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Industrialization and Urbanization, Corporations and Consolidation

In the 19th century, states reduced the requirements for businesses to incorporate. A corporation is a form of business partnership; it is a legal entity that is distinct from the individuals who control it. The corporation (not the individual partners) is responsible for repaying the corporation’s debts; this is known as limited liability. The corporate form of business organization made it possible for entrepreneurs to finance large-scale enterprises because corporations issue stock, certificates representing shares of ownership in a corporation. By issuing stock, a corporation can enable thousands of individuals to pool financial resources and invest in a new venture.

Businesses also grew by combining into trusts. In a trust, a small group of business people, called trustees, acquire enough shares in several competing firms to control those companies. The trustees are then able to manage and direct a group of companies in a unified way—in effect, creating a single firm out of competing firms. The trustees could prevent competition among the firms that were part of the trust. A leading example was the Standard Oil Trust, formed in Ohio in 1882 by John D. Rockefeller and his associates. Within a decade, trusts dominated many industries.

States tried to regulate trusts, but big businesses eluded state control. Afraid that trusts would destroy competition, Congress in 1890 passed the Sherman Antitrust Act. The act banned businesses from joining together in ways that controlled markets, as trusts had been doing. It also outlawed monopoly, in which only a single seller or producer supplies a commodity or a service. But the law defined neither trust nor monopoly and was poorly enforced. The courts threw out cases against the trusts and used the law mainly to declare unions illegal combinations in restraint of trade. For instance, the courts declared that unions that organized boycotts or strikes impeded the flow of commerce and thus violated federal law. Standard Oil, however, continued without interference. In 1892, to avoid Ohio laws, Standard Oil incorporated in New Jersey as a holding company, a corporation with only one purpose: to buy out the stock of other companies.

Corporations introduced new styles of management, or business organization. The railroads, which needed to manage crews, fuel, repairs, and train schedules over large areas, were the first to develop new management techniques. The railroads also developed standard time, which the United States adopted in 1883. Steel industry tycoon Andrew Carnegie, who continually sought less costly ways to make steel, also introduced new management techniques. The Carnegie Steel Company used precise accounting systems to track the costs of all processes and materials involved in making steel. To do this work, Carnegie hired middle managers and encouraged them to compete with one another.

New business practices led to larger corporations. Andrew Carnegie practiced vertical integration; he bought companies that sold supplies to the steel industry, including coal and iron mines and a railroad line. Carnegie thereby controlled every stage of the productive process from raw materials to marketing. Finally, he engaged in horizontal consolidation by acquiring his competitors. He priced his products so low that competitors could not compete and make a profit. Then he bought them out. By 1899 Carnegie’s company was the world’s biggest industrial corporation and produced one-fourth of the nation’s steel. However, vertical integration and horizontal consolidation helped concentrate power in a few giant corporations and limited competition.

According to business magnates such as Rockefeller and Carnegie, their huge enterprises provided new products at lower costs and enriched the nation, as well as themselves. Stressing the value of competition, captains of industry argued that it ensured the survival of the most competent. Business leaders also endorsed a policy of laissez-faire. Government, they believed, should leave business alone. In fact, the federal government adopted policies to benefit big business. Congress passed high tariffs (taxes on imported products) that impeded foreign competition; federal subsidies to railroads enriched investors; and courts penalized labor more often than business.

 

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