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

by Charles R. Morris

  But it’s not just that people were fooled. So dramatic and broad-scale a price restructuring, just like a period of rapid inflation, caught vast numbers of businesses and workers on the wrong side of the adjustment. The financial sector was hit very hard. Railroad stocks dropped 60 percent at their trough, and most other private-sector securities such as coal and iron bonds were closely tied to the fortunes of the roads. In theory, falling prices benefit creditors, but the realignment was radical enough to cause disruptions on all sides. The annual rate of business bankruptcies doubled, and a large number of savings banks failed as they were caught in a mismatch between falling deposits and the nominal value of their loans. There are reports that in major cities wages dropped much faster than food prices. Charitable organizations in New York City reported that relief rolls quadrupled, to 20,000, and public construction reportedly came to a dead stop, although that was partly due to the tightfisted city administration that succeeded the disgraced Tweed machine. Construction on the Brooklyn Bridge, on the other hand, the largest project in the city’s history to that point, continued through the decade.

  Still, when contemporary reports insist on how bad things were, they mostly point to falling prices, as if a “20% fall in retail prices” represented a real loss in value. One much-cited contemporary analysis, for example, tracked railroad revenues, pig iron and coal shipments, merchandise exports and cotton consumption, all in price terms. Pig iron was closely tied to railroad construction, and actually did suffer a terrible decade: prices were halved from 1873 to 1876 and volumes fell by 25 percent. But cotton and coal production both rose steadily in physical units, with minimal year-to-year variations, although output in price terms was flat. Merchandise exports were strong even in price terms. Exports slipped in 1875, but only by comparison to the banner crop export years of 1873 and 1874; otherwise they were stronger than any previous year on record. Overall, from 1870 to 1880, merchandise exports increased by 96 percent in price terms, and, obviously, considerably more than that if deflation is accounted for.

  Many reports of hardship are clearly fanciful. Estimates of unemployment in the mid-1870s range from a half million to five million. The numbers at the upper end of that range are quite implausible. The 1870 labor force was only thirteen million, more than half of them working on farms. The Chronicle’s 1874 report that “half a million of men at the least are computed to have been partially or wholly thrown out of work by the stoppage of railroad building” could not possibly have been true, even on the most extreme assumptions of job losses among outside contractors. There were only 230,000 railroad workers in 1870, and 78,000 primary iron- and steelworkers. (“Primary” iron and steel manufacturing included rails, but not most other end-products.) A modern estimate of the crash-related job loss in iron and steel manufacturing, which was mostly railroad-driven, is just 21,000. There are no reliable data on year-to-year employment fluctuations for this period, but decadal census-based data show that total employment grew some 40 percent between 1870 and 1880, from thirteen million to eighteen million. It strains credulity that such strong growth was accompanied by mass unemployment in mid-decade.

  Although the Chronicle would have been acutely aware of layoffs in big steel companies, the vast majority of manufacturing workers were scattered throughout the country in artisanal shops or modestly sized factories. Outside of railroad-related businesses, there are few signs of a downturn. Annual production of Singer sewing machines, for example, quadrupled over the decade, to 500,000 units in 1880, without a single down year. The Studebaker wagon and carriage works doubled its production between 1872 and 1874; when it was interrupted by a fire, the company rebuilt its factory and continued its strong growth. Philadelphia’s mostly artisanal textile manufacturers doubled employment in the 1870s,* while Providence’s jewelry industry also enjoyed healthy growth. McCormick Reaper had several poor years, but aside from the disruption of the 1871 Chicago fire, its biggest problems were factory foulups and infighting between the McCormick brothers, not slowing demand. This was the era when the Midwest came to dominate grain production: the number of acres devoted to wheat farming went up by 75 percent, mostly on larger farms that were highly dependent on modern machinery.

  Times really were tough on railroad workers, for the roads were under considerable duress. The Pennsylvania, generally considered the best managed of the roads, was badly stretched by its defensive acquisition program in response to Gould’s attacks earlier in the decade, and found itself in a serious cash squeeze during the post–Cooke money market disruptions. But although Tom Scott loudly lamented falling prices, he cut costs so aggressively that the Pennsylvania’s net earnings actually rose, even in the recession year of 1874. Ton-mile rates had fallen by more than half since the war, according to an internal analysis, but year after year, as freight loadings soared, the road consistently earned a bit more than half a cent per ton-mile, give or take a few hundredths of a cent. The Pennsylvania wasn’t unique; the annual Poor’s compendia show that, nationwide, railroad operating margins improved slightly during the 1870s.

  The problem for the roads was that they were overleveraged,* and the burden of fixed interest and dividends became steadily worse as deflation took hold, which explains the large number of defaults. The Pennsylvania’s board, moreover, like most railroads, made it very clear that maintaining faith with its investors took priority over all else, and they bore down especially hard on their workers. During the 1877 strikes, the Baltimore Sun conceded: “The level of [the railroad workers’] struggle to live is very sad. . . . Many of them declare that they might as well starve without work as starve and work.” Even the Chronicle editorialized: “[T]hose who speak flippantly of the matter, saying . . . that a dollar a day is enough for bread, and whoever cannot live on bread and water is no man, at all, do not show either a wise head or a feeling heart.” Railroad managers might have learned another trick from Jay Gould, who, in 1877, was running the Union Pacific. Unlike his peers, he was unburdened with worker-management ideologies, or indeed with ideologies of any kind. He readily met with his strike leaders, made a few modest concessions, and everyone went cheerfully back to work.

  Supply Shock?

  But if production was rising, the question remains of why prices were falling. The simplest explanation is that it was a consequence of America’s return to the gold standard in 1879. After Jay Gould’s 1872 Gold Corner, the greenback had settled into a trading range of 125 to 130 greenbacks for $100 in gold. Achieving parity with gold and the British pound would therefore require a 25 percent or so rise in the greenback. As the greenback’s value rose, the greenback price of goods should fall, and in fact they did fall, by just about 25 percent over the decade. World gold stocks were also flat, which would similarly tend to push down prices in an era of increasing production.

  But the standard monetarist explanation for the fall in prices doesn’t quite fit the facts. If the government wanted to bid up the greenback until it reached parity with gold, it would have restricted its supply and raised interest rates. Lincoln proposed just such a strategy for his second administration, but as soon as the tight greenback policy started to bite, Congress forced Andrew Johnson’s new administration to back off. From that point there are almost no signs of monetary tightening right up to the restoration of gold/greenback parity on January 1, 1879. For most of the 1870s, in fact, money was easy and interest rates fell. The Chronicle, which had documented the extreme tightness of money in 1873, marveled the following spring: “money is so plentiful that banks find it hard to lend”; and a year later reported that the money market “has not for many years shown as much tranquillity as now.” When the new Rutherford B. Hayes administration took office in 1877, America’s booming trade surpluses were already pushing the greenback toward parity. Export-import houses started substituting greenbacks for gold well before the official resumption date, which turned out to be a nonevent. On resumption day at the Gold Exchange, someone wrote “PAR” in huge block lett
ers on the price-tracking board, and everyone went home. There was not even a party.

  The 1870s seem to have been the rare case of a “supply shock.” A supply shock is a good thing; it is the infelicitous term economists use for a sudden, and permanent, improvement in productive capacity, what Federal Reserve chairman Alan Greenspan recently called a “paradigm shift.” With the massive post–Civil War investment in infrastructure, force-fed by the likes of Jay Gould, transaction costs were dropping like a stone. Telegraphic and cable communications were driving down the risks and costs of financial services. John Rockefeller was teaching the world that lower prices meant bigger markets and higher profits. Railroad innovations like the through bill of lading, or “waybill,” and the “car accounting office” eliminated countless middlemen and extra handling steps. (With the waybill, a customer paid a single fare, and the bill traveled with the goods, ensuring proper routing and payment. Car accounting, and the gradual standardization of track gauges, allowed lines to haul each other’s freight cars instead of unloading and reloading goods.) Economies of scale were taking hold in production of most primary products. The cheaper, better, steel flowing out of Andrew Carnegie’s new steel plants made possible mass-produced tools and consumer products that cost less, lasted longer, and worked better than anything that had gone before.

  The currency realignment, in other words, came as a natural fallout from larger tidal movements. The British pound sterling was the nineteenth century’s proxy for gold, much as the dollar was after World War II. As American productive capacity reached parity with, and then surpassed, Great Britain’s, the greenback and sterling realigned by themselves. Falling nominal prices signified strength, not prostration.

  The roughly parallel developments in Great Britain suggest the power of the forces that were afoot. There was a British “Great Depression” starting in the 1870s, which lasted much longer than the contraction in America and which exhibited much the same dissonance between perceptions and the underlying data. As one historian put it:

  Prices certainly fell but almost every other index of economic activity—output of coal and pig iron, tonnage of ships built, consumption of raw wool and cotton, import and export figures, shipping entries and clearances, railway freight and passenger traffic, bank deposits and clearances, joint-stock company formation, trading profits, consumption per head of wheat, meat, tea, beer, and tobacco—all these showed an upward trend.

  Yet just as in the United States, “an overwhelming mass of opinion . . . [agreed] that conditions were bad”—although “the wails of distress did not come from the mass of the people, who were for the most part better off, but mainly from industrialists, merchants, and financiers.” The British, in fact, had more to complain about than Americans, for the quarter century after 1870 was a period of “hollowing-out” of British industry. Real growth continued, and living standards rose, but Great Britain decisively lost competitive advantage to the United States in almost every field, especially manufacturing—much as occurred in 1970s America, when there was decent growth, despite the oil recessions, but pervasive gloom over the loss of competitive leadership to countries such as Japan.

  One of the most striking developments in America was the industrialization of farming. As grain and meat production and transport became much more efficient, America dominated international food markets from the mid-1870s on, in a competition that turned primarily on price. The agricultural transformation brought great wealth to the Northwest, and improved diets not just in America but throughout the world, but at the same time, it made the lives of huge numbers of people simply miserable.

  The Birth of the Factory Farm

  Among the unexpected fallouts from Jay Cooke’s failure was a land boom in the far Northwest, especially in Minnesota and the Red River Valley of the Dakotas. The Northern Pacific had received enormous federal land grants, some thirty-nine million acres in all, and many shareholders and creditors chose to settle their claims in land when the company defaulted. For the first time, eastern capitalists found themselves owning vast tracts of unimproved western land—a fertile, flat, stoneless, treeless grassland like few others in the world. A farmer could plow a straight line for months, according to the local tall tale, then turn around and harvest on the way back. This was land ideally suited to the mass production of wheat and corn; being capitalists, the new owners noticed and began to invest.

  “Bonanza” farms, so-called because of their huge profits, were farms of several thousand acres with factory-style production management, maximum use of machinery, small resident staffs, substantial reliance on seasonal labor, and usually nonresident investor-owners. Operations came to be organized and standardized to the point where they were run in great part by nonfarmers. The core management staffs looked like a normal company’s—bookkeepers, cost accountants, purchasing specialists. The farm work was broken into discrete tasks, like loading bound sheaves, maintaining twine-binding machines, and transporting equipment or grain, so it could be staffed with more or less the same laborers and draymen that an oil refinery or a steel plant used. Bonanza farms were never the majority of farms in the Northwest, or even close to it, but they defined a radically different style and approach to a traditional problem.

  The prototypical bonanza farm was the Cass-Cheney farm near Fargo, founded in 1874 and financed by George Cass, the Northern Pacific president, and George Cheney, a railroad board member. (Cass was a capable railroad executive brought into the Northern Pacific by Cooke much too late to prevent the 1873 collapse.) Their primary goal was not so much to make money—although they did very well—but to demonstrate the value of the railroad’s holdings. Their most interesting and important decision was to hire Oliver H. Dalrymple to run their properties. This was risky, for Dalrymple had already gone bust from grain speculations, but also brought what modern business gurus call a “transformative” management style. He was a Yale Law graduate who had come to the Northwest to practice law, had switched to farming, and had briefly become the Northwest’s “wheat king” by developing a bonanza-style three-thousand-acre wheat farm before losing everything in his bankruptcy. Cass and Cheney had the insight to structure the ideal incentive arrangement: Dalrymple was paid well from the start, but his big payoff was that as his operation succeeded he could gradually win full ownership.

  Cass and Cheney had their nervous moments, as Dalrymple, like a mini-Rockefeller, expanded into grain elevators, Great Lakes steam transport, and a host of related enterprises. But within just a few years it was clear that the farm operations were a spectacular success. The “Dalrymple farm” had grown to thirty thousand acres by the early 1880s, employing upwards of two thousand men at various times of the year. Dalrymple’s total holdings eventually grew to one hundred thousand acres throughout the area.

  From the outset Dalrymple laid out multiyear schedules for bringing the land under cultivation. Sod-busting—breaking up the tough prairie grass roots—was the most expensive investment, usually costing considerably more than raw land. Dalrymple’s schedule of breaking sod on five thousand new acres per year probably would not have been feasible without the new steel plow blades. By 1878, the first Cass-Cheney/Dalrymple spread operated with 126 horses, 84 plows, 81 harrows, 67 wagons, 30 seeders, 8 threshing machines, and 45 binders. Plowing was usually done in one mile square (640-acre) sections. Huge gang plows, pulled by up to five horses, would be chained a dozen or more abreast marching in straight-line one-mile runs to minimize turning. Harrowing, seeding, harvesting, and threshing followed in quasimilitary sequence, then the land would be replowed before freezing set in. The automated binders used up to a freight-car load of twine. Steam-powered threshers could process five thousand bushels a day, pouring out their golden streams into freight cars waiting at the farm’s siding. In 1881, Dalrymple, with thirty-six threshers, was loading three full trainloads a day, or thirty thousand bushels. By 1883, just a few years after Alexander Graham Bell first demonstrated the telephone, the bigger Northwest
farms had already installed telephone connections between far-flung sections. In his second full year of operation, Dalrymple produced wheat at fifty-two cents a bushel for a market that was buying at about a dollar. By 1890, wheat farms west of the Mississippi were producing perhaps a quarter of the world’s supply.

  Bonanza farms were constantly evolving. The first generation of farms, for instance, were solely devoted to wheat—Dalrymple even imported the oats for the horses—and it took a while to learn the limits of extreme monoculture. The fact that the outsiders tended to be “book farmers” was actually helpful, for they hadn’t learned century-old lore at their daddies’ knees and were quick to reach out to agronomists for advice on seeds, fertility maintenance, and erosion. (The land-grant colleges financed by the 1862 Morrill Act were just then turning out their first batches of scientifically trained advisers.) A distinct corn belt also developed as the 1880s progressed. Wheat farming tended to drift westward—California was an important center by the 1890s—while corn stayed close to Chicago, since corn-fattening was the last stage in preparing cattle for slaughter. Mass-market grain production fed the burgeoning Minneapolis flour milling industry; Pillsbury is one of the early important names.