The_Corporation

The Rise of Big Business	Between 1869 and 1910, the value of American manufacturing rose from $3 billion to $13 billion. The steel industry produced just 68,000 tons in 1870, but 4.2 million tons in 1890. The central vehicle of this surge in economic productivity was the modern corporation. In recent years, Americans have often been told that we have entered a "new economy." The older industrial economy, it is said, is giving way to a new global economy based on computers, the Internet, telecommunications, and entertainment. This is not the first new economy in American history. Following the Civil War, a new economy emerged in the United States resting on steam-powered manufacturing, the railroad, the electric motor, the internal combustion engine, and the practical application of chemistry. Unlike the pre-Civil War economy, this new one was dependent on raw materials from around the world and it sold goods in global markets. The transformations that took place in American business following the Civil War involved far more than a change in industrial techniques or productivity. Business organization expanded in size and scale. There was an unparalleled increase in factory production and mechanization. By the beginning of the twentieth century, the major sectors of the nation's economy--banking, manufacturing, meat packing, oil refining, railroads, and steel--were dominated by a small number of giant corporations. The rise of big business was accompanied by the emergence of a new class of millionaires. At the beginning of the Civil War, there were only 400 millionaires in the United States. By 1892, the number had risen to 4,047. The emergence of the modern corporation was accompanied by many positive developments. Through mechanization, standardization, and economies of scale, economic productivity soared. Between 1890 and 1929, the average urban worker put in one less day of work a week and brought home three times as much in pay. The proportion of families confined to the drudgery of farm life declined by half. Families enjoyed comforts and conveniences that were unimaginable before 1890. By 1929, nine out of ten Americans had electricity and indoor plumbing; four-fifths had automobiles; two-thirds had radios; and nearly half refrigerators and phonographs. At the same time, infant mortality fell by two-thirds, and life expectancy increased by twenty years. Said the president of the Chicago, Burlington, and Quincy Railroad: Have not the great merchants, great manufacturers, great inventors, done more for the world than preachers and philanthropists? Can there be any doubt that cheapening the cost of necessaries and conveniences of life is the most powerful agent of civilization and progress? Yet the rise of the big business also produced many anxieties. Corporations were accused of abusing workers, corrupting the political process, and producing shoddy, unsafe products. Many feared that corporate power allowed companies to fix prices and influence government decision-making.
The Corporate Revolution	During the late nineteenth century, a radical transformation took place in the way in which American business was structured and operated. The most obvious contrast involved the corporation's larger size and capitalization. The typical business establishment before the 1870s was financed by a single person or by several people bound together in a partnership. As a result, most businesses represented the wealth of only a few individuals. As late as 1880, the average factory had less than $1,800 in investment. Even the largest textile factories represented less than a million dollars in investment. In contrast, John D. Rockefeller's Standard Oil Company was worth $600 million and U.S. Steel was valued at $1 billion. Another contrast between the new corporate enterprises of the late nineteenth century and earlier businesses lies in the systems of ownership and management. Before the Civil War, almost all businesses were owned and managed by the same people. In the modern corporation, actual management was increased turned over to professional managers. Within corporations, a management revolution took place. In the days before big business, business operations required little in the way of management and administration. Companies usually involved only a few partners and clerks. Usually, an owner oversaw all of a business' operations. To insure honesty in a distant office, a merchant might staff it with a relative. As businesses grew larger, new bureaucratic hierarchies were necessary. A business's success increasingly depended on central coordination. To address this challenge, businesses created formal administrative structures, such as purchasing and accounting departments. Various levels of managers were established, clear lines of authority were devised, and formal rules were created to govern the company's operations. The managerial revolution helped to create a "new" middle class. Unlike the older middle class, which consisted of farmers, shopkeepers, and independent professionals, the new middle class was made up of white collar employees of corporations. Yet another sweeping change in business operation was the corporation's increased size and geographical scale. Before the 1880s, most firms operated in a single town from a single office or factory. Most sales were made to customers in the immediate area. But the new corporate enterprises carried out their functions in widely scattered locations. As early as 1900, General Electric had plants in 23 cities. In addition to carrying out business in an increasing number of locations, the new corporations also engaged in more kinds of business operations. Prior to the Civil War, merchants, wholesalers, and manufacturers tended to specialize in a single operation. But the late nineteenth century, greatly expanded their range of operations. During the late nineteenth century, businesses typically grew as a result of vertical and horizontal integration. When a company integrated vertically, it brings together various phases in the process of production and distribution. Thus U.S. Steel took iron ore from the ground, transported it to its mills, turn it into steel and manufactured finished products, and shipped the products to wholesalers. Somewhat similarly, the great meat packing houses like Swift, which had 4,000 employees, and Armour, with 6,000, combined the business of raising, slaughtering, transporting, and wholesaling meat. Swift developed a fleet of refrigerator railroad cars, which allowed it to bring cattle and hogs to a central packing house in Chicago, where the company could make use of every part of the animal "except the squeal." When a company integrated horizontally, it expanded into related fields of business. In the 1850s, an iron furnace might produce a single product such as cast iron or nails. But U.S. Steel produced a vast array of metal goods. During the last third of the nineteenth century, the American economy was dramatically transformed. After thirty years of periodic economic crises marked by high unemployment and large numbers of business failures, business began to consolidate into progressively larger economic units. Mythmakers sometimes look back on the late nineteenth century as the golden age of free enterprise. But it is important to emphasize that the rise of a new economy did not take place easily. Working conditions in many factories were appalling. Labor conflict was intense. Businesses were accused of price fixing, stock watering, and other abuses. In the end, these abuses would bring about a political reaction. To address the problems of corporate power, the federal government instituted new forms of regulation in the late nineteenth and early twentieth centuries.
Why Business Grew	By 1906, six large railroad systems controlled 95 percent of the nation's mileage. As early as 1904, the 2,000 largest firms in the United States made up less than one percent of the country's businesses. Yet they produced 40 percent of the nation's goods. By the early twentieth century, many important sectors of the American economy were dominated by a handful of firms, a condition that economists call "oligopoly." Why did business grow bigger? The classic explanation stresses such factors as: * the shift from water-powered to coal-powered factories, which freed manufacturers to locate their plants nearer to markets and suppliers. * transportation improvements that meant that firms could distribute their products to regional or national markets. * the development of new financial institutions--such as the stock market, commercial banks, and investment houses--that increased thee availability of investment capital. One of the pacesetters of the "new economy" was Montgomery Ward, the nation's first mail-order business. From its founding until 1926, Montgomery Ward owned no stories. It operated strictly on a mail order basis. Through its catalog, Ward brought consumer goods to a largely rural clientele. To list these factors makes business growth seem like an orderly process. But this was not the way the process was experienced. The emergence of the modern corporation came largely as a response to economic instability. During the late nineteenth century, business competition was cutthroat. In 1907, there were 1,564 separate railroad companies in the United States, and two years later there were 446 companies manufacturing steel. The challenges of competition were compounded by frequent economic contractions, or panics as they were known. Violent contractions gripped the country from 1873 to 1878 and from 1893 to 1897. There were briefer contractions in 1884, 1888, 1903, 1907, and 1911. During the panic of the mid-1870s, 47,000 businesses went bankrupt. In hard times, the competitive marketplace became a jungle and businessmen sought to find ways to overcome the rigors of competition. Faced with recurring business slumps, mounting competition, and declining profits, the boldest businessmen experimented with new ways of creating financial stability. The first attempt to overcome destructive competition was the formation of pools or cartels. These were agreements among competitors to divide markets and forbid price cutting. As early as the 1870s, pools were formed to divide markets, fix production quotas, and set prices. Over the years, pools became trade associations, which devised methods for dividing markets and assisting failing firms. The problem with pools was that they rarely survived an economic contraction. Financial depressions tempted some firms to cut prices and seek a larger share of the market. Pools were too weak to solve the problem of competition because they were voluntary agreements. An alternative was the trust, under which owners of rival firms assigned their stock to a single board of trustees in return for non-voting, interest-bearing certificates. The trustees then fixed prices and marketing policies for all the companies. John D. Rockefeller's Standard Oil Company was the first trust. Half a dozen industries followed, including alcohol distilling and sugar refining. Trusts faced intense legal challenges on the grounds that they illegal restrained trade and violated the corporate charters of the participating firms. In 1890, Congress adopted the Sherman Anti-Trust Act, which declared trusts illegal. Trusts were then supplanted by a new legal entity, the holding company. This was a company with the power to purchase other companies. Perhaps the most famous holding company was General Motors, which purchased a number of automobile manufacturers. A great surge in mergers took place in the American economy after 1897, when many of the largest corporations in such industries as steel and railroads were created. The number of mergers rose from 69 in 1897 to 303 in 1898 and 1,208 in 1899. By 1900, there were 73 combinations worth more than $10 million. Two thirds had been established in the previous three years.
Corporations and the Law	Earlier in American history, states attempted to keep tight reins over corporations. Corporations had to apply to a state legislature for a charter, which restricted the scope of the company's operations, limited the amount of investment, and even specified how long the charter would be in effect. But as the pace of economic activity quickened, it proved cumbersome for legislatures to grant individual charters. As a result, state legislatures adopted general incorporation acts which allowed any business to incorporate and removed limits on capitalization. Even in the nineteenth century, states, seeking revenue, competed with one another to get businesses to incorporate within their boundaries. One source of public anxiety over corporations is summed up by a legal maxim, that "a corporation has no pants to kick or soul to damn." It was unclear what powers states had to regulate big business or who should be held responsible if a corporation committed a legal offense, such as fixing prices or polluting the environment. In an 1877 case, Munn v. Illinois, which is also known as the "Granger Cases," the Supreme Court had ruled that a state law setting maximum rates for grain storage was constitutional, establishing the principle that states have the power to regulate businesses with "a public interest." In subsequent cases, the court retreated from this ruling. In an 1886 decision, Santa Clara v. Southern Pacific Railroad Company, the court held that the 14th Amendment's guarantee of due process applies to corporations. In another decision that same year, in the case of Wabash, St. Louis & Pacific Railroad v. Illinois, the court ruled that Congress has an exclusive right to regulate interstate commerce. The court subsequently invalidated a number of state attempts to regulate business operations. In 1895, in the case of U.S. v. E.C. Knight, the court held that the Sherman Antitrust Act, adopted five years earlier, did not apply to companies located within a single state. This decision severely weakened the ability of the federal government to enforce antitrust laws.
Sources	Digital History, "The Rise of Big Business."