WEBVTT

NOTE Crisis and Liberty: Lecture 3

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Before I start, I want to call your attention to something that has just gone online.

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It's a website called OnPower.org.

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This is one of the projects of the Independent Institute, which I work with.

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It started out a year ago or more to be a website connected with my book, Crisis in Leviathan, and other things that I've written on related themes and topics, but it grew and turned out to be about a hundred times bigger than we had in mind to begin with.

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and it doesn't just deal with my work, although much of my work that relates to the growth of government and related topics is there and a great deal of it is available in hyperlinks so that you can get access to the text online.

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but a tremendous amount of other material is also listed there and organized in subject areas,

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things having to do with the various aspects of government policy making or action

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according to different historical periods and according to different parts of the world.

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So it's really quite a comprehensive resource for people interested in tracking down material.

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The reading lists, which is in a sense what this site contains, are really marvelous.

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I look at it sometimes and I think, I only wish I'd read more than a small fraction of

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of all this material myself and I have that same sinking feeling I had when Murray Rothbard

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wrote that letter years ago. There's a lot to learn and I'm not very far along, but this

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is a wonderful resource in this area. I'd say it's different in flavor from anything

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This is something I know about. It's quite similar, however, to the flavor of suggested readings you get from mises.org and has a great deal of overlap, indeed, with many of the authors you find there.

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But I recommend this to you. Have a look at it. See what you can do with it. I think you may find it very useful.

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And especially if you ever should find yourself in that curious position of wanting to track down something I've written, if it's about the growth of government or a related topic, born policy critiques, or anything along those lines, you're likely to find the text online at onpower.org, so I commend that to you.

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This morning I want to talk about the 19th century and the growth of government during that time.

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Yesterday I put a graph up showing the growth of federal spending from, I think, the very beginning, from 1790 or so all the way up to recent years.

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and one of the striking aspects of that chart is that except for the Civil War, federal spending in the 19th century is always very, very low, runs two or three percent a year at most and jumps up during the Civil War but then it comes back down.

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and so it looks as if government didn't amount to much by that measure.

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What I want to do today is to look also at state and local levels of government

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because they were actually much more important in many ways

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so far as intervening in economic life was concerned in the 19th century

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and also to talk about some of the ways in which the Federal Government did play an important role but a role that doesn't show up in that graph because it doesn't get reflected in the amount of money the Federal Government was spending.

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So, that's the topic today and then I'll begin later on this morning to discuss some of the ways in which structural changes in the late 19th century with the development of the national market and so-called big business began to change the regulatory landscape and to create some curious

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The curiosities, so to speak, in federalism. There was a sense in which I think federalism contained the seeds of its own destruction under the conditions that prevailed then and later.

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And it's an idea that I haven't seen discussed a great deal, but I think has some importance.

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We have some data here which are the product of some very extensive research undertaken by Dick Silla and John Wallace.

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John was a Ph.D. student of mine from the University of Washington years ago.

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and John Legler and these guys have been digging up information for many years.

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It's very hard to find state and local budget data in the 19th century, particularly in the

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early 19th century, just literally finding it. Where is it? Are any records remaining?

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And then when you find it, making some sense of it and trying to organize it in a way that

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It can be made comparable to other information.

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Federalism was not a system made with historian's ease in mind.

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So there's a lot of different jurisdictions to examine.

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But out of all of this work,

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John Wallace compiled these data. They're published a few years ago in a very nice survey article in the Journal of Economic Perspectives.

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And the national data are fairly familiar because they're easy to get and they've been available for a long time.

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But the state and local data are basically information that was available only in rough guesses before.

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Now obviously these data are subject to some errors as well, so I don't want to pretend that they're very, very precise,

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Nor would Silla, Wallace and Legler pretend that. They're still working on this project.

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But I think they're the right orders of magnitude and they show us the correct trends.

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And they're quite revealing.

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You'll notice for example that when we are first able to look at all three levels of government here in 1840,

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We find that the revenues of the national government at that time are a little greater than those of local governments,

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but not much, and less than twice as much as the states are getting in revenues.

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And interestingly, as time goes by, the movement is in the direction of relatively more growth at the state and local level rather than the national level.

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By the time we get to the end of the 19th century, the local governments alone,

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The cities and the counties are getting more revenue substantially than the national government.

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The states haven't grown at nearly such a high rate, but they're not inconsequential either.

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Now to get some idea, these numbers are expressed in current dollars per capita, and of course

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We look at this and we think, what a heaven, even if money had 20 times the purchasing power that it has now, which is probably in the right neighborhood,

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still these seem like negligible levels of taxation by modern standards, so it's almost enough to make us believe there was laissez-faire after all.

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But when you look at the far right-hand column and you see these revenues as a percent of GNP,

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yes, again, they're small compared to modern levels.

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The government's now getting more than 30% of GDP in revenues at all levels,

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and that's a lot more than 7.2%.

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But 7.2% is not nothing. Governments were out there, they were doing things in the 19th century, they weren't just sitting on their hands reading books on anarchism.

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So this is kind of an overview of where things stood at the various levels of government in the 19th century.

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Now again, as I said, in the beginning of the 19th century, the national government wasn't even trying to do very much, especially after Jefferson became president.

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The excise taxes that the federal government had tried to collect in the 1790s were almost all abandoned during Jefferson's administration.

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There was an excise on salt at the federal level that remained in effect, but otherwise there weren't any until the second war with England, and then they were only put back in place for a few years to get some revenues to help pay for the war.

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So, the national government got its revenues predominantly, that is to say about 80% or more, from tariffs and almost all the balance came from sales of land in the public domain.

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So, I mean, it's almost as if that wasn't even a tax, at least you got some land in exchange for your money.

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So the national government didn't have much penetration in a way that modern tax systems have.

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In the 20th century, tax authorities decided that you wanted to use the tax system not just to get revenues so that government could make purchases.

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You wanted to use it to affect behavior.

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You wanted to use it to penalize or refrain from penalizing different kinds of business and different kinds of even personal action so that nowadays, for example, anti-smoking crusaders are gung-ho to place extraordinary taxes on cigarettes.

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All of us here understand what a counterproductive notion that is because in fact when you put a high tax on cigarettes as say New York City has recently, cigarettes get cheaper because it stimulates all the smugglers to bring in cigarettes with no tax at all.

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and so strange as the idea is nonetheless moralists and do-gooders and crusaders and social engineers and all the rest of the busy bodies the world is plagued with discovered the tax system in the 20th century and so they want to continually monkey with it so that they can make people do what they want them to do and they don't seem to ever learn their lesson about the difference

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In the 19th century, taxes were a little more straightforward.

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They were pretty much a way government wanted to get revenue, but not entirely.

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Even there, when the federal government did go back to imposing excises during the war between the states,

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it put thousands of them on. It put them on everything it could think of where it might be able to collect them.

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and after the war ended it didn't give up all of them and it's instructive that the ones it kept were the ones on liquor and tobacco because even in 1865 this country had a fair share of busybodies who wanted to dictate how their neighbors lived.

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And so, in fact, we've had that federal tax on liquor and tobacco continuously from this war between the states till today at the federal level.

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But that, again, that was an exception. At the local level, most of the tax revenue came from property taxes on real estate, just as much of it still does.

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The states laid various kinds of taxes on people but again a relatively small amount of revenue

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was acquired by the states. They didn't do much in the 19th century. They had a kind of a long list

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of actions that they undertook but none of them amounted to a very big deal in terms of the

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The revenue data don't tell us some of the ways in which states became very actively engaged in economic life in the early 19th century.

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One of the important avenues for that sort of activism was in banking.

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You'll recall that the Constitution of the United States forbids states to issue bills of credit, paper money.

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Prior to the Constitution's ratification, most of the states had been issuing paper money.

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And indeed, that issuance was a major complaint for most of the founding fathers,

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Because they viewed that as a way of cheating creditors.

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And indeed, that's what it was intended to be.

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The states issued this paper money.

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You know, the first thing it did was cheat the people they owed.

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And then the paper money got out into circulation and was used to repay debts,

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and of course depreciating all the while,

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thereby becoming a vehicle for the debtors to cheat the people they owed who had expected to be repaid in many cases, if not all, in hard money.

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So this became a major issue leading up to the Constitutional Convention and the insertion of that provision against states issuance of bills of credit.

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Now, as it turned out, the states kind of laughed off this restriction because almost

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immediately they started getting involved in either establishing banks on their own

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account, that is, you know, socialist banking is what it was, so the states just set up

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banking institutions and started accepting deposits and making loans and investments

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just as a regular private commercial bank does.

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So, many of the states went into the banking business.

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Others, although they didn't or even if they did,

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in addition to that, they became investors in private banking companies.

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And, of course, all of these banks then proceeded to create deposits for their lenders, for their borrowers, and to issue paper money.

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So, if the Constitution said you can't state of Rhode Island, issue paper money,

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didn't prevent Rhode Island from establishing the Bank of Rhode Island, which issued paper money.

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And this kind of activity was rampant in the first half of the 19th century.

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It began to fade out around the middle of the 19th century, largely because these enterprises tended to go broke.

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They were, of course, badly managed being public enterprises.

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and failure was not an uncommon event in the banking industry anyhow, so these were especially likely to fail and many of them did and in some states in the 1840s, new constitutions were written forbidding the states to engage in banking anymore.

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So that was one of the ways in which the states did play an important role because these banks all acted as a kind of crony capitalism.

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Your pals were the ones who got the loans and politics dictated how these institutions operated.

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There are even matters such as where they put their branches. If they had branches, which county would get a branch of the State Bank of Iowa, for example.

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I had an interesting article a few years ago in my journal, The Independent Review, on some of the state banks in the Midwestern states that were still operating in the 1860s.

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Some of them so it took a while for this this sort of thing to be be driven away

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In addition the states became heavily engaged from oh about the second decade of the 19th century and

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investing in transportation improvements, especially in canals

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between about 1815 and

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1840

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And in the beginning, New York State really showed the way by building the Erie Canal,

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which linked basically Albany and Buffalo, and by virtue of making that link,

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it allowed waterborne trade to proceed all the way from the Atlantic Ocean to the Great Lakes

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and via the Great Lakes to penetrate far inland,

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farther indeed than anybody cared to penetrate at that time.

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So this was really a tremendous boon

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to the development of that part of New York State.

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First of all, even before the canal was completed in 1825,

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there was a tremendous boom of settlement

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and Development of Agriculture and Industry in the areas nearby the canal and then the state built feeder lines out from the main stem line and so it did a lot to draw people and industry to that part of the country.

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Now, the politicians in other states looked up at New York and said,

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ah, they're getting the jump on us.

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Just the way your politicians here in Alabama looked around recently, I take it, and said,

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somebody's getting the jump on us, let's throw some of our money at Hyundai Corporation.

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I noticed that sign when driving up here on Sunday that Hyundai is building a big plant

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The other side of Montgomery, I told Elizabeth, pity the poor tax payers of Alabama, Hyundai's

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not coming here by accident, I guarantee they've been subsidized to do that, and this was a

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game that states were already playing almost 200 years ago. They've never quit, they've

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I've never quit because this is a form of corruption that state legislators and governors and their flunkies get away with.

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It's based on economic fallacy, but it's a fallacy that the public can easily swallow and continues to swallow,

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and so it's politically viable and I don't see any end to it.

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just like this state of the weather you know tornadoes come sometimes Hyundai

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comes other times and they'll take credit for it when it comes that's the

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that's the bizarre part well the next thing that happened after the Erie Canal

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was built was that several other states said well we got to do this too New York

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is going to suck all the commerce away from us because it was indeed promoting the growth

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of the Port of New York where a lot of this commerce from the West was brought down the

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Hudson River to New York and then in some cases exported to Europe or elsewhere. So

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New York City was flourishing and Philadelphia said we can't have this, we're losing our

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and our preeminence, not to speak of money, and Baltimore said, we can't have this, and even some vagrant politico down in the swamps of the District of Columbia said, well, we can't have this either, we've got to have a canal too.

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And so they began to build canals of their own at public expense, more or less connected to these port cities.

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And elsewhere in the country, a number of large canal projects were undertaken also by state governments.

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Even out in the wilds of Ohio and Indiana and Illinois, which was so far away you couldn't see it even with a telescope.

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People decided they had to build a canal that would basically connect Chicago via the Illinois River

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and eventually hook into the Mississippi River down in the southern part of the state.

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They started digging all these trenches and using taxpayer money to do it.

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Eventually they completed some of them.

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As it turned out, none of them had the effect that the Erie Canal had had in New York, perhaps because they were too late.

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The Erie Canal had already, in a sense, got its foot in the door of connecting the Western economy, the one beyond the Appalachians.

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You'll recognize this as the Appalachian Range, of course, here.

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And that was the problem for early Americans, is that they all lived here on the east side of the Appalachians,

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which Easterners call mountains. I never understood why, being a Westerner, but they were a big barrier in those days.

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and once you got through there somehow, you had a means of connecting with a lot of potentially lucrative trade

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because that interior area was definitely going to be settled. Everybody knew that.

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It was just a matter of time and where and when the pockets of development would appear.

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So New Yorkers got up here and you'll recognize these squiggles as the Great Lakes and once you got into there, you could go and then come down rivers or canals that were built in the West and have access to the entire area almost of the old Northwest Territories, which is a huge, fertile, productive, magnificent area just crying out for land speculation.

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and that was what Americans did above all else you know you can call Americans a

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lot of names but basically what we've we've been from the beginning is land

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speculators and smugglers yeah well some of us didn't have access to water

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These investments in canals almost all went broke at the end of the 1830s and the beginning of the 1840s.

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At the time they went broke, many of them were not completed yet, especially those out in the Midwest.

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And they ended up saddling taxpayers with a lot of debt obligations, with nothing to show for it.

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And a lot of citizens became quite angry about that situation.

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And again, new constitutions were written in a number of states in the 1840s,

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not only to keep states out of banking enterprises but also to prevent them from investing in canals.

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So it wasn't that states stopped channeling money into transportation improvements, they didn't.

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They began instead to channel aid to railroads about the same time,

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The railroad was first built in 1830 in this country. It really developed quickly in the 1850s and afterward.

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Every time a railroad passed through anywhere in this country, the owners would prevail on every county, town and city nearby for some kind of subsidy.

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and very often they got it. One way they got it was by threat, by threatening to go somewhere else with their railroad line and towns even whole counties recognized if the railroad bypassed them then economic development was going to bypass them too to some extent at least and thus their land values wouldn't go up

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Remember, that's what we Americans care about, is getting that unearned increment, as it were, in Henry George's terms.

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So these companies were continually playing off local governments for subsidies, and they got them in various forms.

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Sometimes they got cash grants. Sometimes they got guarantees that the state or the city or county would stand good if the railroad company couldn't pay its debts on time.

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and sometimes they got tax forgiveness and that was pretty common just as I'm

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sure Hyundai's getting a period of tax forgiveness maybe in perpetuity oh just

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25 years okay well it'll polish me off so so you could engineer these boondoggles

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in various ways, and they tried them all, and that was an important way in which state

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and local governments got involved in manipulating the course of economic events in the 19th

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century. Again, a lot of this activity doesn't show up in the budget anywhere. If a county

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guarantees a million dollars worth of Illinois Central's debt, well, it doesn't show up,

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Especially if it never has to make good on that promise, but it still has an effect on the allocation of resources.

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It determines how much gets used, where, when, and how. So it distorts the market system.

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And indeed the market system was subject to all kinds of distortions of this sort in the 19th century.

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Even though, again, it looks like an era of small government, it was an era when graft was quite well known to public officials and citizens, and they engaged in all sorts of corruption.

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So those are just some of the ways in which states and local governments were bigger than we might think.

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Now, in the late 19th century, as urbanization began to really pick up, and many large cities developed in this country,

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at that time, you could no longer just let a city develop willy-nilly, or at least citizens didn't want them to develop that way,

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with mud for streets, and no sidewalks, and no lighting, and no sewerage, and no water supply, and what have you.

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So, as cities developed in the late 19th century, they were called upon.

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I think there was a legitimate demand by the people who lived there for this kind of infrastructure investment.

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and they proceeded to undertake it and it was a massive amount of work to build all of these streets and pave them and build sidewalks and put in lighting and particularly in the 1880s and onward, sewerage systems and water supply systems.

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those are very big projects they took a lot of investment and so when you look

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here at the local government spending you see it it doesn't look at between 1870

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and 80 and 90 as if it's really changed it has because the price level falls

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quite a bit during that period so in real terms it's going up and then in the

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1890s it takes a serious jump because there's even more of that kind of

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infrastructure investment going on at that time and into the early 20th century.

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Those are the days when we began to get drinking water that wouldn't necessarily give you cholera

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or typhoid because cities began to install water filtration systems and so-called sanitary

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sewers so that they were properly piped and didn't allow the sewage to get mixed up with

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the water and the water pipes. We take these things for granted now, but I can easily recommend

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places to you where you don't take them for granted, and you miss them actually when you're

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in a place where you can't drink the water and you don't have a proper sewer system.

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This was a big deal for local governments, especially for city governments. Big cities

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did the whole range of this kind of infrastructure investment. A lot of smaller towns didn't

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do it for a long time until well into the 20th century. Okay, well, let us return, as

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it were, to the national government, the various national governments, and consider some of

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The other ways in which government in the 19th century was bigger than we might think.

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I have here a genuine replica of a $65 bill. Any takers? This actually precedes the 19th

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This was issued in 1779 by the Congress of the United States of North America and it

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promises to pay you 65 Spanish mill dollars. They weren't proud in those days. They weren't

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afraid to promise foreign money because everybody knew that the Spanish mill dollar was made

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out of gold and it had some value. So that's what they promised. Now this turned out to

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be quite quickly not worth the continental. But the point I want to make is that this

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is a, as it were, a piece of evidence of taxation. Because the Congress and the continental army

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and other people it was supporting, went out and exchanged these pieces of paper that they

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had printed up for goods and services. And getting the use of those goods and services

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constituted a tax because the people who got this in exchange, well the first people got

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a little something in exchange and next month after that the guy who held this got nothing

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approximately, because these things depreciated very, very quickly, and by the early 1780s,

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they were worthless. So the paper money issued by the United States and by the various states

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to pay for their Revolutionary War expenses, all operated as a tax by creating worthless

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pieces of paper and using them to acquire real goods and services. So it's the acquisition

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of real goods and services that was the tax and this is just the bookkeeping as it were

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for that Confiscation.

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I have another genuine replica here of another national government from the 19th century.

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This one was called the Confederate States of America, and it issued this bill, or at

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least the one it's a replica of on February the 17th, 1864 at Richmond, and it promises

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says that two years after ratification of a treaty of peace between the Confederate States and the United States,

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the Confederate States of America will pay to the bearer on demand $500.

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Well, we're still waiting for that treaty.

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We're waiting even more than the Koreans.

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They've only been waiting since 1953 for their peace treaty.

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We're waiting much longer for our peace treaty.

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So this was a vehicle of taxation.

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The Confederate states spent this money,

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and they got real goods and services in exchange.

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By this time, of course, the $500 of this bill

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would probably buy you about one potato, if that,

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Because the Confederate price level had gone up about a hundred times by then or close to it.

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So this was worth maybe five cents in gold.

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But it was still something and they were still printing them like crazy almost to the very end

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and using them as a means of taxation. It doesn't show up.

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Of course, none of these data reflect the Confederate states anyhow.

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Money issuance is another way in which, in the 19th century, governments at least periodically

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laid claim to resources and affected the way resources were allocated and used.

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Who got access to them?

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Who was able to do what?

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with the Power to Issue paper money had something to do with that now I have

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drawn a visual aid here believe it or not I sought a real map but failed to

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find one this morning so here we have approximately the the continental limits

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of the United States of America, and the point I want to make with this map is that it's

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a damn big area. When the United States came into existence, as I said a minute ago, nearly

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everybody who lived here, all four million of them, lived right here within a hundred

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But when the United States was created, and when the 13 original states ceded their land claims to the federal government,

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this, that would be the Mississippi River, the original area of the United States extended to the Mississippi River.

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And the states, most of them, had land claims all the way from the Atlantic out to the Mississippi.

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And in the 1780s, they ceded those claims to the government of the United States.

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So this huge area out here came into the ownership of the US government.

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Well, this is a magnificent resource.

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This is not the Sahara Desert. This is magnificent territory as territory goes on the face of the earth.

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It had great potential value once it had transportation access to the outside world so that people could get goods in and out cheaply.

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And as I indicated a while ago, they set about developing those means from the very beginning.

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So people began to move out there quickly, and when they did so, they needed to acquire the use of land, and the land was all owned by the United States.

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So what it meant was that the United States government might not have had much money in its treasury, but it had something almost as good,

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which is it had ownership of a huge amount of land of great potential value and so it began to use that land the way we think of modern governments using money to reward its friends, to carry out projects that it favors and so forth.

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Now, as I indicated yesterday, the governments want money to pay troops to kill people, if need be.

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That's the short course in public finance.

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Now, since they didn't have much money, and it was hard to get money that had any value for this government,

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they used land instead.

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Sometimes when they wanted to hire troops on for some expedition, they were always going to conquer Canada again, for example, they would promise people, as it were,

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look, sign up and when you get back, if you get back, we'll give you some land.

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And so every time there was a military expedition or a war, they would end up giving a land grant to the veterans and setting aside sometimes definite areas in the West that were reserved for the people who held these warrants, allow them a definite quantity of land.

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So this was a means of payment that they could use for anybody, including the services of soldiers, and they did this over and over and over, land grants to veterans.

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In addition, they made grants to states. Eventually this whole area was transformed into states, and as that happened, these states became players in the political process themselves.

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I indicated yesterday, for example, that the land-grant colleges of the 1860s were financed by the federal governments giving land claims to each of the states.

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So that even states which didn't have any public domain, such as the original 13, who never surrendered control of their lands, still got a claim to land somewhere in the West.

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West, and then they could turn around and sell that and use the money to establish their

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own land-grant colleges so that we get institutions such as Cornell University in New York a land-grant

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college even though New York had no public domain. So you could make land into a medium

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Museum of Exchange, as it were. You could finance schools. Indeed, in the original Northwest

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Ordinances, designed by, written by Jefferson in the 1780s, every township, every area six

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miles by six miles in the whole area of the United States west of the Appalachians, it

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is all divided into a grid, rectangular survey, so that you knew definitely where every line

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of longitude and latitude was, and it was all numbered in a way that you could organize

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and keep track of. You could locate any parcel of land in the whole United States with precision.

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According to this rectangular survey system, it really was a magnificent device for promoting

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In every township, which is six miles on a side, one of the sections, which is one square

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was reserved for common schools, which is to say public schools. So the people there could take that section, sell it, use the money to pay for the local school. So that was built into the land system of the country.

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Starting in 1850, the national government began to use land to subsidize major railroad projects.

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The first one was the Illinois Central, which brings us to the interesting topic of the President of the United States no one has ever heard of.

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And that would be Millard Fillmore. Has anyone ever heard of him?

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Well, this forgotten figure, in my mind, is best associated with his signing into law

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the land grant to the Illinois Central Railroad in 1850, and this was the first of what turned

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out to be many, many scores of land grants made by the federal government.

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And the Illinois Central connected, in addition to having some spur lines, Mobile, Alabama

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and Chicago, so more or less like that.

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This has lots of interesting stories associated with it.

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It was a very big business, I guess at the time it may have been one of the biggest enterprises

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ever undertaken in various dimensions, money and employees and the rest of it, but it was

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a kind of boon to a lot of local people too.

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Years ago I met some historians in Mississippi up in Oxford and they had been researching

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local court records and they discovered that the farmers in the county where Oxford, Mississippi

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When old cows got near death, they would haul it out and basically tether it to the railroad track.

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And then the Illinois Central locomotive would come along and smack Bessie.

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and then the farmers would carry her carcass to the local court and sue the

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railroad for the lost value of their cow and receive a very handsome reward by the

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local judge. So I don't know how many counties were engaged in this but I

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I wouldn't begin to assume that they were the only ones who had figured this out.

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Mississippi seldom the leader in thought.

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In Louisiana, we have a saying, that is, well, at least we're not Mississippi.

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But sometimes people write history as if these big corporations were just rapaciously running

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amok across everybody and that's a misreading because from the very beginning there was

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give and take. The great capitalists and the barons were not just doing their bidding.

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There was always a certain amount of resistance and fighting back and counter-exploitation, if you like.

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Now the Illinois Central received about two and a half million acres in its land grant.

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And it established the pattern for how these things would be done.

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And what would happen is that as the line ran along, in the case of the Illinois Central, they'd go back for six miles

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and every other section would be given to the railroad so that on this side it was the second one and so forth, like that.

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And it continued that way all the way down the line.

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Now the government retained all the alternating sections that weren't given to the railroad.

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Railroad, actually for I don't know if it was constitutional purposes or some

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other reason they actually made this grant to the states and then the states

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made the grant to the railroad so they may have been a kind of little bit of

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Jeffersonian strict constructionism still operative in the way they did that

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in 1850 but I know later they didn't do it that way in the 1860s and 70s but

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extended all the way down so the railroad got all this all this land which it could sell and the

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other sections the government retained and it sold and the idea was the government didn't lose

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anything because the railroad's construction and the bringing in of settlers would raise the value

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at least doubling the value of the plots that the government retained so they were giving away

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That was the logic, if you like, of the way they gave these alternating sections.

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Now in the 1860s, during the war, they made a much bigger land grant to two companies,

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the Central Pacific and the Union Pacific, which were built,

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one of them from Sacramento eastward and the other from Council Bluffs, Iowa westward,

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The Land Grants they got were 20 miles deep on each side of the track.

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Later on, the Northern Pacific Railroad got a land grant that extended 40 miles on each

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Each side of the track with all the alternating sections being given to the railroad.

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Now that turned out, all of those railroads actually turned out to pass through some pretty

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worthless territory and nobody ever wanted to buy a lot of those sections from the railroad

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so they still own them now.

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A great deal of land is owned by the Burlington Northern which is a corporate descendant of

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of the Northern Pacific Railroad, and a lot of it is managed in forests out in Montana

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and Washington State, and some of it still just sits there, never developed, but at all

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events these grants were used by the railroads to get revenue because they wanted to exchange

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The Land for Money, and they did sell a lot of it, and they promoted settlement, so they'd

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have customers to use their railroad, and all the big railroads of the late 19th century

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sent agents to Europe to tell immigrants about garden spots like Kansas.

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The Atchison, Topeka and Santa Fe had these posters showing Kansas, and they'd show all

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This poor bohemian guy, he sees this poster. Kansas, that looks great. Next thing you know, he's in Wichita saying, where's the orchard?

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Well, actually it worked out okay for a lot of them.

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There was an element of marketing run amuck here, but nonetheless a great many of these people,

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I don't want to pretend this was just a scam, because in fact a lot of people came to those railroad lands,

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bought them, settled them, lived on them happily and were better off for it.

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So let's give the devil his due here.

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In addition to making the railroad grants, the federal government made its land available to people who wanted to use resources there, even without their acquiring title to it.

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In the 1780s something called the Timber and Stone Act was passed and that was a law that allowed anybody to go on to federal land and cut down trees or take fallen timber if you want to use that for firewood or some other purpose or take stone for building so you could basically get construction materials without payment by just going on to federal lands and taking them.

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1872. They also in that same decade passed a mining act, which allowed people to go on to federal lands and stake mining claims and exploit, build mines and exploit those mines and carry off the minimum wage tax.

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the minerals they took from them and make them, appropriate them, sell them, make them their own, and indeed that law is still in effect, and it's become quite controversial in recent years, but it's allowed thousands and thousands of miners in the west to go on to federal lands and build mines and exploit the minerals there without having to acquire

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and Engineering Ownership. So land was a big deal in the 19th century, very big. And it helps us to place in better perspective these budget data on the amount of money that the federal government had at its disposal because it was able to accomplish a great

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There are too many more objectives using its control of the public domain than it was by using the money it got from tax revenues.

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And to shape the way the country developed even, these big transcontinental railroads that were subsidized probably wouldn't have been built for decades, but for these subsidies.

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That means, of course, resources were being misused, but it also means that the country developed differently than it would have had the market been left to direct where resources were used.

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Sometimes these projects turned out to be reasonably successful afterward, almost by accident, even though market participants had evaluated them as bad prospects beforehand.

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But that was the exception to the general rule, and in almost all cases we'd have to say they were built too fast.

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They might have been sensible projects eventually, but not at the time they were subsidized and built.

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So we had the government, even when it wasn't misdirecting resources in place, it was misdirecting them in time.

376
00:59:24.660 --> 00:59:34.660
Well, the war between the states I've mentioned several times, and I want to come back to it just briefly now,

377
00:59:34.660 --> 00:59:42.660
because I've talked about how important state and local governments were in the 19th century,

378
00:59:42.660 --> 00:59:47.660
and how they were becoming even more important in terms of getting and spending money.

379
00:59:47.660 --> 01:00:00.660
But that's almost like a false signal of the way things were moving in the federalism of the United States.

380
01:00:00.660 --> 01:00:10.660
Because the Civil War, besides establishing all kinds of pernicious precedents for government activity

381
01:00:10.660 --> 01:00:22.220
and Taxing and Spending Money for Uneconomic Purposes and What Have You, changed the nature

382
01:00:22.220 --> 01:00:26.280
of the American political system forever.

383
01:00:26.280 --> 01:00:35.980
Before the war, the federal system had real content in the sense that the federal government

384
01:00:35.980 --> 01:00:42.900
could not just bully the states whenever it determined that it had to have them do something

385
01:00:42.900 --> 01:00:47.020
in a certain way.

386
01:00:47.020 --> 01:00:51.100
We know that because the states eventually just wouldn't put up with even being part

387
01:00:51.100 --> 01:00:56.860
of the system any longer, and 11 of them seceded from it.

388
01:00:56.860 --> 01:01:02.820
So it couldn't just bully them, but it could kill them.

389
01:01:02.820 --> 01:01:09.460
And so, it's like a Gordon Liddy's dictum, I like to repeat.

390
01:01:09.460 --> 01:01:20.620
Gordon Liddy says, you can't kill an idea, but you can sure kill the guy who holds it.

391
01:01:20.620 --> 01:01:28.060
So they couldn't kill the idea of federalism, true federalism, but they sure killed the

392
01:01:28.060 --> 01:01:31.180
guys who held that idea.

393
01:01:31.180 --> 01:01:37.620
And that settled the matter, because after 1865, nobody was really going to go out there

394
01:01:37.620 --> 01:01:43.600
and get killed by the hundreds of thousands for federalism anymore.

395
01:01:43.600 --> 01:01:46.940
That issue was settled here.

396
01:01:46.940 --> 01:01:55.140
Now when no state can secede, states are potentially, if not actually and immediately, nothing but

397
01:01:55.140 --> 01:01:58.820
administrative districts of the federal government.

398
01:01:58.820 --> 01:02:03.860
Doesn't mean they have no autonomy, and indeed there's enough life left in federalism that

399
01:02:03.860 --> 01:02:11.380
its various kicks and twitches still make it of some political interest even nowadays.

400
01:02:11.380 --> 01:02:16.820
But it's not the same system that it was before the war.

401
01:02:16.820 --> 01:02:20.020
Then it was genuine federalism.

402
01:02:20.020 --> 01:02:25.700
Since then it's been federalism at the pleasure of the central government.

403
01:02:25.700 --> 01:02:32.340
And as a result of that, we've had the enormous growth of the government that I'll be talking

404
01:02:32.340 --> 01:02:35.220
about later this week at the central level.

405
01:02:35.220 --> 01:02:41.540
If we had still had the old system of federalism, it's much less likely that the course of events

406
01:02:41.540 --> 01:02:46.140
would have taken that form, I think.

407
01:02:46.140 --> 01:02:54.180
Although it's very hard to say when we deal with hypotheticals of that magnitude exactly

408
01:02:54.180 --> 01:02:58.180
What might have happened, but I'm sure things would have gone differently.

409
01:02:58.180 --> 01:03:07.180
So the Civil War did make a difference even if it doesn't show up right away in such data as revenue distributions.

410
01:03:07.180 --> 01:03:23.180
Now, starting in the 1870s, thereabouts, the nature of the U.S. economy began to change in ways that were politically consequential.

411
01:03:23.180 --> 01:03:33.180
and I have in mind here the development of a national market and the development of big business.

412
01:03:33.180 --> 01:03:43.180
Before that time, there were almost no businesses in this country that employed more than a few hundred workers

413
01:03:43.180 --> 01:04:12.180
and very few that did business far from home in several states. But as the railroad network was developed and as technological changes proceeded in a number of industries, they had the effect of creating a potential for the realization of economies of scale.

414
01:04:12.180 --> 01:04:32.180
particularly industries in manufacturing that have kind of flow technology, things like petroleum refining or steel making or flour milling or even, although the flow is chunkier, meat packing.

415
01:04:32.180 --> 01:04:52.180
In industries that had a raw material flowing through a production process, it turned out that by increasing the size of the batches being processed, one could lower the unit cost of production.

416
01:04:52.180 --> 01:05:02.180
And so every time, for example, they built a bigger blast furnace to make steel, it turned out that they reduced the unit cost, the cost per ton.

417
01:05:02.180 --> 01:05:09.180
And this kept going for decades and decades. They just kept making them bigger and bigger.

418
01:05:09.180 --> 01:05:13.180
And every time they did it, there was a gain realized from doing it.

419
01:05:13.180 --> 01:05:43.180
and if you think about the geometry of it you can begin to understand why that was because the volume increases faster than the circumference of a vessel and so for among other things you didn't have to have twice as much volume containing a batch of steel in order to produce twice as a great an amount of molten metal so you kept

420
01:05:43.180 --> 01:05:51.260
about building these bigger and bigger processing apparatuses and every time you were able to

421
01:05:51.260 --> 01:05:57.060
produce cheaper and therefore to give customers a better deal than your competitors which

422
01:05:57.060 --> 01:06:03.540
compelled them to adopt that large scale technology and in some cases the market wouldn't support

423
01:06:03.540 --> 01:06:10.300
a whole bunch of large scale producers so the ones that didn't get there first do so

424
01:06:10.300 --> 01:06:14.980
the smartest went bankrupt and couldn't meet the competition.

425
01:06:14.980 --> 01:06:20.260
So there was, in a number of industries, there was technological change, growth of large-scale

426
01:06:20.260 --> 01:06:29.260
production, shake-out of small firms, you saw this especially in petroleum refining.

427
01:06:29.260 --> 01:06:34.060
In the beginning there were, I guess, thousands of petroleum refiners making little batches

428
01:06:34.060 --> 01:06:43.060
of Kerosene, and by the end of the 19th century there were only a few dozen maybe left doing

429
01:06:43.060 --> 01:06:49.520
business and most of them were the property of standard oil.

430
01:06:49.520 --> 01:06:52.340
So lots of big businesses developed.

431
01:06:52.340 --> 01:06:58.300
The first ones weren't batch technology operations, but they were the railroads.

432
01:06:58.300 --> 01:07:07.680
The railroads also turned out to be able to realize economies of scale by operating widely

433
01:07:07.680 --> 01:07:11.120
and starting in the 1850s they began to branch out.

434
01:07:11.120 --> 01:07:19.800
The first ones were only a few miles, maybe 20, 30 miles from one place to another and

435
01:07:19.800 --> 01:07:25.420
in the 1850s they built railroads from East Coast cities all the way out to Chicago.

436
01:07:25.420 --> 01:07:32.300
The Erie, the New York Central, the Pennsylvania Railroad, and the Baltimore and Ohio, all

437
01:07:32.300 --> 01:07:38.740
connected in East Coast City with Chicago, and talk about some fierce competition and

438
01:07:38.740 --> 01:07:49.740
some constant motive to cartelize. Those railroads had both. There's a really interesting book

439
01:07:49.740 --> 01:07:59.260
A book by Paul McEvoy written back in the 1960s, I guess, on the competition and cartelization

440
01:07:59.260 --> 01:08:06.500
for the trunk line railroads, the four I mentioned, and it's quite fascinating because he was

441
01:08:06.500 --> 01:08:14.460
able to study their rate wars and their attempts to cartelize and the conclusion of it of course

442
01:08:14.460 --> 01:08:21.740
is that all of their attempts failed fairly quickly. Railroads having this large-scale

443
01:08:21.740 --> 01:08:30.100
attribute and often getting boiled down to a handful of competitors were trying to form

444
01:08:30.100 --> 01:08:37.660
pools and cartels and conspiracies of some kind with great frequency and they always

445
01:08:37.660 --> 01:08:43.420
broke down. The question was how quickly, now you might say if they always broke down

446
01:08:43.420 --> 01:08:52.420
And what you want to remember is Stigler's dictum, the short run is long enough to get rich.

447
01:08:52.420 --> 01:08:58.420
So the motive was there, the incentive was there, they kept trying.

448
01:08:58.420 --> 01:09:06.420
There was actually a one railroad cartel among some of the railroads in the mid-south, upper south,

449
01:09:06.420 --> 01:09:13.420
The New Cartel seems to have worked fairly well in the late 19th century for over a decade.

450
01:09:13.420 --> 01:09:20.420
It was run by a man named Fink, of all things, and Fink was much envied in the railroad industry

451
01:09:20.420 --> 01:09:26.420
as having been able to devise a scheme that allowed him to run a successful railroad cartel,

452
01:09:26.420 --> 01:09:31.420
at least for a number of years, but most of the time they failed.

453
01:09:31.420 --> 01:09:46.420
Well, not only in railroads, but in many of these other new industries with big business, there were attempts to somehow suppress competition, which was normally quite fierce.

454
01:09:46.420 --> 01:09:51.420
And if there's one thing businessmen hate, it's fierce competition.

455
01:09:51.420 --> 01:10:11.420
And so they were attempting to find a way to suppress competition at the same time that other forces were constantly prompting them to compete.

456
01:10:11.420 --> 01:10:26.420
And in the 1880s, the lawyer for John D. Rockefeller's Standard Oil Company hit upon an innovation, the trust.

457
01:10:26.420 --> 01:10:39.420
And the trust was an ancient legal instrument which had been used to, say, set aside funds to support one's children or grandchildren

458
01:10:39.420 --> 01:10:43.780
or to support some hospital or college or something of that sort.

459
01:10:43.780 --> 01:10:46.420
Trusts of that kind had been around for centuries.

460
01:10:46.420 --> 01:10:48.300
So lawyers knew about them.

461
01:10:48.300 --> 01:10:51.940
But trusts had never been used for industrial purposes.

462
01:10:51.940 --> 01:10:56.200
But this clever fellow said, ah, tell you what let's do.

463
01:10:56.200 --> 01:11:01.200
We've got all these competing petroleum refiners

464
01:11:02.080 --> 01:11:03.780
and we're driving each other crazy.

465
01:11:03.780 --> 01:11:08.420
We're always keeping anybody from making profit for long

466
01:11:08.420 --> 01:11:15.340
because we just find ways to reduce costs and lower our prices and undercut the competitors

467
01:11:15.340 --> 01:11:20.620
and pretty soon nobody's making any money. It's just a treadmill. So, let's get off

468
01:11:20.620 --> 01:11:27.620
of this thing. Let's get everybody together. How are we going to do that? We know that

469
01:11:27.780 --> 01:11:33.620
you get people in a room and they all promise they'll hold a certain price and the next

470
01:11:33.620 --> 01:11:42.340
Today, they're cheating on it. They're making secret deals at lower prices to attract business.

471
01:11:42.340 --> 01:11:48.740
So how are we going to get around this? And the trust device was a mechanism by which

472
01:11:48.740 --> 01:11:57.140
the owners of the separate companies handed over their stock certificates to a group of

473
01:11:57.140 --> 01:12:05.260
of Trustees and they got in exchange a trust certificate, kind of gave them a membership

474
01:12:05.260 --> 01:12:11.460
in the central group, the trust, and of course by handing over their stock certificates they

475
01:12:11.460 --> 01:12:18.600
lost their voting rights, those came into the hands of the trustees. So Rockefeller

476
01:12:18.600 --> 01:12:29.560
are managed to persuade or intimidate or bully or somehow get everybody or a lot of the refiners

477
01:12:29.560 --> 01:12:36.320
to join the standard oil trust and at that point the trustees were able to make unified

478
01:12:36.320 --> 01:12:43.680
decisions about setting prices, about restricting supply, about closing down certain high cost

479
01:12:43.680 --> 01:12:49.040
Refinery and diverting production to others where they could produce at lower cost.

480
01:12:49.040 --> 01:12:56.040
This is known as rationalizing in business circles. So this worked out

481
01:12:56.040 --> 01:13:00.640
pretty well actually. It didn't mean that competition ceased because they never

482
01:13:00.640 --> 01:13:06.000
brought everybody into the trust and of course even if you did, some new company

483
01:13:06.000 --> 01:13:13.000
could start up. So it didn't solve their problem once and for all, but it did

484
01:13:43.000 --> 01:13:51.400
People began to refer to the trusts and to big business in general synonymously, so that

485
01:13:51.400 --> 01:13:56.320
even if you didn't form a legal trust, people began to call your company a trust because

486
01:13:56.320 --> 01:14:05.680
it was this big industrial organization. And so the anti-trust problem became, if not the

487
01:14:05.680 --> 01:14:14.180
The biggest issue, one of the two or three biggest political issues of the 1880s. Now,

488
01:14:14.180 --> 01:14:19.480
the people who put up the most squawk about this were, of course, the competitors who

489
01:14:19.480 --> 01:14:25.640
were suffering by virtue of the formation of big business, or in this handful of cases,

490
01:14:25.640 --> 01:14:35.580
the formation of actual trust organizations. And especially squawking were the butchers.

491
01:14:35.580 --> 01:14:42.940
In those days, before refrigeration, every town, every village, every neighborhood of

492
01:14:42.940 --> 01:14:46.460
every city in America had butcher shops.

493
01:14:46.460 --> 01:14:51.980
Because meat spoiled so fast, you had to slaughter the animals and use the meat right away.

494
01:14:51.980 --> 01:14:53.660
So there were butcher shops everywhere.

495
01:14:53.660 --> 01:14:59.780
There were probably hundreds of thousands of butcher shops in the country.

496
01:14:59.780 --> 01:15:12.420
And in the 1870s and especially in the 1880s, the big meatpacking companies in Chicago and

497
01:15:12.420 --> 01:15:18.780
a few other places like Kansas City and St. Louis and Omaha began to develop these mass

498
01:15:18.780 --> 01:15:25.860
production techniques to produce meat at very low cost and use refrigerated railroad cars

499
01:15:25.860 --> 01:15:33.300
to ship their product and keep it fresh and they could ship it anywhere in the U.S. because

500
01:15:33.300 --> 01:15:38.900
a week was no problem. In a week the railroad would take the product to the far ends of

501
01:15:38.900 --> 01:15:47.380
the country and it would get there, it would be as good or better than the local product

502
01:15:47.380 --> 01:15:55.300
and cheaper. So these guys began to drive local butchers out of business. Well, what

503
01:15:55.300 --> 01:16:01.060
What did they do? In neoclassical economics, when somebody can't meet the competition,

504
01:16:01.060 --> 01:16:06.660
he disappears from the industry. But in real life, when somebody can't meet the competition,

505
01:16:06.660 --> 01:16:14.060
he appears in the legislature. So they all appeared in the legislatures of all the states.

506
01:16:14.060 --> 01:16:23.200
And they said, these diabolical foreign trusts are coming into our market and driving perfectly

507
01:16:23.200 --> 01:16:31.560
really decent people out of their livelihoods. We can't allow that. It's not right.

508
01:16:31.560 --> 01:16:40.040
Now the consumers weren't complaining at all. Any trust was never a consumer-led movement.

509
01:16:40.040 --> 01:16:47.960
Never ever. Even where it has appeared in the past 130 years to have consumers involved,

510
01:16:47.960 --> 01:16:53.960
It's a fake. It's lawyers who pretend to be representing consumers.

511
01:16:53.960 --> 01:16:56.960
So it was always competing producers.

512
01:16:56.960 --> 01:17:02.960
And these butchers, because they were everywhere, were a political factor to be reckoned with.

513
01:17:02.960 --> 01:17:11.960
And so they showed up in the legislatures and they got a number of states to pass antitrust laws and health laws.

514
01:17:11.960 --> 01:17:21.960
Things that said, for example, no meat may be sold more than 24 hours after its slaughter in this state.

515
01:17:21.960 --> 01:17:25.960
Okay, I took care of the imported product.

516
01:17:25.960 --> 01:17:31.960
Or you could devise all kinds of other pseudo health rules.

517
01:17:31.960 --> 01:17:33.960
This is a game that's still played.

518
01:17:33.960 --> 01:17:39.960
Europeans do this all the time to keep competing agricultural products out of their markets.

519
01:17:39.960 --> 01:18:03.960
The markets, and the Americans do it too, they for years wouldn't let Argentine beef into the country because it was said to be potentially infected with foot and mouth disease, as if you couldn't check or leave it up to the consumers to take the risk if they cared to, but at all events these butchers were a mighty political movement.

520
01:18:03.960 --> 01:18:11.720
Now, when a number of states began to suppress the competition of the big meatpacking companies,

521
01:18:11.720 --> 01:18:21.280
these guys had some clout too, and so they began to lobby in the state legislatures.

522
01:18:21.280 --> 01:18:27.280
But worse yet, it turned out that they could threaten that they actually would stop coming

523
01:18:27.280 --> 01:18:30.080
into the state.

524
01:18:30.080 --> 01:18:33.640
And then that meant that a whole bunch of people who had discovered they liked this

525
01:18:33.640 --> 01:18:42.320
product and wanted to consume it were in trouble again, and furthermore, the business could

526
01:18:42.320 --> 01:18:53.320
just move out, abandon the state and go somewhere else, and states never like to lose taxable

527
01:18:53.320 --> 01:19:01.920
resources, so there were counter pressures being put on by the big companies and the

528
01:19:01.920 --> 01:19:06.560
issue was carried to the Congress of the United States.

529
01:19:06.560 --> 01:19:14.280
We begin to see here what I referred to earlier today enigmatically as federalism containing

530
01:19:14.280 --> 01:19:18.000
the seeds of its own destruction.

531
01:19:18.000 --> 01:19:25.120
You've got all these states and every one of them has regulatory power.

532
01:19:25.120 --> 01:19:35.200
So they use it, it's political hay to be made by exerting their power as Fred McChesney

533
01:19:35.200 --> 01:19:38.000
expresses it, you know, they use extortion.

534
01:19:38.000 --> 01:19:44.960
A lot of times when you appear to see business paying a bribe, it's not a bribe, it's a

535
01:19:44.960 --> 01:19:56.960
The shakedown. State legislators or officials go to companies and they say, you know, pay us off or we will hurt you by the way we employ our regulatory powers.

536
01:19:56.960 --> 01:20:11.960
So when that happens, companies operating in many different states find themselves caught often at the mercy of having to comply with not only a lot of regulations but different ones,

537
01:20:11.960 --> 01:20:16.720
Which makes it very difficult for them to do their processing or labeling or even to

538
01:20:16.720 --> 01:20:20.600
decide how to construct their product.

539
01:20:20.600 --> 01:20:26.180
And so businessmen, always having the amount of foresight that extends slightly beyond

540
01:20:26.180 --> 01:20:32.240
their nose, are always looking to put out the fire that's burning them at the moment.

541
01:20:32.240 --> 01:20:38.280
And the way they respond to being whipsawed by the different states is by saying, let's

542
01:20:38.280 --> 01:20:46.620
Let's get one regulatory agency, and we can deal with that better, cheaper. Maybe we can

543
01:20:46.620 --> 01:20:55.200
even control it, if not right away, then eventually. And this has happened again and again and

544
01:20:55.200 --> 01:21:01.280
again in American history. States, you know, we all think states are wonderful, they give

545
01:21:01.280 --> 01:21:06.760
us some place to run to when our own gets too onerous. And that's true, there's something

546
01:21:06.760 --> 01:21:14.600
According to that, there is Tebow-type competition, as economists call it, but there's also this

547
01:21:14.600 --> 01:21:24.240
dark side of federalism, which is that it drives regulated companies to seek one regulator,

548
01:21:24.240 --> 01:21:30.720
and that, of course, is the national government, the government that, using the power to regulate

549
01:21:30.720 --> 01:21:38.120
Interstate Commerce can, under the Constitution, get away with regulating companies who do

550
01:21:38.120 --> 01:21:41.180
business in more than one state.

551
01:21:41.180 --> 01:21:49.300
And so that's how we got the Sherman Antitrust Act of 1890.

552
01:21:49.300 --> 01:21:55.580
It wasn't as bad as some people think, actually, because the common law had been dealing with

553
01:21:55.580 --> 01:22:03.660
monopolies and restraints of trade for a long time and judicial doctrines had evolved

554
01:22:03.660 --> 01:22:09.700
that were not unreasonable. Fundamentally what they boiled down to was the idea that

555
01:22:09.700 --> 01:22:14.700
it's unlawful for you to take actions that keep somebody from coming into a market to

556
01:22:14.700 --> 01:22:21.380
compete but otherwise if you want to make agreements about how to use your property,

557
01:22:21.380 --> 01:22:31.380
Even if you want to get together with other producers and set a reasonable price, price fixing, that's also legal.

558
01:22:31.380 --> 01:22:35.380
We don't object to that in the court.

559
01:22:35.380 --> 01:22:44.380
In the beginning, the idea was that all the Sherman Act had done was to codify the common law

560
01:22:44.380 --> 01:22:50.620
and to add the punishment that allowed treble damages to be paid to private plaintiffs

561
01:22:50.620 --> 01:23:00.940
who succeeded in a case brought under that law for charging someone with conspiring or contracting to

562
01:23:00.940 --> 01:23:06.060
operate in a restraint of trade or to operate a monopoly.

563
01:23:06.060 --> 01:23:11.020
That language seems vague and a lot of economists especially have looked back and said,

564
01:23:11.020 --> 01:23:14.020
Well, it didn't say anything. It's so vague. What does it mean?

565
01:23:14.020 --> 01:23:16.020
But it meant something at the time in the courts.

566
01:23:16.020 --> 01:23:25.020
There's a very good book by Martin Sklar, even though Sklar is a kind of Marxist.

567
01:23:25.020 --> 01:23:35.020
He's an excellent legal historian, and a big section of his book deals with the evolution of the jurisprudence of the Sherman Act, and it's outstanding.

568
01:23:35.020 --> 01:23:38.020
I don't know anything that can compare to it.

569
01:23:38.020 --> 01:23:51.520
and explains that until about 1897, the Supreme Court continued basically to read the Sherman Act as if it was nothing but a codification of the common law.

570
01:23:51.520 --> 01:24:07.320
But in 1897, in a case called Trans-Missouri Railroad, it changed its reading, and at that point it began to act as if the Sherman Act had not codified the common law,

571
01:24:07.320 --> 01:24:13.560
Law, but it overturned it and replaced it with a rule that required absolutely no price

572
01:24:13.560 --> 01:24:26.160
fixing and no variety of other measures businesses might enter into to cooperate or act in a

573
01:24:26.160 --> 01:24:28.120
way that restrained competition.

574
01:24:28.120 --> 01:24:35.600
It was no longer read simply as having to do with keeping new entrants out of the market.

575
01:24:35.600 --> 01:24:40.240
That created a lot of uncertainty for business at a time when big business was developing

576
01:24:40.240 --> 01:24:48.480
quickly. It made, among other things, big businesses subject to shakedowns by Theodore

577
01:24:48.480 --> 01:24:56.280
Roosevelt after he became president in 1901. Teddy, as you may remember, didn't oppose

578
01:24:56.280 --> 01:25:03.480
big business, only bad big business. That was the big business that didn't play according

579
01:25:03.480 --> 01:25:05.200
in his Rules.

580
01:25:05.200 --> 01:25:10.700
So he would even turn on his pals like Morgan and Company and go after the Northern Securities

581
01:25:10.700 --> 01:25:19.840
Company that Morgan had formed in 1903, I guess it was, and had that broken up without

582
01:25:19.840 --> 01:25:21.600
even discussing it with Morgan.

583
01:25:21.600 --> 01:25:22.600
Morgan was outraged.

584
01:25:22.600 --> 01:25:28.240
He said, if we had a problem, why didn't you send your man to talk to my man?

585
01:25:28.240 --> 01:25:37.240
That's the way they normally took care of things in those days and, of course, still do in some circles.

586
01:25:37.240 --> 01:25:44.240
That's called Trans-Missouri. Trans-Missouri had to do with a freight company.

587
01:25:44.240 --> 01:25:51.240
But that kind of legal uncertainty about the Sherman Act persisted until 1911.

588
01:25:51.240 --> 01:26:04.240
And in 1911, when the US Supreme Court ruled on the American tobacco and standard oil cases, which had been in the courts for years and years before a final decision was reached,

589
01:26:04.240 --> 01:26:08.240
the court announced what came to be known as the rule of reason.

590
01:26:08.240 --> 01:26:18.240
And that was a little more accommodating rule in the sense that it said mere bigness is not a crime.

591
01:26:18.240 --> 01:26:32.240
And furthermore, there are reasonable kinds of contracts and arrangements that businesses can enter into, which may have the effect of in some way restraining competition, but they're not unlawful nonetheless.

592
01:26:32.240 --> 01:26:45.240
And furthermore, if you acquire your position in the market, even if it's a very large market share, by purchasing other assets, that's okay.

593
01:26:45.240 --> 01:26:52.240
So if, for example, you just merged with a lot of other competing companies, that was not unlawful under the 1911 ruling.

594
01:26:52.240 --> 01:27:02.240
Or if you're just such a well-run company that you just got bigger and bigger and bigger and eventually you had almost all the market, that also was permissible.

595
01:27:02.240 --> 01:27:08.240
So this was a rule that gave more latitude to big business and clarified some of the uncertainty,

596
01:27:08.240 --> 01:27:15.840
But, of course, antitrust law has continued to be a kind of cloud hanging over many business people.

597
01:27:15.840 --> 01:27:25.140
They never are quite sure when it's going to be used as a club by their competitors to, if not to really stop them,

598
01:27:25.140 --> 01:27:31.540
to harass them and make them expend a lot of money on lawyers.

599
01:27:31.540 --> 01:27:36.840
And we've seen that again and again and again in the past century.

600
01:27:36.840 --> 01:28:06.840
So, we got this development of big business, national markets, antitrust law, and in 1887, the first federal regulatory agency of any consequence, the Interstate Commerce Commission, which became more powerful in the early 20th century with amendments to the law, and ended up virtually setting railroad rates and other terms of service, and pretty much ruining the railroad industry by the time World War

601
01:28:06.840 --> 01:28:16.360
in 1921 started, at which time the railroad system got so snarled up thanks to its previous

602
01:28:16.360 --> 01:28:23.760
ruination and bad planning by the war planners that the Federal Government nationalized the

603
01:28:23.760 --> 01:28:30.400
industry in 1917 and operated it on its own account for several years before giving it

604
01:28:30.400 --> 01:28:36.260
back to the owners with many strings attached in 1920.

605
01:28:36.260 --> 01:28:42.260
So we're almost out of time. I've gone on a long time, but we have a few minutes for questions still.

606
01:28:42.260 --> 01:28:44.260
Yes?

607
01:28:44.260 --> 01:28:49.260
Regarding the railroad, when was Amtrak created?

608
01:28:49.260 --> 01:28:51.260
What year?

609
01:28:51.260 --> 01:28:57.260
Seventy... Seventy, was it? 1970?

610
01:28:57.260 --> 01:29:02.260
That's about right. Early 70s sometime, I remember.

611
01:29:02.260 --> 01:29:04.260
Brad?

612
01:29:04.260 --> 01:29:21.260
These new state constitutions in the 40s that were sort of in response to the Wildcat Banking and the debacle, did they just get around the wording by giving subsidies directly to private businesses instead of having the state do it themselves? Is that what happened?

613
01:29:34.260 --> 01:29:44.260
So they just kept them from doing certain enterprises themselves?

614
01:29:54.260 --> 01:30:02.260
Is that where we get today where the states can't run deficits like the federal government can?

615
01:30:04.260 --> 01:30:22.260
The origin of those provisions or not, I'm just not sure when they appeared in the state constitutions, but I believe there are still a few states today that don't have that provision.

616
01:30:22.260 --> 01:30:27.260
I was under the impression until recently that they all required balanced budgets.

617
01:30:27.260 --> 01:30:34.260
Now, they've all devised ways to escape that constraint with off-budget gimmicks and with

618
01:30:34.260 --> 01:30:41.540
borrowing of various sorts, but it's still a serious constraint for state governments

619
01:30:41.540 --> 01:30:45.580
because they can't get around it so easily as the federal government, which doesn't have

620
01:30:45.580 --> 01:30:47.740
any constraint at all of that sort.

621
01:30:47.740 --> 01:30:59.740
Some of those state constitutions also prohibited private banks from issuing paper money too, like the New England state, southern state, southern state.

622
01:30:59.740 --> 01:31:11.740
The soundest banks in the country in the antebellum period were in New Orleans, and although Louisiana did regulate banks to some extent, they were not much regulated.

623
01:31:11.740 --> 01:31:37.740
They were just well-operated banks. They issued bills that circulated widely all over the South and I suppose many of you know that's why the South is called Dixie because Louisiana still used the French language in those days and when they printed a $10 bill it said Dixie.

624
01:31:37.740 --> 01:31:52.740
And to an Anglo, it was Dix. So the area where these kinds of bills circulated around was Dixie, after the $10 French-language New Orleans bank paper money.

625
01:31:52.740 --> 01:31:59.740
Do you think that had something to do with the way that law in Louisiana was structured differently than in other states, that banks were more sound?

626
01:31:59.740 --> 01:32:08.740
Well, in part it had to do with that. Some of the states still had pretty bad banking law and some had more regulation than others.

627
01:32:08.740 --> 01:32:16.740
It's very hard to generalize about state banking laws before the Civil War because they varied a great deal from one state to another.

628
01:32:16.740 --> 01:32:26.740
But all the states did, to some extent, back away from conducting banking business.

629
01:32:26.740 --> 01:32:34.620
Business. As I say, some were still doing it in the Midwest and after the Civil War even.

630
01:32:34.620 --> 01:32:40.860
I think that was one of those activities that legislators ultimately discovered that they

631
01:32:40.860 --> 01:32:49.180
could do better by using indirect means rather than direct means, just as they did when they

632
01:32:49.180 --> 01:32:54.420
adopted general incorporation laws rather than passing a special act of the legislature

633
01:32:54.420 --> 01:33:01.820
Every time they created a corporation, eventually it just got to be a hassle, because thousands

634
01:33:01.820 --> 01:33:06.260
and thousands of guys were coming into the legislature wanting to form a corporation

635
01:33:06.260 --> 01:33:13.780
and they didn't want to be bothered anymore, so eventually all the states passed laws which

636
01:33:13.780 --> 01:33:18.060
set general conditions for conducting corporate business and all you had to do was fill out

637
01:33:18.060 --> 01:33:22.980
the forms and pay a usually nominal fee and you were off and running.

638
01:33:22.980 --> 01:33:32.060
In most cases it was, the earliest general incorporation acts were in the second decade

639
01:33:32.060 --> 01:33:40.700
of the 19th century and I think by about 1880s all the states had some form of general incorporation

640
01:33:40.700 --> 01:33:43.540
in effect.

641
01:33:43.540 --> 01:33:50.540
I myself am a corporation now, but you know, only to kind of jack up my self-esteem.

642
01:33:53.140 --> 01:34:00.140
An S corporation in my case. I'll let you figure out what the S might stand for.

643
01:34:13.540 --> 01:34:17.040
Pretty good to have lunches and munches of those banks.

644
01:34:43.540 --> 01:34:50.540
And they created that system. It had nothing to do with a uniform currency or any of the publicly proffered excuses for it.

645
01:34:50.540 --> 01:34:56.540
It was just another way that the Union government tried to float debt.