Jan. 4 (Bloomberg) -- No sooner had the House of Representatives finished listening to the reading of the president’s veto message than the chamber erupted in outrage.
Representative Theodore Hunt of Louisiana jumped to his feet and thundered, “This abominable veto just brought into the House is the very height of tyranny and usurpation.” Amid cries for impeachment, one Ohio congressman shouted, “The time for revolution has come!”
It was March 3, 1855. The president was Franklin Pierce. And the vetoed bill, that treasure of liberty, worth impeachment or revolution? An extension of a subsidy of $858,000 -- more than 1 percent of the entire federal budget -- for just one steamship company.
During the 1840s and ’50s, an era better known for laissez-faire policies, Congress paid enormous sums to private steamship lines to carry the mail. At the time, the federal government wanted to achieve far-reaching goals, but it was held back by both political ideology and limited administrative capacity -- it couldn’t do very much by itself. So it farmed out the work. The result was a wild tale of unintended consequences, one that reveals a starkly unfamiliar debate over a very familiar topic.
The subsidies first emerged under President James K. Polk. That’s odd, because Polk was a Jacksonian Democrat. He disapproved of active government, which he thought would lead to monopolies, special privileges for a favored few, and an artificial aristocracy.
But Polk was also an expansionist. His war with Mexico gave the U.S. a long Pacific coast, which created a strategic conundrum. The easy capture of California illustrated its vulnerability, either to foreign powers or unruly settlers. To defend the territory, the U.S. would need a reliable communications system.
At the time, shipping was the only practical mode of fast, regular travel between the coasts. So in 1847, Congress authorized unprecedented mail contracts for steamship lines on the Pacific (at $348,250 a year) and the Atlantic (at $290,000), connecting via a land transit of Panama.
The best argument for this subsidy-by-contract was that no such lines existed yet. With only a few thousand Americans living on the Pacific, there was no market. But the gush of federal dollars gave rise to two new corporations, the Pacific Mail Steamship Co. and the U.S. Mail Steamship Co., which put ships in place by January 1849.
The best argument against these subsidies was also that no such lines existed yet. The contracts went to Albert G. Sloo of Cincinnati and Arnold Harris of Nashville, Tennessee. They weren’t mariners, but politically connected speculators. They immediately flipped their rights to actual entrepreneurs.
No sooner had the new lines commenced operations than the California gold rush began. Tens of thousands of migrants clamored for tickets. Prices soared, and large gold shipments yielded additional profits. The market went from nonexistent to among the most lucrative on the planet.
Seemingly everyone who could build, buy or lease a steamship put one on the run to San Francisco. American businessmen began to construct a railroad across Panama, which would also prove immensely profitable. Cornelius Vanderbilt proposed a privately funded ship canal across Nicaragua. When London bankers declined to invest, he started a steamship line and transit route across the country, organized as the Accessory Transit Co. He made a great deal of money, even in competition with the subsidized mail lines.
At this point, one might think the subsidy had served its purpose and could be reduced or eliminated. Indeed, Vanderbilt offered to carry the mail for far less. But the subsidies had created vested interests that steamship men protected through lobbyists. The recipient of the trans-Atlantic contract, Edward K. Collins, operator of the confusingly named United States Mail Steam Ship Co. (different from the U.S. Mail Steamship Co.) deployed them with particular zest. One of his lobbyists was described by a friend as suffering only one flaw -- “He is such an infernal scoundrel.” Bribery wasn’t so much alleged as assumed. And the federal subsidies continued.
With the California lines, immense profitability led to dramatic conflicts. Vanderbilt feuded with his partners, forced them to buy him out, then took control again just as William Walker, an American adventurer with a private army, seized power in Nicaragua. Walker stripped Vanderbilt’s company of its rights and property and sold them to his former partners. Vanderbilt dispatched a secret agent who led Costa Rican troops on a commando raid that shut down Nicaraguan transit operations and helped drive Walker from power. Vanderbilt reopened competition with the mail companies, gained the postal contract in 1859, and forced the Pacific Mail to establish a joint monopoly with him. They still collected federal money, but in vastly reduced amounts.
For a time, though, Pacific Mail paid him a large monthly fee to keep his ships in port. The payoff briefly gave them total control of the market, well worth the price. Curiously, Henry J. Raymond, the editor of the New York Times, blamed Vanderbilt. Raymond compared Vanderbilt to medieval German robber barons -- the first known use of that metaphor in American journalism.
Raymond’s reasoning reveals some of the philosophy behind the subsidy. He decried “competition for competition’s sake; competition which crowds out legitimate enterprises ... or imposes tribute upon them.” An old Whig, Raymond believed in the partnership of government and private enterprise to develop the young republic; competition destroyed badly needed capital. Pacific Mail, he argued, existed to carry out a federal plan to serve the public interest, and deserved protection.
In 1855, Congress debated the subsidy-extension bill (which benefited Collins’s company) in a tone somewhere between candor and sarcasm. Congressman William “Extra Billy” Smith denounced the bill. He noted that one colleague had changed his vote, and Smith accused him of being corrupted. The other man replied, “If the gentleman were so opposed to extras, how he got the name of ‘Extra Billy?’” (Smith claimed it was for extra service to the Democratic Party.)
“Money passed this bill,” the New York Tribune claimed, “money counted down into the palms of Members of Congress themselves -- this is as clear as the noon-day sun.” Another newspaper falsely attributed Pierce’s veto to a $50,000 bribe from Vanderbilt, who was bidding low for the same contract. Congress later extended the subsidy through a rider on another bill. The New York Times predicted that Vanderbilt would set up a competing Congress for half price.
The debate was a late clash between two ideologies that would largely disappear by the end of the century: the Whigs’ active-government conservatism and the Democrats’ populist laissez-faire. Senators spoke of the “honor of the country” in maintaining an American steam fleet. Pierce countered in Jacksonian terms, calling the bill a “donation” that established a monopoly and eliminated “the benefits of free competition.”
Vanderbilt, too, attacked the huge subsidy, saying the mail could be carried far more cheaply. And he defended himself from claims that his competition was destructive. Competition “founded this great Republic,” he wrote, and was “now drawing the commerce of the world to our shores.”
In time, Vanderbilt’s rivalry helped kill the subsidies. Collins went bankrupt, Vanderbilt carried the mail for much less, and the Civil War changed the subject. The political debate turned upside down by 1900. Corporations began to evolve from instruments of public policy into plain and simple businesses; individual competition would seem less egalitarian in an economy dominated by big companies.
But Whig ideas about using corporations to achieve public goals didn’t simply die off. In the 1860s, the Republicans -- the Whigs’ heirs -- believed it was in the national interest to build an unprecedented piece of engineering through private companies supported by public money. They called it the transcontinental railroad. Historians are still arguing about the wisdom of that.
(T.J. Stiles is the author “The First Tycoon: The Epic Life of Cornelius Vanderbilt,” which won the Pulitzer Prize and the National Book Award. The opinions expressed are his own.)
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