Entrepreneurship in American History

John Steele Gordon
Author, An Empire of Wealth: The Epic History of American Economic Power

John Steele GordonJohn Steele Gordon was educated at Millbrook School and Vanderbilt University. His articles have appeared in numerous publications, including Forbes, National Review, Commentary, the New York Times, and the Wall Street Journal. He is a contributing editor at American Heritage, where he wrote the “Business of America” column for many years, and currently writes “The Long View” column for Barron’s. He is the author of several books, including Hamilton’s Blessing: The Extraordinary Life and Times of Our National Debt, The Great Game: The Emergence of Wall Street as a World Power, and An Empire of Wealth: The Epic History of American Economic Power.

Adam Smith’s The Wealth of Nations was published the same year as independence was declared. Being very young, America did not have the burden of hundreds of years of economic cronyism. There were no aristocrats, no guilds, no ancient monopolies or hereditary tariffs as there were in continental Europe. And therefore Karl Marx was wrong, at least about America, when he wrote, “Men make their own history, but they do not make it as they please; they do not make it under circumstances chosen by themselves, but under circumstances directly encountered and transmitted from the past.” We had less past than any other country, and therefore we could make our own history, creating the most Smithian economy in the western world. To be sure, it was not purely Smithian. People in government will always try to help those who are powerful at the expense of those who might become so. But the U.S. has consistently come closer to the Smithian ideal, over a longer period of time, than any other major nation.

Nothing encourages entrepreneurial activity more than the freedom to take risk. Consider one of my favorite early American entrepreneurs, Frederic Tudor. In 1806, he decided to sell ice. He wanted to get it where it was cheap, New England, and sell it where it was dear, the Southern states and the West Indies. Everyone laughed. But his secret was a waste product that a great New England industry was more than happy to supply him with for free—sawdust, an excellent insulator. So Tudor combined two cheap things and made them valuable simply by moving their location. By 1820 he was shipping 2,000 tons of ice a year to as far away as Calcutta, getting as much as 25 cents a pound. By 1850, ice was one of New England’s largest exports. By 1900, of course, the trade was dead, thanks to the invention of refrigeration. We call that creative destruction.

A second great spur to entrepreneurship is the freedom to fail. And no country in the world has been as consistently tolerant of economic failure as the United States. While bankruptcy in Europe has always been regarded as a moral as well as a financial failure, this has not been the case here—possibly because we are descendants of people who sought a second chance by immigrating. There were, to be sure, debtors prisons in colonial and early America, and some very distinguished people spent time in them— including James Wilson, one of the first justices of the Supreme Court. But debtors prison, a remarkably counter-productive institution—after all, how do you pay off your debts while you’re cooling your heels in jail?—was abandoned in the U.S. earlier than elsewhere. It ended under federal law in 1833, and most states had followed suit by 1850. Great Britain wouldn’t abolish debtors prison until 1869.

As a result of this freedom to fail without suffering social opprobrium, many entrepreneurs were able on their second or third try to strike it rich. Consider Henry Flagler, who began his business career in the wholesale commodity business and prospered so well that he was making a then vast income of about $50,000 a year by the time of the Civil War. When the war drove the price of salt through the roof, Flagler invested heavily in a salt company in Michigan. When the war ended, however, the price of salt collapsed, as did the business. Flagler, who had risen from the son of an itinerant preacher to the “one percent,” was broke. He had to borrow money from his father-in-law—at ten percent interest, no less—in order to feed and house his family. But only five years later, Flagler was a founding partner of Standard Oil, with one-sixth of the company. Later, after running Standard Oil became a matter of management rather than entrepreneurship, Flagler used his Standard Oil millions to create the modern state of Florida, turning it from a semi-tropical wilderness into a tourist mecca and agricultural powerhouse. No American had as much influence on the shaping of a state as Henry Flagler had on Florida, except perhaps Brigham Young in Utah.

Or consider Isaac Merritt Singer. He was on his own by the time he was 12, and only basically literate—a character straight out of Dickens. At 19 he obtained an apprenticeship in a machine shop and soon demonstrated a marked talent for mechanics. Unfortunately for Singer, he wanted to be an actor—a profession for which he had little talent. Singer tinkered on the side and invented a rock drill, but he was so desperate for money that he sold the patent for a mere $2,000. Only when he gave up acting in middle age did he turn his attention full time to mechanics, and soon after that he invented a new kind of sewing machine that had a great advantage over previous kinds: It actually worked. Once the patent situation was settled—it was the first use of what is now a standard model for dealing with complex inventions to which many people contribute pieces, the patent pool—he made a vast fortune, as the sewing machine revolutionized, and industrialized, the clothing industry.

It’s not hard to see why: A shirt that took a seamstress 14 hours to sew by hand could now be produced in an hourand- a-quarter. Many clothing workers feared for their livelihoods. But of course the effect of the sewing machine was to enlarge their business, not destroy it. As the price of ready-made clothes dropped, the increasing market for them made up for the lower price many times over. This is one of the fundamental means by which capitalism has made the world a richer place for everyone.