6.6 The Rise of Industrial Capitalism

The Business of Railroads

• Key Role in Economic Growth After 1865

  • New technologies and management structures were pivotal to economic expansion.

  • The most significant “inventions” were in management and financial systems that supported large-scale industries.

• Development of Railroads

  • Expansion:

    • Railroad mileage grew dramatically, from 35,000 miles in 1865 to 193,000 miles in 1900.

    • This fivefold increase occurred over a 35-year period.

  • Government Support:

    • The federal government provided subsidies to the railroad industry, including low-interest loans and vast tracts of land.

  • Impact on the Economy:

    • Railroads created a national market for goods, encouraging:

      • Mass production

      • Mass consumption

      • Economic specialization

  • Industry Growth:

    • Railroads stimulated the growth of other industries, notably coal and steel, due to the resources required for construction.

• Impact on Daily Life

  • Time Zones:

    • Prior to 1883, each community had its own noon based on local sun positioning (144 different time zones).

    • In 1883, the American Railroad Association divided the country into four standardized time zones to streamline scheduling and operations.

    • Railroad time became the national standard, influencing daily routines.

• Innovation of Modern Stockholder Corporation

  • Railroads required massive investments, leading to the creation of:

    • Complex financial structures.

    • Business management systems.

    • Regulation of competition to ensure sustainability.

  • This marked the development of the modern stockholder corporation—a crucial financial model for future industries.

Competition and Consolidation

• Early Railroads (1830–1860)

  • Numerous separate local railroads were built, resulting in:

    • Different track gauges.

    • Incompatible equipment, leading to inefficiencies.

• Post-Civil War Consolidation

  • Railroads merged into integrated trunk lines to streamline operations.

  • A trunk line: Main route between large cities; smaller branch lines connected towns to trunk lines.

  • Commodore Cornelius Vanderbilt:

    • Used wealth from steamboats to merge railroads into the New York Central Railroad (1867).

    • The New York Central ran over 4,500 miles of track, connecting New York City to Chicago.

  • Other key trunk lines:

    • Baltimore and Ohio Railroad

    • Pennsylvania Railroad

  • These railroads set standards for excellence and efficiency in the industry.

• Problems and Corruption

  • Overbuilding (1870s–1880s): Investors overestimated demand, leading to:

    • Mismanagement.

    • Fraud: Speculators like Jay Gould inflated stock values (watering stock).

  • Unfair Practices:

    • Rebates and kickbacks: Railroads offered discounts to favored shippers but overcharged others, especially small customers like farmers.

    • Pools: Competing companies secretly fixed rates and shared traffic to eliminate competition.

• Concentration of Railroad Ownership

  • The 1893 financial panic caused one-quarter of railroads to go bankrupt.

  • J. Pierpont Morgan led efforts to consolidate bankrupt railroads, eliminating competition.

  • By 1900, seven giant systems controlled nearly two-thirds of the nation’s railroads.

  • The consolidation:

    • Increased efficiency.

    • Created regional monopolies controlled by powerful men like Morgan through interlocking directorates.

• Railroad Power and Regulation

  • Railroads were seen as symbols of progress but also faced criticism for exploiting consumers and investors.

  • Early Regulations:

    • Granger Laws (1870s): State laws to regulate railroads, but overturned by the Supreme Court.

    • Interstate Commerce Act (1887): Initially ineffective in controlling railroads.

  • Progressive Era Reforms:

    • In the early 20th century, Congress strengthened the Interstate Commerce Commission (ICC) to better regulate railroads.

Industrial Empires

• The Second Industrial Revolution (Post-Civil War)

  • Shift from textiles and clothing to large-scale industries producing:

    • Steel

    • Petroleum

    • Electric power

    • Industrial machinery

• Andrew Carnegie and the Steel Industry

  • Background: Born in Scotland, Carnegie rose from poverty to lead the steel industry.

  • Vertical Integration:

    • Carnegie controlled every step of production, from mining to transporting finished steel.

  • Carnegie Steel:

    • By 1900, it employed 20,000 workers and produced more steel than all of Britain.

  • Sale of Carnegie Steel:

    • Sold in 1900 for over $400 million to a new steel conglomerate led by J.P. Morgan.

    • The new company, United States Steel, became the first billion-dollar corporation.

• John D. Rockefeller and the Oil Industry

  • Edwin Drake drilled the first U.S. oil well in 1859.

  • John D. Rockefeller:

    • Founded Standard Oil in 1863, which rapidly eliminated competition.

    • By 1881, Standard Oil controlled 90% of U.S. oil refineries.

  • Monopoly and Profits:

    • Rockefeller's control over supply and pricing boosted his fortune.

    • Used rebates from railroads and price-cutting to force competitors out.

• Controversy Over Corporate Power

  • Trusts: Managed assets of various companies, as seen with Standard Oil.

  • Horizontal Integration:

    • Rockefeller used this to control all competitors in a specific industry (e.g., oil refining).

  • Vertical Integration:

    • Carnegie used this strategy to control all stages of steel production, cutting costs and increasing efficiency.

  • Holding Companies:

    • J.P. Morgan managed a holding company to control multiple industries (e.g., banking, railroads, steel).

• Criticism of Giant Corporations

  • Critics argued that monopolies harmed the economy by:

    • Eliminating competition in open markets.

    • Slowing innovation and overcharging consumers.

    • Developing excessive political influence.

  • The term "monopoly" came to symbolize corporations that threatened the public interest.

Laissez-Faire Capitalism:

• Advocated for minimal government intervention in business.

• Governments supported economic growth through infrastructure, tariffs, and public education.

• Prevailing belief in laissez-faire capitalism rejected government regulation.

Conservative Economics:

• Adam Smith's The Wealth of Nations (1776) argued that unregulated business is more efficient than government-controlled trade.

• Smith believed the "invisible hand" of market forces (supply and demand) guided businesses to offer better goods at lower prices.

• Despite the rise of monopolies, industrialists invoked laissez-faire theories to avoid regulation.

Social Darwinism:

• Applied Darwin’s theory of natural selection to human society.

• Herbert Spencer argued that wealth concentration was beneficial for society.

• William Graham Sumner popularized Social Darwinism in the U.S., claiming helping the poor weakened society by preserving the "unfit."

• Social Darwinism supported racial intolerance by claiming racial superiority for certain groups.

Protestant Work Ethic:

• Associated material success with divine favor.

• John D. Rockefeller justified his wealth using the Protestant work ethic, seeing it as a sign of hard work and moral righteousness.

• Reverend Russell Conwell’s “Acres of Diamonds” promoted the idea that everyone should strive to become rich.

Concentration of Wealth:

• By the 1890s, the wealthiest 10% controlled 90% of U.S. wealth.

• New millionaires lived lavishly, such as the Vanderbilts in Newport, Rhode Island.

• Many Americans admired "self-made men" like Andrew Carnegie and Thomas Edison.

• However, wealth typically concentrated among wealthy, Anglo-Saxon, Protestant males from privileged backgrounds.

Business Influence Outside the United States:

• In the late 19th century, U.S. corporations sought to expand into Latin America and Asia.

• Companies aimed to obtain raw materials like sugar and rubber for processing into finished goods.

• By 1900, imports from Cuba, Brazil, and Asia made up about 30% of U.S. imports.

• The U.S. accounted for approximately 5% of the world’s population but 15% of global exports by 1900.

• The growth of U.S. business interests abroad played a role in increasing American involvement in international affairs during the late 1800s and early 1900s.

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