CHAPTER 2

Titans at War: The Industrial Legacy of Rockefeller, Carnegie, and Morgan

The Christmas of 1900 was especially merry for America’s industrial titans, notably three wise men who had already made their New Year’s resolution for January 1901. It was, indeed, a festive occasion that drew together the resources of steel tycoon Andrew Carnegie, oil magnate John D. Rockefeller, and financial tycoon John Pierpont Morgan. On December 12, two of Carnegie’s friends, Edward Simmons and Charles Stuart Smith, gave a dinner, ostensibly social, to which J. P. Morgan was invited. Its real purpose was to allow one of Carnegie’s younger executives, Charles Schwab, to entice Morgan with the idea of forming a supercorporation based on Carnegie’s steel empire. The merger was conceived partly to ensure the greatest economies in iron and steel production, and, hence, the greatest profits. However, its principal advantage would be that it would end divisive competition in the steel industry, notably the price wars instigated by Carnegie, and also remove Carnegie from the very industry with which his name was synonymous.

Negotiations for the deal were completed in January 1901. The plan for organizing the United States Steel Corporation was announced on March 3, 1901, through an advertisement posted by Morgan. U.S. Steel, a holding company, was chartered in New Jersey on April 1, 1901. The organization of U.S. Steel drew together the fortunes of Morgan, Rockefeller, and Carnegie. Morgan raised the funds and supplied the financial expertise, Carnegie had the majority of the original iron and steel business, and Rockefeller, who had acquired iron deposits in the Mesabi fields, brought a crucial supply of ore to U.S. Steel. Thus the January gifts of these three wise men complemented their personalities—gold, steel, and iron will.

The Waldorf Astoria Hotel, at Fifth Avenue and Thirty-fourth Street, New York, completed in 1893, and a memorial of sorts to the opulent life-style of cafe society at the turn of the century. It survived until 1929 when it was demolished to make way for the Empire State Building, just as the Wall Street Crash undercut the social fabric the hotel had come to symbolize. (Photo by Byron, 1903; Library of Congress.)

The deal created a sensation at home and abroad. John Brisbane Walker, editor of Cosmopolitan Magazine, wrote in the April 1901 issue how

the world, on the 3rd day of March, 1901, ceased to be ruled by . . . so-called statesmen. True, there were marionettes still figuring in Congress and as kings. But they were in place simply to carry out the orders of the world’s real rulers–those who control the concentrated portion of the money supply. Between the lines of this advertisement headed “Office of J. P. Morgan & Company” was to be read a proclamation thus: “Commercial metropolis of the world.” The old competitive system, with its ruinous methods, its countless duplications, its wastefulness of human effort, and its relentless business warfare, is hereby abolished.

Industrial Consolidation and the Managerial Revolution

The deal marked an end and a beginning. It was, apparently, the culmination of a quarter-century of financial intrigue and political chicanery by leading industrialists, the so-called robber barons of the Gilded Age, to achieve oligopoly, dominance by plutocrats of a particular industry. At the same time, it indicated the way forward for other large industrial and manufacturing enterprises—consolidation in the interests of the most cost-effective production, promotion, and distribution of their products. Whereas in the 1870s a manufacturing firm was simply a company that made goods, in the 1900s many important industries were dominated by a few large corporations that often controlled their source of raw materials, certainly did their own purchasing, their own production, their own distribution, and possibly their own wholesaling.

The essence of corporation management was the exact ordering of the three stages involved in manufacturing: extraction (of materials), production, and distribution. In certain industries the economic advantages of large-scale production were considerable. This was certainly the case in the manufacture of such machines as combine harvesters and other farm implements, sewing machines, bicycles, and typewriters, and in the refining of steel, sugar, and oil. Those firms that took advantage of improvements in technology expanded rapidly at the expense of those that did not. Some advantages of size had nothing to do with efficiency but more with costs. A large company could more easily obtain credit, more readily get raw materials at a cheaper rate, and deploy its resources on research.

Moreover, what was accomplished with the rise of the corporation was a revolution in business management. A new tier of executives was put in control, not only of individual businesses, but also of the market. As Alfred Dupont Chandler, Jr., remarks in his seminal work, The Visible Hand (1977):

the visible hand of management replaced what Adam Smith referred to as the invisible hand of market forces. The market remained the generator of demand for goods and services, but modern business enterprise took over the functions of coordinating flows of goods through existing processes of production and distribution, and of allocating funds and personnel for future production and distribution. As modern business enterprise acquired functions hitherto carried out by the market, it became the most powerful institution in the American economy and its managers the most influential group of economic decision makers.

The story of industry in America in the Gilded Age is not, however, one of continuous growth. Demand for most products was subject to random changes in booms and slumps. For twenty-five years beginning in 1873 excess capacity was chronic in most industries, especially oil and steel. Industrialists thus did not seek combination simply for the sake of expansion. They wanted to protect themselves against oscillations in the business cycle. As economist John Tipple explains, giant corporations had greater control and a larger share of the market. They could, therefore, dictate prices and terms to everyone. Vertical integration, which reached up or down to other stages of production, led to the creation of a firm that could compete more effectively because it increased efficiency by reducing costs. Horizontal integration—the creation of a firm with several plants each at exactly the same stage of the industrial process–was less likely to be efficient. It was, however, possible to dictate prices to plants at different stages if the horizontal control was a true monopoly.

The first businessman’s remedy for commercial problems was the pool, a gentlemen’s agreement between rivals to divide trade and share profits. More formal association was sought through rings in the 1870s and then through trusts in the 1880s. The prototype was the oil trust of Standard Oil formed in 1882. Trusts under other names were formed in cottonseed oil (1884), linseed oil (1885), lead mining and refining (1887), whiskey distilling (1887), sugar refining (1887), and cord manufacture (1887). The most successful were in refining and distilling.

Such corporations had considerable economic consequences. They divorced the owners, who were the stockholders, from the chores of management. Stockholders were rarely interested in running the business. All they cared about were their dividends. Indeed, one reason for the formation of trusts was to inflate the value of companies so that greater dividends could be claimed. Exaggerated prices were put on stocks and shares when corporations were capitalized, that is, when the money was raised to launch them.

The interaction of various economic forces and the prevalent religious faith in progress had produced a new type of entrepreneur peculiar to the United States and particularly suited to developing its resources. This entrepreneur was ready to put his faith in the collective security of a corporation. These robber barons were the new rich, an opulent and ostentatious plutocracy. In 1892 two New York newspapers, the World and the Tribune, competed with one another to see which could find the most American millionaires. The World discovered 3,045, but the Tribune outdid it with 4,047. John D. Rockefeller in oil, Andrew Carnegie in steel, Gustavus Swift in meat, Charles Pillsbury in grain, Henry Hav-emeyer in sugar, Frederick Weyerhaeuser in lumber, and John Pierpont Morgan in railroads and finance were altogether more influential figures than the principal actors on the political stage. Unlike the politicians who specialized in words without deeds, the robber barons said little but did much. The secret of their success lay in their acumen that amounted to vision, their avarice that was transformed into commercial foresight, and their attack that was equal to military strategy.

It is a myth that the captains of industry and commerce rose from rags to riches. In fact, most of them came from business and industry or one of the professions. Indeed, 65 percent of those from the upper classes had been to college. Yet—and this partly explains the supposed rise from obscurity to opulence—most of them worked their way up in the business in which they made their fortune. They claimed they were self-taught. Perhaps, in everything that really mattered, they were. Many came from New England or the North Atlantic states. The bulk were native-born, Protestant, and Republican. Collis Huntington and John Pierpont Morgan were born Connecticut Yankees. The Jays Cooke and Gould came from Connecticut families. Andrew Carnegie and James J. Hill were Scots.

The public persona of the self-made man was based on a cult of outward modesty and respectability. As a rule, robber barons were puritanical, parsimonious, and pious. Only Jim Fisk, the son of a Vermont tin peddler, spent his youth sowing his wild oats among the fleshpots. Thus, the majority were continuing an established tradition. Historian Matthew Josephson emphasizes that the original colonists were English Protestants devoted to business as if it were a religion. Money was the sole means of attaining power. Benjamin Franklin was held up as a paragon of virtue and thrift. After all, it was he who coined the succinct aphorism, “Time is money.” When Rockefeller claimed, “God gave me my wealth,” he was speaking in the spirit of Cotton Mather.

Businessmen, however, usually preferred the myth that they had made their money by the sweat of their brow. Railroad baron Cornelius Vanderbilt even claimed that he made a million dollars every year of his life but that it was worth “three times that to the people of the United States.” Steel tycoon Andrew Carnegie agreed. In The Empire of Business (1902) he said, “Under our present conditions the millionaire who toils on is the cheapest article which the community secures at the price it pays for him, namely, his shelter, clothing, and food.” It is certainly true that, consumed with ambition, many worked to excess, damaging their health in the process. Most suffered from chronic stomach complaints. Morgan’s face was often a rash of spots and Rockefeller was a victim of premature hair loss. Public opinion preferred to believe that special privilege rather than personal virtue had enabled robber barons to transform abundant natural resources into a profitable preserve. Behind every great fortune was a crime. John Reagan, congressman from Texas, advised his constituents in 1876: “There were no beggars till Vanderbilts and Stewarts and Goulds and Scotts and Huntingtons and Fisks shaped the action of Congress and molded the purposes of government. Then the few became fabulously rich, the many wretchedly poor . . . and the poorer we are the poorer they would make us.” While it was true that individuals might rise or fall by special merits or particular defects, it was equally true that whole classes could not change places.

However, a new philosophy, Social Darwinism, justified the robber barons and their methods. The leading proponent of Social Darwinism was an English journalist, Herbert Spencer. As early as 1850, nine years before Charles Darwin published his revolutionary theory of evolution, Spencer’s Social Statics propounded an extreme form of laissez-faire economics akin to monetarism. The appearance of Darwin’s The Origin of Species in 1859 strengthened Spencer’s case. It was Spencer who in two articles of 1852 first coined the phrase “survival of the fittest,” which Darwin later used to describe the mechanism that propelled evolution. Spencer’s Social Statics mixed laissez-faire economics and biology. Its premise was that the pressure of subsistence on the human race had had a beneficent effect. It had led to social progress by putting a premium on intelligence, self-control, and skill. Spencer opposed state aid to the poor, whom he regarded as unfit and candidates for elimination. By the same token, he disapproved of tariffs to aid agriculture or industry, state banking, and governmental postal services.

It is hardly surprising that the robber barons found Social Darwinism congenial. They were being told what they wanted to hear—how a political system that claimed all men were equal could also encompass economic inequality. Moreover, the new philosophy denied any need for social reform. Between 1864, when his Social Statics was published in New York, and 1903, 368,755 volumes of Spencer’s works were sold in the United States—probably a record for books on sociology and philosophy. It was ironic that a hypochondriac like Spencer should tell society who was and who was not fit. His lasting success was proof of the old adage that a puny, sickly reputation will outlive a healthier one. In the fall of 1882, at the peak of his popularity, Spencer toured the United States. Effusive tributes paid him at banquets everywhere suggested that the origin of species had been turned into the origin of speeches.

Spencer’s most ardent supporter was William Graham Sumner, who held the chair of political and social science at Yale for over thirty years from 1872. Sumner insisted on the beneficence of social struggle: “If we do not like the survival of the fittest we have only one possible alternative, and that is the survival of the unfittest. The former is the law of civilization, the latter is the law of anti-civilization.” Such ideas were supported at a popular level by the children’s books of Horatio Alger, Unitarian chaplain to the Newsboys’ Lodging House in Manhattan. Alger extolled the virtues of self-improvement and propounded the myth of rags to riches in a variety of tales such as Ragged Dick (1867), Luck and Pluck (1869), and Tattered Tom (1871). Each was the first in a series that sold over 20 million copies.

Many firms that were first organized shortly after the American Civil War, whether they were industrial, manufacturing, or commercial, had achieved nationwide success by the turn of the century. They included John D. Rockefeller’s Standard Oil Company, James Buchanan Duke’s American Tobacco Company, Andrew Carnegie’s steel company, and the House of Morgan. Others remained desultory enterprises until the very end of the century. They included Coca-Cola, Levi Strauss, Kellogg, Eastman Kodak, Sears Roebuck, and R. J. Reynolds. Others organized in the Gilded Age expired or were absorbed by their most successful competitors, notably certain oil and railroad companies.

As important in the new system as the robber barons themselves were their salaried managers. Whether the robber barons were exploitive or not, their hierarchy of managers had very different goals. Their economic survival depended on the permanence, power, and growth of the hierarchy itself. Thus, for instance, they preferred policies that would ensure the continuing stability of the company rather than excessive, short-term profits. They were selected and then they proved themselves on the basis of their training, experience, and performance rather than on account of some financial investment in the firm or, more crudely, nepotism. Their priority was the survival of the institution whatever the fate of individuals within it. In large-scale enterprises with a maximum of technological innovation, such as refining oil or manufacturing steel, they appropriated from the natural market control of production, distribution, and sale of goods and services in the interests of their particular class. Until recently their contribution to the industrial revolution was undervalued. They went unrecognized years later just as they were unnoticed, or even invisible, in their own time.

Monopoly capitalism, represented by big business, entailed a great conglomeration of wealth and power, a veritable plutocracy. By 1904 the top 4 percent of American businesses produced 57 percent of America’s total industrial production. The depression of 1893-97 undermined many firms that were only marginally competitive, paving the way for several hundred mergers. In the period 1898–1902 there were 319 major consolidations. Between 1895 and 1904 an average of 300 firms disappeared every year. As a result of this wave of mergers and consolidations, a single firm came to account for 60 percent of production in 50 different industries. Thus DuPont and General Electric came to control 85 percent of their respective markets, chemicals and electric power.

One of the most enduring ideas of American and European culture was that individuals had control of their destiny. It was rudely contradicted by the growth of trusts in which corporate capital counted for everything and individual will for nothing. The conflict between the traditional teaching of education and the new experience of industrial life was deeply perplexing to people whose education with its outmoded assumptions had ill prepared them for modern society. This fact partly explains the extraordinarily deep antagonism people felt toward the trusts. Journalist Mark Sullivan describes monopoly as a union, or unification, of the sellers against the buyer, whose real motive was to give the seller the whip hand. Before the advent of monopolies, buyers could choose between sellers and reasonably expect that they could play one seller off against the other and get the price lowered.

Rockefeller, Standard Oil, and the First Trust

One industry, oil, illustrates some ways in which monopoly was achieved. One man, John Davison Rockefeller, watched the beginning of the industry, supervised its development, and came to dominate it through three generations. British investigative journalist Anthony Sampson describes him thus in The Seven Sisters (1975):

Already he understood the critical facts of the new industry, and he had the capacity of cold analysis which was to mark all the great oil tycoons. He had small eyes, high cheeks, and a long mask-like face, which expressed his dread of emotionalism. His parents had forged an iron discipline; his mother, a Devout Baptist, would tie him to a post and beat him when he was disobedient, while his father, a bogus doctor who sold patent medicines, would trade with his boys to cheat them, to “make ‘em sharp.”

John Pierpont Morgan (1837-1913) (top), the omnipotent financier who drew together the various threads of transportation and communication into his own banking empire and succeeded in unraveling the knots in each.

John D. Rockefeller (1839-1937) (left) achieved a nationwide monopoly in oil refining by rigid economies, cutthroat competition, and manipulation of transportation to his own ends. He unified his various companies in the first trust and became the most widely hated entrepreneur of the Gilded Age.

The route of Andrew Carnegie (1835-1919) (right) to monopoly in steel making was vertical integration, the control of all processes from extraction of ore to the manufacture of finished products. His public persona of generous benefactor was sustained by his numerous charities but did not conceal a ruthless determination to thwart his rivals by means fair or foul. (Photos, Library of Congress.)

The early years of the oil industry disclosed what were to become its chronic problems: alternating cycles of shortage and excess; frenzied oscillation of prices from high to rock bottom; conflicts between producers and distributors; the interdependence of oil and transport. However, the most significant questions were how and who should control it. The year after the first strike in 1859, oil was $20 a barrel. The following year it was only 10 cents a barrel and sometimes a barrel of oil actually cost less than a barrel of water. Thus it was in the oil regions that the expression “the bottom fell out of the market” was coined.

Rockefeller first visited the Venango County oil fields in 1860, acting as business agent for a group of Cleveland investors. He advised them to stay clear of producing and, instead, to put their money in refining, the process he considered the essence of the whole oil production. Surveying the confusion of the new industry, he was appalled by its instability and the careless and whimsical attitude of the producers. Rockefeller’s rigorous bookkeeping training went well with his prudent temperament and frugal habits, and he determined to impose order on the chaos. He could be bold and daring when his plans were thoroughly prepared. He had studied the industry carefully, estimated that it would have the same universal scale as copper or steel, and determined that he would never be at the mercy of circumstances. He sometimes recited a doggerel verse that some interpret as his own injunction for industrial management:

A wise old owl sat on an oak;

The more he saw the less he spoke;

The less he spoke the more he heard;

Why can’t we be like that old bird?

He soon realized that the best way to get control of the industry was not by producing oil but by refining and distributing it, and also by undercutting his rivals through cost-cutting measures such as securing cheap transport.

In 1869 and 1870 Rockefeller and his associates, who included his brother, William, organized five small refineries into the Standard Oil Company with Rockefeller taking two-thirds of the outstanding stock. It was capitalized at $1 million, divided into 10,000 shares at $100 each. At that time Standard Oil was only one of thirty oil refineries in Cleveland and produced about 600 barrels a day, about 5 percent of the national total.

Rockefeller’s subsequent control of the oil industry was based on his command of crucial bottlenecks, firstly, of finite resources of the railroads (in terms of tracks and equipment), secondly, of pipelines. It was more cost-effective for railroads to move freight for long distances because a freight train in motion required only a few men to run it. However, loading and unloading trains at stations and servicing them required many men. Moreover, these processes were the same, and just as costly, whatever the length of the intermediate journey. Thus a “long haul” journey was more cost-effective than a “short haul.” In addition, railroads constructed special lines to certain industries, especially coal, and had become somewhat reliant on their bigger clients for regular custom. Accordingly, Rockefeller prevailed upon railroads in the 1870s to offer him rebates—lower fares—for oil shipped at bulk over long distances. While this was justifiable in purely economic terms for Standard Oil and the railroads, it was unfair to smaller, independent oil producers who could not offer the railroads so much business and were thus put at a disadvantage in having to shoulder higher railroad rates within their overall cost of production.

To make matters worse, Rockefeller’s leverage with the railroads was so great that he could insist on “drawbacks,” a system of fines whereby, if railroads moved oil for other companies they charged them more and paid a fraction of this amount to Standard Oil. Oil rebates were kept secret, but not because they were illegal. At first, no laws existed on the subject. It was simply to avoid recriminations from unfavored clients. Moreover, shippers disadvantaged by rebates regarded this sharp practice as an immutable part of the system. Rockefeller and his cartel were neither better nor worse than their competitors, but they were much keener. As J. M. Bonham explained in Railway Secrecy and Trusts (1890), “They found a system of secret rebates and discriminations in flourishing existence. Should they become participants . . . or become the victims? . . . They naturally chose the first alternative. They employed the ready-made system and made their competitors the victims. It was because they adapted themselves skilfully to the system that they became masters.”

Instead of recurrent waste, alternating cycles of overproduction and underproduction, violent fluctuations in price, and bouts of opulence and distress within the oil business, Rockefeller wanted a regular system. He abhorred the vicious cycle, whereby excessive production led to failure of weaker businesses, followed by the survival of the fittest who took advantage of the opportunity to recoup by charging customers higher prices and by buying out their ruined competitors. He knew the wasteful cycle of high profits encouraging new businesses and leading to more overproduction, lower prices, and bankruptcies would commence all over again.

His preferred solution to the problems of the oil industry was a monopoly controlled by him. What Rockefeller wanted to do was to bring all units within one industry into a group under one leader; to get rid of less economical plants; to pool resources to achieve economy and improvement; to limit production and keep surplus oil off the market until demand exceeded supply; and to stabilize prices. What he sought was vertical integration of all processes from start to finish. What he first achieved was horizontal integration, dominance of one crucial part, oil refining. Thus he wanted to substitute his own, artificial, control for the age-old working of free competition and the free working of supply and demand. His methods led to a public outcry that consumed more time in courts and legislatures over a period of fifty years than any previous or subsequent controversy in American business. He was as much hated for his secrecy as his ruthlessness. Thus when he bought out his competitors in Cleveland, he kept it secret, so that companies associated with his pretended to be separate and competing. As Rockefeller expanded his business, his rivals never knew where they would be hit next.

But Rockefeller’s rise was not simply due to the overwhelming influence of Standard Oil or even to sharp business practice. Many of his tactics were criminal. It was not a matter of playing poker with the cards in his own hand but of first looking at, and then stealing, his opponents’. His first attempt at absolute monopoly in oil refining was the South Improvement Company, a venture of 1871 that failed because of vociferous and effective opposition from owners of independent companies, notably those in Oil City, Pennsylvania, who resented the way Rockefeller put pressure on the railroads to charge his competitors exorbitant rates for shipping oil while giving Standard Oil concessionary rates. Embarrassed, the railroads withdrew from a secret contract on March 25, 1872, and on April 6, 1872, the Pennsylvania state legislature summarily abrogated the South Improvement Company’s charter. It almost looked as if the independent oil producers could stick together. They agreed to stop new drilling, to sell oil at a fixed price, and to come to terms with the refiners. However, when the glut of oil continued, the market soon fell apart. Rockefeller revealed his smug satisfaction in a show of always having acted for the good of the industry as a whole. “We proved,” he opined in his memoirs of 1909, “that the producers and refiners’ associations were ropes of sand.”

In the meantime, Rockefeller had persuaded, cajoled, or intimidated twenty-one out of the twenty-six independent refineries in Cleveland to sell out to him. At this time the oil industry was depressed and Rockefeller paid his competitors less than their investment and earnings of several years were worth. He tried to persuade them to accept payment in Standard Oil stock rather than cash, and subsequently claimed that those who took, and held onto, Standard Oil stock eventually gained far more than they would have done by retaining their plants. Rockefeller’s brother, Frank, who was on bad terms with him, told a congressional investigating committee how Rockefeller put pressure on the independents. They were told that if they did not sell out to Standard Oil their property “would be valueless” because “we have got advantages with the railroads.” Rockefeller’s own version was quite different. In later reminiscences, he emphasized his special generosity.

Whatever his justification for his actions a whole series of press revelations about his affairs ruined Rockefeller’s reputation. Especially damaging was the Scofield case of 1879. During the court hearings, Mrs. Fred A. Backus, a widow with three children, who had sold her family business to Rockefeller, filed an affidavit for the defense. She claimed Rockefeller had swindled her. He had paid $79,000 for a business worth $200,000.

The contest between the South Improvement Company and Standard Oil was a miniature version of epic battles over control of oil that would take place over the next century. The next such major contest, Congress’s attempt to regain the initiative in the 1890s, would pose the exact same question. Who should control oil—the oil companies, the consumers, or the government?

By the mid-1880s Rockefeller’s advantages with the railroads were far less important with the advent of pipelines for carrying oil. He owned a network of pipelines, “iron arteries,” pumping oil across the eastern seaboard. Pipelines were first developed as part of their strategy against monopoly by lesser producers, who now discovered they had provided Standard Oil with its most effective instrument.

Once Rockefeller moved into California, he became locked in the sort of battle with drillers and pioneers that he had fought earlier in Pennsylvania. Once again, history repeated itself. In California Rockefeller played all his old tricks—price wars, playing competing drillers off against one another, and so on—until the discovery of giant new oil fields under Los Angeles. This discovery led to a predictable phase of overproduction and the expected collapse in prices, and the chaos was worsened by the importing of cheap oil from Peru. Rockefeller seized the initiative and in 1895 acquired Demetrius Schofield’s company for less than $1 million.

Yet the South Improvement Company was dead and Rockefeller had to find another route to monopoly. He immediately organized “the Alliance,” the Central Association of Refiners, and installed himself as president; and by 1875 the component refineries had ceased to be competitors with one another. By the 1880s Standard Oil controlled over 90 percent of oil refining in the United States. In 1890 Standard Oil earned $8 million; in 1904, $57 million. The defenders of Standard Oil claimed that its creation of a monopoly rescued the industry from disaster. Its critics claimed that by his secret arrangements with railroads as well as sundry other devices, Rockefeller introduced an artificial element into free competition that prevented it from working out its true destiny and brought ruin to those people not associated with Rockefeller.

Rockefeller continuously sought a form to confer unity on his disparate empire, and Standard Oil lawyer Samuel C. T. Dodd found for Rockefeller the mechanism he sought by adapting a familiar legal device, the trust. This was the means by which courts elicited a solemn obligation from the custodians of property belonging to others. Thus an estate belonging to children, wards, or dependents was handed over to a trustee, who was entrusted to manage it for them as a legal substitute for a parent. Under Dodd’s guidance, the stockholders of Standard Oil and the other companies turned over their stock and gave permanent and irrevocable power of attorney to nine trustees, including John D. and William Rockefeller. The nine trustees ran all the various companies like one outsize company and distributed profits among shareholders. This was the original trust that took its definitive form on January 2, 1882.

Thereafter, besides its traditional meanings, such as “confidence,” “belief,” “truth,” “hope,” and “expectation,” trust meant a “combination formed for the purpose of controlling or monopolizing a trade, industry or business by doing acts in restraint of trade.” By 1887 the word was being used to describe all kinds of combinations. In 1888 a hearing into Standard Oil affairs that was conducted by the New York State Senate heard how thirty-nine corporations “had turned over their affairs to an organization having no legal existence, independent of all authority, able to do anything it wanted anywhere; and to this point working in absolute darkness. Under their agreement, which was unrecognized by the State, a few men had united to do things which no incorporated company could do. It was a situation as puzzling as it was new.”

From 1884 the central office of Standard Oil was at 26 Broadway, New York City. There Rockefeller organized the trust through a series of committees, and the executive committee, which he chaired himself, met every day. It conferred unity on a system always in danger of dissolving into its component parts. The lesser committees dealt with specific areas such as transportation and export, manufacturing and lubricating, and led to a synthesis of divergent and sometimes conflicting ideas. The individual companies were run as autonomous units except in one crucial particular. They did not compete in selling. Within three years the trustees had reduced the Standard’s number of refineries from fifty-three to twenty-two. They proceeded to consolidate the buying of crude oil and thereby control the domestic market.

Thus Standard Oil was impregnable against both state and federal governments whose regulatory powers were minimal. By bestowing favors and giving bribes, it created friends and allies in every important legislature, including Congress, and it employed the most skillful lawyers to defend its positions. Its income was greater than that of most states and its profits were large enough to finance further expansion. Thus, as the oil industry exceeded the original oil regions and moved on from Pennsylvania and Ohio to Kansas and California, Rockefeller acquired oil fields as he had previously acquired refineries, thereby making Standard Oil almost self-sufficient and close to truly vertical integration. It began exporting oil to Europe, the Middle East, and the Far East. According to Anthony Sampson, by 1885 about 70 percent of Standard Oil’s business was abroad, and Rockefeller fielded agents across the world to report on rival initiatives.

Trusts were created in other distilling or refining industries, beginning with whiskey. Eighty distilleries were taken over and only twelve continued in business. One distiller, C. C. Clarke, told the Industrial Commission on May 13, 1899, “We thought we could make better profits and create a more stable business by organizing into a trust. . . . A trust agreement was drawn up, which was a copy of the Standard Oil trust agreement, but changed to suit our business.” The next manufacturing industry to follow suit was sugar. The Sugar Refineries Company, later called the American Sugar Company, took over eighteen refineries, closed eleven, and raised the difference in price between crude and refined sugar from a competitive 0.787 cent in 1887 to a monopolistic 1.258 cents in 1888. Rockefeller could rightly claim, how “this movement” to create trusts

was the origin of the whole system of modern economic administration. It has revolutionized the way of doing business all over the world. The time was ripe for it. It had to come, although all we saw at the moment was to save ourselves from wasteful conditions. . . . The day of combination is here to stay. Individualism has gone never to return.

The pioneering trusts of the 1880s were founded to concentrate and rationalize production. The number of consolidations greatly increased in the 1890s but the underlying motives of the entrepreneurs changed. Originally, consolidations were formed as a means of maintaining price and production schedules. Later, many consolidations were formed to centralize, coordinate, and integrate the manufacturing and marketing of their constituent companies.

One of Rockefeller’s sideline (and most unwelcome) achievements was to fuel the antitrust movement and, indeed, a whole apparatus of congressional investigation that dogged the success of Standard Oil at every step. Social critic Henry Demarest Lloyd first exposed Standard practice in “The Story of a Great Monopoly” for Atlantic Monthly in March 1881. Lloyd’s most damaging indictment was that “the Standard has done everything with the Pennsylvania legislature except refine it.” Rockefeller had created a whole set of values. Lloyd recognized his insidious and pervasive influence in the general movement of business and industry toward monopoly control. Big business brought supreme weight to bear down on the economy and invalidated its traditional tenets. Although the economy supposedly worked in such a way as to give freely competing individuals an even chance of success, it was actually run for the benefit of big business at the expense of small. When the Cullom committee of the Senate reported on the oil trust as a ruthless monopoly in 1886, it did not mince its words:

It is well understood in commercial circles that the Standard Oil Company brooks no competition; that its settled policy and firm determination is to crush out all who may be rash enough to enter the field against it; that it hesitates at nothing in the accomplishment of this purpose, in which it has been remarkably successful, and that it fitly represents the acme and perfection of corporate greed in its fullest development.

Although trusts regulated business on behalf of the insiders, they were resented and distrusted by those firms they excluded and by the public at large. The average American thought of himself as an individual entitled to traditional political and economic freedom. Consumers, small businessmen, and workers were very much concerned about freedom of opportunity and regarded consolidated business as an impediment. The bone of contention was not mass production: it was political and social manipulation. In particular, firms with a monopoly could dictate prices throughout an entire industry. The courts were besieged with literally hundreds of suits brought by small businessmen and small corporations against trusts on the grounds that they had been crippled or driven out of business. In response to public opinion, the various states conducted investigations into the trusts, notably New York (1883, 1888, and 1891) and Ohio (1889). More significantly the states, beginning with Kansas on March 2, 1889, passed laws against trusts. Within two years fifteen others, led by North Carolina, Tennessee, and Michigan, had followed suit. The tide had turned against Standard Oil.

In 1889 David K. Watson, attorney general of Ohio running for reelection, discovered that Standard Oil had violated the state corporation laws, not because it had formed a trust but rather because it had placed the direction of the company in the hands of nonresident trustees. In May 1890 he advised the Supreme Court of Ohio that the company had acted ultra vires and should be dissolved. On March 2, 1892, the Supreme Court of Ohio ruled that the Standard Oil Company must withdraw from the trust. The trust requested, and received, a period of grace to wind up its affairs. Standard Oil was at the height of its capacity. It rewarded its stockholders with dividends of 12 percent up to 1894. In 1895 it paid them 17 percent. Thereafter, it paid between 30 and 43 percent for the next ten years. Yet its actual profits were greater still. They amounted to between 15 and 20 percent on investment to 1894. In the following ten years they were more than 50 percent thrice, more than 60 percent twice, and more than 80 percent twice.

Henry Demarest Lloyd’s full-length attack, Wealth Against Commonwealth, which was first published in 1894, showed its author’s mastery of facts, opinions, and rhetoric. Although Standard and Rockefeller were not mentioned by name but given the allusive titles “combination” and “head of the combination,” fear of libel deterred four publishers from producing the book before Harper and Brothers did so. A seminal work with all its salient facts carefully documented, Wealth Against Commonwealth showed that the essence of monopoly was control of transportation. Lloyd’s selective synopsis of Rockefeller’s career exposed chicanery at every opportunity and was expressed in a plangent style. Lloyd distinguished a paradox. Americans opposed anarchy in politics yet they accepted it in business. The book’s impact on intellectuals was profound. Edward Everett Hale compared it to Uncle Tom’s Cabin. Novelist William Dean Howells said the “monstrous iniquity” of Standard Oil was “so astounding, so infuriating that I have to stop from chapter to chapter to take breath.” Social gospel minister Washington Gladden was only astonished “that it does not cause an insurrection.”

The new attorney general of Ohio, Frank Monnett, advised the state courts there in November 1897 that the Standard had not obeyed the ruling on dissolution of 1892. Hearings were held in October 1898 and March 1899 in various places at which Monnett intended to show that the trust still existed. But crucial evidence was missing. Books, journals, and documents were all burned in November 1898. The Supreme Court of Ohio could not decide on the charge of contempt and it was, therefore, abandoned. The antitrust suits against companies in Ohio were eventually dismissed.

Rockefeller and his associates had learned their lesson, however. The trust would no longer do, so they found an alternative. In 1889 New Jersey had passed a law authorizing holding companies. In 1896 it went further in an amendment by which “Any corporation may purchase . . . the shares or any bonds . . . of any corporation or corporations of this or any other state.” Moreover, only one member of the board of directors had to reside in New Jersey. There was no limit on the capital stock. Annual reports were not required. This law led to the establishment of Standard Oil of New Jersey as a holding corporation. Capitalization was increased from $10 million to $110 million. Trust certificates were exchanged for shares. “What looks like a stone wall to a layman,” observed humorist Finley Peter Dunne’s fictional Irish-American bar owner, Mr. Dooley, “is a triumphal arch to a corporation lawyer.”

Rockefeller’s career raised questions that have been long debated by historians and economists. Was it his single-minded ruthlessness that led inevitably to monopoly in oil? Or was it that oil could never be governed by normal laws of supply and demand, could not long survive as an industry run on lines of free enterprise, and would inevitably be controlled, whether by an individual or a cartel? Rockefeller left an indelible mark on the oil industry not only because he imposed order where there had been anarchy and chaos, but also because he expertly separated the industry from the rule of government. His most quoted remark, of 1905, that “the American Beauty rose can be produced in all its splendor only by sacrificing the early buds that grow up around it,” was turned against him by his critics as clear evidence of his ruthlessness and selfishness in weeding out competition. Although much of the odium heaped on Rockefeller arose because of his wanton ruthlessness, much of it came from a deep need to find a scapegoat to blame for the rise of industrial monopolies. The early contests between Rockefeller and his opponents, the drillers, were retold in epic terms. The opponents were presented as staunch champions of free enterprise, of the rights of the individual against impersonal organizations, and, hence, as defending democracy itself.

Holding Companies

Rockefeller was not the only robber baron to take advantage of the New Jersey law. The holding company was the new device by which combinations sought to evade antitrust laws and was in vogue from the mid-1890s until the early 1900s as the common mode of merger.

Holding companies took two forms. In the first, usually regarded as the safer, the holding company bought outright all the physical property of the subordinate corporation. This was a consolidation or merger. While this form was reasonably secure against prosecution, it was expensive and was not always applicable. Under various old laws the charters of many corporations forbade sale of their entire property. Thus more daring promoters chose a second form, buying a majority of the stock, or enough to control voting, in two or more corporations, and then elected common directors who ran the several corporations as one business. Thus a corporation worth $i million could be acquired for $500,001. By a system of tiers, a process of building one holding company atop another in a pyramid, such acquisitions became progressively less expensive and more profitable. The most significant holding company movement came in the period 1898-1901. Hans Thorelli, in Antitrust Policy, lists 24 holding company consolidations in 1898 and 105 for 1899. Thereafter, the number of mergers declined: 34 in 1900; 23 in 1901; and 26 in 1902. There were only 7 in 1903. The merger movement had run its course. The Boston Globe defined mergers satirically.

Mergers are monsters of so frightful mien,

That to be hated need but to be seen;

But when they’re seen, despairing of a cure,

The public has to whistle—and to endure.

In June 1904 Punch wrote in similar vein: “I see in the paper that a widower with nine children out in Nebraska has married a widow with seven children.” ‘That was no marriage. That was a merger.”

The state of New Jersey played a most conspicuous role in this development. Between 1898 and 1901 183 holding companies were organized in New Jersey at a total capitalization of $4 billion, or one-twentieth of the total wealth of the United States, nearly twice the amount of money in circulation in the country, and over four times the capitalization of all combinations in manufacturing organized between 1860 and 1893. Thus, between them, New Jersey and Delaware incorporated 95 percent of trusts. West Virginia and Maine also acted as hosts and, indeed, offered holding companies far more generous terms, but they got much less of the charter-granting trade because they were much farther from Wall Street than New Jersey.

Rather than charge a high franchise fee, New Jersey followed the economic principle of mass production—small profits on individual items but large sales overall. The New Jersey fee for chartering corporations was only 20 cents on every $1,000 of capitalization. This was one-fifth the cost charged in Illinois and one-sixth the cost in New York and Pennsylvania. Moreover, the annual franchise tax in New Jersey was also low, compared with the tax elsewhere. Various New Jersey corporations acted as hosts, providing nominal head offices of outside companies, notably the Corporation Trust Company of New Jersey, home to over 700 corporations with a total capital of over $1 billion, and the New Jersey Corporation Guarantee and Trust Company, representing 500 companies with an aggregate capital of over $500 million.

Why did New Jersey actively encourage the chartering of trusts, knowing this policy was anathema to most other states? Progressive journalist Lincoln Steffens believed that the explanation was clear. New Jersey was the terminus for many great railroad systems and responsive to corporation influence. Another factor was that many professional citizens spent their working days in New York and had comparatively little interest in the state in which they slept. Their consequent negligent attitude to civic matters made it easy for lawyers and politicians with financial interests to assume control of the political machinery of the state and use it to the advantage of those interests. Furthermore, the revenue accrued by the state from outside corporations lightened the burden of taxes in New Jersey. Whatever the reason, Woodrow Wilson, president of Princeton University, referred to New Jersey as “mother of trusts,” a remark that inspired cartoonists to draw trusts as squalid children harmed elsewhere, calling out “Help!” to New Jersey, represented as a big-bosomed matron replying, “Come to Mother.”

Most trusts were formed by promoters outside the industry, whom Charles R. Flint, the so-called “father of trusts,” called “disinterested intermediaries.” These men were not captains of an industry they had created, but rather financiers anxious to make a financial killing by exploiting industrial ferment, bringing disparate companies together to make a holding company, and conducting a stock market campaign to raise capital. Steel tycoon Andrew Carnegie, who had no time for pools, said that the business of some promoters was simply to “throw cats and dogs together and call them elephants.” Yet the actual process of consolidation was profitable for all involved. The financiers took stock as payment for making the arrangements for a merger, the small businessman got new lamps for old, and the holding company moved closer to monopoly.

The promoters were a motley crew. They included Charles R. Flint, who was a banker specializing in the sale of warships to developing countries and in organizing the consolidation in wool and rubber, chewing gum and coal; William Nelson Cromwell, a corporation and international lawyer who acted as counsel for the French owners of the old Panama Canal, wore his hair and mustache like Buffalo Bill, and had them tended by a barber in the Waldorf Astoria Hotel; John B. Dill, another lawyer, who told a Harvard Law School audience, “I am the lawyer for a million dollars of invested capital”; John W. (“Bet-cha-a-million”) Gates who started his career selling wire fencing in the West and then bought up the Louisville and Nashville Railroad in the open market and made J. P. Morgan pay him millions to recover it. As we shall see, J. P. Morgan was by far the most influential promoter.

Carnegie and Morgan, Vulcan and Midas

The year 1901 was the high tide for holding companies. The biggest was the United States Steel Corporation, organized by J. P. Morgan in March 1901 by outright acquisition of the stocks of ten corporations, including Carnegie’s steel company. Many of these steel companies were already among the largest corporations in the world and U.S. Steel was the largest supercorporation of all.

At this time Carnegie’s name was synonymous with steel production in the United States. Andrew Carnegie was born to bitterly poor parents in Scotland in 1835. His family emigrated from Dunfermline, Fife, in 1848 when his father, a master weaver, lost his job. He rose from telegraph operator to become, at eighteen, personal assistant to Thomas A. Scott at the time Scott was general superintendent of the Pennsylvania Railroad (the Pennsy). He took full advantage of Scott’s advice and inside knowledge when it came to investing his money. In a letter to his cousin George (“Dod”) Lauder of June 21, 1863, he expressed his boundless ambition to acquire and enjoy great wealth in the style of a British gentleman. At that time his income was $49,300, although his actual salary was only $2,400. Even minor railroad officials could be of considerable use to all sorts of companies dealing with railroads, whether they were supplying them with engines, cars, or other parts, or using their services and soliciting favorable freight rates. If Carnegie took advantage of his position, no one thought any the worse of him. Among his profitable investments were an eighth interest in the production of cars for night traveling, subsequently acquired by the Pennsy. In 1864 at the relatively advanced age of twenty-nine, Carnegie became a stockholder in the Iron Forge Company and then its owner. Thereafter, his career was indissoluble from the development of the iron and steel industry that had reached a crucial stage in the United States.

The grandiose interior of the home of Arthur Curtis James at 39 East Sixty-ninth Street, New York, with its melange of medieval and pseudo-medieval furnishings, illustrates an axiom of Gilded Age taste in interior design—that Gothic was the appropriate style for any reception area or library in a house where the height of the rooms matched the pretensions of the owners. (Library of Congress.)

Carnegie was personally frugal but daring when it came to business ventures. Once he realized the British preference for steel rails produced by the Bessemer method over standard iron rails, Carnegie began plowing his money into steel. Whereas Rockefeller was the leading exponent of combination, Carnegie was the principal exponent of ruthless internecine competition. Although he bought plants at Homestead and Du-quesne, he rarely tried to buy out his competitors, preferring to concentrate on production of good steel at a lower cost than others, selling at such prices as would give him the best advantages. His route to monopoly control was vertical integration, control of all processes in production from extraction of iron ore to the making of finished products. By combining all processes within one company, manufacturers with vertical consolidation sought to lower costs generally and to reduce the number of separate profits.

Fritz Redlich describes Carnegie as “the new type of entrepreneur, the captain of business in contrast to the older captain of industry.” He knew the whole market past, present, and future. He was always alert to the possibilities of change. His lack of formal schooling beyond childhood spurred him on to self-improvement. By cultivating his artistic taste he sharpened his wits until he could live by them. In 1890 he argued in “How to Make a Fortune” that he preferred the “scientifically educated youth” to the “trained mechanic of the past” because he “has no prejudices, and goes in for the latest invention or newest method, no matter if another has discovered it.” Carnegie took the advice of those men whose technical expertise was greater than his, such as Bill Jones and Henry Clay Frick, who helped him to develop the various Carnegie enterprises into a tight vertical integration. Unlike other captains of industry, Carnegie left the mechanics of production and routine management to others. His special genius was the knack of deciding which jobs had priority, especially in a crisis, and choosing the right person to carry them out.

The Carnegie Company provides a classic example of the new rules of top and middle management in modern business enterprises. It was the task of middle management to scrutinize the performance of the various operating units and to coordinate the flow of materials; the task of top management was to evaluate and coordinate the activities of middle management and to allocate resources—materials, capital, manpower—within the entire enterprise. Nothing was harder to achieve than the correct balance between integrated mass production and mass distribution, both of which were most complex in themselves. The extent of Carnegie’s success is suggested by his profits. Carnegie’s steel profits soared from $i million in 1883 to $40 million in 1900, the year production touched 4 million tons, about half of all American production and a quarter of world production.

Many people adamantly opposed to horizontal monopolies were ready to accept vertical trusts and the economic thinking behind them. Rockefeller’s methods toward his competitors were actually more humane than Carnegie’s. He bought out his competitors—albeit at knockdown prices—whereas Carnegie simply squeezed them out by cutthroat competition. Yet ironically, because of certain adventitious but widely publicized incidents, it was Rockefeller who became the symbol of inhumanity in business.

At the turn of the century the entire American iron and steel business was concentrated in the Carnegie Steel Company and seven other large but inefficient companies, all of whom were continuously harried by Carnegie’s hard-driven competition. The Carnegie Company led prices and continuously used its lead to reduce them and embarrass its rivals. Carnegie increased his annual production from 322,000 tons in 1890 to about 4 million tons in 1900. During the depression of 1893 to 1897 he expanded his production by 75 percent.

The stage was set for the final consolidation of the steel industry brought about by a war of attrition between the company of Carnegie and the House of Morgan. Carnegie’s main competitor in the 1890s was the Illinois Steel Company. It owned thousands of acres of coal lands in Pennsylvania and West Virginia, and had forests in Michigan and iron mines in Wisconsin besides its main plants in Chicago, Joliet, and Milwaukee. Its general counsel was Elbert H. Gary, a Chicago lawyer who cooperated with J. P. Morgan in the absorption of Illinois Steel into the new Federal Steel Company, organized in 1898 at a capitalization of $200 million. The physical reaction was instantaneous. Federal Steel was a giant magnet to other steel firms.

Carnegie was tired after a professional life of continuous strain. His dominance in steel had been the prize of victory in successive battles with his competitors, his workmen, and even his close associates such as Henry Clay Frick. Uneasy lies the head that wears the crown in continuous crises of outside competition and inside intrigue. Carnegie was physically exhausted and wanted to devote his remaining years exclusively to the distribution of his wealth. The only possible purchaser was John Pierpont Morgan, Midas to his Vulcan.

The Creation of US. Steel

While neither Morgan nor Carnegie could command the other, it was Carnegie who made Morgan, the greater man, do as he wanted.

Carnegie enticed Morgan by taking audacious advantage of his reputation for aggressiveness. His press agent announced that he was about to construct a new pipe-and-tube manufacturing plant at a cost of $12 million, the most extensive of its kind. This disturbed Morgan, who was concerned for the future of the existing National Tube Works in which he had extensive investments. Carnegie started rumors that he was about to build a new railroad for his own products and for others’ in competition with the Pennsy, now a Morgan road. Morgan was understandably proud of the stability he had accomplished in railroads after a decade of strenuous effort, and dismayed by the prospect of the sort of competitive disruption Carnegie could cause. A steel war was the last thing Morgan wanted. Moreover, Carnegie’s various announcements and plans unsettled the world of finance, upsetting security values and the wide Morgan interests.

It took Carnegie’s new threat, laced with his subtle, alluring salesmanship, to get Morgan to act. Carnegie had his man, Charles Schwab, supposedly gifted with “a veritable tongue of gold,” according to U.S. Steel historian Arundel Cotter, persuade Morgan at a private dinner on December 12, 1900, to form a new giant steel company that could provide the United States with a pace of production that neither Britain nor Germany could maintain. Morgan quickly agreed and they announced the forthcoming creation of the United States Steel Corporation in January 1901. Morgan awarded stock to all the smaller constituent companies. However, to the Carnegie company he gave bonds, the entire bond issue of U.S. Steel, namely $303.45 million, plus $98.27 million in preferred stock, plus $90.27 million in common stock. The total capitalization was $1.4 billion, whereas the true physical value of the plants was estimated as $682 million in a government report. Carnegie said later he insisted on payment in bonds because he regarded the stock not merely as water but rather as air. Morgan said he wanted Carnegie completely out of management and out of the steel industry—completely out with no possibility of interference or leverage in the future. Thus Carnegie, on the eve of his forcible retirement, had a personal fortune of $250 million. Morgan took for himself and his associates shares of preferred and common stock that would have been worth $77.98 million if the shares had been sold.

In order to make a market, Morgan used market manipulator James R. Keene, who played on the favorable atmosphere of the times to great effect. Because the United States had recently concluded its first victorious overseas war, both the concept of empire and the psychology that went with it were much in the air. Morgan’s allies manipulated a whole series of so-called “wash” sales on the New York Stock Exchange in order to increase public desire and expectation. The number of sales reached unprecedented totals of over 3 million shares on one day and of over 10 million shares in one week. Despite the legend of the evils of monopolies, people were so dazzled by the supercorporation that they speculated eagerly and greedily. Alexander Dana Noyes recalled how

Men and women and even children all over the country drank in thirstily every scrap of news that was printed in the press about these so-called “captains of industry,” their successful “deals,” the off-hand way in which they converted slips of worthless paper into guarantees of more than princely wealth, and all the details concerning their daily lives, their personal peculiarities, their virtues, and their vices.

It seemed all stocks were going up. No tip could fail. A slogan ran across New York: “Buy A.O.T.—Any Old Thing.” It was expected that U.S. Steel would carry dividends of 4 percent on common shares and 7 percent on preferred shares. Sales started at 38 for common shares and 82¾ for preferred shares and soon advanced to 55 and 101⅞, respectively.

Press comment expressed progressive disquiet at the transaction. Ray Stannard Baker, in a 1901 McClure’s article, “What the United States Steel Corporation Really Is and How It Works,” gave his interpretation: “It receives and expends more money every year than any but the very greatest of the world’s national governments; its debt is larger than that of many of the lesser nations of Europe; it absolutely controls the destinies of a population nearly as large as that of Maryland or Nebraska, and indirectly influences twice that number.” The Commoner, owned and edited by Democratic leader William Jennings Bryan, made an effective point of studied facetiousness: “‘America is good enough for me,’ remarked J. Pierpont Morgan a few days ago. Whenever he doesn’t like it, he can give it back to us.”

Some newspapers discerned the way the supercorporation would polarize opinion between capitalism and socialism. The Boston Herald found that “if a limited financial group shall come to represent the capitalistic end of industry, the perils of socialism, even if brought about by a somewhat rude, because forcible, taking of the instruments of industry, may be looked upon by even intelligent people as possibly the lesser of two evils.” Thus Dr. Albert Shaw in the Review of Reviews expressed a fatalism toward the expected advent of socialism:

It is the belief among people—certainly of those who entertain communistic or socialistic ideals—that we are moving steadily toward the point where the economic and industrial community must become merged absolutely in the political community. . . . The disappearance of the old-fashioned competitive system must result in something like a great co-operative organization of workers.

Others were greatly alarmed and turned on the trusts for stirring class antagonism. Dr. Arthur T. Hadley, president of Yale, told a church congregation in Boston in March 1901,

Trusts have got to be regulated by public sentiment, and that public sentiment is not merely the opinion of any particular part of the whole people, but is a readiness to accept, in behalf of the community, restriction, independent of the question of whether you or I shall be personally harmed by these restrictions. You say the community will not be governed by this principle. We must expect that the community will, for the alternative is an emperor in Washington within twenty-five years.

Apprehension spread to the European press. The Kreuz-Zeitung of Berlin surmised that the supreme organizer of the new corporation would “Morganize” the world and consolidate the iron and steel industries of Europe as “the last humiliation of Europe by the young giant of the West.” Yet the most penetrating comment was, as usual, provided by Mr. Dooley:

Pierpont Morgan calls in wan iv his office boys, th’prisidint iv a national bank, an’ says he, “James/’ he says, “take some change out iv th’damper an’ r-run out an’ buy Europe fir me,” he says. “I intind to re-organize it an’ put it on a paying basis,” he says. “Call up the Czar an’ th’Pope an’ th’Sultan an’ th’Impror Willum, an’ tell thim we won’t need their sarvices afther nex’ week,” he says. “Give thim a year’s salary in advance. An’, James,” he says, “Ye betther put that r-red headed book-keeper near th’ dure in charge iv th’continent. He doesn’t seem to be doin’ much,” he says.

Integration and Accumulation

Although holding companies were legal, they were open to prosecution. Hence corporation lawyers often advised their bosses to eliminate constituent companies and place all their facilities in a single operating company: a centralized business could not be accused of being a combination in restraint of trade. Moreover, holding companies proved unstable if the real intention was simply to merge two or more companies. (A merger occurred when one company acquired the physical assets of another.) If a holding company held prices high enough to maintain its profits, smaller competitors appeared to undercut prices. This explains why several loosely knit holding companies failed, including National Cordage, American Biscuit, United States Leather, and National Wall Paper. These failures suggested that horizontal combinations were too costly and holding companies were not the most efficient means of maintaining them. There were few mergers in labor-intensive industries, such as clothing, furniture, publishing, and lumber. Moreover, when there were mergers in these fields, they were usually failures.

Mergers were only successful after the new company created an effective team of salaried managers to run things from the top, consolidating production, centralizing administration, and establishing good marketing and purchasing operations. For example, when various companies making corn products merged in 1906 as the Corn Products Refining Company, after four previous mergers of the same companies had been disastrous, their president, E. T. Bedford, turned the new venture into a commercial success. Bedford had spent many years as a senior executive in Standard Oil’s overseas marketing office as well as several years as chief executive of the New York Glucose Company. He now drew on his considerable experience. He built up the Corn Products Refining Company’s purchasing and sales organizations, moved decisively and competitively into overseas markets, including the European market, and started new policies of packaging and brand names, advertising, and buying in bulk, along with various economies of scale. Once more, the strategy of vertical integration had succeeded.

The longest-lasting mergers were in those industries that had achieved industrial or manufacturing integration in the 1880s. They were in industries whose technology and markets encouraged fast production and distribution. Shaw Livermore’s analysis of 328 mergers in the period 1888-1906, in his article “The Success of Industrial Mergers” [Quarterly Journal of Economics, November 1935), discloses that 156 were large enough to make an impact on the market structures of their industries. All but eight of these were in manufacturing or processing. Nevertheless, those consolidations that were truly integrated showed how cost-effective mergers could be. Standard Oil, National Lead, American Tobacco, Quaker Oats, Singer Sewing Machine, and Otis Elevator, among others, demonstrated the clear advantage of consolidating in order to centralize manufacturing.

American Tobacco

A classic example of a successful merger was American Tobacco, which had precisely the special features of effective integration of component parts in tobacco manufacture and a skilled managerial team, capable of coordinating and planning the activities of numerous separate units. Then the visible hand of management superseded the invisible hand of market forces. With the benefit of hindsight, given our knowledge of the physical harm cigarette smoking wreaks on human bodies as revealed by much research into lung cancer, we may be tempted to deduce that cigarette smoking is an expensive, deadly, and entirely unnecessary leisure pursuit sustained in the first instance by original marketing.

James Buchanan Duke and his brother, Benjamin, originally of Durham, North Carolina, joined their father’s cigarette business when cigarettes were made and handrolled in a shed on the family farm. In 1883 James (“Buck”) Duke introduced the mechanical manufacture of cigarettes, based on the cigarette machine invented by James Bonsack in 1880. Bonsack, a young Virginian still in his teens, achieved an almost complete mechanization in manufacturing tobacco for smoking in cigarettes. Thus cigarettes were, in effect, a new industrial product, and one considerable part of the economy of the “New South.” In the Bonsack machine a rag of finely shredded and sweetened tobacco was fed onto a continuous strip of paper. The cigarettes were then automatically shaped, pasted, closed, and finally cut to size by a rotary cutting knife.

In 1890 Duke organized the American Tobacco Company, incorporating a number of competitors who exchanged their stock for American Tobacco stock. By expanding the scale of operations, he reduced the per-unit costs of manufacturing, advertising, and sales. Duke was an innovator in brand marketing, identifying a brand name with a particular quality or appeal, to exploit individual consumer taste. Brand marketing became the modern technique by which roughly similar products could be sold by the same company to a large and diverse consumer market. Duke used the so-called “fighting brands,” Horseshoe and Battle Axe, to gain dominance in the chewing-tobacco market. He also gave away large amounts of free samples, thereby undermining less well-endowed companies and forcing them out of business, in what were known as “plug wars.”

Duke owed much of his subsequent success to his early realization that the Bonsack machine could produce so many cigarettes that it would require distribution on a global scale. Thus, even before he signed a contract with James Bonsack, he created offices for distribution and selling across America. Each comprised a salaried manager, a city salesman, a traveling salesman, and sufficient clerks. In the meantime his associate, Richard B. Wright, traveled overseas for nineteen months in order to explore foreign markets and make commercial contacts. Duke established an extensive purchasing network with its own facilities for buying, curing, and storing tobacco. He enlarged his cigarette factory in Durham, built a new large plant in New York, and established a central office there, first at 45 Broadway, and later, in 1898, at in Fifth Avenue. Because cigarette production was simple, these headquarters remained small. Once the erstwhile competitors had become part of American Tobacco, they were merged into the special structure Duke had created. The heads of the functional departments included professional experts John B. Cobb in buying and William R. Harris in auditing.

In the 1890s six factories produced almost all the company’s cigarettes, which touched 3.78 billion cigarettes in 1898. Two factories, in Durham and Rochester, concentrated solely on the 1.22 billion cigarettes for foreign consumption. Nevertheless, American Tobacco either established or bought up foreign factories in Australia (1894), Japan (1899), Britain (1901), and Germany (1901). An essential factor was tight coordination of the curing process to ensure that exactly the right amounts of tobacco of the proper quality arrived for production into various cigarettes at the right time. Thus tobacco for more expensive brands required a longer curing than that of cheaper cigarettes. In the early twentieth century, the company owned twelve drying and packaging houses and nineteen large storage warehouses in Virginia and North Carolina.

However, control of the flow of the billions of cigarettes from field to factory to jobber to retailer remained at the headquarters in New York. Orders received by a branch office were telegraphed to Fifth Avenue where managers decided which factory would process the order, usually the one nearest the consumer to ensure maximum possible freshness. New York received daily reports from factories and depots in order to keep a check on the flow of raw materials and finished products. It was the task of the auditing department to control costs and it calculated all materials, items, labor, and products to five decimal points.

Duke considered that the main function of top management, which he kept to a handful of men, was to devise a strategy to suppress the varied markets of the 1890s for pipe tobacco, plug and chewing tobacco, snuff, and cigars and expand the market for cigarettes at their expense. First, he acquired factories making the other tobacco products. Then he reduced prices to force his competitors to come to terms with him and merge their firms with his. When he realized just how expensive was this strategy, he made powerful allies on the stock market who were ready to back American Tobacco without interfering in its management.

Duke embarked on overseas trade and began the price war on his leading British competitor, W. D. & H. O. Wills. He also acquired a British company, Ogden’s Ltd., for over $5 million, while Wills retaliated by merging thirteen British tobacco companies to form the Imperial Tobacco Company. Then Duke sold Ogden’s to Imperial and the two rivals formed an alliance, the British-American Tobacco Company, in which American held two-thirds and Imperial one-third of the new $5.2 million worth of stock. Duke became chairman. Moreover, American received 14 percent of Imperial’s ordinary shares from the sale of Ogden’s. American Tobacco and Imperial Tobacco gave the British-American Tobacco Company hegemony of the world market.

Duke had his failures. He tried to penetrate the cigar business but never achieved more than 14 percent of national sales. This was because American Tobacco’s existing structure was not attuned to cigar production, essentially different from cigarette production. Whereas plug, snuff, and smoking tobacco used the same tobacco leaf from the southeastern states and could all use the same sort of continuous processes of manufacturing, and sell to much the same consumers, cigars were different. They needed leaf from Cuba, Puerto Rico, and the northeastern states that was cured differently, and they were made by skilled workers in small batches. Their market was select. In short, cigars were not a product suitable for mass production or sale. Not all the advertising in the world could change this basic state of affairs.

American Tobacco reigned all-powerful until it was broken up by a decision of the Supreme Court in 1911 against its holding company, Consolidated Tobacco. Then the three new companies—Reynolds, Liggett & Meyers, and P. Lorillard—soon created their own purchasing and marketing organizations. Thus the four integrated firms dominated the cigarette industry, making 91.3 percent of American cigarettes in 1925. Reynolds’s Camel cigarettes offered a supposedly unique tobacco blend that made them the largest-selling cigarettes, until they were surpassed by Lucky Strike (produced by American Tobacco) in 1926.

Thus American Tobacco illustrates several aspects of the role of large enterprises. Alfred DuPont Chandler concludes, “First, the massive output made possible by application of continuous-process machinery to manufacturing caused and indeed almost forced the creation of a worldwide integrated organization. The resulting managerial hierarchy permitted its creator to dominate first the cigarette and then the rest of the tobacco industry, except for cigars.” The methods of American Tobacco were repeated by other manufacturers of cheap packaged products in the 18 80s, namely matches, cereals, canned soups, milk, and other foods, soap, and photographic film. In the 1890s Coca-Cola, Wrigley’s chewing gum, and Fleischmann’s yeast followed a similar pattern to discourage competition and expand production and sales.

However, once the captains of industry had finished an integrated international organization, the opportunities for future empire-building were limited until there were changes in technology and shifts in marketing. Size and concentration were not accounted for by privileged access to outside capital. Rather, they followed a greater supply of internally generated capital. Thus Rockefeller, Carnegie, and Gustavus Swift (in meat) achieved industrial monopolies because improved technology allowed them to earn more money more quickly than was the case in labor-intensive industries. By the turn of the century a great number of investment banks in New York were willing to accommodate a wide variety of industries requiring funds to finance expansion.

The Gospel of Wealth

Largely because of the controversies surrounding Rockefeller, Carnegie, and Morgan, industrial entrepreneurs not only lost any former heroic image but were also much tarnished by revelations of their cutthroat strategies. They were, it seemed, truly robber barons, just as their early critics, the Kansas farmers, had said back in the 1880s. Yet the truth was more complex. The greatest robber barons were not as heartless as they seemed to their rivals, and the case of Andrew Carnegie before and after 1901 illustrates this.

In an article for the North American Review of June 1889, subsequently reprinted in the Tall Mall Gazette under the striking title “The Gospel of Wealth” and published by Carnegie in 1900 along with other essays in a book of the same title, Carnegie stipulated how the industrial entrepreneurs must first amass wealth for the industrial enrichment of society and then distribute it for the greater social benefit of its people.

This, then, is held to be the duty of the man of wealth: “To set an example of modest, unostentatious living, shunning display or extravagance; to provide moderately for the legitimate wants of those dependent upon him; and after doing so, to consider all surplus revenues that come to him simply as trust funds, which he is called upon to administer . . . in the manner which, in his judgment, is best calculated to provide the most beneficial results for the community—the man of wealth thus becoming the mere trustee and agent for his poorer brethren.”

Carnegie proved as good as his word.

Carnegie began his philanthropic career in 1881 when he was forty-five and only moderately wealthy. He gave a library to Allegheny City. Five years later he gave the first of many gifts to Pittsburgh that would eventually total $28 million for libraries, schools, museums, and assembly rooms, known collectively as the Carnegie Institute of Pittsburgh and including the Carnegie Institute of Technology. Following his early gifts to Allegheny City and Pittsburgh, on receipt of the $250 million in securities provided by Morgan in 1901, he made a gift of $4 million to the employees of the former Carnegie Steel Company, and provided a sum of $250,000 to go toward pensions for former employees who were now indigent.

He then embarked on what was the greatest career of systematic distribution to that period. In time, the total of John D. Rockefeller’s gifts amounted to more money, but Carnegie gave away more of his fortune, did so earlier than Rockefeller, and set a precedent that encouraged other captains of industry. In a letter of 1905 to universities and technical colleges, he announced the establishment of the Carnegie Foundation for the Advancement of Teaching with an endowment of $10 million, subsequently increased to $29.25 million. He maintained how “the least rewarded of all the professions is that of the teacher in our higher educational institutions. The consequences are grievous. . . . Able men hesitate to adopt teaching as a career, and many old professors whose places should be occupied by younger men cannot be retired.” Among the scholars who benefited from retiring allowances were Professors William James, Palmer, Peabody, and Toy of Harvard, and Beers, Sumner, Ladd, and Woolsey of Yale. Other gifts were for the building of new halls and libraries, and the adoption of new chairs, often named after old employees or men whom he admired. In return, he was lauded with such honors by foreign nations as the Legion of Honor, various freedoms of cities (holding the British record with fifty-four freedoms), and sundry honorary degrees.

Practically all his gifts reflected his egotism but also the needs and ambitions he had felt denied him as a child. His family encouraged reading but were too poor to buy many books. They maintained, and borrowed from, the diminutive free library in Dunfermline. Carnegie could not read freely as a child; thus, other poor children must have the benefit of public libraries. He loved music and this explains his distribution of organs. Carnegie was inundated with requests for gifts from all over the world. He often granted them to communities in English-speaking countries, supplying building and fixtures on condition that the community provided the site and also paid running costs. By 1926 he had provided funds for 2,811 libraries, of which 1,946 were in the United States, at a cost of $38 million.

Using $22 million in bonds from U.S. Steel, Carnegie founded the Carnegie Institution of Washington on January 29, 1902. Its brief was to undertake research in botany, evolution, geophysics, marine biology, meridian astronomy, solar observation, terrestrial magnetism, and nutrition. It sent the Carnegie, a nonmagnetic yacht of wood and bronze, across the seas to correct mistakes of previous ocean surveys. The largest Carnegie agency was the Carnegie Corporation of New York, established in 1911 with an endowment of $125 million to maintain a central fund and distribute monies to various institutions to promote scientific and other knowledge, according to the ideas of its trustees as to how best to use the money. Thus the Carnegie Corporation was intended as a permanent reservoir of social energy. Either by gifts in his lifetime or by bequests in his will, Carnegie disposed of $350 million, leaving his widow and daughter about $20 million.

Some jeered at Carnegie’s generosity, criticizing him for trying to atone for past ruthlessness in his professional career by trying to bribe God in his retirement before having to meet him in the next life. Moreover, good works on a large scale established the donor as a member of a privileged class and, therefore, a target for psychological demolition. Mark Sullivan quotes Stuart Sherman’s observation that, if Carnegie had not given $350 million, others might have claimed the credit for founding libraries, buying pipe organs, pensioning employees, and endowing universities. “True, we might have contributed. We might have taxed ourselves at that rate. We might have made similar investments in human progress. But we know pretty well that we wouldn’t have done so.” It is impossible to estimate how far Carnegie’s millions of dollars to science and education spurred knowledge further forward and accelerated human progress. However, Carnegie’s gifts undoubtedly helped democratize culture and made it possible for millions of people to take their own steps for self-improvement and enjoy intellectual and cultural things that would otherwise have been withheld.