Laissez-Faire in American History

Laissez-Faire Capitalism Origins

The doctrine was first developed in France in the eighteenth century, but it did not become popular in America until the nineteenth century. Scottish economist Adam Smith’s eighteenth-century writings were influential in the growth of American capitalism. He argued that free and competitive markets would lead to the greater good of society.

Fig. 1 - Drawing of Adam Smith, 1787

British philosopher and economist John Stuart Mill is largely credited with popularising laissez-faire. His Principles of Political Economy (1848) as it detailed the arguments for and against government intervention in the economy. At the time, it became widely accepted that the state’s role should be as limited as possible, and individuals should be able to pursue their own economic goals.

Laissez-Faire Examples

The introduction of laissez-faire policies in America wasn't only motivated by the influence of European economists' works. It also followed a period of continued failure of government-subsidised companies.

This failure began early in the history of independent America when Secretary of Treasury and Founding Father, Alexander Hamilton, promoted giving subsidies to new industries in order to encourage their growth.

Fig. 2 - Portrait of Alexander Hamilton, 1st United States Secretary of the Treasury

Summing up this policy, Hamilton said:

The failures of this policy can be seen in four examples.

Laissez-faire Examples Fur Trade

President George Washington created and subsidised a government-operated fur-trading company. However, the policies undertaken by private companies were more successful, with German-American trader John Jacob Astor eclipsing the profits made by the government-funded company. By government consensus, the fur trade became wholly conducted by private enterprise in 1822.

Fig. 3 - John Jacob Astor IV

Laissez-faire Examples National Road

In 1806, President Thomas Jefferson commissioned the building of a road to connect the East Coast to Louisiana. The construction costs of this project far exceeded their utility. The road was built based on what areas were politically best to build a road on, and it was not well budgeted. The road wasn't well maintained afterwards either. This failure led to the privatisation of the road in the 1830s.

Laissez-faire Examples Steamship

In 1847, Edward K Collins was placed in charge of a scheme of government-subsidised steamships. Collins focused on luxury over efficiency due to the huge subsidies provided to him. However, an individual named Cornelius Vanderbilt created a far more efficient (and private) steamship business than Collins'. In 1858, subsidies to Collins ended.

Laissez-faire Examples Transcontinental Road

President Abraham Lincoln gave subsidies to two competing railroad companies –the Union Pacific and the Central Pacific – in order to link California to the East during the American Civil War in the 1860s. The building of these railroads was very expensive: it cost the US more than its entire national debt.

These subsequent failures of government-subsidised businesses led to a growth in belief in laissez-faire. Thus far, subsidised industries had failed to boost the US economy, so they decided to try something different. The economic system of the following period became a free market with limited federal intervention.

Laissez-faire Industrial Revolution

The Gilded Age was a period from the late 1870s until the 1890s, brought on by the Second Industrial Revolution. During this period the US economy rose at the fastest rate in history. By the beginning of the twentieth century, US industrial production led the world. The economics of the Gilded Age epitomised laissez-faire capitalism.

Laissez-faire policies were developing even before the Gilded Age began, as President Ulysses Grant abolished federal income tax in 1872. He was one of the Forgotten Presidents, as they were called during the Gilded Age. This is because they did not have the majority of the vote and were often involved in corruption, which made them politically weak. In this sense, laissez-faire capitalism was very compatible with politics during the Gilded Age. The main role of these weak presidents was simply to leave the free market to its natural order.

Fig. 4 - Ulysses S. Grant, 18th President of the United States (4 March 1869 - 4 March 1877)

President Grover Cleveland, the only Democrat president of the Gilded Age, issued over 400 vetoes in just his first term. He notably denied $10,000 dollars to aid East Texas farmers, instead urging private individuals and businesses to offer that aid.

Fig. 5 - Grover Cleveland, 22nd (4 March 1885 - 4 March 1889) and 24th (4 March 1893 - 4 March 1897) President of the United States

Rise of American Economy due to Laissez-faire 1890-1913

The Gilded Age saw industrialists and financiers gain a huge amount of wealth, and by 1890 just 1% of the population controlled 25% of US wealth. These super-wealthy men were labelled ‘robber barons’ by the public, referring to the questionable ways in which they made their fortune, and included individuals such as John D Rockefeller, Andrew Carnegie, and JP Morgan. This was a key weakness of the Gilded Age: far from promoting competition, the economy became dominated by a few key players, almost creating a system of monopolies.

As we said, the role of the federal government during the Gilded Age was generally small. However, an extra tax was imposed on foreign goods in order to promote the growth of home-grown American business. The business-friendly measures of the Gilded Age led to a huge decline in the national debt and saw the budget consistently running at a surplus.

Why was laissez-faire abandoned during the Progressive Era?

Laissez-faire policies benefited big businesses and led to huge economic growth during the Gilded Age, but the detrimental effects of these policies soon led to demands for increased government intervention.

That was the case of the People’s Party that emerged in the 1890s. Its aim was to represent the interests of agricultural workers who had been badly affected by laissez-faire capitalism. They had seen crop prices fall, whilst unregulated railroads charged high rates to transport crops to markets.

In 1896, the Democratic party adopted many proposals of the populist People’s Party and began to advocate a greater role for the federal government. The reasons for this switch included the 1893 recession, poor living standards, widespread corruption, and a public demand to regulate ‘robber barons’.

The Progressive Era began with President Theodore Roosevelt, who took office in 1901. He oversaw measures to tackle corruption and control railroad rates, whilst his successor William Howard Taft re-introduced federal income tax and introduced an eight-hour working day for government employees. Both men passed numerous anti-trust Acts, in a dramatic shift from the laissez-faire policies of the Gilded Age.

Fig. 6 - Theodore Roosevelt, 26th President of the United States (14 September 1901 - 4 March 1909)

This shift was motivated to protect those at a disadvantage due to the laissez-faire policies.

What is the Relationship Between Laissez-Faire and Conservatism?

The philosophy of conservatism favours a free economy, private ownership, and limited government interference. This ideology gained popularity in the US in the 1920s after the First World War. This particular type of conservatism was known as Republican Conservatism and was based on the familiar idea that government stifled innovation and progress.

A series of three Republican presidents were in office during the 1920s: Warren Harding (1921–23), Calvin Coolidge (1923–28), and Herbert Hoover (1928–33). They were all committed to the implementation of laissez-faire policies. In practice, this involved lowering taxes on personal income and business profits, weakening the power of Unions, increasing taxes on foreign goods, and reducing overall government interference and spending. Specific laissez-faire examples of this period include the refusal to give First World War soldiers a bonus to make up for their lack of earnings, and opposition to buying surplus farm produce.

Laissez-faire policies led once again to a huge boom in the economy, and a rise in consumerism in what has been known as the Roaring Twenties. President Coolidge explained the dominant attitude of the American people during this time when he said:

What Conditions Encourage and Discourage Laissez-faire?

The role of the federal government is largely dictated by social circumstances and public demand. Philosophies with a greater role for government tend to become popular in times of hardship.

For instance, during the Great Depression which ended the laissez-faire policies of the 1920s, there was a shift towards Keynesian economics. These argued in favour of tax policies and public funding to target unemployment. They became the dominant economic theory for the rest of the twentieth century.

Laissez-faire is generally favoured when the economy is already doing well. This was the case during the Gilded Age. It is also favoured when the public generally desires limited intervention and freedom to operate as they wish, as in the age of modern-day Republican conservatism.