Before taxpayers lost $529 million on solar energy company Solyndra and $10.5 billion on GM, the US government had a long history of backing the wrong horse.
Many of the great industries in US history — from the fur trade to steamships, railroads, chemicals and airplanes — failed in the hands of government but succeeded thanks to private entrepreneurs.
A closer reading of American history may have avoided the colossal mistake of President Obama’s $700 billion stimulus bill.
The government has learned over and over again that when it comes to business, it’s a terrible boss. Here are a few examples to keep in mind the next time you hear about a government investment — and why you should quickly bet on the private competitor.
Flubbing the fur trade
Beaver pelts were one of the first targets of government subsidies in the United States — and it helped one of New York’s richest men make his fortune.
The man who confounded the normal development of private enterprise in furs was none other than President George Washington.
Washington analyzed the British fur trade in the Michigan area (then called the Northwest Territory), and he considered British interference a menace to America’s future. British agents might stir up the Indians, win their loyalties and thwart US expansion.
With Washington’s support, Congress appropriated $50,000 for government fur factories in 1795 and raised it steadily in later years to $300,000.
The government created a bureaucracy — the Office of Indian Affairs — to conduct the fur trade. It used the money from Congress to set up trading posts (usually near military forts), stock them with goods and pay American agents to buy, store and transfer furs from the trading post to Washington, DC, where they would be sold at auction. Once the factories were funded, they were supposed to be self-supporting.
Almost from the start, however, the factory system struggled. The factories were so poorly run that many Indians held them in contempt and refused to trade there.
In 1816, President James Madison appointed Thomas McKenney, a Washington merchant, to take charge of the Office of Indian Affairs and help the factories expand their business.
Indians needed to be assimilated into American life, McKenney argued. Schools and farms, not trapping and hunting, were McKenney’s vision for future Indian life. And he believed that an active government was the best way to trade with the Indians and help them assimilate into American culture.
McKenney tried to slash costs by limiting credit and gifts — some called them bribes — to the Indians.
McKenney so much wanted Indians to become farmers that he stocked the factories with hoes, plows and other farm equipment. It was part of his campaign to “amend the heads and hearts of the Indian.”
His ideas were a disaster. Indians wanted gifts, needed credit and shunned plows. But since McKenney was funded regularly each year by government, regardless of his volume of trade, he had no incentive to change his tactics.
Private traders, however, had to please Indians or go broke. As private traders grew in numbers and dealt successfully with the Indians, an immigrant named John Jacob Astor joined their ranks, learned the business and began to prosper.
Astor, the son of a German butcher, came to the United States in 1784 at age 20 to join his brother in selling violins and flutes.
Soon, however, he changed his tune. He became fascinated with the fur trade and studied it day and night. He learned prices, markets, and trade routes for all kinds of pelts.
Astor founded the American Fur Company in 1808. Where McKenney and his predecessors built trading posts and forced Indians to come to them — sometimes hundreds of miles — Astor’s fur traders lived with the Indians and bought and sold on the spot.
One reason Astor excelled was that he accepted the Indians as they were, not as he wanted them to be.
Astor surpassed the government factories and emerged as the leading exporter of furs in the United States. By the 1820s, his American Fur Company employed more than 750 men, not counting the Indians, and collected annual fur harvests of about $500,000, which made it one of the largest companies in America.
Meanwhile, the government, on its $300,000 investment, received a return of only $56,038.15.
Monopolizing the steamboat
After 20 years in Europe perfecting his steamboat, an inventor named Robert Fulton returned to the US in December 1806.
He knew that a legislator, Robert Livingston of New York, would back him to the hilt. Livingston was a Founding Father who believed that steamboats would work well on the wide rivers of North America. Livingston and Fulton obtained a monopoly from the New York legislature for the privilege of carrying all steamboat traffic in New York for 30 years, if they could produce a working steamboat within two years.
Thus, when Fulton sailed the North River up the Hudson River on a hot summer day in August 1807, he had built the first viable steamboat and had just begun the first steamboat line with any measure of success. Fulton opened up new possibilities in transportation, marketing and city building.
One problem with Fulton’s monopoly, however, was that it affected shippers in neighboring states. As steamboats became more common, the Fulton monopoly meant that other companies couldn’t sail in New York waters without fear of fines. The monopoly also kept ticket prices high.
Finally, in 1817, Thomas Gibbons, a New Jersey steamboat man, tried to crack Fulton’s monopoly when he hired young Cornelius Vanderbilt. Gibbons asked Vanderbilt to run steamboats in New York and charge less than the monopoly rates.
Vanderbilt was intrigued by the challenge of breaking the Fulton monopoly. On the mast of Gibbons’ ship, Vanderbilt hoisted a flag that read: “New Jersey must be free.”
For 60 days in 1817, Vanderbilt defied capture as he raced passengers cheaply from Elizabeth, NJ, to New York City. He became a popular figure on the Atlantic as he lowered the fares and eluded the law.
Finally, in 1824, in the landmark case of Gibbons v. Ogden, the US Supreme Court struck down the Fulton monopoly. Chief Justice John Marshall ruled that only the federal government, not the states, could regulate interstate commerce.
This extremely popular decision opened the waters of America to competition. A jubilant Vanderbilt was greeted in New Brunswick, NJ, by cannon salutes fired by “citizens desirous of testifying in a public manner their good will.”
On the Ohio River, steamboat traffic doubled in the first year after Gibbons v. Ogden and quadrupled after the second year. The real value of removing the Fulton monopoly was that the costs of traveling upriver dropped. Passenger traffic, for example, from New York City to Albany immediately dipped from $7 to $3 dollars after the court decision.
Picking the wrong airplane
Alexander Graham Bell sat calmly in his rowboat, camera in hand. The great scientist Samuel Langley was on the shore holding a stopwatch, about to launch his miniature “aerodrome.”
Suddenly, Langley signaled, and his flying machine took off from the nearby houseboat into the air. After a wobbly start, the two wings steadied, the small engine buzzed and the unmanned plane soared over the Potomac River in a circular path. Bell was so excited, he almost forgot to snap the picture.
Langley clocked the flight at 90 seconds and computed the distance at a half-mile. His triumph on May 6, 1896, made him the favorite to fulfill man’s dream of flying. But he needed money.
Then, on Feb. 15, 1898, the Maine blew up in Havana harbor, and the United States and Spain lurched toward war. Congress appropriated $50 million for defense, and Langley developed an argument about the military value of flight.
Teddy Roosevelt, assistant secretary of war, was especially exuberant: “The machine has worked. It seems to me worthwhile for this government to try whether it will not work on a large enough scale to be of use in the event of war.”
Roosevelt’s endorsement was important because the subsidy disasters with railroads and steamships had, for the past generation, knocked the government out of economic planning. Many politicians doubted the government’s ability to pick winners and losers through federal aid.
But Langley and his Great Aerodrome seemed to be different — he was authorized a $50,000 subsidy.
Langley made his top priority the building of an engine, light in weight and strong in power. But a bicycle mechanic named Wilbur Wright disagreed. He concluded, after studying Langley and his work carefully, that stressing engine power over glider maneuvering was wrong.
When asked later about Langley’s strategy of engine first, then wind control later, Will responded, “Unfortunately, the wind usually blows.”
That statement spoke volumes about the practical and financial side of Will’s thinking. He wanted to invent the airplane, in part, to make a profit. But Will knew that to make a plane that people would want to buy, or to fly in, he would have to invent one that could fly safely in all kinds of weather. What good was a plane that could be used to drop bombs, deliver mail or carry passengers if it was regularly grounded by even light winds?
Langley, by contrast, wanted fame but not profits. His Great Aerodrome, funded by taxpayers, would be his gift to the nation and his legacy to science. If it had the potential to make money, that task would be left to others.
But Langley flopped. After taking more money from the government, his aerodrome plunged nose-first into the Potomac on Oct. 7, 1903.
Two months later, the Wright brothers — funded by their bike shop, not the government — stayed aloft for 59 seconds and traveled 852 feet in Kitty Hawk.
By 1908, the Wright brothers were the undisputed inventors of the airplane. And the government did what it should have done in the first place — it paid for results, not experiments. It paid $25,000 for a Wright Flyer.
From the book “Uncle Sam Can’t Count: A History of Failed Government Investments, From Beaver Pelts to Green Energy” by Burton W. Folsom Jr., and Anita Folsom. Copyright © 2014 by Burton W. Folsom Jr. Reprinted by permission of Broadside Books, an imprint of HarperCollins Publishers.