The relentless revolution: a history of capitalism (32 page)

At the beginning of the century the United States had fewer than four million people, almost all of whom lived on the Atlantic shelf on the North American continent. They had shared a common history for a very brief period. Germany, like the United States, was composed of disparate parts in 1776, but those disparate parts shared a history going back to the time of Charlemagne in the ninth century. Americans loved novelty; Germans feared it. The American practiced religious toleration; Germans had fought bitter wars over differences within the Christian faith. Germans accepted authoritarian politics; Americans celebrated the weakness of their political institutions. Still, Germany almost equaled the American economic record without its “exceptional” advantages.

Nothing undermined the dominance of inherited wealth more than this capitalist principle of the interchangeability of participants. A son who depleted his family’s fortune created opportunities for someone else more attuned to making than to spending money. Unlike an aristocracy, capitalism didn’t depend upon the virtue, prudence, or boldness of anyone’s progeny for growth. Americans accepted and admired these capitalist imperatives. Germans were less convinced of their virtue. Throughout the nineteenth century engineers and manufacturers struggled against the contempt of upper-class Germans toward parvenus, a word with hardly any meaning in the United States.
⁵²
But it didn’t really matter because impersonal forces would maintain capitalism’s momentum once enough key players had jump-started the development process. Americans more easily took risks in keeping with the entrepreneurial spirit of capitalism, but Germans had a disciplined tenacity that contributed to their country’s successful economic development.

Along with the obvious advantages of being a first mover in economic development like Great Britain, there came some distinct disadvantages that rivals might exploit. Britain had a heavy investment in its trailblazing textile industry, but success made its entrepreneurial class timid. English investors looked elsewhere for opportunities. The United States and Germany benefited from this. They could move into new industries and tap the pools of capital, looking for promising new investments. Nation building, important to both countries throughout the nineteenth century, acted as a catalyst for economic development. America had a pervasive entrepreneurial spirit and a vast continent lying ready for cultivation. In Germany a rising class of industrialists was ready to integrate economically the nation that the aristocratic Junkers had brought into being. Both countries were rich in the natural resources vital to railroad building and heavy industry. Their citizens proved to be amazingly adept at copying and modifying English inventions. More important, they soon started innovating in chemistry, electricity, and automobile making. In retrospect, their surpassing Great Britain seems almost overdetermined. The British economy didn’t decline; it simply lost its relative position while maintaining an impressive level of productivity, as the Dutch had earlier.
⁵³
The mystery is why France did not step up to the mat.
⁵⁴

The relentless revolution of capitalism kept up a fast pace during the nineteenth century. The size and scope of enterprise had penetrated every continent. As the twentieth century began, the philosopher Max Weber called capitalism an “iron cage.” If people really wished to live as their forebears had, they could find a way, but fewer and fewer wanted to live that way. Behind the bars of the iron cage, products and services expanded. Life expectancy increased; improvements in public health enhanced the quality of life. Quite naturally people would like to have it both ways: enjoy the fruits of the enormous wealth that capitalism created but without suffering the loss of old ways of life.

At the end of the nineteenth century scarcity in capitalist countries was just beginning to yield to abundance. With this cushion, the capitalist world was poised to demonstrate just how wasteful, rapacious, and indifferent to the long-run consequences of its habits could be. In the ratcheted-up use of fossil fuel, that essential element in economic development, capitalist aggressiveness would pass beyond the earth’s surface to its life-sustaining atmosphere. We still might have it both ways if we could build in restraints without killing the goose that laid the golden egg of prosperity.

THE INDUSTRIAL LEVIATHANS AND THEIR OPPONENTS

T
HE PREEMINENT INDUSTRIAL
powers of the nineteenth century—Great Britain and its two rivals, Germany and the United States—transformed the physical world. They laid iron tracks across thousands and thousands of miles. They built enormous factories, to which they drew millions of men and women, most of them recently off the farm. They collected capital in banks, consumed coal, finished steel, dug minerals from the earth, leveled hills, diverted the water from rivers into canals, and generally displayed the previously undetected strength and ingenuity of human beings. Despite the impersonality of all these changes, particular people brought them about: swashbuckling heroes of enterprise and the workingmen and women whose lives industrialization had turned upside down. A few men so completely grasped the dynamics of capitalism that they established firms that are still among the world’s largest. The initiative lay with these industrialists, yet their workers found ways with courage and determination to organize vibrant oppositions to the new rulers of their universe. The success of these labor movements depended upon the political tactics, ideological assumptions, and historical precedents within the different capitalist countries. The story begins with the entrepreneurs.

Because capitalism created unparalleled freedom of action in the economy, its history is studded with stories of personal endeavors. Major accomplishments in science and engineering gave direction to nineteenth-century entrepreneurs who scoured these advances for their commercial potential. As the scope of enterprise grew larger and larger, a few individuals carved out large economic domains of their own. Cornelius Vanderbilt, Andrew Carnegie, and John D. Rockefeller in the United States and August Thyssen, Carl Zeiss, and Siemens in Germany were the giants who carried their nations to economic preeminence in the nineteenth century. They founded the companies of Carl Zeiss, Thyssen, Krupp, and Siemens in Germany and the New York Central Railroad, U.S. Steel, and Standard Oil in the United States. These leviathans of industry created powers as sweeping as those of monarchs, which ironically meant that these hyper-competitors shrank competition because of the size of the market share they commanded. Too large to be run by a single man or even a family, they formed giant corporations that came to characterize capitalism in the twentieth century.

These men didn’t just make huge fortunes; they pioneered the industries that were to dominate their age: railroads, steel, oil, electrical-powered tools, scientific apparatuses, pharmaceuticals, and dyes. American entrepreneurs like Vanderbilt, Rockefeller, and the Scottish-born Carnegie were fierce competitors who beat down prices as they simultaneously drove rival companies out of business. German leaders like Zeiss and Siemens more typically relied on institutional support for research to advance and diversify Germany’s economy. Thyssen was called the American, a sobriquet that doubled as criticism of his ferocious individualism more typical of American entrepreneurs than German ones.

Often these founders of megafirms came from prominent families. The German industrialist Alfred Krupp took over the management of his father’s ironworks firm. Thyssen’s was a family of successful entrepreneurs. In our own time, Bill Gates got a boost from a wealthy father. Yet other industrial giants sprang de novo into the world of trade with little in their backgrounds to suggest a future fabulous success. The perfect example, Cornelius Vanderbilt, began his ascent from a modest waterside farm on Staten Island. Carnegie came from a poor immigrant family, and Rockefeller started at the bottom of the business hierarchy. Siemens got his start through service in the German Army, and Zeiss grew up in a family of toymakers.

Vanderbilt’s talents unfolded with the country’s revolution in transportation as he moved from running ferries to transatlantic steamships to railroads. The rivalry among early railroad operators produced near chaos in an area where coordination was essential. So Vanderbilt reorganized the untidy mess of diverse railroads coming into New York City, making Grand Central Station a permanent tribute to his organizational acumen.
¹
Starting in the old way with personal savings and family loans, Vanderbilt moved smoothly in middle age to the new financial world of stock trades, mergers, and clearinghouse transactions. While old-fashioned in many of his habits, he had no trouble adapting, as many others could not, to corporate capitalism with its fluid commerce in stock shares with fluctuating values. Through his no-holds-barred style, Vanderbilt managed to give competition a bad name, something rather remarkable in a country so committed to individual effort and laissez-faire policies.

Unlike the tyros of New York City financial circles, Vanderbilt retained the feral energy of his youth, probably best captured in his adventures in Central America. When thousands of Americans rushed to get to California during the gold rush, Vanderbilt set up a route through Nicaragua, building roads there to expedite the passage to the Pacific. His competitors tried to get the government to withdraw Vanderbilt’s operating permit, so he brought down the Nicaraguan government. Vanderbilt’s exploits dazzled and dismayed his contemporaries, particularly those who crossed him. He could also astound as when at age eighty he responded to the panic of 1873 by buying up those companies on the ropes to broaden his railroad empire. And then there was the 260-foot-long yacht with its grand staircase and ten elegantly-furnished staterooms to give authentic glitter to the name “Gilded Era.”
²

Carnegie and Rockefeller were also self-made millionaires. The arrival of steam-powered looms had destroyed the livelihood of Carnegie’s father and prompted his mother to scrape together enough savings from her shop to move her family from Scotland to the sooty shores of the Monongahela River. Carnegie’s stunning proficiency as a telegraph operator smoothed an upward path in the Pennsylvania Railroad Company, whence he became a venture capitalist dealing in railroads, bridges, and oil derricks.

Carnegie could be a charmer, which came in handy when he was selling bonds—often of dubious value—in Europe. Returning with substantial profits, he invested in ironworks, steel mills, and iron ore fields around Lake Superior. The Civil War with its demand for armament turned Pittsburgh into a major industrial center. When Congress raised a steep wall of tariffs in the 1870s, it gave Pittsburgh and Carnegie the protection they needed for their growing pains. He was one of the first industrialists to integrate their operations upward from the extraction of raw materials to the finishing of steelworks, mainly rails. He was a relentless competitor, whose goal was always to “scoop the bottom,” beating out his rivals with lower prices, often aided by the hard bargains he drove with the workers. In 1892 he merged his various investments into the Carnegie Steel Company.
³

A decade later the banker J. P. Morgan bought out Carnegie to form U.S. Steel. Morgan pronounced Carnegie the country’s wealthiest man. Had his $100 million estate been liquidated at his death in 1877 it would have contained one-twentieth of all American dollars! Unskilled workers then earned about $8.50 a week. (By comparison, Bill Gates’s $53 billion represents $1 in every $130 when a minimum wage job in 2009 would bring in $290 a week.) Giving away money with the same zeal he brought to earning it, Carnegie quickly shrank his estate, estimated at his death at $23 million. Grateful for access to a private library when he was a boy, he established more than twenty-five hundred public libraries in the United States, Canada, and Scotland, his homeland.

Carnegie may be one of the most complex figures in the history of American capitalism. Denied a formal education, he studied literature and history throughout his life. His intellectual interests went beyond reading. He also wrote voluminously about political systems and his philosophy of enterprise. His business archive is stuffed with letters to American presidents, annotated board minutes, advisory memos to himself, memorandums to subordinates, accounting sheets, and drafts of the numerous articles that he had submitted for publication. One thing that had distinguished his Scottish relatives was their radicalism in support of labor, a tradition Carnegie left behind when he came to America. Typical of the self-made man, he believed that any boy in America could succeed, discounting the limited space at the top. Still, he considered the pursuit of profits distasteful, writing, “No idol is more debasing than the worship of money!”

Like Vanderbilt and Carnegie, Rockefeller came from a farm family, though his father at least had one thousand dollars to lend his son when he wanted to set himself up as a commission merchant to sell grain, hay, meats, household goods, and farm implements. In 1853, a scion of a distinguished New England family, Benjamin Silliman, demonstrated that the petroleum that produced a smelly, smoky light was actually a mixture of hydrocarbons that could be purified through fractional distillation. This enhanced the value of the oil widely found in Ohio and Pennsylvania by perfecting its preparation as a lubricant and a source of cheap, clean light. Rockefeller decided to pursue a career in refining oil. He called his start-up company Standard Oil.

Sizing up the railroad companies’ need for secure returns to offset their fixed costs, Rockefeller promised a steady freight volume in exchange for lower fares for the transport of crude oil to his Cleveland refineries and the return trip of refined oil to New York. With this cost leverage, he began his long career of gobbling up other oil refineries, often lowering his prices below cost just to rid himself of a competitor. Rockefeller had unshakable faith in the future of oil even before the internal-combustion engine had been perfected. When overcapacity sank prices in 1870, he bought up all the companies whose owners had lost heart.
⁴
Then he mounted an aggressive marketing campaign.