ADVANCED PLACEMENT AMERICAN HISTORY

Captains of Industry

*The laissez-faire American economy of the 1800s could allow an ambitious and hard-working man to develop his own business and truly live out one of Horatio Alger’s rags-to-riches stories.  However, because some of the men who built great businesses that way had no limits whatsoever, they were eventually able to build businesses so large and powerful that many smaller businesses were crushed or absorbed (or at least much harder to create) so that by the late 1800s it became harder for the average American to achieve the American Dream.

 

*The men who did build vast business empires were known as Captains of Industry by those who admired them for their accomplishments and for their contributions to a booming economy in the late 1800s.  The smaller businessmen whose lives they ruined, the farmers who depended on their transportation and manufactured goods, and the workers who laboured 12 hours a day, six days a week in their factories called them Robber Barons.

*One way businessmen came to dominate their market was by sharing the costs and risks by forming corporations.  These are groups of investors who all put money into the company, but cannot lose more than they invest (a small businessman whose business goes bad might lose everything he owned paying off his debts, whereas a corporation could just go bankrupt and the investors would not lose any more than they had already put into it).  On the other hand, if the company did well, the investors would share the profits.

*Forming a corporation was nearly the only way to undertake a major project such as building a railroad or opening a mine.  In turn, new inventions such as the railroad and telegraph allowed corporations to communicate and transport goods across a long distance, so that different investors did not necessarily have to live near each other or their places of business, and in some cases, one man could control an industry.

*One of the first (and according to some, the worst) of the Robber Barons, was Jay Gould.  He made his first money in partnerships in leather tanning businesses, buying out his partners when they had financial problems.  He later became involved in railroads, and through them, in politics when he and ‘Diamond Jim’ Fisk made Boss Tweed of Tammany Hall a director of the Erie Railroad in exchange for his help in getting laws they liked passed.  He later sold shares in his New York railroads when lawsuits threatened, and began to buy up Western railroads, where he cut wages and used his wealth to buy elections in the Great Plains and on the Pacific Coast.

 

*As a speculator in railroad stocks, Gould was an expert at stock-watering, a term that comes from cattle, but that in business means artificially inflating the value of a company’s stock before selling it off.  The new owners of the company would then be stuck with something worth much less than they paid for it. 

 

*In 1869, Gould and Fisk attempted to corner the market in gold, allowing them to manipulate its price and thus the price of wheat so that western farmers would want to sell more of it, so that they could charge them more to ship that wheat on their railroads.  This caused the prices of many goods to skyrocket and the value of many stocks to fall.  To keep control of the gold market, Gould tried to get President Grant’s brother-in-law to influence the president not to sell the government’s gold reserves.

 

*In the end, Grant realised what was happening and the US Government did sell off some of its gold reserves, causing the value of gold to crash on Black Friday, 1869, but not before Gould and Fisk were able to sell off most of what they had invested in, thanks to a warning from the Secretary of the Treasury (although some of their business partners were ruined).  Although Gould and Fisk did not end up making nearly as much as they hoped, the mere fact that they were able to completely destabilise the stock market and cause prices to rise and fall, Americans tended to blame Gould for any major economic shifts.  When newspapers portrayed him as a monster, however, Gould simply bought the papers and put a stop to that.

 

*Some people despised how these monopolists came to dominate industries and run competitors out of business.  They called the monopolists Robber Barons.  Others said that they actually were Captains of Industry, men who used their wealth and their organisation to improve America’s economy, because overall the economy boomed in the late 1800s.

 

*Other men who were successful were more honest and respected, although none were close to being saints. 

 

*Cornelius Vanderbilt made a fortune in transportation--steamboats and railroads.  He was the richest man in the world when he died in 1885.  He gave money to a university in Nashville, which renamed itself in his honour.  Due to the size of his fleet, he was known as 'the Commodore.'

 

*George Westinghouse developed the air brake, making trains easier and safer to stop, thus letting railroads run longer trains and run them at higher speeds.  He also created one of the first and most influential electric companies in competition with Thomas Edison.

 

*Eleuthère Irénée du Pont founded and the Du Pont family ran a major gunpowder company that later produced many other chemicals.

 

*In the most important single industry of the age, steel, Andrew Carnegie, a Scottish immigrant who truly embodied the rags to riches tales of Horatio Alger rose from poverty to control the largest steel company in America.  He did so through hard work, the cultivation of important friends, and careful management of his company, which he made a model of vertical integration.

 

*Vertical integration is the practise of owning every step in the production of a finished good.  Carnegie owned the mines to produced coal and iron, the ships and trains that carried them to his factories, and the factories themselves.  Cutting out the middle men saved him millions of dollars.

 

*Other companies formed cartels, in which many companies agreed to keep their prices the same so they would not have to compete with one another in a particular industry, gaining many of the advantages of a monopoly without having to complete integrate different companies.  This was known as pooling or price-fixing. 


*Eventually some corporations grew so large that they were able to buy or destroy their competitors. They could destroy competitors by lowering prices in one area until local businesses failed because they were making their own money in many areas. 

 

 

*A corporation that controlled most or all of the type of business that it engaged in was called a monopoly or a trust (because each of the companies they go control of ‘entrusted’ their companies to a group of ‘trustees,’ all of which were made up of the same people).

*Perhaps the most successful monopolist of all was the owner of Standard Oil, John D. Rockefeller.  He began at a time when oil was just beginning to become important as a source of light, heat, and fuel.  As his company grew, he told the managers of each region his company operated in that Standard Oil should sell all their oil that was sold in their territory.  As Standard Oil grew larger, it was able to buy out smaller companies or run them out of business by underselling them (even at a loss) or forcing railroads to give Standard Oil preferential shipping rates or rebates.  He used spies to discover his competitors’ weaknesses.  He did everything allowed by law (and perhaps more) at a time when the law placed very few limits on what corporations might do.  By 1877 he owned 95% of the country’s oil refineries.

 

*A monopoly of this type was described as horizontal integration.  Rockefeller did not need to own every step in the production of his oil (although eventually he did come to own many wells and gas stations in addition to his refineries), because by controlling everything at one level, he could still dictate the prices at which he sold his oil and pressure his suppliers and the railroads to give him the prices he wanted, or run the risk of losing his business.

 

*Rockefeller compared his success to the success of the type of rose called an American Beauty.  It has a large bloom, but it grows large because all the buds except the largest are pinched off, allowing the bush to put all its energy into the blossoming of a single, long-stemmed, rose.

 

*A man who took this process even further than Rockefeller was John Pierpont Morgan.  He was a successful New York banker who used the wealth of his banks to gain control of other companies, either by seizing their assets when they defaulted on loans or by buying them up when their businesses were endangered by financial problems such as the Panic of 1893.  His system of interlocking directorates was a type of trust, in which he placed members of the board of directors of his bank on the boards of the companies he controlled, making sure that, although there were always some independent directors, his people held a majority of the voting rights, allowing him to control many theoretically separate companies.

 

*Morgan eventually bought out Andrew Carnegie when Carnegie was tired of making money and wished to devote his last years to philanthropy (living out the Gospel of Wealth, his belief that the truly rich should not hoard their money, but spend it for the good of society—he eventually endowed colleges and libraries across America (some people in Johnson City considered renaming the city Carnegie or founding a new town of that name right next to it in order to attract a Carnegie library)). 

 

*A similar philosophy was promoted by Milton Hershey, who developed shelf-stable chocolate, allowing his company to become a major confectioner by shipping its candy all over the country.  He believed in the Social Gospel, an obligation by successful capitalists to use their wealth for the good of society.  Unlike many company towns, Hershey, Pennsylvania was a model community built and run for the good of his employees, and even after his death, he directed that a portion of the Hershey company's profits be used for charitable purposes and for the benefit of Hershey employees.  Such views, however, were rare. 

 

*JP Morgan merged Carnegie’s company with other steel companies he controlled, creating US Steel, the first company in the United States valued at over a billion dollars.

 

*Morgan was so powerful that when the US Treasury was in danger of running out of money in 1895, President Grover Cleveland had to ask him to raise $65 million to keep the United States solvent.  During the Panic of 1907, he saved the US economy again by organising New York’s bankers to bail out failing businesses and buy up stocks to keep the market from collapsing.  Some conservatives praised Morgan for these actions; liberals feared the power he had over the economy.

 

*In a sense, Rockefeller was right that cutting out competition and creating monopolies was good for society.  After his competitors were pinched off, he was able to focus on efficiency rather than competition, which actually allowed him to sell a better product at a lower price.  The same was true of many other monopolists, although certainly not all--railroads in particular were infamous for cutting rates to run competitors out of business, and then raising rates sky-high in any areas they had complete control of. 

 

*Still, while monopolies allowed a few Americans to grow rich and the poor and middle class to buy their products at a better price, it became harder and harder for the poor and middle class to achieve what the Robber Barons had done.

 

*This, however, was viewed as natural.  For some, the blessing of wealth was seen as proof of God’s favour for the Captain of Industry so blessed.  Rockefeller might have been ruthless toward other oilmen, but he was a pious Sunday School teacher who never smoked, drank, or cussed, and gave a portion of his vast income to his church.  Other Robber Barons of the late 19th Century turned to science to explain their success, applying Darwin’s theories of the survival of the fittest to society.

 

*Social Darwinism is the notion that the most fit people prosper in society just as the fittest creatures thrive in the wild.  Most of the millionaires of the late 19th Century had risen from humble beginnings (Carnegie had been very poor, Gould, Vanderbilt and Rockefeller barely middle class; of the great Robber Barons, only Morgan had been born into a wealthy family, inheriting his bank from his father, but making it into something much larger on his own), and did not see why others could not do the same. 

 

*The feeling was that if a person was poor or unsuccessful, it was his own fault for being lazy or stupid.  It was not the job of others to lift him up (although providing basic education to give people a decent start was seen as worthwhile). 

 

*This also meant that if some races were more successful, then those who were not were inferior.  In America this justified discrimination against African-Americans and American Indians, and as Europeans (and Americans) colonised the globe, it justified their civilising mission to lift up (while exploiting) the world’s ‘silent, sullen peoples, half devil and half child.’

 

*For some, the ideas of Social Darwinism developed into eugenics, the idea that races could be made better.  This encouraged laws prohibiting interracial marriage and in some places led to the forced sterilisation of criminals and the mentally or physically handicapped.

 

*Without the sense that society, business, or the government needed to take care of the working class, the working class began to organise to take care of itself, creating new labour unions and demanding better treatment.  Many of the unions were inspired by socialist ideas, and sometimes resorted to violence to try to win better wages and better treatment or in hopes of overturning capitalism itself in a communist revolution.




This page last updated 10 January, 2012.