Chapter 18: Industrialization and the Rise and Fall of Business 1870 - 1900 (Open Stax US History)

Introduction

Electricity started to become a daily part of life in the beginning of industrialization. Businessmen took advantage of major technological innovations, while the working class faced challenges regarding labor. These frustrations were the grounds for the first labor movement

18.2 From Invention to Industrial Growth

Railroads and Robber Barrons

  • The creation of America’s Transcontinental Railroad stimulated the growth of iron, wood, and coal industries
  • From 1877 - 1890, railroad freight and passengers tripled
  • Growth came from Federal and State loans and grants
    • Railroads also listed stock
  • Midwest farmers were angry at railroad business for exploitative business practices and referred to them as “Robber Barrons” as businesses were often shady
    • Large businesses received discounts in shipping rates as opposed to local producers and farmers who’s higher rates were subsidized the discounts
  • Jay Gould was the first prominent “Robber Barron”, he bought older run down railroads, offered minimal improvements, and capitalized on factory owners’ desires to ship in a more efficient way
  • His idea worked better in the West where railroads were still scattered, and forced farmers and businesses to pay Gould’s prices
    • Gould owned 15% of all railroad transport and had a personal wealth of 100 Million dollars
  • Commodore Cornelius Vanderbilt was a Robber Barron who cared more about the success of his railroads and its positive impacts on the American economy
    • He later purchased stock and of a railroad network that connected Chicago and New York City
    • By 1900, seven major railroad tycoons controlled over 70% of all operating lines

Giants of Wealth: Carnegie, Rockefeller, and Morgan

Andrew Carnegie

  • Andrew Carnegie developed an interest in railroads, bridge building, and the steel industry through being a telegram messenger
    • He worked to a position of management for the Pennsylvania Railroad and invested his earnings with the help of Tom Scott, earning him more than one million in cash
  • Carnegie’s enterprises, J. Edgar Thompson Steel Works and Pittsburgh Bessemer Steel Company were bringing in profit excess of 40 million dollars by 1900
  • Carnegie bought cheap steel mills during the recessions of 1870 and 1890 and urged workers to “constantly think of innovative ways to increase production and reduce costs”
  • In his essay, The Gospel of Wealth, Carnegie argued that the rich should find proper uses for their wealth by funding hospitals, libraries, colleges, the arts, etc.

John D. Rockerfeller

  • Rockerfeller had an opportunity to take accounting and bookkeeping classes while in high school and developed an interest in business
  • He had business refining oil into kerosene from the oil boom in Pennsylvania and created the Standard Oil Company of Ohio, valued at one million dollars
  • In 1872, Rockerfeller sold kerosene at discounted rates to large companies, driving competition out of business if they refused to sell to Rockerfeller, known as horizontal integration
    • In 1879, the Standard Oil Company controlled 95% of oil refining business in the country, as well as 90% of the oil refineries in the world
  • Rockerfeller began to grow his company through vertical integration, where a company monitors all phases of a product’s lifecycle. For Rockerfeller, this required him to drive out all competitors on the market through price wars.
  • He created a legal entity called a “trust”, a person possessing legal ownership of a business that they operate for the benefit of other investors
  • In 1892, 37 stock holders gave their stock to 9 trustees who directed the company’s business ventures
    • Ohio Supreme Court ruled that the Standard Oil Company must dissolve, as its monopoly was in control over all refineries in the US and was in violation of Federal and State Standards
    • Rockerfeller shifted to a “holding company” model, where a central corporate entity controlled the operations of multiple companies by holding majority of the stock for each enterprise
    • This was not technically a “trust”, therefore was not vulnerable to anti-monopoly laws, it was still on par with a monopoly, so progressive reformers considered holding companies as a danger

John Pierpont Morgan

  • J.P. Morgan’s father was a London Banker. After moving to New England in 1857, Morgan created the J. Pierpont Morgan and Company Financial Firm, which bought stock in growing companies, turning profit as a result.
  • In the companies that Morgan invested in, he demanded seats on these companies’ boards, which gave him greater control over policies and decisions
  • Morgan bought out Carnegie’s steel industry, valued at 1.4 Billion dollars
  • Morgan was blamed for a bubble of prosperity that burst in the 1930’s depression
  • Ultimately, Morgan controlled 341 directorships, 112 corporations, and 22 Billion dollars in assets