The panic of 1873 was a severe blow to many overbuilt railroads, and it was railroad men who LED in calling for MORE GREENBACKS to stem the tide. Thomas Scott; Collis P. Huntington, leader of the Central Pacific Railroad; Russel Sage; and other railroad men joined in the call for greenbacks. So strong was their influence that the Louisville Courier-Journal, in April 1874, declared: "The strongest influence at work in Washington upon the currency proceeded from the railroads....THE GREAT INFLATIONISTS AFTER ALL, ARE THE GREAT TRUNK RAILROADS." --Murray N. Rothbard, A History of Money and Banking in the United States: The Colonial Era to World War II, 150, emphasis mine)Rothbard's introductory quote stresses the fact that some of the largest corporations are in fact the biggest sponsors of a policy of inflation. The reason why is that most of these railroads were heavily in debt; consequently, the railroad men saw an inflationary policy as a means to their desired end, that end being a reduction in their long-term debt burden. As Ludwig von Mises notes in his article entitled Socialism, Inflation, and the Thrifty Householder, "the more inflation progresses, the more is the debtor favored at the expense of the creditor" (Article 21 of Economic Freedom and Interventionism, 120). Mises came to the same conclusion that the Louisville Courier-Journal did back in 1874, namely, that the large corporations are usually heavily in debt so that they are the biggest beneficiaries of inflation. Mises stresses the point that the common man is by far a creditor and therefore the common man is the biggest loser from inflationary policies. Mises made the following important observations of this general tendency of inflation to benefit the heavily in debt corporations at the expense of the common man by noting that
in the balance the common man is by far a creditor, not a debtor. The billions of dollars that big business and real estate owe to mortgage banks, commercial banks, savings banks, and insurance companies belong--virtually, although not formally--to the common man....A policy of "creeping inflation" such as this country has now pursued for a long series of years--apart from all the other detrimental effects it produces--is in the strict meaning of the words antisocial and antidemocratic. It is a policy against the vital material interests of the common man. (Ludwig von Mises, Socialism, Inflation, and the Thrifty Householder, Article 21 of Economic Freedom and Interventionism, 121-122, emphasis mine)The railroads, to be sure, were not only using inflation as a form of corporate welfare; they had a whole laundry list of additional techniques at their disposal. According to Thomas J. DiLorenzo's book How Capitalism Saved America: The Untold History of Our Country, from the Pilgrims to the Present, in Chapter 7 "The Truth About the 'Robber Barons,'" an important distinction is made between those who acquire wealth through political means and those who acquire wealth through economic means. DiLorenzo's distinction is reminiscent of the distinction made by Franz Oppenheimer in the latter's work on the Origins of the State itself. Most of the railroads used the "political means" and became entangled in numerous government backed schemes with the notable exception being James J. Hill's railroad. DiLorenzo paints the stark contrast between these two groups by noting that "Jay Cooke was not the only one whose government-subsidized railroad ended up in bankruptcy. In fact, Hill's Great Northern was the ONLY transcontinental railroad that never went bankrupt" (115-116, emphasis mine). Hill, of course, used the "economic means" to acquiring wealth because Hill built his Great Northern Railroad "without any government aid, even the right of way, through hundreds of miles of public lands, being paid for in cash," (112, emphasis mine). Therefore, the inflationary tool for getting out of debt, which both Mises and Rothbard mention, is only one special type of this much bigger and broader "corporate welfare" problem.
Nevertheless, the inflationary tool is certainly a potent weapon in the arsenal of large corporations trying to avoid paying their long-term debts. The government is a willing accomplice to this crime in many ways. One obvious way would be to stress the government created central banking system, which certainly plays a major role in our modern discussions of this government-business corporate welfare problem. However, back in the 1870s, the United States banking system was not a central banking system. Granted, there were successful steps being taken in this direction going back to at least the early 1860s. As Thomas DiLorenzo notes in his book Hamilton's Curse: How Jefferson's Archenemy Betrayed the American Revolution--and What It Means for Americans Today, the neo-Hamiltonian Republicans, that is Republicans influenced by the works of Alexander Hamilton and Henry Clay, the administration of Abraham Lincoln launched many pro-inflationist banking reforms. DiLorenzo observed that the monopolization process of the American banking industry began in February 1862:
These [Legal Tender] acts of legislation permitted the treasury secretary to issue paper currency (greenbacks) that was not immediately redeemable in gold or silver. Then they passed the National Currency Acts of 1863 and 1864, which created a system of nationally chartered (and regulated) banks that could issue currency. A punitive 10 percent tax was placed on state-chartered banks in order to drive them into bankruptcy. The neo-Hamiltonians were candid about their intention to create an "unqualified government monopoly." (127)All of these areas are very important since they are all contributing factors in explaining the corporate welfare schemes used to bail out big businesses and railroads in particular. In fact the railroad corporate welfare schemes started in 1862 when "Congress, with the southern Democrats gone, diverted millions of dollars from the [Civil] war effort to begin building a subsidized railroad" (Thomas J. DiLorenzo, How Capitalism Saved America, 116, emphasis mine). I do not want to downplay the importance of these other contributing factors; nevertheless, another important contributing factor THAT IS OFTEN OVERLOOKED is the ROLE PLAYED BY THE UNITED STATES SUPREME COURT IN BACKING THESE CORPORATE WELFARE SCHEMES.
Returning to the introductory quote from Rothbard, the economic means for reducing the debt load of the railroads was certainly a pro-inflationary scheme supported by the banking system. However, there was a problem for the railroads, namely, the United States Constitution, which was initially interpreted by the Supreme Court of the United States in such a way that harmed the railroads because the Court initially was anti-inflationary in its rulings. However, because of political interference in Supreme Court appointments, the Grant administration was able to get the earlier decisions changed. Therefore, the United States Supreme Court also contributed to the pro-inflationary and hence pro-corporate welfare schemes of the railroad corporations. Rothbard documents all the details in his A History of Money and Banking in the United States: The Colonial Era to World War II and shows clearly how the "political means" mentioned earlier by both DiLorenzo and by Oppenheimer were at play in helping the railroad industry avoid paying its debts to its creditors:
The Grant administration was upset by Hepburn v. Griswold, as were the railroads, who had accumulated a heavy long-term debt, which would now be payable in more valuable gold. As luck would have it, however, there were two vacancies on the Court, one of which was created by the retirement of one of the majority judges. Grant appointed not only two Republican judges, but two railroad lawyers whose views on the subject were already known. The new 5-4 majority dutifully and quickly reconsidered the question, and, in May 1871, reversed the previous Court in the fateful decision of Knox v. Lee. From then on, paper money would be held consonant with [i.e., in agreement with] the U.S. Constitution. (153)In conclusion, we see that the economic tool of inflation can be used to bail out railroads and other large corporations who took on too much debt. However, to actually implement such a fraudulent scheme, the political apparatus must also be utilized. Notice how Congress, the President, and the Supreme Court all played roles in aiding and abetting the various corporate welfare schemes for the railroad industry. The behavior of the Grant administration, which amounted to rigging the Supreme Court with political partisans, raises a serious question about the impartiality and justice of the entire governmental system in the United States. Maybe a future article could address the following research question that flows naturally from this discussion: "Is corporate welfare inherently unjust, a violation of the rule of law?"