In the final decades of the nineteenth century, the United States experienced an industrial transformation. Over the course of approximately 30 years, America became an industrial and agricultural giant and the world’s greatest economic power. By 1894, the U.S. ranked first among the manufacturing nations of the world. Several factors contributed to this second American Industrial Revolution and the birth of modern America.
An abundance of natural resources were discovered and exploited, creating new industries as well as opportunities for established industries to grow. The Mesabi Range deposits in Minnesota’s Lake Superior region yielded huge tracts of iron ore for the steel industry. A continuous flow of new immigrants provided the cheap labor needed by the expanding industries and contributed to the growth of the U.S. economy.
The well-developed agricultural sector contributed to the changes in America. The growth of an extensive network of canals and intercontinental railroads enabled farmers to move their produce long distances. Their markets were no longer just local and regional in scope, but had expanded to national and international levels, allowing farmers to produce and sell more. Focus on a single commercial crop again became more common due to new farming methods and the widespread availability of new machinery. In turn, agricultural expansion stimulated growth in other sectors of the economy.
In the manufacturing sector, companies were perfecting Eli Whitney’s mass production techniques. Large, intricately organized factories that specialized in a limited number of products became the norm. Production by machine rather than by hand was also common, enabling companies to produce higher quality goods at a faster rate.
Some of the industrial expansion was fueled indirectly by the Civil War. Destruction from the war created a need for new construction, which produced new jobs and new building techniques. Inflation during the War led to increased capital accumulation for those who owned property and were making profits on war goods. The newly created capital was invested in the expansion of various industries. In fact, although the word “millionaire” was coined in the 1840s, this class did not become widespread until the end of the nineteenth century.
Republican policies may also have contributed to American economic expansion. The Homestead Act, which helped populate the “Great American Desert,” provided cheap land for agricultural growth. High protective tariffs helped to hamper foreign competition. Land grants made to railroad companies helped expand the transportation network that became the backbone of American growth. Between 1862 and 1871, the government awarded various railroad companies approximately 70 land grants, which led to the creation of new cities, more commerce in the west, and great wealth for the railroad owners.
The network of rails across the United States bonded the country together by connecting newfound raw materials in the west with factories and markets in the east, stimulating both mining and agriculture. The railroads themselves became a market for iron, steel, lumber, and coal. Railroads were such big business that in 1883 the major rail companies divided America into four “time zones” so they could schedule trains and trade. Commuter railroads mobilized America’s work force as well, leading to large-scale migration as Americans sought greener pastures all over the country.
American innovation played a large role in the second American Industrial Revolution. In the 1790s, the Patent Office recorded just over 200 patents, but between 1860 and 1890 it issued over 400,000 patents. The time was ripe for technological innovation that emphasized inventions and applied science. The list of innovations springing up at the time is endless: barbed wire was invented by Joseph Glidden in 1873; air brakes for trains were created by George Westinghouse in 1868; McGaffey’s vacuum cleaner was invented in 1869; and George B. Eastman devised roll film and the Kodak camera in 1888. The typewriter, stock ticker, and cash register all enhanced business operations and brought many women into the workforce. The commercial canning and packaging of food also expanded rapidly, enabling women to do less “housekeeping.”
One of the more significant inventions of the time was Alexander Graham Bell’s telephone, which he patented in 1876. Upon recognizing the importance of the telephone, Western Union commissioned Thomas A. Edison to develop an improved version of the machine to compete with Bell. Western Union eventually sold the rights to Bell to avoid a patent dispute, and Edison’s version became the prototype for today’s telephone. In 1885, the Bell interests formed the American Telephone and Telegraph Company, which held over 49 subsidiaries and provided long-distance lines. The invention of the telephone spurred many young, middle-class women to join the workplace as switchboard operators.
Thomas Edison is credited with many other inventions, including the phonograph, the motion picture, the storage battery, the Dictaphone, the mimeograph, and most importantly, the electric light bulb in 1879. The “Wizard of Menlo Park” experimented with several thousand filaments before he discovered that a carbonized filament would glow brightly in a vacuum tube for over 100 hours without crumbling. With the backing of J.P. Morgan in 1882, the Edison Electric Illuminating Company supplied current for lighting to 85 customers in New York City. The electric power industry expanded rapidly, leading to the creation of machines far more efficient than steam-driven models and becoming a cornerstone of American industrialization.
The small businesses that supported the pre-Civil War economy could not satisfy the rapidly growing national markets. Entrepreneurs quickly developed systems of mass production and distribution to meet growing national needs. The resulting expansion in industry went hand-in-hand with industrial combination and concentration, enabling a few business leaders to dominate the largest markets of the time.
One of the greatest of these “Captains of Commerce” stands out for his achievements and his contributions—Andrew Carnegie. In 1848, as a young boy, Carnegie migrated with his family from Scotland to Allegheny, Pennsylvania. Carnegie eventually worked his way to the top through a number of jobs in various industries. During a trip to Europe in 1872 he met Sir Henry Bessemer, who in 1856 had invented a new process of turning iron into steel. To this point, steel was a scarce commodity in America, but with the Bessemer process steel could be inexpensively and easily produced for locomotives, rails, and the girders used in building construction. This inspired Carnegie to focus his business efforts on steel, and in 1875 he launched J. Edgar Thompson Steel Works, which was named after the president of his biggest customer, Pennsylvania Railroad.
America was one of the few places where all of the components needed to make steel were available in fairly close proximity. Recognizing this, Carnegie employed a tactic known as “vertical integration,” where he integrated every phase of the steel-making business. He acquired coal properties, iron ore from Lake Superior, a fleet of steamships to transport materials across the Great Lakes, and railroads that delivered the materials to the furnaces in Pittsburgh. His goals were to improve efficiency, increase quality, and decrease costs by controlling all of the variables in the production process.
Carnegie was a skilled businessman and salesman, and he had a talent for hiring men with the greatest expertise. Contrary to most, he used times of recession to expand his business, slowly buying out all of his competitors. However, he disliked monopolistic trusts, and so built his organization into a partnership that included about 40 Pittsburgh millionaires. By 1900, Carnegie’s company was producing one quarter of the nation’s Bessemer steel.
By 1900, Carnegie was ready to sell his steel holdings. J.P. Morgan, an investment banker, bought Carnegie out for over $400 million. Though often criticized for paying low wages to his workers, Carnegie believed that he and other industrial giants had a social responsibility and should consider themselves public benefactors. At the age of 65, Carnegie devoted the rest of his life to philanthropic endeavors that promoted social welfare and world peace. In all, he gave approximately $350 million to public libraries, universities, hospitals, parks, meeting and concert halls, swimming pools, church buildings, and other charitable causes.
Once he bought out Carnegie, J. Pierpont Morgan moved rapidly to expand his holdings, adding other steel and finished product companies, and “watering” the stock, or selling stock to buyers at a price greater than its current value. This enabled him to launch The United States Steel Corporation in 1901, which was America’s first billion-dollar corporation.
Morgan was born into a rich family and worked to increase his wealth throughout his life. He was an investment banker and owned a Wall Street banking house that financed the reorganization of railroads, insurance companies, and banks. Once Morgan got into the steel business, he began to eliminate all competition to create his steel monopoly.
During the depression of the 1890s, Morgan bought out his competition and placed officers from his own banking house on their boards of directors. This duplicated board was called an interlocking directorate, and it ensured future harmony among the rival enterprises. This concentration of financial power could be abused if the intent of the directors was to build two companies, transfer all the benefits to one company, and bankrupt the other at the expense of the stock and bondholders. However, an effective board could increase efficiency, enhance economic growth, pave the way for large-scale mass production, and stimulate new markets. Morgan, along with most big business leaders, did not believe the consolidation of money was anything but advantageous to the nation, and the rapid rise of the U.S. economy made Morgan’s position hard to refute. Social critics and Progressive-Era politicians would soon propose limits to “unbridled” capitalism.
Another important business leader of the time was John D. Rockefeller. He was born to a modest family in New York State, and as a youth moved to Cleveland, which was strategically located near the oil fields of Pennsylvania. Rockefeller, already a successful businessman as a teenager, recognized the potential profits in refining oil. In 1859, the first oil well was struck in Titusville, Pennsylvania, called “Drake’s Folly.” In 1870, Rockefeller formed the Standard Oil Company of Ohio, worth $1 million.
Although Rockefeller was the largest oil refiner, he felt his competition was flooding the market by producing too much oil, which led to reduced profits, so he weeded them out. Rockefeller was ruthless in his business tactics, and he perfected what came to be known as the “trust.” He forced his competition to join with him and assign their stock to the board of directors of his Standard Oil Company, who would then consolidate the two operations. If his competitors did not agree to this, he would temporarily lower the price of his oil and drive them out of business. By 1877, Rockefeller controlled 95 percent of the oil refineries in United States and monopolized virtually the entire world petroleum market.
John D. Rockefeller justified his wealth with statements like, “The good Lord gave me my money.” Yet, in spite of his often ruthless business practices, Rockefeller donated more than $500 million to philanthropic endeavors throughout his lifetime.
Following Rockefeller’s lead, trusts rapidly developed in other industries, such as lead, rubber, sugar, tobacco, and leather. In the 1860s, Cornelius Vanderbilt consolidated 13 separate railroads creating the New York Central Railroad System, and Gustavus F. Swift and Philip Armour consolidated the meat packing industry. Aggressive businessmen rapidly consolidated much of the transportation and communication industries. In retailing, huge urban department stores grew up in the big cities, and Montgomery Ward and Sears, Roebuck and Company dominated the mail-order industry, making it difficult for smaller businesses to compete. Over time, public opposition toward trusts increased and they swiftly became a hotly debated political issue. However, for most businesses at the end of the century, monopoly was not the goal of a trust, but rather increased efficiency through centralization of the management of increasingly complex business operations.
The rapid expansion of industry and the concentration of ownership by fewer and fewer people changed the way many Americans felt about the role of government in economic affairs. With the growing number of trusts in America, reformers in the late nineteenth century began to voice their concerns about the expanding gulf between the rich and the poor. Although the new class of millionaires brought economic and material progress, they also created deepening class divisions. Reformers feared that businessmen held an increasing amount of power that would eventually succeed in destroying republican institutions and placing captains of industry in direct control of the government.
Along with the reformers, the “old blood” American aristocracy was highly resentful of the "nouveau riche." Long-established merchants and professionals did not like the change in the order of society and felt that this arrogant class of "new rich" should be held in check. Small business owners and farmers resented both classes, and a new “civil war” was brewing.
In contrast, some theorists and wealthy business leaders used Charles Darwin’s The Origin of Species (1859) to champion the extreme success of such a small percentage of Americans. Although Darwin’s argument that existing species had all evolved through a long process of “natural selection,” described as a basic process of biology, many theorists drew broader economic inferences from his writings. William Graham Sumner applied Darwin’s “survival of the fittest” theory to the social world, touting in What Social Classes Owe to Each Other that “the millionaires are a product of natural selection.”
Herbert Spencer, one of the first major prophets of Social Darwinism, used Darwin’s theory as a foundation for promoting the virtues of free-market capitalism. He felt that Social Darwinism was the logical explanation for small businesses being crowded out by trusts and monopolies, and that the government should not interfere in this natural process. Spencer warned that “fostering the good-for-nothing at the expense of the good is an extreme cruelty.”
Andrew Carnegie did not advocate Social Darwinism, but instead felt the wealthy had to prove that they were morally responsible. Carnegie’s The Gospel of Wealth, published in 1889, stated that the concentration of wealth was necessary for society to progress. Carnegie felt that that the contrast between a millionaire and a laborer was an indication of how far humanity had come and that in the long run extreme disparities of wealth were good for the "race."
Political action against big business came first at the state level with legislation aimed at regulating railroads. This approach failed, in part due to the Wabash case, which confirmed the federal role in regulating interstate commerce. Congress stepped in and passed the Interstate Commerce Act in 1887 as a response to the plight of farmers as well as to the widespread practice among the railroads of giving kickbacks and preferential treatment to certain customers. The act was aimed at stopping discrimination against small business customers by requiring that all charges made by railroads must be reasonable. The railroads were also required to publish their rates and were not allowed to charge a different rate without giving public notice.
The Interstate Commerce Act spawned the first federal regulatory board, the Interstate Commerce Commission (ICC). The ICC supervised the affairs of the railroads, investigated any complaints, and issued orders when they determined the railroads had acted illegally. The most important outcome of the Interstate Commerce Act was that it established a precedent for Congress to regulate businesses engaged in interstate trade.
In 1890, President Benjamin Harrison signed the Sherman Anti-Trust Act, which declared that any combination “in the form of trust or otherwise” in restraint of trade or commerce was illegal. Unfortunately, the act turned out to be largely symbolic since succeeding administrations did little to enforce it, and when it was enforced it contained legal loopholes. The actions of the Federal government seemed to reflect the general public’s perception that the laissez-faire approach, a philosophy that the government leaves business alone, was best for the burgeoning capitalistic nation.
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