Businessmen and "That Creature" the Corporation
Names like James J. Hill, Andrew Carnegie, Cornelius Vanderbilt, and John D. Rockefeller have struck terror in the hearts of many, yet these same names have inspired millions of other Americans. Between 1870 and 1900, the United States became a world industrial power, in part because of the ingenious business practices of these individuals. Were these early industrialists "Robber Barons" or "Captains of Industry?" What about "that creature" the corporation and its monopolistic cousin, the trust? The debate over whether the business practices of the Gilded Age were corrupt or beneficial rages on even to this day. Even in our own times, corporate mergers, mass layoffs, deregulation, and the ubiquitous Bill Gates remind us that the line between corruption and progress is indeed a fine one.
Two contrasting images of American history can help us understand the importance of the new businessmen of the Gilded Age.
The Erie Railroad Wars are an example of the unscrupulous and often illegal business activity that dominated the Gilded Age. The "war" involved four men:
(1797-1879), financier. Born in Carmel, New York, Drew served briefly in the War of 1812 and then began a livestock business, driving cattle and horses to New York City from upstate and later expanding to the Midwest, bringing in herds from as far as Illinois. He early acquired a reputation for sharp dealing and was known to feed salt to his cattle and then let them drink themselves full in order to increase their weight. The practice became known as "stock watering" and Drew was its master, in that and in the later financial sense of the term. In 1857 Drew became director and treasurer of the Erie Railroad line. A shrewd man, Drew used "watered stock" and other tools to try and squeeze every possible dollar out of the railroad and into his own coffers.
(1836-1892), financier. Gould grew up in relative poverty and received little formal education; nonetheless, possessed of a quick mind and native shrewdness and untroubled by scruples, he soon began finding opportunities for money making. His earnings from three years as a surveyor and from the publication of his History of Delaware County, and Border Wars of New York in 1856 enabled him to open a tannery in Pennsylvania the next year. By 1860 he had begun speculating in railroad securities and eventually became a director of the Erie Railroad in 1867. Gould, working with codirectors Jim Fisk and Daniel Drew, combined "stock watering" and bribes to New York City's "Boss" William M. Tweed and state legislators, profited handsomely by stripping the Erie. In 1872 Gould turned to Western railroads, where he eventually assembled an empire that consisted of half the track mileage in the Southwest. A prototype of the "robber baron" capitalist, Gould remained ruthless, unscrupulous, and friendless to the end.
(1834-1872), financier. Fisk received little schooling and in his youth held a variety of jobs from waiter to ticket agent for a circus. Fisk earned the title of "Barnum of Wall Street" for his flamboyant trading techniques. With the proceeds gained from his Wall Street endeavors, Fisk led the life of a sybarite, developing tastes for French theatricals, Broadway showgirls, expensive horses, and honorary but gaudy military posts. After becoming almost the epitome of the "robber baron," thereafter continued his career as a voluptuary-about-town until, following a quarrel over certain business matters and a favorite mistress, the actress Josie Mansfield, he was shot by Edward S. Stokes on January 6, 1872.
(1794-1877), financier. At sixteen Vanderbilt purchased a small sailboat with money he borrowed from his parents and used it to carry passengers between Staten Island and New York City. He was authorized during the War of 1812 to transport provisions to regiments around the city and soon had a small fleet engaged in river and coastal trade. Vanderbilt formed his own steamboat company in 1829. To the dismay of the established firms on the Hudson River, he quickly dominated the business by charging lower fares than his competitors. By 1846 "Commodore" Vanderbilt was a millionaire.
He began purchasing stock in the New York and Harlem Railroad in 1862, and by 1863 he controlled the line and used it to initiate New York streetcar service. He then acquired the Hudson River Railroad, for which he had to fight Daniel Drew. They again clashed over the New York Central Railroad, though Vanderbilt emerged victorious from the struggle and merged the New York Central with the Hudson River Railroad in 1869. Vanderbilt's acquisition of the Lake Shore and Michigan Southern Railroad completed the first New York-to-Chicago rail system. In every case he made large capital investments in improved roads, rolling stock, and facilities. By ordering construction of Grand Central Terminal in New York City, he opened jobs to thousands of unemployed during the Panic of 1873. At his death on January 4, 1877, his wealth was estimated at $100 million.
began when Cornelius Vanderbilt began buying shares in the Erie Railroad Co. in an attempt to drive his only competition out of business. The treasurer of the Erie Railroad Co., Daniel Drew, saw an opportunity to bilk Vanderbilt out of millions of dollars. Drew, along with Jay Gould and Jim Fisk, had 100,000 worthless stocks printed up, which Vanderbilt promptly bought, though he soon realized the stocks had no value. Though Vanderbilt generally had little respect for the law, the situation seemed desperate. Although this was the same man who once said, "Law, what do I care about the law? Ain't I got the power?" Vanderbilt called on the authorities to have Fisk, Gould, and Drew arrested.
Fisk, Gould, and Drew, hearing of their impending arrest, took a short vacation to New Jersey where the laws of New York, fortunately for them, did not apply to their situation. Fisk made a public statement claiming that their trip to New Jersey had been prompted by a desire to do better business. Meanwhile, Gould "encouraged" some members of the New York state legislature to pass a law making the sale of watered stock to Vanderbilt legal (a half million dollars made the "encouragement" all that much the easier). The result was that Drew, Fisk, and Gould ended up $7 million richer while Vanderbilt appeared to the public as a monopolistic power-monger.
Although American businessmen had always been making money, the Gilded Age saw the rise of new methods of capitalism that allowed individuals to limit their liability and maximize their profits.
"Before the Gilded Age, individuals had looted society. But the most characteristic economic institution of the Gilded Age no longer was the individual. Instead it was a collection of individuals together called the corporation" (Professor Schultz, videotape lecture #5).
One of the key features of corporations and the Gilded Age in general was an increasing concentration of power in large entities. Business and government became bigger while their respective operations became intertwined. Ever since the federal government had used its power and money to encourage businessmen to build railroads, all levels of government had become more involved in the nation's economic welfare.
A corporation was formed when a group of people requested a charter from the state legislature that provided them with a set of legal rights and (presumably) responsibilities. State law treated the corporation as an individual. Unlike a partnership, in which liability ran high for individual investors, the corporation involved limited liability. Limited liability makes individual investors legally liable only for their share of the investment. In partnerships, if a partner skips town or dies, the other partners are liable for any outstanding debts. In corporations, if an individual investor dies no other investors are affected. If the corporation goes bankrupt, the investors are only required to foot the bill for a percentage corresponding to the proportion of their investment. As corporations became more common in the mid-19th century, the opportunity for wide numbers of people to invest in business greatly expanded, for individual investors could now invest without the fear of total liability. Another important result of the corporation revolution was that corporations became "immortal." Most state laws of the time allowed corporations to buy, sell, and inherit property; thus, corporations took on their own identity. Individual investors may come and go, but the corporation has an indefinite lifespan.
Corporations in the past Corporations were not a new invention of the Gilded Age; even the first American colonies were the result of corporate activity. Even in the years before the Civil War, corporations began cropping up throughout the Northeast and other sections of the nation to produce goods such as textiles. However, by the 1850s corporations began changing purpose. After the Civil War, ownership of a corporation no longer meant control of the corporation. Whereas prior to the Civil War investors had retained a great deal of power over the means of production, the new concept of corporations allowed managers and directors to make money while investors reaped only the benefits of limited dividends. This allowed a handful of managers and directors of corporations to profit enormously from other people's money with little personal risk.
Combinations of corporations One of the most salient characteristics of the Gilded Age was the continual combination of corporations. Small corporations began merging with one another to increase efficiency and profits. These new "mega corporations" became known as trusts. Control of a group of corporations was handed over to a small board of trustees who managed the means of production and distribution. Though the trusts were certainly larger, more efficient, and more profitable than smaller corporations, they also destroyed the healthy competition that makes capitalism a viable economic model.
In 1879, John D. Rockefeller and a handful of associates created what became known as Standard Oil of New Jersey. Rockefeller made Standard Oil an amazing example of consolidation and efficiency. In fact, he was so successful that at his death, his personal fortune was estimated at $815,647,796.89, not to mention the $40 million in profits that the Standard Oil trust averaged per year. However, Rockefeller's methods of persuading small companies to join his trust were often less admirable than we might expect of an American folk hero. Though Rockefeller often bought control of smaller oil companies publicly, he also did so privately or through a proxy to hide the fact that the company would soon be destroyed by his behemoth trust. If buying stock either privately or publicly proved too arduous a task, Rockefeller would hire armed Pinkerton Agents to "persuade" his competition to relinquish control. The Pinkerton Agents were famed for their club-wielding ability, and many a small business owner became familiar with the wrong end of those clubs.
The new businessmen and the new methods of doing business that became prominent during the Gilded Age were not always shining examples of morality and democracy. As the Gilded Age wore on, Americans began to realize the social pains that go hand-in-hand with untrammeled business growth. The first federal effort to slow the growth of trusts was passed in 1890. The Sherman Antitrust Act was, however, merely a token law, for it was rarely invoked until after WWI. Possibly a more important sign of the growing disillusionment with the corruption of the Gilded Age came from the American people themselves. Although many Americans still regarded men like John D. Rockefeller as "Captains of Industry," more and more people began to publicly question the tactics of the "Robber Barons." As trusts grew ever more powerful and wealth became concentrated in fewer and fewer hands, animosity towards the new businessmen and the new methods of doing business increased tremendously.