NOTHING SO EPITOMIZED THE ECONOMY of the late nineteenth-century Western world as steel. Its production became the measure of a country’s industrial power, and its uses were almost without limit. Its influence in other sectors of the economy, such as railroads and real estate, was immense. But steel was hardly an invention of the time. Indeed, it has been around for at least three thousand years. What was new was the cost of producing it.
Pig iron, the first step in iron and steel production, is converted into bar iron by remelting it and mixing it with ground limestone to remove still more impurities. Cast iron is then created by pouring this into molds, producing such items as frying pans, cookstoves, and construction members. Cast iron was widely used in urban construction in the antebellum period, but it had serious drawbacks. Extremely strong in compression, cast iron makes excellent columns. But, because it is very brittle, it is weak in tension, making it unsuitable for beams. For them, wrought iron was needed.
Wrought iron is made by melting pig iron and stirring it repeatedly until it achieves a pasty consistency and most of the impurities have been volatilized. The laborers who worked these furnaces were known as puddlers and were both highly skilled and highly paid. After the metal is removed from the puddling furnace, it is subjected to pressure and rolled and folded over and over—in effect, it is kneaded like bread dough—until it develops the fibrous quality that makes wrought iron much less brittle than cast iron and thus moderately strong in tension. Wrought iron is quite soft compared to cast iron but it is also ductile, able to be drawn out and hammered into various shapes, just as copper can be.
Wrought iron, of course, was much more expensive to produce than cast iron but could be used for making beams, bridges, ships, and, most important to the nineteenth-century economy after 1830, railroad rails. The Industrial Revolution simply could not have moved into high gear without large quantities of wrought iron.
Steel, which is iron alloyed with just the right amount of carbon under suitable conditions, has the good qualities of both cast and wrought iron. It is extremely strong and hard, like cast iron, while it is also malleable and withstands shock like wrought iron. And it is far stronger in tension than either, and thus makes a superb building material.
But until the mid-nineteenth century, the only way to make steel was in small batches from wrought iron, mixing the iron with carbon and heating it for a period of days. Thus its use was limited to very high-value items such as sword blades, razors, and tools, where its ability to withstand shock and take and hold a sharp edge justified its high cost. At mid-century, roughly 250,000 tons of steel were being made by the old methods in Europe, and only about 10,000 tons in the United States.
Then, in 1856, an Englishman named Henry Bessemer (later Sir Henry) invented the Bessemer converter, which allowed steel to be made directly and quickly from pig iron. As so often happens in the history of technological development, the initial insight was the result of an accidental observation. Bessemer had developed a new type of artillery shell, but the cast-iron cannons of the day were not strong enough to handle it. He began experimenting in hopes of developing a stronger metal, and one day a gust of wind happened to hit some molten iron. The oxygen in the air, combining with the iron and carbon in the molten metal, raised the temperature of the metal and volatilized the impurities. Most of the carbon was driven off. What was left was steel.
Bessemer, realizing what had happened, immediately set about designing an industrial process that would duplicate what he had observed accidentally. His converter was a large vessel, about ten feet wide by twenty feet high, with trunnions so that its contents could be poured. It was made of steel and lined with firebrick. At the bottom, air could be blasted through holes in the firebrick into the “charge,” as the mass of molten metal in the crucible was called, converting it to steel in a stupendous blast of flame and heat. With the Bessemer converter, ten to thirty tons of pig iron could be turned into steel every twelve to fifteen minutes in what is one of the most spectacular of all industrial processes.
The labor activist John A. Fitch wrote in 1910 that “there is a glamor about the making of steel. The very size of things—the immensity of the tools, the scale of production—grips the mind with an overwhelming sense of power. Blast furnaces, eighty, ninety, one hundred feet tall, gaunt and insatiable, are continually gaping to admit ton after ton of ore, fuel, and stone. Bessemer converters dazzle the eye with their leaping flames. Steel ingots at white heat, weighing thousands of pounds, are carried from place to place and tossed about like toys…. [C]ranes pick upsteel rails or fifty-foot girders as jauntily as if their tons were ounces. These are the things that cast a spell over the visitor in these workshops of Vulcan.”
One of the visitors to Henry Bessemer’s steelworks in Sheffield, England, in 1872, was a young Scottish immigrant to America, Andrew Carnegie. He was mightily impressed—so impressed, in fact, that in the next thirty years he would ride the growing demand for steel to one of the greatest American fortunes.
Carnegie had been born in Dunfermline, a few miles northwest and across the Firth of Forth from Edinburgh, in 1835. His father was a hand weaver who owned his own loom, on which he made intricately patterned damask cloth. Dunfermline was a center of the damask trade, and skilled weavers such as William Carnegie could make a good living at it.
But the Industrial Revolution destroyed William Carnegie’s livelihood. By the 1840s power looms could produce cloth such as damask much more cheaply than handlooms. While there had been 84,560 handloom weavers in Scotland in 1840, there would be only 25,000 ten years later. William Carnegie would not be one of them.
The elder Carnegie sank into despair, and his far tougher-minded wife took charge of the crisis. She had gotten a letter from her sister, who had immigrated to America, settling in Pittsburgh. “This country’s far better for the working man,” her sister wrote, “than the old one, & there is room enough & to spare, notwithstanding the thousands that flock to her borders.” In 1847, when Andrew was twelve, the Carnegie family moved to Pittsburgh.
The Carnegies were in the first wave of one of the great movements of people in human history, known as the Atlantic migration. At first most of the immigrants came from the British Isles, especially Ireland after the onset of the Great Famine of the 1840s. Later Germany, Italy, and Eastern Europe provided immigrants in huge numbers, more than two million in 1900 alone.
In its size and significance the Atlantic migration was the equal of the barbarian movements in late classic times that helped bring the Roman Empire to an end. But while many of the barbarian tribes had been pushed by those behind them, the more than thirty million people who crossed the Atlantic to settle in America between 1820 and 1914 were largely pulled by the lure of economic opportunity.
Many, such as the land-starved Scandinavians who settled in the Upper Middle West, moved to rural areas and established farms. But most, at least at first, settled in the country’s burgeoning cities, in the fast-spreading districts that came to be called slums (a word that came into use, in both Britain and America, about 1825). For the first time in American history, a substantial portion of the population was poor. But most of the new urban poor were not poor for long.
These slums, by modern standards, were terrible almost beyond imagination, with crime-and vermin-ridden, sunless apartments that often housed several people, sometimes several families, to a room and had only communal privies behind the buildings. In the 1900 census, when conditions in the slums had much improved from mid-century, one district in New York’s Lower East Side had a population of more than fifty thousand but only about five hundred bathtubs.
Such housing, however, was no worse—and often better—than what the impoverished immigrants left behind in Europe, and as Mrs. Carnegie’s sister—and millions like her—reported back home, the economic opportunities were far greater. The labor shortage so characteristic of the American economy since its earliest days had not abated. So the average stay for an immigrant family in the worst of the slums was less than fifteen years, before they were able to move to better housing in better neighborhoods and begin the climb into the American middle class.
The migration of people to the United States in search of economic opportunity has never ceased, although legal limits were placed on it beginning in the early 1920s. And this vast migration did far more than help provide the labor needed to power the American economy. It has given the United States the most ethnically diverse population of any country in the world. And because of that, it has provided the country with close personal connections with nearly every other country on the globe, an immense economic and political advantage.
The Carnegies moved into two rooms above a workshop that faced a muddy alleyway behind Mrs. Carnegie’s sister’s house in Allegheny City, a neighborhood of Pittsburgh. Mrs. Carnegie found work making shoes, and Mr. Carnegie worked in a cotton mill. Andrew got a job there as well, as a bobbin boy earning $1.20 a week for twelve-hour days, six days a week.
Needless to say, it didn’t take the bright and ambitious Andrew Carnegie fifteen years to start up the ladder. By 1849 he had a job as a telegraph messenger boy, earning $2.50 a week. This gave him many opportunities to become familiar with Pittsburgh and its business establishment, and Carnegie made the most of them. Soon he was an operator, working the telegraph himself and able to interpret it by ear, writing down the messages directly. His salary was up to $25 a month.
In 1853, in a classic example of Louis Pasteur’s dictum that chance favors the prepared mind, Thomas A. Scott, general superintendent of the Pennsylvania Railroad, a frequent visitor to the telegraph office where Carnegie worked, needed a telegraph operator of his own to help with the system being installed by the railroad. He chose Carnegie, not yet eighteen years old. By the time Carnegie was thirty-three, in 1868, he had an annual income of $50,000, thanks to the tutelage of Thomas Scott and numerous shrewd investments in railway sleeping cars, oil, telegraph lines, and iron manufacturing. But after his visit to Bessemer’s works in Sheffield, he decided to concentrate on steel.
IT HAD BEEN PURE CHANCE that had brought the Carnegie family to Pittsburgh, but its comparative advantages would make it the center of the American steel industry.
Set where the Allegheny and Monongahela rivers join to form the Ohio and provide easy transportation over a wide area, Pittsburgh had been founded, as so many cities west of the mountains were, as a trading post. Shortly after the Revolution, Pittsburgh began to exploit the abundant nearby sources of both iron ore and coal and specialize in manufacturing. While the rest of the country still relied on wood, coal became the dominant fuel in Pittsburgh, powering factories that were turning out glass, iron, and other energy-intensive products. As early as 1817, when the population was still only six thousand, there were 250 factories in operation, and the nascent city, with already typical American boosterism, was calling itself the “Birmingham of America.” Because of the cheap coal, Pittsburgh exploited the steam engine long before it began to displace water power elsewhere, and most of its factories were steam-powered by 1830.
There was, however, a price to be paid for the cheap coal, which produces far more smoke than does wood. About 1820, when Pittsburgh was still a relatively small town, a visitor wrote that the smoke formed “a cloud which almost amounts to night and overspreads Pittsburgh with the appearance of gloom and melancholy.” By the 1860s even Anthony Trollope, London-born and no stranger to coal smoke, was impressed with the pall. Looked down on from the surrounding hills, Trollope reported, some of the tops of the churches could be seen, “But the city itself is buried in a dense cloud. I was never more in love with smoke and dirt than when I stood here and watched the darkness of night close in upon the floating soot which hovered over the house-tops of the city.” As the Industrial Revolution gathered strength, other American cities became polluted with coal smoke and soot, but none so badly as Pittsburgh.
The most important coal beds in the Pittsburgh area were those surrounding the town of Connellsville, about thirty miles southeast of the city. What made Connellsville coal special was that it was nearly perfect for converting into coke. Indeed it is the best coking coal in the world.
Coke is to coal exactly what charcoal is to wood: heated in the absence of air to drive off the impurities, it becomes pure carbon and burns at an even and easily adjusted temperature. And either charcoal or coke is indispensable to iron and steel production. As the iron industry in Pittsburgh grew, it turned more and more to coke, the production of which was far more easily industrialized than was charcoal.
By the time Andrew Carnegie was moving into steel, Henry Clay Frick, who had been born in West Overton, Pennsylvania, not far from Connellsville, in 1849, was moving into coke. Like Carnegie, Frick was a very hardheaded businessman and willing to take big risks for big rewards. And like Carnegie, he was a millionaire by the time he was thirty. Unlike Carnegie, however, he had little concern with public opinion or the great social issues of the day. Carnegie always wanted to be loved and admired by society at large. Frick was perfectly willing to settle for its respect. Unlike Carnegie, he rarely granted newspaper interviews and never wrote articles for publication.
By the 1880s the Carnegie Steel Company and the H. C. Frick Company dominated their respective industries, and Carnegie was by far Frick’s biggest customer. In late 1881, while Frick was on his honeymoon in New York, Carnegie, who loved surprises, suddenly proposed a merger of their companies at a family lunch one day. Frick, who had no inkling the proposal was coming, was stunned. So was Carnegie’s ever-vigilant mother, now in her seventies. The silence that ensued was finally broken by what is perhaps the most famous instance of maternal concern in American business history.
“Ah, Andra,” said Mrs. Carnegie in her broad Scots accent, “that’s a very fine thing for Mr. Freek. But what do we get oout of it?”
Needless to say, Carnegie had calculated closely what he would get out of it. First, the Carnegie Steel Company would get guaranteed supplies of coke at the best possible price; second, he would get the surpassing executive skills of Henry Clay Frick; and third, he would further the vertical integration of the steel industry in general and his company in particular.
Vertical integration simply means bringing under one corporation’s control part or all of the stream of production from raw materials to distribution. It had been going on since the dawn of the Industrial Revolution (Francis Cabot Lowell had been the first to integrate spinning and weaving in a single building) but greatly accelerated in the last quarter of the nineteenth century as industrialists sought economies of scale as well as of speed to cut costs.
Carnegie and Frick shared a simple management philosophy: (1) Innovate constantly and invest heavily in the latest equipment and techniques to drive down operating costs. (2) Always be the low-cost producer so as to remain profitable in bad economic times. (3) Retain most of the profits in good times to take advantage of opportunities in bad times as less efficient competitors fail.
One such opportunity arose in 1889, by which time Frick was chairman of the Carnegie steel companies (Carnegie himself never held an executive position in the companies he controlled, but as the holder of a comfortable majority of the stock, he was always the man in charge). That year Frick snapped up the troubled Duquesne Steel Works, paying for it with $1 million in Carnegie company bonds due to mature in five years. By the time the bonds were paid off, the plant had paid for itself five times over.
Much of the technological advances that Carnegie was so quick to use came from Europe’s older and more established steel industries, just as, nearly a century earlier, the American cloth industry had piggybacked on Britain’s technological lead. As one of Carnegie’s principal lieutenants, Captain W. M. Jones, explained to the British Iron and Steel Institute as early as 1881, “While your metallurgists as well as those of France and Germany, have been devoting their time and talents to the discovery of new processes, we have swallowed the information so generously tendered through the printed reports of the Institute, and we have selfishly devoted ourselves to beating you in output.”
And beat them they did. In 1867 only 1,643 tons of Bessemer steel was produced in the United States. Thirty years later, in 1897, the tonnage produced was 7,156,957, more than Britain and Germany combined. By the turn of the century the Carnegie Steel Company alone would outproduce Britain. It would also be immensely profitable. In 1899 the Carnegie Steel Company, the low-cost producer in the prosperous and heavily protected American market, made $21 million in profit. The following year profits doubled. No wonder Andrew Carnegie exclaimed at one point, “Was there ever such a business!”
And steel was also transforming the American urban landscape. When stone was the principal construction material of large buildings, they could not rise much above six stories, even after the elevator was perfected in the 1850s, because of the necessary thickness of the walls. It was church steeples that rose above their neighbors and punctuated the urban skyline. But as the price of steel declined steadily as the industry’s efficiency rose—by the 1880s the far longer-lasting steel railroad rails cost less than the old wrought-iron rails—more and more buildings were built with steel skeletons and could soar to the sky. Between the 1880s and 1913 the record height for buildings was broken as often as every year as “skyscrapers” came to dominate American urban skylines in an awesome display of the power of steel.
CAPITAL AND LABOR are equally necessary to industrial production on a grand scale, such as that of steel, for neither can create wealth without the other. The problem has always been one of deciding how to allocate the wealth created between them. Before the Industrial Revolution, capital and labor lived on intimate terms, often within the same family. Much of the labor was supplied by apprentices, who earned little beyond room and board, but acquired skills they could exploit later as adults.
What labor was hired in the open market was often highly skilled and could command good wages. That, of course, did not mean that there were no disagreements. The earliest recorded strike in what is now the United States took place in 1768 when journeymen tailors walked out in New York City. In 1798 the first union, the Federal Society of Journeyman Cordwainers, was formed in Philadelphia. (Journeymen, as the word implies, are those who are paid by the day; cordwainer is a now obsolete term for a shoemaker.) By the 1820s unions of these types were joining together in tradesmen associations, representing all, or many, skilled workers in a given area. By the 1850s, with the formation of the International Typographical Union that represented printers in both the United States and Canada, labor organizations of national and even international scope began to emerge.
But as the factory system spread and the division of labor became more finely broken down, more and more unskilled workers sought jobs in factories, first in such industries as spinning and cloth weaving and later in steel and other heavy industries as they exploded in size after the Civil War. Unlike the skilled workers, such as the puddlers, these men (and women in the cloth industry) had little individual bargaining power.
This has long been the heart of the problem in the eternal tug-of-war between capital and labor in the American economy. Capital speaks with one voice, either because the company is dominated by one person, such as Andrew Carnegie, or the stockholders hire management to speak for them. But labor, at first, was fragmented, and individual laborers often had no choice but to take what was offered.
Even after the craft labor unions formed, they did little to help the unskilled workers. The skilled workers looked down on the unskilled, many of whom were recent immigrants, seeing them not as allies against management but as a burden, likely to bring down their own wages. This produced a deep split in the ranks of labor that would not be fully healed until the 1950s.
There were several attempts to form organizations that would represent all workers, such as the National Labor Union, formed in 1866, and, most famously, the Knights of Labor, organized three years later, which had more than seven hundred thousand members by the mid-1880s. It accepted workers of all skill levels and even admitted black workers, although they were in separate locals. The Industrial Workers of the World, the so-called Wobblies, formed in 1905, never numbered its membership in more than tens of thousands, but had great influence, thanks to its innovative tactics and bold proposals.
Unfortunately, many of these wide-based labor organizations had other agendas besides improving the wages and working conditions of their members. They increasingly adhered to socialist ideas imported from Europe that, perhaps not surprisingly, found little support among the population of a nation that had been founded and built by generations of individualists bent on their own economic advancement.
Socialism, in all its many forms, is based on class and the idea that the various social classes are fixed, and therefore the members of each class have economic interests that are in common and opposed to the other classes. But the so-called classes in democratic countries are, in fact, nothing more than lines drawn by intellectuals across what are, in the real world, economic continua. For generations now, more than 90 percent of Americans have defined themselves as “middle class.”
And no country in history has developed a social structure more rewarding of individual economic success than the United States. Ward McAllister, the self-appointed arbiter of New York society in the Gilded Age—he coined the phrase “the four hundred”—described that group’s membership. It consisted, he wrote, of those, “who are now prominently to the front, who have the means to maintain their position, either by gold, brains or beauty, gold being always the most potent ‘open sesame,’ beauty the next in importance, while brains and ancestors count for very little.” No wonder so many intellectuals have been chronically disaffected with American society.
Andrew Carnegie himself, of course, was the ultimate example of what millions of other immigrants hoped that they, or their children, might become. Another immigrant of Carnegie’s generation followed a different path to immortality. Born in 1850, Samuel Gompers, like Carnegie, was born British and poor. His parents were Jewish, and his father worked as a cigar maker and was active in the union and socialist movements there. In 1863 the family immigrated to New York, where Gompers soon began working as a cigar maker himself and quickly became involved in union matters. By the 1880s he was heading the Cigar Makers International Union.
Gompers believed in organizing unions on craft lines, giving primacy to national organizations, rather than locals, and to reaching labor’s goals by economic action—strikes, boycotts, picketing, and so on—not political action. He was convinced that “pure and simple” unionism would lead to success and to “industrial emancipation.” Gompers was a socialist, in theory, but realized that the only way to achieve that distant goal was to see that labor became strong enough to bargain with management as an equal first.
In 1886 he took the cigar workers out of the Knights of Labor and formed the American Federation of Labor, an organization of craft unions. He would be president of the AFL for the rest of his life (except for the year 1895) and would be the most famous labor leader in the country. By 1900 about 10 percent of American workers were members of unions, a larger percentage than is found in the private sector today.
Because there were almost no rules dealing with the inevitable conflict between labor and management, there were bound to be clashes that turned violent. And because management was in a far better position to influence government at this time, government almost always came down on the side of the companies in a crisis. In 1877, at the bottom of the depression of the 1870s, management of most of the eastern railroads coordinated to cut pay by 10 percent for all workers, suddenly and without warning. Workers on the Baltimore and Ohio struck, seized possession of the rail yards, and refused to allow freight trains to leave.
The strike quickly spread to other railroads, including the other three major trunk lines that linked the East Coast with the Middle West. When the governor of Pennsylvania called out the state militia, it dispersed the strikers on the Pennsylvania Railroad in Pittsburgh, killing twenty-six of them. An enraged mob then forced the militia to seek refuge in a roundhouse at the Pennsylvania yard and set it afire. The militia managed to fight their way out but then left the city of Pittsburgh in the hands of the strikers and looters, who destroyed more than $5 million in railroad property. President Hayes felt he had no choice but to dispatch regular army troops to restore civil order.
Because of such violence, and, of course, because of their own self-interest, many of the more established citizens feared unions, regarding labor leaders, many of whom were immigrants such as Gompers, as foreigners with dangerous, un-American ideas. Andrew Carnegie, however, often championed the rights of workers in the frequent articles he wrote and published. But these articles dealt with abstractions of social and economic policy. Where Carnegie’s personal interests were involved, Carnegie had no hesitation to oppose and break unions at his own plants, although he typically left the dirty work to others.
In 1889 a strike in the face of great demand for steel in a booming economy and a panicky Carnegie executive in charge of negotiations had resulted in a contract highly favorable to the union that represented workers at the Homestead Works outside Pittsburgh. Carnegie was determined that when the contract came up for renewal in 1892, the union be broken. Always concerned with his reputation, he gave Henry Clay Frick carte blanche to do what was necessary and then left for Scotland.
Frick built an eleven-foot-high fence, three miles long, around the entire plant and equipped it with watch towers, searchlights, and barbed wire. It was immediately dubbed “Fort Frick.” He also arranged with the Pinkerton Detective Agency to supply three hundred men to defend the plant in the event of a lockout.
When the union rejected Frick’s offer (as Frick had hoped and intended it would), he announced that the plant would deal only with individual workers, not the union, and began shutting down the plant. The workers struck. He tried to sneak the Pinkertons in on barges towed up the Monongahela River into the plant, but they were spotted by workers, who immediately broke through the fence and seized the plant. (So much for Fort Frick.) A battle raged all day as the Pinkertons tried to land, with casualties on both sides. Finally a truce was negotiated, allowing the Pinkertons to withdraw. Three of them were killed during the withdrawal, however, and the governor of Pennsylvania sent in six thousand militia to restore order. Under their protection, Frick was able to hire nonunion workers.
A blaze of publicity more or less destroyed Carnegie’s carefully cultivated friend-of-the-working-man reputation. But when Frick was attacked a few days later in his office by an assassin named Alexander Berkman, he earned both the sympathy and even admiration of the country. Despite two bullet wounds to the neck and three stab wounds, Frick fought back ferociously and managed to subdue his attacker with the help of his office assistants. He then refused anesthetic as the doctor probed for the bullets and insisted on finishing his day’s work.
The assassin was entirely unconnected with the labor dispute, but was, inevitably, associated with it, and public sympathy for the union drained away. “It would seem,” said Hugh O’Donnell, the strike’s leader, “that the bullet from Berkman’s pistol, failing in its foul intent, went straight through the heart of the Homestead strike.” By November the strike was over and the company had won an unequivocal victory in economic terms.
Violence in labor disputes abated toward the end of the nineteenth century, but it would be another generation, until the 1930s, before the interests of labor would be fully protected by government action and labor could bargain with management on something like equal terms.
WHILE THE LATE-NINETEENTH-CENTURY American economy was increasingly built by and with steel, it was increasingly fueled by oil. In 1859, the year Edwin Drake drilled the first well, American production amounted to only 2,000 barrels. Ten years later it was 4.25 million and by 1900, American production would be nearly 60 million barrels. But while production rose steadily, the price of oil was chaotic, sinking as low as 10 cents a barrel—far below the cost of the barrel itself—and soaring as high as $13.75 during the 1860s. One reason for this was the vast number of refineries then in existence. Cleveland alone had more than thirty, many of them nickel-and-dime, ramshackle operations.
Many people, while happy to exploit the new oil business, were unwilling to make large financial commitments to it for fear that the oil would suddenly dry up. The field in northwestern Pennsylvania was very nearly the only one in the world until the 1870s, when the Baku field in what was then southern Russia opened up. There would be no major new field in the United States until the fabulous Spindletop field in Texas was first tapped in 1902.
But a firm named Rockefeller, Flagler, and Andrews, formed to exploit the burgeoning market for petroleum products, especially kerosene, took the gamble of building top-quality refineries. Like Carnegie, it intended to exploit being the low-cost producer, with all the advantages of that position. The firm also began buying up other refineries as the opportunity presented itself.
The firm realized that there was no controlling the price of crude oil but that it could control, at least partly, another important input into the price of petroleum products: transportation. It began negotiating aggressively with the railroads to give the firm rebates in return for guaranteeing high levels of traffic. It was this arrangement that often allowed the firm to undersell its competitors and still make handsome profits, further strengthening the firm’s already formidable competitive position.
In 1870 one of the partners, Henry Flagler, convinced the others to change the firm from a partnership to a corporation, which would make it easier for the partners to continue to raise capital to finance their relentless expansion while retaining control. The new corporation, named Standard Oil, was capitalized at $1 million and owned at that time about 10 percent of the country’s oil refining capacity. By 1880 it would control 80 percent of a much larger industry.
The expansion of Standard Oil became one of the iconic stories of late-nineteenth-century America, as its stockholders became rich beyond imagination and its influence in the American economy spread ever wider. Indeed, the media reaction to Standard Oil and John D. Rockefeller in the Gilded Age is strikingly similar to the reaction to the triumph of Microsoft and Bill Gates a hundred years later. It is perhaps a coincidence that Rockefeller and Gates were just about the same age, their early forties, when they became household names and the living symbols of a new and, to some, threatening economic structure.
The image of Standard Oil that remains even today in the American folk memory was the product of a number of writers and editorial cartoonists who often had a political agenda to advance first and foremost. The most brilliant of these was Ida Tarbell, whose History of the Standard Oil Company, first published in McClure’s magazine in 1902, vividly depicted a company ruthlessly expanding over the corporate bodies of its competitors, whose assets it gobbled up as it went.
That is by no means a wholly false picture, but it is a somewhat misleading one. For one thing, as the grip of Standard Oil relentlessly tightened on the oil industry, prices for petroleum products declined steadily, dropping by two-thirds over the course of the last three decades of the nineteenth century. It is simply a myth that monopolies will raise prices once they have the power to do so. Monopolies, like everyone else, want to maximize their profits, not their prices. Lower prices, which increase demand, and increased efficiency, which cuts costs, is usually the best way to achieve the highest possible profits. What makes monopolies (and most of them today are government agencies, from motor vehicle bureaus to public schools) so economically evil is the fact that, without competitive pressure, they become highly risk-aversive—and therefore shy away from innovation—and notably indifferent to their customers’ convenience.
Further, Standard Oil used its position as the country’s largest refiner not only to extract the largest rebates from the railroads but also to induce them to deny rebates to refiners that Standard Oil wanted to acquire. It even sometimes forced railroads to give it secret rebates not only on its own oil, but on that shipped by its competitors as well, essentially a tax on competing with Standard Oil. (This is about as close as the “robber barons” ever came to behaving like, well, robber barons.) It thus effectively presented these refiners with Hobson’s choice: they could agree to be acquired, at a price set by Standard Oil, or they could be driven into bankruptcy by high transportation costs.
The acquisition price set, however, was a fair one, arrived at by a formula developed by Henry Flagler, and consistently applied. Sometimes, especially if the owners of the refinery being acquired had executive talents that Standard wished to make use of, the price was a generous one. Further, the seller had the choice of receiving cash or Standard Oil stock. Those who chose the latter—and there were hundreds—became millionaires as they rode the stock of the Standard Oil Company to capitalist glory. Those who took the cash often ended up whining to Ida Tarbell.
None of this, of course, was illegal, and that was the real problem. In the late nineteenth century people such as Rockefeller, Flagler, Carnegie, and J. P. Morgan were creating at a breathtaking pace the modern corporate economy, and thus a wholly new economic universe. They were moving far faster than society could fashion, through the usually slow-moving political process, the rules needed to govern that new universe wisely and fairly. But that must always be the case in democratic capitalism, as individuals can always act far faster than can society as a whole. Until the rules were written—largely in the first decades of the twentieth century—it was a matter of (in the words of Sir Walter Scott)
The good old rule, the simple plan
That they should take who have the power
And they should keep who can.
Part of the problem is that there is a large, inherent inertia in any political system, and democracy is no exception. Politicians, after all, are in the reelection business, and it is often easier to do nothing than to offend one group or another. So while the American economy had changed profoundly since the mid-nineteenth century, the state incorporation laws, for instance, had not. As an Ohio corporation, Standard Oil was not allowed to own property in other states or to hold the stock of other corporations. As it quickly expanded throughout the Northeast, the country, and then across the globe, however, Standard Oil necessarily acquired property in other states and purchased other corporations.
The incorporation laws, largely written in an era before the railroads and telegraph had made a national economy possible, were no longer adequate to meet the needs of the new economy. To get around the outdated law, Henry Flager, as secretary of Standard Oil, had himself appointed as trustee to hold the property or stock that Standard Oil itself could not legally own. By the end of the 1870s, however, Standard owned dozens of properties and companies in other states, each, in theory, held by a trustee who was in some cases Flagler and in other cases other people. It was a hopelessly unwieldy corporate structure.
In all probability, it was Flagler—a superb executive—who found the solution. Instead of each subsidiary company having a single trustee, with these trustees scattered throughout the Standard Oil empire, the same three men, all at the Cleveland headquarters, were appointed trustees for all the subsidiary companies. In theory, they controlled all of Standard Oil’s assets outside Ohio. In fact, of course, they did exactly what they were told.
Thus was born the business trust, a form that was quickly imitated by other companies that were becoming national in scope. The “trusts” would be one of the great bogeymen of American politics for the next hundred years, but, ironically, the actual trust form of organization devised by Henry Flagler lasted only until 1889. That year New Jersey—seeking a source of new tax revenue—became the first state to modernize its incorporation laws and bring them into conformity with the new economic realities. New Jersey now permitted holding companies and interstate activities, and companies flocked to incorporate there, as, later, they would flock to Delaware, to enjoy the benefits of a corporation-friendly legal climate. Standard Oil of New Jersey quickly became the center of the Rockefeller interests, and the Standard Oil Trust, in the legal sense, disappeared.
WITH THE GROWTH of American industry, the nature of American foreign trade changed drastically. The United States remained, as it remains today, a formidable exporter of agricultural and mineral products. Two new ones were even added in the post–Civil War era: petroleum and copper. But it also became a major exporter of manufactured goods that it had previously imported. In 1865 they had constituted only 22.78 percent of American exports. By the turn of the twentieth century they were 31.65 percent of a vastly larger trade. The percentage of world trade, meanwhile, that was American in origin doubled in these years to about 12 percent of total trade.
Nowhere was this more noticeable than in iron and steel products, the cutting edge of late-nineteenth-century technology. Before the Civil War the United States exported only $6 million worth of iron and steel manufactures a year. In 1900 it exported $121,914,000 worth of locomotives, engines, rails, electrical machinery, wire, pipes, metalworking machinery, boilers, and other goods. Even sewing machines and typewriters were being exported in quantity.
Europe had long imported raw materials from the United States and elsewhere and exported finished goods to America and the rest of the world. To alarmist economic commentators—all too often a redundancy then as now—it seemed that an American colossus had suddenly appeared to snatch this profitable trade away, threatening to reduce once-mighty Europe to an economic backwater. Books with such ominous titles as The American Invaders, The Americanization of the World, and The “American Commercial Invasion” of Europe began to fill the bookstores of the Old World in the 1890s.
The new American economy also created enormous new personal fortunes, of an order of magnitude quite undreamed of before. Indeed, nothing has so consistently characterized the American economy throughout its history as the tendency of new fortunes to supplant old ones. When John Jacob Astor died the richest man in America in 1848, he left $25 million. Commodore Vanderbilt left $105 million less than thirty years later. Andrew Carnegie sold out in 1901 for $480 million. Fifteen years later, John D. Rockefeller was worth $2 billion.
Mark Twain noted the trend as early as 1867 when he reported that New York’s old “Knickerbocker aristocracy,” “find themselves supplanted by upstart princes of Shoddy, vulgar with unknown grandfathers. Their incomes, which were something for the common herd to gape and gossip about once, are mere livelihoods now—would not pay Shoddy’s house rent.” That has not changed. Except Rockefeller and Hearst, not a single name that was legendary for wealth in the Gilded Age—Twain’s “princes of Shoddy”—is to be found today on the Forbes Four Hundred list. And the Rockefeller fortune, vast as it remains, is barely a tenth of the fortune that Bill Gates has created in just the last twenty years.
This country has never developed an aristocracy, because the concept of primogeniture, with the eldest son inheriting the bulk of the fortune, never took hold. Thus great fortunes have always been quickly dispersed among heirs in only a few generations. The American super rich are therefore always nouveau riche and often act accordingly, giving new meaning in each generation to the phrase conspicuous consumption. In the Gilded Age, they married European titles, built vast summer cottages and winter retreats that cost millions but were occupied only a few weeks a year.
Their main residences were equally lavish. And while every American town and city had its millionaires’ row, where the banker and the factory owners lived, nothing could compare with what New York, the country’s richest, most money-minded city, produced. There, by the turn of the twentieth century, a parade of mansions, each larger and grander than the next, ran for nearly three miles up Fifth Avenue, from the Forties to the Nineties. It was one of the wonders of the age that created it and attracted visitors from around the world to gawk at this symbol of America’s unlimited wealth. Today, like the fortunes that created them, all but a few of the houses have vanished. Those that remain are consulates, schools, and museums.
What have not vanished are the public monuments the rich also built both to glorify their names and to justify their fortunes. The giving of vast sums to eleemosynary institutions by the very rich is a uniquely American practice; the European upper classes have no such tradition. It began early in the nineteenth century with people like George Peabody (the Peabody Museums at Harvard and Yale, among much else), Peter Cooper (the Cooper Union, still the only major college in the United States to charge no tuition), and John Jacob Astor, whose Astor Library is today the core of the New York Public Library, the second largest library in the country and the largest privately financed library in the world.
As the nineteenth century began to wane, the people who were building great fortunes began to found or endow museums, concert halls, orchestras, colleges, hospitals, and libraries in astonishing numbers in every major city. Carnegie had written that “a man who dies rich, dies disgraced,” and gave away nearly his entire fortune, building more than five thousand town libraries among numerous other beneficences. Henry Clay Frick gave his incomparable art collection to the city of New York, along with his Fifth Avenue mansion to house it and $15 million to maintain it. John D. Rockefeller, who as a committed Baptist had always tithed even before he became the richest man in the world, donated millions almost beyond counting to worthy causes across the country. J. P. Morgan’s art collection, the largest ever in private hands, is now mostly in the Metropolitan Museum, the Wadsworth Atheneum in Hartford, and the Morgan Library, which also houses one of the world’s great collections of manuscripts and rare books.
The United States in its early days had been a cultural backwater, and artists and writers routinely went to Europe to study. By the turn of the twentieth century, the United States was as great a cultural and intellectual power as it was an economic one, largely thanks to the often poorly educated men who are remembered today as the robber barons.
THE INDUSTRIAL EMPIRES that were created by the robber barons appeared more and more threatening in their economic power as they merged into ever-larger companies. In the latter half of the 1890s, this trend toward consolidation accelerated. In 1897 there were 69 corporate mergers; in 1898 there were 303; the next year 1,208. Of the seventy-three “trusts” with capitalization of more than $10 million in 1900, two-thirds had been created in the previous three years.
In 1901 J. P. Morgan created the largest company of all, U.S. Steel, merging Andrew Carnegie’s empire with several other steel companies to form a new company capitalized at $1.4 billion. The revenues of the federal government that year were a mere $586 million. The sheer size of the enterprise stunned the world. Even the Wall Street Journal confessed to “uneasiness over the magnitude of the affair,” and wondered if the new corporation would mark “the high tide of industrial capitalism.” A joke made the rounds where a teacher asks a little boy about who made the world. “God made the world in 4004 B.C.,” he replied, “and it was reorganized in 1901 by J. P. Morgan.”
But when Theodore Roosevelt entered the White House in September 1901, the laissez-faire attitude of the federal government began to change. In 1904 the government announced that it would sue under the Sherman Antitrust Act—long thought a dead letter—to break up a new Morgan consolidation, the Northern Securities Corporation. Morgan hurried to Washington to get the matter straightened out.
“If we have done anything wrong,” Morgan told the president, fully encapsulating his idea of how the commercial world should work, “send your man to my man and they can fix it up.”
“That can’t be done,” Roosevelt replied.
“We don’t want to fix it up,” his attorney general, Philander Knox, explained. “We want to stop it.”
From that point on, the federal government would be an active referee in the marketplace, trying—not always successfully, to be sure—to balance the needs of efficiency and economies of scale against the threat of overweening power in organizations that owed allegiance only to their stockholders, not to society as a whole.
In 1907 the federal government took on the biggest “trust” of all, Standard Oil. The case reached the Supreme Court in 1910 and was decided the following year, when the Court ruled unanimously that Standard Oil was a combination in restraint of trade. It ordered Standard Oil broken up into more than thirty separate companies.
The liberal wing of American politics hailed the decision, needless to say, but in one of the great ironies of American economic history, the effect of the ruling on the greatest fortune in the world was only to increase it. In the two years after the breakup of Standard Oil, the stock in the successor companies doubled in value, making John D. Rockefeller twice as rich as he had been before.