Business and government

Laissez-faire—nonintervention by government in economic affairs—is an untried panacea. The late 19th century, the Gilded Age, in the United States, is widely regarded as a period of laissez-faire; indeed much lip service was paid to that concept, but government was far from quiescent at that time. Initially, much of the intervention in economic matters benefited substantial business interests, but by the late 1880s the demand for government regulation of RAILROADS and TRUSTS became irresistible.

The post-Civil War industrial expansion was accelerated by government aid to business. The most conspicuous form of governmental intervention in the economy was in protective tariff legislation. Prior to the Civil War the United States was on the road to free trade, with rates of approximately 20 percent, but the 1860 Republican Party platform called for a protective tariff, and the secession of southern states enabled Congress to pass the Morrill Tariff in 1861 and subsequent revisions from 1862 to 1869 that raised rates to 47 percent. In the 1870s and 1880s the tariff was reduced slightly, but the protective feature was retained. The McKinley Tariff of 1890 raised rates to 49.5 percent and provided the flexibility of reciprocity to either raise or lower rates to secure favorable trading agreements with other nations. The Wilson-Gorman Tariff of 1894 was a hodgepodge that lowered rates, but in 1897 the Dingley Tariff jacked rates up to 57 percent, where they remained until lowered to 38 percent in 1909 by the Payne-Aldrich Tariff. The protective tariff was a substantial subsidy levied by the federal government on American consumers for the benefit of American business. The tariff effectively excluded foreign manufacturers from the enormous and rapidly expanding American market.

The federal government in the post-Civil War era also disposed of much of the vast national domain in order to develop the West rapidly. This largesse primarily benefited business interests. Mineral and timberlands were sold at ridiculously low prices. In 1873 Congress approved the sale of land rich in iron ore deposits for $1.25 an acre, and its Timber and Stone Act of 1878 allowed for the sale of timberland at $2.50 an acre. Transcontinental railroads were by far the greatest beneficiaries of federal largesse. Although railroads forfeited some acreage by failing to fulfill requirements, they were given approximately 130 million acres of the national domain. In addition, states gave railroads about 49 million acres of state lands. These land grants were justified because the roads were to be built through territory sparsely populated by Native Americans and not likely to produce any freight until settled by whites. As a result, the land-grant railroads became agents of colonization. Although Congress called a halt to land grants in 1871, railroads benefited from them into the 20th century. Just how necessary the grants were has been questioned because, without a land grant, JAMES J. Hill built the Great Northern Railway to the Pacific by 1893 on the profits of settlements he developed along his right of way. Yet if the building of the Union Pacific and the Central Pacific had been delayed until the regions through which they ran matured, the first continental railroad may not have been completed until the 1890s.

The federal government did not as a rule give outright cash subsidies to industries from its treasury. The tariffs subsidized industry out of the pockets of consumers, and the federal government gave railroads land, not cash. It did advance money to the Union Pacific and Central Pacific, but those loans were paid back in the 1890s. The federal government did, however, subsidize the ailing American merchant marine with generous mail contracts for steamship lines connecting the United States with South America, Japan, and China via Hawaii. In addition, the Merchant Marine Act of 1891 gave a small per-mile bounty (662/3 cents to $4.00, depending on the size of the vessel) on outward bound voyages. These subsidies did little to arrest the decline of the once proud American merchant marine.

The federal government also regulated—albeit not harshly—as well as subsidized industry. A NATIONAL BANKING system had been created during the Civil War that gave the federal government some control over the banking system and did provide more financial stability. Banks could issue banknotes secured by government bonds deposited with the comptroller of the currency, and a death tax of 10 percent on state banknotes eliminated them from circulation. National banks, however, served the monetary needs of the Northeast better than those of the South and West, where there were not enough banknotes available. The reserve requirements of the national banks also enabled a few great New York banks to centralize the system. Decentralization and greater federal control would come with the Federal Reserve System in 1913.

Since railroads were monopolies in most rural areas and competitive where they converged in urban areas, they charged less where they encountered competition and more where shippers had no alternative transportation. Railroads also would offer large-volume shippers rebates while requiring shippers of small amounts to pay the published rate. Freight-rate discrimination angered farmers, small business owners, and communities because it diminished their profits and even threatened their survival. In the late 1860s and the 1870s the Grangers advocated railroad regulation and secured legislation creating tough commissions to set nondiscriminatory rates. The Supreme Court in Munn v. Illinois (1877) upheld state regulation of railroads even if they were engaged in interstate commerce. In 1886 the Court reversed itself in Wabash v. Illinois, declaring that the regulation of interstate commerce is the responsibility of Congress. In 1887 Congress responded with the Interstate Commerce Act (ICA), which prohibited rebates, the long-and-short-haul abuse; called for “reasonable and just” rates; outlawed pools of freight and earnings; and established the Interstate Commerce Commission (ICC) to investigate, recommend and, if ignored, go to the courts to compel obedience. The passage of the ICA marked the shift of the federal government from promoting railroads to restraining railroads. The ICC was reasonably successful in administering the ICA until 1897 when the Supreme Court, in the Maximum Freight Rates case, denied that the ICC could set rates and, in the Alabama Midland decision, undermined the effectiveness of the long-and-short-haul clause. Effective railroad regulation was postponed until the 20th century.

The development in the Gilded Age of huge industrial combinations called TRUSTS gave rise to a significant antimonopoly movement that the federal government could not ignore. Yet while virtually everyone—farmers and laborers, reformers and most businesspeople—was hostile to trusts, virtually everyone favored individualism, suspected strong government, and opposed economic equality. They wanted equality of economic opportunity and for the government to regulate business to restore the competition that existed in an earlier era. Although by the 1890s 15 states had constitutional provisions against monopolies and 27 states had laws against them, these prohibitions were ineffectual. By 1890 it was obvious to Congress that federal action was necessary, and with virtual unanimity it passed the Sherman Antitrust Act, which reiterated the common-law prohibition of monopolies, combinations, or conspiracies in restraint of trade. The wording of the act was vague, but it put Congress on record as opposed to monopoly the same year it increased significantly the protective tariff. The Sherman Act was to be enforced by the attorney general, and violators were to be prosecuted in the courts. Prior to the administration of Theodore Roosevelt (1901-9) the act was ineffectual. Given the merger mania that swept the United States in the 1890s, neither attorney generals nor the Supreme Court seriously challenged monopolies. The Sherman Act was invoked only 18 times from 1890 to 1901, and four of those times it was used against organized labor. The Supreme Court, in U. S. v. E. C. Knight Company (1895), denied that the American Sugar Refining Company, which controlled 98 percent of the nation’s sugar refining capacity, was restraining trade. Taking a narrow view, the Court regarded manufacturing—even of commodities shipped across state lines—as separate from commerce and trade. The Sherman Act, nevertheless, was law and would be available in the Progressive Era.

See also currency issue; tariff issue.

Further reading: Morton Keller, Affairs of State: Public Life in Late Nineteenth Century America (Cambridge, Mass.: Harvard University Press, 1977); Edward C. Kirkland, Industry Comes of Age: Business, Labor, and Public Policy, 18601897 (New York: Holt, Rinehart and Winston, 1961).