How Things Got Bigger: Economy of Scale
How Things Got Bigger: Economy of Scale
In the one hundred years between 1800 and 1900, things got much bigger. Businesses boomed: a family-run fabric-making operation that was contained in a single cottage in 1800 had turned into an enormous factory housing giant machines and employing hundreds of workers by 1900. Transportation expanded: a horse-drawn cart delivering farm produce to market in 1800 had been replaced, by 1900, with a long train pulled by a huge locomotive puffing great clouds of smoke and steam. Agriculture spread: the family farm grew from a small plot, or several small plots, in 1800 to a several-hundred-acre estate by 1900. And manufacturing accelerated: a single skilled worker making carriages in 1800 had given way, by 1900, to a long assembly line turning out automobiles.
This enormous increase in the size of business enterprises was a key characteristic of the Industrial Revolution. Businesses grew larger partly in order to take advantage of a concept called economy of scale, which refers to the fact that generally it is cheaper to build and operate one very large factory that can turn out many products per hour as opposed to a series of smaller factories that can turn out only a few products per hour. It may take just one person to operate a large machine, whereas many people might be needed to operate several smaller machines. Even if the cost of raw materials for each product is the same, when the cost of labor is taken into account, it is cheaper to manufacture products on a large scale.
How Things Got Bigger: Economy of Scale: Words to Know
- Assembly line:
A system of manufacturing goods in which many workers, often arranged in different stations along a line, carry out the same precise task over and over on multiple products, as opposed to a single worker carrying out many tasks on one product.
A business organization that is given the right to act as if it were a person in certain legal matters, such as buying or selling things or entering into binding agreements (contracts).
- Economy of scale:
The reduction in cost of a product resulting from mass production.
- Interchangeable parts:
Identical components of a product that are produced separately from the product itself and then assembled.
- Mass production:
Making large numbers of identical products, often using a system like an assembly line in a factory, rather than making products one at a time.
A business large enough to be able to control the price of a product without regard to competition.
A journalist who focuses on uncovering corruption, abuse, or other wrong-doing. The term is most often applied to a group of journalists writing about business practices in the late 1890s and early 1900s.
- Robber baron:
The owner and manager of a very large business that was judged to be a monopoly.
The American system
The Industrial Revolution was made possible by a series of inventions that allowed machines to substitute for human and animal muscles. An equally important innovation during the second part of the Industrial Revolution was the way machines and humans were organized to mass produce goods that were once laboriously made one by one. A method of manufacturing pioneered in the United States, called the American system, revolutionized manufacturing by introducing two new ideas: interchangeable parts and the moving assembly line.
Manufacturing is largely a process of assembling multiple parts—sometimes thousands of different parts, as in a car, for example—to make a finished product. A key development during the Industrial Revolution was the concept of making parts interchangeable. Before the Industrial Revolution, skilled workers made products for specific customers. Each part would be made for the specific job. The axle of one carriage, for example, might be similar to the axle of another, but not necessarily identical. The American system changed this. Many axles, for example, would be manufactured separately, each one identical, and then assembled into the finished product, such as an automobile.
Interchangeable parts were essential for the other innovation, the moving assembly line. At one time, a worker had to walk around the factory floor to collect parts and assemble a whole product. With a moving assembly line, a product, such as a car, moved along on a platform (such as a conveyor belt) and came to a series of stations where workers were waiting to carry out one specific job, such as installing the axle. Once the part was installed, the partially assembled car moved to the next station, where the next worker would install a different part. In the meantime, the first worker was installing an axle on the next unit moving along the line. The assembly line required each worker to stay in the same place and to carry out the same task over and over again; identical tasks matched identical parts and turned out identical products.
A moving assembly line could significantly increase the output of a factory. The volume of work accomplished by workers in a factory in a single day depended on the speed of the assembly line. If the line moved quickly, workers could produce more products than if the line moved slowly. And the success of the assembly line depended on each particular part being absolutely identical; there was no time for workers to adjust parts to fit individual products.
As part of a system, the moving assembly line and interchangeable parts could result in a highly efficient manufacturing operation, when everything worked as designed by an engineer or business owner. Efforts by factory owners to speed up the line provoked workers, however, who in turn staged work slowdowns to slow the lines (see Chapter 7). Despite their resistance to the American system, workers of the late nineteenth century knew that the days of skilled individuals shaping wooden and metal parts by hand and assembling goods with some measure of their own creativity was virtually over.
The idea of interchangeable parts originated around 1850, but it took several decades to implement fully, mostly because of the expense of creating machines to make the standard parts. Devices that could, for example, stamp out exact copies of a part from a solid piece of metal had to be designed and built. Until these so-called machine tools were fully developed, manufacturing from interchangeable parts in fact added to the cost of goods.
Among the first users of interchangeable parts were makers of firearms, clocks, sewing machines, typewriters, engines, and bicycles. Henry Ford (1863–1947), a pioneer automobile manufacturer, was most famous for his success in making the assembly line system work on a massive scale. His new process reduced the cost of making cars so that Ford's company could produce products that Ford workers could afford to buy. What had once been a luxury item became a product that nearly everyone could hope to own. The Ford Motor Company was a classic illustration of how the idea of economy of scale benefited an entire society. The idea that ordinary American workers could afford to drive private cars helped make the United States the envy of the world.
Henry Ford and the Model T
Henry Ford did not invent the gas-powered automobile, nor did he invent the assembly line. He is credited, however, with developing the moving assembly line. In Ford's factories, piles of interchangeable parts were set out in a line. Starting with a bare chassis (the frame), a new car started moving along the line. Workers at their stations added parts until a completed automobile came out, about ninety minutes later.
Ford Motor Company's famous moving assembly line did not spring up overnight. It evolved over time, and at several different companies. Ford's main idea was to drive down the cost of making cars; the moving assembly line was a means to that end. To accomplish this, Ford hired engineers and consultants to study car production and devise ways to reduce the cost. The first car built by Ford came off the line in October 1913, and Ford constantly sought improvements. Over time, the time required to make a car steadily fell, as did the price. Sales, on the other hand, rose, as workers snapped up the popular "Tin Lizzie," as the Model T was affectionately nicknamed.
Henry Ford was born in 1863 in a farmhouse near Dearborn, Michigan, west of Detroit. His grandfather, John Ford, had immigrated to the United States from Ireland in 1847. Henry grew up on the family farm, where he developed a fascination for machinery. Although he absorbed the values of hard work and individualism on the farm, he said later in life that he never loved farm life.
In 1879, at age 16, Ford left his family and became an apprentice (assistant) in a Detroit machine shop. He also took a job at night repairing watches. In 1880, he went to work for a shipbuilding company, where he learned about engines. Two years later, he worked for the Westinghouse Engine Company, repairing the engines on farmers' tractors.
For a time after 1888, Ford returned to farming life, working on land given to him as a wedding present by his father. But his heart lay in working with machines. It was at just this time that two German inventors, Gottlieb Daimler and Karl Benz, developed the first practicable automobile with a gasoline engine. In 1891, Ford abandoned farming for good and moved back to Detroit, working for the Edison Illuminating Company, where he soon became chief engineer. In the evenings, he worked on building a car with a gasoline engine, and in 1896, he demonstrated it on the streets of Detroit. He called it a Quadricycle.
Ford immediately started working on another car, using money invested by Detroit's mayor and some leading city businessmen. In 1899, Ford helped to organize the Detroit Automobile Company. The firm built twenty cars, then went out of business in 1900. Despite the company's failure, Ford was established as a player in Detroit's infant automobile industry.
In 1901, Ford attracted new investors and organized the Henry Ford Company; he owned one-sixth of the stock and worked as chief engineer. But after a year, Ford fell out with the investors and quit. The company agreed to stop using his name, and took a new one: the Cadillac Motor Car Company. Ford then turned to building race cars; one of his vehicles set a new speed record of over 60 miles an hour (132 kph).
In 1902, Ford organized a partnership to make cars with the goal of competing with the Oldsmobile, a modestly priced car already in production. From the very beginning, Ford bought parts from independent machine shops in Detroit, including a shop owned by the brothers John and Horace Dodge (they supplied 650 chassis, the frame on which the parts of a car sit). From the first moment, the Ford Motor Company was based on the practice of assembling parts into a finished automobile. Henry Ford's most important contribution to the industry (and to the Industrial Revolution) was finding better, cheaper, faster ways to assemble parts.
Without doubt Henry Ford revolutionized not only the automobile industry, but also the face of America, by manufacturing cars that many workers could aspire to own. Ford's most famous product was the Model T, introduced in 1908 at a price of $950. Over the next nineteen years, Ford sold 15.5 million Model Ts in the United States alone. Ford's manufacturing techniques drove down the price of a Model T to as low as $280 in 1915. (In 2003 prices, the Model T went from about $18,900 in 1908 to a low of about $4,900 in 1915.) Of course, the Model T produced in 1915 hardly compares to contemporary cars. It was slow, it lacked power (often drivers had to get out and push it up steep hills), the passenger space lacked any of the comforts of a modern car (such as a heater or air-conditioning), and after 1913 it came only in one color: black. (Ford once famously quipped that the Model T came in any color the customer wanted, as long as it was black.) By manufacturing inexpensive cars, Ford put them within economic reach of his workers.
In 1914 Ford introduced the $5.00 work day. He began paying his workers $5.00 a day for eight hours of work (about $11.25 an hour in 2003 prices), roughly twice what other manufacturers were paying automobile assemblers at the time. Not only did the $5.00 a day Ford was paying improve the living conditions of his workers, that wage enabled the workers to buy the products they were making. Ford was building a customer base among his own employees.
The car culture
Ford's moving assembly line system was soon copied by other manufacturers. The relatively inexpensive automobiles Ford and, later, other automakers produced revolutionized American life in the twentieth century. The automobile made it possible for everyone, not just the wealthy, to move much more quickly and travel greater distances. Instead of living within walking distance of work, people could move to a more rural locale and drive to work in the city. Thus was born the suburb, a residential area on the outskirts of a city.
The automobile created a tremendous demand for a whole new infrastructure of paved highways, gasoline stations, repair shops, tire dealers, and insurance agents, to say nothing of parking garages, parking meters, and meter maids. Within a few short decades, the existence of hundreds of thousands of cars created a need for larger, improved roads and highways (cars did not do well in mud or snow) to carry drivers from suburb to city. As suburbs spread farther from traditional city centers, drivers demanded wider roads that sliced through the middle of cities to reduce traffic jams.
The automobile industry also spurred the rapid growth of the petroleum industry since cars that were steadily growing in size and weight required more fuel. Gradually, U.S. underground reserves of petroleum began to dwindle, and foreign supplies were sought. U.S. companies began to exploit the extensive oil reserves in the Middle East in the late 1930s, and by 1946 oil would replace coal as the primary fuel in the world.
The cost of purchasing, maintaining, and fueling a car had to be added to the family budget, both as a means of getting to work and as a way of maintaining prestige as larger autos became status symbols. People started doing more and more in their cars: eating at drive-in restaurants, watching films at drive-in movie theaters, doing their banking at drive-up teller windows, and even picking up their clothing at drive-through dry cleaners.
Frederick Taylor and Scientific Management
In 1911 an engineer named Frederick Taylor (1856–1915) published a collection of essays titled The Principles of Scientific Management. Taylor was an early example of a management consultant, someone who offers advice to business owners and managers on how to make more money. Taylor's advice was particularly well received, and he had an enormous impact on the way industrial companies were organized.
Taylor began his book by saying: "The principal object of management should be to secure the maximum prosperity for the employer, coupled with the maximum prosperity for each employee." In his view, a key way to improve a facto-ry's efficiency (that is, to increase the value of goods produced by more than the cost of producing them) was to reduce the time spent in production. The way to accomplish this, according to Taylor, was to break down each step in manufacturing to its basic tasks and then assign those tasks to workers best able to perform them. For example, if a worker is good at putting nuts on bolts, then that worker should do that and only that. No further thought or variation would be needed or allowed.
Taylor believed that a key role of managers in enterprises was to study the process and eliminate inefficiencies. One inefficiency was the time wasted when individual workers stopped to think about what they were doing. Thinking not only took up valuable time (paid for by the employer), but also introduced the possibility of variations in the process. Taylor advocated that the manager should use engineering skills to determine the single most efficient way of completing a process, and then ensure that each individual engaged in the enterprise did his or her job exactlyas designed. This method was "scientific management."
Taylor also was concerned that workers might think it was to their advantage to work more slowly and produce less than they were capable of producing, as a means of keeping their jobs (that is, they feared that if they were too efficient the manager might think he needed fewer workers and let some workers go). Taylor was eager to persuade workers that producing more would not harm their economic interests, nor the interests of their fellow workers, but instead would result in greater rewards.
Taylor's book was widely read and became highly influential. A whole corps of management consultants went to work figuring out the "best" way of doing a task, and designing ways of implementing that best way. One result of using Taylor's method was to minimize or eliminate the possibility that an individual worker might think about his (or her) job and experiment with different—and possibly better—ways of working.
Although Taylor repeatedly insisted that workers must be rewarded financially for their role in increasing the profitability of the business by doing things in a scientific way, that part of his scheme was not always adopted by factory owners. Sometimes factory owners just adopted Taylor's recommendations for changes in the production system—for example, that workers be allowed to perform only the one task at which they excel—which were not readily accepted by most workers. Because factory owners accepted only part of Taylor's approach, scientific management contributed to the shift from treating workers as individual skilled craftspeople to treating them as interchangeable parts of the larger machine.
Concerns began to arise in the 1960s about the impact of air pollution from automobile emissions (poisonous byproducts of burning gasoline and oil) as the number of cars continued to escalate. Many families had begun owning two or three cars, greatly increasing the number of automobiles spewing exhaust and snarling traffic on highway networks. By the 1960s cars were fully integrated into the economic structure—even into the architecture—of the most advanced nations. Whole cities were built around the assumption that workers would drive to their workplaces.
Highway trucking emerged as an alternative to railroads for delivering raw materials and finished goods, just as railroads had emerged as an alternative to canals in the middle of the nineteenth century. The railroads that had generated huge fortunes in the mid-1800s (see Chapter 5) began to suffer as larger and larger rigs took to the roads. The rise of the trucking industry led to a period of rapid consolidation of railroad companies as they competed with the trucks and tried to stay in business.
Alongside the American system of manufacturing grew another concept central to the second stage of the Industrial Revolution: the network. Among the most important networks of the nineteenth century were the telegraph network, the telephone network, the electricity network (the grid), and the railroad network. The twentieth century gave rise to three other important networks: radio networks, television networks, and the Internet, a network of links between computers made possible by adopting standardized computer codes to transfer digital information to points around the world.
The essential idea behind a network is the distribution of something, whether messages, products, or energy. Usually networks evolve gradually. In the cases above, shortly after the invention upon which the network was based was perfected, businesspeople rushed to try to turn the new technology into a profitable enterprise. They started to deliver telegraph service, for example, from one point to another. In doing so, they built a leg of the network that was to come, whether they were aware of doing so or not. In the early days of networks it was too ambitious even to think of building a network that connected all points; that process took place a bit later on.
The stories of the network industries have several things in common. At first, each was grossly overbuilt in and around major urban areas. Photographs from the late 1800s show a thick mass of wires strung in New York City, where several companies were competing to deliver electricity. In the case of railroads, many short lines connected only two cities, between which there was a demonstrable need for fast, efficient travel. Initially there were several companies that competed to deliver telegrams between major cities.
At the same time, networks shared another feature: the enormous cost of building them in the first place, and the relatively low cost of operating them once they were built. This feature was especially true of railroads, where land had to be acquired, cleared, and made relatively level so that iron, and later steel, rails could be laid—an enormous expense before the first dollar could be collected for delivering passengers or goods. These projects were often simply too expensive to be undertaken by individuals, or even groups of individuals. Instead, local and state governments were enlisted, and many early railroads were built with money borrowed by state governments. The governments judged that it was important to have a railroad in order to support the many other industries in the state that relied on transportation to distribute both manufactured goods and agricultural products.
Yet another feature of networks is the need to be complete. What good is a telephone if you can call some people but not others? Initially, some businesses required several telephones in order to be in touch with all their customers and suppliers. Completeness means compatibility. In the case of railroads, if the tracks are not the same width in all cases, locomotives and cars cannot make use of all tracks—they cannot continue when the width of tracks changes. The same is true of other networks. All telephones work with any long-distance service; on the Internet, E-mail messages can travel from one local provider to a computer using a different provider. In the United States, all electrical appliances are made to use 110 volts of electricity, which is the standard delivered on the electricity network.
Consequently, the rise of networks during the second half of the Industrial Revolution gave rise to standards, the idea that on a single network, all objects will conform to the needs of the network. All light bulbs work in compatible lamps, for example. Customers can switch between one brand of bulb and another without worrying about whether the bulbs will fit, or whether the electricity will be of the right power. Lamp manufacturers cooperate by making sure all brands of bulbs can be used in their products. All railroad cars in the United States and Canada can run on any set of tracks, regardless of who manufactured the cars and on whose tracks they are running: the gauge (width) is the same on all. (There are a handful of historical exceptions to this rule. In the nineteenth century, some railroads in the Rocky Mountains, built to serve mines, were built to a different standard—narrow gauge—which was judged easier to build under the circumstances. Today, narrow-gauge railroads are relegated to tourist attractions.)
Building, maintaining, and using a network is not just a technical issue. It is also an important business issue. Individual businesspeople, sometimes aided by the government, voluntarily agree to accept a certain set of standards in order to be on the network. It is easy to imagine a better telephone receiver, one that sends stereo-quality sound and music, for example. But it does not exist. The reason is that in order to be useful, every telephone needs to be able to send and receive to every other telephone, and the agreed-upon standard does not support stereo-quality telephones.
In some cases, dual networks exist side by side. One example is videotapes: for a long time there were two standards, VHS and Betamax. VHS tapes could only be played in a VHS videotape player; and Betamax tapes could only be played in a Betamax player. Eventually, the VHS standard gained the upper hand (even though some people thought Betamax offered a better picture), video rental stores began stocking only VHS tapes, and the Betamax video player disappeared. Videotapes were not judged to be as socially important as some of the other networks (they needn't be regulated for public welfare and safety reasons, for example), and so government left it up to the marketplace to battle it out. Eventually there was a kind of videotape network that included stores that rent and sell videotapes that conform to the standard.
As the Industrial Revolution continued to progress, the idea of networks gave rise to the idea that a few business-people acting together could control key networks, railroads in particular, and charge whatever they wished for access. A related idea was building an enterprise so large that its economies of scale would give it a monopoly on the market: the enterprise could control the price of the product it sold without interference from competitors. A few businesspeople came close to successfully monopolizing the railroad market in the late 1800s, and they became famous in the process.
All aboard! The railroads story
The growth of railroads in the second half of the nineteenth century illustrates many of the positive and the negative features of the Industrial Revolution. In the United States, railroads tied together the Atlantic and Pacific coasts, gave life to whole industries, and created a whole new class of business owners: the robber barons, wealthy industrialists like Andrew Carnegie and John D. Rockefeller.
As Americans—and the boundary of the United States—moved westward in the first half of the nineteenth century, railroads followed. The growth of agriculture, coal mining, and iron mining in the Midwest largely dictated where railroads headed. Railroads were built to haul grain from Ohio; coal from Pennsylvania; iron ore from Minnesota; and later, meat from Chicago, Illinois, to the West. Chicago became the focal point of the railroad network, as it was a port city on Lake Michigan. East Coast port cities like New York; Baltimore, Maryland; and Boston, Massachusetts, however, were anxious to maintain their importance as ports. In order to keep Boston's status intact, railroad promoters there went door to door to solicit funds to build new railroads linking that city to Albany, New York, at the eastern end of the Erie Canal, a traditional inland shipping route to the Midwest.
The Importance of Transportation
The ability to move goods rapidly over long distances was critical to the progression of the Industrial Revolution. After 1850, railroads expanded dramatically with the development of the steam engine. The railroads at first competed with shipping businesses that used waterways to haul raw materials and manufactured goods, but soon railroads overwhelmed the competition. Later, in the twentieth century, trucks would replace railroads as the primary mover of freight, and automobiles would come to play a central role in everyday life.
In preindustrial society, the movement of people and goods was limited to the speed, strength, and endurance of animals, mostly horses and oxen. Goods were hauled in wagons that could travel only during the day and at speeds of less than 5 miles an hour, and there were pauses to feed and water the animals. Alternatively, sailing ships could carry large cargoes, but they depended on uncertain winds.
The available modes of transportation meant that most industries were local in nature. The size of a single enterprise was limited, in part, by the cost and speed of shipping things over long distances. The train and the steamship, and later the automobile and the truck, revolutionized transportation, and thus were major contributors to the success of industrialization.
As the railroad network expanded, so did the competition—and, surprisingly, the cooperation—among the companies building the railroads. Various entrepreneurs sought to make a fortune by building tracks connecting all the major cities and towns of America and by taking customers away from their competitors by offering inexpensive shipping. At the same time, though, a railroad is a natural network; people want to be able to ship goods between any two points, and doing so often meant using more than one railroad company for a product to reach its final destination. Consequently, railroad company heads would compete with one another at one time, then sit down together to agree on standards at another time.
During the decades between 1860 and 1890, American railroad owners effectively created a national network by agreeing to standards. For example, railroad standards dictated that the distance between tracks (gauge) would be 4 feet, 81⁄2 inches, and that railroad cars would have brakes and compatible coupling devices so they could fit together. Operations were also standardized, including the use of common signals, schedules, and even time. (In about 1880 railroads agreed to set the minute hands on all their clocks and watches to the same time, a "standard time," instead of relying on local jewelers along the line who set their clocks to noon when the sun was directly overhead.) Standards were also set in business affairs: there was a set cost for using another company's freight cars, and all companies agreed to sell "through" tickets so that a passenger could buy a ticket at the start of a journey that used several different railroads.
At first, building railroads was seen both as a business opportunity and as a social necessity for some cities and towns. There was intense competition among lines for hauling freight from the West to the East. Smaller lines, linking cities with towns, were bought up by the "main line" companies, creating a series of parallel rail networks. For example, the New York Central Railroad (from which New York City's Grand Central Station derives its name) was assembled by Commodore Cornelius Vanderbilt (1794–1877) in 1853; Vanderbilt purchased and merged several smaller lines in New York State to link New York City with Buffalo, then an important shipping port on Lake Erie.
Building a railroad was, of course, highly expensive. Land had to be acquired, a roadbed had to be built by clearing the land, tracks had to be laid, and engines and cars had to be purchased. Some small railroads could never make a profit after paying for their initial investment; others were barely profitable, and in the case of economic slowdowns (called "panics" in the 1800s), they operated on the verge of bankruptcy or went out of business altogether.
The finances of railroads, in fact, came to be even more important than their actual operations. In the late 1800s, building a network to enable long-distance shipping became central to the railroad industry. Thus, long after the technology had been improved and the rails laid, railroads came to be dominated by financiers, people whose interests were in buying and selling companies, rather than operating them.
The robber barons
At the end of the nineteenth century, a handful of businesspeople managed to control enormous business empires and to accumulate some of the greatest fortunes yet seen. So great was their influence over such key industries as steel, railroads, and oil that they came to be seen as a challenge to the government of the United States. Known as robber barons at the time, they not only shaped the later Industrial Revolution, they came to symbolize its excesses. Three of the best known robber barons were Andrew Carnegie (1835–1919), John D. Rockefeller (1839–1937), and J. P. Morgan (1837–1913).
Andrew Carnegie and steel
The life story of Andrew Carnegie is the classic American dream come true: poor little Scottish lad comes to the United States with no money, works hard, gets into the steel business, and ends up a billionaire who can't give away his fortune fast enough before he dies.
Strangely, Carnegie's story started when his father became a victim of industrialization. The family weaving business in Scotland was forced out of business by the new textile mills when Carnegie was a young boy. The Carnegies picked up stakes and moved to Pittsburgh, Pennsylvania, where they had relatives.
In Pittsburgh Andrew went to work in a textile factory at age thirteen, earning $1.20 a week. His origins were humble, but Carnegie was smart and ambitious. He went through a series of jobs after leaving the textile mill. He delivered telegraph messages, and then was promoted to sending messages. So great was his telegraphy skill that he was offered a job as general assistant to an executive of the Pennsylvania Railroad. Riding the train, he happened to meet an inventor with an idea for a specially made car with seats that folded into beds at night. Carnegie took the idea to his boss, who snapped it up. For his trouble, Carnegie was paid $5,000 as a bonus, a huge amount at the time.
Carnegie did not spend his bonus. Instead, he invested it in many companies that were founded during the American Civil War (1861–65) and were growing rapidly. By age twenty, he owned stock in dozens of companies. He was offered a job as general superintendent of the Pennsylvania Railroad, but instead he decided to follow the advice he later gave to others: "Put all your eggs in one basket—and watch that basket." In Carnegie's case, the basket was filled with steel mills.
Carnegie knew from his railroad work that cast iron rails were prone to cracking. On a trip to England, Carnegie saw the new Bessemer process for making inexpensive steel, which was lighter, stronger, and longer-lasting than iron (see Chapter 5). Carnegie obtained the rights to use the process and returned to the United States, where he built a steel mill of his own. Soon he was supplying steel rails to railroads. Always a shrewd businessperson, Carnegie also bought coal mines, rather than pay someone else for the chief fuel used in making steel.
Carnegie was generally known as a good employer, but he was not fond of labor unions, groups of workers who banded together to negotiate better pay and working conditions from their employers. Labor unions found there was strength in numbers: an employer could fire one worker who asked for a raise, but generally he would not fire all the workers in a factory if together they all asked for a raise. In 1892 steelworkers at his Homestead facility, near Pittsburgh, went on strike, refusing to work until a new union contract was signed The issue was not limited to pay; the
For a period of about twenty years, between 1890 and 1910, a group of journalists writing for national magazines specialized in revealing the business practices of the giant corporations, called trusts. The trusts had monopolies on the markets they were in, meaning they were large enough, and powerful enough, to be able to control the price of their products without regard to the competition. These investigative journalists also wrote articles about how some businesses engaged in unsafe practices (especially in the food industry), and they described the utterly miserable conditions in which some poor workers were forced to live. As a group, these journalists were called "muckrakers," a term first applied to them by U.S. president Theodore Roosevelt (1858–1919) in 1906. Roosevelt was defending his political allies following a series of Cosmopolitan magazine articles in written by David Graham Phillips (1867–1911). Phillips revealed that some Senators received payments from companies in exchange for arguing on behalf of the companies before the Senate.
One of the earliest of the muckrakers was the Danish-born journalist Jacob Riis (pronounced reese; 1849–1914), who took photos and wrote stories about immigrants in New York City. Riis described the lives of the poorest immigrants, who often went without food and who lived jammed in tiny apartments that lacked bathrooms. Published in 1890 as the book How the Other Half Lives, Riis's work presented a stark, even shocking, contrast between the country's image of itself and the realities of life for the poor. Among fans of Riis was Theodore Roosevelt, who was then governor of New York. Riis's work led to broad public acceptance of government programs to help the poor and to impose minimum standards for landlords renting out apartments.
Ida Tarbell (1857–1944) was a journalist born in western Pennsylvania whose father made barrels in which oil was hauled. She wrote an in-depth study of the Standard Oil Trust, published in nineteen installments between November 1902 and October 1904 in McClure's Magazine (the articles were collected into book form in 1904). Her articles exposed how Standard Oil's business practices drove smaller competitors out of business (her own father had been one such competitor) in violation of federal law. Her work paved the way for the Roosevelt administration to enforce the 1890 Sherman Antitrust Act and break up the oil monopoly into several smaller companies.
Perhaps the greatest of the muck-rakers was American writer Upton Sinclair (1878–1968). In 1906 he published the novel The Jungle, a harrowing tale about immigrant workers in Chicago's stockyards, where cattle were slaughtered and butchered for shipment to markets. While Sinclair's point was the misery of immigrant workers, middle-class readers were horrified to read his account of the filthy conditions of the meatpacking industry that provided their Sunday roast beef. Popular sentiment caused the federal government to pass the Food and Drug Act in 1906, regulating the preparation of food and sending government inspectors into businesses to make sure they obeyed the law.
The influence of the muckrakers, many of whom published their articles in McClure's Magazine, began to fade after about 1906. But their articles, photographs, and books had helped to bring about an important change in public perception of big business, and they opened the door to politicians like Theodore Roosevelt and his cousin Franklin Delano Roosevelt to institute new laws that made the government a third player, alongside business owners and workers, in the new economy of the Industrial Revolution.
Homestead strike became a contest of wills between Carnegie's manager, Henry Clay Frick (1849–1919), and the union over whether the company could eliminate the union altogether by refusing to sign a contract. The strike started while Carnegie was vacationing in Scotland (some union sympathizers thought he arranged his vacation specifically to be away when a new union contract was due to be signed). Violence broke out, and eighteen strikers and guards were killed. Eventually, state militiamen (called the National Guard today) were sent to the site to restore order, and to end the strike.
Carnegie later claimed that had he known what was happening in Homestead, he would never have let the violence go so far. Two years after the strike, Carnegie fired Frick. But in the meantime, Carnegie Steel had become the largest steel company in the world, and Carnegie had become immensely wealthy. Not only did he own the steel plants, he owned the mines in Minnesota where the iron ore was mined as well as the boats and railroad used to haul the ore to his plants. And while the market for steel rails was declining, new uses for steel were springing up, including the beams used to build the skyscrapers that were just coming into style.
Today we would call Carnegie Steel a vertically integrated company. Carnegie gathered under one company the raw materials (iron from Minnesota), the transport (boats to carry the ore across the Great Lakes to Pennsylvania and a railroad to take it to his plants in Pittsburgh), and the manufacturing facilities (steel mills in Pittsburgh) that made an essential commodity with applications nearly everywhere.
In 1901 the New York financier J. P. Morgan hatched a scheme to corral virtually all steel production in one company; acquiring Carnegie's company was vital to the plan. Morgan enlisted one of Carnegie's assistants to approach the steel magnate to find out how much Carnegie wanted for his steel company. Carnegie thought about it overnight, then scribbled a figure on a piece of paper: $480 million (worth about $10.3 billion in 2003 prices). He sent the paper with his assistant to Morgan, and the banker accepted the price.
After selling his company, Carnegie, then sixty-five, turned his attention to giving away his fortune. He contributed money to build 1,679 libraries throughout the United States. About 70 percent of the libraries financed by Carnegie were built in small towns of fewer than 10,000 people. He also donated money to build Carnegie Hall in New York City, still a premier auditorium for music; he contributed to Tuskegee Institute, a school for African Americans in Alabama; and he founded the Carnegie Institute of Technology in Pittsburgh, Pennsylvania (now part of Carnegie-Mellon University).
In 1889 Carnegie wrote an essay titled The Gospel of Wealth. Having gained a fabulous fortune after starting with nothing (except for high intelligence, a pleasing personality, and a huge dose of luck), Carnegie praised the Industrial Revolution. He acknowledged that the rich lived in huge houses, but he justified this on the grounds that in these mansions the fine arts could find a home. He expressed the opinion that workers, too, were better off than before the Industrial Revolution, even if they were not as well off as people who controlled huge companies. And Carnegie had a solution for the enormous inequalities of wealth: the rich should give away their fortunes in ways that benefit those less well off. It was a lesson he followed twelve years after writing the essay. After he had died, on November 11, 1919, it was discovered that his net worth was about $23 million. Carnegie was hardly poor at his death, but he had managed to give away more than 90 percent of his fortune.
John D. Rockefeller and oil
In 1859 Edwin L. Drake (1819–1880), a retired railroad conductor, discovered oil in Titusville, Pennsylvania (see Chapter 5); at about the same time two young men in Cleveland, Ohio, Maurice Clark and his neighbor, a young accountant named John D. Rockefeller, were opening a small wholesale grocery business with $1,000 of Rockefeller's own savings and $1,000 from his father. Fifty years later, Rockefeller was one of the richest men in the world, and perhaps the richest man ever. His fortune was estimated at about $50 billion (in 2003 dollars), his name a synonym for fabulous wealth. It wasn't groceries that made Rockefeller rich; it was oil.
Rockefeller was not exactly an oil man: he was a money man. It was his expertise in business, in buying companies and arranging deals, that succeeded in creating the Standard Oil Trust, a series of related companies that controlled practically all the oil in the United States at a time when the Industrial Revolution was beginning to run on oil.
Just as the Industrial Revolution could not have proceeded without technical innovations, it could not have succeeded without money, great heaps of it, to build machines, factories, railroads, telegraph lines: the entire infrastructure that transformed society in Europe and North America in the course of 150 years. At the beginning of the Industrial Revolution, one clever inventor might have been able to raise enough money to start a company, and then earn enough money from that company to make it bigger. But as the scale of business grew, more complicated financial arrangements were needed. The Standard Oil story is about the influence of finance.
Four years after opening their wholesale grocery business, Rockefeller and Clark decided to get into the fast-growing oil business by building an oil refinery in Cleveland (kerosene lamps were becoming very popular, and refineries made kerosene from the oil that was pumped from the ground). They brought in a third partner, Samuel Andrews, who had experience in oil refining, and later two brothers of Clark joined them. Rockefeller, the former bookkeeper, was eager to see the company grow, and he always looked for another opportunity to increase profits. He built his own oil barrels, for example, and even bought land where oak trees, used for making the barrels, grew. He built kilns where the trees grew, in order to dry the freshly cut lumber and save on the cost of shipping the lumber to his barrel-making shop. But the main way to grow as a business, Rockefeller thought, was to buy other oil-related companies.
In 1865, however, Rockefeller ran into opposition from the Clark brothers, who did not want to borrow money to buy more refineries. Rockefeller paid the partners $72,000 (about $862,000 in 2003 prices) for their shares in the company, and he became the sole owner. Five years later, Rockefeller and several new partners formed a new company with $1 million in capital (monetary assets), and they began buying other refineries in Cleveland. Within five years the new firm, named the Standard Oil Company, had bought all the other refineries in the city. Besides kerosene, Standard Oil also made paint and glue, which were by-products of oil refining. But the future still lay ahead: the gas-powered internal combustion engine was not perfected until 1885.
For the next two decades, Rockefeller assembled a large collection of companies related to the petroleum business. He especially concentrated on buying and building companies that marketed oil. His companies had agreements among each other that divided the United States into regions where the companies did not compete with one another.
Rockefeller also made deals with railroads that gave him secret discounts on shipping oil, discounts that competitors did not receive. Consequently, Rockefeller's costs were lower, and he could afford to drive smaller competitors out of business by underpricing them. Occasionally Rockefeller would keep his ownership of a company secret, in order to obtain business information from competitors who never realized they were dealing with a Rockefeller subsidiary. Some details of Rockefeller's business dealings have never been uncovered, although a series of articles written by Ida Tarbell and published in McClure's magazine between 1902 and 1904 had carefully documented ways in which Rockefeller operated. These articles had aroused public sentiment against the man who controlled about 75 percent of the oil business in the United States.
In 1906, the administration of President Theodore Roosevelt went to a federal court in Missouri, successfully making the case that Standard Oil violated the Sherman Antitrust Act by restraining (limiting) competition. Two years later, in 1911, the Supreme Court agreed with the lower court. The Supreme Court ruled that Rockefeller's company was guilty of limiting competition among formerly competitive companies by fixing the cost of transporting oil, the prices paid for oil, and the prices charged for products—actions that together the court described as an "unreasonable" restraint of trade. The court ordered that Standard Oil be broken apart into its constituent firms, which would have to compete with each other. Some of the separated companies, such as Standard of Ohio (Sohio), Standard Oil of California (Chevron), and Standard Oil of New York (Mobil), were quite large by themselves. Eventually, some of these separated companies merged together again, but these mergers were limited, and they did not take place for at least twenty years. The combination of firms created by Rockefeller was never fully reassembled.
J. P. Morgan and just about everything
While John D. Rockefeller used finance to build a fortune based on an actual activity—pumping, refining, shipping, and selling oil products—another business titan of the same period built his influence wholly on paper. Though John Pierpont Morgan, universally known as J. P. Morgan, was not nearly as wealthy as Rockefeller, Morgan held far more economic power.
Morgan's father, Junius Spencer Morgan, himself came from a wealthy New England family, and became even wealthier by helping to direct British investments in the rapidly growing American economy. Pierpont, as J. P. was called, was trained from the beginning to carry on the family tradition, and so he did. The principal business of the Morgans was to help collect the huge sums of money needed to finance expensive new enterprises, especially railroads. As railroad companies faltered (as a result, perhaps, of spending too much money and gaining too little business), the Morgans were there again, to buy up the failing companies and consolidate them into larger enterprises (today one might say larger networks). So far as is known, J. P. Morgan never drove a railroad spike, never shoveled a lump of coal into a locomotive, never designed any improvement to an industrial system. He did, however, arrange to have written very large checks.
Morgan and his company arranged the financing that put together corporate giants such as American Telephone and Telegraph (AT&T), International Harvester (successor to Cyrus McCormick's company), General Electric (founded by Thomas Alva Edison), Westinghouse Electric, and, most famously, United States Steel, the result of Morgan's combining Andrew Carnegie's steel company with several smaller firms. It was during Morgan's heyday that most big corporations moved their headquarters from the towns where they were founded to New York City, to be close to the stock markets of Wall Street and the sources of money needed to pay for business expansion or to scoop up faltering competitors.
Morgan was famously opposed to competition. He thought that when Andrew Carnegie constantly drove down the price of steel to ruin his competitors, he jeopardized those businesses as well as their workers. Morgan maintained that it was better to control industries in a trust (a monopoly) to avoid chaos in business and the pain it entailed.
For all his power and influence, Morgan did not die with a fabulous fortune. His wealth at the time of his death in 1913 was estimated at $80 million. He was far from being a pauper, but his fortune was less than one-tenth that of Rockefeller who, as the story goes, sniffed when he heard of Morgan's demise: "And to think, he wasn't even a rich man."
For More Information
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Hoyt, Edwin Palmer, Jr. The House of Morgan. New York: Dodd, Mead, 1966.
Krass, Peter. Carnegie. New York: John Wiley and Sons, 2002.
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Quackenbush, Robert. Along Came the Model T! How Henry Ford Put the World on Wheels. New York: Parents' Magazine Press, 1978.
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Harrington, Ann. "The Big Ideas: Ever Since Frederick Taylor Pulled Out His Stopwatch, Big Thinkers Have Been Coming Up with New—Though Not Always Better—Ways to Manage People and Business." Fortune, November 22, 1999, p. 152.
Holzmann, Bjorn Pehrson. "The First Data Networks." Scientific American, January 1994, p. 124.
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"John D. Rockefeller, 1839–1937." The Rockefeller University: The Rockefeller Archive Center.http://www.rockefeller.edu/archive.ctr/jdrsrbio.html (accessed on February 18, 2003).
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