Still, large-scale fires swept through Chicago (1871), New York (1876), Colorado Springs (1878), and in San Francisco on multiple dates, some resulting from earthquakes. Chicago suffered more than $200 million in damage—a staggering loss in the nineteenth century—in its 1871 blaze, which, according to legend, was started when Mrs. O’Leary’s cow kicked over a lantern. Flames leaped thirty to forty feet into the air, spreading throughout the West Side’s downtrodden shacks, then leaping the Chicago River to set most of the city afire. Even the wealthy North Side combusted when the winds carried aloft a burning board that set the district’s main fire station afire. Ultimately, thousands of people sought shelter in the frigid October water of Lake Michigan.
These fires occurred in no small part because many cities still used natural gas lighting, which proved susceptible to explosions; fire could then spread easily because wood was the most common construction material in all but the largest buildings. The growing number of citywide water systems and fire departments offered a hope of reducing the number, and spread, of fires. Generally speaking, by 1900 most of the apocalyptic fires that eradicated entire towns occurred on the grasslands, where in a two-year period the Dakota towns of Leola, Jamestown, Sykeston, and Mt. Vernon were “virtually incinerated by fires rising out of the prairies.”20
Even with fire prevention measures, plenty of water, and urban fire departments (often volunteer), fire-related disasters still plagued America well into the twentieth century. Baltimore suffered a two-day fire in 1904, and the San Francisco quakes set off fires that paved the way for a binge of looting by inhabitants of the notorious Barbary Coast section of town. Soldiers had to be called in, and authorities issued orders to shoot looters on sight.21
The introduction of electricity, more than the appearance of water systems, diminished the threat of fires in American cities. Before electricity, urban areas had relied on gas lighting, and a leak could turn city blocks into smoking ruins. When electric dynamos began to provide energy for lighting in the major cities, gas-originated fires naturally became less frequent. The introduction of electricity to business, however, could only ensue after several corporate giants strode onto the national stage.
Titans of Industry
In 1870 steelmaker Andrew Carnegie ordered construction of his Lucy blast furnace, completing the transition of his company into a vertical combination that controlled every aspect of product development, from raw materials to manufacturing to sales. With the Lucy furnace, Carnegie would become a supplier of pig iron to his Union Mills, and when it was completed two years later, the Lucy furnace set world records, turning out 642 tons of steel per week (the average was 350). Completion of the furnace ensured Carnegie a steady supply of raw materials for his Keystone Bridge Company, allowing him to concentrate exclusively on reducing costs. Lucy provided the springboard that Carnegie would need to become the nation’s leading steelmaker and one of the wealthiest men in America—a remarkable accomplishment considering he had arrived in America penniless.
Carnegie (born 1835) had come to America from Scotland at the age of thirteen, arriving in Pittsburgh, where his mother had relatives.22 First employed to change bobbins for $1.20 a week, Carnegie improved his skills with each new job he took. He learned to operate a telegraph and to write messages down directly without the intermediate step of translating from Morse code. His skills impressed the district superintendent of the Pennsylvania Railroad, Thomas Scott, enough that when the Pennsy opened service from Pittsburgh to Philadelphia, Scott hired Carnegie as his personal telegraph operator. The Scotsman soaked up the railroad business from Scott, learning all aspects of business management and placing him in contact with other entrepreneurs. At age twenty-four, when Scott was promoted, Carnegie took over his district supervisor job.
Seeing the railroads firsthand convinced Carnegie that the next boom would occur in the industry that supplied their bridges, leading him to found the Keystone Bridge Company (1865); he then took the next logical step of supplying iron to the bridge company through a small ironworks. In the 1860s, British iron works had turned out 6 million tons. That was b.c.—before Carnegie. After he had applied his managerial skill and innovation to his integrated steel process, the United States surged ahead of British producers as Lucy and other similar furnaces produced 2 million tons of pig iron. Hiring the best managers by offering them a share of the partnership, Carnegie brought in steel men who were innovators in their own right, including Julian Kennedy, who claimed patents on 160 inventions, half of which were in operation at the Carnegie mills during Kennedy’s employ.
Carnegie viewed depressions as mere buying opportunities—a time to acquire at a bargain what others, because of circumstance, had to sell. But he ran against the grain in many other ways. Dismissing the old advice against putting all your eggs in one basket, Carnegie said, “Put all your eggs in one basket and watch that basket!” He eagerly embraced new, and foreign, technologies. When his own mills became obsolete, even if built only a few years earlier, he engaged in “creative destruction,” whereby he leveled them to build new state-of-the-art facilities.23 He obtained his own source of raw materials whenever possible: the company’s demand for coal and coke had originally led Carnegie into his association with Henry Clay Frick, a titan Carnegie called “a positive genius” who operated 1,200 coke ovens before the age of thirty-five.24
Inexpensive steel, obtained by driving costs down through greater efficiencies in production, provided the foundation for America’s rapid economic surge, but the obsession with low costs was hardly Carnegie’s alone. (John D. Rockefeller had the same attitude toward kerosene when he said, “We are refining oil for the poor man and he must have it cheap and good.”)25 Carnegie put it slightly differently: two pounds of iron shipped to Pittsburgh, two pounds of coal (turned into a quarter pound of coke), a half a pound of limestone from the Alleghenies, and a small amount of Virginia manganese ore yielded one pound of steel that sold for a cent. “That’s all that need be said about the steel business,” Carnegie adroitly noted.26
Carnegie ran the company as a close partnership, rather than a modern corporation. He never fit the modern working definition of “big business,” which requires that ownership be separated from management, usually because ownership consists of thousands of stockholders who elect a board of directors who in turn hire a president to run the company. As large as Carnegie Steel was, though, the Scotsman essentially managed the company himself, sometimes consulting his brother or a few close confidants. Thus, the Carnegie management style meant that Carnegie Steel had more in common with the corner drugstore than it did with Rockefeller’s equally imposing Standard Oil. Yet it was this structure that gave Carnegie his flexibility and provided the dynamism that kept the company efficient and constantly pushing down prices.
With falling prices came greater sales. Carnegie Steel saw its capital rise from $20 million to $45 million from 1888 to 1898, when production tripled to 6,000 tons of steel a day. “The 4,000 men at Carnegie’s Homestead works,” noted Paul Johnson, “made three times as much steel in any year as the 15,000 men at the great Krupps works in Essen, supposedly the most modern in Europe.”27 Carnegie slashed the price of steel from $160 a ton for rails in 1875 to $17 a ton by 1898. To Carnegie, it all came down to finding good employees, excellent managers, and then streamlining the process.
That frequently antagonized labor unions, for whom Carnegie had little patience. It was not that he was against labor. Quite the contrary, Carnegie appreciated the value of hard work, but based on his own experience, he expected that workers would do their own negotiating and pay would be highly individualized. He wanted, for example, a sliding scale that would reward greater productivity. Such an approach was fiercely resisted by unions, which, by nature, catered to the least productive workers. Even though he was out of the country when the famous Homestead Strike (1892) occurred—Frick dealt with it—the Scotsman did not disagree with Frick’s basic principles, only his tactics. Homestead was a labor-re
lations blunder of significant proportions, but it tarnished Carnegie’s image only slightly. Even Frick, who had tried to sneak in Pinkerton strikebreakers at night to reopen the company and break the strike, became a sympathetic figure in the aftermath when an anarchist named Alexander Berkman burst into his office and shot him twice. After the maniac was subdued, Frick gritted his teeth and insisted that the company physician remove both bullets without anesthesia. The imperturbable Frick then wrote his mother a letter in which he scarcely mentioned the incident: “Was shot twice today, though not seriously.”28
Frick had only come into the presidency of Carnegie Steel because, by that time, Carnegie was more interested in giving away his fortune and traveling in Europe than in running the company. He epitomized the captains of industry who single-handedly transformed industry after industry. His empire brought him into contact with John D. Rockefeller, who had purchased control of the rich Mesabi iron range in Minnesota, making Carnegie dependent on Rockefeller’s iron ore. When Carnegie finally decided to sell his business, he sold it to the premier banker in America, J. P. Morgan, at which point Carnegie’s second in command, Charles Schwab, negotiated the deal. Schwab then went on to become a powerful steel magnate in his own right. The sale of Carnegie Steel to Morgan for $450 million constituted the biggest business transaction in history, and made Carnegie, as Morgan told him, “the richest man in the world.” The Scotsman proceeded to give most of it away, distributing more than $300 million to philanthropies, art museums, community libraries, universities, and other endowments that continue to this day.
It is difficult to say which of the nineteenth-century captains of industry was most important, though certainly Carnegie is in the top three. The other two, however, would have to be both John D. Rockefeller and J. P. Morgan, each a business wizard in his own right. Rockefeller probably came in for the most scorn of the three, even described as a “brooding, cautious, secretive man” who founded the “meanest monopoly known to history.”29 When Rockefeller died, another said, “Hell must be half full.”30 One can scarcely imagine that these comments were made about a devout Baptist, a lifelong tither, and a man who did more to provide cheap energy for the masses (and, in the process, probably saved the whales from extinction) than any other person who ever walked the earth.
Rockefeller’s father had been a peddler in New York before the family moved to Cleveland, where John went to school. He worked as an assistant bookkeeper, earning fifty cents per day. In that job he developed an eye for the detail of enterprise, although it was in church where he learned of a new venture in oil from a member who became one of his partners in building a refinery. In 1867, Rockefeller, along with Samuel Andrews and Henry Flagler, formed a partnership to drill for oil, but Rockefeller quickly saw that the real profits lay in oil refining. He set out to reduce the waste of the refining process by using his own timber, building his own kilns and manufacturing his own wagons to haul the kerosene, and saving money in other ways. From 1865 to 1870, Rockefeller’s prices dropped by half, and the company remained profitable even as competitors failed in droves.
Reorganized as the Standard Oil Company, the firm produced kerosene at such low costs that the previous source of interior lighting, whale oil, became exorbitantly expensive, and whaling immediately began to diminish as a viable energy industry. Cheap kerosene also kept electricity at bay for a brief time, though bringing with it other dangers. Standard Oil’s chemists, who were charged by Rockefeller to come up with different uses for the by-products, eventually made some three hundred different products from a single barrel of oil.
After an attempt to fix prices through a pool, which brought nothing but public outrage, Rockefeller developed a new concept in which he would purchase competitors using stock in Standard Oil Company, bringing dozens of refiners into his network. By the 1880s, Standard controlled 80 percent of the kerosene market. Since Standard shipped far more oil than anyone else, the company obtained discounts from railroads known as rebates. It is common practice in small businesses today for a frequent customer, after so many purchases, to receive a free item or a discount. Yet in the 1800s, the rebate became the symbol of unfairness and monopoly control. Most, if not all, of the complaints came from competitors unable to meet Rockefeller’s efficiencies—with or without the rebates—never from consumers, whose costs plunged. When Standard obtained 90 percent of the market, kerosene prices had fallen from twenty-six cents to eight cents a gallon. By 1897, at the pinnacle of Standard’s control, prices for refined oil reached “their lowest levels in the history of the petroleum industry.”31 Most customers of energy—then and now—would beg for control of that nature.
Yet Rockefeller was under no illusions that he could eliminate competition: “Competitors we must have, we must have,” he said. “If we absorb them, be sure it will bring up another.”32 Citing predatory price cutting as a tool to drive out competitors, Rockefeller’s critics, such as Ida Tarbell, bemoaned Standard Oil’s efficiency. But when John S. McGee, a legal scholar, investigated the testimony of the competitors who claimed to have been harmed by the price cutting, he found “no evidence” to support any claims of predatory price cutting.33
Like Carnegie, Rockefeller excelled at philanthropy. His church tithes increased from $100,000 per year at age forty-five to $1 million per year at fifty-three, a truly staggering amount considering that many modern churches have annual budgets of less than $1 million. At eighty years of age, Rockefeller gave away $138 million, and his lifetime philanthropy was more than $540 million, exceeding that of the Scotsman. Where Carnegie had funded secular arts and education, however, Rockefeller gave most of his money to the preaching of the Gospel, although his money helped found the University of Chicago.
John Pierpont (“J.P.”) Morgan, while not personally as wealthy as either Rockefeller or Carnegie, nevertheless changed the structure of business more profoundly. A contemporary of both men (Morgan was born in 1837, Rockefeller in 1839, and Carnegie in 1835), Morgan started with more advantages than either. Raised in a home as luxurious as Carnegie’s was bleak and schooled in Switzerland, Morgan had nevertheless worked hard at learning the details of business. As a young man, he was strong and tall, although he later suffered from skin disorders that left his prominent nose pockmarked and red. He studied every aspect of the banking and accounting business, apprenticing at Duncan, Sherman and Company, then worked at his father’s investment banking office in London. Morgan then joined several partnerships, one with Anthony Drexel that placed him at the center of many railroad reorganizations. His first real railroad deal, which consisted of a mortgage bond issue of $6.5 million for the Kansas Pacific Railroad, taught him that he needed to take a personal role in supervising any railroad to which he lent money. Within years, he was merging, disassembling, and reorganizing railroads he financed as though they were so many toy train sets.
After the Panic of 1873, the failures of several railroads led to a wave of bank bailouts by investment consortia. Most of those roads had received massive government subsidies and land grants, and were not only thoroughly inefficient, but were also laced with corruption. Only Hill’s Great Northern, financed almost entirely by private funding, survived the purge. As Morgan and his partners rescued railroad after railroad, they assumed control to restore them to profitability. This was accomplished by making railroads, in essence, look much like banks. Imposing such a structure on many of the railroads improved their operations and brought them into the managerial revolution by introducing them to modern accounting methods and line-and-staff managerial structures, and pushing them toward vertical combinations.
On one occasion, during the Panic of 1893, Morgan essentially rescued the federal government with a massive bailout, delivering 3.5 million ounces of gold to the U.S. Treasury to stave off national bankruptcy. Again, during the Panic of 1907, Morgan and his network of investment bankers helped save the banking structure, although by then he recognized that the American commercial banking system had
grown too large for him to save again. By then, his completely rotund shape; stern, almost scowling, expression; and bulbous irritated nose left him a target for merciless caricatures of the “evil capitalist.” Although he hardly matched the private philanthropy of Rockefeller or Carnegie, the Atlas-like Morgan had hoisted Wall Street and the entire U.S. financial world on his back several times and held it aloft until it stabilized.
If Morgan, Rockefeller, and Carnegie had been the only three prominent American business leaders to emerge in the post–Civil War era, they alone would have composed a remarkable story of industrial growth. The entrepreneurial explosion that occurred in the 1830s, however, only accelerated in the postbellum era, unleashing an army of inventors and corporate founders who enabled the United States to leapfrog past Britain and France in productivity, profitability, and innovation. From 1870 to 1900, the U. S. Patent Office granted more than four hundred thousand patents—ten times what was granted in the previous eighty years. The inventors who sparked this remarkable surge owed much to entrepreneurs who had generated a climate of risk taking unknown to the rest of the world (including capitalist Europe and England). Much of the growth derived from the new emphasis on efficiency that came with the appearance of the managerial hierarchies. The goal was to make products without waste, either in labor or in raw materials, and to sell the goods as efficiently as possible.34
James B. Duke, who founded the American Tobacco Company, used the Bonsack rolling machine to turn out 120,000 cigarettes per day. Charles Pillsbury, a New Hampshire bread maker, invented the purifier that made bread flour uniform in quality. In 1872 he installed a continuous rolling process similar to Duke’s that mass-produced flour. By 1889 his mills were grinding 10,000 barrels of flour a day, drawing wheat from the Dakotas, processing it, then selling it in the East.35
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