INDUSTRY IN THE LATE 19TH CENTURY
CREDIT MOBILIER, ERIE WAR, CARNEGIE, J.P. MORGAN, ROCKEFELLER, KNIGHTS
OF LABOR, HAYMARKET RIOT, A.F.L., HOMESTEAD STRIKE, PULLMAN RIOTS,
EUGENE DEBS, SHERMAN ANTITRUST ACT
American Economic Growth 1865-1900
The late 19th century was a time of phenomenal growth in business and
industry. GNP increased by 600% between 1865 and 1900. The
population of the country doubled, a sign of healthy, vibrant
economy. We went from 35,000 of rails to over 160,000 miles—more
than all of Europe combined. There was tremendous growth in oil,
coal, steel—just about everything associated with industrialization.
Along with this growth came all the problems typically associated with
industrialization. Both the blessings and the problems or
industrialization are often attributed to the "free enterprise" system,
a system where government maintains a laissez-faire attitude toward
business and economics. But it is doubtful if the economic system
of the late 19th century can truly be characterized as one of "free
Throughout this period, the competition that should be the heart of a
free enterprise system was limited by a high protective tariff on
imported goods…generally 40-50% of the value of those goods. The
tariff meant that a disproportionate share of the cost of government
was paid for by those who might have consumed foreign goods or gotten
American goods cheaper. Farmers in general and the South in
particular were adversely affected by the tariff.
The growth of American rails is another example of government
intervention on the behalf of business rather than a truly free-market
The Federal government gave huge subsidies to the companies that built
the first transcontinental railroad, Union Pacific and Central Pacific.
The companies got 20 square miles of land for each mile of track laid,
plus direct payments of $16,000 and $48,000 per mile for track laid in
plain areas and mountain areas respectively.
Not content with their enormous government-subsidized profits, the
directors of Union Pacific maximized their own profits by hiring out
the work to a subsidiary, Credit Mobilier. They paid CM $73
million for $50 million worth of work. Why? Well, they
controlled CM outright while they were only major share holders in
Union Pacific. The scheme they adopted allowed them to transfer
$23,000,000 in profits directly to themselves so that they would not
have to share with the other Union Pacific stock holders.
The directors of Central Pacific (Stanford, Huntington, Crocker, and
Hopkins) did likewise, raking in the big bucks and ensuring bright
futures in business and politics for themselves. Meanwhile, those
doing the actual work (engineers like Theodore Judah and the Irish
“Paddies” and Chinese “Coolies” who did the actual work) received
little credit or compensation.
Ultimately, the Federal government gave away more than 155 million
acres of land to the railroads—and local governments gave the railroads
even more so that the rails would go through their town rather than
When not ripping off stockholders and the government, the railroad
tycoons were busy ripping each other off and to destroy the
competition. Cornelius Vanderbilt, for instance, decided to
secretly buy up Erie Railroad stock so he could control the line and
eliminate its tendency to compete with his own lines. The director of
the Erie (Jay Gould, Dan Drew, and Jim Fisk) figured out what he was
doing and responded by watering the stock: printing more and more
shares so that Vanderbilt wouldn’t gain control no matter how many
shares he bought. Ultimately, there was $74 million of
outstanding stock on a railroad worth perhaps $24 million. Fisk,
Gould, and Drew pocketed the difference, not using the money for
capital improvements or anything else to improve the value of the
company. These men pocketed millions—while the other Erie
stockholders made nothing at all: the railroad didn’t pay a dividend
for 70 years, and its safety record was the worst in the country—in an
era when trains were notoriously unsafe anyway.
Further, railroad companies in general connived to make sure there was
no real competition among them, forming “pools,” essentially,
agreements not to compete so that prices and profits could remain
high. “The public be damned,” said William H. Vanderbilt.
The Steel (Steal?) Industry
The growth of the railroads meant a tremendous increase in the demand
for steel, and more opportunity for enterprising individuals. One
of the biggest names in steel: Andrew Carnegie.
Carnegie’s story is often used as a model of the American ideal.
Young Andrew, son of a tailor, emigrated from Scotland, working as a
bobbin boy for $1.20 a day. Honest, industrious, and
hard-working, always willing to do the extra job, he accumulated enough
capital to buy his way into the steel business. One of the first
to see the potential of the Bessemer process to turn out a higher
quality steel at a lower price, Carnegie ended up earning a large
fortune—which he then prepared to give away. His “gospel of
wealth” said that the man who died rich died disgraced, and so Carnegie
used his money to endow schools, libraries, etc.
Well, that’s the way free-enterprise is supposed to work, and the story
above is basically true…but it’s not the whole truth.
The Bessemer process was *first* used in this country by Duquesne
Steel, not Carnegie. Carnegie knew who wasn’t going to be able to
compete with Duquesne, a company turning out a better product and a
lower price. So he wrote to the railroad companies and warned
them that Bessemer steel was dangerous: they were going to face
accidents and law suits if they used it. Duquesne found itself
losing contract after contract. Its stock price plummeted—and
Carnegie made his move. He bought up control of Duquesne at a
bargain price—and now he improved Bessemer steel. Oh, the steel
wasn’t actually any different: but there was a big improvement: now
Carnegie-controlled mills were producing it!
Carnegie further increased his competitive advantage by mastering
what’s called vertical integration: controlling the manufacture of
steel at every step. He controlled iron mines, coal mines, rails,
enabling him to control production costs and undercut his competitors.
J.P. Morgan, another manufacturing of steel was unhappy with the
competition and the downward pressure on steel prices, so he simply
bought Carnegie out, paying Carnegie $500 million more than Carnegie’s
company was really worth. But, for Morgan, ending completion
worked out just fine. His company, Unite States Steel, became the
first billion dollar company in America, maybe the world,
Morgan also had his hand in the railroad industry and in banking.
As in steel, he worked to eliminate completion and to keep profits
up. He didn’t have to buy up control, either. Other
businessmen were ready to join him to create what were called trusts,
agreements to limit competition and keep prices high. Eventually,
there were trusts in all sorts of different industries, trusts that
eliminated the competition necessary for a truly free enterprise
system. And then there were the outright monopolies such as the
oil monopoly created by John D. Rockefeller.
Rockefeller and his Standard Oil Company were completely unscrupulous
in the way they dealt with potential competitors. For instance,
Rockefeller might buy up all the barrel staves in an area so
competitors couldn’t get barrels to ship their oil.
But Rockefeller’s most successful tactic was the one he used with the
railroads. “You want my business?” he asked, “Well, then, give me
a rebate on each barrel I ship with you—oh, and I also want a rebate on
each barrel of oil any of my competitors ship with you.”
Rockefeller succeeded in getting much lower transportation costs,
allowing him to undercut his competitors. When they started going
under, he’d by up their stock. Then, with monopoly control, he’d
jack up the prices: no competition anymore! In this way,
Rockefeller ended up controlling most of the nation’s oil
production. And he got away with such shenanigans by bribing
legislators. “Standard oil did everything to the Ohio legislature
except refine it.”
Free enterprise, or big-business connivance to destroy competition and
prevent the growth of true free enterprise? I would say the