The relentless revolution: a history of capitalism (40 page)

In 1893 another downturn in the economy coupled with price wars among capital-intensive industries created incentives to dampen competition through amalgamation. New Jersey gave American companies a break with an incorporation statute that let corporations hold stock shares of other corporations, regardless of where the corporations had been chartered. Merging companies then became a favorite strategy for reducing competition in the United States. Mergers, following the time-honored principle of the economy of scale enabled three or four large companies to enjoy the cost savings of size, but bigness is beneficial only if it leads to savings.
²⁶

Cooperating businesses had the choice of forming a trust or getting a state charter for a new company that pooled the shares of existing firms. The return of prosperity set off the largest merger movement yet seen. More than 157 giant corporations swallowed up 1,800 separate businesses between 1895 and 1904. Close to 100 of these new corporations had a commanding share—from 40 to 70 percent—of their markets. Large companies in oil, tobacco, steel, and automobile making obviously flourished, but literally hundreds of other attempts to follow this model failed because they couldn’t benefit from either size or scope.
²⁷

For many firms, the most treacherous passage was the one from family company to impersonal corporation. Families, like the Swifts, Deeres, Eastmans, Schwabs, Firestones, Dows, Watsons, McCormicks, Westinghouses, and Armours maintained control over their firms longest because they grew through internal developments rather than acquisitions. Still, while personal attachment counted for much, the challenges to grow and diversify intensified. Not all heirs were equally able, steering expansion required a breadth of knowledge, and most family firms did not have the deep pockets to meet the considerable costs of vertical integration and managerial reorganization. For instance, only the Vanderbilts had the money to modernize their railroad system.

The gifts of Pierre du Pont make this point better. Responsible for restructuring the DuPont Company after 1904 and General Motors after 1920, du Pont was both wealthy and astute enough in financial affairs not to have to repair to Wall Street for expansion. He had an intuitive sense of which managers would succeed and the good sense to get out of their way as they tackled the daunting task of modernizing operations while maintaining profits. At General Motors, du Pont’s promotion of Alfred Sloan was enough to secure the company’s prosperity.
²⁸
But his rare success raises another point. If unusual talent is needed to carry complex organizations like a corporation across the bridge of critical change, which plays the more important part in success: the unique individual or the optimal structure?
²⁹

A list of the two hundred largest firms in 1917 gives us a picture of what had replaced the local meat-packer, farmer-retailer, seamstress, and wheelwright. Think American Tobacco, United States Rubber, Quaker Oats, Standard Oil, and Pittsburgh Plate Glass. With assets in the millions and employees in the thousands, these corporations produced food, tobacco, textiles, apparel, lumber, furniture, paper, printed items, chemicals, petroleum, rubber, leather, glass, metals, machinery, transportation equipment, and instruments.
³⁰
Sometimes referred to as managerial capitalism, this consolidation into behemoths depended on the legal foundation of the corporation for perpetuity, limited liability, and a protected scope of action. Given incorporation generously by state governments, stockholders rarely recognized it as the gift that it was.
³¹

Private banks like that of J. P. Morgan created a market in shares of industrial securities. These sales financed the many mergers that were consolidating whole industries. Banks bought sufficiently large blocks of equity to be able to have their weight felt in dividend and investment policies at shareholders’ meetings. This arrangement worked until the bankers’ influence appeared as a threat to the interests of the public, whose advocates demanded laws curtailing this financial capitalism. Over time banks lost some of the power they had exercised at the end of the nineteenth century. Not only was there more federal regulation, there were new sources of capital available to big companies, like their savings or stock issues. New or expanding smaller companies became the Wall Street banks best customers.
³²
As the separation of management and ownership widened, shareholders’ capacity to monitor management weakened.

Just as new machinery made it possible to break up the production process into individual steps, so the complex arrangements of offices and departments facilitated the paper work of ordering, billing, bookkeeping, letter writing, and preparing marketing material to be assigned and accounted for in separate units, each with its own managerial team. The goal was to coordinate the diverse activities that stretched from buying raw materials, building plants, and training a work force through to the manufacturing, marketing, and delivering of goods to cutting checks, accounting for costs, and carrying on relevant research. Employing workers, which used to be done by the shop foremen, got professionalized with the addition of personnel offices and efficiency experts. With this elaboration of business bureaucracies came the new language of bureaucratese we’re so familiar with, captured in phrases like “functional specialization.”

The deep pockets of corporations paid for the expensive transformation of innovative design into sellable commodities. In the United States, where government remained relatively small, these business enterprises became the country’s largest, most intricate social organizations. Government at the state level offered few obstacles and some important incentives to corporate reorganizations. As the New Jersey statute suggests, the federal system with shared power between the state and national governments served business interests well. States competed for resources; chartering corporations brought in tax revenues; incentives were strong to give corporate boards what they wanted. New Jersey attracted the majority of incorporations with its accommodating law. Despite the trend toward building giant corporations, more efforts failed than succeeded. National Novelty, National Salt, National Starch, National Wallpaper, and National Cordage all bit the dust. Even today most people work for small businesses. Of the Fortune 500 firms established before 1910, only twenty-nine exist today.
³³

The competition that promoted the formation of large, market-commanding corporations in the United States had a different result in Germany. There the depression of 1873–1896 encouraged manufacturers to form cartels, organization of producers within a single sector directed to achieving collective goals. By 1911 there were more than five hundred cartels; by 1923, fifteen hundred. The common law of England and the United States construed the price regulations of a cartel as a restraint of trade. When Franklin Delano Roosevelt in the midst of the Great Depression of the 1930s shepherded through Congress the National Recovery Act, which imposed cooperative rules upon manufacturing companies, the Supreme Court declared it unconstitutional. No such obstacle operated under Europe’s civil law. This meant that in Britain or the United States cartels could be formed, but their rules could not be enforced in a court of law. The scrappy competition that marked enterprises in the eighteenth and early nineteenth centuries had given way to the imperative to moderate the destructive aspects of competition.

Cartels reflected a cautious, defensive strategy. Aimed at conserving earnings rather than exploiting opportunities, cartels promoted slow, orderly advances in their particular industry, usually setting prices at the level of the least efficient producer. When it became obvious that stability required more than price setting, cartels became even more intrusive by allocating shares of the market, or quotas, to individual firms. Like most institutions that prevail for a long time, cartels had both advantages and disadvantages.
³⁴
They tended to reduce obsolete practices through the spread of information, and they prevented erratic swings in returns by setting prices. They encumbered individual decision making and sometimes the innovations that came along with it.

As a collaborative endeavor, a cartel relied upon direction from professional administrators working at cartel headquarters to make industrywide decisions that would smooth out the ups and downs of trade. They also protected individual companies from being swallowed up by larger outfits. Whereas Carnegie Steel and Federal Steel each produced 35 percent of steel ingots and 45 percent of rails in the United States, no steelmaker in the Ruhr Valley produced as much as 10 percent of either product.
³⁵

With its own highly bureaucratized regime in place, the German imperial government was in a position to channel economic developments, but in fact both the federal and state governments pretty much left the industrialists alone. What the Prussian government had done since the beginning of the nineteenth century was to initiate technical and scientific research that was diffused through a network of engineering schools.
³⁶
This became the source of Germany’s competitive edge in chemicals, metals, and electrical and heavy machinery. Having put in place tariffs to protect the German steel and iron industries from English and Belgian competition, the government left it to its industrialists to run their companies. The United States followed other European countries in raising tariff walls to protect their “home” industries. By the 1890s German and American economic preeminence was pronounced and accelerating.

The English, the pioneer of free trade policies, along with the Netherlands and Belgium, declined to erect tariff barriers, and they suffered from that decision. Not that they got much credit for it. A typically jaundiced view was expressed by a diplomat who compared Great Britain’s free trade policy with someone climbing a tree full of fruit and kicking away the ladder to it.
³⁷
But in fact everyone benefited. Britain’s willingness to hold to free trade during downturns in the world economy meant that countries suffering from gluts had some outlet for their goods, a not inconsiderable service that stabilized the market for the long run, despite short-run costs to itself.
³⁸
Everyone came to appreciate this service after it ended when adverse circumstances forced Great Britain to abandon its leadership in 1931. In another “peculiarity of the British,” they had a penchant for keeping control of businesses in the hands of family owners and so did not undertake the corporate restructuring that the Americans and Germans had done. The failure to do so was painful as these firms watched the biggest shares in the international markets in steel products, electrical equipment, and dyestuffs pass to their competitors. Small may have been beautiful, but it was not as effective at the end of the nineteenth century.

One might expect cartels and tariffs to breed a complacent business environment, but German producers performed well, competing for shares of the domestic market. The momentum created at mid-century by railroad building was strong enough for an almost seamless transition to the new technologies in electricity, chemistry, and precision engineering.
³⁹
The Germans became the world’s trailblazers with these new winners of capitalism. The German electrical engineering industry was moving toward global dominance. By the early twentieth century it was marketing half the electrical products in the international market. At the same time Germany achieved almost a monopoly of European commerce in fine chemicals, dyestuffs, and optics.

The Scope of Industries

Germans devoted substantial resources to scientific education even while they shared the high premium Europeans put on classical studies. German researchers during the nineteenth century only later found practical applications for their discoveries. And those applications were astounding! Germans gained more knowledge of energy, electricity, and optics than their peers in France and Great Britain combined. Academic researchers and business leaders worked hand in glove in what contemporaries sometimes called a secret marriage. By 1890 there were twice as many chemists in Germany as in Great Britain. They gave their country a virtual monopoly of dyestuffs before 1914. Their laboratories led the way in synthesizing natural materials, like fertilizer and dyes. After Germany’s humiliating defeat by Napoleon some concluded that their country would do better concentrating on science and the economy.
⁴⁰
From Waterloo to Verdun, Germany industrial production grew an amazing forty-fivefold while agricultural output increased by three and a half times with population more than doubling. Malthus had been proven wrong; agricultural productivity had kept up with population growth.

Again the technological trajectory of the United States differed from that of Germany. Individual American inventors, like Thomas Alva Edison and Alexander Graham Bell, built major companies from their own workshops. Both men set up laboratories from the early returns of their inventions. They succeeded in establishing landmark corporations to capitalize on what electricity had wrought. They had been born in the same year, 1847, but it would be hard to find two more different men. Bell was the son and grandson of distinguished Scottish educators and came to the telephone by way of a career devoted to helping the deaf. Edison was an autodidact. When he quit school, he left behind teachers convinced that he was a slow learner. He educated himself in chemistry while working as a telegraph operator.

Remembered most for the incandescent light bulb, which banished the darkness of night without smoke, soot, heat, or the danger of fire, Edison had a genius that was as prolific as it was profitable. With 1,093 patents, he still holds the world’s record. He also nurtured the talent of others. From Edison’s lab came Nikola Tesla, a Hungarian immigrant whose patent for the radio the Supreme Court upheld. Simultaneously, a slew of talented men from many countries had been working on the radio, including James Clerk Maxwell, a Scotsman; Mahlon Loomis, an American dentist; and the Italian Guglielmo Marconi. Many of Edison’s ideas emanated from telegraphy. Bell too began with telegraphy, and his great contribution was making electricity do the work of transmitting sound. Others working with both electricity and telegraphy developed phonographs, telephones, and motion pictures. The commercialization of these inventions fostered popular modes of entertainment that became the cultural signature of the twentieth century.