Vanderbilt Goes Upstream Against the Subsidies
Many children are taught that Robert Fulton was the first American to build and operate a steamboat when his Clermont sauntered four miles per hour upstream on the Hudson River in 1807. Fulton, however, was not the first American to put a steam engine on a boat, and when he did succeed, his steamboat was named the North River, the nickname that local New Yorkers used for the Hudson River.1
The idea of a self-propelled boat going upriver had long fascinated inventors. With the wretched state of roads in all countries of the world, water travel was far easier and often more economical. But how could a boat go upstream? From Leonardo da Vinci to Benjamin Franklin, brilliant thinkers had drawn diagrams and described mechanisms with enough power to fight river currents and free mankind from depending upon the wind or sheer muscle to travel upstream. But no one had been able to build a working motor or engine that would do such a thing. When James Watt set up the first full-sized steam engine in England in 1776, mankind finally had a practical power source that might be harnessed on ships.
Inventors quickly began to adapt steam engines to watercraft, but early steam engines were inefficient and often caused such strong vibrations that boats simply fell apart. The first American to set up an actual steamboat line was John Fitch, described as “a wild-eyed, scruffy genius.”2 Fitch made the unfortunate decision to sail up the Delaware River on a very slow steamboat and try to make a profit at the same time. The banks of the Delaware were flat and the roads along the river good enough that stagecoaches on land actually passed Fitch’s boat on its way upstream. Potential passengers also feared explosions of the steam engine itself. Would they be killed or injured if they tried Fitch’s wild new invention? Fitch’s enterprise soon failed, and he disappeared from history.3
Robert Fulton, on the other hand, chose to establish his first steamboat line along the Hudson River. The banks of the Hudson were extremely hilly and almost mountainous north of New York City. Travel by land in that area was difficult at best. The Hudson Valley was also heavily populated, and New Yorkers wanted a convenient method of traveling upstream to Albany, the state capital. And the best reason of all to Fulton, a political entrepreneur, was that his benefactor in New York had great influence in the state legislature.
Fulton had spent almost twenty years in Europe, first in England and then in France. The British had an established tradition of subsidizing all kinds of commercial ventures: shipping, canals, shipbuilding. In England, Fulton tried to get funding from British politicians for his various inventions. Then he moved on to France, where he became an “expert” on the current ideas of how to build a working submarine. He even built an underwater craft, and with two companions, tried to get close enough to British ships in the English Channel to sink one of the vessels and impress French politicians. He lobbied Napoléon Bonaparte for money to develop his submarine and use it against the British navy, but Napoléon declined the offer.4
Fulton returned to the United States in December 1806, knowing that Robert Livingston of New York believed in his steamboat project and would back it to the hilt. Livingston was a Founding Father who believed that steamboats would work well on the wide rivers of North America. Livingston and Fulton obtained a monopoly from the New York legislature for the privilege of carrying all steamboat traffic in New York for thirty years, if they could produce a working steamboat within two years.5
Thus, when Robert Fulton sailed the North River up the Hudson River on a hot summer day in August 1807, he had built the first viable steamboat and had just begun the first steamboat line with any measure of success. Fulton opened up new possibilities in transportation, marketing, and city building.
One problem with Fulton’s monopoly, however, was that it affected shippers in neighboring states. As steamboats became more common, the Fulton monopoly meant that other companies couldn’t sail in New York waters without fear of fines. The monopoly also kept ticket prices high. Finally, in 1817, Thomas Gibbons, a New Jersey steamboat man, tried to crack Fulton’s monopoly when he hired young Cornelius Vanderbilt. Gibbons asked Vanderbilt to run steamboats in New York and charge less than the monopoly rates.6
Vanderbilt was intrigued by the challenge of breaking the Fulton monopoly. On the mast of Gibbons’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 U.S. 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 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.7
The triumph of free markets 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.”8
The real value of removing the Fulton monopoly was that the costs of traveling upriver dropped. Passenger traffic, for example, from New York City to Albany immediately dipped 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.9
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 established 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.”10
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 fix prices informally 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 two hundred dollars per day to operate his boats; if he could fill them with one hundred passengers, he could take them for 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 immediately 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.11
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.”12
By 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 midcentury were many times larger and faster than Fulton’s North River. 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 one thousand passengers, and they also had space for mail and freight. These ships were sturdy enough to cross the Atlantic Ocean. The New York to England route was the first to open up the steamship competition; the New York to California line (via Panama) soon followed.13
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.
In 1838, Englishmen 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 semi-monthly 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.14
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: first, to show the world American progress and shipbuilding prowess; second, to deliver the mail profitably overseas; and third, to provide a military fleet in case of war.
The man who exploited these three arguments was Edward K. Collins, the operator of the first packet line from New Orleans to New York. For two decades Collins had achieved some success, and this gave him the stature to propose this self-serving plan: If the government would give him $3 million 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 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 travel, because the Cunarders had already opened them. Americans would not be delivering mail more often, because the Collins ships, like Cunard’s, would sail only every two weeks. Finally, Americans would not be bringing the mail cheaper because the Cunarders could still do it for less.15
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. 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.16
Congress gave money to the Collins and California lines in 1847, but the luxurious ships were under construction for years. 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 staterooms 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.17
What’s more, Collins’s four ships were worthless for national defense. The secretary of the navy had an engineer examine Collins’s ships, and he found their shape and structure wholly unsuited for war. If the Collins ships were converted for war, the engineer argued, they would be “as disastrous to our national interests as their construction has been to our professional reputation as constructors and engineers.”18
But with annual government aid, Collins still had no incentive to cut his costs from year to year. To cover his lavish expenses, 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 Millard Fillmore, his cabinet, and influential congressmen. Collins also hired William W. Corcoran, perhaps the most effective lobbyist—or “borer” as he was then called—in Washington, D.C. Congress eventually voted to increase Collins’s subsidy to $858,000 a year (or $33,000 each for twenty-six voyages—which came to $5 per ocean mile) to compete with the Cunarders. Representative John C. Breckinridge of Kentucky said that Collins won the large increase in his subsidy “by the most powerful and determined outside pressure I have ever seen brought to bear upon any legislative body.”19
Meanwhile, Vanderbilt had been watching this government waste 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 compete in 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’s price.20
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 benefited from Collins’s 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, “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’s lobbying prevailed, so Congress turned Vanderbilt down and kept payments to Collins at $858,000 per year.21
President Franklin Pierce, however, dramatically vetoed the Collins subsidy bill on March 3, 1855. He argued that the effect of such a subsidy “would be to deprive commercial enterprise 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.” When the president’s secretary brought Pierce’s veto to Congress, Thomas Hart Benton was elated. Benton had served as the first five-term senator in U.S. history, and had also opposed the government subsidy for the fur trade back in the 1820s. Benton shook the secretary’s hand vigorously and said, “Tell the President he has covered himself with glory.”22
Most congressmen thought otherwise. They attached the full subsidy for Collins to a naval appropriations bill and worked it through Congress that way. “A million dollars a year is a power that will be felt,” lamented Senator Robert Toombs of Georgia. “I have seen its influence. I have seen the public treasury plundered by it.”23
Vanderbilt was so disgusted that he 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.” Vanderbilt’s 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 steerage. The steerage must have been uncomfortable—people were practically stacked on top of each other—but for seventy-five dollars, and sometimes less, he did get newcomers to travel.24
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’s 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 more than five hundred 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.”25
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’s traditional side-lever engines. In a head-to-head race, the Vanderbilt beat Collins’s 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 five hundred passengers). In desperation, he spent more than 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.26
Even Collins’s friends in Congress could defend him no longer. Between Collins’s 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’s 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.27
And there was yet another twist. When Vanderbilt competed against the English, his major competition did not come from the Cunarders. The new unsubsidized 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.28
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 twentieth-century economist 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.29
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.30
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’s subsidy expired in 1858 that Americans began experimenting with iron hulls in a serious way.31
Later, 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. 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 sink the Confederates’ 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 United States 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 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.32
In a manner similar to John Jacob Astor’s pursuit of new markets, Vanderbilt was always on the hunt for more transportation routes. While he competed with Collins on the east coast, Vanderbilt also tried to dominate transportation to the west coast. 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 five hundred 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.33
Such a development says 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 with 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.34
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.35
The operators of the California lines were typical political entrepreneurs: They didn’t 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 payoff money from the California lines, he ended up with a profit anyway.36
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 king-fish that is robbing these small plunderers that come about the Capitol. He does not come here for that purpose.” Toombs’s conclusion: End the mail subsidies.37
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.”38 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 had “swooped down” and “wrung tribute” from the subsidized lines, not from “every passenger.” Passengers paid lower fares to California because Vanderbilt’s competition had slashed the fares permanently.39 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 more than $11 million 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 $600.40
Vanderbilt’s victory marked the end of political entrepreneurship in the American steamship business. America didn’t end up with perfect free trade, but it was closer to it than ever before. 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 67 down to 9 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 loaded 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.41
This study of American steamboating focuses on the market and the impact different entrepreneurs had on the market. The political entrepreneurs—Robert Fulton, Edward Collins, and Samuel Cunard—cannot be lumped with Thomas Gibbons, Cornelius Vanderbilt, and William Inman, the market entrepreneurs, because of their differing 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, which was necessary in order to survive against subsidized opponents. Some of them were personally repugnant—Vanderbilt disinherited his son and placed his own wife in an asylum, while 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 during his lifetime, perhaps he was blessed to have received no federal aid. Collins, like Thomas McKenney in the earlier fur trade, seemed to have more problems than blessings from all the subsidies he took from the federal government.