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The Men Who Built America: Cornelius Vanderbilt and Crony Capitalism

This is part three of a series on “The Men Who Built America.” My last two posts introduced you to Cornelius Vanderbilt, an entrepreneur widely recognized for his contributions to the railroad industry. He also had success in advancing steamboats in New York waters and steamships across the Atlantic Ocean. My final post on Vanderbilt may be the most exciting yet—for it involves gold, racing and even overthrowing Nicaraguan governments. VanderbiltWhen the Gold Rush hit the Western United States, people wanted to figure out how to get out West, as fast as possible. Steamboat travel was the best option, though it required first traveling to Panama, where one would catch a connecting train to another steamboat, to head to California via the Pacific Ocean (before the famous canal was finished, in 1914). As expected, the government (via the Post Office) was monopolizing the routes, through subsidies to two companies that delivered the mail to the West Coast. Each year, these companies received $500,000 from Uncle Sam. The fare for one passenger from New York to California was $600. Vanderbilt knew he could do it for less—and he did. Instead of bringing traffic through Panama, Vanderbilt spent a year digging out a canal in Nicaragua (some 500 miles shorter than the Panama route). Meanwhile, he set up an agreement with the Nicaraguan government to pay an annual sum of $10,000 for use of the canal. Vanderbilt not only offered a cheaper fare (first $400, and eventually $150), but he was also able to deliver the mail … for free! That should put those companies contracted out by the post office out of business, right? Those familiar with today’s lobbying infrastructure should know better than that. In fact, the two companies got Congress to give them more money—$900,000 a year, apiece! This allowed the two “insiders” to compete with Vanderbilt, but he was not deterred. What did deter Vanderbilt was the revoking of his canal privileges. What stopped him was a man with a crazy mission. William Walker, an American (most likely with some connections to the two subsidized companies), “shipped a small army into Nicaragua, overthrew the existing government, proclaimed himself the president and revoked Vanderbilt’s canal rights.” Vanderbilt, who became enraged, decided to take the Panama route and was able to slash fares to $100 (and $30 for third class!). This shifted pressure to the subsidized companies, so instead of trying to compete against Vanderbilt’s efficient machine, they bought him out. Congress was outraged when they learned that the subsidies were going to fund Vanderbilt. Some saw Vanderbilt as the culprit and decided to end the mail subsidy immediately. But the real culprits were the companies that were monopolizing the market for transporting people and mail to the West Coast. According to Burton Folsom, “Their subsidies gave them an unfair advantage over all competition, and they used this advantage to charge monopoly rates to passengers.” Vanderbilt was the one who dislodged the monopolies by offering both cheaper travel and faster travel time to consumers, all without the help of taxpayer dollars. Imagine what other entrepreneurs could have accomplished sooner had taxpayer dollars not been used at all! Over the last three posts we have seen how subsidized companies have led to price-fixing, technological stagnation and bribing competitors. On the other hand, we have seen how private companies, such as Vanderbilt’s, can lead to price-reduction, technological innovation—all without involving taxpayer dollars. In future posts, I’ll explore other entrepreneurial giants who helped make America what she is today.