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Laissez-Faire in American History

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Laissez-Faire in American History

Laissez-faire means ‘let them do [what they will]’ in French, which is exactly what laissez-faire economics is about. The first proponents of laissez-faire, liberals, believed that free economic competition creates a ‘natural order,’ and that this order will produce the best and most efficient economic outcomes.

In practice, they oppose federal involvement in the economy, including in legislation such as implementing trade restrictions, imposing corporate taxes, and establishing minimum wages. In particular, laissez-faire economists view corporate tax as a penalty to successful production.

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.

Laissez-Faire in American History Laissez Faire Adam Smith Image StudySmarterDrawing of Adam Smith by James Tassie, 1787. Public Domain. Source: Wikimedia Commons.

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.

Laissez-Faire in American History Alexander Hamilton StudySmarterPortrait of Alexander Hamilton. Public Domain. Source: Wikimedia Commons.

Summing up this policy, Hamilton said:

There is no purpose to which public money can be more beneficially applied, than to the acquisition of a new and useful branch of industry."

- Alexander Hamilton, Report on the Subject of Manufactures, 17911

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

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.

Laissez-Faire in American History John Jacob Astor StudySmarterPortrait of John Jacob Astor, known for being the first multi-millionaire businessman of the United States. Public Domain. Source: Wikimedia Commons.

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 its 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 afterward either. This failure led to the privatisation of the road in the 1830s.

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.

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.

Laissez-Faire in American History Union Pacific Railroad Transcontinental Railway Image StudySmarterAdvertisement for the Union Pacific Railroad, 1867. Public Domain. Source: Wikimedia Commons.

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.

Federal income tax

A tax on the yearly earnings of individuals and businesses.

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.

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.

 Explanation: Laissez-Faire in American History John D Rockefeller StudySmarterPortrait of John D Rockefeller. Public Domain. Source: Wikimedia Commons. Laissez-Faire in American History Andrew Carnegie StudySmarterPortrait of Andrew Carnegie. Public Domain. Source: Wikimedia Commons.Laissez-Faire in American History JP Morgan StudySmarterPortrait of JP Morgan. Public Domain. Source: Wikimedia Commons.

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’.

Laissez-Faire in American History Theodore Roosevelt Image StudySmarterPortrait of President Theodore Roosevelt, 1904 by Pach Bros. Public Domain. Source: Wikimedia Commons.

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.

Anti-trust Acts

Laws that encourage economic competition by limiting the power of certain firms which could form, or have already formed, monopolies. They also prevent firms from conspiring to limit competition through things such as price-fixing. Price-fixing involves setting the price of a product rather than allowing it to be determined by the market.

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 in American History Calvin Coolidge StudySmarterPortrait of Calvin Coolidge in 1919. Public Domain. Source: Wikimedia Commons.

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:

The chief business of the American people is business."

- Calvin Coolidge, Address to the American Society of Newspaper Editors, 19252

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.

Laissez-Faire in American History - Key Takeaways

  • Laissez-faire refers to the belief in a natural economic order. If this natural economic order is left to develop without government intervention, it will produce the best results for everyone.
  • Before laissez-faire policies became popular in the US, government-subsidised business ventures had repeatedly failed and shown the benefits of privatisation.
  • The Gilded Age epitomised laissez-faire capitalism and led to a huge growth in the US economy, as did the laissez-faire of conservatives in the 1920s.
  • The Progressive Era emerged after the Gilded Age as opposition to the small role of the federal government, which had allowed robber barons to dominate the economy and had been detrimental for many in society.
  • Laissez-faire tends to be abandoned in times of crisis and hardship when the public demands more action from the government.

References

  1. Alexander Hamilton, Final Version of the Report on the Subject of Manufactures, 1791. You can read it here at: https://founders.archives.gov/documents/Hamilton/01-10-02-0001-0007.
  2. Calvin Coolidge, Address to the American Society of Newspaper Editors, 1925, Washington D.C. You can read it here at: https://www.presidency.ucsb.edu/documents/address-the-american-society-newspaper-editors-washington-dc.

Frequently Asked Questions about Laissez-Faire in American History

Laissez-faire is important as it was the economic doctrine that helped the US economy boom in the late nineteenth century, and in the 1920s. It tends to be popular when the economy is already flourishing or when the public demands more economic freedom.

Yes, laissez-faire has been popular at different points throughout American history- namely The Gilded Age (1870s–90s) and the 1920s.

Laissez-faire greatly contributed to the growth of the US economy as businesses were allowed to operate freely, without government restriction. It also led to wealth inequality, and those in poverty were not helped by the federal government.

The US does not currently have a laissez-faire economy because the government imposes some regulations on economic activity. The idea is, however, still important in America, and the regulation of the market ebbs and flows.

While laissez-faire capitalism contributed to the economic growth in the US during the Gilded Age, it also led to wealth inequality and the exclusion of different social groups from participation in economic prosperity. Rising inequality combined with The Panic of 1893 created conditions for social and political reforms and started a period in American History known as The Progressive Era (1896-1916).

Final Laissez-Faire in American History Quiz

Question

What does laissez-faire mean?

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Answer

Let them do (what they will).

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Question

Who were the first proponents of laissez-faire as a philosophy?

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Answer

Liberals

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Question

What is Social Darwinism?


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Answer

A social theory that applies Darwin’s theory of natural selection to people.

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Question

What two men were important in the origins of laissez-faire?


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Answer

Adam Smith and John Stuart Mill

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Question

Who said, ‘There is no purpose to which public money can be more beneficially applied, than to the acquisition of a new and useful branch of industry’?


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Answer

Alexandar Hamilton

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Question

Give four examples of the early failure of government-subsidised industry.


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Answer

Fur-trading, the national road, steamships, and the transcontinental railroad.

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Question

When was the Gilded Age?


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Answer

Late 1870s to 1890s

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Question

How many vetoes did President Grover Cleveland issue?


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Answer

Over 400

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Question

What were the ‘robber barons’?


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Answer

Super wealthy industrialists and financiers that dominated the economy during the Gilded Age. 

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In 1890, what percentage of US wealth did the richest 1% of the population hold?


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Answer

25%

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What party emerged in the 1890s to represent the interests of agricultural workers?


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Answer

The People’s Party

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Give three reasons for the emergence of the Progressive Era.


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Answer

Any three of: the 1893 recession, poor living standards, widespread corruption, public demand to regulate robber barons.

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When did laissez-faire re-emerge?


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Answer

The 1920s

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What three ideas does conservatism favour?


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Answer

A free economy, private ownership, and limited government interference

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Question

Why did laissez-faire policies of the 1920s end?


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Answer

The advent of the Great Depression.

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