Adam Smith believed that the economic arrangements he prescribed would achieve the greatest amount of prosperity distributed to the widest population. He did not anticipate the periodic “boom-and-bust business cycles” that historically accompanied capitalist “progress” and eventually sparked heated, progressive calls for active government intervention. Prolonged economic crises struck the United States in 1792, 1819, 1837, 1857, 1873, 1893, 1907, and—worst of all—the Great Depression of the 1930s.
At the height of the Great Depression, Samuel Pettengill wrote: “When it is said that free enterprise has failed, my answer is that we have not permitted it to work.” The long succession of financial panics and market crashes were not caused by free market activities. Once we distinguish laissez faire capitalism from what can best be designated as crony capitalism (i.e., the corrupt use of public power to advance private, pecuniary interests) we then can learn what really caused these economic crises.
It was corporate welfare policies alone that precipitated the many panics and the alleged “need” for social welfare reform from the Progressive Era to the New Deal and beyond.
The Panic of 1873 illustrates the thesis. That financial crash ushered in five years of grievous hardship for millions of American families. It culminated in the Great Railway Strike of 1877—among the most calamitous labor-capital conflicts in the country’s history. And that should serve as a strong hint of what precipitated the panic itself. The strike followed the third time that year that railroads cut the salaries of their employees, which invites the question: would there have been a panic at all, had there not been a transcontinental railroad in the first place?
1862 was a most fateful year. Far more important for the future of the republic than the
Civil War battles fought that year, was a piece of legislation that passed both houses of Congress and was signed into law. The Pacific Railway Act of 1862 authorized the construction of a transcontinental railroad stretching from Omaha, Nebraska to the Pacific Ocean. Every encouragement was offered by Congress to assure the project’s success. Federal cash subsidies for each mile completed ranged from $16 thousand (across flat land) to $48 thousand (between mountain ranges). The Union and Central Pacific corporations would be awarded two miles along the tracks’ right of way. By 1864, the railroads were awarded 20 miles of land on alternating sections upon certified completion of so many miles by certain established dates. In all, the railroads were treated to a total of 12 million acres of land adjourning the transcontinental route.
On May 10, 1869, Leland Sanford, standing at the intersection of the final tracks laid at Promontory Point, Utah, hammered a golden spike into the ground. The Union Pacific and Central Pacific Railroads were now connected as were—by extension—the Atlantic and Pacific Oceans. It was a breathtaking engineering achievement and a day full of celebration.
It was later learned that $450,000 in bribes was handed to Congress by interested parties. Representative Elihu Washburn of Illinois went to the well to deplore what he called “the greatest legislative crime in history.” $450,000 proved to be small potatoes. The Grant administration spent $94 million to complete an infrastructure project that cost barely $50 million. Such prominent American “statesmen” as James Blaine, James Garfield, House Speaker Schuyler Colfax were all implicated in the scheme to defraud the American taxpayer.
On September 4, 1872, the New York Sun exposed the Credit Mobilier scandal: “THE KING OF FRAUDS: How the Credit Mobilier Bought Its Way Through Congress.” The Vice-President of the United States, the Speaker of the House of Representatives, and the chairman of almost every important committee in the House of Representatives—all of them are proven by irrefutable evidence to have been bribed.
Completed in 1869, the Union and Central Pacific Railroads declared bankruptcy and fell into receivership by 1872. Cornelius Vanderbilt didn’t know what to make of this business of building railroads “from nowhere to nowhere at public expense.” But it was another railroad bankruptcy in 1873 that brought down the economic curtain and drove the nation into a ditch.
Jay Cooke took up space in the halls of power, making his mark by marketing Civil War bonds to the nation and a good part of Europe. He used his influence to wrest from Congress lucrative land grants for his long-dreamed of Northern Pacific Railroad. Wiley investors knew they needed to get aboard before this iron horse left the station. Cooke did not get all he hoped for from Congress. As railroad historian John Lubetkin reported:
Cooke, in the back of his mind, expected Congress to give the Northern Pacific both land grants and...upon track certification, at least bond guarantees. It was no more than what had been done for the Central and Union Pacific roads.... But the mood of Congress had changed, a northern route served no vital national interest, most of the land was devoid of settlement. Ultimately, Cooke was allowed to sell bonds, secured by...the 47 million-acre land grant Congress awarded the NP.
The collapse of Jay Cooke & Co. in 1873 launched the first full-scale depression of the Industrial Age. Within three years, half of the nation’s railroads were in bankruptcy. Half of the country’s iron producing capacity dried up and coal production declined precipitously. A piece published in the Washington Post on July 1, 2011 by Francois Furstenberg summed up the impact of Jay Cooke’s crash:
As demand collapsed, businesses slashed payrolls and reduced wages, and a ruinous period of deflation began. By 1879, wholesale prices had declined 30 percent. The consequences were catastrophic for the nation’s many debtors and set off a vicious economic cycle. No central bank existed to fight deflation. Large-scale government stimulus was a thing of the distant future.
The failure of Jay Cooke’s bank set off a chain reaction of bank failures. Factories soon began to lay off workers and the country’s economic fortunes tumbled. Within two months, some 55 railroads were insolvent and another 60 fell into receivership by year’s end. Railroad building had been the nation’s leading industry, providing work for steel mills, lumber mills, coal mines, foundries, carting services, farmers and ranchers who had to supply food all along the line. Eighteen thousand businesses failed between 1873 and 1875. By 1878, unemployment reached 25 percent. Building construction was put on hold, working men’s wages were slashed, real estate values plummeted and the market value of corporations declined precipitously.
The patriotic project designed to spur economic growth and bind the nation together proved an unmitigated disaster for the country. It was the source of the corruption, hardship, acrimony and strife that is constantly attributed to capitalism’s recurring booms and busts. Had there been no Railway Act of 1862, so much trouble would have been avoided. In the end, it was “capitalism” that was unjustly blamed for the calamity. As in all earlier and later crises of capitalism, it was not free market activities, but easy money and credit and corporate welfare policies that alone engineered the dastardly Panic of 1873 and eventually created the “need” for “reform” from the Progressive Era, to the Fed, to the New Deal, to today.