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Honors U.S. History
Mr. Irwin
1/19/16
Name:
Week 17
Period:
Lecture 17
THE GROWTH OF BIG BUSINESS
1859 – 1900
Key Industrialists, Big Business & Government Regulation
Terms to look up in a dictionary:
You will be able to better understand this lecture if you look up these terms in
your book or in a dictionary:
capital
revenue
dividend
predatory pricing
robber barron
oligopoly
monopoly
pool
trust
cartel
trustee.
1859, near Titusville, Pennsylvania – the Birth of Oil Drilling:
Edwin L. Drake came up with a unique drilling method that incorporated the use
of 10-foot sections of pipe driven into the ground. When the pipe hit bedrock,
drilling tools were lowered inside the pipe, and a steam engine was used to
power drill through bedrock and ultimately into an underground oil reserve.
When oil was struck, the drilling tools were removed and the oil was pumped out
of the ground.
At this time in history, crude oil would be refined into kerosene, which would be
used for lamps and for heating. Gasoline was a by-product of the crude oil
refining process and was often thrown out, dumped onto the ground, or flushed
out into rivers or streams.
John D. Rockefeller and the Standard Oil Company:
Between the years of 1870 – 1911, Standard Oil Company of Ohio became one
of the most successful companies in America. It went from processing 2 to 3
percent of our nation’s crude oil, to becoming a virtual monopoly, and controlling
90 percent of the U.S. crude oil refining market.
Founded by John D. Rockefeller, his brother, William Rockefeller, Henry Flagler,
Samuel Andrews, and Stephen V. Harkness, Standard Oil has made the history
books as much by the business tactics employed by Rockefeller, as by the
millions of dollars that were made in the business.
Horizontal Integration:
Rockefeller employed “horizontal consolidation,” the form of business merger
that unites companies that make the same or similar products, or that provide the
same or similar service. A firm that could buy out all of its competitors could
achieve a monopoly and therefore maintain control over the entire industry’s
production, wages, and prices. Rockefeller was interested in accomplishing all of
these goals.
Rockefeller reaped huge profits by paying his employees extremely low wages.
He was known to drive his competitors out of business through the use of
“predatory pricing.” He would either drive out the competition or absorb it
through purchase, and then once he had gained control of a market, he would
hike prices far above the original levels.
Critics who were alarmed by such business practices, came up with the name
“robber barron” to describe Rockefeller and others who sought monopolies in
order to line their own pockets.
The Trusts:
As a response to anti-competitive tactics being used by “Big Business,” states
began passing laws designed to limit the scale of companies. In 1882,
Rockefeller and his partners developed an innovative way of organizing, in order
to increase profits, or at least keep profits high. The “trust” was a way for large
competing companies to join together through “trust agreements”.
Participants in trusts, turned their stock over to a group of “trustees,” people
who would run the separate companies as if they were one large corporation. In
return, the owners of trust companies were entitled to “dividends” on profits
earned by the trust; thus bringing in even more money for the owners.
The Sherman Antitrust Act:
This type of business partnership was monopolistic and tended to make it
difficult, if not impossible for small or independent companies to compete in
markets that were dominated by the trusts. In 1890, Congress passed the
Sherman Antitrust Act, which made it illegal to form a trust that interfered with
free trade between states, or with other countries.
A series of lawsuits resulted, many were aimed at Standard Oil. In 1911, the
U.S. Supreme Court made a ruling which forced Standard Oil to separate into 34
different companies. This Supreme Court ruling gave birth to what is today,
ExxonMobil, Conoco-Phillips, Chevron, Amoco, Sohio, Arco, and several other oil
companies.
Carnegie Steel:
Born in Scotland to a poor family, Andrew Carnegie came to the United States at
age 12, in 1848. By age 18, he had gotten a job with the Pennsylvania Railroad
Company, earning $4.00 per week as a private secretary to superintendent,
Thomas A. Scott.
As a reward for a job well done on a particular task, his boss gave the young Mr.
Carnegie a chance to buy stock in the company. His mother mortgaged their
house to come up with the purchase price of the stock. Reflecting back on the
realization that one can make money upon money, Carnegie himself said:
“One morning a white envelope was lying upon my desk…it contained a check
for ten dollars…It gave me the first penny of revenue from capital…Eureka! I
cried. Here’s the goose that lays the golden eggs.”
Andrew Carnegie was one of the first American industrialists to make his own
fortune. He truly rose from rags to riches. His story is considered the model of
the American dream come true. By 1865, Carnegie was so busy managing the
money he was earning in dividends that he left his railroad job.
After touring a British steel mill and witnessing the revolutionary Bessemer
process in action, he founded the Carnegie Steel Company. By 1899,
Carnegie’s various U.S. companies (which had grown immensely through
horizontal consolidation) were manufacturing more steel than all of Great Britain.
Although he had been involved in a number of profitable business ventures,
Carnegie made his fortune in the steel industry. Eventually, he controlled the
most extensive iron and steel works ever owned by an individual in the United
States. His great innovation was in the cheap and efficient production of steel
rails for railroad lines.
Carnegie believed in continuous improvement and sought out ways to make
better and cheaper products. He incorporated new machinery and techniques,
and even employed new accounting methods that enabled him to track costs
more precisely. In order to reduce and control costs, he used the principle of
“vertical consolidation” (the process of buying out suppliers such as coal
fields, iron mines, ore freighters, and railroad lines, in order to control the raw
material and transportation costs).
He was said to be a good judge of character and that he attracted talented
employees by offering them stock in his company. He believed that good people
would work harder if they had a stake in the company. As the result, some
individuals who began with Carnegie at entry level jobs, ended up millionaires
later on.
Carnegie did not set up his companies as public stock companies. He kept his
companies private through the concept of “limited partnerships” in which the
stock could only be traded within the owners and employees of the companies.
He always made sure that he was the controlling partner. If someone died,
retired or left the company for any reason, that person’s stock was bought back
by the company at book value.
J.P. Morgan:
By 1901, Andrew Carnegie had amassed an incredible fortune. He was 65 years
old and ready to retire. Banker and financier, John Pierpoint Morgan put
together what was probably his greatest financial deal, when he created a
“holding company” to buy out Carnegie and a few other companies in the steel
industry. He planned to consolidate these companies into one, and to get rid of
any duplicity or waste. On March 2, 1901, the buyout was complete when J.P.
Morgan formed the United States Steel Corporation. It was the first
corporation in the world with a market capitalization of over $1,000,000,000
(that’s one billion dollars, folks!).
Social Darwinism
In 1859, Charles Darwin published his theory of evolution. According to Darwin,
all animal life had evolved by a process of “natural selection,” a process in
which only the fittest survived to reproduce.
As America’s Age of Big Business began to unfold, someone applied Darwin’s
theory to explain the rise and success of the largest industrialists, the companies
that they built, and how they maintained their dominance; thus the term of
“Social Darwinism” was born.
According to the principle of Social Darwinism, society and government should
not interfere with a man’s pursuit of success. Social Darwinists believed that if
government would stay out of the affairs of businesses, those who were most
“fit,” would succeed and become rich, and the weak would fail and fade away;
that Social Darwinism in the business world was as natural as Darwin’s theory
of evolution was in the animal world.
- End of Lecture -