Mises Daily Articles
The Failure of Subsidized Production in the Massachusetts Theocracy
[This article is excerpted from Conceived in Liberty (1975), volume 1, chapter 33, "Economics Begins to Dissolve the Theocracy: The Failure of Subsidized Production." An MP3 audio file of this article, narrated by Floy Lilley, is available for download.]
To return to the New England scene, the flourishing but harassed Massachusetts merchants received a severe economic shock in 1640. Much of the capital and credit for expanding their commerce had come from the wealthier emigrants from England, but by 1640 the great exodus had dried up. Realization of this change further cut off the vital flow of English credit to Massachusetts merchants, since the credit had been largely predicated on a continuing flow of immigrant funds. In addition, the fur trade was already declining from the drying up of nearby sources and the restrictions of the licensing system. A result of these factors was a severe economic crisis in 1640 with heavy declines in prices — of cattle, land, and agricultural products. Credit and confidence also collapsed, and the consequent calling in of debts aggravated the crisis. (There can be little doubt that the panic was also aggravated by the crisis in the English economy in 1640, a crisis sparked by Charles I's seizure of stocks of bullion and other commodities.) As is usual in an economic panic, the debtors faced a twofold squeeze: falling prices meant that they had to repay their debts in currency worth more in purchasing power than the currency they had borrowed; and the demand to pay quickly at a time when money was hard to obtain aggravated their financial troubles.
Almost immediately, the debtors turned to the government for aid and special privilege. Obediently, the Massachusetts General Court passed, in October 1640, the first of a series of debtors-relief legislation that was to plague America in every subsequent crisis and depression. A minimum-appraisal law compelled the appraisal of insolvent debtors' property at an artificially inflated price and a legal-tender provision compelled creditors to accept all future payments of debts in an arbitrarily inflated and fixed rate in corn, cattle, or fish. Additional privileges to debtors were passed in 1642 and 1644; in the latter, for instance, a law was passed permitting a debtor to escape foreclosure by simply leaving the colony. Most drastic was a law passed by the upper chamber of magistrates, but defeated by the deputies, which would have gone to the amazing length of having the Massachusetts government assume all private debts that could not be paid!
The fact that this general debt-assumption bill was passed by the council of magistrates, the organ par excellence of the ruling oligarchy, and rejected by the substantially more democratic chamber of deputies, indicates the need for drastic revision of the common historical stereotype that debtors are ipso facto the poor. For here we find the debtors' interest represented especially by the ruling oligarchy and not by the more democratic body.
Further debtors-relief legislation — again at the behest of merchants — was passed in 1646, compelling creditors to accept barter payments for money debts, and in 1650, compelling outright moratoriums on debt payment.
With fur production declining badly, the Massachusetts government turned desperately to artificial attempts to create industry by state action. The motives were a blend of the mercantilist error of attempting self-sufficiency and cuts in imports and the shrewd granting of privileges to favorite businessmen.
Hence, the colony decided to turn to the subsidization of iron manufactures. Early iron mines in America were small and located in coastal swamps ("bog iron"), and the primary manufactured or wrought iron was produced cheaply in local "bloomeries" at an open hearth. The Massachusetts government, however, wanted to force the use of the more imposing — and far more expensive — indirect process of wrought-iron manufacture, a process that required the erection of a blast furnace and a forge. Such an operation required a far larger plant and much more skilled labor.
In 1641, John Winthrop Jr. found bog-iron ore at Braintree. He decided to embark on the ambitious construction of a furnace and forge — the first in the colonies. The Massachusetts General Court had offered any discoverer of an iron mine the right to work it for 21 years; yet it insisted that within 10 years an iron furnace and forge be erected at each bog mine — thus repressing the cheaper open-hearth process. The court also insisted that the Winthrop Company — soon organized as the Company of Undertakers for an Iron Works in New England, with English capital — transport iron to churches, and keep a minimum of its production at home rather than export the iron. In 1645 the company was granted a 21 year monopoly of all iron manufacturing in Massachusetts as well as subsidies of timberland, provided that within a few years the company would supply the colonists with iron at a price of no more than £20 a ton.
However, even with these privileges, plus large grants of timberland that Winthrop managed to wangle from the towns of Boston and Dorchester, the venture at Braintree was too expensive and failed almost immediately. Ousting Winthrop, the company moved its operation northward to Lynn, where it managed to build a furnace and forge and to produce some quantities of bar iron. Here again, economics caught up with the venture, and costs rose faster than revenues. In addition, the company owners wanted to sell the iron for cash but the Massachusetts court insisted that the company accept barter for its iron, thus "keeping the iron in the colony"; otherwise, the court argued, the iron would redound to the benefit of foreign buyers and the cash profits would be siphoned off to the owners in England. The wages paid at the ironworks were apparently not enough of a benefit for the court. In its unsuccessful petition to the General Court, the company pointed to the benefits to the colony of its payment of wages and purchase of supplies, and argued that it had a right to export as it chose and to obtain cash in return. What in the world would it do with crops paid in barter? With this sort of harassment added to its other troubles, the company finally went bankrupt in 1653, and the ironworks itself closed down less than a decade later.
This was not the last of younger Winthrop's ventures into subsidized, uneconomic, and failing enterprises. In 1655 he discovered a bog-iron deposit at Stony River in New Haven Colony. The New Haven authorities, finding their colony increasingly a sleepy backwater rather than the expected commercial success, eagerly welcomed the chance to subsidize an ironworks. Raising the capital locally to avoid colonial harassment from foreign owners, Winthrop was granted a host of special privileges by colony and town governments including land grants, payment of all costs of building the furnace, a dam on the river, and the transport of fuel. One of the owners was the deputy governor of New Haven, Stephen Goodyear, who was thus able to use the power of the government to grant himself substantial privileges. Yet this ironworks quickly began to lose money and little iron was ever produced at Stony River. The works was abandoned altogether in the 1660s.
The sorry record of forced iron production was matched by that of compulsion in textiles. The New England governments, heedless of the fact that the growth of hemp was largely uneconomic, decided that not enough hemp was being grown by private farmers and that something had to be done about it. Connecticut went to the length of compelling every family to plant a minimum of hemp or flax, but soon had to abandon the attempt. Massachusetts decided, in 1641, to grant a subsidy of 25 percent for all linens, cottons, and woolens spun or woven in the colony. It also decreed that all servants and children must spend all their leisure time on hemp and flax. So speedily did all this spur the growth of hemp that only one year later, Massachusetts rescinded its subsidy and felt it had to legislate against the "hoarding" of stocks of hemp.
Massachusetts also felt that not enough warmer woolen clothes were being produced at home. In 1645 it ordered the production of more sheep, and in 1654 prohibited all further exports of sheep. Finally, in 1656 Massachusetts brought its fullest coercive powers into play: all idle hands, especially those of "women, girls, and boys," were ordered to spin thread. The selectmen of each town were to appoint from each family at least one "spinner" and each spinner was ordered to spin linen, wool, or cotton, at least half the year, at a rate of three pounds of thread per week. For every pound short of the decree, the family responsible was to pay a fine of twelve pence to the state. Still, all these stringent mercantilist attempts to coerce self-sufficiency were a failure; economic law prevailed once more over statute law. By 1660 the attempts to found a textile industry in Massachusetts were abandoned. From then on, rural western Massachusetts made its clothes at home ("homespun" household manufacturers), while the urban citizens were content to import their clothing from England.
John Winthrop Jr. also tried to found a saltworks in Massachusetts, again subsidized by a government eager to promote self-sufficiency in salt. These subsidies continued intermittently over a 20-year period. In the 1630s free wood for fuel was donated to Winthrop's salthouse; in the 1640s Massachusetts agreed to buy 100 tons of salt from Winthrop; in the mid-16505 the General Court granted him a 21-year patent. But Winthrop never succeeded in producing any salt.