[Part I of the "Free Enterprise" midterm question]


BUSINESS AND INDUSTRY IN THE LATE 19TH CENTURY
FREE ENTERPRISE?


KEY TERMS:   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 miles of rails to over 160,000 miles during this period.  We had more miles of track 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 enterprise."

The Tariff

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.

Railroads

The growth of American rails is another example of government intervention on the behalf of business rather than a truly free-market system.

The Federal government, for instance, gave huge subsidies to the companies that built the first transcontinental railroad, Union Pacific and Central Pacific. These 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 Credit Mobilier $73 million for $50 million worth of work.  Why?  Well, they controlled Credit Mobilier 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 some other. 

Why did local governments do this?  Not much choice.  Columbia (just to the Northeast of Aberdeen), was at first the bigger town.  But Columbia civic official refused to be easy marks for the railroads.  The railroad owners were annoyed, so they changed routes.  Aberdeen became "The Hub City," and Columbia faded.

When not ripping off stockholders and the government, the railroad tycoons were busy ripping each other off and destroying 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 directors 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."  The "pools" were 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 latter.