Mansel Blackford. Magazine of History. Volume 24, Issue 1. January 2010.
Writing in 1899, David A. Wells, a noted economist and former official in me United States Treasury, observed, “It is clear that an almost total revolution has taken place, and is yet in progress, in every branch and in every relation of the world’s industrial and commercial system.” He was correct, as an industrial revolution—or really a series of industrial revolutions—swept across western Europe and the United States. The industrial revolutions were part of a larger process of historical change: the development of modern capitalism since about 1600, spurred on by business entrepreneurship and innovation. In capitalism, transactions in markets of all sorts—ones in which goods and services were sold and bought, labor markets, and capital markets—replaced traditional ways of doing things, which had emphasized tradition, custom, and nonprice decision making.
Especially in the nineteenth century, the development of modern capitalism and industrialization marked a major watershed in American and world history. Big businesses and large cities grew greatly in significance, and small towns and small businesses became less important. In general, organizations such as large companies, labor unions, farmers’ cooperatives, and professional organizations (such as the American Medical Association and the American Bankers’ Association) developed, replacing an earlier, more personal, way of life for many Americans.
The study of business history offers a key means through which to understand the alterations that occurred in the United States and abroad—changes in business and economic systems, surely, but also alterations in politics, societies, cultures, and the lived experience of millions of ordinary people. Business history examines the evolution of the business firm in relationship to the environment within which business has developed. Business historians look at business firms as large as Microsoft and as small as card stores in malls, but are especially interested in the rise of modern forms of business worldwide. The external environment—politics, culture, social norms, and law—in which businesses operate constitutes the palette of business history. For instance, the passage by Congress of the Interstate Commerce Act in 1887 set up the Interstate Commerce Commission (ICC), which came to regulate railroad, bus, and truck service in the United States—telling companies in those industries what they could and could not do.
In the United States, the rise of big business between 1850 and 1920 was an especially potent force for change. This essay examines industrialization and the rise of big business in the United States and suggests what those developments meant for Americans. More specifically, the essay describes how and why businesses with radically new types of organizational structures and several layers of managers partially replaced firms that were smaller and less complex. We look as well at the impact that those new businesses had on the nation’s political system. The essay closes by discussing a recent and wrenching business and economic change—the latest trends in globalization—and what that phenomenon may mean for Americans.
Industrialization in the United States and Worldwide
Business and economic historians generally recognize three overlapping industrial revolutions: the first one in the 1760s through the 1840s, led by Great Britain and, a bit later, by the United States, Germany, and France; a broader-based second one that extended from about the 1840s up to the 1950s, which involved the production of more sophisticated products based on scientific discoveries; and a third revolution from the 1950s to the present, in which science and information technologies became even more important. Industrialization was a major turning point in world history, especially because of the increased economic growth it brought. During the thousand years between 700 and 1700, European per capita income rose only about o.n percent annually, doubling only every 630 years. Just between 1820 and 1990, however, per capita income multiplied tenfold in Great Britain, fifteenfold in Germany, eighteenfold in the United States, and a whopping twenty-five- fold in Japan.
In the United States, as in most nations, there were multiple roads to industrialization. In the Northeast, from Maine south through Pennsylvania, some four hundred mill villages using water power sprang up by 1820 to produce textiles, milled lumber, ground grain, iron, and paper. One was Rochdale in southeastern Pennsylvania, known for its production of cloth. Founders of villages such as Rochdale provided living quarters for families to try to hold on to a stable supply of workers in a time of labor shortage. Industrial work was often done by entire families. Bigger one-industry cities and towns—such as Lowell, Massachusetts, for large cotton textile factories and Lynn, Massachusetts, for centralized and mechanized shoemaking—also grew up. There workers turned out thousands of feet of identical bolts of cloth and thousands of pairs of identical shoes. They specialized in making long production runs of homogeneous (identical) products. More diversified industrialized cities, such as New York and Philadelphia, made up a third variant. In these cities many smaller and medium-size businesses employing mainly skilled workers made a wide range of goods, including cotton pants, dresses, and other goods in successful competition with larger counterparts in the one-industry towns such as Lowell. Finally, in the mostly rural South, business executives fostered industrial slavery. Not all did: William Gregg, who started a mill village turning out textiles in South Carolina, opposed industrial slave labor as inefficient. Gregg, however, was the exception. In the 1850s, nearly 200,000 slaves labored in textile mills, iron works, sugar refineries, and other industrial enterprises—about 5 percent of the 4 million slaves in the region.
In all of these regional variations, American manufacturers, much more than their British counterparts, sought to achieve high-volume, low-cost production, even before the American Civil War. In Chicago in 1848, for example, Cyrus Hall McCormick established a large factory to make reapers, horse-drawn farm implements used to cut wheat mechanically. Similarly, Samuel Colt put up a large factory to produce his famous “Colt” revolvers in Springfield, Massachusetts. Faced with a shortage of skilled workers, American industrialists aimed at interchangeability of parts in machine production in such industries as clock-making, small arms, and farm machinery, a goal partially achieved in the antebellum years.
Concerns about efficiency extended to the slaughtering of animals. In Cincinnati, which was known as “Porkopolis” because of the thousands of hogs slaughtered there each year, workers drove hogs up high walkways on the outsides of slaughterhouses. Other workers killed the hogs at the top. The hogs then descended through the building by gravity—fed, killed, cut up, cooked, and preserved along the way. This “disassembly” line, which was adopted in other stockyards, such as those in Chicago, foreshadowed the assembly line in American factories. It was said of operations in Chicago that every part of the hog was used except the squeal! (See Thomas Andrews’ teaching strategy starting on p. 37 of this issue.)
Technological breakthroughs in three major fields of industrial production led to increased high-volume, low-cost production after the Civil War. In liquids and semi-liquids—oil, distilled liquors, and drugs—new processes using heat greatly increased the speed and volume of production. In the processing of agricultural or semi-agricultural goods into consumer products—flour, soap, matches, and cigarettes—new pieces of machinery came into use. The Bonsack machine, adopted in the mid-1880s, produced over 100,000 cigarettes in one day. the same time in which a team of eleven men (and occasionally women) could roll at most only 20,000 by hand. In steelmaking and metal-working, two types of changes were important. New ways of making steel, the Bessemer and open hearth processes, combined with more efficient plant layouts to greatly increase America’s iron and steel production (9). By the 1880s and 1890s, Americans increasingly smoked, drank, and ate goods processed by machines in factories. General Mills and Kellogg, for example, provided packaged cereals. Conversely, the production of such products in homes declined.
In the United States, consumers seeking comfort, convenience, and cleanliness spurred the growth of domestic markets. Those markets, along with the new production methods, were of utmost importance in stimulating industrialization, economic growth, and business change. Transportation improvements helped create markets. From the 1850s, the United States’ national market was the largest free-trade area in the world. Particularly important was the railroad: 30,000 miles of trackage by 1860; 166,000 by 1890; and 250,000 in 1916. The United States also possessed a market-oriented population of consumers eager to buy the industrial goods, ranging from soap to cereals, made available by the transportation improvements. America’s population rose from 4 million people in 1790 to 31 million in 1860 and to 106 million by 1920.
Industrialization altered forever the business system in the United States. By greatly increasing the speed of production and the volume of output, as in the vastly increased production of cigarettes—what business historian Alfred D. Chandler, Jr., has called the “throughput” of business—industrialization created new challenges for business leaders. Industrial companies turned out vast quantities of identical products for the insatiable national market. Individual firms usually made only one or two types of goods. For instance, America’s largest steel companies mainly produced uniform steel rails for railroads and structural-steel I-beams for skyscrapers. Manufacturers were able to increase their outputs greatly, because they benefited from economies of scale.
By building larger factories, business leaders were also able to reduce the cost of production per unit of their goods. These cost reductions were often passed on, at least in part, to consumers in the form of lower prices, broadening the markets for those goods. Henry Ford was able to use mass-production methods to achieve astounding economies of scale. His very large factories in the Detroit area turned out a staggering 15 million Model Ts between 1908 and 1927, allowing him to reduce the price of a Model T from around $800 (about $42,667 in 2007 dollars) to just $290 (roughly $7,460 in 2007 dollars) during those years.
The Rise of Big Business
In the 1850S the largest industrial enterprises were cotton textile mills. Only a few, however, were capitalized at over $1 million (about $27 million in 2007 dollars) or employed more than 500 workers. In 1860, no single American company was valued at as much as $10 million (roughly $2.60 million in 2007 dollars), but by 1904 over 300 were. In 1901, the newly formed United States Steel Corporation was capitalized at $1.4 billion (about $91 billion in 2007 dollars)—America’s and the world’s first billion-dollar company. It employed over 100,000 workers; by 1929, 440,000.
U.S. Steel emerged from earlier efforts, starting around 1880, by business executives such as Andrew Carnegie in the steel industry to create very large companies. Carnegie and others such as John D. Rockefeller, the founder of Standard Oil, sought to bring every aspect of manufacturing inside the firm—as in Carnegie’s effort to combine smelting iron and making steel within his company. Greater control of production helped drive down costs, block competitors, and raise profits. As part of this drive toward big business, Carnegie’s firm employed tens of thousands of workers. (The more fragmented, smaller, and less prosperous nature of their domestic markets helps explain why businesses in other nations were slower to grow large.)
As firm size grew, the “visible hand” of management, as historian Alfred Chandler put it, replaced the “invisible hand” of the market in some key industries. The decisions of business owners and managers in some industries, that is, largely replaced market forces in allocating raw materials and setting prices for finished goods. What Carnegie and his executives decided determined much of the functioning of America’s basic steel industry by the late 1880s and the 1890s. Similarly, Rockefeller’s Standard Oil controlled about 90 percent of the kerosene refining in the United States by the early 1890s, and the decisions of the firm’s leaders largely set the parameters within which much of the United States’ oil industry operated. There existed few head-to-head competitors for either Standard Oil or Carnegie Steel.
The new big businesses in the United States differed from their smaller counterparts in fundamental ways. Bureaucratic management based on layers of top, middle, and lower management and on committees and reports began replacing personal management based on individuals. Then too, in the mid- and late nineteenth century, more and more American industrial companies became corporations, under state incorporation laws. Manufacturing concerns were usually capital-intensive and needed to raise vast sums of money to build factories. The corporate form of organization, with its promise of limited liability for investors (investors were not held personally responsible for the debts of the corporations in which they invested), proved especially attractive to would-be industrialists. Another advantage of the corporation was that, unlike a partnership, it did not have to be reorganized every time an investor left the business. By 1904, corporations accounted for three-quarters of the United States’ industrial output.
The emergent big businesses developed organizations different from those of earlier enterprises. Carnegie pioneered a process called vertical integration, which became the common American response to the challenges of market and technological change. In vertical integration a company that initially engages in only one stage of the production and sale of a good may acquire the ability to control its sources of raw materials (integrate backward) and may acquire the ability to make and sell its finished goods (integrate forward). In this way, big businesses in America combined mass production with mass distribution to partially insulate their firms from the ups and downs of the national market. By controlling raw materials, they could assure themselves of adequate supplies during times of peak demand, and by controlling all stages of manufacturing, they could keep all of the profits within their own firms.
Carnegie followed the tenets of vertical integration to create the largest steel company in the world. When United States Steel was formed with Carnegie Steel as its base, the new company included forty-one mines for coal and iron ore, over 1,000 miles of railroad tracks and 112 ore ships to get those raw materials to its 213 iron smelters, steel mills, and plants making finished steel items, and sales outlets around the United States and abroad. United States Steel controlled 43 percent of America’s pig iron capacity and 60 percent of the nation’s steelmaking capacity.
By World War II big business was clearly well established in the United States. In 1917, the United States possessed 278 companies capitalized at $20 million or more—a whopping sum in those days, worth about $673 million in 2007. Of these companies, 236 were in manufacturing. Some 171 were in only six fields: food processing, chemicals, oil, metals, machine-making (making machines for installation in factories, where they would turn out products), and transportation equipment. It was in these capital-intensive industrial areas that there were the greatest opportunities for American executives to exploit economies of scale and scope through the formation of large vertically-integrated firms. Parts of American industry came to be characterized by oligopoly; in these fields a handful of large companies dominated their markets. As early as 1904, just a few major companies controlled at least half of the output of seventy-eight different industries in the United States. Such was the case in America’s basic steel and refined oil products (such as kerosene) industries. A bit later in th 1930s, the “Big Three” automakers of General Motors, Ford, and Chrysler made most of automobiles purchased in the United States.
It may seem, then, that technological and economic imperatives dictated the rise of big business in the United States. There was more to the story, however, for political and cultural factors also encouraged the development of new business forms. Americans loved the material abundance, the outpouring of goods, and the rising standard of living that they associated with big business. By the mid-1800s, Americans were well on their way to becoming the leading consumers of the world. There was, however, considerable ambivalence in American attitudes, for industrial development and the rise of big business were sudden, new, and disruptive. The response of Americans was to try to control big business through regulation by the government.
Federal and state government regulation of business expanded greatly during the Progressive period, roughly the years 1890 through about 1920. Particularly important were actions at the federal level. In 1920, Congress awarded enhanced authority to the ICC to set railroad freight and passenger rates and terms of service. The Meat Inspection Act and the Pure Food and Drug Act, both passed by Congress in 1906, gave the federal government responsibility, if not adequate authority, for the regulation of America’s food and drug industries. The Food and Drug Administration was also set up in that year. In addition, the Federal Reserve Act of 1913 established the Federal Reserve System to regulate banking practices and die money supply in the United States. Historians often think of these independent regulatory commissions as a “fourth branch” of government, in addition to and separate from the executive, legislative, and judicial branches. In some ways, these long-lived commissions took on decisions about price and output formerly reserved to owners and managers of companies.
While the main thrust of American public policy at both the federal and state levels was to regulate rather than destroy big business, law makers passed far-reaching antitrust measures. These measures grew out of America’s common law tradition, which reflected a sense of distrust toward big business. Common law fell short of outlawing big business, but did place restrictions on how large companies could act. A new level of action began with the passage of the Sherman Act by Congress in 1890. Its supporters intended that the act encompass the common law tradition. The Sherman Act outlawed restraints of trade, but the law’s sponsors intended that “reasonable” restraints, those not injurious to the public and not preventing new firms from entering business fields, be allowed to continue.
As interpreted by the United States Supreme Court, the Sherman Act permitted large firms to exist, as long as they grew big through reasonable means. The Sherman Act was used to break up American Tobacco and Standard Oil in 1911, but only because these two companies were perceived as having become large by unreasonable, or immoral, methods. Ironically, the Supreme Court’s “rule of reason” emanating from those two decisions stimulated combination, not competition. The Sherman Act was used most commonly to break up loose combinations among businesses, especially cartels (combinations of companies often established to set prices and divide markets). Tight combinations, such as vertically integrated companies, were not attacked as often or as effectively, and as a consequence business leaders continued to form them. Thus were laws, public attitudes, and economics reconciled in a manner significantly different from that which prevailed elsewhere. By way of contrast, in Great Britain cartels of smaller firms were tolerated, and in Germany and Japan cartels were encouraged by law—a situation that contributed to the greater significance of small and medium-size manufacturing firms in those nations, when compared to the United States.
The Persistence of Small Business
Even though American business leaders pioneered in the development of big business, smaller firms remained important in manufacturing, as well as in other fields such as sales and services. While not as important as in some other nations, small businesses remained significant in American manufacturing. In 1914, nearly a third of America’s industrial workers found employment in plants with 500 or more in their labor forces, and another third in those with 100 to 499. Even so, a third was still employed by firms with 100 or fewer workers. Some 54 percent worked in companies employing no more than 250 people. Altogether, about 54,000 manufacturing businesses had six to twenty workers.
Most small businesses that succeeded in manufacturing did so as flexible firms producing specialty products for niche markets, either on their own or as members of regional business networks and industrial districts. America’s textile industry provides a good example of how large and small firms could coexist. America’s textile industry divided into two segments. At Waltham and Lowell in Massachusetts, large factories employed unskilled workers to turn out standardized textiles for the mass market. By 1850, twelve corporations employed twelve thousand textile workers in Lowell, including many women.
A very different pattern, however, unfolded in Philadelphia. There, in 1850 some 326 firms employed 12,400 textile workers. Two-thirds of these firms employed twenty-five or fewer workers. The smaller Philadelphia firms competed successfully by stressing specialization and flexibility in production and marketing. Most specialized in one or two steps that they then did very well indeed, using the most up-to-date machinery and employing skilled workers, often men, at high wages. Productivity levels were high. With skilled workforces and modern machinery, the Philadelphia mills could rapidly switch to various types of cotton, wool, and other fabrics as needed. In 1910, a carpet maker celebrated its twenty-fifth anniversary by bringing out its 25,000 pattern. Small size and versatility continued to be hallmarks of Philadelphia textile firms into the mid-twentieth century. Only when national economic problems joined particular local problems of the Philadelphia mills during the Great Depression of the 1930s did the Philadelphia textile businesses decline.
Business History and Globalization
Just as industrialization fundamentally altered the United States in the late nineteenth and early twentieth centuries, rapidly expanding globalization is changing the United States and the world today. In economic terms, globalization means the free (or at least freer) flow of products, services, workers, and capital across national boundaries, especially since World War II. As much a political as an economic construct, globalization has depended on institutions originating in the Bretton Woods Agreement of 1944 (such as the World Bank and the International Monetary Fund) and the General Agreement on Tariffs and Trade of 1947 (the foundation on which the World Trade Organization was built in 1995). The impact of globalization on Americans and other people around the world has been controversial.
While international politics have been a very important part of globalization, so have multinational firms, those companies operating across national boundaries. For example, three hundred of the largest five hundred American industrial firms had manufacturing operations in China by 2005. Business historians have made particularly valuable contributions to the debate on the pros and cons of globalization by exploring how multinational corporations or enterprises have functioned and what their various impacts have been. The work of Geoffrey Jones, a business historian and a leading scholar at the Harvard Business School, has been especially important, and anyone dealing with the topic of economic globalization would benefit greatly from reading his accessible histories.
Business history has much to offer teachers in the fields of American and world history. For those working in American history it may be especially valuable since, more than some other nations, the United States has long had business cultures. Industrialization and the rise of big business transformed American politics, society, and culture, as well as the nation’s economy. Anyone teaching United States history needs to deal with that transformation. Similarly, globalization is altering life in the United States and in many other nations in the present day; and, once again, business history offers an important key to understanding the fundamental changes taking place.