The Steamboat Monopoly

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In the early 1970s, when Wall Street was going through a particularly bad time, it actually cost more money to buy a taxi medallion—a license to own and operate a taxicab in New York City—than it did to purchase a seat—a license to trade—on the New York Stock Exchange.

The reason was simple enough. In the 1930s the city had frozen the number of taxi medallions, in order to keep otherwise unemployed people who happened to own cars from going into the taxi business and competing with professional cabdrivers. New York City, in other words, created a taxi cartel, and the fortunate medallion holders have been making out like bandits ever since.

There’s a lesson here. While we still tend to think of monopolies and cartels as the product of top-hatted nine-teenth-century plutocrats conspiring against the public good, the major combinations in restraint of trade in this century have been governmentsponsored, and just as pernicious.

New York’s taxi cartel is pretty trivial in the scale of things (unless, of course, you’re in New York, in a hurry, and it’s raining). But the federal cartels in the trucking and airline industries, also established in the 1930s, were a different matter altogether. When they were finally broken up in the late 1970s and early 1980s, wrenching economic adjustments were required. Many companies, such as Pan American and Eastern Airlines, failed to make them and have vanished.

But the effect for the general public has been almost wholly beneficial. Average airline fares have declined 35 percent in real terms since 1977, while the industry has nearly doubled in size. Many more routes are now served by competing airlines than before deregulation, and the number of direct and nonstop connections between mediumsized cities has increased sharply.

In the trucking industry, meanwhile, the number of ton-miles carried has been growing twice as fast as the gross national product (GNP) while the total number of rigs on the nation’s highways has been declining, thanks to greatly enhanced productivity.

All this has had no small effect on the American economy as a whole. Everything we buy, after all, comes from somewhere else, and the distribution costs incurred have to be factored into the price. These costs are huge. In 1981 they amounted to almost 15 percent of GNP, or about $650 billion (in current dollars). In 1992, however, distribution costs were only about 10 percent of the GNP, or about $570 billion.

In other words, the American economy is much larger now than it was twelve years ago, but total distribution costs are much smaller. Even Milton Friedman, the Nobel-laureate economist who coined the expression “There is no such thing as a free lunch,” admits that it amounts to, very nearly, a free lunch.

But the cartels established in the 1930s were hardly the first government intrusions into the transportation market in this country. At the very dawn of the industrial age, government-granted monopolies threatened to stifle the new technology of steamboats. Had they succeeded, the history of this country would have been very different indeed.

It is hard to imagine today the difficulties of overland transportation in the eighteenth century. Most freight moved by water or it did not move at all. In the young United States the broad rivers and estuaries of the East Coast were vital arteries of commerce. As long as most of the population lived within a few miles of tidewater, ocean-going sailing ships served the needs of this commerce adequately.

But as the population began to move across the Appalachian Mountains in large numbers and spread out into the Mississippi River Valley, the problem of moving freight and passengers became critical if this vast, and vastly rich, region was to be developed.

There were, to be sure, plenty of water routes available. The Mississippi and its tributaries total no less than sixteen thousand miles of navigable water. But there was one big problem: The rivers were, in effect, one-way roads.

As long as freight was headed down river, flatboats were able to carry thirty or forty tons of cargo at a clip, swept along by the current. Once in New Orleans, the cargo would be sold and the flatboat broken up for lumber.

The only way to send freight upriver, however, was by keelboat. Keelboats were long, narrow vessels that hugged the shoreline to avoid the current as much as possible, and they had to be poled upstream solely by human effort, a backbreaking, not to mention extremely expensive, way to transport freight.

It is not surprising, therefore, that the technology of the steamboat was immediately hailed as the answer to the problem of inland transportation in the United States. But, naturally, the developers of the first steamboats wanted to be sure that their ventures would be financially successful. Therefore, many early designers applied to the various states for monopolies of steam navigation. There was nothing unusual about this at the time. Governments had been routinely awarding monopolies to the favored for centuries.

John Fitch received such rights in five states, James Rumsey in three. When Fitch was unable to meet the terms imposed by New York, the grant was revoked and given to Robert R. Livingston, a member of the state’s most politically powerful family.