Exactly one hundred seventy-five years ago, in 1822, the people of Michigan were beneficiaries of a fascinating sale of federal property, including hundreds of a quaint little musical instrument known as the "jew’s harp." That was the year that witnessed the collapse of the first industry in U. S. history to receive a federal subsidy, but both the episode and its valuable lessons have been largely forgotten.
This remarkable story began with President George Washington, who feared the influence of British fur traders along the Canadian border. Only a government-run company, he reasoned, would be strong enough to challenge the British in the newly formed Michigan Territory. So at Washington’s request in 1795, Congress voted $50,000 to establish a company that would secure furs from the Indians in exchange for an assortment of goods. With trading posts in Detroit and on Mackinac Island, the subsidized company lobbied for ever increasing subsidies—up to $300,000 eventually, which would be worth more than $10 million today.
Problems, however, developed with the government’s fur business. Thomas McKenney, the long-time head of the government company, refused to extend credit to the Indians. Many Indians then could not buy the supplies needed to trap and skin the animals.
Also, McKenney insisted on buying American-made goods to trade with the Indians even if British imports were lower in price and better in quality.
Finally, McKenney had a social agenda. He wanted to "amend the heads and hearts" of the Indians and change them from hunters to farmers. To do this he bought lots of plows and hoes for his trading posts, while the Indians preferred muskets and gunpowder.
As the government fur company stumbled, private traders flourished. The most prominent was John Jacob Astor, an immigrant from Germany who came to New York and set up the American Fur Company in 1808. He targeted Michigan for his fur trade and used Mackinac Island as his western headquarters. To win the Indians’ business, he knew he had to be responsive and efficient.
Astor hired traders, gave them supplies, and had them live with the various Indian tribes. His men provided credit to the Indians and traded with them on the spot. McKenney’s operation, by contrast, required the Indians to travel long distances to the government trading posts only to find they had to hand over their furs for an assortment of goods they found unattractive—including jew’s harps and even an expensive Chinese Mandarin dress.
Astor cut costs and bought less costly, more popular British goods to trade with the Indians. If the Indians wanted axes, kettles, muskets and liquor instead of hoes, he made sure they could get the best.
As an incentive, Astor gave bonuses to agents and traders who developed the most friendly and profitable relationships with the Indians. That spurred his men to spread their operations throughout the Great Lakes area.
Before long, Astor had captured most of the fur trade in Michigan, and McKenney, even with his government support, was losing money. When congressmen began to ask questions, McKenney urged them to increase his subsidy, slap a $10,000 license fee on Astor’s agents, and even ban the private fur companies entirely.
Astor was forced to play politics or else watch his company be abolished by law. Congress needed to investigate the government fur company, he argued. Why, he asked, should we spend tax dollars to have the government do something that entrepreneurs were already doing better?
A subsequent inquiry exposed McKenney’s deficiencies. Among the government company’s dust-collecting inventory of strange or shoddy merchandise unwanted by the Indians, the investigators counted 1,152 unsold jew’s harps.
The revelations of incompetence in the government company sent congressmen scurrying to debate "privatization" for the first time in U. S. history. Especially sarcastic was Thomas Hart Benton, senator from Missouri. What use were the jew’s harps? Benton asked. "I know," he answered with disdain. "They are part of McKenney’s schemes to amend the heads and hearts of the Indians, to improve their moral and intellectual faculties, and to draw them from the savage and hunter state, and induct them into the innocent pursuits of civilized life." Benton knew McKenney’s social experiment had not panned out.
After much debate, Congress, in 1822, shut down the government company. Its unsold supplies were put on the open market, but netted less than 20 percent of what McKenney had paid for them. Lewis Cass, the governor of the Michigan Territory, knew why. "They are not fit for distribution," he concluded after viewing them—proof of the old adage that nobody spends someone else’s money as carefully as he spends his own.
So ended, in Michigan, the federal fur fantasy—in failure with a capital "F."
The Mackinac Center for Public Policy is a nonprofit research and educational institute that advances the principles of free markets and limited government. Through our research and education programs, we challenge government overreach and advocate for a free-market approach to public policy that frees people to realize their potential and dreams.
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