Cyclopædia of Political Science, Political Economy, and the Political History of the United States

Edited by: Lalor, John J.
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Includes articles by Frédéric Bastiat, Gustave de Molinari, Henry George, J. B. Say, Francis A. Walker, and more.
1002 of 1105



SUBSIDIES. This word has been used in three quite distinct senses. 1. In earlier English constitutional history it is applied to the form of special tax most frequently resorted to until the last century. It was assessed not directly upon property, but upon persons. It most important elements was a land tax of one-fifth the nominal rental. A single subsidy yielded about £70,000. On extraordinary occasions more than one at a time was granted by the house of commons. (Blackstone, vol. i., p. 311.) 2. In the last century and the beginning of the present century, we find the term commonly used to denote payments to anally to assist in carrying on a war. This practice was largely resorted to by England; but since 1815 it has fallen into disuse. 3. In its modern use, dating from about 1840, it has been applied to any direct pecuniary aid rendered by the state to industrial enterprises of individuals. In its widest sense it includes all such government aid, even to mercantile and manufacturing industry, as, for instance, the system of bounties on exports, which holds so important a place in the commercial policy of France. Practically, it is better to apply the term only to grants in aid of transportation interests.


—The earlier form of state aid to these enterprises was by enabling them to secure monopoly rights. These were fully embodied in the early trading charters, the principle survives to this day in the navigation laws of the United States. Our earliest railroads attempted to secure similar provisions. But the development of the transportation system in the present century, and the growing repugnance to monopolies, made this policy more unwise than ever; and the system of subsidies, that is, of direct state aid, was resorted to instead. Such aid may be given either by assuming part of the burden and risk of construction, or by increasing the current receipts for a term of years. The former policy was prevailed for railroads, the latter for steamships.


—Railroad building has been encouraged in three ways: 1. By the state building the lines for the companies to operate for a term of year, either with or without payment of rent; 2. By a guarantee of interest on a part or the whole of the bonded debt, or even on the capital stock; 3. By direct grants, either of money or of public lands. Every large European state, except England, has adopted one or more of these methods. France built the roadbed for most of her main lines, and guaranteed the interest on the bonded debt incurred by the operating companies in building branches. Prussia gave extensive guarantee of interest, until the adoption by her government of the policy favoring state ownership and control of railways. Austria started with a system of state railways, but, between 1850 and 1860, ceded to private companies, for very inadequate compensation, the right to operate most of them for long terms of years. Practically, the results to the companies have been much the same as under the French system. Austria also gave extensive and ill-judged guarantees of interest, on stock as well as bonds. Nearly the same course of events has taken place in Italy. Russia has given interest guarantees, and also direct pecuniary aid in large amounts.


—In the United States payment of money to assist railways have been mainly appropriated by towns and other local organizations. Much has been spent in this way, but in such a manner as not to attract public attention. National aid to railroads has been, with one exception in the form of lands grants. Even before the time of railroads, there had been such grants in aid of canals, two million acres in 1827 being the chief instance. Buy the system really took its start in the year 1850, with the grants to the Illinois Central and the Mobile & Ohio railroads. There grants, like those that followed them, were for form's sake not made directly to the railroads, but through the medium of the states of Illinois. Alabama and Mississippi, in which the lands were situated. Similar grants followed in Missouri in 1852, Arkansas in 1853, and in a number of other states in 1856. By these and subsequent concessions nearly fifty-seven million acres of land in organized states were granted in all, of which fully three-fifths have been certified to the corporations. In addition to this, immense tracts of the so-called swamp land, often very valuable, have been appropriated by individual states, for the same purpose.


—The matter took a new shape in 1862, when Thaddeus Stevens in order to bind California closer to the Union, introduced and carried the Pacific railroad bill. By the terms of this act there were granted 12,800 acres of land to each mile of road built (ultimately amounting to about 33,000,000 acres in all); and, in addition, the credit of the United States was pledged to the amount, on an average, of $25,000 per mile, or about half the cost. On the money thus advanced, the United States had paid, up to 1880, principal and interest, about $112,000,000, and had received from the road about $15,000,000 worth of payment. When it came to the incorporation of the Northern Pacific railroad, the promoters would have been glad to cite this as a precedent; but, as they could not obtain the government credit, they secured a double grant of land per mile, 47,000,000 acres in all. Subsequently the two southern routes secured together about 70,000,000 acres. There have been granted to railroads, in all, nearly 160,000,000 acres of territorial land, besides the state lands above mentioned.


—Land concession came to an abrupt end twelve years ago. It is a question whether, apart from its abuse, it was a good system. It advocates claim: 1, that the country was the gainer by the construction of long lines of useful railroad at a much earlier time than would have been possible otherwise; 2, that the government was no loser, because the land was only granted in alternate sections, and the immediate increase in value of those sections retained by the government was more than an equivalent for the much slower increase in the value of the whole which would otherwise have accrued; 3, that the settler was a gainer because he could better afford to pay the additional price for the sake of being near a railroad. On the other side it is charged: 1, that it stimulated unsound railroad schemes and caused too much railroad building; 2, that the provisions intended to protect the government interest were almost systematically disregarded; 3, that the settler, once established so far from markets and from competing transportation routes, was placed at the mercy of the railroad; while the real gainer by these enhanced values was generally the land speculator. The comparative force of these arguments must be decided by the special circumstances of each case where they are applied; but there have been so many mistakes, and so much corruption, that the burden of proof in every case lies upon the advocates of the land-grant policy.


—England never adopted any system of railroad subsidies. Her inland relations were such that her people were only too ready to undertaken the construction of the necessary lines without government encouragement. But England's foreign and colonial relations were such as to force her government to take the lead in the matter of steamship subsidies; and it did so with great promptness. It was not until 1838 that the practical importance of ocean steam navigation was made to appear. Proposals for a line of Atlantic mail steamers were at once invited, and in 1839 the contract was awarded to Samuel Cunard, whose bid was the most favorable. The original contract was for three ships at an annual compensation of £55,000; it was soon modified to four ships of £81,000. This contract was extended and modified to the advantage of the company in 1846, 1834 and 1858; it is only within the last fifteen years that it has been greatly reduced. In 1840 a contract for fourteen ships at £240,000 was made with the Royal Mail steam packet company, for the carriage of the mails to the West Indies and southern United States. This company afterward extended its field of operations to South America. In 1845 the Peninsular & Oriental company, which had had for some years a small mail contract, engaged to run seven mail steamers to India for £160,000; and this company gradually extended its engagements with the government, so that for a series of years it has received more than £400,000, and often £500,000, annually. The contracts with these three companies have been by far the most important; of the rest only those with the Pacific steam navigation company and with the Union steamship company, to Africa, need be mentioned. Under contracts like these, England expended in forty years nearly £45,000,000 sterling. The expense is now gradually decreasing, but still amounts annually to some £700,000 sterling.


—These payments are so often cited as an example for America to follow, that we must consider carefully how far they were actually of the nature of bounties for the encouragement of the shipping interest. The early contracts with Mr. Cunard were unquestionably of this nature. Ocean steam navigation was then an experiment; and Great Britain's colonial relations made it a political necessity for her to try the experiment first. Her statesmen were forced to take the burden of risks which no private individual could prudently bear; hence the apparent disproportion of the payments to the cost of the steamships. Nor is there good reason to doubt the candor of the commons committee, who, in 1846, reported, in answer to some complaints on this head, that the service was better performed by that company for the price than it would be by any other. But twelve years later, when the business was thoroughly established, the conservatism of the admiralty allowed the Cunard contract to be renewed at a figure which was then quite in the nature of a bounty, and was felt by the post office to be burdensome and unfair. There was somewhat the same spirit shown in dealing with the Royal Mail company, especially renewing their contract in 1868, when, for certain reason, the business was not thrown open to public competition, as had been the case in all other instances since 1860. The question is a complicated one; but it is impossible to read the correspondence of the authorities with a rival line, and particularly a report for the government by Mr. Scudamore (Parl. Papers, 1867-8, xli.), without feeling that there was an anxiety not merely to have the service well done, but to keep in good condition the line which had done it in the past.


—The company whose case is oftenest cited as an example of what is done by government subsidy, is the Peninsular & Oriental. But here there is much less ground for so doing than in the two former cases. The company owed its origin and early development to private enterprise; so far from being favored by government contract, it often seemed as if partiality was shown against it; and when it was finally recognized as the only agency competent to perform certain necessary parts of the mail service, the contracts were awarded grudgingly at a sum which was considered scarcely an equivalent for the extra liabilities and expense incurred. The facts which have given rise to the public impression, are the enormous aggregate sum paid to the company, the renewal of one of its contracts some years before its expiration on terms which seemed especially advantageous, and, above all, the guarantee, for some years in force, of a 6 per cent. dividend on the capital stock of the company. The enormous aggregate pay is explained by the enormous aggregate service. The contract renewal in 1870 was really sought by the authorities to obviate some difficulties under the old contract, which gave them far more trouble than they did the company. The guaranteed dividend requires a word of explanation. In 1867 the company was disinclined to take the government contract, believing that the pay offered would not compensate the service required. The authorities were equally persuaded that it would. As no other company would undertake the work, the matter was compromised; the company taking the contract with the proviso that if they should, under its terms, be unable to pay a 6 per cent. dividend (not 8 per cent., as has been frequently stated), the government should make good the deficiency. Experience proved the company's original estimate a correct one. How the matter was regarded by the government is illustrated by the following extract from Mr. Scudamore's report (Parl. Papers, 1867-8, xli., 131, incl. 3): "It would seem that in dealing with ocean services the postoffice has only two questions to consider: first, what is the nature of the service required; and, second, what is the proper price to pay for it. In the case of communication with the east, parliament has openly declared in favor of a more frequent and equally regular and rapid communication; the postoffice has ascertained that only the company will undertake the maintenance of that communication, and I think I may also claim to say that it has ascertained, with a reasonably close approximation to accuracy, the proper price to pay for it. For the proper price must in every such case be that which, taken together with the revenue from traffic, will cover the working expenses and give a moderate dividend on capital. It is impossible to obtain good service on other terms. The question can not be dealt with a commercial principles, because the conditions of the postal service compel the contractors to disregard commercial principles. * * For the sake of keeping up such communication with the east as the nation requires, they must set commercial principles at defiance; and, cost what it may, the nation must either pay them what they lost thereby, or forego the communication." (See also Rep. of Com. on Affairs of Oriental S. S. Co., 1867, ix.)


—Of England's mail contract system it may be fairly said: 1, that its aims are political and not commercial. It is a necessity for England to have constant communication with her colonies, and she has spent large sums for this object. It is almost equally important for her to have an efficient naval reserve and transport service, and she has made her mail contracts one among several means toward this end. 2. That the incidental commercial advantage to the subsidized companies has not been generally great, except at a very early period of the system. This is evinced by the fact that rival unsubsidized lines have been equally successful, and that the largest contracts have been on terms which made them a matter of indifference to the party receiving them.


—The French government encouraged the Mediterranean steamship service from the first, and in the years 1861-5 extended its operations to the support of lines to North and South America, India and China. The annual amount recently paid under these contracts has been more than four and a half million dollars. These efforts met with some degree of success; but the attempt, by the law of January, 1881, still further to increase the French carrying trade by bounties on ship building, sometimes as high as 60 francs per ton, and by a navigation bounty with a maximum of 1.50 francs per ton per thousand miles, did not produce the desired results. Of other nations, Italy, in 1880, spent more than three million dollars on steamship subsidies; Brazil, one million seven hundred thousand; Japan, half a million. Belgium, in 1878, spent over a quarter of a million; Austria, a mileage rate, with a maximum of about three hundred thousand dollars; Russia, a moderate fixed sum, and a mileage rate in addition. The subsidies of Portugal and Holland are small; those of Germany and Denmark apply only to Baltic steamers. The most successful ocean steamship lines of the continent, those of Hamburg and Bremen, receive no pay from the government other than the very moderate postage rates. (45th Cong., 2d Sess., Ex. Doc. 38; 46th Cong., 3d Sess., House Com. Report, 342.)


—The United States was reluctant to allow England to get the start in ocean steam navigation. In 1841, only two years after the first Cunard contract, T. Butler King, of Georgia, chairman of the house committee on naval affairs, presented a report urging similar subsidies on the part of the United States. In 1845 an act was passed authorizing the postmaster general to make contracts for the carriage of the foreign mails in American steamships. The first line established under this system was from New York to Bremen; the first passage was made in 1847. The steamers ran ultimately twice a month, to Havre and Bremen alternately, for an annual subsidy of $350,000. Mr. King continued to push the subject; and in March, 1847, an act was passed requiring the secretary of the navy to contract for mail service from New York to Liverpool, to New Orleans, Havana and Chagres, and from Panama up the Pacific coast. From these contracts arose the Collins line, the George Law line to Aspinwall, and the Pacific Mail steamship company. In 1848 there were further resolutions in congress looking to the establishment of lines to China, to Antwerp, and to the mouth of the Elbe, but these proposals were never actually carried out. By the act of March 3, 1851, the amount expended for Pacific mail service was largely increased, provision being at the same time made for the Panama railroad; and in July, 1852, the subsidy for the Collins Line to Liverpool, originally $385,000, was increased to $858,000. Oct. 1, 1852, the United States foreign mail service was as follows:

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—By far the most ambitious of these enterprises was the Collins line to Liverpool. The United States government had demanded such vessels as would afford a very high rate of speed; therein departing from the English policy, which demanded regularity and great safety at comparatively slow rates, as exemplified in the Cunard and Peninsular & Oriental lines. The Collins steamships thus cost a large sum in their construction, and a career of exceptional prosperity was needed to support them even with the assistance of the subsidy. This prosperity they enjoyed for four years, from 1850 to 1854. In September of that year they lost the steamship "Arctic," and little more than a year later the "Pacific." Under the dissatisfaction produced by these disasters, combined with other reasons, the subsidy was withdrawn. The line succumbed, and in 1858 the steamships were sold. The other subsidies were discontinued at about the same time. The Bremen line withdrew its steamships on the expiration of the contract in 1858; the Havre line continued operations until after the breaking out of the rebellion. A considerable portion of the United States mail service was at this time maintained by Vanderbilt's steamships without subsidy; but these ceased in the war time to be employed in this way. At the beginning of 1864 we had no steamships crossing the ocean, and none engaged in foreign trade except the Havana and Pacific lines. (See Memorial of New York Chamber of Commerce, 1864.)


—In that year congress authorized a mail contract for twelve round trips, of vessels of not less than 2,000 tons, from New York to Brazil, at an amount not exceeding $150,000. The most favorable offer was made by J. F. Navarro, representing what afterward became the United States & Brazil steamship company. The negotiations dragged on for a long time; there were many irregularities, including most suspicious and persistent efforts on the part of the company to make the government accept unsuitable vessels. In the latter part of 1865 a conditional contract for ten years was entered into and finally ratified. (See 39th Cong., 1st Sess., Ex. Doc. 121.)


—Early in 1865 a contract was made with the Pacific Mail steamship company for a monthly mail service to China, in vessels of 3,000 tons, at an annual payment of $500,000. No further lines were subsidized, in spite of the well-known report of the Lynch committee in 1870, favoring an extension of this policy. But in 1872 an additional subsidy of $500,000 was offered the Pacific Mail for the establishment of a second service per month; this time in vessels of 4,000 tons. But the Pacific Mail was unfortunate in every way. Before the subsidy contract of 1865 it had been a sound and well-managed concern; since that time it had been the plaything of speculators. It lost nine vessels inas many years. Foreign shippers had become dissatisfied with its rates and methods. The shares had fallen from above par to below 40. Nor did the supplementary contract bring the expected relief. It was found impossible to complete the vessels for the new service within the contract time. As there had been apparently no lack of intention on the part of the company, the government hesitated what to do, and seemed disposed to grant the company special favor. But then came the disclosures as to how the contract of 1872 had been obtained, the evidence of vast amounts of money spent for corrupt purposes. Public sentiment was strongly aroused, as was evinced by the vote on Mr. Holman's anti-subsidy resolution. In the face of feeling like this a much better case than that of the Pacific Mail would have had no chance of a favorable hearing; and the decision of the senate judiciary committee that the subsidy of 1872 had been forfeited by non-fulfillment of the contract, was almost a foregone conclusion. (43d Cong., 2d Sess., Senate Rep., 268; House Rep., 674.) The subsidy of 1865 ran on till the middle of 1875. The Brazilian line subsidy expired at about the same time. With that year ended the second systematic attempt at thus supporting steamship lines, even more completely and decisively than the former attempt had ended in 1858. Since that time there has been more or less agitation in favor of subsidies, but without distinct results. Even the Russell committee of 1880, with their obvious leanings in that direction, did not venture to propose anything specific. An attempt on the part of the Pennsylvania railroad company to support a line from Philadelphia to Liverpool by similar payments, was, after full trial, finally abandoned.


—It is urged by the advocates of a subsidy system for the United States steam marine, 1, that we stand almost alone among maritime nations in not doing so; 2, that we lose not merely the carrying trade, but a large part of our foreign commerce; 3, that we are left defenseless in case of war. To this the reply is made, 1, that the example of England does not really apply to our own case, while that of France and other nations can hardly be appealed to as successful; 2, that the loss of our carrying trade and foreign commerce is due to other causes, and can not be remedied in this way. The third point is more difficult to meet directly. There can be no doubt that England's brilliant success in Egypt, and her power of waging distant wars elsewhere, are due to the readiness and efficiency of her transports, and that this reserve transport service was partly connected with her system of mail contracts. Nor is there any doubt that at the beginning of the rebellion the control of a number of really swift steamers would have been of inestimable service to the government. But such a naval reserve is much more needed for offensive than for defensive war, the general carrying trade being, in the latter case, a source of actual weakness. And whether, in the existing machinery of the United States government, and the liabilities to fraud on government contracts, such a naval reserve could be secured by a system of subsidies, is, to say the least, doubtful; whether it would ever be worth the money we should have to spend upon it, is even more doubtful; not to speak of the possibility of obtaining the same result on a larger scale, with less cost and less fraud, by the removal of some of the restrictions upon commerce. (For a strong statement of some of the arguments against subsidies, see David A. Wells' "Our Merchant Marine," chap. viii. See also, ENCOURAGEMENT OF INDUSTRY BY THE STATE.)


Notes for this chapter

Owing to a misprint in the original report to congress, both this sum and the total are usually quoted half a million dollars too large

Footnotes for SUFFRAGE

End of Notes

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