3.1 history
3,1 Why was the late 19th century an age of rapid industrialisation?
There is no single reason why the United States underwent such a remarkable transformation in the period after
1870. Many related factors played a part. These ranged the availability of raw materials such as coal and iron ore, to the attitude of the government. There was no point in businessmen building factories to make clothes, for example, if there was no transport system to bring in the necessary raw materials and take away the finished products. There had to be a supply of energy to drive the looms to make the cotton and plenty of labour to work them. There had to be capital available to enable the factory owners to borrow the money needed for their new machines at a reasonable rate of interest. There also had to be a demand for the clothing and consumers needed to be able to afford to buy it. All of these requirementswere available in America in this period. There was also a political system which put no obstacles in the way of this growth, and did all it could to encourage it.
Many factors came together to make this period one of great economic development, such as:
the effects of the Civil War
rapid population growth and the availability of food to feed a growing population
the availability of land for factories, housing, transport and food production
a rapidly expanding transport system
access to raw materials such as coal, iron ore and cotton
supportive federal and state legislatures and the absence of regulation
great technological and business innovation and active support for both
the availability of capital, a developed banking system and a good supply of money
unrestricted growth of large businesses
protective tariffs and growing export markets
strong social attitudes which were sympathetic to capitalism and commercial and industrial growth.
KEY TERMS
State legislature: Every state in the USA has its own legislative body, democratically elected, which has the power to pass laws on every subject except those which are specifically given to Congress by the Constitution.
Tariffs: Taxes imposed on goods imported from other countries. If, for example, Britain made cheaper railway lines than was possible in the USA, the US government could impose a tax on imported British rails to ensure that it was cheaper to buy American rails. Tariffs were also a major source of the federal government's income.
The impact of the Civil War
In spite of the death and destruction it brings, conflict can often provide a great motivation to an economy. The US Civil War encouraged economic growth in a variety of ways. The victorious North created a very large army.
That army needed guns, ammunition, clothing and transportation on a scale unknown in America before.
The economy had to adapt to this sudden increase in demand and produce the vast amount of goods required. Goods were produced in large quantities.
Mass production could deliver the materials that
large armies needed and new methods of distribution were developed. Meanwhile, the government had to raise money to pay for the war. This led to a very sophisticated capital-raising system centred on Wall Street in New York. It also developed a new (and very expandable) paper currency known as the United States Note or 'greenback: The country's banking system had to evolve to cope with the increasing amount of money in circulation and the government's growing need to borrow money. This banking system was vital in ensuring that industrial expansion could be financed.
Tariffs were raised. This was partly to gain income for the government, but also to protect American goods, such as railway engines and wheat, from cheaper imports.
The Civil War was the start of a great expansion of industry in the United States. A lot of men made a lot of money out of the war by adapting and innovating in response to the demands of war. Many others wanted to do the same.
ACTIVITY 3.2
Work with another student to examine why the Civil War helped future economic growth. Which was the most important reason? Why? In what ways do you think the benefits to the economy outweighed the harm done to the country? Make a mind map or spider diagram of the reasons which identifies the links between them.
Population growth
The large growth in the population of the United States in this period was very important for industrial expansion.
This population provided the workforce needed for industrial expansion. It also meant that there was an agricultural workforce which could feed this growing population. These people then became the consumers for the products that were produced.
There were two factors in this remarkable population growth. One was the growth of the existing population and the other was immigration.
The principal reason why the existing population grew so rapidly was the decline in the death rate, especially among
children. Improved living standards led to a substantial reduction in the death rate of children under the age of five. The infant mortality rate was approximately 181 per 1000 births in 1860. This dropped to 151 by 1890 and 96 by 1910 (although it is worth noting that it rose to 215 in 1880 before the cities were cleaned up). Healthier diet, greater medical knowledge and, above all, improved living standards in the cities were vital here. Better housing, cleaner water supplies and sewage disposal gradually made a difference too. Life expectancy for men also rose steadily in the period, from 44 years in 1860 to 57 years in 1920 (again with a drop in 1880). Life expectancy for African Americans, usually about 10 years less than for whites, also rose, and by the same proportion.
This rapid growth in population was a major factor in leading to an annual growth rate of the American economy by between 3.5% and 4% a year in this period.
There are usually three major factors which lead to industrial growth: labour supply, availability of natural resources such as coal and availability of capital. In this case it is thought that the supply of a large amount of labour was the most important. In the USA, the workforce grew from 11.2 million in 1860 to 24 million in 1890 and to 29 million by 1900. It was that number of men and women capable of work that was so important to American economic growth.
The proportion of the workforce employed by agriculture declined from about 50% to about 35% in this period.
However, the percentage of the workforce employed in manufacturing, mining, transport, construction, retail and business services such as marketing and advertising all grew considerably. Real wages rose by about 1% a year for non-farm workers in the period. There were more and more people in work earning more and more money to buy products with.
KEY TERM
Real wages: Income expressed in terms of purchasing powe in a year, and your income only gaes up by 1%, your real wages as opposed to the actual income earned. If prices go up by sie have declined.
Land availability
One vital component in America's industrialisation was the availability of large amounts of land. The USA is a big country. Between 1800 and 1860, with acquisitions and gains such as the Louisiana Purchase see 'Attempts at compromise in Chapter 1.1) and lands taken from Mexico, the area of the United States went from approximately 2 million km to over 7 million km?.
The Homestead Act of 1862 allowed farmers to settle huge areas in the West. But there were still large areas of land available for ownership by the states as well as for business and transport. Although many farmers did not prosper in this period, it did mean that there was always food available for the growing urban population. Farm productivity grew because of increasing mechanisation and the spread of greater knowledge about farming techniques. The creation of the Department of Agriculture in 1862 did much to circulate knowledge about more productive methods.The growth of the railroads
Manufacturers needed a way to bring in the right raw materials and the coal needed to power the engines.
This needed to be done efficiently and cheaply. In addition, manufacturers could do little without being able to then distribute the goods they produced.
Initially, the United States developed along the eastern coast with its ports and up the major rivers such as the Mississippi. Therefore, most of the large cities were on the coast or on navigable rivers. The railroads transformed the USA by opening up the West and making rapid industrialisation possible. By 1900, every major city and its surrounding region, and all the states, were linked by one of the most comprehensive railway networks in the world. Cattle could now be easily transported from Texas to the Chicago meat-packing plants and coal from the West Virginia coalfields to the factories of New England.
What happened to the cost of freight was also critical to industrialisation. If the cost of transporting a finished product, bringing in raw materials or the wheat grown is too high, then the railroad is no use. Transport prices dropped from 2 cents per mile per ton in 1865 to 0.75 cents per mile per ton in 1900. Such low transport costs were vital for both producer and consumer.
By 1890, American railroads were carrying about 79 billion tons per mile of rail each year. It was a huge achievement.
By 1900, the railways employed nearly 1 million workers, and their construction had employed many thousands more. They provided an excellent example of how a large organisation could work efficiently. They required a sophisticated capitalisation process. This stimulated the money and capital markets even more. They also revealed some of the risks of capitalism when the banking and financial panic of 1873 happened. Above all, the railway stimulated demand. The 311 000 km of track needed a lot of steel, and that steel needed a lot of coal to make it. New engines and rolling stock for carrying people and goods seemed to pour out of the factories. Tough competition between railroad companies kept prices down at first.
The safety and efficiency requirements generated an urgent demand for technological innovation in areas such as braking and signalling. The engineer George Pullman developed special new train carriages so that passengers could travel in luxury. Retailers could send their goods to remote corners of the country. New stations were built, as well as bridges and tunnels. Engineers and architects and builders gained contracts and made profits. Even farming was boosted as American corn could now be easily exported.
There was active support from government for railroad expansion. There were few obstacles - other than natural ones such as the Rocky Mountains. Over 170 million acres of public land was given to the railroads by a sympathetic government. Much of the land which in fact wasn't needed by the railroads was sold on. The money from these sales was never returned to the government. There was no regulation or control in this vital development stage and without the railroads, there would have been limited industrialisation.
The availability of raw materials
America was fortunate in having the crucial raw materials needed for its industrialisation. Nearly 20 states had substantial deposits of coal, essential for powering textile factories, steel mills and railways engines. Coal could also provide the warmth needed by the growing city populations. America had more coal deposits than it needed and the surplus was exported using the new railroads and the new merchant ships made out of iron.
There were also good supplies of iron ore, which again the railroads could transport cheaply to the steel mills.
The South could produce the cotton for the textile mills of New England. The forests of the West and North could provide the timber for housing and railway sleepers. So, the raw materials essential for rapid industrialisation were already there.
Technological innovations, such as electrical power and the telephone
There were many great success stories of businessmen and innovators in this period, and there would not have been the rapid industrialisation without them. These were men who either saw the opportunities to develop new techniques, or came up with inventions themselves.
For example, engineers saw the need to develop a good braking system for railway engines, so they invented and patented these new pieces of equipment and made great profits. George Pullman did not invent the railway carriage, but he developed luxury carriages for the wealthy, and made a fortune that way. Two of the best-known examples of innovators like this are Andrew Carnegie and Thomas Edison.
KEY TERM
Patent: The right given by the law for an inventor to be the only person allowed to make, and profit from, an invention,
vfor a fixed period of years.
Carnegie and United States Steel
Andrew Carnegie (1835-1919) was a Scottish immigrant who came to the United States as a child. He started working as a messenger boy and ended up dominating the production of steel in the country. He died a multimillionaire. Carnegie realised that the demand for steel after the Civil War was going to grow, but it was expensive to produce. He saw a new way of making steel called the Bessemer process when he visited Britain in the 1860s. This cut the price of steel by nearly 80%. It improved its quality and the speed of production and lowered labour costs at the same time. He also knew that this steel was much better for railway track as it was stronger and more hard-wearing. Working closely with Henry Frick, who controlled much of the energy supply needed for the steel mills, Carnegie built up a steel company - United States Steel, On its own, it wasproducing more steel than Britain by 1900. That year, his company made a profit of $42 million.
In addition to developing the technology, Carnegie's companies invested heavily in new manufacturing plants and equipment. So, Carnegie controlled the whole steel process, from sourcing the raw materials needed, such as coal and iron ore, through the manutacturing process to distribution. He innovated, invested and kept prices as low as possible. in good times, he banked profits to keep his plants operational in bad times. However, he ruthlessly opposed any attempts to farm Labor unions in his plants. When his workers went on strike for better pay and working conditions, Carnegie was prepared to bring in his own armed guards and to use violence to stamp out the strike. Several workers were killed and wounded in the struggle and no judicial action was taken against their
employer.
KEY TERM
Labor union: An organisation of employed people, who eam their living in the same type of work as one another, such as coalminers. The union campaigns for higher wages and better working conditions for its members, and defends them against unfair dismissal or mistreatment by their employer. It might also pursue a political agenda. These organizations were also known as trade unions.
Edison and electrical power
With the Bessemer process, Carnegie showed that inventions were important, but that the ability to spot the commercial possibilities of an invention were vital. In Britain Michael Faraday made the key scientific discoveries about electricity. However, it was Thomas Edison (1847-1931) in the United States who made electricity
"commercial'. Edison was almost totally self-educated, but he was one of the greatness inventors of all time and had a great understanding of the commercial possibilities of electricity.
There are three particular reasons why Edison is such a good example of the entrepreneurship of this period:
He was responsible for a large number of inventions, such as the light bulb
He had the skill to industrialise inventions, make them commercially viable, and produce and sell them on a very large scale.
He developed the first great industrial research laboratory, with chemists, engineers and mechanics, to work on inventions.
Edison was helped considerably by the Patent Acts passed by Congress, which stopped other manufacturers from copying his ideas.
Bell and the telephone
Alexander Graham Bell (1847-1922) and the telephone was another great example of entrepreneurship in the period of industrialisation. Bell was born in Edinburgh, Scotland, but went to Canada where he became a teacher for deaf people. He moved to Boston in the USA, and was always interested in acoustics as well as electricity.
Bell experimented with to produce what became the telephone. Finally he developed and patented it. (Whether he actually invented it is open to debate.) Bell had strong technical skills but also quickly saw vast commercial potential of such an invention. The Bell Telephone Company (later Al&), more or less had a monopoly by 1880. This was achieved by buying up patents in the technology necessary to expand the telephone system on a national scale and by making use of the holding company system. The first telephone exchanges were being built by 1878. This meant that there could be communication within towns and cities, and then intercity communication became possible by 1890. This was very important to the development of business across America.
By 1900, there were 600000 telephones in the United States, and there were 5.8 million by 1910. Bell controlled the entire system, and was a multimillionaire.
KEY TERMS
Holding company: A company that does not actually make anytning or provide a service. All it does is own assets, such as shares, in other companies.
Monopoly: A commercial situation in which one individual or company owns the whole supply of a particular commodity or service.
Capital availability
While labour and resources were vital for industrialisation, so was the availability of capital. Railroads and steel mills, factories and city electrification projects needed substantial amounts of initial investment. The long-term returns on that investment were large. However, building generators to provide electricity for a city, and laying miles of cables, was an expensive process.
By 1870, a highly sophisticated capital-raising system, the stock market, had developed in New York. This was mostly due to the stimulus provided by the Civil War, when government
needed money to pay for the war and arms manufacturers needed capital to build or expand their factories.
The huge profits generated by the war were invested in this stock market. It was here that the capital needed to build new steel mills or build a railway across the United States could be raised. People could invest their savings and manufacturers could invest their profits in the stock market. Both hoped for great returns on their investments. Banks invested their deposits, and insurance companies their invested clients premiums. Institutions sprang up which specialised solely in investment. By 1865, the annual turnover on the New York Stock exchange was over $6 billion and, by 1880, it was the second largest money market in the world. The funds for industrialisation could be raised here, and investors could make money (as well as lose it) by buying shares in new companies. They hoped that they would get good dividends on those shares and that, if the company did well then the value of their shares would rise. However, there was no regulation of the stock market or the banking system at this time. Three serious crises, in 1873, 1893 and 1907, showed the potential weakness of the system.
KEY TERM
Dividend: When an individual invests in a company, known as buying a share, they expect to get a financial retum on that investment. Companies pay this out every year in what is called an annual dividend. So, if a dividend is 10%, and you have invested $100 in a company, you will get $10.
The growth of trusts and corporations including robber barons
The effects of minimal legislation
The Constitution of the United States gave the federal government virtually no role in managing the economy.
There was no desire from presidents or Congress to intervene in economic matters, except in emergencies.
There were no laws restricting the hours of labour. There were no taxes on profits. There were no rules about how business had to be conducted. State legislatures and judiciaries were in a position to bring in rules and regulations in their own states. However, they were usually dominated by local business or agricultural interests.
Businessmen soon learned how to use money and pressure to ensure that the limited state control there was did not harm their interests. The law provided few, if any, obstacles to entrepreneurship. The one attempt to impose regulation, the Sherman Anti-Trust Act of 1890 passed by Congress, was not enforced effectively for much of the period.
TERMS
Sherman Anti-Trust Act: This was designed to restrict concentration of economic power in too few hands, which could interfere with bade or reduce economic competition.
Some states had alrency passed such measures, but without coverage of all states they were ineffective.
Corporation: A legally recognised firm. It is quite separate from its owners, it is owned by its shareholders who share in the profits and losses the corporation makes.
Trust: A simple, but legal, device to avoid some state laws which prevented companies established in one state from owning property in another state or shares in other companies.
Trusts were vital for the creation of monopolies.
The United States had no tradition of labor unions in the 19th century. The few unions there were usually divided between those of the skilled workers and the unskilled, who tended to have very different interests.
Some unions were prepared to use peaceful methods to achieve better pay and conditions and others were not.
When industrial disputes rose, both state and federal authorities used troops to assist owners in defeating worker protests for improved pay and conditions. State assemblies, local judiciaries and police forces, largely dominated by business interests, showed little tolerance for those who went on strike during an industrial dispute. An employer could manage his workforce in any way he wanted as there were no laws or other sanctions protect his workers.
The complete absence of any formal rules and regulations until the Sherman Anti-Trust Act meant that businessmen were free to create organisations that could manage national expansion. With this, the corporation emerged.
For example, a corporation could own a large number of railways. It could hire the management it wanted to run them. It could sue (and be sued), It could buy, sell and own property in many states. It could merge with other railways and take over companies which made railway engines. It could become big enough to undercut the prices of rival and force them out of business before raising their own prices. There were many examples where corporations eliminated competition and gained the advantages of a monopoly. It could attract investors and speculators and its managers could own shares in their own companies and run it for their own benefit. There were no rules about keeping accounts or reporting to anyone such as their investors.
Corporations were the perfect way for giant industries to grow.
Trusts also helped this massive expansion. Some states had existing laws that prevented a company set up in that state from owning property in another state or from owning shares in other companies. Henry Flager found a way to avoid these laws by creating a trust. This was a simple legal strategy. Flager, the secretary of Standard Oil, a vast corporation, appointed himself as a 'trustee" for the stocks and property that the company was not allowed to own. Three employees of the Standard Oil Company of Ohio, including Flager, were trustees of all the properties and assets of Standard Oil outside Ohio.
Flager had created a simple and perfectly legal device to allow his company to dominate oil supply, refining and distribution in America. This company ended up controlling almost the entire US oil industry. The same thing happened in other vital areas such as steel production and railway ownership
It was quite common by the 1870s for competing businessmen involved in a single industry, for example sugar refining or steel making, to make informal agreements together to divide up the trade and share the profits. This allowed them to avoid business threats, such as sudden recession and excess capacity and overproduction. It lowered their risks and meant they could survive hard times, it also enabled them to control or collectively negotiate the prices of things like coal and freight. Combined size meant greater strength and increased profits.
Industries under one-man control
With the growth of trusts a significant number of major industries gradually came under the control of one man.
These trusts were usually controlled by a single individual.
Oil was the first industry to be controlled by one man.
Standard Oil of Ohio became a trust in 1882 with John D.
Rockefeller in charge. Other major industries followed, with Andrew Carnegie controlling steel, Gustavus Swift controlling meat packing and J.P. Morgan controlling much of America's banking and railroad systems. In most cases, they had monopoly control of their industries, and competition was eliminated. They nearly always became multimillionaires. They were well known for their efficient management methods but usually treated their workforce badly. Their focus was on profit and dominance. As a result they became known as the 'robber barons'.
KEY TERM
Robber barons: A phrase used first of all at this time by journalists, and later by historians. It was originally used in the Middle Ages to describe how a noble and his followers were able to force money from local people and travellers in a system that varied between taxation and
Rockefeller created the Standard Oil Company through very aggressive business methods and came to dominate the oil industry in the United States. He was the first American billionaire.
When he retired, he devoted his life to charitable works.
John D. Rockefeller and Standard Oil
He started as a bookkeeper in 1862 and made a $4000 investment in oil, seen as an exceptionally risky business then. By 1870 he had built up a thriving, if small,business in oil refining through hard work, incredible personal economy and tough management. However, his aim was to dominate the entire oil business. As he started with about 3% of the refining capacity of the USA, he was aiming high. He gave rail owners shares in his company in order to get cheaper freight rates than his rivals. This meant he could undersell his rivals, then force them out of business and thus gain monopoly control. By 1880, his company produced only 2% of the nation's oil, but he controlled 90% of the refining capacity. As a result of this, he controlled the price of oi in the USA.
Backed by his enormous profits, John D. Rockefeller and his younger brother and partner William Rockefeller were able to gain more control of oil production, much of the transport system and also significant parts of the national banking system. Competition was reduced or eliminated. He controlled everything from New York, brilliantly managing and manipulating the trust system he took great care to gain influence in any state legislatures which had the ability to restrict his business.
However, Rockefeller didn't stop. Legislation was passed against trusts to prevent the commercial methods of men like Rockefeller but his large team of lawyers came up with a new legal device to get around this law. In 1889, the holding company (a business formed to sell and buy shares of other companies which it then controls) was formed, allowing Rockefeller to maintain control over the oil industry. Enormous profits poured into his bank accounts. He seemed above the law.
By 1900, he controlled the domestic and foreign oil market and the whole industry from the oil wells to the automobile's lubricating oil and petrol tank. His organisation also made the asphalt which made the roads which the automobiles drove on. His company was making nearly $20 million dollars a year profits for him by 1890 and paying out dividends of over $11 million to his delighted shareholders.
J. P. Morgan and investment banking
Like several of the other robber barons, J. P. Morgan (1837-1913) did not come from a poor background. His father was a wealthy and successful investment banker and Morgan followed in his footsteps. In the 1860s he saw opportunities in the growing railway industry and he joined the group of robber barons. Some railway companies were having financial difficulties. This was due to a mixture of overbuilding of tracks in some areas, falling prices and national recession. Morgan invested in many of these companies and took control of them, Many of these companies were in the heavily populated north-east of the country, and gradually he gained control of passenger
tr, s-1920
and freight prices. This enabled his companies to build up substantial profits.
These large profits were usually gained by a degree of monopoly control. He invested in, or just bought out, a large number of banks in New York, insurance companies and investment trusts. By 1900, he had enormous influence on railroads as well as the capital market in the United States. Major corporations such as Edison Electric (the new electrical industry) and International Harvester (farm machinery) got their startup funding from Morgan. Morgan played a substantial role in the resolution of the two financial crises in 1893 and 1907. He became enormously influential as he preferred cooperation to open rivalry. In 1901, he took over Carnegie's steel empire and created the United States Steel Corporation. This was the world's first billion-dollar corporation. So, he controlled most of the steel industry and capital in America. In 1901, he created his Northern Securities Corporation which controlled much of the rail network in the north-east as well. He also bought out the struggling New York Times to ensure that he got a favourable reports in the newspapers.
Trade policies and protectionism
Congress in this period was largely influenced by business interests as presidents and their cabinets were highly responsive to the needs of US industry and overseas trade. The economic policies of government helped commercial expansion. Congress was happy to impose protective tariffs and the government enforced them. The intention of the tariffs was to ensure that foreign-made goods were always more expensive than home-produced ones, therefore protecting US producers. These duties could be as much as 50% of the cost of imported goods and effectively forced people to buy American goods.
Tariffs could be unpopular with many consumers as they also pushed up prices of the imported items that they needed to buy, like sugar. Tariffs were the principal source of the federal government's income which was another complication. (A federal income tax or tax on business profits was not introduced until the next century.) There was little chance of significant change while business interests controlled Congress and the government needed income to pay for the civil service and the military.
Tariffs remained controversial, especially in the 1880s and 1890s. Manufacturers liked them, as they reduced competition from aboard, but the farmers of the South and West did not as they increased their operating costs. Other countries responded by imposing similar tariffs on American goods which therefore damaged exports. The Republican Party supported tariffs and the Democrats opposed them. However, they remained as the Republicans were dominant in both the presidency and Congress in the latter part of the 19th century.
There were two changes in the 1890s, but they were relatively minor. The first, known as the McKinley Tariff raised the rates imposed on imported goods, which hit consumers very hard. When the rate on imported sugar was later cut, the Sugar Trust, which controlled the whole market, kept the prices artificially high and made even greater profits. This really angered many voters.
The only real change from the 1890 Act was the decision to lower tariffs on goods coming in from the foreign nations who would also agree to lower their tariffs on goods they imported from America.
Tariffs became a major issue in the elections of 1890 as a result of the McKinley Act. The Republicans, the party of business, supported them, while the Democrats strongly opposed them. The Democrats did well in elections to the House of Representatives in particular. They ran a campaign arguing that high food prices were caused by the Republicans and their tariffs and that two thousand millionaires were running the country in their own interests'. In 1894, the Democrats put a bill through Congress, known as the Wilson-Gorman Bill, which tried to cut many tariffs.
However, Republicans in the Senate were able to add so many amendments that there were hardly any reductions in the end. This led to a growing demand to change the way Senators were elected. At that time, they were chosen by the State Legislatures. These were often business-controlled, and Senators and were not directly elected by the people of the state like members of the House of Representatives were.
Protective tariffs remained a major issue between the two parties throughout the period.
The government also provided assistance to the industrial process with its foreign policy. Great care was taken to ensure that much of the Caribbean and Central America was open to US business. The same happened in the Philippines, China and Japan. A growing US navy (another boost for American industry) ensured that American trade was protected overseas. The State Department did all it could to support US commerce, especially in the potentially vast markets of China and Japan.
There was rapid industrialisation in the US in the final three decades of the 19th century. This was due to a combination of human dynamism, unlimited resources, bold entrepreneurship, plenty of labour and great demand, as well as a lack of serious obstacles or regulation.