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291. Fooling Some of the People All the Time Updated and Revised: A Long Short Story, by David Einhorn

Author:
Daniel Wahl
Publication Date:
06-2009
Content Type:
Journal Article
Journal:
The Objective Standard
Institution:
The Objective Standard
Abstract:
The scene is the offices of Donaldson, Lufkin Jenrette (DLJ) in late 1991. Analysts here are regularly given deadlines requiring them to work through the night; hundred-hour workweeks are the norm, and the environment is extremely hectic-even by Wall Street standards. It is three o'clock on a Sunday morning, and a young David Einhorn sits at his desk trying to finish the job he was given. A few months into this position, he has lost fifteen pounds due to the stress (p. 12). Two years later, Einhorn takes a job working for Siegler, Collery Company, a mid-sized hedge fund with about $150 million under management. He learns "how to invest and perform investment research from Peter [Collery], a patient and dedicated mentor" (p. 12). He spends weeks "researching a company, reading the SEC filings, building spreadsheets and talking to management and analysts." He then turns in his work to Peter-who, having read everything, makes a detailed list of questions that Einhorn wishes he had asked (p. 12). In 1996, confident in his own abilities, Einhorn resigns from the firm to start his own. The original business plan is written on the back of a napkin. The original office is a 130-square-foot, windowless room. He names the firm Greenlight Capital, as suggested by his wife, who also gave him the green light. As Einhorn explains, "When you leave a good job to go off on your own and don't expect to make money for a while, you name the firm whatever your wife says you should" (p. 12). Greenlight Capital is a "long-short" hedge fund-which means a fund that "goes long" on investment opportunities that it thinks are substantially undervalued and "short" on those it regards as substantially overvalued. Einhorn succinctly explains these terms: Short selling is the opposite of owning, or being long a stock. When you are long, the idea is to buy low and sell high. In a short sale, you still want to buy low and sell high, but in this case the sale comes before the purchase. It works this way: Your broker borrows shares from a stockholder who lends them to you, and you sell them in the market to a new buyer, thus establishing a short position. To close out the position at a later date, you buy shares in the market and return them to your broker to "cover" your short, and the broker returns them to the owner. Your profit or loss is the difference between the price you receive when you sell the shares short and the price you pay to buy them back. The more the stock falls, the more money you make-and vice versa (p. 5). For instance, on the long side, Greenlight invests 15 percent of the fund in C. R. Anthony, "a small retailer that had recently emerged from bankruptcy and returned to profitability. The market valued the company at $18 million despite its having twice that in net working capital (current assets less all liabilities)." When other investors (finally) notice the discount at which it is selling relative to net working capital, the stock increases substantially. And when they start to value the company based on its future earnings potential, the stock shoots up 500 percent from Greenlight's initial investment (page 19-20). On the short side, Greenlight sells Sirrom Capital, a business development company that Einhorn considers overvalued. "By tracking performance of [Sirrom's] loans from the year of origination, we determined that although the overall portfolio statistics appeared appealing, rapid asset growth masked poor results. . . . We estimated that from inception to final maturity, 40 percent of the loans went bad" (p. 29). After researching how Sirrom has accounted for bad loans in the past, Einhorn predicts that the company will have to recognize a significant loss on its loans in the near future. If this is correct, the market will lower its estimation of both Sirrom's current assets and its future earnings potential; the company will be unable to sell new stock in amounts large enough to mask past errors; and the price of its current shares will decline accordingly. Einhorn's prediction proves accurate. Sirrom is able to sell shares to the public only one more time before reporting disappointing results, at which point the shares collapse from a high of $32 to just under $3 (p. 30). The foregoing are just two of Greenlight's many such successes. By figuring out the true state of a company, comparing it with the state of the company as reported by its management team or as judged by the market, and then going long or short accordingly, Greenlight proceeds to earn spectacular returns for its clients. The company's earnings and assets under management soar-as does peer respect for Einhorn himself. Because of Greenlight's success in shorting Sirrom, Einhorn is approached by a hedge fund specializing in financial institutions for his opinion on a company with a structure identical to Sirrom's and with seemingly identical problems. The company in question is Allied Corporation (p. 43). . . .

292. The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger

Author:
Heike Larson
Publication Date:
06-2009
Content Type:
Journal Article
Journal:
The Objective Standard
Institution:
The Objective Standard
Abstract:
Free marketeers reading the news these days cannot help but feel depressed. Media reports would lead us to believe that entrepreneurs are exploiters, that global trade hurts rather than helps people in America-in short, that capitalism has failed and that only the "change" offered us by central planners can alleviate our economic woes. In this climate, Marc Levinson's book The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger provides a welcome respite and intellectual refueling for weary capitalists. It tells a suspenseful story of achievement-replete with many twists and turns and a swashbuckling American hero-that will leave you wanting to run to the nearest container port to admire with newfound appreciation the industrial machinery that impacts almost every part of our daily lives. The Box, published on the fiftieth anniversary of the first sailing of a containership christened The Ideal-X, tells the story of how a seemingly mundane thing-a metal box with a wooden floor-managed to fundamentally change the world we live in. Until the 1960s, shipping had not changed much in decades. Handling cargo was a labor-intensive activity, and transportation costs and times-whether by land or by sea-were huge obstacles to trade, often making transcontinental, let alone global, trade economically unfeasible. In the 1950s, moving goods by ship was "a hugely complicated project," involving "millions of people who drove, dragged, or pushed cargo through city streets to or from the piers" (p. 16). Docks were cluttered with every kind of good imaginable, "steel drums of cleaning compound and beef tallow alongside 440-pound bales of cotton and animal skins"-all of which needed to be loaded and unloaded manually by gangs of longshoremen (p. 17). The process of loading and unloading a single ship during a single visit to a port often took weeks and accounted for between 60 and 75 percent of shipping costs. And, given the difficulties inherent and time involved in moving goods housed in a variety of different containers, it was imperative that factories locate close to docks for fast access to raw materials. Transportation costs and long delivery times made long-distance trade challenging and expensive-even before factoring in the heavy regulation that plagued the shipping industry. Recognizing the great expense and wasted time inherent in shipping practices of the day, two companies-both outsiders to the maritime shipping industry-developed in parallel an alternative system. Malcom McLean, an entrepreneur who grew his trucking company from a single vehicle purchased on credit during the Great Depression to one of the largest in America, bought a marginal East Coast maritime shipping line using "an unprecedented piece of financial and legal engineering" to circumvent regulations that prevented trucking companies from owning ship lines (p. 45). McLean set out to design and build a new shipping system from scratch based on a novel approach to the business: Whereas most shipping executives at the time believed that their business was operating ships, "McLean's fundamental insight, commonplace today but quite radical in the 1950s, was that the shipping industry's business was moving cargo" (p. 53, emphasis added). Within less then two years, McLean and his company, Pan-Atlantic, bootstrapped the first viable container system, in which cargo was loaded into stackable metal and wooden boxes of uniform dimensions, eliminating much of the labor required for and many of the problems inherent in loading ships with goods housed in a variety of containers. Further, "McLean understood that reducing the cost of shipping goods required not just a metal box but an entire new way of handling freight. Every part of the system-ports, ships, cranes, storage facilities, trucks, trains and the operations of the shippers themselves-would have to change. In that understanding, he was years ahead of almost everyone else in the transportation industry" (p. 53). His team of entrepreneurial, fast-moving engineers, managers, and partners designed, among many other things, the 33-foot box (only small steel containers were previously available); developed a quick-release locking system that eliminated the need to chain containers to ships or trucks; built a new trailer chassis to guide containers automatically into place; and put in place large cranes equipped with spreader bars-devices stretching the entire length of a container that enabled crane operators to attach and release hooks at the container's corner with the flick of a switch, thereby eliminating the need for longshoremen to climb up to each container corner and attach chains manually. And they accomplished all of these things while dealing with skeptical regulators who doubted the safety of containers and were pressured by truck and rail competitors to prohibit the container shipping experiment. When the first containership sailed on April 24, 1956, McLean's detailed cost tracking system showed clearly the benefits of the new system: "Loading loose cargo on a medium-sized cargo ship cost $5.83 per ton in 1956. McLean's experts pegged the cost of loading the Ideal-X at 15.8 cents per ton. With numbers like that, the container seemed to have a future" (p. 52). . . .
Topic:
Economics
Political Geography:
America

293. Getting Things Done: The Art of Stress-Free Productivity

Author:
Amy Peikoff
Publication Date:
06-2009
Content Type:
Journal Article
Journal:
The Objective Standard
Institution:
The Objective Standard
Abstract:
You strive to be as productive as possible in your career. You have relationships with friends and family you want to enjoy and nurture. You have hobbies or other interests you want to pursue. You have a car, a home, or other physical things that command your attention. You have a body to maintain. Your life is full and, at least at times, you feel overwhelmed by all the commitments you have made to yourself and others. At those times you find it difficult, perhaps impossible, to "live in the moment"-to focus on whatever you are or need to be doing right now, and thereby make the most of your time and life. If you have explored other strategies for managing your time and life, then you might be skeptical of David Allen's claim at the beginning of Getting Things Done (GTD): "It's possible for a person to have an overwhelming number of things to do and still function productively with a clear head and a positive sense of relaxed control" (p. 3). You may be even more doubtful when Allen tells you that, although he will incorporate "many of the things you've been doing instinctively and intuitively all along" into "a new behavior set," the results will nonetheless "blow your mind" (p. xiv). The promise to "blow your mind" is not representative of Allen's style in GTD, however. The book is a logically structured presentation of an approach to time and life management that is grounded in good epistemology and designed to facilitate productivity in light of certain features and limitations of the human mind. The problem, Allen says, is that all the commitments you have made are "on your mind," which overwhelms you to the point that you cannot think clearly and be productive. The question becomes, why are all these things on your mind? "[T]he reason something is 'on your mind,'" Allen writes, "is that you want it to be different than it currently is" (p. 15). Allen's formulation is deliberate. Many people have not really thought about the commitments they have made, and therefore have neither "clarified exactly what the intended outcome is" nor "decided what the very next physical action step is" (p. 15). And yet, inherent in allowing a commitment into one's life, Allen says, is a further commitment: a "commitment to . . . define and clarify its meaning" (p. 17). Allen explains that, in order for your mind to let go of this corollary commitment so it can be clear and ready to focus on the task at hand, you must envision the outcome you desire and decide what is the very next physical action you must take in order to move the current state of affairs toward that outcome. Thus arises one of two main prongs of the GTD approach, "disciplining yourself to make front-end decisions about all the 'inputs' you let into your life so that you will always have a plan for 'next actions' that you can implement or renegotiate at any moment" (pp. 3-4). You must do whatever thinking is necessary to define outcomes and requisite actions for each of your commitments, from the simplest to the most complex. Allen facilitates this thinking by introducing an intentionally broad definition of "project": "any desired result that requires more than one action step" (p. 37). Some things that Allen calls "projects" are so simple-for instance, "make guacamole for party"-that one can immediately call to mind not just the next action, but all actions required to complete them. More-complex projects may require the use of a more elaborate project-planning model, which Allen provides (chaps. 3, 10). Such a model is needed because, insofar as the next actions are not yet identified, a complex project on a "to-do" list will seem vague, in need of clarification, and thus in need of your attention. The goal is to see all projects as a sequence of discrete actions because, as Allen puts it, "You don't actually do a project; you can only do action steps related to it" (p. 38).

294. From the Editor

Author:
Craig Biddle
Publication Date:
10-2009
Content Type:
Journal Article
Journal:
The Objective Standard
Institution:
The Objective Standard
Abstract:
No abstract is available.
Topic:
War
Political Geography:
America and Washington

295. Letters and Replies

Author:
Alex Epstein and Yaron Brook
Publication Date:
10-2009
Content Type:
Journal Article
Journal:
The Objective Standard
Institution:
The Objective Standard
Abstract:
No abstract is available.
Topic:
Islam and War
Political Geography:
America

296. Obama's Atomic Bomb: The Ideological Clarity of the Democratic Agenda

Author:
John David Lewis
Publication Date:
10-2009
Content Type:
Journal Article
Journal:
The Objective Standard
Institution:
The Objective Standard
Abstract:
Examines America's political climate in light of the unmistakably statist agenda emanating from Washington, and finds cause for optimism in the effect Obama is having on the minds of Americans-and cause for activism toward helping Americans to see the proper political alternative: not conservatism but capitalism.
Political Geography:
America and Washington

298. An Unwinnable War?

Author:
Elan Journo
Publication Date:
10-2009
Content Type:
Journal Article
Journal:
The Objective Standard
Institution:
The Objective Standard
Abstract:
Author's note: The following is the introduction to Winning the Unwinnable War: America's Self-Crippled Response to Islamic Totalitarianism. The book is being published by Lexington Books and is scheduled for release this November. "I don't think you can win it. . . . I don't have any . . . definite end [for the war]"-President George W. Bush1 The warriors came in search of an elusive Taliban leader. Operating in the mountains of eastern Afghanistan, the team of Navy SEALs was on difficult terrain in an area rife with Islamist fighters. The four men set off after their quarry. But sometime around noon that day, the men were boxed into an impossible situation. Three Afghan men, along with about one hundred goats, happened upon the team's position. What should the SEALs do? Their mission potentially compromised, they interrogated the Afghan herders. But they got nothing. Nothing they could count on. "How could we know," recalls one of the SEALs, "if they were affiliated with a Taliban militia group or sworn by some tribal blood pact to inform the Taliban leaders of anything suspicious-looking they found in the mountains?" It was impossible to know for sure. This was war, and the "strictly correct military decision would still be to kill them without further discussion, because we could not know their intentions." Working behind enemy lines, the team was sent there "by our senior commanders. We have a right to do everything we can to save our own lives. The military decision is obvious. To turn them loose would be wrong." But the men of SEAL Team 10 knew one more thing. They knew that doing the right thing for their mission-and their own lives-could very well mean spending the rest of their days behind bars at Leavenworth. The men were subject to military rules of engagement that placed a mandate on all warriors to avoid civilian casualties at all costs. They were expected to bend over backward to protect Afghans, even if that meant forfeiting an opportunity to kill Islamist fighters and their commanders, and even if that meant imperiling their own lives. The SEALs were in a bind. Should they do what Washington and the military establishment deemed moral-release the herders and assume a higher risk of death-or protect themselves and carry out their mission-but suffer for it back home? The men-Lt. Michael Murphy; Sonar Technician 2nd Class Matthew Axelson; Gunner's Mate 2nd Class Danny Dietz; and Hospital Corpsman 2nd Class Marcus Luttrell-took a vote. They let the herders go. Later that afternoon, a contingent of about 100-140 Taliban fighters swarmed upon the team. The four Americans were hugely outnumbered. The battle was fierce. Dietz fought on after taking five bullets, but succumbed to a sixth, in the head. Murphy and Axelson were killed not long after. When the air support that the SEALs had called for finally arrived, all sixteen members of the rescuing team were killed by the Islamists. Luttrell was the lone survivor, and only just.2 The scene of carnage on that mountainside in Afghanistan captures something essential about American policy. What made the deadly ambush all the more tragic is that in reaching their decision, those brave SEALs complied with the policies handed down to them from higher-ups in the military and endorsed by the nation's commander-in-chief. Their decision to place the moral injunction to selflessness ahead of their mission and their very lives encapsulates the defining theme of Washington's policy response to 9/11. Across all fronts U.S. soldiers are made to fight under the same, if not even more stringent, battlefield rules. Prior to the start of the Afghanistan War and the Iraq War, for instance, the military's legal advisors combed through the Pentagon's list of potential targets, and expansive "no-strike" lists were drawn up.3 Included on the no-strike lists were cultural sites, electrical plants, broadcast facilities-a host of legitimate strategic targets ruled untouchable, for fear of affronting or harming civilians. To tighten the ropes binding the hands of the military, some artillery batteries "were programmed with a list of sites that could not be fired on without a manual override," which would require an OK from the top brass.4 From top to bottom, the Bush administration consciously put the moral imperative of shielding civilians and bringing them elections above the goal of eliminating real threats to our security. . . .
Topic:
War
Political Geography:
Afghanistan and America

299. The Creed of Sacrifice vs. The Land of Liberty

Author:
Craig Biddle
Publication Date:
10-2009
Content Type:
Journal Article
Journal:
The Objective Standard
Institution:
The Objective Standard
Abstract:
The proper purpose of government, wrote Thomas Jefferson, is to "guarantee to everyone the free exercise of his industry and the fruits acquired by it." The government "shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned. This is the sum of good government." In accordance with this view of the purpose of government, the founders established a republic in which the government was constitutionally limited to the protection of individual rights-the rights to life, liberty, property, and the pursuit of happiness. In this new republic, men were free to think, to produce, and to trade in accordance with their own best judgment; thus, they were free to thrive in accordance with their intelligence, their ability, their initiative. The result was astounding. Nineteenth-century America was a land of unparalleled innovation and prosperity-and further political achievement. In addition to countless inventions that sprang up-including the steamboat, the cotton gin, vulcanized rubber, the telephone, the incandescent light, the electric power plant, the skyscraper, and the safety elevator-and in addition to the vital industries that arose or were revolutionized-such as the railroad, oil, and steel industries-19th-century America witnessed the end of slavery, which was recognized as a violation of the basic principle of the land. Between the end of the Civil War and the turn of the century, America came as close to being a fully rights-respecting society as any country has ever come. Men were essentially free to live their own lives, by their own judgment, for their own sake. Unfortunately, although the Land of Liberty was a great success, it would not and could not last. The founders established America on the principle of individual rights, but neither they nor the thinkers who followed them identified the deeper philosophic foundation on which this principle depends, namely, the morality of egoism-the idea that being moral consists in pursuing the values on which one's life and happiness depend. In the absence of this foundation, Americans have embraced philosophical ideas that are contrary to individual rights. Over the past century, Americans have increasingly accepted the morality of altruism-the notion that being moral consists in self-sacrificially serving others-and they have increasingly applied this morality to the realm of politics. Consequently, our government is no longer committed to "restrain men from injuring one another [and] leave them otherwise free to regulate their own pursuits of industry and improvement." Rather, our government regularly-and increasingly-"take[s] from the mouth of labor the bread it has earned" and redistributes that bread to those who have not earned it. Consider just a few of the countless altruistically motivated, wealth-redistributing laws and institutions that have been enacted or established over the past hundred years: The Federal Reserve violates the rights of Americans by (among other things) printing fiat money-thus debasing citizens' savings-in order to finance welfare programs, bail out failed banks, "rescue" bankrupt car companies, and the like. The Federal Deposit Insurance Corporation (FDIC) violates the rights of taxpayers by forcing them to insure the bank deposits of strangers. Social Security violates the rights of younger Americans by forcing them to fund the retirements of older Americans. The National Labor Relations Act (aka the Wagner Act) violates the rights of automakers (and other businessmen) by forcing them to "contract" with labor unions on terms that are detrimental to their businesses. Medicare and Medicaid violate the rights of taxpaying Americans by forcing them to fund the health care of the aged and the (allegedly) destitute. The Community Reinvestment Act violates the rights of bankers by forcing them to provide loans to people whom they regard as too risky for business. The Troubled Asset Relief Program (TARP) violates the rights of taxpayers by forcing them to purchase bad debt from failing financial institutions. The American Recovery and Reinvestment Act (ARRA) violates the rights of Americans by expanding the extent to which they are forced to fund welfare programs, unemployment benefits, government-run education, and the health care of others. Of course, federal, state, and municipal governments violate Americans' rights in thousands of other ways as well, but the foregoing indicates the enormity of the problem. The explicit "justification" for all such rights-violating laws and institutions-the principle behind all of them-is altruism: the notion that we have a moral duty to serve others, whether "the poor" or "the public interest" or "society" or "the common good." As Theodore Roosevelt put it, the government must "regulate the use of wealth in the public interest" and "regulate the terms and conditions of labor, which is the chief element of wealth, directly in the interest of the common good"; or as Franklin D. Roosevelt put it, the government must seek "the greater good of the greater number of Americans"; or as John F. Kennedy put it, the individual must "weigh his rights and comforts against his obligations to the common good"; or as Bill Clinton put it, the individual must "give something back" on behalf of "the common good"; or as George W. Bush put it, we must "seek a common good beyond our comfort"; or as Barack Obama puts it, we must heed the "call to sacrifice" and uphold our "core ethical and moral obligation" to "look out for one another" and to "be unified in service to a greater good." A government animated by this principle will increasingly force citizens to serve the so-called "common good"-and with each political success, the government will get bolder and more aggressive in its enforcement of this principle. This is why the U.S. government has graduated over decades from the mere redistribution of wealth via taxation and inflation . . . to the establishment of wealth-redistributing institutions and hubs such as Social Security, Medicare, and TARP . . . to the outright nationalization of businesses, such as American International Group (AIG), General Motors (GM), and Citigroup . . . and to the nullification of private contracts that stand in its way (e.g., employment contracts in the case of AIG bonuses, investment contracts in the case of Chrysler's senior-secured creditors). Under such expanding government control, explains an article in the New York Times: Businesses and private property . . . become not an instrument of private "egoism" but "functions of the people." They remain private wherever and so long as they fulfill their "functions." Wherever and whenever they fall down, the State steps in and either forces them to fulfill the functions or takes them over entirely. That description of what we have witnessed recently, however, was not written recently; it was written in 1938. Nor was the author describing conditions in the United States; he was describing conditions in Germany under the then-burgeoning National Socialist Party.
Topic:
Oil and War
Political Geography:
America

300. The Rise of American Big Government: A Brief History of How We Got Here

Author:
Michael Dahlen
Publication Date:
10-2009
Content Type:
Journal Article
Journal:
The Objective Standard
Institution:
The Objective Standard
Abstract:
Nineteenth-century America was the closest thing to capitalism-a system in which government is limited to protecting individual rights-that has ever existed. There was no welfare state, no central bank, no fiat money, no deficit spending to speak of, no income tax for most of the century, and no federal regulatory agencies or antitrust laws until the end of the century. Consequently, total (federal, state, and local) government spending averaged a mere 3.26 percent of Gross Domestic Product (GDP). The Constitution's protection of individual rights and limitation on the power of government gave rise to an economy in which individuals were free to pursue their own interests, to start new businesses, and to create as much wealth as their ability and ambition allowed. This near laissez-faire politico-economic system led to the freest, most innovative, and wealthiest nation in history. Since the beginning of the 20th century, however, capitalism and freedom have been undermined by an explosion in the size and power of government: Total government spending has increased from 6.61 percent of GDP in 1907 to a projected 45.19 percent of GDP in 2009; the dollar has lost more than 95 percent of its value due to the Federal Reserve's inflationary policies; top marginal income tax rates have been as high as 94 percent; entitlement programs now constitute more than half of the federal budget; and businesses are hampered and hog-tied by more than eighty thousand pages of regulations in the Federal Register. What happened? How did America shift from a predominantly free-market economy to a heavily regulated mixed economy; from capitalism to welfare state; from limited government to big government? This article will survey the progression of laws, acts, programs, and interventions that brought America to its present state-and show their economic impact. Let us begin our survey by taking a closer look at the state of the country in the 19th century. Total (Federal, State, and Local) Government Spending America's Former Free Market The Constitution established the political framework necessary for a free market. It provided for the protection of private property (the Fifth Amendment) including intellectual property (Article I, Section 8), the enforcement of private contracts (Article 1, Section 10), and the establishment of sound (gold or silver) money (Article I, Sections 8 and 10). It prohibited the states from erecting trade barriers (Article I, Section 9), thereby establishing the whole nation as one large free-trade zone. It permitted direct taxes such as the income tax only if apportioned among the states on the basis of population (Article 1, Sections 2 and 9), which made them very difficult to levy. Finally, it specifically enumerated and therefore limited Congress's powers (Article I, Section 8), severely constraining the government's power to intervene in the marketplace. Federal regulatory agencies dictating how goods could be produced and traded did not exist. Rather than being forced to accept the questionable judgments of agencies such as the FDA, FTC, and USDA, participants in the marketplace were governed by the free-market principle of caveat emptor (let the buyer beware). As historian Larry Schweikart points out: merchants stood ready to provide customers with as much information as they desired. . . . In contrast to the modern view of consumers as incompetent to judge the quality or safety of a product, caveat emptor treated consumers with respect, assuming that a person could spot shoddy workmanship. Along with caveat emptor went clear laws permitting suits for damage incurred by flawed goods. To be sure, 19th-century America was not a fully free market. Besides the temporary suspension of the gold standard and the income tax levied during the Civil War, the major exceptions to the free market in the 19th century were tariffs, national banking, and subsidies for "internal improvements" such as canals and railroads. These exceptions, however, were limited in scope and were accompanied by considerable debate about whether they should exist at all. Alexander Hamilton, Henry Clay, and Abraham Lincoln supported such interventions; Thomas Jefferson, Andrew Jackson, and John Tyler generally opposed them. These interventions (except for tariffs) were, as Jefferson, Jackson, and Tyler pointed out, unconstitutional. But history shows that they were also impractical. Tariffs were initially implemented, beginning with the Tariff Act of 1789, as a source of revenue-the main source in the 19th century-for the federal government. Pressure from northern manufacturers, however, to implement tariffs for purposes of protection led to the "Tariff of Abominations" (1828), which was scaled back by 1833 due to heavy opposition from the South. Tariff rates then remained relatively low-about 15 percent-until the Civil War. By 1864, average tariff rates had risen to 47.09 percent for protectionist reasons and remained elevated for the remainder of the century. As to national banking, the Second Bank of the United States' charter expired in 1836, thereby paving the way for the free banking era-which lasted until a national bank was reinstituted during the Civil War. By virtually every measure of bank health, this free banking era was the soundest in American history. In terms of capital adequacy, asset quality, liquidity, profitability, and prudent management, national banking proved to be inferior to free banking. As to subsidies for internal improvements, although private entrepreneurs financed and built most roads and many canals, state governments intervened in the 1820s to subsidize canal building-amending their constitutions to do so. However, most state-funded canals either went unfinished, generated little to no income, or went bankrupt. As a result, by 1860 most state constitutions were amended again to prohibit such subsidies. After the Civil War, federal subsidies for the transcontinental railroads caused similar problems-as well as corruption. Further, they were proven to be a hindrance to rather than a precondition of a thriving railroad industry: James Jerome Hill's Great Northern was the most successful of the transcontinental railroads, yet was built without any subsidies or land grants. The foregoing interventions, though impractical, were motivated in part by a desire to help promote the development of business and industry. But lurking in the periphery, growing in popularity, and poised to fuel further government interference in the marketplace, was the ideology of collectivism-the notion that the individual must be subordinated to the collective or the "common good." This idea was stated by economist Daniel Raymond in his 1820 textbook: "it is the duty of every citizen to forgo his own private advantage for the public good." And as the 19th century progressed, this idea was increasingly cited as a justification for government intervention. One of the most important instances of this was the Supreme Court's decision in Munn v. Illinois (1876). In the majority opinion, Chief Justice Morrison Waite declared: Property does become clothed with a public interest when used in a manner to make it of public consequence. . . . When, therefore, one devotes his property to a use in which the public has an interest, he, in effect, grants to the public an interest in that use, and must submit to be controlled by the public for the common good. . . . Although the case applied only to the states, Munn undermined the sanctity of private property rights by establishing the precedent that property "clothed with a public interest" (i.e., any property related to business) is subject to government regulation and control. As a result, Munn helped pave the way for the two major assertions of federal control over the economy-the Interstate Commerce Act and the Sherman Antitrust Act-that would come in the Gilded Age.
Topic:
Government and History
Political Geography:
America