The Progressive Era

1. America’s Industrial Revolution

In the decades after the Civil War and until the end of the 19th century, America experienced its veritable Industrial Revolution. In an explosion of industrialization, the United States transformed from a predominantly agricultural into an industrial country. In the process, output and living standards soared for a rapidly increasing population. The enormous expansion of production took place through the factory system which, in these decades, replaced the small artisan and craftsman as the predominant form of industrial production. Formerly, the craftsmen typically worked at home on his own tools, with his raw materials sometimes financed by his wholesale merchant customer (“the putting out” or “domestic” system). Now, a capitalist employer, from his own or from his partner’s savings, built or purchased buildings, machines, and raw material, and hired a number of employees to work on these materials at a central location. It proved to be efficient in most industries to help increase the scale and size of the factories and firms as markets for the increased production expanded throughout the nation.

There are many indices that reveal the extent of the explosion of production and industrialization in the three decades after the Civil War. Thus, in “real” terms (in constant 1879 dollars), total commodity output increased by three-and-a-half-fold from 1869 to 1899. Agricultural output, in those years, more than doubled, construction increased 2½ times. Manufacturing output, in contrast, rose almost six-fold in that period, while mining increased eight-fold. In more specific types of production, increases were even more spectacular, led by the blossoming iron and steel industry. Thus, in 1865, 930 thousand short tons of pig iron were shipped in the United States; in 1899, the figure had risen sixteen-fold to 15.25 million tons. And steel ingots and castings produced, rose five-hundred- fold, from 20 thousand long tons in 1867 to 10.6 million long tons in 1899. Structural iron and steel production increased ten-fold, cotton textiles over five-fold, and rails produced rose nearly six-fold. Bituminous coal output rose seventeen-fold from 1865 to 1900, while crude oil production rose twenty-six-fold.

Output per head, and consequently living standards, also rose sharply in this period, despite the large increase in the nation’s population. Commodity output per capita nearly doubled in this period, and Gross National Product per capita in constant 1929 prices rose by 80% in the 20 years from 1871 to 1891. In terms of real wages, the average daily wage in all industry rose by 13% from 1865 to 1891, while the cost of living fell on the average of 31% in the same period. The average daily real wages (corrected for price changes) increased by 64%. Then, when we consider that average hours worked dropped from 11 to 10 hours a day in this period, we should add 10% to the average real wage.

So spectacular was the expansion of products that it outstripped the increase in the money supply during this period, so that, mirabile dictu, overall prices fell steadily by 2½% per year from 1870 to 1890.1

Manufacturing, however, only caught up to the capital advances of railroads by the 1890s. Before then, industrial firms were still largely individual proprietorships or partnerships, with the corporate form confined to railroads and banks. Despite the fact that savings per capita grew rapidly during the 1870s and 1880s, the size of firms was not large enough for most of this period to require a shift from the proprietorship or partnership to the corporate form. As a result, firms were financed largely by the savings of partners or informal debts from friends or relatives. Until the 1890s, therefore, the New York Stock Exchange and other security markets were confined to government bonds, railroad stocks and bonds, and bank stocks.

As a result, the crucial role of investment banks, which underwrote and floated the sale of securities, was largely confined to government bonds and railroad securities until the mid-1890s. Hence, the almost exclusive concern of the Houses of Cooke and Morgan for governments and railroads. By the 1890s, however, J.P. Morgan led the way in organizing large-scale industrial corporations and then underwriting and controlling issues of their securities. Thus, Morgan organized the General Electric Company, in the vital new field of electric machinery and lighting, in 1892. On the other hand, while the passing of ownership from the great inventor Thomas Edison to the enlarged Morgan Company symbolized future trends in American industry, the equally great inventor George Westinghouse stubbornly refused to merge with GE in the mid-1890s. The newly formed Westinghouse Company continued to live on the savings and plowed-back profits of George Westinghouse and his fellow stockholders and to spurn any reliance on “Wall Street” and the investment bankers.

Another successful tactic of the investment banking houses was to acquire control of the rapidly burgeoning life insurance companies. Total assets of life insurance companies had increased ten-fold from 1867 to 1897.2 Since these companies were “owned” by a self-perpetuating board of trustees who could not earn profits from the companies’ assets, life insurance executives were more motivated to maintaining assets than to seek profits with alacrity. Hence, they were ripe for takeover by investment banking houses, who could try to gain control of the boards of trustees and have them purchase securities of industrial companies, controlled by the banks themselves.3

2.  The Petroleum Industry

As manufacturing developed in the decades after the Civil War, the temptation to seek monopoly, and thereby to attempt to restrict production and raise prices, infected industry after industry. The attempts took two forms. One was cartels, which had the same function as in railroads, with the same disastrous effects under the pressure of internal breakup and new external competition. Another form was mergers, an attempt to merge all firms within an industry into One Big Firm, which would then achieve the monopoly goal. To a certain extent, mergers were beneficial and inevitable, as small firms took advantage of the expanding market to grow and merge into larger firms with larger and eventually corporate capitalization, as the corporate form began to replace the self-owned firm or the partnership. Similar mergers took place in the Eastern railroads after 1850, as small lines consolidated into a more efficient, larger line. But it was very different to merge not from natural market forces but because of “ideology,” because of the will o’ the wisp of achieving monopoly through this route. The result of such mergers was as disastrous and very similar to the result of cartels.

The first important attempt at achieving industrial monopoly was in petroleum, a new industry which began with the first small oil well at Titusville, in northwestern Pennsylvania, in 1859. Quickly springing up to refine the oil pumped into western Pennsylvania were numerous refiners in Cleveland. Emerging very early out of the pack was a business genius, John D. Rockefeller. Rockefeller, who had begun in business as an impoverished bookkeeper, soon rose to be a wholesale commission grocer. By 1863, Rockefeller and Samuel Andrews were the major partners in the largest kerosene refinery in Cleveland, the Excelsior Works. To form the company, Rockefeller invested his own funds and money borrowed from his father, relatives, friends, and associates. By 1867, Rockefeller had formed Rockefeller,  Flagler & Andrews Co., with his brother William, Henry M. Flagler and Stephen V. Harkness as newly joined partners. So great was the efficiency and so low the cost of their refineries that the company further expanded and merged with competing refiners, to incorporate in a few years, in 1870, as the Standard Oil Company of Ohio (SOHIO), a company possessing the world’s largest oil refining capacity. SOHIO was capitalized at $1 million.

It should be noted that SOHIO was a business and financial alliance of its major owners, of whom Rockefeller was first among equals. From then on, and on into the 20th century, these founding Standard Oil families tended to act together, to ally with one another, and to make investment decisions in tandem. Some of these founding families were: the Flaglers, the Harknesses, the Paynes, the Bostwicks, the Pratts, the Brewsters, the Rogers, and the Archbolds.

We have seen how Rockefeller participated in the South Improvement Company in 1871, a failed attempt to cartelize both Eastern railroads and the oil industry. After that, Rockefeller tried to achieve the same result more permanently by buying out all of his competitors. In contrast to historical legend, Rockefeller did not attempt to achieve his dominance in the oil industry by the costly and dangerous process of driving them out of business by cutting prices sharply. Instead, Rockefeller simply bought out his competitors, and paid handsome prices to boot. For one thing, he was anxious to keep the good will of the former owners and to enlist their administrative capacities in the Standard organization.

Neither did Standard achieve its original dominance solely by obtaining railroad rebates. As we have indicated, all refineries, along with other industries, were receiving rebates, some small competitors even receiving larger rebates than Standard. SOHIO achieved its dominance by also being more efficient, by pioneering in innovative ways to cut costs and to improve product. Its costs were lower than its competitors. While Standard launched several technological innovations and improved lubricating oils, its major innovations were in management techniques. SOHIO pioneered in modern corporate management — in the executive committee system, in careful bookkeeping, in corporate accounting, and in systematic managerial reporting to a central review board.

By 1879, Rockefeller had purchased refineries in Pittsburg, Philadelphia, New York, and Baltimore, and had obtained nearly 90% of American oil refining capacity and 80% of the pipelines. In 1882, Rockefeller and his allies expanded to form an overall Standard Oil Trust, with headquarters in New York City and capitalized at $70 million. Individual firms in the different states had exchanged their stock for pro rata shares in the new, seemingly monopoly, trust.

But Standard Oil was never to retain the dominance it had achieved in 1879 — a dominance, by the way, that never even threatened to extend to marketing or to crude oil production. For one thing, Standard Oil’s standing ready to purchase any independent oil refinery at a handsome price functioned something like farm price supports in later years. In brief, various shrewd entrepreneurs began to realize that if Rockefeller were foolish enough to stand ready to purchase any oil refineries offered to him, well they would go heavily into a new, profitable business: the building of oil refineries solely for the purpose of “forcing” Rockefeller to buy them. In their haste, these new refineries were sometimes not even fit for the refining of oil; that they should seem to be so as to deceive Standard Oil inspectors was sufficient. As a result, Rockefeller found himself on a treadmill, paying out money for a steady stream of new refineries. Finally, in 1881, Rockefeller declared he would no longer pay “blackmail” to these new refineries, and for the next few years, many overtures for sale by new independent refiners were turned down by Rockefeller. By 1885, then, Rockefeller had given up his attempt to achieve monopoly in oil refining by merger and purchase. From then on, there were to continue to be 10–20% of refining capacity outside the Standard Oil network, and ready to step in to increase competition should the opportunity arise.

Typical of common distortions of the truth about the small competitors of Standard Oil is the case of George Rice, a small Ohio refiner, who was lionized in the press for his alleged martyrdom at the house of Standard Oil. In fact, Rice profited handsomely from his competition, so much so that his asking price to Standard kept increasing. At the historians Hidy and Hidy relate:

... Rice invited combat by darting into an area, cutting prices until dangerous to profits, and then diverting his efforts to another spot. In 1881, under the title of Black Death, he published a pamphlet of anti-Standard statements. ... Standard Oil officials tried to silence him by attempting to purchase his refinery, but they balked at paying his asking price, which rose from an original $20,000 to a final $500,000. This represented either his reassessment of his nuisance value or a remarkable growth in net assets within less than a decade in the face of competition from a monopoly.4

Despite its near monopoly of refining, Standard was clearly never able to use its position to restrict production and raise prices. The price of kerosene, the major oil product during this period, fell drastically throughout these decades as oil production greatly increased. Thus, the wholesale price of kerosene fell from 45 cents per gallon in 1863 to 6 cents per gallon in the mid-1890s. Production was increasing to tap a mass market, and, so long as government did not restrict entry into the field, Standard always had to look to its laurels.

In fact, Standard Oil’s virtual monopoly position began to slip by the early 1880s. We have seen how Rockefeller had to abandon trying to achieve a monopoly. More slippage began to occur in the 1890s. Independent pipelines began to grow to challenge Standard’s dominance in this area. Finally, after 1900, and long before the anti-trust dissolution of 1911 and unrelated to it, Standard’s dominance of petroleum refining began increasingly to fade. Whereas in 1899 Standard Oil had 90% of the petroleum refining in the country, this share had slipped to 84% during 1904–07, to 80% in 1911, and then to 50% (including together all the separate Standard Oil companies) in 1921. The basic reason was an increasingly conservative, stodgy, and bureaucratic management of the Standard Oil complex, a development accelerated by the retirement of the senior Rockefeller and other top executives by the late 1890s.

Specifically, Standard made two grave mistakes because of its deficient entrepreneurial skills after 1900. It failed to grasp the crude oil revolution, namely that more and more crude was being discovered in the Texas, Gulf, and California areas. Rooted completely in the Pennsylvania-Ohio oil fields, Standard only grasped the significance of the new oil discoveries late in the day. As a result, new firms such as Texas Company and Gulf Oil were able to stead a march on Standard. Secondly, Standard was the last major firm to realize that gasoline was replacing kerosene as the major petroleum product, a mighty shift occasioned by the two great technological industrial revolutions of the first decades of the 20th century: the shift from kerosene to electricity in providing light, and the growth of the automobile as the major means of land transportation. As a result, in 1899, 63% of total oil refined was kerosene; 20 years later, however, the percentage was only 15%.

Moreover, new independent refiners were attracted to the petroleum industry by Standard’s high profit margins. Whereas there was a total of 67 refiners in 1899, they had more than doubled to 147 by 1911. The independents, furthermore, led Standard in various innovations in petroleum: in the concept of retail gas stations; in the discovery and production of petrochemicals; in tank cars and tank trucks for conveying oil.5

3. Iron and Steel

Until very recently, iron and steel has been the glamor industry of the Industrial Revolution. Any undeveloped country that wishes to feel modern makes sure to subsidize and force-feed at least one large steel plant. In the United States, however, the iron and steel industry was chronically inefficient throughout the 19th century. The Pittsburg ironmasters were the source of America’s first organized movement for a protective tariff in 1820, and for the rest of the century Pennsylvania iron and steel manufacturers were in the forefront of cries for protection against more efficient British imports.

Despite the high Republican tariffs, there were 719 companies either in the blast furnace, steel work, or rolling mill industry in 1889. Throughout the 1880s and 1890s, there were repeated attempts at pools and cartels to reduce production and raise prices. Pools in pig iron, steel, steel billet, wire, and wire-nails all failed, breaking down from failure of one or more firms to abide by the agreement. Finally, a series of extensive mergers and trusts, incorporating 138 companies consolidated into six trusts, merged in turn to form a new mammoth trust-like holding company, the $1.4 billion United States Steel Corporation, in 1901. U.S. Steel was organized by J.P. Morgan, and represents a shift in industry from plowing-back of profits to finance and underwriting by investment banks. The power in the company soon became George W. Perkins, a partner of the House of Morgan. Even so, since there were still 223 firms with blast furnaces and 445 steel work and rolling mill companies by the turn of the century, U.S. Steel only controlled 62% of the market.

Yet, despite its enormous size and its large share of the market, U.S. Steel did badly from the beginning by any criteria. U.S. Steel shares, priced at $55 in 1901, fell precipitately to $9 by 1904. Steel’s profits also dropped sharply, yielding 16% in 1902 and falling to less than 8% two years later. Steel prices fell steadily, and U.S. Steel did not dare to raise prices for fear of attracting new and active competitors. Finally, in late 1907, Judge Elbert H. Gary, chairman of the board of U.S. Steel and another Morgan man at the company, inaugurated a series of “Gary dinners” among steel leaders, to form “gentlemen’s agreements” to keep up the price of steel. But by as early as mid-1908, smaller independents began cutting their prices secretly, and this broke the agreements and forced U.S. Steel and then other majors to follow suit. By early 1909, even the formal structure of the Gary dinners had completely collapsed. Prices consequently fell sharply in 1908 and until U.S. entry into World War I. As Kolko writes, “The collapse of the Gary agreements is an important turning point in the history of steel, for it represents the final failure of the promised stability and profit that motivated the U.S. Steel merger.”6

Then, despite further mergers acquired by U.S. Steel, and despite its ownership of three-quarters of the Minnesota iron ore fields, U.S. Steel experienced — until the present day — a steady shrinkage in its share of the market. Thus, its share of wire nails fell from 66% in 1901 to 55% in 1910 and its share of ingots and castings declined from 63% in 1901–05 to 52.5% in 1911–1915. In 1909, furthermore, there were still 208 firms with blast furnaces and 446 firms with steel works and rolling mills.

The basic reason for U.S. Steel’s steady decline was the curse of all overly-large corporations: technological and entrepreneurial conservatism. As in the case of Standard Oil, U.S. Steel was consistently the last firm to embrace major technological innovations in the steel industry. From 1900 to 1919, the open-hearth steel process largely replaced the Bessemer process as the dominant way of producing steel; U.S. Steel was mired in the Bessemer method and was late in making the change. Similarly, in later decades, U.S. Steel was the last major company to shift from the open-hearth to the basic oxygen process. Largely invested in the production of heavy steel, U.S. Steel was very slow to enter the new and growing field of lighter steel products, of alloys or of structural steel. It was slow, also, to shift from ore to the use of scrap for raw material.

Hence, the Morgan attempt to create U.S. Steel as a stabilizing force for dominating and monopolizing the steel industry was as dismal a failure as the previous pools and cartels. As Kolko concludes:

If nothing else, the steel industry was competitive before the World War, and the efforts of the House of Morgan to establish control and stability over the steel industry by voluntary, private economic means had failed. Having failed in the realm of economics, the efforts of the United States Steel group were to be shifted to politics.7

4. Agricultural Machinery

By the turn of the century, the agricultural machinery industry was dominated by two large firms: McCormick Harvester, owned by Cyrus McCormick and the McCormick family, and William Deering and Company. When the competition between McCormick and Deering became so intense that they began to buy iron ore and build rolling mills and thereby compete with iron and steel, Judge Gary, Morgan man and chairman of U.S. Steel, took a hand. At his suggestion, George W. Perkins, Morgan partner, threw his weight around and induced McCormick and Deering to merge into a supposedly profitable farm machinery monopoly. Accordingly, in 1902 International Harvester was formed, combining McCormick, Deering and three smaller firms, with Perkins as chairman of the board. International Harvester began with 85% of the harvester market, 96% of the binders, and 91% of the mowers in the United States.

But International Harvester floundered almost immediately. In the 15 months after the merger the firm earned less than 1% profit; and even after extensive reorganization and jettisoning of deadwood the firm, in 1907 only paid 3 to 4% in dividends; and only began paying dividends on its common stock in 1910. Three small firms left out of the merger, Deere and Co., J.I. Case and Co., and Oliver Farm Equipment Co., quickly expanded and developed a full line of machinery. In 1909, there were still 640 farm manufacturing firms in the United States. More significantly, International Harvester’s share of the market fell sharply across-the-board. Its share of binders had fallen to 87% in 1911; of mowers to 75%; and of the harvesters it had declined to 80% in 1911 and then to 64% in 1918. Of particular significance, International fell prey quickly to the curse of “monopoly” firms: sluggishness in developing or exploiting innovations.8

5. The Sugar Trust

We may mention one more case study of attempted monopolization of an industry: the “Sugar Trust.” The sugar refining industry had attempted a cartel in 1882, but the agreement had fallen apart for the usual reasons. Five years later, the industry attempted the merger route toward monopoly, forming the trust, the American Sugar Refining Company.

Conditions for success seemed propitious. The industry was geographically concentrated; of the 23 refineries, ten were located in New York City, of which six were in Brooklyn. And of the latter, the three largest, constituting 55% of total sugar refining capacity in the country, were owned by the Havemeyer family, headed by the formidable Henry O. Havemeyer.

But even so, the trust would not have been attempted were it not for the very high protective tariff that the sugar refiners had managed to wangle from Congress. As Havemeyer later testified before Congress in 1899, “Without the tariff I doubt if we should have dared to take the risk of forming the trust ... I certainly should not have risked all I had ... in a trust unless the business had been protected as it was by the tariff.” And, in his testimony, Havemeyer coined a phrase that was to become famous: “The mother of all trusts is the customs tariff bill.”9 Democrats and free traders were from then on to link the protective tariff as the necessary condition of the drive toward trusts and monopolization.

The American Sugar Refining Company, when formed in 1887, possessed 80% of the refining capacity of the country. The importance of the tariff in making the attempt is seen by comparing the British and American prices. Thus, in 1886, the price of British refined sugar, including transportation costs to the United States, was $4.09 per cwt. This compared to the price of American refined sugar, which amounted to $6.01. Thus, it is clear that only the protective tariff allowed the American industry to compete at all.

The American Sugar Refining Co. promptly did what it had been formed to do: cut production and raise prices. Its 20 plants were dismantled and reduced to ten, and it was able to raise its price to $7.01 in 1888 and $7.64 in 1889.

But a grave problem quickly arose, for as the Sugar Trust cut its own production, independents, eager to take advantage of the higher prices, increased theirs, so that the Trust’s share of the total refined sugar market began to fall precipitously: to 73% in 1888 and 66% the following year. Particularly annoying to the Trust was the entrant into the industry, under the umbrella of its own price increases, of Claus Spreckles, “the sugar king of the Sandwich Islands.” Spreckles built modern new plants in Philadelphia and Baltimore that were able to outcompete the older refineries. By 1891, the refining capacity of the independents had almost doubled, and prices had fallen drastically to $4.69, and reached $4.35 in 1892.

The Trust was in deep trouble, but the new McKinley Tariff of 1890, which put imported raw sugar on the free list, emboldened it to try once more. And so the Trust bought out Spreckles, merging into the grand new American Sugar Refining Company in 1892, with no less than 95% of the nation’s total sugar production.

But there was still a serpent in Eden. For old sugar hands, seeing their opportunity, moved into refining with new and competitive plants. Adolph Segal, for example, posed a similar problem to the Trust that Rockefeller had faced in petroleum: for he apparently made a business out of building sugar refineries which the Trust felt obliged to purchase. In one case, in 1895, Segal built the U.S. Sugar Refining Company at Camden, New Jersey, which, upon purchase by the Trust, was found to be totally inoperative because of the lack of a proper water supply.

As a result of the new competition by independents, the price of sugar, which had risen to $4.84, fell back to $4.12 in 1894, and the American Sugar Refining Co. only had 85% of the sugar market. During the next two years, the refiners attempted another cartel agreement, the agreement covering 90% of sugar production. But the result was the entry into sugar refining, in the next couple of years, of Claus Dorscher and the Arbuckle Brothers. The Arbuckle refinery, in particular, was able to break the cartel, with its low cost and superior product. The Dingley Tariff of 1897, which levied a high tariff on raw sugar, raising its price in the U.S. by 18%, made times still more difficult for the sugar refinery industry. As early as 1898, the Sugar Trust only produced 75% of total national output.

In 1900–01, the industry tried once again. Arbuckle and Havemeyer formed a cartel which included almost all Eastern refiners, and Dorscher and other independents merged into American to bring the Sugar Trust’s share of national output back up to 90% by 1902. Sugar prices rose from $4.50 in 1897 to $5.32 in 1900.

Once again, however, the Trust could not maintain a monopoly position. New sugar plants, including a modern one built by Spreckles, again entered the industry. Furthermore, beet sugar, which had only been 4% or less of total sugar production, now received a notable spur from the high Dingley Tariff on raw cane sugar imports. Seeing this, the Sugar Trust tried to maintain its quasi-monopoly position by buying up beet sugar companies after 1901. But, by 1905, American Sugar Refining was forced to abandon this costly policy as a losing proposition. When it did so, in 1905, the Sugar Trust, including its cartel, only controlled 70% of total sugar production, which included 70% of total beet sugar production. Increased competition had also brought sugar prices down to $4.52 by 1906.

After 1905, furthermore, when the Sugar Trust abandoned its policy of buying up competing beet sugar companies, beet sugar won a greater share of the total market (increasing from 4% in 1905 to 14% in 1911), while the Trust’s share of beet sugar production fell to 54% in the same year. In fact, its control of the latter was largely soft; it controlled the majority stock of only 8% of the beet sugar market.

By 1917, the share of the Sugar Trust had fallen to 28% of the total market. Indeed, the subsequent story of the American Sugar Refining Company is strongly reminiscent of the history of U.S. Steel:

There is no evidence to indicate that the sugar refiners were successful in their aim of reestablishing the cartel. Consequently, with wisdom and faith, they turned to one of the more efficient cartel promoters, the government. The government was singularly successful in cartelizing the industry during World War I during the Food Administration Act.10

6. Overall Assessment

A typical example of the rapid rise and fall of the trust, peaking during the great merger wave of 1897–1901, was the National Biscuit Company. It was formed in 1898 as a great combination of three previous regional combinations, designed to monopolize the biscuit market, to purchase competitors, and to control competition by restricting production and raising prices. The result was disaster, as the National Biscuit Company admitted in a remarkable confession in its Annual Report for 1901. Announcing a complete change of policy from its previous aim of controlling competition, the Annual Report declared:

When we look back over the four years [since National Biscuit Company was founded], we find that a radical change has been wrought in our methods of business. ... [W]hen this company started, it was thought that we must control competition, and that to do this we must either fight competition or buy it. The first meant a ruinous war of prices, and a greater loss of profit; the second, a constantly increasing capitalization. Experience soon proved to us that, instead of bringing success, either of these courses, if persevered, must bring disaster. This led us to reflect whether it was necessary to control competition ... we soon satisfied ourselves that within the Company itself we must look for success.

    We turned our attention and bent our energies to improving the internal management of our business, to getting full benefit from purchasing our raw materials in large quantities, to economizing the expenses of manufacture, to systematizing and rendering more effective our selling department; and above all things and before all things to improve the quality of our goods and the condition in which they should reach the customer.

         It became the settled policy of this Company to buy out no competition ...11

By the turn of the 20th century, in fact, businessmen had become disillusioned with trust combinations. In trust after trust, higher prices brought about by the combine simply attracted new and powerful competitors — and this after the trust had expended a great deal of resources in buying out previous competition. As the influential Iron Age lamented, trouble confronted the trust especially “where the combination is naming confessedly high prices for its goods and is at the same time under heavy expenses on account of buying out competitors or subsidizing them to keep out of the market.” Moreover, the New York Financier stated:

The most serious problem that confronts trust combinations today is competition from independent sources. …When the papers speak of a cessation of operation in certain trust industries, they fail to mention the awakening of new life in independent plants ...12

In his study of the success of the trusts at the end of the 19th century, Arthur S. Dewing divided the waves into the first, from the late 1880s to 1893, and the second and by far the larger wave, from 1897–1901 or a little later. He concluded that the trusts came to a sudden halt simply because they turned out badly.13 They did not succeed in suppressing competition; they did not realize the heady expectations of their founders. Shares of stock in the new trusts steadily declined, and few managed to pay dividends. Many of the trusts even failed outright.

Taking a random sample of 35 trusts formed during both waves, Dewing found as follows: that the average earnings of the separate firms just before the formation of the trust was about 20% greater than the trust in its first year, and was also greater than the average earnings of the trust in its first ten years or in its tenth year. Furthermore, the average expected estimates of the promoters and bankers responsible for the trusts exceeded actual first year earnings by 50%, and was also considerably higher than over the first ten years. Of the 35 combinations, only four had earnings equal to expectations.14

There are other ways of revealing similar conclusions. Thus, of nearly 100 consolidations formed in 1899–1900, three-quarters were not paying dividends in 1900. Alfred L. Bernheim’s study of 109 corporations with a capitalization of $10 million and up in 1903, found that 16 failed before 1914, 24 paid no dividends during 1909-1914, and only 22 paid dividends of over 5% during this period. The average dividend for this period was a puny 4.3% for these companies. Or, put another way, of the 50 largest corporations in 1909, 27 had dropped out of the 100 by 1929, while 61 of the 100 in 1909 had dropped out of the ranks by the latter year.15

Dewing concluded from this study that businesses who analogized from economies of scale to a quest for One Big Firm in their industry had committed a grave error. They overlooked that there were definite limits to the economic size of a firm. In particular, managerial ability, individual human judgment, and initiative are extremely scarce and cannot be automated and routinized into one giant firm. Mere large size, he pointed out, was often a handicap in competing with smaller, more mobile competitors — competitors who had lower overhead costs, who could leave the industry in bad years and return in good ones, and who could shop around quietly for raw materials without being so big as to significantly raise their own costs. Moreover, he might have added that smaller competitors were very often better innovators, less bureaucratic, and more open to new ideas and new methods; indeed, they were not struck with obsolescing fixed plants.

Dewing concluded with these wise words:

I have been impressed throughout by the powerlessness of mere aggregates of capital to hold monopoly; I have been impressed, too, by the tremendous importance of individual, innate ability, or its lack, in determining the success or failure of any enterprise. With these observations in mind, one may hazard the belief that whatever “trust problem” exists will work out its own solution. The doom of the inefficient waits on no legislative regulation. It is rather delayed thereby. Restrictive regulation will perpetuate the inefficient corporation, by furnishing an artificial prop to support natural weakness; it will hamper the efficient by impeding the free play of personal ambition.16

We have pointed out earlier in this chapter that industrial corporations and stock shares only appeared in the mid-1890s. It is no coincidence, therefore, that it was the investment bankers, who promoted and underwrote such corporations — led by J.P. Morgan — who took the lead in forming corporate mergers in the same period and attempting to achieve the alleged advantages of monopoly prices. U.S. Steel was but one example of such a failed monopoly.

In manufacturing as well as railroads, then, mergers as well as cartels had systematically failed to achieve the fruits of monopoly on the free market.17 It was time, then, for those industrial and financial groups who had sought monopoly to emulate the example of the railroads: to turn to government to impose the cartels on their behalf. Except that even more than in the railroads, the regulation would have to be ostensibly in opposition to a business “monopoly” on the market, and even more would it have to be put through in conjunction with the opinion-molding groups in the society. The stage was set, at the turn of the 20th century, for the giant leap into statism to become known as the Progressive Period.

• 1[Editor’s footnote] U.S. Department of Commerce, Historical Statistics of the United States, Colonial Times to 1957 (Washington, D.C.: Government Printing Office, 1960), pp. 7, 90, 115, 127, 139, 355, 365–66, 414–17. For similar statistics on the overall performance of the American economy during this period, see Rothbard, “A History of Money and Banking,” pp. 159–66.
• 2[Editor’s footnote] Historical Statistics, pp. 675–76.
• 3[Editor’s footnote] For the general transformation of American business, see Chandler, The Visible Hand, passim.
• 4Ralph W. and Muriel E. Hidy, Pioneering in Big Business, 1882–1911 (New York: Harper & Bros., 1955), pp. 203–04.
• 5[Editor’s footnote] Ibid., pp. 1–49; Nevins, Study in Power, vol. 1, pp. 56–76, vol. 2, pp. 54–79; John S. McGee, “Predatory Price Cutting: The Standard Oil (N.J.) Case,” Journal of Law and Economics (October, 1958): 137–69; Kolko, The Triumph of Conservatism, pp. 39–42; Simon N. Whitney, Antitrust Policies: The American Experience in Twenty Industries (New York: The Twentieth Century Fund, 1958), p. 143; Harold F. Williamson and Arnold R. Daum, The American Petroleum Industry: The Age of Illumination 1859–1899 (Evanston, IL: Northwestern University Press, 1959), pp. 326, 484, 575, 680. See also Armentano, Antitrust and Monopoly, pp. 55–73; Robert L. Bradley, Jr., Oil, Gas, and Government: The U.S. Experience (Lanham, MD and Washington D.C.: Rowman and Littlefield Publishers and the Cato Institute, 1995), vol. 1, pp. 1067–1105, the latter a doctoral dissertation written under Rothbard.
       More recent research has argued that Standard Oil’s success was due to its ability to replicate the South Improvement Company in form by successfully controlling its rebates. Standard was able to ensure low rebates for the oil it shipped relative to its competitors, and if a railroad Standard shipped oil with cut rebates for one of their competitors, they would retaliate by reducing the amount of oil it shipped with the railroad. See Elizabeth Granitz and Benjamin Klein, “Monopolization by ‘Raising Rivals’ Costs: The Standard Oil Case,” Journal of Law and Economics (April, 1996): 1–47. However, it should be noted that as expected, railroads still did frequently try to cut rebates to Standard’s competitors in order to boost their sales, and new oil was discovered and refineries opened up in areas of the country which Standard did not have control over. For a critique of the Granitz and Klein argument that champions the usual efficiency argument, see Morris, The Tycoons, pp. 345, 359.
• 6Kolko, The Triumph of Conservatism, p. 36.
• 7Kolko, Triumph of Conservatism, p. 39. [Editor’s remarks] Ibid., pp. 30–39; Armentano, Antitrust and Monopoly, pp. 95–100; Butler Shaffer, In Restraint of Trade: The Business Campaign Against Competition, 1918–1938 (Cranbury, NJ: Associated University Presses, 1997), pp. 123–27.
• 8[Editor’s footnote] Kolko, The Triumph of Conservatism, pp. 45–47; Chandler, The Visible Hand, p. 409.
• 9Quoted in Richard Zerbe, “The American Sugar Refinery Company, 1887–1914: The Story of a Monopoly,” Journal of Law and Economics 12 (October, 1969): 341–42. [Editor’s remarks] The protective tariffs that had been a feature of the United States since the Civil War were hotly contested and criticized as fostering domestic monopolies safe from foreign competition which hurt the American consumer. Prominent legislation included the 1861 Morrill Tariff, the 1890 McKinley Tariff, the 1897 Dingley Tariff, and the 1909 Payne-Aldrich Tariff, all of which helped maintain the average level of duties at roughly 40–50%. For more, see Chapter 7 below, pp. 228–29; Gary M. Walton and Hugh Rockoff, History of the American Economy, 8th ed. (New York: Harcourt Brace & Company, 1998), pp.  462–64. It is important to note, however, that despite this enormous privilege to forming monopolies, market competition still managed to whittle them away.
• 10Zerbe, “The American Sugar Refinery Company,” p. 367; Chandler, The Visible Hand, p. 328. [Editor’s remarks] In addition, see Richard Zerbe, “Monopoly, The Emergence of Oligopoly and the Case of Sugar Refining,” Journal of Law and Economics (October, 1970): 501–15; Armentano, Antitrust and Monopoly, pp. 50–51.
• 11Quoted in Alfred D. Chandler, Jr., “The Beginnings of Big Business in American Industry,” Business History Review (Spring 1959): 11–13.
• 12The Iron Age (September 20, 1900): 7; (November 1, 1900): 43; The New York Financier (June 11, 1900). Quoted in Marian V. Sears, “The American Businessman at the Turn of the Century,” Business History Review (December, 1956): 391.
• 13They did not cease because of fear of anti-trust prosecution, which then had barely served as a threat to mergers. For more, see Chapter 7 below, pp. 210–29.
• 14Arthur S. Dewing, “A Statistical Test of the Success of Consolidations,” Quarterly Journal of Economics (1921), pp. 84–101. See also Arthur S. Dewing, The Financial Policy of Corporations, 2 vols. 5th ed. (New York: Ronald Press, 1953).
• 15Sears, “The American Businessman,” pp. 391–92; Kolko, Triumph of Conservatism, pp. 27–29.
• 16Arthur S. Dewing, Corporate Promotions and Reorganizations (Cambridge, MA: Harvard University Press, 1914), pp. vii–viii.
• 17[Editor’s footnote] For similar evidence that mergers generally invited new competition and were not successful, see Naomi Lamoreaux, The Great Merger Movement in American Business, 1895–1904 (New York: Cambridge University Press, 1985).