November 1993 | Volume 44, Issue 7
Had the state-granted cartel held up, our history would have been unimaginably different
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.
In 1803 the grant was renewed, provided Livingston produced a boat capable of traveling four knots against the current of the Hudson River. This requirement was considered impossible, and the measure was passed amidst gales of laughter in the legislature. But Livingston was then ambassador to France, where he was negotiating the Louisiana Purchase and funding the experiments of another American, Robert Fulton, who had a steamboat operating on the Seine that same year. In 1807 the two built the Clermont for the Hudson and made it to Albany from New York City in thirty-two hours, averaging about four and a half knots. The monopoly in New York waters was theirs.
Livingston knew, perhaps better than any other Easterner, the potential for steamboats in the Mississippi River Valley, which he had helped so mightily to bring under the American flag. He and Fulton moved to obtain a monopoly there as well as in New York, writing the various states and territories and asking for exclusive rights.
But while the Livingston name was potent in New York, it was, if anything, a liability in the far more egalitarian West, already resentful of Eastern money and commercial power. So the pair got nowhere, except in the Territory of Orleans. Livingston’s brother Edward had moved there after being mayor of New York and was soon a political power there. When the territory became a state, in 1812, Fulton and Livingston got their monopoly. Since New Orleans was the breakpoint between ocean- and river-going vessels, a monopoly in Louisiana waters was nearly as good as one over the whole Mississippi River system.
In both New York and the West, the Fulton-Livingston monopolies were bitterly resented, by the public and by other would-be entrepreneurs. “Our road to market must and will be free,” thundered the Cincinnati Western Spy .
Many defied the monopolies. Henry Shreve, for whom Shreveport is named, ran his steamboat Enterprise into New Orleans and often evaded those trying to enforce the monopoly. Finally caught, he won the case when the court ruled that the territory had no authority to grant a monopoly. By this time Fulton and Livingston both were dead, and their heirs did not pursue the case in a higher court. The Mississippi was free.
Freight out of New Orleans increased from 65,000 tons in 1810 to 4,690,000 in 1860. As early as 1841 a Westerner could write: “Steam navigation colonized the West! … Steam is crowding our eastern cities with western flour and western merchants, and lading the western steamboats with eastern emigrants and eastern merchandise. It has advanced the career of national colonization and national production at least a century.”
The monopoly still held in New York waters, however. New York courts, under the thumb of the Livingstons and their allies, upheld the grant. Finally the case made its way to the U.S. Supreme Court in 1824. Sen. Daniel Webster and Attorney General William Wirt, acting as private lawyers, argued the case for the plaintiff. Webster’s presentation took two and a half hours to deliver, and it has been regarded ever since as a masterpiece of both legal histrionics and legal reasonings. No one present—the courtroom was packed—ever forgot it.
Webster argued that the federal government’s right to regulate interstate commerce was total and exclusive and that therefore, the monopoly was null and void, as were all other such laws. Chief Justice John Marshall and the rest of the Court bought Webster’s argument whole. Indeed, as Webster described it, with typical lack of reticence, “The opinion of the court … was little else than a recital of my argument.”
Regardless, the decision in the case of Gibbons v. Ogden is considered one of the great Chief Justice’s most important. Its immediate practical effect was considerable. A year after the decision the number of steamboats operating in New York waters had increased from six to forty-three.
Its philosophical effect, perhaps, was even greater. For a hundred years the idea of government monopolies in this country was unthinkable. One can only hope that it is becoming so again.