Have Government Subsidies Worked in the Past?

by Burt on November 13, 2012

The idea of granting government subsidies to private companies is not new. Since the earliest days of the American Republic, politicians have been tempted to intervene in the business arena by awarding favored enterprises with funds from federal coffers.

The first serious government subsidy in U.S. history began as an attempt to operate a fur company in the 1790s. Oddly, George Washington, who usually insisted on limited government, thought that a government-operated fur company in the American Northwest would help to prevent the British from encroaching on American territory. Unfortunately, our subsidy encouraged waste and discouraged creativity in the trading of furs with the Indians and the selling of furs at home and abroad.

In the early 1800s, an American entrepreneur named John Jacob Astor believed that he could compete effectively against this poorly run company. Astor started the American Fur Company and, with no federal subsidy, he built a larger and more efficient company that extended throughout the nation. The government-run company, by contrast, eventually went bankrupt and was disbanded.

Fifty years later, Congress granted federal subsidies to Edward Collins to build a transatlantic steamship line. I describe the disaster that followed in the first chapter of The Myth of the Robber Barons. Collins tried to increase his subsidy annually until, at last, Cornelius Vanderbilt challenged Collins with no federal subsidies. As in the case of the fur company, the free-market challenger won the competition. Collins eventually went bankrupt, while Vanderbilt emerged as the largest and most efficient steamship operator in the U.S.

As an afterthought, we can ponder that John Jacob Astor became the first American to be worth $10 milllion, and Vanderbilt became the first American to be worth $100 million. These two entrepreneurs did so by offering a quality product at a competitive price. Of course, two case studies do not prove all government subsidies are misplaced, but these examples should make us pause and reflect whenever we are tempted to believe that government intervention–whether through subsidies or management–will improve a business or an industry.

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