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Why Business Grew Previous Next
Digital History ID 3167

 

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 and suppliers.
  • 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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