By 1906, six large railroad systems controlled 95 percent of the nation's mileage. As early as 1904, the 2,000 largest firms in the United States made up less than one percent of the country's businesses. Yet they produced 40 percent of the nation's goods. By the early 20th century, many important sectors of the American economy were dominated
by a handful of firms, a condition that economists call "oligopoly."
Why did business grow bigger? The classic explanation stresses
such factors as:
- the shift from water-powered to coal-powered factories,
which freed manufacturers to locate their plants nearer to markets
- transportation improvements that meant that firms could
distribute their products to regional or national markets.
- the development of new financial institutions--such as the
stock market, commercial banks, and investment houses--that increased
the availability of investment capital.
One of the pacesetters of the "new economy" was Montgomery
Ward, the nation's first mail-order business. From its founding
until 1926, Montgomery Ward owned no stories. It operated strictly
on a mail order basis. Through its catalog, Ward brought consumer
goods to a largely rural clientele.
To list these factors makes business growth seem like an orderly
process. But this was not the way the process was experienced.
The emergence of the modern corporation came largely as a response
to economic instability.
During the late 19th century, business competition was
cutthroat. In 1907, there were 1,564 separate railroad companies
in the United States, and two years later there were 446 companies
manufacturing steel. The challenges of competition were compounded
by frequent economic contractions, or panics as they were known.
Violent contractions gripped the country from 1873 to 1878 and
from 1893 to 1897. There were briefer contractions in 1884, 1888,
1903, 1907, and 1911. During the panic of the mid-1870s, 47,000
businesses went bankrupt. In hard times, the competitive marketplace
became a jungle and businessmen sought to find ways to overcome
the rigors of competition.
Faced with recurring business slumps, mounting competition,
and declining profits, the boldest businessmen experimented with
new ways of creating financial stability. The first attempt to
overcome destructive competition was the formation of pools or
cartels. These were agreements among competitors to divide markets
and forbid price cutting. As early as the 1870s, pools were formed
to divide markets, fix production quotas, and set prices. Over
the years, pools became trade associations, which devised methods
for dividing markets and assisting failing firms.
The problem with pools was that they rarely survived an economic
contraction. Financial depressions tempted some firms to cut prices
and seek a larger share of the market.
Pools were too weak to solve the problem of competition because
they were voluntary agreements. An alternative was the trust,
under which owners of rival firms assigned their stock to a single
board of trustees in return for non-voting, interest-bearing certificates.
The trustees then fixed prices and marketing policies for all
the companies. John D. Rockefeller's Standard Oil Company was
the first trust. Half a dozen industries followed, including alcohol
distilling and sugar refining.
Trusts faced intense legal challenges on the grounds that they
illegal restrained trade and violated the corporate charters of
the participating firms. In 1890, Congress adopted the Sherman
Anti-Trust Act, which declared trusts illegal. Trusts were then
supplanted by a new legal entity, the holding company. This was
a company with the power to purchase other companies. Perhaps
the most famous holding company was General Motors, which purchased
a number of automobile manufacturers.
A great surge in mergers took place in the American economy
after 1897, when many of the largest corporations in such industries
as steel and railroads were created. The number of mergers rose
from 69 in 1897 to 303 in 1898 and 1,208 in 1899. By 1900, there
were 73 combinations worth more than $10 million. Two thirds had
been established in the previous three years.
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