Big Business: Steel and Oil

The term “big business” is often used to characterize industrial expansion after the Civil War. During this period, the movement of the production of goods out of small shops and mills and into factories increased tremendously. In almost every industry, the number of factory workers grew, and by 1900, manufacturing plants with over 1,000 employees — something unheard of 30 years earlier — were commonplace. Big business also meant consolidation; entire industries were controlled by a handful of companies as competition led to new forms of business organization. The steel and oil industries are good examples of this trend.

Andrew Carnegie and the steel industry. With the introduction of such new technology as the Bessemer converter and the open hearth process, the amount of steel produced in the United States went from 77,000 tons in 1870 to over 10 million tons in 1900. The bulk of the production at the turn of the century was in the hands of a single company, Carnegie Steel, founded by Scottish immigrant and railroad entrepreneur Andrew Carnegie. While acquiring other steel companies that were unable to compete against his highly efficient operations, Carnegie also bought iron ore deposits as well as steamships and railroad cars, which were used to ship ore to his plants and goods to his customers. This concept of controlling the manufacture of a product from the raw material stage to the sale of the finished product is known as vertical integration. Carnegie sold his company to a group of investors led by J. Pierpont Morgan in 1901 for just under $500 million. Out of that sale came the United States Steel Corporation, the largest company in the world at that time, controlling 200 subsidiaries and employing more than 168,000 people.

Carnegie was also a philosopher of the new industrial age. His article “Wealth,” which was first published in the North American Review in 1889 and was later included in his book Gospel of Wealth (1900), drew on the then‐popular ideas of social Darwinism. He argued that although competition in business widened the gap between the rich and poor, it also insured the “survival of the fittest” and was essential to human progress. To Carnegie, the issue was not the concentration of wealth in the hands of a few, but how those few used their wealth. Carnegie strongly believed that the purpose of philanthropy was to enable people to help themselves, and he used his immense fortune to support universities, libraries, hospitals, and similar projects throughout the country.

John D. Rockefeller and the oil industry. John D. Rockefeller created Standard Oil of Ohio in 1870, and the company quickly monopolized oil refining and transportation in the United States. Rockefeller received significant rebates from the railroads and made his own oil barrels, built pipelines and oil storage facilities, and bought tank cars to reduce expenses. These methods of vertical integration allowed Standard Oil to cut prices and drive competitors out of business. The company also led the way in horizontal integration, controlling businesses in the same industry. In 1882, Rockefeller formed the Standard Oil Trust, which controlled upward of 95 percent of the refining capacity in the United States. In a trust, stockholders give up their stock and the control of their respective companies to a board of trustees in return for trust certificates, which pay higher dividends.

Growth in the number of trusts led Congress to take action against them. The Sherman Antitrust Act of 1890 declared trusts or other business combinations operating “in restraint of trade” to be illegal and authorized the federal government to break them up. However, the legislation did not define what a trust was or what “restraint of trade” meant, and it was not vigorously enforced. Eighteen lawsuits were filed under the statute between 1890 and 1904, four of these against labor unions. Nevertheless, as a result of the antitrust legislation, the Ohio Supreme Court dissolved the Standard Oil Trust in 1892. Rockefeller reorganized his business in 1899 as Standard Oil Company of New Jersey. The new entity was a holding company (a corporation owning a controlling share of the stock in other firms), and this new type of combination continued to exercise a monopoly over the oil industry.

New forms of business organization were not unique to steel and oil, though. Gustavus Swift, for instance, established meat packing and provisioning as a vertical integration by purchasing cattle, refrigerated railroad cars and warehouses, and a fleet of wagons to deliver beef to retail butchers. Similarly, other industries, such as sugar refining, followed Rockefeller's example and formed trusts. Nor was big business limited to heavy industry; the late nineteenth century also saw the rise of large‐scale retailing. In Philadelphia in 1876, John Wanamaker opened the first department store, which was quickly imitated by Macy's in New York and Marshall Field in Chicago. The successful department store sold a wide variety of merchandise, kept prices low through buying in large volume direct from manufacturers, focused on quality and customer service, and advertised heavily.