From the 1941 book, Political and Social Growth of the American People, 1865-1940.

THE TREND TOWARD BIG BUSINESS

AS THE tariff wall rose higher and higher, manufacturers benefited increasingly from the cutting off of foreign
competition, and fresh capital poured into mills and mines. Meanwhile, the expanding network of rails facilitated the shipment of merchandise to distant points, and high-pressure methods of advertising educated the public to new needs.

The amount spent on newspaper advertising alone grew from about forty million dollars in 1880 to nearly ninety-six in 1900. These totals, of course, did not include the cost of traveling salesmen or of outdoor signs and billboards.

“America is daubed from one end of the country to the other with huge white-paint notices of favorite articles of manufacture,” wrote one observer. Jacques Offenbach, the European operatic composer, spoke of advertising in the United States as “playing upon the brain of man like a musician does upon a piano.”

To meet the waxing domestic demand for goods as well as the growing export trade, business leaders turned more and more to large-scale methods of production. Industry conducted with limited capital in a restricted area began to give way to operation with unstinted capital for far-flung markets.

Whether in manufacturing or transportation, the drift set strongly toward the merging of smaller into larger units, with a consequent reduction of competition and a corresponding concentration of control. By the 1880’s organization on a nation-wide basis became a distinguishing feature of the economic world.

The advantages of combination and consolidation were many. Through its ampler command of capital a large business concern could employ more efficient managers, install improved machinery, buy raw materials more cheaply, effect economies in marketing and finance, and withstand more easily the demands of employees for higher pay and better working conditions.

To the extent that the business was monopolistic, the owners were in a position to reduce production and raise prices. A big plant could also make profitable use of wastes and by-products that smaller establishments had to discard.

As the newspaper humorist, “Mr. Dooley” (Finley Peter Dunne), said of one of the mammoth Chicago packing houses, “A cow goes lowin’ softly in to Armours an’ comes out glue, gelatine, fertylizer, celooloid, joolry, sofy cushions, hair restorer, washin’ sody, soap, lithrachoor an’ bed springs so quick that while aft she’s still cow, for’ard she may be anything fr’m buttons to pannyma hats.” *

* Actually, Mr. Dooley’s fiction hardly exceeded the fact, for the by-products included glue, gelatine, fertilizer, soap, leather, felt, knife handles, combs, buttons, brushes, pepsin, albumen, oils, oleomargarine, candles, glycerine, isinglass, lard, tennis strings, hairpins, umbrella handles, dice, perfume-bottle caps and artificial teeth.

With such advantages captains of industry could appease the clamor of investors for bigger returns and, when they wished to do so, satisfy the public’s demand for cheaper prices.

In order to command the financial support needful for huge undertakings, the type of business organization known as the corporation rapidly supplanted individual ownership and the partnership, the forms commonly employed before the Economic Revolution. Through the sale of stock a wide reservoir of capital could be tapped.

Besides the expectation of unusual profits, the investor was attracted by the fact that he was liable only to the extent of his stock in case of business failure, whereas in a partnership each member could be held for the firm’s full indebtedness.

The corporation enjoyed the further advantage of being able to plan its activities without reference to the lifetime of particular individuals.

Moreover, if it wished to hide excessive profits from the public, it could “water” its stock, that is, grant additional shares to its stockholders and so disguise the rate of dividend. Thus, a corporation earning twelve per cent might, by doubling the stock held by each individual, cut the nominal rate of return to six per cent without denying each stockholder his full profits. In such case the board of directors could, with a specious show of sincerity, combat the demands both of consumers for lower prices and of wage-earners for better pay.

Watering was also a regular practice of unprincipled financiers who seized the opportunity to sell stock to gullible investors without warning them of its diminished value. One expert estimated in 1883 that more than a quarter of the railroad capitalization represented water.

The actual process of absorption and consolidation was directed by business leaders who, because of their boldness, creative energy and relentless driving power, embodied many of the mythical elements of folk heroes. By common consent they were termed “steel kings,” “coal barons,” “railway magnates,” “Napoleons of finance.”

Foremost among them were:
• Cornelius and William H. Vanderbilt, J. Edgar Thomson, Jay Gould, James J. Hill and Edward H. Harriman in railroad organization;
• John D. Rockefeller, Henry H. Rogers and Henry M. Flagler in the oil industry;
• Andrew Carnegie, Henry C. Frick and Charles M. Schwab in steel;
• Philip D. Armour, Nelson Morris and Gustavus F. Swift in meat packing; and
• Jay Cooke and J. Pierpont Morgan in the financial field.

Arising in most cases from obscure origins, and unhindered by moral scruples, they were fired by a passionate will to succeed. They conceived of themselves as above the law though always willing to hide behind it. “Law!” roared Cornelius Vanderbilt. “What do I care about the law? Hain’t I got the power?”

Some of these men were builders with far-reaching plans; others were wreckers with no plans at all. The story of their activities is a singular blend of the heroic and splendid with the sordid and sinister.

For the most part, they were free to carry out their schemes without let or hindrance from the government, for the American people traditionally held to the gospel of individualism or laissez faire, that is, the right of citizens to he let alone in their economic pursuits.

Yet the captains of the new order proclaimed the doctrine with tongue in cheek, for, while they opposed governmental intervention to their detriment, they constantly advocated interference with the free play of economic forces through tariffs, subsidies and the gift of natural resources.

The country’s belief in individualism was an inheritance from pioneer days when the doors of opportunity swung wide for all; only gradually did the public come to realize that, under modern conditions, unbridled freedom for the few threatened economic servitude for the many.

The philosophy of the new leadership was a primitive one. It may be summed up in the phrase, “Everyone for himself,” or, in the terse expression attributed to William H. Vanderbilt, “The public be damned!”

Yet, with all their cynicism, the best of these men were spurred by the conviction that they were laying the foundations of a new America, that the accumulation of colossal wealth by a select class would indirectly benefit all ranks of society.

The tendency toward combination in the United States resembled a similar development abroad, for everywhere the advantage lay with large-scale economic enterprises. In Great Britain, an older industrial country than America, the process of railway amalgamation started sooner. As a result, the government began to regulate the roads as early as the 1840’s and in 1873 set up a commission to safeguard the interests of the public.

In Germany the railroad problem was solved in most instances by government ownership, but the trend toward industrial consolidation was more marked than in England. The reason was that the Germans, like the Americans, had hitherto lagged far behind in manufacturing and were trying to catch up. As one means of stimulating industry, Germany paralleled the course of the United States in increasing her tariff duties in 1879, 1885 and 1887.

In Europe, however, the combinations did not attain the gigantic size of those in America, for the countries were smaller and many of the other favorable conditions were absent.

RAILROAD CONSOLIDATION

Though occasional mergers of railroads had earlier taken place in the United States, the close of the Civil War ushered in the era of rapid and extensive amalgamation. Cornelius Vanderbilt was one of the first to vision the possibilities. Already past middle age, the possessor of riches amassed in steamboat traffic, he sold his vessels in 1865 in order to give his whole attention to developing a continuous rail route from the Atlantic Seaboard to the heart of the Midwest.

Starting with a line joining New York City with Albany, Vanderbilt acquired the New York Central in 1867, making possible un interrupted traffic from New York to Buffalo. In 1873 he extended the road to Chicago by leasing the Lake Shore and Michigan Southern.

When he embarked on his railway career Vanderbilt’s wealth amounted to about ten million dollars; when he died twelve years later at eighty-three, he left nearly a hundred and five million, the first great modern fortune. Much of it came from unscrupulous manipulation of railway stocks and from methods of competition akin to the ethics of the jungle.

Meanwhile the Pennsylvania Railroad under J. Edgar Thomson’s leadership outgrew its line from Philadelphia to Pittsburgh, gaining entry to Chicago and St. Louis in 1869 and establishing connections with New York City two years later.

Thomson’s business methods, however, formed a welcome contrast to Vanderbilt’s.

By 1875 three other trunk lines had been completed between the Atlantic and Lake Michigan: the Erie, the Baltimore and Ohio, and the Grand Trunk.

Similar mergers took place in the Mississippi Valley. Three through lines linked Chicago and St. Louis by 1870, and others were later established. In the South, also, comparable tendencies were at work.

It is doubtful whether enough business existed as yet to support all these roads. At any rate, the rival companies engaged in furious strife for traffic between major shipping points.

Certain practices resulted that harmed both the railways and the public. Thus in 1869, and again in the years from 1874 to 1876, the trunk lines between Chicago and the seaboard waged relentless rate wars. A standard freight charge of $1.88 per hundred pounds in 1868 was slashed to twenty-five cents in 1869; sometimes the rates did not pay the expense of operating the trains. Such contests proved too costly to the railroads, however, to continue long at a time.

Another scheme was to charge higher rates between some places than between others without regard to distance. Intent on taking business from their rivals, the companies held down freight charges between cities having several rail connections, while exacting excessive rates between points on their roads served by but a single line. As a result, it cost less to ship goods from Chicago to New York than to places a few hundred miles east of Chicago.

The “long-and-short-haul” device aroused popular indignation, especially among rural inhabitants, who were the chief sufferers; but the practice enabled the roads to offset losses elsewhere.

Equally objectionable was the policy of discriminating against small shippers by granting secret rebates to dealers in the same area who provided the lines with a larger freight traffic. When, as sometimes happened, the railroads themselves conducted other businesses, such as coal mining, they had a special incentive to employ unfair methods in order to put competitors in such fields at a disadvantage.

At the same time, the rail companies sought to influence legislation and public opinion by bestowing free passes on governors, legislators, judges, politicians, newspaper editors and preachers.

To escape the evils of cutthroat competition, the railroads from time to time tried various schemes of joint action. Rate agreements were entered into for fixing uniform charges, only to break down sooner or later for want of mutual confidence.

Pooling, a somewhat similar device, proved more successful than rate fixing. By this plan the rival companies divided the freight business according to some prearranged ratio, or placed the total earnings in a common fund for like distribution.

The first notable pool, that formed in 1870 by the roads connecting Chicago and Omaha—the Northwestern, the Rock Island and the Burlington—lasted fourteen years. Each line retained about half its earnings on the through traffic, leaving the balance to be shared equally among them. Meanwhile, railroads elsewhere made similar arrangements, their duration determined usually by the willingness of former competitors to trust one another.

Popular resentment at railroad practices deepened as the years rolled by. While the movement for state regulation culminating in the Granger laws had a good effect, the transportation problem was, by its very nature, interstate or national in character, calling for action by Congress.

As early as 1874 a Senate committee, headed by William Windom of Minnesota, proposed that the government build and operate a double-track freight line from the seaboard to the Mississippi as a means of keeping down the charges of private companies. In 1874 and 1878 the House, under Western pressure, passed bills for the federal regulation of railroads, and in 1885 both branches acted, though without being able to agree on a common measure.

Final action was hastened by the decision of the Supreme Court in 1886 in the case of Wabash, St. Louis & Pacific Railway v. Illinois. The tribunal, reversing its view of nine years before in the Peik case, forbade individual states to fix rates on shipments passing beyond their borders. At the time, about three fourths of the country’s rail traffic was of this character.

The ’Wabash’ Supreme Court decision declared, in effect, that this ever increasing volume of interstate business could be regulated only by the federal government.

The upshot was the interstate-commerce act which Cleveland somewhat reluctantly signed on February 4, 1887. It forbade unreasonable charges, special rates, pools, rebates and the long-and-short-haul discrimination, and provided for an Interstate Commerce Commission of five members to guard against violations.

This body, however, could not fix traffic rates or enforce its own decisions. If a railroad refused to comply, the Commission must bring suit in a federal court. The law, being based upon the interstate-commerce clause, did not apply to traffic wholly within a single state.

This first experiment in the national supervision of transportation proved, in most respects, a disappointment. In cases of appeal, the Supreme Court was more apt to uphold the companies than the Commission. Repeated decisions restricted its powers within the narrowest bounds.

According to Mr. Justice Samuel F. Miller’s explanation of the laissez faire attitude of most of his colleagues on the high court, “It is vain to contend with judges who have been at the bar the advocates for forty years of railroad companies, and all the forms of associated capital, when they are called upon to decide cases where such interests are in contest. All their training, all their feelings are from the start in favor of those who need no such influence.”

Accordingly, the railways were, for the most part, able to continue their evil ways, though they had to pay greater regard to external appearances than before. For example, since pooling was banned, the companies attained much the same result through traffic associations, which regulated rates and punished disobedient members.

The Interstate Commerce Commission after a decade of experience declared the situation “intolerable both from the standpoint of the public and the commission.”

When the Supreme Court in 1897 by a vote of five to four held that traffic associations were illegal, a new consolidating movement began, which led to the merging of many hitherto independent lines.*

* In this case, involving the Trans-Missouri Freight Association, the court held that the association was a combination in restraint of trade and hence that it contravened the Sherman antitrust act of 1890.

Despite the steady expansion of mileage in the later years of the century, the number of railroads declined from 1500 in 1880 to about 800 in 1900. At the latter date more than half the nation’s trackage belonged to six major financial groups, the Vanderbilt, Morgan, Harriman and Pennsylvania interests owning approximately 20,000 miles each, the Gould group 16,000 and the Hill interests 5000.

From this centralizing movement came benefits as well as abuses. Thanks to the economies inherent in large-scale undertakings, freight rates, which in 1860 had rarely fallen below two cents per ton-mile, averaged three quarters of a cent in 1900.

Though the interstate-commerce act had largely missed its aim, nevertheless the principle of national regulation was established, and for such regulation official machinery existed which Congress might strengthen and enlarge whenever public opinion should demand.

CONCENTRATION IN MANUFACTURING

The movement for the consolidation of manufacturing resembled that of railroad combination. Following the Civil War, industrial establishments, unhindered by legal barriers, waxed rapidly in size and, like the rail companies, waged desperate war with their competitors in the effort to absorb or destroy them.

This phase in turn gave way to widespread attempts by the bigger concerns to stabilize particular industries through price agreements, pools and other devices for restricting output and lifting prices.

Finally, with public opinion at full tilt against Big Business, both states and nation intervened with restraining laws. The unifying trend, while stronger in some branches than others, left untouched few industries of basic importance.

The career of the Standard Oil Company, one of the earliest and strongest industrial combinations, illustrates the process of concentration in other fields. In 1865 John D. Rockefeller, then a young man of twenty-six who had made a small fortune from army contracts during the Civil War, was the guiding spirit in a commission house in Cleveland, Ohio, a concern capitalized at $100,000.

Joining hands with powerful capitalists there and in New York, he expanded his operations, absorbed rival establishments and in 1870 organized the million-dollar Standard Oil Company of Ohio, which controlled four per cent of all the oil refined in the United States.

Now began a career of conquest that was Napoleonic in its daring, scope and execution. By 1872 the Standard owned twenty of the twenty-five independent plants in Cleveland. In the ensuing three years Rockefeller and his associates acquired the biggest refineries in New York, Philadelphia and Baltimore. The Standard next obtained control of the refining business of western Pennsylvania.

Thus, within a decade, ninety per cent of all the refineries in the land had passed into its hands.

Many elements, good and evil, made possible this brilliant campaign. Not least was the remarkable group of men who gathered about Rockefeller—Henry M. Flagler, Henry H. Rogers, John D. Archbold and others—who strained every nerve to plan, plot and fight for the Standard and exacted an equal measure of devotion from their subordinates.

Another factor was the superior efficiency attained through large-scale operation. The Standard not only set up factories to make its own barrels and produce its own acids, but it acquired tank cars and built great underground mains, or pipe lines, for the transportation of crude oil.

It also created selling agencies and, instead of paying high storage charges, erected large tanks at strategic points.

In addition to its main product, kerosene or coal oil, it utilized and popularized many by-products, such as lubricating oils, gasoline, paraffin and vaseline.

Its success was further assured by unfair methods of competition, ranging all the way from secret rebates on its rail shipments (a favor which it enjoyed for thirty years or more) to the bribery and blackmail of public officials. In 1872 the Standard, joining certain Pittsburgh refining concerns in the South Improvement Company, induced the railroads to agree to grant them secret rebates not only on their own oil but also on their competitors’ shipments.

The scheme was discovered before the arrangement went into effect and, in the face of a mighty popular wrath, all parties to the agreement disowned it. Before the public exposure, however, agents of the Standard used its existence as a club to force the sale of rival refineries.

The Standard Oil’s favorite method of crushing competitors was through ruinous price-cutting campaigns, followed by proportionate increases once the object was attained.

By 1882 the Rockefeller group owned fourteen companies outright, besides a majority interest in twenty-six others.

Price agreements and pooling arrangements had helped secure harmony of operation in earlier years, but now, with so vast a system to manage, the Standard undertook a novel form of organization: the industrial trust. It was an old device fitted to new conditions.

Adopted in 1879 and revised in 1882, the " industrial trust" provided for a secret union of the several companies under nine trustees to whom was confided all the stock of the individual companies and who thus exercised centralized direction. The original holders, in return for their stock, received “trust certificates” which entitled them to their due share of the earnings of the whole.

Operating without a charter, the trust could do pretty much as it pleased. So successful did the scheme prove that between 1884 and 1887 it prompted the formation of trusts in other fields, notably the American Cottonseed Oil Trust, the National Linseed Oil Trust, the National Lead Trust, the Distillers’ and Cattle Feeders’ Trust (popularly termed the whisky trust), the Sugar Refineries Company (the sugar trust) and the National Cordage Association.

Meanwhile, the popular outcry against Big Business was reaching a climax. The gains to the public from the improved quality and generally lower prices of commodities were obscured by the brutal practices of muzzling competition, corrupting government officials, extorting excessive profits, watering stock and opposing labor welfare.

The idea of monopolies had always been abhorrent to the American mind. Now, under the reign of laissez faire, not only the comforts but the very necessities of life—”from meat to tombstones,” declared Henry Demarest Lloyd in his book ’Wealth against Commonwealth’—were drifting into the maw of “soulless corporations.”

As Lloyd put it, “We now have Captains of Industry . . . rearranging from office-chairs this or that industry, by mere contrivances of wit compelling the fruits of the labor of tens of thousands of their fellows, who never saw them . . . ; sitting calm through all the hubbub raised in courts, legislatures, and public places, and by dictating letters and whispering words remaining the master magicians of the scene.”

As an indication of the mounting tide of public protest, an Anti-Monopoly party appeared in the campaign of 1884, though with little success. President Cleveland took note of the situation in his tariff message of 1887 when he remarked that competition among businessmen “is too often strangled by combinations . . . which have for their object the regulation of the supply and price of commodities. . . . The people can hardly hope for any consideration in the operation of these selfish schemes.”

In the election of the next year the two old parties, for the first time, condemned trusts and monopolies. That they took this stand was due to pressure from the farming regions, where the aroused people were urging similar action on their state legislatures.

In 1889 and 1890 fifteen commonwealths, mostly in the West and South, passed measures to ban conspiracies or agreements in restraint of free competition. Before the movement spent its force, all but New Jersey, Delaware and West Virginia followed suit.

Unfortunately, remissness on the part of some states proved fatal because a corporation chartered in one of them could trade unmolested across state lines.

With this in mind, Congress in July, 1890, adopted a national prohibitory law known as the Sherman antitrust act. It declared illegal “every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations.”

Passed in response to an imperious popular demand, the statute was drafted in such haste that the purport of its apparently simple and direct language was, for many years, the subject of impassioned controversy.

The words might mean that all extensive business enterprises were illegal since, by their superior efficiency, they tended to be in restraint of competitive trade. If this were the true interpretation, then the law aimed to prevent the benefits of large-scale operation as well as its evils.

But it was contended by others that, inasmuch as the terms used in the statute had been employed since ancient times in the common law, they had acquired a special technical meaning. If this were so, acts in restraint of trade, when reasonable and fair, were not intended to be affected.

Other obscurities lurked in the statute. Were railway combinations forbidden as well as other kinds? Were labor organizations prohibited along with capitalistic combinations? These and similar questions had to be decided eventually by the judiciary.

The Supreme Court in these early years leaned toward an interpretation which made the antitrust act apply equally to reasonable and unreasonable restraints of trade.*

* The court reversed this view in 1911 in the case of Standard Oil Company v. United States.

On the other hand, the judges seriously crippled the law’s effectiveness by defining the term “trade” as narrowly as possible. When the government sought to dissolve the sugar trust, the tribunal held in the case of United States v. E. C. Knight Company (1895) that the control of ninety-five per cent of the sugar refining of the country did not in itself constitute an act in restraint of trade.

In other words, Congress could legislate concerning the distribution of products, but it lacked power to deal with industrial concentration as such.

In the circumstances the executive department put little energy into trying to enforce the statute. Only seven suits were instituted under Harrison, eight under Cleveland and three under McKinley; and some of these were directed against labor combinations.

It was left for later administrations to discover means of rendering the Sherman act an effective instrument against Big Business.

With the antitrust act hardly more than an empty threat, it is not surprising that the centralizing trend in business proceeded with increased momentum. In the thirty years before 1890 twenty-four industrial combinations had been effected with an aggregate nominal capital of $436 million, but in the last decade of the century one hundred and fifty-seven came into being with a total capital of over $3 billion.

The years 1898-1901 were particularly prolific, ushering in an era of super-consolidation signalized by the formation of the United States Steel Corporation (1901), the first billion-dollar amalgamation. This leviathan combined under one management two hundred and twenty-eight companies located in a hundred and twenty-seven towns and cities in eighteen states.

By this time, however, the particular type of organization known technically as the trust was a thing of the past. Two decisions in state courts were responsible, one in New York in 1890 against a unit of the Sugar Refineries Company, and another in Ohio two years later against the Standard Oil Trust.*

* The New York decision held that the combination partook of the nature of a partnership of corporations and hence violated the common law. In the Ohio case, the decision rested explicitly on the contention that the object was to form a monopoly.

But the word itself continued, in popular parlance, to denote any form of Big Business that in size approached a monopoly.

In deference to these decisions the great capitalistic organizations now assumed a different legal framework. Some changed into single huge corporations. Others took the form of holding companies, organized to secure control of corporations in the same branch of industry through the purchase of stock.

To many people the holding company seemed the old trust doing business under a different name and with better legal protection. Indeed, the changes in structure had no perceptible effect on efficiency of operation or on earnings.

• As a trust from 1882 to 1891 the Standard, for example, never made less than $8 million a year.
• Under a system of interlocking directorates from 1892 to 1896 the individual companies totaled from $19 million to $34 million.
• As a holding company the annual profits from 1899 to 1905 ranged from $34 million to $57 million.

The centripetal tendency in manufacturing and transportation was symptomatic of a similar movement in almost every other important sphere of economic activity. As the century drew to a close, the telephone, telegraph and express businesses gravitated into the hands of a few corporations.

The Amalgamated Copper Company, formed in 1899, controlled sixty per cent of all the copper produced in the land; and a few years later the United States Steel Corporation controlled about seventy per cent of the iron and steel production.

In the field of banking and finance the Morgan and Rockefeller groups had by 1900 acquired such immense power that it was virtually impossible to launch a large business undertaking without their participation or approval. In many instances their representatives exercised the directing power in industrial corporations, life-insurance companies, railroads, public-utility companies and the like.

Thus the country was confronted with the spectacle of combinations and monopolies forming on nearly every hand.

Thoughtful people began to wonder how long democratic institutions could withstand the strain.