Chapter 5

An industrial country, 1880–1910

In the late nineteenth century, America’s cities, linked by telegraph and railroad, grew at prodigious rates. The fastest growing was Chicago, which went from a fairly small town in 1840 (whose population was less than 5,000) to the second largest city in the United States (with nearly 1.1 million people) by 1890. The population increased to over 2 million by 1910. Other midwestern cities, like Minneapolis, Cleveland, Milwaukee, and Detroit, also grew by a factor of ten or more during this period, and some far greater than that. These cities became home to thousands of new businesses, including restaurants, laundries, hardware stores, and much else, and to large pools of laborers, many of whom were immigrants. In 1865, a Chicago business directory listed, for example, 768 grocers, 354 shoe- and bootmakers, 156 carpenters, and 481 boarding houses, among many other enterprises. The South remained agricultural and mostly rural. In 1910, the North had three cities with more than 1 million people each, yet the largest city in the South, by a wide margin, was New Orleans, with about 340,000.

After the Civil War, with much of the South in ruins, former slaves, now freedmen, sought to enter business and trades or find other ways to support themselves and their families. Freedmen, especially those who had served in the Union army, had hoped for land grants as compensation for their labor and service. Union General William Tecumseh Sherman’s field order issued in the waning months of the war seemed to indicate that they would receive “forty acres and a mule.” Land redistribution on this scale had the potential to help make the free black population (which numbered around 3.9 million) economically self-sufficient, not only granting them land for their own use but also endowing them with a source of wealth that could be passed down to future generations. However, these promises failed to materialize. President Andrew Johnson—who assumed the office after Abraham Lincoln’s assassination in 1865—was sympathetic to white Southern opposition and immediately revoked Sherman’s order.

As a result, many freedmen found themselves stuck in a system of sharecropping and oppression that became widespread in the South. Landowners provided a plot on their plantation to work and supplies, and the sharecropping farmer received a share of the crop, perhaps one-half or one-third. Sharecropping, which endured through the 1950s, was a highly unequal system. African Americans who sought to create their businesses also faced tremendously adverse circumstances. Jim Crow laws meant they had to operate in segregated sections of cities, could not access credit markets, and had to sell to a smaller, often poor, clientele.

The Civil War had many consequences beyond the South. The war boosted Northern industry, and the aftermath saw the emergence of the New York Stock Exchange as a dominant financial institution. The postwar years also saw mining become a major industry in the West. Copper mining at Bingham County, Utah, and other locations was highly mechanized and the movement of coal, metals, and minerals from mines to factories became part of the geography of American industry. But perhaps the most significant change to the American business landscape from 1880 to 1910 was the rise of large industrial corporations, which produced in great volume and were led by a corps of managers. These new industrial concerns were enabled by technological advancements in machine production, a federal government that often sided with business over organized labor, and new laws, especially those that allowed for general incorporation.

Leading these large-scale operations were the so-called robber barons—known also, more positively though less frequently, as “captains of industry”—who forged colossal businesses in oil, steel, aluminum, meatpacking, and other industries. This generation of business leaders, including John D. Rockefeller, Andrew Carnegie, Henry Clay Frick, Andrew W. Mellon, J. P. Morgan, and James Buchanan Duke, followed in the path of Astor and Vanderbilt, marshaling financial, managerial, political, technological, and organizational skill to build their enterprises. They also relied on the work of previous generations of entrepreneurs who had built railroads, steamships, and telegraph lines that would allow them to create business empires.

All of these industrial companies started as small and entrepreneurial concerns, often with many competitors. As their businesses grew, these entrepreneurs, and the managers they hired, faced tremendous organizational challenges, most important, how to maintain continuous mass production for a national or international market. Yet, combining large-scale production and distribution was not one problem but several: securing a steady supply of raw materials, obtaining financing, and establishing reliable manufacturing processes. To solve production problems, manufacturers took advantage of new machines to transform the production process, producing goods at an unprecedented rate and realizing declining marginal costs (a phenomenon known as economies of scale). They also created highly standardized products, including commodities that were produced continuously (such as oil), branded goods (such as cigarettes), and complex machines (such as cash registers).

These manufacturers, too, faced challenges with distributing their products. Some responded by building vast networks of wholesale distribution, others by managing the process of reaching customers directly, and still others by relying entirely on middlemen and agents. The large industrial firms also experimented with different types of legal structures. Many began as partnerships, and some remained so for many decades. Others operated under a new legal structure called a trust or holding company, which allowed a small group of trustees to manage the activities of several companies. However, after the passage of a general incorporation law in New Jersey in 1896 and Delaware in 1899, most firms became limited liability corporations—the standard legal form for modern industrial enterprises.

The companies that rose to the top in their respective industries—notably Standard Oil, Carnegie Steel, Alcoa, Armour, Swift, and National Cash Register—were in some ways even more impressive than the railroads that facilitated their growth. They quickly became some of the largest business organizations the world had ever seen and gave rise to vast fortunes. John D. Rockefeller became the wealthiest person not only in the United States, as Astor and Vanderbilt had been in their time, but also in the world.

The industrialist managers who ran the large corporations of the late nineteenth century became so dominant in the American economy that the historian Alfred Chandler, looking back at this period from the 1970s, argued that the economy was no longer run by the invisible hand of the marketplace, as Adam Smith had observed, but by the “visible hand” of management.

Oil

Some of the first mass-production companies were producers of oil. Petroleum, or “rock oil” as it was first known, was initially used only in medicinal concoctions. But it began to serve as a substitute for whale oil in lubrication and illumination in the 1850s, especially after Edwin Drake’s discovery of oil deposits in Titusville, Pennsylvania, in 1859. Indeed, annual production of crude oil, found in Pennsylvania, Ohio, West Virginia, and Kentucky, rose from 1,000 barrels per day in 1860 to 14,000 barrels in 1870.

Unlike the early textile industry, which depended on water power for energy, the processing of oil required the high and steady heat of anthracite coal—mined in western Pennsylvania and made available through railway distribution. The heat from coal allowed for the continuous refining of oil, and the use of steam-driven engines hastened the flow of oil through pipelines in the production process. The processing of crude oil yielded kerosene, heavy fuels, and lubricants.

There were few regulations or legal requirements for entering the oil business, and the cost of entry was low. As a result, many entrepreneurs set out to build refineries in the decade after Titusville. The more ambitious sought to integrate their production capacity with the railroads by developing pipelines, large storage tanks, and special tank cars.

John D. Rockefeller was a wholesale grocer in Cleveland when he first entered the oil business as a side pursuit in 1863. By 1865, he had sold his grocery interest and partnered with English chemist Samuel Andrews—moving fully into the refining business with the new firm, Rockefeller and Andrews. The same year, they bought out the largest refinery in Cleveland and constructed a second refinery to increase output. Two years later, the firm added two new partners, Stephen Harkness and Henry Morrison Flagler, who contributed more than $100,000 to enable further growth. Harkness took no managerial role in the firm, but Flagler did, and he became one of Rockefeller’s closest and most trusted business partners. By 1869, output had increased from 500 barrels a day to 1,500.

In 1870, Rockefeller combined facilities and reincorporated the firm as Standard Oil Company of Ohio, with a capitalization of $1 million. Rockefeller was the largest shareholder, owning slightly over one-quarter of the original 10,000 shares, and Andrews and Flagler each held roughly half that amount. The decision to become a corporation was strategic, making it easier to finance expansion without risking the loss of control over the company. As a result, the new Standard Oil immediately began a new phase of growth, and with a different strategy: rather than paying for acquisitions in cash, Standard offered to compensate acquired firms through the exchange of stock. This offer was attractive to some because it allowed acquired firms to share in, and benefit from, Standard’s success. In this way, Standard acquired five large and seven small firms by the end of 1871. By 1872, Standard Oil dominated the Cleveland market and controlled one-quarter of the total daily capacity of the US oil industry. By the 1880s, Rockefeller was also developing a market for Standard Oil products abroad.

Rockefeller improved efficiency by finding ways to sell even the waste products from his refineries. As a result of these and other strategies, he cut the price of kerosene in half from 1865 to 1870, making it accessible to middle- and working-class families. Whereas whale oil was only affordable for the wealthy, the availability of inexpensive kerosene broadened the use of oil for home lighting. The high volume of production gave Standard powerful leverage in rate negotiations with railroads compared to its competitors. This approach was, in turn, advantageous for the railroads because they were able to run trains with only oil cars and plan a steady flow of traffic. Standard also built its own pipelines, which provided necessary storage capacity, as well as a steadier flow of crude oil into refineries.

By 1882, the firm controlled some 20,000 domestic wells and 4,000 miles of pipeline and had more than 100,000 employees. That same year, Rockefeller sought to organize his disparate entities, spread across many states, into a manageable organization, the Standard Oil Trust, overseen by nine trustees, who controlled the stock of the many semi-independent enterprises. This “trust,” at first a secret organization, set a template for the organization of many other industrial enterprises. In 1885, Standard Oil moved its headquarters to 26 Broadway in New York City.

Steel

While oil brought light and heat to cities, steel was used to build infrastructure. Indeed, the steel industry was essential for the construction of rails for the railroad, bridges, buildings (including new skyscrapers), factories, railcars, ships, and industrial machinery. The steel industry grew out of iron making, which dated back to colonial times. However, it was not until Sir Henry Bessemer, an English inventor and engineer, created a new steel-making process in the mid-1860s and 1870s that the steel industry took off. By 1876, eleven mills had adopted Bessemer converters, producing roughly a half million tons of steel per year. By the end of World War I, US production rose to 60 million tons per year, making the country the world’s leading steel producer.

Andrew Carnegie, born in Dunfermline, Scotland, was an early adopter of the Bessemer technology. In 1848, at just thirteen, Carnegie immigrated with his parents to the United States and went to work as a bobbin boy in the cotton mill where his father worked. After a brief period as a telegraph messenger, he left to work for Thomas A. Scott, who was then a station agent of the Pennsylvania Railroad (but would go on to lead the railroad). Guided by Scott, Carnegie began investing part of his salary in bridge-building firms.

After the Civil War, Carnegie left the railroads. Through his connections with Scott and Edgar Thomson, he entered the ironworks industry and later moved into steel production. One major factor that prompted Carnegie to make this career transition was the passage of new legislation in 1870 that imposed a tariff of twenty-eight dollars per ton on imported steel and gave protection to domestic producers. In 1872, Carnegie, working with American mechanical engineer Alexander Lyman Holley, constructed his first steel mill, named the Edgar Thomson Steel Works. They designed the plant to combine blast furnaces, forges, and rolling and finishing mills in contiguous locations. Process innovations—for example, the open-hearth furnace—increased production speed, enabled the production of a greater variety of steel products, and, with high-speed capacity, reduced costs.

Carnegie’s next step was to integrate vertically. He formed a partnership with Henry Clay Frick, who owned vast coal mines near Pittsburgh, as well as a large number of coke ovens—dome-shaped brick ovens that transformed coal into coke, a more purified compound that generated more heat when burned and could withstand higher temperatures. This partnership furthered Carnegie’s vertical integration and allowed him to undercut competitors in price.

The low costs at Carnegie Steel also resulted from the hiring of unskilled immigrant labor. In the 1880s, Frick—famous today for his art collection, but infamous to many in the late nineteenth and early twentieth centuries for his opposition to organized labor—became chairman of Carnegie Steel and sought to recruit workers from southern and eastern Europe. These laborers had little to no knowledge of English and were put in makeshift schools that taught them only enough words to follow their foremen’s instructions. Any association of workers, or any outside agent coming to organize the Carnegie workforce, was met with violence. The 1892 strike by the Amalgamated Association of Iron and Steel Workers at Carnegie’s Homestead Works was quelled by a heavily armed private security force (known as the Pinkertons) and 4,000 soldiers of the state militia. It was a significant setback to efforts to organize steelworkers, and the incident also heightened racial tensions, as many of the strikebreakers were African Americans, who themselves were often barred from union membership.

Food and tobacco

The late nineteenth century saw the rise of companies producing agricultural and perishable products on an unprecedented scale. These companies not only had to organize and coordinate a high volume of continuous output but also had to find ways to develop national and international distribution networks that reached wholesalers and shop owners.

In cigarettes, James Buchanan Duke, of Durham, North Carolina, was an early entrepreneur. When he started in the industry, cigarette sales were negligible. Those who purchased tobacco products were far more likely to smoke cigars and pipes or chew tobacco. In 1884, he bought two machines, designed by James Albert Bonsack, that produced 120,000 cigarettes in ten hours—far surpassing the amount that could be generated by hand rolling. This output, however, was more than the existing demand. Duke realized that his main challenge would be in advertising and distribution.

Duke’s ability to build a national distribution network depended on the rise of two other industries—the credit reporting agency (which assessed the reputations of wholesalers and retailers throughout the country) and the advertising agency (which placed ads in regional newspapers), both of which were based in New York City. Accordingly, Duke moved his operation, W. Duke, Sons & Company, to New York. He started building a national sales force and, with associates, established sales offices in other US cities. He also sought marketing agreements with wholesalers and dealers in countries around the globe. Duke tasked salesmen with visiting grocers, tobacco shops, drugstores, and other retail establishments to boost sales. By 1889, he had sales of $4.5 million annually; in that same year, he spent about $800,000 on advertising in an attempt to edge out competitors.

With the market leveling off and competition increasing, Duke consolidated his various enterprises and aimed to gain control of others. In 1890, he made agreements with four competing companies to form the American Tobacco Company, which then produced about 90 percent of the cigarettes in America.

The meatpacking industry was also transformed during this period, with Chicago as the central hub. Its growth depended on the railroad, the telegraph, advances in a bureaucratic organization, and, most crucially, the new technology of refrigeration. Gustavus F. Swift Sr. was a pioneer of the refrigerated railcar that allowed the initially seasonal industry to operate year-round.

Swift began his career at age fourteen, as apprentice to a butcher in his home state of Massachusetts. He soon went into business on his own, slaughtering cattle and selling the meat door to door. In 1875, he relocated his operation to Chicago, realizing that he could save a great deal of money if he butchered animals in Chicago and shipped only the meat eastward (as freight charges were determined by volume). His quest for efficiency also led to the development of a routinized butchering process, in which animal carcasses were suspended from hooks and moved along a “disassembly line” on overhead belts and pulleys.

Like Carnegie, Swift pursued a strategy of vertical integration, bringing together all parts of the industry, from the ownership of cattle to the process of slaughtering, the construction of warehouses, and the maintenance of distribution networks. Apart from productivity and efficiency, however, slaughterhouses also became notorious for their filth and brutal working conditions, as graphically recounted in Upton Sinclair’s The Jungle (1906).

Competition in the meatpacking industry was fierce. One of Swift’s competitors, Philip Danforth Armour, used similar methods to maximize the efficiency of his operation. Armour even hired chemists to find uses for parts of the animals that had been discarded, transforming waste products into soap, glue, upholstery stuffing, and fertilizer. Like other large companies, Swift, too, started to operate internationally. To increase his supply of beef, Swift acquired operations in Argentina in 1907, which was quickly becoming a new center of meat packing.

Entrepreneurs in the meatpacking industry were matched by others who implemented continuous processing machinery to produce vast volumes of output in other types of food. For example, the Kellogg brothers, John Harvey and Will Keith, developed Toasted Corn Flakes in Battle Creek, Michigan, beginning in the late nineteenth century, and the Kellogg Company went on to produce a variety of other breakfast cereals. Other companies that got their start during this period included C. A. Pillsbury and Company (1872), makers of flour and other grains; Campbell’s (1869), which produced canned tomatoes, vegetables, and soup; and the H. J. Heinz Company (1869), makers of ketchup and many bottled and canned foods.

Consolidation and antitrust

All of these firms—Standard Oil, Carnegie Steel, American Tobacco, Swift, and Armour—sought to find ways to coordinate and control high-speed output by finding efficiencies in their production and distribution processes. Beginning in the late nineteenth century, they also began to consolidate their industries. In 1902, for instance, Swift, Armour, and other Chicago-area meatpackers formed the National Packing Company, a group known as “Big Five” that began buying up other meat companies.

Finance was essential in forming these large consolidations. Two bankers, in particular, played a role in enabling combinations through formal channels. The first was Andrew Mellon of Pittsburgh, Pennsylvania. The patriarch of the family, Thomas Mellon, emigrated from Ireland to western Pennsylvania as a child. In his autobiography, he recalled being impressed by the level of luxury attained by other recent immigrant families. The father of the neighboring Negley family, he mused, “must have been a man of considerable ability and energy, judging from the estate he accumulated.” At age fourteen, Thomas Mellon discovered a “dilapidated copy of the autobiography of Dr. Franklin.” The book, he wrote, “delighted me with a wider view of life and inspired me with new ambition—turned my thoughts into new channels.” Mellon loved the maxims of Franklin’s “Poor Richard” and credited reading the book as the turning point of his life—affirming his entrepreneurial aspirations.

As an adult, Thomas Mellon built a school in his backyard to train his sons, several of whom went into business. Andrew Mellon and his brother Richard acted as venture capitalists and lent money to entrepreneurs to help found companies, including Gulf Oil, Koppers Chemical, Carborundum Corporation, and the giant aluminum company Alcoa. They also founded the Union Trust Company to manage these growing businesses. The Mellon family soon held a substantial interest in all of the region’s major industries, including coal, steel, aluminum, natural gas, construction, railroads, and chemicals.

In consolidating industries, Mellon was surpassed only by J. P. Morgan of New York, who reorganized industrial concerns including General Electric, American Telephone and Telegraph, and International Harvester. In 1901, Carnegie sold his company to J. P. Morgan’s new organization, United States Steel Corporation, a conglomerate with many subsidiaries that became the nation’s first billion-dollar company in assets, a significant milestone. After the formation of U.S. Steel, privately held industrial firms became rare (except Ford Motor Company) as more and more large companies formed public corporations.

Criticism of big business—especially the extent of its power and influence—was expressed vibrantly in the 1880s by journalists who came to be known as muckrakers. (The moniker was a reference to John Bunyan’s seventeenth-century allegory Pilgrim’s Progress, as used pejoratively by Theodore Roosevelt in a speech in 1906.) McClure’s Magazine, a monthly publication founded in 1893 by a handful of graduates from the Illinois-based Knox College, became the epicenter of such writing. “Big business” was frequently portrayed as an enemy of democratic governance because wealthy titans of industry exercised undue influence over policymakers. Lincoln Steffens, who wrote about corruption in city governments in McClure’s, reasoned, “In a country where business is dominant, business men must and will corrupt a government.” Ida Tarbell, who wrote History of Standard Oil in 1904, also concluded that business had become synonymous with immorality and corruption in America: “Very often people who admit the facts, who are willing to see that Mr. Rockefeller has employed force and fraud to secure his ends, justify him by declaring, ‘It’s business.’ That is, ‘it’s business’ has come to be a legitimate excuse for hard dealing, sly tricks, special privileges.” Historians and literary critics began to refer to the late nineteenth century as the “Gilded Age,” in which a small, but conspicuous wealthy class masked widespread poverty.

Alongside the muckrakers’ work to expose corporate misdeeds, there were legislative and judicial efforts to dismantle large corporations found guilty of deliberately restraining trade—whether by price fixing, limiting output, or otherwise diminishing competition. The Sherman Antitrust Act of 1890 prohibited anticompetitive agreements and other efforts by companies to monopolize their respective industries.

During his presidency, Theodore Roosevelt formed a Bureau of Corporations to investigate monopolistic behavior. In 1902, the Roosevelt administration began investigating the “Beef Trust,” the organization of the nation’s largest meatpackers, for price fixing and dividing the market between a handful of big companies. In the subsequent ruling of Swift & Co. v. United States (1905), the Supreme Court ruled that Swift and its allies had violated antitrust laws.

5. A 1905 cartoon from Puck magazine suggests the influence American titans of industry had come to have on US policy. Here they are depicted in an imaginary cabinet meeting during the administration of Theodore Roosevelt. John D. Rockefeller appears as secretary of the Treasury, J. P. Morgan as secretary of the Navy, Andrew Carnegie as secretary of state, and, as postmistress general, investor Hetty Green, whose family had made a fortune in whaling.

Other similar court decisions followed. In 1911, the Supreme Court ruled Standard Oil had violated the Sherman Antitrust Act for its involvement in anticompetitive agreements and other efforts to exert monopolistic control over the oil market. The court found that the company received preferential rates from the railroads, controlled pipelines, and engaged in price cutting to push out competitors. As a result, Standard was broken up into thirty-four independent companies, including present-day ExxonMobil and Chevron. On the same day, in United States v. American Tobacco Company (1911), the Supreme Court compelled the American Tobacco Company to dissolve and form several smaller companies, including R. J. Reynolds, Liggett & Myers, and Lorillard. These rulings were emblematic of a new period of antitrust regulation, which—though it did not end the subsequent growth of big business—represented a meaningful development in evolving business–government relations in the early twentieth century.

In part as a reaction to this, companies began to think carefully about what became known as corporate public relations. Companies sought, in effect, to create a “corporate soul”—that is, an explanation of the corporation’s purpose and mission to policymakers, society, and its employees. Such a strategy of public relations became one more step in the formation of the modern corporation.