 Before I start I want to call your attention to something that has just gone online. It's a website called onpower, that's one word, no spaces, onpower.org. And this is one of the projects of the Independent Institute which I work with. And it started out a year ago or more to be a website connected with my book Crisis and Leviathan and other things that I've written on related themes and topics. But it grew and it turned out to be about a hundred times bigger than we had in mind to begin with and it doesn't just deal with my work although much of my work that relates to the growth of government and related topics is there and a great deal of it is available in hyperlink so that you can get access to the text online. But a tremendous amount of other material is also listed there and organized in subject areas, things having to do with the various aspects of government policymaking or action according to different historical periods and according to different parts of the world. So it's really quite a comprehensive resource for people interested in tracking down material. The reading lists which is in a sense what this site contains are really marvelous. I look at it sometimes and I think I only wish I'd read more than a small fraction of all this material myself and I had that same sinking feeling I had when Murray Rothbard wrote that letter years ago. But there's a lot to learn and I'm not very far along but this is a wonderful resource in this area. I'd say it's different in flavor from anything I know about. It's quite similar however to the flavor of suggested readings you get from mesus.org and has a great deal of overlap indeed with many of the authors you find there. But I recommend this to you, have a look at it, see what you can do with it. I think you may find it very useful and especially if you ever should find yourself in that curious position of wanting to track down something I've written, if it's about the growth of government or a related topic, foreign policy critiques or anything along those lines you're likely to find the text online at onpower.org so I commend that to you. This morning I want to talk about the 19th century and the growth of government during that time. Yesterday I put a graph up showing the growth of federal spending from I think the very beginning from 1790 or so all the way up to recent years and one of the striking aspects of that chart is that except for the Civil War federal spending in the 19th century is always very very low, runs two or three percent a year at most and jumps up during the Civil War but then it comes back down and so it looks as if government didn't amount to much by that measure. What I want to do today is to look also at state and local levels of government because they were actually much more important in many ways so far as intervening in economic life was concerned in the 19th century and also to talk about some of the ways in which the federal government did play an important role but a role that doesn't show up in that graph because it doesn't get reflected in the amount of money the federal government was spending. So that's the topic today and then I'll begin later on this morning to discuss some of the ways in which structural changes in the late 19th century with the development of the national market and so-called big business began to change the regulatory landscape and to create some curiosities so to speak in federalism there was a sense in which I think federalism contained the seeds of its own destruction under the conditions that prevailed then and later and it's an idea that I haven't seen discussed a great deal but I think has some importance. I have some data here which are the product of some very extensive research undertaken by Dick Silla and John Wallace. John was a PhD student of mine from the University of Washington years ago and John Legler and these guys have been digging up information for many years. It's very hard to find state and local budget data in the 19th century particularly in the early 19th century just literally finding it. Where is it? Are any records remaining? And then when you find it making some sense of it and trying to organize it in a way that it can be made comparable to other information. Federalism was not a system made with historians' ease in mind so there's a lot of different jurisdictions to examine but out of all of this work John Wallace compiled these data. They're published a few years ago in a very nice survey article in the Journal of Economic Perspectives and the national data are fairly familiar because they're easy to get and they've been available for a long time but the state and local data are basically information that was available only in rough guesses before. Now obviously these data are subject to some errors as well so I don't want to pretend that they're very, very precise nor would Silla Wallace and Legler pretend that. They're still working on this project but I think they're the right orders of magnitude and they show us the correct trends and they're quite revealing. You'll notice for example that when we are first able to look at all three levels of government here in 1840 we find that the revenues of the national government at that time are little greater than those of local governments but not much and less than twice as much as the states are getting in revenues and interestingly as time goes by the movement is in the direction of relatively more growth at the state and local level rather than the national level. By the time we get to the end of the 19th century the local governments alone, the cities and the counties are spending are getting more revenue substantially than the national government the states haven't grown at nearly such a high rate but they're not inconsequential either. Now to get some idea these numbers are expressed in current dollars per capita and of course we look at this and we think what a heaven even if money had 20 times the purchasing power that it has now which is probably in the right neighborhood still these are seem like negligible levels of taxation by modern standards so it's almost enough to make us believe there was laissez-faire after all but when you look at the far right hand column and you see these revenues as a percent of GNP yes again they're small compared to modern levels the government's now getting more than 30% of GDP and revenues at all levels and that's a lot more than 7.2% but 7.2% is not nothing governments were out there they were doing things in the 19th century they weren't just sitting on their hands and reading books on anarchism so this is kind of an overview of where things stood at the various levels of government in the 19th century now again as I said in the beginning of the 19th century the national government wasn't even trying to do very much especially after Jefferson became president the excise taxes that the federal government had tried to collect in the 1790s were almost all abandoned during Jefferson's administration there wasn't excise on salt at the federal level that remained in effect but otherwise there weren't any until the Second War with England and then they were only put back in place for a few years to get some revenues to help pay for the war so the national government got its revenues predominantly that is to say about 80% or more from tariffs and almost all the balance came from sales of land in the public domain so I mean it's almost as if that wasn't even a tax it got some land in exchange for your money so the national government didn't have much penetration in a way that modern tax systems have in the 20th century tax authorities decided that you wanted to use the tax system not just to get revenues so the government could make purchases you wanted to use it to effect behavior you wanted to use it to penalize or refrain from penalizing different kinds of business and different kinds of even personal action so that nowadays for example anti-smoking crusaders are gung-ho to place extraordinary taxes on cigarettes you know it's not all of us here understand what a counterproductive notion that is because in fact when you put a high tax on cigarettes as say New York City has recently cigarettes get cheaper because it stimulates all the smugglers to bring in cigarettes with no tax at all and so strange as the idea is nonetheless moralists and do-gooders and crusaders and social engineers and all the rest of the busybodies the world is plagued with discovered the tax system in the 20th century and so they want to continually monkey with it so that they can make people do what they want them to do they don't seem to ever learn their lesson about the difficulty of accomplishing that objective in the 19th century taxes were a little more straightforward they were pretty much a way government wanted to get revenue but not entirely even there when the federal government did go back to imposing X sizes during the war between the states it put thousands of them on it put them on everything it could think of where it might be able to collect them and after the war ended it didn't give up all of them and it's instructive that the ones it kept were the ones on liquor and tobacco because even in 1865 this country had fair share of busybodies who wanted to dictate how their neighbors lived and so in fact we've had that federal tax on liquor and tobacco continuously from this war between the states till today at the federal level but that again that was an exception at the local level most of the tax revenue came from property taxes on real estate just as much of it still does the states laid various kinds of taxes on people but again a relatively small amount of revenue was acquired by the states they didn't do much in the 19th century they had kind of a long list of actions that they undertook but none of them amounted to a very big deal in terms of the money required to carry them out the revenue data don't tell us some of the ways in which states became very actively engaged in economic life in the early 19th century one of the important avenues for that sort of activism was in banking you'll recall that the Constitution of the United States forbids states to issue bills of credit paper money prior to the Constitution's ratification most of the states had been issuing paper money and indeed that issuance was a major complaint for most of the founding fathers because they viewed that as a way of cheating creditors and indeed that's what it was intended to be the states issued this paper money the first thing it did was cheat the people they owed and then the paper money got out into circulation was used to repay debts and of course depreciating all the while thereby becoming a vehicle for the debtors to cheat the people they owed who had expected to be repaid in many cases if not all in hard money so this became a major issue leading up to the Constitutional Convention the insertion of that provision against states issuance of bills of credit now as it turned out the states kind of left off this restriction because almost immediately they started getting involved in either establishing banks on their own account that is you know socialist banking is what it was so the states just set up banking institutions started accepting deposits and making loans and investments just as a regular private commercial bank does so many of the states went into the banking business others although they didn't or even if they did in addition to that they became investors in private banking companies and of course all of these banks then proceeded to create deposits for their lenders for their borrowers and to issue paper money so if the Constitution said you can't state of Rhode Island issue paper money didn't prevent Rhode Island from establishing the Bank of Rhode Island which issued paper money and this kind of activity was rampant in the first half of the 19th century it began to fade out around the middle of the 19th century largely because these enterprises tended to go broke they were of course badly managed being public enterprises and failure was not an uncommon event in the banking industry anyhow so these were especially likely to fail and many of them did and in some states in the 1840s new constitutions were written forbidding the states to engage in banking anymore so that was one of the ways in which states did play an important role because these banks all acted as a kind of crony capitalism your pals were the ones who got the loans and politics dictated how these institutions operated even matters such as where they put their branches if they had branches which county would get a branch of the state bank of Iowa for example I had an interesting article a few years ago in my journal the Independent Review on some of the state banks in the Midwestern states that were still operating in the 1860s some of them so it took a while for this sort of thing to be driven away in addition the states became heavily engaged from about the second decade of the 19th century in investing in transportation improvements especially in canals between about 1815 and 1840 and in the beginning New York state really showed the way by building the Erie Canal which linked basically Albany and Buffalo and by virtue of making that link it allowed waterborne trade to proceed all the way from the Atlantic Ocean to the Great Lakes and via the Great Lakes to penetrate far inland farther indeed than anybody cared to penetrate at that time so this was really a tremendous boon to the development of that part of New York state first of all even before the canal was completed in 1825 there was a tremendous boom of settlement and development of agriculture and industry in the areas nearby the canal and then the state built feeder lines out from the main stem line and so it did a lot to draw people and industry to that part of the country now the politicians in other states looked up at New York and said ah they're getting the jump on us just the way your politicians here in Alabama looked around recently I take it and said somebody's getting the jump on us let's throw some of our money at Hyundai Corporation I noticed that sign when driving up here on Sunday that Hyundai is building a big plant the other side of Montgomery I told Elizabeth, pity the poor taxpayers of Alabama Hyundai's not coming here by accident guaranteed they've been subsidized to do that and this was a game that states were already playing almost 200 years ago they've never quit because this is a form of corruption that state legislators and governors and their flunkies get away with it's based on economic fallacy but it's a fallacy that the public can easily swallow and continues to swallow and so it's politically viable and I don't see any end to it it's just like this state of the weather you know tornadoes come sometimes Hyundai comes other times and they'll take credit for it when it comes that's the bizarre part well the next thing that happened after the area canal was built was that several other states said well we got to do this too New York is going to suck all the commerce away from us because it was indeed promoting the growth of the port of New York where a lot of this commerce from the west was brought down the Hudson River to New York and then in some cases exported to Europe or elsewhere so New York City was flourishing and Philadelphia said we can't have this we're losing our preeminence not to speak of money and Baltimore said we can't have this and even some vagrant politico down in the swamps of the District of Columbia said well we can't have this we got to have a canal too and so they began to build canals of their own at public expense more or less connected to these port cities and elsewhere in the country a number of large canal projects were undertaken also by state governments even out in the wiles of Ohio and Indiana and Illinois which was so far away you couldn't see it even with a telescope people decided they had to build a canal that would basically connect Chicago via the Illinois River and eventually hook into the Mississippi River down in the southern part of the state and they started digging all these trenches and using taxpayer money to do it and eventually they completed some of them as it turned out none of them had the effect that the Erie Canal had had in New York perhaps because they were too late the Erie Canal had already in a sense got its foot in the door of connecting the western economy the one beyond the Appalachians you'll recognize this as the Appalachian range of course here and that was the problem for early Americans they all lived here on the east side of the Appalachians which Easterners call mountains I've never understood why being a Westerner but they were a big barrier in those days and once you got through there somehow you had a means of connecting with a lot of potentially lucrative trade because that interior area was definitely going to be settled everybody knew that it was just a matter of time and where and when the pockets of development would appear so New Yorkers got up here and you'll recognize these squiggles as the Great Lakes and once you got into there you could go and then come down rivers or canals that were built in the west and have access to the entire area almost of the old northwest territories which is a huge, fertile, productive, magnificent area just crying out for land speculation and that is what Americans did above all else you can call Americans a lot of names but basically what we've been from the beginning is land speculators and smugglers, yeah, well some of us didn't have access to water these investments in canals almost all went broke at the end of the 1830s and the beginning of the 1840s at the time they went broke and many of them were not completed yet especially those out in the Midwest and they ended up saddling taxpayers with a lot of debt obligations with nothing to show for it and a lot of citizens became quite angry about that situation and again new constitutions were written in a number of states in the 1840s not only to keep states out of banking enterprises but also to prevent them from investing in canals so it wasn't that states stopped channeling money into transportation improvements they didn't they began instead to channel aid to railroads about the same time which were just getting rolling as it were railroads were first built in 1830 in this country and it really developed quickly in the 1850s and afterward and every time a railroad passed through anywhere in this country the owners would prevail on every county, town and city nearby for some kind of subsidy and very often they got it one way they got it was by threat by threatening to go somewhere else with their railroad line and towns, even whole counties recognized if the railroad bypassed them then economic development was going to bypass them too to some extent at least and thus their land values wouldn't go up as much remember that's what we Americans care about is getting that unearned increment as it were in Henry George's terms so these companies were continually playing off local governments for subsidies and they got them in various forms sometimes they got cash grants sometimes they got guarantees that the state or the city or county would stand good if the railroad company couldn't pay its debts on time and sometimes they got tax forgiveness and that was pretty common just as I'm sure Hyundai is getting a period of tax forgiveness maybe in perpetuity oh just 25 years okay well it will polish me off so you could engineer these boondoggles in various ways and they tried them all and that was an important way in which state and local governments got involved in manipulating the course of economic events in the 19th century again a lot of this activity doesn't show up in the budget anywhere if a county guarantees a million dollars worth of the Illinois Central's debt well it doesn't show up especially if it never has to make good on that promise but it still has an effect on the allocation of resources it determines how much gets used, where, when and how so it distorts the market system and indeed the market system was subject to all kinds of distortions of this sort in the 19th century even though again it looks like an era of small government it was an era when Graff was quite well known to public officials and citizens and they engaged in all sorts of corruption so those are just some of the ways in which states and local governments were bigger than we might think now in the late 19th century as urbanization began to really pick up and many large cities developed in this country at that time you could no longer just let a city develop willy-nilly or at least citizens didn't want them to develop that way with mud for streets and no sidewalks and no lighting and no sewerage and no water supply and what have you so that as cities developed in the late 19th century they were called upon I think there was a legitimate demand by the people who lived there for this kind of infrastructure investment and they proceeded to undertake it and it was a massive amount of work to build all of these streets and pave them and build sidewalks and put in lighting and particularly in the 1880s and onward sewerage systems and water supply systems those are very big projects they took a lot of investment and so when you look here at the local government spending you see it doesn't look at between 1870 and 80 and 90 as if it's really changed it has because the price level falls quite a bit during that period so in real terms it's going up and then in the 1890s it takes a serious jump because there's even more of that kind of infrastructure investment going on at that time and into the early 20th century those were the days when we began to get drinking water that wouldn't necessarily give you cholera or typhoid because cities began to install water filtration systems and so-called sanitary sewers so that they were properly piped and didn't allow the sewage to get mixed up with the water and the water pipes and we take these things for granted now but I can easily recommend places to you where you don't take them for granted and you miss them actually when you're in a place where you can't drink the water and you don't have a proper sewer system and whatnot so this was a big deal for local governments especially for city governments big cities did the whole range of this kind of infrastructure investment a lot of smaller towns didn't do it for a long time until well into the 20th century okay well let us return as it were to the national government the various national governments and consider some of the other ways in which government in the 19th century was bigger than we might think I have here a genuine replica of a $65 bill any takers? this actually precedes the 19th century but it makes a point this was issued actually in 1779 by the Congress of the United States of America and it promises to pay you a 65 Spanish mill to dollars they weren't proud in those days they weren't afraid to promise foreign money because everybody knew that the Spanish mill dollar was made out of gold and it had some value so that's what they promised now this turned out to be quite quickly not worth the continental but the point I want to make is that this is a piece of evidence of taxation because the Congress and the continental army and other people that were supporting went out and exchanged these pieces of paper that had printed up for goods and services and getting the use of those goods and services constituted a tax because the people who got this in exchange well the first people got a little something in exchange and next month after that the guy who held this got nothing approximately because these things depreciated very very quickly and by the early 1780s they were worthless so the paper money issued by the United States and by the various states to pay for their revolutionary war expenses all operated as a tax by creating worthless pieces of paper and using them to acquire real goods and services so it's the acquisition of real goods and services that was the tax the bookkeeping as it were for that confiscation I have another genuine replica here of another national government from the 19th century this one was called the Confederate States of America and it issued this bill or at least one it's a replica of on February the 17th, 1864 at Richmond and it promises that two years after ratification of a treaty of peace between the Confederate States and the United States the Confederate States of America will pay to the bearer on demand $500 well, we're still waiting for that treaty we're waiting even more than the Koreans they've only been waiting since 1953 for their peace treaty but we're waiting much longer for our peace treaty so this was a vehicle of taxation the Confederate States spent this money and they got real goods and services in exchange by this time of course the $500 of this bill would probably buy you about one potato if that, because the Confederate price level had gone up about a hundred times by then or close to it so this was worth maybe five cents in gold but it was still something and they were still printing them like crazy almost to the very end and using them as a means of taxation it doesn't show up because none of these data reflect the Confederate States anyhow it's as if it never happened it somehow disappears so money issuance is another way in which in the 19th century governments at least periodically laid claim to resources and affected the way resources were allocated and used who got access to them who was able to do what governments with the power to issue paper money had something to do with that now I have drawn a visual aid here believe it or not I sought a real map but failed to find one this morning so here we have approximately the continental limits of the United States of America and the point I want to make with this map is that it's a damn big area now when the United States came into existence as I said a minute ago nearly everybody who lived here all four million of them lived right here within a hundred miles of the Atlantic Ocean I mean literally they were clinging to the coast for survival a couple hundred thousand people had gone over the Appalachians and they were pretty much living the life of self-sufficiency because it was so expensive to go back and forth or carry anything that there wasn't any alternative they couldn't really accommodate serious trade in 1790 but when the United States was created and when the 13 original states ceded their land claims to the federal government that would be the Mississippi River the original area of the United States extended to the Mississippi River and the states most of them had land claims all the way from the Atlantic out to the Mississippi and in the 1780s they ceded those claims to the government of the United States so this huge area out here came into the ownership of the U.S. government well this is a magnificent resource this is not the Sahara Desert this is magnificent territory as territory goes on the face of the earth it had great potential value once it had transportation access to the outside world so that people could get goods in and out cheaply and as I indicated a while ago they said about developing those means from the very beginning so people began to move out there quickly and when they did so they needed to acquire the use of land and the land was all owned by the United States so what it meant was that the United States government might not have had much money in its treasury but it had something almost as good which is it had ownership of a huge amount of land with potential value and so it began to use that land the way we think of modern governments using money to reward its friends to carry out projects that it favors and so forth as I indicated yesterday the governments want money to pay troops to kill people if need be that's the short course in public finance now since they didn't have much money and it was hard to get money to have any value for this government they used land instead sometimes when they wanted to hire troops on for some expedition they were always going to conquer Canada again for example they would promise people as it were look sign up and when you get back if you get back we'll give you some land and so every time there was a military expedition or a war they would end up giving a land grant to the veterans and setting aside sometimes definite areas in the west that were reserved for the people who held these warrants allowed them a definite quantity of land so this was a means of payment that they could use for anybody including the services of soldiers and they did this over and over and over land grants to veterans in addition they made grants to states eventually this whole area was transformed into states and as that happened these states became players in the political process themselves I indicated yesterday for example that the land grant colleges of the 1860s were financed by the federal governments giving land claims to each of the states so that even states which didn't have any public domain such as the original 13 who never surrendered control of their lands still got a claim to land somewhere in the west and then they could turn around and sell that and use the money to establish their own land grant colleges so that we get institutions such as Cornell University in New York a land grant college even though New York had no public domain so you could make land into a medium of exchange as it were you could finance schools indeed in the original northwest ordinances designed by written by Jefferson in the 1780s every township every area six miles by six miles in the whole area of the United States west of the Appalachians it was all divided into a grid rectangular survey so that you knew definitely where every line of longitude and latitude was and it was all numbered in a way that you could organize and keep track of you could locate any parcel of land in the whole area with precision according to this rectangular survey system it really was a magnificent device for promoting settlement and the privatization of this public domain but in every township which is six miles on a side one of the sections which is one square mile was reserved for common schools which is say public schools so the people there could take that section sell it use the money to pay for the local school so that was built into the land system of the country starting in 1850 the national government began to use land to subsidize major railroad projects the first one was the Illinois Central which brings us to the interesting topic of the president of the United States no one has ever heard of and that would be Millard Fillmore has anyone ever heard of him well this forgotten figure in my mind is best associated with his signing into law the land grant to the Illinois Central Railroad in 1850 and this was the first of what turned out to be many many scores of land grants made by the federal government Illinois Central connected in addition to having some spur lines Mobile Alabama and Chicago more or less like that this has lots of interesting stories associated with it it was a very big business I guess at the time it may have been one of the biggest enterprises ever undertaken in various dimensions money and employees and the rest of it but it was a kind of boon to a lot of local people too years ago I met some historians in Mississippi up in Oxford they had been researching local court records and they discovered that the farmers in the county where Oxford and Mississippi is located for decades had a scam going which is they would when whether old cows got near death they would haul it out and basically tether it to the railroad track and then the Illinois Central locomotive would come along and smack Bessie and then the farmers would carry her carcass to the local court and sue the railroad for a lost value of their cow and receive a very handsome reward by the local judge so I don't know how many counties were engaged in this but I wouldn't begin to assume that they were the only ones who had figured this out and Mississippi sell them the leader in thought in Louisiana we have a saying that is well at least we're not in Mississippi but sometimes people in history as if these big corporations were just rapaciously running amok across everybody and that's a misreading because from the very beginning there was give and take the great capitalists and the barons were not just doing their bidding there was always a certain amount of resistance and fighting back and counter exploitation if you like now the Illinois Central received about two and a half million acres in its land grant and it established the pattern for how these things would be done and what would happen is that as the line ran along in the case of the Illinois Central they'd go back for six miles and every other section would be given to the railroad so that on this side it was the second one and so forth like that and it continued that way all the way down the line now the government retained all the alternating sections that weren't given to the railroad actually for I don't know if it was constitutional purposes or some other reason they actually made this grant to the states and then the states made the grant to the railroad so they may have been a little bit of Jeffersonian strict constructionism still operative in the way they did that in 1850 but I know later they didn't do it that way in the 1860s and 70s but extended all the way down so the railroad got all this land which it could sell and the other sections the government retained and it sold and the idea was the government didn't lose anything because the railroad's construction and the bringing in of settlers would raise the value at least doubling the value of the plots that the government retained so they were giving away nothing that was the logic to the way they gave these alternating sections now in the 1860s during the war they made a much bigger land grant to two companies the Central Pacific and the Union Pacific which were built one of them from Sacramento Eastward and the other from Council Bluffs Iowa Westward and they eventually linked up in 1869 and created the first railroad that crossed all the way across the United States and the land grants they got were 20 miles deep on each side of the track later on the northern Pacific railroad got a land grant that extended 40 miles on each side of the track with all the alternating sections being given to the railroad it turned out all those railroads actually turned out to pass through some pretty worthless territory and nobody ever wanted to buy a lot of those sections from the railroad so they still own them now a great deal of land is owned by the Burlington Northern which is a corporate descendant of the northern Pacific railroad and a lot of it is managed in forests out in Montana and Washington State and some of it still just sits there never developed but at all events these grants were used by the railroads to get revenue because they wanted to exchange the land for money and they did sell a lot of it and they promoted settlement to customers to use their railroad and all the big railroads of the late 19th century sent agents to Europe to tell immigrants about garden spots like Kansas the Atchison, Topeka and Santa Fe had these posters showing Kansas and show all these orchards and vineyards and flowers blooming this is our Bohemian guy he sees this poster Kansas that looks great next thing you know he's in Wichita saying you know where's the orchard well actually it worked out okay for a lot of them there was an element of marketing running muck here that's a great many of these people I don't want to pretend this was just a scam because in fact a lot of people came to those railroad lands bought them settled and lived on them happily and were better off for it so let's give the devil his due here in addition to making the railroad grants the federal government made its land available and basically wanted to use resources there even without their acquiring title to it in the 1780s something called the timber and stone act was passed and that was a law that allowed anybody to go on to federal land and cut down trees or take fallen timber if you wanted to use that for firewood or some other purpose or take stone for building construction materials without payment by just going on to federal lands and taking them that was a 1780 I believe 2 1872 I mean 1872 I'm backwards 1872 they also in that same decade passed a mining act which allowed people to go on to federal lands and stake mining claims and exploit, build mines and exploit those mines and carry off the minerals they took from them and make them appropriate them sell them, make them their own and indeed that law is still in effect and it's become quite controversial in recent years but it's allowed thousands and thousands of miners in the west to go on to federal lands and build mines and exploit the minerals there without having to acquire ordinary ownership so land was a big deal in the 19th century very big and it helps us to place in better perspective these budget data on the amount of money that the federal government had at its disposal because it was able to accomplish a great many more objectives using its control of the public domain than it was by using the money it got from tax revenues and to shape the way the country developed even these big transcontinental railroad that were subsidized had not been built for decades but for these subsidies and that means of course resources were being misused but it also means that the country developed differently than it would have had the market been left to direct where resources were used sometimes these projects turned out to be reasonably successful afterward almost by accident the government said it evaluated them as bad prospects beforehand but that was the exception to the general rule and in almost all cases we'd have to say they were built too fast they might have been sensible projects eventually but not at the time they were subsidized and built so we had the government even when it wasn't misdirecting resources in place it was misdirecting them in time well the war between the states I've mentioned several times and I want to come back to it just briefly now because I've talked about how important state and local governments were in the 19th century and how they were becoming even more important in terms of getting and spending money that's almost like a false signal of the way things were moving in the federalism of the United States because the civil war besides establishing all kinds of pernicious precedence for government activity in taxing and spending money for money-economic purposes and what have you changed the nature of the American political system forever before the war the federal system had real content in the sense that the federal government could not just bully the states whenever it determined that it had to have them do something in a certain way and we know that because the states eventually just wouldn't put up with even being part of the system any longer and eleven of them seceded from it so it couldn't just bully them but it could kill them and so it's like Gordon Liddy's dictum I like to repeat he says you can't kill an idea but you can sure kill the guy who holds it so they couldn't kill the idea of federalism true federalism but they sure killed the guys who held that idea and that settled the matter because after 1865 nobody was really going to go out there and get killed by the hundreds of thousands for federalism anymore that issue was settled here now when no state can secede states are potentially if not actually and immediately nothing but administrative districts of the federal government doesn't mean they have no autonomy and indeed there's enough life left in federalism that it's various kicks and twitches and it doesn't make it of some political interest even nowadays but it's not the same system that it was before the war then it was genuine federalism since then it's been federalism at the pleasure of the central government and as a result of that we've had the enormous growth of the government that I'll be talking about later this week at the central level if we still had the old system of federalism it's much less likely that the course of events would have taken that form I think although it's very hard to say when we deal with hypotheticals of that magnitude exactly what might have happened but I'm sure things would have gone differently so the civil war did make a difference even if it doesn't show up right away in such data as revenue distributions now starting in the 1870s thereabouts the nature of the US economy began to change in ways that were politically consequential and I have in mind here the development of a national market and the development of big business before that time there were almost no businesses in this country that employed more than a few hundred workers and very few that did business far from home in several states say but as the railroad network was developed and as technological changes proceeded in a number of industries they had the effect of creating a potential for the realization of economies of scale particularly industries in manufacturing that have kind of flow technology things like petroleum refining or steel making or flour milling or even although the flow is a chunkier meat packing in industries that had a raw material flowing through a production process it turned out that by increasing the size of the batches being processed one could lower the unit cost of production and so every time for example they built a bigger blast furnace to make steel it turned out that they reduced the unit cost the cost per ton and this kept going for decades and decades they just kept making them bigger and bigger and every time they did it there was a gain realized from doing it and if you think about the geometry of it you can begin to understand why that was the volume increases faster than the circumference of a vessel and so for among other things you didn't have to have twice as much volume containing a batch of steel in order to produce twice as a greater amount of molten metal so you kept building these bigger and bigger processing apparatus and every time you were able to produce cheaper and therefore to give customers a better deal than your competitors which compelled them to adopt that large scale technology and in some cases the market wouldn't support a whole bunch of large scale producers so the ones that didn't get there first or do so the smartest went bankrupt and couldn't meet the competition so in a number of industries there was technological change growth of large scale production shake out of small firms you saw this especially in petroleum refining in the beginning there were I guess thousands of petroleum refiners making little batches of kerosene and by the end of the 19th century there were only a few dozen maybe left doing business and most of them were the property of standard oil so lots of big businesses developed the first ones weren't batch technology operations but they were the railroads the railroads also turned out to be able to realize economies of scale by operating widely and starting in the 1850s they began to branch out the first ones were only a few miles maybe 20, 30 miles from one place to another and in the 1850s they built railroads from east coast cities all the way out to Chicago the Erie, the New York Central, the Pennsylvania Railroad and the Baltimore and Ohio all connected in east coast city with Chicago and talk about some fierce competition and some constant motive to cartilize those railroads had both there's a really interesting book by Paul McEvoy written back in the 1960s I guess on the competition cartilization for the trunk line railroads the four I mentioned and it's quite fascinating because he was able to study their rate wars and their attempts to cartilize and the conclusion of it of course is that all of their attempts failed fairly quickly railroads having this large scale attribute and often getting boiled down to a handful of competitors were trying to form pools and cartels and conspiracies of some kind with great frequency and they always broke down the question was how quickly now you might say if they always broke down why do they keep trying and what you want to remember is a Stigler's dictum the short run is long enough to get rich so the motive was there, the incentive was there they kept trying there was actually one railroad cartel among some of the railroads in the mid south upper south that seems to have worked fairly well in the late 19th century for over a decade it was run by a man named Fink of all things and Fink was much envied in the railroad industry as having been able to devise a scheme that allowed him to run a successful railroad cartel at least for a number of years but most of the time they failed well not only in railroads but in many of these other new industries with big business there were attempts to somehow suppress competition which was normally quite fierce and if there's one thing business men hate it's fierce competition and so they were attempting to find a way to suppress competition at the same time that other forces were constantly prompting them to compete and in the 1880s the lawyer for John D. Rockefeller's Standard Oil Company hit upon an innovation the trust and the trust was an ancient legal instrument which had been used to say set aside funds to support one's children or grandchildren or to support some hospital or college something of that sort trusts of that kind had been around for centuries so lawyers knew about them but trusts had never been used for industrial purposes but this clever fellow said ah anyway let's do it we've got all these competing petroleum refiners and we're driving each other crazy we're always keeping anybody from making profit for long because we just find ways to reduce costs and lower our prices and undercut the competitors and pretty soon nobody's making any money it's just a treadmill so let's get off of this thing let's get everybody together how are we going to do that? we know that you get people in a room and they all promise they'll hold a certain price and the next day they're cheating on it they're making secret deals at lower prices to attract business so how are we going to get around this and the trust device was a mechanism by which the owners of the separate companies handed over their stock certificates to a group of trustees and they got in exchange a trust certificate kind of gave them a membership in the central group, the trust and of course by handing over their stock certificates they lost their voting rights those came into the hands of the trustees so Rockefeller managed to persuade or intimidate or bully or somehow get everybody or a lot of the refiners to join the standard oil trust and at that point the trustees were able to make unified decisions about setting prices about restricting supply about closing down certain high cost refineries and diverting production to others where they could produce at lower cost and this is known as rationalizing in business circles so this worked out pretty well actually it didn't mean that competition ceased because they never brought everybody into the trust and of course even if you did some new company could start up so it didn't solve their problem once and for all but it did move them in the direction they wanted to go at least for several years now other industries looked around and said this looks like a good idea and so 12 or 15 other trusts were formed similar to the standard oil trust now while that was going on we've also got this just general growth of big businesses in various lines and so people began to refer to the trust and to big business in general synonymously so that even if you didn't form a legal trust people began to call your company a trust because it was this big industrial organization and so the antitrust problem became if not the biggest issue one of the two or three biggest political issues of the 1880s now the people who put up the most squawk about this were of course the competitors who were suffering by virtue of the formation of big business or in this handful of cases the formation of actual trust organizations and especially squawking were the butchers in those days before refrigeration every town, every village, every neighborhood of every city in America had butcher shops because meat spoils so fast you had to slaughter the animals and use the meat right away so there were butcher shops everywhere there were probably hundreds of thousands of butcher shops in the country and in the 1870s and especially in the 1880s the big meat packing companies in Chicago and a few other places like Kansas City and St. Louis and Omaha began to develop these mass production techniques to produce meat at very low cost and use refrigerated railroad cars to ship their product and keep it fresh and they could ship it anywhere in the US because a week was no problem in a week the railroad would take the product to the far ends of the country and it would get there it would be as good or better than the local product and cheaper so these guys began to drive local butchers out of business well what did they do? in neoclassical economics when somebody can't meet the competition he disappears from the industry but in real life when somebody can't meet the competition he appears in the legislature so they all appeared in the legislatures of all the states and they said these diabolical foreign trusts are coming into our market and driving perfectly decent people out of their livelihoods we can't allow that, it's not right now the consumers weren't complaining at all any trust was never a consumer led movement never ever even where it has appeared in the past 130 years to have consumers involved it's a fake, it's lawyers who pretend to be representing consumers so it was always competing producers and these butchers because they were everywhere were a political factor to be reckoned with and so they showed up in the legislatures and they got a number of states to pass antitrust laws and health laws things that said for example no meat may be sold more than 24 hours after it's slaughter in this state okay I took care of the imported product or you could devise all kinds of other pseudo health rules this is a game that still played Europeans do this all the time to keep competing agricultural products out of their markets and the Americans do it too they for years wouldn't let Argentine beef into the country because it was said to be potentially infected with foot and mouth disease as if you couldn't check or leave it up to the consumers to take the risk if they cared to but at all events these butchers were a mighty political movement now when a number of states began to suppress the competition of the big meat packing companies these guys had some clout too and so they began to lobby in the state legislatures but worse yet it turned out that they could threaten that they actually would stop coming into the state and then that meant that a whole bunch of people who had discovered they liked this product and wanted to consume it were in trouble again and furthermore the business could just move out abandon the state and go somewhere else and states never like to lose taxable resources so there were counter pressures being put on by the big companies and the issue was carried to the Congress of the United States now we begin to see here what I referred to earlier today as federalism contained the seeds of its own destruction you've got all these states and every one of them has regulatory power so they use it there's political hay to be made by exerting their power as Fred McChesney expresses it you know they use extortion a lot of times when you appear to see business paying a bribe it's not a bribe, it's a shakedown state legislators or officials go to companies and they say you know pay us off or we will hurt you by the way we employ our regulatory powers so when that happens companies operating in many different states find themselves caught often at the mercy of having to comply with not only a lot of regulations but different ones which makes it very difficult for them to do their processing or labeling or even to decide how to construct their product and so businessmen always having the amount of foresight that extends slightly beyond their nose are always looking to put out the fire that's burning them at the moment the way they respond to being whipsawed by the different states is by saying let's get one regulatory agency and we can deal with that better, cheaper maybe we can even control it if not right away then eventually and this has happened again and again and again in American history states you know we all think states are wonderful they give us some place to run to when our own gets too onerous and that's true there's something to that there is Tebow type competition as economists call it but there's also this dark side of federalism which is that it drives regulated companies to seek one regulator and that of course is the national government the government that using the power to regulate interstate commerce can under the constitution get away with regulating companies who do business in more than one state and so that's how we got the Sherman Antitrust Act of 1890 it wasn't as bad as some people think actually because the common law had been dealing with monopolies and restraints of trade for a long time and judicial doctrines had evolved that were not unreasonable fundamentally what they boiled down to was the idea that's unlawful for you to take actions that keep somebody from coming into a market to compete but otherwise if you want to make agreements about how to use your property even if you want to get together with other producers a reasonable price price fixing that's also legal we don't object to that in the court in the beginning the idea was that all the Sherman Act had done was to codify the common law and to add the punishment that allowed treble damages to be paid to private plaintiffs who succeeded in a case brought under that law for charging someone with conspiring or contracting to operate in a restraint of trade or to operate a monopoly that language seems vague and a lot of economists especially have looked back and said oh I didn't say anything it's so vague what does that mean but it meant something at the time in the courts there's a very good book by Martin Sklar even though Sklar is a kind of marxist he's an excellent legal historian and a big section of his book deals with the evolution of the jurisprudence of the Sherman Act and it's outstanding I don't know anything that can compare to it and it explains that until about 1897 the Supreme Court continued basically to read the Sherman Act as if it was nothing but a codification of the common law but in 1897 in a case called Trans-Missouri Railroad it changed its reading and at that point it began to act as if the Sherman Act had not codified the common law but it overturned it and replaced it with a rule that required absolutely no price fixing and no variety of other measures businesses might enter into to cooperate or act in a way that restrained competition it was no longer read simply as having to do with keeping new entrants out of the market that created a lot of uncertainty for business at a time when big business was developing quickly it made, among other things, big businesses subject to shakedowns by Theodore Roosevelt after he became president in 1901 Teddy as you may remember didn't oppose big business only bad big business that was the big business that didn't play according to his rules so he would even turn on his pals like Morgan and Company and go after the Northern Securities Company that Morgan had formed in 1903 I guess it was and had had that broken up without even discussing it with Morgan Morgan was outraged he said we had a problem why didn't you send your man to talk to my man that's the way they normally took care of things in those days and of course still do in some circles that's called Trans-Missouri Trans-Missouri had to do with a freight company but that kind of legal uncertainty about the Sherman Act persisted until 1911 and in 1911 when the U.S. Supreme Court ruled on the American tobacco and standard oil cases which had been in the courts for years and years before a final decision was reached the court announced what came to be known as the rule of reason and that was a little more accommodating rule in the sense that it said mere bigness is not a crime and furthermore there are reasonable kinds of contracts and arrangements that businesses can enter into which may have the effect of in some way restraining competition but they're not unlawful nonetheless and furthermore if you acquire your position in the market even if it's a very large market share by purchasing other assets that's okay so for example you just merged with a lot of other competing companies that was not unlawful under the 1911 ruling or if you're just such a well-run company that you just got bigger and bigger and bigger and eventually you had almost all the market that also was permissible so this was a rule that gave more latitude to big business and clarified some of the uncertainty but of course antitrust law has continued to be a kind of cloud hanging over many business people they never are quite sure when it's going to be used as a club by their competitors to if not to really stop them to harass them and make them expend a lot of money on lawyers and we've seen that again and again and again in the past century so we got this development of big business national markets antitrust law and in 1887 the first federal regulatory agency of any consequence the interstate commerce commission which became more powerful in the early 20th century made commitments to the law and ended up virtually setting railroad rates and other terms of service and pretty much ruining the railroad industry by the time World War I started at which time the railroad system got so snarled up thanks to its previous ruination and bad planning by the war planners that the federal government nationalized the industry in 1917 and operated it on its own account for several years before giving it back to the owners with many strings attached in 1920 so we're almost out of time I've gone on a long time but we have a few minutes for questions still yes regarding the railroad when was Amtrak created? 70 70 was it 1970? that's about right early 70s sometime I remember Brad? these new state constitutions in the 40s that were sort of in response to the law gap banking and the debacle they just get around the wording by giving subsidies directly to private businesses instead of having the state do it themselves is that what happened? well some of them just forbade the state to enter into enterprises such as banking or to operate banks they didn't necessarily forbid subsidies being paid certainly not subsidies to transportation companies because all the states have always done that and still do so they just kept them from doing certain enterprises themselves? yes they sometimes put restrictions also on their indebtedness and the form of indebtedness things of that sort is that where we get today where the states cannot have the states can't run deficits like the federal government can? I don't know if that's the origin of those provisions or not I'm just not sure when they appeared in the state constitutions but I believe there are still a few states today that don't have that provision under the impression until recently that they all required balanced budgets now they've all devised ways to escape that constraint with off-budget gimmicks and with borrowing of various sorts but it's still a serious constraint for state governments they can't get around it so easily as the federal government which doesn't have any constraint at all of that sort some of those state constitutions also prohibited private banks from decision making like the New England state southern states the soundest banks in the country in the antebellum period were in New Orleans and although Louisiana did regulate banks to some extent they were not much regulated they were just well operated banks they issued bills that circulated widely all over the south and I suppose many of you know that's why the south is called Dixie because Louisiana still used the French language in those days and when they printed a ten dollar bill it said D and to an Anglo it was Dix so the area where these kinds of bills circulated around was Dixie after the ten dollar French language New Orleans bank paper money did you think that had something to do with the way the law in Louisiana was structured differently than other states that banks were more sound? well in part it had to do with that some of the states still had pretty bad banking law some had more regulation than others it's very hard to generalize about state banking laws before the Civil War because they varied a great deal from one state to another but all the states did to some extent back away from conducting banking business as I say some were still doing it in the Midwest after the Civil War even I think that was one of those activities that legislators ultimately discovered that they could do better by using indirect means rather than direct means just as they did when they adopted general incorporation laws rather than passing a special act of the legislature every time they created a corporation eventually just got to be a hassle because thousands and thousands of guys were coming into the legislature wanting to form a corporation and they didn't even want to be bothered anymore so they eventually all the states passed laws which set general conditions for conducting corporate business and all you had to do was fill out the forms and pay a usually nominal fee and you were often running this is before the corporation became a big business? in most cases it was the earliest general incorporation acts were in the second decade of the 19th century and I think by about 1880s all the states had some form of general incorporation in effect I myself am a corporation now but only to kind of jack up my self-esteem an S corporation in my case I'll let you figure out what the S might stand for yes sir when you have a bank you can sit there and say okay you can be in business but you have to use my bond as reserves it becomes pretty good at lunges and lunges in those banks yeah that's true actually the sole reason for the creation of the national banking system during the war between the states because those banks were required by law to hold a certain issue of U.S. bond as reserves that's how their reserves had to be held and there was an automatic market created for U.S. bonds and that was the only reason they created that system it had nothing to do with the uniform currency or any of the publicly proffered excuses for it it was just another way that the union government tried to float debt okay thank you Bob