1.
Discuss the varied patterns of business monopolism in late 19th century America and the
responses it evoked.
2. Outline the reasons for the consolidation of the Big Business Organizations in the American
economy in the second half of the 19th century.
3. Analyze the various ways of business monopoly that changed the nature of profit and
competition in postbellum America (OR)
The period 1865 to 1920 witnessed a dramatic change in the size distribution of firms in the U.S.
economy as large-scale enterprises emerged to dominate huge swaths of industry. The growth of big
business in America in the last two decades of the nineteenth century was primarily a response to the
rise of urban markets — a result, in turn, of the spreading railroad network. Then, as a new century
began to unfold, the dominant influence upon big business development came to be technological.
Discernible patterns of integration, combination, diversification, and administration influenced and
were influenced by the rise of huge companies and oligopolistic industries. Price competition yielded
to other weapons, and the economy adjusted to make room for the young giants in its midst.
Big business has become an integral part of the economies of all major industrial urban nations where
means of production and distribution are in private hands. In the United States, the big-business
enterprises differ from those of other nations not only in their size but also in the ways in which they
are owned and managed. All the great firms are joint stock corporations. None is managed by a single
man, not even by a single family. The story of the coming of big business in the United States should,
then, indicate why and how the American corporations grew to such size, why and how they came to
be operated by professional managers, and why and how these managers came to make the critical
economic decisions. The giant enterprises which the professional managers came to command
appeared suddenly and dramatically in many of America's most important industries during the last
two decades of the nineteenth century. They came as the United States was reaching the climax of its
drive to industrialism which made it the world's leading manufacturing nation before 1890 and
producer of one-third of the world's industrial goods by 1913.
Before the rise of the new industrial giants—that is before the 1880s—decisions affecting the flow of
goods through the economy and the allocation of its resources were even more decentralized than they
were in Europe. They were made by hundreds of thousands of small personal or family firms. The
business decisions of their owners were affected by an impersonal market over which they had
relatively little control. Price tended to determine the volume of output. The great shift from
decentralized decision-making to centralized coordination and control of production and distribution
culminated in the years between 1897 and 1902, when the first and most significant merger movement
in American history took place.
As Alfred D. Chandler, Jr., has argued, railroads were the nation‟s first big businesses. They were the
first private enterprises to raise substantial sums of money from the capital markets in New York and
abroad, and through their seemingly insatiable demand for funds, stimulated the development of new
types of financial intermediaries and instruments that would be important for the economy‟s
subsequent growth. They were also the first businesses to confront coordination problems that were
sufficiently complex to induce them to innovate organizationally. By the 1850s, executives such as
Daniel C. McCallum of the New York and Erie, Benjamin Latrobe of the Baltimore & Ohio, and J.
Edgar Thomson of the Pennsylvania Railroad, had realized that it was imperative for both profit and
safety to improve control of the rapidly increasing volume of traffic that was flowing over their lines.
Over the next several decades they devised organizational charts and manuals that arrayed employees
according to a hierarchy of responsibility, clearly specifying the duties of each. They also developed
new accounting techniques that enabled them to measure the performance of all the operating units in
their dominions. The managers who staffed these organizations increasingly thought of themselves as
professionals. Collectively they worked to standardize gauges and railroad equipment so as to
facilitate the movement of traffic from road to road. They developed system-wide tracking methods
that ensured each company that it would be properly credited for the services it provided. They also
agreed on a basic structure of freight charges. Moreover, as the railroads faced increasing numbers of
infringement suits in the 1870s from outside owners of intellectual property, their managers
formalized these exchanges by organizing patent pools that could bargain on behalf of all the railroads
simultaneously. The pools not only economized on litigation costs but reduced inventors‟ ability to
play one railroad off against another. An understanding of this process of centralization calls for a
look back to the 1850s and to the beginning of the modern corporation in American railroads. The
railroads, as the nation's first big business, came to provide the only available model for the financing
and administration of the giant industrial enterprises. They became so because their promotors,
financiers, and managers were among the first businessmen to build, finance, and operate private
business enterprises requiring massive capital investment and calling for complex administrative
arrangements. By 1875 one American railroad corporation alone, the Pennsylvania, was operating a
trackage equivalent to one-half the railroad mileage then in operation in France and over one - third of
that in Great Britain . The financing of the American railroads required such large amounts of money
that it brought into being modern Wall Street and it's specialized investment bankers. Financial
requirements forced the use of the corporate form. An individual , partnership, or family firm simply
could not supply enough capital to build even a small railroad . The sale of corporate stocks and bonds
was essential.
The expansion of the railroad network linked the far-flung regions of the United States into a national
market, making it possible for firms in industries characterized by economies of scale to lower their
unit costs by concentrating production in large facilities. In such industries the average size of the
production unit rose over time and the number of firms declined. The comparatively rapid speed at
which railroads operated also created opportunities for entrepreneurs to found new kinds of business.
For instance Gustavus Swift who built his entire distribution system from scratch. Swift‟s creation of
a vertically integrated empire changed the nature of competition in the industry. The industry quickly
acquired an oligopolistic structure. Then in the late 1840s and 1850's factory production began for the
first time to be significant in the making of sewing machines, clocks, watches, plows, reapers, shoes,
suits and other ready-made clothing, and guns and pistols for commercial use . The same years saw
the spread of the large integrated iron ironworks , using coal and coke instead of charcoal for fuel. The
Civil War further stimulated growth in these industries. After the war the factory spread to still others.
By 1880 the census of that year reported that of the three million people employed in industries using
machines, four-fifths worked under the factory system of production. "Remarkable applications of this
system," the census added.
In the quarter of a century following the completion of this census, the family-owned factory was in
many industries transformed into a vertically integrated, multi-functional enterprise. In 1880 nearly all
manufacturing firms only manufactured . The factory owners purchased their raw materia s and sold
their finished goods through wholesalers , sometimes as commission agents and at others as jobbers
who took title to the goods . By the first years of the twentieth century , however , many American
industries were dominated by enterprises that had created their own distributing organizations ,
sometimes including even retailing outlets, and had formed their own purchasing systems . Often they
had begun to control their supplies of semifinished and raw materials. The large industrial firm thus
became a primary agent for large-scale distribution as well as large-scale production.
Many reasons have been suggested for this fundamental change. These include the impact of new
technology , the influence of a shifting overseas demand for American goods, the development of the
market for industrial securities , the desire for tighter market control , the tariff , and the personal
motives of bad men , the robber barons .
The continued declining prices in the mid 1870s and mid 1890s forced many industries to adopt
another pattern - the second route to great size - one of combination, consolidation, and then vertical
integration. To meet the threat of falling prices and profits , the factory owners formed trade
associations whose primary function was to control price and production. But these associations were
rarely able to maintain their cartels. While railroad men turned unsuccessfully to persuade state and
national legislatures to legalize pools or cartels , the manufacturers devised ways of acquiring firmer
legal control of the factories in their industries . They initially began to purchase stock in competing
companies . Then came a new device , the trust. The stocks of the various manufacturing companies
were turned over to a board of trustees, with the owners of the stock receiving trust certificates in
return . Less cumbersome was the holding company , whose stock could be exchanged directly for
that of the operating firm and could then be bought or sold in the security markets . Once New Jersey
passed a general incorporation law for holding companies in 1889 , this instrument became the
standard one by which a group of manufacturers obtained legal control over a large number of
factories. Administrative control and industrial reorganization often , though not always , followed
legal consolidation . The manager's of a few of the new holding companies , were satisfied with
assured legal control of their operating subsidiaries . Others saw that legal control permitted them to
improve their market and profit position by rationalizing the production facilities under their control .
The railroad industry itself had an oligopolistic market structure. Because railroads had enormous
sunk costs, wherever multiple railroads served a particular region, they competed vigorously for
freight. The railroads attempted to put limits on this competition by forming themselves into cartels,
but these efforts were rarely successful, especially before the 1880s. Nonetheless, one particularly
entrepreneurial producer was able to take advantage of the railroads‟ eagerness to fix prices to
consolidate his own industry. That entrepreneur was John D. Rockefeller. During the late 1860s
Rockefeller‟s Standard Oil refinery was the largest in the petroleum industry, but it accounted for only
about 4 percent of total industry capacity and did not have any particular advantage in costs. Price
competition was eroding profits, and the refiners‟ repeated attempts to put a stop to it by organizing
cartels just as repeatedly failed. In the early 1870s, however, the railroads that served the country‟s
main refining regions collectively offered Standard and other important firms in the industry a deal.
Although the South Improvement agreement was never implemented,84 there was a several month
period (after the company was formed but before it fell apart) when prospects seemed dim for
refineries not included in the scheme. Rockefeller took advantage of the situation to induce the other
firms to sell out. As Elizabeth Granitz and Benjamin Klein have demonstrated, only fear of the effects
of the agreement on their competitive position can explain why so many non-members sold their
refineries to Rockefeller during these months, many of them at distress prices. Emerging from this
episode with effective control of the Cleveland segment of the industry, Standard then secretly merged
with the original participating refiners in the other production centers. As a result of these acquisitions
and mergers, Standard was large enough in and of itself to police the railroads‟ cartel agreements, and
they willingly rewarded it for performing this service with rebates on its shipments. This favored
position then allowed Standard to use its ability to “raise rivals‟ costs” to secure monopoly control of
the industry.
The petroleum industry was one of the very first to combine , then to consolidate legally and
administratively , and then to integrate, because it was one of the very first to overproduce for the
national and international markets . In the early 1870' s both refiner's and producers of petroleum
formed trade associations to control price and production . They were completely unsuccessful in
enforcing their rulings throughout the industry. So in the mid-seventies Rockefeller , by using railroad
rates as a weapon, was able to bring a large portion of the industry under the legal control of his
Standard Oil Company. However, legal control proved to be insufficient . Standard's primary market
was abroad. Rockefeller therefore had to develop an efficient operating organization at home if he was
to compete successfully abroad . So his company tightened up legal control through the formation of
the first modern business trust . Next , the trust moved to acquire its own distributing organization in
the domestic market in order to assure a continuing outlet for its massive production. This move was
stimulated by the expansion of the home market resulting from the rapid growth of American industry
and cities.
In the late 1880's and early 1890's manufacturers in other industries began to follow the example of
Standard Oil , Swift , and McCormick. Before the coming of the depression of the nineties, firms in
rubber , whiskey , rope, cotton and linseed oil , leather , and other industries had moved beyond the
combination to consolidation. The severe depression of the mid-nineties slowed the processes. Then
as prosperity returned in 1897 and capital became easier to obtain, industry after industry came to be
dominated by handful of large integrated corporations. The promise of handsome returns from mass
production and mass distribution and the harsh memory of twenty years of falling prices made the
prospect of consolidation and integration difficult to resist. The result was the first great merger
movement in American history.
Most capital intensive industries in the late nineteenth-century were more like petroleum than
meatpacking or sewing machines. The petroleum mergers were followed in the 1880s by a small
number of others, most notably in the sugar, lead, whiskey, linseed oil, cotton-seed oil, and cordage
industries. Mergers continued at a slow pace in the 1890s and then took off as the economy rebounded
from the depression of that decade. Thirteen multi-firm consolidations had been formed during the
depression years 1895-97, but in 1898 the number suddenly rose to sixteen and in 1899 to sixty-three.
Thereafter the number began to tail off again. Despite their initially impressive market shares, many
of the new consolidations were no more successful over the long run than the collusive agreements
they had replaced. The high prices they charged after their formation stimulated an influx of
competition, causing virtually all to lose ground and many even to fail. The survivors transformed the
business environment in important ways, however. Consolidations were usually financed by the issue
of securities, and the profitability of the most successful ones, as well as the new techniques that their
promoters. As a result of the merger movement, then, large manufacturing corporations gained the
same access to national capital markets that the railroads had earlier achieved. In industries where
they proved successful, moreover, consolidations had a major impact on competitive behavior. The
merger of virtually all the firms in an industry created a “dominant firm” that could set prices for the
remaining fringe of smaller competitors. According to Chandler, the most successful of the
consolidations tended to be those that created barriers to entry by integrating forward into distribution.
Certainly, there is no question that, by taking control of distribution, the most entrepreneurial of these
enterprises were able to exploit new marketing opportunities. Crackers, for example, had typically
been distributed in bulk to retailers who dumped them unbranded into barrels in their stores. After the
National Biscuit merger, however, the consolidation began to distribute its product in individual
packages under the “Uneeda Biscuit” brand, building its own marketing organization to handle and
promote the product.
With the merger movement big business took its modern form . Externally the new consolidated
enterprises competed in an oligopolistic way—that is, competed with only a few other giants.
Internally they became managed in a bureaucratic manner—that is, throug h a hierarchy of offices and
departments . Pricing became based largely on costs . With better cost accounting the companies were
able to set prices in relation to desired return on investment. The managers of the great consolidations
also paid close attention to developing the internal organisation of their enterprises. This task involved
the building of departments to handle all the different functions—production , marketing, purchasing ,
finance, engineering, and research—and a central office to coordinate the work of the departments.
Department building often required a massive reorganization of an industry's production and
distribution facilities .
The United States pioneered the techniques of mass production and mass distribution precisely
because the consolidated , integrated enterprises replaced the small , family-owned and managed,
single-function firms and associations or combinations of these firms. Both economic and
noneconomic differences made this change more rapid and more pronounced than in the other
industrializing nations of western Europe and in Japan . The most important difference , as has so
often and so rightly been stressed, was the existence of the large domestic market in the United States.
However, almost as important as its size was its newness. The existing forms of production and
distribution were not so deeply entrenched in the United States as they were in Europe . The
wholesale network only began to take form as the nation moved westward after the War of 1812 ;
while the specialized wholesaling house, the key unit in the older distributing system , did not take
root west of the Appalachians and south of the Potomac until after 1850 . Nor, for that matter, did the
modern factory begin to move south and west until after the Civil War. American attitudes and value s
may have provided an additional reason for the transformation of the cartel into a consolidated
enterprise . To be effective , a cartel , in Europe or the United States, required at least tacit approval by
the government . In the United States such combinations not only failed to receive governmental
recognition but became explicitly illegal . The antitrust legislation reflected a powerful bias of
Americans against special privilege. In any case , no other industrialized nation ever developed an
antitrust movement similar to that of the United States . And , paradoxically , anti - trust legislation
and its interpretation by the courts, which made combinations of small units illegal but permitted the
formation of large consolidated operating companies , actually encouraged the swift growth of big
business in American manufacturing and distribution. The more underlying causes for the coming of
big business are the same as those that brought the rapid industrializing of the nation. These Thomas
C . Cochran has listed - Vast natural resources, the large number of customers within the boundaries of
single nation , the ability to draw on European capital and labor , the success-oriented , utilitarian
middle-class attitudes and values of a large portion of the population all created the basic opportunity
out of which men could fashion an economy based on mass production and mass distribution and
build the great enterprises that today carry on and link together this massive production and
distribution.
The federal government‟s regulatory role in the economy was relatively modest in the decades that
followed the Civil War. The National Banking Acts gave the U.S. Comptroller of the Currency
responsibility for overseeing banks that held national charters (a declining proportion of the total over
time), but there were no other agencies with similar authority over important sectors of the economy.
All this would change by the turn of the century. First the railroads and then, with the mergers of the
late nineteenth century, enterprises in important parts of the manufacturing sector, grew so large
relative to most other businesses of the time that they raised fears about the concentration of economic
and political power. The ruthlessness with which the “robber barons” of the period pursued their
ambitions exacerbated these fears.
As William Novak has shown, local governments had long routinely intervened in the economy in
numerous ways, enforcing standard weights and measures, setting rules for the conduct of trade,
requiring licenses to engage in certain kinds of businesses, and inspecting the purity or quality of
products sold to consumers. State governments performed a similar range of functions and more. In
addition, their authority to charter corporations enabled them to regulate the business of incorporated
enterprises in highly specific ways.
By the late 1880s the popular outcry against railroads and other large-scale businesses had spurred the
federal government to act. In 1887 Congress passed the Interstate Commerce Act, creating the
Interstate Commerce Commission (ICC) and empowering it make sure that railroad rates were
“reasonable and just.” Although the bill was confusingly written and the ICC was soon hamstrung by
the courts, these problems were subsequently remedied by additional legislation, particularly the
Hepburn Act of 1906 and the Mann-Elkins Act of 1910. Similarly, in 1890 Congress passed the
Sherman Antitrust Act prohibiting combinations in restraint of trade or that monopolized their
industries. Although the details of the Sherman Act‟s application were largely worked out in the
courts, Congress supplemented the statute by passing the Clayton Antitrust and Federal Trade
Commission Acts in 1914. Other regulatory legislation passed by Congress during this period
included the Pure Food and Drug Act of 1906, and the Meat Inspection Act of 1906.
