#81 Lasting Effects of the Civil War (The End of Laissez-Faire part 4)

Read part 3 of this series

Author’s note:

This series of blogposts will be my paraphrased notes on a lecture given by Murray Rothbard called “The American Economy and the End of Laissez Faire“. This means the post will contain some word for word transcriptions of Rothbard’s words and some editorializing and rephrasing of my own. I will not distinguish between the two.

Republican Economic Reform
Following the Republican economic reforms post civil war, the Democrats were at such a major political disadvantage they were never quite able to dispel the many new economic regulatory powers possessed by the Federal government. This economic framework remained in place until the creation of the Federal Reserve under the Wilson adminstration in 1913.

To recap, this period of banking can be marked by the outlawing of state bank notes and the centralizing of the banking system in the hands of a few Wall Street banks, where their reserves were now based primarily on government debt.

Protective tariffs also remained in place, however they were reduced gradually over many decades. As well, high excise taxes on liquor and tobacco remained in place.

Income taxes were declared unconstitutional by the Supreme Court but were then reintroduced during the first world war under the Wilson administration. Greenbacks were eliminated in 1879 when the US finally returned to a gold standard.

Land grants, which began in 1862 lasted until 1873, by which time most of the land had been given away and most of the transcontinental railroads had been built. Coincidentally as these subsidies began to end, around this time most of the transcontinental railroads started to go bankrupt.

With these new economic mechanisms firmly in place, the idea of having an austere federal government with a balanced budget was now more or less impossible, with president Andrew Jackson having been the final president to fully pay off the Federal government debt balance in the 1830s. Try as they might, Democrats were fighting a losing battle in pushing back the expansion of Federal government powers.

While obviously it cannot be done precisely, if one could chart government intervention in matters of economy and society starting with the 1780s, it would start out very low. Then the war of 1812 occurs and there would be a significant increase. Over the following couple of decades the degree of this interventionism receded back to it’s baseline, however, by the end of the civil war government interventions reached astounding new heights which never receded as they had prior. These expansions of statism continued exponentially into the first and second world war and beyond.

The largest increases in the scale of government intervention (with the exception of the 1930s progressive era) were a product of a wartime environment with a trailing post war legacy.

The Rail Road Industry
It is important to note the significance of the rail industry in the 19th century, which is often lost on the modern man. Throughout all of history prior to the proliferation of rail travel (~1840), humanity had no mechanized forms of locomotion across land. The majority of trade and travel was done over waterways and canals and thus civilizations tended to concentrate around oceans and rivers. The arrival of rail travel meant cheap and efficient land transportation for the first time in history.

Thus, the first “big business”, in terms of capital concentration like we think about today, originated in the rail industry. The first real corporations (large business interests with special operating privileges from the government) were railroad companies. Subsidies to railroads began, to an extent, in the 1850s and by the 1890s the industry was “big business”.

For perspective total mileage of rail vs canals in the 19th century.
1840 – 3.3k miles of canals & 3.3k miles of railroad.
1850 – 3.7k miles of canals & 8.9k miles of railroad
1860 –  3.7k miles of canals & 30.6k miles of railroad

There was a massive growth in rail over the course of the 1850s (as well as in industry in general) with canals beginning to decline as rail was cheaper and more efficient. The first railroads started out as small lines from one location to another (think 10-30 miles). As time went on, and these businesses profited immensely from the benefits of rail travel for consumers and industry, capital and technology expanded to much longer travel lines.

By the 1850s, the railroad network east of the Mississippi was more or less finished, and by the Civil war, had mostly merged into one long line. New York and Philadelphia originally had 8 different rail roads, but rail companies made the savvy decision to merge and integrate lines which made longer scale travel immensely more efficient. The majority of the Eastern rail lines were built without the help of subsidies.

It is interesting to note, standardized time zones were instituted by the rail companies as a matter of efficiency. Originally there were about 80 different time zones across the United States because overland travel was so slow that there was little reason for a unified standard. Railroads convened together and established a unified standard of time zoning across the continental United States which is still in place today. The government was uninvolved in this achievement, rail companies, however, had an economic incentive to organize an efficient system. Daylight savings time, however, was a later invention of government.

Similarly, the railroads also convened together and established a standardized gauge for the rail track that was being laid. This was crucial for establishing and maintaining interoperability of rail cars across different lines.

Subsidization of the rail industry was due in no small part to the politicization of the placement of railway stations. Because rail travel was such a monumental advancement in overland travel, any small town that was connected to a rail line saw massive benefits in terms of it’s access to trade and commerce. Subsidization (at the local, state, and federal level) was intended to “overbuild” rail throughout all of the small towns across the United States and interconnect them.

By around the 1870s, there was a widespread collapse (which I’ve written about before) of the malinvestment of rail companies which overbuilt to capture government subsidies.

The biggest railroad prior to the Civil War was the Illinois Central, which traveled from Chicago to New Orleans. It was heavily subsidized and heavily politicized. Due to the importance of capturing large government subsidies, rail companies began to buy politicians to represent their lines. It was not uncommon around this time period to hear something like “Senator So and So is an Illinois Central Man”, because he had been purchased to represent the political interests of Illinois Central!

For example, Stephan Douglas (Democratic Senator from IL who lost in a bid for the presidency against Lincoln) was an Illinois Central man (he was a large equity holder and owned a lot of real estate for the terminals in Chicago which he sold for a profit to the rail line).

Abraham Lincoln was a wealthy corporate railroad attorney. He was hired as a lobbyist by Illinois Central to procure a charter in 1850. His wife’s sister’s Father in law was a president of the Louisville Nashville Railroad (another large firm). He was a dark horse (a little known contender) candidate for the Republican presidential nomination in 1860. William H Seward (a NY Wall Street lawyer) was originally supposed to receive the nomination.

Lincoln’s campaign manager, Norman Judd (a Chicago lawyer who was chairman of the Illinois Republican party and a rail road official) essentially won him the nomination. Judd was a bigshot of the Chicago and Rock Island rail line, which went from Chicago to Omaha. This line is very important because Omaha is where the famous Union Pacific Transcontinental line emerged heading west.

Another man named Judge David Davis (an old friend of Lincoln’s), who was a bigshot of Illinois Central prior to becoming a judge, sold a large amount of acreage to Illinois Central was also instrumental in helping secure Lincolns presidential nomination.

Thus Lincoln himself and his two Campaign managers were all three heavily involved in the Illinois Central Rail company.

The Secretary of Treasury in Lincoln’s cabinet was Salmon P Chase (a former Democrat from Cincinnati). He was lobbied into the executive cabinet by the Cooke brothers, Jay Cooke (a banker in Philadelphia) and Henry Cooke (a newspaper editor in Cincinnati) who both invested a large amount of money into Lincolns presidential bid. By 1864 Jay Cooke had personally invested $100,000 (worth millions in today’s dollars) into Chase’s political campaign for the executive cabinet.

Read Part 5 of this Series