1302 Lecture #2: The Gilded Age (PDF)

1302 Lecture #2: The Gilded Age Timeline: 1870-94 The Civil War created an economic boom which continued for almost decade after the conflict.1 The post-war years were characterized by an unconstrained, freewheeling capitalism. This stimulus created windfall profits financial speculators who, in tu...

1302 Lecture #2: The Gilded Age Timeline: 1870-94 The Civil War created an economic boom which continued for almost decade after the conflict.1 The post-war years were characterized by an unconstrained, freewheeling capitalism. This stimulus created windfall profits financial speculators who, in turn, developed a habit for extravagance that set the tone for the period to follow. Speculators are investors who gamble by investing their money in business ventures with the expectation of a significant gain. Great fortunes were made in this period by daring men who took a chance on the future. The era from the 1870s to 1900 was known as THE GILDED AGE, a term coined by writers Mark Twain and Charles Dudley Warner as the title of their novel satirizing the serious social problems of the day masked by a thin veneer, or gilding, of gold. The age saw the greatest increase in economic growth in the shortest period ever in previous history. Living standards improved significantly in the industrialized countries as the price of goods fell dramatically due to increases and efficiencies in production. However, these changes also created a massive and disorienting upheaval as many average people were displaced by machines and older ways of production became obsolete in a very short time span. The Commercial and Financial Chronicle summarized the circumstances: “There is an increasing tendency in our capital to move in larger masses than formerly. Small business firms compete at more disadvantage with richer houses, and are gradually being absorbed into them.” As disciples of Alexander Hamilton’s philosophy, triumphant Republicans began a policy of corporate welfare to railroad companies that spurred a boom in railroad construction which, in turn, spurred greater industrialization. The natural result of the intermingling of government authority and private business was corruption. And corruption in government was a significant feature and the pervasive problem of the Gilded Age. Investment provided the capital that fueled new enterprises. These businesses created a shift in history known as THE SECOND INDUSTRIAL REVOLUTION, an incredible expansion of technology which took place from 1870-1914 and altered the traditional ways of human existence forever. It followed and continued the first Industrial Revolution which began in Great Britain in the late 18th century and spread throughout Western Europe and America. The half-century of the Second Industrial Revolution was one of stupendous invention, entrepreneurship and wage gains and was stimulated in three ways: 1. Creation of an interconnected network of railroad transportation and telegraph and telephone communications; 2. The widespread use of electricity and, 3. The application of scientific research to industrial development.2 While the first Industrial Revolution was driven by steam power, interchangeable parts and mass production, the second was characterized by large-scale iron and steel production and widespread use of machinery in manufacturing. Modern organizational methods for operating large scale businesses over vast areas came into use at that time. The United States led the revolution and, by 1900, surpassed the British Empire to become the world’s greatest economic power. Free of income tax and meddling government regulators, the pioneering 1 At least for the North and much of the West. The South, as you recall, was devastated by the war and slow to recover. 2 During the Second Industrial Revolution the use of gas, water supply and sewage systems, which had been concentrated in just a few select cities, became widespread. The enormous expansion of rail and telegraph lines after 1870 allowed unprecedented movement of people and ideas, which culminated in a new wave of globalization. In the same time period, new technological systems were introduced, most significantly electrical power and telephones. entrepreneurs of the Second Industrial Revolution took business practices to unprecedented heights, bringing the CORPORATION to prominence. A corporation is group of people legally authorized to act as a single entity (legally, a corporation is a person). Businessmen formed corporations to do the big jobs of producing products and distributing them into the market. The modern corporation spawned many common-place practices from public relations and advertising to sophisticated managerial methods and financing processes. The founders of these 19th century corporations remain familiar to us even in the 21st century. These men amassed incredible fortunes unlike any seen before in human history. As their corporations grew, these innovative and wealthy men sought to integrate all the processes of the business – production, distribution and services – into their corporations in an effort to dominate entire sections of the market. Collectively, they became known as the ROBBER BARONS, a disparaging term applied to about 30 of the largest and most successful titans of industry in the late 1800s. These men robbed no one and made daily life more modern, efficient and comfortable for average people of all types, but their enormous wealth and eagerness to eliminate competitors rubbed many Americans the wrong way. “Robber Baron” is an historic term once applied to the despotic noblemen of Medieval Europe. Among the Robber Barons of the 19th century were Andrew Carnegie who made millions in steel production; Railroad magnate Leland Stanford founded Stanford University and named it for his son who died of typhoid at 15. Marshall Fields established the lucrative department store in Chicago named for him. Shipping and railroad tycoon Cornelius Vanderbilt also established Vanderbilt University. The men who financed the corporations also claimed membership in the group, including J.P. (John Pierpont) Morgan, who made a fortune in industrial consolidation and created a banking dynasty. The most famous of the Robber Barons was JOHN D. ROCKEFELLER who developed corporate management techniques that revolutionized American business. Born into modest circumstances, Rockefeller developed a mind for business at an early age, keeping his own financial records at 16. He saved the money he made from early jobs and entered the fledgling oil business in 1863.3 He founded the Standard Oil Company in 1870. Rockefeller’s aggressive business practices made his company so successful that by the early 1880s Standard Oil controlled about 90 percent of U.S. refineries and pipelines and ranked as one of the world’s great corporations. He achieved this by buying rival refineries and developing companies for distributing and marketing its products around the globe. His ability to eliminate competition – a technique called horizontal integration – made Standard Oil a monopoly. Critics accused Rockefeller of unethical practices, such as predatory pricing and colluding with railroads to eliminate his competitors.4 In 1911, the U.S. Supreme Court found Standard in violation of anti-trust 3 In those days, oil distilled from shale became kerosene which was used to light lamps. Oil was much more adaptable and flexible than coal. Additionally, the kerosene that was refined originally from crude provided a reliable and relatively inexpensive alternative to “coal-oils” and whale oil for fueling lamps. 4 Predatory pricing is the act of setting prices low in an attempt to eliminate the competition. Predatory pricing violates antitrust law because it makes markets more vulnerable to a monopoly. However, allegations of this can be difficult to prosecute because defendants can argue that lowering prices are part of normal competition, rather than a deliberate attempt to undermine the marketplace. After all, everybody likes a bargain, right? Predatory pricing isn’t always successful because of the difficulties in recouping lost revenue and eliminating competitors. laws and ordered it to dissolve.5 Rockefeller donated more than half a billion dollars to various educational, religious and scientific causes through the Rockefeller Foundation. Among his accomplishments was the establishment of the University of Chicago.6 A common misconception is that men like Rockefeller and the Robber Barons were capitalists, supporters of free enterprise and free markets.7 But a close inspection of their words and deeds should dispel that assumption. The incredibly dynamic and productive nature of capitalism was volatile and unpredictable and it bothered the Robber Barons who saw it as unstable and creating a climate of, what they called, “ruinous competition” that threatened their corporations. In the open atmosphere of free markets in the late 1800s, the little guy with the better idea could build his own enterprise and knock off the old established businesses. The Robber Barons, fixated on maximizing their profits, worked to convert the American economy to a managerial system by which they could better dominate their industries by forming monopolies to maintain control. Rockefeller saw capitalism as too chaotic and sought to impose “order” on the market by weeding out his competition. Notoriously stingy in business, he was determined to “pay nobody a profit.” Instead of contracting other companies for their products and services, Rockefeller preferred to have Standard Oil control all factors of its production from drilling and refining oil down to making their own barrels and cans. This is a practice known as “vertical integration.”8 Standard even maintained large reserves of cash to keep from seeking bank loans. The Robber Barons also attempted to tame the dynamic power of capitalism through consolidations, mergers and TRUSTS in an attempt to monopolize industries and eliminate upstart competitors who threatened their enterprises. Trusts were a joining of several companies into a single group with a board of trustees to manage it. The Sherman Anti-Trust Act of 1890 was the first measure passed to prohibit monopolies to ensure free market competition. By the turn of the century, the Robber Barons turned away from trusts and looked to politics as their means of centralizing the economy and maintain their positions at the top of the economic heap. They used government regulation of business to forge a government–business coalition. This was a powerful partnership of economic influence and political power that expanded the Hamiltonian method of government subsidies and special privileges for big business, taking it to a new level in a complex industrial society. But the hazy language of the Sherman Anti-Trust Act made it inherently weak. Remarkably, it failed to define the meaning of important concepts such as “trust,” “restraint,” and “combination.” It was also unclear whether 5 Standard Oil was broken up into 34 separate entities that included companies that would become ExxonMobil (Humble Oil), Conoco, Chevron and Amoco. The breakup turned out to be a financial windfall for Rockefeller, who held a quarter of Standard Oil’s stock. The individual pieces of the company were worth more than the whole and as shares of each company doubled and tripled in value in their early years. Rockefeller became America’s first billionaire with a fortune worth nearly 2 percent of the entire U.S. economy. 6 Although rich beyond imagination, Rockefeller lived frugally. He rode public transportation to work, ate at home and attended his Baptist church. 7 The American economy has always included a mix of entrepreneurs. Historian Thomas J. DiLorenzo has divided them into two categories: market entrepreneurs and a political entrepreneurs. According to DiLorenzo, market entrepreneurs succeed by selling a newer, better, or less expensive product on the free market without any government subsidies, direct or indirect. By contrast, a political entrepreneur succeeds primarily by influencing government to subsidize his business or industry, or to enact legislation or regulation that harms his competitors. 8 A vertically integrated company will bring in previously outsourced operations in-house by obtaining all the assets, resources, and expertise needed to produce every piece of its products. The direct benefits of vertical integration are greater control over the company’s supply chain and lower production costs. unions and railroads were covered by the act. Consequently, the law was not vigorously enforced and monopolies continued to grow under other names. As a sophisticated industrial economy emerged in the United States, so did the need for educated managers to run companies. The Morrill Act of 1862 granted to each state 30,000 acres of land for the purpose of establishing agricultural and mechanical institutions known as LAND GRANT COLLEGES. About 69 colleges and universities were established by this act, including many of the largest state universities in the country.9 Land grant colleges mark a break with the classical tradition of higher education which mainly prepared the wealthy for professional careers as doctors, lawyers, professors, ministers and diplomats. The land grant college advanced the rise of professionalism and modernism in American life by introducing scientific methods, offering laboratories for research and teaching modern methods to a broad section of the population. In 1860, only one percent of Americans between the ages of 18 and 24 were college students. A century later, the number increased to 30 percent. Today about 60 percent of Americans in that age range attend college. These colleges also helped to formulate public school and community college systems. The land grant college would also expand to create graduate schools and Ph.D programs that created experts in a variety of fields. American capitalism nurtured ingenuity and new inventions propelled the revolution. Christopher Schole invented the typewriter in 1867. Alexander Graham Bell revolutionized communications when he created the telephone in 1876. GEORGE WESTINGHOUSE, with 361 patents, was one of the American dynamos of the era. At 19, Westinghouse received a patent for a rotary steam engine. His invention of the air brake, was spurred by frequent locomotive accidents that resulted from slow braking. In 1869, he patented a fail-safe air brake system which let locomotives brake faster. His inventions drove Westinghouse deeper into industrialism. He became a major entrepreneur during the Second Industrial Revolution, opening 61 factories around the world. Each company manufactured machine parts patented either by Westinghouse or others who worked for him. However, the best known genius of the age was THOMAS EDISON, an entrepreneur and the most prolific inventor of the Second Industrial Revolution. He was one of the first inventors to apply the principles of mass production and large-scale teamwork to the process of invention. He is credited with the creation of the first industrial research laboratory which Edison set up in Menlo Park, New Jersey. Edison developed the phonograph, electric light bulb, alkaline storage batteries and the motion picture camera. Between 1879 and 1886, he received more than 400 patents for his inventions. In the 1880s, Edison became embroiled in a longstanding rivalry with Westinghouse and Nikola Tesla over the use of direct current electricity, which Edison favored, versus alternating current, which Tesla championed. Tesla entered into a partnership with George Westinghouse, an Edison competitor, sparking a major business feud over electrical power known as the “War of Currents.” The trio knew only one type 9 Texas A&M is a land grant college of the type specified by the Morrill Act. In 1871 the Texas Legislature established A&M, opening it in 1876 as the agricultural and mechanical branch of the University of Texas. The University of Texas was established by the state of Texas with one million acres of land in 1858 following an additional million acres in 1883. The state, however, didn’t get around to building UT until 1881. So, Texas A&M was established as a branch of a university that did not yet exist. of current would prevail as the standard American electricity system and Edison set out to ruin Westinghouse with a broad strategy in which he staged publicity events where dogs, horses and even an elephant were killed using Westinghouse’s alternating current.10 The men played out their battle on the front pages of newspapers and in the Supreme Court. Despite all of Edison’s efforts, the superiority of the AC current was too much for he and his DC system to overcome. In 1893, Westinghouse was awarded the contract to light the Chicago World’s Fair, bringing all the positive publicity he would need to make alternating current the industry standard. Railroad companies provided the model for the corporation. Railroads were the best way to move large quantities of manufactured goods which could be shipped all over the country at low rates. During the Civil War, about 4,000 miles of lines were built. Between 1865 and1873, 30,000 miles of new track were opened. When the refrigerated car became common, beef, pork and mutton from the West became available to the masses of people in the East. Rail transport developed the U.S. into a vast consumer market and enlarged the national economy. Railroad companies were large and sophisticated organizations managing a complicated system of routes spread out along a wide and diverse geography. Operating them demanded skilled technicians who could work out time and rate schedules as well as operate and service the trains themselves. The TRANSCONTINENTAL RAILROAD, which had been the source of much rivalry between North and South before the Civil War, was a 1,907-mile rail line built to connect the West Coast to the rest of the American rail network. The U.S. government donated 44 million acres to the project and provided $61 million in loans to the three companies building it. Construction began on the 1863 with companies working east to west and west to east. To keep costs down, the firms employed foreign and immigrant workers, including hundreds of Chinese “coolie” laborers.11 The workers and their tracks converged on May 10, 1869 with the ceremonial driving of the “Golden Spike” with a silver hammer at Promontory Summit, Utah. The spike signified the completion of the rail line and the uniting of East and West. The road established a transportation network that revolutionized the settlement and economy of the American West by tying the western states and territories firmly by making goods and travel quicker, cheaper, and more flexible, thus expanding the national market, enabling the movement of capital into the West. Most railroads were subsidized by either the federal government, the states or both. Lincoln, who was a lobbyist of the railroads, personally benefitted from the deals he made. Many other Republicans like Thaddeus Stevens and Justin Morrill took payoffs to from companies to swing subsidies and land grants their way. This “pay for play” arrangement resulted in the CREDIT MOBLIER scandal of 1872 during the Grant Administration. Crédit Mobilier was a company contracted by Union Pacific to construct part of the Transcontinental Railroad. The feds paid so much per mile of construction and Crédit Mobilier overcharged $94 million for $44 million worth of work. When rumors of 10 Edison recognized the limitation of DC power was that it was very difficult to transmit over distances without a significant loss of energy. Tesla, a Serbian mathematician and engineer, had been hired by Edison to help solve the problem. 11 The word ‘coolie’ comes from the South Asian word ‘kuli’ which originated in the 17th century and means general laborer. the swindle began to surface, company officers offered stock in the company – at a reduced rate of $5 a share for stock that was worth $100 on the market – to prominent congressmen and federal officials to prevent an investigation. The congressmen then bribed members of President Ulysses Grant’s administration to keep a lid on the deal, but it failed. The Speaker of the House and Grant’s vice president, had been given Credit Mobilier stock, as had more than a dozen prominent Republican congressmen. Revelations of other scandals soon followed. Congress busied itself setting up committees to investigate the “Whiskey Ring” in the spring of 1875. As it turned out, President Grant’s personal secretary, General Orville E. Babcock, was the ringleader of the “Ring,” by which the government was defrauded of millions of dollars in taxes through the sale of forged revenue stamps.12 Indictments of more than 200 individuals resulted, many in the Treasury Department. Grant’s Secretary of War, W.W. Belknap, was impeached by the House in 1876, for accepting bribes for the sale of trading posts in Indian Territory. He resigned to avoid a trial in the Senate. The consequences of these and other scandals stemmed from the involvement of Congress with big business. They were harmful to President Grant and the Republican Party, but the onset of the PANIC OF 1873 proved devastating. The first great economic crisis of American industrialism, the panic was an economic depression that disrupted the economy and caused widespread suffering.13 Three million workers lost their jobs over the next five years, the stock market collapsed, banks closed and farm prices plummeted. Economic calamities in the 19th century were called panics because people, fearing they would lose all their money, rushed to banks in panic to withdraw it before it was all gone. It was triggered by another corruption of the era, the debasement of the currency. To pay for the war effort, the federal government created a system of national banks. The government used the banks to issue paper currency called GREENBACKS that flooded into wide circulation.14 So many greenbacks flowed through the economy that, by July 1864, greenback dollars were worth just 35 cents, creating instability in the market. The federal government had issued huge amounts of credit to the railroad companies to stimulate construction, coupled with $450 million in greenbacks issued between 1862 and 1865 to finance the Civil War. The credit bubble popped in 1873 when a financial crisis in Europe forced investors there to dump American stocks and bonds. Since greenbacks were worth less than when issued, the financial institutions in the U.S. tanked and 25 railroad companies defaulted on their loan payments. To make matters worse, the feds tried to counter the depression by printing up $26 million more greenbacks. The Panic of 1873 had repercussions throughout the rest of the 1800s. Issues of money, inflation and the instability of greenbacks convinced the U.S. government to establish a GOLD STANDARD in 1879. The Gold Standard was a monetary system in which the value of the dollar was based on a specified amount of gold ($20.67 per ounce). It kept the dollar stable by preventing it from losing value. The Panic of 1873 led to a decline in wages which sparked the GREAT RAILROAD STRIKE OF 1877. On July 14th, leaders of the Baltimore and Ohio Railroad Company 12 Although indicted, Babcock escaped imprisonment through the intervention of President Grant. 13 The Panic of 1873 also helped convince the federal government to end Reconstruction efforts. 14 The federal government also placed a punitive 10 percent tax on state banks to drive them out of business in order to establish a federal monopoly on money. ordered a cut in wages for its workers – the third reduction in less than eight months. The company’s workers responded with a violent strike, seizing railroads, occupying railyards, stopping trains and burning bridges. Workers for other rail companies in Maryland, Ohio and Pennsylvania joined them and more strikes spread to other industries and more parts of the country, paralyzing American commerce. When local police and their special agents could not halt the strikes and quell the violence, governors in ten states mobilized 60,000 militia soldiers to bring the situation under control.15 President Rutherford B. Hayes called out federal troops to aid the militias. The strike was broken within a few weeks, but it set the stage for more labor violence and radical political action in the 1880s and 90s, including the Haymarket Square bombing in Chicago in 1886, the Homestead Steel Strike in 1892 and the Pullman Strike in 1894. The Great Railroad Strike provided some impetus for organizing American labor unions. One of the best known and successful union organizers of the day was SAMUEL GOMPERS. An immigrant Jewish cigar-maker from London, Gompers had once been a socialist, preaching the inevitability of class conflict. But, after coming to America, he rejected socialism and revolution and came to understand that what workers cared most about most were personal, “bread and butter” issues. Instead of overthrowing the system altogether, the vast number of them simply wanted higher wages and better working conditions. In 1886 Gompers helped organize the AMERICAN FEDERATION OF LABOR, a loose grouping of smaller craft unions, such as the masons’ union, the hat- makers’ union and Gompers’s own cigar-makers’ union. Every member of the A.F. of L. was a skilled worker. Gompers would serve as president of the AF of L from 1886 until his death in 1924, with the exception of one year, 1895. Union membership in the early 1890s was barely 200,000 but as the economy expanded, unions found more effective methods of organization and union membership and reached 447,000 members in 1897, or about two percent of the total workforce. One of the most popular labor campaigns of the era was the push for the EIGHT-HOUR DAY. In the 1800s, the work day could range from 10 to 16 hours, six days a week. Workers wanted to have enough time to enjoy themselves and the idea of eight hours for work, eight hours for recreation and eight hours for sleep began to take hold. Chicago, where industrialization and new factories swelled the population to make it the second largest city in the country, was the center of the eight-hour work day movement. Although many unions advocated it, the eight-hour day became a reality in 1914 thanks, not to unions, but to a businessman. Henry Ford figured out that he could increase production at his Ford automobile factory in Detroit by running three shifts of eight hours thus keeping his plants running 24-hours a day. -30- 15 In Texas, railroad workers in Marshall struck against the pay cut. Longshoremen in Galveston also walked off the job and marched down the Strand persuading construction laborers, track layers and others to strike for $2.00 a day wage.