1302_Robber

REVOLUTION BY RAILROAD
Lecture 3: "Robber Barons" or Pioneers?

The Debate Over Big Business

A great debate over big business took place during late nineteenth century. Among the issues that Americans debated was:

    * whether wealth come from exploitation or from patience, frugality, and virtue;
    * whether bigness was the result of conspiracy or of pressures of blind economic forces;
    * whether men of wealth and power be free to use their riches as they wished or whether they should be taxed to support the public good.

     Henry Demarest Lloyd, a precursor for the muckraking journalists of the Progressive era, considered the lords of industry monopolists and profiteers, who monopolized blocked the road to success for those who tried to compete with them. Others, like Edward Atkinson, a successful investor and businessman, asserted that the great business titans made all Americans better off through their innovations in management, finance, and production. Lloyd and Atkinson helped set the terms for a long lasting public debate: Were the business leaders of the Gilded Age robber barons or creative industrial pioneers?

J. P. Morgan

     During the Gilded Age, J.P. Morgan stood astride the nation's financial world like a colossus. His banking house erected the structure of the most prominent American industries in the Gilded Age beginning with the railroad. Convinced that cutthroat competition had to give way to order, he consolidated competing railroad lines and many other industries. He organized syndicates to float bond and stock issues that gave birth to such companies as AT&T (which dominated the nation's telephone industry for decades), General Electric, and U.S. Steel (the world's largest steel manufacturer). A voracious collector, he also spent $60 million on paintings, sculptures, rare books, and manuscripts.

     His critics considered him a ruthless capitalist pirate, the personification of the oppressive power of Wall Street that would crucify mankind on a cross of gold. But his goal was to replace cutthroat competition with economic stability. Morgan was instrumental in helping to create the modern American economy. After the Panic of 1893, he reorganized many bankrupt railroads and industrial companies. He assembled U.S. Steel, the world's first billion-dollar corporation, and helped establish International Harvester and General Electric. He believed that the combination of rival interests into rational systems was necessary to stabilize the U.S. economy and to prevent harmful price wars.

     During a financial panic in 1907, which threatened to trigger a run on the nation's banks, Morgan took charge. He assembled the leading bank presidents in his library and locked the door. At 4 a.m., his lawyer read them an agreement stipulating how much each must pledge to the bailout package. "There the place..." Morgan told one banker, "and here's the pen."

     When he decided to buy the Carnegie Steel company on the way to forming United States Steel, he asked Andrew Carnegie to name his price. Carnegie wrote $480 million on a sheet of paper. Morgan glanced at the paper and said, "I accept this price."

Railroads, Investment Bankers, and "Morganization"

     Railroads expanded significantly in the 1880s, laying over 75,000 miles of new track, but some new lines earned little profit. Some ran through sparsely populated areas of the West. Others spread into areas already saturated with rail service. In the late 1880s, however, a few ambitious, talented, and occasionally unscrupulous railway executives maneuvered to produce great regional railway systems. The Santa Fe and the Southern Pacific, for example, came to dominate the Southwest, and the Great Northern and the Northern Pacific held sway in the Northwest. The Pennsylvania and the New York Central controlled much of the shipping to the Northeast. By consolidating many of the lines within a region, railway executives tried to create more efficient systems with less duplication, fewer price wars, and more dependable profits.

     To raise the enormous amounts of capital necessary for construction and consolidation, railroad executives turned increasingly to investment banks. By the late 1880s, John Pierpont Morgan had emerged as the nation's leading investment banker. Born in Connecticut in 1837, Morgan was the son of a successful merchant who turned to banking (and helped fund Andrew Carnegie's first big steel plant). After schooling in Switzerland and Germany, young Morgan began working in his father's bank. In 1857 he moved to New York, where his father had arranged a banking position for him.

     Morgan's background and his growing stature in banking gave him access to capital within the United States and abroad, in London and Paris. His investors wanted to put their money where it would be safe and give them reliable returns. Morgan therefore tried to stabilize the railroad business, especially the cutthroat competition that often results when several companies served one market. Railroad companies that turned to Morgan for raising capital found strings attached to funding. Morgan regularly insisted that beneficiaries reorganize to simplify corporate structures and to combine small lines into larger, centrally controlled systems. He often demanded a seat on the board of directors as well, to guard against risky decisions in the future. Some began to refer to this process as "Morganization," and "Morganized" lines soon included some of the largest in the country.

Andrew Carnegie

     The new industrial economy rode on a network of steel rails, propelled by locomotives made of steel. Steel plows broke the tough sod of the western prairies. Skyscrapers in the burgeoning cities relied on steel frames. Steel, a relative latecomer to the industrial revolution, defined the age.

     In 1875, just to the south of Pittsburgh, Pennsylvania, Andrew Carnegie opened the nation's largest steel plant, employing 1,500 workers. From then until 1901, Carnegie played a central role in the steel industry.

      Andrew Carnegie had been born in Scotland. He and his penniless parents came to America in 1848. Young Andrew first worked in a textile mill, then became a messenger in a telegraph office, and was soon promoted to telegraph operator. He soon rose rapidly through the ranks of the Pennsylvania Railroad, eventually becoming a superintendent at the age of 25.

     At the end of the Civil War, Carnegie decided to devote all his energy to the iron and steel industry, in which he had previously invested money. He quickly applied to iron companies the management lessons he had learned with the railroad. His basic rule was: "Cut the prices; scoop the market; run the mills full." An aggressive competitor, he took every opportunity to cut costs that he might show a profit while charging less than his rivals. He occasionally participated in pools with other steel makers, but he usually chose to undersell competitors rather than cooperate with them.

     Carnegie's company was larger and more complex than any manufacturing enterprise in pre-Civil War America. Drawing in part on his experience with the railroads, Carnegie applied the innovations of managing that large-scale enterprise to the manufacture of steel. Carnegie and other entrepreneurs transformed the organizational structure of manufacturing. They often joined together a range of operations, from acquisition of raw materials to processing to distribution of finished goods, into one company, achieving vertical integration. Companies that developed vertical integration to ensure steady operations and to gain a competitive advantage. Carnegie, for example, gained control over his raw material by purchasing iron ore mines in Michigan and Wisconsin, buying a fleet of ships to transport the ore across the Great lakes, railroads to transport it over land, coal mines to produce the fuel for the steel mills, and the steel mills themselves. Carnegie Steel was vertically integrated from the point where the raw materials came out of the ground through the delivery of the steel rails and beams.

     Carnegie's efficiency greatly reduced the price of finished steel. In 1864, steel rails sold for $126 per ton; by 1875, Carnegie was selling them for $69 per ton. Driven by technology and Carnegie's own competitiveness, steel prices continued to fall, reaching $29 in 1885 and less than $20 in the late 1890s.

Andrew Carnegie and the Gospel of Wealth

     Andrew Carnegie did not believe that men of great wealth were robber barons, but trustees whose duty it was to devote their talents to the common good. This, he wrote, is "the true Gospel concerning Wealth, obedience to which is destined some day to solve the problem of the Rich an the Poor, and to bring 'Peace on earth, among men of Good-Will.'"

     Drawing on the doctrine of St. Paul, that the rich had to be stewards of wealth, defenders of the Gospel of Wealth, like the Episcopal Bishop of Massachusetts, argued that it was God's will that some men attained great wealth, and "in the long run, it is only to the man of morality that wealth comes." He concluded: "Material prosperity is helping to make the national character sweeter, more joyous, more unselfish, more Christ like."

     In an 1889 essay, steel magnate Carnegie told his fellow business leaders, "The man who dies thus rich dies disgraced." Carnegie believed that the wealthy should repay their debt to society. True to his beliefs, by his death in 1919 he had divested himself of more than 95 percent of his fortune. He built a library building for any town that would provide a site, stock the building with books, and guarantee maintenance expenses. He provided pensions for professors at universities that agreed to meet strict academic standards. In addition to funding music halls, outdoor swimming pools, and church organs, he also set up endowments to promote teaching and world peace.

John D. Rockefeller

     Just as Carnegie provided a model for other steel companies and for heavy industry in general, John D. Rockefeller revolutionized the petroleum industry and provided a model for other consumer-goods industries.

     Rockefeller was born in upper New York state in 1839 and educated in Cleveland, Ohio. After working as a bookkeeper and clerk, he became a partner in a grain and livestock business in 1859 and earned large profits during the Civil War. At that time, Cleveland was the center for refining oil from northwestern Pennsylvania, then that nation's main source for crude oil. The main product of oil refining at this time was kerosene, which was used in home lighting. In 1863, Rockefeller invested his hefty wartime profits in a refinery. After the war, he bought control of other refineries and incorporated them as Standard Oil in 1870.

     The refining business was relatively easy to enter and highly competitive. Aggressive competition became a distinctive Standard Oil characteristic. Recognizing that technology could bring a competitive advantage, Rockefeller recruited experts to make Standard the most efficient refiner. He secured reduced rates or rebates from railroads by offering a heavy volume traffic on a regular basis. He usually sought to persuade his competitors to join the cartel he was creating. If they refused, he often tried to drive them out of business.

     By 1881, following a strategy of horizontal integration, Rockefeller and his associates controlled some forty oil refineries, accounting for about 90 percent of the nation's refining capacity. In the 1880s, Standard also moved toward vertical integration, by gaining control of oil fields, building transportation facilities (including pipelines and outgoing tanker ships), and creating retail marketing operations. By the early 1890s, Standard Oil had achieved almost complete horizontal and vertical integration, or monopoly, over the entire American petroleum industry.

     Between 1879 and 1881, Rockefeller also centralized decision making among all his companies by creating the Standard Oil Trust. The trust was a new organizational form designed to get around state laws that prohibited one company from owning stock in another. To create the Standard Oil Trust, Rockefeller and others who held shares in the individual companies exchanged their stock for trust certificates issued by Standard Oil. Standard Oil thus controlled all the individual companies, though technically it did not own them. Eventually new laws in New Jersey made it legal for corporations chartered in New Jersey to own stock in other companies. So Rockefeller set up Standard Oil of New Jersey as a holding company for all the companies in the trust.

    Once Rockefeller achieved his near monopoly, Standard Oil consolidated its operations by closing many of its older refineries and building larger plants that incorporated the newest technology. These and other innovations reduced the cost of producing petroleum products by more than two-thirds, leading to a decline by more than half in the price paid by consumers for fuel and home-lighting products.

Jay Gould

     He was the prototype for the "Robber Baron" and the corrupt railroad king. The railroad "pirate" Jay Gould stirred up the most enmity. He was painted as an unscrupulous pirate who manipulated and watered stock, deliberately running businesses down and building them up again to his own advantage.

      Jay Gould considered himself to be most hated men in late-nineteenth century America. He was vilified by the press as a reckless speculator and brutal strikebreaker. To many late nineteenth century Americans, he personified the unscrupulous, greedy robber baron.

     In an age of scandal and corruption, Jay Gould was regarded as a master of bribery and insider stock manipulation. He paid off President Grant's brother-in-law to learn the president's intentions about government gold sales; he bribed members of New York's legislature; and he tried to corner the gold market. But Gould was much more than a robber baron. At a time when the rules of modern American business were just being written, he was one of the architects of a consolidated national railroad and communication system. One of his major achievements was to lead Western Union to a place of dominance in the telegraph industry.

     Born into poverty on an upstate New York in 1836, Gould was too sickly to go into farming. Instead, he went into surveying and then into tanning animal hides. He speculated first in hides and then in railroad stocks, engaging in one of the most colorful struggles in American business history: a fight with Commodore Vanderbilt for control of the Erie Railroad. To prevent gangs of toughs sent by Vanderbilt from gaining access to his records, Gould placed cannons on the Jersey City waterfront and launched a flotilla of four vessels of armed gunmen. As quickly as Vanderbilt bought stock in the railroad, Gould illegally issued more. When Gould was placed under the custody of a court officer for this illegal act, he bribed members of New York's legislature to change the law.

      He reduced the wages of imported Chinese laborers in his mines to just $27 a month. He was damned as a speculator, rigging markets for short-term gains. But in fact he had a number of actual achievements to his name. He was actually an empire builder who sought to create railroad and communications system capable of meeting the needs of an expanding nation. He operated New York City's elevated railroad and led Western Union to victory in its battle for control of the telegraph industry.

Survival of the Fittest

Herbert Spencer

     Many Americans were uneasy with the new economic powerhouses bred by industrialization. In a book published in 1889, economist David A. Wells remarked on the "wholly unprecedented" size of the new businesses, the "rapidity" with which they emerged, and their tendency to be "far more complex than what has been familiar." Such giant enterprises, he noted, "are regarded to some extent as evils. But, he added, "they are necessary, as there is apparently no other way in which the work of production and distribution...can be prosecuted."

     The concentration of power and wealth during the late nineteenth century generated extensive comment and concern. One prominent view on the subject was known as Social Darwinism, reflecting its roots in Charles Darwin's work on evolution. In his book On the Origin of the Species (1859), Darwin had concluded that those creatures and in the face of an often inhospitable environment are those that have best adapted to their surroundings. Such adaptation, he suggested, leads to the evolution of different species, each uniquely suited to a particular ecological niche.

     Two philosophers, Herbert Spencer, writing in England in the 1870s and after, and William Graham Sumner, in the United States in the 1880s and after, put their own interpretations on Darwin's, reasoning and applied it to the human situation, producing Social Darwinism (a philosophical perspective that had little relation to Darwin's original work). Social Darwinism contended that competition among people produced "progress" through "survival of the fittest," and that competition provided the best possible route for improving humankind and advancing civilization. Further, they argued that efforts to ease the harsh impact of competition only protected the unfit and thereby worked to the long-term disadvantage of all. Some concluded that powerful businessmen constituted "the fittest" and benefitted all humankind by their accomplishments.

     Andrew Carnegie enthusiastically embraced Spencer's arguments and endorsed individualism and self-reliance as the cornerstones of progress. "Civilization took its start from that day that the capable, industrious workman said to his incompetent and lazy fellow, `If thou didst not sow, thou shalt not reap,'" Carnegie wrote. When applied to government, this notion became a form of laissez faire, the belief that the economy functions best when the government leaves it strictly on its own.

     Although many Americans subscribed to the vision of Social Darwinism propounded by Spencer and Sumner, many Americans did not. Businessmen themselves often welcomed some form of government in the intervention in the economy--from railroad land grants to the protective tariff to suppression of strikes--although most agreed with the Social Darwinists that government should not assist the poor and destitute.

     Furthermore, many Americans disagreed with the Social Darwinists' equating of laissez faire with progress. Henry George, a San Francisco journalist, pointed out in Progress and Poverty (1879) that "amid the greatest accumulations of wealth, men die of starvation," and he concluded that "material progress does not merely fail to relieve poverty--it actually produces it." Lester Frank Ward, a sociologist, in 1886 posed a carefully reasoned refutation of Social Darwinism, suggesting that biological competition produced bare survival, not civilization. Civilization, he argued, represented "a triumph of mind" that derived not from "ceaseless and aimless competition" but from rationality and cooperation.

     Americans also disagreed about whether the railroad magnates and powerful industrialists were heroes or villains. One accepted them wholeheartedly as benefactors of the nation. Others sided with E. L. Godkin, a journalist who in 1869 compared railroad magnate Cornelius Vanderbilt to a medieval robber baron--a feudal lord who stole from the travelers who dared travel through his domain. Those who called the wealthy industrialists robber barons pointed out they were unscrupulous, greedy, exploitative, and anti-social. Looking only at the deeds or misdeeds of individual businessmen, however, hides more about the economy than it reveals. Understanding these men and the larger economic changes of the era requires more than an examination of individual behavior.

     Thomas C. Cochran, a historian, has looked at the broad cultural context that affected not just the prominent businessmen but also most Americans. He identified three broadly shared "cultural themes" as central for understanding the period: (1) a belief that the economy operated according to self-correcting principles, especially the law of supply and demand; (2) the ideas of Social Darwinism; and (3) an assumption that people were motivated primarily by a desire for material gain. These themes shed light not only on the action of the entrepreneurs of the late nineteenth century but also on those of political leaders of the day and on the reception those actions received from other Americans.

Robber Barons or Pioneers?

     There can be no doubt that the late nineteenth century business titans were business innovators, who, through their technical, administrative, and financial skills, achieved economies of scale, eliminated waste, and brought order and stability to large sectors of the American economy. In large part, their wealth was the product of innovations that transformed business practice. Rockefeller developed the oil tank-car; Swift the refrigerated rail car; and Montgomery Ward the mail-order catalogue. As philanthropists in later life, some also served important welfare and educational functions.

     But big business' critics accused the captains of industry of financial trickery, such as cornering and watering stock, and of political corruption and the bribing of legislatures. They attacked them for the inhumane treatment of labor--including the imposition of heavy hours, wage cuts, lockouts and the suppression of trade unions. They also condemned them for using cheap immigrant contract labor to undercut wage rates and defeat strikes and the imposing monopoly prices. Above all, they were condemned as sinister monopolists who engaged in ruthless competition--choking off rivals by use of railroad rebates and drawbacks, control of raw material supplies, industrial espionage, and the forced purchase of competing firms.

     Many people likened J.P. Morgan, Jay Gould, and other business leaders to the "robber barons" of the Middle Ages, who set up barriers across rivers and forced boats to pay a toll in order to navigate the waterways. A U.S. Senator described Morgan as a "thick-necked financial bully, drunk with wealth and power, [who] bawls his orders to stock markets, Directors, courts, Governments, and Nations."

Sources

Excerpts, Chapter 17, "An Industrial Order Emerges, 1860-1880," and Chapter 18, "Becoming an Urban Industrial Society, 1880-1890," in Berkin, et al., Making America: A History of the United States, Vol. II from 1865, 3rd edition (Boston and New York, 2003).

Digital History, "The Rise of Big Business."