1.4 The Expansion of Industry and Big Business

Essential Question:Where do you think the US would be in history if it had not had the natural resources it did/does?Do you think that the tycoons of the late 1800s are best described as ruthless robber barons or

as effective captains of industry? Explain.

Starter Activity• On a half sheet of paper write down the name

of someone who you think is the most successful person in the world.

• Next list the qualities/characteristics that made you choose that person

• How do you think success is determined? What constitutes or defines success in your opinion?

• What future goals would determine success for you?

• Turn in your answers

Natural Resources Fuel Industrialization

• The Civil War in many ways lead to the growth of industrialization in the US

• Prior to the Civil War, the US was predominately agricultural with southern farmers controlling politics and the economy

• After the Civil War, the US transitioned into an increasingly industrial society

• What lead to this Industrial Revolution, was the discovery of natural resources

Black Gold• Oil had been discovered by Native Americans long

before Europeans arrived, however, their uses of it were limited

• In the 1840s, Americans began using kerosene to light lamps after the Canadian geologist Abraham Gesner discovered how to distill the fuel from oil or coal

• In 1859, Edwin L. Drake used a steam engine to drill for oil in Pennsylvania– This technique spread throughout the Midwest and into

Texas with major cities including Cleveland and Pittsburg– Gasoline, a by-product of the kerosene making process was

initially disposed of– But after cars were invented another use for it was found

Coal and Iron Ore• In 1887 iron ore was

discovered in deposits more than 100 miles long and 3miles wide in the Mesabi range of Minnesota

• At the same time, coal production increased from 33 mil toms to more than 250 mil tons in 1900

Coal as a Percentage of Energy Consumption in US

• Discovered in 1851 by William Kelley, but was not used on an industrial scale until 1851 when Henry Bessemer patented it for major iron industries

The Bessemer Process

New Uses for Steel

• Can you guess what industry used the most steel?– Railroads

• Others Uses:– Joseph Glidden’s barbed wire– Deere’s farm equipment – Steel Plow– Brooklyn Bridge – in 1883 it spanned 1,595 feet

and used 7,045 pounds of steel to build

Inventions Promote Change• The Power of Electricity

– In 1876 Thomas Edison established the world’s first research laboratory in Menlo Park, New Jersey

• Here, he produced the first incandescent light bulb, the most life changing invention of the 1800s

• Later he invented and entire system for producing and establishing energy

Effects of Edison’s Electricity• By 1890 – this power was used to run

machines: fans, printing presses, home appliances, electric streetcars

• Allowed manufacturers to locate their factories away from rivers

• Allowed more efficient process for business– Example: Armour and Swift meat packing plants

packed meat in a way that made it safer to eat, and it sped up production

– Milton Hershey mass producing chocolate

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George Westinghouse• George Westinghouse was an industrialist

who made his fortune with the invention of the electric transformer and air brakes

Inventions Change Lifestyles

• Christopher Sholes– 1867 – invented the typewriter

• Alexander Graham Bell– 1876 – invented the telephone

• Both of these inventions affected office work and gave jobs to women– In 1870 women made up 5% of office workers – By 1910, they made up 40% of office workers

Dupont Family• The Dupont Family created an industry that

experimented with chemicals and explosives

Andrew Carnegie

• Just as inventions began changing America, so did the men and women who were behind the innovations

• Andrew Carnegie was an immigrant from Scotland who worked for the Pennsylvania RR

• Soon he began buying stock in the company he worked and by 1865 he had made so much money, he was able to leave the company to start his own

Carnegie and Steel• After touring a British steel mill and witnessing the

Bessemer Process first hand, he returned to the US and entered the steel industry

• By 1899, the Carnegie Steel Company manufactured more steel than all of the manufacturers in Great Britain

How did he do this?• First, he continually searched for ways to make better

products at cheaper expenses– He incorporated new machinery and techniques like

accounting systems to track precise costs

• Second, he attracted talented people by offering stock in his company, and he encouraged competition among his assistants

• In addition, he attempted to control as much of the steel industry as he could by using vertical integration– A process by which every aspect of the industry is controlled

by the produced – raw materials, like iron and coal, are mined, they are manufactured in plants, and distributed and sold all by the company – TOTAL CONTROL – FEWER EXPENSES

• Carnegie also attempted to buy out the competing steel producers by using horizontal integration– A process in which companies producing similar

products merge – LESS COMPETITION

• By controlling the raw material extraction, manufacturing, and distribution, as well as reducing competition, Carnegie was able to control almost the entire steel industry

• He attributed his success to his strong work ethic and logic behind business practices

• But some people of the time explained his success using scientific theories

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What is another example of horizontal integration that we just saw a few slides back?

Social Darwinism and Laissez-faire• Social Darwinism is the premise of survival and success

of the most capable people in society– Poor = lazy, unintelligent rich=busy, smart

• The English philosopher Herbert Spencer used Darwin’s biological theories to explain the evolution of human society

• With this, economists found a way to justify the doctrine of Laissez-faire – a French term meaning “allow to do” – According to this doctrine, the marketplace should not be

regulated– Success and failure in business is governed by natural law and

that no one has a right to intervene

• Popular culture and literature promoted the possible “rags to riches” success for anyone who worked hard and was virtuous, like Carnegie

• In “Risen from the Ranks”, Herbert works at a post office which is bought out by a rich business man

• He meets a scholar traveling to Boston and throughout their journey, Herbert makes a small fortune that he returns home with overturning his and his mother’s lives.

But what are the pros and cons of this belief in business practices?

• Pros –– Liberty – Beneficial to entrepreneurial spirit due to lack of taxes,

rules, regulations. – Lots of incentive for profit, and in theory the invisible hand

benefits all of society.

• Cons – – No regulation– Allows for monopolies, which doesn't benefit society.– Bad working conditions, wages, etc...

Monopolies

• Many business men took this Laissez-faire approach and pursued horizontal integration

• This was usually in the form of a merger, like the one that formed between Swift and Armour meat packing using the same shipyard

• When firms buy out all competitions though, or merge, there is no competition leading to total control over that market, this is called a monopoly

• Monopolies, as we will see later, become a major problem of the Gilded Age – particularly with big business like oil, steel, and railroads

J.P. Morgan• J. P. Morgan was a banker who also owned United

States Steel, a holdings company– A holding company is one that does nothing but buy out the

stock of another company, like Carnegie Steel in this case

• In 1901 Morgan bought out Carnegie Steel making US Steel the world’s largest business

Standard Oil and John D. Rockefeller

• John D. Rockefeller took a different approach with mergers– He joined companies in trust agreements– Participants of the trust turned their stock over to

group of “trustees” who ran the separate companies as one large corporation

– Trusts were not legal mergers, but they still provided dividends to stock owners

• He used this approach to create Standard Oil which controlled all of US oil

The “Robber Barons”• In 1870 Standard Oil Company in Ohio processed

2% of the country’s crude oil• Within a decade, it controlled 90%• But, with no competition and a monopoly on the

market, you can do whatever you want (without regulation)– He paid his employees extremely low wages– And he sold his oil at cheaper rates, snubbing out

competition – people will buy cheaper anything– Then, after he controlled the market, he hiked prices

way up – now people only have one option– Good or Bad Business???

Robber Baron? OR Philanthropist?• Industrialists began referring to these men as

“robber barons” due to their business practices• But these men were also philanthropists

– Rockefeller kept most of his assets, but he still gave away $500 million establishing the Rockefeller foundation, giving money to University of Chicago, and creating a medical institute that helped find a cure for yellow fever (50% - but where was this money going really???)

– In his later years, Andrew Carnegie became a great philanthropist donating about 90% of the wealth he accumulated during his lifetime to arts and education

Carnegie Quote:

It will be a great mistake for the community to shoot the millionaires, for they are the bees that that make the most honey, and contribute most to the hive even after they have gorged themselves full

Do you see it this way?

• Today, David Rockefeller ranks number 15 on Bloomberg’s list of most generous philanthropists of all time– His estimated lifetime

giving equals $940 million (35% of his fortune)

• Top Philanthropists:– Warren Buffet – holding

company and investor - $40,780 million (78%)

– Bill and Melinda Gates – Microsoft co-founder - $21,844 million (48%)

Sherman Antitrust Act• In 1890, the Sherman Antitrust Act made it illegal

to form a trust that interfered with free trade between stated or with other countries

• But, there was a problem – – The act didn’t define clearly what a trust was, so it

hard for prosecuting groups to gather a case– And, because trusts were not legally binding, if a

company felt pressure of prosecution, they would simply disassemble into small businesses again

– The Supreme Court threw out 7/8 cases presented, finally they stopped enforcing the Act

Business Boom Bypasses the South• What do you need to have thriving industry?

– Natural and urban resources

• The South was still trying to recover from the loss of Civil War– They were suffering from a lack of money and people

in the south were skeptical of investing their money– They were still trying to remain an agricultural

economy

• Due to lack in ambition, 90% of stock in southern industry was owned by businessmen in the north

Answer the Essential Questions

Where do you think the US would be in history if it had not had the resources it

did/does?Do you think that the tycoons of the late

1800s are best described as ruthless robber barons or as effective captains of industry?

Explain.