The Tycoons: How Andrew Carnegie, John D. Rockefeller, Jay Gould, and J. P. Morgan Invented the American Supercompany

by Charles R. Morris

  The only explicit mention of the use of rebates to pump up the railroad revenue line for bond-holders is in Allan Nevins, I:262, where a contemporary explains them as a device “to satisfy the stockholders on the one side, and prevent competition on the other.” It is normal behavior for early investors in a high-growth industry to focus on revenue growth and market share rather than profits. As an example of free discussion of rebates, see the testimony of Peter Watson and O. H. P. Archer, at the time respectively president and vice president of the Erie, Assembly of the State of New York, Report, pp. 417–19, 299–302. For a near-contemporary argument on the virtues of rebates, see Guy Morrison Walker, Railroad Rates and Rebates (New York: privately published, 1917). This is an advocacy paper, but argues, I believe correctly, that rebates were typically the leading edge of general rate reductions. The pattern of steady rate reductions ended with regulation, to be succeeded by a long period of rising rates and improved profits.

  On Standard and rebates, John Archbold insisted to an 1889 congressional committee that the Standard took no rebates after they were outlawed in 1887, producing letters from presidents of all the major railroads confirming his statement—U.S. House of Representatives, Investigation of Certain Trusts: Report in Relation to the Sugar Trust and Standard Oil Trust by the Committee on Manufactures (Washington, D.C.: U.S. Government Printing Office, 1889), p. 514ff. Chernow, op. cit., p. 252, tells us that although Rockefeller (much later) said that the Standard did not receive rebates after 1880, the practice continued “well into the 1880s,” citing a case from 1886, which was, of course, before they had been outlawed. (Rockefeller was probably confused on the dates, but Chernow, like Tarbell, seems to believe that rebates were always and everywhere illegal.)

  The quotes in the text and in the footnote on the common law and restraints of trade are from Tony Allan Freyer, Regulating Big Business: Antitrust in Great Britain and America (New York: Cambridge University Press, 1992), pp. 127, 24. Even to speak of a British common law of railroads is misleading, since the roads were governed by highly specific statutory enactments from the earliest days—some nine hundred railroad acts were passed in the 1840s and 1850s alone. See Edward Cleveland-Stevens, English Railways: Their Development and Relation to the State (New York: Dutton, 1915). Data on legislation are on p. 25. Parliamentary rate regulation tended to focus on maximum rates, and seem rather more focused on passenger provision than American initiatives. In an important case from the early 1840s, the Lord Chancellor refused to prohibit differential rates, saying that the court “would not interfere unless it were clear that the public interest required it, and that in this case, it being admitted that the higher charge was not more than the Act permitted, it did not appear that the public were prejudiced by the arrangement” (p. 46n). The quote “undue or unreasonable” is from a comprehensive 1854 Act that attempted to codify the previous legislative scheme, ibid., p. 193.

  For the reception of the common law into American antitrust doctrine, see Rudolph J. R. Peritz, Competition Policy in America, 1888–1992: History, Rhetoric, Law (New York: Oxford University Press, 1996), pp. 13–38. The “[A]t a very” quote is from Standard Oil Co. of N.J. v. U.S. 221 U.S. 1 (1911), 52. The Supreme Court refrained from finding that any specific acts of the Standard were illegal, and concurred with the lower court that acts alleged to have been in restraint of trade which took place before the passage of the Sherman Act could not have been illegal. But the court found that the Standard had achieved such thoroughgoing control of the industry as to amount to a monopoly, which was by definition an “undue restraint on trade.” The behavioral history, whether the individual acts were legal or not, was held to be relevant to the question of whether the Standard intended to take over the industry—which could hardly be disputed. For common law and Progressives, see the first three chapters of Edward A. Purcell, Jr., Brandeis and the Progressive Constitution: Erie, the Judicial Power, and the Politics of the Federal Courts in Twentieth-Century America (New Haven, Conn.: Yale University Press, 2000).

  For Tarbell on region refiner rollup, Ida M. Tarbell, History, I:154–60. Chernow, Titan, p. 150, suggests that Rockefeller was driven to the consolidation by his “outsized debt,” which is highly doubtful. Rockefeller borrowed almost solely from banks, who were almost exclusively short-term lenders at this period. A bank letter quoted by Nevins, I:274, stipulates that in the previous year (1869) Rockefeller’s balance sheet varied between high levels of debt and large cash surpluses, which is what one would expect of a short-term working capital borrower. Compared to the railroads, refining was not especially capital intensive, and new facilities were brought on line very rapidly. The Standard managed to reconstruct virtually the entire Cleveland refinery industry in 1872–73, and still keep production flowing, apparently profitably. The large dividends the company paid would also be inconsistent with a company straining under a debt load. Chernow, 151, also says that noncompetition agreements with acquirees’ managers would be “outlawed as a restraint of trade” today. In fact, they are standard in takeover agreements—I have signed several—although modern courts would not enforce the ten-year terms of the Rockefeller agreements, and some state courts usually refuse to enforce them except in exceptional circumstances.

  Carnegie Chooses a Career

  The summary of Carnegie’s multiple enterprises follows Joseph Frazier Wall, Andrew Carnegie (Pittsburgh, Pa.: University of Pittsburgh Press, 1989), pp. 192–306. For the St. Louis Bridge, see Robert W. Jackson, Rails across the Mississippi: A History of the St. Louis Bridge (Urbana, Ill.: University of Illinois Press, 2001); the Sullivan quote is from Carl W. Condit, “Sullivan’s Skyscrapers as an Expression of Nineteenth Century Technology,” Technology and Culture (Winter 1959), 62–83, at 67. Both Jackson’s book, and David G. McCullough, The Great Bridge (New York: Simon and Schuster, 1972), on the Brooklyn Bridge, have excellent descriptions of the pneumatic caissons. (The bends are a common hazard for scuba divers. Recreational divers go as deep as 120 feet without special precautions, except for limiting bottom time and ascending slowly. The problem at the bridges was the rate of the men’s ascents, not the depth itself.) Morgan’s quote on delays is from Robert W. Jackson, Rails, p. 135; his “Think Mr. Gould” and “somewhat less” are from, respectively, Vincent P. Carosso, The Morgans: Private International Bankers, 1854–1913 (Cambridge, Mass.: Harvard University Press, 1987), p. 244, and Julius Grodinsky, Jay Gould, p. 340.

  The Pennsylvania crackdown on its executives is detailed in Report of the Investigating Committee of the Pennsylvania Railroad Company (Philadelphia, Pa.: March 10, 1874), a strikingly thorough and professional document. For the evolution of conflict of interest rules, see Steven W. Usselman, Regulating Railroad Innovation, especially pp. 65–82, which focuses on the Pennsylvania. For the footnote on insider dealing in this era, see Naomi Lamoreaux, “Information Problems and Banks’ Specialization in Short-Term Commercial Lending: New England in the Nineteenth Century,” in Peter Temin, ed., Inside the Business Enterprise: Historical Perspectives on the Use of Information (Chicago, Ill.: University of Chicago Press, 1991), pp. 161–205.

  4. Wrenchings

  The main sources for the strikes are Philip Foner, The Great Labor Uprising (New York: Monad Press, 1977); J. A. Dacus, Annals of the Great Strikes in the United States (New York: Burt Franklin, 1969) (reprint of 1877 edition); along with reports in the Commercial and Financial Chronicle. Quotes “saturnalia” and “bungling” from the Chronicle, July 28, 1877; “peace everywhere” (actually Pax semper et ubique) in Foner, op. cit., pp. 200–201. The “long and merciless” quote is from Allan Nevins, John D. Rockefeller: The Heroic Age of American Enterprise (New York: Charles Scribner’s Sons, 1940 (2 vols.), I:444.

  The Crash of 1873

  Jay Cooke’s career and banking failure are drawn primarily from Henrietta M. Larson, Jay Cooke, Private Banker (Cambridge, Mass.: Harvard University Press, 1936), supplemented by contemporary reports in the Chronicle. Quotes “received
with,” “Jay Cooke panic,” and “Since” from the Chronicle, September 20, 1873; railroad default count, Chronicle, October 10, 1874. After his bank collapsed, Cooke, rather than stiffing his creditors à la Jay Gould, spent three years working out settlements, emerging, if not actually poor, with sharply constrained means. Within a few years, he made a second fortune in silver mining, and before his death, had the pleasure of seeing the Northern Pacific live up to his most expansive forecasts. Duluth built a statue in his honor, and the railroad made him their guest on a special train for the full trip to Puget Sound.

  The bank squeeze follows accounts in the Chronicle, as well as Frederick J. L. Edwards, “Some Economic Effects of the Depression of the 1870s in the United States” (master’s thesis, Columbia University, 1951), and Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867–1960 (Princeton, N.J.: Princeton University Press, 1963), pp. 76–77. The Friedman and Schwartz chapter “The Greenback Period,” pp. 15–88, is a very crisp roundup of the era. The crop turnaround between 1872 and 1873 was extremely large—exports to Great Britain, the United States’ primary customer, jumped from 12 million bushels in 1872 to 26 million in 1873, far higher than any previous year, Chronicle, September 12, 1874.

  A Most Peculiar Decade

  A good summary of the reconstructive work is Paul W. Rhode, “Gallman’s Annual Output Series for the United States, 1834–1909,” National Bureau of Economic Research, Working Paper 8860 (April 2002), which includes an updated set of Gallman tables, as well as Gallman’s own unpublished corrections and adjustments. The original Gallman tables are in Robert E. Gallman, “Gross National Product in the United States, 1834–1909,” in Dorothy Brady, ed., National Bureau of Economic Research, Output, Employment, and Productivity in the United States after 1800 (New York: Columbia University Press, 1966), pp. 3–75. Also see Simon Kuznets, “Notes on the Pattern of U.S. Economic Growth,” in Edgar O. Edwards, ed., The Nation’s Economic Objectives (Chicago, Ill.: University of Chicago Press, 1964). The year-to-year growth rates are 4.5 percent from 1869 to 1879, and 6.0 percent from 1870 to 1880 (1880 growth was very strong); Kuznets’s five-year arithmetic averages give an annual rate of 4.95 percent. Gallman does not estimate data for the 1859–68 decade because of the war disruptions, although Kuznets does. Comparing the five years from 1869–73 to 1879–83 gives 6.1 percent. The “more recent” higher growth calculation is cited in Michael D. Bordo and Angela Redish, “Is Deflation Depressing? Evidence from the Classical Gold Standard,” NBER Working Paper 9520 (Cambridge, Mass.: National Bureau of Economic Research, February 2003), p. 15. Friedman and Schwartz, based on their monetary analysis, think that the Kuznets data may be too high, but stress that even their lowered estimate “confirms one striking finding of the Kuznets estimates, namely that the decade from 1869 to 1879 was characterized by an extraordinarily rapid growth of output: at a rate of 4.3 or 4.9 per cent per year in total output, and 2.0 or 2.6 per cent per year in per capita output.”

  Commodity and physical output data, except as noted, are from Robert S. Manthy, Natural Resource Commodities—A Century of Statistics: Prices, Output, Consumption, Foreign Trade, and Employment in the United States, 1870–1913 (Baltimore, Md.: Johns Hopkins University Press, 1978), see Tables N–1, 2, 4, and 5; MC–11, 20, and MO–3; for food, Tables AC–11, 12, 9, and 10. There are no comprehensive data on railroad loadings for this period, so I took a sample of large roads from the relevant Poor’s Manual of Railroads (Henry V. Poor) (New York: Poor’s Publishing Co., annual from 1869). For the Chicago, Burlington, and Quincy; Lake Shore and Michigan and Southern; New York Central; Pennsylvania; and Union Pacific, from 1871 (1872 for Union Pacific) to 1877, freight tonnage rose, respectively, 135%, 46%, 40%, 47%, and 89%, which is roughly consistent with the increases in commodity output. Immigration data are from United States Bureau of the Census, Historical Statistics of the United States, Colonial Times to 1970 (2 vols.) (Washington, D.C.: U.S. Government Printing Office, 1975), Series C 89–119.

  For U.K.-U.S. steel production, Peter Temin, “Relative Decline of British Steel Industry, 1880–1913,” in Henry Rosovsky, ed., Industrialization in Two Systems: Essays in Honor of Alexander Gerschenkron by a Group of His Students (New York: John Wiley, 1966), pp. 140–55, at p. 143. The “awful” quote and Frick coke volumes are from Kenneth Warren, Wealth, Waste, and Alienation: Growth and Decline in the Connellsville Coke Industry (Pittsburgh, Pa.: University of Pittsburgh Press, 2001), pp. 34, 32. For employment, I use Stanley Lebergott, “Labor Force and Employment, 1800–1960,” in Dorothy Brady, ed., Output, Employment, and Productivity, pp. 117–204, with the railroad adjustments from Albert Fishlow, “Productivity and Technological Change in the Railroad Sector, 1840–1910,” in ibid., pp. 583–646. The quote “the wage-earning” is cited in Thomas Kessner, Capital City: New York City and the Men behind America’s Rise to Economic Dominance, 1860–1900 (New York: Simon and Schuster, 2003), p. 191. The data for the footnote on unskilled labor is from Edith Abbott, “The Wages of Unskilled Laborers in the United States, 1850–1900,” The Journal of Political Economy, vol. 13, no. 3 (June 1905), 321–67, at 363.

  The overview of hardship follows, except as noted, Samuel Reznack, “Distress, Relief, and Discontent in the United States during the Depression of 1873–1878,” Journal of Political Economy (December 1950), 494–512. The “20%” quote is on p. 496. The “much-cited” contemporary analysis is quoted at length in Reznack; I could not track down a copy of it, but the description seems to make clear that it is following price data (which Friedman and Schwartz also surmised, op. cit., p. 43n). For commodity volumes, see supra; merchandise exports are given only in current prices in United States Bureau of the Census, Historical Statistics, Series U, 1–25. The half million unemployed was a contemporary estimate from the Massachusetts labor commissioner, Carroll Wright, extrapolating from his Massachusetts count (Reznack, op. cit., p. 498), while the five million, the highest I’ve seen, is from Philip Foner, The Great Labor Uprising of 1877, p. 24, but no source is given. (Wright’s estimates perhaps gain some credibility from his later incarnation as the pioneer of comprehensive labor statistics at the federal level.) For concentration of employment in small and medium businesses, see Stanley Lebergott, “Labor Force,” pp. 118–20; and also Harold F. Williamson, Ralph L. Andreano, and Carmen Menezes, “The American Petroleum Industry,” in Dorothy Brady, ed., Output, Employment, and Productivity, pp. 349–403, at p. 377. Chronicle job loss estimate is from issue of August 22, 1874. Possibly the largest ever American railroad building crew was the roughly 6,000 men that the Union Pacific employed in crossing the Rockies. (The Chinese crews on the Central Pacific were even bigger, but no one would have counted them in unemployment data.) The UP crew, however, was virtually a moveable city, with huge numbers of wagonmen carting supplies into a still relatively unexplored wilderness, cattle herders, loggers and sawyers so they could harvest ties and poles from passing forests, plus equipment for the massive cuts and trestles to go through or over mountain passes. See Maury Klein, Union Pacific, vol. 1 (New York: Doubleday, 1987), pp. 165–69. Normal crews, in settled areas, would have been in the hundreds. For perspective, by the 1870s, a single crew readily laid five miles a day; in a good year, the industry added 5,000 miles of new track. The post-crash job loss in steel is from Thomas J. Misa, A Nation of Steel: The Making of Modern America, 1865–1925 (Baltimore, Md.: Johns Hopkins University Press, 1995), p. 31.

  For other manufacturers, see David A. Hounshell, From American System to Mass Production, 1800–1932: The Development of Manufacturing Technology in the United States (Baltimore, Md.: Johns Hopkins University Press, 1984), pp. 89 (Singer), 147 (Studebaker), and 174–76 (McCormick); Philip Scranton, Endless Novelty: Specialty Production and American Industrialization, 1865–1925 (Princeton, N.J.: Princeton University Press, 1997), pp. 90–91 (Philadelphia) and 109 (Providence). The “Despite” quote in the note is from Scranton, ibid., p. 91. For acreage and mechanization
, William Parker and Judith L. V. Klein, “Productivity Growth in Grain Production in the United States, 1840–1860 and 1900–1910,” in Dorothy Brady, ed., Output, Employment, and Productivity, pp. 523–82, at pp. 542–43. For the shift of capital formation away from “extensive” additions, like clearing more land, to “intensive” investments, like mechanization in the 1870s, see Robert Gallman, “The United States Capital Stock in the Nineteenth Century,” in Stanley Engerman and Robert Gallman, eds., Long-Term Factors in American Economic Growth: National Bureau of Economic Research Studies in Income and Wealth, vol. 51 (Chicago: University of Chicago Press, 1986), pp. 165–214.

  Pennsylvania finances are from Report of the Investigating Committee of the Pennsylvania Railroad Company (Philadelphia, Pa.: March 10, 1874). National railroad earnings are from Poor’s Manual of Railroads, 1877–78 (which has a ten-year table). Revenues rose about 30 percent from 1871 to the banner year of 1873, then fell about 10 percent from 1873 to 1877, while operating margins to revenues rose from 35.1 percent in 1871 to 36.2 percent in 1877. The only year that margins fell below 35 percent was in 1873 when, presumably, gross earnings were so good that the roads could afford to get a little sloppy. The Sun quote is from Foner, op. cit., p. 34; Chronicle editorial, July 28, 1877.