The United States Since the Civil War

by Charles Ramsdell Lingley

To understand the dangers of the monopolies which Lloyd feared and denounced, it is necessary to know the principal features in the development of American industry from the close of the Civil War to 1890.

It will be remembered that the consolidation of small railroad lines into large systems was accompanied by such advantages to the companies and to the travelling public, as to demonstrate that combination was the inevitable order of the day. The similar integration of small industrial and commercial enterprises took place more slowly between 1870 and 1890, but the process was no less inevitable on that account. The census of 1890 indicated that the production of manufactured articles had greatly increased since 1870; more capital was engaged; the product was more valuable; and more workmen were employed. Nevertheless the number of establishments which were in operation had shown a considerable decline in many industries. An army of 100,000 employees represented the expansion of the wage-earning force in the iron and steel works, for example, and $270,000,000 the increase in the value of their products; yet the number of establishments engaged showed a shrinkage of nearly fourteen per cent. The workers in the textile mills grew from 275,000 to 512,000, and the capital outlay from $300,000,000 to $750,000,000, but the number of factories declined from 4,790 to 4,114. A cartoon in Puck on January 26, 1881, remarked that "the telegraph companies have been consolidated, which in simple language means that Mr. Jay Gould controls every wire in the United States over which a telegram can be sent."

Some of the reasons for the prevalent tendency toward combination were not hard to discover. In the first place, although industrial organizations fought one another with the utmost bitterness, it was in the nature of things for them to combine if threatened by any common foe. Moreover, production on a large scale made possible savings and improvements that were outside the grasp of more modest enterprises; buying and selling large quantities of goods commanded opportunities for profit; waste products could be made use of and costly scientific investigations conducted in order to discover improved methods, overcome difficulties and open new avenues of activity; large salaries and important positions could be offered to men of executive capacity; and expensive equipment could be purchased and utilized.[1] An effective force which tended to drive industries to combine was the cut-throat competition which prevailed. Herbert Croly in his stimulating book The Promise of American Life vividly describes the bitter, warlike character of industrial competition after 1865. Competition was battle to the knife and tomahawk. The leaders were constantly seeking bigger operations, to which the bigger risks only added zest. A company might be making unbelievable profits one year and "skirting" bankruptcy the next. Exciting as all this was, however, the desire for adventure was not as powerful as the desire for profits, and cut-throat competition in industry led as naturally to combination, as rate-wars on the railroads led to pooling agreements.

An important factor in the development of large corporations was the increasing use of the corporation form of industrial organization, as contrasted with the co-partnership plan. If a few men enter a copartnership, each of them must supply a considerable amount of capital; but if a corporation is formed and stock is sold, the par value of the shares may be placed at a low figure—$100 or less, for example—and thus a large number of persons may be able to establish an industry which is far beyond the financial resources of any individual or small group among them. The corporation, moreover, is relatively permanent, for the death of one stock-holder among many is unimportant as compared with that of one member of a co-partnership. In case of disaster to the enterprise the liability of the stock-holder in a corporation is limited to the amount which he has invested, while any member of a partnership may be legally held for all the debts of the organization. With such advantages in its favor the corporation plan largely dominated the organization of industry.

The most famous example of combination before 1890 was the Standard Oil Company, which was the cause of more litigation, more study and more complaint than any other industrial organization that has ever existed in America. In 1865 Rockefeller & Andrews started an oil-refining business in Cleveland, Ohio. Samuel Andrews was a mechanical genius and he attended to the technical end of the industry; John D. Rockefeller had bargaining capacity, and to him fell the task of buying the crude oil, providing barrels and other materials and selling the product. The firm prospered. H.M. Flagler was taken into the company and a branch was established in New York. In 1870 these three with a few others organized the Standard Oil Company of Ohio, with a capitalization of a million dollars. It controlled not over ten percent. of the business of oil-refining in the United States at that time. But the oil business was so profitable that capital flowed into it and competition became keen. Rockefeller and some associates, therefore, devised the South Improvement Company of Pennsylvania, a combination of refiners, headed and controlled by the Standard, the purpose of which was to make advantageous arrangements With the railroads for transportation facilities. Early in 1872, a most remarkable contract was signed between the company and the important railroads of the oil country—the Pennsylvania, the New York Central and the Erie. By it the roads agreed to establish certain freight rates from the crude-oil producing region of western Pennsylvania to such refining and shipping centers as New York, Philadelphia, Baltimore, Pittsburg and Cleveland. From these rates the South Improvement Company was to receive substantial rebates, amounting to forty or fifty per cent. on crude oil and twenty-five to forty-five per cent. on refined. On their side the railroads were promised the entire freight business of the Company, each to have an assured proportion of the traffic, with freedom from rate-cutting competition. All this was the common railroad practice of the times.

But another portion of the contract was not so common. It provided that the roads should give the South Improvement Company rebates on all oil shipped by its competitors and furnish it with full way-bills of all such shipments each day. In other words, the Company was to know exactly the amount of the business of its competitors and with whom it was being done. The contract allowed the roads to make similar rebates with anybody offering an equal amount of traffic, but the likelihood of such an outcome was slender in the extreme. Armed with this powerful weapon, Rockefeller entered upon a campaign to eliminate competition by offering to buy out independent refiners either with cash or with Standard Oil stock, at his estimate of the value of their property. Those who objected to selling were shown that the alliance between the South Improvement Company and the railroads was so strong that they faced the alternative of giving way or being crushed. Of the twenty-six refineries in Cleveland, at least twenty-one yielded. The capacity of the Standard leaped from 1,500 to 10,000 barrels a day and it controlled a fifth of the refining business of the country. When these facts came to be known in the oil country, the bitter Oil War of 1872 began. Independent producers joined to fight for existence, and at length the railroads gave way and agreed to abandon the contract with the South Improvement Company, and the legislature of Pennsylvania annulled its charter, although in one way or another rebates continued and the absorption of rivals went on. In 1882 the entire combination—thirty-nine refiners, controlling ninety to ninety-five per cent. of the product—was organized as the Standard Oil Trust. All stock-holders in the combining companies surrendered their certificates and received in return receipts or "trust-certificates," which showed the amount of the owner's interest in the trust. In order to secure unity of purpose and management, the affairs of the combination were put into the hands of nine trustees, with Rockefeller at the head.

The wonderful success of the Standard Oil Company, however, was not due solely to the alliance with the railroads, although this advantage came at a strategic time when it was fighting for supremacy. Its marketing department gave it an unenviable reputation, but achieved amazing success. The department was organized to cover the country, find out everything possible about competitors, and then kill them off by price-cutting or other means. The great resources of the Company enabled it to undersell rivals, going below cost if necessary, and thus wearing out opposition. Continuity of control, also, contributed to Standard success; the narrow limits of the area in which the crude oil was produced before 1890 rendered the problem of securing a monopoly somewhat easier; the organization was extremely efficient and the constituent companies were stimulated to a high degree of productivity by encouraging the spirit of emulation; men of ability were called to its high positions; the policy of gaining the mastery over the trade in petroleum and its products was kept definitely and persistently to the front; and then there was John D. Rockefeller.

Rockefeller was what used to be called a "self-made" man. He began his business life in Cleveland as a clerk at an extremely modest salary. Capacity for details and for shrewd bargaining, patience, frugality, seriousness, secretiveness, caution, an instinctive sense for business openings, self-control—all these were characteristic both of the Cleveland clerk and the later oil-refiner. In the bigger field he developed a daring caution, a quick understanding of the value of new inventions, a capacity for organization, quick grasp of essentials and a resourcefulness that dominated the entire Standard combination. He built his own barrels, owned the pipe-lines, tank-cars, tank-wagons and warehouses. Consolidation, magnitude and financial returns were his aims, and in achieving these he and his associates were so successful as to make the Standard a leader in all branches of business, except the ethics of industry. Litigation has been the constant accompaniment of Standard progress.

Following the Standard Oil Company, other combinations found the trust form of organization a convenient one. The cotton trust, the whiskey trust, and the sugar, cotton bagging, copper and salt trusts made the public familiar with the term. Moreover, popular suspicion and hostility became aroused, and the word "trust" began to acquire something of the unpleasant connotation which it later possessed.

Although it was upon the Standard Oil Company that people turned when they denounced the trusts and feared or condemned their practices, the principles to which the Standard adhered when under the strain of competition were the practices which were followed by their contemporaries, both big and little. When the Diamond Match Company, for example, was before the Courts of Michigan in 1889, it appeared that the organization was built up for the purpose of controlling the manufacture and trade in matches in the United States and Canada. Its policy was to buy up and "remove" competition, so that it might monopolize the manufacture and sale of matches. It could then fix the price of its commodity at such a point that it could recoup itself for the expense of eliminating competitors and also make larger profits than were possible when its rivals were active.