Big Business in USA

Big Business in USA

By the close of the 1890’s the United States had become the world’s leading industrial nation. The expansion of industry was such a varied and complex process that no brief description can do it justify. Yet the industrial output for 1900 was small indeed in compared with that of the 20th century. The value of manufactured in goods produced in 1900 was about 13 billion dollars. By 1929 this figure had increased more than five times as over as 68 billion dollars. Certain forms of mining and manufacturing, however, were of peculiar importance. The two most essential needs of the new economy were coal and steel. In fact, the most reliable way to measure industrial progress in general to watch the increase in the production of these two basic commodities by the domination of a few corporations.By 1900 a starling change had taken place. The very years that witnessed the filling in of the West and the passing of the frontier also saw a revolution in the business and economic life of America. From a country which was not well developed industrially, the US had grown into a land of big business- business which no longer local but nation-wide in scope. Improved forms of communication and railroads which spanned the continent bound together. In the quantity and value of its products it had become the leading manufacturing country of the world. Its population was shifting rapidly to the cities, centers alike of wealth and grinding poverty. Unprecedented quantities of capital had been pooled into single enterprises. Similar way big business also developed by the end of 19th century.

By the close of the 1890’s the United States had become the world’s leading industrial nation. The expansion of industry was such a varied and complex process that no brief description can do it justify. Yet the industrial output for 1900 was small indeed in compared with that of the 20th century. The value of manufactured in goods produced in 1900 was about 13 billion dollars. By 1929 this figure had increased more than five times as over as 68 billion dollars. Certain forms of mining and manufacturing, however, were of peculiar importance. The two most essential needs of the new economy were coal and steel. In fact, the most reliable way to measure industrial progress in general to watch the increase in the production of these two basic commodities by the domination of a few corporations.By 1900 a starling change had taken place. The very years that witnessed the filling in of the West and the passing of the frontier also saw a revolution in the business and economic life of America. From a country which was not well developed industrially, the US had grown into a land of big business- business which no longer local but nation-wide in scope. Improved forms of communication and railroads which spanned the continent bound together. In the quantity and value of its products it had become the leading manufacturing country of the world. Its population was shifting rapidly to the cities, centers alike of wealth and grinding poverty. Unprecedented quantities of capital had been pooled into single enterprises. Similar way big business also developed by the end of 19th century.

Coal and steel:

The principal coal-mining region was a section of northeastern Pennsylvania where there were beds of the hard coal known as anthracite. Anthracite was not discovered in any other part of the United States, but there were plentiful supplies of soft bituminous coal down the Appalachian plateau and in a number of Middle and Far Western states. The anthracite fields soon passed under the control of half a dozen railroad corporations, but the soft-coal fields continued to be owned by thousands of small operators. During the last forty years of the nineteenth century the annual production of anthracite increased from 10,000,000 to 60,000,000 tons, and that of bituminous coal from 6,000,000 to nearly 200,000,000 tons.

In 1860 the production of pig iron amounted to 800,000 tons, while that of steel was negligible. By 1900 the United States was producing nearly 14,000,000 tons of pig iron, of which 11,000,000 were made into steel. This was larger than the combined production of two other leading industrial nations in the world, the Great Britain and Germany.

Pennsylvania, which had both coal and iron fields and transportation facilities, had become the chief center of iron productionbefore the Civil War. Later in the century vast iron fields were developed around Lake Superior, especially the Mesabi Range in Minnesota. But since there was no coal in the region, the ore was transported by water through the Soo Canal and across in the Great Lakes to the Pennsylvania blast furnaces. Pittsburg and other Pennsylvania cities thus retained their predominance in heavy industry, although centers of steel-production developed also in Ohio and other Midwestern states and, on a smaller scale, in parts of the South and the Far West.

The dominant figure in the growth of the American steel industry was Andrew Carnegie. Brought to America from Scotland at the age of thirteen, he worked first in a cotton mill and then for the Pennsylvania Railroad, and became an iron-manufacturer at Pittsburg in 1864. By 1900 the Carnegie Steel Company was making a quarter of all steel in US, and was the owner of coal fields, coke ovens, limestone deposits, iron mines, ore ships, and railroads. Carnegie’s success was due primarily to his efficient business methods and driving energy and to his capacity for forming partnerships with men of almost equal ability, such as Henry C. Frick and Charles Schwab. Like most other corporation executives of this period, he enforced a harsh labor policy of long hours and low wages, and was uncompromisingly hostile to trade unions. On the other hand, he did not engage in stock-watering or other financial malpractices, and he felt obligated to use part of his wealth for useful objectives. Afterhe retired in 1901, he contributed large sums to founding public libraries, improving education, and promoting world peace.

Oil Industry:

After coal and iron, the most important product wasoil, although this did not become indispensible until internal combustion engines came into general use in the 20th century. The organizer of the oil business was John D. Rockefeller, who was comparable to Carnegie both as an industrial builder and in the scale of his philanthropies. Establishing the initial trust, he provided the first outstanding example of the tendency towards monopoly.

The first commercial oil well was drilled in western Pennsylvania in 1859 by E.L. Drake, the chief use of oil at this time being for lighting. Mineral oil quickly began to take the place of tallow and whale oil, and a large number of small operators went into the business. The violently competitive conditions caused a great deal of waste, prevented any stability of prices, profits, and wages, and made long- range planning impossible. Rockefeller, then a young merchant at Cleveland, Ohio, became interested in oil in 1862. He left the drilling to other people and set out to win control of refining, through which he could hope to dictate terms to the whole industry and thereby to stabilize production and ensure regular and substantial profits for himself and his associates. Thus his method of making a fortune was to impose order and economy upon a chaotic, wasteful, and uncertain business.

Rockefeller adopted the most efficient methods of production made a regular habit of saving part of his profits, and, by forming alliances with the ablest men in the industry, was able to establish a kind of monopoly of brains. Operators who were willing to accept his terms were assured of large profits, but those who insisted on remaining independent were crushed by means of ruthless price-cutting. His most remarkable performance was to compel the railroads not merely to give him rebates on the oil which he shipped but also to pay him drawbacks on shipments of oil by rival companies. The refiners who were driven into bankruptcy and the oil drillers who were forced to accept whatever prices Rockefeller chose to offer them portrayed him as a monster of cold- blooded avarice, although his competitive methods were actually not more unethical than those of many other businessmen of the time.

In 1870 Rockefeller and his associates formed the Standard Oil Company of Ohio, which soon acquired a monopoly of refining in the Cleveland area. He then formed alliances with refiners in other parts of the country, and by the end of the decade his group controlled 90 per cent of the oil business in the United States. One of their problems was to find some legal device for tying together the forty different corporations which they represented. A pooling agreement was too easily violated. The problem was temporarily solved in 1882 when the stock of the different corporations was turned over to a group of nine trustees. In this manner Rockefeller created the original “trust,” a word which was afterwards loosely applied to any large combination with monopolistic powers. Ten years later the State of Ohio, under whose laws the trust had been organized, ordered its dissolution. In 1889, however, New Jersey had altered its corporation laws in such a way as to legalize the formation of a holding company- a company, in other words, which owned a majority of the stock in a number of subsidiary corporations and was set up for the sole purpose of maintaining unified control. In1899 the various properties of the Rockefeller group were legally combined through the creation of a giant holding company, the Standard Oil Company of New Jersey.

Meanwhile, the expanding market for oil in its various forms was rapidly increasing the wealth of the group. They began to acquire ownership of railroads, iron and copper mines, public utilities, and numerous other industries, representing an enormous concentration of economic power.

Electricity:

The growing use of electricity for light, power, and communication was another notable feature of the period. This had been made possible by the researches of a number of pure scientists, especially Michael Faraday in England and Joseph Henry in the United States. That electricity could be used to provide light had been demonstrated early in the century, but for a long time the materials used for filaments in bulbs were not sufficiently cheap or durable to make general use possible. The problem was then taken up by Thomas Alva Edison, a self- educated man who had little basic scientific knowledge but had a genius for invention. Edison devised a satisfactory filament in 1879, and in 1882 the Edison Electric Company opened a power plant in New York City to supply current for electric lights. In the same year Frank J.Sprague  worked out a practical method for using electrical power to provide transportation, and in 1887 he directed the building of the first electrical streetcar service at Richmond, Virginia. The use of electricity for communication, which had already produced the telegraph, was further exemplified in 1876 with the invention of the telephone by Alexander Graham Bell, a Scotch immigrant scientist who had specialized in the study of deafness. Bell’s original telephone was afterwards improved by numerous other inventors, the most notable of whom was a Yugoslav immigrant, Michael Pupin. By 1900,  1,355,000 telephones were in use in the United States.

In this public utilities competition meant a wasteful and inconvenient duplication of equipment, and there was therefore strong economic justification for the monopolistic tendencies which quickly developed. The manufacture of much of the essential equipment was controlled partly by Edison Electric, which was expanded into General Electric in 1892, and partly byWestinghouse Electric, which developed the patents taken out by another gifted Yugoslav inventor, Nikola Tesla. The telegraph after 1886 was divided between two companies, Western Union and Postal Telegraph, while most of the nation’s telephones were the property of a network of Bell companies which were tied together by a single vast holding company, American Telephone and Telegraph. This eventually became the largest corporation in the US.

Other Industries:

Technological advance was producing equally revolutionary effects in many other human activities. One group of inventors, for example, devised a series of mechanical implements which transformed farming methods. Others speeded up business procedure with appliances like typewriter (1867), the adding machine (1888), and the cash register (1897). The making of cloths was mechanized by the sewing machine, which had been invented in 1846 but was not generally adopted for factory use until Civil War period. Food habits were changed by development of artificial refrigeration and canning. After the Civil War between the states, the number of patents issued to inventions showed a marked increase. Inventions mushroomed even faster during the 20th century. From 1900 to 1930 the Patent Office issued 1,119,000 patents-nearly three times as many as in the 30-year period from 1860 (36,000) to 1890 (440,000).

Some industries continued to be highly competitive. The manufacturing of textiles and clothing, for example, was performed by numerous small or medium corporations. But the tendency towards concentration was by no means restricted to the processing of mineral products and to railroads and public utilities. Entrepreneurs almost as forceful and ambitious as Rockefeller were putting an end to competition in many different fields. Many of the new mechanical appliances were made exclusively by single corporations. The McCormick Harvester Company of Chicago, for example, acquired almost a monopoly of mechanical farm equipment. Even in some of the industries producing goods directly for consumers, where consolidation often had less economic justification, there was the same tendency James B. Duke’s American Tobacco Company, founded in 1890, and Henry O. Havemeyer’s American Sugar Refining Company, founded in 1891, were examples of almost complete monopoly, while meat-packing was dominated by a small group of Chicago businessmen headed by Philip D. Armour, Gustavus Swift, and Nelson Morris. Among other consumers goods notoriously controlled by trusts were salt, whisky, matches, crackers, wire, and nails. Thus the American people could enjoy the benefits of technology only by paying tribute to the overlords of the new industrial economy.

Anti-trust Legislation:

Throughout the 1880’s public opinion was becoming increasingly alarmed by the growth of monopoly, its most bitter opponents being the small businessmen who could not compete with the big corporations. In popular parlance any large combination was known as a trust, although actually businessmen secured control of the market in a variety of ways. In addition to forming trusts, they combined different corporations through holding companies or by means of complete mergers. Sometimes one corporation secured so large a share of the market that it could dictate terms to its rivals, and in some of the new industries competition was impossible because one corporation had an exclusive ownership of essential patent rights. As the American people watched the proliferation of millionaires, they became convinced that something must be done to maintain effective competition and thereby bring about lower prices.

During the 1880’s a number of state governments passed laws prohibiting trusts and other forms of combination; but such legislation was ineffective as long as other states refused to fall into line. Some of them, however, notably New Jersey, Delaware, and West Virginia, placed very few restrictions upon the issuance of corporation charters. A group of businessmen organizing a combination had only to establish legal head-quarters in New Jersey and secure a New Jersey charter, after which their corporation could own property and do business in all the other states. It became obvious, therefore, that only the Federal government could prevent the growth of trusts.

As with the Interstate Commerce Act, few Congressmen regarded legislation as either desirable or practicable, but public opinion demanded some kind of action. In 1890 Congress passed the Sherman Anti-trust Act by an almost unanimous vote. This brief and loosely worded measure was a remarkably crude attempt to cope with a very delicate and complex problem. Giving statutory definition to a traditional common-law doctrine, the act declared that “every contract, combination in the form of trust or otherwise, or conspiracy in restraint of trade or commerce among the several states, or with foreign nations” was illegal. “Every person who shall attempt to monopolize, or combine or conspire with any other person or persons to monopolize, any part of trade or commerce among the several states or with foreign nations” was declared guilty of a misdemeanor punishable by a fine of not more than $5,000 and/or imprisonment of not more than one year.

If any hopeful citizens expected that John D. Rockefeller would now be sent to jail, they were quickly disillusioned. Prior to the year 1901 neither the Department of Justice nor the law courts showed any honest desire to comply with the Sherman Act. Strict and literal enforcement of its terms would, in fact, have impeded technological progress; it would have been absurd to fine or imprison anybody who established a monopoly without distinguishing between those businessmen who formed combinations solely in order to raise prices and those who dominated an industry through the efficiency of their methods of production. Between 1891 and 1901 the Federal law officers brought eighteen suits under the Sherman Act and won ten of them, while private persons brought twenty-two suits and were successful in three. But none of the victories were won against big business. In the E. C. Knight Company case of 1895 Attorney General Olney showed that the sugar trust controlled 98 per cent of the sugar refined in the United States, but according to the Supreme Court he failed to prove that it had sought “to put a restraint upon trade or commerce,” and on this ground the trust was acquitted. The manufacturing business in which it was engaged, declared the Court, “had no direct relation with commerce between the states.” But while the Sherman Act was not enforced against the big corporations, it was perverted in several cases into a weapon for attacking trade unions.

The tendency towards combination, in fact, actually became accelerated after the Sherman Act, and did not reach its climax until the turn of the century. In 1904 John Moody calculated that during the period since the Civil War 5,300 separate firms had been combined into 318 large corporations, and that 236 of these combinations had taken place during the period 1898-1903. By 1904, 38 percent of all manufacturing was done by those firms, 1 percent of the total, which had an annual output of more than $1,000,000.

The Rise of Investment Banking:

Perhaps the most significant feature of the combinations of the 1890’s was the growing influence of the investment bankers. Historians sometimes distinguish between three different phases in the development of capitalism, both in Europe and in America; the dominance of mercantile capitalism had been replaced in the early nineteenth century by that of industrial capitalism, and this was now changing into finance capitalism. The influence of the bankers came about through their control of the investment market. A corporation in need of capital would ask a banking house to undertake the function of selling its securities. But if the bankers were to retain the confidence of the customers to whom they sold such securities, they needed some assurance that the corporation was soundly organized and likely to make a profit. As a result of their function of protecting stockholders interests, the bankers gradually began to assume supervisory power over corporation management.

The chief banking house of the Civil War period, Jay Cooke and Company of Philadelphia, became insolvent in 1873. Financial supremacy then passed to New York, where the leading firm was Drexel, Morgan and Company,reorganized in1895 under the name of J.P. Morgan and Company. Other important houses were August Belmont and Kuhn, Loeb of New York and Lee, Higginson and Kidder, Peabody of Boston. But there was relatively little competition between, and by the 1890’s J.P. Morgan was recognized as their leader and, indeed, as the dominant figure in the entire national economy.

The House of Morgan:

Endowed not only with great financial ability but with an extraordinarily personality, Morgan set out to impose order and stability in one industry after another. His main objective was to ensure a regular flow of dividends to stockholders, in order that they might continue to buy securities and contribute their savings for further expansion. This made it necessary to ensure efficient management and to put an end to the buccaneering of men like Jay Gould, who had made millions by buying control of different corporations, arranging mergers, watering the stock, and then selling out. By promoting higher standards of financial integrity, Morgan performed a very necessary function. At the same time he disliked competition, on the ground that it led to outbreaks of cutthroat price-cutting which were bad for all the businessmen involved, and believed in a policy of “community of interest” by which corporations should make agreements with each about price and the division of the market. Thus while Morgan’s policies meant more protection for stockholders, they also resulted in higher prices for the consuming public.

Drexel, Morgan and Company was at first occupied chiefly with the sale of American securities in Europe. Since much European capital was invested in railroads, the firm assumed responsibility for reorganizing roads that were no longer paying dividends, scaling down their capitalization and squeezing out the water, installing more efficient management, placing its own representatives on the boards of directors, and promoting combinations. Before the end of the century more than a third of the total railroad mileage of the country had been “Morganized.” In the 1890’s Morgan extended his activities into a large number of other industries, and was the moving spirit in many of the combinations formed around the turn of the century.

The biggest of the Morgan promotions was United States Steel in 1901, which was made possible by the retirement of Andrew Carnegie. Morgan took the lead in combining the Carnegie Company with ten other steel companies into a single vast corporation capitalized at the then unprecedented figure of $1,018,000,000 plus a bonded debt of $303,450,000. This was scarcely an example of Morgan financing at its best, since the combined assets of the merged companies were valued at only $682,000,000 and the remainder of the capitalization therefore represented water, while the House of Morgan itself received the tidy sum of $75,000,000 for its services. But the investors who bought the stock of United States Steel had no cause to regret their purchases, which usually earned high dividends. United States Steel controlled more than half the entire steel business and was strong enough to fix prices and determine policies for the whole industry. In accordance with Morgan’s “community of interest” doctrine, its directors cultivated friendly relations with their competitors, andused their power to maintain high price schedules, which sometimes remained unchanged for a dozen years at a time.

The only financial empire which could compete with the House of Morgan was Standard Oil. But in 1907 the two groups established interlocking directorates in some of the corporations they controlled and became partners in a number of different financial operations. In 1912 the Pujo Committee of the House of Representatives investigated the situation and came to the conclusion that, through the banks, trust companies, and insurance companies under their management, the Morgan-Rockefeller combination had control of financial resources amounting to more than $6,000,000,000, and that members of the group held directorships in 112 corporations with a total capitalization of $22,245,000,000. Many people interpreted these findings as a proof that the House of Morgan had created a monopoly of money and thereby acquired dictatorial powers over American industry. Such fears were exaggerated, since the House of Morgan was a part of the economic system and not a controlling influence over it. Nor should it be forgotten that it had acquired its pre-eminence chiefly because its methods had won the confidence of investors. But such a concentration of money and credit under the control of a few men was certainly a startling to the democratic ideals in which Americans professed to believe.

The Evolution of the Corporation:

The rise of the investment bankers was accompanied by important changes in the management and control of the big corporations. Many of the new industries had been built up by independent entrepreneurs who owned a large proportion of the stocks in the corporations they organized and personally supervised their activities. But after these men died or retired, they did not usually pass on their managerial functions to their heirs, who often preferred to devote themselves to sport, pleasure, politics, or philanthropy. As corporations grew larger, moreover, there was a tendency for ownership to become diffused among large numbers of stockholders, none of whom held a big enough percentage to exercise control. Thus ownership and management began to become divorced from each other, as had happened in the New England textile industry even before the Civil War. Although a corporation was still legally the property of the stockholders, they often ceased to have any effective control over its policies; ownership now meant only the right to receive whatever dividends management chose to distribute. In practice, as we have seen, the function of representing stockholders interests, including the power to appoint and supervise the managers, was exercised by the investment banking houses. But the actual work of administration was left to salaried executives who understood the business and had usually worked their way up within it.