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The postwar boom in productivity led everywhere to the problem of excess capacity. Even before the contraction, industries across the country had been struggling to cope with periodic imbalances of supply and demand. Too many goods flooding the market with no increase in the money supply had driven prices down, and the depression cut them further: wholesale prices, which had doubled during the Civil War, fell 30 percent between 1873 and 1879.
Adam Smith noted in 1776 that “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” The impetus to fix prices increased in the late nineteenth century in direct proportion to the size of potential profits and losses. “The tendencies Smith observed seemed mild indeed when compared with the manic compulsions stimulated afterward by the revolution in productivity”—writes the historian Thomas K. McCraw—“which made the potential rewards of industrial success far greater than anything possible in Smith’s era. It had the same magnifying effect on the potential cost of failure: the immense capital investment represented by a large modern factory or string of factories raised the penalty for failure beyond anything Smith could have contemplated.”
Rising productivity after the industrial revolution had created overcapacity problems all over Europe as well. European governments, playing an active role in their countries’ economic affairs, gave legal sanction to cartels that set prices and limited production. In making these agreements enforceable, foreign states curtailed free-market competition, promoted the growth of loose horizontal associations, mediated industrial conflict, and imposed a certain amount of stability on the marketplace. The price they paid for “managing” competition this way tended to be reduced productivity and fewer innovative gains. In the United States, by contrast, national commitment to individual initiative and unfettered market forces, matched by ideological opposition to central planning, ensured that the “state” had no power to control industrial overcapacity or modulate fluctuations in the business cycle. Competition red in tooth and claw was animating U.S. economic growth, as private capital in search of profit built giant modern enterprises, and powerful industrialists devised private solutions to the problems they faced.
Individual railroad managers struggled to stabilize their markets and earn enough to meet fixed costs. Forced to keep rates low where they faced competition—usually on long routes between major cities—they raised prices on short hauls in rural areas where they had monopoly control. And they gave discounts to large shippers who promised steady business. These discriminatory policies outraged farmers and other small-scale shippers, who formed cooperative organizations called Granges in self-defense, and demanded external regulation of the roads.
The railroads, too, tried cooperation in self-defense. As early as 1854 the Big Four trunk lines had met in New York with their western allies to set prices, coordinate through traffic on connecting roads, and agree on “general principles which should govern Railroad Companies competing for the same trade, and preventing ruinous competition.…” Incentives to compete proved stronger than the inclination to cooperate, however. With no enforceable sanctions, these peace treaties invariably fell apart.
As the long depression of the seventies reduced traffic and increased competition on roads across the nation, the heads of the trunk lines tried again to divide up traffic in the West. John W. Garrett of the Baltimore & Ohio, a long-term Morgan client, reported to Junius in March 1877 that they had agreed to act upon one “great principle”—“to earn more and to spend less, to fix a system under which reasonable and equitable rates between all points can be established and maintained.” This attempt at confederation also failed.
What did seem to work was consolidated ownership of regional systems that could maximize efficiency, minimize costs, coordinate information, and restrict competition—and the strong roads were moving in that direction. By 1874 the giant Pennsylvania controlled six thousand miles of road (8 percent of all U.S. mileage) between the Atlantic seaboard, the Great Lakes, and the Mississippi River. Jay Gould in the seventies acquired control of the Union Pacific Railroad, the Wabash Railroad, and Western Union, building a transportation and communications empire in the West.
In different ways, Andrew Carnegie and John D. Rockefeller took command of other wildly competitive industries in the seventies, creating huge, low-cost, high-volume enterprises organized to take advantage of technological innovations, administrative rationalization, and tremendous economies of scale. Carnegie dominated the steel market by relentlessly underselling less efficient rivals, and by running his mills at full blast to maintain high production volumes even if he wore the mills out in the process. It was, he knew from careful cost accounting, cheaper to build new mills than to cut production runs. And he did not hesitate to scrap old methods when a new discovery promised to lower his costs. He had installed expensive Bessemer converters at his E.T. plant in 1873–75, but as soon as he was convinced that an amateur English chemist had found a way to make steel better and more cheaply with open-hearth furnaces, he ordered open-hearth equipment and switched to the new technique. Small savings per ton at very high volumes quickly justified the cost.
The depression enabled Carnegie to buy up competitors and raw-material suppliers at fractions of their values. By 1881 he had consolidated steelworks, iron mines, coke plants, and coalfields into the tightly organized Carnegie Bros. & Co., Ltd., capitalized at $5 million. He himself held 55 percent of the new partnership, which earned $2 million profit its first year. With his immense competitive advantages, this master strategist had no use for cooperative cartels. “The market is mine whenever I want to take it,” he told a rival. “I see no reason why I should present you with all my profits.”
John D. Rockefeller by 1873 owned the largest consolidated oil-refining complex in the world, Standard Oil of Ohio. During the depression he expanded his facilities, improved the quality of his products, kept a hawkish eye on costs, stockpiled cash, bought out rivals, and began the process of vertical integration—acquiring raw materials such as ore lands and timber as well as distribution facilities such as tank cars, ships, and warehouses—to protect his enterprise from the fluctuations of the market. His tactics were not genteel. He forced competitors to sell out by spying on them, depriving them of raw materials he controlled, and slashing prices until they had to operate at a loss. Because he shipped the huge volumes of freight the railroads needed for income, he could force the roads’ managers not only to give him discounted rates but also to kick back a portion of the higher fees his rivals had to pay. By the end of the seventies the Rockefeller partnerships controlled 90 percent of America’s oil-refining capacity, as well as pipelines, gathering facilities, and transportation systems. In 1882 the partnerships reorganized as the Standard Oil Trust, which held the securities of forty constituent companies worth $70 million.
These shrewd, aggressive, single-minded “captains of industry” were operating not according to grand plans but on pragmatic instinct. Trying to harness the tremendous productive capacities unleashed by new technologies and huge domestic U.S. markets, they built companies that came to dominate world trade and earned them immense personal fortunes.
Before the industrial revolution, Adam Smith described how the invisible hand of market forces governed economic activity: individual firms invariably tried to grow faster and make more money than their rivals, but competition ensured that all earned roughly equal profits, and none could dominate the market. That model of “perfect” competition represented the American ideal, but with the rise of large-scale, capital-intensive enterprise it became possible for a few giant firms to overcome competitive restraints and control significant portions of their markets.
The great size, ruthless efficiency, and sometimes brutal tactics of these companies aroused fierce political opposition. Yet the firms that succeeded over the long run did so largely because their operational strategies—makin
g use of scale efficiencies, new technologies, vertical integration, and rationalization of the production process—made economic sense. As the “visible hand” of management, in Alfred Chandler’s potent phrase, took over from the market, the country entered into a debate about competition and regulation that would continue for over a hundred years.
The successful entrepreneurs of the late nineteenth century rarely concerned themselves with the political or social consequences of their actions, and few had moral qualms about their work. They saw themselves building a great industrial empire and making America rich. “To imagine that such men did not sleep the sleep of the just would be romantic sentimentalism,” reflected Richard Hofstadter decades later. “In the Gilded Age even the angels sang for them.”
Not all the angels. To farmers caught in the vise of falling prices and the rising cost of debt, to small businessmen ruined by corporate giants, and to workers who earned minimal wages laboring long hours under hazardous conditions with no job security, the consolidation of large-scale, mechanized production in the hands of men such as Carnegie, Rockefeller, and the railroad barons represented everything their antecedents had fought a revolution against. The opponents of big business had little political leverage in the 1870s, however, and no expectation of government help.
Reviewing a French book about the United States in 1876, The New York Times criticized the author for failing to realize how unimportant Americans considered their government: “Its powers are more limited, its functions less extensive, its relations to the people and to other Governments of less consequence than in the case of European Governments.” The Times went on proudly: “The American citizen of to-day can pass a busy or a leisurely life of great or of moderate prosperity, and have very little personal occasion to know or to care what sort of men fill the offices.… Our Government nowhere touches our purse or our pride as that of France does those of its citizens. It is not a dispenser of special honors of any kind; it does not stand guard for us against the encroachments of socialism … it cannot greatly help or hinder us in any of our ordinary interests and ambitions.”
The government also did not stand guard against the economic power of big business, and it was dispensing special favors to those who could afford them. Political parties in the post–Civil War period operated more on the basis of patronage than principle—according to Hofstadter, “they divided over spoils, not issues”—and the corporate bank accounts of the Gilded Age fueled the politics of patronage.
Party leaders at all levels of government brokered deals, handed out offices, and managed the money that supported their increasingly complex organizations and expensive election campaigns. Legislators from both parties accepted cash, stock, free passes, directorships, and other financial favors from railroad promoters, and voted for bills that favored the roads. At one point four different roads were paying Republican National Committee chairman William E. Chandler. Liberal Republican Lyman Trumbull sat in the Senate while on retainer from the Illinois Central. Jay Cooke before his failure took out a mortgage for House Speaker James G. Blaine, and sold land at a steep discount to Ohio Governor Rutherford B. Hayes. One Gilded Age reformer quipped that Rockefeller had done everything imaginable to the Pennsylvania State Legislature except refine it—and that the Pennsylvania Railroad ran the State Supreme Court “as if it were one of its limited trains.” Job Stevenson of Ohio characterized the House of Representatives in 1873 as “an auction room where more valuable considerations were disposed of under the speaker’s hammer than in any other place on earth.”
The Grant administration proved to be the most corrupt of the century, with financial scandal tarring nearly every member of the cabinet. Both of Grant’s vice presidents were implicated in the 1872 Crédit Mobilier fraud, in which a construction company set up by Union Pacific Railroad profiteers issued stock to congressmen who authorized federal subsidies and looked the other way, until the arrangement was exposed by the New York Sun. The Navy Secretary took bribes from naval suppliers, the Interior Secretary’s son sold surveying contracts, the Secretary of War got kickbacks from Indian trading posts, the President’s private secretary was involved in a whiskey-tax scam, and Grant’s brother-in-law helped Jay Gould corner gold.
Pierpont championed one of the few honest officers in Grant’s cabinet—Benjamin Bristow, Treasury Secretary from 1874 to 1876—and was disgusted by Washington corruption. Still, the Republican commitment to monetary stability mattered more to the Morgans than any individual figure or scandal. In 1874 Grant vetoed a moderately expansionist Inflation Bill that would have increased greenback circulation by $64 million. Wall Street was delighted with the veto, as were liberal reformers and western bankers who saw the bill as an unhealthy expansion of the government’s power to regulate the money supply.
The Republicans suffered huge losses in that fall’s midterm elections, chiefly because of the economic crisis. Democrats won governorships in eight states and control of the House for the first time since the war. Samuel J. Tilden, the reformist new governor of New York, called the outcome “not merely a victory but a revolution.” It was not quite the revolution Democrats had in mind: for most of the next two decades the parties split control of the Senate, House, and White House, which meant that few strong initiatives emanated from Washington. Since the federal government had no clear fiscal or monetary policy, leadership on economic questions came largely from the nation’s financial capital—New York.
The Morgan bank was doing well in all this tumult. For 1873, the year of the panic, the Philadelphia and New York houses netted over $1 million (Philadelphia roughly $580,000, New York $460,000), after deducting $200,000 to cover possible bad debts. “I don’t think there is another concern in the country can begin to show such a result,” Pierpont told his father, whom he was beginning to echo. “Profitable as the year was, it has been attended by hard work and great anxiety during the panic, and the satisfaction is greatest from the enhanced position accorded us by the public generally which is very marked.”
His definition of “the public” did not include many people west of the Hudson or east of Lexington Avenue, but his social world also acknowledged his “enhanced position.” After he saw one of his wife’s friends off on a steamer to Europe at the end of 1873, the woman gushed: “Fanny how I do love him—I can’t help saying so he is now on such a grand noble scale.”
The depression-era cutback in commercial activity increased the stakes and the conflicts on Wall Street. “The competition for the best business is getting very strong & the margins consequently less,” the junior Morgan told the senior early in 1875, but “we have been very successful thus far in getting our share.” There was competition even within the Morgan/Drexel alliance, as New York surpassed Philadelphia: Drexel, Morgan earned nearly $600,000 in 1874, reported Pierpont, “pretty good for a dull year,” and “Phila. netted about 400,000. New York carried the palm.”
In August of 1875, the failure of his first employer, Duncan, Sherman & Co., brought his own firm “a great many new accounts,” Pierpont told a colleague, “so it is an ill wind that blows nobody good.” Still, those who wanted the “best” business had to go after it. Bankers who could sell government bonds in Europe, especially during a depression when domestic capital was tight, would gain not only profit and prestige but a voice in the direction of U.S. monetary policy—and Jay Cooke’s failure left the government’s business open to competition.
After corruption charges forced Boutwell’s successor at the Treasury to resign in 1874, Grant appointed Benjamin H. Bristow, a liberal Kentucky Republican and Union army veteran who had argued most of the government’s Reconstruction cases between 1870 and 1872, when he served as U.S. solicitor general. Bristow was physically imposing at six feet, 225 pounds, and the New York World thought the firm “sweep” of his jaw promised “aggressive perseverance” at the Treasury. Secretary of State Hamilton Fish said Grant had finally done something to redeem himself by appointing the trustworthy Bri
stow.
The Morgans took no part in Bristow’s first refunding loan, but secured a share of the second early in 1875, with Rothschilds in the lead. Junius told Bristow by cable of his “pleasure in thus responding your wishes & in being associated with negotiations bringing us into more intimate relations yourself.” Pierpont followed up with a call on the Secretary, whom he found “clearheaded [and] reliable … very different from his immediate predecessors,” but unlikely to stay at Treasury for long since he was “evidently ill at ease” with the corruption around him. The new loan sold well, but Pierpont resented the arrogance of Rothschild’s U.S. agent, August Belmont: “So far as we are concerned,” he complained, “we are entire nonentities—we are never consulted or informed [by Belmont] & have no more idea of what is being done than if we had no interest or liability in the matter.”
Over the following year, Pierpont strengthened his alliance with Bristow. He told the Secretary in February 1876: “I am entirely at your service at any time and if you want to see me, I will go on to Washington whenever you like”—to which Bristow replied, “I need not assure you that, should refunding operations be resumed, I should very much hope to have the benefit of the services of Mr. Drexel and your house in the negotiations.”
Two weeks later, an investigation launched by Bristow established that Grant’s private secretary had helped the Whiskey Ring avoid paying millions in federal taxes—a finding that infuriated the President, and prompted rumors that the Treasury Secretary would have to resign. From New York, Pierpont wrote Bristow “to beg you on behalf of all those who desire an honest and capable control of the Treasury Department to stand by your colors at any personal sacrifice.” Bristow replied, “I beg to express my gratitude for your words of sympathy and confidence—and to say that it looks now as if matters had assumed a different shape. At any rate the discomfort of my position is not as great as it has been for a few weeks past.”