Lecture 1: The Rise of Big Business (1)

I. The rise of the modern corporation in the US post Civil War period was one of the most important developments of the 19th Century.

A. The Industrial Revolution, which gave rise to the emergence of large-scale enterprise, was among the most significant causes of the Civil War itself, and the subsequent rise of the modern corporation after the war would dominate American politics until World War I. It has remained a potent issue up to and including the present day.

1. Beginning as early as the 1820s, Americans in the North began to visualize the development of the US into a modern, industrial nation. This accelerated dramatically as technological developments—the cotton gin, the steam engine, railroads, and textile equipment—came to be commonplace. Along with these new technologies, the factory system—in which goods were mass produced at a single location—replaced the older system of small-scale production in homes, blacksmith shops, et cetera.

2. With the acquisition Texas, the South West, Oregon and California, the US had become a continental nation—and the vision of a dynamic industrial republic replaced the older Jeffersonian vision of  the US as a pastoral agrarian republic. In the new vision of America’s future, slavery would not have a place. Slavery was not only morally repugnant—worse, it was economically inefficient. The dominant view of the Civil War among today’s leading historians is that it was more about modernization than slavery. The South, a pre-modern society in which life was dominated by growing seasons and the weather, had no place in a world where factories operated regardless of time of year or day.

          a. The new acquisitions were linked by the 1850s by the telegraph, but transportation remained a huge problem.

3. Interestingly, it was in the midst of the Civil War, with the South absent from US national government that a host of far-reaching decisions were made that would facilitate the corporate revolution in American business.

a. Perhaps the most far-reaching was language included in the 14th Amendment to the US Constitution in which corporations were to be designated as “legal person” under US law.

i. The corporation was an American version of the old English organization known as a joint stock company. It was a business organization formed by a group of people who are given permission by the state government to sell stock in the company to the public.

ii. This money is then used to run the company while the stockholders are paid a portion of the profits - called dividends.

iii. The corporation as a form of business organization quickly came to replace old ways of organizing business ( Proprietorship and Partnership) because these forms had severe limitations—the inability to raise large sums of money, the risk of losing everything if things went wrong, and the disruption of business upon death of the owner or a major partner.

iv. Corporations had three main advantages: they made it easy to raise large amounts of money by selling stock allowing for the creation of very large companies that could achieve significant for economies of scale (the more units of a product a company makes the less it costs to make each unit); they offered limited liability to investors, since neither the stockholders' assets nor the personal assets of corporate leaders could not be seized to satisfy claims against the corporation; and they had perpetual life--the corporation does not come to an end with the death of an owner, the stock is inherited. Moreover, an investor may withdraw from the corporation by selling his shares (transferability).

b. A second major decision taken during the Civil War was the decision to build a trans-continental railroad along a northern route in the Pacific Railway Act of 1862.

          i. The US had around 30,000 miles of railroad track in 1860, but it was not a unified system—there were hundreds of small railroads and they used a variety of equipment standards.

          ii. Offering huge land grants to companies that would invest in building a transcontinental route to California, Congress chartered the Union Pacific Railroad in 1862 and the Northern Pacific in 1864. The first transcontinental route was finished at Promontory Point, Utah, in 1869.

          iii. From 1862 to 1910, the main railroad trackage in the US increased from 30,000 miles to 240,000 miles. Equally important, by 1886, every railroad in the country had adopted the same equipment standards and the country became a truly unified marketplace.

B. The development of the railroads was the driving force behind both the emergence of the modern corporation and the industrialization of the United States in the 50 years following the Civil War.

1. Railroads required a large organization that was spread out along its route. The size and geographic requirements made the idea of a proprietorship or partnership almost impossible.

2. Railroads fueled industrialization in several ways—first, of course, was the demand railroad construction created for steel and energy sources.

a. The steel industry, in its infancy before the railroad construction boom, became a massive industry in its own right and led to one of the earliest great fortunes in America—that of Andrew Carnegie, whose organizational skills and corporate ruthlessness allowed him to gain control over most of the industry through both horizontal and vertical integration.

b. Railroads, once constructed, offered a fast, easy, and cheap way to transport large quantities of goods—this helped develop the US into a vast consumer market for manufactured goods and also helped to develop manufacturing of all kinds as well—raw materials could be shipped from the west to factories in the east.


          C. In addition to the railroads and steel, Oil came to be a giant industry in the decades following the Civil War.

                    1. Oil was considered a problem until it was discovered that it could be used to create energy in 1859. The industry quickly developed after that, and was consolidated by John D. Rockefeller using the methods of horizontal and vertical integration pioneered by Carnegie and others.

          D. The consolidation of production in industry after industry in the US in what is called  “The Gilded Age” resulted in an economy that was huge, but very unfair and distorted. Workers had few rights and farmers, the traditional backbone of the economy, were marginalized. The rise of big business in the US after the Civil War would change the country dramatically and dominated not only economic development, but social and political development as well. In fact, much of American politics between 1866 and 1920 can be understood as an ongoing effort to figure out how to preserve the freedom of individuals and the free enterprise system in the face of the emergence of these large corporations and the powers they were able to wield.