and UP
several times on this issue before getting Congress to grant him his right-of-way.
“It really seems hard,” Hill later wrote, “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.”24

In the depression year of 1893, all the transcontinental owners but Hill
were lobbying in Congress for more government loans. To one of them. Hill
wrote, “The government should not furnish capital to these companies, in
addition to their enormous land subsidies, to enable them to conduct their
business in competition with enterprises that have received no aid from the
public treasury.” He proudly concluded, “Our own line in the North. . .was built
without any government aid, even the right of way, through hundreds of miles of
public lands, being paid for in cash.”25

Shortly after Hill wrote this, the Union Pacific, the Northern Pacific, and
the Santa Fe all went bankrupt and had to be reorganized. This didn’t surprise
Hill; he gloated, “You will recall how often it has been said that when the Nor
Pac, Union Pac and other competitors failed, our company would not be able to
stand. . . . Now we have them all in bankruptcy. . .while we have gone along and
met their competition.” In fact, the efficient Hill cut his costs 13 percent from
1894 to 1895.

Hill criticized the grab for subsidies, but here is the ironic twist: those who
got federal aid ended up being hung by the strings that were attached to it. In
other words, there is some cause and effect between Hill’s having no subsidy and

prospering and the other transcontinentals’ getting aid and going bankrupt. First,
the subsidies, whether in loans or land, were always given on the basis of each
mile completed. In this arrangement, as we have seen, the incentive was not to
build a quality line, as Hill did, but to build quickly to get the aid. This resulted
not only in poorly built lines but in poorly surveyed lines as well. Steep
gradients meant increased fuel costs; poor building meant costly repairs and
accidents along the line. Hill had no subsidy, so he built slowly and
methodically. “During the past two years,” Hill said in 1884, “we have spent a
great deal of money for steel rails, ballasting track, transfer yards, terminal
facilities, new equipment, new shops, and in fact we have put the road in better
condition than any railway similarly situated that I know of. …” Hill, then, had
lower fixed costs than did his subsidized competitors.26

By building the Great Northern without government interference, Hill
enjoyed other advantages as well. He could build his line as he saw fit. Until
Carnegie’s triumph in the 1890s, American rails were inferior to some foreign
rails, so Hill bought English and German rails for the Great Northern. The
subsidized transcontinentals were required in their charters to buy American-
made steel, so they were stuck with the lesser product. Their charters also
required them to carry government mail at a discount, and this cut into their
earnings. Finally, without Congressional approval, the subsidized railroads could
not build spur lines off the main line. Hill’s Great Northern, in contrast, looked
like an octopus, and he credited spur lines as critical to his success.

In debating the Pacific Railway Bill in the 1860s, some Congressmen
argued that even if the federally funded transcontinentals proved to be
inefficient, they should still be aided because they would increase the social rate
of return to the United States. Some historians and economists, led by Robert
Fogel, have picked up this argument, and it goes like this: the UP made little
profit and was poorly built, but it increased the value of the land along the road
and promoted farms and cities in areas that could not have supported them
without cheap transportation. Fogel claims that the value of land along a forty-
mile strip on each side of the UP was worth $4.3 million in 1860 and $158.5
million by 1880. Without the UP, this land would have remained unsettled and
the U. S. would not have had the national benefits of productive farms, new
industries, and growing cities in the West. To the nation, then, the high social
rate of return justified the building of the UP, CP, NP, and Santa Fe railroads.27

What this argument overlooks is the negative social, economic, and
political return to the United States that came with using federal subsidies to
build railroads. The first thing to recognize is that the gain in social return that

Fogel describes is temporary. If the government had not subsidized a
transcontinental, then private investors like Hill would have built them sooner
and would have built them better. Subsidy promoters tried to deny this argument
at the time, but Hill’s achievement shows that it would have been done, only at a
slower (but more efficient) pace. We can dismiss the widely promoted view
expressed in Congress by Rep. James H. Campbell: “This [Union Pacific] road
never could be constructed on terms applicable to ordinary roads. … It is to be
constructed through almost impassable mountains, deep ravines, canyons,
gorges, and over arid and sandy plains. The Government must come forward
with a liberal hand, or the enterprise must be abandoned forever.” The increase
in social rate of return, then, would only be present until some private investor
did what the government did first.28

Here is a key point: the gain in social return was only temporary, but the
loss of shipping with an inefficient railroad was permanent. The UP and NP
were, as we have seen, inefficient in gradients, curvature, length, quality of
construction, repair costs, and use of fuel. This meant permanently high fixed
costs for all passengers and freight using the subsidized transcontinentals.

The subsidizing of railroads cost the nation in other ways, too. First, the
land that was given to the railroads could not be sold for revenue. Second, the
giving of subsidies to one established a precedent and resulted in the giving of
subsidies to many. When the government gave twenty million acres to the UP,
the NP and others clamored for aid; the result was the giving of 131 million
acres of land to various railroads. Third, the granting of all this land, and money
too, made for shady business ethics and political corruption. The Credit Mobilier
is an example of poor business ethics, and the CP’s tight control over California
politics is a sample of political corruption. Part of this corruption is reflected in
the automatic monopolies that subsidized transcontinentals had. When Jay Gould
doubled rates along parts of the UP, not much could be done. It took time to
build privately financed lines; and, when they were done, they had to compete
with a railroad that had, thanks to the government, millions of acres of free land
and large cash reserves.

A final hidden cost of subsidizing railroads is seen in the mass of
lawmaking, much of it harmful, all of it time-consuming, that state legislatures,
Congress, and the Supreme Court did after watching the UP, CP, and NP in
action. The publicizing of shoddy construction, the Credit Mobilier scandal, rate
manipulating, and bankrupt health spas angered consumers; and angry
consumers pestered their Congressmen to regulate the railroads. Much of the
regulating, however, had unintended consequences and made the situation worse.
For example, when the corruption in the building of the UP became known, there

was public outrage followed by a congressional investigation. In the
investigating, many were irritated that the UP had made no payment on its
government loans. Congress, as we have seen, passed the Thurman Law, which
forced the UP to pay 25 percent of its annual earnings toward retiring its $28
million debt to the government. The problem here is that the shoddy construction
of the UP made for high fixed costs, and the lack of spur lines limited its chances
for profits. This meant that the UP had to raise rates for passengers and freight to
pay back its loans. The rate hikes, though, caused even more public outcry:
many noticed, for example, that the UP and NP were charging more than the GN
did; and this helped lead to demands for rate regulation. Congress obliged and,
in 1887, created the Interstate Commerce Commission to investigate and abolish
rate discrimination. This created two new problems: first, it was now illegal to
give discounts. Hill argued that rate cutting had led to lower rates over the years
and that this allowed the United States to capture a larger share of overseas trade.
Hill insisted that the ICC law, if enforced (which it eventually was), would hurt
railroads in domestic and overseas trade. Second, the ICC law eventually cost
the taxpayers millions of dollars every year; it created a need for thousands of
federally funded bureaucrats to listen to shippers all over the nation and to snoop
into the detailed records of almost every railroad in the country.29

The issue of foreign trade is important and was hotly disputed during
Congress’ debates on the transcontinentals. Advocates of federal aid strongly
argued that subsidized railroads would capture foreign trade and increase
national wealth. “Commerce is power and empire,” said Senator William M.
Gwin of California. “Give us, as this [Union Pacific] Railroad would, the
permanent control of the commerce and exchanges of the world, and in the
progress of time and the advance of civilization, we would command the
institutions of the world.” Yet the UP and NP were so inefficient, they couldn’t
even capture or develop the trade of their own regions, least of all the world. If
Hill hadn’t come along and built the privately financed Great Northern, the
United States might have forever lost opportunities to capture Oriental
markets.30

Once he completed the GN, he studied the opportunities for trade in the
Orient and marveled at its potential. “If the people of a single province of China
should consume [instead of rice] an ounce a day of our flour,” Hill wistfully said,
“they would need 50,000,000 bushels of wheat per annum, or twice the Western
surplus.” The key, Hill believed, was “low freight rates”; and these he intended
to supply. In 1900, he plowed six million dollars into his Great Northern
Steamship Company and shuttled two steamships back and forth from Seattle to

Yokohama and Hong Kong. Selling wheat was only one of Hill’s ideas. He tried
cotton, too. Ever the pump-primer, Hill told a group of Japanese industrialists he
would send them cheap Southern cotton, and deliver it free, if they would use it
along with the short-staple variety they got from India. If they didn’t like it, they
could have a refund and keep the cotton. This technique worked, and Hill filled
many boxcars and steamships with Southern cotton destined for Japan. Hill’s
railroads and steamships also carried New England textiles to China. In 1896,
American exports to Japan were only $7.7 million; but nine years later, with Hill
in command, this figure jumped to $51.7 million.31

An even greater coup may have been Hill’s capturing of the Japanese rail
market. Around 1900, Japan began a railroad boom and England and Belgium
made bids to supply the rails, hi this case, the Japanese may have underestimated
Hill: it didn’t seem likely that he could be competitive if he had to buy rails in
Pittsburgh, ship them to the Great Northern, carry them by rail to Seattle, then by
steamship to Yokohama. Hill was so efficient, though, and so eager for trade in
Asia, that he underbid the English and the Belgians by $1.50 per ton and
captured the order for 15,000 tons of rails. Hill was spearheading American
dominance in the Orient.32

Hill worked diligently to market the exports of the Northwest. Wheat from
the plains, copper from Montana, and apples from Washington all got Hill’s
special attention. Without Hill’s low freight rates and aggressive marketing,
some of these Northwest products might never have been competitive to export.
Washington and Oregon, for example, were covered with Western pine and
Douglas fir trees. But it was Southern pine that had dominated much of the
American lumber market. Hill could provide the lowest freight rates, but he
needed someone to risk harvesting the Western lumber. He found Frederick
Weyerhauser, his next-door neighbor, and sold him 900,000 acres of Western
timberland at $6.00 an acre. Then Hill cut freight costs from ninety to forty cents
per hundred pounds, and the two of them captured some of the Midwestern
lumber market and prospered together.33

Hill became America’s greatest railroad builder, he believed, because he
followed a consistent philosophy of business. First, build the most efficient line
possible. Second, use this efficient line to promote the exports in your section—
in other words you must help others before you can be helped. Third, do not
overextend; expand only as profits allow. Hill would probably have agreed with
Thomas Edison that genius is one percent inspiration and 99 percent
perspiration. Few people were willing to exert the perspiration necessary to learn
the railroad business and apply these principles. Many, like Villard, Gould, and

Stanford, took the easy route and chased subsidies, hiked rates, and manipulated
stock; but this approach never built a winning railroad. “If the Northern Pacific
could be handled as we handle our property,” Hill said, “it could be made [a]
great property … but it has not been run as a railway for years, but as a device for
creating bonds to be sold.” Hill understood markets, prices, and human nature;
when he saw what his rivals were doing, he ceased to fear them.

The only thing that Hill did seem to fear was the potential for damage
when the federal government stepped in to direct the economy. He understood
why this happened—why people pressured Congress to involve itself in
economic matters. California, isolated on the Pacific coast, wanted the cheap
goods that a railroad would bring. So Senator Gwin lobbied in Congress for the
UP. American steel producers wanted to sell more steel, so they pushed Congress
to put a tariff on imported steel. Hill’s problem was that, when his rivals were
subsidized and when tariffs forced him to pay 50 percent more for English steel,
he had to be twice as good to survive. One way out, which Hill took, was to
support those politicians in the Northwest who would fight subsidies and high
tariffs, and who would urge Congress to give him the right-of-way through
Indian land.34

What Hill ultimately deplored more than tariffs and subsidies were the ICC
and the Sherman Antitrust Act. Congress passed these vague laws to protest rate
hikes and monopolies. They were passed to satisfy public clamor (which was
often directed at wrong-doing committed by Hill’s subsidized rivals). Because
they were vaguely written, they were harmless until Congress and the Supreme
Court began to give them specific meaning. And here came the irony: laws that
were passed to thwart monopolists, were applied to, thwart Hill.

The ICC, for example, was created in 1887 to ban rate discrimination. The
Hepburn Act, passed in 1906, made it illegal for railroads to charge different
rates to different customers. This law was partly aimed at rate manipulators like
Jay Gould. But it ended up striking Hill, who now could not offer rate discounts
on exports traveling on the Great Northern en route to the Orient. Hill had given
the Japanese and Chinese special rates on American cotton, wheat, and rails to
wean them to American exports. But the Hepburn Act, according to Hill,
immediately cut in half American trade to these countries. Hill testified
vigorously during the Senate hearings that preceded the Hepburn Act, but was
ignored. He was furious that he now had to publish his rates and give all shippers
anywhere the special discount he was giving the Asians to capture their business.
Since he couldn’t do this and survive, he eventually sold his ships and almost
completely abandoned the Asian trade.35

“Rates vary with conditions,” Hill said.

They vary from day to day, almost. I was much struck by some of the
questions [addressed to the previous witness during the Hepburn Act hearings]
as the difficulty in fixing what is a reasonable rate by law. You are dealing with
the questions that exist today. Can you apply the conditions that exist today to
tomorrow or next week or next month? It is absolutely impossible. …

The Hepburn Act, though, said rates had to be made public, applied
equally to all shippers, and could not be changed without thirty days notice.
American exports to Japan and China dropped 40 percent ($41 million) between
1905 and 1907, and we will never know how much trade, domestic and foreign,
was lost elsewhere.36

Another federal law that was aimed at others, but which struck Hill
instead, was the Sherman Antitrust Act. As written, the Sherman Act banned
“every combination. . .in restraint of trade.” This vaguely written law was an
immediate problem because every act of trade potentially restrains other trade.
This meant that the courts would have to decide what the law meant. The first
test of the Sherman Act, the E. C. Knight case (1895), liberated entrepreneurs to
freely buy and sell. The American Sugar Refining Company had bought the E.
C. Knight company and thereby held 98 percent of the American sugar market.
The Supreme Court upheld this acquisition because no one had tried to “put a
restraint upon trade or commerce.” No one stopped anyone else from producing
sugar and competing with American Sugar Refining. Therefore, the trade was
legal even though “the result of the transaction. . .was creation of a monopoly in
the manufacture of a necessary of life. . . .” In fact, other sugar producers did
enter the market and steadily whittled the market share of American Sugar
Refining from 98 to 25 percent by 1927.37 With the E. C. Knight case the law of
the land, Hill saw no problem when he created the Northern Securities Company
in 1901. After the Panic of 1893, Hill bought a controlling interest in the
bankrupt NP and sometimes used it to ship his own freight. In 1901, Hill added
the Chicago, Burlington, and Quincy to his holdings; this allowed him to tap
markets to the south in lumber, meat-packing, and cotton. That same year he
placed his stock in the GN, NP, and CB&Q in a holding company called the
Northern Securities Company. Hill pointed out that in doing this he was not
restraining trade; he was combining three smaller companies he already
controlled into one larger company. Actually, competition among the
transcontinentals was keener than ever. Edward H. Harriman had taken over the
bankrupt UP after the Panic of 1893 and, free of governmental restrictions, had

plowed $25 million into new track, new routes, new equipment, and spur lines.
He adopted Hill’s philosophy of building an efficient railroad and promoting the
exports of the region. Harriman even bought steamships and prepared to
challenge Hill in the Orient. When Harriman tried to buy into the NP, a stock
fight resulted, and financierj. P. Morgan suggested the creating of a holding
company, the Northern Securities, to prevent stock manipulation on Wall Street.
Hill would be president of the Northern Securities and therefore keep control of
his three railroads; Harriman would serve on the board of directors. Competition
was not stifled; in fact, rates fell on both the GN and the UP in the two years
after the Northern Securities was created.38

Hill was therefore disappointed when President Theodore Roosevelt urged
the Supreme Court to strike down the Northern Securities under the Sherman
Act. He called the Northern Securities a “very arrogant corporation” and Hill a
“trust magnate, who attempts to do what the law forbids.” But, of course, no one
knew what the Sherman Act did or did not forbid. To lead his defense, Hill hired
John G. Johnson, who was the “successful warrior” in the E. C. Knight case.
Johnson defended the Northern Securities in much the same way he had
defended the E. C. Knight Company. He argued that the Northern Securities did
not restrain trade or bar other railroads from entering the Northwest; he then
attacked the Sherman Act for being “so obscurely written that one cannot tell
when he is violating [it]. . . .” With the E. C. Knight case as a precedent, with
rates falling on Hill’s railroads, and with competition stiff between the GN and
the UP, Johnson argued his case with confidence.39

In 1904, however, in a landmark case, the Supreme Court decided five to
four against the Northern Securities. It had to be dissolved. Hill was especially
irritated at Justice John M. Harlan, who wrote the majority opinion. The
Northern Securities was, according to Harlan, “within the meaning of the
[Sherman] Act, a ‘trust’; but if it is not it is a combination in restraint of interstate
and international commerce; and that is enough to bring it under the
condemnation of the act.” Harlan continued with a devastating statement: “The
mere existence of such a combination…constitute^] a menace to, and a restraint
upon, that freedom of commerce which Congress intended to recognize and
protect, and which the public is entitled to have protected.”40

The Northern Securities decision, then, overturned the E. C. Knight case.
Now “the mere existence” of a large corporation was seen as a threat to trade and
therefore unlawful. Justice Oliver Wendell Holmes wrote a dissent which
credited this astonishing verdict to an unsophisticated, but widespread belief
among the public, in Congress, and in the courts that big corporations must

necessarily be bad ones. “Great cases,” Holmes concluded, “make bad law.”
Meanwhile Hill had to abolish the Northern Securities, as well as his trade with
the Orient.41

A look at the story of Hill and the railroads shows again the harmful, but
unintended consequences that followed federal tinkering with the economy. The
goals for federal intervention sounded so noble: subsidize a railroad to conquer
the West and then the world; strike down those corporations that “restrain trade.”
Yet these noble goals were soon lost in an eddy of tragic consequences. In the
case of the Sherman Act, Harlan’s interpretation was applied again and again.
Since “the mere existence of such a combination” as the Northern Securities was
bad, all large corporations now had to fear prosecution. Just how much this hurt
American trade, at home and abroad will never be known. Robert Sobel and
other business historians have argued that this fear of being too big made some
corporations stifle innovation and reduce their dominance in their industries in
order to protect inefficient competitors. General Motors and IBM are frequently
cited as examples of companies that dulled their competitive edge to help their
rivals survive.42

Hill was sad and predicted that the ICC and the Sherman Act would ruin
American railroads and threaten cheap trade throughout the nation. A 72-year-
old Hill would even write a book, Highways of Progress, to argue this point. But
his last days seem to have been happy. He had built the best railroad in America
and had used it to beat subsidized rivals time and again. He helped open the
Northwest to settlement and the Orient to American trade. He had made a
difference in the way the world worked. To some viewers, he was the real hero
in the drama of the American transcontinental railroads.

CHAPTER THREE

The Scrantons and America’s First
Iron Rails

Steamships and transcontinental railroads were obviously important to
America’s industrial revolution. Even more critical, however, was the iron and
steel industry itself. A successful iron industry could be the means of
manufacturing a variety of cheap products to sell at home and abroad. With iron,
for example, Americans could mass-produce rails and use them to cut
transportation costs, open markets out west, and speed new products to cities
throughout the nation. In the world of the 1800s, if a nation could produce cheap
iron and steel, it could shape its own destiny.

The problem for America was that Englishmen controlled the world’s iron
markets. They had developed the first blast furnaces, and they had also invented
the puddling techniques needed to purify molten iron. They likewise had a
generation of skilled iron-makers eager to compete on a world market. In short,
they had a large head start and, during the 1830s, used it to build all of America’s
iron rails. They also sent America iron-tipped plows, locks, nails, and all of the
cast-iron pipes used for the nation’s water system. By 1840, dozens of Americans
were frantically tinkering with different types of fuels, ores, and blast furnaces,
trying to produce American-made iron.1

In 1839, Nicholas Biddle, the former president of the Bank of the United
States, lamented, “With all the materials for supplying iron in our own lands, the
country has been obliged to pay enormous sums to Europeans for this necessary
article. . . . This dependence is horrible.” This “costly humiliation,” Biddle urged,
“ought to cease forever.” Rails were especially needed; and, six years later, the
American Railroad Journal complained: “The American iron-masters appear to
consider railroad iron as unworthy of their notice. . . . Not a bar of T-rail has yet
been rolled in the three great anthracite and iron districts of Pennsylvania.”2

During the 1840s, Pennsylvania’s Lackawanna Valley, in the northeast part
of the state, would be the battleground where American independence from

English iron would be fought and won. This masterpiece of entrepreneurship
was largely the work of George, Selden, and Joseph Scranton, who, after much
experimenting, became the first Americans to mass-produce rails.3 In doing so
they harnessed talent, capital, and technical expertise from within their families
and friends, investors in small towns in the Lackawanna Valley, and outsiders
from New York. Two things are striking: first, the Lackawanna Valley, with its
thinly scattered, low-quality ore deposits, was hardly a natural setting for
manufacturing; second, in the competition for urban growth, the winning city of
Scranton did not exist until the 1840s. Nearby Wilkes-Barre and Carbondale had
the advantages of age and wealth, until Scranton overcame them.4

The migration of the visionary Scrantons to northeast Pennsylvania began
in 1839, when William Henry, a trained geologist, scoured the area looking for
the right ingredients for iron-making—water power, anthracite coal, iron ore,
lime, and sulphur. He found these elements near Wilkes-Barre, the oldest,
largest, and wealthiest city in northeast Pennsylvania. Wilkes-Barre’s leaders,
though, were cautious: they preferred to ship coal safely down the Susquehanna
River, not to risk their fortunes on unproven iron. They rejected Henry’s
“attempts to raise a company in the Wyoming Valley [Wilkes-Barre] for an iron
concern.” So Henry went about twenty miles east into the wilderness of the
Lackawanna Valley, and looked over the land in this area. It had some water
power and, of course, lots of anthracite; he also found small quantities of iron
ore and lime, so he falsely assumed they existed there in abundance.5

Playing a hunch, Henry took an option to buy 500 acres of land at present-
day Scranton and built a blast furnace on it. At first he sought the necessary
$20,000 for the scheme from New York and England; but the high risk of his
daring experiment frightened away even the hardiest of speculators. Finding
greater faith from his family, Henry received support from his son-in-law, Selden
Scranton, and Scranton’s brother George, both of whom were operating the
nearby Oxford Iron Works in Oxford, New Jersey. Originally from Connecticut,
the wide-ranging Scrantons tapped their credit lines and picked up additional
capital from their first cousin, Joseph Scranton; his brother-in-law, Joseph C.
Platt; and friends, Sanford Grant, and John and James Blair, who were merchants
and bankers in Belvidere, New Jersey. These entrepreneurs, which we will call
the Scranton group, raised $20,000 in 1840 and spent the next two years building
the blast furnace and digging the ore and coal to make iron.6

Making iron, they quickly discovered, required more entrepreneurship than
they had originally expected. The local ores and limestone were limited and of
poor quality. They had chosen the wrong location, but it was too late to sell out

and switch so they searched eastern Pennsylvania and New Jersey for the right
combination of ores and limestone. As the Iron Manufacturers’s Guide later
understated: “The absence of anthracite iron deposits becomes a subject of
curious speculation as it has been one of great pecuniary interest and was a bitter
disappointment to the first manufacturers of iron with stone [anthracite] coal.”7

Only the local coal lived up to expectations, and this was available in other
areas with established cities closer to the lime and ore. When the Scrantons made
their iron, they brought their lime and ore on boats from Danville, Pennsylvania,
about thirty miles up the Susquehanna River right by the mansions on the River
Common in Wilkes-Barre and over land almost twenty miles to Scranton.8

The high costs of transportation and the unexpected purchases of ore and
lime almost ran the Scrantons into bankruptcy; then George Scranton came up
with a plan to convert the pig-iron into nails. Such a bold venture into
manufacturing would not be cheap. The need for a rolling mill and a nail factory
upped the ante to $86,000. Desperate for credit, George Scranton coaxed some
of this money from New Yorkers. Yet this jeopardized the family’s ownership.
So he placed his greatest reliance on other members of the Scranton group: long-
time friends John and James Blair invested money from their bank in New
Jersey, and Joseph Scranton sent funds from his mercantile business in Augusta,
Georgia. By 1843, George Scranton got his $86,000, kept control within the
family, and began making nails for markets throughout the east coast.9

The nail factory failed miserably. First, no rivers or rails helped market its
product. Dependent on land transportation, the Scrantons transferred the nails on
wagons east to Carbondale and west to the Susquehanna River and from there
shipped them to other markets. Second, no one wanted the Scrantons’ nails
because they were poor in quality. The low-grade ores in the Lackawanna Valley
provided only brittle and easily breakable nails. Faced with bankruptcy, the
Scrantons contemplated the conversion of the nail mill into a rolling mill for
railroad tracks. Experienced Englishmen still dominated the world production of
rails in the 1840s; no American firm had dared to challenge them. After
floundering in the production of nails, however, the Scrantons decided that a
lucrative rail contract might be the gamble that could restore their lost
investment.10

As luck would have it, in 1846, the nearby New York and Erie Railroad
had a contract with the state of New York to build a rail line 130 miles from Port
Jervis to Binghamton, New York. When Englishmen hesitated to supply the Erie
with the needed rails, the Scrantons had their chance. They traveled to New York
and boldly persuaded the board of directors of the New York and Erie to give

their newly formed company the two-year contract for producing 12,000 tons of
T-rails. They promised to supply rails cheaper and quicker than the British.
Impressed with the Scrantons and desperate for rails, the directors of the New
York and Erie advanced $90,000 to the eager Scrantons to construct a rolling
mill and to furnish the necessary track.11

The construction of the mill and the making of thousands of tons of rails
seemed impossible. The contract called for the Scrantons to supply the Erie with
rails in less than twenty months. The Scrantons would first have to learn how to
make the rails they promised to provide. Building the blast furnaces would come
next. Then they would have to import some ore and much limestone into the
Lackawanna Valley to make the rails. Finally, because they lacked a water route
to the Erie line, they would have to draft dozens of teams of horses to carry
finished rails from their rolling mills scores of miles through the wilderness and
up mountains to New York, right where the track was laid. It is no wonder the
New Yorkers wanted to back out at the last moment. Yet somehow, in less than a
year and a half, the Scrantons did it. On December 27, 1848, just four days
before the expiration of the Erie’s charter, the Scrantons fulfilled their contract
and completed the rail line.12

An interesting feature of the Scrantons’ achievement was that hey built
their rails during a time of low tariffs. Some businessmen have always argued
that their government should place high tariffs on imports to protect local
manufacturers against foreign competitors. Yet, in 1846, the year the Scrantons
began making rails, Congress passed the Walker Tariff, which lowered duties on
imported rails and other iron products from England. George Scranton actually
said he liked the lower tariff for two reasons. First, the Scranton price of $65 per
ton of rail was already fixed and was competitive with English prices. In any
case, Scranton estimated his firm would be earning $20 per ton profit, so the
tariff was not needed. Second, the low tariff meant that the Scrantons could buy
their raw materials— pig iron, rolled bars, and hammered bars—more cheaply.
This would, Scranton hoped, lay the foundation for his firm to be the strongest
on the continent for years to come.13

Many Americans were amazed that an iron works located in the middle of
a wilderness, with no connecting links to outside markets, could build and
deliver 130 miles of rails to a railroad in another state. The Scrantons did not
want to have to duplicate this feat, so they did two things to improve their
location: first, they started building a city around their iron works; second, they
began building a railroad to connect their city to outside markets. That way they
could ship rails anywhere in the country and also export the local anthracite,

which could be sold as a home-heating fuel.14
With the confidence of New York investors, the Scrantons proposed two

railroads: the Liggett’s Gap, and the Delaware and Cobb’s Gap. The Liggett’s
Gap line, running from Scranton fifty-six miles north to connect with the Erie at
Great Bend, would permit Scranton to supply coal to the farms in the Genessee
Valley in upstate New York; the Delaware and Cobb’s Gap route, running sixty-
four miles east to the Delaware River at Stroudsburg, would give the Scrantons a
potential outlet for coal to New York City. By backing two lines, the Scrantons
gave themselves two markets for Lackawanna Valley coal. The building of a
railroad, then, was a logical sequel to the Scrantons’ superb iron works. The
railroad itself became a market for Scranton iron, it provided an outlet for
Scranton coal, and it promoted trade for Scranton city.15

Building these two railroads was no cinch. Some of the terrain was
mountainous: even after using gunpowder to level the hills, the grade was still
steep (eight feet to the mile) in places. Also, George Scranton had to negotiate
some delicate right-of-way problems with farmers along the rail route who were
overvaluing their land. Of course, the Scrantons were using their own homemade
rails for the line, but this still ran into costs. For all of this, the Scrantons needed
more New York capital, but they had to be careful. They wanted to be
entrepreneurs, not pawns of the New Yorkers. The Scrantons had to make sure
they retained a guiding interest in their projects. This they did. The two railroads
were surveyed and built from 1850 to 1853; they both were consolidated into
one line, the Delaware, Lackawanna, and Western Railroad (hereafter
Lackawanna Railroad) with George Scranton as its first president. In 1853,
flushed with success, the Scrantons also incorporated their iron works as the
Lackawanna Iron and Coal Company (hereafter Lackawanna Company) with
$800,000 in stock; they elected Selden Scranton as president.16

The building of America’s premier iron works and railroad was an amazing
feat of collective entrepreneurship. The Scranton group became unified behind a
vision of mass-produced rails, the creating of a city, and the laying of rails from
its borders east and north to outside markets. As individuals, the members of the
Scranton group had few of the skills and little of the capital needed to fulfill this
vision; but collectively they did. They had to have outside cash, but their
confidence and unity of purpose impressed New York investors and convinced
them the Scrantons could do the job.17

Not everyone wished the Scrantons well. And this made their success story
even more remarkable. First, there was the generally negative reaction from
leaders in Wilkes-Barre, who thought the rise of a new city would threaten their

hegemony in northeast Pennsylvania. The Scrantons logically tried to secure
loans in Wilkes-Barre, the oldest and largest city in the area. But the
businessmen there rarely helped, and they often hurt. For example, in the 1850s
the Scrantons tried to get a charter for their railroad from the state legislature;
Wilkes-Barre’s able and influential politicians thwarted the Scrantons because
the new rail line threatened Wilkes-Barre’s trade dominance along the
Susquehanna River through the North Branch Canal. Referring to Wilkes-Barre
as “the old harlot of iniquity,” a concerned lawyer advised the Scrantons that
those associated with the North Branch Canal in Wilkes-Barre “all make
common cause against [the] Liggett’s Gap [Railroad].”18

Not only did politicians in Wilkes-Barre hamper iron production and delay
rail completion, they prevented the Scrantons’ emerging industrial city from
becoming a county seat. The new city of Scranton happened to be situated in the
eastern end of Luzerne County. So wily politicians in the county seat of Wilkes-
Barre used statewide influence to delay for decades the creation of a new county.
Even the prestige and influence of George Scranton in the Pennsylvania Senate
and U. S. Congress during the 1850s could not force the division of Luzerne
County. So while the Scrantons were trying to promote their new town as a
Mecca of industrial opportunity, the town’s administrative business was being
diverted to the county seat of Wilkes-Barre. Summarizing Wilkes-Barre’s general
“policy of obstruction,” Benjamin Throop observed that during all these early
struggles, Wilkes-Barre had the advantage. The Lackawanna Valley was poor,
and had its fortune still to make; Wilkes-Barre had inherited considerable wealth
from its former generations. The public-spirited men here were, most of them,
newcomers and unknown. Those of the opposition had prestige and influence.19

Possibly even more damaging than the opposition from Wilkes-Barre’s
politicians was the hostility from many local farmers near Scranton. These old
settlers liked the prospects of improved transportation to get their crops to
market, but many did not want to see the “machine” transform their “garden”
into an industrial community.20 One local observer described their fears
sarcastically as follows: There were then, as there are yet, and as there always
will be, a debilitated, but croaking class of persons who by some hidden process
manage to keep up a little animation in their useless bodies, who gathered in bar-
room corners, and who, with peculiar wisdom belonging to this class while
discussing weighty matters, gravely predicted that “the Scrantons must fail!”21

Even before the Scrantons arrived, several of these farmers had formed a
committee and denounced “blackleg drivellers, in the shape of incorporated

companies.”22
The local squabbles with the old settlers regularly kept the Scrantons from

fully attending to their iron works. Recognizing this problem early, the Scrantons
donated land and labor to help build the old settlers a church. Through a
company store, the industrialists enthusiastically traded goods and produce with
nearby farmers. Desperate for credit, though, the Scrantons were barely
surviving in the early 1840s and had to seek extensions on local loans. At one
point William Henry wrote, “We have not twenty-five cents in hand. . . . The
credit of the concern [is] impaired.” He added, “This suspense and uncertainty is
worse where our credit is concerned than almost any other mode of proceeding.”
George Scranton felt the same way. At one point he described himself as being
“worried most to death for fear we can’t meet all [credit obligations]. … I cannot
stand trouble & excitement as I could once. I don’t sleep good. My appetite is
poor & digestion bad. … If we can succeed in placing [the] Lacka[wanna iron
works] out of debt it would help me much. . . .” During some of the Scrantons’
darker moments, “every petty claim of indebtedness was urged and pressed
before the justices of the township with an earnestness really annoying.”23

Disputes with the old settlers over land and credit, then, persisted as the
Scrantons verged for years on bankruptcy without successfully producing nails
or rails. At one extreme, a vindictive local merchant threatened to “break. .
.down” the Scrantons’ company store by “selling goods very cheap”—if
necessary by “giving away his goods.” At the other end, legend has it that after
the Scrantons’ brittle nails were rejected by New York merchants, Selden
Scranton immediately sold quantities of the “practically worthless” product to
unsuspecting old settlers. Such feuding seems to have been commonplace; even
when the Scrantons finally received the rail contract from the Erie, many farmers
withheld the use of their mules and horses to prevent delivery of the rails; others
charged exorbitant prices.24 Under these conditions, one can hardly argue that
the location of Scranton was inevitably destined for urban glory. It was not.

When the iron works and the railroad succeeded, the Scrantons then
promoted the growth of their new city. Their correspondence shows that they
dearly viewed industrial and urban growth as symbiotic. Their investment in real
estate and housing multiplied in value after the success of their iron works and
the arrival of a railroad. The Scranton group originally bought a 500-acre tract
for $8,000 in 1840. As mere coal land that acreage was worth at least $400,000
by the mid-1850s. As improved land much of it was worth even more. The
Scrantons had laid out streets, sold lots, and built mansions for themselves and
company houses for their workers.25

Unlike the leaders in Wilkes-Barre and Carbondale, the Scranton group
created an open environment for their city and actively recruited investors to
come. To do this effectively, they went to the state legislature in 1866 and
secured wide city limits of almost twenty square miles, which at that time
included mostly farm and timberland. They incorporated this large space to
fulfill their vision of their city’s future, in which they saw many more industries,
homes, and parks. The space was needed to plan all this properly.26

Wilkes-Barre’s leaders, by contrast, wanted to limit immigration and
preserve their closed society. They intentionally settled for small city limits of
4.14 square miles and did not even incorporate this much land until five years
after the Scrantons did so. This made urban planning in Wilkes-Barre difficult,
and it also hindered the preventing of fires and the controlling of epidemics.27

Carbondale became an even more dreadful example of urban planning.
Most industrial cities in the nineteenth century were hardly paragons of
cleanliness and safety, but Carbondale was among the dingiest. Fires periodically
gutted whole sections of the city, destroying property, buildings, and lives. Mines
caved in from time to time; the most serious collapse buried sixty miners
(fourteen died) in forty acres of subterranean caverns. Floods were also a threat.
One flood, caused by a poorly planned reservoir, surged through the main street,
filling the mines, taking lives, and annihilating buildings and houses.

In light of these disorderly influences, it is startling to discover that, before
1851, Carbondale had no fire or police department. In that year, after an
unusually severe fire “laid waste to the greater portion of the city above the
public square,” Carbondale’s shortsighted leaders finally decided to get some
“means of protection against fire or outlaws.” The dedication of Carbondale’s
new civil servants seems to have been slim because another fire soon ravaged
the city, this time “entailing a considerable loss” to William Richmond’s coal-car
factory and George L. Dickson’s mercantile firm, among other damage. This new
city government apparently made no provision for sanitation; as one resident
complained in 1875, “Another inconvenience is that citizens have no convenient
place to dump their coal ashes, or empty. . .rubbish.” Such a perilous
environment prevented a stable business climate and may have helped push
Richmond, Dickson, and other entrepreneurs out of Carbondale and into
Scranton.28

All of this creates the impression that, once the iron works and the railroad
were established, and once the city of Scranton was incorporated, the Scranton
group had it made. But this was not the case; in fact, most of the Scranton group
did not die rich, and two died very poor. William Henry, the original leader of

the group, left the city in the 1840s after some bad investments. Henry had
energy and vision but little patience and endurance; he died embittered and
impoverished in 1878. Sanford Grant, the first owner of the company store,
wilted when faced with business competition and industrial risk. Selling his
stock, he left for safer business climes in Belvidere, New Jersey, where he lived,
without ulcers or wealth, until his death in the 1880s. Displaying greater
fortitude than Grant, Selden Scranton became the first president of the
Lackawanna Company; five years later, though, he and his brother Charles left to
operate a blast furnace in Oxford, New Jersey. Their iron-making talents
ultimately failed them; Selden declared bankruptcy in 1884 and died shortly
thereafter. George Scranton, the early leader and driving force behind coal and
railroad development, had more faith and perseverance than most of the others.
He amassed $200,000, built a fine mansion, and served as U.S. Congressman
from northeast Pennsylvania. George, however, still lost some of his fortune
during the Panic of 1857 and had to sell much of his stock in the Lackawanna
Railroad at reduced value. Plagued with health problems from overwork during
the rugged days of the 1840s, George died in 1861 at age forty-nine.29

Three other members of the Scranton group never abandoned their vision
of manufacturing rails and building a city; they achieved fabulous success and
wealth. On top was Joseph Scranton, who said at the start, “I have no fears of the
ultimate success [of the iron works],. . .1 have invested in it. Should remain till it
is doubled or lost as the case may be.” Twenty-seven years later, Scranton was
president of the flourishing Lackawanna Iron and Coal Company and was worth
$1,100,000, making him the wealthiest man in northeast Pennsylvania. His
brother-in-law and next-door neighbor, Joseph C. Platt, was superintendent of
the Lackawanna Company and was worth $220,000. Right behind Joseph
Scranton with $910,000 was his friend James Blair, who had backed the
Scrantons from nails to rails. Blair held lots of stock in both the iron works and
the railroad; he then expanded and started Scranton’s first trolley company.30

Some people point to such wealth, and the absence of it in other
households, and argue that the state should redistribute it, or at least tax it at high
rates. It hardly seems fair, they might say, that some people should have so little,
while three men—Joseph Scranton, Joseph Platt, and James Blair—should own
close to ten percent of all the wealth in the city (according to the data in the 1870
federal manuscript census). As socialist Harold Laski once said, “Less
government. . .means liberty only for those who control the sources of economic
power.” What we need, according to this view, is an active state to transfer
income, chop up inheritances, perhaps even to impose equality of condition.

To argue this way is to miss a key point: Scranton’s founders, as
entrepreneurs, created something out of nothing. They created their assets and
created opportunities for others when they successfully bore the risks of making
America’s first iron rails. Without them, almost everybody else in the region
would have been poorer. The amount of wealth in a region (or a country) is not
fixed; in 1870, Scranton, Platt, and Blair got the biggest piece of the economic
pie, but it was the biggest piece of a much larger pie—made so by what they
cooked up when they came to Pennsylvania thirty years earlier.

When the Scrantons came to the Lackawanna Valley, it was a poor farming
region with no close ties to outside markets. In 1850, according to the federal
manuscript census, no one in the Lackawanna Valley was worth more than
$10,000. In 1870, after the Scrantons had established their city and their iron
works, thirty-three families in Scranton alone were worth at least $100,000; and
one was already a millionaire. Thousands of other families were working their
way toward better lives. The Scrantons’ iron works and railroad were the means
to this end.31

Some people look at the results of splendid entrepreneurship and say that
someone else might have come along later and done the same thing. We can see
how improbable this is in the Scranton case. The wealthy leaders in the older,
more prosperous city of Wilkes-Barre, for example, shunned manufacturing for
years and often tried to thwart the Scranton’s plans. If the Scrantons had not
come along, much of the iron ore in central Pennsylvania and New Jersey would
probably have been exported to Philadelphia, Pittsburgh, or New York, where
more abundant capital would have eventually taken the risks of making
manufactured goods. Northeast Pennsylvania would have been left in the dark.32

To be sure, the anthracite in the Lackawanna Valley was already attracting
New York investors: but they came only to get coal, not to build cities and make
the region prosper. Without dedicated local entrepreneurs, the Lackawanna
Valley, like so many mining regions, would have enjoyed only fleeting and
limited prosperity. The entrepreneurs in New York would have bought the coal
land cheap, then supplied transportation to the region, collected their profits, and
left the exporting area full of deserted mines and ghost towns.33

Let’s look at the different opportunities the Scrantons, as entrepreneurs,
created intentionally and unintentionally for others. First, the people in northeast
Pennsylvania, especially those with capital to invest, now had new and better
opportunities available. Scranton, in fact, became a magnet for entrepreneurs in
nearby towns, except for Wilkes-Barre. Investors in the nearby county seats of
Montrose and Towanda came to Scranton and set up the city’s first two banks.

From nearby Honesdale came Scranton’s first large-scale flour miller. From
Carbondale came the presidents of both of that city’s banks, a locomotive
builder, a stove maker, a coal operator, and the mayor. Not all of these men won
fortunes, but several did, and their investments helped diversify Scranton’s
economy and made it one of the fastest growing cities in America in the late
1800s.34

Another group of winners were the many local farmers who held on to
their land and sold it later as coal land. All they had to do was watch others do
the work of establishing the region’s export. After this, they cashed in. The
Scrantons bore the risks of making rails from imported ore; then they risked
building a railroad to connect the Lackawanna Valley to New York City. All the
farmers had to do was hold on to their land and watch it rise in value—from $15
an acre in 1840 to $800 an acre in 1857. In just seventeen years, then, a 160-acre
farm increased in worth from $2,400 to $128,000. Some of these locals even
ended up richer than the wealthiest of the Scrantons. Benjamin Throop, for
example, was a local physician who watched the Scrantons build their iron
works; then he bought up much of the land in the area on the chance that they
would succeed. He later wrote a book describing his real estate exploits and
expressing his gratitude to the Scrantons. He even named his only son after
George Scranton. When Throop died in 1897, at age 86, he left an estate of
$10,000,000.35

Even immigrants could sometimes get rich in Scranton. The growth of
Scranton from farming hamlet in 1840 to 45,000 people in 1880 brought
thousands of immigrants to town. Many of them worked in the factories and
improved their lives; they saved a little money and bought their own homes.
Some of them had the talent and vision to rise to the top. In 1880, of Scranton’s
forty most prominent businessmen, measured by memberships on boards of
directors, nine of them were immigrants. Some of these rags to riches
immigrants were clearly among the most successful men in Scranton. Thomas
Dickson, for example, came to America from Scotland and began work as a
mule driver. Soon he was making engines, boilers, and locomotives for the
Scrantons; he ended up as president of the Delaware and Hudson Railroad, a
500-mile line that linked Scranton to markets all over the east. Another
immigrant, John Jermyn, came to Scranton in 1847 from England and began
working for the Scrantons for 75 cents a day. Soon he was managing coal mines
and was putting what little money he earned into coal land and real estate with a
knack that amazed everyone. The critical risk in his career came in 1862, when
he leased some abandoned mines northeast of Scranton. Defying the skeptics,

Jermyn bought new machines and fulfilled a contract for one million tons of
coal. He then tripled his contract and was on his way to becoming the largest
independent coal operator in the Lackawanna Valley. A local credit agent said
that Jermyn was “believed to be unaffected by the times, holding his own versus
all contingencies.” When he died in 1902, Jermyn left an estate of $7,000,000.36

Because the Scrantons did what they did, thousands of Americans had new
opportunities in life. If they could just capture the Scrantons’ vision, they had a
chance to succeed. One life that was made anew was that of Joseph J. Albright,
the uncle of Selden Scranton. Albright was in business near Nazareth,
Pennsylvania, and went bankrupt in 1850, when he was nearly forty years old.
He had to sell all his furniture at a sheriff’s sale and deal with creditors from two
states. He wrote Selden that “it is hard at my age to be thrown upon the world
pennyless [sic],” and hoped that Selden’s wife “wouldn’t be ashamed of her poor
friend.” He even seems to have contemplated suicide and wrote that “death
would have been a relief” to him.37

The Scranton group came to Albright’s rescue and gave him a job as coal
agent for their railroad. Soon Albright caught the Scrantons’ vision. He was
patient and invested wisely: he bought stock in the Scrantons’ iron and coal
company; he then joined them in building the city’s gas and water system. On his
own, he invested in a company to mill flour and in a firm to make locomotives.
By 1872, he was worth half a million dollars and was elected president of the
largest bank in the city. He had become a believer in Scranton and wanted to
help the city that had given him a chance; when he died, he deeded his home to
the city and gave $125,000 to build a major public library to help educate future
generations in Scranton.38

Not everyone joined the Scranton team. Albright did, but another relative,
Phillip Walter, also of Nazareth, resisted an elaborate courtship from the
Scrantons in 1852. He told them he was reluctant “to pull [up] stakes and move”
from “my long cherished home” because “I might fail.” After a visit to Scranton,
in which Walter sold hundreds of dollars worth of merchandise to an expanding
population, he confessed that “I was quite enchanted with your place and the
great, though undeserved, esteem in which I was held by many of the
inhabitants.” Walter also admitted, “I certainly could not find a place anywhere
where I would rather go than to Scranton.” He further acknowledged, “My sons.
. .would likely find openings for business in such a thriving place as Scranton
appears to be and will yet become.” Other men of means saw these advantages
and settled in Scranton. But Walter avoided getting “carried away by the
admiration of your thriving place” by his reluctance to uproot and his haunting

fear that “still I might fail.” Winnowing out the conservative and the weak at
heart, Scranton seems to have attracted a select set of venturesome leaders to
guide its industrial growth.39

In building their city, the Scrantons consciously promoted entrepreneur
ship. The securing of wide city limits was part of this effort. They believed their
city would grow, and they diligently planned its expansion. Along these lines,
the Scrantons and their allies established a board of trade in 1867 to promote the
industrial development of their city. They installed an innovative Welsh
immigrant as the board’s first president. The board actively recruited industry
and even secured a law granting all new corporations tax-free status for their
first ten years in Scranton.40

In this open environment, Scranton grew as a manufacturing center and
attracted many capitalists who were willing to take different types of risks. This
made for a combination of inventiveness and creative entrepreneurship. For
example, Henry Boies came to Scranton from New York in 1865 and founded
the successful Moosic Powder Company; then he perfected a gunpowder
cartridge that reduced the death and injury resulting from carelessness in mining
explosions. Boies seemed to court risky ventures and had failed twice before
coming to Scranton. Once he had made his fortune in powder, the credit lines
were open, and he went to work inventing a flexible steel wheel for locomotives.
He started the Boies Steel Wheel Company in 1888 to manufacture his patented
invention.41

Another innovation that succeeded in Scranton was Charles S.
Woolworth’s five-and-tencent store. Born in upstate New York, Woolworth, his
brother Frank, and partner, Fred M. Kirby, experimented in the late 1870s with
the opening of specialty stores featuring largely five-and-tencent merchandise.
Shoppers were often skeptical of the first stores opened in Harrisburg, Lancaster,
and York, Pennsylvania. In 1880, however, when Charles Woolworth set up a
five-and-tencent store in Scranton, the idea caught on. The sales in Scranton
were a modest $9,000 the first year, but the Woolworths and Kirby had laid the
foundation for an empire, and Charles had found himself a new home in
Scranton. A decade of brisk sales in Scranton encouraged Woolworth to start
branch stores in New York and Maine in the 1890s. Kirby, meanwhile, started a
profitable store in Wilkes-Barre. Soon Woolworths was selling nationally, and
became a major American corporation. In Scranton, Woolworth joined with
other local entrepreneurs in founding the International Textbook Company,
which employed thousands of people to sell textbooks throughout the nation.42

The introduction of electricity in the 1880s brought out the best in

Scranton’s entrepreneurs. They didn’t produce Thomas Edison; but they did have
Merle J. Wightman, who designed and built one of the first motors to run trolley
cars by electricity. Scranton also became one of the first cities in the nation to
have an electric trolley system. Sensing opportunity, Wightman started his own
company in Scranton to manufacture trolley engines on a large scale. Other
Scrantonians tried to adapt electricity to coal mining. In 1894, they founded the
Scranton Electric Construction Company, which perfected and manufactured
electrical apparatus (e. g., mechanical drills, locomotive hoists, and mining
pumps) for use throughout the anthracite coal fields.43

Scranton did not emerge inevitably as a center for manufacturing trolley
motors, locomotive wheels, or textbooks. Nor was there any particular reason
why Scranton should have become a major headquarters for directing a chain of
five-and-tencent stores. Other cities throughout America had good enough
location and transportation to have been sites for these industries. Even the
making and distributing of electrical mining equipment could have been done in
Wilkes-Barre or in anthracite towns other than Scranton. A key to Scranton’s
success seems to have been the presence of aggressive entrepreneurs, who had a
philosophy of openness and commitment to growth. As the spiral of growth in
industries, services, and population persisted, the city of Scranton, which was
founded on a hunch, officially became one of the forty largest cities in the
country in 1900.44

A lot can be learned from the story of the Scrantons. The first lesson is that
entrepreneurs are needed to create wealth; when they succeed, others then have
the chance to build on what they started. If we look at the later history of
Scranton, we can also learn a second lesson: that it is hard for those on top to
stay there in the generations that follow. An inheritance can be transferred; but
entrepreneurship, talent, and vision cannot be. The industrial city of Scranton
saw lots of movement down the ladder of social mobility, as well as up.

This can be seen if we look at what happened to the Scranton economic
elite of 1880—those men who made up the first generation of the city’s industrial
leadership. I collected data on the forty men in Scranton who, by 1880, held the
largest number of corporate directorships and major partnerships. These forty
men dominated all of Scranton’s major industries. Several were millionaires; and
all had access to credit and contracts, which seemingly should have insured the
success of their children in Scranton, which spiralled in population from 45,000
in 1880 to 137,000 in 1920.45

As founders and developers of the Scrantons’ vision, these forty
entrepreneurs had much to give their children. Blessed by the luck of the draw,

these fortunate offspring could choose almost any career, with the security that
only wealth can bring. Raised in Victorian mansions rife with servants, they
often had doting parents to give them private-school education, college if they
wanted, or specialized training in engineering or industry. If these children did
not prosper, they could fall back on hefty inheritances. Also, as they matured,
they could take advantage of Scranton’s thriving marketplace to make even more
money. By 1920, the sons of Scranton’s 1880 leaders had ample opportunity to
succeed their fathers as the pacesetters of Scranton’s business world.46

Yet they did not. Few went hungry, but most could not come close to
matching their father’s achievements. Only nine of the forty economic leaders in
1880 had even one son, son-in-law, or grandson who forty years later was an
officer of even one corporation in Scranton. In short, the fathers and sons
provide a stunning contrast.47

The fathers built the city of Scranton, but why the sons did so poorly is
complicated. Part of the reason for this startling breakdown lies in the general
problem of family continuity. Six families didn’t have any sons; seven others had
too many—which splintered the family wealth into small pieces. In a very few
cases, some sons left Scranton for business ventures elsewhere. Often the sons
chose not to go into business: they led lives of brief and precarious leisure.

The fragmentation of some of Scranton’s larger family fortunes seems
remarkable. For example, brothers Thomas and George Dickson became
president of a national railroad, the largest manufacturing company in northeast
Pennsylvania, an iron company in New York, the vice president of the largest
bank in Scranton, and directors on many large companies. Yet only one of
Thomas Dickson’s three sons went into business; and, under his leadership, the
Dickson Manufacturing Company went out of business. George Dickson’s only
child, Walter, became a mere salesman and held no corporate influence. The four
sons of multimillionaire James Blair were nonentities. Only one of Blair’s sons
appears to have been gainfully employed, and his job was that of assistant
cashier in his father’s bank.48

Even the Scrantons of Scranton were almost extinguished. George, Selden,
and Joseph Scranton were the founding fathers of American rail making, but
only one of their sons showed entrepreneurial skill. Selden was childless, and
went bankrupt in any case. George was worth $200,000 when he died; but his
sons, James and Arthur, became men of leisure, not entrepreneurs. Joseph’s son
William gave business a try, but his story was often sad. Joseph was president of
the Lackawanna Iron and Coal Company from 1858 until his death in 1872. But
during these years, the New Yorkers bought up so much stock that William was

not allowed to succeed his father as company president. Young William was
restless as a mere local manager, so he studied the new Bessemer process in
Europe and returned to start his own Scranton Steel Company in 1881. The city’s
low tax on new industries gave him an edge over the larger Lackawanna
Company, but the older company won the competition and absorbed his
enterprise in 1891. William did prove to be a very capable builder and operator
of the Scranton Gas and Water Company. He and his son, Worthington, ran this
company profitably and, in 1928, Worthington sold it for $25 million.49

Some of the sons of Scranton’s early industrialists literally squandered
fortunes. Benjamin Throop, who was described earlier, became a millionaire in
coal land and urban real estate. His surviving son had, at best, modest business
skills, and when he and his wife died prematurely in 1894, the eighty-three-year-
old Throop undertook the task of rearing his only grandchild, five-year-old
Benjamin, Jr. The elder Throop died shortly thereafter, but young “Benny”
inherited a ten-million-dollar fortune. Young Throop married into a prominent
local family and, having no financial worries, began raising German shepherd
dogs. He served in World War I, but by that time his wife had divorced him and
he seems to have lost any interest that he might have had in gainful employment
or in the city of Scranton. During the 1920s, like a character from an F. Scott
Fitzgerald novel, he spent most of his time in Paris indulging champagne tastes
in cars and women. He married a French movie star and traveled widely during
their marriage. Throop died in 1935, in his mid-forties, of undisclosed stomach
ailments after apparently dissipating his grandfather’s entire fortune.50

Throop was a rare but not unique example of dissolution. Given the
tradition of partible inheritance, many of the sons of economic leaders knew that
they would never have to work, and so they became men of leisure with no
business interests. For example, James Blair’s son Austin was “a gentleman of
leisure [with] [n]o[thing] to do except fish and hunt.” According to a credit
agent, “his fa[ther], James Blair, is a millionaire and supports him [and] lets him
have a fine residence rent free and supplies him with funds when required.”51

Without strong parental guidance, a slothful life was understandably
attractive to these scions of wealth. Owing to the genetic improbability that
Scranton’s 1880 elite would produce only children like themselves, with a knack
for business, the fragmenting of economic leadership should not surprise us.
Edmund B. Jermyn’s taste for horse racing—this son of the multimillionaire coal
operator apparently “never missed a day’s [horse] racing at Honesdale or at
Goshen, N. Y.”—becomes understandable. The son grew up under different
conditions with different options in life from those that were available to his

rags-to-riches father.52
The Throop and Blair families may provide clues to one possible

relationship between parental guidance and entrepreneurship. On one hand, all of
Benny Throop’s parents and grandparents died before he was eight years old, so
he had no family pressure to become a businessman and pass on the family
fortune. The four sons of James Blair, on the other hand, had a long-lived father,
who personally directed many of his own enterprises until his death at age
ninety. The elder Blair outlived two of his sons, and the other two had passed
middle age by the time they were independent of paternal control. By living so
long and holding on so tightly to his investments, Blair may have quenched the
spirit of entrepreneurship in his sons. The role of the parents, the lack of business
talent, the quest for leisure, and the problems of family continuity in general all
seem to have combined to fragment the Scranton economic elite of 1880.

Of course, not all of Scranton’s early industrialists had downwardly mobile
sons. Nine of the forty top capitalists in the Scranton of 1880 passed the torch of
leadership from father to son in 1920. hi any randomly selected group of forty
families, of course, some would produce sons or have sons-in-law with a flair for
business. It is improbable, however, that nine of forty randomly chosen families
would have corporate officers as sons. This merely shows that industrial leaders
are much more likely than other groups in the population to father corporate
officers. It does not show continuity of economic leadership because more than
three-fourths of the industrial families of 1880 in Scranton failed to continue a
line of corporate succession in the following generation.53

While most of the sons of entrepreneurs stumbled, a variety of new
immigrants in Scranton saw their opportunities and took them. By 1920, for
example, Andrew Casey, an Irish liquor dealer, had become a bank president and
a hotel magnate. Michael Bosak, a Slovak immigrant who started life as a
breaker boy in the 1880s, owned banks, a manufacturing company, and a real
estate firm in Scranton in 1920. Few had the talent and vision to build such
empires, but those who did picked up where the city’s founders had left off.54

Scranton was, in a sense, America’s first manufacturing city. It marked the
spot where America began its independence from British iron. During the next
generation, Scranton became a showcase of remarkable entrepreneurship and
industrial growth. In this relatively open environment, Scranton’s economic
order was fluid: upward mobility for the poor existed side by side with
downward mobility for the rich. Entrepreneurs were prize possessions for cities
and for the nation; but their vision, talent, and drive were hard to transfer from
generation to generation. Most of the families of Scranton’s early industrialists

died out as entrepreneurs; they didn’t inherit their fathers’ vision and turned over
the city’s economic leadership to newcomers.

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 either.

CHAPTER FOUR

Charles Schwab and The Steel
Industry

When asked for the secret of his success in the steel industry, Charles
Schwab always talked about making the most with what you have, using praise,
not criticism, giving liberal bonuses for work well done, and “appealing] to the
American spirit of conquest in my men, the spirit of doing things better than
anyone has ever done them before.” He liked to tell this story about how he
handled an unproductive steel mill: I had a mill manager who was finely
educated, thoroughly capable and master of every detail of the business. But he
seemed unable to inspire his men to do their best.

“How is it that a man as able as you,” I asked him one day, “cannot make
this mill turn out what it should?”

“I don’t know,” he replied; “I have coaxed the men; I have pushed them, I
have sworn at them. I have done everything in my power Yet they will not
produce.”

It was near the end of the day; in a few minutes the night force would
come on duty. I turned to a workman who was standing beside one of the red-
mouthed furnaces and asked him for a piece of chalk.

“How many heats has your shift made today?” I queried.
“Six,” he replied.
I chalked a big “6” on the floor, and then passed along without another

word. When the night shift came in they saw the “6” and asked about it.
“The big boss was in here today,” said the day men. “He asked us how

many heats we had made, and we told him six. He chalked it down.”
The next morning I passed through the same mill. I saw that the “6” had

been rubbed out and a big “7” written instead. The night shift had announced
itself. That night I went back. The “7” had been erased, and a “10” swaggered in
its place.The day force recognized no superiors. Thus a fine competition was
started, and it went on until this mill, formerly the poorest producer, was turning

out more than any other mill in the plant.1

Schwab showed the ability to find solutions to problems even as a lad
growing up in Loretto, Pennsylvania. According to one of his teachers, “Charlie
was a boy who never said, ‘I don’t know.’ He went on the principle of ‘pretend
that you know and if you don’t, find out mighty quick’.” Schwab knew early that
he would have to live by his wits; his parents and immigrant grandparents
weaved and traded wool products, jobs which put food on the table but not much
money in the bank. Young Charlie, therefore, started work early in life: in one
job he was a “singing cabby”; he drove passengers from nearby Cresson to
Loretto and entertained them with ballads along the way. One of his passengers,
impressed with the gregarious youth, gave him a travel book and Schwab later
said, “It opened my eyes to the glories of the outside world, and stimulated my
imagination tremendously.” Soon, Loretto, Pennsylvania, population 300, would
be too small to contain the ambitious Schwab. With his parents’ blessing> he left
home at age seventeen to clerk in a general store in Braddock, a suburb of
Pittsburgh.2

Braddock was a steel town, varied in its cultural and urban life. Working in
the store, young Charlie often pleased customers with his good looks, wit, and
charm; one man whom he impressed was William “Captain Bill” Jones, the mill
superintendent at Braddock for Carnegie Steel. Jones offered Schwab a place as
a stake driver for the engineering corps who designed plans for building
furnaces. Schwab accepted, proved himself capable, and soon became a
draftsman. Here, he worked overtime to master his craft; within six months he
became Jones’ righthand man at the mill. As Jones’ messenger boy, Schwab came
into contact with the mill owner, the Scottish immigrant Andrew Carnegie.
Carnegie took a special liking to Schwab, who wisely spent some of his off
hours playing Scottish ballads on Carnegie’s piano.3

Schwab worked hard to please Jones and Carnegie. Doing so allowed him
to advance in the Carnegie organization. Fortunately for Schwab, Carnegie did
not recruit his leaders on the basis of wealth or family standing. He used a merit
system; he wanted people who could make the best steel possible at the lowest
price. To succeed under Carnegie’s system, Schwab would have to master the
methods of steel production.

Carnegie stressed cutting costs: in fact his motto was “Watch the costs and
the profits will take care of themselves.” This meant hard work in innovating,
accounting, and managing. Purchases, for example, were made in bulk to
achieve economies of scale. Also, Carnegie strived for vertical integration, the
control of his steel business from the buying of raw materials to the marketing of

finished steel.4
At the heart of Carnegie’s system were bonuses and partnerships for those

who excelled. Strong incentives were given employees who could figure out
how to save on iron ore, coke, and limestone; or how to produce a harder,
cheaper steel; or how to capture new markets for steel. Carnegie explained that
success “flows from having interested exceptional men in our service; thus only
can we develop ability and hold it in our service.” In fact, Carnegie said, “Every
year should be marked by the promotion of one or more of our young men.”5

Captain Jones had risen to mill superintendent this way. Among other
things he had invented the Jones mixer, a device that cut costs in the transferring
of steel from the blast furnace to the Bessemer converter. For his inventions and
know-how, Carnegie paid him the highest salary in the business, $25,000—the
same salary as that of the President of the United States.6

Schwab rose through the ranks just as Jones did. He completed small tasks
and was given larger ones. At age twenty-three, he designed and built a bridge
over the Baltimore and Ohio Railroad tracks; he saved time and money doing the
job and received as a bonus ten $20 gold pieces from Carnegie himself. Other
assignments followed: he installed meters in the factories and reduced waste of
natural gas; he redesigned a rail-finishing department and saved ten cents per ton
of steel; he effectively helped in calming down workers during a violent strike in
the Homestead plant. When Captain Jones died in a blast furnace explosion in
1889, Schwab became the logical choice for superintendent at Braddock.7

Gregarious and competent, Schwab became Carnegie’s problem solver. For
example, the workers at Braddock were turning out “seconds,” or substandard
rails. Schwab’s solution: give $20 cash bonuses to those steelmakers producing
the fewest seconds. The quality of the rails shot up and the resulting increase in
profits more than paid the bonuses given. No wonder that Carnegie soon gave
Schwab a small partnership in Carnegie Steel, with the promise of more to come
if he could keep producing. Carnegie even wrote one of his senior partners,
Henry Clay Frick, that Schwab “gives every promise of being the man we have
long desired” to eventually run the business.8

Schwab idolized Carnegie and found him amazing to watch. Carnegie’s
efficiency and his thorough knowledge of the industry made him a terror among
fellow steel producers. He spied on them, used their annual reports against them,
and even wrote them to secure information on costs of production. Meanwhile,
Carnegie Steel was a closed corporation; he told outsiders nothing of his costs or
his future plans. Carnegie disdained “pools,” secret agreements among
competitors to divide up the market and keep prices high. Pools were for the

weak; Carnegie wanted to “scoop the market [and] run the mills full.”9
Not that Carnegie didn’t use friendships and other means to help him. In

bidding on a large Union Pacific contract for rails, he may have outmaneuvered
the veteran Scranton family. Joseph Scranton was a director on the Union Pacific
as well as president of the Lackawanna Iron and Coal Company. But Carnegie
had done a favor for Sidney Dillon, the president of the Union Pacific, and
Dillon agreed to give Carnegie the contract if he would match the lowest bid.10

In the case of the Scrantons, Carnegie showed no mercy. When Carnegie
went into the steel business in 1872, he was told that he could never compete
against the Lackawanna Company; Joseph Scranton was a founding father of
American rail-making; he had a generation of experience making rails. But that
year Joseph Scranton died, and his sons William and Walter would be the ones to
challenge Carnegie: first with the Lackawanna Company, then with their
Scranton Steel Company. Carnegie and the Scrantons joined the Bessemer Steel
Association in 1875, but their approaches were different: the Scrantons wanted a
pool, but Carnegie told them and others that unless he got the largest share he
would “withdraw from it and undersell you all in the market—and make good
money doing it.” The Scrantons and the others were bluffed by Carnegie and
gave him his way. Carnegie then studied the Scrantons and learned their
strengths and weaknesses. He discovered that they (and others) were discarding
the thin steel shavings, called “scale,” that fell on the floor when the steel passed
through the rollers. When he learned this, he regularly sent a man to Scranton to
cart away tons of the Scrantons’ scale, almost free of charge, and brought it to
Pittsburgh to use in making rails for Carnegie Steel.11

As Carnegie moved to the top of the American steel business, Schwab
watched, learned, and proved himself time and again. In 1897 the thirty-five year
old Schwab became president of Carnegie Steel and the two men ran the
company together. Business was never better. Schwab put in sixteen new
furnaces at the Homestead plant, and costs per ton of finished steel fell 34
percent in one year. To promote esprit de corps Schwab held Saturday meetings
with all of his superintendents to work out problems. Meanwhile, the results of
large-scale production took hold: the cost of making rails fell from $28 to $11.50
per ton from 1880 to 1900, but the profits from the larger volume of business
went from $2 million in 1888 to $4 million in 1894, to $40 million in 1900.
Some people wondered if Carnegie Steel might soon capture the steel trade of
the entire world.12

Such speculating was premature. The next year, at age sixty-five, Carnegie
retired and, with Schwab as his emissary, sold Carnegie Steel to J. P. Morgan for

$480 million. Morgan then combined Carnegie Steel with other companies to
create U. S. Steel, the first billion-dollar company in American history. The
choice for president of the company: Charles Schwab.13

Reporters and critics condemned “The Steel Trust,” as they called U. S.
Steel, for its size and its potential to monopolize. Who would be able to
compete, they asked, with such a large vertically integrated company? At his
disposal, Schwab would have 213 steel mills and transportation companies, 41
iron ore mines, and 57,000 acres of coal land—enough, critics charged, to dwarf
competitors and keep prices high.14

Schwab discovered, however, that he would not be able to use the
Carnegie system at U. S. Steel. In fact, he would not have authority to run the
company at all. Morgan and his friend Elbert Gary had organized U. S. Steel so
that an executive committee, headed by Gary, and the board of directors would
set the policies of the company; Schwab, as president, would carry them out.
Morgan and Gary were interested in business stability, not in innovating or in
cutting the price of steel. For example, when Schwab wanted to secure more ore
land, Gary said no. He also opposed price-cutting, aggressive marketing, giving
bonuses, and adopting new technology. Schwab later said, “Gary, who had no
real knowledge of the steel business, forever opposed me on some of the
methods and principles that I had seen worked out with Carnegie—methods that
had made the Carnegie Company the most successful in the world.”15

Schwab’s personal life, more than disputes over policy, seems to have led
to his downfall at U. S. Steel. He showed he had the values of a dissipater as well
as those of an entrepreneur. When Carnegie was in control, Schwab consciously
restrained his extravagant tastes; Carnegie deplored living beyond one’s income,
gambling, and adultery. But out from under Carnegie’s grip, Schwab engaged in
all three and almost ruined his marriage and his career. In New York City,
Schwab built a gargantuan mansion, which consumed one whole block of the
city and $7 million of his cash. He also gambled at Monte Carlo, which made
bad newspaper copy and cost him credibility. Finally, he had an affair with a
nurse, which resulted in a child. Though Schwab hid this from the press, he
could not do so from his wife, Rana. The strain from his adultery, combined with
the pressure of Monte Carlo, the expense of Riverside, and the barbs from Elbert
Gary wrecked Schwab’s health. He went to Europe to recover and, in 1904,
resigned as president of U. S. Steel. 16

Schwab, the man who said, “I cannot fail,” seemed to have failed. He was
depressed for months. Even Carnegie repudiated Schwab and this added to the
pain. During his troubles he had insomnia, he lost weight, his arms and legs were

regularly numb, and sometimes he fainted. His wife forgave him for his adultery
and this no doubt eased the strain; but she was still not happy because she
wanted a child of her own and never did have one. She didn’t covet the
extravagant life, so dear to her husband, and she spent many lonely days at
Riverside.17

Schwab was out at U. S. Steel, but he already had the makings for a
comeback. When he was president of U. S. Steel, Schwab had bought Bethlehem
Steel as a private investment. He was criticized for this, especially when he
merged Bethlehem Steel with some unsound companies into an unprofitable
shipbuilding trust. This merger eventually collapsed; and when Schwab stepped
down at U. S. Steel, he still had Bethlehem Steel as his own property. The
demotion from being president of a company worth over one billion dollars, to
being president of one worth less than nine million dollars, would have
embarrassed some men, but not Schwab. He would have full control in running
the company and would succeed or fail on his own abilities.18

Before Schwab took over Bethlehem Steel, its future had not looked
promising. It had been founded in 1857 and soon produced rails for the Lehigh
Valley Railroad. This was more than coincidence because entrepreneur Asa
Packer, who had built the Lehigh Valley Railroad, held a large interest in what
was then Bethlehem Iron. Packer, a Connecticut Yankee, had the vision and
ability to promote both of these investments and make them profitable. His rise
from carpenter to railroad tycoon had made him a legend in Pennsylvania; he
was worth $17 million by the late 1870s. When he died in 1879, his sons, sons-
in-law, and nephews took over his investments, but did not have the success that
Packer did. The Lehigh Valley Railroad floundered and went into receivership in
the Panic of 1893. Bethlehem Iron almost shared the same fate.19

Led by Philadelphians and the Packer group, Bethlehem Iron became very
conservative after Packer’s death. The younger leaders single-mindedly produced
rails, even though (1) Carnegie was doing it cheaper, and (2) they had the
expense of importing most of their iron ore from Cuba. They escaped a price
squeeze in 1885 when, reluctantly, they shifted from making rails to making
military ordnance, which commanded a higher price per ton than rails. Such an
imaginative strategy, as one might expect, did not originate within the Packer
group; in fact, they resisted it until declining profits on rails presented them with
no alternative.20

The wise, if belated, switch from rails to gun-forgings and armor plate led
to profits because Bethlehem Iron was the only bidder on its first government
contract for ordnance in 1887. Other contracts were forthcoming and Bethlehem

Iron “established a reputation for quality and reliability,” if not for
aggressiveness and efficiency. Regarding the last, its operations were so
inefficient that the company in 1898 hired Frederick W. Taylor, master of
scientific management, to suggest ways of improving worker productivity. Yet
the Packer group soon became hostile to Taylor’s cost-cutting ideas. Of one
suggestion to reduce the number of workers handling raw materials, Taylor
observed that the owners “did not wish me, as they said, to depopulate South
Bethlehem.” He further commented, “They owned all the houses in South
Bethlehem and the company stores, and when they saw we [Taylor and his
assistants] were cutting the labor force down to about one-fourth, they did not
want it.” They also rejected Taylor’s suggestions to standardize job functions and
give raises to key personnel.21

Surviving, then, on government contracts, Bethlehem ton stumbled into the
twentieth century—a profitable operation in spite of itself. In the midst of this
conservatism, Schwab came to Bethlehem in 1904 and boldly announced that he
would “make the Bethlehem plant the greatest armor plate and gun factory in the
world.” Taking the helm, Schwab “backed Bethlehem with every dollar I could
borrow.” This backing included buying new branch plants and closing
unprofitable ones, getting new contracts by selling aggressively, and
reorganizing the company as Bethlehem Steel. Planning for the future, Schwab
bought large tracts of land for the company east of South Bethlehem. He also
bought or leased more ore land and mechanized the company’s Cuban iron fields
to spur production there.22

Schwab’s entrepreneurship clashed with the Packer group’s cautiousness
right from the start. As one historian said, “Many of the veteran Bethlehem
executives preferred the old, pre-Taylor and pre-Schwab way of doing things.
They resented Schwab; he was an intruder.” Soon after arriving in South
Bethlehem, Schwab ousted the inbred Packer group from authority. In the new
president’s remarkable words, “I selected fifteen young men right out of the mill
and made them my partners.” Two of these “partners” were Eugene Grace, the
son of a sea captain, and Archibald Johnston, a local Moravian. They later
became presidents of Bethlehem Steel.23

After reorganization Schwab wanted to diversify his company and
challenge U. S. Steel. To do this, he began making rails and moving Bethlehem
Steel away from its dependence on government contracts. Schwab adopted open-
hearth technology because it produced better rails than the Bessemer system did.
As historian Robert Hessen notes: U. S. Steel, the nation’s largest rail producer,
did not follow Schwab’s lead; it would have had to replace its Bessemer facilities

with open hearth equipment. Being a late starter, Bethlehem enjoyed a dear
advantage: with no heavy investment in obsolete equipment to protect, it could
adopt the newest and most efficient technological processes.24

Schwab’s reorganization of the Cuban ore mines also improved
Bethlehem’s competitive position at the expense of U. S. Steel.

Cuban ore was richer in iron and lower in phosphorus than was the Mesabi
range ore used by U. S. Steel. It also had another advantage: it contained large
amounts of nickel, so that Bethlehem could produce nickel steel at no extra cost.
For a ton of iron Bethlehem’s cost was $4.31; U. S. Steel’s was $7.10.25

Now that Schwab was running an efficient diversified company he turned
his attention to cutting costs. He reasoned that workers would work harder if
they knew it would directly result in a raise. Therefore, he set up a bonus system
for productive laborers, foremen, and managers throughout the company. As
Schwab described it, “Do so much and you get so much; do more and you get
more— that is the essence of the system.” At U.S. Steel, by contrast, Gary tied
bonuses to the overall profitability of the company, not to individual
performance. Under that system, Schwab noted, a worker could toil hard and
creatively and receive no reward.26

Schwab wanted bursts of creative energy and he paid the highest salaries
in the industry to get them. When Eugene Grace proved himself, Schwab made
him president of the company, regularly paying him salary and bonuses of over
one million dollars per year. This was twice as much as Gary earned at U.S.
Steel. Gary could never understand Schwab’s philosophy of cutting costs. It
didn’t seem logical to pay bonuses in order to lower expenses and increase
profits. But Schwab showed that this worked, and Bethlehem Steel’s sales grew
from $10 million in 1904 to $230 million in 1916. During these same years, the
company’s stock increased in value from $20 to $600 per share.27

Schwab’s biggest move at Bethlehem was his challenge to U.S. Steel in the
making of structural steel. Here he focused on an innovation in making the steel
beams that went into bridges and skyscrapers. Schwab had been listening to
Edward Grey, who had an idea of making steel beams directly from an ingot as a
single section instead of riveting smaller beams together. Grey claimed that his
invention provided “the greatest possible strength with the least dead weight and
at the lowest cost.”28

The other steelmakers rejected Grey’s theory; but Schwab was eager to try
it even though it would cost $5 million to design the plant, build the mill, and
pay Grey’s royalties. The problem was that the experts were so skeptical that

Schwab had trouble raising money. In fact, he almost backed out but then
jumped back in with the statement: “If we are going bust, we will go bust big.”
He staked his own money, and that of his company, on the Grey beam, but still
he needed more. So Schwab buttonholed wealthy investors for large personal
loans and then, through remarkable salesmanship, persuaded his major suppliers,
the Lehigh Valley and the Reading Railroads, to give him credit on deliveries of
the new steel. Schwab then aggressively recruited big contracts for the
“Bethlehem beam”: the Chase National Bank and the Metropolitan Life
Insurance Company in New York were among them. The experiment worked.
This cheaper and more durable beam quickly became Schwab’s greatest
innovation and he captured a large share of the structural steel market from U. S.
Steel.29

Schwab’s actions had consequences for the American steel industry. From
1905 to 1920, Bethlehem Steel’s labor force doubled every five years. By
contrast, U. S. Steel often stagnated; one officer noted after Schwab left that
“works standing idle have deteriorated.. .the men are disheartened and a certain
amount of apathy exists.”By the 1920s, the chagrined leaders at U. S. Steel
secretly began making Bethlehem beams; as an official there observed, “The
tonnage lost on account of competition with Bethlehem… is … ever increasing
We are obliged to sell.. .at unusually low prices in order to compete.” Schwab
discovered their ploy, however, and forced U. S. Steel to pay him royalties for
making his Bethlehem beams.30

Schwab had transformed Bethlehem Steel. Even before World War I his
company had become the second largest steelmaker in America. The New York
Times praised Bethlehem Steel as “possibly the most efficient, profitable self-
contained steel plant in the country.” By 1920, it employed 20,000 people in the
Lehigh Valley and was among the largest enterprises in the world. In 1922, it
absorbed Lackawanna Steel, the company that launched America’s rail-making
industry seventy-five years earlier.31

During World War I, Schwab’s abilities were needed by the U. S.
government. In April, 1918, one year after America entered the war, victory was
uncertain. Delays in shipping cargo and troops from America to Europe
threatened the Allies with defeat. More ships were needed; but in the U.S.
shipyards few ships were forthcoming. Within the Wilson administration some
blamed the owners of the shipyards; others blamed the workers; still others
blamed radical unions. In the midst of this fingerpointing, Franklin K. Lane, the
Secretary of Commerce, posed a solution:

The President ought to send for Schwab and hand him a treasury warrant

for a billion dollars and set him to work building ships, with no government
inspectors or supervisors or accountants or auditors or other red tape to bother
him. Let the President just put it up to Schwab’s patriotism and put Schwab on
his honor. Nothing more is needed. Schwab will do the job.

That month Schwab became Director-General of the Emergency Fleet
Corporation for the U. S. government. In his investigation, he discovered cases
of laziness, incompetence, work slowdowns, and poor coordination of the ship
building. As usual, though, Schwab said, “The best place to succeed is where
you are with what you have.” He quickly rearranged incentives: he eliminated
the “cost plus” system whereby shipyards were paid whatever it cost them to
build ships plus a percentage of that as a profit. Instead, Schwab tied profits to
cost-cutting by paying a set price per ship. Cost overruns would be paid by the
shipbuilders who would have to be efficient to make a profit. As usual, bonuses
were part of the Schwab formula. He paid them, sometimes out of his own
pocket, to those shipbuilders who exceeded production.32

Schwab enjoyed being a showman, so he went to the shipyards himself: he
rallied the workers, praised the owners, and even drew applause in a speech to
the Industrial Workers of the World, a radical union. Never one to ignore
symbols for achievement, Schwab had Rear Admiral F. F. Fletcher head a group
to award flags and medals to plants and workers whose work had been
outstanding. By the fall of 1918, ships were being completed on time and even
ahead of schedule. President Wilson and the leaders of the Shipping Board were
astonished with the change and gave Schwab the credit. Carnegie, in the last
year of his life, called it “a record of accomplishment such as has never been
equaled.”33

Not all of Schwab’s dealings with the federal government were so
productive. The armor-plate business is an example of this. The making of
military equipment—armor plate for ships, gun forgings, ordnance, and shrapnel
—brought Schwab into regular contact with government purchasers. Throughout
his career, Schwab had problems with these government contracts. Even at
Carnegie Steel, Schwab had quarreled with government officials over allegedly
defective armor plate; the issue never was amicably settled.34

The problem began in the 1880s when various officials began urging the
United States to build a large Navy. At the time the American steel companies
were mostly making rails, so President Cleveland and others began urging
someone to diversify. Making military equipment was complicated and
expensive, however; only reluctantly did Bethlehem Iron and Carnegie Steel
shift into ordnance. Had the government not promised them Navy contracts they

would not have switched.35
Four things in the military supply business made for tension between the

federal government and the steel companies. First, the federal government was
the largest and sometimes the only buyer of military equipment; the
government’s notions of quality sometimes differed from that of the producers.
Often both sides had legitimate points of view. Second, since the demand for
military equipment was limited and the costs of building a factory to produce it
were high, only U. S. Steel, Bethlehem Steel, and later Midvale Steel made
armor plate. The potential for either a monopoly or for price-rigging bothered
some government officials. Third, a ton of military equipment was more
expensive to make than a ton of rails or a ton of structural steel; some purchasers
thought that $450 for a ton of armor plate was price-gouging if rails sold for only
$25 per ton. Finally, the ordnance producers sometimes made lower bids on
foreign contracts than they did on domestic ones. To some in the American
government, this was evidence they were being overcharged; to the steel
companies, lower bids meant they had to cut their profit margin to almost zero to
overcome tariffs in foreign countries. Also, when American needs were low, the
steel men argued they had to get foreign business to keep their factories
operating.36

The government’s solution to these four problems was to threaten to go
into the military supply business and build an armor-plate factory with federal
funds. Schwab countered that the government would not be able to make armor
plate cheaper than he could. After all, Bethlehem had a veteran work force, a
good bonus system, and could buy materials more cheaply in bulk. Any
vertically integrated company would have an advantage over companies
purchasing supplies in the open market. A government factory, Schwab insisted,
would waste the taxpayers’ money.37

If Schwab had been a mediator, not a participant, he might have been able
to settle this dispute. Part of the problem was the same as that of the low
productivity of the American shipyards during World War I: misdirected
incentives. When the Navy department took bids for contracts from the three
steel companies, it naturally accepted the lowest bid. But then the Navy official
went to the two higher bidders and offered them part of the contract if they
would agree to accept the lowest bid. He did this so that all three could survive;
that way, with three producers, a future monopoly of ordnance would be
prevented. The problem is that this strategy gave the three companies an
incentive to collude and fix prices high. Why should they bid low if all of them
would get part of the contract anyway? A winner-take-all approach would have

provided an incentive for lower bidding, but the Navy department was unwilling
to do this. Not surprisingly, then, year after year the steel companies submitted
nearly identical bids for military equipment.38

This problem reached a crisis point during the Wilson administration. In
1913, Josephus Daniels, Wilson’s Secretary of the Navy, and Ben Tillman,
Senator from South Carolina, investigated the armor business. Both men urged
Wilson to back a government armor plant. They held hearings in Congress on the
armor business but did not like what they heard. The leaders of the three steel
companies all said their bids were reasonable. In fact, Schwab submitted figures
showing that he and the others charged less for armor plate than did England,
France, Germany and Japan. If others didn’t believe it, then let the Federal Trade
Commission look at the accounts and fix a price. Daniels and Tillman rejected
this. They were convinced that the government could make armor plate cheaper.
The head of the Bureau of Ordnance estimated that $10.3 million would build an
armor plant and that plate could be made for less than $300 per ton, instead of
$454 per ton, which was a typical bid from the steel companies.39

In 1916, then, Daniels and Tillman began the campaign to convince
Congress to spend $11 million for an armor factory. In the Senate, Tillman
argued that the government would save money and would no longer be at the
mercy of identical bids from the “greedy and hoggish” steel companies.
President Wilson backed Tillman and said, “I remember very well my promise to
help all I could with the bill for the construction of an armor plant and I stand
ready to redeem my promise.”40

Schwab led the effort to defeat the bill. He spoke out against it in public
and ran ads in over 3,000 newspapers challenging the need for a government
plant. He stressed the fairness angle. He said that years ago the government had
asked Bethlehem to make armor; they had done so only when the government
agreed to buy from them.

Now, with $7 million invested in equipment, the government was planning
to build its own plant and make Bethlehem’s useless.41

Most Congressmen, however, bought the arguments of Tillman and
Daniels. The bill passed the Senate and the House by about two to one margins,
and Wilson signed it. As Senator Albert Cummins of Iowa said, “It is [one of]
my profoundest convictions that the manufacture of armor-plate for battleships is
a government function. I hope the private enterprises will be entirely
eliminated.”42

Dozens of cities lobbied to be the site for the new plant. From Rome,
Georgia, to Kalamazoo, Michigan, city after city was put forth as being uniquely

situated to produce armor plate. The winner of this competition was South
Charleston, West Virginia. Congress soon raised the appropriation to $17.5
million and authorized the South Charleston plant to make guns and projectiles,
as well as armor. Construction began in 1917 on the new factory and on
hundreds of houses for the workers. The war delayed the building, but it was
continued later. Higher construction costs after the war meant an overrun of
several million dollars. By 1921, the new plant was making guns, projectiles,
and armor—all at prices apparently much higher than that of Bethlehem Steel.
Within a year the whole plant was shut down, put on “inoperative status,” and
never run again.43

Schwab turned sixty in 1921 and was beginning to look backward more
than forward. There was much to see: whether he had made rails, beams, or
armor plate, he was successful. Even Carnegie, near death, had recently written
Schwab, “I have never doubted your ability to triumph in anything you
undertook. I cannot help feeling proud of you for having far outstripped any of
my ‘boys’.”44

In the 1920s and 1930s, however, Schwab seemed to lose his
entrepreneurial spirit. Producing a better product at a lower price no longer
seemed to dominate his thinking. Let’s “live and let live,” Schwab told the
steelmakers at the American Iron and Steel Institute in 1927. Next year, he urged
them to fix prices and avoid cutting them. The year after this, Schwab, the father
of the Bethlehem beam, urged the steel men not to expand but to use their
existing plant capacity.45

When the Great Depression took hold in the 1930s, Schwab’s public
addresses were full of anecdotes and preaching that “the good. . .lies ahead.” One
of Schwab’s remedies for the ailing economy was a high protective tariff. He had
always favored a tariff on imported steel but usually settled for low duties. The
Smoot-Hawley Tariff of 1930 created the highest duties in American history on
many items. Some writers have argued that the Smoot-Hawley Tariff triggered
the Great Depression; others say it merely made the depression worse. One thing
is certain: many nations retaliated against high American tariffs by dosing off
their borders to American-made goods. The demand for American goods,
therefore, declined and this put more people out of work. When Cordell Hull,
Roosevelf s Secretary of State, tried to lower American tariffs in 1934, Schwab
opposed it. He was afraid of foreign competition.46

During the 1930s, Schwab enjoyed his role as elder statesman of the steel
industry. He was full of stories and ever ready to do interviews with reporters.
He never got senile; his ability to memorize speeches and his knack for

remembering names and faces was still amazing. He just preferred to let Eugene
Grace and others run Bethlehem Steel, while he worked the crowd.47

When Schwab retired as an entrepreneur, his fortune became jeopardized.
He had earlier shown the traits of a dissipater and had the potential to run
through his $25 million fortune. Liberated from work, Schwab traveled,
gambled, and flirted more than ever. He joined the New York Whist Club and
played there for high stakes. He frequented the roulette tables in Monte Carlo
with his favorite mistress. The art of speculation, an anathema to Carnegie,
appealed to Schwab: he installed a ticker tape in his mansion to keep tabs on
Wall Street; he also invested in a variety of companies and knew almost nothing
about some of them. Gambling wasn’t the only drain on Schwab’s wealth: he co-
signed one million dollars worth of notes— usually worthless—for “friends” and
also gave monthly allowances to twenty-seven people.48

Schwab refused to cut back on expenses, even during the Great
Depression. He still hired the most famous musicians of the era to give private
recitals for him at Riverside. The mansion itself—complete with swimming
pool, wine cellar, gymnasium, bowling alley, six elevators, and ninety bedrooms
—needed twenty servants to keep it functioning. He also hired 300 men to care
for his 1000-acre estate at Loretto. So Schwab desperately needed his $250,000
annual salary at Bethlehem, given for past services, just to pay his expenses.
From 1935 to 1938, a small group of rebel stockholders attended the company’s
annual meetings; they challenged Schwab’s salary and told him he had “outlived
his usefulness.” He finally stopped them by privately telling one of the critics
that he desperately needed the money to live on. Actually he needed more. He
couldn’t pay the annual taxes on Riverside and couldn’t sell it either, even at a $6
million loss. He couldn’t even give it away, when he offered it as the residence
for the mayor.49

Schwab’s last years were also marked by poor health and the death of his
wife, who had borne him no children. After her funeral, Riverside was taken by
creditors; Schwab moved into a small apartment. Schwab, who had shown the
world a vision of entrepreneurship, now had only a vision of death. “A man
knows when he doesn’t want to be alive,” he said, “when the will to continue
living has gone from him.” Schwab died nine months after he said this, at age
seventy-seven with debts exceeding assets by over 300,000.50

CHAPTER FIVE

John D. Rockefeller and the Oil
Industry

In 1885 John D. Rockefeller wrote one of his partners, “Let the good work
go on. We must ever remember we are refining oil for the poor man and he must
have it cheap and good.” Or as he put it to another partner: “Hope we can
continue to hold out with the best illuminator in the world at the lowest price.”
Even after twenty years in the oil business, “the best. . .at the lowest price” was
still Rockefeller’s goal; his Standard Oil Company had already captured 90
percent of America’s oil refining and had pushed the price down from 58 cents to
eight cents a gallon. His well-groomed horses delivered blue barrels of oil
throughout America’s cities and were already symbols of excellence and
efficiency. Consumers were not only choosing Standard Oil over that of his
competitors; they were also preferring it to coal oil, whale oil, and electricity.
Millions of Americans illuminated their homes with Standard Oil for one cent
per hour; and in doing so, they made Rockefeller the wealthiest man in
American history.1

Rockefeller’s early life hardly seemed the making of a near billionaire. His
father was a peddler who often struggled to make ends meet. His mother stayed
at home to raise their six children. They moved around upstate New York—from
Richford to Moravia to Owego—and eventually settled in Cleveland, Ohio. John
D. was the oldest son. Although he didn’t have new suits or a fashionable home,
his family life was stable. From his father he learned how to earn money and
hold on to it; from his mother he learned to put God first in his life, to be honest,
and help others.2

“From the beginning,” Rockefeller said, “I was trained to work, to save,
and to give.” He did all three of these things shortly after he graduated from the
Cleveland public high school. He always remembered the “momentous day” in
1855, when he began work at age sixteen as an assistant bookkeeper for 50 cents
per day.3

On the job Rockefeller had a fixation for honest business. He later said, “I
had learned the underlying principles of business as well as many men acquire
them by the time they are forty.” His first partner, Maurice Clark, said that
Rockefeller “was methodical to an extreme, careful as to details and exacting to
a fraction. If there was a cent due us he wanted it. If there was a cent due a
customer he wanted the customer to have it.” Such precision irritated some
debtors, but it won him the confidence of many Cleveland businessmen; at age
nineteen Rockefeller went into the grain shipping business on Lake Erie and
soon began dealing in thousands of dollars.4

Rockefeller so enjoyed business that he dreamed about it at night. Where
he really felt at ease, though, was with his family and at church. His wife Laura
was also a strong Christian and they spent many hours a week attending church
services, picnics, or socials at the Erie Street Baptist Church. Rockefeller saw a
strong spiritual life as crucial to an effective business life. He tithed from his first
paycheck and gave to his church, a foreign mission, and the poor. He sought
Christians as business partners and later as employees. One of his fellow
churchmen, Samuel Andrews, was investing in oil refining; and this new frontier
appealed to young John. He joined forces with Andrews in 1865 and would
apply his same precision and honesty to the booming oil industry.5

The discovery of large quantities of crude oil in northwest Pennsylvania
soon changed the lives of millions of Americans. For centuries, people had
known of the existence of crude oil scattered about America and the world. They
just didn’t know what to do with it. Farmers thought it a nuisance and tried to
plow around it; others bottled it and sold it as medicine.6

In 1855, Benjamin Silliman, Jr., a professor of chemistry at Yale, analyzed
a batch of crude oil; after distilling and purifying it, he found that it yielded
kerosene—a better illuminant than the popular whale oil. Other byproducts of
distilling included lubricating oil, gasoline, and paraffin, which made excellent
candles. The only problem was cost: it was too expensive to haul the small
deposits of crude from northwest Pennsylvania to markets elsewhere. Silliman
and others, however, formed an oil company and sent “Colonel” Edwin L.
Drake, a jovial railroad conductor, to Titusville to drill for oil. “Nonsense,” said
local skeptics. “You can’t pump oil out of the ground as you pump water.” Drake
had faith that he could; in 1859, when he built a thirty-foot derrick and drilled
seventy feet into the ground, all the locals scoffed. When he hit oil, however,
they quickly converted and preached oil drilling as the salvation of the region.
There were few barriers to entering the oil business: drilling equipment cost less
than $1,000, and oil land seemed abundant. By the early 1860s, speculators were

swarming northwest Pennsylvania, cluttering it with derricks, pipes, tanks, and
barrels. “A good time coming for whales,” concluded one newspaper. America
had become hooked on kerosene.

Cleveland was a mere hundred miles from the oil region, and Rockefeller
was fascinated with the prospects of refining oil into kerosene. He may have
visited the region as early as 1862. By 1863 he was talking oil with Samuel
Andrews and two years later they built a refinery together. Two things about the
oil industry, however, bothered Rockefeller right from the start: the appalling
waste and the fluctuating prices.

The overproducing of oil and the developing of new markets caused the
price of oil to fluctuate wildly. In 1862 a barrel (42 gallons) of oil dropped in
value from $4.00 to $.35. Later, when President Lincoln bought oil to fight the
Civil War, the price jumped back to $4.00, then to $13.75. A blacksmith took
$200 worth of drilling equipment and drilled a well worth $100,000. Others,
with better drills and richer holes, dug four wells worth $200,000. Alongside the
new millionaires of the moment were the thousands of fortune hunters who came
from all over to lease land and kick down shafts into it with cheap foot drills.
Most failed. Even Colonel Drake died in poverty. As J. W. Trowbridge wrote,
“Almost everybody you meet has been suddenly enriched or suddenly ruined
(perhaps both within a short space of time), or knows plenty of people who
have.”7

Those few who struck oil often wasted more than they earned. Thousands
of barrels of oil poured into Oil Creek, not into tanks. Local creek bottoms were
often flooded with runaway oil; the Allegheny River smelled of oil and glistened
with it for many miles toward Pittsburgh. Gushers of wasted oil were bad
enough; sometimes a careless smoker would turn a spouting well into a killing
inferno. Other wasters would torpedo holes with nitroglycerine, sometimes
losing the oil and their lives.8

Rockefeller was intrigued with the future of the oil industry, but was
repelled by its past. He shunned the drills and derricks and chose the refining
end instead. Refining eventually became very costly, but in the 1860s the main
supplies were only barrels, a trough, a tank, and a still in which to boil the oil.
The yield would usually be about 60 percent kerosene, 10 percent gasoline, 5 to
10 percent benzol or naphtha, with the rest being tar and wastes. High prices and
dreams of quick riches brought many into refining; and this attracted
Rockefeller, too. But right from the start, he believed that the path to success was
to cut waste and produce the best product at the lowest price. Sam Andrews, his
partner, worked on getting more kerosene per barrel of crude. Both men searched

for uses for the byproducts: they used the gasoline for fuel, some of the tars for
paving, and shipped the naphtha to gas plants. They also sold lubricating oil,
vaseline, and paraffin for making candles. Other Cleveland refiners, by contrast,
were wasteful: they dumped their gasoline into the Cuyahoga River, they threw
out other byproducts, and they spilled oil throughout the city.9

Rockefeller was constantly looking for ways to save. For example, he built
his refineries well and bought no insurance. He also employed his own plumber
and almost halved the cost on labor, pipes, and plumbing materials. Coopers
charged $2.50 per barrel; Rockefeller cut this to $.96 when he bought his own
tracts of white oak timber, his own kilns to dry the wood, and his own wagons
and horses to haul it to Cleveland, There with machines he made the barrels,
then hooped them, glued them, and painted them blue. Rockefeller and Andrews
soon became the largest refiners in Cleveland. In 1870, they reorganized with
Rockefeller’s brother William, and Henry Flagler, the son of a Presbyterian
minister. They renamed their enterprise Standard Oil.10

Under Rockefeller’s leadership they plowed the profits into bigger and
better equipment; and, as their volume increased, they hired chemists and
developed three hundred byproducts from each barrel of oil. They ranged from
paint and varnish to dozens of lubricating oils to anesthetics. As for the main
product, kerosene, Rockefeller made it so cheaply that whale oil, coal oil, and,
for a while, electricity lost out in the race to light American homes, factories,
and streets. “We had vision,” Rockefeller later said. “We saw the vast
possibilities of the oil industry, stood at the center of it, and brought our
knowledge and imagination and business experience to bear in a dozen, in
twenty, in thirty directions.”11

Another area of savings came from rebates from railroads. The major
eastern railroads—the New York Central, the Erie, and Pennsylvania—all
wanted to ship oil and were willing to give discounts, or rebates, to large
shippers. These rebates were customary and dated back to the first shipments of
oil. As the largest oil refiner in America, Rockefeller was in a good position to
save money for himself and for the railroad as well. He promised to ship 60
carloads of oil daily and provide all the loading and unloading services. All the
railroads had to do was to ship it east. Commodore Vanderbilt of the New York
Central was delighted to give Rockefeller the largest rebate he gave any shipper
for the chance to have the most regular, quick and efficient deliveries. When
smaller oil men screamed about rate discrimination, Vanderbilt’s spokesmen
gladly promised the same rebate to anyone else who would give him the same
volume of business. Since no other refiner was as efficient as Rockefeller, no

one else got Standard Oil’s discount.12

Many of Rockefeller’s competitors condemned him for receiving such
large rebates. But Rockefeller would never have gotten them had he not been the
largest shipper of oil. These rebates, on top of his remarkable efficiency, meant
that most refiners could not compete. From 1865 to 1870, the price of kerosene
dropped from 58 to 26 cents per gallon. Rockefeller made profits during every
one of these years, but most of Cleveland’s refiners disappeared. Naturally, there
were hard feelings. Henry Demarest Lloyd, whose cousin was an unhappy oil
man, wrote Wealth Against Commonwealth in 1894 to denounce Rockefeller. Ida
Tarbell, whose father was a Pennsylvania oil producer, attacked Rockefeller in a
series of articles for McClure’s magazine.13

Some of the oil producers were unhappy, but American consumers were
pleased that Rockefeller was selling cheap oil. Before 1870, only the rich could
afford whale oil and candles. The rest had to go to bed early to save money. By
the 1870s, with the drop in the price of kerosene, middle and working class
people all over the nation could afford the one cent an hour that it cost to light
their homes at night. Working and reading became after-dark activities new to
most Americans in the 1870s.14

Rockefeller quickly learned that he couldn’t please everyone by making
cheap oil. He pleased no one, though, when he briefly turned to political
entrepreneurship in 1872. He joined a pool called the South Improvement
Company and it turned out to be one of the biggest mistakes in his life. This
scheme was hatched by Tom Scott of the Pennsylvania Railroad. Scott was
nervous about low oil prices and falling railroad rates. He thought that if the
large refiners and railroads got together they could artificially fix high prices for
themselves. Rockefeller decided to join because he would get not only large
rebates, but also drawbacks, which were discounts on that oil which his
competitors, not he, shipped. The small producers and refiners bitterly attacked
Rockefeller and forced the Pennsylvania Legislature to revoke the charter of the
South Improvement Company. No oil was ever shipped under this pool, but
Rockefeller got bad publicity from it and later admitted that he had been
wrong.15

At first, the idea of a pool appealed to Rockefeller because it might stop
the glut, the waste, the inefficiency, and the fluctuating prices of oil. The South
Improvement Company showed him that this would not work, so he turned to
market entrepreneurship instead. He decided to become the biggest and best
refiner in the world. First, he put his chemists to work trying to extract even
more from each barrel of crude. More important, he tried to integrate Standard

Oil vertically and horizontally by getting dozens of other refiners to join him.
Rockefeller bought their plants and talent; he gave the owners cash or stock in
Standard Oil.16

From Rockefeller’s standpoint, a few large vertically integrated oil
companies could survive and prosper, but dozens of smaller companies could
not. Improve or perish was Rockefeller’s approach. “We will take your burdens,”
Rockefeller said. “We will utilize your ability; we will give you representation;
we will all unite together and build a substantial structure on the basis of
cooperation.” Many oil men rejected Rockefeller’s offer, but dozens of others all
over America sold out to Standard Oil. When they did, Rockefeller simply shut
down the inefficient companies and used what he needed from the good ones.
Officers Oliver Payne, H. H. Rogers, and President John Archbold came to
Standard Oil from these merged firms.17

Buying out competitors was a tricky business. Rockefeller’s approach was
to pay what the property was worth at the time he bought it. Outmoded
equipment was worth little, but good personnel and even good will were worth a
lot. Rockefeller had a tendency to be generous because he wanted the future
good will of his new partners and employees. “He treated everybody fairly,”
concluded one oil man. “When we sold out he gave us a fair price. Some refiners
tried to impose on him and when they found they could not do it, they abused
him. I remember one man whose refinery was worth $6,000, or at most $8,000.
His friends told him, ‘Mr. Rockefeller ought to give you $100,000 for that.’ Of
course, Mr. Rockefeller refused to pay more than the refinery was worth, and the
man . . . abused Mr. Rockefeller.”18

Bigness was not Rockefeller’s real goal. It was just a means of cutting
costs. During the 1870s, the price of kerosene dropped from 26 to eight cents a
gallon and Rockefeller captured about 90 percent of the American market. This
percentage remained steady for years. Rockefeller never wanted to oust all of his
rivals, just the ones who were wasteful and those who tarnished the whole trade
by selling defective oil. “Competitors we must have, we must have,” said
Rockefeller’s partner Charles Pratt. “If we absorb them, be sure it will bring up
another.”19

Just as Rockefeller reached the top, many predicted his demise. During the
early 1880s, the entire oil industry was in jeopardy. The Pennsylvania oil fields
were running dry and electricity was beginning to compete with lamps for
lighting homes. No one knew about the oil fields out west and few suspected that
the gasoline engine would be made the power source of the future. Meanwhile,
the Russians had begun drilling and selling their abundant oil, and they raced to

capture Standard Oil’s foreign markets. Some experts predicted the imminent
death of the American oil industry; even Standard Oil’s loyal officers began
selling some of their stock.20

Rockefeller’s solution to these problems was to stake the future of his
company on new oil discoveries near Lima, Ohio. Drillers found oil in this Ohio-
Indiana region in 1885, but they could not market it. It had a sulphur base and
stank like rotten eggs. Even touching this oil meant a long, soapy bath or social
ostracism. No one wanted to sell or buy it and no city even wanted it shipped
there. Only Rockefeller seemed interested in it. According to Joseph Seep, chief
oil buyer for Standard Oil, Mr. Rockefeller went on buying leases in the Lima
field in spite of the coolness of the rest of the directors, until he had accumulated
more than 40 million barrels of that sulphurous oil in tanks. He must have
invested millions of dollars in buying and storing and holding the sour oil for
two years, when everyone else thought it was no good.21

Rockefeller had hired two chemists, Herman Frasch and William Burton,
to figure out how to purify the oil; he counted on them to make it usable.
Rockefeller’s partners were skeptical, however, and sought to stanch the flood of
money invested in tanks, pipelines, and land in the Lima area. They “held up
their hands in holy horror” at Rockefeller’s gamble and even outvoted him at a
meeting of Standard’s Board of Directors. “Very well, gentlemen,” said
Rockefeller. “At my own personal risk, I will put up the money to care for this
product: $2 million—$3 million, if necessary.” Rockefeller told what then
happened: This ended the discussion, and we carried the Board with us and
continued to use the funds of the company in what was regarded as a very
hazardous investment of money. But we persevered, and two or three of our
practical men stood firmly with me and constantly occupied themselves with the
chemists until at last, after millions of dollars had been expended in the tankage
and buying the oil and constructing the pipelines and tank cars to draw it away to
the markets where we could sell it for fuel, one of our German chemists cried
‘Eureka!’ We … at last found ourselves able to clarify the oil.22

The “worthless” Lima oil that Rockefeller had stockpiled suddenly became
valuable; Standard Oil would be able to supply cheap kerosene for years to
come. Rockefeller’s exploit had come none too soon: the Russians struck oil at
Baku, four square miles of the deepest and richest oil land in the world. They
hired European experts to help Russia conquer the oil markets of the world. In
1882, the year before Baku oil was first exported, America refined 85 percent of
the world’s oil; six years later this dropped to 53 percent. Since most of

Standard’s oil was exported, and since Standard accounted for 90 percent of
America’s exported oil, the Baku threat had to be met.23

At first glance, Standard Oil seemed certain to lose. First, the Baku oil was
centralized in one small area: this made it economical to drill, refine, and ship
from a single location. Second, the Baku oil was more plentiful: its average yield
was over 280 barrels per well per day, compared with 4.5 barrels per day from
American wells. Third, Baku oil was highly viscous: it made a better lubricant
(though not necessarily a better illuminant) than oil in Pennsylvania or Ohio.
Fourth, Russia was closer to European and Asian markets: Standard Oil had to
bear the costs of building huge tankers and crossing the ocean with them. One
independent expert estimated that Russia’s costs of oil exporting were one-third
to one-half of those of the United States. Finally, Russia and other countries
slapped high protective tariffs on American oil; this allowed inefficient foreign
drillers to compete with Standard Oil. The Austro-Hungarian empire, for
example, imported over half a million barrels of American oil in 1882; but they
bought none by 1890. What was worse, local refiners there marketed a low-
grade oil in barrels labeled “Standard Oil Company.” This allowed the Austro-
Hungarians to dump their cheap oil and damage Standard’s reputation at the
same time.

Rockefeller pulled out all stops to meet the Russian challenge. No small
refinery would have had a chance; even a large vertically integrated company
like Standard Oil was at a great disadvantage. Rockefeller never lost his vision,
though, of conquering the oil markets of the world. First, he relied on his
research team to help him out. William Burton, who helped clarify the Lima oil,
invented “cracking,” a method of heating oil to higher temperatures to get more
use of the product out of each barrel. Engineers at Standard Oil helped by
perfecting large steamship tankers, which cut down on the costs of shipping oil
overseas.

Second, Rockefeller made Standard Oil even more efficient. He used less
iron in making barrel hoops and less solder in sealing oil cans. In a classic move,
he used the waste (culm) from coal heaps to fuel his refineries; even the
sweepings from his factory he sorted through for tin shavings and solder drops.

Third, Rockefeller studied the foreign markets and learned how to beat the
Russians in their part of the world. He sent Standard agents into dozens of
countries to figure out how to sell oil up the Hwang Ho River in China, along the
North Road in India, to the east coast of Sumatra, and to the huts of tribal
chieftains in Malaya. He even used spies, often foreign dipomats, to help him
sell oil and tell him what the Russians were doing. He used different strategies in

different areas. Europeans, for example, wanted to buy kerosene only in small
quantities, so Rockefeller supplied tank wagons to sell them oil street by street.
As Allan Nevins notes: The [foreign) stations were kept in the same beautiful
order as in the United States. Everywhere the steel storage tanks, as in America,
were protected from fire by proper spacing and excellent fire-fighting apparatus.
Everywhere the familiar blue barrels were of the best quality. Everywhere a
meticulous neatness was evident. Pumps, buckets, and tools were all clean and
under constant inspection, no litter being tolerated. . . . The oil itself was of the
best quality. Nothing was left undone, in accordance with Rockefeller’s long-
standing policy, to make the Standard products and Standard ministrations,
abroad as at home, attractive to the customer.24

Rockefeller’s focus on quality meant that, in an evenly balanced price war
with Russia, Standard Oil would win.

The Russian-American oil war was hotly contested for almost thirty years
after 1885. In most markets, Standard’s known reliability would prevail, if it
could just get its price close to that of the Russians. In some years this meant that
Rockefeller had to sell oil for 5.2 cents a gallon—leaving almost no profit
margin—if he hoped to win the world. This he did; and Standard often captured
two-thirds of the world’s oil trade from 1882 to 1891 and a somewhat smaller
portion hi the decade after this.

Rockefeller and his partners always knew that their victory was a narrow
triumph of efficiency over superior natural advantages. “If,” as John Archbold
said in 1899, “there had been as prompt and energetic action on the part of the
Russian oil industry as was taken by the Standard Oil Company, the Russians
would have dominated many of the world markets. . . .”25

At one level, Standard’s ability to sell oil at dose to a nickel a gallon meant
hundreds of thousands of jobs for Americans in general and Standard Oil in
particular. Rockefeller’s margin of victory in this competition was always
narrow. Even a rise of one cent a gallon would have cost Rockefeller much of his
foreign market. A rise of three cents a gallon would have cost Rockefeller his
American markets as well.

At another level, oil at almost a nickel a gallon opened new possibilities
for people around the world. William H. Libby, Standard’s foreign agent, saw
this change and marveled at it. To the governor general of India he said: I may
claim for petroleum that it is something of a civilizer, as promoting among the
poorest classes of these countries a host of evening occupations, industrial,
educational, and recreative, not feasible prior to its introduction; and if it has
brought a fair reward to the capital ventured in its development, it has also

carried more cheap comfort into more poor homes than almost any discovery of
modern times.26

In Standard Oil, Rockefeller arguably built the most successful business in
American history. In running it, he showed the precision of a bookkeeper and the
imagination of an entrepreneur. Yet, in day-to-day operations, he led quietly and
inspired loyalty by example. Rockefeller displayed none of the tantrums of a
VanderbUt or a Hill, and none of the flamboyance of a Schwab. At board
meetings, he would sit and patiently listen to all arguments. Until the end, he
would often say nothing. But his fellow directors all testified to his genius for
sorting out the relevant details and pushing the right decision, even when it was
shockingly bold and unpopular. “You ask me what makes Rockefeller the
unquestioned leader in our group,” said John Archbold, later a president of
Standard Oil. “Well, it is simple. In business we all try to look ahead as far as
possible. Some of us think we are pretty able. But Rockefeller always sees a
little further ahead than any of us—and then he sees around the corner!”27

Some of these peeks around the corner helped Rockefeller pick the right
people for the right jobs. He had to delegate a great deal of responsibility, and he
always gave credit—and sometimes large bonuses—for work well done. Paying
higher than market wages was Rockefeller’s controversial policy: he believed it
helped slash costs in the long run. For example, Standard was rarely hurt by
strikes or labor unrest. Also, he could recruit and keep the top talent and
command their future loyalty. Rockefeller approached the ideal of the “Standard
Oil family” and tried to get each member to work for the good of the whole. As
Thomas Wheeler said, “He managed somehow to get everybody interested in
saving, in cutting out a detail here and there. . . .”He sometimes joined the men
in their work, and urged them on. At 6:30 in the morning there was Rockefeller
“rolling barrels, piling hoops, or wheeling out shavings.” In the oil fields, there
was Rockefeller trying to fit nine barrels on a eight-barrel wagon. He came to
know the oil business inside out and won the respect of his workers. Praise he
would give; rebukes he would avoid. “Very well kept—very indeed,” said
Rockefeller to an accountant about his books before pointing out a minor error
and leaving. One time a new accountant moved into a room where Rockefeller
kept an exercise machine. Not knowing what Rockefeller looked like, the
accountant saw him and ordered him to remove it. “All right,” said Rockefeller,
and he politely took it away. Later, when the embarrassed accountant found out
whom he had chided, he expected to be fired; but Rockefeller never mentioned
it.28

Rockefeller treated his top managers as conquering heroes and gave them

praise, rest, and comfort. He knew that good ideas were almost priceless: they
were the foundation for the future of Standard Oil. To one of his oil buyers,
Rockefeller wrote, “I trust you will not worry about the business. Your health is
more important to you and to us than the business.” Long vacations at full pay
were Rockfeller’s antidotes for his weary leaders. After Johnson N. Camden
consolidated the West Virginia and Maryland refineries for Standard Oil,
Rockefeller said, “Please feel at perfect liberty to break away three, six, nine,
twelve, fifteen months, more or less. . . . Your salary will not cease, however
long you decide to remain away from business.” But neither Camden nor the
others rested long. They were too anxious to succeed in what they were doing
and to please the leader who trusted them so. Thomas Wheeler, an oil buyer for
Rockefeller, said, “I have never heard of his equal in getting together a lot of the
very best men in one team and inspiring each man to do his best for the
enterprise.”29

Not just Rockefeller’s managers, his fellow entrepreneurs thought he was
remarkable. In 1873, the prescient Commodore Vanderbilt said, “That
Rockefeller! He will be the richest man in the country.” Twenty years later,
Charles Schwab learned of Rockefeller’s versatility when Rockefeller invested
almost $40 million in the controversial ore of the Mesabi iron range near the
Great Lakes. Schwab said, “Our experts in the Carnegie Company did not
believe in the Mesabi ore fields. They thought the ore was poor. . . . They
ridiculed Rockefeller’s investments in the Mesabi.” But by 1901, Carnegie,
Schwab, and J. P. Morgan had changed their minds and offered Rockefeller
almost $90 million for his ore investments.30

That Rockefeller was a genius is widely admitted. What is puzzling is his
philosophy of life. He was a practicing Christian and believed in doing what the
Bible said to do. Therefore, he organized his life in the following way: he put
God first, his family second, and career third. This is the puzzle: how could
someone put his career third and wind up with $900 million, which made him
the wealthiest man in American history? This is not something that can be easily
explained (at least not by conventional historical methods), but it can be studied.

Rockefeller always said the best things he had done in life were to make
Jesus his savior and to make Laura Spelman his wife. He prayed daily the first
thing in the morning and went to church for prayer meetings with his family at
least twice a week. He often said he felt most at home in church and in regular
need of “spiritual food”; he and his wife also taught Bible classes and had
ministers and evangelists regularly in their home.31

Going to church, of course, is not necessarily a sign of a practicing

Christian. Ivan the Terrible regularly prayed and went to church before and after
torturing and killing his fellow men. Even Commodore Vanderbilt sang hymns
out of one side of his mouth and out of the other he spewed a stream of
obscenities.

Rockefeller, by contrast, read the Bible and tried to practice its teachings in
his everyday life. Therefore, he tithed, rested on the Sabbath, and gave valuable
time to his family. This made his life hard to understand for his fellow
businessmen. But it explains why he sometimes gave tens of thousands of
dollars to Christian groups, while, at the same time, he was trying to borrow over
a million dollars to expand his business. It explains why he rested on Sunday,
even as the Russians were mobilizing to knock him out of European markets. It
explains why he calmly rocked his daughter to sleep at night, even though oil
prices may have dropped to an all-time low that day. Others panicked, but
Rockefeller believed that God would pull him through if only he would follow
His commandments. He worked to the best of his ability, then turned his
problems over to God and tried not to worry. This is what he often said: Early I
learned to work and to play. I dropped the worry on the way. God was good to
me every day.32

Those who heard him say this may have thought that he was mouthing
platitudes, but the key to understanding Rockefeller is to recognize that he said it
because he believed it.

When the Russians sold their oil in Standard’s blue barrels, Rockefeller did
not get into strife. He knew that the book of James said, “Where strife is there is
confusion and every evil work.” He fought the Russians, using his spies and his
authority to stop them and outsell them; but he never slandered them or
threatened them. No matter what, Rockefeller never lost his temper, either. This
was one of the remarkable findings of Allan Nevins in his meticulous research
on Rockefeller. During the 1930s, Nevins interviewed dozens of people who
worked with Rockefeller and knew him intimately. Not one—son, daughter,
friend, or foe—could ever recall Rockefeller losing his temper or even being
perturbed. He was always calm.33

The most famous example is the time Judge K. M. Landis fined Standard
Oil of Indiana over $29 million. The charge was taking rebates; and Landis, an
advocate of government intervention, publicly read the verdict of “guilty” for
Standard Oil. Railway World was shocked that “Standard Oil Company of
Indiana was fined an amount equal to seven or eight times the value of its entire
property, because its traffic department did not verify the statement of the Alton

rate clerk that the six-cent commodity rate on oil had been properly filed with
the Interstate Commerce Commission.” The New York Times called this decision
a bad law and “a manifestation of that spirit of vindictive savagery toward
corporations. . . .” But Rockefeller, who had testified at the trial, was unruffled.

On the day of the verdict, he chose to play golf with friends. In the middle
of their game, a frantic messenger came running through the fairways to deliver
the bad news to Rockefeller. He calmly looked at the telegram, put it away, and
said, “Well, shall we go on, gentlemen?” Then he hit his ball a convincing 160
yards. At the next hole, someone sheepishly asked Rockefeller, “How much is
it?” Rockefeller said, “Twenty-nine million two hundred forty thousand dollars/’
and added, “the maximum penalty, I believe. Will you gentlemen drive?” He
ended the nine holes with a respectable score of 53, as though he hadn’t a care in
the world.34

Landis’ decision was eventually overruled, but Rockefeller was not so
lucky in his fight against the Sherman Antitrust Act. Rockefeller had set up a
trust system at Standard Oil merely to allow his many oil businesses in different
states to be headed by the same board of directors. Some states, like
Pennsylvania, had laws permitting it to tax all of the property of any corporation
located within state borders. Under these conditions, Rockefeller found it
convenient to establish separate Standard Oil corporations in many different
states, but have them directed in harmony, or in trust, by the same group of men.
The Supreme Court struck this system down in 1911 and forced Standard Oil to
break up into separate state companies with separate boards of directors.

This decision was puzzling to Rockefeller and his supporters. The
Sherman Act was supposed to prevent monopolies and those companies “in
restraint of trade.” Yet Standard Oil had no monopoly and certainly was not
restraining trade. The Russians, with the help of their government, had been
gaining ground on Standard in the international oil trade. In America,
competition in the oil industry was more intense than ever. Over one hundred oil
companies—from Gulf Oil in Texas to Associated Oil in California—competed
with Standard. Standard’s share of the United States and world markets had been
steadily declining from 1900 to 1910. Rockefeller, however, took the decision
calmly and promised to obey it.35

Even more remarkable than Rockefeller’s serenity was his diligence in
tithing. From the time of his first job, where he earned 50 cents a day, the
sixteen-year-old Rockefeller gave to his local Baptist church, to missions in New
York City and abroad, and to the poor— black or white. As his salary increased,
so did his giving. By the time he was 45, he was up to $100,000 per year; at age

53, he topped the $1,000,000 mark in his annual giving. His eightieth year was
his most generous: $138,000,000 he happily gave away.36

The more he earned the more he gave, and the more he gave the more he
earned. To Rockefeller, it was the true fulfillment of the Biblical law: “Give, and
it shall be given unto you; good measure, pressed down, and shaken together,
and running over, shall men give unto your bosom.” Not “money” itself but “the
love of money” was “the root of all evil.” And Rockefeller loved God much
more than his money. He learned what the prophet Malachi meant when he said,
“Bring the whole tithe into the storehouse, . . . and see if I will not throw open
the floodgates of heaven and pour out so much blessing that you will not have
room enough for it.” He learned what Jesus meant when he said, “With the
measure you use, it will be measured to you.” So when Rockefeller proclaimed:
“God gave me [my] money,” he did so in humility and in awe of the way he
believed God worked.37

Some historians haven’t liked the way Rockefeller made his money, but
few have quibbled with the way he spent it. Before he died, he had given away
about $550,000,000, more than any other American before him had ever
possessed. It wasn’t so much the amount that he gave as it was the amazing
results that his giving produced. At one level he built schools and churches and
supported evangelists and missionaries all over the world. After all, Jesus said,
“Go ye into all the world, and preach the gospel to every creature.”

Healing the sick and feeding the poor were also part of Rockefeller’s
Christian mission. Not state aid, but Rockefeller philanthropy paid teams of
scientists who found cures for yellow fever, meningitis, and hookworm. The boll
weevil was also a Rockefeller target, and the aid he gave in fighting it improved
farming throughout the South.

Rockefeller attacked social and medical problems the same way he
attacked the Russians—with efficiency and innovation. To get both of these,
Rockefeller gave scores of millions of dollars to higher education. The
University of Chicago alone got over $35,000,000. Black schools, Southern
schools, and Baptist schools also reaped what Rockefeller had sown. His guide
for giving was a variation of the Biblical principle—”If any would not work,
neither should he eat.” Those schools, cities, or scientists who weren’t anxious to
produce or improve didn’t get Rockefeller money. Those who did and showed
results got more. As in the parable of the talents, to him who has, more
(responsibility and trust) shall be given by the Rockefeller Foundation.38

At about age sixty, Rockefeller began to wind down his remarkable
business career to focus more on philanthropy, his family, and leisure. He took

up gardening, started riding more on his horses, and began playing golf. Yale
University might ban the tango, but Rockefeller hired an instructor to teach him
how to do it. Even in recreation, Rockefeller wanted to discipline his actions for
the best result. In golf, he hired a caddy to say, “Hold your head down,” before
each of his swings. He even strapped his left foot down with croquet wickets to
keep it steady during his drives. 39

In a way, Rockefeller’s life was a paradox. He was fascinated with human
nature and enjoyed studying people. Yet his unparalleled success in business
made friendships awkward and forced him to shut out much of the world. To his
children Rockefeller was the man who played blind man’s bluff with great gusto,
balanced dinner plates on his nose, and taught them how to swim and to ride
bicycles. But from the world he had to keep his distance: he was a target for
fortune hunters, fawners, chiselers, mountebank preachers, and hundreds of
hard-luck letters written to him each week.40

Retirement, however, liberated him more to enjoy people and nature. On
his estate in New York, he studied plants and flowers. Sometimes he would drive
out into the countryside just to admire a wheatfield. Down in Florida, he liked to
watch all the people who passed his house and guess at what they did in life. He
handed out dimes to the neighborhood children and urged them to work and to
save.41

Naturally, Rockefeller had some disappointments in his last years. He was
sad that Standard Oil had been broken up by the Sherman Act and that the
Russians had increased their foreign oil sales. He was also saddened by the Great
Depression of the 1930s. Still, Rockefeller knew he had lived a full life and had
been a key part of the two big transformations in the oil industry: the making of
kerosene for lighting homes and the making of gasoline for running cars.
Rockefeller loved life and wanted to live to be one-hundred, but he died in his
sleep during his ninety-eighth year in 1937.

CHAPTER SIX

Andrew Mellon and the 1920s

Andrew Mellon is one of the most misunderstood men in American
history. As Secretary of Treasury, he persuaded Congress to cut taxes to help
generate the capital that made the 1920s so prosperous for so many Americans.
But many textbooks claim he aided only the rich, and that he helped trigger the
Great Depression. Even during the 1920s, when Mellon became one of the best
known men in America, he stirred emotions with his sensational tax plan. If we
look at the facts, and cut away the myth, the story of Andrew Mellon can tell us
much about which tax policies work and which don’t.

We all think we know that raising taxes increases revenue and that slashing
taxes always lowers revenue. But Mellon challenged this conventional wisdom.
“It seems difficult for some to understand,” he wrote, “that high rates of taxation
do not necessarily mean large revenue to the Government, and that more revenue
may often be obtained by lower rates.”1 Had Mellon not been a success as an oil
and aluminum entrepreneur, few would have taken his tax philosophy seriously.
Yet on December 14, 1929, the U. S. Senate passed Mellon’s sixth and final tax
cut of the decade. It climaxed his tax revolution: from 1921 to 1929 the tax rates
on those earning under $4000 per year had been chopped eightfold (from 4 to Vi
percent); those in the $4000 to $8000 bracket had their burden slashed fourfold
(from 8 to 2 percent); and taxes on top incomes had been cut threefold (from 73
to 24 percent). And the result for Mellon in government revenue was a startling
triumph: the personal income-tax receipts for 1929 were over $1 billion, in
contrast to the $719 million raised in 1921, when tax rates were so much higher.
Editors, economists, and politicians across the nation were astonished and many
labeled Mellon “the greatest Secretary of Treasury since Alexander Hamilton.”2

I
Andrew Mellon came by his philosophy of low taxes and limited

government quite naturally. His grandfather, a thrifty Scots-Irishman, fled Ulster
in 1818 to escape the high taxes of the Napoleonic Wars. He farmed near
Pittsburgh and taught his son Thomas, Andrew’s father, to avoid debt, be honest,
and work hard in life. As Thomas later wrote, “the hardships experienced by…
my own parents, from oppressive taxation, became so thoroughly ingrained in
my nature, when a child, that I have always felt a strong opposition… to all
measures rendering an increase of taxes necessary. It was the universal
complaint which drove our people from their homes… .”3

Young Thomas became more than a tax critic. He moved to Pittsburgh to
practice law, start a bank, and raise a family. He developed a knack for finance
and trained his five sons at the dinner table in how to use money to make money.
Andrew, born in 1855, proved to be an eager learner. At age nine, he learned
about supply and demand by selling apples from the family orchard. As a
teenager Andrew went on business trips for his father, buying land near
Baltimore and hiring a theater operator in Philadelphia. He went into the lumber
business with his brother Richard and sold out at a nice profit just before the
Panic of 1873. Thomas, a proud father, retired early and turned the family bank
over to Andrew and Richard, his two youngest sons.4

They were an excellent team: Richard was outgoing and jovial; Andrew
was introverted and quiet. Richard would greet customers and do ribbon
cuttings; Andrew would do more of the thinking and planning. Many workers at
T. Mellon and Sons Bank, even some officers, knew Richard as a friend but
knew Andrew hardly at all, even by sight. Andrew was 5’9″ tall, lean in body,
sharp in features, and had a thick moustache. For exercise he liked to walk and
did so with a firm pace and erect back, even into his seventies. When he spoke,
which was not often, his voice was soft, like a whisper. He would sometimes
preface his words with a slight cough. Pauses were frequent. Yet his mouselike
manner hid a mental toughness that always commanded respect. When Andrew
gave advice, ears strained to listen.5

What Mellon lacked in rhetorical skill he made up for with his exceptional
judgment of people and ideas. He had a remarkably creative mind and liked to
think about strategies that would change industry and society. As a banker, for
example, he backed industrialists who were strong on ideas but weak on
finances. The production of aluminum, for example, was slow, expensive, and
irrelevant to most Americans in the 1890s. But when Mellon backed Alcoa he
believed that aluminum, with its light weight and excellent conducting qualities,
would challenge steel and copper as a major industrial metal. Mellon and his
family sank $15 million into Gulf OH in the early 1900s, because he believed

that they could build and run a vertically-integrated oil company that could
compete with mighty Standard Oil. He was right; Gulf built pipelines from Texas
to Oklahoma, invented offshore drilling, and built the first corner service stations
to provide gas for cars.6

The key to the success of these industries, and dozens of other Mellon
enterprises, was capital—high-risk, venture capital. Somebody had to have the
nerve, the money, and the vision to back risky ideas that had potential. Mellon
had done this so ably that by 1920 he was worth close to one billion dollars,
which ranked him with John D. Rockefeller and Henry Ford as one of the three
wealthiest men in America. Mellon’s superior grasp of economics caught the
attention of national political leaders after World War I. They were struggling
with a stagnant economy, a rising national debt, and a crushing tax burden.
Republican Warren G. Harding, winner of the 1920 Presidential election, asked
Mellon to be his Secretary of Treasury and do for the American economy what
he had done with aluminum and oil.7

Mellon hesitated to accept Harding’s offer. In the industrial world he
directed a worldwide economic empire. He would have to resign his position on
the boards of directors of sixty corporations to take a $12,000-a-year job trying
to straighten out a mess. At age 65, though, Mellon had been the entrepreneur
long enough. His family urged him to accept, and he was challenged by the idea
of applying his business experience to government problems. So Mellon went to
Washington, bought an apartment on Massachusetts Avenue, and took command
of the Treasury Department. In a sense, he was very comfortable with his work:
corporate problems and government problems were often similar; he delegated
the detail work to his undersecretaries and applied his talent to strengthening the
postwar economy. In another sense, Mellon had to make adjustments.
Newspapers publicized his wealth and reporters pried into his life. They freely
accosted him, even as he walked to work. The taciturn Mellon stumbled so
completely in his first interview that he couldn’t articulate a thought. After some
practice, and some good press clippings, Mellon warmed up to most reporters.
All through his term, though, the less he was forced to say about something the
more at ease he was. When Mellon held a press conference, or spoke before
Congress, he usually wrote out his message and had his undersecretary read it. If
possible, he even had the undersecretary field the questions.8

Mellon came to Washington at a crucial time in U. S. history. World War I
had been a turning point in the way many perceived the role of government in
economic life. Before the war, the federal role in operating, regulating, and
taxing American business was small. Federal budgets were less than $1 billion

per year. The taxes needed to run the American government were low and fairly
easily collected; land sales and tariffs were the major sources of revenue.9 In the
1910s, two things helped change all of this: the passing of the income tax and the
outbreak of the First World War.

The idea of taxing incomes had long been debated in American history.
During the Civil War, Congress passed a 3 percent tax on all incomes over $800,
and raised the rate and taxable amounts twice, but repealed the tax in 1872. Then
in 1894, during an economic downturn, Congress passed a flat 2 percent tax on
all incomes over $4000. The next year, however, the Supreme Court declared
this law unconstitutional. Conservatives tended to oppose the income tax: high
taxes stifled investment, they argued, and any income tax, once passed, was easy
to raise and hard to reduce. Existing taxes were adequate, conservatives argued,
and business should be left relatively free. “Progressives,” as they called
themselves, favored the income tax and fought to pass a constitutional
amendment giving Congress the right to levy taxes on personal and corporate
incomes. The income tax, in Progressive theory, could be used instead of tariffs
to raise revenue, and also to increase the powers of the federal government. The
leading Progressive spokesmen during the 1920s were Senators Robert M.
LaFollette of Wisconsin, George W. Norris of Nebraska, and James Couzens of
Michigan.10

The period from 1900 to 1920 is sometimes called the Progressive Era
because during this time Progressives entered politics and increased the role of
the federal government in the American economy. In 1913, they secured the 16th
amendment, which enabled Congress to tax personal incomes. The income tax
passed that year was light: individuals earning less than $3000 per year and
married couples making $4000 per year paid no tax. Those who earned more
were taxed only 1 percent up to $20,000 income. Then the tax became
progressive, that is, the rates increased as income increased. Those earning from
$20,000 to $50,000 were taxed at 2 percent; from $50,000 to $75,000 at 3
percent; and so on. The top rate was 7 percent of incomes over $500,000. Under
this law, few Americans paid any income taxes; of those who did, most paid only
1 percent. The revenue raised from this law was small, but the government itself
was small in 1913 and it needed little revenue to run efficiently.11

In 1916, in response to President Wilson’s program of preparedness for
war, Congress hiked the income tax rate. It became 2 percent on incomes under
$20,000 and rose to 15 percent on incomes of $2 million or more. The
exemptions were unchanged. The next year the U. S. entered the First World
War: expenses soared to the highest levels in U. S. history; massive government

programs bought food, weapons, and equipment for America and her allies. The
government also set prices and wages, and controlled production of scores of
industries. Wilson used the income tax to raise much of the money needed to
wage war: rates started at 4 percent and soared to 77 percent on top incomes.
Corporate taxes rose to 18 percent. Most Americans were willing to sacrifice for
this emergency and paid over $7 billion in taxes during the war years. They also
bought billions of dollars in “Liberty bonds” to aid the allied cause. In the wake
of military victory, the national debt had skyrocketed from $1.5 billion in 1916
to $24 billion in 1919.12

This controlled economy fulfilled the dream of many Progressives. They
had problems, though, when the revenue raised from high taxes plunged in 1919
and 1920. The federal spending that Progressives desired could not continue
after the war because of this shrinking revenue and a dramatic increase in the
national debt. “There is a point,” President Wilson discovered, “at which in
peace times high rates of income and profits taxes discourage energy . . . and
produce industrial stagnation with consequent unemployment and other . . .
evils.” The byproducts of war— high taxes and a soaring national debt—would
clearly be issues in the 1920s. Andrew Mellon agreed with Wilson’s new way of
thinking and went from there.13

As Treasury Secretary, Mellon carefully collected and studied data on the
American economy. High taxes, he concluded, were the chief parasites draining
the lifeblood of the American economy. “Before the period of the war,” he
observed, “taxes as high as those now in effect would have been thought
fantastic and impossible of payment.” Rich men went to great lengths to avoid
paying the 73 percent rate Mellon confronted when he came to Washington.

The high rates inevitably put pressure upon the taxpayer to withdraw his
capital from productive business and invest it in tax-exempt securities. . . .The
result is that the sources of taxation are drying up; wealth is failing to carry its
share of the tax burden; and capital is being diverted into channels which yield
neither revenue to the Government nor profit to the people.14

Mellon publicized the evidence in Table 1 to make his point. Between
1916 and 1921, the number of people who earned over $300,000 per year had
shrunk, and so had their average incomes. The rich were not poorer but wiser;
they were shifting their fortunes into tax-exempt bonds.

The subject of tax-exempt bonds became relevant because Congress allowed
cities and states to issue bonds that were free of any taxes. When tax rates were
higher than 50 percent on top incomes, municipal bonds that paid about 5
percent were more attractive to wealthy people than taxable investments that

paid 11 percent. Since almost no corporation in the country consistently earned
11 percent per year, capital flooded into bonds for projects in cities all over the
country.15

Table 1: THE DECLINE OF TAXABLE INCOMES OVER $300,000
FROM 1916 TO 1921

YEAR
NUMBER OF

RETURNS NET INCOME
All classes

Incomes over
$300,000

All classes
Incomes over
$300,000

1916
1917 1918
1919 1920
1921

437,036
3,472,890
4,425,114
5,332,760
7,259,944
6,662,176

1,296
1,015
627
679

395 246

$6,298,577,620
13,652,383,207
15,924,639,355
19,859,491,448
23,735,629,183
19,577,212,528

$992,972,986
731,372,153
401,107,868
440,011,589
246,354,585
153,534,305

Source Andrew Mellon, Taxation: The People’s Business (New York:
Macmillan, 1924), 74.

Mellon estimated in 1923 that Americans held fully $12 billion—a

threefold increase in ten years—in tax-exempt bonds. This $12 billion was
almost three times the amount of the federal budget and more than half of the
debt owed by the national government. All of these rich people pouring cash into
municipal bonds alarmed Mellon: America’s industries, he argued, were starving
for capital while the cities had abundant low-interest cash available whether they
needed it or not. Thus, the U. S. had more and more large football stadiums and
civic centers but fewer and fewer factories where these cityfolks could work
long-term jobs.16

Mellon knew firsthand how hard it was for speculative ventures—such as
making aluminum or drilling for oil—to raise the money needed for success.
Poor or middle-class people, living from payday to payday, could rarely afford to
invest in these high-risk ventures. Only the wealthy could afford the risk and
supply the capital to start up high-risk industries. When the top incomes in the U.
S. shifted away from corporate development and into tax-exempt bonds, new
industries especially had trouble raising the capital to compete. But, Mellon
insisted, the whole economy suffered, too. He used William Rockefeller, the

brother of John D., as an example of high taxes chasing capital out of productive
investment. When Rockefeller died in 1923, Mellon discovered that he had $44
million in tax-exempt bonds and only $7 million left in Standard Oil.17 Mellon
urged Congress to support a law— even a constitutional amendment—to abolish
the tax-free status of city and state bonds. But he knew this was no quick fix. As
long as taxes were high, investors would find some way to avoid them. Taxes
had to be slashed “to attract the large fortunes back into productive enterprise.”
Then Mellon added a twist to his argument: “more revenue [for the government],
may often be obtained by lower rates.” Not just more revenue from the rich,
Mellon predicted, but more revenue overall might come to the government if
taxes were cut. He compared the government setting tax rates on incomes to a
businessman setting prices on products. “If a price is fixed too high, sales drop
off and with them profits.” Mellon asked: Does anyone question that Mr. Ford
has made more money by reducing the price of his car [from $3000 to $380] and
increasing his sales than he would have made by maintaining a high price and a
greater profit per car, but selling less [sic] cars?

Mellon, of course, recognized that there was a limit to how far you could
cut taxes and still increase revenue. “The problem of the government,” he said,
“is to fix rates which will bring in a maximum amount of revenue to the Treasury
and at the same time bear not too heavily on the taxpayer or on business
enterprises.” Mellon believed that 25 percent was about as much as rich people
would pay in taxes before they rushed to the tax shelters.18

Mellon’s prediction that lowering tax rates might produce more revenue
for the government was controversial right from the start. Progressives
shuddered at the thought; but even conservatives were nervous. At stake to
conservatives was balancing the budget and shrinking the high national debt.
Over $7.5 billion worth of 4 percent Liberty bonds was coming due in 1923.
None of the bonds could be paid off if Mellon was wrong. The government
would have to renegotiate these bonds, probably at higher rates, and then borrow
more each year to make up for lower revenues and for the added interest
payments on the national debt. It would then be harder in the future to balance
the budget, confidence in the American government would fall, interest rates
might rise, and investors might withdraw capital from the American economy.
The economic downturn after the war might persist through the 1920s. Mellon
quietly waged his war of ideas first with Harding and then with Coolidge till
both decided to back him.19

Mellon was an odd sort of man to command such attention in the Harding-
Coolidge administration. After Harding was elected, he invited Mellon to come

to his home in Marion, Ohio, to discuss the Treasury job. Mellon took the train
to Marion and found no one in the depot to meet him. So he walked the mile to
Harding’s house, suitcase in hand, and waited in line—behind local jobseekers—
to have his appointment with Harding. When the astounded clerk realized
Mellon was waiting in the reception room, Mellon refused to have any fuss made
and insisted on taking his turn behind the others. When Mellon’s turn finally
came, he spent much of the time trying to talk Harding out of choosing him to
head the Treasury Department. At last, Harding had a man for his cabinet who
was not seeking glory and who couldn’t be bought.20

Sometimes Mellon’s humility created embarrassments. At a press banquet
Mellon was mistakenly called to the phone and ended up being asked to take a
long message for some reporter named George. Mellon dutifully took three
pages of notes from the stranger and delivered them to George.21

In Harding’s administration, Mellon’s low-key personality and his
encyclopedic knowledge of economics became legendary. At a cabinet meeting
in 1921, the question came up whether the U. S. should scrap a war factory that
had cost $12 million, or a similar amount should be spent to refurbish it. Finally,
Mellon was asked his opinion.

Mr. Mellon was hesitant. Then he spoke up in his low, quiet, dry voice.
The matter was not exactly in his department; he had not given the problem
any study; he was not familiar with all the conditions and the full situation;
it was a question of some importance; he did not wish to be understood as
giving his final opinion unless he had opportunity to go into the whole
matter more fully, but he thought he could indicate possibly what his final
judgment might be, if allowed to tell what he had done in a somewhat
similar and personal case. He owned a war plant that stood him about
fifteen or sixteen millions, and just the other day the question had come up
whether to spend that much more money on it or to wipe it off. “I told ’em
to scrap it,” concluded Mr. Mellon.22

And so the government scrapped its war plant. In a later cabinet meeting
on international relations, the subject of the Chinese Eastern Railway came up:

The President leaned over to Attorney General [Harry] Daugherty and
whispered, “Now we’ve got him. Surely he wasn’t in this.”

“I don’t suppose, Mellon,” said President Harding, winking at
Daugherty, and assuming a most casual manner, “that you were interested in
the Chinese Eastern Railway, were you?”

“Oh, yes,” Mr. Mellon replied placidly; “we had a million or a million

and a half of the bonds.” And he told the cabinet all about the road; all
about it—not part—all.

“It’s no use,” said the President, “no use. He’s the ubiquitous financier of
the universe.”23

As the resident “financier of the universe,” Mellon commanded respect;
and in 1924 when he wrote Taxation: The People’s Business, he had full
presidential support. The press dubbed his proposal the “Mellon Plan.” Its four
main points were:

1. Cut the top income tax rate to 25 percent. This was one of the first
things Mellon had tried to do when he took office. In 1921 Congress did cut
the top rate from 73 to 58 percent; but after this the resistance stiffened. The
Progressives wanted a high tax rate on the rich and they had the logic of
democratic politics on their side: few voters earned large incomes; many
voters resented those who did, and therefore there was always support for a
soak-the-rich policy. Mellon believed that about 25 percent was the most
that investors would pay before they fled to tax-exempt bonds. Cutting the
top tax to 25 percent would, he predicted, bring the large fortunes back into
productive enterprise and might generate a surplus of revenue for the
government.24

2. Cut taxes on low incomes. When Mellon took office the existing rates
were 4 percent on those incomes of $4000 or less, and 8 percent on incomes
over $4000. Mellon wanted to cut these rates from 4 to 3 percent and from
8 to 6 percent; later he argued that these rates should be cut even further. No
doubt Mellon was being politically shrewd with this part of his plan, but he
also seems to have believed in what he was doing. Tax policy, he argued,
“must lessen, so far as possible, the burden of taxation on those least able to
bear it.” To further this end, he also suggested an income-tax credit of 25
percent on earned income—that is, income earned by wages would be taxed
less than income earned through investments. Mellon also proposed a
repeal of the federal taxes on telegrams, telephones, and movie tickets. The
tax on movie tickets, especially, was a fee “paid by the great bulk of the
people whose main source of recreation is attending the movies in the
neighborhood of their homes. The loss in revenue would be about seventy
million dollars, but it would constitute a direct saving to a large number of
people whose tax burden should be lightened wherever it is possible to do
so.”25

But Progressives often opposed cutting the tax rates even on the
lowerincome groups. When the income tax first became law, for example,

Robert LaFollette wanted the taxing to start at $10,000, instead of $20,000.
In later Congressional debates he often tried to reduce the personal
exemptions, so that taxes would start on incomes of $1,000, instead of
$2,000. As Governor of Wisconsin, he pushed for a bill that allowed the
state to start taxing those who made as little as $800. When LaFollette died
in 1925, his son, Robert Jr., went to the Senate and picked up where his
father left off. He joined thirteen other Progressive senators in voting
against Mellon’s bill to cut taxes from 1V£ to Va percent on those earning
less than $4,000 per year.26

3. Reduce the federal estate tax. In 1916 Congress passed the first
federal inheritance tax. The rates were progressive and started on estates of
over $50,000. By the time Mellon took office the top rate had been
increased from 5 to 25 percent. Progressives pushed the maximum up to 40
percent at the same time the Mellon Plan was launched. Mellon opposed
this vigorously. He thought that states, not the federal government, should
enjoy the revenue from inheritance taxes. He also argued that stocks and
properties in large estates could not net their full value because with high
taxes they would have to be sold quickly by heirs. Furthermore, large estate
taxes, like large income taxes, tempted the wealthy to shift their fortunes
into tax-exempt shelters.27 In the case of large estates, the shelter would be
tax-exempt foundations, as Mellon would show in the 1930s.

4. Efficiency in government. The 1919 federal budget was over $18
billion; Mellon wanted to see annual budgets drop below $4 billion. Smaller
budgets meant less need for tax revenues and also greater ease in reducing
the $24 billion national debt. In the Treasury Department Mellon cut
personal expenses; he also cut from the Treasury Department staff an
average of one person per day every day during the 1920s. He was able to
do this because lower tax rates meant fewer returns, which meant fewer
people wereneeded to process and audit returns. Mellon had other ideas,
too.He cut the size of paper bills to fit wallets more easily and thereby
saved expenses on paper and ink.28
The Mellon Plan was probably the subject of more debate than any other

political issue during the 1920s. Not just the money was involved; two political
ideologies were clashing. In a sense, it made little difference whether a man
making $4000 paid $120 tax under the old rates, or $67.50 under the Mellon
Plan. But the Progressives wanted to take these small amounts, add them to the
huge windfalls they hoped to extract from the rich, and use the money to back
the McNary-Haugen bill, which authorized the government to help farmers

market their surplus crops; pay a cash bonus to veterans of World War I; and pay
for the federal development of hydroelectric power along the Tennessee River
Valley. Mellon, by contrast, wanted to use any surplus revenue from tax cutting
to retire the national debt. He called the Progressive agenda “taking money out
of the pockets of all the people in order that it shall find its way back into the
pockets of some of the people.”29

Mellon made one exception to his theme of limited government—he
favored a tariff. Perhaps he felt obligated to support a tariff because the
Republican party endorsed one. Still, it created inconsistencies in his argument
and opened him to attack. When the Republicans passed the Fordney-McCumber
Tariff in 1922, Mellon seemed comfortable supporting it. Included in this tariff
was a three-cent-a pound rise in the duty on imported aluminum. Mellon, of
course, had divested himself of his Alcoa interests when he went to Washington,
but there was still understandable criticism of him. Senator William Borah, a
Progressive from Idaho, attacked Mellon for opposing government protection for
farmers but favoring government protection for Alcoa.30

The debate between Mellon and the Progressives was fought almost every
year in Congress. In the early 1920s, the sides were about evenly matched. In the
tax bills of 1921, 1922, and 1924, Mellon and his supporters reduced the rates on
large personal incomes to 46 percent, a minor victory; corporation taxes,
however, were raised from 10 to 12.5 percent, a minor defeat. Progressives had
the rates on large estates hiked from 25 to 40 percent. They also enacted a gift
tax to prevent the rich from giving their fortunes away before they died. Mellon
did get his lower rates on incomes below $8,000, but this was less controversial
because it was so politically popular. The Democratic party leaders also
suggested lower rates and, on occasion, so did Progressives.31

When Harding died in 1923 and Coolidge became President, Mellon found
himself with a strong ally to help break the Congressional deadlock. Coolidge
studied the tax problem and agreed with Mellon’s conclusions. “I agree
perfectly,” Coolidge said, “with those who wish to relieve the small taxpayer by
getting the largest possible contribution from the people with large incomes. But
if the rates on large incomes are so high that they disappear, the small taxpayer
will be left to bear the entire burden.”32

Coolidge and Mellon not only thought alike, they acted alike. Both men
were shy and at state dinners they must have made guests uneasy because they
said almost nothing. Cleveland Amory wrote that Mellon and Coolidge seemed
to have conversed “almost entirely in pauses.” They even installed a direct phone
hookup to each other, perhaps to share silence together.33

The two men were quiet for different reasons. Coolidge grew up on a farm
in Vermont. His mother died when he was young and he saw few people as a
boy, so he never developed social skills. Mellon, by contrast, had a weak
speaking voice, and the presence of a crowd made him uneasy. Coolidge’s
political success and Mellon’s business success only reinforced the problem;
crowds, jobseekers, and fawners all sought these men out for favors. A retreat to
silence was their response to these pressures.34

Both men took almost childish delight in their families. Coolidge adored
his wife and bought her fancy clothes and presents. When driving his car,
Coolidge allowed only family members to ride with him. Mellon, although
divorced, was close to his two children, Ailsa and Paul. “With his children this
quiet, reserved man was a different being from the financier the world knew,”
observed Mellon’s nephew William. Mellon would join his children on sled
rides, he would fly kites and play ball with them, or chase them in blind man’s
bluff. “If the children slid down the banisters, he would slide with them,” his
nephew observed. “He would play hide-and-seek until they were tired of the
game.”35

Distrustful of outsiders, both Coolidge and Mellon found joy in pets or
possessions. Coolidge had a pet raccoon that roamed the White House freely; he
was given a parrot trained to say “What about the appropriation?”; and he raised
chickens in the White House back yard. Mellon had an all-aluminum car; and he
assembled one of the finest art collections in the world. This closeness in
personality and philosophy may have united Coolidge and Mellon and made
them more forceful in their appeals for tax cuts and balanced budgets.36

The 1924 elections shifted the balance of power to the conservatives.
Coolidge ran for reelection and won a landslide victory over the Democrats and
also LaFollette, who ran as a third-party candidate. The tax cuts were a major
issue in the campaign and the Republicans now had a mandate and a strong
congressional majority to put them into effect. Congress passed most of the
Mellon Plan in 1926. In 1928 and 1929, Mellon recommended, and Congress
passed, further tax cuts: the estate tax was halved to 20 percent, top incomes paid
24 percent, and smaller incomes had even larger proportional reductions.37

The Progressives denigrated his achievements whenever possible. They
could hardly dispute his results; instead they challenged his motives. In 1925,
Senator Norris announced, “Mr. Mellon himself gets a larger personal reduction
than the aggregate of practically all the taxpayers in the state of Nebraska.” The
records showed, however, that Mellon also paid more in income taxes than did
all of the taxpayers of Nebraska. John Nance Garner, the Democratic leader in

the House, said in 1924 that the Mellon Plan had “for its sole purpose the
reduction of the larger taxpayers at the expense of the smaller taxpayer.” To
Senator LaFollette, the Mellon Plan meant that “wealth will not and cannot be
made to bear its full share of taxation.”38

The results of Mellon’s tax cuts in 1926, however, as seen in Table 2, show
that the tax burden shifted toward, not away from, the rich. In 1921 people who
earned less than $10,000 per year paid almost as much in total income taxes as
did those who earned over $100,000 per year. In 1926, the ratios changed: those
who earned over $100,000 per year paid over ten times as much in aggregate
income taxes as those who earned less than $10,000 per year. Meanwhile, the
total revenue from 1921 to 1926 had increased. These trends continued with
Mellon’s smaller tax cuts in 1928 and 1929. In 1929, the income-tax revenue
surpassed $1 billion. Those in the $100,000 bracket paid 65 percent of it; those
in the under $10,000 bracket paid only 1.3 percent of the total tax.39

As a last resort, Progressives attacked Mellon’s integrity. He manipulated
tax audits, they charged, and refunded $3.5 billion during the 1920s to
Republican friends and to corporations in which he had a large interest. Alcoa,
for example, received a $15 million refund for supposed overpayment of taxes
during the war. Refunds also went to Gulf Oil and to seventeen people who
contributed $10,000 to the Republican party in 1930.40

These attacks suggest that Mellon used his office to ladle cash to himself and
his cronies. Mellon, however, had little to do with granting refunds; a Board of
Tax Appeals ruled on these cases. This Board did award $3.5 billion in refunds
to taxpayers during the 1920s, as the Progressives charged; but it also reassessed
other taxpayers $5.3 billion during this same period. In other words, the Treasury
department took in more revenue in reassessments than it lost in refunds. And
prominent Democrats, as well as Republicans, were among the winners and
losers in tax cases during the 1920s.41

Table 2: THE TAX REVENUE COLLECTED ACCORDING TO
INCOME GROUPINGS BEFORE AND AFTER THE 1926 TAX CUTS
Net Income
Grouping

Tax Revenue Collected from Income Grouping (In Millions
of constant 1929 Dollars)

1921 1926
Less than
$10,000

$155.1 $ 32.5

$10,000 to
$25,000

121.8 70.3

$25,000 to
$50,000

108.3 109.4

$50,000 to
$100,000

111.1 136.6

Over $100,000 194.0 361.5
Total $690.2 $710.2

Source: James Gwartney, “Tax Cuts: Who Shoulders the Burden?”
Economic Review (March 1982).

Mellon usually avoided critics and stayed out of public arguments.42

Reporters often quoted Mellon’s critics to him to see how he would respond. “It
is merely vicious piffle,” Mellon once said when asked about a criticism.
Another time, a Republican leader asked him what he thought of Senator Borah,
a regular critic of Treasury policies. Mellon replied, “I never think of him unless
somebody mentions his name.” Some listeners probably thought this retort was
clever; but Mellon meant it. He knew his energy was limited and he wanted to
spend it working on ways to strengthen the economy. “Worry,” concluded
Mellon, “is the sport of men who have nothing to do and plenty of time in which
to make a mess of doing it.”43

This attitude served him well in the 1930s, the last years of his life, when
the New Dealers came into power and his policies came under attack. After
Coolidge’s term, Mellon stayed on as Herbert Hoover’s Secretary of Treasury.
But the two men clashed over how to respond to the Great Depression. Mellon
resigned in February, 1932, and served as Hoover’s Ambassador to Great Britain
until Franklin Roosevelt took office as President in 1933. Under both Hoover
and Roosevelt federal income taxes were raised. By 1935, the top marginal rate
had again reached almost 80 percent, and investors again manipulated their
investments to avoid taxes. To make up for lost revenue, Congress passed a
series of excise taxes on bank checks, movie tickets, telephone calls, gasoline,
tires, cars, electricity, lubricating oils, and grape concentrates. The New Deal
was funded in large part by the money raised from these taxes. Excise taxes,
however, are considered regressive because they hit lower income groups
proportionally more heavily than richer groups. Mellon had slashed excise taxes
during the 1920s to lighten the burden on the common man. But even though
Mellon’s tax policies were overturned, he believed that his ideas would endure
and that history would vindicate his policy of low tax rates. He retired from
politics, donated his $50 million art collection to the National Gallery of Art, and

died peacefully in 1937.44

III
College textbooks have naturally devoted space to Andrew Mellon and the

1920s. One of the most widely used texts is The National Experience by John M.
Blum of Yale, William S. McFeely of the University of Georgia, Edmund S.
Morgan of Yale, Arthur Schlesinger, Jr., of the City University of New York,
Kenneth Stampp of Berkeley and C. Vann Woodward of Yale. In 1993, this text
went into its eighth edition. Blum and Schlesinger, who has won a Pulitzer Prize,
wrote the sections on the 1920s and 1930s, and here is what they say about
Mellon: Foremost among Harding’s advisers was Secretary of the Treasury
Andrew Mellon, a reticent multimillionaire from Pittsburgh whose intricate
banking and investment holdings gave him, his family, and his associates
control, among many other things, of the aluminum monopoly. A man of slight
build, with a cold and weary face, Mellon exuded sober luxury and
contemptuous worldliness. “The Government is just a business,” he believed,
“and can and should be run on business principles.”

Great businesses, as Mellon knew, thrive on innovation and expansion. Yet
the only business principle he considered relevant to government was economy.
With small regard for the services that only government could furnish the nation,
Mellon worked unceasingly to reduce federal expenditures. Expenses had to be
cut if he was to achieve his corollary purpose: the reduction of taxes, especially
taxes on the wealthy. It was better, he argued, to place the burden of taxes on
lowerincome groups, for taxing the rich inhibited their investments and thus
retarded economic growth. A share of the tax-free profits of the rich, Mellon
reassured the country, would ultimately trickle down to the middle-and
lowerincome groups in the form of salaries and wages. Robert LaFollette
paraphrased that theory succinctly: “Wealth will not and cannot be made to bear
its full share of taxation.”45

But Mellon did not want to “place the burden of taxes on lowerincome
groups.” On the contrary, as we have seen, he cut taxes proportionally more on
the lower income groups. The rich were carrying almost the entire income-tax
burden after Mellon’s tax cuts. It was the tax hikes of the 1930s that shifted the
burden of taxation back to the lowerincome groups. But Schlesinger almost
completely ignores these tax hikes. He never mentions that large incomes were
taxed at 63 percent after 1932, and at 79 percent after 1934. He also never
mentions the new excise taxes that became law after 1932 and were used to fund
New Deal programs. Another best-selling textbook has been The American

Nation, by John Garraty of Columbia University. Garraty describes Mellon’s
ideas this way: Mellon carried his policies to unreasonable extremes. He
proposed eliminating inheritance taxes and reducing the tax on high incomes by
two-thirds, but he opposed lower rates for taxpayers earning less than $66,000 a
year, apparently not realizing that economic expansion required greater mass
consumption as well. Freeing the rich from “oppressive” taxation, he argued,
would enable them to invest more in potentially productive enterprises, the
success of which would create jobs for ordinary people. Little wonder that
Mellon’s admirers called him the greatest secretary of the treasury since
Alexander Hamilton.

Although the Republicans had large majorities in both houses of Congress,
Mellon’s proposals were too reactionary to win unqualified approval.46

Garraty’s account, in content and in tone, is similar to Schlesinger’s. When
Garraty says Mellon “opposed lower rates for taxpayers earning less than
$66,000 a year. . . .” he is wrong. Those earning under $66,000 a year, as we
have seen, had the largest proportional tax cut and had most of their tax burden
lifted. Also, Mellon did not propose “eliminating inheritance taxes,” as Garraty
claims. Mellon wanted the states, not the federal government, to receive revenue
from inheritance taxes. Like Schlesinger, Garraty never mentions the specific tax
rates on large incomes during the 1930s. Nor does he mention the excise taxes of
the New Deal period.

Probably the best-selling college history textbook is The American
Pageant by Thomas A. Bailey and David M. Kennedy, both of Stanford. This
text is in its tenth edition and has sold over two million copies, according to its
promotional literature. Bailey and Kennedy describe Mellon’s ideas. Then they
conclude that “Mellon’s spare-the-rich policies thus shifted much of the tax
burden from the wealthy to the middle-income groups.”47 This, of course, is the
same error that Schlesinger and Garraty make. Mellon’s tax cut produced one
result; and these historians have said that the opposite occurred. Bailey and
Kennedy also ignore the tax increases of the 1930s.

Other texts are similar. There seems to be almost no correct information in
any college history text on the impact of Mellon’s tax cuts, or on the New Deal
tax hikes. Yet the tax records have been available for almost sixty years. And
studies of these records by Roy and Gladys Blakey, Benjamin Rader, James
Gwartney, and Thomas Silver have also been available for some time. This
situation is especially perplexing because Schlesinger has written well-respected
books on the 1920s and 1930s, and Garraty has written widely in economic
history. Expertise in the field, in fact, does not seem to correlate with presenting

accurate information. Irwin Unger, for example, is also an economic historian,
and even won a Pulitzer Prize for a book on the Greenback era. Yet in his
textbook, These United States, he writes: [Mellon] persuaded Congress to
eliminate the wartime excess-profits tax and reduce income tax rates at the upper
levels while leaving those at the bottom, untouched. Between 1920 and 1929
Mellon won further victories for his drive to shift more of the tax burden from
high-income earners to the middle and wage-earning classes. (48) It’s hard to
know who would have been more startled by Unger’s account: Mellon or the
lowerincome taxpayers, who saw both their income and excise taxes drastically
cut during the 1920s. George Santayana once said that those who do not learn
from the past are condemned to repeat it. But how can we learn what happened
in the past if historians either will not teach it or do not know it? National
debates over tax cuts occurred in the 1960s, 1980s, and the 1990s, but how can
we debate a subject intelligently if we are misinformed about the facts?49

Andrew Mellon never made an investment without knowing the relevant
facts; his business success demonstrated his grasp of financial situations. In
similar fashion, modern politicians, businessmen, and historians would do well
to learn the facts of American tax history before they try to plot its future.

CHAPTER SEVEN

Entrepreneurs vs. The Historians

A nation must believe in three things. It must believe in the past. It must
believe in the future. It must, above all, believe in the capacity of its people so to
learn from the past that they can gain in judgment for the creation of the future.

—Franklin D. Roosevelt

One reason for studying history is to learn from it. If we can discover
what worked and what didn’t work, we can use this knowledge to create a better
future. Studying the rise of big business, for example, is important because it is
the story of how the United States prospered and became a world power. During
the years in which this took place, roughly from 1840 to 1920, we had a variety
of entrepreneurs who took risks and built very successful industries. We also had
a state that created a stable marketplace in which these entrepreneurs could
operate. However, this same state occasionally dabbled in economic
development through subsidies, tariffs, regulating trade, and even running a steel
plant to make armor. When the state played this kind of role, it often failed. This
is the sort of information that is useful to know when we think about planning
for the future.

The problem is that many historians have been teaching the opposite
lesson for years. They have been saying that entrepreneurs, not the state, created
the problem. Entrepreneurs, according to these historians, were often “robber
barons” who corrupted politics and made fortunes bilking the public.1 In this
view, government intervention in the economy was needed to save the public
from greedy businessmen. This view, with some modifications, still dominates in
college textbooks in American history.

American history textbooks always have at least one chapter on the rise of
big business. Most of these works, however, portray the growth of industry in
America as a grim experience, an “ordeal” as one text calls it. Much of this
alleged grimness is charged to entrepreneurs.2

Thomas Bailey, in The American Pageant, is typical when he says of
Vanderbilt: “Though ill-educated, ungrammatical, coarse, and ruthless, he was
clear-visioned. Offering superior railway service at lower rates, he amassed a
fortune of $100 million.”3 If this second sentence is true, to whom was
Vanderbilt “ruthless?” Not to consumers, who received “superior service at lower
rates,” but to his opponents, such as Edward Collins, who were using the state to
extort subsidies and impose high rates on consumers. This distinction is vital and
must be stressed if we are to sort out the impact of different types of
entrepreneurs.

I have systematically studied three of the best-selling college textbooks in
American history: The American Pageant, by Thomas Bailey and David
Kennedy of Stanford University; The American Nation, by John Garraty of
Columbia University; and The National Experience, by John Blum of Yale
University, Edmund Morgan of Yale University, William S. McFeely of the
University of Georgia, Arthur Schlesinger, Jr., of the City University of New
York, Kenneth Starnpp of the University of California at Berkeley, and C. Vann
Woodward of Yale University. These works have been written by some of the
most distinguished men in the historical profession; all three books have sold
hundreds of thousands of copies.4 In all three, John D. Rockefeller receives more
attention than any other entrepreneur. This is probably as it should be. His story
is a crucial part of the rise of big business: he dominated his industry, he
drastically cut prices, he never lobbied for a government subsidy or a tariff, and
he ended up as America’s first near-billionaire.

The three textbooks do credit Rockefeller with cutting costs and improving
the efficiency of the oil industry, but they all see his success as fraudulent. In The
National Experience, Woodward says that: Rockefeller hated free competition
and believed that monopoly was the way of the future. His early method of
dealing with competitors was to gain unfair advantage over them through special
rates and rebates arranged with the railroads. With the aid of these advantages,
Standard became the largest refiner of oil in the country. … In 1881 [Standard
Oil] controlled nearly 90 percent of the country’s oil refining capacity and could
crush any remaining competitors at will.5

In The American Nation, John Garraty commends Rockefeller for his skill
but adopts roughly the same line of reasoning as does Woodward: Rockefeller
exploited every possible technical advance and employed fair means and foul to
persuade competitors either to sell out or to join forces…. Rockefeller competed
ruthlessly not primarily to crush other refiners but to persuade them to join with

him, to share the business peaceably and rationally so that all could profit….
Competition almost disappeared; prices steadied; profits skyrocketed. By 1892
John D. Rockefeller was worth over $800 million.6

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. Even
then, the Vanderbilts offered the same rebates to anyone who shipped as much
oil on the New York Central as Rockefeller did. In any case, the rebates went
largely to cutting the price of oil for consumers, not to Rockefeller himself.

Perhaps even more misleading than the faulty stress on the rebates is the
omitting of the most important feature of Rockefeller’s career: his thirty-year
struggle with Russia to capture the world’s oil markets. Not one of the three texts
even mentions this oil war with Russia.

Three facts show the importance of Rockefeller’s battle with the Russians.
First, about two-thirds of the oil refined in America in the late 1800s was
exported. Second, Russia was closer than the U. S. to all European and Asian
markets. Third, Russian oil was more centralized, more plentiful, and more
viscous than American oil. If Rockefeller had not overcome Russia’s natural
advantages, no one else could have. America would have lost millions of dollars
in exports and might have even had to import oil from Russia. The spoils of
victory—jobs, technology, cheap kerosene, cheap byproducts, and cheap gas to
spur the auto industry—all of this might have been lost had it not been for
Rockefeller’s ability to sell oil profitably at six cents a gallon. The omitting of
the RussoAmerican oil war was so striking that I checked every college
American history text that I could find (twenty total) to see if this is typical. It is.
Only one of the twenty textbooks even mentions the Russian oil competition.7

Obviously textbooks can’t include everything. Nor can their authors be
expected to know everything. Textbook writers have a lot to cover and we can’t
expect them to have read much on Rockefeller. Unfortunately, they also don’t
seem to be very familiar with the books on Vanderbilt, Hill, Schwab and other
entrepreneurs.8 None of the twenty texts that I looked at describe the federal aid
to steamships and the competition between the subsidized lines and Vanderbilt.
Similarly, none of the textbooks mentions Schwab’s triumph over the
government-run armor plant in West Virginia. The story of the Scrantons is also
absent.

Some of the textbook authors do talk about Hill and his accomplishments.
In fact, large sections of Bailey’s, Garraty’s, and Woodward’s books tell us about
the transcontinental railroads. But the problem of the government subsidies is
often not well-reasoned. Bailey, for example, admits that Hill was “probably the
greatest railroad builder of all.” Bailey even displays a picture of all four
transcontinentals and says that Hill’s Great Northern was “the only one
constructed without lavish federal subsidies.” But from this, he does not consider
the possibility that federal subsidies may not have been needed. Instead, he says,
“Transcontinental railroad building was so costly and risky as to require
government subsidies.” As we have seen earlier, however, when the federal aid
to railroads came, so did political entrepreneurship and corruption. Bailey
describes some of this boondoggling and blames not the government, for making
federal aid available, but the “grasping railroads” and “greedy corporations,” for
receiving it.9

Bailey later applauds the passing of the Sherman Antitrust Act and the
creation of the Interstate Commerce Commission.

Not until 1914 were the paper jaws of the Sherman Act fitted with
reasonably sharp teeth. Until then, there was some question whether the
government would control the trusts or the trusts the government. But the iron
grip of monopolistic corporations was being threatened. A revolutionary new
principle had been written into the law books by the Sherman Anti-Trust Act of
1890, as well as by the Interstate Commerce Act of 1887. Private greed must
henceforth be subordinated to public need.10

As we have seen, however, the efficient Hill was the one who got hurt by
these laws: The Hepburn Act, which strengthened the Interstate Commerce
Commission, throttled his international railroad and shipping business; the
Sherman Act was used to break up his Northern Securities Company.

Not all historians accept the modified robber-baron view dominant in the
textbooks. Specialists in business history have been moving away from this view
since the 1960s. Instead, many of them have adopted an interpretation called the
“organizational view” of the rise of big business. Where the authors of these
textbooks say that entrepreneurs cheated us, organizational historians say that
entrepreneurs were not very significant. Business institutions, and their
evolution, were more important than the men who ran them. To organizational
historians, the rise of the corporation is the central event of the industrial
revolution. The corporation—its layers of specialized bureaucracy, its
centralization of power, and its thrust to control knowledge—evolved to meet the
new challenges in marketing, producing, and distributing goods. In this view, of

course, moral questions are not so relevant. The entrepreneur’s strategy was
almost predetermined by the structure of the industry and the peculiarities of
vertical integration. The corporation was bigger than the entrepreneur.11

The organizational historians have contributed much to the writing of
business history. Their amoral emphasis on the corporation is a refreshing
change from the Robber Baron model. Yet, this points up a problem as well.
Amoral organizational history has a deterministic quality to it. The structure of
the corporation shapes the strategy of the business. In this setting, there is little
room for entrepreneurship. Whatever happened had to happen. And if any
entrepreneur had not done what he did, another would have come along and
done roughly the same thing.

This point of view is perhaps most boldly stated by Robert Thomas:
Individual entrepreneurs, whether alone or as archetypes, don’t matterl
(Thomas’s emphasis) And if indeed they do not matter, the reason, I suggest, is
that the supply of entrepreneurs throughout American history, combined with
institutions that permitted—indeed fostered— intense competition, was
sufficiently elastic to reduce the importance of any particular individual. . . . This
is not to argue that innovations don’t matter, only that they do not come about as
the product of individual genius but rather as the result of more general forces
acting in the economy.12

Thomas illustrates his view in the following way: Let us examine an
analogy from track and field; a close race in the 100-yard dash has resulted in a
winner in 9.6 seconds, second place goes to a man whose time is 9.7, and the
remaining six runners are clustered below that time. Had the winner instead not
been entered in the race and everyone merely moved up a place in the standings,
I would argue that it would only make a marginal difference to the spectators. To
be sure they would be poorer because they would have had to wait one-tenth of a
second longer to determine the winner, but how significant a cost is that? That is
precisely the entrepreneurial historian’s task, to place the contributions of the
entrepreneur within a marginal framework.13

It is only when we extend Thomas’ logic that we see its flaws. For, in fact,
small margins are frequently the crucial difference between success and failure,
between genius and mediocrity. To continue the sports analogies, the difference
between hitting the ball 311 feet and 312 feet to left field in Yankee stadium is
probably the difference between a long out and a home run. The difference
between a quarterback throwing a pass forty yards or forty-one yards may be the
difference between a touchdown and an incompleted pass. When facing a ten-

foot putt, any duffer can hit the ball nine or eleven feet; it takes a pro to
consistently sink it.

In the same way small margins can reveal the differences between an
entrepreneur, with his creative mind and innovative spirit, and a run-of-the-mill
businessman. John D. Rockefeller dominated oil refining primarily by making a
series of small cuts in cost. For example, he cut the drops of solder used to seal
oil cans from forty to thirty-nine. This small reduction improved his competitive
edge: he gained dominance over the whole industry because he was able to sell
kerosene at less than eight cents a gallon.

A better illustration would be the small gradual cost-cutting that allowed
America to capture foreign steel markets. When Andrew Carnegie entered steel
production in 1872, England dominated world production and the price of steel
was $56 per ton. By 1900, Carnegie Steel, headed by Charles Schwab, was
manufacturing steel for $11.50 per ton—and outstripping the entire production
of England. That allowed railroad entrepreneur James J. Hill to buy cheap
American rails, ship them across the continent and over the ocean to Japan, and
still outprice England. The point here is that America did not claim these
markets by natural advantages: they had to be won in international competition
by entrepreneurs with vision for an industry and ability to improve products bit
by bit.14

It would be silly for someone to say that if Carnegie had not come along,
someone else would have emerged to singlehandedly outproduce the country
that had led the world in steel. Yet some organizational historians say exactly
this. They are right in claiming that the rise of the corporation made some of
Carnegie’s success possible. But Carnegie was the only steel operator before
Schwab to take full advantage of this rise. They are also right in saying that the
environment (e. g. location and resources) plays some role in success. But
Carnegie rose to the top before the opening of America’s Mesabi iron range.
American steel companies began outdistancing the British even when the
Americans had to import some of their raw material from Cuba and Chile,
manufacture it in Pennsylvania, and ship it across the country and over oceans to
foreign markets.

This is not to denigrate the organizational view, but only to recognize its
limitations. By focusing on the rise of the corporation, organizational historians
have shown how corporate structure pervaded and helped to shape American
economic and social life. However, the organizational view, like all other
interpretations, can’t explain everything. Specifically, it tends to ignore or
downgrade the significant and unique contributions that entrepreneurs made to

American economic development.
The “organizational” and “robber baron” views both have some merit. The

rise of the corporation did shape economic development in important ways.
Also, we did have 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. These entrepreneurs are a major part of the story of American
business.

Many historians know this and teach it, but the issue is often muddled
because textbooks tend to lump the predators and political adventurers with the
creators and builders. Therefore, the teaching ends up like this: “Entrepreneurs
cut costs and made many contributions to American economic growth, but they
also marred political life by bribing politicians, forming pools, and misusing
government funds. Therefore, we needed the federal government to come in and
regulate business.”

Historians’ misconceptions about entrepreneurs have led to problems in
related areas as well. This is nowhere more apparent than in the studies of social
mobility, which have become very popular among historians ever since the
1960s. Naturally, historians of social mobility have not operated in a vacuum.
They have often been influenced by the prevailing historical theories denigrating
the role of entrepreneurs and championing the role of government regulation. Put
another way, if America’s industrial entrepreneurs were a sordid group of
replaceable people, then they could not have helped, and may have hindered,
upward social mobility in cities throughout America. This is the implicit
assumption in many social mobility studies conducted in the last generation.

Influenced by these prevailing views, many historians have argued two
basic ideas about social mobility under American capitalism. First is the notion
of low social mobility for manual laborers. In Poverty and Progress: Social
Mobility in a Nineteenth Century City, Stephan Thernstrom finds that “the
common workman who remained in Newburyport, [Massachusetts, from] 1850
to 1880 had only a slight chance of rising into a middle class occupation.” As for
the captains of industry at the opposite end of the spectrum, the second idea is
that they usually got rich because they were born rich. This again suggests little
mobility. For example, William Miller, recorded the social origins of 190
corporation presidents between 1900-1910. He found that almost 80 percent of
them had business or white collar professionals as fathers. More recently,
Edward Pessen has argued that 90 percent of the antebellum elite in New York,

Philadelphia, and Boston was silk-stocking in origin.15

Fortunately, more careful research has discredited this negative view of
social mobility. Newburyport, for example, was a stagnant town during the thirty
years covered by Thernstrom’s research. If new industries were rare and if
opportunities were few, then, of course, we would expect social mobility to be
low. Michael Weber sensed this and did a study of social mobility in Warren,
Pennsylvania, an oil-producing boom town from 1880 to 1910. In Warren,
population multiplied every decade as market entrepreneurs created a climate for
opportunity and growth. Growth and opportunity seem to have gone together:
Warren residents were much more upwardly mobile than those living in
Thernstrom’s Newburyport.16

Flaws are also apparent in William Miller’s analysis of the social origins of
America’s corporate elite in 1910. Miller traced the background of 190 corporate
presidents and board chairmen. But as diligent as his research was, he could not
discover the social origins of 23 (12 percent) of these men. Miller draws no
inference from this lack of evidence. If they left no record, however, the fathers
were probably artisans at best, crooks at worst. Furthermore, 60 percent of
Miller’s industrialists came from farms or small towns (under 8,000 population).
This almost certainly makes their fathers country merchants rather than urban
capitalists. And the ascent from son of a country merchant to corporate president
is indeed sensational. Miller’s statistics do not “speak for themselves”: they need
careful thought and imaginative interpretation.

Newer studies suggest this too. For example, Herbert Gutman found that
most of the successful locomotive, iron, and machinery manufacturers in
Paterson, New Jersey, started work as apprentice craftsmen or iron workers. Also
important is Bernard Saracheck’s analysis of a group of entrepreneurs similar in
size and prestige to Miller’s sample. Saracheck went to “published biographies
and company histories” to get a large list of entrepreneurs in a wide range of
industries. His group was much more upwardly mobile than Miller’s group.
Almost one-half of Saracheck’s entrepreneurs had fathers who were workers or
farmers. Of course the business ties from father to son link many of Saracheck’s
men, too.17 But shouldn’t this be expected? The key point here is that an open
and growing system produces fluidity: manual laborers often became skilled
workers or clerks and, for some, there was room at the top.

We still need to explain the contrasting results of Miller and Saracheck.
Many of Miller’s men were presidents of textile corporations or railroads, both of
which were older and even declining fields by 1910. As economist Ralph
Andreano has noted, Miller’s sample neglected men from newer, more rapidly

growing industries such as oil, beverages, and publishing—where Jews and
immigrants often excelled.18 Saracheck included a wider range of businessmen
than Miller did, and perhaps for this reason he got a more upwardly mobile
group. Again we get the strong tie between rapid growth (this time in industries,
not cities) and upward mobility. The work of Edward Pessen has supported the
idea that it was easy for rich men and their children to keep their wealth and
influence over time. After studying New York City, Philadelphia, Brooklyn, and
Boston, Pessen concluded: The rich with few exceptions had been born to wealth
and comfort, owing their worldly success mostly to inheritance and family
support. Instead of rising and falling at a mercurial rate, fortunes usually
remained in the hands of their accumulators, whether in the long or the short. . . .
Antebellum urban society [and, by implication, postbeflum urban society] was
very much a class society.19

Is there any way to reconcile the stability of wealth found by Pessen and
others20 with the fluid mobility of the Scranton elite? One problem, of course, is
with technique and method. Defining who constituted a “leader,” an
“entrepreneur,” or an “industrialist” varies from study to study. A bigger problem
is the scope of the research of Pessen and others. In studying the continuity of
wealth and talent in families over time, Pessen and others rarely look at all
family members, only those who were successful. In fact, if my Scranton
research is on target, the successful seem to be the exception, not the rule.

First glances can be deceptive, hi Scranton, for example, James Blair and
brothers Thomas and George Dickson held three of the five directorships of the
First National Bank in 1880. In 1869, James Linen, a nephew of Thomas and
George Dickson, married Blair’s daughter, Anna; in 1891, Linen became
president of the bank for a twenty-two year stretch. To the casual observer, such
an occurrence illustrates overpowering continuity of leadership. However, if one
looks at all eight sons of Blair and the two Dicksons, a sharply etched picture of
failure clearly emerges. Seven of their eight sons never darkened the door of a
corporate boardroom; under the eighth, the Dickson Manufacturing Company
disintegrated. Continuity from father to son may actually have been the undoing
of the business. Furthermore, H. A. Coursen, like bank president James Linen,
married a daughter of James Blair; yet Coursen remained a small retailer with no
apparent economic influence. In the city of Scranton, at least, the scions of
power were not the men their fathers were. Before historians can assert the
continuity of economic leadership or family wealth, they must study all the
children of the rich, not just the rare conspicuous successes.

A few historians have already been doing this. Lee Benson has studied the

Philadelphia economic elite in the 1800s and finds it to be fluid with much
upward and downward mobility at all levels. Fredric C. Jaher also finds the
“upper strata” in several industrial cities to be very fluid. Stanley Lebergott has
studied corporate leadership in America and cites a high rate of discontinuity
from father to son.21 Naturally those born into wealth are, on the whole, more
successful than those born into poverty. But to say this is merely to confirm what
applies to all societies at all times. Yes, wealth counts; but so do talent, vision,
initiative, and luck.

The classic question asked by those historians who study social
stratification is this: “Who gets what and why?” We can see how many historians
err when they assume that the rich got rich by being robber barons and stayed
rich by keeping the corporation in the family and keeping newcomers out of
their group as much as possible.

There is another realm of misunderstanding, too: some historians have
implied that the economic pie was fixed. This is a weakness in many historical
studies of social stratification. Edward Pessen, for example, tells how only one
percent of the population held about forty percent of the wealth in many
industrial cities in the 1840s. His research is careful, and he insists this share
increased over time. Along similar lines, Gabriel Kolko has recorded the
distribution of income from 1910 to 1959. He points out that the top one-tenth of
Americans usually earned about thirty percent of the national income and that
the lowest one-tenth consistently earned only about one percent.22 This may be
true, but Pessen and Kolko also need to emphasize that the total amount of
wealth in American society increased geometrically after 1820. This means that
American workers improved their standard of living over time even though their
percentage of the national income may not have increased. We must also
remember that there was constant individual movement up and down the
economic ladder. Therefore, the pattern of inequality may have persisted, but the
categories of wealth-holding were still fluid in our open society. Finally, it needs
to be stressed that one percent of the population often created not only their own
wealth, but many of the opportunities that enabled others to acquire wealth.

To sum up, then, we need to divide industrialists into two groups. First,
were market entrepreneurs, such as Vanderbilt, Hill, the Scrantons, Schwab,
Rockefeller, and Mellon, who usually innovated, cut costs, and competed
effectively in an open economy. Second, were political entrepreneurs, such as
Edward Collins, Henry Villard, Elbert Gary, and Union Pacific builders, all of
whom tried to succeed primarily through federal aid, pools, vote-buying, or
stock speculation. 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.23

The second point is that, in the key industries we have studied, the state
failed as an economic developer. It failed first as a subsidizer of industrial
growth. Vanderbilt showed this in his triumph over the Edward Collins’ fleet and
the Pacific Mail Steamship Company in the 1850s. James J. Hill showed this
forty years later when his privately built Great Northern outdistanced the
subsidized Northern Pacific and Union Pacific. The state next failed in the role
of an entrepreneur when it tried to build and operate an armor plant in
competition with Charles Schwab and Bethlehem Steel. The state also seems to
have failed as an active regulator of trade. The evidence in this study is far from
conclusive; but we can see problems with the Interstate Commerce Commission
and the Sherman Antitrust Act, both of which were used against the efficient Hill
and Rockefeller.

A third point is that the relative absence of state involvement— either
through subsidies, tariffs, or income taxes—may have spurred entrepreneurship
in the 1840-1920 period. One of the traditional arguments cited by some
businessmen, especially the political entrepreneurs, is that a tariff or a subsidy
given to a new industry will help that industry survive and eventually flourish
against foreign competition. What really happened, though, is that, when Collins
and Cunard got subsidies from their governments, they did not become efficient
steamship operators; instead, they became lavish wastrels and soon came back
asking for larger subsidies, which they then used to compete against more
efficient rivals.

In the case of protective tariffs, neither George Scranton or John D.
Rockefeller needed them in establishing their steel and oil companies. The
Scranton group very profitably built America’s first large quantity of rails in a
time of a low tariff on British iron imports. Also Rockefeller never needed a
tariff (though a small one did exist) on his way to becoming the largest oil
producer in the world.

The American government also resisted the temptation to tax large
incomes for most of the 1840-1920 period. Low taxes often spur entrepreneurs
to invest and take risks. If the builders can keep most of what they build, they
will have an incentive to build more. It is true that the state lost the revenue it
could have raised if it had taxed large incomes. This was largely offset, however,
by the philanthropy of the entrepreneurs. When the income tax became law in
1913, the most anyone had to pay was seven percent of that year’s income. Most

people paid no tax or only one percent of their earnings. In the years before and
after 1913, however, John D. Rockefeller sometimes gave over 50 percent of his
annual income to charitable causes. He almost always gave more than ten
percent. Hill, Vanderbilt, the Scranton group, and Schwab were also active
givers. Sometimes they gave direct gifts to specific people. Usually, though, they
used their money to create opportunities that many could exploit. In academic
jargon, they tried to improve the infrastructure of the nation by investing in
human capital. A case in point consisted of the many gifts to high schools and
universities, north and south, black and white, urban and rural. Cheap high-
quality education meant opportunities for upwardly mobile Americans, and was
also a guarantee that the United States would have quality leadership in its next
generation. Vanderbilt University, the University of Chicago, Tuskegee Institute,
and Lehigh University were just some of the dozens of schools that were
supported by these five entrepreneurs.

Libraries were also sources of support. Not just Andrew Carnegie, but also
Hill and Rockefeller were builders and suppliers of libraries. The free public
library, which became an American institution in the 1800s, gave opportunities
to rich and poor alike to improve their minds and their careers.

Finally, America has always been a farming nation: Rockefeller attacked
and helped conquer the boll weevil in the South; Hill helped create dry farming
and mixed agriculture in the North. America’s cotton and wheat farmers took
great advantage of these changes to lead the world in the producing of these two
crops.

All of these men (except for Schwab) tried to promote self-help with their
giving. They gave to those people or institutions who showed a desire to succeed
and a willingness to work. Rockefeller and Hill both paid consultants to sort out
the deadbeats and the golddiggers. They sympathized with the needy, but
supported only those needy imbued with the work ethic.

Each entrepreneur, of course, had his own variations on the giving theme.
Vanderbilt, for example, plowed a series of large gifts into Vanderbilt University
and helped make it one of the finest schools in the nation. He almost never gave
to individuals, though, and said if he ever did he would have people lined up for
blocks to pick his pockets. Schwab, by contrast, was a frivolous giver and had
dozens of friends and hangers-on who tapped him regularly for handouts.
Rockefeller concentrated his giving in the South and the Midwest; the Scranton
group and Schwab focused on the East; Hill gave mainly in the Northwest.

Even without an income or an inheritance tax, these entrepreneurs, and
others, had trouble handing down their wealth to the next generation. This was

true in part, of course, because they gave so much of it away. As we have seen
with the Scranton group, though, most entrepreneurs did not have sons with the
same talents the fathers had. Vanderbilt’s son William was a worthy successor,
but the rest of his children showed little aptitude for business. Hill’s three sons
did not come close to matching their father’s accomplishments; one son, Louis,
followed his father as president of the Great Northern, but Louis’ career was
lackluster. The Oregonian of Portland called him “impulsive”; not so much a
railroad man, but “a painter of some ability.”24 Charles Schwab and his wife
were childless, which was probably fortunate because he squandered over $30
million and died a debtor. Rockefeller’s only son, John D. Jr., became a full-time
philanthropist. Granted, the senior Rockefeller’s five grandsons were all
multimillionaires, but their economic influence was much less than that of their
grandfather. Sometimes the descendants of these original entrepreneurs parlayed
their family names and what was left of their fortunes into political careers.
During the 1960s, two of the grandchildren of John D. Rockefeller and one of
the great grandchildren of Joseph Scranton were governors of New York,
Arkansas and Pennsylvania.25

If we seriously study entrepreneurs, the state, and the rise of big business
in the United States we will have to sacrifice the textbook morality play of
“greedy businessmen” fleecing the public until at last they are stopped by the
actions of the state. But, in return, we will have a better understanding of the past
and a sounder basis for building our future.

Notes to Chapters

Notes to Chapter One

Commodore Vanderbilt and the
Steamship Industry

1The literature on the “Robber Barons” controversy is extensive. For a
good description of the various arguments, see Glenn Porter, The Rise of Big
Business, 1860-1910 (Arlington Heights, 111.: AHM Publishing Corporation,
1973).

2No recent historian has systematically traced the history of the American
steamship industry. Two older histories are David B. Tyler, Steam Conquers the
Atlantic (New York: D. Appleton-Century Co., 1939); and John G. B. Hutchins,
The American Maritime Industries and Public Policy, 1789-1914 (Cambridge,
Mass.: Harvard University Press, 1941).

3Modern historians have usually de-emphasized entrepreneurs in
describing American industrial development. For a more detailed look at this
dichotomy between political and market entrepreneurs, see my book Urban
Capitalists (Baltimore: Johns Hopkins University Press, 1981). See also Maury
Klein, “The Robber Barons,” American History Illustrated (October 1971), 13-
22.

4Fulton’s monopoly rights are dearly spelled out in a pamphlet entitled The
Right of a State to Grant Exclusive Privileges in Roads, Bridges, Canals,
Navigable Waters, etc. Vindicated by a Candid Examination of the Grant from
the State of New York to and Contract with Robert R. Livingston and Robert
Fulton for Exclusive Navigation (New York: E. Conrad, 1811). For a good
description of the steamboat monopoly, see Maurice G. Baxter, The Steamboat
Monopoly: Gibbons v.Ogden, 1824 (New York: Alfred A. Knopf, 1972), 3-25.
See also John S. Morgan, Robert Fulton (New York: Mason/Charter, 1977), 178-
88.

5Baxter, Gibbons v. Ogden, 25-26; and Robert G. Albion, “Thomas
Gibbons” and “Aaron Ogden,” Dictionary of American Biography, 20 vols.

(New York: Charles Scribner’s Sons, 1928-37). 7:242-43; 8:636-37 (hereafter
cited as DAB). The best studies of Vanderbilt are Wheaton J. Lane, Commodore
Vanderbilt: An Epic of the Steam Age (New York: Alfred A. Knopf, 1942); and
William A. Croffut, The Vanderbilts and the Story of Their Fortune (Chicago:
Belford Clarke, 1886). A more recent study of the whole Vanderbilt family is
Edwin P. Hoyt, The Vanderbilts and Their Fortunes (Garden City, N.Y.:
Doubleday, 1962).

6Chief Justice Marshall’s written decision has been reprinted in John
Roche, ed.John Marshall: Major Opinions and Other Writings (Indianapolis:
Bobbs-Merrill, 1967), 206-25. A lively account of the Gibbons v. Ogden case is
in Albert J. Beveridge, The Life of John Marshall, 4 vols. (Boston and New
York: Houghton, Mifflin and Co., 1916-19), 4:397-460. See also Baxter,
Gibbons v. Ogden, 37-86; David W. Thomason, “The Great Steamboat
Monopoly,” American Neptune 16 (January and October 1956), 23-40, 279-80;
George Dangerfield, “Steamboats’ Charter of Freedom: Gibbons vs. Ogden,
“American Heritage (October 1963), 38-43, 78-80; and Robert G. Albion, The
Rise of New York Port (New York: Charles Scribner’s Sons, 1939), 152-55. For a
newer study, see Erik F. Haites, James Mak, and Gary M. Walton, Western River
Transportation: The Era of Internal Development, 1810-1860 (Baltimore: Johns
Hopkins University Press, 1975).

7David L. Buckman Old Steamboat Days on the Hudson River (New York:
Grafton Press, 1907), 53-55.

8Lane, Vanderbilt, 43-49; Morgan, Fulton, 179, 187; and Albion, New
York, 152-55.

9ane, Vanderbilt, 47, 50-51.
10Albion, New York, 154-55; and Lane, Vanderbilt, 56-62.
11Harper’s Weekly, March 5, 1859, 145-46; Lane, Vanderbilt, 50-84, 231;

Albion, New York, 156-57.
12Sailing ships (called “packets”) and clipper ships were still competitive

carriers of freight (not passengers) before 1860. Their reliance on wind, not coal,
made them cheaper, if not faster. During the 1850s, clipper ships captured a lot
of trade to the Orient. The most thorough account of steamships is William S.
Lindsay, History of Merchant Shipping and Ancient Commerce, 4 vols. (London:
Sampson, Marston, Low, and Searle, 1874). See also Hutchins, The American
Maritime Industries, 348-62.

13For a good history of the Cunard line, see Francis E. Hyde, Cunard and

the North Atlantic, 1840-1973 (Atlantic Highlands, N.J.: Humanities Press,
1975). See also Tyler, Steam Conquers the Atlantic 142-45; Royal Meeker,
History of the Shipping Subsidies (New York: Macmillan, 1905), 5-7; Hutchins,
American Maritime Industries, 349; and Lindsay, Merchant Shipping, 4:184. For
an excellent critique of shipping subsidies, see Walter T. Dunmore, Ship
Subsidies: An Economic Study of the Policy of Subsidizing Merchant Marines
(Bostons: Houghton, Mifflin and Co., 1907), esp. 92-103.

14Congressional Globe, 33rd Congress, 2nd session, 755-56. Cunard later
began weekly mail and passenger service. See also Tyler, Steam Conquers the
Atlantic, 136-48; and William E. Bennet, The Collins Story (London: R. Hale,
1957).

15For a defense of mail subsidies, see “Speech of James A. Bayard of
Delaware on the Collins Line of Steamers Delivered in the Senate of the United
Staes, May 10, 1852” (Washington: John T. Towers, 1852). See also Thomas
Rainey, Ocean Steam Navigation and the Ocean Port (New York: D. Appleton
and Co., 1858). For other views of the subsidies, see Lindsay, Merchant
Shipping, 4:200-03; Hutchins, American Maritime Industries, 358-62; and
Dunmore, Ship Subsidies, 96-103.

16French E. Chadwick, Ocean Steamships (New York: Charles Scribner’s
Sons, 1891), 120-22; John H. Morrison, History of American Steam Navigation
(New York: W. F. Sametz and Co., 1903), 420-23; and N. A., “A Few
Suggestions Respecting the United States Steam Mail Service” (n. p., 1850), 9-
17.

17Tyler, Steam Conquers the Atlantic, 202-14; and George E. Hargest,
History of Letter Post Communications Between the United States and Europe,
1845-1875 (Washington: Smithsonian Institution Press, 1971).

18Congressional Globe, 33rd Congress, Appendix, 192. See also Lane,
Vanderbilt, 143-44.

19President Franklin Pierce vetoed the Collins subsidy bill. He argued that
the effect of such a “donation . . . would be to deprive commercial enterprises of
the benefits of free competition, and to establish a monopoly, in violation of the
soundest principles of public policy, and of doubtful compatibility with the
Constitution.” Congressional Globe, 33rd Congress, 2nd session, 1156-57. But
Congress got the whole subsidy back for Collins later in a Navy appropriations
bill. See Tyler,Stem Conquers the Atlantic, 225-29; Lane, Vanderbilt, 143-48;
Hutchins, American Maritime Industries, 367; Dunmore, Ship Subsidies, 92-103;
and Roy Nichols, Franklin Pierce (Philadelphia: University of Pennsylvania

Press, 1958), 377. For Seward’s comment, see Congressional Globe, 33rd
Congress, Appendix, 301.

20New York Tribune, March 8, 1855; Lane, Vanderbilt, 147-48, 150.
21Lane, Vanderbilt, 147-48. In a letter to the New York Tribune, March 8,

1855, Vanderbilt complained that the Collins subsidy was “paralyzing private
enterprise, and in fact forbidding it access to the ocean.”

22Lane, Vanderbilt, 148-51, 167; Tyler, Steam Conquers the Atlantic, 238-
41.

23Congressional Globe, 35th Congress, 1st session, 2826, 2827, 2843. See
also Tyler, Steam Conquers the Atlantic, 231-46; James D. McCabe, Jr., Great
Fortunes (Philadelphia: G. MacLean, 1871); and Meeker,Shipping Subsidies,
156.

24Lane, Vanderbilt, 151-56; and Meeker, Shipping Subsidies, 5-20.
25Meeker, Shipping Subsidies, 10-11; Henry Fry, The History of North

Atlantic Steam Navigation (New York: Charles Scribner’s Sons, 1896), 42-53,
77-78, 81; and Hyde, Cunard, 27-34.

26Robert Macfarlane, History of Propellers and Steam Navigation (New
York: George P. Putnam, 1851); Tyler, Steam Conquers the Atlantic, 117-18,138-
42; Lane, Vanderbilt, 93-94.

27Congressional Globe, 33rd Congress, Appendix, 354-55; Tyler, Steam
Conquers the Atlantic, 128-32, 138-42; Lane, Vanderbilt, 175-78.

28Earnest A. Wiltsee, Gold Rush Steamers (San Francisco: Grabhorn Press,
1938), 50-89; Lane, Vanderbilt, 85-107; Hutchins, American Maritime
Industries, 359-60.

29Hutchins, American Maritime Industries, 359-63.
30Lane, Vanderbilt, 108-38; Wiltsee, Gold Rush Steamers, 112-51.
31Lane, Vanderbilt, 123-24,135; and William D. Scroggs, “William

Walker,” DAB, 19:363-65.
32Congressional Globe, 35th Congress, 1st session, 2843-44. 33Lane,

Vanderbilt, 124, 136.
34In 1855, with Vanderbilt paid off, the California lines raised the New

York to San Francisco fare from $150 to $300. They also doubled the steerage
fare from $75 to $150. Many passengers—real and potential—were angry, but
one point needs to be made. This fare was only one-half of what it was before
Vanderbilt arrived. The effect of Vanderbilf s competition was to shrink the fare

from $600 to $150; when he left, it was still only $300.
For the California lines to have raised the fare any higher would have

probably meant two things: first, a decline in the number of passengers wanting
to go to California; second, the appearance of a new rival ready to cut fares and
capture what traffic was left. Since the California lines had only one-fourth of
their subsidy left, they could ill-afford the arrival of another Vanderbilt, so they
kept the fares moderately low. See Wiltsee,Go/rf Rush Steamers, 21-26, 55-56,
139-42, 149.

35Meeker, Shipping Subsidies, 156.
36Harry H. Pierce, Railroads of New York: A Study of Government Aid,

1826-1875 (Cambridge, Mass.: Harvard University Press, 1953), 14-16; George
Rogers Taylor, The Transportation Revolution (New York: Harper and Row,
1951), 128-31; Julius Rubin, Canal or Railroad? Imitation and Innovation in
Response to the Erie Canal in Philadelphia, Baltimore, and Boston
(Philadelphia: American Philosophical Society, 1961); Douglass C. North,
Growth and Welfare in the American Past (Englewood Cliffs, N.J.: Prentice-
Hall, 1974). After the Civil War, Vanderbilt sold his steamships and began
building the New York Central Railroad from New York to Chicago. Vanderbilt
again had to battle political entrepreneurs (this time city councilmen and state
legislators) in New York who demanded bribes from Vanderbilt before they
would approve of a right-of-way for his railroad. But Vanderbilt never took his
eyes off the main task: building the best railroad and delivering goods at the
lowest possible prices. He spearheaded America’s switch from iron to steel rails,
standardized his railroad’s gauge, and experimented with the four track system.
He improved roadbeds and rolling stock and cut his cost in half in seven years—
all the time maintaining an eight percent dividend to stockholders.

Notes to Chapter Two

James J. Hill and the Transcontinental
Railroads

‘John A. Garraty, The American Nation: A History of the United States, 7th
ed. (New York: Harper Collins, 1991), 497.

2James F. Stover, American Railroads (Chicago: University of Chicago
Press, 1961), 67; Henry Kirke White, History of the Union Pacific Railway
(Chicago: University of Chicago Press, 1895).

3Robert G. Athearn, Union Pacific Country (Chicago: Rand McNally,
1971), 37-38, 43-44.

4J. R. Perkins, Trails, Rails, and War: The Life of General G. M. Dodge
(Indianapolis: Bobbs-Merrill, 1929), 207. See also Stanley P. Hirshson, Grenville
M. Dodge: Soldier, Politician, Railroad Pioneer (Bloomington, Ind.: Indiana
University Press, 1967) 5Athearn, Union Pacific Country, 200-03.

6Perkins, Dodge, 231-33, 238. See also William F. Rae, Westward By
Rail:The New Route to the East (London: Longmans, Green, and Co., 1871).

7Athearn, Union Pacific Country, 139-42.
8Perkins, Dodge, 205-06; Athearn, Union Pacific Country, 153.
9Athearn, Union Pacific Country, 224, 337-40, 346.
10Julius Grodinsky, Transcontinental Railway Strategy, 1869-1893: A

Study of Businessmen (Philadelphia: University of Pennsylvania Press, 1962),
70-71.

11For a full description of the Central Pacific, see Oscar Lewis, The Big
Four: The Story of Huntington, Stanford, Hopkins, and Crocker,and of the
Building of the Central Pacific (New York: Alfred A. Knopf. 1938).

12Grodinsky, Transcontinental Railway Strategy,137. For A fuller account
of Villard’s career, see James B. Hedges, Henry Villard and the Railways of the
Northwest (New Haven: Yale University Press, 1930).

13 Hedges, Villard, 112-211; Grodinsky, Transcontinental Railway
Strategy, 140, 185.

14Mildred H. Comfort, James Jerome Hill, Railroad Pioneer (Minneapolis:

T. S. Denison, 1973), 64-65.
15Grodinsky, Transcontinental Railway Strategy, 137.
16Albro Martin, James J. Hill and the Opening of the Northwest (New

York: Oxford University Press, 1976), 16-45; Stewart Holbrook, James /. Hill: A
Great Life in Brief (New York: Alfred A Knopf, 1955), 9-23.

17Stover, American Railroads, 76; Holbrook, Hill, 13-42. “Martin,
18Martin, Hill, 122-40, 161-71, passim; Holbrook, Hill, 44, 54-68.

19Martin, Hill, 183; Robert Sobel, The Entrepreneurs: Explorations Within
the American Business Tradition (New York: Weybright and Talley, 1974), 140;
Howard L. Dickman, “James Jerome Hill and the Agricultural Development of
the Northwest” (Ph.D. dissertation, University of Michigan, 1977), 67-144.

20Holbrook, Hill,93; Martin, Hill, 366.
21Martin, Hill,381-83; Comfort, Hill, 67-70.
23Martin, Hill,233, 236.
23Ibid., 225, 239-43, 264-70.
24Ibid., 298, 307, 338, 346, 494.
25Ibid., 410-11.
26Ibid., 300, 414-15, 442.
27Robert W. Fogel, The Union Pacific Railroad (Baltimore: Johns Hopkins

University Press, 1960), 99-100.
28Ibid., 25. Carl Degler has a variant of this viewpoint. He says, “In the

West, where settlement was sparse, railroad building required government
assistance.” Later, he adds, “By the time the last of the four pioneer
transcontinentals, James J. Hill’s Great Northern, was constructed in the 1890s,
private capital was able and ready to do the job unassisted by government.” This
argument suggests that the key variable is the timing of the building, not the
subsidy itself. The main problem here is that Hill’s transcontinental across the
sparse Northwest, especially with the Canadian Pacific above him and the
Northern Pacific below him, was just as risky as the Union Pacific was. That’s
why it was called “Hill’s Folly.” Also, Hill was building at roughly the same time
as the Northern Pacific; but Hill succeeded, while the Northern Pacific failed.
Finally, we need to remember that, in 1893, Hill flourished, while the Union
Pacific, the Northern Pacific, and the Santa Fe all went into receivership. This
brings us back to the subsidy as the problem, not the timing of the gift. See Carl
Degler, The Age of the Economic Revolution, 1876-1900 (Glenview, 111.: Scott,
Foresman and Co., 1977), 19-20.

29For a development of much of this argument, see Albro Martin,
Enterprise Denied: Origins of the Decline of American Railroads, 1897-1917
(New York: Columbia University Press, 1971). See also Martin, Hill, 535-44.

30Fogel, Union Pacific Railroad, 41.
31Holbrook, Hill, 161-63; Sobel, Entrepreneurs, 138; James J. Hill,

Highways of Progress (New York: Doubleday, Page, and Co., 1910), 156-69.
32Holbrook, Hill, 162-63.
33Md., 161; Sobel, Entrepreneurs, 135; Martin, Hill, 464-65.
34Martin, Hill, 298-99, 307, 347, 442, 462.
35Hill, Highways of Progress, 156-184; Holbrook, Hill, 163; Ari and Olive

Hoogenboom, A History of the ICC: From Panacea to Palliative (New York: W.
W. Norton, 1976), 49-59.

36Hill, Highways of Progress, 169; Martin, Hill, 540.
37Dominick T. Armentano, The Myths of Antitrust: Economic Theory and

Legal Cases (New Rochelle, N.Y.: Arlington Press, 1972), 56-58.
38Martin, Hill, 494-523.
39Armentano, The Myths of Antitrust, 58-62; Martin, Hill, 515, 518.
40Armentano, The Myths of Antitrust, 58-59.
41Martin, Hill, 519.
42Robert Sobel, The Age of Giant Corporations: A Microeconomic History

of American Business, 1914-1970 (Westport, Conn.: Greenwood Press, 1972),
189-94.

Notes to Chapter Three

The Scrantons and America’s First Iron
Rails

1For a good discussion of America’s iron industry in the 1830s and 1840s,
see Peter Temin, Iron and Steel in Nineteenth Century America: An Economic
Inquiry (Cambridge, Mass.: MIT Press, 1964), 20-52.

2Ibid.t 47. Biddle’s quotation is in David Craft, W. A. Wilcox, Alfred
Hand, and J. Wooldridge, History of Scranton, Pennsylvania (Dayton: H. W.
Crew, 1891), 247.

3America’s first rails were built in the 1820s and were made of wood.
These were gradually supplemented by English-made iron rails during the 1830s
and 1840s. A couple of American firms, particularly the Mount Savage Works at
Lonaconing, Maryland, experimented with making iron rails in the 1840s before
the Scrantons did. But the Scrantons were the first to mass produce notable
quantities of iron rails. See W. David Lewis, “The Early History of the
Lackawanna Iron and Coal Company: A Study in Technological Adaptation,”
Pennsylvania Magazine of History and Biography 96 (October 1972), 456-58;
Stover, American Railroads, 20-29; John Moody, The Railroad Builders (New
Haven: Yale University Press, 1919), 66-70; Temin, Iron and Steel in Nineteenth
Century America, 109, 117.

4For a more detailed description of the Scranton experiment, see Folsom,
Urban Capitalists.

5Much information on the Scrantons’ efforts at economic development can
be gathered from the Scranton papers, known as the Edmund T. Lukens
Collection (hereafter cited ETLC), in the Hagley Museum and Library in
Wilmington, Delaware. Another smaller collection of Scranton correspondence
is available in the Lackawanna Historical Society (hereafter LHS) in Scranton,
Pennsylvania. The best secondary source on the Scrantons’ early attempts at iron
and coal development is Lewis, ‘The Lackawanna Iron and Coal Company.” For
the quotation in this paragraph, see William Henry to Selden Scranton, March 8,
1840, Box 9, ETLC.

6The trauma of the Scrantons’ early years in the Lackawanna Valley is
described in the correspondence in Box 9, ETLC. For a good summary of the

Scrantons from 1841-43, see Lewis, “The Lackawanna Iron and Coal Company,”
435-51.

7Frederick L. Hitchcock, History of Scranton and Its People, 2 vols. (New
York: Lewis Historical Publishing Co., 1914), 1:28.

8Ibid.; Personal interviews with Robert C. Mattes, Lackawanna Historical
Society, October 1972, and April 1973.

9For a good discussion of this, see Lewis, “The Lackawanna Iron and Coal
Company.”

10John P. Gallagher, “Scranton: Industry and Politics, 1835-1885,” (Ph.D.
dissertation, Catholic University, 1964), 39, 57; Lewis, “The Lackawanna Iron
and Coal Company,” 454-55; Horace Hollister, Contributions to the History of
the Lackawanna Valley (New York: W. H. Tinson, 1857), 166.

11Edward Hungerford, Men of Erie: A Story of Human Effort (New York:
Random House, 1946), 76-78; Lewis, “The Lackawanna Iron and Coal
Company,” 454-55; Hollister, Contributions, 166.

12Edward H. Mott, Between Ocean and the Lakes: The Story of Erie (New
York: Ticker Publishing Company, 1908), 91; Benjamin H. Throop, A Half
Century in Scranton (Scranton, Pa.: Press of the Scranton Republican, 1895),
114-16.

13George W. Scranton to Selden Scranton, August 3, 1846, ETLC, Box 9,
in Lewis, “The Lackawanna Iron and Coal Company,” 460-63. See also Frank
W. Taussig, The Tariff History of the United States, 7th ed. (New York: G. P.
Putnam’s Sons, 1923), 112-35. George Scranton later became an advocate for
higher tariffs. See the Daily National Intelligencer, March 27, 1861.

14Hitchcock, History of Scranton, 1:51-57. Lewis, “The Lackawanna Iron
and Coal Company,” 440, 464-66.

15Hitchcock, History of Scranton, 1:51-57; Report of Joseph J. Albright,
coal agent, May 1852, ETLC, Box 11; Joseph H. Scranton to Selden T. Scranton,
February 23,1854, ETLC, Box 11; Charles Silkman to Selden T. Scranton,
March 28, 1849, ETLC, Box 13.

16Robert J. Casey and W. A. S. Douglas, The Lackawanna Story: The First
Hundred Years of the Delaware, Lackawanna, and Western Railroad (New York:
McGraw-Hill, 1951), 32-72, 208-11; Hitchcock, History of Scranton 1:55-57.
Michael Meylert to Selden T. Scranton, August 3,1853, ETLC, Box 13; Horace
Hayden, Alfred Hand, and John W. Jordan, Genealogical and Family History of

the Wyoming and Lackawanna Valleys Pennsylvania, 2 vols. (New York: Lewis
Publishing Co., 1906), 2:50-51, 154.

17Two of the important New Yorkers were Anson Phelps and William E.
Dodge, who founded Phelps, Dodge and Company. See William B. Shaw,
“William Earl Dodge,” Harold U. Faulkner, “Anson G. Phelps,” and Joseph V.
Fuller, “William Walter Phelps,” DAB, 5:352-53, 14:525-26, and 533; Lewis,
“The Lackawanna Iron and Coal Company,” 458-59. In a letter to Selden
Scranton, John J. Phelps asserted, “The Erie Company is managed by
Connecticut businessmen—of large means, and liberal views, and they will be
disposed to go for … the several interests of their city.” See John J. Phelps to
Selden T. Scranton, December 16, 29, 1845, ETLC, Box 13; and Hayden et al.,
Wyoming and Lackawanna Valleys, 2:153-54.

18William Henry to Selden T. Scranton, March 8,1840, June 8, July, and
August 24,1841, ETLC, Box 9; Charles Silkman to Selden T. Scranton, March
28, 29, 1849, ETLC, Box 13; Lewis, “The Lackawanna Iron and Coal
Company,” 442.

19Throop, A Half Century in Scranton, 135.
20This terminology comes from Leo Marx, The Machine in the Garden:

Terminology and the Pastoral Ideal in America (New York: Oxford University
Press, 1964).

.21Hollister, Contributions, 124-25.
22Some members of this committee were upset that the North Branch

Canal would not provide a feeder to connect their farming area to outside
markets. Wilkes-Barre Advocate, December 19,1838, cited by Hollister,
Contributions, 105. For an additional description of the opposition to economic
development, see Throop, A Half Century in Scranton, 124-26.

23Horace Hollister, History of the Lackawanna Valley (New York: C. A.
Alvord, 1869), 238; William Henry to Selden T. Scranton, March 10, 1841,
ETLC, Box 9; Sanford Grant to Selden T. Scranton, June 9,1841, ETLC, Box 9;
George W. Scranton to Selden T. Scranton, May 23, 1846, ETLC, Box 9.

24Hollister, Contributions, 116; Hollister, History of the Lackawanna
Valley, 231-32; Lewis, “The Lackawanna Iron and Coal Company,” 454; Sanford
Grant to Selden T. Scranton, June 9,1841, ETLC, Box 9. One contemporary
insisted, “The Lackawanna Iron Works, supposed to be hopelessly bankrupt,
were of no account to the old settlers in their struggles for a single gleam of
financial sunlight.” John R. Durfee, Reminiscences of Carbondale, Dundaff, and

Providence Forty Years Past (Philadelphia: Miller’s Bible Publishing House,
1875), 103.

25Hollister, Contributions, 108, 118, 124, 133; Throop, A Half Century in
Scranton, 263-76.

26Hitchcock, History of Scranton, 1:360-62; Scranton Republican, March
30, and April 13, 27, 1866; The Legislative Record: Debates and Proceedings of
the Pennsylvania Legislature, Session of 1866 (Harrisburg, 1866) 825-26.

27Scranton Republican, April 13, 1866. Henry C. Bradsby, History
ofLuzerne County, Pennsylvania, with Biographical Selections (Chicago: S. B.
Nelson and Co., 1893), 473-74, 520.

28Durfee, Reminiscences, et passim; R. G. Dun Credit Ledgers,
Pennsylvania, Luzerne County, 89:49, 53, 71, 89.

29W. David Lewis, “William Henry, Armsmaker, Ironmaster, and Railroad
Speculator: A Case Study in Failure,” in Proceedings of the Business History
Conference (Ft. Worth, Texas, 1973), 51-94; Manuscript Census Returns, Ninth
Census of the United States, 1870, Luzeme County, Pennsylvania, National
Archives Microfilm Series, M-593, Roll 1368; Personal interview with Robert
C. Mattes, October 1972. See also John H. Frederick, “George Whitfield
Scranton,” DAB, 16:513-14; Daily National Intelligencer, March 27, 1861.

30The listing of wealth for Scranton, Blair, and Platt is in Manuscript
Census Returns, Luzerne County, Pennsylvania, 1870. The quotation is from
Joseph H. Scranton to Selden T. Scranton, February 28, 1843, Box 9, ETLC,
which is discussed in Lewis, “The Lackawanna Iron and Coal Company,” 449.

31The information on wealth holding is available in the federal manuscript
censuses of 1850 and 1870. The 1870 census citation is in note 29. The 1850
census citation is Manuscript Census Returns, Seventh Census of the United
States, 1850, Luzerne County, Pennsylvania, National Archives Microfilm
Series, M-432, Roll 793.

32This deduction is implied from other studies of city and hinterland. For
example, see James W. Livingood, The Philadelphia-Baltimore Trade Rivalry,
1780-1860 (Harrisburg, Pa.: Pennsylvania Historical and Museum Commission,
1947). A recent study that involves coal and Pennsylvania regions is Edward J.
Davies II, Anthracite Aristocracy: Leadership and Social Change in the Hard
Coal Regions of Northeastern Pennsylvania, 1800-1930 (DeKalb, 111.: Northern
Illinois University Press, 1985).

33Pennsylvania’s Schuylkill region is an example of a coal area that did not

develop a strong local elite and became subordinate to nearby Philadelphia. See
Davies, Anthracite Aristocracy. See also Robert Baldwin, “Patterns of
Development in Newly Settled Regions,” Manchester School of Economics and
Social Studies 24 (May 1956) 161-79.

34For a more detailed description of Scranton attracting investors from
nearby towns, see Folsom, Urban Capitalists, chapters 3, 4, and 6.

35New York Sun, May 10,1935, in Obituaries Notebook No. 7, in
Lackawanna Historical Society, 74; Hitchcock, History of Scranton 1:10-13;
Throop, A Half Century in Scranton; Hollister, Contributions, 132-33; Personal
interview with Robert C. Mattes, April 1973; Personal interview with William
Lewis, July 1978.

36Samuel C. Logan, The Life of Thomas Dickson: A Memorial (Scranton,
Pa.: n.p., 1888); Gerald M. Best, Locomotives of the Dickson Manufacturing
Company, (San Marino, Ca.: Golden West, 1966); Chapman Publishing
Company, Portrait and Biographical Record ofLackawanna County,
Pennsylvania (New York: Chapman Publishing Co., 1897), 502-03, 455-57;
Hitchcock, History of Scmnton, 1:89-90; 2:22-24, 37-40, 498-501; R. G. Dun
Credit Ledgers, Pennsylvania, Luzerne County, 93:119, 94:330.

37Joseph J. Albright to Selden Scranton, July 7, 1850, October 14, 1850,
and November 9, 1850, Boxes 36 and 10, ETLC; Chapman Publishing
Company, Lackawanna County, 205-07.

3SR. G. Dun Credit Ledgers, Pennsylvania, Luzerne County, 94:40, 91:939;
Chapman Publishing Company, Lackawanna County, 205-07.

39Phillip Walter to Selden T. Scranton, May 19, 1852, ETLC, Box 10; for a
brief description of Walter’s relationship to the Scrantons, see Hitchcock, History
of Scranton, 1:7.

40The Welshman was Lewis Pughe. See W. W. Munsell and Company,
History of Luzerne, Lackawanna, and Wyoming Counties with Biographical
Sketches of Some of their Prominent Men and Pioneers (New York: W. W.
Munsell and Co., 1880), 438D, 392B; Hitchcock, History of Scranton, 1:211-12,
426-34.

41Hitchcock, History of Scranton, 2:1-5. See also Luther Laflin Mills,
Joseph H. Twitchell, Alfred Hand, Frederick L. Hitchcock, James H. Torrey,
Eugene Smith, Edward B. Sturges, Charles H. Wells, James McLeod, and James
A. Beaver, eds., Henry Martyn Boies: Appreciations of His Life and Character
(New York, 1904).

42Thomas F. Murphy, History of Lackawanna County, 3 vols. (Topeka:
Historical Publishing Co., 1928), 1:614-16.

43IWd., 617-18; Craft et al., History of Scranton, 283-84.
44In 1900, Scranton’s population was 102,026. Twelfth Census of the

United States, 1900: Population (Washington: Government Printing Office,
1902), 2:606-07.

45For a more detailed analysis of this Scranton elite, see Folsom, Urban
Capitalists, chapter 7.

46Personal interviews with Robert C. Mattes, April 1973, and William
Lewis, July 1978.

47For a fuller discussion of this point, see Burton W. Folsom, “Like
Fathers, Unlike Sons: The Fall of the Business Elite in Scranton, Pennsylvania,
1880-1920,” Pennsylvania History 46 (October 1980), 291-309.

48Logan, Thomas Dickson; Hitchcock, History of Scranton, 1:89-90, 254-
55; 2:22-24; Chapman Publishing Company, Lackawanna County, 456-57; 502-
04; Mills et al., Henry Martyn Boies, 51; Scranton City Directory, 1921;
Murphy, History of Lackawanna County, 682-83.

49R. G. Dun Credit Ledgers, Pennsylvania, Luzerne County, 95:133,
93:380, 91:1136; Murphy, History of Lackawanna County, 1:128-29; Rowland
Berthoff, “The Social Order of the Anthracite Region, 1825-1902,” Pennsylvania
Magazine of History and Biography 89 (September 1965), 261-91.

50Hitchcock, History of Scranton 2:10-13; New York Sun, May 10, 1935,
cited in Obituaries Notebook No. 7, in Lackawanna Historical Society, 74;
Personal interview with Robert C. Mattes, director of the Lackawanna Historical
Society, April 1973.

51Obituaries Notebook No. 7, in Lackawanna Historical Society, 40; R. G.
Dun Credit Ledgers, Pennsylvania, Luzeme County, 96:249.

52Hitchcock, History of Scranton, 1:254-55; 2:10-13.
53Most historians and scholars have argued that continuity from wealthy

father to son is typical. See E. Digby Baltzell, Philadelphia Gentlemen (Glencoe,
111.: Free Press, 1958); Edward Pessen, Riches, Class, and Power Before the
Civil War (Lexington, Mass.: D. C. Heath and Co., 1973); Ferdinand Lundberg,
The Rich and Super-Rich (New York: Lyle Stuart, 1968); John N. Ingham, The
Iron Barons: A Social Analysis of an American Urban Elite, 1874-1965
(Westport, Conn.: Greenwood Press, 1978).

For a point of view different from these studies, see Lee Benson, Robert
Gough, Ira Harkavy, Marc Levine, and Brodie Remington, “Propositions on
Economic Strata and Groups, Social Classes, Ruling Classes: A Strategic Natural
Experiment, Philadelphia Economic and Prestige Elites, 1775-1860”
(unpublished essay, University of Pennsylvania, 1976). My thinking on this issue
has been strongly influenced by Professor Benson.

54Hitchcock, History of Scranton, 2:53-55, 30-32, 5-7, 188-91; Scranton
City Directory, 1920, 1921.

Notes to Chapter Four

Charles Schwab and the Steel Industry
1Charles M. Schwab, Succeeding With What You Have (New York:

Century Co., 1917), 39-41.
2Robert Hessen, Steel Titan: The Life of Charles M. Schwab (New York:

Oxford University Press, 1975), 4-12 (quotations on pages 10 and 11).
3Ibid., 13-16, 21; Eugene G. Grace, Charles M. Schwab (n. p., 1947), 6.
4Harold Livesay, Andrew Carnegie (Boston: Little, Brown and Co., 1975),

101, 165-66.
5Hessen, Schwab, 70; Joseph Frazier Wall, Andrew Carnegie (New York:

Oxford University Press, 1970), 665.
6Wall, Carnegie, 532-33; Livesay, Carnegie, 117-18.
7Hessen, Schwab, 28-30, 41-42, 60.
8Ibid., 31, 38, 74.
9Wall, Carnegie, 330-38; Livesay, Carnegie, 101.
10Livesay, Carnegie, 103.
11Wall, Carnegie, 329-32, 337, 341-42.
12Livesay, Carnegie, 150, 165-66; Hessen, Schwab, 69-70.
13Livesay, Carnegie, 187-88.
14Hessen, Schwab, 123.
15lbid., 125-27 (quotation on page 127). The Finance Committee at U. S.

Steel rejected Schwab’s request for more ore land. I assume that Gary approved
of this decision.

16Ibid., 121, 133-40, 299. l7Ibid.t 119-22, 138.
l8Ibid., 147-62.
l9Raymond Walters, Bethlehem Lang Ago and Today (Bethlehem: Carey

Printing Co., 1923), 64; William J. Heller, ed., History of Northampton County,
Pennsylvania, and the Grand Valley of the Lehigh, 3 vols. (Boston: American
Historical Society, 1920), 1:44; Joseph M. Levering, A History of Bethlehem,
Pennsylvania, 1741-1892, with Some Account of Its Founders and their Early
Activity in America (Bethlehem: Times Publishing Co., 1903), 722-24; Alfred
Mathews and Austin N. Hungerford, History of the Counties of Lehigh and

Carbon, in the Commonwealth of Pennsylvania (Philadelphia: Everts and
Richards, 1884), 690, 704-05; John W. Jordan, ed., Encyclopedia of
PennsylvaniaBiography, 32 vols. (New York: Lewis Historical Publishing Co.,
1914-1967), 6:2139-42.

20John Fritz, The Autobiography of John Fritz (New York: J. Wiley and
Sons, 1912), 173-74; Hessen, Schwab, 164-66.

21Hessen, Schwab, 165-66.
22Ibid., 167-68; Walters, Bethlehem, 88.
23Hessen, Schwab, 170-72, 177-78, 252; Walters, Bethlehem, 88.
24Hessen, Schwab, 169.
25Ibid., 171.
26Ibid., 185.
27Ibid., 226-27, 270, 272, 276.
28Ibid., 172-73.
29Ibidd., 173-75, 182-84. 30Ibid., 186-87, 267-69.
3llbid., 230, 265-66; New York Times, April 14, 1915; Heller, History of

Northampton County, 276; and Robert Hessen, “Charles M. Schwab, President
of United States Steel, 1901-1904,” Pennsylvania Magazine of History and
Biography 96 (April 1972), 203.

32Hessen, Schwab, 236-44 (quotation on page 236). 33Ibid., 240-44
(quotation on page 244).

34My understanding of the armor-plate business in general, and how it
affected Bethlehem Steel in particular, has been greatly enriched by reading
Hessen, Schwab, 42-58, 217-26, 307-10. Reading Hessen has led me to several
key sources on the armor-plate issue.

35Andrew Carnegie to Josephus Daniels, December 9, 1913, Box 497,
Josephus Daniels papers, Library of Congress. See also Robert Seager, “Ten
Years Before Mahan: The Unofficial Case for the New Navy, 1880-1890,”
Mississippi Valley Historical Review,60 (December 1953), 491-512.

36For the point of view of the steel companies, see Eugene G. Grace to
Josephus Daniels, April 19,1913, Box 497, Daniels papers; Andrew Carnegie to
Daniels, December 9,1913, in Ibid.; Statements by Senators Boies Penrose and
Warren G. Harding in the Congressional Record in Ibid.; New York Herald,
January 28, 1911, in Ibid. For the point of view of the critics of the steel
companies, see Benjamin Tillman to Daniels, May 22,1913, in Ibid.; T. B. H.

Stenhouse to Daniels, September 24, 1913, in Ibid.; Statement by

Representative Clyde Tavenner in Congressional Record, in Ibid.
See also Melvin I. Urofsky, Big Steel and the Wilson Administration

(Columbus, Ohio: Ohio State University Press, 1969), 117-51; Hessen, Schwab,
42-58, 216-26; Josephus Daniels, The Wilson Era: Years of Peace, 1910-1917
(Chapel Hill: University of North Carolina Press, 1944), 351-63; Francis B.
Simkins, Pitchfork Ben Tillman: South Carolinian (Baton Rouge: Louisiana
State University Press, 1967), 511-13.

37Benjamin Tillman to Josephus Daniels, May 22, 1913; Josephus Daniels’
Response to Senate Resolution, July 12, 1913; Andrew Carnegie to Josephus
Daniels, December 9, 1913, all in Box 497, Daniels papers. See also Urofsky,
Big Steel, 136, 142-43.

381906, for example, the government took bids for 8000 tons of armor
plate. The Carnegie division of U. S. Steel bid $370 per ton, Bethlehem Steel bid
$381, and Midvale Steel bid $346. The Navy department divided the contract
among all three after U. S. Steel and Bethlehem Steel agreed to Midvale’s $346
per ton price. The next year all three companies submitted identical bids of $420
per ton. These $420 per ton bids continued until 1912, and the armor contracts
were always divided among all three companies. See extracts from the Report of
Hon. Josephus Daniels, Secretary of the Navy, December 1, 1913; Armor
Contracts as Awarded for Increase of Navy to Date, January 26, 1915; Eugene
Grace to Josephus Daniels, April 19, 1913; Claude Swanson to Woodrow
Wilson, March 21, 1916, all in Josephus Daniels papers, Boxes 497 and 498,
Library of Congress.

39Benjamin Tillman to Josephus Daniels, May 22, 1913; Eugene Grace to
Daniels, April 19, 1913; Extracts from the Report of Hon. Josephus Daniels,
Secretary of the Navy, December 1, 1913; Claude Swanson to Woodrow Wilson,
March 21, 1916, in Josephus Daniels papers, Boxes 497 and 498. See also
Benjamin Tillman to Woodrow Wilson, January 5, 1916; March 9, 1916, April
29, 1916, and May 21, 1916; and Josephus Daniels to Wilson, April 12, 1913;
Charles Schwab and Eugene Grace, “Should the Government Destroy Private
Armor-Making Industries?” April 5, 1916, in Woodrow Wilson papers,
microfilm reel 259, Library of Congress.

40Tillman’s speech to the Senate is in Congressional Record, 64th
Congress, 1st session, February 8, 1916. Woodrow Wilson to Benjamin Tillman,
January 6, 1916, in Wilson papers, microfilm reel 259.

41See two articles by Charles Schwab and Eugene Grace. One is untitled;

the other is “Should the Government Destroy Private Armor-Making
Industries?” April 5, 1916, both in Wilson papers, microfilm reel 259.

42Daniels, Wilson Era, 360; Hessen, Schwab.
43C. F. Adams, Secretary of the Navy, to the Chairman of the House

Committee on Naval Affairs, National Archives, Record Group 80, Entry 13,
Box 141; Claude A. Swanson, Secretary of the Navy, to Henry Wallace, National
Archives, Record Group 80, Entry 13, Box 55; William D. Leahy, Acting
Secretary of the Navy, to Senator Gerald P. Nye, National Archives, Record
Group 80, Entry 13, Box 176. See also George Marvell to Josephus Daniels,
February 9, 1921, Daniels papers; and Roger M. Freeman, The Armor-Plate and
Gun Forging Plant of the U. S. Navy Department at South Charleston, West
Virginia (n. p., 1920).

44Hessen, Schwab,244.
45Ibid, 279-80.
46Ibid., 282; Jude Wanniski, The Way the World Works (New York: Basic

Books, 1978), 116-48; Don McLeod, “The History of Protectionism Proves the
Value of Free Trade,” Insight (June 30,1986), 11-14.

47Hessen, Schwab,280-82. 48Ibid., 288-90, 292.
49Ibid.t 132-33, 285-86, 290-91, 296, 298-300. ., 293-303.

Notes to Chapter Five

John D. Rockefeller and the Oil Industry

1Allan Nevins, Study in Power. John D. Rockefeller, 2 vols. (New York:
Charles Scribner’s Sons, [1940] 1953), 1:672,208. Nevins was the first historian
to look at the wealth of primary source material in the Rockefeller papers (now
located in Tarrytown, N.Y.). His thousand-page biography is still the standard
work on Rockefeller and was indispensable to me. For differing points of view,
see Jules Abels, The Rockefeller Billions: The Story of the World’s Most
Stupendous Billions (New York: Macmillan Company, 1965); Peter Collier and
David Horowitz, The Rockefellers: An American Dynasty (New York: New
American Library, 1976), 3-72; Ferdinand Lundberg, The Rockefeller Syndrome
(Secaucus, N.J.: Lyle Stuart, 1975); and David Freeman Hawke, John D,: The
Founding Father of the Rockefellers (New York: Harper and Row, 1980).

2Grace Goulder, John D, Rockefeller: The Cleveland Years (Cleveland:
Western Reserve Historical Society, 1972), 17-25.

3Ibid., 26-27; Nevins, Rockefeller, 1:43, 100-02.
4Nevins, Rockefeller, 1:132.
5Ibid., 1:103, 186-91; Goulder, Rockefeller, 59-73.
6For a good discussion of the beginnings of the petroleum industry, see

Harold F. Williamson and Arnold R. Daum, The American Petroleum Industry:
The Age of Illumination, 1859-1899 (Evanston, 111.: Northwestern University
Press, 1959), 27-114.

7Goulder, Rockefeller, 59-80; Nevins, Rockefeller, 1:199,167-69,173, 205.
8Williamson and Daum, American Petroleum Industry, 82-194.
9Nevins, Rockefeller, 1:183-85, 197-98.
10lbid., 1:183-86, 268-70,289; Williamson and Daum, American Petroleum

Industry, 342-68; John D. Rockefeller, Random Reminiscences of Men and
Events (Garden City, N.Y.: Doubleday, Doran, and Co., 1933), 88.

11Nevins, Rockefeller, 1:666. 12lbid., 1:256, 296-97.
I3lbid., 1:115,175,279, 487. See Ida M. Tarbell, The History of the

Standard Oil Company, (New York: Harper and Row, 1966); and Henry
Demarest Lloyd, Wealth Against Commonwealth(Englewood Cliffs, N.J.:
Prentice-Hall, 1963).

14Nevins, Rockefeller, 1:277-79, 555-56, 671-72.
I5lbid., 1:306-37; Williamson and Daum, American Petroleum Industry,

342-68.
16Rockefeller, Random Reminiscences, 55-76.
17Nevins, Rockefeller, 1:366.
I8lbid., 1:380.
I9lbid., 2:76; 1:277-79.
20lbid., 2:2-4, 96ff; Williamson and Daum, American Petroleum Industry,

630-47.
21Williamson and Daum, American Petroleum Industry, 589-613; Nevins,

Rockefeller, 2:3.
22Nevins, Rockefeller, 2:29-30.
23The RussoAmerican oil war was a crucial part of Rockefeller’s career.

My three sources for this episode, which is described in the next six paragraphs,
are Ralph W. Hidy and Muriel E. Hidy, Pioneering in Big Business, 1882-1911
(New York: Harper and Brothers, 1955), 130-54; Nevins, Rockefeller 1:397, 505,
666; 2:102-04, 125-26; Williamson and Daum, American Petroleum Industry,
509-19, 630-47.

24Nevins, Rockefeller, 2:125-26.
25Ibid., 2:115.
26Hidy and Hidy, Pioneering in Big Business, 137.
27Nevins, Rockefeller, 1:237.
28Ibid., 1:397, 186, 395, 627-29.
29Ibid., 1:627-29.
30lbid., 1:623; 2:245-75; Hessen, Schwab, 24, 63-64.
31Nevins, Rockefeller, 2:295-96, 90-93; Raymond P. Fosdick, John D,

Rockefeller, Jr.: A Portrait (New York: Harper and Row, 1956), 35.
32B. F. Winkelman, John D. Rockefeller: The Authentic and Dramatic

Story of the World’s Greatest Money Maker and Money Giver (Philadelphia:
Universal Book and Bible House, 1937), 309.

33Nevins, Rockefeller, 1:190, 237, 627; 2:427.
34Ibid., 2:366-68.
35Armenteno, Myths of Antitrust, 75-85; John S. McGee, “Predatory Price

Cutting: The Standard Oil (N. J.) Case,” Journal of Law and Economics 1

(October 1958), 137-69; Hidy and Hidy, Pioneering in Big Business, 671-718.
36Nevins, Rockefeller, 2:479.
37Ibid., 2:435. The Bible verses are Luke 6:38,1 Timothy 6:10, and

Malachi 3:10.
38E. Richard Brown, Rockefeller Medicine Men: Medicine and Capitalism

in America (Berkeley: University of California Press, 1979); Alvin Moscow, The
Rockefeller Inheritance (Garden City, N. Y.: Doubleday and Co., 1977), 101-08;
Rockefeller, Random Reminiscences, 137-62; and Nevins, Rockefeller, 2:300-27,
386-402.

39Nevins, Rockefeller, 2:292-94, 199-200; Rockefeller, Random
Reminiscences, 24-29.

40Fosdick, John D. Rockefeller, Jr., 8-10; Nevins, Rockefeller, 2:199-200.
41John K. Winkler, John D.: A Portrait in Oils (New York: Blue Ribbon

Books, 1929), 226. For a recent biography of Rockefeller, see Ron Chernow,
Titan (New York: Random House, 1998). For my critical review, see
“Rockefeller Biography Has Serious Flaws,” The Detroit News (July 22, 1998),
HA.

Notes to Chapter Six

Andrew Mellon and the 1920s

1Andrew Mellon, Taxation: The People’s Business (New York: Macmillan,
1924), 16.

2New York Times, December 17, 1929, p. 1. U. S. Bureau of the Census,
Historical Statistics of the United States (Washington: Government Printing
Office, 1975), 1107. See also Benjamin G. Rader, “Federal Taxation in the
1920s: A Reexamination,” The Historian33 (May 1971), 432; and Roy G.
Blakey and Gladys C. Blakey, The Federal Income Tax (London: Longmans,
Green and Co., 1940), 516.

Contemporary accounts of Mellon tended to treat him as either a saint or a
devil. A hostile biography of Mellon is Harvey O’Connor, Mellon’s Millions: The
Life and Time of Andrew Mellon (New York: The John Day Co., 1933). For a
friendly biography, see Philip H. Love, Andrew W. Mellon: The Man and His
Work (Baltimore: F. Heath Coggins and Co., 1929). Two more recent and more
scholarly studies are David E. Koskoff, The Mellons (New York: Thomas Y.
Crowell Co., 1978); and Lawrence L. Murray III, “Andrew Mellon: Secretary of
the Treasury, 1921-1932: A Study in Policy” (Ph. D. dissertation, Michigan State
University, 1970).

3Thomas Mellon, Thomas Mellon and His Times (Pittsburgh: W. G.
Johnston and Co., 1885), 72, 77.

4Ibid., 164; O’Connor, Mellon’s Millions, 21-22, 26, 29-30, 32, 35, 49-51,
54; William Larimer Mellon, Judge Mellon’s Sons (Pittsburgh: n. p., 1948), 28-
32.

5Koskoff, The Mellons, 67-69, 172-76.
6Two useful books on Gulf Oil and Alcoa are Craig Thompson, Since

Spindletop; A Human Story of Gulfs First Half-Century (Pittsburgh: n. p., 1951);
Charles C. Carr, Alcoa, An American Enterprise (New York: Rinehart, 1952).

7Love, Andrew Mellon, 37.
8Mellon, Judge Mellon’s Sons, 396-438; Koskoff, The Mellons, 165-

67,172-76, 182-83, 260.
9Bureau of the Census, Historical Statistics, 1104.

10Robert Higgs, Crisis and Leviathan: Critical Episodes in the Growth of
American Government (New York: Oxford University Press, 1987), 97-103;
Blakey and Blakey, Federal Income Tax, 2-20. Useful biographies of the
Progressives are Harry Barnard, Independent Man: The Life of James Couzens
(New York: Charles Scribner’s Sons, 1958); Richard Lowitt, George W. Norn’s:
The Persistence of a Progressive, 1913-1933 (Urbana: University of Illinois
Press, 1971); David Thelen, Robert M. LaFollette and the Insurgent Spirit
(Boston: Little Brown and Co., 1976). There are also many histories of the
Progressive movement and of the 1920s. See, for example, Arthur S. Link and
Richard C. McCormick, Progressivism (Arlington Heights, Dl.: Harlan
Davidson, 1983).

11Bureau of the Census, Historical Statistics, 1104,1106,1108,1110;
Blakey and Blakey, Federal Income Tax, 71-103. There are several good studies
on the federal income tax. See, for example, Jerold Waltman, “Origins of the
Federal Income Tax, Mid-America 62 (October 1980), 147-60; and John F.
Witte, The Politics and Development of the Federal Income Tax (Madison:
University of Wisconsin Press, 1985).

12Blakey and Blakey, Federal Income Tax, 104-21; Higgs, Crisis and
Leviathan, 150.

13Mellon, Taxation, 129. The continuity between Wilson’s desire to cut
taxes and the Republican Mellon Plan is explored in Lawrence L. Murray,
“Bureaucracy and Bi-Partisanship in Taxation: The Mellon Plan Revisited,”
Business History Review 52 (Summer 1978), 200-25.

14Murray, “Andrew Mellon,” 111-17; Mellon Taxation, 13.
15Mellon, Taxation, 73-83. See also Andrew W. Mellon, “The Business of

Taxation,” Forum 71 (March 1924), 346-47; Andrew W. Mellon, “High Surtaxes
and Municipal Securities,” The American City Magazine 30 (March 1924), 239-
40.

16Mellon, Taxation, 199-202. The building of civic centers and football
stadiums does, of course, create temporary jobs and generate some local
revenue.

17Ibid. 78, 94, 104; Carr, Alcoa, 23-49, Thompson, Since Spindletop, 9-46.
Other people also argued this idea that high taxes helped larger, established
businesses perpetuate monopolies. Otto H. Kahn of the Citizen’s National
Committee said “high surtaxes unavoidably tend to diminish competition and to
intrench [sic] and fortify those who are in established positions.” New York

Times, February 24, 1924, p. 4.
18Mellon, Taxation, 9,16-17, 79-81, 96-97. See also Andrew W. Mellon,

“Taxing Energy and Initiative,” The Independent 112 (March 29, 1924), 168.
19Mellon, Taxation, 32; Andrew W. Mellon, “What I Am Trying to

Do,”World’s Work 47 (November 1923), 73-76. The Democrats in 1924 offered
the Garner Plan, which would have cut taxes on those earning under $56,000,
but would have left the tax rate on the rich at 50 percent. This approach allowed
the Democrats to make the following popular appeal: “There is not a person in
the country getting an income of less than $56,000 a year who is not better
treated by the Democratic than by the Republican scheme.” See Herbert
Claiborne Pell, Jr., “Taxing the Middle Class,” Forum 71 (March 1924), 349-53
(quotation on p. 351). See also Homer Joseph Dodge, “Which Tax Plan Do We
Want?” The Independent 112 (March 29, 1924), 169-70.

20O’Connor, Me/ton’s Millions, 120.
21Ibid., 235.
22Koskoff, TheMellons, 190-91.
23Ibid., 191; Mellon, Judge Mellon’s Sons, 408.
24Mellon, Taxation, 16, 69-76; Blakey and Blakey, Federal Income Tax,

219.
25Mellon, Taxation, 9, 54, 61-62.
26Belle Case LaFollette and Fola LaFollette, Robert M. LaFollette (New

York: Macmillan, 1953), 1: 178, 480-81, 2: 743-47; Robert LaFollette,
LaFollette’s Autobiography (Madison: University of Wisconsin Press, 1968),
124; Blakey and Blakey, Federal Income Tax, 88, 137, 146, 180, 185, 358, 379;
and New York Times, December 15, 1929, p. 1 and 2, 27Mellon, Taxation, 111-
24.

28Bureau of the Census, Historical Statistics, 1104. Love, Andrew Mellon,
317; Blakey and Blakey, Federal Income Tax, 540.

29Mellon, Taxation, 39, 55. 30Koskoff, The Mellons, 238-40.
31For a helpful discussion of the tax bills in Congress, see Rader, “Federal

Taxation in the 1920s,” 415-35.
32Mellon, Taxation, 221. For Coolidge’s support of the Mellon Plan, see

New York Times, January 5, 1924, p. 1; January 9, 1924, p. 1; and January 12,
1924, p. 1.

33O’Connor, Mellon’s Millions, 229-30; Koskoff, The Mellons, 230.

34Lillian Rogers Parks, My Thirty Years Backstairs at the White House
(New York: Fleet Publishing Co., 1961), 184. Helpful biographies of Coolidge
are Donald R. McCoy, Calvin Coolidge: The Quiet President (New York:
Macmillan, 1967); William Allen White, A Puritan in Babylon: The Story of
Calvin Coolidge (New York: Macmillan, 1938); and Claude M. Fuess, Calvin
Coolidge: The Man from Vermont (Hamden, Conn.: Archon Books, 1965).

35Parks, Backstairs at the White House,183-84; Mellon, Judge Mellon’s
Sons, 395; Irwin H. Hoover, Forty-Two Years in the White House(Boston:
Houghton Mifflin Co., 1934), 132.

36Parks, Backstairs at the White House, 178-81; Koskoff, The Mellons,
183. 37Blakey and Blakey, Federal Income Tax, 251-301.

38Thomas B. Silver, Coolidge and the Historians (Durham, N. C.: Carolina
Academic Press, 1982), 111; O’Connor, Mellon’s Millions, 127; Murray,
“Andrew Mellon,” 127-29. Hiram Johnson weighed in with this criticism of the
Mellon Plan: “The concern of this tax scheme is not for the man of small
income, but for the man of large income, who can best bear the burden.” New
York Times, January 18, 1924, p. 2.

39Rader, “Federal Taxation in the 1920s”, 433.
40Silver, Coolidge and the Historians, 112-14; Barnard, Couzens, 165.
41 Silver, Coolidge and the Historians, 112-21. Silver’s study is essential

reading for historians who are trying to understand the 1920s. Mellon denied he
was using refunds as a political weapon; he called the accusations “simply
preposterous.” See O’Connor, Mellon’s Millions, 159.

42Mellon’s audit of Progressive Senator James Couzens, of Michigan, was
a political error. Couzens earned $30 million working for Henry Ford; Mellon
challenged the amount of capital gains tax Couzens paid on his stock. The Board
of Tax Appeals not only sided with Couzens; it said that the government owed
him $900,000 for overpayment. Mellon probably felt foolish and stayed out of
refund cases whenever possible. Couzens, meanwhile, won reelection to the
Senate, possibly using his $900,000 refund for expenses, and kept up his attacks
on Mellon. See Barnard, Couzens, 130, 160-67.

43Love, Andrew Mellon, 318; O’Connor, Mellon’s Millions, 237; Koskoff,
The Mellons, 341.

44From 1929 to 1935, federal revenue from personal income taxes declined
from $1,095 million to $527 million, while federal revenue from excise taxes
during these years increased from $539 million to $1,363 million. Of course,

hard times, as well as higher taxes, contributed to the fall in revenue from
personal income taxes. See Bureau of the Census, Historical Statistics, 1107;
Koskoff, The Mellons; Mark Leff, The Limits of Symbolic Reform: The New
Deal and Taxation, 1933-1939 (London: Cambridge University Press, 1984);
Thomas M. Renaghan, “Distributional Effects of Federal Tax Policy 1929-1939,”
Explorations in Economic History 21 (1984), 40-63; Walter K. Lambert, “New
Deal Revenue Acts: The Politics of Taxation” (Ph. D. dissertation, University of
Texas, 1970), 1-66.

45John M. Blum, William S. McFeely, Edmund Morgan, Arthur M.
Schlesinger, Jr., Kenneth Stampp, C. Vann Woodward, The National Experience,
8th ed. (New York: Harcourt, Brace, and Jovanovich, 1993), 640.

46John A. Garraty, The American Nation, 7th ed. (New York: Harper
Collins, 1991), 744.

47Thomas A.Baily, David M. Kennedy, and Lizabeth Cohen The American
Pageant.llth ed. (Boston: Houghton-Mifflin, 1998), 768.

48Irwin Unger, These United States: The Questions of Our Past, concise
edition (Upper Saddle River, N.J.: Prentice-Hall, 1999), 591, 49The issue of
changing the tax structure was widely debated during the 1996 presidential
election. See, for example, “An ‘Untested’ Flat Tax?” Wall Street Journal
(February 9,1996), A12; and Daniel ]. Mitchell, “Making Sense of Competing
Tax Reform Plans,” The Heritage Foundation, F. Y. I. (February 22, 1996). For a
critical analysis of the income tax, see Stephen Moore, “Ax the Tax,” National
Review (April 17,1995), 38-42.

Notes to Chapter Seven

Conclusion: Entrepreneurs vs. The
Historians

1The term “robber barons” was in use in the early 1900s, but was
popularized by Matthew Josephson, The Robber Barons: The Great American
Capitalists, 1861-1901 (New York: Harcourt, Brace, and World, 1934).

2John M. Blum, et al., The National Experience, 8th ed. (New York:
Harcourt, Brace, and Jovanovich, 1993), 463.

3Thomas A.Bailey, David M. Kennedy, and Lizabeth Cohen The American
Pageant, 11th ed. (Boston: Houghton-Mifflin, 1998), 540-41.

4Publishers are sometimes reluctant to disclose sales figures, but
discussions with many publishers’ representatives show clearly that these three
textbooks have been among the best sellers from the 1960s through the 1990s.
Bailey’s former publisher, D. C. Heath, claimed that The American Pageant has
sold over two million copies. Since the 1970s, David M. Kennedy, also of
Stanford University, and Lizabeth Cohen of Harvard University have been added
as co-authors.

5p. 471. Woodward wrote the section entitled “The Ordeal of
Industrialization.”

6John Garraty, The American Nation, 7th ed. (New York: Harper Collins,
1991), 519-20.

7The only reference to the RussoAmerican oil war that I found was in
Robert L. Kelley, The Shaping of the American Past, 2nd ed. (Englewood Cliffs,
N. J.: Prentice-Hall, 1978), 404.

8For example, Lane, Vanderbilt; Martin, Hill;Hessen, Steel Titan.
9Bailey, Kennedy, and Cohen, The American Pageant, 536-54. See also the

tenth edition of the Bailey text, especially pp. 535-51.
10Bailey, Kennedy, and Cohen, The American Pageant, 551.
11For good surveys of the organizational view, see Louis Galambos, “The

Emerging Organizational Synthesis in Modern American History,” Business
History Review, 44 (Autumn 1970), 279-90; and Alfred D. Chandler, Jr.,
“Business History as Institutional History,” in George R. Taylor and Lucius F.

Ellsworth, eds. Approaches to American Economic History (Char-lottesville, Va.:
University Press of Virginia, 1971). For books that use the organizational
approach, see Alfred D. Chandler, Jr., ed., The Railroads: The Nation’s First Big
Business (New York: Harcourt, Brace, and World, 1965). See also Chandler’s
Strategy and Structure (Cambridge, Mass.: MIT Press, 1962), and The Visible
Hand: The Managerial Revolution in American Business (Cambridge, Mass.:
Belknap Press, 1977). A good book on the impact of corporate organization on
American society is Jerry Israel, ed., Building the Organizational Society (New
York: Free Press, 1972), especially the essay by Samuel P. Hays, ‘The New
Organizational Society,” 1-15.

12Thomas, “The Automobile Industry and Its Tycoon,” 141.
I3lbid., 142.
14Livesay, Carnegie; Hessen, Schwab.
15Stephan Thernstrom, Poverty and Progress: Social Mobility in a

Nineteenth Century City (Cambridge, Mass.: Harvard University Press, 1964);
William Miller, “American Historians and the Business Elite,” Journal of
Economic History 9 (November 1949), 184-208; Edward Pessen, “The
Egalitarian Myth and the American Social Reality: Wealth, Mobility and
Equality in the ‘Era of the Common Man’,” American Historical Review 76
(October 1971), 989-1034. See also Frances W. Gregory and Irene D. Neu, “The
American Industrial Elite in the 1870’s,” in William Miller, ed., Men in Business
(Cambridge, Mass.: Harvard University Press, 1952), 193-211.

16Michael P. Weber, Social Change in an Industrial Town: Patterns of
Progress in Warren, Pennsylvania, from Civil War to World War I (University
Park, Pa.: Pennsylvania State University Press, 1976).

17Herbert Gutman, “The Reality of the Rags-to-Riches ‘Myth’: The Case of
Paterson, New Jersey, Locomotive, Iron, and Machinery Manufacturers, 1830-
1880,” in Stephen Thernstrom and Richard Sennett, eds., Nineteenth Century
Cities: Essays in the New Urban History (New Haven, Conn.: Yale University
Press, 1969), 98-124; and Bernard Saracheck, “American Entrepreneurs and the
Horatio Alger Myth,” Journal of Economic History 38 (June 1978), 439-56.

18Ralph Andreano, “A Note on the Horatio Alger Legend: Statistical
Studies of the Nineteenth Century American Business Elite,” in Louis P. Cain
and Paul J. Uselding, eds., Business Enterprise and Economic Change (Kent,
Ohio: Kent State University Press, 1973), 227-46.

19Pessen, Riches, Class, and Power Before the Civil War, 303. Although I
disagree with Professor Pessen’s conclusions, I have learned much from reading

his books and articles.
20Baltzell, Philadelphia Gentlemen; Lundberg, The Rich and the Super-

Rich; and Ingham, The Iron Barons.
21See LeeBenson, “Philadelphia Elites and Economic Development:

Quasi-Public Innovation during the First American Organizational Revolution,”
Working Papers of the Eleutherian Mills-Hagley Foundation (1978); Joseph F.
Rishel, The Founding Families of Pittsburgh: the Evolution of a Regional Elite,
1760-1810 (Pittsburgh: University of Pittsburgh Press, 1990); Frederic C. Jaher,
The Urban Establishment: Upper Strata in Boston, New York,
Charleston,Chicago, and Los Angeles (Urbana, fll.: University of Illinois Press,
1982); and Stanley Lebergott, Wealth and Want (Princeton, N.J.: Princeton
University Press, 1975). There are a variety of newer studies that discuss the
issue of the continuity of leadership. For example, see Edward J. Davies II,
“Class and Power in the Anthracite Region: The Control of Political Leadership
in Wilkes-Barre, Pennsylvania, 1845-1885,” Journal of Urban History 9 (May
1983), 291-334.

22See Pessen, Riches, Class, and Power Before the Civil War, and Pessen,
The Egalitarian Myth,” 1020-27; and Gabriel Kolko, Wealth and Power in
America (New York: Frederick A. Praeger, 1962).

23For another essay that pursues this reasoning, see Klein, “The Robber
Barons,” 13-22.

24Holbrook, Hill,201.
25Collier and Horowitz, The Rockefellers.

INDEX

Adams, Charles Francis, Jr., 21. Alcoa, 105, 116. Albright, Joseph J., 54.
Alger, Horatio, 25.

American Iron and Steel Institute, 77. American Nation, The, 119, 122,
123. American Pageant, The, 119, 122. American Railroad Journal, 41.
American Sugar Refining Company, 36. Ames, Oakes, 21. Amory, Cleveland,
114. Andrews, Samuel, 84, 85, 86. Archbold, John, 88, 92, 93. Associated Oil,
97.

Bailey, Thomas, 119, 122, 124.
Bank of the United States, 41.
Benjamin, Senator Judah P., 10.
Bessemer Steel Association, 66.
Bethlehem Steel, 68-74, 75, 76-77, 79, 132.
Biddle, Nicholas, 41.
“Big Four” the, 22-23.
Blair, Austin, 59.
Blair, James, 43, 51, 52, 59.
Blair, John, 43, 51.
Blakey, Gladys, 120.
Blakey, Roy, 120.
Blum, John, 118, 122.
Board of Tax Appeals, 117.
Boies, Henry, 55.
Boies Steel Wheel Company, 55.
Borah, William, 114, 117.
Bosak, Michael, 60.
Bureau of Railroad Accounts, 21.
Burton, William, 90, 91.

Camden, Johnson N., 94.
Campbell, Rep. James H., 31.
Canadian Pacific, 29.
Carnegie, Andrew, 30, 64-68, 74, 77, 78-79, 95, 126-27, 133

Carnegie Steel, 64, 66, 67, 74, 75, 95, 126.
Casey, Andrew, 60.
Central Pacific, 17-18, 19-20, 22-23, 31-32.
Chase National Bank, 71.
Chicago, Burlington, & Quincy (railroad), 36.
Chinese Eastern Railway, 111.
Civil War, 11, 14.
Clark, Maurice, 84.
Clermont, 2, 5.
Cleveland, Grover, 75.
Collins, Edward K., 6-11, 14, 15, 122, 132.
Contract and Finance Company, 22-23.
Coolidge, Calvin, 110, 114-15, 117.
Couzens, James, 106, 159n.
Credit Mobilier, 20-21, 22, 31, 32.
Crocker, Charles, 22.
Cummins, Senator Albert, 77.
Cunard, Samuel, 5-6, 9, 10-11, 15, 132.

Daniels, Josephus, 76-77.
Daugherty, Harry, 111.
Delaware and Cobb’s Gap (railroad), 45.
Delaware, Lackawanna, and Western Railroad, 46; see Lackawanna

Railroad
Dickson, George L,., 50, 58. Dickson Manufacturing Company, 58.

Dickson, Thomas, 53, 58. Dickson, Walter, 58. Dillon, Sidney, 21, 66. Dodge,
Grenville, 18, 20. Drake, Edwin L., 84, 85. Drew, Daniel, 4. Durant, Thomas,
18, 20-21.

E. C. Knight Company, 36, 37. Edison, Thomas, 34, 56. Emergency Fleet
Corporation, 74. Ericsson, John, 11.

Federal Trade Commission, 76. Fillmore, Millard, 7. Flagler, Henry, 86.
Fletcher, F. F., 74. Fogel, Robert, 30. Ford, Henry, 105, 109-10. Fordney-
McCumber Tariff, 114. Frasch, Herman, 90.

Frick, Henry Clay, 66. Fulton, Robert, 2-3, 15.

Garner, John Nance, 116.
Garraty, John, 17, 119, 122, 123, 124.
Gary, Elbert, 67, 71, 132.
General Motors, 39.
Gibbons, Thomas, 2, 15.
Gibbons v. Ogden, 2-3.
Gould, Jay, 22, 23, 31, 34, 35, 127.
Grace, Eugene, 70, 71, 79.
Grant, Sanford, 43, 51.
Grant, President Ulysses S., 19.
Great Northern Railroad, 28, 30, 32, 33, 35, 36, 124, 132, 134.
Great Northern Steamship Company, 33.
Grey, Edward, 71.
Grodinsky, Julius, 24.
Gulf Oil, 97, 105, 116.
Gutman, Herbert, 129.
Gwartney, James, 120.
Gwin, Senator William M., 32, 34.

Harding, Warren G., 105, 110-11, 118.
Harlan, John M., 37-39.
Harper’s Weekly, 4.
Harriman, Edward H., 36-39.
Henry, William, 42-43, 47, 50.
Hepburn Act, 35.
Hessen, Robert, 70.
Highways of Progress, 39.
Hill, James J., 17-39, 93, 124-25, 107, 132-34.
Hill, Louis, 134.
Hamilton, Alexander, 104.
Holmes, Oliver Wendell, 37.
Hoover, Herbert, 117.
Hopkins, Mark, 22.
Hudson River Steamboat Association, 3-4.
Hull, Cordell, 79.
Hunter, Senator Robert M. T., 10.
Huntington, Collis, 22.

IBM, 39.
income tax, 106-08, 111-14, 116-17, 120.
Industrial Workers of the World, 74.
Inman, William, 10-11, 15.
Interstate Commerce Commission, 22, 32, 35, 39, 96, 124-25, 132.
Iron Manufacturer’s Guide, 43.

Jaher, Frederic, 131.
Jermyn, Edmund B., 59.
Jermyn, John, 54.
Jesus, 97.
Johnson, Andrew, 19.
Johnson, John G., 37.
Johnston, Archibald, 70.
Jones, William “Captain Bill”, 64-65.

Kirby, Fred M., 55-56. Kolko, Gabriel, 131. Kennedy, David, 119.

Lackawanna Iron and Coal Company, 46,48, 51,58, 66; see Lackawanna
Steel.

Lackawanna Railroad, 46, 51. Lackawanna Steel, 73. LaFollette, Robert
M., 106, 112, 115, 118. LaFollette, Robert M., Jr., 112. Landis, K. M., 96. Lane,
Franklin K., 73. Laski, Harold, 51. Lebergott, Stanley, 131. Lehigh University,
133. Lehigh Valley Railroad, 69, 73. Libby, William H., 92. Liberty bonds, 107.
Liggett’s Gap (railroad), 45, 46. Lincoln, Abraham, 85. Llyod, Henry Demarest,
87.

McFeely, William S., 118.
McNary-Haugen bill, 113.
Marshall, Chief Justice John, 2.
McClure’smagazine, 187.
Meeker, Royal, 10.
Mellon, Ailsa, 115.
Mellon, Andrew, 102-20.
Mellon, Paul, 115.
Mellon, Richard B., 104.
Mellon, Thomas, 104.
Mellon Plan, 111-14, 116.
Merrimacthe, 8, 11, 12.
Metropolitan Life Insurance Company, 73.
Midvale Steel, 75.
Monitor the, 8, 11.
Moosic Powder Company, 55.

Morgan, Edmund, 118, 122. Morgan, J. P., 36, 67, 95.

National Experience, The, 118, 122.
National Gallery of Art, 118.
Nevins, Allan, 95.
New Deal, 117.
New York and Erie Railroad, 44-45, 48.
New York Central Railroad, 14, 87, 123.
Norris, George, 106, 115-16.
Norris, Frank, 22.
Northern Pacific, 22-26, 28, 29, 31, 32, 33, 34, 36, 132.
Northern Securities Company, 36-37, 125.

Octopus, The, 22. Oxford Iron Works, 42.

Pacific Mail Steamship Company, 12-14, 22, 132.
Pacific Railroad Act, 18.
Pacific Railway Bill, 30.
Packer, Asa, 69.
Panic of 1857, 51.
Panic of 1893, 36.
Payne, Oliver, 88.
Pennsylvania Railroad, 88.
“People’s Line” the, 3.
Pessen, Edward, 128, 130-31.
Platt, Joseph C, 43, 51, 52.
Plum Creek massacre, 19.
Pratt, Charles, 89.

Rader, Benjamin, 120.
Railway World, 96.
Reading Railroad, 73.
Richmond, William, 50.
Robber barons, 1-2, 125.
Rockefeller Foundation, 99.
Rockefeller, John D., 82-100, 105, 122-24, 126, 131, 132, 133, 134.
Rockefeller, John D., Jr., 134.
Rockefeller, Laura Spelman, 84, 94.
Rockefeller, William, 86, 109.
Rogers, H. H., 88.

Roosevelt, Franklin D., 79, 117, 121.
Rose, Willie Lee, 122.

Santa Fe (railroad), 29, 31. Santayana, George, 120. Saracheck, Bernard,
109.

Schlesinger, Arthur, Jr., 118, 119, 122.
Schwab, Charles, 63-80, 93, 94, 124, 126, 127, 131-34.
Schwab, Rana, 68.
Scott, Tom, 88.
Scranton, Arthur, 58.
Scranton, Charles, 50.
Scranton Electric Construction Company, 56.
Scranton, George, 42-43, 45-46, 47, 51-52, 58, 132.
Scranton, James, 58.
Scranton, Joseph, 42-43, 51, 58, 66, 134.
Scranton, Selden, 42-43, 46, 48, 51, 54, 58.
Scranton Steel Company, 58, 66.
Scranton, Walter, 66.
Scranton, William, 58, 66.
Scrantons, the, 41-60, 124, 132-34.
Seep, Joseph, 89.
Seward, Senator William, 7.
Sherman Anti-Trust Act, 4, 35-36, 37-39, 96, 100, 124-25, 132.
Sherman, General William T., 21, 26.
Sillman, Benjamin, Jr., 84.
Silver, Thomas, 120.
Smoot-Hawley Tariff, 77, 79.
Sobel, Robert, 39.
South Improvement Company, 88.
Southern Pacific (railroad), 22.
St. Paul and Pacific Railroad, 26.
Stampp, Kenneth, 118, 122.
Standard Oil Company, 83, 86, 87, 88, 89-94, 95-97,100, 105, 109,133.
Stanford, Leland, 22, 34.
Stanton, Edwin, 11.
Stone Arch Bridge, 28.

Tarbell, Ida, 87. Tax-exempt bonds, 108-09. Taylor, Frederick W., 68.
Thernstrom, Stephan, 128-29. These United States, 120. Thomas, Robert, 125-
26. Thompson, Senator John B., 10. Throop, Benjamin, 47, 53, 58-59. Throop,
Benjamin II, 59. Thurman Law, 21, 32. Thurston, John M., 21. Tillman, Senator
Ben, 76-77. Toombs, Senator Robert A., 13. Trowbridge, J. W., 85. Tuskegee
Institute, 133.

Unger, Irwin, 120.
Union Pacific, 17-22, 23, 29, 30-31, 32, 33, 34, 36, 66.
University of Chicago, 99, 133.
U.S. Mail Steamship Company, 12-14.
U.S. Steel, 67, 68, 70-71, 75.

Vanderbiltthe, 10, 11.
Vanderbilt, Cornelius, 1-15, 87, 93, 94, 95, 122, 123, 124, 131, 132-34.
Vanderbilt University, 113-14.
Vanderbilt, William, 114.
Villard, Henry, 23-25, 26, 27, 28, 29, 34, 127, 132.

Walker Tariff, 44.
Walker, William, 13.
Walter, Phillip, 54-55.
Wealth Against Commonwealth, 87.
Weber, Michael, 108.
Weyerhauser, Frederick, 34.
Wheeler, Thomas, 93, 94.
Wightman, Merle J., 56.
William Inman Line, 10.
Wilson, Woodrow, 73-74, 76, 107-08.
Woodward, C. Vann, 118, 122, 124.
Woolworth, Charles S., 55-56.
Woolworth, Frank, 55.
Wyoming Coal and Mining Company, 20.

Bibliographic Essay

The major sources for this book are cited in the footnotes after each
chapter. In this bibliographic essay, therefore, I will briefly indicate the origins of
the Robber Baron concept and then explain other useful sources in the Robber
Baron controversy, some of which were written after 1987, when this book was
first published.

The idea of referring to certain businessmen as robber barons is an old one.
Matthew Josephson, The Robber Barons: The Great American Capitalists, 1861-
1901 (New York: Harcourt, Brace and World, 1934) popularized it for twentieth
century readers, but it goes back at least 800 years before that. According to Eli
Heckscher, Mercantilism, the Rhine River was a central trading route in Europe
during the Middle Ages. During the 1100s, the Rhine had nineteen toll stations,
replete with armed guards, to tax traders sending goods up and down the river.
These early “robber barons” did not create wealth; they extorted it from others.
They resemble America’s nineteenth century robber barons—Henry Villard,
Edward Collins, and Leland Stanford—who had toll stations in Washington,
D.C. and assessed taxpayers to support their inefficient steamships and railroads.
All of these robber barons are classic political entrepreneurs, who used politics,
not innovation and low prices, to gain wealth. In the case of the medieval robber
barons, the number of toll stations along the Rhine River increased to 44 in the
1200s, and to over 60 in the 1300s. Likewise in the U.S., with the growth of
government in the twentieth and twenty-first centuries, the opportunities for
political entrepreneurship have also increased. The key error that Josephson
made was to mix both market and political entrepreneurs, and not to separate
their differing impacts on American life.

The best text in U. S. business history, one that puts the Robber Baron
conflict in excellent historical perspective, is Larry Schweikart, The
Entrepreneurial Adventure (New York: Harcourt and Brace, 2000). A shorter,
useful text is Gerald Gunderson, The Wealth Creators (New York: E. P. Button,
1989). A study that focuses on recent entrepreneurs, one that indirectly dispels
the robber baron idea, is George Gilder, Recapturing the Spirit of Enterprise
(San Francisco: ICS Press, 1992).

Historians often tend to be woefully trained in basic economics. Two short,
helpful primers on economics are Henry Hazlitt, Economics in One Lesson (New
York: Laissez Faire Books, [1946,1962,1979] 1996), a readable book that has

sold one million copies; and James Gwartney and Richard Stroup, What
Everyone Should Know about Economics and Prosperity (1993). A

short and venerable primer on economics is Frederic Bastiat, The Law,
written in 1850 and recently (1998) published by the Foundation for Economic
Education, in Irvington, New York. Finally, the first two chapters of Milton and
Rose Friedman, Free to Chose(New York: Avon Books, 1980), are an eloquent
and informative introduction to economics.

The growth of government in the U. S. has spawned several important
works of political philosophy. In fact, the first major contribution to political
philosophy written in the United States, The Federalist Papers (1788), was not
only a defense of the Constitution, but a response by Alexander Hamilton, James
Madison, and John Jay to the question of what should be the proper role of
government in American society. In the late 1800s, the increasing of subsidies to
Robber Barons and other groups prompted Yale professor William Graham
Sumner to defend limited government in a series of essays, recently collected
and edited by Robert Bannister, entitled On Liberty, Society, and Politics
(Indianapolis: Liberty Fund, 1992). During the rapid spurt in the growth of
government during the New Deal, a devastating critique of political
entrepreneurship was Walter Lippmann, The Good Society (Boston: Little,
Brown, and Co., 1937). It was followed by Friedrich A. Hayek, The Road to
Serfdom (Chicago: University of Chicago Press, 1944). A brief and readable
defense of free markets, written by Hayek’s mentor, is Ludwig Von Mises, The
Anti-Capitalistic Mentality (South Holland, 111.: Libertarian Press, 1972).

About the Author

BURTON W. FOLSOM, JR. is the Charles Kline professor of history and
management at Hillsdale College in Michigan. He received his Ph.D. in
American history from the University of Pittsburgh and has taught at the
University of Nebraska, the University of Pittsburgh, Northwood University, and
Murray State University. He has also been a senior fellow at the Mackinac
Center for Public Policy in Midland, Michigan; and historian in residence at the
Center for the American Idea in Houston, Texas.

Professor Folsom’s first book was Urban Capitalists (Johns Hopkins
University Press, 1981; second ed., University of Scranton Press, 2000). His
later books include Empire Builders (Rhodes and Easton, 1998); No More Free
Markets or Free Beer: The Progressive Era in Nebraska, 1900-1924 (Lexington
Books, 1999). He has two edited books, The Spirit of Freedom (Foundation for
Economic Education, 1994); and The Industrial Revolution and Free Trade
(Foundation for Economic Education, 1996). His articles have appeared in the
Journal of Southern History, Pacific Historical Review, Journal of
AmericanStudies, Great Plains Quarterly, The American Spectator, and The Wall
Street Journal. He is a columnist on economic history for The Freeman for Ideas
on Liberty.

  • CHAPTER ONE
  • CHAPTER TWO
  • CHAPTER THREE
  • CHAPTER FOUR
  • CHAPTER FIVE
  • CHAPTER SIX
  • CHAPTER SEVEN
  • CHAPTER ONE
  • CHAPTER TWO
  • CHAPTER THREE
  • CHAPTER FOUR
  • CHAPTER FIVE
  • CHAPTER SIX
  • CHAPTER SEVEN

Copyright © 2010, 2007, 2003,1996, 1991, 1987 by Burton W. Folsom, Jr.
All rights reserved
Manufactured in the United States of America
Published by Young America’s Foundation F. M. Kirby FreedomCenter

110 Elden Street Hemdon, Virginia 20170

No part of this book may be reproduced in any form by any electronic or

mechanical means, including information storage and retrieval systems, without
permission in writing from the publisher, except by a reviewer who may quote
brief passages in a review.

Library of Congress Cataloging-in-Publication Data Folsom, Burton W.
(Entrepreneurs vs. the State) The Myth of the Robber Barons/Burton W.

Folsom, Jr. p. cm.
Previously published as: Entrepreneurs vs. the State ISBN 0-9630203-0-7

(HB) : $19.95. —ISBN 0-9630203-1-5 (PB) : $9.95

1. Capitalists and financiers—United States—History. 2. Competition—

United States—History. 3. Free enterprise—History. 4. Steamboats—United
States—History. 5. Entrepreneurship—History. I. Title HG181.F647 1991
338′.04’097309034—dc20

From reviews of THE MYTH OF THE ROBBER BARONS

“THE MYTH OF THE ROBBER BARONS is … excellent…. In short, this
book is the perfect supplement to most standard economic and business history
textbooks. This reviewer has adopted it already.”

Larry Schweikart, THE HISTORIAN

“I read this book in one sitting. In spite of the easy reading of the text, the
book has profound meaning for the nature of business in America, with
implications for political philosophy and economic theory. There isn’t a
businessman in the country who would not profit from the reading of this
important book.”

Angus MacDonald, BOOK REVIEWS

“Folsom demonstrates the pernicious effects of government involvement in
business…. The enormous value of this book is that it enlightens the intelligent
reader with the facts about an era that virtually every history book shrouds in
falsehoods.”

Second Renaissance Books THE MYTH OF THE ROBBER BARONS “is
a lively, well written and informative introduction to the subject. It is a useful

source for students of American history.”
Ann M. Scanlon, NEW YORK HISTORY

“The subtlest essay makes James J. Hill an American hero as the only man
who built a transcontinental railroad without government subsidy…. The most
daring attempt at revision is the author’s paean to John D. Rockefeller.”

Stuart D. Brandes, AMERICAN HISTORICAL REVIEW

“Folsom draws an insightful lesson. Government aid [to railroads] bred
inefficiency; the inefficiency raised costs and rates, and angry customers
demanded government regulation; the resulting regulation promoted even greater
inefficiency….”

Robert Higgs, THE WORLD & I “Burt Folsom has done a wonderful
job…. The picture of economic history printed in this book helps prove that

political promotion of economic development is futile.”
Carl Watner, THE VOLUNTARYIST

“Folsom presents the subjects as they were, warts and all, avoiding shrill
accusation or exoneration of shortcomings.”

Tommy W. Rogers, CHRONICLES

“If these stories are correct, then much of the conventional history of

American business is off base…. Folsom persuasively describes how government
subsidies to ‘political entrepreneurs’ actually lowered the quality of output.”

M. L. Rantala, CHICAGO ENTERPRISE

Contents

Foreword by Forrest McDonald Preface

CHAPTER ONE

“The greatest anti-monopolist in the country:”
Commodore Vanderbilt and the Steamship Industry

CHAPTER TWO

“Making a difference in the way the world worked:”
James J. Hill and the Transcontinental Railroads

CHAPTER THREE

“Confidence and unity of purpose:”

The Scrantons and America’s First Iron Rails

CHAPTER FOUR

“The American spirit of conquest:”

Charles Schwab and the Steel Industry

CHAPTER FIVE

“Refining oil for the poor man:”
John D. Rockefeller and the Oil industry

CHAPTER SIX

“Cutting taxes to raise revenue:”

Andrew Mellon and the 1920s

CHAPTER SEVEN

Conclusion: Entrepreneurs vs. the Historians APPENDIX
Notes
Index
Bibliographic Essay

Foreword

It is possible to regard this book as light reading, despite the range and
depth of the meticulous scholarship on which it is based, because it is written in
a pleasant, almost chatty style and is concerned with an array of fascinating
characters—bold innovators who created mightily as well as pious frauds who
bilked the public on a grand scale. Indeed, though I have studied American
economic history for many years, I have found on almost every page information
and anecdotes I had not encountered before. The entertainment value of the work
is not lessened by the fact that it revises in important ways many misperceptions
that historians have imposed upon the record—for instance, the idea that vertical
mobility is a myth. Quietly but conclusively, and without interrupting the flow of
his narrative, Folsom demonstrates that vertical mobility, both upwards and
downwards, has truly been a norm in America: poor men have become rich men
and rich men have become poor men, depending upon skill, brains, work, and
luck.

But there is considerably more here than some good stories and some
significant revisionism. On one level, Folsom shows that the “Robber Baron”
school of historians of American business enterprise was partly right and partly
wrong but was unable to distinguish which was which. He points out that during
the nineteenth and the early twentieth century (and by unmistakable implication,
in the late twentieth as well) there were two kinds of business developers, whom
he describes as “political entrepreneurs” and “market entrepreneurs.” The former
were in fact comparable to medieval robber barons, for they sought and obtained
wealth through the coercive power of the state, which is to say that they were
subsidized by government and were sometimes granted monopoly status by
government. Invariably, their products or services were inferior to and more
expensive than the goods and services provided by market entrepreneurs, who
sought and obtained wealth by producing more and better for less cost to the
consumer. The market entrepreneurs, however, have been repeatedly—one is
tempted to say systematically—ignored by historians.

On another level, Folsom’s study has profound implications for American
historiography beyond the immediate subject to which it is addressed. It is
commonly held that the Whig Party of Clay and Webster and its successor
Republican Party of Abraham Lincoln and William McKinley were the “pro-
business” parries, and that the Jacksonian Democrats were anti-business. What

comes through here is something quite different. The Whigs and Republicans
engaged in a great deal of pro-business rhetoric and in talk of economic
development, but the policies they advocated, such as subsidies, grants of special
privileges, protective tariffs, and the like, actually worked to retard development
and to stifle innovation. The Jacksonian Democrats engaged in a great deal of
anti-business rhetoric, but the results of their policies were to remove or reduce
governmental interferences into private economic activity, and thus to free
market entrepreneurs to go about their creative work. The entire nation grew
wealthy as a consequence.

On yet another level, though Folsom’s work is balanced, judicious history,
addressed to the past (and is unmarred by the shrill accusatory tone that
characterizes the writings of anti-business historians), it has a powerful
relevance to current political discourse. In response to the relative decline of the
American economy during the last decade or two, many corporate businessmen
have joined with leftist ideologues to clamor for a “partnership” between
government and business that would involve central planning, protective tariffs,
and a host of restrictions upon foreign competitors. What Folsom has to say to
them is a common-sense message drawn from endlessly repeated historical
examples. Political promotion of economic development is inherently futile, for
it invariably rewards incompetence; if incompetence is rewarded, incompetence
will be the product; and when incompetence is the product, politicians will insist
that increased planning and increased regulation is the appropriate remedy.

Adam Smith forewarned us more than two centuries ago: “The statesman,
who should attempt to direct people in what manner they ought to employ their
capital, would not only load himself with a most unnecessary attention, but
assume an authority which could safely be trusted, not only to no single person,
but to no council or senate whatever, and which would nowhere be so dangerous
as in the hands of a man who had folly and presumption enough to fancy himself
fit to exercise it.”

Forrest McDonald Williamsburg, Virginia April 1987

Preface to the Sixth Edition

I am delighted to welcome The Myth of the Robber Barons to a sixth
edition. That it continues to sell well is testimony to the persistence of free
market ideas. Special thanks go to the usual culprits: Ron Robinson for his
patience and support for almost thirty years; Patrick Coyle for his energy and
encouragement; and Dede Hamilton for all the time she takes with this book.
Thanks also go to Larry Arnn, Larry Reed, Larry Schweikart, and Joseph Rishel
for their advice and counsel. Over the years, I have benefited from suggestions
and criticisms from Lee Benson, Roger Custer, Edward Davies II, Thomas
DiLorenzo, James R. Edwards, Winston Elliott, Burton Folsom, Sr., Margaret
Folsom, Samuel P. Hays, Robert Hessen, Rusty Humphries, Doug Jeffrey, Aileen
Kraditor, Forrest and Ellen McDonald, William H. Mulligan, George Nash,
James Nesbitt, Glenn Porter, Helen Roulston, Julius Rubin, James Taylor, John
Willson, Kirby Wilbur, and my students at Murray State University and Hillsdale
College.

In doing research, I needed help; from many libraries and institutions. The
Hagley Museum and Library* in Wilmington, Delaware, gave me access to the
Scranton papers and other specialized sources. The R. G. Dun Credit Reports in
the Baker Library at Harvard University helped me in writing the Schwab and
Scranton essays. The Library of Congress and the National Archives provided
me with a wealth of sources on entrepreneurs. At the Lackawanna Historical
Society, I received wise counsel from former directors Robert Mattes and
William Lewis. William W. Scranton was very supportive and has straightened
me out on some points about his family history. The libraries at Murray State
University, Southern Illinois University, Indiana University, and Hillsdale
College have supplied me with most of the secondary sources used in this study.

In the financing and publication of this book, I have received aid and
comfort from Young America’s Foundation, the Wilbur Foundation, Roe
Foundation, Broyhill Foundation, the Bradley Foundation, and from both
Murray State University and Hillsdale College.

Finally, I want to thank my wife Anita, for her wise counsel and editing
skills, and my son Adam, who has my blog BurtFolsom.com up and running.
Anita and Adam make this work worthwhile for me.

Burton W. Folsom, Jr.

Hillsdale, Michigan March 2010

CHAPTER ONE

Commodore Vanderbilt and the
Steamship Industry

For two generations historians have been arguing about the effects of
entrepreneurs on American industry. Whether the entrepreneurs were Robber
Barons, industrial statesmen, or irrelevant to growth still seems to be disputed
even after shelves of books have been written on the subject.1 Maybe we can
find a useful line of reasoning by looking at one of America’s first large-scale
businesses, the steamship industry. It was mechanized in the early 1800s; and,
during that century, it was in the vanguard of technological change.
Steamboating was also highly competitive and soon became large in scale.
Furthermore, a look at the steamboat industry allows us to study entrepreneurs in
the comparative context of the whole industry. Only then can we see how
different entrepreneurs responded to different challenges and who, if any, made
creative contributions to industrial growth.2

A key point about the steamship industry is that the government played an
active role right from the start in both America and England. Right away this
separates two groups of entrepreneurs—those who sought subsidies and those
who didn’t. Those who tried to succeed in steamboating primarily through
federal aid, pools, vote buying, or stock speculation we will classify as political
entrepreneurs. Those who tried to succeed in steamboating primarily by creating
and marketing a superior product at a low cost we will classify as market
entrepreneurs. No entrepreneur fits perfectly into one category or the other, but
most fall generally into one category or the other. The political entrepreneurs
often fit the classic Robber Baron mold; they stifled productivity (through
monopolies and pools), corrupted business and politics, and dulled America’s
competitive edge. Market entrepreneurs, by contrast, often made decisive and
unpredictable contributions to American economic development.3

I

Every schoolchild is taught that Robert Fulton was the first American to
build and operate a steamboat on New York waters. When his
Clermontsauntered four miles per hour upstream on the Hudson River in 1807,
Fulton opened up new possibilities in transportation, marketing, and city
building. What is not often taught about Fulton is that he had a monopoly
enforced by the state. The New York legislature gave Fulton the privilege of
carrying all steamboat traffic in New York for thirty years.4 It was this monopoly
that Thomas Gibbons, a New Jersey steamboat man, tried to crack when he hired
young Cornelius Vanderbilt in 1817 to run steamboats in New York by charging
less than the monopoly rates.5

Vanderbilt was a classic market entrepreneur, and he was intrigued by the
challenge of breaking the Fulton monopoly. On the mast of Gibbon’s ship
Vanderbilt hoisted a flag that read: “New Jersey must be free.” For sixty days in
1817, Vanderbilt defied capture as he raced passengers cheaply from Elizabeth,
New Jersey, to New York City. He became a popular figure on the Atlantic as he
lowered the fares and eluded the law. Finally, in 1824, in the landmark case of
Gibbons v. Ogden,the Supreme Court struck down the Fulton monopoly. Chief
Justice John Marshall ruled that only the federal government, not the states,
could regulate interstate commerce. This extremely popular decision opened the
waters of America to complete competition. A jubilant Vanderbilt was greeted in
New Brunswick, New Jersey, by cannon salutes fired by “citizens desirous of
testifying in a public manner their good will.” Ecstatic New Yorkers immediately
launched two steamboats named for John Marshall. On the Ohio River,
steamboat traffic doubled in the first year after Gibbons v. Ogden and quadrupled
after the second year.6

The triumph of market entrepreneurs in steamboating led to improvements
in technology. As one man observed, “The boat builders, freed from the
domination of the Fulton-Livingston interests, were quick to develop new ideas
that before had no encouragement from capital.” These new ideas included
tubular boilers to replace the heavy and expensive copper boilers Fulton used.
Cordwood for fuel was also a major cost for Fulton, but innovators soon found
that anthracite coal worked well under the new tubular boilers, so “the expense
of fuel was cut down one-half.”7

The real value of removing the Fulton monopoly was that the costs of
steamboating dropped. Passenger traffic, for example, from New York City to
Albany immediately dropped from seven to three dollars after Gibbons v. Ogden.
Fulton’s group couldn’t meet the new rates and soon went bankrupt. Gibbons and

Vanderbilt, meanwhile, adopted the new technology, cut their costs, and earned
$40,000 profit each year during the late 1820s.8

With such an open environment for market entrepreneurs, Vanderbilt
decided to quit his pleasant association with Gibbons, buy two steamboats, and
go into business for himself. During the 1830s, Vanderbilt would establish trade
routes all over the northeast. He offered fast and reliable service at low rates. He
first tried the New York to Philadelphia route and forced the “standard” three-
dollar fare down to one dollar. On the New Brunswick to New York City run,
Vanderbilt charged six cents a trip and provided free meals. As Niles’ Register
said, the “times must be hard indeed when a traveller who wishes to save money
cannot afford to walk.”9

Moving to New York, Vanderbilt decided to compete against the Hudson
River Steamboat Association, whose ten ships probably made it the largest
steamboat line in America in 1830. It tried to informally fix prices to guarantee
regular profits. Vanderbilt challenged it with two boats (which he called the
“People’s Line”) and cut the standard New York to Albany fare from three
dollars to one dollar, then to ten cents, and finally to nothing. He figured it cost
him $200 per day to operate his boats; if he could fill them with 100 passengers,
he could take them free if they would each eat and drink two dollars worth of
food (Vanderbilt later helped to invent the potato chip). Even if his passengers
didn’t eat that much, he was putting enormous pressure on his wealthier
competitors. Finally, the exasperated Steamboat Association literally bought
Vanderbilt out: they gave him $100,000 plus $5,000 a year for ten years if he
would promise to leave the Hudson River for the next ten years. Vanderbilt
accepted, and the Association raised the Albany fare back to three dollars. Such
bribery may be wrong in theory, but it had little effect in practice. With no
barriers to entry, other steamboaters came along and quickly cut the fare. They
saw that it could be done for less, and they saw what had happened to Vanderbilt
for doing it. So almost immediate Daniel Drew began running steamboats on the
Hudson—until the Association paid him off, too. At least five other competitors
did the same thing until they, too, were bought off. It’s hard to figure who got the
better deal: those who ran the steamboats and were bought out, or those who
traveled the steamboats at the new low rates.10

Meanwhile, Vanderbilt took his payoff money and bought bigger and
faster ships to trim the fares on New England routes. He started with the New
York City to Hartford trip and slashed the five-dollar fare to one dollar. He then
knocked the New York City to Providence fare in half from eight to four dollars.

When he sliced it to one dollar, the New York Evening Post called him “the
greatest practical anti-monopolist in the country.” In these rate wars, sometimes
Vanderbilt’s competitors bought him out, sometimes they went broke, and
sometimes they matched his rates and kept going. Some people denounced
Vanderbilt for engaging in extortion, blackmail, and cutthroat competition.
Today, of course, he would be found “in restraint of trade” by the Sherman
Antitrust Act. Nonetheless, Vanderbilt qualifies as a market entrepreneur: he
fought monopolies, he improved steamship technology, and he cut costs.
Harper’s Weekly insisted that Vanderbilt’s actions “must be judged by the results;
and the results, in every case, of the establishment of opposition lines by
Vanderbilt has been the permanent reduction of fares.” The editor went on to say,
“Wherever [Vanderbilt] ‘laid on’ an opposition line, the fares were instantly
reduced; and however the contest terminated, whether he bought out his
opponents, as he often did, or they bought him out, the fares were never again
raised to the old standards.” Vanderbilt himself later put it bluntly when he said:
“If I could not run a steamship alongside of another man and do it as well as he
for twenty percent less than it cost him I would leave the ship.”11

II
In the 1840s, improving technology changed steamboats into steamships.

Larger engines and economies of scale in shipbuilding led to changes in size,
speed, and comfort. The new steamers of the mid-century were many times
bigger and faster than Fulton’s Clermont: they were each two decks high with a
grand saloon and individual staterooms for first-class passengers. When full,
some of these new steamships could hold almost 1,000 passengers, and they also
had space for mail and freight. These ships were sturdy and were built to cross
the Atlantic Ocean. The New York to England route would be the first to open
up the steamship competition; the New York to California line (via Panama)
would soon follow.12 Rapid overseas trade was a new concept, and this reopened
the debate for federal aid to eager steamboat operators. Fulton was gone, but
others like him argued for government subsidies and contracts. Political and
market entrepreneurs on both sides of the Atlantic would fight for control of the
seas.

Actually, Englishmen, in 1838, were the first to travel the Atlantic Ocean
entirely by steam. The open environment was quickly altered when Samuel
Cunard, a political entrepreneur, convinced the English government to give him
$275,000 a year to run a semimonthly mail and passenger service across the
ocean. Cunard charged $200 per passenger and $.24 a letter; the $.24 for the mail

didn’t cover the cost of Cunard’s shipping, and that’s one argument he had for a
subsidy. He also contended that subsidized steamships gave England an
advantage in world trade and were a readily available merchant marine in case of
war. Parliament accepted this argument and increased government aid to the
Cunard line throughout the 1840s.13

Soon, political entrepreneurs across the ocean began using these same
arguments for federal aid to the new American steamship industry. They argued
that America needed subsidized steamships to compete with England to provide
a military fleet in case of war. Edward K. Collins, a classic political
entrepreneur, exploited these arguments with a self-serving plan. If the
government would give him $3,000,000 down and $385,000 a year, he would
build five ships and outrace the Cunarders from coast to coast. Collins would
deliver the mail, too; and the Americans would get to “drive the Cunarders off
the seas.” Collins appealed to American nationalism, not to economic efficiency.
Americans would not be opening up new lines of communication because the
Cunarders had already opened them. Americans would not be delivering mail
more often because the Collins’s ships, like Cunard’s, would sail only every two
weeks. Finally, Americans would not be bringing the mail cheaper because the
Cunarders could do it for much less.14

Once the Senate established the principle of mail subsidy, other political
entrepreneurs asked for subsidies to bring the mail to other places. Soon
Congress also gave $500,000 a year for two lines to bring mail to California: an
Atlantic line to get mail to Panama and a Pacific line to take letters from Panama
to California. As in the case of Cunard, Collins and the California operators, all
argued that a generous subsidy now would help them become more efficient and
lead to no subsidy later.15

Congress gave money to the Collins and California lines in 1847, but they
took years to build their luxurious ships. Collins, especially, had champagne
tastes with taxpayers’ money. He built four enormous ships (not five smaller
ships as he had promised), each with elegant saloons, ladies’ drawing rooms, and
wedding berths. He covered the ships with plush carpet and brought aboard rose,
satin, and olive-wood furniture, marble tables, exotic mirrors, flexible barber
chairs, and French chefs. The state rooms had painted glass windows and electric
bells to call the stewards. Collins stressed luxury, not economy, and his ships
used almost twice the coal of the Cunard line. He often beat the Cunarders
across the ocean by one day (ten days to eleven), but his costs were high and his
economic benefits were nil.16

With annual government aid, Collins had no incentive to reduce his costs
from year to year. His expenses, in fact, more than doubled in 1852: Collins
preferred to compete in the world of politics for more federal aid than in the
world of business against price-cutting rivals. So in 1852 he went to Washington
and lavishly dined and entertained President Fillmore, his cabinet, and influential
Congressmen. Collins artfully lobbied in Congress for an increase to $858,000 a
year (or $33,000 each for twenty-six voyages—which came to $5.00 per ocean
mile) to compete with the Cunarders.17

Meanwhile, Vanderbilt had watched this political entrepreneurship long
enough. In 1855 he declared his willingness to deliver the mail for less than
Cunard, and for less than half of what Collins was getting. Collins apparently
begged Vanderbilt not to go to Congress. He may have offered to help Vanderbilt
get an equally large subsidy from Congress—if only he wouldn’t open the
transatlantic steamship trade. But Vanderbilt had told Collins and Congress that
he would run an Atlantic ferry for $15,000 per trip, which was cheaper than
anyone else could do.18

So in 1855, Collins, the subsidized lobbyist, began battle with Vanderbilt,
the market entrepreneur. Collins fought the first round in Congress rather than on
the sea. Most Congressmen, former Whigs especially, backed Collins. To do
otherwise would be to admit they had made a mistake in helping him earlier; and
this might call into question all federal aid. Other Congressmen, especially the
New Englanders, had constituents who benefitted from Collins’ business.
Senator William Seward of New York stressed another angle by asking, “Could
you accept that proposition of Vanderbilt[‘s] justly, without, at the same time,
taking the Collins steamers and paying for them?” In other words, Seward is
saying that we backed Collins at the start, now we are committed to him, so let’s
support him no matter what. Vanderbilt, by contrast, warned that “private
enterprise may be driven from any of the legitimate channels of commerce by
means of bounties.” His point was that it is hard for unsubsidized ships to
compete with subsidized ships for mail and passengers. Since the contest is
unfair from the start, the subsidized ships have a potential monopoly of all trade.
But Collins’ lobbying prevailed, so Congress turned Vanderbilt down and kept
payments to Collins at $858,000 per year.19

Vanderbilt decided to challenge Collins even without a subsidy. “The share
of prosperity which has fallen to my lot,” said Vanderbilt, “is the direct result of
unfettered trade, and unrestrained competition. It is my wish that those who are
to come after me shall have that same field open before them.” Vanderbilts
strategy against Collins was to charge only $.15 for half-ounce letters and to cut

the standard first-class fare $20, to $110. Later he slashed it to $80. Vanderbilt
also introduced a new service: a cheaper third-class fare in the steerage. The
steerage must have been uncomfortable—people were practically stacked on top
of each other—but for $75, and sometimes less, he did get newcomers to
travel.20

To beat the subsidized Collins, Vanderbilt found creative ways to cut
expenses. First, he had little or no insurance on his fleet. He always said that if
insurance companies could make money on shipping, so could he. So Vanderbilt
built his ships well, hired excellent captains, and saved money on insurance.
Second, he spent less than Collins did for repairs and maintenance. Collins’ ships
cost more than Vanderbilt’s, but they were not seaworthy. The engines were too
big for the hulls, so the ships vibrated and sometimes leaked. They usually
needed days of repairing after each trip. Third, Collins, like Cunard in England,
was elitist with his government aid. He cared little for cheap passenger traffic.
Vanderbilt, by contrast hired local “runners,” who buttonholed all kinds of
people to travel on his ships. These second-and third-class passengers were
important because all steamship operators had fixed costs for making each
voyage. They had to pay a set amount for coal, crew, maintenance, food, and
docking fees. In such a situation, Vanderbilt needed volume business. With third-
class fares, Vanderbilt sometimes carried over 500 passengers per ship.

Even so, Vanderbilt barely survived the first year competing against
Collins. He complained, “It is utterly impossible for a private individual to stand
in competition with a line drawing nearly one million dollars per annum from
the national treasury, without serious sacrifice.” He added that such aid was
“inconsistent with the. . .economy and prudence essential to the successful
management of any private enterprise.”21

Vanderbilt met this challenge by spending $600,000 building a new
steamship, immodestly named the Vanderbilt, “the largest vessel which has ever
floated on the Atlantic Ocean.” The Commodore built the ship with a beam
engine, which was more powerful than Collins’ traditional side-lever engines. In
a head-to-head race, the Vanderbilt beat Collins’ ship to England and won the
Blue Ribbon, an award given to the one ship owning the fastest time from New
York City to Liverpool. By 1856, Collins had two ships—half of his accident-
prone fleet—sink (killing almost 500 passengers). In desperation, he spent over a
million dollars of government money building a gigantic replacement; but he
built it so poorly that it could make only two trips and had to be sold at more
than a $900,000 loss.22

Even Collins’ friends in Congress could defend him no longer. Between

Collins’ obvious mismanagement and Vanderbilt’s unsubsidized trips, most
Congressmen soured on federal subsidies. Senator Judah P. Benjamin of
Louisiana said, “I believe [the Collins line] has been most miserably managed.”
Senator Robert M. T. Hunter of Virginia went further: “the whole system was
wrong;. . .it ought to have been left, like any other trade, to competition.”
Senator John B. Thompson of Kentucky said, “Give neither this line, nor any
other line, a subsidy. . . . Let the Collins line die. … I want a tabula rasa— the
whole thing wiped out, and a new beginning.” Congress voted for this “new
beginning” in 1858: they revoked Collins’ aid and left him to compete with
Vanderbilt on an equal basis. The results: Collins quickly went bankrupt, and
Vanderbilt became the leading American steamship operator.23

And there was yet another twist. When Vanderbilt competed against the
English, his major competition did not come from the Cunarders. The new
unsubsidized William Inman Line was doing to Cunard in England what
Vanderbilt had done to Collins in America. The subsidized Cunard had
cautiously stuck with traditional technology, while William Inman had gone on
to use screw propellers, and iron hulls instead of paddle wheels and wood. It
worked; and from 1858 to the Civil War, two market entrepreneurs, Vanderbilt
and Inman, led America and England in cheap mail and passenger service.24

The mail subsidies, then, actually retarded progress because Cunard and
Collins both used their monopolies to stifle innovation and delay technological
changes in steamship construction. Several English steamship companies
experimented with iron hulls and screw propellers in the 1840s, but Cunard
thwarted this whenever he could. According to Royal Meeker, The mail
payments made it possible for the Cunard company to cling to an out-of-date and
uneconomical type of steamer. Both the Admiralty and the Post Office
departments refused to permit mail steamers to use the screw propeller until long
after other lines had adopted it. … Without government aid to inefficiency, the
Cunard Company would have been compelled to adopt improvements in order to
compete with other and more progressive lines.

Cunard also refused to introduce a third-class rate. So, when William
Inman came along in the 1850s with his iron ships and third-class fares, he
practically knocked Cunard out of business. After 1850, Inman and other
newcomers kept the pressure on Cunard. They experimented with oscillating
cabins (to reduce the impact of the swaying of the ship), compound engines (to
increase the ship’s speed and decrease its fuel consumption), and twin propellers.
Cunard’s subsidy kept him from having to innovate and protected him from
errors of judgment that would have ruined his competitors.25

In America, Collins, like Cunard, chose wood and paddle wheels for his
ships. Americans were slower to turn to iron ships because their costs of iron
construction were higher than those in England. Still, American engineers had
been experimenting with iron hulls and screw propellers during the 1840s, partly
because iron was more durable in handling the big engines built after 1840.
Collins apparently considered using iron, but he was no innovator. So he ended
up using wood hulls for his powerful engines, and his ships were not as safe or
as seaworthy because of that. With Collins using wood, American steamship
operators feared switching to iron. They had little margin for error because their
chief competitor was subsidized. Yet in 1851, Vanderbilt became one of the first
Americans to build and run iron ships (he used them on his California route).
But it wasn’t until Collins’ subsidy expired in 1858 that Americans began
experimenting with iron hulls in a serious way.26

This delay in experimenting with iron meant that iron ships could not be
much of a force during the Civil War. John Ericsson, who in 1862 built the iron-
hulled Monitor, had been promoting the advantages of iron ships since 1843. But
in 1847, when Collins decided to use wood for his subsidized fleet, only
Vanderbilt dared to risk more experiments with iron hulls. The irony here is that
one of the central arguments for subsidizing Collins was that his fleet would be
usable in case of war. Yet his outmoded wooden ships—even the ones that didn’t
sink—would have been helpless against ironclad opponents. And we wouldn’t
have needed them anyway because Vanderbilt gave his 5,000-ton ship, the
Vanderbilt, as a permanent gift to the United States during the Civil War. He
even offered to personally sink the Confederate’s Merrimac, asking only that
everyone stay “out of the way when I am hunting the critter.” He never got the
chance; and, partly because of the Collins subsidy, the U.S.never got the chance
to blockade Confederate ports with an iron fleet. Who knows whether or not that
would have shortened the war? It certainly would have relieved those who feared
that the Confederates would buy iron ships from England. And it would have
relieved the Secretary of War, Edwin Stanton, who worried that the Merrimac
would go on a rampage, sail up the Potomac unmolested, and blow the dome off
the Capitol.27

Vanderbilt was also cast as a market entrepreneur in his battle for the
steamship traffic to California. Two California lines—the U.S. Mail Steamship
Company and the Pacific Mail Steamship Company—started mail delivery in
1849 with $500,000 per year in federal aid. As happened with Collins, these mail
contracts were not opened for bidding; they were a private deal between the Post
Office and the two steamship companies. At first the two lines charged company

rates: $600 per passenger from New York to California, via railroad over
Panama. As the gold-rush traffic increased, Vanderbilt became convinced that
more gold could be made in steamships than in the hills of California—even
without a subsidy. Vanderbilt chose not to challenge the subsidized lines directly
through Panama; instead he built a canal through Nicaragua. It took Vanderbilt a
year to deepen and clean out the San Juan River in Nicaragua, but it was worth it
because the Nicaraguan route was 500 miles shorter to California. So Vanderbilt
agreed to pay the Nicaraguan government $10,000 a year for canal privileges.
He then slashed the California fare to $400 and promised all passengers that he
would beat the rival steamships to the gold fields. He even offered to carry the
mail free. After a year of rate-cutting the fare dropped to $150; yet Vanderbilt
and his competitors apparently were still making money.28

Such a development tells us a lot about the subsidy system. The California
lines originally got a half-million dollars a year from the government; then they
charged people $600 to get to California. Yet Vanderbilt, with no outside aid, ran
a profitable line to California by charging passengers only $150 and carrying the
mail free. He hoped that doing this would expose his subsidized opponents and
end their federal aid. But the California lines, like Collins, artfully pleaded to
Congress for a subsidy even larger (which they needed to beat Vanderbilt). And
they got $900,000 a year to compete with the more efficient Vanderbilt.29

In the next stage of the subsidy saga, Vanderbilt had his canal rights
revoked by the Nicaraguan government in 1854. Behind this movement was
William Walker, an American with a bizarre mission. Walker shipped a small
army into Nicaragua, overthrew the existing government, proclaimed himself the
president and revoked Vanderbilt’s canal rights. Since Vanderbilt’s canal
company was chartered in Nicaragua, the American government was technically
not obligated to help him. So the enraged Vanderbilt put his ships on the Panama
route, instead. There he competed head to head against the California mail
carriers. He then cut the fare to $100 ($30 for third class) and swore he would
beat the subsidized California lines and any new line in Nicaragua that Walker
might help establish.30

The operators of the California lines were typical political entrepreneurs:
they did not want to compete with a market entrepreneur like Vanderbilt. So they
bought him out instead by paying him most of their subsidy if he promised not to
run any ships to California. Vanderbilt demanded and received $672,000, or 75
percent, of the $900,000 annual subsidy. But more than this, he wanted his
Nicaragua canal back. So he dabbled in Central American politics and helped get
Walker overthrown. Unfortunately for Vanderbilt, his canal had been

permanently destroyed during Walker’s coup; but since he had the pay-off money
from the California lines, he ended up with a profit anyway.31

Congress was astonished when it learned what the California lines were
doing with their $900,000 subsidy. In 1858 Senator Robert A. Toombs of
Georgia said that he admired Vanderbilt: his “superior skills,” Toombs said, had
exposed the whole subsidy system. “You give $900,000 a year to carry the mails
to California; and Vanderbilt compels the contractors to give him $56,000 a
month to keep quiet. This is the effect of your subventions. . . . [Vanderbilt] is
the kingfish that is robbing these small plunderers that come about the Capitol.
He does not come here for that purpose.” Toombs’ conclusion: end the mail
subsidies.32

Many people, though, were more critical of Vanderbilt than of the
subsidies. They looked at Vanderbilt’s tactics, instead of his influence on the
market. One court later called Vanderbilt’s actions “immoral and in restraint of
trade.” The New York Times compared Vanderbilt to “those old German barons
who, from their eyries along the Rhine, swooped down upon the commerce of
the noble river, and wrung tribute from every passenger that floated by.”33 From
Vanderbilt’s standpoint, the California lines were the ones “in restraint of trade.”
Their subsidies gave them an unfair advantage over all competition, and they
used this advantage to charge monopoly rates to passengers. As for the
“swooping” metaphor, Vanderbilt “swooped down” and “wrung tribute” from the
subsidized lines, not from “every passenger.” Every passenger, in fact, paid
lower fares to California because Vanderbilt’ competition had slashed the fares
permanently.34 And, of course, if there had been no government subsidy, there
would have been no Vanderbilt payoff. Vanderbilt ran his California lines as a
personal investment and charged passengers less than one-fourth the fare that the
subsidized lines had been charging. Congress, however, had committed its
support for political entrepreneurs. And the annual $900,000 subsidy proved to
be so large that the California lines could give three-fourths of it to Vanderbilt
and still make money. Without Vanderbilt, this political entrepreneurship might
have gone on much longer.

This clash between market and political entrepreneurs changed the
competitive environment of American steamboating. Between 1848 and 1858,
the American government paid the two California lines and Edward Collins over
eleven million dollars to build ships and carry mail. Vanderbilt, by contrast,
engaged these men in head-to-head competition free of charge. Largely because
of Vanderbilt, Congress, in 1858, ended all mail subsidies. Afterward, Vanderbilt
and others carried the mail only for the postage; and the passenger rates after

1858 were still competitive: only $200 to California, far below the original
monopoly rate of $600. 35

Vanderbilt’s victory marked the end of political entrepreneurship in the
American steamship business. We didn’t end up with perfect free trade, but we
were closer to it than we ever had been. In this environment, Americans found
railroads to be more profitable investments than steamships. So, after the Civil
War, Vanderbilt and others sold their fleets and spent their money building
railroads. The percentage of American exports carried on American ships
dropped from sixty-seven to nine percent from 1860 to 1915, but that was no
problem. England’s comparative advantage in shipping lowered America’s cost
for freight, mail, and passenger service throughout these years. And since the
English were anxious to buy America’s grain, Vanderbilt took his steamship
profits and built his New York Central Railroad over one thousand miles out to
Chicago and other midwestern cities. When Vanderbilt shipped midwestern grain
to New York and had it boarded on English ships to be sold in Liverpool, both
countries were finally doing what they could do best. By Vanderbilt’s death in
1877, he had been a central figure in America’s industrial revolution, both in
steam and in rails. He also was worth almost $100 million, which made him the
richest man in America.36 This study of American steamboating focuses on the
market and the impact different entrepreneurs had on the market. If we look at
the issue this way, we can sort out two distinct groups: political and market
entrepreneurs. Robert Fulton, Edward Collins, and Samuel Cunard cannot be
lumped with Thomas Gibbons, Cornelius Vanderbilt, and William Inman. They
are two separate groups with different attitudes toward innovation, technology,
price-cutting, monopolies, and federal aid. 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. They said they had to be to survive against
subsidized opponents. Some of them were personally repugnant (Vanderbilt
disinherited his son and placed his own wife in an asylum; Gibbons tried to
horsewhip one of his rivals), but they advanced their industry and cut passenger
fares permanently. Since Vanderbilt ended up as the richest man in America,
perhaps the federal aid was a curse, not a blessing, even to those who received it.

CHAPTER TWO

James J. Hill and the
Transcontinental

Railroads

The story of the building of the transcontinental railroads makes for good
reading. It has a sound plot: four railroads get charters and subsidies to build
across the country. It has suspense: the Union Pacific and Central Pacific
frantically race across plains and over mountains to complete the railroad. It has
an all-star cast: U.S. Presidents, army generals, and political adventurers
confront Indians on the warpath, politicians on the take, and thousands of
Chinese and Irish workers. The story tells of the agony of defeat—Indian raids
and winter storms—and the thrill of victory with the meeting of the Union and
Central Pacific in Utah and the final hammering of the golden spike. Finally,
there is celebrating as the story ends: Western Union telegraphs the event across
the nation, and revelers sound the Liberty Bell from Independence Hall.

Over the years historians have told this story and described the drama, but
they have often criticized the main actors and their exploits. The grab for federal
subsidies seems to have led to greed and corruption; but—and this is the key
point—most historians say there was no way to get the happy ending to the
transcontinental story without federal aid. “Unless the government had been
willing to build the transcontinental lines itself,” John Garraty typically asserts,
“some system of subsidy was essential.”1

But there is a nagging problem in this argument. While some of this rush
for subsidies was still going on, James J. Hill was building a transcontinental
from St. Paul to Seattle with no federal aid whatsoever. Also, Hill’s road was the
best built, the least corrupt, the most popular, and the only transcontinental never
to go bankrupt. It took longer to build than the others, but Hill used this time to
get the shortest route on the best grade with the least curvature. In doing so, he
attracted settlement and trade by cutting costs for passengers and freight. Could

it be that, in the long run, the subsidies may have corrupted railroad development
and hindered economic growth? The transcontinental story is worth a more
careful look. It may have a different ending if we move Hill from a cameo role to
that of a leading actor.

The dream of a transcontinental had excited promoters and patriots ever
since the Mexican War and the acquisition of California. Congress spent
$150,000 during the 1850s surveying three possible routes from the Mississippi
River to the west coast. In 1862, with the Southern Democrats out of the union,
Congress hastily passed the Pacific Railroad Act. This act led to the creating of
the Union Pacific, which would lay rails west from Omaha, and the Central
Pacific, which would start in Sacramento and build east. Since congressmen
wanted the road built quickly, they did two key things. First, they gave each line
twenty alternate sections of land for each mile of track completed. Second, they
gave loans: $16,000 for each mile of track of flat prairie land, $32,000 per mile
for hilly terrain, and $48,000 per mile in the mountains.2

The UP and CP, then, would compete for government largess. The line that
built the most miles would get the most cash and land. The land, of course,
would be sold; and this way the railroad would be financed. In this arrangement,
the incentive was for speed, not efficiency. The two lines spent little time
choosing routes; they just laid track and cashed in.

The subsidies shaped the UP builders’ strategy in the following ways. They
moved west from Omaha in 1865 along the Platte River. Since they were being
paid by the mile, they sometimes built winding, circuitous roads to collect for
more mileage. For construction they used cheap and light wrought iron rails,
soon to be outmoded by Bessemer rails. And Thomas Durant, vice-president and
general manager, stressed speed, not workmanship. “You are doing too much in
masonry this year,” Durant told a staff member; “substitute tressel [sic] and
wooden culverts for masonry wherever you can for the present.” Also, since
trees were scarce on the plains, Durant and his chief engineer, Grenville Dodge,
were hard pressed to make railroad ties, 2300 of which were needed to finish
each mile of track. Sometimes they shipped in wood; other times they used the
fragile cottonwood found in the Platte River Valley; often, though, they artfully
solved their problem by passing it on to others. The UP simply paid top wages to
tie-cutters and daily bonuses for ties received. Hordes of tie-cutters, therefore,
invaded Nebraska, cut trees wherever they were found, and delivered freshly cut
ties right up to the UP line. The UP leaders conveniently argued that, since most
of Nebraska was unsurveyed, farmers in the way were therefore squatters and
held no right to any trees on this “public land.” Some farmers used rifles to
defend their land; and, in the wake of violence, even Durant discovered “that it

was not good policy to take all the timber.”3
The rush for subsidies caused other building problems, too. Nebraska

winters were long and hard; but, since Dodge was in a hurry, he laid track on the
ice and snow anyway. Naturally the line had to be rebuilt in the spring. What was
worse, unanticipated spring flooding along the Loup fork of the Platte River
washed out rails, bridges, and telephone poles, doing at least $50,000 damage
the first year. No wonder some observers estimated the actual building cost at
almost three times what it should have been.4

By pushing rail lines through unsettled land, the transcontinentals invited
Indian attacks, which caused the loss of hundreds of lives and further ran up the
cost of building. The Cheyenne and Sioux harassed the road throughout
Nebraska and Wyoming: they stole horses, damaged track, and scalped workmen
along the way. The government paid the costs of sending extra troops along the
line to help protect it. But when they left, the graders, tie-setters, tracklayers, and
bolters often had to work in teams with half of them standing guard and the other
half working. In some cases, such as the Plum Creek massacre in Nebraska, the
UP attorney admitted his line was negligent: it had sent workingmen into areas
known to be frequented by hostile Indians.5

As the UP and CP entered Utah in 1869, the competition became fiercer
and more costly. Both sides graded lines that paralleled each other and both
claimed subsidies for this mileage. As they approached each other the workers
on the UP, mostly Irish, assaulted those on the CP, mostly Chinese. In a series of
attacks and counterattacks, with boulders and gunpowder, many lives were lost
and much track was destroyed. Both sides involved Presidents Johnson and
Grant in the feuding. With the threat of a federal investigation looming, the two
lines finally compromised on Promontory Point, Utah, as their meeting place.
There they joined tracks on May 10, with hoopla, speeches, and the veneer of
unity. After the celebration, however, both of the shoddily constructed lines had
to be rebuilt and sometimes relocated, a task that the UP didn’t finish until five
years later. As Dodge said one week before the historic meeting, “I never saw so
much needless waste in building railroads. Our own construction department has
been inefficient.”6

After the construction was completed, many were astonished at the costs
of construction. The UP and CP, even with 44,000,000 acres of free land and
over $61,000,000 in cash loans, were almost bankrupt. Two other circumstances
helped to keep costs high. First, the costs of building a railroad, or anything else
for that matter, were abnormally high after the Civil War. Capital and labor were
scarce; also, even without the harsh winters and the Indians, it was costly to feed

thousands of workmen who were sometimes hundreds of miles from a nearby
town. Second, the officers of the Union and Central Pacific created their own
supply companies and bought materials for their roads from these companies.
The UP, for example, needed coal, so six of its officers created the Wyoming
Coal and Mining Company. They mined coal for $2.00 per ton (later reduced to
$1.10) and sold it to the UP for as high as $6.00 a ton. Even more significant, the
Credit Mobilier, which was also run by UP officials, supplied iron and other
materials to the UP at exorbitant prices. What they didn’t make running the
railroad, they made selling to the railroad.7

Many people then and now have pointed accusing fingers at the UP with
its Credit Mobilier and its wasteful building. But this misdirects the problem. If
we look at the subsidies instead, we can see that they dictated the building
strategy and dramatically shaped the outcome. Granted, the leaders of the UP
were greedy and showed poor judgment. But the presence of free land and cash
tempted them to rush west, then made them dependent on federal aid to survive.

No wonder the UP courted politicians so carefully. In this arrangement
they were more precious than freight or passengers. In 1866, Thomas Durant
wined and dined 150 “prominent citizens” (including Senators, an 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 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
that all would go back to Washington inclined to repay the UP for its hospitality.
If not, the UP could appeal to a man’s wallet as well as his stomach. In Congress
and in state legislatures, free railroad passes were distributed like confetti. For a
more personal touch, the UP let General William T. Sherman buy a section of its
land near Omaha for $2.50 an acre when the going rate was $8.00. In case that
failed, Oakes Ames, president of the UP, handed out Credit Mobilier stock to
congressmen at a discount “where it would do the most good.” It was for this act,
not for selling the UP overpriced goods, that Congress censured Oakes Ames
and then investigated the UP line.8

The airing of the Credit Mobilier scandal—just four years after the
celebrating at Promontory Point—soured many voters on the UP. Others were
annoyed because the UP was so inefficient that it couldn’t pay back any of its
borrowed money. Just as the UP was birthed and nurtured on federal aid, though,
so it would have to mature on federal supervision and regulation.

In 1874, Congress passed the Thurman Law, which forced the UP to pay
25 percent of its net earnings each year into a sinking fund to retire its federal
debt. Because the line was so badly put together, it competed poorly and needed
the sinking fund money to stay afloat. Building branch lines to get rural traffic
would have helped the UP, but the government often wouldn’t give them
permission. President Sidney Dillon called his line “an apple tree without a
limb,” and concluded, “unless we have branches there will be no fruit.” Congress
further squashed any trace of ingenuity or independence by passing a law
creating a Bureau of Railroad Accounts to investigate the UP books regularly. Of
these federal restrictions, Charles Francis Adams, Jr., a later president,
complained: “We cannot lease; we cannot guarantee, and we cannot make new
loans on business principles, for we cannot mortgage or pledge; we cannot build
extensions, we cannot contract loans as other people contract them. All these
things are [prohibited] to us; yet all these things are habitually done by our
competitors.” The power to subsidize, Adams discovered, was the power to
destroy.

John M. Thurston, the UP’s solicitor general, saw this connection between
government aid and government control. The UP, he said, was “perhaps more at
the mercy of adverse legislation than any other corporation in the United States,
by reason of its Congressional charter and its indebtedness to the government
and the power of Congress over it.”9

When Jay Gould took control of the UP in 1874, his solution was to use
and create monopoly advantages to raise prices, fatten profits, and cancel debts.
For example, he paid the Pacific Mail Steamship Company not to compete with
the UP along the west coast. Then he raised rates 40 to 100 percent and, a few
weeks later, hiked them another 20 to 33 percent. This allowed him to pay off
some debts and even declare a rare stock dividend; but it soon brought more
consumer wrath, and this translated into more government regulation and,
eventually, helped lead to the Interstate Commerce Commission, which outlawed
rate discrimination.10

It is sad to read of the UP struggling for survival in the 1870s and 1880s,
only to collapse into bankruptcy in 1893. Yet if s hard to see how its history
could have taken any other direction, given the presence of government aid. 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.

The Central Pacific did better, but only because its circumstances were
different. Its leaders—Leland Stanford, Collis Huntington, Charles Crocker, and

Mark Hopkins—were united on narrow goals and worked together effectively to
achieve them. These men, the “Big Four,” focused mainly on one state,
California, and used their wealth and political pull to dominate (and sometimes
bribe) California legislators. Stanford, who was elected Governor and U.S.
Senator, controlled politics for the Big Four and prevented any competing
railroad from entering California. Profits from the resulting monopoly rates were
added to windfall gains from their Contract and Finance Company, which was
the counterpart of the Credit Mobilier. Unlike the UP leaders in the Credit
Mobilier scandal, the Big Four escaped jail because the records of the Contract
and Finance Company “accidentally” were destroyed. Without records, it was
left to Frank Morris to tell the story of the CP monopoly in his novel, The
Octopus. It was almost 1900 before privately funded railroads could muster the
financial strength and the political muscle to take on the entrenched CP (later
renamed the Southern Pacific) in California politics.11

In case Congress needed another lesson, the story of the Northern Pacific
again featured government subsidies. Congressmen chartered the Northern
Pacific in 1864 as a transcontinental running through the Northwest. They gave
it no loans, but granted it forty sections of land per mile, which was twice what
the UP received. Various owners floundered and even bankrupted the NP, until
Henry Villard took control in 1881. Villard had come to America at age eighteen
from Bavaria in 1853. Shortly after he arrived, he showed a flair for journalism;
he won recognition for his writing during the Civil War. In his writing and in his
speaking, Villard developed the ability to persuade others to follow him. He first
became interested in the Northwest in 1874; he was hired as an agent for
German bondholders in America and went to Oregon to analyze their
investments. He liked what he saw and began to have grandiose visions about a
transportation empire in the Northwest. He soon began buying NP stock and
took charge of the stagnant railroad in 1881. 12

Villard had many of the traits of his fellow transcontinental operators.
First, like Jay Gould, he manipulated stock; in fact, he bought his NP shares on
margin and used overcapitalized stock as collateral for his margin account.
Second, like the Big Four on the CP, Villard liked monopolies. He even bought
railroads and steamships along the Pacific coast, not for their value, but to
remove them as competitors. Finally, like the leaders of the UP, Villard eagerly
sought the 44,000,000 acres the government had promised him for building a
railroad.

Villard’s strategy, then, resembled that of the other builders. He had an
added plus, though, in his skills in promoting and coaxing funds from wealthy

investors. “I feel absolutely confident,” he wrote, “that we shall be able to work
results.. .that will astonish every participant.” Hundreds of German investors,
and others too, heeded the call for funds and sent Villard $8,000,000 to bring the
NP to the west coast. Businessmen everywhere were amazed at Villard’s
persuasive ways. “This is the greatest feat of strategy I ever performed,” Villard
proclaimed, “and I am constantly being congratulated …upon…the achievement.”
So with his friends’ $8,000,000, and with the government’s free land, Villard
pushed the NP westward and arrived in Seattle, Washington, in 1883. His
celebration, however, was short-lived because that same year the NP almost
declared bankruptcy and Villard was ousted.13

If we look at Villard’s actions, we can see why he failed. First, like the
other transcontinental builders, he rushed into the wilderness to collect his
subsidies. Villard knew that the absence of settlement meant the absence of
traffic, but his solution was to promote tourism as well as immigration. He
thought tourists would pay to enjoy the beauty of the Northwest, so he built
some of the line along a scenic route. This hiked Villard’s costs because he had
to increase the grade, the curvature, and the length of the railroad to
accommodate the Rocky Mountain view. Villard also created some expensive
health spas around the hot springs at Bozeman and in Broadwater County,
Montana. He also put glass domes around the hot springs and built plush hotels
near them to accommodate the throng of tourists he predicted would come.
Despite lavish advertising in the east, though, the tourists went elsewhere and
Villard went broke.14

The federal aid and the foreign investors had given Villard some room for
error. But he made other mistakes, too. He was so anxious to rush to the coast
that he built when construction costs were high. They were much lower three
years before and three years after he built. High costs meant high rates, and this
deterred freight and immigrants from traveling along the NP. Villard could have
cut some of these costs, but as Julius Grodinsky has observed of Villard, “What
was asked, he paid.” He didn’t bother to learn much about railroads; in fact,
during 1883 he seems to have been more interested in leveling six houses in
New York City to build a glamorous mansion, in which to entertain the city’s
elite. With the NP he thought he could promote immigration, tourism, scenic
routes, health spas, and use the free land and foreign cash to cover the costs.
When his bubble burst, the NP went bankrupt and the German investors were
ruined. But not so Villard—from his mansion in New York City, he raised more
money and took control of the NP again five years later. The smooth-talking
Villard, however, still could not overcome his earlier errors. The poorly

constructed Northern Pacific was so inefficient that even the Villard charm could
not make it turn a profit. In 1893, the NP went bankrupt again and the Villard era
was over.15

Villard’s failure was pathetic but in some ways understandable. The
American Northwest was a tough section for building a railroad. It had a sparse
population and a rugged terrain. Oddly enough, though, one man did come along
and did build a transcontinental through the Northwest. In fact, he built it north
of the NP, almost touching the Canadian border. And he did it with no federal
aid. That man was James J. Hill, and his story tells us a lot about the larger
problem of federal aid to railroads.

Hill’s life could have made good copy for Horatio Alger. He was born in a
log cabin in Ontario, Canada, in 1838. His father died when the boy was young,
and he supported his mother by working in a grocery for $4.00 per month. He
lost use of his right eye in an accident, so his opportunities seemed limited. But
Hill was a risk-taker and a doer. At age seventeen he aimed for adventure in the
Orient, but settled for a steamer to St. Paul. There he clerked for a shipping
company and learned the transportation business. He was good at it and became
intrigued with the future of the Northwest.16

The American Northwest was America’s last frontier. The states from
Minnesota to Washington made up one-sixth of the nation, but remained
undeveloped for years. The climate was harsh and the terrain was imposing.
There were obvious possibilities with the trees, coal, and copper in the region;
but crossing it and connecting it with the rest of the nation was formidable. The
Rocky Mountains divided the area into distinct parts: to the east were Montana,
North Dakota, and Minnesota, which were dry, cold, flat, and, predictably,
empty. It was part of what pioneers called “The Great American Desert.” Once
the Rockies were crossed, the land in Idaho and Washington turned green with
forests and plentiful rain. But the road to the coast was broken by the almost
uncrossable canyons and jagged peaks of the Cascade Mountains. Since the
Northwest was fragmented in geography, remote in location, and harsh in
climate, most settlers stopped in the lower Great Plains or went on to California.

To most, the Northwest was, in the words of General William T. Sherman,
“as bad [a piece of land] as God ever made.” To others, like Villard, the
Northwest was a chance to grab some subsidies and create a railroad monopoly.
But to Hill the Northwest was an opportunity to develop America’s last frontier.
Where some saw deserts and mountains, Hill had a vision of farms and cities.
Villard might build a few swanky hotels and health spas, but Hill wanted to
settle the land and develop the resources. Villard preferred to approach the

Northwest from his mansion in New York City. Hill learned the Northwest
firsthand, working on the docks in St. Paul, piloting a steamboat on the Red
River, and travelling on snowshoes in North Dakota. Villard was attracted to the
Northern Pacific because of its monopoly potential; Hill wanted to build a
railroad to develop the region, and then to prosper with it.17

Hill’s years of maturing in St. Paul followed a logical course; from
investing in shipping, he switched to steamships, then to railroads. In 1878, he
and a group of Canadian friends bought the bankrupt St. Paul and Pacific
Railroad from a group of Dutch bondholders.We don’t know whether or not he
then had the vision to turn it into a privately financed transcontinental. The St.
Paul and Pacific story, like that of the other transcontinentals, had been one of
federal subsidies, stock manipulation, profit-taking on construction, and
bankruptcy. Its ten miles of track were sometimes unconnected and were made
of fifteen separate patterns of iron. Bridge material, ties, and equipment were
scattered along the right-of-way. When Hill and his friends bought this railroad
and announced their intention to complete it, critics dubbed it “Hill’s Folly.” Yet
he did complete it, ran it profitably, and soon decided to expand it into North
Dakota. It was not yet a transcontinental, but it was in the process of becoming
one.18

As Hill built his railroad across the Northwest, he followed a consistent
strategy. First, he always built slowly and developed the export of the area before
he moved farther west. In the Great Plains this export was wheat, and Hill
promoted dry-farming to increase wheat yields. He advocated diversifying crops
and imported 7,000 cattle from England and elsewhere, handing them over free
of charge to settlers near his line. Hill was a pump-primer. He knew that if
farmers prospered, their freight would give him steady returns every year. The
key was to get people to come to the Northwest. To attract immigrants, Hill
offered to bring them out to the Northwest for a mere $10.00 each if they would
farm near his railroad. “You are now our children,” Hill would tell immigrants,
“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.” To make sure they prospered, he even set up
his own experimental farms to test new seed, livestock, and equipment. He
promoted crop rotation, mixed farming, and the use of fertilizers. Finally, he
sponsored contests and awarded prizes to those who raised meaty livestock or
grew abundant wheat.19

Unlike Villard, Hill built his railroad for durability and efficiency, not for
scenery. “What we want,” Hill said, “is the best possible line, shortest distance,
lowest grades and least curvature that we can build. We do not care enough for

Rocky Mountain scenery to spend a large sum of money developing it.” That
meant that Hill personally supervised the surveying and the construction. “I find
that it pays to be where the money is being spent,” noted Hill, but he didn’t
skimp on quality materials. He believed that building a functional and durable
product saved money in the long run. For example, he usually imported high
quality Bessemer rails, even though they cost more than those made in America.
He was thinking about the future, and quality building cut costs in the long run.
When Hill constructed the solid granite Stone Arch Bridge—2100 feet long, 28
feet wide, and 82 feet high—across the Mississippi River it became the
Minneapolis landmark for decades.20

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 Marias 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, if it did, where it was. Hill wanted the best gradient so much that he hired a
man to spend months searching western Montana for this legendary pass. He did
in fact find it, and the ecstatic Hill shortened his route almost one hundred
miles.21

As Hill pushed westward, slowly but surely, the Northern Pacific was there
to challenge him. Villard had had first choice of routes, lavish financing from
Germany, and 44,000,000 acres of free federal land. Yet it was Hill who was
producing the superior product at a competitive cost. His investments in quality
rails, low gradients, and short routes saved him costs in repairs and fuel every
trip across the Northwest. Hill, for example, was able to outrun the Northern
Pacific from coast to coast at least partly because his Great Northern line was
115 miles shorter than Villard’s NP.

More than this, though, Hill bested Villard in the day-to-day matters of
running a railroad. For example, Villard got his coal from Indiana, but Hill got
his from Iowa and saved $2.00 per ton. In the volatile leasing game, Hill
outmaneuvered Villard and got a lower cost to the Chicago market. As Hill said,
“A railroad is successful in the proportion that its affairs are vigilantly looked
after.”22

Villard may have realized he was outclassed, so he countered with
obstructionism, not improved efficiency. One of Hill’s partners alerted him to
Villard’s “egotistic stamp” and concluded that “Villard’s vanity will be apt to lead
him to reject any treaty of peace that does not seem to gratify his vain desire to
obtain a triumph.” Before Hill could move out of Minnesota, for example, the
NP refused him permission to cross its line at Moorhead, along the Minnesota-

North Dakota border. Local citizens apparently wanted Hill’s line; and he wrote,
“I had a letter from a leading Moorhead merchant today offering 500 good
citizen tracklayers to help us at the crossing.” Each move west that Hill made
threatened Villard’s monopoly. Ironically, Hill sometimes had to use the NP to
deliver rails; when he did Villard sometimes raised rates so high that Hill used
the Canadian Pacific when he could.23

Villard found that manipulating politics was the best way to thwart Hill.
For example, the gaining of right-of-way through Indian reservations was a
thorny political issue. Legally, no railroad had the right to pass through Indian
land. The NP, as a federally funded transcontinental, had a special dispensation.
Hill, however, didn’t, so the NP and UP tried to block Congress from granting
Hill right-of-way through four Indian reservations in North Dakota and
Montana. Hill gladly offered to pay the willing Indians fair market value for
their land, but Congress stalled, and Hill said, “All our contracts [are] in
abeyance until [this] question can be settled.” Hill had to fight the NP and UP
several times on this issue before getting Congress to grant him his right-of-way.
“It really seems hard,” Hill later wrote, “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.”24

In the depression year of 1893, all the transcontinental owners but Hill
were lobbying in Congress for more government loans. To one of them. Hill
wrote, “The government should not furnish capital to these companies, in
addition to their enormous land subsidies, to enable them to conduct their
business in competition with enterprises that have received no aid from the
public treasury.” He proudly concluded, “Our own line in the North. . .was built
without any government aid, even the right of way, through hundreds of miles of
public lands, being paid for in cash.”25

Shortly after Hill wrote this, the Union Pacific, the Northern Pacific, and
the Santa Fe all went bankrupt and had to be reorganized. This didn’t surprise
Hill; he gloated, “You will recall how often it has been said that when the Nor
Pac, Union Pac and other competitors failed, our company would not be able to
stand. . . . Now we have them all in bankruptcy. . .while we have gone along and
met their competition.” In fact, the efficient Hill cut his costs 13 percent from
1894 to 1895.

Hill criticized the grab for subsidies, but here is the ironic twist: those who
got federal aid ended up being hung by the strings that were attached to it. In
other words, there is some cause and effect between Hill’s having no subsidy and

prospering and the other transcontinentals’ getting aid and going bankrupt. First,
the subsidies, whether in loans or land, were always given on the basis of each
mile completed. In this arrangement, as we have seen, the incentive was not to
build a quality line, as Hill did, but to build quickly to get the aid. This resulted
not only in poorly built lines but in poorly surveyed lines as well. Steep
gradients meant increased fuel costs; poor building meant costly repairs and
accidents along the line. Hill had no subsidy, so he built slowly and
methodically. “During the past two years,” Hill said in 1884, “we have spent a
great deal of money for steel rails, ballasting track, transfer yards, terminal
facilities, new equipment, new shops, and in fact we have put the road in better
condition than any railway similarly situated that I know of. …” Hill, then, had
lower fixed costs than did his subsidized competitors.26

By building the Great Northern without government interference, Hill
enjoyed other advantages as well. He could build his line as he saw fit. Until
Carnegie’s triumph in the 1890s, American rails were inferior to some foreign
rails, so Hill bought English and German rails for the Great Northern. The
subsidized transcontinentals were required in their charters to buy American-
made steel, so they were stuck with the lesser product. Their charters also
required them to carry government mail at a discount, and this cut into their
earnings. Finally, without Congressional approval, the subsidized railroads could
not build spur lines off the main line. Hill’s Great Northern, in contrast, looked
like an octopus, and he credited spur lines as critical to his success.

In debating the Pacific Railway Bill in the 1860s, some Congressmen
argued that even if the federally funded transcontinentals proved to be
inefficient, they should still be aided because they would increase the social rate
of return to the United States. Some historians and economists, led by Robert
Fogel, have picked up this argument, and it goes like this: the UP made little
profit and was poorly built, but it increased the value of the land along the road
and promoted farms and cities in areas that could not have supported them
without cheap transportation. Fogel claims that the value of land along a forty-
mile strip on each side of the UP was worth $4.3 million in 1860 and $158.5
million by 1880. Without the UP, this land would have remained unsettled and
the U. S. would not have had the national benefits of productive farms, new
industries, and growing cities in the West. To the nation, then, the high social
rate of return justified the building of the UP, CP, NP, and Santa Fe railroads.27

What this argument overlooks is the negative social, economic, and
political return to the United States that came with using federal subsidies to
build railroads. The first thing to recognize is that the gain in social return that

Fogel describes is temporary. If the government had not subsidized a
transcontinental, then private investors like Hill would have built them sooner
and would have built them better. Subsidy promoters tried to deny this argument
at the time, but Hill’s achievement shows that it would have been done, only at a
slower (but more efficient) pace. We can dismiss the widely promoted view
expressed in Congress by Rep. James H. Campbell: “This [Union Pacific] road
never could be constructed on terms applicable to ordinary roads. … It is to be
constructed through almost impassable mountains, deep ravines, canyons,
gorges, and over arid and sandy plains. The Government must come forward
with a liberal hand, or the enterprise must be abandoned forever.” The increase
in social rate of return, then, would only be present until some private investor
did what the government did first.28

Here is a key point: the gain in social return was only temporary, but the
loss of shipping with an inefficient railroad was permanent. The UP and NP
were, as we have seen, inefficient in gradients, curvature, length, quality of
construction, repair costs, and use of fuel. This meant permanently high fixed
costs for all passengers and freight using the subsidized transcontinentals.

The subsidizing of railroads cost the nation in other ways, too. First, the
land that was given to the railroads could not be sold for revenue. Second, the
giving of subsidies to one established a precedent and resulted in the giving of
subsidies to many. When the government gave twenty million acres to the UP,
the NP and others clamored for aid; the result was the giving of 131 million
acres of land to various railroads. Third, the granting of all this land, and money
too, made for shady business ethics and political corruption. The Credit Mobilier
is an example of poor business ethics, and the CP’s tight control over California
politics is a sample of political corruption. Part of this corruption is reflected in
the automatic monopolies that subsidized transcontinentals had. When Jay Gould
doubled rates along parts of the UP, not much could be done. It took time to
build privately financed lines; and, when they were done, they had to compete
with a railroad that had, thanks to the government, millions of acres of free land
and large cash reserves.

A final hidden cost of subsidizing railroads is seen in the mass of
lawmaking, much of it harmful, all of it time-consuming, that state legislatures,
Congress, and the Supreme Court did after watching the UP, CP, and NP in
action. The publicizing of shoddy construction, the Credit Mobilier scandal, rate
manipulating, and bankrupt health spas angered consumers; and angry
consumers pestered their Congressmen to regulate the railroads. Much of the
regulating, however, had unintended consequences and made the situation worse.
For example, when the corruption in the building of the UP became known, there

was public outrage followed by a congressional investigation. In the
investigating, many were irritated that the UP had made no payment on its
government loans. Congress, as we have seen, passed the Thurman Law, which
forced the UP to pay 25 percent of its annual earnings toward retiring its $28
million debt to the government. The problem here is that the shoddy construction
of the UP made for high fixed costs, and the lack of spur lines limited its chances
for profits. This meant that the UP had to raise rates for passengers and freight to
pay back its loans. The rate hikes, though, caused even more public outcry:
many noticed, for example, that the UP and NP were charging more than the GN
did; and this helped lead to demands for rate regulation. Congress obliged and,
in 1887, created the Interstate Commerce Commission to investigate and abolish
rate discrimination. This created two new problems: first, it was now illegal to
give discounts. Hill argued that rate cutting had led to lower rates over the years
and that this allowed the United States to capture a larger share of overseas trade.
Hill insisted that the ICC law, if enforced (which it eventually was), would hurt
railroads in domestic and overseas trade. Second, the ICC law eventually cost
the taxpayers millions of dollars every year; it created a need for thousands of
federally funded bureaucrats to listen to shippers all over the nation and to snoop
into the detailed records of almost every railroad in the country.29

The issue of foreign trade is important and was hotly disputed during
Congress’ debates on the transcontinentals. Advocates of federal aid strongly
argued that subsidized railroads would capture foreign trade and increase
national wealth. “Commerce is power and empire,” said Senator William M.
Gwin of California. “Give us, as this [Union Pacific] Railroad would, the
permanent control of the commerce and exchanges of the world, and in the
progress of time and the advance of civilization, we would command the
institutions of the world.” Yet the UP and NP were so inefficient, they couldn’t
even capture or develop the trade of their own regions, least of all the world. If
Hill hadn’t come along and built the privately financed Great Northern, the
United States might have forever lost opportunities to capture Oriental
markets.30

Once he completed the GN, he studied the opportunities for trade in the
Orient and marveled at its potential. “If the people of a single province of China
should consume [instead of rice] an ounce a day of our flour,” Hill wistfully said,
“they would need 50,000,000 bushels of wheat per annum, or twice the Western
surplus.” The key, Hill believed, was “low freight rates”; and these he intended
to supply. In 1900, he plowed six million dollars into his Great Northern
Steamship Company and shuttled two steamships back and forth from Seattle to

Yokohama and Hong Kong. Selling wheat was only one of Hill’s ideas. He tried
cotton, too. Ever the pump-primer, Hill told a group of Japanese industrialists he
would send them cheap Southern cotton, and deliver it free, if they would use it
along with the short-staple variety they got from India. If they didn’t like it, they
could have a refund and keep the cotton. This technique worked, and Hill filled
many boxcars and steamships with Southern cotton destined for Japan. Hill’s
railroads and steamships also carried New England textiles to China. In 1896,
American exports to Japan were only $7.7 million; but nine years later, with Hill
in command, this figure jumped to $51.7 million.31

An even greater coup may have been Hill’s capturing of the Japanese rail
market. Around 1900, Japan began a railroad boom and England and Belgium
made bids to supply the rails, hi this case, the Japanese may have underestimated
Hill: it didn’t seem likely that he could be competitive if he had to buy rails in
Pittsburgh, ship them to the Great Northern, carry them by rail to Seattle, then by
steamship to Yokohama. Hill was so efficient, though, and so eager for trade in
Asia, that he underbid the English and the Belgians by $1.50 per ton and
captured the order for 15,000 tons of rails. Hill was spearheading American
dominance in the Orient.32

Hill worked diligently to market the exports of the Northwest. Wheat from
the plains, copper from Montana, and apples from Washington all got Hill’s
special attention. Without Hill’s low freight rates and aggressive marketing,
some of these Northwest products might never have been competitive to export.
Washington and Oregon, for example, were covered with Western pine and
Douglas fir trees. But it was Southern pine that had dominated much of the
American lumber market. Hill could provide the lowest freight rates, but he
needed someone to risk harvesting the Western lumber. He found Frederick
Weyerhauser, his next-door neighbor, and sold him 900,000 acres of Western
timberland at $6.00 an acre. Then Hill cut freight costs from ninety to forty cents
per hundred pounds, and the two of them captured some of the Midwestern
lumber market and prospered together.33

Hill became America’s greatest railroad builder, he believed, because he
followed a consistent philosophy of business. First, build the most efficient line
possible. Second, use this efficient line to promote the exports in your section—
in other words you must help others before you can be helped. Third, do not
overextend; expand only as profits allow. Hill would probably have agreed with
Thomas Edison that genius is one percent inspiration and 99 percent
perspiration. Few people were willing to exert the perspiration necessary to learn
the railroad business and apply these principles. Many, like Villard, Gould, and

Stanford, took the easy route and chased subsidies, hiked rates, and manipulated
stock; but this approach never built a winning railroad. “If the Northern Pacific
could be handled as we handle our property,” Hill said, “it could be made [a]
great property … but it has not been run as a railway for years, but as a device for
creating bonds to be sold.” Hill understood markets, prices, and human nature;
when he saw what his rivals were doing, he ceased to fear them.

The only thing that Hill did seem to fear was the potential for damage
when the federal government stepped in to direct the economy. He understood
why this happened—why people pressured Congress to involve itself in
economic matters. California, isolated on the Pacific coast, wanted the cheap
goods that a railroad would bring. So Senator Gwin lobbied in Congress for the
UP. American steel producers wanted to sell more steel, so they pushed Congress
to put a tariff on imported steel. Hill’s problem was that, when his rivals were
subsidized and when tariffs forced him to pay 50 percent more for English steel,
he had to be twice as good to survive. One way out, which Hill took, was to
support those politicians in the Northwest who would fight subsidies and high
tariffs, and who would urge Congress to give him the right-of-way through
Indian land.34

What Hill ultimately deplored more than tariffs and subsidies were the ICC
and the Sherman Antitrust Act. Congress passed these vague laws to protest rate
hikes and monopolies. They were passed to satisfy public clamor (which was
often directed at wrong-doing committed by Hill’s subsidized rivals). Because
they were vaguely written, they were harmless until Congress and the Supreme
Court began to give them specific meaning. And here came the irony: laws that
were passed to thwart monopolists, were applied to, thwart Hill.

The ICC, for example, was created in 1887 to ban rate discrimination. The
Hepburn Act, passed in 1906, made it illegal for railroads to charge different
rates to different customers. This law was partly aimed at rate manipulators like
Jay Gould. But it ended up striking Hill, who now could not offer rate discounts
on exports traveling on the Great Northern en route to the Orient. Hill had given
the Japanese and Chinese special rates on American cotton, wheat, and rails to
wean them to American exports. But the Hepburn Act, according to Hill,
immediately cut in half American trade to these countries. Hill testified
vigorously during the Senate hearings that preceded the Hepburn Act, but was
ignored. He was furious that he now had to publish his rates and give all shippers
anywhere the special discount he was giving the Asians to capture their business.
Since he couldn’t do this and survive, he eventually sold his ships and almost
completely abandoned the Asian trade.35

“Rates vary with conditions,” Hill said.

They vary from day to day, almost. I was much struck by some of the
questions [addressed to the previous witness during the Hepburn Act hearings]
as the difficulty in fixing what is a reasonable rate by law. You are dealing with
the questions that exist today. Can you apply the conditions that exist today to
tomorrow or next week or next month? It is absolutely impossible. …

The Hepburn Act, though, said rates had to be made public, applied
equally to all shippers, and could not be changed without thirty days notice.
American exports to Japan and China dropped 40 percent ($41 million) between
1905 and 1907, and we will never know how much trade, domestic and foreign,
was lost elsewhere.36

Another federal law that was aimed at others, but which struck Hill
instead, was the Sherman Antitrust Act. As written, the Sherman Act banned
“every combination. . .in restraint of trade.” This vaguely written law was an
immediate problem because every act of trade potentially restrains other trade.
This meant that the courts would have to decide what the law meant. The first
test of the Sherman Act, the E. C. Knight case (1895), liberated entrepreneurs to
freely buy and sell. The American Sugar Refining Company had bought the E.
C. Knight company and thereby held 98 percent of the American sugar market.
The Supreme Court upheld this acquisition because no one had tried to “put a
restraint upon trade or commerce.” No one stopped anyone else from producing
sugar and competing with American Sugar Refining. Therefore, the trade was
legal even though “the result of the transaction. . .was creation of a monopoly in
the manufacture of a necessary of life. . . .” In fact, other sugar producers did
enter the market and steadily whittled the market share of American Sugar
Refining from 98 to 25 percent by 1927.37 With the E. C. Knight case the law of
the land, Hill saw no problem when he created the Northern Securities Company
in 1901. After the Panic of 1893, Hill bought a controlling interest in the
bankrupt NP and sometimes used it to ship his own freight. In 1901, Hill added
the Chicago, Burlington, and Quincy to his holdings; this allowed him to tap
markets to the south in lumber, meat-packing, and cotton. That same year he
placed his stock in the GN, NP, and CB&Q in a holding company called the
Northern Securities Company. Hill pointed out that in doing this he was not
restraining trade; he was combining three smaller companies he already
controlled into one larger company. Actually, competition among the
transcontinentals was keener than ever. Edward H. Harriman had taken over the
bankrupt UP after the Panic of 1893 and, free of governmental restrictions, had

plowed $25 million into new track, new routes, new equipment, and spur lines.
He adopted Hill’s philosophy of building an efficient railroad and promoting the
exports of the region. Harriman even bought steamships and prepared to
challenge Hill in the Orient. When Harriman tried to buy into the NP, a stock
fight resulted, and financierj. P. Morgan suggested the creating of a holding
company, the Northern Securities, to prevent stock manipulation on Wall Street.
Hill would be president of the Northern Securities and therefore keep control of
his three railroads; Harriman would serve on the board of directors. Competition
was not stifled; in fact, rates fell on both the GN and the UP in the two years
after the Northern Securities was created.38

Hill was therefore disappointed when President Theodore Roosevelt urged
the Supreme Court to strike down the Northern Securities under the Sherman
Act. He called the Northern Securities a “very arrogant corporation” and Hill a
“trust magnate, who attempts to do what the law forbids.” But, of course, no one
knew what the Sherman Act did or did not forbid. To lead his defense, Hill hired
John G. Johnson, who was the “successful warrior” in the E. C. Knight case.
Johnson defended the Northern Securities in much the same way he had
defended the E. C. Knight Company. He argued that the Northern Securities did
not restrain trade or bar other railroads from entering the Northwest; he then
attacked the Sherman Act for being “so obscurely written that one cannot tell
when he is violating [it]. . . .” With the E. C. Knight case as a precedent, with
rates falling on Hill’s railroads, and with competition stiff between the GN and
the UP, Johnson argued his case with confidence.39

In 1904, however, in a landmark case, the Supreme Court decided five to
four against the Northern Securities. It had to be dissolved. Hill was especially
irritated at Justice John M. Harlan, who wrote the majority opinion. The
Northern Securities was, according to Harlan, “within the meaning of the
[Sherman] Act, a ‘trust’; but if it is not it is a combination in restraint of interstate
and international commerce; and that is enough to bring it under the
condemnation of the act.” Harlan continued with a devastating statement: “The
mere existence of such a combination…constitute^] a menace to, and a restraint
upon, that freedom of commerce which Congress intended to recognize and
protect, and which the public is entitled to have protected.”40

The Northern Securities decision, then, overturned the E. C. Knight case.
Now “the mere existence” of a large corporation was seen as a threat to trade and
therefore unlawful. Justice Oliver Wendell Holmes wrote a dissent which
credited this astonishing verdict to an unsophisticated, but widespread belief
among the public, in Congress, and in the courts that big corporations must

necessarily be bad ones. “Great cases,” Holmes concluded, “make bad law.”
Meanwhile Hill had to abolish the Northern Securities, as well as his trade with
the Orient.41

A look at the story of Hill and the railroads shows again the harmful, but
unintended consequences that followed federal tinkering with the economy. The
goals for federal intervention sounded so noble: subsidize a railroad to conquer
the West and then the world; strike down those corporations that “restrain trade.”
Yet these noble goals were soon lost in an eddy of tragic consequences. In the
case of the Sherman Act, Harlan’s interpretation was applied again and again.
Since “the mere existence of such a combination” as the Northern Securities was
bad, all large corporations now had to fear prosecution. Just how much this hurt
American trade, at home and abroad will never be known. Robert Sobel and
other business historians have argued that this fear of being too big made some
corporations stifle innovation and reduce their dominance in their industries in
order to protect inefficient competitors. General Motors and IBM are frequently
cited as examples of companies that dulled their competitive edge to help their
rivals survive.42

Hill was sad and predicted that the ICC and the Sherman Act would ruin
American railroads and threaten cheap trade throughout the nation. A 72-year-
old Hill would even write a book, Highways of Progress, to argue this point. But
his last days seem to have been happy. He had built the best railroad in America
and had used it to beat subsidized rivals time and again. He helped open the
Northwest to settlement and the Orient to American trade. He had made a
difference in the way the world worked. To some viewers, he was the real hero
in the drama of the American transcontinental railroads.

CHAPTER THREE

The Scrantons and America’s First
Iron Rails

Steamships and transcontinental railroads were obviously important to
America’s industrial revolution. Even more critical, however, was the iron and
steel industry itself. A successful iron industry could be the means of
manufacturing a variety of cheap products to sell at home and abroad. With iron,
for example, Americans could mass-produce rails and use them to cut
transportation costs, open markets out west, and speed new products to cities
throughout the nation. In the world of the 1800s, if a nation could produce cheap
iron and steel, it could shape its own destiny.

The problem for America was that Englishmen controlled the world’s iron
markets. They had developed the first blast furnaces, and they had also invented
the puddling techniques needed to purify molten iron. They likewise had a
generation of skilled iron-makers eager to compete on a world market. In short,
they had a large head start and, during the 1830s, used it to build all of America’s
iron rails. They also sent America iron-tipped plows, locks, nails, and all of the
cast-iron pipes used for the nation’s water system. By 1840, dozens of Americans
were frantically tinkering with different types of fuels, ores, and blast furnaces,
trying to produce American-made iron.1

In 1839, Nicholas Biddle, the former president of the Bank of the United
States, lamented, “With all the materials for supplying iron in our own lands, the
country has been obliged to pay enormous sums to Europeans for this necessary
article. . . . This dependence is horrible.” This “costly humiliation,” Biddle urged,
“ought to cease forever.” Rails were especially needed; and, six years later, the
American Railroad Journal complained: “The American iron-masters appear to
consider railroad iron as unworthy of their notice. . . . Not a bar of T-rail has yet
been rolled in the three great anthracite and iron districts of Pennsylvania.”2

During the 1840s, Pennsylvania’s Lackawanna Valley, in the northeast part
of the state, would be the battleground where American independence from

English iron would be fought and won. This masterpiece of entrepreneurship
was largely the work of George, Selden, and Joseph Scranton, who, after much
experimenting, became the first Americans to mass-produce rails.3 In doing so
they harnessed talent, capital, and technical expertise from within their families
and friends, investors in small towns in the Lackawanna Valley, and outsiders
from New York. Two things are striking: first, the Lackawanna Valley, with its
thinly scattered, low-quality ore deposits, was hardly a natural setting for
manufacturing; second, in the competition for urban growth, the winning city of
Scranton did not exist until the 1840s. Nearby Wilkes-Barre and Carbondale had
the advantages of age and wealth, until Scranton overcame them.4

The migration of the visionary Scrantons to northeast Pennsylvania began
in 1839, when William Henry, a trained geologist, scoured the area looking for
the right ingredients for iron-making—water power, anthracite coal, iron ore,
lime, and sulphur. He found these elements near Wilkes-Barre, the oldest,
largest, and wealthiest city in northeast Pennsylvania. Wilkes-Barre’s leaders,
though, were cautious: they preferred to ship coal safely down the Susquehanna
River, not to risk their fortunes on unproven iron. They rejected Henry’s
“attempts to raise a company in the Wyoming Valley [Wilkes-Barre] for an iron
concern.” So Henry went about twenty miles east into the wilderness of the
Lackawanna Valley, and looked over the land in this area. It had some water
power and, of course, lots of anthracite; he also found small quantities of iron
ore and lime, so he falsely assumed they existed there in abundance.5

Playing a hunch, Henry took an option to buy 500 acres of land at present-
day Scranton and built a blast furnace on it. At first he sought the necessary
$20,000 for the scheme from New York and England; but the high risk of his
daring experiment frightened away even the hardiest of speculators. Finding
greater faith from his family, Henry received support from his son-in-law, Selden
Scranton, and Scranton’s brother George, both of whom were operating the
nearby Oxford Iron Works in Oxford, New Jersey. Originally from Connecticut,
the wide-ranging Scrantons tapped their credit lines and picked up additional
capital from their first cousin, Joseph Scranton; his brother-in-law, Joseph C.
Platt; and friends, Sanford Grant, and John and James Blair, who were merchants
and bankers in Belvidere, New Jersey. These entrepreneurs, which we will call
the Scranton group, raised $20,000 in 1840 and spent the next two years building
the blast furnace and digging the ore and coal to make iron.6

Making iron, they quickly discovered, required more entrepreneurship than
they had originally expected. The local ores and limestone were limited and of
poor quality. They had chosen the wrong location, but it was too late to sell out

and switch so they searched eastern Pennsylvania and New Jersey for the right
combination of ores and limestone. As the Iron Manufacturers’s Guide later
understated: “The absence of anthracite iron deposits becomes a subject of
curious speculation as it has been one of great pecuniary interest and was a bitter
disappointment to the first manufacturers of iron with stone [anthracite] coal.”7

Only the local coal lived up to expectations, and this was available in other
areas with established cities closer to the lime and ore. When the Scrantons made
their iron, they brought their lime and ore on boats from Danville, Pennsylvania,
about thirty miles up the Susquehanna River right by the mansions on the River
Common in Wilkes-Barre and over land almost twenty miles to Scranton.8

The high costs of transportation and the unexpected purchases of ore and
lime almost ran the Scrantons into bankruptcy; then George Scranton came up
with a plan to convert the pig-iron into nails. Such a bold venture into
manufacturing would not be cheap. The need for a rolling mill and a nail factory
upped the ante to $86,000. Desperate for credit, George Scranton coaxed some
of this money from New Yorkers. Yet this jeopardized the family’s ownership.
So he placed his greatest reliance on other members of the Scranton group: long-
time friends John and James Blair invested money from their bank in New
Jersey, and Joseph Scranton sent funds from his mercantile business in Augusta,
Georgia. By 1843, George Scranton got his $86,000, kept control within the
family, and began making nails for markets throughout the east coast.9

The nail factory failed miserably. First, no rivers or rails helped market its
product. Dependent on land transportation, the Scrantons transferred the nails on
wagons east to Carbondale and west to the Susquehanna River and from there
shipped them to other markets. Second, no one wanted the Scrantons’ nails
because they were poor in quality. The low-grade ores in the Lackawanna Valley
provided only brittle and easily breakable nails. Faced with bankruptcy, the
Scrantons contemplated the conversion of the nail mill into a rolling mill for
railroad tracks. Experienced Englishmen still dominated the world production of
rails in the 1840s; no American firm had dared to challenge them. After
floundering in the production of nails, however, the Scrantons decided that a
lucrative rail contract might be the gamble that could restore their lost
investment.10

As luck would have it, in 1846, the nearby New York and Erie Railroad
had a contract with the state of New York to build a rail line 130 miles from Port
Jervis to Binghamton, New York. When Englishmen hesitated to supply the Erie
with the needed rails, the Scrantons had their chance. They traveled to New York
and boldly persuaded the board of directors of the New York and Erie to give

their newly formed company the two-year contract for producing 12,000 tons of
T-rails. They promised to supply rails cheaper and quicker than the British.
Impressed with the Scrantons and desperate for rails, the directors of the New
York and Erie advanced $90,000 to the eager Scrantons to construct a rolling
mill and to furnish the necessary track.11

The construction of the mill and the making of thousands of tons of rails
seemed impossible. The contract called for the Scrantons to supply the Erie with
rails in less than twenty months. The Scrantons would first have to learn how to
make the rails they promised to provide. Building the blast furnaces would come
next. Then they would have to import some ore and much limestone into the
Lackawanna Valley to make the rails. Finally, because they lacked a water route
to the Erie line, they would have to draft dozens of teams of horses to carry
finished rails from their rolling mills scores of miles through the wilderness and
up mountains to New York, right where the track was laid. It is no wonder the
New Yorkers wanted to back out at the last moment. Yet somehow, in less than a
year and a half, the Scrantons did it. On December 27, 1848, just four days
before the expiration of the Erie’s charter, the Scrantons fulfilled their contract
and completed the rail line.12

An interesting feature of the Scrantons’ achievement was that hey built
their rails during a time of low tariffs. Some businessmen have always argued
that their government should place high tariffs on imports to protect local
manufacturers against foreign competitors. Yet, in 1846, the year the Scrantons
began making rails, Congress passed the Walker Tariff, which lowered duties on
imported rails and other iron products from England. George Scranton actually
said he liked the lower tariff for two reasons. First, the Scranton price of $65 per
ton of rail was already fixed and was competitive with English prices. In any
case, Scranton estimated his firm would be earning $20 per ton profit, so the
tariff was not needed. Second, the low tariff meant that the Scrantons could buy
their raw materials— pig iron, rolled bars, and hammered bars—more cheaply.
This would, Scranton hoped, lay the foundation for his firm to be the strongest
on the continent for years to come.13

Many Americans were amazed that an iron works located in the middle of
a wilderness, with no connecting links to outside markets, could build and
deliver 130 miles of rails to a railroad in another state. The Scrantons did not
want to have to duplicate this feat, so they did two things to improve their
location: first, they started building a city around their iron works; second, they
began building a railroad to connect their city to outside markets. That way they
could ship rails anywhere in the country and also export the local anthracite,

which could be sold as a home-heating fuel.14
With the confidence of New York investors, the Scrantons proposed two

railroads: the Liggett’s Gap, and the Delaware and Cobb’s Gap. The Liggett’s
Gap line, running from Scranton fifty-six miles north to connect with the Erie at
Great Bend, would permit Scranton to supply coal to the farms in the Genessee
Valley in upstate New York; the Delaware and Cobb’s Gap route, running sixty-
four miles east to the Delaware River at Stroudsburg, would give the Scrantons a
potential outlet for coal to New York City. By backing two lines, the Scrantons
gave themselves two markets for Lackawanna Valley coal. The building of a
railroad, then, was a logical sequel to the Scrantons’ superb iron works. The
railroad itself became a market for Scranton iron, it provided an outlet for
Scranton coal, and it promoted trade for Scranton city.15

Building these two railroads was no cinch. Some of the terrain was
mountainous: even after using gunpowder to level the hills, the grade was still
steep (eight feet to the mile) in places. Also, George Scranton had to negotiate
some delicate right-of-way problems with farmers along the rail route who were
overvaluing their land. Of course, the Scrantons were using their own homemade
rails for the line, but this still ran into costs. For all of this, the Scrantons needed
more New York capital, but they had to be careful. They wanted to be
entrepreneurs, not pawns of the New Yorkers. The Scrantons had to make sure
they retained a guiding interest in their projects. This they did. The two railroads
were surveyed and built from 1850 to 1853; they both were consolidated into
one line, the Delaware, Lackawanna, and Western Railroad (hereafter
Lackawanna Railroad) with George Scranton as its first president. In 1853,
flushed with success, the Scrantons also incorporated their iron works as the
Lackawanna Iron and Coal Company (hereafter Lackawanna Company) with
$800,000 in stock; they elected Selden Scranton as president.16

The building of America’s premier iron works and railroad was an amazing
feat of collective entrepreneurship. The Scranton group became unified behind a
vision of mass-produced rails, the creating of a city, and the laying of rails from
its borders east and north to outside markets. As individuals, the members of the
Scranton group had few of the skills and little of the capital needed to fulfill this
vision; but collectively they did. They had to have outside cash, but their
confidence and unity of purpose impressed New York investors and convinced
them the Scrantons could do the job.17

Not everyone wished the Scrantons well. And this made their success story
even more remarkable. First, there was the generally negative reaction from
leaders in Wilkes-Barre, who thought the rise of a new city would threaten their

hegemony in northeast Pennsylvania. The Scrantons logically tried to secure
loans in Wilkes-Barre, the oldest and largest city in the area. But the
businessmen there rarely helped, and they often hurt. For example, in the 1850s
the Scrantons tried to get a charter for their railroad from the state legislature;
Wilkes-Barre’s able and influential politicians thwarted the Scrantons because
the new rail line threatened Wilkes-Barre’s trade dominance along the
Susquehanna River through the North Branch Canal. Referring to Wilkes-Barre
as “the old harlot of iniquity,” a concerned lawyer advised the Scrantons that
those associated with the North Branch Canal in Wilkes-Barre “all make
common cause against [the] Liggett’s Gap [Railroad].”18

Not only did politicians in Wilkes-Barre hamper iron production and delay
rail completion, they prevented the Scrantons’ emerging industrial city from
becoming a county seat. The new city of Scranton happened to be situated in the
eastern end of Luzerne County. So wily politicians in the county seat of Wilkes-
Barre used statewide influence to delay for decades the creation of a new county.
Even the prestige and influence of George Scranton in the Pennsylvania Senate
and U. S. Congress during the 1850s could not force the division of Luzerne
County. So while the Scrantons were trying to promote their new town as a
Mecca of industrial opportunity, the town’s administrative business was being
diverted to the county seat of Wilkes-Barre. Summarizing Wilkes-Barre’s general
“policy of obstruction,” Benjamin Throop observed that during all these early
struggles, Wilkes-Barre had the advantage. The Lackawanna Valley was poor,
and had its fortune still to make; Wilkes-Barre had inherited considerable wealth
from its former generations. The public-spirited men here were, most of them,
newcomers and unknown. Those of the opposition had prestige and influence.19

Possibly even more damaging than the opposition from Wilkes-Barre’s
politicians was the hostility from many local farmers near Scranton. These old
settlers liked the prospects of improved transportation to get their crops to
market, but many did not want to see the “machine” transform their “garden”
into an industrial community.20 One local observer described their fears
sarcastically as follows: There were then, as there are yet, and as there always
will be, a debilitated, but croaking class of persons who by some hidden process
manage to keep up a little animation in their useless bodies, who gathered in bar-
room corners, and who, with peculiar wisdom belonging to this class while
discussing weighty matters, gravely predicted that “the Scrantons must fail!”21

Even before the Scrantons arrived, several of these farmers had formed a
committee and denounced “blackleg drivellers, in the shape of incorporated

companies.”22
The local squabbles with the old settlers regularly kept the Scrantons from

fully attending to their iron works. Recognizing this problem early, the Scrantons
donated land and labor to help build the old settlers a church. Through a
company store, the industrialists enthusiastically traded goods and produce with
nearby farmers. Desperate for credit, though, the Scrantons were barely
surviving in the early 1840s and had to seek extensions on local loans. At one
point William Henry wrote, “We have not twenty-five cents in hand. . . . The
credit of the concern [is] impaired.” He added, “This suspense and uncertainty is
worse where our credit is concerned than almost any other mode of proceeding.”
George Scranton felt the same way. At one point he described himself as being
“worried most to death for fear we can’t meet all [credit obligations]. … I cannot
stand trouble & excitement as I could once. I don’t sleep good. My appetite is
poor & digestion bad. … If we can succeed in placing [the] Lacka[wanna iron
works] out of debt it would help me much. . . .” During some of the Scrantons’
darker moments, “every petty claim of indebtedness was urged and pressed
before the justices of the township with an earnestness really annoying.”23

Disputes with the old settlers over land and credit, then, persisted as the
Scrantons verged for years on bankruptcy without successfully producing nails
or rails. At one extreme, a vindictive local merchant threatened to “break. .
.down” the Scrantons’ company store by “selling goods very cheap”—if
necessary by “giving away his goods.” At the other end, legend has it that after
the Scrantons’ brittle nails were rejected by New York merchants, Selden
Scranton immediately sold quantities of the “practically worthless” product to
unsuspecting old settlers. Such feuding seems to have been commonplace; even
when the Scrantons finally received the rail contract from the Erie, many farmers
withheld the use of their mules and horses to prevent delivery of the rails; others
charged exorbitant prices.24 Under these conditions, one can hardly argue that
the location of Scranton was inevitably destined for urban glory. It was not.

When the iron works and the railroad succeeded, the Scrantons then
promoted the growth of their new city. Their correspondence shows that they
dearly viewed industrial and urban growth as symbiotic. Their investment in real
estate and housing multiplied in value after the success of their iron works and
the arrival of a railroad. The Scranton group originally bought a 500-acre tract
for $8,000 in 1840. As mere coal land that acreage was worth at least $400,000
by the mid-1850s. As improved land much of it was worth even more. The
Scrantons had laid out streets, sold lots, and built mansions for themselves and
company houses for their workers.25

Unlike the leaders in Wilkes-Barre and Carbondale, the Scranton group
created an open environment for their city and actively recruited investors to
come. To do this effectively, they went to the state legislature in 1866 and
secured wide city limits of almost twenty square miles, which at that time
included mostly farm and timberland. They incorporated this large space to
fulfill their vision of their city’s future, in which they saw many more industries,
homes, and parks. The space was needed to plan all this properly.26

Wilkes-Barre’s leaders, by contrast, wanted to limit immigration and
preserve their closed society. They intentionally settled for small city limits of
4.14 square miles and did not even incorporate this much land until five years
after the Scrantons did so. This made urban planning in Wilkes-Barre difficult,
and it also hindered the preventing of fires and the controlling of epidemics.27

Carbondale became an even more dreadful example of urban planning.
Most industrial cities in the nineteenth century were hardly paragons of
cleanliness and safety, but Carbondale was among the dingiest. Fires periodically
gutted whole sections of the city, destroying property, buildings, and lives. Mines
caved in from time to time; the most serious collapse buried sixty miners
(fourteen died) in forty acres of subterranean caverns. Floods were also a threat.
One flood, caused by a poorly planned reservoir, surged through the main street,
filling the mines, taking lives, and annihilating buildings and houses.

In light of these disorderly influences, it is startling to discover that, before
1851, Carbondale had no fire or police department. In that year, after an
unusually severe fire “laid waste to the greater portion of the city above the
public square,” Carbondale’s shortsighted leaders finally decided to get some
“means of protection against fire or outlaws.” The dedication of Carbondale’s
new civil servants seems to have been slim because another fire soon ravaged
the city, this time “entailing a considerable loss” to William Richmond’s coal-car
factory and George L. Dickson’s mercantile firm, among other damage. This new
city government apparently made no provision for sanitation; as one resident
complained in 1875, “Another inconvenience is that citizens have no convenient
place to dump their coal ashes, or empty. . .rubbish.” Such a perilous
environment prevented a stable business climate and may have helped push
Richmond, Dickson, and other entrepreneurs out of Carbondale and into
Scranton.28

All of this creates the impression that, once the iron works and the railroad
were established, and once the city of Scranton was incorporated, the Scranton
group had it made. But this was not the case; in fact, most of the Scranton group
did not die rich, and two died very poor. William Henry, the original leader of

the group, left the city in the 1840s after some bad investments. Henry had
energy and vision but little patience and endurance; he died embittered and
impoverished in 1878. Sanford Grant, the first owner of the company store,
wilted when faced with business competition and industrial risk. Selling his
stock, he left for safer business climes in Belvidere, New Jersey, where he lived,
without ulcers or wealth, until his death in the 1880s. Displaying greater
fortitude than Grant, Selden Scranton became the first president of the
Lackawanna Company; five years later, though, he and his brother Charles left to
operate a blast furnace in Oxford, New Jersey. Their iron-making talents
ultimately failed them; Selden declared bankruptcy in 1884 and died shortly
thereafter. George Scranton, the early leader and driving force behind coal and
railroad development, had more faith and perseverance than most of the others.
He amassed $200,000, built a fine mansion, and served as U.S. Congressman
from northeast Pennsylvania. George, however, still lost some of his fortune
during the Panic of 1857 and had to sell much of his stock in the Lackawanna
Railroad at reduced value. Plagued with health problems from overwork during
the rugged days of the 1840s, George died in 1861 at age forty-nine.29

Three other members of the Scranton group never abandoned their vision
of manufacturing rails and building a city; they achieved fabulous success and
wealth. On top was Joseph Scranton, who said at the start, “I have no fears of the
ultimate success [of the iron works],. . .1 have invested in it. Should remain till it
is doubled or lost as the case may be.” Twenty-seven years later, Scranton was
president of the flourishing Lackawanna Iron and Coal Company and was worth
$1,100,000, making him the wealthiest man in northeast Pennsylvania. His
brother-in-law and next-door neighbor, Joseph C. Platt, was superintendent of
the Lackawanna Company and was worth $220,000. Right behind Joseph
Scranton with $910,000 was his friend James Blair, who had backed the
Scrantons from nails to rails. Blair held lots of stock in both the iron works and
the railroad; he then expanded and started Scranton’s first trolley company.30

Some people point to such wealth, and the absence of it in other
households, and argue that the state should redistribute it, or at least tax it at high
rates. It hardly seems fair, they might say, that some people should have so little,
while three men—Joseph Scranton, Joseph Platt, and James Blair—should own
close to ten percent of all the wealth in the city (according to the data in the 1870
federal manuscript census). As socialist Harold Laski once said, “Less
government. . .means liberty only for those who control the sources of economic
power.” What we need, according to this view, is an active state to transfer
income, chop up inheritances, perhaps even to impose equality of condition.

To argue this way is to miss a key point: Scranton’s founders, as
entrepreneurs, created something out of nothing. They created their assets and
created opportunities for others when they successfully bore the risks of making
America’s first iron rails. Without them, almost everybody else in the region
would have been poorer. The amount of wealth in a region (or a country) is not
fixed; in 1870, Scranton, Platt, and Blair got the biggest piece of the economic
pie, but it was the biggest piece of a much larger pie—made so by what they
cooked up when they came to Pennsylvania thirty years earlier.

When the Scrantons came to the Lackawanna Valley, it was a poor farming
region with no close ties to outside markets. In 1850, according to the federal
manuscript census, no one in the Lackawanna Valley was worth more than
$10,000. In 1870, after the Scrantons had established their city and their iron
works, thirty-three families in Scranton alone were worth at least $100,000; and
one was already a millionaire. Thousands of other families were working their
way toward better lives. The Scrantons’ iron works and railroad were the means
to this end.31

Some people look at the results of splendid entrepreneurship and say that
someone else might have come along later and done the same thing. We can see
how improbable this is in the Scranton case. The wealthy leaders in the older,
more prosperous city of Wilkes-Barre, for example, shunned manufacturing for
years and often tried to thwart the Scranton’s plans. If the Scrantons had not
come along, much of the iron ore in central Pennsylvania and New Jersey would
probably have been exported to Philadelphia, Pittsburgh, or New York, where
more abundant capital would have eventually taken the risks of making
manufactured goods. Northeast Pennsylvania would have been left in the dark.32

To be sure, the anthracite in the Lackawanna Valley was already attracting
New York investors: but they came only to get coal, not to build cities and make
the region prosper. Without dedicated local entrepreneurs, the Lackawanna
Valley, like so many mining regions, would have enjoyed only fleeting and
limited prosperity. The entrepreneurs in New York would have bought the coal
land cheap, then supplied transportation to the region, collected their profits, and
left the exporting area full of deserted mines and ghost towns.33

Let’s look at the different opportunities the Scrantons, as entrepreneurs,
created intentionally and unintentionally for others. First, the people in northeast
Pennsylvania, especially those with capital to invest, now had new and better
opportunities available. Scranton, in fact, became a magnet for entrepreneurs in
nearby towns, except for Wilkes-Barre. Investors in the nearby county seats of
Montrose and Towanda came to Scranton and set up the city’s first two banks.

From nearby Honesdale came Scranton’s first large-scale flour miller. From
Carbondale came the presidents of both of that city’s banks, a locomotive
builder, a stove maker, a coal operator, and the mayor. Not all of these men won
fortunes, but several did, and their investments helped diversify Scranton’s
economy and made it one of the fastest growing cities in America in the late
1800s.34

Another group of winners were the many local farmers who held on to
their land and sold it later as coal land. All they had to do was watch others do
the work of establishing the region’s export. After this, they cashed in. The
Scrantons bore the risks of making rails from imported ore; then they risked
building a railroad to connect the Lackawanna Valley to New York City. All the
farmers had to do was hold on to their land and watch it rise in value—from $15
an acre in 1840 to $800 an acre in 1857. In just seventeen years, then, a 160-acre
farm increased in worth from $2,400 to $128,000. Some of these locals even
ended up richer than the wealthiest of the Scrantons. Benjamin Throop, for
example, was a local physician who watched the Scrantons build their iron
works; then he bought up much of the land in the area on the chance that they
would succeed. He later wrote a book describing his real estate exploits and
expressing his gratitude to the Scrantons. He even named his only son after
George Scranton. When Throop died in 1897, at age 86, he left an estate of
$10,000,000.35

Even immigrants could sometimes get rich in Scranton. The growth of
Scranton from farming hamlet in 1840 to 45,000 people in 1880 brought
thousands of immigrants to town. Many of them worked in the factories and
improved their lives; they saved a little money and bought their own homes.
Some of them had the talent and vision to rise to the top. In 1880, of Scranton’s
forty most prominent businessmen, measured by memberships on boards of
directors, nine of them were immigrants. Some of these rags to riches
immigrants were clearly among the most successful men in Scranton. Thomas
Dickson, for example, came to America from Scotland and began work as a
mule driver. Soon he was making engines, boilers, and locomotives for the
Scrantons; he ended up as president of the Delaware and Hudson Railroad, a
500-mile line that linked Scranton to markets all over the east. Another
immigrant, John Jermyn, came to Scranton in 1847 from England and began
working for the Scrantons for 75 cents a day. Soon he was managing coal mines
and was putting what little money he earned into coal land and real estate with a
knack that amazed everyone. The critical risk in his career came in 1862, when
he leased some abandoned mines northeast of Scranton. Defying the skeptics,

Jermyn bought new machines and fulfilled a contract for one million tons of
coal. He then tripled his contract and was on his way to becoming the largest
independent coal operator in the Lackawanna Valley. A local credit agent said
that Jermyn was “believed to be unaffected by the times, holding his own versus
all contingencies.” When he died in 1902, Jermyn left an estate of $7,000,000.36

Because the Scrantons did what they did, thousands of Americans had new
opportunities in life. If they could just capture the Scrantons’ vision, they had a
chance to succeed. One life that was made anew was that of Joseph J. Albright,
the uncle of Selden Scranton. Albright was in business near Nazareth,
Pennsylvania, and went bankrupt in 1850, when he was nearly forty years old.
He had to sell all his furniture at a sheriff’s sale and deal with creditors from two
states. He wrote Selden that “it is hard at my age to be thrown upon the world
pennyless [sic],” and hoped that Selden’s wife “wouldn’t be ashamed of her poor
friend.” He even seems to have contemplated suicide and wrote that “death
would have been a relief” to him.37

The Scranton group came to Albright’s rescue and gave him a job as coal
agent for their railroad. Soon Albright caught the Scrantons’ vision. He was
patient and invested wisely: he bought stock in the Scrantons’ iron and coal
company; he then joined them in building the city’s gas and water system. On his
own, he invested in a company to mill flour and in a firm to make locomotives.
By 1872, he was worth half a million dollars and was elected president of the
largest bank in the city. He had become a believer in Scranton and wanted to
help the city that had given him a chance; when he died, he deeded his home to
the city and gave $125,000 to build a major public library to help educate future
generations in Scranton.38

Not everyone joined the Scranton team. Albright did, but another relative,
Phillip Walter, also of Nazareth, resisted an elaborate courtship from the
Scrantons in 1852. He told them he was reluctant “to pull [up] stakes and move”
from “my long cherished home” because “I might fail.” After a visit to Scranton,
in which Walter sold hundreds of dollars worth of merchandise to an expanding
population, he confessed that “I was quite enchanted with your place and the
great, though undeserved, esteem in which I was held by many of the
inhabitants.” Walter also admitted, “I certainly could not find a place anywhere
where I would rather go than to Scranton.” He further acknowledged, “My sons.
. .would likely find openings for business in such a thriving place as Scranton
appears to be and will yet become.” Other men of means saw these advantages
and settled in Scranton. But Walter avoided getting “carried away by the
admiration of your thriving place” by his reluctance to uproot and his haunting

fear that “still I might fail.” Winnowing out the conservative and the weak at
heart, Scranton seems to have attracted a select set of venturesome leaders to
guide its industrial growth.39

In building their city, the Scrantons consciously promoted entrepreneur
ship. The securing of wide city limits was part of this effort. They believed their
city would grow, and they diligently planned its expansion. Along these lines,
the Scrantons and their allies established a board of trade in 1867 to promote the
industrial development of their city. They installed an innovative Welsh
immigrant as the board’s first president. The board actively recruited industry
and even secured a law granting all new corporations tax-free status for their
first ten years in Scranton.40

In this open environment, Scranton grew as a manufacturing center and
attracted many capitalists who were willing to take different types of risks. This
made for a combination of inventiveness and creative entrepreneurship. For
example, Henry Boies came to Scranton from New York in 1865 and founded
the successful Moosic Powder Company; then he perfected a gunpowder
cartridge that reduced the death and injury resulting from carelessness in mining
explosions. Boies seemed to court risky ventures and had failed twice before
coming to Scranton. Once he had made his fortune in powder, the credit lines
were open, and he went to work inventing a flexible steel wheel for locomotives.
He started the Boies Steel Wheel Company in 1888 to manufacture his patented
invention.41

Another innovation that succeeded in Scranton was Charles S.
Woolworth’s five-and-tencent store. Born in upstate New York, Woolworth, his
brother Frank, and partner, Fred M. Kirby, experimented in the late 1870s with
the opening of specialty stores featuring largely five-and-tencent merchandise.
Shoppers were often skeptical of the first stores opened in Harrisburg, Lancaster,
and York, Pennsylvania. In 1880, however, when Charles Woolworth set up a
five-and-tencent store in Scranton, the idea caught on. The sales in Scranton
were a modest $9,000 the first year, but the Woolworths and Kirby had laid the
foundation for an empire, and Charles had found himself a new home in
Scranton. A decade of brisk sales in Scranton encouraged Woolworth to start
branch stores in New York and Maine in the 1890s. Kirby, meanwhile, started a
profitable store in Wilkes-Barre. Soon Woolworths was selling nationally, and
became a major American corporation. In Scranton, Woolworth joined with
other local entrepreneurs in founding the International Textbook Company,
which employed thousands of people to sell textbooks throughout the nation.42

The introduction of electricity in the 1880s brought out the best in

Scranton’s entrepreneurs. They didn’t produce Thomas Edison; but they did have
Merle J. Wightman, who designed and built one of the first motors to run trolley
cars by electricity. Scranton also became one of the first cities in the nation to
have an electric trolley system. Sensing opportunity, Wightman started his own
company in Scranton to manufacture trolley engines on a large scale. Other
Scrantonians tried to adapt electricity to coal mining. In 1894, they founded the
Scranton Electric Construction Company, which perfected and manufactured
electrical apparatus (e. g., mechanical drills, locomotive hoists, and mining
pumps) for use throughout the anthracite coal fields.43

Scranton did not emerge inevitably as a center for manufacturing trolley
motors, locomotive wheels, or textbooks. Nor was there any particular reason
why Scranton should have become a major headquarters for directing a chain of
five-and-tencent stores. Other cities throughout America had good enough
location and transportation to have been sites for these industries. Even the
making and distributing of electrical mining equipment could have been done in
Wilkes-Barre or in anthracite towns other than Scranton. A key to Scranton’s
success seems to have been the presence of aggressive entrepreneurs, who had a
philosophy of openness and commitment to growth. As the spiral of growth in
industries, services, and population persisted, the city of Scranton, which was
founded on a hunch, officially became one of the forty largest cities in the
country in 1900.44

A lot can be learned from the story of the Scrantons. The first lesson is that
entrepreneurs are needed to create wealth; when they succeed, others then have
the chance to build on what they started. If we look at the later history of
Scranton, we can also learn a second lesson: that it is hard for those on top to
stay there in the generations that follow. An inheritance can be transferred; but
entrepreneurship, talent, and vision cannot be. The industrial city of Scranton
saw lots of movement down the ladder of social mobility, as well as up.

This can be seen if we look at what happened to the Scranton economic
elite of 1880—those men who made up the first generation of the city’s industrial
leadership. I collected data on the forty men in Scranton who, by 1880, held the
largest number of corporate directorships and major partnerships. These forty
men dominated all of Scranton’s major industries. Several were millionaires; and
all had access to credit and contracts, which seemingly should have insured the
success of their children in Scranton, which spiralled in population from 45,000
in 1880 to 137,000 in 1920.45

As founders and developers of the Scrantons’ vision, these forty
entrepreneurs had much to give their children. Blessed by the luck of the draw,

these fortunate offspring could choose almost any career, with the security that
only wealth can bring. Raised in Victorian mansions rife with servants, they
often had doting parents to give them private-school education, college if they
wanted, or specialized training in engineering or industry. If these children did
not prosper, they could fall back on hefty inheritances. Also, as they matured,
they could take advantage of Scranton’s thriving marketplace to make even more
money. By 1920, the sons of Scranton’s 1880 leaders had ample opportunity to
succeed their fathers as the pacesetters of Scranton’s business world.46

Yet they did not. Few went hungry, but most could not come close to
matching their father’s achievements. Only nine of the forty economic leaders in
1880 had even one son, son-in-law, or grandson who forty years later was an
officer of even one corporation in Scranton. In short, the fathers and sons
provide a stunning contrast.47

The fathers built the city of Scranton, but why the sons did so poorly is
complicated. Part of the reason for this startling breakdown lies in the general
problem of family continuity. Six families didn’t have any sons; seven others had
too many—which splintered the family wealth into small pieces. In a very few
cases, some sons left Scranton for business ventures elsewhere. Often the sons
chose not to go into business: they led lives of brief and precarious leisure.

The fragmentation of some of Scranton’s larger family fortunes seems
remarkable. For example, brothers Thomas and George Dickson became
president of a national railroad, the largest manufacturing company in northeast
Pennsylvania, an iron company in New York, the vice president of the largest
bank in Scranton, and directors on many large companies. Yet only one of
Thomas Dickson’s three sons went into business; and, under his leadership, the
Dickson Manufacturing Company went out of business. George Dickson’s only
child, Walter, became a mere salesman and held no corporate influence. The four
sons of multimillionaire James Blair were nonentities. Only one of Blair’s sons
appears to have been gainfully employed, and his job was that of assistant
cashier in his father’s bank.48

Even the Scrantons of Scranton were almost extinguished. George, Selden,
and Joseph Scranton were the founding fathers of American rail making, but
only one of their sons showed entrepreneurial skill. Selden was childless, and
went bankrupt in any case. George was worth $200,000 when he died; but his
sons, James and Arthur, became men of leisure, not entrepreneurs. Joseph’s son
William gave business a try, but his story was often sad. Joseph was president of
the Lackawanna Iron and Coal Company from 1858 until his death in 1872. But
during these years, the New Yorkers bought up so much stock that William was

not allowed to succeed his father as company president. Young William was
restless as a mere local manager, so he studied the new Bessemer process in
Europe and returned to start his own Scranton Steel Company in 1881. The city’s
low tax on new industries gave him an edge over the larger Lackawanna
Company, but the older company won the competition and absorbed his
enterprise in 1891. William did prove to be a very capable builder and operator
of the Scranton Gas and Water Company. He and his son, Worthington, ran this
company profitably and, in 1928, Worthington sold it for $25 million.49

Some of the sons of Scranton’s early industrialists literally squandered
fortunes. Benjamin Throop, who was described earlier, became a millionaire in
coal land and urban real estate. His surviving son had, at best, modest business
skills, and when he and his wife died prematurely in 1894, the eighty-three-year-
old Throop undertook the task of rearing his only grandchild, five-year-old
Benjamin, Jr. The elder Throop died shortly thereafter, but young “Benny”
inherited a ten-million-dollar fortune. Young Throop married into a prominent
local family and, having no financial worries, began raising German shepherd
dogs. He served in World War I, but by that time his wife had divorced him and
he seems to have lost any interest that he might have had in gainful employment
or in the city of Scranton. During the 1920s, like a character from an F. Scott
Fitzgerald novel, he spent most of his time in Paris indulging champagne tastes
in cars and women. He married a French movie star and traveled widely during
their marriage. Throop died in 1935, in his mid-forties, of undisclosed stomach
ailments after apparently dissipating his grandfather’s entire fortune.50

Throop was a rare but not unique example of dissolution. Given the
tradition of partible inheritance, many of the sons of economic leaders knew that
they would never have to work, and so they became men of leisure with no
business interests. For example, James Blair’s son Austin was “a gentleman of
leisure [with] [n]o[thing] to do except fish and hunt.” According to a credit
agent, “his fa[ther], James Blair, is a millionaire and supports him [and] lets him
have a fine residence rent free and supplies him with funds when required.”51

Without strong parental guidance, a slothful life was understandably
attractive to these scions of wealth. Owing to the genetic improbability that
Scranton’s 1880 elite would produce only children like themselves, with a knack
for business, the fragmenting of economic leadership should not surprise us.
Edmund B. Jermyn’s taste for horse racing—this son of the multimillionaire coal
operator apparently “never missed a day’s [horse] racing at Honesdale or at
Goshen, N. Y.”—becomes understandable. The son grew up under different
conditions with different options in life from those that were available to his

rags-to-riches father.52
The Throop and Blair families may provide clues to one possible

relationship between parental guidance and entrepreneurship. On one hand, all of
Benny Throop’s parents and grandparents died before he was eight years old, so
he had no family pressure to become a businessman and pass on the family
fortune. The four sons of James Blair, on the other hand, had a long-lived father,
who personally directed many of his own enterprises until his death at age
ninety. The elder Blair outlived two of his sons, and the other two had passed
middle age by the time they were independent of paternal control. By living so
long and holding on so tightly to his investments, Blair may have quenched the
spirit of entrepreneurship in his sons. The role of the parents, the lack of business
talent, the quest for leisure, and the problems of family continuity in general all
seem to have combined to fragment the Scranton economic elite of 1880.

Of course, not all of Scranton’s early industrialists had downwardly mobile
sons. Nine of the forty top capitalists in the Scranton of 1880 passed the torch of
leadership from father to son in 1920. hi any randomly selected group of forty
families, of course, some would produce sons or have sons-in-law with a flair for
business. It is improbable, however, that nine of forty randomly chosen families
would have corporate officers as sons. This merely shows that industrial leaders
are much more likely than other groups in the population to father corporate
officers. It does not show continuity of economic leadership because more than
three-fourths of the industrial families of 1880 in Scranton failed to continue a
line of corporate succession in the following generation.53

While most of the sons of entrepreneurs stumbled, a variety of new
immigrants in Scranton saw their opportunities and took them. By 1920, for
example, Andrew Casey, an Irish liquor dealer, had become a bank president and
a hotel magnate. Michael Bosak, a Slovak immigrant who started life as a
breaker boy in the 1880s, owned banks, a manufacturing company, and a real
estate firm in Scranton in 1920. Few had the talent and vision to build such
empires, but those who did picked up where the city’s founders had left off.54

Scranton was, in a sense, America’s first manufacturing city. It marked the
spot where America began its independence from British iron. During the next
generation, Scranton became a showcase of remarkable entrepreneurship and
industrial growth. In this relatively open environment, Scranton’s economic
order was fluid: upward mobility for the poor existed side by side with
downward mobility for the rich. Entrepreneurs were prize possessions for cities
and for the nation; but their vision, talent, and drive were hard to transfer from
generation to generation. Most of the families of Scranton’s early industrialists

died out as entrepreneurs; they didn’t inherit their fathers’ vision and turned over
the city’s economic leadership to newcomers.

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 either.

CHAPTER FOUR

Charles Schwab and The Steel
Industry

When asked for the secret of his success in the steel industry, Charles
Schwab always talked about making the most with what you have, using praise,
not criticism, giving liberal bonuses for work well done, and “appealing] to the
American spirit of conquest in my men, the spirit of doing things better than
anyone has ever done them before.” He liked to tell this story about how he
handled an unproductive steel mill: I had a mill manager who was finely
educated, thoroughly capable and master of every detail of the business. But he
seemed unable to inspire his men to do their best.

“How is it that a man as able as you,” I asked him one day, “cannot make
this mill turn out what it should?”

“I don’t know,” he replied; “I have coaxed the men; I have pushed them, I
have sworn at them. I have done everything in my power Yet they will not
produce.”

It was near the end of the day; in a few minutes the night force would
come on duty. I turned to a workman who was standing beside one of the red-
mouthed furnaces and asked him for a piece of chalk.

“How many heats has your shift made today?” I queried.
“Six,” he replied.
I chalked a big “6” on the floor, and then passed along without another

word. When the night shift came in they saw the “6” and asked about it.
“The big boss was in here today,” said the day men. “He asked us how

many heats we had made, and we told him six. He chalked it down.”
The next morning I passed through the same mill. I saw that the “6” had

been rubbed out and a big “7” written instead. The night shift had announced
itself. That night I went back. The “7” had been erased, and a “10” swaggered in
its place.The day force recognized no superiors. Thus a fine competition was
started, and it went on until this mill, formerly the poorest producer, was turning

out more than any other mill in the plant.1

Schwab showed the ability to find solutions to problems even as a lad
growing up in Loretto, Pennsylvania. According to one of his teachers, “Charlie
was a boy who never said, ‘I don’t know.’ He went on the principle of ‘pretend
that you know and if you don’t, find out mighty quick’.” Schwab knew early that
he would have to live by his wits; his parents and immigrant grandparents
weaved and traded wool products, jobs which put food on the table but not much
money in the bank. Young Charlie, therefore, started work early in life: in one
job he was a “singing cabby”; he drove passengers from nearby Cresson to
Loretto and entertained them with ballads along the way. One of his passengers,
impressed with the gregarious youth, gave him a travel book and Schwab later
said, “It opened my eyes to the glories of the outside world, and stimulated my
imagination tremendously.” Soon, Loretto, Pennsylvania, population 300, would
be too small to contain the ambitious Schwab. With his parents’ blessing> he left
home at age seventeen to clerk in a general store in Braddock, a suburb of
Pittsburgh.2

Braddock was a steel town, varied in its cultural and urban life. Working in
the store, young Charlie often pleased customers with his good looks, wit, and
charm; one man whom he impressed was William “Captain Bill” Jones, the mill
superintendent at Braddock for Carnegie Steel. Jones offered Schwab a place as
a stake driver for the engineering corps who designed plans for building
furnaces. Schwab accepted, proved himself capable, and soon became a
draftsman. Here, he worked overtime to master his craft; within six months he
became Jones’ righthand man at the mill. As Jones’ messenger boy, Schwab came
into contact with the mill owner, the Scottish immigrant Andrew Carnegie.
Carnegie took a special liking to Schwab, who wisely spent some of his off
hours playing Scottish ballads on Carnegie’s piano.3

Schwab worked hard to please Jones and Carnegie. Doing so allowed him
to advance in the Carnegie organization. Fortunately for Schwab, Carnegie did
not recruit his leaders on the basis of wealth or family standing. He used a merit
system; he wanted people who could make the best steel possible at the lowest
price. To succeed under Carnegie’s system, Schwab would have to master the
methods of steel production.

Carnegie stressed cutting costs: in fact his motto was “Watch the costs and
the profits will take care of themselves.” This meant hard work in innovating,
accounting, and managing. Purchases, for example, were made in bulk to
achieve economies of scale. Also, Carnegie strived for vertical integration, the
control of his steel business from the buying of raw materials to the marketing of

finished steel.4
At the heart of Carnegie’s system were bonuses and partnerships for those

who excelled. Strong incentives were given employees who could figure out
how to save on iron ore, coke, and limestone; or how to produce a harder,
cheaper steel; or how to capture new markets for steel. Carnegie explained that
success “flows from having interested exceptional men in our service; thus only
can we develop ability and hold it in our service.” In fact, Carnegie said, “Every
year should be marked by the promotion of one or more of our young men.”5

Captain Jones had risen to mill superintendent this way. Among other
things he had invented the Jones mixer, a device that cut costs in the transferring
of steel from the blast furnace to the Bessemer converter. For his inventions and
know-how, Carnegie paid him the highest salary in the business, $25,000—the
same salary as that of the President of the United States.6

Schwab rose through the ranks just as Jones did. He completed small tasks
and was given larger ones. At age twenty-three, he designed and built a bridge
over the Baltimore and Ohio Railroad tracks; he saved time and money doing the
job and received as a bonus ten $20 gold pieces from Carnegie himself. Other
assignments followed: he installed meters in the factories and reduced waste of
natural gas; he redesigned a rail-finishing department and saved ten cents per ton
of steel; he effectively helped in calming down workers during a violent strike in
the Homestead plant. When Captain Jones died in a blast furnace explosion in
1889, Schwab became the logical choice for superintendent at Braddock.7

Gregarious and competent, Schwab became Carnegie’s problem solver. For
example, the workers at Braddock were turning out “seconds,” or substandard
rails. Schwab’s solution: give $20 cash bonuses to those steelmakers producing
the fewest seconds. The quality of the rails shot up and the resulting increase in
profits more than paid the bonuses given. No wonder that Carnegie soon gave
Schwab a small partnership in Carnegie Steel, with the promise of more to come
if he could keep producing. Carnegie even wrote one of his senior partners,
Henry Clay Frick, that Schwab “gives every promise of being the man we have
long desired” to eventually run the business.8

Schwab idolized Carnegie and found him amazing to watch. Carnegie’s
efficiency and his thorough knowledge of the industry made him a terror among
fellow steel producers. He spied on them, used their annual reports against them,
and even wrote them to secure information on costs of production. Meanwhile,
Carnegie Steel was a closed corporation; he told outsiders nothing of his costs or
his future plans. Carnegie disdained “pools,” secret agreements among
competitors to divide up the market and keep prices high. Pools were for the

weak; Carnegie wanted to “scoop the market [and] run the mills full.”9
Not that Carnegie didn’t use friendships and other means to help him. In

bidding on a large Union Pacific contract for rails, he may have outmaneuvered
the veteran Scranton family. Joseph Scranton was a director on the Union Pacific
as well as president of the Lackawanna Iron and Coal Company. But Carnegie
had done a favor for Sidney Dillon, the president of the Union Pacific, and
Dillon agreed to give Carnegie the contract if he would match the lowest bid.10

In the case of the Scrantons, Carnegie showed no mercy. When Carnegie
went into the steel business in 1872, he was told that he could never compete
against the Lackawanna Company; Joseph Scranton was a founding father of
American rail-making; he had a generation of experience making rails. But that
year Joseph Scranton died, and his sons William and Walter would be the ones to
challenge Carnegie: first with the Lackawanna Company, then with their
Scranton Steel Company. Carnegie and the Scrantons joined the Bessemer Steel
Association in 1875, but their approaches were different: the Scrantons wanted a
pool, but Carnegie told them and others that unless he got the largest share he
would “withdraw from it and undersell you all in the market—and make good
money doing it.” The Scrantons and the others were bluffed by Carnegie and
gave him his way. Carnegie then studied the Scrantons and learned their
strengths and weaknesses. He discovered that they (and others) were discarding
the thin steel shavings, called “scale,” that fell on the floor when the steel passed
through the rollers. When he learned this, he regularly sent a man to Scranton to
cart away tons of the Scrantons’ scale, almost free of charge, and brought it to
Pittsburgh to use in making rails for Carnegie Steel.11

As Carnegie moved to the top of the American steel business, Schwab
watched, learned, and proved himself time and again. In 1897 the thirty-five year
old Schwab became president of Carnegie Steel and the two men ran the
company together. Business was never better. Schwab put in sixteen new
furnaces at the Homestead plant, and costs per ton of finished steel fell 34
percent in one year. To promote esprit de corps Schwab held Saturday meetings
with all of his superintendents to work out problems. Meanwhile, the results of
large-scale production took hold: the cost of making rails fell from $28 to $11.50
per ton from 1880 to 1900, but the profits from the larger volume of business
went from $2 million in 1888 to $4 million in 1894, to $40 million in 1900.
Some people wondered if Carnegie Steel might soon capture the steel trade of
the entire world.12

Such speculating was premature. The next year, at age sixty-five, Carnegie
retired and, with Schwab as his emissary, sold Carnegie Steel to J. P. Morgan for

$480 million. Morgan then combined Carnegie Steel with other companies to
create U. S. Steel, the first billion-dollar company in American history. The
choice for president of the company: Charles Schwab.13

Reporters and critics condemned “The Steel Trust,” as they called U. S.
Steel, for its size and its potential to monopolize. Who would be able to
compete, they asked, with such a large vertically integrated company? At his
disposal, Schwab would have 213 steel mills and transportation companies, 41
iron ore mines, and 57,000 acres of coal land—enough, critics charged, to dwarf
competitors and keep prices high.14

Schwab discovered, however, that he would not be able to use the
Carnegie system at U. S. Steel. In fact, he would not have authority to run the
company at all. Morgan and his friend Elbert Gary had organized U. S. Steel so
that an executive committee, headed by Gary, and the board of directors would
set the policies of the company; Schwab, as president, would carry them out.
Morgan and Gary were interested in business stability, not in innovating or in
cutting the price of steel. For example, when Schwab wanted to secure more ore
land, Gary said no. He also opposed price-cutting, aggressive marketing, giving
bonuses, and adopting new technology. Schwab later said, “Gary, who had no
real knowledge of the steel business, forever opposed me on some of the
methods and principles that I had seen worked out with Carnegie—methods that
had made the Carnegie Company the most successful in the world.”15

Schwab’s personal life, more than disputes over policy, seems to have led
to his downfall at U. S. Steel. He showed he had the values of a dissipater as well
as those of an entrepreneur. When Carnegie was in control, Schwab consciously
restrained his extravagant tastes; Carnegie deplored living beyond one’s income,
gambling, and adultery. But out from under Carnegie’s grip, Schwab engaged in
all three and almost ruined his marriage and his career. In New York City,
Schwab built a gargantuan mansion, which consumed one whole block of the
city and $7 million of his cash. He also gambled at Monte Carlo, which made
bad newspaper copy and cost him credibility. Finally, he had an affair with a
nurse, which resulted in a child. Though Schwab hid this from the press, he
could not do so from his wife, Rana. The strain from his adultery, combined with
the pressure of Monte Carlo, the expense of Riverside, and the barbs from Elbert
Gary wrecked Schwab’s health. He went to Europe to recover and, in 1904,
resigned as president of U. S. Steel. 16

Schwab, the man who said, “I cannot fail,” seemed to have failed. He was
depressed for months. Even Carnegie repudiated Schwab and this added to the
pain. During his troubles he had insomnia, he lost weight, his arms and legs were

regularly numb, and sometimes he fainted. His wife forgave him for his adultery
and this no doubt eased the strain; but she was still not happy because she
wanted a child of her own and never did have one. She didn’t covet the
extravagant life, so dear to her husband, and she spent many lonely days at
Riverside.17

Schwab was out at U. S. Steel, but he already had the makings for a
comeback. When he was president of U. S. Steel, Schwab had bought Bethlehem
Steel as a private investment. He was criticized for this, especially when he
merged Bethlehem Steel with some unsound companies into an unprofitable
shipbuilding trust. This merger eventually collapsed; and when Schwab stepped
down at U. S. Steel, he still had Bethlehem Steel as his own property. The
demotion from being president of a company worth over one billion dollars, to
being president of one worth less than nine million dollars, would have
embarrassed some men, but not Schwab. He would have full control in running
the company and would succeed or fail on his own abilities.18

Before Schwab took over Bethlehem Steel, its future had not looked
promising. It had been founded in 1857 and soon produced rails for the Lehigh
Valley Railroad. This was more than coincidence because entrepreneur Asa
Packer, who had built the Lehigh Valley Railroad, held a large interest in what
was then Bethlehem Iron. Packer, a Connecticut Yankee, had the vision and
ability to promote both of these investments and make them profitable. His rise
from carpenter to railroad tycoon had made him a legend in Pennsylvania; he
was worth $17 million by the late 1870s. When he died in 1879, his sons, sons-
in-law, and nephews took over his investments, but did not have the success that
Packer did. The Lehigh Valley Railroad floundered and went into receivership in
the Panic of 1893. Bethlehem Iron almost shared the same fate.19

Led by Philadelphians and the Packer group, Bethlehem Iron became very
conservative after Packer’s death. The younger leaders single-mindedly produced
rails, even though (1) Carnegie was doing it cheaper, and (2) they had the
expense of importing most of their iron ore from Cuba. They escaped a price
squeeze in 1885 when, reluctantly, they shifted from making rails to making
military ordnance, which commanded a higher price per ton than rails. Such an
imaginative strategy, as one might expect, did not originate within the Packer
group; in fact, they resisted it until declining profits on rails presented them with
no alternative.20

The wise, if belated, switch from rails to gun-forgings and armor plate led
to profits because Bethlehem Iron was the only bidder on its first government
contract for ordnance in 1887. Other contracts were forthcoming and Bethlehem

Iron “established a reputation for quality and reliability,” if not for
aggressiveness and efficiency. Regarding the last, its operations were so
inefficient that the company in 1898 hired Frederick W. Taylor, master of
scientific management, to suggest ways of improving worker productivity. Yet
the Packer group soon became hostile to Taylor’s cost-cutting ideas. Of one
suggestion to reduce the number of workers handling raw materials, Taylor
observed that the owners “did not wish me, as they said, to depopulate South
Bethlehem.” He further commented, “They owned all the houses in South
Bethlehem and the company stores, and when they saw we [Taylor and his
assistants] were cutting the labor force down to about one-fourth, they did not
want it.” They also rejected Taylor’s suggestions to standardize job functions and
give raises to key personnel.21

Surviving, then, on government contracts, Bethlehem ton stumbled into the
twentieth century—a profitable operation in spite of itself. In the midst of this
conservatism, Schwab came to Bethlehem in 1904 and boldly announced that he
would “make the Bethlehem plant the greatest armor plate and gun factory in the
world.” Taking the helm, Schwab “backed Bethlehem with every dollar I could
borrow.” This backing included buying new branch plants and closing
unprofitable ones, getting new contracts by selling aggressively, and
reorganizing the company as Bethlehem Steel. Planning for the future, Schwab
bought large tracts of land for the company east of South Bethlehem. He also
bought or leased more ore land and mechanized the company’s Cuban iron fields
to spur production there.22

Schwab’s entrepreneurship clashed with the Packer group’s cautiousness
right from the start. As one historian said, “Many of the veteran Bethlehem
executives preferred the old, pre-Taylor and pre-Schwab way of doing things.
They resented Schwab; he was an intruder.” Soon after arriving in South
Bethlehem, Schwab ousted the inbred Packer group from authority. In the new
president’s remarkable words, “I selected fifteen young men right out of the mill
and made them my partners.” Two of these “partners” were Eugene Grace, the
son of a sea captain, and Archibald Johnston, a local Moravian. They later
became presidents of Bethlehem Steel.23

After reorganization Schwab wanted to diversify his company and
challenge U. S. Steel. To do this, he began making rails and moving Bethlehem
Steel away from its dependence on government contracts. Schwab adopted open-
hearth technology because it produced better rails than the Bessemer system did.
As historian Robert Hessen notes: U. S. Steel, the nation’s largest rail producer,
did not follow Schwab’s lead; it would have had to replace its Bessemer facilities

with open hearth equipment. Being a late starter, Bethlehem enjoyed a dear
advantage: with no heavy investment in obsolete equipment to protect, it could
adopt the newest and most efficient technological processes.24

Schwab’s reorganization of the Cuban ore mines also improved
Bethlehem’s competitive position at the expense of U. S. Steel.

Cuban ore was richer in iron and lower in phosphorus than was the Mesabi
range ore used by U. S. Steel. It also had another advantage: it contained large
amounts of nickel, so that Bethlehem could produce nickel steel at no extra cost.
For a ton of iron Bethlehem’s cost was $4.31; U. S. Steel’s was $7.10.25

Now that Schwab was running an efficient diversified company he turned
his attention to cutting costs. He reasoned that workers would work harder if
they knew it would directly result in a raise. Therefore, he set up a bonus system
for productive laborers, foremen, and managers throughout the company. As
Schwab described it, “Do so much and you get so much; do more and you get
more— that is the essence of the system.” At U.S. Steel, by contrast, Gary tied
bonuses to the overall profitability of the company, not to individual
performance. Under that system, Schwab noted, a worker could toil hard and
creatively and receive no reward.26

Schwab wanted bursts of creative energy and he paid the highest salaries
in the industry to get them. When Eugene Grace proved himself, Schwab made
him president of the company, regularly paying him salary and bonuses of over
one million dollars per year. This was twice as much as Gary earned at U.S.
Steel. Gary could never understand Schwab’s philosophy of cutting costs. It
didn’t seem logical to pay bonuses in order to lower expenses and increase
profits. But Schwab showed that this worked, and Bethlehem Steel’s sales grew
from $10 million in 1904 to $230 million in 1916. During these same years, the
company’s stock increased in value from $20 to $600 per share.27

Schwab’s biggest move at Bethlehem was his challenge to U.S. Steel in the
making of structural steel. Here he focused on an innovation in making the steel
beams that went into bridges and skyscrapers. Schwab had been listening to
Edward Grey, who had an idea of making steel beams directly from an ingot as a
single section instead of riveting smaller beams together. Grey claimed that his
invention provided “the greatest possible strength with the least dead weight and
at the lowest cost.”28

The other steelmakers rejected Grey’s theory; but Schwab was eager to try
it even though it would cost $5 million to design the plant, build the mill, and
pay Grey’s royalties. The problem was that the experts were so skeptical that

Schwab had trouble raising money. In fact, he almost backed out but then
jumped back in with the statement: “If we are going bust, we will go bust big.”
He staked his own money, and that of his company, on the Grey beam, but still
he needed more. So Schwab buttonholed wealthy investors for large personal
loans and then, through remarkable salesmanship, persuaded his major suppliers,
the Lehigh Valley and the Reading Railroads, to give him credit on deliveries of
the new steel. Schwab then aggressively recruited big contracts for the
“Bethlehem beam”: the Chase National Bank and the Metropolitan Life
Insurance Company in New York were among them. The experiment worked.
This cheaper and more durable beam quickly became Schwab’s greatest
innovation and he captured a large share of the structural steel market from U. S.
Steel.29

Schwab’s actions had consequences for the American steel industry. From
1905 to 1920, Bethlehem Steel’s labor force doubled every five years. By
contrast, U. S. Steel often stagnated; one officer noted after Schwab left that
“works standing idle have deteriorated.. .the men are disheartened and a certain
amount of apathy exists.”By the 1920s, the chagrined leaders at U. S. Steel
secretly began making Bethlehem beams; as an official there observed, “The
tonnage lost on account of competition with Bethlehem… is … ever increasing
We are obliged to sell.. .at unusually low prices in order to compete.” Schwab
discovered their ploy, however, and forced U. S. Steel to pay him royalties for
making his Bethlehem beams.30

Schwab had transformed Bethlehem Steel. Even before World War I his
company had become the second largest steelmaker in America. The New York
Times praised Bethlehem Steel as “possibly the most efficient, profitable self-
contained steel plant in the country.” By 1920, it employed 20,000 people in the
Lehigh Valley and was among the largest enterprises in the world. In 1922, it
absorbed Lackawanna Steel, the company that launched America’s rail-making
industry seventy-five years earlier.31

During World War I, Schwab’s abilities were needed by the U. S.
government. In April, 1918, one year after America entered the war, victory was
uncertain. Delays in shipping cargo and troops from America to Europe
threatened the Allies with defeat. More ships were needed; but in the U.S.
shipyards few ships were forthcoming. Within the Wilson administration some
blamed the owners of the shipyards; others blamed the workers; still others
blamed radical unions. In the midst of this fingerpointing, Franklin K. Lane, the
Secretary of Commerce, posed a solution:

The President ought to send for Schwab and hand him a treasury warrant

for a billion dollars and set him to work building ships, with no government
inspectors or supervisors or accountants or auditors or other red tape to bother
him. Let the President just put it up to Schwab’s patriotism and put Schwab on
his honor. Nothing more is needed. Schwab will do the job.

That month Schwab became Director-General of the Emergency Fleet
Corporation for the U. S. government. In his investigation, he discovered cases
of laziness, incompetence, work slowdowns, and poor coordination of the ship
building. As usual, though, Schwab said, “The best place to succeed is where
you are with what you have.” He quickly rearranged incentives: he eliminated
the “cost plus” system whereby shipyards were paid whatever it cost them to
build ships plus a percentage of that as a profit. Instead, Schwab tied profits to
cost-cutting by paying a set price per ship. Cost overruns would be paid by the
shipbuilders who would have to be efficient to make a profit. As usual, bonuses
were part of the Schwab formula. He paid them, sometimes out of his own
pocket, to those shipbuilders who exceeded production.32

Schwab enjoyed being a showman, so he went to the shipyards himself: he
rallied the workers, praised the owners, and even drew applause in a speech to
the Industrial Workers of the World, a radical union. Never one to ignore
symbols for achievement, Schwab had Rear Admiral F. F. Fletcher head a group
to award flags and medals to plants and workers whose work had been
outstanding. By the fall of 1918, ships were being completed on time and even
ahead of schedule. President Wilson and the leaders of the Shipping Board were
astonished with the change and gave Schwab the credit. Carnegie, in the last
year of his life, called it “a record of accomplishment such as has never been
equaled.”33

Not all of Schwab’s dealings with the federal government were so
productive. The armor-plate business is an example of this. The making of
military equipment—armor plate for ships, gun forgings, ordnance, and shrapnel
—brought Schwab into regular contact with government purchasers. Throughout
his career, Schwab had problems with these government contracts. Even at
Carnegie Steel, Schwab had quarreled with government officials over allegedly
defective armor plate; the issue never was amicably settled.34

The problem began in the 1880s when various officials began urging the
United States to build a large Navy. At the time the American steel companies
were mostly making rails, so President Cleveland and others began urging
someone to diversify. Making military equipment was complicated and
expensive, however; only reluctantly did Bethlehem Iron and Carnegie Steel
shift into ordnance. Had the government not promised them Navy contracts they

would not have switched.35
Four things in the military supply business made for tension between the

federal government and the steel companies. First, the federal government was
the largest and sometimes the only buyer of military equipment; the
government’s notions of quality sometimes differed from that of the producers.
Often both sides had legitimate points of view. Second, since the demand for
military equipment was limited and the costs of building a factory to produce it
were high, only U. S. Steel, Bethlehem Steel, and later Midvale Steel made
armor plate. The potential for either a monopoly or for price-rigging bothered
some government officials. Third, a ton of military equipment was more
expensive to make than a ton of rails or a ton of structural steel; some purchasers
thought that $450 for a ton of armor plate was price-gouging if rails sold for only
$25 per ton. Finally, the ordnance producers sometimes made lower bids on
foreign contracts than they did on domestic ones. To some in the American
government, this was evidence they were being overcharged; to the steel
companies, lower bids meant they had to cut their profit margin to almost zero to
overcome tariffs in foreign countries. Also, when American needs were low, the
steel men argued they had to get foreign business to keep their factories
operating.36

The government’s solution to these four problems was to threaten to go
into the military supply business and build an armor-plate factory with federal
funds. Schwab countered that the government would not be able to make armor
plate cheaper than he could. After all, Bethlehem had a veteran work force, a
good bonus system, and could buy materials more cheaply in bulk. Any
vertically integrated company would have an advantage over companies
purchasing supplies in the open market. A government factory, Schwab insisted,
would waste the taxpayers’ money.37

If Schwab had been a mediator, not a participant, he might have been able
to settle this dispute. Part of the problem was the same as that of the low
productivity of the American shipyards during World War I: misdirected
incentives. When the Navy department took bids for contracts from the three
steel companies, it naturally accepted the lowest bid. But then the Navy official
went to the two higher bidders and offered them part of the contract if they
would agree to accept the lowest bid. He did this so that all three could survive;
that way, with three producers, a future monopoly of ordnance would be
prevented. The problem is that this strategy gave the three companies an
incentive to collude and fix prices high. Why should they bid low if all of them
would get part of the contract anyway? A winner-take-all approach would have

provided an incentive for lower bidding, but the Navy department was unwilling
to do this. Not surprisingly, then, year after year the steel companies submitted
nearly identical bids for military equipment.38

This problem reached a crisis point during the Wilson administration. In
1913, Josephus Daniels, Wilson’s Secretary of the Navy, and Ben Tillman,
Senator from South Carolina, investigated the armor business. Both men urged
Wilson to back a government armor plant. They held hearings in Congress on the
armor business but did not like what they heard. The leaders of the three steel
companies all said their bids were reasonable. In fact, Schwab submitted figures
showing that he and the others charged less for armor plate than did England,
France, Germany and Japan. If others didn’t believe it, then let the Federal Trade
Commission look at the accounts and fix a price. Daniels and Tillman rejected
this. They were convinced that the government could make armor plate cheaper.
The head of the Bureau of Ordnance estimated that $10.3 million would build an
armor plant and that plate could be made for less than $300 per ton, instead of
$454 per ton, which was a typical bid from the steel companies.39

In 1916, then, Daniels and Tillman began the campaign to convince
Congress to spend $11 million for an armor factory. In the Senate, Tillman
argued that the government would save money and would no longer be at the
mercy of identical bids from the “greedy and hoggish” steel companies.
President Wilson backed Tillman and said, “I remember very well my promise to
help all I could with the bill for the construction of an armor plant and I stand
ready to redeem my promise.”40

Schwab led the effort to defeat the bill. He spoke out against it in public
and ran ads in over 3,000 newspapers challenging the need for a government
plant. He stressed the fairness angle. He said that years ago the government had
asked Bethlehem to make armor; they had done so only when the government
agreed to buy from them.

Now, with $7 million invested in equipment, the government was planning
to build its own plant and make Bethlehem’s useless.41

Most Congressmen, however, bought the arguments of Tillman and
Daniels. The bill passed the Senate and the House by about two to one margins,
and Wilson signed it. As Senator Albert Cummins of Iowa said, “It is [one of]
my profoundest convictions that the manufacture of armor-plate for battleships is
a government function. I hope the private enterprises will be entirely
eliminated.”42

Dozens of cities lobbied to be the site for the new plant. From Rome,
Georgia, to Kalamazoo, Michigan, city after city was put forth as being uniquely

situated to produce armor plate. The winner of this competition was South
Charleston, West Virginia. Congress soon raised the appropriation to $17.5
million and authorized the South Charleston plant to make guns and projectiles,
as well as armor. Construction began in 1917 on the new factory and on
hundreds of houses for the workers. The war delayed the building, but it was
continued later. Higher construction costs after the war meant an overrun of
several million dollars. By 1921, the new plant was making guns, projectiles,
and armor—all at prices apparently much higher than that of Bethlehem Steel.
Within a year the whole plant was shut down, put on “inoperative status,” and
never run again.43

Schwab turned sixty in 1921 and was beginning to look backward more
than forward. There was much to see: whether he had made rails, beams, or
armor plate, he was successful. Even Carnegie, near death, had recently written
Schwab, “I have never doubted your ability to triumph in anything you
undertook. I cannot help feeling proud of you for having far outstripped any of
my ‘boys’.”44

In the 1920s and 1930s, however, Schwab seemed to lose his
entrepreneurial spirit. Producing a better product at a lower price no longer
seemed to dominate his thinking. Let’s “live and let live,” Schwab told the
steelmakers at the American Iron and Steel Institute in 1927. Next year, he urged
them to fix prices and avoid cutting them. The year after this, Schwab, the father
of the Bethlehem beam, urged the steel men not to expand but to use their
existing plant capacity.45

When the Great Depression took hold in the 1930s, Schwab’s public
addresses were full of anecdotes and preaching that “the good. . .lies ahead.” One
of Schwab’s remedies for the ailing economy was a high protective tariff. He had
always favored a tariff on imported steel but usually settled for low duties. The
Smoot-Hawley Tariff of 1930 created the highest duties in American history on
many items. Some writers have argued that the Smoot-Hawley Tariff triggered
the Great Depression; others say it merely made the depression worse. One thing
is certain: many nations retaliated against high American tariffs by dosing off
their borders to American-made goods. The demand for American goods,
therefore, declined and this put more people out of work. When Cordell Hull,
Roosevelf s Secretary of State, tried to lower American tariffs in 1934, Schwab
opposed it. He was afraid of foreign competition.46

During the 1930s, Schwab enjoyed his role as elder statesman of the steel
industry. He was full of stories and ever ready to do interviews with reporters.
He never got senile; his ability to memorize speeches and his knack for

remembering names and faces was still amazing. He just preferred to let Eugene
Grace and others run Bethlehem Steel, while he worked the crowd.47

When Schwab retired as an entrepreneur, his fortune became jeopardized.
He had earlier shown the traits of a dissipater and had the potential to run
through his $25 million fortune. Liberated from work, Schwab traveled,
gambled, and flirted more than ever. He joined the New York Whist Club and
played there for high stakes. He frequented the roulette tables in Monte Carlo
with his favorite mistress. The art of speculation, an anathema to Carnegie,
appealed to Schwab: he installed a ticker tape in his mansion to keep tabs on
Wall Street; he also invested in a variety of companies and knew almost nothing
about some of them. Gambling wasn’t the only drain on Schwab’s wealth: he co-
signed one million dollars worth of notes— usually worthless—for “friends” and
also gave monthly allowances to twenty-seven people.48

Schwab refused to cut back on expenses, even during the Great
Depression. He still hired the most famous musicians of the era to give private
recitals for him at Riverside. The mansion itself—complete with swimming
pool, wine cellar, gymnasium, bowling alley, six elevators, and ninety bedrooms
—needed twenty servants to keep it functioning. He also hired 300 men to care
for his 1000-acre estate at Loretto. So Schwab desperately needed his $250,000
annual salary at Bethlehem, given for past services, just to pay his expenses.
From 1935 to 1938, a small group of rebel stockholders attended the company’s
annual meetings; they challenged Schwab’s salary and told him he had “outlived
his usefulness.” He finally stopped them by privately telling one of the critics
that he desperately needed the money to live on. Actually he needed more. He
couldn’t pay the annual taxes on Riverside and couldn’t sell it either, even at a $6
million loss. He couldn’t even give it away, when he offered it as the residence
for the mayor.49

Schwab’s last years were also marked by poor health and the death of his
wife, who had borne him no children. After her funeral, Riverside was taken by
creditors; Schwab moved into a small apartment. Schwab, who had shown the
world a vision of entrepreneurship, now had only a vision of death. “A man
knows when he doesn’t want to be alive,” he said, “when the will to continue
living has gone from him.” Schwab died nine months after he said this, at age
seventy-seven with debts exceeding assets by over 300,000.50

CHAPTER FIVE

John D. Rockefeller and the Oil
Industry

In 1885 John D. Rockefeller wrote one of his partners, “Let the good work
go on. We must ever remember we are refining oil for the poor man and he must
have it cheap and good.” Or as he put it to another partner: “Hope we can
continue to hold out with the best illuminator in the world at the lowest price.”
Even after twenty years in the oil business, “the best. . .at the lowest price” was
still Rockefeller’s goal; his Standard Oil Company had already captured 90
percent of America’s oil refining and had pushed the price down from 58 cents to
eight cents a gallon. His well-groomed horses delivered blue barrels of oil
throughout America’s cities and were already symbols of excellence and
efficiency. Consumers were not only choosing Standard Oil over that of his
competitors; they were also preferring it to coal oil, whale oil, and electricity.
Millions of Americans illuminated their homes with Standard Oil for one cent
per hour; and in doing so, they made Rockefeller the wealthiest man in
American history.1

Rockefeller’s early life hardly seemed the making of a near billionaire. His
father was a peddler who often struggled to make ends meet. His mother stayed
at home to raise their six children. They moved around upstate New York—from
Richford to Moravia to Owego—and eventually settled in Cleveland, Ohio. John
D. was the oldest son. Although he didn’t have new suits or a fashionable home,
his family life was stable. From his father he learned how to earn money and
hold on to it; from his mother he learned to put God first in his life, to be honest,
and help others.2

“From the beginning,” Rockefeller said, “I was trained to work, to save,
and to give.” He did all three of these things shortly after he graduated from the
Cleveland public high school. He always remembered the “momentous day” in
1855, when he began work at age sixteen as an assistant bookkeeper for 50 cents
per day.3

On the job Rockefeller had a fixation for honest business. He later said, “I
had learned the underlying principles of business as well as many men acquire
them by the time they are forty.” His first partner, Maurice Clark, said that
Rockefeller “was methodical to an extreme, careful as to details and exacting to
a fraction. If there was a cent due us he wanted it. If there was a cent due a
customer he wanted the customer to have it.” Such precision irritated some
debtors, but it won him the confidence of many Cleveland businessmen; at age
nineteen Rockefeller went into the grain shipping business on Lake Erie and
soon began dealing in thousands of dollars.4

Rockefeller so enjoyed business that he dreamed about it at night. Where
he really felt at ease, though, was with his family and at church. His wife Laura
was also a strong Christian and they spent many hours a week attending church
services, picnics, or socials at the Erie Street Baptist Church. Rockefeller saw a
strong spiritual life as crucial to an effective business life. He tithed from his first
paycheck and gave to his church, a foreign mission, and the poor. He sought
Christians as business partners and later as employees. One of his fellow
churchmen, Samuel Andrews, was investing in oil refining; and this new frontier
appealed to young John. He joined forces with Andrews in 1865 and would
apply his same precision and honesty to the booming oil industry.5

The discovery of large quantities of crude oil in northwest Pennsylvania
soon changed the lives of millions of Americans. For centuries, people had
known of the existence of crude oil scattered about America and the world. They
just didn’t know what to do with it. Farmers thought it a nuisance and tried to
plow around it; others bottled it and sold it as medicine.6

In 1855, Benjamin Silliman, Jr., a professor of chemistry at Yale, analyzed
a batch of crude oil; after distilling and purifying it, he found that it yielded
kerosene—a better illuminant than the popular whale oil. Other byproducts of
distilling included lubricating oil, gasoline, and paraffin, which made excellent
candles. The only problem was cost: it was too expensive to haul the small
deposits of crude from northwest Pennsylvania to markets elsewhere. Silliman
and others, however, formed an oil company and sent “Colonel” Edwin L.
Drake, a jovial railroad conductor, to Titusville to drill for oil. “Nonsense,” said
local skeptics. “You can’t pump oil out of the ground as you pump water.” Drake
had faith that he could; in 1859, when he built a thirty-foot derrick and drilled
seventy feet into the ground, all the locals scoffed. When he hit oil, however,
they quickly converted and preached oil drilling as the salvation of the region.
There were few barriers to entering the oil business: drilling equipment cost less
than $1,000, and oil land seemed abundant. By the early 1860s, speculators were

swarming northwest Pennsylvania, cluttering it with derricks, pipes, tanks, and
barrels. “A good time coming for whales,” concluded one newspaper. America
had become hooked on kerosene.

Cleveland was a mere hundred miles from the oil region, and Rockefeller
was fascinated with the prospects of refining oil into kerosene. He may have
visited the region as early as 1862. By 1863 he was talking oil with Samuel
Andrews and two years later they built a refinery together. Two things about the
oil industry, however, bothered Rockefeller right from the start: the appalling
waste and the fluctuating prices.

The overproducing of oil and the developing of new markets caused the
price of oil to fluctuate wildly. In 1862 a barrel (42 gallons) of oil dropped in
value from $4.00 to $.35. Later, when President Lincoln bought oil to fight the
Civil War, the price jumped back to $4.00, then to $13.75. A blacksmith took
$200 worth of drilling equipment and drilled a well worth $100,000. Others,
with better drills and richer holes, dug four wells worth $200,000. Alongside the
new millionaires of the moment were the thousands of fortune hunters who came
from all over to lease land and kick down shafts into it with cheap foot drills.
Most failed. Even Colonel Drake died in poverty. As J. W. Trowbridge wrote,
“Almost everybody you meet has been suddenly enriched or suddenly ruined
(perhaps both within a short space of time), or knows plenty of people who
have.”7

Those few who struck oil often wasted more than they earned. Thousands
of barrels of oil poured into Oil Creek, not into tanks. Local creek bottoms were
often flooded with runaway oil; the Allegheny River smelled of oil and glistened
with it for many miles toward Pittsburgh. Gushers of wasted oil were bad
enough; sometimes a careless smoker would turn a spouting well into a killing
inferno. Other wasters would torpedo holes with nitroglycerine, sometimes
losing the oil and their lives.8

Rockefeller was intrigued with the future of the oil industry, but was
repelled by its past. He shunned the drills and derricks and chose the refining
end instead. Refining eventually became very costly, but in the 1860s the main
supplies were only barrels, a trough, a tank, and a still in which to boil the oil.
The yield would usually be about 60 percent kerosene, 10 percent gasoline, 5 to
10 percent benzol or naphtha, with the rest being tar and wastes. High prices and
dreams of quick riches brought many into refining; and this attracted
Rockefeller, too. But right from the start, he believed that the path to success was
to cut waste and produce the best product at the lowest price. Sam Andrews, his
partner, worked on getting more kerosene per barrel of crude. Both men searched

for uses for the byproducts: they used the gasoline for fuel, some of the tars for
paving, and shipped the naphtha to gas plants. They also sold lubricating oil,
vaseline, and paraffin for making candles. Other Cleveland refiners, by contrast,
were wasteful: they dumped their gasoline into the Cuyahoga River, they threw
out other byproducts, and they spilled oil throughout the city.9

Rockefeller was constantly looking for ways to save. For example, he built
his refineries well and bought no insurance. He also employed his own plumber
and almost halved the cost on labor, pipes, and plumbing materials. Coopers
charged $2.50 per barrel; Rockefeller cut this to $.96 when he bought his own
tracts of white oak timber, his own kilns to dry the wood, and his own wagons
and horses to haul it to Cleveland, There with machines he made the barrels,
then hooped them, glued them, and painted them blue. Rockefeller and Andrews
soon became the largest refiners in Cleveland. In 1870, they reorganized with
Rockefeller’s brother William, and Henry Flagler, the son of a Presbyterian
minister. They renamed their enterprise Standard Oil.10

Under Rockefeller’s leadership they plowed the profits into bigger and
better equipment; and, as their volume increased, they hired chemists and
developed three hundred byproducts from each barrel of oil. They ranged from
paint and varnish to dozens of lubricating oils to anesthetics. As for the main
product, kerosene, Rockefeller made it so cheaply that whale oil, coal oil, and,
for a while, electricity lost out in the race to light American homes, factories,
and streets. “We had vision,” Rockefeller later said. “We saw the vast
possibilities of the oil industry, stood at the center of it, and brought our
knowledge and imagination and business experience to bear in a dozen, in
twenty, in thirty directions.”11

Another area of savings came from rebates from railroads. The major
eastern railroads—the New York Central, the Erie, and Pennsylvania—all
wanted to ship oil and were willing to give discounts, or rebates, to large
shippers. These rebates were customary and dated back to the first shipments of
oil. As the largest oil refiner in America, Rockefeller was in a good position to
save money for himself and for the railroad as well. He promised to ship 60
carloads of oil daily and provide all the loading and unloading services. All the
railroads had to do was to ship it east. Commodore Vanderbilt of the New York
Central was delighted to give Rockefeller the largest rebate he gave any shipper
for the chance to have the most regular, quick and efficient deliveries. When
smaller oil men screamed about rate discrimination, Vanderbilt’s spokesmen
gladly promised the same rebate to anyone else who would give him the same
volume of business. Since no other refiner was as efficient as Rockefeller, no

one else got Standard Oil’s discount.12

Many of Rockefeller’s competitors condemned him for receiving such
large rebates. But Rockefeller would never have gotten them had he not been the
largest shipper of oil. These rebates, on top of his remarkable efficiency, meant
that most refiners could not compete. From 1865 to 1870, the price of kerosene
dropped from 58 to 26 cents per gallon. Rockefeller made profits during every
one of these years, but most of Cleveland’s refiners disappeared. Naturally, there
were hard feelings. Henry Demarest Lloyd, whose cousin was an unhappy oil
man, wrote Wealth Against Commonwealth in 1894 to denounce Rockefeller. Ida
Tarbell, whose father was a Pennsylvania oil producer, attacked Rockefeller in a
series of articles for McClure’s magazine.13

Some of the oil producers were unhappy, but American consumers were
pleased that Rockefeller was selling cheap oil. Before 1870, only the rich could
afford whale oil and candles. The rest had to go to bed early to save money. By
the 1870s, with the drop in the price of kerosene, middle and working class
people all over the nation could afford the one cent an hour that it cost to light
their homes at night. Working and reading became after-dark activities new to
most Americans in the 1870s.14

Rockefeller quickly learned that he couldn’t please everyone by making
cheap oil. He pleased no one, though, when he briefly turned to political
entrepreneurship in 1872. He joined a pool called the South Improvement
Company and it turned out to be one of the biggest mistakes in his life. This
scheme was hatched by Tom Scott of the Pennsylvania Railroad. Scott was
nervous about low oil prices and falling railroad rates. He thought that if the
large refiners and railroads got together they could artificially fix high prices for
themselves. Rockefeller decided to join because he would get not only large
rebates, but also drawbacks, which were discounts on that oil which his
competitors, not he, shipped. The small producers and refiners bitterly attacked
Rockefeller and forced the Pennsylvania Legislature to revoke the charter of the
South Improvement Company. No oil was ever shipped under this pool, but
Rockefeller got bad publicity from it and later admitted that he had been
wrong.15

At first, the idea of a pool appealed to Rockefeller because it might stop
the glut, the waste, the inefficiency, and the fluctuating prices of oil. The South
Improvement Company showed him that this would not work, so he turned to
market entrepreneurship instead. He decided to become the biggest and best
refiner in the world. First, he put his chemists to work trying to extract even
more from each barrel of crude. More important, he tried to integrate Standard

Oil vertically and horizontally by getting dozens of other refiners to join him.
Rockefeller bought their plants and talent; he gave the owners cash or stock in
Standard Oil.16

From Rockefeller’s standpoint, a few large vertically integrated oil
companies could survive and prosper, but dozens of smaller companies could
not. Improve or perish was Rockefeller’s approach. “We will take your burdens,”
Rockefeller said. “We will utilize your ability; we will give you representation;
we will all unite together and build a substantial structure on the basis of
cooperation.” Many oil men rejected Rockefeller’s offer, but dozens of others all
over America sold out to Standard Oil. When they did, Rockefeller simply shut
down the inefficient companies and used what he needed from the good ones.
Officers Oliver Payne, H. H. Rogers, and President John Archbold came to
Standard Oil from these merged firms.17

Buying out competitors was a tricky business. Rockefeller’s approach was
to pay what the property was worth at the time he bought it. Outmoded
equipment was worth little, but good personnel and even good will were worth a
lot. Rockefeller had a tendency to be generous because he wanted the future
good will of his new partners and employees. “He treated everybody fairly,”
concluded one oil man. “When we sold out he gave us a fair price. Some refiners
tried to impose on him and when they found they could not do it, they abused
him. I remember one man whose refinery was worth $6,000, or at most $8,000.
His friends told him, ‘Mr. Rockefeller ought to give you $100,000 for that.’ Of
course, Mr. Rockefeller refused to pay more than the refinery was worth, and the
man . . . abused Mr. Rockefeller.”18

Bigness was not Rockefeller’s real goal. It was just a means of cutting
costs. During the 1870s, the price of kerosene dropped from 26 to eight cents a
gallon and Rockefeller captured about 90 percent of the American market. This
percentage remained steady for years. Rockefeller never wanted to oust all of his
rivals, just the ones who were wasteful and those who tarnished the whole trade
by selling defective oil. “Competitors we must have, we must have,” said
Rockefeller’s partner Charles Pratt. “If we absorb them, be sure it will bring up
another.”19

Just as Rockefeller reached the top, many predicted his demise. During the
early 1880s, the entire oil industry was in jeopardy. The Pennsylvania oil fields
were running dry and electricity was beginning to compete with lamps for
lighting homes. No one knew about the oil fields out west and few suspected that
the gasoline engine would be made the power source of the future. Meanwhile,
the Russians had begun drilling and selling their abundant oil, and they raced to

capture Standard Oil’s foreign markets. Some experts predicted the imminent
death of the American oil industry; even Standard Oil’s loyal officers began
selling some of their stock.20

Rockefeller’s solution to these problems was to stake the future of his
company on new oil discoveries near Lima, Ohio. Drillers found oil in this Ohio-
Indiana region in 1885, but they could not market it. It had a sulphur base and
stank like rotten eggs. Even touching this oil meant a long, soapy bath or social
ostracism. No one wanted to sell or buy it and no city even wanted it shipped
there. Only Rockefeller seemed interested in it. According to Joseph Seep, chief
oil buyer for Standard Oil, Mr. Rockefeller went on buying leases in the Lima
field in spite of the coolness of the rest of the directors, until he had accumulated
more than 40 million barrels of that sulphurous oil in tanks. He must have
invested millions of dollars in buying and storing and holding the sour oil for
two years, when everyone else thought it was no good.21

Rockefeller had hired two chemists, Herman Frasch and William Burton,
to figure out how to purify the oil; he counted on them to make it usable.
Rockefeller’s partners were skeptical, however, and sought to stanch the flood of
money invested in tanks, pipelines, and land in the Lima area. They “held up
their hands in holy horror” at Rockefeller’s gamble and even outvoted him at a
meeting of Standard’s Board of Directors. “Very well, gentlemen,” said
Rockefeller. “At my own personal risk, I will put up the money to care for this
product: $2 million—$3 million, if necessary.” Rockefeller told what then
happened: This ended the discussion, and we carried the Board with us and
continued to use the funds of the company in what was regarded as a very
hazardous investment of money. But we persevered, and two or three of our
practical men stood firmly with me and constantly occupied themselves with the
chemists until at last, after millions of dollars had been expended in the tankage
and buying the oil and constructing the pipelines and tank cars to draw it away to
the markets where we could sell it for fuel, one of our German chemists cried
‘Eureka!’ We … at last found ourselves able to clarify the oil.22

The “worthless” Lima oil that Rockefeller had stockpiled suddenly became
valuable; Standard Oil would be able to supply cheap kerosene for years to
come. Rockefeller’s exploit had come none too soon: the Russians struck oil at
Baku, four square miles of the deepest and richest oil land in the world. They
hired European experts to help Russia conquer the oil markets of the world. In
1882, the year before Baku oil was first exported, America refined 85 percent of
the world’s oil; six years later this dropped to 53 percent. Since most of

Standard’s oil was exported, and since Standard accounted for 90 percent of
America’s exported oil, the Baku threat had to be met.23

At first glance, Standard Oil seemed certain to lose. First, the Baku oil was
centralized in one small area: this made it economical to drill, refine, and ship
from a single location. Second, the Baku oil was more plentiful: its average yield
was over 280 barrels per well per day, compared with 4.5 barrels per day from
American wells. Third, Baku oil was highly viscous: it made a better lubricant
(though not necessarily a better illuminant) than oil in Pennsylvania or Ohio.
Fourth, Russia was closer to European and Asian markets: Standard Oil had to
bear the costs of building huge tankers and crossing the ocean with them. One
independent expert estimated that Russia’s costs of oil exporting were one-third
to one-half of those of the United States. Finally, Russia and other countries
slapped high protective tariffs on American oil; this allowed inefficient foreign
drillers to compete with Standard Oil. The Austro-Hungarian empire, for
example, imported over half a million barrels of American oil in 1882; but they
bought none by 1890. What was worse, local refiners there marketed a low-
grade oil in barrels labeled “Standard Oil Company.” This allowed the Austro-
Hungarians to dump their cheap oil and damage Standard’s reputation at the
same time.

Rockefeller pulled out all stops to meet the Russian challenge. No small
refinery would have had a chance; even a large vertically integrated company
like Standard Oil was at a great disadvantage. Rockefeller never lost his vision,
though, of conquering the oil markets of the world. First, he relied on his
research team to help him out. William Burton, who helped clarify the Lima oil,
invented “cracking,” a method of heating oil to higher temperatures to get more
use of the product out of each barrel. Engineers at Standard Oil helped by
perfecting large steamship tankers, which cut down on the costs of shipping oil
overseas.

Second, Rockefeller made Standard Oil even more efficient. He used less
iron in making barrel hoops and less solder in sealing oil cans. In a classic move,
he used the waste (culm) from coal heaps to fuel his refineries; even the
sweepings from his factory he sorted through for tin shavings and solder drops.

Third, Rockefeller studied the foreign markets and learned how to beat the
Russians in their part of the world. He sent Standard agents into dozens of
countries to figure out how to sell oil up the Hwang Ho River in China, along the
North Road in India, to the east coast of Sumatra, and to the huts of tribal
chieftains in Malaya. He even used spies, often foreign dipomats, to help him
sell oil and tell him what the Russians were doing. He used different strategies in

different areas. Europeans, for example, wanted to buy kerosene only in small
quantities, so Rockefeller supplied tank wagons to sell them oil street by street.
As Allan Nevins notes: The [foreign) stations were kept in the same beautiful
order as in the United States. Everywhere the steel storage tanks, as in America,
were protected from fire by proper spacing and excellent fire-fighting apparatus.
Everywhere the familiar blue barrels were of the best quality. Everywhere a
meticulous neatness was evident. Pumps, buckets, and tools were all clean and
under constant inspection, no litter being tolerated. . . . The oil itself was of the
best quality. Nothing was left undone, in accordance with Rockefeller’s long-
standing policy, to make the Standard products and Standard ministrations,
abroad as at home, attractive to the customer.24

Rockefeller’s focus on quality meant that, in an evenly balanced price war
with Russia, Standard Oil would win.

The Russian-American oil war was hotly contested for almost thirty years
after 1885. In most markets, Standard’s known reliability would prevail, if it
could just get its price close to that of the Russians. In some years this meant that
Rockefeller had to sell oil for 5.2 cents a gallon—leaving almost no profit
margin—if he hoped to win the world. This he did; and Standard often captured
two-thirds of the world’s oil trade from 1882 to 1891 and a somewhat smaller
portion hi the decade after this.

Rockefeller and his partners always knew that their victory was a narrow
triumph of efficiency over superior natural advantages. “If,” as John Archbold
said in 1899, “there had been as prompt and energetic action on the part of the
Russian oil industry as was taken by the Standard Oil Company, the Russians
would have dominated many of the world markets. . . .”25

At one level, Standard’s ability to sell oil at dose to a nickel a gallon meant
hundreds of thousands of jobs for Americans in general and Standard Oil in
particular. Rockefeller’s margin of victory in this competition was always
narrow. Even a rise of one cent a gallon would have cost Rockefeller much of his
foreign market. A rise of three cents a gallon would have cost Rockefeller his
American markets as well.

At another level, oil at almost a nickel a gallon opened new possibilities
for people around the world. William H. Libby, Standard’s foreign agent, saw
this change and marveled at it. To the governor general of India he said: I may
claim for petroleum that it is something of a civilizer, as promoting among the
poorest classes of these countries a host of evening occupations, industrial,
educational, and recreative, not feasible prior to its introduction; and if it has
brought a fair reward to the capital ventured in its development, it has also

carried more cheap comfort into more poor homes than almost any discovery of
modern times.26

In Standard Oil, Rockefeller arguably built the most successful business in
American history. In running it, he showed the precision of a bookkeeper and the
imagination of an entrepreneur. Yet, in day-to-day operations, he led quietly and
inspired loyalty by example. Rockefeller displayed none of the tantrums of a
VanderbUt or a Hill, and none of the flamboyance of a Schwab. At board
meetings, he would sit and patiently listen to all arguments. Until the end, he
would often say nothing. But his fellow directors all testified to his genius for
sorting out the relevant details and pushing the right decision, even when it was
shockingly bold and unpopular. “You ask me what makes Rockefeller the
unquestioned leader in our group,” said John Archbold, later a president of
Standard Oil. “Well, it is simple. In business we all try to look ahead as far as
possible. Some of us think we are pretty able. But Rockefeller always sees a
little further ahead than any of us—and then he sees around the corner!”27

Some of these peeks around the corner helped Rockefeller pick the right
people for the right jobs. He had to delegate a great deal of responsibility, and he
always gave credit—and sometimes large bonuses—for work well done. Paying
higher than market wages was Rockefeller’s controversial policy: he believed it
helped slash costs in the long run. For example, Standard was rarely hurt by
strikes or labor unrest. Also, he could recruit and keep the top talent and
command their future loyalty. Rockefeller approached the ideal of the “Standard
Oil family” and tried to get each member to work for the good of the whole. As
Thomas Wheeler said, “He managed somehow to get everybody interested in
saving, in cutting out a detail here and there. . . .”He sometimes joined the men
in their work, and urged them on. At 6:30 in the morning there was Rockefeller
“rolling barrels, piling hoops, or wheeling out shavings.” In the oil fields, there
was Rockefeller trying to fit nine barrels on a eight-barrel wagon. He came to
know the oil business inside out and won the respect of his workers. Praise he
would give; rebukes he would avoid. “Very well kept—very indeed,” said
Rockefeller to an accountant about his books before pointing out a minor error
and leaving. One time a new accountant moved into a room where Rockefeller
kept an exercise machine. Not knowing what Rockefeller looked like, the
accountant saw him and ordered him to remove it. “All right,” said Rockefeller,
and he politely took it away. Later, when the embarrassed accountant found out
whom he had chided, he expected to be fired; but Rockefeller never mentioned
it.28

Rockefeller treated his top managers as conquering heroes and gave them

praise, rest, and comfort. He knew that good ideas were almost priceless: they
were the foundation for the future of Standard Oil. To one of his oil buyers,
Rockefeller wrote, “I trust you will not worry about the business. Your health is
more important to you and to us than the business.” Long vacations at full pay
were Rockfeller’s antidotes for his weary leaders. After Johnson N. Camden
consolidated the West Virginia and Maryland refineries for Standard Oil,
Rockefeller said, “Please feel at perfect liberty to break away three, six, nine,
twelve, fifteen months, more or less. . . . Your salary will not cease, however
long you decide to remain away from business.” But neither Camden nor the
others rested long. They were too anxious to succeed in what they were doing
and to please the leader who trusted them so. Thomas Wheeler, an oil buyer for
Rockefeller, said, “I have never heard of his equal in getting together a lot of the
very best men in one team and inspiring each man to do his best for the
enterprise.”29

Not just Rockefeller’s managers, his fellow entrepreneurs thought he was
remarkable. In 1873, the prescient Commodore Vanderbilt said, “That
Rockefeller! He will be the richest man in the country.” Twenty years later,
Charles Schwab learned of Rockefeller’s versatility when Rockefeller invested
almost $40 million in the controversial ore of the Mesabi iron range near the
Great Lakes. Schwab said, “Our experts in the Carnegie Company did not
believe in the Mesabi ore fields. They thought the ore was poor. . . . They
ridiculed Rockefeller’s investments in the Mesabi.” But by 1901, Carnegie,
Schwab, and J. P. Morgan had changed their minds and offered Rockefeller
almost $90 million for his ore investments.30

That Rockefeller was a genius is widely admitted. What is puzzling is his
philosophy of life. He was a practicing Christian and believed in doing what the
Bible said to do. Therefore, he organized his life in the following way: he put
God first, his family second, and career third. This is the puzzle: how could
someone put his career third and wind up with $900 million, which made him
the wealthiest man in American history? This is not something that can be easily
explained (at least not by conventional historical methods), but it can be studied.

Rockefeller always said the best things he had done in life were to make
Jesus his savior and to make Laura Spelman his wife. He prayed daily the first
thing in the morning and went to church for prayer meetings with his family at
least twice a week. He often said he felt most at home in church and in regular
need of “spiritual food”; he and his wife also taught Bible classes and had
ministers and evangelists regularly in their home.31

Going to church, of course, is not necessarily a sign of a practicing

Christian. Ivan the Terrible regularly prayed and went to church before and after
torturing and killing his fellow men. Even Commodore Vanderbilt sang hymns
out of one side of his mouth and out of the other he spewed a stream of
obscenities.

Rockefeller, by contrast, read the Bible and tried to practice its teachings in
his everyday life. Therefore, he tithed, rested on the Sabbath, and gave valuable
time to his family. This made his life hard to understand for his fellow
businessmen. But it explains why he sometimes gave tens of thousands of
dollars to Christian groups, while, at the same time, he was trying to borrow over
a million dollars to expand his business. It explains why he rested on Sunday,
even as the Russians were mobilizing to knock him out of European markets. It
explains why he calmly rocked his daughter to sleep at night, even though oil
prices may have dropped to an all-time low that day. Others panicked, but
Rockefeller believed that God would pull him through if only he would follow
His commandments. He worked to the best of his ability, then turned his
problems over to God and tried not to worry. This is what he often said: Early I
learned to work and to play. I dropped the worry on the way. God was good to
me every day.32

Those who heard him say this may have thought that he was mouthing
platitudes, but the key to understanding Rockefeller is to recognize that he said it
because he believed it.

When the Russians sold their oil in Standard’s blue barrels, Rockefeller did
not get into strife. He knew that the book of James said, “Where strife is there is
confusion and every evil work.” He fought the Russians, using his spies and his
authority to stop them and outsell them; but he never slandered them or
threatened them. No matter what, Rockefeller never lost his temper, either. This
was one of the remarkable findings of Allan Nevins in his meticulous research
on Rockefeller. During the 1930s, Nevins interviewed dozens of people who
worked with Rockefeller and knew him intimately. Not one—son, daughter,
friend, or foe—could ever recall Rockefeller losing his temper or even being
perturbed. He was always calm.33

The most famous example is the time Judge K. M. Landis fined Standard
Oil of Indiana over $29 million. The charge was taking rebates; and Landis, an
advocate of government intervention, publicly read the verdict of “guilty” for
Standard Oil. Railway World was shocked that “Standard Oil Company of
Indiana was fined an amount equal to seven or eight times the value of its entire
property, because its traffic department did not verify the statement of the Alton

rate clerk that the six-cent commodity rate on oil had been properly filed with
the Interstate Commerce Commission.” The New York Times called this decision
a bad law and “a manifestation of that spirit of vindictive savagery toward
corporations. . . .” But Rockefeller, who had testified at the trial, was unruffled.

On the day of the verdict, he chose to play golf with friends. In the middle
of their game, a frantic messenger came running through the fairways to deliver
the bad news to Rockefeller. He calmly looked at the telegram, put it away, and
said, “Well, shall we go on, gentlemen?” Then he hit his ball a convincing 160
yards. At the next hole, someone sheepishly asked Rockefeller, “How much is
it?” Rockefeller said, “Twenty-nine million two hundred forty thousand dollars/’
and added, “the maximum penalty, I believe. Will you gentlemen drive?” He
ended the nine holes with a respectable score of 53, as though he hadn’t a care in
the world.34

Landis’ decision was eventually overruled, but Rockefeller was not so
lucky in his fight against the Sherman Antitrust Act. Rockefeller had set up a
trust system at Standard Oil merely to allow his many oil businesses in different
states to be headed by the same board of directors. Some states, like
Pennsylvania, had laws permitting it to tax all of the property of any corporation
located within state borders. Under these conditions, Rockefeller found it
convenient to establish separate Standard Oil corporations in many different
states, but have them directed in harmony, or in trust, by the same group of men.
The Supreme Court struck this system down in 1911 and forced Standard Oil to
break up into separate state companies with separate boards of directors.

This decision was puzzling to Rockefeller and his supporters. The
Sherman Act was supposed to prevent monopolies and those companies “in
restraint of trade.” Yet Standard Oil had no monopoly and certainly was not
restraining trade. The Russians, with the help of their government, had been
gaining ground on Standard in the international oil trade. In America,
competition in the oil industry was more intense than ever. Over one hundred oil
companies—from Gulf Oil in Texas to Associated Oil in California—competed
with Standard. Standard’s share of the United States and world markets had been
steadily declining from 1900 to 1910. Rockefeller, however, took the decision
calmly and promised to obey it.35

Even more remarkable than Rockefeller’s serenity was his diligence in
tithing. From the time of his first job, where he earned 50 cents a day, the
sixteen-year-old Rockefeller gave to his local Baptist church, to missions in New
York City and abroad, and to the poor— black or white. As his salary increased,
so did his giving. By the time he was 45, he was up to $100,000 per year; at age

53, he topped the $1,000,000 mark in his annual giving. His eightieth year was
his most generous: $138,000,000 he happily gave away.36

The more he earned the more he gave, and the more he gave the more he
earned. To Rockefeller, it was the true fulfillment of the Biblical law: “Give, and
it shall be given unto you; good measure, pressed down, and shaken together,
and running over, shall men give unto your bosom.” Not “money” itself but “the
love of money” was “the root of all evil.” And Rockefeller loved God much
more than his money. He learned what the prophet Malachi meant when he said,
“Bring the whole tithe into the storehouse, . . . and see if I will not throw open
the floodgates of heaven and pour out so much blessing that you will not have
room enough for it.” He learned what Jesus meant when he said, “With the
measure you use, it will be measured to you.” So when Rockefeller proclaimed:
“God gave me [my] money,” he did so in humility and in awe of the way he
believed God worked.37

Some historians haven’t liked the way Rockefeller made his money, but
few have quibbled with the way he spent it. Before he died, he had given away
about $550,000,000, more than any other American before him had ever
possessed. It wasn’t so much the amount that he gave as it was the amazing
results that his giving produced. At one level he built schools and churches and
supported evangelists and missionaries all over the world. After all, Jesus said,
“Go ye into all the world, and preach the gospel to every creature.”

Healing the sick and feeding the poor were also part of Rockefeller’s
Christian mission. Not state aid, but Rockefeller philanthropy paid teams of
scientists who found cures for yellow fever, meningitis, and hookworm. The boll
weevil was also a Rockefeller target, and the aid he gave in fighting it improved
farming throughout the South.

Rockefeller attacked social and medical problems the same way he
attacked the Russians—with efficiency and innovation. To get both of these,
Rockefeller gave scores of millions of dollars to higher education. The
University of Chicago alone got over $35,000,000. Black schools, Southern
schools, and Baptist schools also reaped what Rockefeller had sown. His guide
for giving was a variation of the Biblical principle—”If any would not work,
neither should he eat.” Those schools, cities, or scientists who weren’t anxious to
produce or improve didn’t get Rockefeller money. Those who did and showed
results got more. As in the parable of the talents, to him who has, more
(responsibility and trust) shall be given by the Rockefeller Foundation.38

At about age sixty, Rockefeller began to wind down his remarkable
business career to focus more on philanthropy, his family, and leisure. He took

up gardening, started riding more on his horses, and began playing golf. Yale
University might ban the tango, but Rockefeller hired an instructor to teach him
how to do it. Even in recreation, Rockefeller wanted to discipline his actions for
the best result. In golf, he hired a caddy to say, “Hold your head down,” before
each of his swings. He even strapped his left foot down with croquet wickets to
keep it steady during his drives. 39

In a way, Rockefeller’s life was a paradox. He was fascinated with human
nature and enjoyed studying people. Yet his unparalleled success in business
made friendships awkward and forced him to shut out much of the world. To his
children Rockefeller was the man who played blind man’s bluff with great gusto,
balanced dinner plates on his nose, and taught them how to swim and to ride
bicycles. But from the world he had to keep his distance: he was a target for
fortune hunters, fawners, chiselers, mountebank preachers, and hundreds of
hard-luck letters written to him each week.40

Retirement, however, liberated him more to enjoy people and nature. On
his estate in New York, he studied plants and flowers. Sometimes he would drive
out into the countryside just to admire a wheatfield. Down in Florida, he liked to
watch all the people who passed his house and guess at what they did in life. He
handed out dimes to the neighborhood children and urged them to work and to
save.41

Naturally, Rockefeller had some disappointments in his last years. He was
sad that Standard Oil had been broken up by the Sherman Act and that the
Russians had increased their foreign oil sales. He was also saddened by the Great
Depression of the 1930s. Still, Rockefeller knew he had lived a full life and had
been a key part of the two big transformations in the oil industry: the making of
kerosene for lighting homes and the making of gasoline for running cars.
Rockefeller loved life and wanted to live to be one-hundred, but he died in his
sleep during his ninety-eighth year in 1937.

CHAPTER SIX

Andrew Mellon and the 1920s

Andrew Mellon is one of the most misunderstood men in American
history. As Secretary of Treasury, he persuaded Congress to cut taxes to help
generate the capital that made the 1920s so prosperous for so many Americans.
But many textbooks claim he aided only the rich, and that he helped trigger the
Great Depression. Even during the 1920s, when Mellon became one of the best
known men in America, he stirred emotions with his sensational tax plan. If we
look at the facts, and cut away the myth, the story of Andrew Mellon can tell us
much about which tax policies work and which don’t.

We all think we know that raising taxes increases revenue and that slashing
taxes always lowers revenue. But Mellon challenged this conventional wisdom.
“It seems difficult for some to understand,” he wrote, “that high rates of taxation
do not necessarily mean large revenue to the Government, and that more revenue
may often be obtained by lower rates.”1 Had Mellon not been a success as an oil
and aluminum entrepreneur, few would have taken his tax philosophy seriously.
Yet on December 14, 1929, the U. S. Senate passed Mellon’s sixth and final tax
cut of the decade. It climaxed his tax revolution: from 1921 to 1929 the tax rates
on those earning under $4000 per year had been chopped eightfold (from 4 to Vi
percent); those in the $4000 to $8000 bracket had their burden slashed fourfold
(from 8 to 2 percent); and taxes on top incomes had been cut threefold (from 73
to 24 percent). And the result for Mellon in government revenue was a startling
triumph: the personal income-tax receipts for 1929 were over $1 billion, in
contrast to the $719 million raised in 1921, when tax rates were so much higher.
Editors, economists, and politicians across the nation were astonished and many
labeled Mellon “the greatest Secretary of Treasury since Alexander Hamilton.”2

I
Andrew Mellon came by his philosophy of low taxes and limited

government quite naturally. His grandfather, a thrifty Scots-Irishman, fled Ulster
in 1818 to escape the high taxes of the Napoleonic Wars. He farmed near
Pittsburgh and taught his son Thomas, Andrew’s father, to avoid debt, be honest,
and work hard in life. As Thomas later wrote, “the hardships experienced by…
my own parents, from oppressive taxation, became so thoroughly ingrained in
my nature, when a child, that I have always felt a strong opposition… to all
measures rendering an increase of taxes necessary. It was the universal
complaint which drove our people from their homes… .”3

Young Thomas became more than a tax critic. He moved to Pittsburgh to
practice law, start a bank, and raise a family. He developed a knack for finance
and trained his five sons at the dinner table in how to use money to make money.
Andrew, born in 1855, proved to be an eager learner. At age nine, he learned
about supply and demand by selling apples from the family orchard. As a
teenager Andrew went on business trips for his father, buying land near
Baltimore and hiring a theater operator in Philadelphia. He went into the lumber
business with his brother Richard and sold out at a nice profit just before the
Panic of 1873. Thomas, a proud father, retired early and turned the family bank
over to Andrew and Richard, his two youngest sons.4

They were an excellent team: Richard was outgoing and jovial; Andrew
was introverted and quiet. Richard would greet customers and do ribbon
cuttings; Andrew would do more of the thinking and planning. Many workers at
T. Mellon and Sons Bank, even some officers, knew Richard as a friend but
knew Andrew hardly at all, even by sight. Andrew was 5’9″ tall, lean in body,
sharp in features, and had a thick moustache. For exercise he liked to walk and
did so with a firm pace and erect back, even into his seventies. When he spoke,
which was not often, his voice was soft, like a whisper. He would sometimes
preface his words with a slight cough. Pauses were frequent. Yet his mouselike
manner hid a mental toughness that always commanded respect. When Andrew
gave advice, ears strained to listen.5

What Mellon lacked in rhetorical skill he made up for with his exceptional
judgment of people and ideas. He had a remarkably creative mind and liked to
think about strategies that would change industry and society. As a banker, for
example, he backed industrialists who were strong on ideas but weak on
finances. The production of aluminum, for example, was slow, expensive, and
irrelevant to most Americans in the 1890s. But when Mellon backed Alcoa he
believed that aluminum, with its light weight and excellent conducting qualities,
would challenge steel and copper as a major industrial metal. Mellon and his
family sank $15 million into Gulf OH in the early 1900s, because he believed

that they could build and run a vertically-integrated oil company that could
compete with mighty Standard Oil. He was right; Gulf built pipelines from Texas
to Oklahoma, invented offshore drilling, and built the first corner service stations
to provide gas for cars.6

The key to the success of these industries, and dozens of other Mellon
enterprises, was capital—high-risk, venture capital. Somebody had to have the
nerve, the money, and the vision to back risky ideas that had potential. Mellon
had done this so ably that by 1920 he was worth close to one billion dollars,
which ranked him with John D. Rockefeller and Henry Ford as one of the three
wealthiest men in America. Mellon’s superior grasp of economics caught the
attention of national political leaders after World War I. They were struggling
with a stagnant economy, a rising national debt, and a crushing tax burden.
Republican Warren G. Harding, winner of the 1920 Presidential election, asked
Mellon to be his Secretary of Treasury and do for the American economy what
he had done with aluminum and oil.7

Mellon hesitated to accept Harding’s offer. In the industrial world he
directed a worldwide economic empire. He would have to resign his position on
the boards of directors of sixty corporations to take a $12,000-a-year job trying
to straighten out a mess. At age 65, though, Mellon had been the entrepreneur
long enough. His family urged him to accept, and he was challenged by the idea
of applying his business experience to government problems. So Mellon went to
Washington, bought an apartment on Massachusetts Avenue, and took command
of the Treasury Department. In a sense, he was very comfortable with his work:
corporate problems and government problems were often similar; he delegated
the detail work to his undersecretaries and applied his talent to strengthening the
postwar economy. In another sense, Mellon had to make adjustments.
Newspapers publicized his wealth and reporters pried into his life. They freely
accosted him, even as he walked to work. The taciturn Mellon stumbled so
completely in his first interview that he couldn’t articulate a thought. After some
practice, and some good press clippings, Mellon warmed up to most reporters.
All through his term, though, the less he was forced to say about something the
more at ease he was. When Mellon held a press conference, or spoke before
Congress, he usually wrote out his message and had his undersecretary read it. If
possible, he even had the undersecretary field the questions.8

Mellon came to Washington at a crucial time in U. S. history. World War I
had been a turning point in the way many perceived the role of government in
economic life. Before the war, the federal role in operating, regulating, and
taxing American business was small. Federal budgets were less than $1 billion

per year. The taxes needed to run the American government were low and fairly
easily collected; land sales and tariffs were the major sources of revenue.9 In the
1910s, two things helped change all of this: the passing of the income tax and the
outbreak of the First World War.

The idea of taxing incomes had long been debated in American history.
During the Civil War, Congress passed a 3 percent tax on all incomes over $800,
and raised the rate and taxable amounts twice, but repealed the tax in 1872. Then
in 1894, during an economic downturn, Congress passed a flat 2 percent tax on
all incomes over $4000. The next year, however, the Supreme Court declared
this law unconstitutional. Conservatives tended to oppose the income tax: high
taxes stifled investment, they argued, and any income tax, once passed, was easy
to raise and hard to reduce. Existing taxes were adequate, conservatives argued,
and business should be left relatively free. “Progressives,” as they called
themselves, favored the income tax and fought to pass a constitutional
amendment giving Congress the right to levy taxes on personal and corporate
incomes. The income tax, in Progressive theory, could be used instead of tariffs
to raise revenue, and also to increase the powers of the federal government. The
leading Progressive spokesmen during the 1920s were Senators Robert M.
LaFollette of Wisconsin, George W. Norris of Nebraska, and James Couzens of
Michigan.10

The period from 1900 to 1920 is sometimes called the Progressive Era
because during this time Progressives entered politics and increased the role of
the federal government in the American economy. In 1913, they secured the 16th
amendment, which enabled Congress to tax personal incomes. The income tax
passed that year was light: individuals earning less than $3000 per year and
married couples making $4000 per year paid no tax. Those who earned more
were taxed only 1 percent up to $20,000 income. Then the tax became
progressive, that is, the rates increased as income increased. Those earning from
$20,000 to $50,000 were taxed at 2 percent; from $50,000 to $75,000 at 3
percent; and so on. The top rate was 7 percent of incomes over $500,000. Under
this law, few Americans paid any income taxes; of those who did, most paid only
1 percent. The revenue raised from this law was small, but the government itself
was small in 1913 and it needed little revenue to run efficiently.11

In 1916, in response to President Wilson’s program of preparedness for
war, Congress hiked the income tax rate. It became 2 percent on incomes under
$20,000 and rose to 15 percent on incomes of $2 million or more. The
exemptions were unchanged. The next year the U. S. entered the First World
War: expenses soared to the highest levels in U. S. history; massive government

programs bought food, weapons, and equipment for America and her allies. The
government also set prices and wages, and controlled production of scores of
industries. Wilson used the income tax to raise much of the money needed to
wage war: rates started at 4 percent and soared to 77 percent on top incomes.
Corporate taxes rose to 18 percent. Most Americans were willing to sacrifice for
this emergency and paid over $7 billion in taxes during the war years. They also
bought billions of dollars in “Liberty bonds” to aid the allied cause. In the wake
of military victory, the national debt had skyrocketed from $1.5 billion in 1916
to $24 billion in 1919.12

This controlled economy fulfilled the dream of many Progressives. They
had problems, though, when the revenue raised from high taxes plunged in 1919
and 1920. The federal spending that Progressives desired could not continue
after the war because of this shrinking revenue and a dramatic increase in the
national debt. “There is a point,” President Wilson discovered, “at which in
peace times high rates of income and profits taxes discourage energy . . . and
produce industrial stagnation with consequent unemployment and other . . .
evils.” The byproducts of war— high taxes and a soaring national debt—would
clearly be issues in the 1920s. Andrew Mellon agreed with Wilson’s new way of
thinking and went from there.13

As Treasury Secretary, Mellon carefully collected and studied data on the
American economy. High taxes, he concluded, were the chief parasites draining
the lifeblood of the American economy. “Before the period of the war,” he
observed, “taxes as high as those now in effect would have been thought
fantastic and impossible of payment.” Rich men went to great lengths to avoid
paying the 73 percent rate Mellon confronted when he came to Washington.

The high rates inevitably put pressure upon the taxpayer to withdraw his
capital from productive business and invest it in tax-exempt securities. . . .The
result is that the sources of taxation are drying up; wealth is failing to carry its
share of the tax burden; and capital is being diverted into channels which yield
neither revenue to the Government nor profit to the people.14

Mellon publicized the evidence in Table 1 to make his point. Between
1916 and 1921, the number of people who earned over $300,000 per year had
shrunk, and so had their average incomes. The rich were not poorer but wiser;
they were shifting their fortunes into tax-exempt bonds.

The subject of tax-exempt bonds became relevant because Congress allowed
cities and states to issue bonds that were free of any taxes. When tax rates were
higher than 50 percent on top incomes, municipal bonds that paid about 5
percent were more attractive to wealthy people than taxable investments that

paid 11 percent. Since almost no corporation in the country consistently earned
11 percent per year, capital flooded into bonds for projects in cities all over the
country.15

Table 1: THE DECLINE OF TAXABLE INCOMES OVER $300,000
FROM 1916 TO 1921

YEAR
NUMBER OF

RETURNS NET INCOME
All classes

Incomes over
$300,000

All classes
Incomes over
$300,000

1916
1917 1918
1919 1920
1921

437,036
3,472,890
4,425,114
5,332,760
7,259,944
6,662,176

1,296
1,015
627
679

395 246

$6,298,577,620
13,652,383,207
15,924,639,355
19,859,491,448
23,735,629,183
19,577,212,528

$992,972,986
731,372,153
401,107,868
440,011,589
246,354,585
153,534,305

Source Andrew Mellon, Taxation: The People’s Business (New York:
Macmillan, 1924), 74.

Mellon estimated in 1923 that Americans held fully $12 billion—a

threefold increase in ten years—in tax-exempt bonds. This $12 billion was
almost three times the amount of the federal budget and more than half of the
debt owed by the national government. All of these rich people pouring cash into
municipal bonds alarmed Mellon: America’s industries, he argued, were starving
for capital while the cities had abundant low-interest cash available whether they
needed it or not. Thus, the U. S. had more and more large football stadiums and
civic centers but fewer and fewer factories where these cityfolks could work
long-term jobs.16

Mellon knew firsthand how hard it was for speculative ventures—such as
making aluminum or drilling for oil—to raise the money needed for success.
Poor or middle-class people, living from payday to payday, could rarely afford to
invest in these high-risk ventures. Only the wealthy could afford the risk and
supply the capital to start up high-risk industries. When the top incomes in the U.
S. shifted away from corporate development and into tax-exempt bonds, new
industries especially had trouble raising the capital to compete. But, Mellon
insisted, the whole economy suffered, too. He used William Rockefeller, the

brother of John D., as an example of high taxes chasing capital out of productive
investment. When Rockefeller died in 1923, Mellon discovered that he had $44
million in tax-exempt bonds and only $7 million left in Standard Oil.17 Mellon
urged Congress to support a law— even a constitutional amendment—to abolish
the tax-free status of city and state bonds. But he knew this was no quick fix. As
long as taxes were high, investors would find some way to avoid them. Taxes
had to be slashed “to attract the large fortunes back into productive enterprise.”
Then Mellon added a twist to his argument: “more revenue [for the government],
may often be obtained by lower rates.” Not just more revenue from the rich,
Mellon predicted, but more revenue overall might come to the government if
taxes were cut. He compared the government setting tax rates on incomes to a
businessman setting prices on products. “If a price is fixed too high, sales drop
off and with them profits.” Mellon asked: Does anyone question that Mr. Ford
has made more money by reducing the price of his car [from $3000 to $380] and
increasing his sales than he would have made by maintaining a high price and a
greater profit per car, but selling less [sic] cars?

Mellon, of course, recognized that there was a limit to how far you could
cut taxes and still increase revenue. “The problem of the government,” he said,
“is to fix rates which will bring in a maximum amount of revenue to the Treasury
and at the same time bear not too heavily on the taxpayer or on business
enterprises.” Mellon believed that 25 percent was about as much as rich people
would pay in taxes before they rushed to the tax shelters.18

Mellon’s prediction that lowering tax rates might produce more revenue
for the government was controversial right from the start. Progressives
shuddered at the thought; but even conservatives were nervous. At stake to
conservatives was balancing the budget and shrinking the high national debt.
Over $7.5 billion worth of 4 percent Liberty bonds was coming due in 1923.
None of the bonds could be paid off if Mellon was wrong. The government
would have to renegotiate these bonds, probably at higher rates, and then borrow
more each year to make up for lower revenues and for the added interest
payments on the national debt. It would then be harder in the future to balance
the budget, confidence in the American government would fall, interest rates
might rise, and investors might withdraw capital from the American economy.
The economic downturn after the war might persist through the 1920s. Mellon
quietly waged his war of ideas first with Harding and then with Coolidge till
both decided to back him.19

Mellon was an odd sort of man to command such attention in the Harding-
Coolidge administration. After Harding was elected, he invited Mellon to come

to his home in Marion, Ohio, to discuss the Treasury job. Mellon took the train
to Marion and found no one in the depot to meet him. So he walked the mile to
Harding’s house, suitcase in hand, and waited in line—behind local jobseekers—
to have his appointment with Harding. When the astounded clerk realized
Mellon was waiting in the reception room, Mellon refused to have any fuss made
and insisted on taking his turn behind the others. When Mellon’s turn finally
came, he spent much of the time trying to talk Harding out of choosing him to
head the Treasury Department. At last, Harding had a man for his cabinet who
was not seeking glory and who couldn’t be bought.20

Sometimes Mellon’s humility created embarrassments. At a press banquet
Mellon was mistakenly called to the phone and ended up being asked to take a
long message for some reporter named George. Mellon dutifully took three
pages of notes from the stranger and delivered them to George.21

In Harding’s administration, Mellon’s low-key personality and his
encyclopedic knowledge of economics became legendary. At a cabinet meeting
in 1921, the question came up whether the U. S. should scrap a war factory that
had cost $12 million, or a similar amount should be spent to refurbish it. Finally,
Mellon was asked his opinion.

Mr. Mellon was hesitant. Then he spoke up in his low, quiet, dry voice.
The matter was not exactly in his department; he had not given the problem
any study; he was not familiar with all the conditions and the full situation;
it was a question of some importance; he did not wish to be understood as
giving his final opinion unless he had opportunity to go into the whole
matter more fully, but he thought he could indicate possibly what his final
judgment might be, if allowed to tell what he had done in a somewhat
similar and personal case. He owned a war plant that stood him about
fifteen or sixteen millions, and just the other day the question had come up
whether to spend that much more money on it or to wipe it off. “I told ’em
to scrap it,” concluded Mr. Mellon.22

And so the government scrapped its war plant. In a later cabinet meeting
on international relations, the subject of the Chinese Eastern Railway came up:

The President leaned over to Attorney General [Harry] Daugherty and
whispered, “Now we’ve got him. Surely he wasn’t in this.”

“I don’t suppose, Mellon,” said President Harding, winking at
Daugherty, and assuming a most casual manner, “that you were interested in
the Chinese Eastern Railway, were you?”

“Oh, yes,” Mr. Mellon replied placidly; “we had a million or a million

and a half of the bonds.” And he told the cabinet all about the road; all
about it—not part—all.

“It’s no use,” said the President, “no use. He’s the ubiquitous financier of
the universe.”23

As the resident “financier of the universe,” Mellon commanded respect;
and in 1924 when he wrote Taxation: The People’s Business, he had full
presidential support. The press dubbed his proposal the “Mellon Plan.” Its four
main points were:

1. Cut the top income tax rate to 25 percent. This was one of the first
things Mellon had tried to do when he took office. In 1921 Congress did cut
the top rate from 73 to 58 percent; but after this the resistance stiffened. The
Progressives wanted a high tax rate on the rich and they had the logic of
democratic politics on their side: few voters earned large incomes; many
voters resented those who did, and therefore there was always support for a
soak-the-rich policy. Mellon believed that about 25 percent was the most
that investors would pay before they fled to tax-exempt bonds. Cutting the
top tax to 25 percent would, he predicted, bring the large fortunes back into
productive enterprise and might generate a surplus of revenue for the
government.24

2. Cut taxes on low incomes. When Mellon took office the existing rates
were 4 percent on those incomes of $4000 or less, and 8 percent on incomes
over $4000. Mellon wanted to cut these rates from 4 to 3 percent and from
8 to 6 percent; later he argued that these rates should be cut even further. No
doubt Mellon was being politically shrewd with this part of his plan, but he
also seems to have believed in what he was doing. Tax policy, he argued,
“must lessen, so far as possible, the burden of taxation on those least able to
bear it.” To further this end, he also suggested an income-tax credit of 25
percent on earned income—that is, income earned by wages would be taxed
less than income earned through investments. Mellon also proposed a
repeal of the federal taxes on telegrams, telephones, and movie tickets. The
tax on movie tickets, especially, was a fee “paid by the great bulk of the
people whose main source of recreation is attending the movies in the
neighborhood of their homes. The loss in revenue would be about seventy
million dollars, but it would constitute a direct saving to a large number of
people whose tax burden should be lightened wherever it is possible to do
so.”25

But Progressives often opposed cutting the tax rates even on the
lowerincome groups. When the income tax first became law, for example,

Robert LaFollette wanted the taxing to start at $10,000, instead of $20,000.
In later Congressional debates he often tried to reduce the personal
exemptions, so that taxes would start on incomes of $1,000, instead of
$2,000. As Governor of Wisconsin, he pushed for a bill that allowed the
state to start taxing those who made as little as $800. When LaFollette died
in 1925, his son, Robert Jr., went to the Senate and picked up where his
father left off. He joined thirteen other Progressive senators in voting
against Mellon’s bill to cut taxes from 1V£ to Va percent on those earning
less than $4,000 per year.26

3. Reduce the federal estate tax. In 1916 Congress passed the first
federal inheritance tax. The rates were progressive and started on estates of
over $50,000. By the time Mellon took office the top rate had been
increased from 5 to 25 percent. Progressives pushed the maximum up to 40
percent at the same time the Mellon Plan was launched. Mellon opposed
this vigorously. He thought that states, not the federal government, should
enjoy the revenue from inheritance taxes. He also argued that stocks and
properties in large estates could not net their full value because with high
taxes they would have to be sold quickly by heirs. Furthermore, large estate
taxes, like large income taxes, tempted the wealthy to shift their fortunes
into tax-exempt shelters.27 In the case of large estates, the shelter would be
tax-exempt foundations, as Mellon would show in the 1930s.

4. Efficiency in government. The 1919 federal budget was over $18
billion; Mellon wanted to see annual budgets drop below $4 billion. Smaller
budgets meant less need for tax revenues and also greater ease in reducing
the $24 billion national debt. In the Treasury Department Mellon cut
personal expenses; he also cut from the Treasury Department staff an
average of one person per day every day during the 1920s. He was able to
do this because lower tax rates meant fewer returns, which meant fewer
people wereneeded to process and audit returns. Mellon had other ideas,
too.He cut the size of paper bills to fit wallets more easily and thereby
saved expenses on paper and ink.28
The Mellon Plan was probably the subject of more debate than any other

political issue during the 1920s. Not just the money was involved; two political
ideologies were clashing. In a sense, it made little difference whether a man
making $4000 paid $120 tax under the old rates, or $67.50 under the Mellon
Plan. But the Progressives wanted to take these small amounts, add them to the
huge windfalls they hoped to extract from the rich, and use the money to back
the McNary-Haugen bill, which authorized the government to help farmers

market their surplus crops; pay a cash bonus to veterans of World War I; and pay
for the federal development of hydroelectric power along the Tennessee River
Valley. Mellon, by contrast, wanted to use any surplus revenue from tax cutting
to retire the national debt. He called the Progressive agenda “taking money out
of the pockets of all the people in order that it shall find its way back into the
pockets of some of the people.”29

Mellon made one exception to his theme of limited government—he
favored a tariff. Perhaps he felt obligated to support a tariff because the
Republican party endorsed one. Still, it created inconsistencies in his argument
and opened him to attack. When the Republicans passed the Fordney-McCumber
Tariff in 1922, Mellon seemed comfortable supporting it. Included in this tariff
was a three-cent-a pound rise in the duty on imported aluminum. Mellon, of
course, had divested himself of his Alcoa interests when he went to Washington,
but there was still understandable criticism of him. Senator William Borah, a
Progressive from Idaho, attacked Mellon for opposing government protection for
farmers but favoring government protection for Alcoa.30

The debate between Mellon and the Progressives was fought almost every
year in Congress. In the early 1920s, the sides were about evenly matched. In the
tax bills of 1921, 1922, and 1924, Mellon and his supporters reduced the rates on
large personal incomes to 46 percent, a minor victory; corporation taxes,
however, were raised from 10 to 12.5 percent, a minor defeat. Progressives had
the rates on large estates hiked from 25 to 40 percent. They also enacted a gift
tax to prevent the rich from giving their fortunes away before they died. Mellon
did get his lower rates on incomes below $8,000, but this was less controversial
because it was so politically popular. The Democratic party leaders also
suggested lower rates and, on occasion, so did Progressives.31

When Harding died in 1923 and Coolidge became President, Mellon found
himself with a strong ally to help break the Congressional deadlock. Coolidge
studied the tax problem and agreed with Mellon’s conclusions. “I agree
perfectly,” Coolidge said, “with those who wish to relieve the small taxpayer by
getting the largest possible contribution from the people with large incomes. But
if the rates on large incomes are so high that they disappear, the small taxpayer
will be left to bear the entire burden.”32

Coolidge and Mellon not only thought alike, they acted alike. Both men
were shy and at state dinners they must have made guests uneasy because they
said almost nothing. Cleveland Amory wrote that Mellon and Coolidge seemed
to have conversed “almost entirely in pauses.” They even installed a direct phone
hookup to each other, perhaps to share silence together.33

The two men were quiet for different reasons. Coolidge grew up on a farm
in Vermont. His mother died when he was young and he saw few people as a
boy, so he never developed social skills. Mellon, by contrast, had a weak
speaking voice, and the presence of a crowd made him uneasy. Coolidge’s
political success and Mellon’s business success only reinforced the problem;
crowds, jobseekers, and fawners all sought these men out for favors. A retreat to
silence was their response to these pressures.34

Both men took almost childish delight in their families. Coolidge adored
his wife and bought her fancy clothes and presents. When driving his car,
Coolidge allowed only family members to ride with him. Mellon, although
divorced, was close to his two children, Ailsa and Paul. “With his children this
quiet, reserved man was a different being from the financier the world knew,”
observed Mellon’s nephew William. Mellon would join his children on sled
rides, he would fly kites and play ball with them, or chase them in blind man’s
bluff. “If the children slid down the banisters, he would slide with them,” his
nephew observed. “He would play hide-and-seek until they were tired of the
game.”35

Distrustful of outsiders, both Coolidge and Mellon found joy in pets or
possessions. Coolidge had a pet raccoon that roamed the White House freely; he
was given a parrot trained to say “What about the appropriation?”; and he raised
chickens in the White House back yard. Mellon had an all-aluminum car; and he
assembled one of the finest art collections in the world. This closeness in
personality and philosophy may have united Coolidge and Mellon and made
them more forceful in their appeals for tax cuts and balanced budgets.36

The 1924 elections shifted the balance of power to the conservatives.
Coolidge ran for reelection and won a landslide victory over the Democrats and
also LaFollette, who ran as a third-party candidate. The tax cuts were a major
issue in the campaign and the Republicans now had a mandate and a strong
congressional majority to put them into effect. Congress passed most of the
Mellon Plan in 1926. In 1928 and 1929, Mellon recommended, and Congress
passed, further tax cuts: the estate tax was halved to 20 percent, top incomes paid
24 percent, and smaller incomes had even larger proportional reductions.37

The Progressives denigrated his achievements whenever possible. They
could hardly dispute his results; instead they challenged his motives. In 1925,
Senator Norris announced, “Mr. Mellon himself gets a larger personal reduction
than the aggregate of practically all the taxpayers in the state of Nebraska.” The
records showed, however, that Mellon also paid more in income taxes than did
all of the taxpayers of Nebraska. John Nance Garner, the Democratic leader in

the House, said in 1924 that the Mellon Plan had “for its sole purpose the
reduction of the larger taxpayers at the expense of the smaller taxpayer.” To
Senator LaFollette, the Mellon Plan meant that “wealth will not and cannot be
made to bear its full share of taxation.”38

The results of Mellon’s tax cuts in 1926, however, as seen in Table 2, show
that the tax burden shifted toward, not away from, the rich. In 1921 people who
earned less than $10,000 per year paid almost as much in total income taxes as
did those who earned over $100,000 per year. In 1926, the ratios changed: those
who earned over $100,000 per year paid over ten times as much in aggregate
income taxes as those who earned less than $10,000 per year. Meanwhile, the
total revenue from 1921 to 1926 had increased. These trends continued with
Mellon’s smaller tax cuts in 1928 and 1929. In 1929, the income-tax revenue
surpassed $1 billion. Those in the $100,000 bracket paid 65 percent of it; those
in the under $10,000 bracket paid only 1.3 percent of the total tax.39

As a last resort, Progressives attacked Mellon’s integrity. He manipulated
tax audits, they charged, and refunded $3.5 billion during the 1920s to
Republican friends and to corporations in which he had a large interest. Alcoa,
for example, received a $15 million refund for supposed overpayment of taxes
during the war. Refunds also went to Gulf Oil and to seventeen people who
contributed $10,000 to the Republican party in 1930.40

These attacks suggest that Mellon used his office to ladle cash to himself and
his cronies. Mellon, however, had little to do with granting refunds; a Board of
Tax Appeals ruled on these cases. This Board did award $3.5 billion in refunds
to taxpayers during the 1920s, as the Progressives charged; but it also reassessed
other taxpayers $5.3 billion during this same period. In other words, the Treasury
department took in more revenue in reassessments than it lost in refunds. And
prominent Democrats, as well as Republicans, were among the winners and
losers in tax cases during the 1920s.41

Table 2: THE TAX REVENUE COLLECTED ACCORDING TO
INCOME GROUPINGS BEFORE AND AFTER THE 1926 TAX CUTS
Net Income
Grouping

Tax Revenue Collected from Income Grouping (In Millions
of constant 1929 Dollars)

1921 1926
Less than
$10,000

$155.1 $ 32.5

$10,000 to
$25,000

121.8 70.3

$25,000 to
$50,000

108.3 109.4

$50,000 to
$100,000

111.1 136.6

Over $100,000 194.0 361.5
Total $690.2 $710.2

Source: James Gwartney, “Tax Cuts: Who Shoulders the Burden?”
Economic Review (March 1982).

Mellon usually avoided critics and stayed out of public arguments.42

Reporters often quoted Mellon’s critics to him to see how he would respond. “It
is merely vicious piffle,” Mellon once said when asked about a criticism.
Another time, a Republican leader asked him what he thought of Senator Borah,
a regular critic of Treasury policies. Mellon replied, “I never think of him unless
somebody mentions his name.” Some listeners probably thought this retort was
clever; but Mellon meant it. He knew his energy was limited and he wanted to
spend it working on ways to strengthen the economy. “Worry,” concluded
Mellon, “is the sport of men who have nothing to do and plenty of time in which
to make a mess of doing it.”43

This attitude served him well in the 1930s, the last years of his life, when
the New Dealers came into power and his policies came under attack. After
Coolidge’s term, Mellon stayed on as Herbert Hoover’s Secretary of Treasury.
But the two men clashed over how to respond to the Great Depression. Mellon
resigned in February, 1932, and served as Hoover’s Ambassador to Great Britain
until Franklin Roosevelt took office as President in 1933. Under both Hoover
and Roosevelt federal income taxes were raised. By 1935, the top marginal rate
had again reached almost 80 percent, and investors again manipulated their
investments to avoid taxes. To make up for lost revenue, Congress passed a
series of excise taxes on bank checks, movie tickets, telephone calls, gasoline,
tires, cars, electricity, lubricating oils, and grape concentrates. The New Deal
was funded in large part by the money raised from these taxes. Excise taxes,
however, are considered regressive because they hit lower income groups
proportionally more heavily than richer groups. Mellon had slashed excise taxes
during the 1920s to lighten the burden on the common man. But even though
Mellon’s tax policies were overturned, he believed that his ideas would endure
and that history would vindicate his policy of low tax rates. He retired from
politics, donated his $50 million art collection to the National Gallery of Art, and

died peacefully in 1937.44

III
College textbooks have naturally devoted space to Andrew Mellon and the

1920s. One of the most widely used texts is The National Experience by John M.
Blum of Yale, William S. McFeely of the University of Georgia, Edmund S.
Morgan of Yale, Arthur Schlesinger, Jr., of the City University of New York,
Kenneth Stampp of Berkeley and C. Vann Woodward of Yale. In 1993, this text
went into its eighth edition. Blum and Schlesinger, who has won a Pulitzer Prize,
wrote the sections on the 1920s and 1930s, and here is what they say about
Mellon: Foremost among Harding’s advisers was Secretary of the Treasury
Andrew Mellon, a reticent multimillionaire from Pittsburgh whose intricate
banking and investment holdings gave him, his family, and his associates
control, among many other things, of the aluminum monopoly. A man of slight
build, with a cold and weary face, Mellon exuded sober luxury and
contemptuous worldliness. “The Government is just a business,” he believed,
“and can and should be run on business principles.”

Great businesses, as Mellon knew, thrive on innovation and expansion. Yet
the only business principle he considered relevant to government was economy.
With small regard for the services that only government could furnish the nation,
Mellon worked unceasingly to reduce federal expenditures. Expenses had to be
cut if he was to achieve his corollary purpose: the reduction of taxes, especially
taxes on the wealthy. It was better, he argued, to place the burden of taxes on
lowerincome groups, for taxing the rich inhibited their investments and thus
retarded economic growth. A share of the tax-free profits of the rich, Mellon
reassured the country, would ultimately trickle down to the middle-and
lowerincome groups in the form of salaries and wages. Robert LaFollette
paraphrased that theory succinctly: “Wealth will not and cannot be made to bear
its full share of taxation.”45

But Mellon did not want to “place the burden of taxes on lowerincome
groups.” On the contrary, as we have seen, he cut taxes proportionally more on
the lower income groups. The rich were carrying almost the entire income-tax
burden after Mellon’s tax cuts. It was the tax hikes of the 1930s that shifted the
burden of taxation back to the lowerincome groups. But Schlesinger almost
completely ignores these tax hikes. He never mentions that large incomes were
taxed at 63 percent after 1932, and at 79 percent after 1934. He also never
mentions the new excise taxes that became law after 1932 and were used to fund
New Deal programs. Another best-selling textbook has been The American

Nation, by John Garraty of Columbia University. Garraty describes Mellon’s
ideas this way: Mellon carried his policies to unreasonable extremes. He
proposed eliminating inheritance taxes and reducing the tax on high incomes by
two-thirds, but he opposed lower rates for taxpayers earning less than $66,000 a
year, apparently not realizing that economic expansion required greater mass
consumption as well. Freeing the rich from “oppressive” taxation, he argued,
would enable them to invest more in potentially productive enterprises, the
success of which would create jobs for ordinary people. Little wonder that
Mellon’s admirers called him the greatest secretary of the treasury since
Alexander Hamilton.

Although the Republicans had large majorities in both houses of Congress,
Mellon’s proposals were too reactionary to win unqualified approval.46

Garraty’s account, in content and in tone, is similar to Schlesinger’s. When
Garraty says Mellon “opposed lower rates for taxpayers earning less than
$66,000 a year. . . .” he is wrong. Those earning under $66,000 a year, as we
have seen, had the largest proportional tax cut and had most of their tax burden
lifted. Also, Mellon did not propose “eliminating inheritance taxes,” as Garraty
claims. Mellon wanted the states, not the federal government, to receive revenue
from inheritance taxes. Like Schlesinger, Garraty never mentions the specific tax
rates on large incomes during the 1930s. Nor does he mention the excise taxes of
the New Deal period.

Probably the best-selling college history textbook is The American
Pageant by Thomas A. Bailey and David M. Kennedy, both of Stanford. This
text is in its tenth edition and has sold over two million copies, according to its
promotional literature. Bailey and Kennedy describe Mellon’s ideas. Then they
conclude that “Mellon’s spare-the-rich policies thus shifted much of the tax
burden from the wealthy to the middle-income groups.”47 This, of course, is the
same error that Schlesinger and Garraty make. Mellon’s tax cut produced one
result; and these historians have said that the opposite occurred. Bailey and
Kennedy also ignore the tax increases of the 1930s.

Other texts are similar. There seems to be almost no correct information in
any college history text on the impact of Mellon’s tax cuts, or on the New Deal
tax hikes. Yet the tax records have been available for almost sixty years. And
studies of these records by Roy and Gladys Blakey, Benjamin Rader, James
Gwartney, and Thomas Silver have also been available for some time. This
situation is especially perplexing because Schlesinger has written well-respected
books on the 1920s and 1930s, and Garraty has written widely in economic
history. Expertise in the field, in fact, does not seem to correlate with presenting

accurate information. Irwin Unger, for example, is also an economic historian,
and even won a Pulitzer Prize for a book on the Greenback era. Yet in his
textbook, These United States, he writes: [Mellon] persuaded Congress to
eliminate the wartime excess-profits tax and reduce income tax rates at the upper
levels while leaving those at the bottom, untouched. Between 1920 and 1929
Mellon won further victories for his drive to shift more of the tax burden from
high-income earners to the middle and wage-earning classes. (48) It’s hard to
know who would have been more startled by Unger’s account: Mellon or the
lowerincome taxpayers, who saw both their income and excise taxes drastically
cut during the 1920s. George Santayana once said that those who do not learn
from the past are condemned to repeat it. But how can we learn what happened
in the past if historians either will not teach it or do not know it? National
debates over tax cuts occurred in the 1960s, 1980s, and the 1990s, but how can
we debate a subject intelligently if we are misinformed about the facts?49

Andrew Mellon never made an investment without knowing the relevant
facts; his business success demonstrated his grasp of financial situations. In
similar fashion, modern politicians, businessmen, and historians would do well
to learn the facts of American tax history before they try to plot its future.

CHAPTER SEVEN

Entrepreneurs vs. The Historians

A nation must believe in three things. It must believe in the past. It must
believe in the future. It must, above all, believe in the capacity of its people so to
learn from the past that they can gain in judgment for the creation of the future.

—Franklin D. Roosevelt

One reason for studying history is to learn from it. If we can discover
what worked and what didn’t work, we can use this knowledge to create a better
future. Studying the rise of big business, for example, is important because it is
the story of how the United States prospered and became a world power. During
the years in which this took place, roughly from 1840 to 1920, we had a variety
of entrepreneurs who took risks and built very successful industries. We also had
a state that created a stable marketplace in which these entrepreneurs could
operate. However, this same state occasionally dabbled in economic
development through subsidies, tariffs, regulating trade, and even running a steel
plant to make armor. When the state played this kind of role, it often failed. This
is the sort of information that is useful to know when we think about planning
for the future.

The problem is that many historians have been teaching the opposite
lesson for years. They have been saying that entrepreneurs, not the state, created
the problem. Entrepreneurs, according to these historians, were often “robber
barons” who corrupted politics and made fortunes bilking the public.1 In this
view, government intervention in the economy was needed to save the public
from greedy businessmen. This view, with some modifications, still dominates in
college textbooks in American history.

American history textbooks always have at least one chapter on the rise of
big business. Most of these works, however, portray the growth of industry in
America as a grim experience, an “ordeal” as one text calls it. Much of this
alleged grimness is charged to entrepreneurs.2

Thomas Bailey, in The American Pageant, is typical when he says of
Vanderbilt: “Though ill-educated, ungrammatical, coarse, and ruthless, he was
clear-visioned. Offering superior railway service at lower rates, he amassed a
fortune of $100 million.”3 If this second sentence is true, to whom was
Vanderbilt “ruthless?” Not to consumers, who received “superior service at lower
rates,” but to his opponents, such as Edward Collins, who were using the state to
extort subsidies and impose high rates on consumers. This distinction is vital and
must be stressed if we are to sort out the impact of different types of
entrepreneurs.

I have systematically studied three of the best-selling college textbooks in
American history: The American Pageant, by Thomas Bailey and David
Kennedy of Stanford University; The American Nation, by John Garraty of
Columbia University; and The National Experience, by John Blum of Yale
University, Edmund Morgan of Yale University, William S. McFeely of the
University of Georgia, Arthur Schlesinger, Jr., of the City University of New
York, Kenneth Starnpp of the University of California at Berkeley, and C. Vann
Woodward of Yale University. These works have been written by some of the
most distinguished men in the historical profession; all three books have sold
hundreds of thousands of copies.4 In all three, John D. Rockefeller receives more
attention than any other entrepreneur. This is probably as it should be. His story
is a crucial part of the rise of big business: he dominated his industry, he
drastically cut prices, he never lobbied for a government subsidy or a tariff, and
he ended up as America’s first near-billionaire.

The three textbooks do credit Rockefeller with cutting costs and improving
the efficiency of the oil industry, but they all see his success as fraudulent. In The
National Experience, Woodward says that: Rockefeller hated free competition
and believed that monopoly was the way of the future. His early method of
dealing with competitors was to gain unfair advantage over them through special
rates and rebates arranged with the railroads. With the aid of these advantages,
Standard became the largest refiner of oil in the country. … In 1881 [Standard
Oil] controlled nearly 90 percent of the country’s oil refining capacity and could
crush any remaining competitors at will.5

In The American Nation, John Garraty commends Rockefeller for his skill
but adopts roughly the same line of reasoning as does Woodward: Rockefeller
exploited every possible technical advance and employed fair means and foul to
persuade competitors either to sell out or to join forces…. Rockefeller competed
ruthlessly not primarily to crush other refiners but to persuade them to join with

him, to share the business peaceably and rationally so that all could profit….
Competition almost disappeared; prices steadied; profits skyrocketed. By 1892
John D. Rockefeller was worth over $800 million.6

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. Even
then, the Vanderbilts offered the same rebates to anyone who shipped as much
oil on the New York Central as Rockefeller did. In any case, the rebates went
largely to cutting the price of oil for consumers, not to Rockefeller himself.

Perhaps even more misleading than the faulty stress on the rebates is the
omitting of the most important feature of Rockefeller’s career: his thirty-year
struggle with Russia to capture the world’s oil markets. Not one of the three texts
even mentions this oil war with Russia.

Three facts show the importance of Rockefeller’s battle with the Russians.
First, about two-thirds of the oil refined in America in the late 1800s was
exported. Second, Russia was closer than the U. S. to all European and Asian
markets. Third, Russian oil was more centralized, more plentiful, and more
viscous than American oil. If Rockefeller had not overcome Russia’s natural
advantages, no one else could have. America would have lost millions of dollars
in exports and might have even had to import oil from Russia. The spoils of
victory—jobs, technology, cheap kerosene, cheap byproducts, and cheap gas to
spur the auto industry—all of this might have been lost had it not been for
Rockefeller’s ability to sell oil profitably at six cents a gallon. The omitting of
the RussoAmerican oil war was so striking that I checked every college
American history text that I could find (twenty total) to see if this is typical. It is.
Only one of the twenty textbooks even mentions the Russian oil competition.7

Obviously textbooks can’t include everything. Nor can their authors be
expected to know everything. Textbook writers have a lot to cover and we can’t
expect them to have read much on Rockefeller. Unfortunately, they also don’t
seem to be very familiar with the books on Vanderbilt, Hill, Schwab and other
entrepreneurs.8 None of the twenty texts that I looked at describe the federal aid
to steamships and the competition between the subsidized lines and Vanderbilt.
Similarly, none of the textbooks mentions Schwab’s triumph over the
government-run armor plant in West Virginia. The story of the Scrantons is also
absent.

Some of the textbook authors do talk about Hill and his accomplishments.
In fact, large sections of Bailey’s, Garraty’s, and Woodward’s books tell us about
the transcontinental railroads. But the problem of the government subsidies is
often not well-reasoned. Bailey, for example, admits that Hill was “probably the
greatest railroad builder of all.” Bailey even displays a picture of all four
transcontinentals and says that Hill’s Great Northern was “the only one
constructed without lavish federal subsidies.” But from this, he does not consider
the possibility that federal subsidies may not have been needed. Instead, he says,
“Transcontinental railroad building was so costly and risky as to require
government subsidies.” As we have seen earlier, however, when the federal aid
to railroads came, so did political entrepreneurship and corruption. Bailey
describes some of this boondoggling and blames not the government, for making
federal aid available, but the “grasping railroads” and “greedy corporations,” for
receiving it.9

Bailey later applauds the passing of the Sherman Antitrust Act and the
creation of the Interstate Commerce Commission.

Not until 1914 were the paper jaws of the Sherman Act fitted with
reasonably sharp teeth. Until then, there was some question whether the
government would control the trusts or the trusts the government. But the iron
grip of monopolistic corporations was being threatened. A revolutionary new
principle had been written into the law books by the Sherman Anti-Trust Act of
1890, as well as by the Interstate Commerce Act of 1887. Private greed must
henceforth be subordinated to public need.10

As we have seen, however, the efficient Hill was the one who got hurt by
these laws: The Hepburn Act, which strengthened the Interstate Commerce
Commission, throttled his international railroad and shipping business; the
Sherman Act was used to break up his Northern Securities Company.

Not all historians accept the modified robber-baron view dominant in the
textbooks. Specialists in business history have been moving away from this view
since the 1960s. Instead, many of them have adopted an interpretation called the
“organizational view” of the rise of big business. Where the authors of these
textbooks say that entrepreneurs cheated us, organizational historians say that
entrepreneurs were not very significant. Business institutions, and their
evolution, were more important than the men who ran them. To organizational
historians, the rise of the corporation is the central event of the industrial
revolution. The corporation—its layers of specialized bureaucracy, its
centralization of power, and its thrust to control knowledge—evolved to meet the
new challenges in marketing, producing, and distributing goods. In this view, of

course, moral questions are not so relevant. The entrepreneur’s strategy was
almost predetermined by the structure of the industry and the peculiarities of
vertical integration. The corporation was bigger than the entrepreneur.11

The organizational historians have contributed much to the writing of
business history. Their amoral emphasis on the corporation is a refreshing
change from the Robber Baron model. Yet, this points up a problem as well.
Amoral organizational history has a deterministic quality to it. The structure of
the corporation shapes the strategy of the business. In this setting, there is little
room for entrepreneurship. Whatever happened had to happen. And if any
entrepreneur had not done what he did, another would have come along and
done roughly the same thing.

This point of view is perhaps most boldly stated by Robert Thomas:
Individual entrepreneurs, whether alone or as archetypes, don’t matterl
(Thomas’s emphasis) And if indeed they do not matter, the reason, I suggest, is
that the supply of entrepreneurs throughout American history, combined with
institutions that permitted—indeed fostered— intense competition, was
sufficiently elastic to reduce the importance of any particular individual. . . . This
is not to argue that innovations don’t matter, only that they do not come about as
the product of individual genius but rather as the result of more general forces
acting in the economy.12

Thomas illustrates his view in the following way: Let us examine an
analogy from track and field; a close race in the 100-yard dash has resulted in a
winner in 9.6 seconds, second place goes to a man whose time is 9.7, and the
remaining six runners are clustered below that time. Had the winner instead not
been entered in the race and everyone merely moved up a place in the standings,
I would argue that it would only make a marginal difference to the spectators. To
be sure they would be poorer because they would have had to wait one-tenth of a
second longer to determine the winner, but how significant a cost is that? That is
precisely the entrepreneurial historian’s task, to place the contributions of the
entrepreneur within a marginal framework.13

It is only when we extend Thomas’ logic that we see its flaws. For, in fact,
small margins are frequently the crucial difference between success and failure,
between genius and mediocrity. To continue the sports analogies, the difference
between hitting the ball 311 feet and 312 feet to left field in Yankee stadium is
probably the difference between a long out and a home run. The difference
between a quarterback throwing a pass forty yards or forty-one yards may be the
difference between a touchdown and an incompleted pass. When facing a ten-

foot putt, any duffer can hit the ball nine or eleven feet; it takes a pro to
consistently sink it.

In the same way small margins can reveal the differences between an
entrepreneur, with his creative mind and innovative spirit, and a run-of-the-mill
businessman. John D. Rockefeller dominated oil refining primarily by making a
series of small cuts in cost. For example, he cut the drops of solder used to seal
oil cans from forty to thirty-nine. This small reduction improved his competitive
edge: he gained dominance over the whole industry because he was able to sell
kerosene at less than eight cents a gallon.

A better illustration would be the small gradual cost-cutting that allowed
America to capture foreign steel markets. When Andrew Carnegie entered steel
production in 1872, England dominated world production and the price of steel
was $56 per ton. By 1900, Carnegie Steel, headed by Charles Schwab, was
manufacturing steel for $11.50 per ton—and outstripping the entire production
of England. That allowed railroad entrepreneur James J. Hill to buy cheap
American rails, ship them across the continent and over the ocean to Japan, and
still outprice England. The point here is that America did not claim these
markets by natural advantages: they had to be won in international competition
by entrepreneurs with vision for an industry and ability to improve products bit
by bit.14

It would be silly for someone to say that if Carnegie had not come along,
someone else would have emerged to singlehandedly outproduce the country
that had led the world in steel. Yet some organizational historians say exactly
this. They are right in claiming that the rise of the corporation made some of
Carnegie’s success possible. But Carnegie was the only steel operator before
Schwab to take full advantage of this rise. They are also right in saying that the
environment (e. g. location and resources) plays some role in success. But
Carnegie rose to the top before the opening of America’s Mesabi iron range.
American steel companies began outdistancing the British even when the
Americans had to import some of their raw material from Cuba and Chile,
manufacture it in Pennsylvania, and ship it across the country and over oceans to
foreign markets.

This is not to denigrate the organizational view, but only to recognize its
limitations. By focusing on the rise of the corporation, organizational historians
have shown how corporate structure pervaded and helped to shape American
economic and social life. However, the organizational view, like all other
interpretations, can’t explain everything. Specifically, it tends to ignore or
downgrade the significant and unique contributions that entrepreneurs made to

American economic development.
The “organizational” and “robber baron” views both have some merit. The

rise of the corporation did shape economic development in important ways.
Also, we did have 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. These entrepreneurs are a major part of the story of American
business.

Many historians know this and teach it, but the issue is often muddled
because textbooks tend to lump the predators and political adventurers with the
creators and builders. Therefore, the teaching ends up like this: “Entrepreneurs
cut costs and made many contributions to American economic growth, but they
also marred political life by bribing politicians, forming pools, and misusing
government funds. Therefore, we needed the federal government to come in and
regulate business.”

Historians’ misconceptions about entrepreneurs have led to problems in
related areas as well. This is nowhere more apparent than in the studies of social
mobility, which have become very popular among historians ever since the
1960s. Naturally, historians of social mobility have not operated in a vacuum.
They have often been influenced by the prevailing historical theories denigrating
the role of entrepreneurs and championing the role of government regulation. Put
another way, if America’s industrial entrepreneurs were a sordid group of
replaceable people, then they could not have helped, and may have hindered,
upward social mobility in cities throughout America. This is the implicit
assumption in many social mobility studies conducted in the last generation.

Influenced by these prevailing views, many historians have argued two
basic ideas about social mobility under American capitalism. First is the notion
of low social mobility for manual laborers. In Poverty and Progress: Social
Mobility in a Nineteenth Century City, Stephan Thernstrom finds that “the
common workman who remained in Newburyport, [Massachusetts, from] 1850
to 1880 had only a slight chance of rising into a middle class occupation.” As for
the captains of industry at the opposite end of the spectrum, the second idea is
that they usually got rich because they were born rich. This again suggests little
mobility. For example, William Miller, recorded the social origins of 190
corporation presidents between 1900-1910. He found that almost 80 percent of
them had business or white collar professionals as fathers. More recently,
Edward Pessen has argued that 90 percent of the antebellum elite in New York,

Philadelphia, and Boston was silk-stocking in origin.15

Fortunately, more careful research has discredited this negative view of
social mobility. Newburyport, for example, was a stagnant town during the thirty
years covered by Thernstrom’s research. If new industries were rare and if
opportunities were few, then, of course, we would expect social mobility to be
low. Michael Weber sensed this and did a study of social mobility in Warren,
Pennsylvania, an oil-producing boom town from 1880 to 1910. In Warren,
population multiplied every decade as market entrepreneurs created a climate for
opportunity and growth. Growth and opportunity seem to have gone together:
Warren residents were much more upwardly mobile than those living in
Thernstrom’s Newburyport.16

Flaws are also apparent in William Miller’s analysis of the social origins of
America’s corporate elite in 1910. Miller traced the background of 190 corporate
presidents and board chairmen. But as diligent as his research was, he could not
discover the social origins of 23 (12 percent) of these men. Miller draws no
inference from this lack of evidence. If they left no record, however, the fathers
were probably artisans at best, crooks at worst. Furthermore, 60 percent of
Miller’s industrialists came from farms or small towns (under 8,000 population).
This almost certainly makes their fathers country merchants rather than urban
capitalists. And the ascent from son of a country merchant to corporate president
is indeed sensational. Miller’s statistics do not “speak for themselves”: they need
careful thought and imaginative interpretation.

Newer studies suggest this too. For example, Herbert Gutman found that
most of the successful locomotive, iron, and machinery manufacturers in
Paterson, New Jersey, started work as apprentice craftsmen or iron workers. Also
important is Bernard Saracheck’s analysis of a group of entrepreneurs similar in
size and prestige to Miller’s sample. Saracheck went to “published biographies
and company histories” to get a large list of entrepreneurs in a wide range of
industries. His group was much more upwardly mobile than Miller’s group.
Almost one-half of Saracheck’s entrepreneurs had fathers who were workers or
farmers. Of course the business ties from father to son link many of Saracheck’s
men, too.17 But shouldn’t this be expected? The key point here is that an open
and growing system produces fluidity: manual laborers often became skilled
workers or clerks and, for some, there was room at the top.

We still need to explain the contrasting results of Miller and Saracheck.
Many of Miller’s men were presidents of textile corporations or railroads, both of
which were older and even declining fields by 1910. As economist Ralph
Andreano has noted, Miller’s sample neglected men from newer, more rapidly

growing industries such as oil, beverages, and publishing—where Jews and
immigrants often excelled.18 Saracheck included a wider range of businessmen
than Miller did, and perhaps for this reason he got a more upwardly mobile
group. Again we get the strong tie between rapid growth (this time in industries,
not cities) and upward mobility. The work of Edward Pessen has supported the
idea that it was easy for rich men and their children to keep their wealth and
influence over time. After studying New York City, Philadelphia, Brooklyn, and
Boston, Pessen concluded: The rich with few exceptions had been born to wealth
and comfort, owing their worldly success mostly to inheritance and family
support. Instead of rising and falling at a mercurial rate, fortunes usually
remained in the hands of their accumulators, whether in the long or the short. . . .
Antebellum urban society [and, by implication, postbeflum urban society] was
very much a class society.19

Is there any way to reconcile the stability of wealth found by Pessen and
others20 with the fluid mobility of the Scranton elite? One problem, of course, is
with technique and method. Defining who constituted a “leader,” an
“entrepreneur,” or an “industrialist” varies from study to study. A bigger problem
is the scope of the research of Pessen and others. In studying the continuity of
wealth and talent in families over time, Pessen and others rarely look at all
family members, only those who were successful. In fact, if my Scranton
research is on target, the successful seem to be the exception, not the rule.

First glances can be deceptive, hi Scranton, for example, James Blair and
brothers Thomas and George Dickson held three of the five directorships of the
First National Bank in 1880. In 1869, James Linen, a nephew of Thomas and
George Dickson, married Blair’s daughter, Anna; in 1891, Linen became
president of the bank for a twenty-two year stretch. To the casual observer, such
an occurrence illustrates overpowering continuity of leadership. However, if one
looks at all eight sons of Blair and the two Dicksons, a sharply etched picture of
failure clearly emerges. Seven of their eight sons never darkened the door of a
corporate boardroom; under the eighth, the Dickson Manufacturing Company
disintegrated. Continuity from father to son may actually have been the undoing
of the business. Furthermore, H. A. Coursen, like bank president James Linen,
married a daughter of James Blair; yet Coursen remained a small retailer with no
apparent economic influence. In the city of Scranton, at least, the scions of
power were not the men their fathers were. Before historians can assert the
continuity of economic leadership or family wealth, they must study all the
children of the rich, not just the rare conspicuous successes.

A few historians have already been doing this. Lee Benson has studied the

Philadelphia economic elite in the 1800s and finds it to be fluid with much
upward and downward mobility at all levels. Fredric C. Jaher also finds the
“upper strata” in several industrial cities to be very fluid. Stanley Lebergott has
studied corporate leadership in America and cites a high rate of discontinuity
from father to son.21 Naturally those born into wealth are, on the whole, more
successful than those born into poverty. But to say this is merely to confirm what
applies to all societies at all times. Yes, wealth counts; but so do talent, vision,
initiative, and luck.

The classic question asked by those historians who study social
stratification is this: “Who gets what and why?” We can see how many historians
err when they assume that the rich got rich by being robber barons and stayed
rich by keeping the corporation in the family and keeping newcomers out of
their group as much as possible.

There is another realm of misunderstanding, too: some historians have
implied that the economic pie was fixed. This is a weakness in many historical
studies of social stratification. Edward Pessen, for example, tells how only one
percent of the population held about forty percent of the wealth in many
industrial cities in the 1840s. His research is careful, and he insists this share
increased over time. Along similar lines, Gabriel Kolko has recorded the
distribution of income from 1910 to 1959. He points out that the top one-tenth of
Americans usually earned about thirty percent of the national income and that
the lowest one-tenth consistently earned only about one percent.22 This may be
true, but Pessen and Kolko also need to emphasize that the total amount of
wealth in American society increased geometrically after 1820. This means that
American workers improved their standard of living over time even though their
percentage of the national income may not have increased. We must also
remember that there was constant individual movement up and down the
economic ladder. Therefore, the pattern of inequality may have persisted, but the
categories of wealth-holding were still fluid in our open society. Finally, it needs
to be stressed that one percent of the population often created not only their own
wealth, but many of the opportunities that enabled others to acquire wealth.

To sum up, then, we need to divide industrialists into two groups. First,
were market entrepreneurs, such as Vanderbilt, Hill, the Scrantons, Schwab,
Rockefeller, and Mellon, who usually innovated, cut costs, and competed
effectively in an open economy. Second, were political entrepreneurs, such as
Edward Collins, Henry Villard, Elbert Gary, and Union Pacific builders, all of
whom tried to succeed primarily through federal aid, pools, vote-buying, or
stock speculation. 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.23

The second point is that, in the key industries we have studied, the state
failed as an economic developer. It failed first as a subsidizer of industrial
growth. Vanderbilt showed this in his triumph over the Edward Collins’ fleet and
the Pacific Mail Steamship Company in the 1850s. James J. Hill showed this
forty years later when his privately built Great Northern outdistanced the
subsidized Northern Pacific and Union Pacific. The state next failed in the role
of an entrepreneur when it tried to build and operate an armor plant in
competition with Charles Schwab and Bethlehem Steel. The state also seems to
have failed as an active regulator of trade. The evidence in this study is far from
conclusive; but we can see problems with the Interstate Commerce Commission
and the Sherman Antitrust Act, both of which were used against the efficient Hill
and Rockefeller.

A third point is that the relative absence of state involvement— either
through subsidies, tariffs, or income taxes—may have spurred entrepreneurship
in the 1840-1920 period. One of the traditional arguments cited by some
businessmen, especially the political entrepreneurs, is that a tariff or a subsidy
given to a new industry will help that industry survive and eventually flourish
against foreign competition. What really happened, though, is that, when Collins
and Cunard got subsidies from their governments, they did not become efficient
steamship operators; instead, they became lavish wastrels and soon came back
asking for larger subsidies, which they then used to compete against more
efficient rivals.

In the case of protective tariffs, neither George Scranton or John D.
Rockefeller needed them in establishing their steel and oil companies. The
Scranton group very profitably built America’s first large quantity of rails in a
time of a low tariff on British iron imports. Also Rockefeller never needed a
tariff (though a small one did exist) on his way to becoming the largest oil
producer in the world.

The American government also resisted the temptation to tax large
incomes for most of the 1840-1920 period. Low taxes often spur entrepreneurs
to invest and take risks. If the builders can keep most of what they build, they
will have an incentive to build more. It is true that the state lost the revenue it
could have raised if it had taxed large incomes. This was largely offset, however,
by the philanthropy of the entrepreneurs. When the income tax became law in
1913, the most anyone had to pay was seven percent of that year’s income. Most

people paid no tax or only one percent of their earnings. In the years before and
after 1913, however, John D. Rockefeller sometimes gave over 50 percent of his
annual income to charitable causes. He almost always gave more than ten
percent. Hill, Vanderbilt, the Scranton group, and Schwab were also active
givers. Sometimes they gave direct gifts to specific people. Usually, though, they
used their money to create opportunities that many could exploit. In academic
jargon, they tried to improve the infrastructure of the nation by investing in
human capital. A case in point consisted of the many gifts to high schools and
universities, north and south, black and white, urban and rural. Cheap high-
quality education meant opportunities for upwardly mobile Americans, and was
also a guarantee that the United States would have quality leadership in its next
generation. Vanderbilt University, the University of Chicago, Tuskegee Institute,
and Lehigh University were just some of the dozens of schools that were
supported by these five entrepreneurs.

Libraries were also sources of support. Not just Andrew Carnegie, but also
Hill and Rockefeller were builders and suppliers of libraries. The free public
library, which became an American institution in the 1800s, gave opportunities
to rich and poor alike to improve their minds and their careers.

Finally, America has always been a farming nation: Rockefeller attacked
and helped conquer the boll weevil in the South; Hill helped create dry farming
and mixed agriculture in the North. America’s cotton and wheat farmers took
great advantage of these changes to lead the world in the producing of these two
crops.

All of these men (except for Schwab) tried to promote self-help with their
giving. They gave to those people or institutions who showed a desire to succeed
and a willingness to work. Rockefeller and Hill both paid consultants to sort out
the deadbeats and the golddiggers. They sympathized with the needy, but
supported only those needy imbued with the work ethic.

Each entrepreneur, of course, had his own variations on the giving theme.
Vanderbilt, for example, plowed a series of large gifts into Vanderbilt University
and helped make it one of the finest schools in the nation. He almost never gave
to individuals, though, and said if he ever did he would have people lined up for
blocks to pick his pockets. Schwab, by contrast, was a frivolous giver and had
dozens of friends and hangers-on who tapped him regularly for handouts.
Rockefeller concentrated his giving in the South and the Midwest; the Scranton
group and Schwab focused on the East; Hill gave mainly in the Northwest.

Even without an income or an inheritance tax, these entrepreneurs, and
others, had trouble handing down their wealth to the next generation. This was

true in part, of course, because they gave so much of it away. As we have seen
with the Scranton group, though, most entrepreneurs did not have sons with the
same talents the fathers had. Vanderbilt’s son William was a worthy successor,
but the rest of his children showed little aptitude for business. Hill’s three sons
did not come close to matching their father’s accomplishments; one son, Louis,
followed his father as president of the Great Northern, but Louis’ career was
lackluster. The Oregonian of Portland called him “impulsive”; not so much a
railroad man, but “a painter of some ability.”24 Charles Schwab and his wife
were childless, which was probably fortunate because he squandered over $30
million and died a debtor. Rockefeller’s only son, John D. Jr., became a full-time
philanthropist. Granted, the senior Rockefeller’s five grandsons were all
multimillionaires, but their economic influence was much less than that of their
grandfather. Sometimes the descendants of these original entrepreneurs parlayed
their family names and what was left of their fortunes into political careers.
During the 1960s, two of the grandchildren of John D. Rockefeller and one of
the great grandchildren of Joseph Scranton were governors of New York,
Arkansas and Pennsylvania.25

If we seriously study entrepreneurs, the state, and the rise of big business
in the United States we will have to sacrifice the textbook morality play of
“greedy businessmen” fleecing the public until at last they are stopped by the
actions of the state. But, in return, we will have a better understanding of the past
and a sounder basis for building our future.

Notes to Chapters

Notes to Chapter One

Commodore Vanderbilt and the
Steamship Industry

1The literature on the “Robber Barons” controversy is extensive. For a
good description of the various arguments, see Glenn Porter, The Rise of Big
Business, 1860-1910 (Arlington Heights, 111.: AHM Publishing Corporation,
1973).

2No recent historian has systematically traced the history of the American
steamship industry. Two older histories are David B. Tyler, Steam Conquers the
Atlantic (New York: D. Appleton-Century Co., 1939); and John G. B. Hutchins,
The American Maritime Industries and Public Policy, 1789-1914 (Cambridge,
Mass.: Harvard University Press, 1941).

3Modern historians have usually de-emphasized entrepreneurs in
describing American industrial development. For a more detailed look at this
dichotomy between political and market entrepreneurs, see my book Urban
Capitalists (Baltimore: Johns Hopkins University Press, 1981). See also Maury
Klein, “The Robber Barons,” American History Illustrated (October 1971), 13-
22.

4Fulton’s monopoly rights are dearly spelled out in a pamphlet entitled The
Right of a State to Grant Exclusive Privileges in Roads, Bridges, Canals,
Navigable Waters, etc. Vindicated by a Candid Examination of the Grant from
the State of New York to and Contract with Robert R. Livingston and Robert
Fulton for Exclusive Navigation (New York: E. Conrad, 1811). For a good
description of the steamboat monopoly, see Maurice G. Baxter, The Steamboat
Monopoly: Gibbons v.Ogden, 1824 (New York: Alfred A. Knopf, 1972), 3-25.
See also John S. Morgan, Robert Fulton (New York: Mason/Charter, 1977), 178-
88.

5Baxter, Gibbons v. Ogden, 25-26; and Robert G. Albion, “Thomas
Gibbons” and “Aaron Ogden,” Dictionary of American Biography, 20 vols.

(New York: Charles Scribner’s Sons, 1928-37). 7:242-43; 8:636-37 (hereafter
cited as DAB). The best studies of Vanderbilt are Wheaton J. Lane, Commodore
Vanderbilt: An Epic of the Steam Age (New York: Alfred A. Knopf, 1942); and
William A. Croffut, The Vanderbilts and the Story of Their Fortune (Chicago:
Belford Clarke, 1886). A more recent study of the whole Vanderbilt family is
Edwin P. Hoyt, The Vanderbilts and Their Fortunes (Garden City, N.Y.:
Doubleday, 1962).

6Chief Justice Marshall’s written decision has been reprinted in John
Roche, ed.John Marshall: Major Opinions and Other Writings (Indianapolis:
Bobbs-Merrill, 1967), 206-25. A lively account of the Gibbons v. Ogden case is
in Albert J. Beveridge, The Life of John Marshall, 4 vols. (Boston and New
York: Houghton, Mifflin and Co., 1916-19), 4:397-460. See also Baxter,
Gibbons v. Ogden, 37-86; David W. Thomason, “The Great Steamboat
Monopoly,” American Neptune 16 (January and October 1956), 23-40, 279-80;
George Dangerfield, “Steamboats’ Charter of Freedom: Gibbons vs. Ogden,
“American Heritage (October 1963), 38-43, 78-80; and Robert G. Albion, The
Rise of New York Port (New York: Charles Scribner’s Sons, 1939), 152-55. For a
newer study, see Erik F. Haites, James Mak, and Gary M. Walton, Western River
Transportation: The Era of Internal Development, 1810-1860 (Baltimore: Johns
Hopkins University Press, 1975).

7David L. Buckman Old Steamboat Days on the Hudson River (New York:
Grafton Press, 1907), 53-55.

8Lane, Vanderbilt, 43-49; Morgan, Fulton, 179, 187; and Albion, New
York, 152-55.

9ane, Vanderbilt, 47, 50-51.
10Albion, New York, 154-55; and Lane, Vanderbilt, 56-62.
11Harper’s Weekly, March 5, 1859, 145-46; Lane, Vanderbilt, 50-84, 231;

Albion, New York, 156-57.
12Sailing ships (called “packets”) and clipper ships were still competitive

carriers of freight (not passengers) before 1860. Their reliance on wind, not coal,
made them cheaper, if not faster. During the 1850s, clipper ships captured a lot
of trade to the Orient. The most thorough account of steamships is William S.
Lindsay, History of Merchant Shipping and Ancient Commerce, 4 vols. (London:
Sampson, Marston, Low, and Searle, 1874). See also Hutchins, The American
Maritime Industries, 348-62.

13For a good history of the Cunard line, see Francis E. Hyde, Cunard and

the North Atlantic, 1840-1973 (Atlantic Highlands, N.J.: Humanities Press,
1975). See also Tyler, Steam Conquers the Atlantic 142-45; Royal Meeker,
History of the Shipping Subsidies (New York: Macmillan, 1905), 5-7; Hutchins,
American Maritime Industries, 349; and Lindsay, Merchant Shipping, 4:184. For
an excellent critique of shipping subsidies, see Walter T. Dunmore, Ship
Subsidies: An Economic Study of the Policy of Subsidizing Merchant Marines
(Bostons: Houghton, Mifflin and Co., 1907), esp. 92-103.

14Congressional Globe, 33rd Congress, 2nd session, 755-56. Cunard later
began weekly mail and passenger service. See also Tyler, Steam Conquers the
Atlantic, 136-48; and William E. Bennet, The Collins Story (London: R. Hale,
1957).

15For a defense of mail subsidies, see “Speech of James A. Bayard of
Delaware on the Collins Line of Steamers Delivered in the Senate of the United
Staes, May 10, 1852” (Washington: John T. Towers, 1852). See also Thomas
Rainey, Ocean Steam Navigation and the Ocean Port (New York: D. Appleton
and Co., 1858). For other views of the subsidies, see Lindsay, Merchant
Shipping, 4:200-03; Hutchins, American Maritime Industries, 358-62; and
Dunmore, Ship Subsidies, 96-103.

16French E. Chadwick, Ocean Steamships (New York: Charles Scribner’s
Sons, 1891), 120-22; John H. Morrison, History of American Steam Navigation
(New York: W. F. Sametz and Co., 1903), 420-23; and N. A., “A Few
Suggestions Respecting the United States Steam Mail Service” (n. p., 1850), 9-
17.

17Tyler, Steam Conquers the Atlantic, 202-14; and George E. Hargest,
History of Letter Post Communications Between the United States and Europe,
1845-1875 (Washington: Smithsonian Institution Press, 1971).

18Congressional Globe, 33rd Congress, Appendix, 192. See also Lane,
Vanderbilt, 143-44.

19President Franklin Pierce vetoed the Collins subsidy bill. He argued that
the effect of such a “donation . . . would be to deprive commercial enterprises of
the benefits of free competition, and to establish a monopoly, in violation of the
soundest principles of public policy, and of doubtful compatibility with the
Constitution.” Congressional Globe, 33rd Congress, 2nd session, 1156-57. But
Congress got the whole subsidy back for Collins later in a Navy appropriations
bill. See Tyler,Stem Conquers the Atlantic, 225-29; Lane, Vanderbilt, 143-48;
Hutchins, American Maritime Industries, 367; Dunmore, Ship Subsidies, 92-103;
and Roy Nichols, Franklin Pierce (Philadelphia: University of Pennsylvania

Press, 1958), 377. For Seward’s comment, see Congressional Globe, 33rd
Congress, Appendix, 301.

20New York Tribune, March 8, 1855; Lane, Vanderbilt, 147-48, 150.
21Lane, Vanderbilt, 147-48. In a letter to the New York Tribune, March 8,

1855, Vanderbilt complained that the Collins subsidy was “paralyzing private
enterprise, and in fact forbidding it access to the ocean.”

22Lane, Vanderbilt, 148-51, 167; Tyler, Steam Conquers the Atlantic, 238-
41.

23Congressional Globe, 35th Congress, 1st session, 2826, 2827, 2843. See
also Tyler, Steam Conquers the Atlantic, 231-46; James D. McCabe, Jr., Great
Fortunes (Philadelphia: G. MacLean, 1871); and Meeker,Shipping Subsidies,
156.

24Lane, Vanderbilt, 151-56; and Meeker, Shipping Subsidies, 5-20.
25Meeker, Shipping Subsidies, 10-11; Henry Fry, The History of North

Atlantic Steam Navigation (New York: Charles Scribner’s Sons, 1896), 42-53,
77-78, 81; and Hyde, Cunard, 27-34.

26Robert Macfarlane, History of Propellers and Steam Navigation (New
York: George P. Putnam, 1851); Tyler, Steam Conquers the Atlantic, 117-18,138-
42; Lane, Vanderbilt, 93-94.

27Congressional Globe, 33rd Congress, Appendix, 354-55; Tyler, Steam
Conquers the Atlantic, 128-32, 138-42; Lane, Vanderbilt, 175-78.

28Earnest A. Wiltsee, Gold Rush Steamers (San Francisco: Grabhorn Press,
1938), 50-89; Lane, Vanderbilt, 85-107; Hutchins, American Maritime
Industries, 359-60.

29Hutchins, American Maritime Industries, 359-63.
30Lane, Vanderbilt, 108-38; Wiltsee, Gold Rush Steamers, 112-51.
31Lane, Vanderbilt, 123-24,135; and William D. Scroggs, “William

Walker,” DAB, 19:363-65.
32Congressional Globe, 35th Congress, 1st session, 2843-44. 33Lane,

Vanderbilt, 124, 136.
34In 1855, with Vanderbilt paid off, the California lines raised the New

York to San Francisco fare from $150 to $300. They also doubled the steerage
fare from $75 to $150. Many passengers—real and potential—were angry, but
one point needs to be made. This fare was only one-half of what it was before
Vanderbilt arrived. The effect of Vanderbilf s competition was to shrink the fare

from $600 to $150; when he left, it was still only $300.
For the California lines to have raised the fare any higher would have

probably meant two things: first, a decline in the number of passengers wanting
to go to California; second, the appearance of a new rival ready to cut fares and
capture what traffic was left. Since the California lines had only one-fourth of
their subsidy left, they could ill-afford the arrival of another Vanderbilt, so they
kept the fares moderately low. See Wiltsee,Go/rf Rush Steamers, 21-26, 55-56,
139-42, 149.

35Meeker, Shipping Subsidies, 156.
36Harry H. Pierce, Railroads of New York: A Study of Government Aid,

1826-1875 (Cambridge, Mass.: Harvard University Press, 1953), 14-16; George
Rogers Taylor, The Transportation Revolution (New York: Harper and Row,
1951), 128-31; Julius Rubin, Canal or Railroad? Imitation and Innovation in
Response to the Erie Canal in Philadelphia, Baltimore, and Boston
(Philadelphia: American Philosophical Society, 1961); Douglass C. North,
Growth and Welfare in the American Past (Englewood Cliffs, N.J.: Prentice-
Hall, 1974). After the Civil War, Vanderbilt sold his steamships and began
building the New York Central Railroad from New York to Chicago. Vanderbilt
again had to battle political entrepreneurs (this time city councilmen and state
legislators) in New York who demanded bribes from Vanderbilt before they
would approve of a right-of-way for his railroad. But Vanderbilt never took his
eyes off the main task: building the best railroad and delivering goods at the
lowest possible prices. He spearheaded America’s switch from iron to steel rails,
standardized his railroad’s gauge, and experimented with the four track system.
He improved roadbeds and rolling stock and cut his cost in half in seven years—
all the time maintaining an eight percent dividend to stockholders.

Notes to Chapter Two

James J. Hill and the Transcontinental
Railroads

‘John A. Garraty, The American Nation: A History of the United States, 7th
ed. (New York: Harper Collins, 1991), 497.

2James F. Stover, American Railroads (Chicago: University of Chicago
Press, 1961), 67; Henry Kirke White, History of the Union Pacific Railway
(Chicago: University of Chicago Press, 1895).

3Robert G. Athearn, Union Pacific Country (Chicago: Rand McNally,
1971), 37-38, 43-44.

4J. R. Perkins, Trails, Rails, and War: The Life of General G. M. Dodge
(Indianapolis: Bobbs-Merrill, 1929), 207. See also Stanley P. Hirshson, Grenville
M. Dodge: Soldier, Politician, Railroad Pioneer (Bloomington, Ind.: Indiana
University Press, 1967) 5Athearn, Union Pacific Country, 200-03.

6Perkins, Dodge, 231-33, 238. See also William F. Rae, Westward By
Rail:The New Route to the East (London: Longmans, Green, and Co., 1871).

7Athearn, Union Pacific Country, 139-42.
8Perkins, Dodge, 205-06; Athearn, Union Pacific Country, 153.
9Athearn, Union Pacific Country, 224, 337-40, 346.
10Julius Grodinsky, Transcontinental Railway Strategy, 1869-1893: A

Study of Businessmen (Philadelphia: University of Pennsylvania Press, 1962),
70-71.

11For a full description of the Central Pacific, see Oscar Lewis, The Big
Four: The Story of Huntington, Stanford, Hopkins, and Crocker,and of the
Building of the Central Pacific (New York: Alfred A. Knopf. 1938).

12Grodinsky, Transcontinental Railway Strategy,137. For A fuller account
of Villard’s career, see James B. Hedges, Henry Villard and the Railways of the
Northwest (New Haven: Yale University Press, 1930).

13 Hedges, Villard, 112-211; Grodinsky, Transcontinental Railway
Strategy, 140, 185.

14Mildred H. Comfort, James Jerome Hill, Railroad Pioneer (Minneapolis:

T. S. Denison, 1973), 64-65.
15Grodinsky, Transcontinental Railway Strategy, 137.
16Albro Martin, James J. Hill and the Opening of the Northwest (New

York: Oxford University Press, 1976), 16-45; Stewart Holbrook, James /. Hill: A
Great Life in Brief (New York: Alfred A Knopf, 1955), 9-23.

17Stover, American Railroads, 76; Holbrook, Hill, 13-42. “Martin,
18Martin, Hill, 122-40, 161-71, passim; Holbrook, Hill, 44, 54-68.

19Martin, Hill, 183; Robert Sobel, The Entrepreneurs: Explorations Within
the American Business Tradition (New York: Weybright and Talley, 1974), 140;
Howard L. Dickman, “James Jerome Hill and the Agricultural Development of
the Northwest” (Ph.D. dissertation, University of Michigan, 1977), 67-144.

20Holbrook, Hill,93; Martin, Hill, 366.
21Martin, Hill,381-83; Comfort, Hill, 67-70.
23Martin, Hill,233, 236.
23Ibid., 225, 239-43, 264-70.
24Ibid., 298, 307, 338, 346, 494.
25Ibid., 410-11.
26Ibid., 300, 414-15, 442.
27Robert W. Fogel, The Union Pacific Railroad (Baltimore: Johns Hopkins

University Press, 1960), 99-100.
28Ibid., 25. Carl Degler has a variant of this viewpoint. He says, “In the

West, where settlement was sparse, railroad building required government
assistance.” Later, he adds, “By the time the last of the four pioneer
transcontinentals, James J. Hill’s Great Northern, was constructed in the 1890s,
private capital was able and ready to do the job unassisted by government.” This
argument suggests that the key variable is the timing of the building, not the
subsidy itself. The main problem here is that Hill’s transcontinental across the
sparse Northwest, especially with the Canadian Pacific above him and the
Northern Pacific below him, was just as risky as the Union Pacific was. That’s
why it was called “Hill’s Folly.” Also, Hill was building at roughly the same time
as the Northern Pacific; but Hill succeeded, while the Northern Pacific failed.
Finally, we need to remember that, in 1893, Hill flourished, while the Union
Pacific, the Northern Pacific, and the Santa Fe all went into receivership. This
brings us back to the subsidy as the problem, not the timing of the gift. See Carl
Degler, The Age of the Economic Revolution, 1876-1900 (Glenview, 111.: Scott,
Foresman and Co., 1977), 19-20.

29For a development of much of this argument, see Albro Martin,
Enterprise Denied: Origins of the Decline of American Railroads, 1897-1917
(New York: Columbia University Press, 1971). See also Martin, Hill, 535-44.

30Fogel, Union Pacific Railroad, 41.
31Holbrook, Hill, 161-63; Sobel, Entrepreneurs, 138; James J. Hill,

Highways of Progress (New York: Doubleday, Page, and Co., 1910), 156-69.
32Holbrook, Hill, 162-63.
33Md., 161; Sobel, Entrepreneurs, 135; Martin, Hill, 464-65.
34Martin, Hill, 298-99, 307, 347, 442, 462.
35Hill, Highways of Progress, 156-184; Holbrook, Hill, 163; Ari and Olive

Hoogenboom, A History of the ICC: From Panacea to Palliative (New York: W.
W. Norton, 1976), 49-59.

36Hill, Highways of Progress, 169; Martin, Hill, 540.
37Dominick T. Armentano, The Myths of Antitrust: Economic Theory and

Legal Cases (New Rochelle, N.Y.: Arlington Press, 1972), 56-58.
38Martin, Hill, 494-523.
39Armentano, The Myths of Antitrust, 58-62; Martin, Hill, 515, 518.
40Armentano, The Myths of Antitrust, 58-59.
41Martin, Hill, 519.
42Robert Sobel, The Age of Giant Corporations: A Microeconomic History

of American Business, 1914-1970 (Westport, Conn.: Greenwood Press, 1972),
189-94.

Notes to Chapter Three

The Scrantons and America’s First Iron
Rails

1For a good discussion of America’s iron industry in the 1830s and 1840s,
see Peter Temin, Iron and Steel in Nineteenth Century America: An Economic
Inquiry (Cambridge, Mass.: MIT Press, 1964), 20-52.

2Ibid.t 47. Biddle’s quotation is in David Craft, W. A. Wilcox, Alfred
Hand, and J. Wooldridge, History of Scranton, Pennsylvania (Dayton: H. W.
Crew, 1891), 247.

3America’s first rails were built in the 1820s and were made of wood.
These were gradually supplemented by English-made iron rails during the 1830s
and 1840s. A couple of American firms, particularly the Mount Savage Works at
Lonaconing, Maryland, experimented with making iron rails in the 1840s before
the Scrantons did. But the Scrantons were the first to mass produce notable
quantities of iron rails. See W. David Lewis, “The Early History of the
Lackawanna Iron and Coal Company: A Study in Technological Adaptation,”
Pennsylvania Magazine of History and Biography 96 (October 1972), 456-58;
Stover, American Railroads, 20-29; John Moody, The Railroad Builders (New
Haven: Yale University Press, 1919), 66-70; Temin, Iron and Steel in Nineteenth
Century America, 109, 117.

4For a more detailed description of the Scranton experiment, see Folsom,
Urban Capitalists.

5Much information on the Scrantons’ efforts at economic development can
be gathered from the Scranton papers, known as the Edmund T. Lukens
Collection (hereafter cited ETLC), in the Hagley Museum and Library in
Wilmington, Delaware. Another smaller collection of Scranton correspondence
is available in the Lackawanna Historical Society (hereafter LHS) in Scranton,
Pennsylvania. The best secondary source on the Scrantons’ early attempts at iron
and coal development is Lewis, ‘The Lackawanna Iron and Coal Company.” For
the quotation in this paragraph, see William Henry to Selden Scranton, March 8,
1840, Box 9, ETLC.

6The trauma of the Scrantons’ early years in the Lackawanna Valley is
described in the correspondence in Box 9, ETLC. For a good summary of the

Scrantons from 1841-43, see Lewis, “The Lackawanna Iron and Coal Company,”
435-51.

7Frederick L. Hitchcock, History of Scranton and Its People, 2 vols. (New
York: Lewis Historical Publishing Co., 1914), 1:28.

8Ibid.; Personal interviews with Robert C. Mattes, Lackawanna Historical
Society, October 1972, and April 1973.

9For a good discussion of this, see Lewis, “The Lackawanna Iron and Coal
Company.”

10John P. Gallagher, “Scranton: Industry and Politics, 1835-1885,” (Ph.D.
dissertation, Catholic University, 1964), 39, 57; Lewis, “The Lackawanna Iron
and Coal Company,” 454-55; Horace Hollister, Contributions to the History of
the Lackawanna Valley (New York: W. H. Tinson, 1857), 166.

11Edward Hungerford, Men of Erie: A Story of Human Effort (New York:
Random House, 1946), 76-78; Lewis, “The Lackawanna Iron and Coal
Company,” 454-55; Hollister, Contributions, 166.

12Edward H. Mott, Between Ocean and the Lakes: The Story of Erie (New
York: Ticker Publishing Company, 1908), 91; Benjamin H. Throop, A Half
Century in Scranton (Scranton, Pa.: Press of the Scranton Republican, 1895),
114-16.

13George W. Scranton to Selden Scranton, August 3, 1846, ETLC, Box 9,
in Lewis, “The Lackawanna Iron and Coal Company,” 460-63. See also Frank
W. Taussig, The Tariff History of the United States, 7th ed. (New York: G. P.
Putnam’s Sons, 1923), 112-35. George Scranton later became an advocate for
higher tariffs. See the Daily National Intelligencer, March 27, 1861.

14Hitchcock, History of Scranton, 1:51-57. Lewis, “The Lackawanna Iron
and Coal Company,” 440, 464-66.

15Hitchcock, History of Scranton, 1:51-57; Report of Joseph J. Albright,
coal agent, May 1852, ETLC, Box 11; Joseph H. Scranton to Selden T. Scranton,
February 23,1854, ETLC, Box 11; Charles Silkman to Selden T. Scranton,
March 28, 1849, ETLC, Box 13.

16Robert J. Casey and W. A. S. Douglas, The Lackawanna Story: The First
Hundred Years of the Delaware, Lackawanna, and Western Railroad (New York:
McGraw-Hill, 1951), 32-72, 208-11; Hitchcock, History of Scranton 1:55-57.
Michael Meylert to Selden T. Scranton, August 3,1853, ETLC, Box 13; Horace
Hayden, Alfred Hand, and John W. Jordan, Genealogical and Family History of

the Wyoming and Lackawanna Valleys Pennsylvania, 2 vols. (New York: Lewis
Publishing Co., 1906), 2:50-51, 154.

17Two of the important New Yorkers were Anson Phelps and William E.
Dodge, who founded Phelps, Dodge and Company. See William B. Shaw,
“William Earl Dodge,” Harold U. Faulkner, “Anson G. Phelps,” and Joseph V.
Fuller, “William Walter Phelps,” DAB, 5:352-53, 14:525-26, and 533; Lewis,
“The Lackawanna Iron and Coal Company,” 458-59. In a letter to Selden
Scranton, John J. Phelps asserted, “The Erie Company is managed by
Connecticut businessmen—of large means, and liberal views, and they will be
disposed to go for … the several interests of their city.” See John J. Phelps to
Selden T. Scranton, December 16, 29, 1845, ETLC, Box 13; and Hayden et al.,
Wyoming and Lackawanna Valleys, 2:153-54.

18William Henry to Selden T. Scranton, March 8,1840, June 8, July, and
August 24,1841, ETLC, Box 9; Charles Silkman to Selden T. Scranton, March
28, 29, 1849, ETLC, Box 13; Lewis, “The Lackawanna Iron and Coal
Company,” 442.

19Throop, A Half Century in Scranton, 135.
20This terminology comes from Leo Marx, The Machine in the Garden:

Terminology and the Pastoral Ideal in America (New York: Oxford University
Press, 1964).

.21Hollister, Contributions, 124-25.
22Some members of this committee were upset that the North Branch

Canal would not provide a feeder to connect their farming area to outside
markets. Wilkes-Barre Advocate, December 19,1838, cited by Hollister,
Contributions, 105. For an additional description of the opposition to economic
development, see Throop, A Half Century in Scranton, 124-26.

23Horace Hollister, History of the Lackawanna Valley (New York: C. A.
Alvord, 1869), 238; William Henry to Selden T. Scranton, March 10, 1841,
ETLC, Box 9; Sanford Grant to Selden T. Scranton, June 9,1841, ETLC, Box 9;
George W. Scranton to Selden T. Scranton, May 23, 1846, ETLC, Box 9.

24Hollister, Contributions, 116; Hollister, History of the Lackawanna
Valley, 231-32; Lewis, “The Lackawanna Iron and Coal Company,” 454; Sanford
Grant to Selden T. Scranton, June 9,1841, ETLC, Box 9. One contemporary
insisted, “The Lackawanna Iron Works, supposed to be hopelessly bankrupt,
were of no account to the old settlers in their struggles for a single gleam of
financial sunlight.” John R. Durfee, Reminiscences of Carbondale, Dundaff, and

Providence Forty Years Past (Philadelphia: Miller’s Bible Publishing House,
1875), 103.

25Hollister, Contributions, 108, 118, 124, 133; Throop, A Half Century in
Scranton, 263-76.

26Hitchcock, History of Scranton, 1:360-62; Scranton Republican, March
30, and April 13, 27, 1866; The Legislative Record: Debates and Proceedings of
the Pennsylvania Legislature, Session of 1866 (Harrisburg, 1866) 825-26.

27Scranton Republican, April 13, 1866. Henry C. Bradsby, History
ofLuzerne County, Pennsylvania, with Biographical Selections (Chicago: S. B.
Nelson and Co., 1893), 473-74, 520.

28Durfee, Reminiscences, et passim; R. G. Dun Credit Ledgers,
Pennsylvania, Luzerne County, 89:49, 53, 71, 89.

29W. David Lewis, “William Henry, Armsmaker, Ironmaster, and Railroad
Speculator: A Case Study in Failure,” in Proceedings of the Business History
Conference (Ft. Worth, Texas, 1973), 51-94; Manuscript Census Returns, Ninth
Census of the United States, 1870, Luzeme County, Pennsylvania, National
Archives Microfilm Series, M-593, Roll 1368; Personal interview with Robert
C. Mattes, October 1972. See also John H. Frederick, “George Whitfield
Scranton,” DAB, 16:513-14; Daily National Intelligencer, March 27, 1861.

30The listing of wealth for Scranton, Blair, and Platt is in Manuscript
Census Returns, Luzerne County, Pennsylvania, 1870. The quotation is from
Joseph H. Scranton to Selden T. Scranton, February 28, 1843, Box 9, ETLC,
which is discussed in Lewis, “The Lackawanna Iron and Coal Company,” 449.

31The information on wealth holding is available in the federal manuscript
censuses of 1850 and 1870. The 1870 census citation is in note 29. The 1850
census citation is Manuscript Census Returns, Seventh Census of the United
States, 1850, Luzerne County, Pennsylvania, National Archives Microfilm
Series, M-432, Roll 793.

32This deduction is implied from other studies of city and hinterland. For
example, see James W. Livingood, The Philadelphia-Baltimore Trade Rivalry,
1780-1860 (Harrisburg, Pa.: Pennsylvania Historical and Museum Commission,
1947). A recent study that involves coal and Pennsylvania regions is Edward J.
Davies II, Anthracite Aristocracy: Leadership and Social Change in the Hard
Coal Regions of Northeastern Pennsylvania, 1800-1930 (DeKalb, 111.: Northern
Illinois University Press, 1985).

33Pennsylvania’s Schuylkill region is an example of a coal area that did not

develop a strong local elite and became subordinate to nearby Philadelphia. See
Davies, Anthracite Aristocracy. See also Robert Baldwin, “Patterns of
Development in Newly Settled Regions,” Manchester School of Economics and
Social Studies 24 (May 1956) 161-79.

34For a more detailed description of Scranton attracting investors from
nearby towns, see Folsom, Urban Capitalists, chapters 3, 4, and 6.

35New York Sun, May 10,1935, in Obituaries Notebook No. 7, in
Lackawanna Historical Society, 74; Hitchcock, History of Scranton 1:10-13;
Throop, A Half Century in Scranton; Hollister, Contributions, 132-33; Personal
interview with Robert C. Mattes, April 1973; Personal interview with William
Lewis, July 1978.

36Samuel C. Logan, The Life of Thomas Dickson: A Memorial (Scranton,
Pa.: n.p., 1888); Gerald M. Best, Locomotives of the Dickson Manufacturing
Company, (San Marino, Ca.: Golden West, 1966); Chapman Publishing
Company, Portrait and Biographical Record ofLackawanna County,
Pennsylvania (New York: Chapman Publishing Co., 1897), 502-03, 455-57;
Hitchcock, History of Scmnton, 1:89-90; 2:22-24, 37-40, 498-501; R. G. Dun
Credit Ledgers, Pennsylvania, Luzerne County, 93:119, 94:330.

37Joseph J. Albright to Selden Scranton, July 7, 1850, October 14, 1850,
and November 9, 1850, Boxes 36 and 10, ETLC; Chapman Publishing
Company, Lackawanna County, 205-07.

3SR. G. Dun Credit Ledgers, Pennsylvania, Luzerne County, 94:40, 91:939;
Chapman Publishing Company, Lackawanna County, 205-07.

39Phillip Walter to Selden T. Scranton, May 19, 1852, ETLC, Box 10; for a
brief description of Walter’s relationship to the Scrantons, see Hitchcock, History
of Scranton, 1:7.

40The Welshman was Lewis Pughe. See W. W. Munsell and Company,
History of Luzerne, Lackawanna, and Wyoming Counties with Biographical
Sketches of Some of their Prominent Men and Pioneers (New York: W. W.
Munsell and Co., 1880), 438D, 392B; Hitchcock, History of Scranton, 1:211-12,
426-34.

41Hitchcock, History of Scranton, 2:1-5. See also Luther Laflin Mills,
Joseph H. Twitchell, Alfred Hand, Frederick L. Hitchcock, James H. Torrey,
Eugene Smith, Edward B. Sturges, Charles H. Wells, James McLeod, and James
A. Beaver, eds., Henry Martyn Boies: Appreciations of His Life and Character
(New York, 1904).

42Thomas F. Murphy, History of Lackawanna County, 3 vols. (Topeka:
Historical Publishing Co., 1928), 1:614-16.

43IWd., 617-18; Craft et al., History of Scranton, 283-84.
44In 1900, Scranton’s population was 102,026. Twelfth Census of the

United States, 1900: Population (Washington: Government Printing Office,
1902), 2:606-07.

45For a more detailed analysis of this Scranton elite, see Folsom, Urban
Capitalists, chapter 7.

46Personal interviews with Robert C. Mattes, April 1973, and William
Lewis, July 1978.

47For a fuller discussion of this point, see Burton W. Folsom, “Like
Fathers, Unlike Sons: The Fall of the Business Elite in Scranton, Pennsylvania,
1880-1920,” Pennsylvania History 46 (October 1980), 291-309.

48Logan, Thomas Dickson; Hitchcock, History of Scranton, 1:89-90, 254-
55; 2:22-24; Chapman Publishing Company, Lackawanna County, 456-57; 502-
04; Mills et al., Henry Martyn Boies, 51; Scranton City Directory, 1921;
Murphy, History of Lackawanna County, 682-83.

49R. G. Dun Credit Ledgers, Pennsylvania, Luzerne County, 95:133,
93:380, 91:1136; Murphy, History of Lackawanna County, 1:128-29; Rowland
Berthoff, “The Social Order of the Anthracite Region, 1825-1902,” Pennsylvania
Magazine of History and Biography 89 (September 1965), 261-91.

50Hitchcock, History of Scranton 2:10-13; New York Sun, May 10, 1935,
cited in Obituaries Notebook No. 7, in Lackawanna Historical Society, 74;
Personal interview with Robert C. Mattes, director of the Lackawanna Historical
Society, April 1973.

51Obituaries Notebook No. 7, in Lackawanna Historical Society, 40; R. G.
Dun Credit Ledgers, Pennsylvania, Luzeme County, 96:249.

52Hitchcock, History of Scranton, 1:254-55; 2:10-13.
53Most historians and scholars have argued that continuity from wealthy

father to son is typical. See E. Digby Baltzell, Philadelphia Gentlemen (Glencoe,
111.: Free Press, 1958); Edward Pessen, Riches, Class, and Power Before the
Civil War (Lexington, Mass.: D. C. Heath and Co., 1973); Ferdinand Lundberg,
The Rich and Super-Rich (New York: Lyle Stuart, 1968); John N. Ingham, The
Iron Barons: A Social Analysis of an American Urban Elite, 1874-1965
(Westport, Conn.: Greenwood Press, 1978).

For a point of view different from these studies, see Lee Benson, Robert
Gough, Ira Harkavy, Marc Levine, and Brodie Remington, “Propositions on
Economic Strata and Groups, Social Classes, Ruling Classes: A Strategic Natural
Experiment, Philadelphia Economic and Prestige Elites, 1775-1860”
(unpublished essay, University of Pennsylvania, 1976). My thinking on this issue
has been strongly influenced by Professor Benson.

54Hitchcock, History of Scranton, 2:53-55, 30-32, 5-7, 188-91; Scranton
City Directory, 1920, 1921.

Notes to Chapter Four

Charles Schwab and the Steel Industry
1Charles M. Schwab, Succeeding With What You Have (New York:

Century Co., 1917), 39-41.
2Robert Hessen, Steel Titan: The Life of Charles M. Schwab (New York:

Oxford University Press, 1975), 4-12 (quotations on pages 10 and 11).
3Ibid., 13-16, 21; Eugene G. Grace, Charles M. Schwab (n. p., 1947), 6.
4Harold Livesay, Andrew Carnegie (Boston: Little, Brown and Co., 1975),

101, 165-66.
5Hessen, Schwab, 70; Joseph Frazier Wall, Andrew Carnegie (New York:

Oxford University Press, 1970), 665.
6Wall, Carnegie, 532-33; Livesay, Carnegie, 117-18.
7Hessen, Schwab, 28-30, 41-42, 60.
8Ibid., 31, 38, 74.
9Wall, Carnegie, 330-38; Livesay, Carnegie, 101.
10Livesay, Carnegie, 103.
11Wall, Carnegie, 329-32, 337, 341-42.
12Livesay, Carnegie, 150, 165-66; Hessen, Schwab, 69-70.
13Livesay, Carnegie, 187-88.
14Hessen, Schwab, 123.
15lbid., 125-27 (quotation on page 127). The Finance Committee at U. S.

Steel rejected Schwab’s request for more ore land. I assume that Gary approved
of this decision.

16Ibid., 121, 133-40, 299. l7Ibid.t 119-22, 138.
l8Ibid., 147-62.
l9Raymond Walters, Bethlehem Lang Ago and Today (Bethlehem: Carey

Printing Co., 1923), 64; William J. Heller, ed., History of Northampton County,
Pennsylvania, and the Grand Valley of the Lehigh, 3 vols. (Boston: American
Historical Society, 1920), 1:44; Joseph M. Levering, A History of Bethlehem,
Pennsylvania, 1741-1892, with Some Account of Its Founders and their Early
Activity in America (Bethlehem: Times Publishing Co., 1903), 722-24; Alfred
Mathews and Austin N. Hungerford, History of the Counties of Lehigh and

Carbon, in the Commonwealth of Pennsylvania (Philadelphia: Everts and
Richards, 1884), 690, 704-05; John W. Jordan, ed., Encyclopedia of
PennsylvaniaBiography, 32 vols. (New York: Lewis Historical Publishing Co.,
1914-1967), 6:2139-42.

20John Fritz, The Autobiography of John Fritz (New York: J. Wiley and
Sons, 1912), 173-74; Hessen, Schwab, 164-66.

21Hessen, Schwab, 165-66.
22Ibid., 167-68; Walters, Bethlehem, 88.
23Hessen, Schwab, 170-72, 177-78, 252; Walters, Bethlehem, 88.
24Hessen, Schwab, 169.
25Ibid., 171.
26Ibid., 185.
27Ibid., 226-27, 270, 272, 276.
28Ibid., 172-73.
29Ibidd., 173-75, 182-84. 30Ibid., 186-87, 267-69.
3llbid., 230, 265-66; New York Times, April 14, 1915; Heller, History of

Northampton County, 276; and Robert Hessen, “Charles M. Schwab, President
of United States Steel, 1901-1904,” Pennsylvania Magazine of History and
Biography 96 (April 1972), 203.

32Hessen, Schwab, 236-44 (quotation on page 236). 33Ibid., 240-44
(quotation on page 244).

34My understanding of the armor-plate business in general, and how it
affected Bethlehem Steel in particular, has been greatly enriched by reading
Hessen, Schwab, 42-58, 217-26, 307-10. Reading Hessen has led me to several
key sources on the armor-plate issue.

35Andrew Carnegie to Josephus Daniels, December 9, 1913, Box 497,
Josephus Daniels papers, Library of Congress. See also Robert Seager, “Ten
Years Before Mahan: The Unofficial Case for the New Navy, 1880-1890,”
Mississippi Valley Historical Review,60 (December 1953), 491-512.

36For the point of view of the steel companies, see Eugene G. Grace to
Josephus Daniels, April 19,1913, Box 497, Daniels papers; Andrew Carnegie to
Daniels, December 9,1913, in Ibid.; Statements by Senators Boies Penrose and
Warren G. Harding in the Congressional Record in Ibid.; New York Herald,
January 28, 1911, in Ibid. For the point of view of the critics of the steel
companies, see Benjamin Tillman to Daniels, May 22,1913, in Ibid.; T. B. H.

Stenhouse to Daniels, September 24, 1913, in Ibid.; Statement by

Representative Clyde Tavenner in Congressional Record, in Ibid.
See also Melvin I. Urofsky, Big Steel and the Wilson Administration

(Columbus, Ohio: Ohio State University Press, 1969), 117-51; Hessen, Schwab,
42-58, 216-26; Josephus Daniels, The Wilson Era: Years of Peace, 1910-1917
(Chapel Hill: University of North Carolina Press, 1944), 351-63; Francis B.
Simkins, Pitchfork Ben Tillman: South Carolinian (Baton Rouge: Louisiana
State University Press, 1967), 511-13.

37Benjamin Tillman to Josephus Daniels, May 22, 1913; Josephus Daniels’
Response to Senate Resolution, July 12, 1913; Andrew Carnegie to Josephus
Daniels, December 9, 1913, all in Box 497, Daniels papers. See also Urofsky,
Big Steel, 136, 142-43.

381906, for example, the government took bids for 8000 tons of armor
plate. The Carnegie division of U. S. Steel bid $370 per ton, Bethlehem Steel bid
$381, and Midvale Steel bid $346. The Navy department divided the contract
among all three after U. S. Steel and Bethlehem Steel agreed to Midvale’s $346
per ton price. The next year all three companies submitted identical bids of $420
per ton. These $420 per ton bids continued until 1912, and the armor contracts
were always divided among all three companies. See extracts from the Report of
Hon. Josephus Daniels, Secretary of the Navy, December 1, 1913; Armor
Contracts as Awarded for Increase of Navy to Date, January 26, 1915; Eugene
Grace to Josephus Daniels, April 19, 1913; Claude Swanson to Woodrow
Wilson, March 21, 1916, all in Josephus Daniels papers, Boxes 497 and 498,
Library of Congress.

39Benjamin Tillman to Josephus Daniels, May 22, 1913; Eugene Grace to
Daniels, April 19, 1913; Extracts from the Report of Hon. Josephus Daniels,
Secretary of the Navy, December 1, 1913; Claude Swanson to Woodrow Wilson,
March 21, 1916, in Josephus Daniels papers, Boxes 497 and 498. See also
Benjamin Tillman to Woodrow Wilson, January 5, 1916; March 9, 1916, April
29, 1916, and May 21, 1916; and Josephus Daniels to Wilson, April 12, 1913;
Charles Schwab and Eugene Grace, “Should the Government Destroy Private
Armor-Making Industries?” April 5, 1916, in Woodrow Wilson papers,
microfilm reel 259, Library of Congress.

40Tillman’s speech to the Senate is in Congressional Record, 64th
Congress, 1st session, February 8, 1916. Woodrow Wilson to Benjamin Tillman,
January 6, 1916, in Wilson papers, microfilm reel 259.

41See two articles by Charles Schwab and Eugene Grace. One is untitled;

the other is “Should the Government Destroy Private Armor-Making
Industries?” April 5, 1916, both in Wilson papers, microfilm reel 259.

42Daniels, Wilson Era, 360; Hessen, Schwab.
43C. F. Adams, Secretary of the Navy, to the Chairman of the House

Committee on Naval Affairs, National Archives, Record Group 80, Entry 13,
Box 141; Claude A. Swanson, Secretary of the Navy, to Henry Wallace, National
Archives, Record Group 80, Entry 13, Box 55; William D. Leahy, Acting
Secretary of the Navy, to Senator Gerald P. Nye, National Archives, Record
Group 80, Entry 13, Box 176. See also George Marvell to Josephus Daniels,
February 9, 1921, Daniels papers; and Roger M. Freeman, The Armor-Plate and
Gun Forging Plant of the U. S. Navy Department at South Charleston, West
Virginia (n. p., 1920).

44Hessen, Schwab,244.
45Ibid, 279-80.
46Ibid., 282; Jude Wanniski, The Way the World Works (New York: Basic

Books, 1978), 116-48; Don McLeod, “The History of Protectionism Proves the
Value of Free Trade,” Insight (June 30,1986), 11-14.

47Hessen, Schwab,280-82. 48Ibid., 288-90, 292.
49Ibid.t 132-33, 285-86, 290-91, 296, 298-300. ., 293-303.

Notes to Chapter Five

John D. Rockefeller and the Oil Industry

1Allan Nevins, Study in Power. John D. Rockefeller, 2 vols. (New York:
Charles Scribner’s Sons, [1940] 1953), 1:672,208. Nevins was the first historian
to look at the wealth of primary source material in the Rockefeller papers (now
located in Tarrytown, N.Y.). His thousand-page biography is still the standard
work on Rockefeller and was indispensable to me. For differing points of view,
see Jules Abels, The Rockefeller Billions: The Story of the World’s Most
Stupendous Billions (New York: Macmillan Company, 1965); Peter Collier and
David Horowitz, The Rockefellers: An American Dynasty (New York: New
American Library, 1976), 3-72; Ferdinand Lundberg, The Rockefeller Syndrome
(Secaucus, N.J.: Lyle Stuart, 1975); and David Freeman Hawke, John D,: The
Founding Father of the Rockefellers (New York: Harper and Row, 1980).

2Grace Goulder, John D, Rockefeller: The Cleveland Years (Cleveland:
Western Reserve Historical Society, 1972), 17-25.

3Ibid., 26-27; Nevins, Rockefeller, 1:43, 100-02.
4Nevins, Rockefeller, 1:132.
5Ibid., 1:103, 186-91; Goulder, Rockefeller, 59-73.
6For a good discussion of the beginnings of the petroleum industry, see

Harold F. Williamson and Arnold R. Daum, The American Petroleum Industry:
The Age of Illumination, 1859-1899 (Evanston, 111.: Northwestern University
Press, 1959), 27-114.

7Goulder, Rockefeller, 59-80; Nevins, Rockefeller, 1:199,167-69,173, 205.
8Williamson and Daum, American Petroleum Industry, 82-194.
9Nevins, Rockefeller, 1:183-85, 197-98.
10lbid., 1:183-86, 268-70,289; Williamson and Daum, American Petroleum

Industry, 342-68; John D. Rockefeller, Random Reminiscences of Men and
Events (Garden City, N.Y.: Doubleday, Doran, and Co., 1933), 88.

11Nevins, Rockefeller, 1:666. 12lbid., 1:256, 296-97.
I3lbid., 1:115,175,279, 487. See Ida M. Tarbell, The History of the

Standard Oil Company, (New York: Harper and Row, 1966); and Henry
Demarest Lloyd, Wealth Against Commonwealth(Englewood Cliffs, N.J.:
Prentice-Hall, 1963).

14Nevins, Rockefeller, 1:277-79, 555-56, 671-72.
I5lbid., 1:306-37; Williamson and Daum, American Petroleum Industry,

342-68.
16Rockefeller, Random Reminiscences, 55-76.
17Nevins, Rockefeller, 1:366.
I8lbid., 1:380.
I9lbid., 2:76; 1:277-79.
20lbid., 2:2-4, 96ff; Williamson and Daum, American Petroleum Industry,

630-47.
21Williamson and Daum, American Petroleum Industry, 589-613; Nevins,

Rockefeller, 2:3.
22Nevins, Rockefeller, 2:29-30.
23The RussoAmerican oil war was a crucial part of Rockefeller’s career.

My three sources for this episode, which is described in the next six paragraphs,
are Ralph W. Hidy and Muriel E. Hidy, Pioneering in Big Business, 1882-1911
(New York: Harper and Brothers, 1955), 130-54; Nevins, Rockefeller 1:397, 505,
666; 2:102-04, 125-26; Williamson and Daum, American Petroleum Industry,
509-19, 630-47.

24Nevins, Rockefeller, 2:125-26.
25Ibid., 2:115.
26Hidy and Hidy, Pioneering in Big Business, 137.
27Nevins, Rockefeller, 1:237.
28Ibid., 1:397, 186, 395, 627-29.
29Ibid., 1:627-29.
30lbid., 1:623; 2:245-75; Hessen, Schwab, 24, 63-64.
31Nevins, Rockefeller, 2:295-96, 90-93; Raymond P. Fosdick, John D,

Rockefeller, Jr.: A Portrait (New York: Harper and Row, 1956), 35.
32B. F. Winkelman, John D. Rockefeller: The Authentic and Dramatic

Story of the World’s Greatest Money Maker and Money Giver (Philadelphia:
Universal Book and Bible House, 1937), 309.

33Nevins, Rockefeller, 1:190, 237, 627; 2:427.
34Ibid., 2:366-68.
35Armenteno, Myths of Antitrust, 75-85; John S. McGee, “Predatory Price

Cutting: The Standard Oil (N. J.) Case,” Journal of Law and Economics 1

(October 1958), 137-69; Hidy and Hidy, Pioneering in Big Business, 671-718.
36Nevins, Rockefeller, 2:479.
37Ibid., 2:435. The Bible verses are Luke 6:38,1 Timothy 6:10, and

Malachi 3:10.
38E. Richard Brown, Rockefeller Medicine Men: Medicine and Capitalism

in America (Berkeley: University of California Press, 1979); Alvin Moscow, The
Rockefeller Inheritance (Garden City, N. Y.: Doubleday and Co., 1977), 101-08;
Rockefeller, Random Reminiscences, 137-62; and Nevins, Rockefeller, 2:300-27,
386-402.

39Nevins, Rockefeller, 2:292-94, 199-200; Rockefeller, Random
Reminiscences, 24-29.

40Fosdick, John D. Rockefeller, Jr., 8-10; Nevins, Rockefeller, 2:199-200.
41John K. Winkler, John D.: A Portrait in Oils (New York: Blue Ribbon

Books, 1929), 226. For a recent biography of Rockefeller, see Ron Chernow,
Titan (New York: Random House, 1998). For my critical review, see
“Rockefeller Biography Has Serious Flaws,” The Detroit News (July 22, 1998),
HA.

Notes to Chapter Six

Andrew Mellon and the 1920s

1Andrew Mellon, Taxation: The People’s Business (New York: Macmillan,
1924), 16.

2New York Times, December 17, 1929, p. 1. U. S. Bureau of the Census,
Historical Statistics of the United States (Washington: Government Printing
Office, 1975), 1107. See also Benjamin G. Rader, “Federal Taxation in the
1920s: A Reexamination,” The Historian33 (May 1971), 432; and Roy G.
Blakey and Gladys C. Blakey, The Federal Income Tax (London: Longmans,
Green and Co., 1940), 516.

Contemporary accounts of Mellon tended to treat him as either a saint or a
devil. A hostile biography of Mellon is Harvey O’Connor, Mellon’s Millions: The
Life and Time of Andrew Mellon (New York: The John Day Co., 1933). For a
friendly biography, see Philip H. Love, Andrew W. Mellon: The Man and His
Work (Baltimore: F. Heath Coggins and Co., 1929). Two more recent and more
scholarly studies are David E. Koskoff, The Mellons (New York: Thomas Y.
Crowell Co., 1978); and Lawrence L. Murray III, “Andrew Mellon: Secretary of
the Treasury, 1921-1932: A Study in Policy” (Ph. D. dissertation, Michigan State
University, 1970).

3Thomas Mellon, Thomas Mellon and His Times (Pittsburgh: W. G.
Johnston and Co., 1885), 72, 77.

4Ibid., 164; O’Connor, Mellon’s Millions, 21-22, 26, 29-30, 32, 35, 49-51,
54; William Larimer Mellon, Judge Mellon’s Sons (Pittsburgh: n. p., 1948), 28-
32.

5Koskoff, The Mellons, 67-69, 172-76.
6Two useful books on Gulf Oil and Alcoa are Craig Thompson, Since

Spindletop; A Human Story of Gulfs First Half-Century (Pittsburgh: n. p., 1951);
Charles C. Carr, Alcoa, An American Enterprise (New York: Rinehart, 1952).

7Love, Andrew Mellon, 37.
8Mellon, Judge Mellon’s Sons, 396-438; Koskoff, The Mellons, 165-

67,172-76, 182-83, 260.
9Bureau of the Census, Historical Statistics, 1104.

10Robert Higgs, Crisis and Leviathan: Critical Episodes in the Growth of
American Government (New York: Oxford University Press, 1987), 97-103;
Blakey and Blakey, Federal Income Tax, 2-20. Useful biographies of the
Progressives are Harry Barnard, Independent Man: The Life of James Couzens
(New York: Charles Scribner’s Sons, 1958); Richard Lowitt, George W. Norn’s:
The Persistence of a Progressive, 1913-1933 (Urbana: University of Illinois
Press, 1971); David Thelen, Robert M. LaFollette and the Insurgent Spirit
(Boston: Little Brown and Co., 1976). There are also many histories of the
Progressive movement and of the 1920s. See, for example, Arthur S. Link and
Richard C. McCormick, Progressivism (Arlington Heights, Dl.: Harlan
Davidson, 1983).

11Bureau of the Census, Historical Statistics, 1104,1106,1108,1110;
Blakey and Blakey, Federal Income Tax, 71-103. There are several good studies
on the federal income tax. See, for example, Jerold Waltman, “Origins of the
Federal Income Tax, Mid-America 62 (October 1980), 147-60; and John F.
Witte, The Politics and Development of the Federal Income Tax (Madison:
University of Wisconsin Press, 1985).

12Blakey and Blakey, Federal Income Tax, 104-21; Higgs, Crisis and
Leviathan, 150.

13Mellon, Taxation, 129. The continuity between Wilson’s desire to cut
taxes and the Republican Mellon Plan is explored in Lawrence L. Murray,
“Bureaucracy and Bi-Partisanship in Taxation: The Mellon Plan Revisited,”
Business History Review 52 (Summer 1978), 200-25.

14Murray, “Andrew Mellon,” 111-17; Mellon Taxation, 13.
15Mellon, Taxation, 73-83. See also Andrew W. Mellon, “The Business of

Taxation,” Forum 71 (March 1924), 346-47; Andrew W. Mellon, “High Surtaxes
and Municipal Securities,” The American City Magazine 30 (March 1924), 239-
40.

16Mellon, Taxation, 199-202. The building of civic centers and football
stadiums does, of course, create temporary jobs and generate some local
revenue.

17Ibid. 78, 94, 104; Carr, Alcoa, 23-49, Thompson, Since Spindletop, 9-46.
Other people also argued this idea that high taxes helped larger, established
businesses perpetuate monopolies. Otto H. Kahn of the Citizen’s National
Committee said “high surtaxes unavoidably tend to diminish competition and to
intrench [sic] and fortify those who are in established positions.” New York

Times, February 24, 1924, p. 4.
18Mellon, Taxation, 9,16-17, 79-81, 96-97. See also Andrew W. Mellon,

“Taxing Energy and Initiative,” The Independent 112 (March 29, 1924), 168.
19Mellon, Taxation, 32; Andrew W. Mellon, “What I Am Trying to

Do,”World’s Work 47 (November 1923), 73-76. The Democrats in 1924 offered
the Garner Plan, which would have cut taxes on those earning under $56,000,
but would have left the tax rate on the rich at 50 percent. This approach allowed
the Democrats to make the following popular appeal: “There is not a person in
the country getting an income of less than $56,000 a year who is not better
treated by the Democratic than by the Republican scheme.” See Herbert
Claiborne Pell, Jr., “Taxing the Middle Class,” Forum 71 (March 1924), 349-53
(quotation on p. 351). See also Homer Joseph Dodge, “Which Tax Plan Do We
Want?” The Independent 112 (March 29, 1924), 169-70.

20O’Connor, Me/ton’s Millions, 120.
21Ibid., 235.
22Koskoff, TheMellons, 190-91.
23Ibid., 191; Mellon, Judge Mellon’s Sons, 408.
24Mellon, Taxation, 16, 69-76; Blakey and Blakey, Federal Income Tax,

219.
25Mellon, Taxation, 9, 54, 61-62.
26Belle Case LaFollette and Fola LaFollette, Robert M. LaFollette (New

York: Macmillan, 1953), 1: 178, 480-81, 2: 743-47; Robert LaFollette,
LaFollette’s Autobiography (Madison: University of Wisconsin Press, 1968),
124; Blakey and Blakey, Federal Income Tax, 88, 137, 146, 180, 185, 358, 379;
and New York Times, December 15, 1929, p. 1 and 2, 27Mellon, Taxation, 111-
24.

28Bureau of the Census, Historical Statistics, 1104. Love, Andrew Mellon,
317; Blakey and Blakey, Federal Income Tax, 540.

29Mellon, Taxation, 39, 55. 30Koskoff, The Mellons, 238-40.
31For a helpful discussion of the tax bills in Congress, see Rader, “Federal

Taxation in the 1920s,” 415-35.
32Mellon, Taxation, 221. For Coolidge’s support of the Mellon Plan, see

New York Times, January 5, 1924, p. 1; January 9, 1924, p. 1; and January 12,
1924, p. 1.

33O’Connor, Mellon’s Millions, 229-30; Koskoff, The Mellons, 230.

34Lillian Rogers Parks, My Thirty Years Backstairs at the White House
(New York: Fleet Publishing Co., 1961), 184. Helpful biographies of Coolidge
are Donald R. McCoy, Calvin Coolidge: The Quiet President (New York:
Macmillan, 1967); William Allen White, A Puritan in Babylon: The Story of
Calvin Coolidge (New York: Macmillan, 1938); and Claude M. Fuess, Calvin
Coolidge: The Man from Vermont (Hamden, Conn.: Archon Books, 1965).

35Parks, Backstairs at the White House,183-84; Mellon, Judge Mellon’s
Sons, 395; Irwin H. Hoover, Forty-Two Years in the White House(Boston:
Houghton Mifflin Co., 1934), 132.

36Parks, Backstairs at the White House, 178-81; Koskoff, The Mellons,
183. 37Blakey and Blakey, Federal Income Tax, 251-301.

38Thomas B. Silver, Coolidge and the Historians (Durham, N. C.: Carolina
Academic Press, 1982), 111; O’Connor, Mellon’s Millions, 127; Murray,
“Andrew Mellon,” 127-29. Hiram Johnson weighed in with this criticism of the
Mellon Plan: “The concern of this tax scheme is not for the man of small
income, but for the man of large income, who can best bear the burden.” New
York Times, January 18, 1924, p. 2.

39Rader, “Federal Taxation in the 1920s”, 433.
40Silver, Coolidge and the Historians, 112-14; Barnard, Couzens, 165.
41 Silver, Coolidge and the Historians, 112-21. Silver’s study is essential

reading for historians who are trying to understand the 1920s. Mellon denied he
was using refunds as a political weapon; he called the accusations “simply
preposterous.” See O’Connor, Mellon’s Millions, 159.

42Mellon’s audit of Progressive Senator James Couzens, of Michigan, was
a political error. Couzens earned $30 million working for Henry Ford; Mellon
challenged the amount of capital gains tax Couzens paid on his stock. The Board
of Tax Appeals not only sided with Couzens; it said that the government owed
him $900,000 for overpayment. Mellon probably felt foolish and stayed out of
refund cases whenever possible. Couzens, meanwhile, won reelection to the
Senate, possibly using his $900,000 refund for expenses, and kept up his attacks
on Mellon. See Barnard, Couzens, 130, 160-67.

43Love, Andrew Mellon, 318; O’Connor, Mellon’s Millions, 237; Koskoff,
The Mellons, 341.

44From 1929 to 1935, federal revenue from personal income taxes declined
from $1,095 million to $527 million, while federal revenue from excise taxes
during these years increased from $539 million to $1,363 million. Of course,

hard times, as well as higher taxes, contributed to the fall in revenue from
personal income taxes. See Bureau of the Census, Historical Statistics, 1107;
Koskoff, The Mellons; Mark Leff, The Limits of Symbolic Reform: The New
Deal and Taxation, 1933-1939 (London: Cambridge University Press, 1984);
Thomas M. Renaghan, “Distributional Effects of Federal Tax Policy 1929-1939,”
Explorations in Economic History 21 (1984), 40-63; Walter K. Lambert, “New
Deal Revenue Acts: The Politics of Taxation” (Ph. D. dissertation, University of
Texas, 1970), 1-66.

45John M. Blum, William S. McFeely, Edmund Morgan, Arthur M.
Schlesinger, Jr., Kenneth Stampp, C. Vann Woodward, The National Experience,
8th ed. (New York: Harcourt, Brace, and Jovanovich, 1993), 640.

46John A. Garraty, The American Nation, 7th ed. (New York: Harper
Collins, 1991), 744.

47Thomas A.Baily, David M. Kennedy, and Lizabeth Cohen The American
Pageant.llth ed. (Boston: Houghton-Mifflin, 1998), 768.

48Irwin Unger, These United States: The Questions of Our Past, concise
edition (Upper Saddle River, N.J.: Prentice-Hall, 1999), 591, 49The issue of
changing the tax structure was widely debated during the 1996 presidential
election. See, for example, “An ‘Untested’ Flat Tax?” Wall Street Journal
(February 9,1996), A12; and Daniel ]. Mitchell, “Making Sense of Competing
Tax Reform Plans,” The Heritage Foundation, F. Y. I. (February 22, 1996). For a
critical analysis of the income tax, see Stephen Moore, “Ax the Tax,” National
Review (April 17,1995), 38-42.

Notes to Chapter Seven

Conclusion: Entrepreneurs vs. The
Historians

1The term “robber barons” was in use in the early 1900s, but was
popularized by Matthew Josephson, The Robber Barons: The Great American
Capitalists, 1861-1901 (New York: Harcourt, Brace, and World, 1934).

2John M. Blum, et al., The National Experience, 8th ed. (New York:
Harcourt, Brace, and Jovanovich, 1993), 463.

3Thomas A.Bailey, David M. Kennedy, and Lizabeth Cohen The American
Pageant, 11th ed. (Boston: Houghton-Mifflin, 1998), 540-41.

4Publishers are sometimes reluctant to disclose sales figures, but
discussions with many publishers’ representatives show clearly that these three
textbooks have been among the best sellers from the 1960s through the 1990s.
Bailey’s former publisher, D. C. Heath, claimed that The American Pageant has
sold over two million copies. Since the 1970s, David M. Kennedy, also of
Stanford University, and Lizabeth Cohen of Harvard University have been added
as co-authors.

5p. 471. Woodward wrote the section entitled “The Ordeal of
Industrialization.”

6John Garraty, The American Nation, 7th ed. (New York: Harper Collins,
1991), 519-20.

7The only reference to the RussoAmerican oil war that I found was in
Robert L. Kelley, The Shaping of the American Past, 2nd ed. (Englewood Cliffs,
N. J.: Prentice-Hall, 1978), 404.

8For example, Lane, Vanderbilt; Martin, Hill;Hessen, Steel Titan.
9Bailey, Kennedy, and Cohen, The American Pageant, 536-54. See also the

tenth edition of the Bailey text, especially pp. 535-51.
10Bailey, Kennedy, and Cohen, The American Pageant, 551.
11For good surveys of the organizational view, see Louis Galambos, “The

Emerging Organizational Synthesis in Modern American History,” Business
History Review, 44 (Autumn 1970), 279-90; and Alfred D. Chandler, Jr.,
“Business History as Institutional History,” in George R. Taylor and Lucius F.

Ellsworth, eds. Approaches to American Economic History (Char-lottesville, Va.:
University Press of Virginia, 1971). For books that use the organizational
approach, see Alfred D. Chandler, Jr., ed., The Railroads: The Nation’s First Big
Business (New York: Harcourt, Brace, and World, 1965). See also Chandler’s
Strategy and Structure (Cambridge, Mass.: MIT Press, 1962), and The Visible
Hand: The Managerial Revolution in American Business (Cambridge, Mass.:
Belknap Press, 1977). A good book on the impact of corporate organization on
American society is Jerry Israel, ed., Building the Organizational Society (New
York: Free Press, 1972), especially the essay by Samuel P. Hays, ‘The New
Organizational Society,” 1-15.

12Thomas, “The Automobile Industry and Its Tycoon,” 141.
I3lbid., 142.
14Livesay, Carnegie; Hessen, Schwab.
15Stephan Thernstrom, Poverty and Progress: Social Mobility in a

Nineteenth Century City (Cambridge, Mass.: Harvard University Press, 1964);
William Miller, “American Historians and the Business Elite,” Journal of
Economic History 9 (November 1949), 184-208; Edward Pessen, “The
Egalitarian Myth and the American Social Reality: Wealth, Mobility and
Equality in the ‘Era of the Common Man’,” American Historical Review 76
(October 1971), 989-1034. See also Frances W. Gregory and Irene D. Neu, “The
American Industrial Elite in the 1870’s,” in William Miller, ed., Men in Business
(Cambridge, Mass.: Harvard University Press, 1952), 193-211.

16Michael P. Weber, Social Change in an Industrial Town: Patterns of
Progress in Warren, Pennsylvania, from Civil War to World War I (University
Park, Pa.: Pennsylvania State University Press, 1976).

17Herbert Gutman, “The Reality of the Rags-to-Riches ‘Myth’: The Case of
Paterson, New Jersey, Locomotive, Iron, and Machinery Manufacturers, 1830-
1880,” in Stephen Thernstrom and Richard Sennett, eds., Nineteenth Century
Cities: Essays in the New Urban History (New Haven, Conn.: Yale University
Press, 1969), 98-124; and Bernard Saracheck, “American Entrepreneurs and the
Horatio Alger Myth,” Journal of Economic History 38 (June 1978), 439-56.

18Ralph Andreano, “A Note on the Horatio Alger Legend: Statistical
Studies of the Nineteenth Century American Business Elite,” in Louis P. Cain
and Paul J. Uselding, eds., Business Enterprise and Economic Change (Kent,
Ohio: Kent State University Press, 1973), 227-46.

19Pessen, Riches, Class, and Power Before the Civil War, 303. Although I
disagree with Professor Pessen’s conclusions, I have learned much from reading

his books and articles.
20Baltzell, Philadelphia Gentlemen; Lundberg, The Rich and the Super-

Rich; and Ingham, The Iron Barons.
21See LeeBenson, “Philadelphia Elites and Economic Development:

Quasi-Public Innovation during the First American Organizational Revolution,”
Working Papers of the Eleutherian Mills-Hagley Foundation (1978); Joseph F.
Rishel, The Founding Families of Pittsburgh: the Evolution of a Regional Elite,
1760-1810 (Pittsburgh: University of Pittsburgh Press, 1990); Frederic C. Jaher,
The Urban Establishment: Upper Strata in Boston, New York,
Charleston,Chicago, and Los Angeles (Urbana, fll.: University of Illinois Press,
1982); and Stanley Lebergott, Wealth and Want (Princeton, N.J.: Princeton
University Press, 1975). There are a variety of newer studies that discuss the
issue of the continuity of leadership. For example, see Edward J. Davies II,
“Class and Power in the Anthracite Region: The Control of Political Leadership
in Wilkes-Barre, Pennsylvania, 1845-1885,” Journal of Urban History 9 (May
1983), 291-334.

22See Pessen, Riches, Class, and Power Before the Civil War, and Pessen,
The Egalitarian Myth,” 1020-27; and Gabriel Kolko, Wealth and Power in
America (New York: Frederick A. Praeger, 1962).

23For another essay that pursues this reasoning, see Klein, “The Robber
Barons,” 13-22.

24Holbrook, Hill,201.
25Collier and Horowitz, The Rockefellers.

INDEX

Adams, Charles Francis, Jr., 21. Alcoa, 105, 116. Albright, Joseph J., 54.
Alger, Horatio, 25.

American Iron and Steel Institute, 77. American Nation, The, 119, 122,
123. American Pageant, The, 119, 122. American Railroad Journal, 41.
American Sugar Refining Company, 36. Ames, Oakes, 21. Amory, Cleveland,
114. Andrews, Samuel, 84, 85, 86. Archbold, John, 88, 92, 93. Associated Oil,
97.

Bailey, Thomas, 119, 122, 124.
Bank of the United States, 41.
Benjamin, Senator Judah P., 10.
Bessemer Steel Association, 66.
Bethlehem Steel, 68-74, 75, 76-77, 79, 132.
Biddle, Nicholas, 41.
“Big Four” the, 22-23.
Blair, Austin, 59.
Blair, James, 43, 51, 52, 59.
Blair, John, 43, 51.
Blakey, Gladys, 120.
Blakey, Roy, 120.
Blum, John, 118, 122.
Board of Tax Appeals, 117.
Boies, Henry, 55.
Boies Steel Wheel Company, 55.
Borah, William, 114, 117.
Bosak, Michael, 60.
Bureau of Railroad Accounts, 21.
Burton, William, 90, 91.

Camden, Johnson N., 94.
Campbell, Rep. James H., 31.
Canadian Pacific, 29.
Carnegie, Andrew, 30, 64-68, 74, 77, 78-79, 95, 126-27, 133

Carnegie Steel, 64, 66, 67, 74, 75, 95, 126.
Casey, Andrew, 60.
Central Pacific, 17-18, 19-20, 22-23, 31-32.
Chase National Bank, 71.
Chicago, Burlington, & Quincy (railroad), 36.
Chinese Eastern Railway, 111.
Civil War, 11, 14.
Clark, Maurice, 84.
Clermont, 2, 5.
Cleveland, Grover, 75.
Collins, Edward K., 6-11, 14, 15, 122, 132.
Contract and Finance Company, 22-23.
Coolidge, Calvin, 110, 114-15, 117.
Couzens, James, 106, 159n.
Credit Mobilier, 20-21, 22, 31, 32.
Crocker, Charles, 22.
Cummins, Senator Albert, 77.
Cunard, Samuel, 5-6, 9, 10-11, 15, 132.

Daniels, Josephus, 76-77.
Daugherty, Harry, 111.
Delaware and Cobb’s Gap (railroad), 45.
Delaware, Lackawanna, and Western Railroad, 46; see Lackawanna

Railroad
Dickson, George L,., 50, 58. Dickson Manufacturing Company, 58.

Dickson, Thomas, 53, 58. Dickson, Walter, 58. Dillon, Sidney, 21, 66. Dodge,
Grenville, 18, 20. Drake, Edwin L., 84, 85. Drew, Daniel, 4. Durant, Thomas,
18, 20-21.

E. C. Knight Company, 36, 37. Edison, Thomas, 34, 56. Emergency Fleet
Corporation, 74. Ericsson, John, 11.

Federal Trade Commission, 76. Fillmore, Millard, 7. Flagler, Henry, 86.
Fletcher, F. F., 74. Fogel, Robert, 30. Ford, Henry, 105, 109-10. Fordney-
McCumber Tariff, 114. Frasch, Herman, 90.

Frick, Henry Clay, 66. Fulton, Robert, 2-3, 15.

Garner, John Nance, 116.
Garraty, John, 17, 119, 122, 123, 124.
Gary, Elbert, 67, 71, 132.
General Motors, 39.
Gibbons, Thomas, 2, 15.
Gibbons v. Ogden, 2-3.
Gould, Jay, 22, 23, 31, 34, 35, 127.
Grace, Eugene, 70, 71, 79.
Grant, Sanford, 43, 51.
Grant, President Ulysses S., 19.
Great Northern Railroad, 28, 30, 32, 33, 35, 36, 124, 132, 134.
Great Northern Steamship Company, 33.
Grey, Edward, 71.
Grodinsky, Julius, 24.
Gulf Oil, 97, 105, 116.
Gutman, Herbert, 129.
Gwartney, James, 120.
Gwin, Senator William M., 32, 34.

Harding, Warren G., 105, 110-11, 118.
Harlan, John M., 37-39.
Harper’s Weekly, 4.
Harriman, Edward H., 36-39.
Henry, William, 42-43, 47, 50.
Hepburn Act, 35.
Hessen, Robert, 70.
Highways of Progress, 39.
Hill, James J., 17-39, 93, 124-25, 107, 132-34.
Hill, Louis, 134.
Hamilton, Alexander, 104.
Holmes, Oliver Wendell, 37.
Hoover, Herbert, 117.
Hopkins, Mark, 22.
Hudson River Steamboat Association, 3-4.
Hull, Cordell, 79.
Hunter, Senator Robert M. T., 10.
Huntington, Collis, 22.

IBM, 39.
income tax, 106-08, 111-14, 116-17, 120.
Industrial Workers of the World, 74.
Inman, William, 10-11, 15.
Interstate Commerce Commission, 22, 32, 35, 39, 96, 124-25, 132.
Iron Manufacturer’s Guide, 43.

Jaher, Frederic, 131.
Jermyn, Edmund B., 59.
Jermyn, John, 54.
Jesus, 97.
Johnson, Andrew, 19.
Johnson, John G., 37.
Johnston, Archibald, 70.
Jones, William “Captain Bill”, 64-65.

Kirby, Fred M., 55-56. Kolko, Gabriel, 131. Kennedy, David, 119.

Lackawanna Iron and Coal Company, 46,48, 51,58, 66; see Lackawanna
Steel.

Lackawanna Railroad, 46, 51. Lackawanna Steel, 73. LaFollette, Robert
M., 106, 112, 115, 118. LaFollette, Robert M., Jr., 112. Landis, K. M., 96. Lane,
Franklin K., 73. Laski, Harold, 51. Lebergott, Stanley, 131. Lehigh University,
133. Lehigh Valley Railroad, 69, 73. Libby, William H., 92. Liberty bonds, 107.
Liggett’s Gap (railroad), 45, 46. Lincoln, Abraham, 85. Llyod, Henry Demarest,
87.

McFeely, William S., 118.
McNary-Haugen bill, 113.
Marshall, Chief Justice John, 2.
McClure’smagazine, 187.
Meeker, Royal, 10.
Mellon, Ailsa, 115.
Mellon, Andrew, 102-20.
Mellon, Paul, 115.
Mellon, Richard B., 104.
Mellon, Thomas, 104.
Mellon Plan, 111-14, 116.
Merrimacthe, 8, 11, 12.
Metropolitan Life Insurance Company, 73.
Midvale Steel, 75.
Monitor the, 8, 11.
Moosic Powder Company, 55.

Morgan, Edmund, 118, 122. Morgan, J. P., 36, 67, 95.

National Experience, The, 118, 122.
National Gallery of Art, 118.
Nevins, Allan, 95.
New Deal, 117.
New York and Erie Railroad, 44-45, 48.
New York Central Railroad, 14, 87, 123.
Norris, George, 106, 115-16.
Norris, Frank, 22.
Northern Pacific, 22-26, 28, 29, 31, 32, 33, 34, 36, 132.
Northern Securities Company, 36-37, 125.

Octopus, The, 22. Oxford Iron Works, 42.

Pacific Mail Steamship Company, 12-14, 22, 132.
Pacific Railroad Act, 18.
Pacific Railway Bill, 30.
Packer, Asa, 69.
Panic of 1857, 51.
Panic of 1893, 36.
Payne, Oliver, 88.
Pennsylvania Railroad, 88.
“People’s Line” the, 3.
Pessen, Edward, 128, 130-31.
Platt, Joseph C, 43, 51, 52.
Plum Creek massacre, 19.
Pratt, Charles, 89.

Rader, Benjamin, 120.
Railway World, 96.
Reading Railroad, 73.
Richmond, William, 50.
Robber barons, 1-2, 125.
Rockefeller Foundation, 99.
Rockefeller, John D., 82-100, 105, 122-24, 126, 131, 132, 133, 134.
Rockefeller, John D., Jr., 134.
Rockefeller, Laura Spelman, 84, 94.
Rockefeller, William, 86, 109.
Rogers, H. H., 88.

Roosevelt, Franklin D., 79, 117, 121.
Rose, Willie Lee, 122.

Santa Fe (railroad), 29, 31. Santayana, George, 120. Saracheck, Bernard,
109.

Schlesinger, Arthur, Jr., 118, 119, 122.
Schwab, Charles, 63-80, 93, 94, 124, 126, 127, 131-34.
Schwab, Rana, 68.
Scott, Tom, 88.
Scranton, Arthur, 58.
Scranton, Charles, 50.
Scranton Electric Construction Company, 56.
Scranton, George, 42-43, 45-46, 47, 51-52, 58, 132.
Scranton, James, 58.
Scranton, Joseph, 42-43, 51, 58, 66, 134.
Scranton, Selden, 42-43, 46, 48, 51, 54, 58.
Scranton Steel Company, 58, 66.
Scranton, Walter, 66.
Scranton, William, 58, 66.
Scrantons, the, 41-60, 124, 132-34.
Seep, Joseph, 89.
Seward, Senator William, 7.
Sherman Anti-Trust Act, 4, 35-36, 37-39, 96, 100, 124-25, 132.
Sherman, General William T., 21, 26.
Sillman, Benjamin, Jr., 84.
Silver, Thomas, 120.
Smoot-Hawley Tariff, 77, 79.
Sobel, Robert, 39.
South Improvement Company, 88.
Southern Pacific (railroad), 22.
St. Paul and Pacific Railroad, 26.
Stampp, Kenneth, 118, 122.
Standard Oil Company, 83, 86, 87, 88, 89-94, 95-97,100, 105, 109,133.
Stanford, Leland, 22, 34.
Stanton, Edwin, 11.
Stone Arch Bridge, 28.

Tarbell, Ida, 87. Tax-exempt bonds, 108-09. Taylor, Frederick W., 68.
Thernstrom, Stephan, 128-29. These United States, 120. Thomas, Robert, 125-
26. Thompson, Senator John B., 10. Throop, Benjamin, 47, 53, 58-59. Throop,
Benjamin II, 59. Thurman Law, 21, 32. Thurston, John M., 21. Tillman, Senator
Ben, 76-77. Toombs, Senator Robert A., 13. Trowbridge, J. W., 85. Tuskegee
Institute, 133.

Unger, Irwin, 120.
Union Pacific, 17-22, 23, 29, 30-31, 32, 33, 34, 36, 66.
University of Chicago, 99, 133.
U.S. Mail Steamship Company, 12-14.
U.S. Steel, 67, 68, 70-71, 75.

Vanderbiltthe, 10, 11.
Vanderbilt, Cornelius, 1-15, 87, 93, 94, 95, 122, 123, 124, 131, 132-34.
Vanderbilt University, 113-14.
Vanderbilt, William, 114.
Villard, Henry, 23-25, 26, 27, 28, 29, 34, 127, 132.

Walker Tariff, 44.
Walker, William, 13.
Walter, Phillip, 54-55.
Wealth Against Commonwealth, 87.
Weber, Michael, 108.
Weyerhauser, Frederick, 34.
Wheeler, Thomas, 93, 94.
Wightman, Merle J., 56.
William Inman Line, 10.
Wilson, Woodrow, 73-74, 76, 107-08.
Woodward, C. Vann, 118, 122, 124.
Woolworth, Charles S., 55-56.
Woolworth, Frank, 55.
Wyoming Coal and Mining Company, 20.

Bibliographic Essay

The major sources for this book are cited in the footnotes after each
chapter. In this bibliographic essay, therefore, I will briefly indicate the origins of
the Robber Baron concept and then explain other useful sources in the Robber
Baron controversy, some of which were written after 1987, when this book was
first published.

The idea of referring to certain businessmen as robber barons is an old one.
Matthew Josephson, The Robber Barons: The Great American Capitalists, 1861-
1901 (New York: Harcourt, Brace and World, 1934) popularized it for twentieth
century readers, but it goes back at least 800 years before that. According to Eli
Heckscher, Mercantilism, the Rhine River was a central trading route in Europe
during the Middle Ages. During the 1100s, the Rhine had nineteen toll stations,
replete with armed guards, to tax traders sending goods up and down the river.
These early “robber barons” did not create wealth; they extorted it from others.
They resemble America’s nineteenth century robber barons—Henry Villard,
Edward Collins, and Leland Stanford—who had toll stations in Washington,
D.C. and assessed taxpayers to support their inefficient steamships and railroads.
All of these robber barons are classic political entrepreneurs, who used politics,
not innovation and low prices, to gain wealth. In the case of the medieval robber
barons, the number of toll stations along the Rhine River increased to 44 in the
1200s, and to over 60 in the 1300s. Likewise in the U.S., with the growth of
government in the twentieth and twenty-first centuries, the opportunities for
political entrepreneurship have also increased. The key error that Josephson
made was to mix both market and political entrepreneurs, and not to separate
their differing impacts on American life.

The best text in U. S. business history, one that puts the Robber Baron
conflict in excellent historical perspective, is Larry Schweikart, The
Entrepreneurial Adventure (New York: Harcourt and Brace, 2000). A shorter,
useful text is Gerald Gunderson, The Wealth Creators (New York: E. P. Button,
1989). A study that focuses on recent entrepreneurs, one that indirectly dispels
the robber baron idea, is George Gilder, Recapturing the Spirit of Enterprise
(San Francisco: ICS Press, 1992).

Historians often tend to be woefully trained in basic economics. Two short,
helpful primers on economics are Henry Hazlitt, Economics in One Lesson (New
York: Laissez Faire Books, [1946,1962,1979] 1996), a readable book that has

sold one million copies; and James Gwartney and Richard Stroup, What
Everyone Should Know about Economics and Prosperity (1993). A

short and venerable primer on economics is Frederic Bastiat, The Law,
written in 1850 and recently (1998) published by the Foundation for Economic
Education, in Irvington, New York. Finally, the first two chapters of Milton and
Rose Friedman, Free to Chose(New York: Avon Books, 1980), are an eloquent
and informative introduction to economics.

The growth of government in the U. S. has spawned several important
works of political philosophy. In fact, the first major contribution to political
philosophy written in the United States, The Federalist Papers (1788), was not
only a defense of the Constitution, but a response by Alexander Hamilton, James
Madison, and John Jay to the question of what should be the proper role of
government in American society. In the late 1800s, the increasing of subsidies to
Robber Barons and other groups prompted Yale professor William Graham
Sumner to defend limited government in a series of essays, recently collected
and edited by Robert Bannister, entitled On Liberty, Society, and Politics
(Indianapolis: Liberty Fund, 1992). During the rapid spurt in the growth of
government during the New Deal, a devastating critique of political
entrepreneurship was Walter Lippmann, The Good Society (Boston: Little,
Brown, and Co., 1937). It was followed by Friedrich A. Hayek, The Road to
Serfdom (Chicago: University of Chicago Press, 1944). A brief and readable
defense of free markets, written by Hayek’s mentor, is Ludwig Von Mises, The
Anti-Capitalistic Mentality (South Holland, 111.: Libertarian Press, 1972).

About the Author

BURTON W. FOLSOM, JR. is the Charles Kline professor of history and
management at Hillsdale College in Michigan. He received his Ph.D. in
American history from the University of Pittsburgh and has taught at the
University of Nebraska, the University of Pittsburgh, Northwood University, and
Murray State University. He has also been a senior fellow at the Mackinac
Center for Public Policy in Midland, Michigan; and historian in residence at the
Center for the American Idea in Houston, Texas.

Professor Folsom’s first book was Urban Capitalists (Johns Hopkins
University Press, 1981; second ed., University of Scranton Press, 2000). His
later books include Empire Builders (Rhodes and Easton, 1998); No More Free
Markets or Free Beer: The Progressive Era in Nebraska, 1900-1924 (Lexington
Books, 1999). He has two edited books, The Spirit of Freedom (Foundation for
Economic Education, 1994); and The Industrial Revolution and Free Trade
(Foundation for Economic Education, 1996). His articles have appeared in the
Journal of Southern History, Pacific Historical Review, Journal of
AmericanStudies, Great Plains Quarterly, The American Spectator, and The Wall
Street Journal. He is a columnist on economic history for The Freeman for Ideas
on Liberty.

  • CHAPTER ONE
  • CHAPTER TWO
  • CHAPTER THREE
  • CHAPTER FOUR
  • CHAPTER FIVE
  • CHAPTER SIX
  • CHAPTER SEVEN
  • CHAPTER ONE
  • CHAPTER TWO
  • CHAPTER THREE
  • CHAPTER FOUR
  • CHAPTER FIVE
  • CHAPTER SIX
  • CHAPTER SEVEN

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