The Robber Barons
The Robber Barons
During the period of the Industrial Revolution known as the Gilded Age (an era lasting roughly from the early 1860s to the turn of the century), shrewd businessmen from humble backgrounds became multimillionaires by seizing opportunities in the country's new industries. Their fortunes quickly became legendary, inspiring many young men to leave their family farms and head for the city with hopes of becoming rich. In this era the very act of making money was idealized in the arts and media, and even in church sermons. The "rags-to-riches" story, in which an impoverished young man rises to wealth and prominence through his own hard work and determination, spread throughout the popular culture.
The inspiration for rags-to-riches dreams of this period came from a relatively small number of American businessmen who created gigantic industries unlike anything known before. They became enormously wealthy and held great influence over the economy and even over the government. Some Americans viewed them as "robber barons," a ruthless and greedy bunch that would stop at nothing in pursuit of their own fortunes. Others viewed them as captains of industry and credited them for making the United States the richest industrial nation of the world.
The robber barons came into power around the close of the American Civil War (1861–65; a war between the Union [the North], who were opposed to slavery, and the Confederacy [the South], who were in favor of slavery), at a time when all the pieces were in place for tremendous expansion. The country was rich in natural resources such as iron, coal, and oil. Technological advances had greatly improved manufacturing processes. Population growth, fed by the arrival of immigrants, provided a steady labor force that worked for low wages. The country was connected for the first time by a national railway system. Although Congress had imposed income and estate taxes on individuals to support the Civil War in 1862, these taxes were unpopular and ceased in 1872. (There were no personal or corporate income taxes again—except for one brief period in 1894–95—until 1913, when the 16th Amendment to the Constitution made the income tax a permanent feature of the U.S. tax system.) In general during the Gilded Age the nation's policies were extremely favorable for big business, as the government maintained a laissez-faire (hands-off) attitude and did not regulate or oversee the businesses. The robber barons turned these factors to their advantage, building great industrial empires. Whether they benefited or took advantage of the U.S. economy—or both—is an issue still being argued today.
The trouble with free competition
Until the Civil War there had been little competition among manufacturers. Most companies served the market in their own region, and new companies simply went where they were needed. But after the war the large new industries sold their products across the nation, creating true business competition for the first time in American history. This competition caused some major problems. When several manufacturers tried to sell the same product to the same market (population of buyers), the result was often a flooding of the market with more goods than consumers could buy. With too much product on the market, manufacturers lowered their prices to draw customers away from competitors. Sometimes they were forced to drop their prices below the cost of producing the goods. Unlike large companies that had strong financial backing, small companies could not survive a period with meager earnings and collapsed when prices fell too low.
Words to Know
- Accumulated wealth or goods devoted to the production of other goods.
- An economic system in which the means of production and distribution are privately owned by individuals or groups and competition for business establishes the price of goods and services.
- A process in which companies purchase other companies and fold them into one large corporation.
- Evolution is the process by which all plant and animal species change over time because of variations that are passed from one generation to the next. The theory of evolution was first proposed by naturalist Charles Darwin (1809–1882).
- horizontal expansion:
- Growth occurring when a company purchases rival companies in the same industry in an effort to eliminate competition.
- The social system that results from an economy based on large-scale industries.
- A distinct group of profit-making enterprises that produces a certain product, such as the textile or steel industry.
- interstate commerce:
- Trade that crosses the borders between states.
- An economic doctrine that opposes government regulation of commerce and industry beyond the minimum necessary.
- The exclusive possession or right to produce a particular good or service.
- Journalists who search for and expose corruption in public affairs.
- The desire or effort to help humankind, as by making charitable donations.
- Agreements among rival companies to share their profits or divide up territories to avoid destructive competition and maintain higher prices.
- A building in which a raw material is processed to free it from impurities.
- A work stoppage by employees to protest conditions or make demands of their employer.
- A group of companies, joined for the purpose of reducing competition and controlling prices.
- vertical expansion:
- Growth that occurs when a primary company purchases other companies that provide services or products needed for the company's business, in order to avoid paying competitive prices.
Although free competition on the market fit American ideals, overproduction and price wars made an unstable economic environment for many businesses. The U.S. government did not have rules and regulations that extended to national businesses at the time, so the industrialists of the Gilded Age took it into their own hands to establish a more stable market for their products.
Pools and trusts
During the late 1860s, rival companies in some industries got together to form pools—agreements among rivals to share their profits or divide up territories in order to avoid destructive competition and maintain higher prices. U.S. salt producers were among the first to create a successful pool, when competition had created a chaotic price war. After the formation of the Michigan Salt Association in 1869, the salt companies agreed to divide up their territories and were immediately able to double the price of salt. Other industries soon formed similar pools. While this stabilized the market for the companies, the lack of competition in the market hurt consumers, who had to pay higher prices.
Pool agreements were informal agreements among businesses and not legal contracts; therefore they could not be enforced and some companies did not live up to their word. This caused new price wars. From the 1870s on, the largest trend in business was toward consolidation, a process in which companies purchased other companies and folded them into one large corporation. There were two general ways to consolidate. One was horizontal expansion, in which the primary company purchased as many of its rival companies as possible. The end result, if the primary company was successful, would be a monopoly, or ownership of all companies in the industry. The other way to consolidate was vertical expansion, in which the primary company bought up companies that provided the services it needed, thus avoiding having to pay competitive prices for equipment, transportation, and manufacturing.
Some new big businesses began to form trusts, or groups of companies joined together to reduce competition and control prices. A trust was formed when several companies in the same industry transferred their properties and stocks to a board of trustees who then ran all the companies. As the trusts got bigger and stronger, they were able to buy out more and more of their competition. Capital (accumulated wealth or goods devoted to the production of other goods) became concentrated in just a few huge corporations, especially in transportation and heavy industry. The pioneer and best example of the gigantic trusts of the Gilded Age was the Standard Oil Company Trust, formed by John D. Rockefeller (1839–1937).
The Meat Industry and Gustavus Swift
Gustavus Swift (1839–1903) moved his meatpacking business to Chicago in 1875 and began shipping beef to consumers in the Northeast. In those days only live cattle were shipped and it was a costly process. The cattle had to be fed along the way, some died in transit, and the railroads charged per pound. A 1,000-pound steer yielded only about 600 pounds of beef and the rest was a loss for the company. Swift wanted to butcher the cattle first and then ship the beef, so he explored ways to keep the meat from spoiling during transport. He successfully sent one carload of beef during the coldest part of winter in 1877, but railroad-car refrigeration technology was inadequate for shipping during the rest of the year. Swift hired an engineer to perfect a refrigeration car that used circulating fresh air cooled by ice. He contracted ice harvesters in Wisconsin to produce enough ice for the cars and established icing stations along the railroad routes heading east. After finding partners in the railroad industry, he built functioning refrigerated railroad cars for his business.
However, many obstacles remained. Consumers in eastern cities did not feel safe eating meat slaughtered elsewhere, as they feared it might spoil before it reached them. Railroads preferred the larger freight profits from shipping live cattle, and they joined together against Swift, charging high prices for his packaged meats. Undaunted, Swift mounted large-scale advertising campaigns to win public confidence and made partnerships allowing him to sell through local butchers. For transport, he negotiated good rates with the Grand Trunk Railway, which had never made much profit shipping cattle. Swift's success continued and after fifteen years his company was worth $25 million.
Rockefeller and Standard Oil
Prior to the 1850s people usually lit their lamps with whale oil. As the supply of whales diminished, oil producers had to look for oil elsewhere. Crude oil (liquid petroleum in its natural state) could be refined into flammable oil called kerosene for lighting lamps, but it was obtained by a difficult process of skimming it off the tops of ponds of water. The first modern oil well was drilled in 1859, and crude oil was suddenly available in large quantities. In 1861 the first petroleum refinery (a building in which a raw material is processed to free it from impurities) opened in the United States, churning out mostly kerosene. Four years later, Rockefeller, co-owner of a very successful wholesale grocery business in Cleveland, Ohio, expanded into oil refining as a side business. Though few thought there was much of a future in it, his interest had been captivated. In 1865 he shifted his focus exclusively to refining oil. By the end of the year, his oil refinery was producing at least twice as much as any other refinery in Cleveland.
Since Standard Oil was not close to the oil wells in Pennsylvania or many of its consumers, the company shipped massive quantities of oil on a regular basis. Low shipping rates were essential to maintaining competitive prices and high profits. Railroads at the time commonly gave favored shippers rebates, or partial refunds, on their publicly stated rates. The larger the shipper, the higher the rebate. Rockefeller manipulated the railroads to get the lowest rates possible, offering large and consistent business in return. This allowed him to sell for a lower price than his competitors.
Rockefeller invested in the top machinery and consistently rearranged his manufacturing processes in order to save a few cents per step. Standard Oil began making its own barrels to ship oil. Since the company needed wood for the barrels, Rockefeller bought his own timber tracts, or wooded areas purchased for logging. He owned his own warehouses, bought his own tank cars, and, to the extent possible, owned or produced the raw materials and transportation he needed to operate.
South Improvement Company and the Cleveland Massacre
In 1870 Standard Oil joined the South Improvement Company, a secret partnership among important railroad lines and a few of the largest oil refiners. Participating companies formed a pact (agreement) that the railroads would post their shipping rates at a high level, but they would pay rebates to the refiners who were members of the South Improvement Company. In addition, the railroads would pay drawbacks, or duties, to the members for all shipments made by nonmembers. Thus, oil refiners who were not in the pact would end up paying a great deal more for shipping than the members. In the end their losses would drive them out of business. When news of the pact leaked, the public was infuriated. The South Improvement Company was shut down before it made a single transaction and Rockefeller's reputation was badly tarnished.
Rockefeller was nevertheless convinced that the health of the refinery business depended on getting rid of destructive competition. Indeed, the petroleum industry was chaotic. Unregulated drilling and oil strikes produced irregular floods of oil. It cost no more to build a small refinery than to open a hardware store, so when oil prices rose, several newcomers built refineries in an attempt to seize quick profits. Their production would flood the market with oil, causing prices to fall and destroying small companies. Only the large companies with vast reserves could hold out until prices rose again. Rockefeller believed that these alternative waves of boom and bust could be abolished by combining the refineries under the leadership of Standard Oil, placing the entire refining industry in the hands of what was essentially a federation of its strongest units.
During the commotion over the South Improvement Company, Rockefeller had been carrying out a scheme of horizontal expansion that came to be called the Cleveland Massacre. Early in 1872 he offered to buy out most of the twenty-six Cleveland oil refineries. Owners could accept either a cash offer or Standard Oil stock, or risk being driven out of business and losing everything. Twenty-one refiners sold out within three months. Some claimed they had been pressured into selling at prices less than their businesses were worth. Others felt threatened by the looming South Improvement Company agreement. Standard Oil was suddenly one of the industrial giants of the time.
By the end of 1872 Rockefeller and his associates controlled all the major refineries in Cleveland, New York City, Pittsburgh, Pennsylvania, and Philadelphia, Pennsylvania. Over the next decade, the Standard Oil Company developed a pipeline system, purchased new oil-bearing lands, acquired extensive oil shipping facilities, and constructed an elaborate and efficient marketing system. By 1879 Standard Oil Company controlled between 90 and 95 percent of the American refining capacity, dominating the American petroleum industry.
Creation of the Standard Oil Trust
In buying up its competition, Standard Oil acquired stock in other companies, which was illegal in Ohio. To get around the law, the stocks were simply purchased in the names of various stockholders acting as trustees. For years the trustee system allowed the company to expand well beyond the borders of Ohio. However, there was no provision for the death or resignation of a trustee. A more formal arrangement was needed, so in 1882 the Standard Oil Trust was formed by an agreement that placed all properties owned or controlled by the Standard Oil Company in the hands of nine trustees, including Rockefeller. The trust included fourteen companies that it owned outright and twenty-six more that it owned in part. The trustees exercised general supervision over them all. Rockefeller retired from active leadership in 1897.
Carnegie and U.S. steel
In the 1850s industrial demand for iron, particularly for the railroads, stimulated major expansion in the U.S. iron industry. After 1865, however, steel slowly began to replace iron in popularity. Steel is an alloy (a compound made up of two or more metals) of carbon and iron that is harder and stronger than iron. It had previously been too expensive to produce in quantity in the United States, but in 1856 British inventor Henry Bessemer (1813–1898) invented a converter that could efficiently remove carbon from pig iron (processed crude iron) in amounts necessary for mass production of steel. In the early 1870s, thirty-six-year-old Scottish American businessman Andrew Carnegie (1835–1919) was visiting England and witnessed the Bessemer steel-making process. Upon returning to the United States, he built the largest steel mill in the country using the Bessemer process.
Carnegie, who had raised himself out of poverty, learned a great deal about business working for the Pennsylvania Railroad. He was knowledgeable about the future of railroads and understood the value of steel rails. By keeping costs down, technology updated, and always hiring the most talented managers, he produced steel more efficiently than his rivals and sold his steel rails at the lowest prices on the market. His company was an immediate success. In 1881 he combined his company with several others, naming it the Carnegie Steel Company. By the 1890s Carnegie's mills had introduced the Siemens-Martin process, an advanced and more efficient open-hearth furnace process that is still used in steel making today. (The process is named after English engineer Charles William Siemens [1823–1883], who designed an improved regenerative furnace for steel production, and French engineer Pierre Émile Martin [1824–1915], who created a variation of Siemens's design.)
Carnegie expanded vertically to keep costs low and competition at bay. He purchased a large coke (a form of coal used as fuel) company and vast acres of coalfields and iron-ore deposits that furnished the raw materials needed for steel making. Then he purchased the ships and railroads needed to transport these supplies to the mills. Carnegie was able to defeat his competitors by always having the lowest prices and the highest profits. By the end of the nineteenth century, the Carnegie Steel Company controlled all the elements it used in the steel production process and was producing one quarter of the nation's steel.
The Homestead Strike of 1892
Homestead, Pennsylvania, was the center of Andrew Carnegie's enormous steel empire, the Carnegie Steel Company, which produced fully one-quarter of the nation's steel by 1892. Most of the steelworkers belonged to the Amalgamated Association of Iron and Steel Workers, a strong union with 24,000 members. In the past, Carnegie had publicly supported the right of workers to form unions, but by 1892 he opposed the union in his plants. He believed they interfered with good management of the company and he was also aware that a strike (work stop-page) could cripple his steel empire.
In 1892, as Carnegie's contract with the union was about to expire, he instructed his general manager, Henry Clay Frick (1849–1919), to announce that the steel mill would now employ nonunion workers and pay lower wages. Carnegie then left for Europe, leaving management to Frick, whose opposition to unions was well known. The Homestead workers went on strike on July 1. Frick employed 300 company guards hired through Pinkerton's National Detective Agency to seize the millworks from the strikers. When the guards attacked on the night of July 5, the strikers had been alerted and were waiting. The eight-hour battle that followed resulted in 35 deaths and about 60 seriously wounded men.
An unsuccessful assassination attempt on Frick's life by a Russian radical soon after the confrontation turned public opinion against the union. The state of Pennsylvania sent 4,000 soldiers to occupy the factory, which was soon turned over to management. Nonunion workers were hired and the millwork resumed normal operations. Four months later, the Amalgamated voted to end the strike, but the organization was now crushed, effectively ending unionism in the steel industry (see Chapter 10).
Robber Barons and Philanthropy
Quite a few of the great industrialists of the Gilded Age believed it was their responsibility to use part of their large fortunes to promote the public good. Their philanthropy resulted in the creation of some of the nation's great institutions of learning, science, and culture.
John D. Rockefeller virtually created the University of Chicago with gifts totaling $80.6 million. He created the Rockefeller Institute for Medical Research in 1901 and the General Education Board in 1902. In 1913 he formed the giant Rockefeller Foundation. Rockefeller's gifts to the public totaled more than a half billion dollars.
Andrew Carnegie funded 2,509 public libraries, built Carnegie Hall in New York City, and founded the Carnegie Institute of Technology, which later became Carnegie-Mellon University. In 1905 he established the Carnegie Foundation for the Advancement of Teaching, and in 1910 the Carnegie Endowment for International Peace. In 1911 he founded the Carnegie Corporation of New York. Throughout his lifetime Carnegie distributed some $350 million towards the public good.
J. P. Morgan was a trustee of the American Museum of Natural History for more than forty years from its founding in 1869. He purchased and donated many of its great collections. He was also a trustee of the Metropolitan Museum of Art and through his contributions was responsible for making it an extremely successful and respected museum.
Cornelius Vanderbilt gave $1 million to Vanderbilt University (previously Central University) at Nashville, Tennessee, and is regarded as the school's founder.
Philip Danforth Armour founded the Armour Mission and the Armour Institute of Technology. He contributed large sums of money for the construction of low-cost housing for his workers.
Gustavus Swift was one of the founders and chief supporters of St. James Methodist Episcopal Church in Chicago and was a generous donor to the University of Chicago, Northwestern University, the Young Men's Christian Association (YMCA), and other causes.
The gospel of wealth
Carnegie believed society benefited from the concentration of industry in the hands of a few, but only so long as the rich industrialists used their extra wealth for the common benefit. In his essay "Wealth," which originally appeared in the 1889 North American Review, Carnegie declared, "The man of wealth [becomes] the mere trustee and agent for his poorer brethren, bringing to their service his superior wisdom, experience, and ability to administer, doing for them better than they would or could do for themselves." Carnegie practiced extensive philanthropy, or the desire or effort to help humankind, as by making charitable donations.
J. P. Morgan and U.S. Steel
Wealthy financier J. P. Morgan (1837–1913) created his first business monopolies by purchasing most of the railroad industry in the eastern United States in the 1890s (see Chapter 6). By the turn of the twentieth century, Morgan's attention had shifted to steel. He purchased two major steel producers, Federal Steel and National Steel, and then sought to buy Carnegie Steel. Carnegie did not like bankers and would not sell. The powerful Morgan was able to make Carnegie's customers cancel their contracts and his competitors lower their rates. Carnegie fought back as long as he could, but in January 1901 Morgan bought him out, paying $492 million for Carnegie Steel. Morgan's United States Steel Corporation was the nation's first billion-dollar enterprise. No rival could hope to compete against such a monopoly.
Social Darwinism: The survival of the fittest
Many robber barons shared a popular viewpoint about their wealth called social Darwinism. The theory was established by English philosopher Herbert Spencer (1820–1903) and refers to biologist Charles Darwin (1809–1882) and his theory of evolution. Evolution is the process by which all plant and animal species change over time because of variations that are passed from one generation to the next. Spencer believed that the human social world is in a constant evolutionary process. He coined the phrase "the survival of the fittest," arguing that the wealthy and powerful took their place at the top of society because they were the best adapted to the environment, while those who did not compete well became poor and eventually died out. (It is worth noting that Darwin did not agree with this social theory.)
In the United States the most eloquent spokesperson for social Darwinism was Yale professor William Graham Sumner (1840–1910). He argued that human beings struggle against one another by nature. To Sumner, the economy was part of the instinctive struggle between humans and a part of the evolution of society. Sumner believed that governments had no business interfering with the economy, and also held that trade unions, charities, and other forms of social welfare were obstacles to the natural course of things.
Some ministers of the era held similar views, claiming that the making of money was the proper work of a Christian. In his popular "Acres of Diamonds" sermon, Baptist minister Russell H. Conwell (1843–1925) preached pure capitalism (an economic system in which the means of production and distribution are privately owned by individuals or groups and competition for business establishes the price of goods and services): "I have come to tell you … you ought to be rich and it is your duty to get rich." He concluded the lecture by saying that "to make money is to preach the gospel." Conwell was careful to distinguish between making money for its own sake, of which he did not approve, and seeking wealth to do good.
Early response to the monopolies
The American public was not convinced by social Darwinism. An early voice against the robber barons was journalist Henry Demarest Lloyd (1847–1903), who began a campaign in 1881 with his Atlantic Monthly article "Story of a Great Monopoly," which exposed the methods of the railroads and the Standard Oil Company. Lloyd saw the dangers of the rising monopolies and became a tireless champion of the independent competitor, the consumer, and the worker. He is considered to be one of the first muckrakers, a group of journalists who search for and expose corruption in public affairs. Lloyd's most important book, Wealth Against Commonwealth (1894), was a strong criticism of monopolies, especially the Standard Oil Company.
Members of the clergy, led by Congregational minister Washington Gladden (1836–1918), started a new movement known as the social gospel to secure social justice for the poor. The movement paved the way for the Christian religion to be linked with reform and for future progressives to take action against the power of the robber barons. But true reform would not be accomplished for many years.
The Interstate Commerce Act
By the 1880s large and powerful trusts controlled many industries, including those producing sugar, meat, lead, natural gas, cotton oil, linseed oil, and whiskey. But it was the railroads that sparked the most public anger. By favoring large customers such as Standard Oil, the railroads hurt and even destroyed some small businesses and farms. Public displeasure with the railways led state legislatures, especially those in the Midwest, to create commissions to oversee the railroad business. But as railway networks continued expanding across state lines, it was soon beyond the power of any one state to regulate railroads. By the late 1880s it was clear that interstate commerce, or trade that crosses the borders between states, could only be regulated by the federal government.
The government had maintained its laissez-faire position for most of the nineteenth century, but in 1886 the Supreme Court proclaimed that only the U.S. Congress had the right to regulate interstate commerce. In 1887 Congress passed the Interstate Commerce Act, the first regulatory act designed to establish government supervision over a major industry. The Interstate Commerce Commission (ICC), the nation's first regulatory agency, was given the daunting mission of trying to regulate railroad rates and stop unfair practices.
By the 1890s, after hundreds of mergers and consolidations, there were only six mammoth railroad systems left, and J. P. Morgan owned four of them. The railroad, steel, and other monopolies, like Standard Oil, were so powerful that no government commission could regulate them, and public resentment grew. In 1889 Kansas enacted the first state antitrust legislation, and the effort soon spread across the South and the West. By 1900 twenty-seven states had created laws prohibiting or regulating trusts.
Many trusts were simply too big to be controlled by the laws of any one state. For example, when the state of Ohio moved against the Standard Oil Company in 1892, the trust simply reformed under the more business-friendly laws of New Jersey. Most trusts and monopolies were interstate in scope. Once again, pressure mounted for the federal government to take action. Unfortunately, the federal government was in no hurry to respond. The business trusts donated heavily to political campaigns, bribed legislators, and were in a position to make or break many politicians.
Finally, in 1888, Senator John Sherman (1823–1900) of Ohio introduced an antitrust measure in the U.S. Senate. Two years later Congress passed the act after considerable revision. The Sherman Antitrust Act barred any "contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade" and made it a federal crime "to monopolize or attempt to monopolize, or combine or conspire … to monopolize any part of the trade or commerce among the several states."
Unlike the Interstate Commerce Act, which established a commission to investigate violations of the law, the Sherman Act left enforcement up to the U.S. attorney general, the chief law officer of the nation. Most attorneys general at that time did not think it necessary to move against trusts. The presidential administrations of Grover Cleveland (1837–1908; served 1885–89 and 1893–97), Benjamin Harrison (1833–1901; served 1889–93), and William McKinley (1843–1901; served 1897–1901) filed a total of only eighteen antitrust suits, and four of them were against labor unions. In fact, more combinations and trusts were formed between 1897 and 1901 than at any other time in American history.
For More Information
Brogan, Hugh. The Penguin History of the USA. 2nd ed. London and New York: Penguin, 1999.
Cashman, Sean Dennis. America in the Gilded Age: From the Death of Lincoln to the Rise of Theodore Roosevelt. New York and London: New York University Press, 1984.
Chernow, Ron. Titan: The Life of John D. Rockefeller, Sr. New York: Vintage Books, 1998.
Sinclair, Upton. The Jungle. New York: Doubleday, Page & Co., 1906.
Smith, Page. The Rise of Industrial America: A People's History of the Post-Reconstruction Era. Vol. 6. New York: McGraw-Hill, 1984.
Carnegie, Andrew. "Wealth." North American Review, June 1889. http://www.swarthmore.edu/SocSci/rbannis1/AIH19th/Carnegie.html (accessed on June 30, 2005).
Rockefeller Foundation. http://www.rockfound.org/display.asp?context=2&SectionTypeId=32&Preview=0&ARCurrent=1 (accessed on June 30, 2005).