What did the practice of mergers and trusts horizontal integration reduce in the late 1800s?

New processes in steel refining, along with inventions in the fields of communications and electricity, transformed the business landscape of the nineteenth century. The exploitation of these new technologies provided opportunities for tremendous growth, and entrepreneurs with financial backing and the right mix of business acumen and ambition could make their fortunes. The robber barons often combined their pursuit of wealth with massive amounts of charitable spending, establishing schools and philanthropic organizations which still bear their names today, like Vanderbilt University and Carnegie-Mellon University. These charitable works were often devised to improve their public image, but also to contribute to further technological and scientific innovations. Regardless of how they were perceived, these businessmen and the companies they created revolutionized American industry.

Earlier in the nineteenth century, the first transcontinental railroad and subsequent spur lines paved the way for rapid and explosive railway growth. The railroad industry quickly became the nation’s first “big business.” A powerful, inexpensive, and consistent form of transportation, railroads accelerated the development of virtually every other industry in the country, including iron, wood, coal, oil, and other related industries. By 1890, railroad lines covered nearly every corner of the United States, bringing raw materials to industrial factories and finished goods to consumer markets. The coverage of tracks grew from 35,000 miles at the end of the Civil War to over 200,000 miles by the close of the century. Inventions such as car couplers, air brakes, and Pullman passenger cars allowed the volume of both freight and people to increase steadily. From 1877 to 1890, both the volume of goods and the number of passengers traveling the rails tripled.

Financing for all of this growth came through a combination of private capital and government loans and grants. Federal and state loans of cash and land grants totaled $150 million and 185 million acres of public land, respectively. Railroads also listed their stocks and bonds on the New York Stock Exchange to attract investors from both the United States and Europe. Individual investors consolidated their power as railroads merged and companies grew in size and power. These owners and investors became some of the wealthiest Americans the country had ever known. However, many of their business practices upset smaller farmers in the Midwest, who felt exploited and left out of the new industrial market.

Among these highly questionable tactics were the practice of differential shipping rates, in which larger businesses received discounted rates to transport their goods, as opposed to local producers and farmers whose higher rates essentially paid for the discounts. The railroad companies would make more money simply because the large businesses had more product to ship than the smaller ones. This would sometimes result in smaller farmers being unable to pay just to get their produce to markets, which sometimes led to them selling their land to the big business that had gained from the differential shipping rates. Similar practices were taking root in other industries too, forcing small businesses to sell and creating massive monopolies, where one corporation would own and control all of a given industry.

Jay Gould

Figure 2. “The Great Race for the Western Stakes,” a Currier & Ives lithograph from 1870, depicts one of Cornelius Vanderbilt’s rare failed attempts at further consolidating his railroad empire when he lost his 1866–1868 battle with James Fisk, Jay Gould, and Daniel Drew for control of the Erie Railway Company.

Jay Gould was perhaps the first prominent railroad magnate to be tarred with the “robber baron” brush. He bought older, smaller, rundown railroads, offered minimal improvements, and then capitalized on factory owners’ desire to ship their goods on this increasingly popular and more cost-efficient form of transportation. His work with the Erie Railroad was notorious among other investors, as he drove the company to near ruin in a failed attempt to attract foreign investors. His model worked better in the American West, where the railroads were still widely scattered across the country, forcing farmers and businesses to pay whatever prices Gould demanded in order to use his trains. In addition to owning the Union Pacific Railroad that helped construct the original transcontinental railroad line, Gould came to control over 10,000 miles of track across the United States, accounting for 15% of all railroad transportation. When he died in 1892, Gould had a personal worth of over $100 million (over $3.1 billion in today’s money), although he was a deeply unpopular figure. For context, Bill Gates, the founder of Microsoft and 3rd richest person in the U.S. at the time of this writing, had a net worth of about $135 billion in 2022.

Cornelius Vanderbilt

In contrast to Gould’s exploitative business model, which focused on financial profit more than on tangible industrial contributions, Cornelius Vanderbilt was a “robber baron” who truly cared about the success of his railroad enterprise and its positive impact on the American economy. Vanderbilt consolidated several smaller railroad lines, called trunk lines, to create the powerful New York Central Railroad Company, one of the largest corporations in the United States at the time. He later purchased stock in the major rail lines that would connect his company to Chicago, thus expanding his reach and power while simultaneously creating a railroad network to connect Chicago to New York City. This consolidation provided more efficient connections from Midwestern suppliers to eastern markets. It was through such consolidation that, by 1900, seven major railroad tycoons controlled over 70% of all operating lines. Vanderbilt’s personal wealth at his death (over $100 million in 1877), placed him among the top three wealthiest individuals in American history at the time.

Taylorism & the Science of Business

By the turn of the century, corporate leaders and wealthy industrialists embraced the new principles of scientific management, or Taylorism, named for its proponent, Frederick Taylor. To match the demands for increased efficiency brought on by the machine age, Taylor said, corporations needed a scientific organization of production. He urged all manufacturers to increase efficiency by subdividing tasks. Rather than having thirty mechanics individually making thirty machines, for instance, a manufacturer could assign thirty laborers to perform thirty distinct tasks. Such a shift would not only make workers as interchangeable as the parts they were using, but would also dramatically speed up the process of production. If managed by trained experts, specific tasks could be done quicker and more efficiently.

Taylorism increased the scale and scope of manufacturing and allowed for the flowering of mass production, which involved making great quantities of identical products using a mechanized or standardized process rather than individuals hand-making each item. Building on the earlier strategy of using interchangeable parts in Civil War-era weapons manufacturing, American firms advanced mass production techniques and technologies. Singer Sewing Machines, Chicago packers’ “disassembly” lines, McCormick grain reapers, Duke cigarette rollers: all realized unprecedented efficiencies and achieved unheard-of levels of production that propelled their companies into the forefront of American business. Henry Ford made the assembly line famous, allowing the production of automobiles to skyrocket as their cost plummeted, but various American firms had been paving the way for decades.

Figure 3. This print shows the four stages of pork packing in nineteenth-century Cincinnati. This centralization of production made meat-packing an innovative industry, one of great interest to industrialists of all ilks. 1873. Wikimedia.

Cyrus McCormick had overseen the construction of mechanical reapers (large machines used for harvesting wheat) for decades. He had relied on skilled blacksmiths, machinists, and woodworkers to handcraft horse-drawn machines. But production was slow and the machines were expensive. The reapers still enabled massive efficiency gains in grain farming, but their high cost and slow production times put them out of reach of most American wheat farmers. But then, in 1880, McCormick hired a production manager who had overseen the manufacturing of Colt firearms to transform his system of production. McCormick’s Chicago plant introduced new jigs, steel gauges, and pattern machines that could make precise duplicates of new, interchangeable parts. The company produced 21,000 machines in 1880. It made twice as many in 1885, and by 1889 it was producing over 100,000 a year.

Unskilled Labor

Since the parts were identical and interchangeable, the workers became interchangeable too. McCormick no longer needed a handful of highly skilled, well-paid craftsmen who could build an entire reaper from the ground up. He now needed workers who had just enough stamina to work a 10-14 hours shift screwing the same bolt into the same part on a reaper, then sending it down the line and doing the same thing over again. These workers could be paid far less for their labor because it took very little time or training to teach them how to do it and they were normally immigrants, the poor, women, older children, or newly emancipated Black Americans who were desperate for jobs.

Firms such as McCormick’s realized massive economies of scale: after accounting for their initial massive investments in machines and marketing, each additional product lost the company relatively little in production costs. The bigger the production, then, the bigger the profits. New industrial companies, therefore, hungered for markets to keep their high-volume production facilities operating. Retailers and advertisers sustained the vast markets needed for mass production, and corporate bureaucracies grew to manage the new firms. Novel inventions and processes created a class of managers who mediated between the worlds of workers and owners and ensured the efficient operation and administration of mass production and mass distribution. Even more important to the growth and maintenance of these new companies, however, were the legal creations used to protect investors and sustain the power of massed capital.

Industrialization, Big Business, and the Law

The costs of entering the mass production economy were prohibitive for all but the very wealthiest individuals, and, even then, the risks would be too great to bear individually. The corporation itself was ages old, but the right to incorporate had generally been reserved for public works projects or government-sponsored monopolies. After the Civil War, however, the corporation, using new state incorporation laws passed during the Market Revolution of the early nineteenth century, became a legal mechanism for nearly any enterprise to marshal vast amounts of capital while limiting the liability of shareholders. By washing their hands of legal and financial obligations while still retaining the right to profit massively, investors flooded corporations with the capital needed to industrialize.

But a competitive marketplace threatened the promise of investments. Companies had to keep their prices low in order to entice customers to buy their products rather than their competitors’ products. However, if they dropped prices too low they could not turn a profit and might be forced to either raise prices (and lose customers) or shut down and sell off. Investors lost money when companies did, so a company that continuously lost money might struggle to find investors. While additional production provided immense profits, the high fixed costs of operating factories dictated that even small losses from selling underpriced goods were preferable to not selling profitably priced goods at all. American industrial firms tried everything to avoid competition: they formed informal pools and trusts, they entered price-fixing agreements, they divided markets, and, when blocked by antitrust laws and renegade price-cutting, merged into consolidations. Rather than suffer from ruinous competition, firms combined and bypassed it altogether.

Between 1895 and 1904, and peaking between 1898 and 1902, a wave of corporate mergers rocked the American economy. Competition melted away in what is known as “the great merger movement.” In nine years, four thousand companies—nearly 20% of the American economy—were bought out by rival firms. In nearly every major industry, newly consolidated firms such as General Electric and DuPont thoroughly dominated their respective markets. Forty-one separate consolidations each controlled over 70% of the market in their particular industries. In 1901, financier J. P. Morgan oversaw the formation of United States Steel, built from eight leading steel companies. Industrialization was built on steel, and one single firm—the world’s first billion-dollar company—controlled the market. Large-scale monopolies now dominated the American business landscape.

Monopolies in the world today are even more powerful than during the Gilded Age due to the ease of international business, the internet, and globalization trends. When you go to the grocery store, you are overwhelmed with choices of different brands in everything from toothpaste to dog food to coffee, but you may not know that many of those seemingly different brands are actually being sold by the same few huge monopolies. For example, did you know that the company Unilever owns personal and skincare brands like Dove, Vaseline, Suave, Axe, TreSemme, Q-tips, Caress, Degree, Ponds, St. Ives, and more? Or that Proctor and Gamble own the home care brands of Tide, Bounce, Gain, Cascade, Charmin, Febreeze, Downy, Bounty, Mr. Clean, Swiffer, Puffs, and more? You can read more about these types of monopolies in this report from the American Economic Liberties Project, an organization committed to modern-day trustbusting.

These monopolies are not just confined to the grocery store aisle. Have you ever moved into a new house and discovered that you only have one option for internet service or cable? That’s because one large company has bought up many smaller providers in the area and made it extremely difficult for any new ones to move in through contracts with local city governments (who have to provide permits for the infrastructure). You can read more about ISP monopolies in this 2018 report from the Institute for Local Self-Reliance, which estimates that “at least 49.7 million Americans only have access to broadband from one of the seven largest cable and telephone companies. In total, at least 83.3 million Americans can only access broadband through a single provider.”

John D. Rockefeller and Business Integration Models

John D. Rockefeller was born in 1839 of modest means to his mother Eliza and father Bill, who was frequently described as a con man and was rarely at home. While Rockefeller’s mother was thrifty and taught him to work hard and never to waste anything, his father, locally known as “‘Devil Bill,’ taught Rockefeller and his younger brothers to “trade dishes for platters” and once bragged, “I cheat my boys every chance I get. I want to make ’em sharp.”

Young Rockefeller helped his mother with various chores and earned extra money for the family through the sale of family farm products. When the family moved to a suburb of Cleveland in 1853, he had an opportunity to take accounting and bookkeeping courses while in high school and developed a career interest in business. While living in Cleveland in 1859, he learned of Colonel Edwin Drake who had struck “black gold,” or oil, near Titusville, Pennsylvania, setting off a boom even greater than the California Gold Rush of the previous decade. Many sought their fortune through risky and chaotic “wildcatting,” or drilling exploratory oil wells, hoping to get lucky. But Rockefeller chose a more certain investment: refining crude oil into kerosene, which could be used for both heating and lamps. As a more efficient source of energy that was less dangerous to produce, kerosene quickly replaced whale oil in many businesses and homes. Rockefeller worked initially with family and friends in the refining business, but by 1870, Rockefeller ventured out on his own, consolidating his resources and creating the Standard Oil Company of Ohio, initially valued at $1 million.

Rockefeller was ruthless in his pursuit of total control of the oil refining business. As other entrepreneurs flooded the area, Rockefeller developed a plan to crush his competitors and create a monopoly. Beginning in 1872, he forged agreements with several large railroad companies to obtain discounted rates for shipping his product. He also used the railroad companies to gather information on his competitors. As he could now deliver his kerosene at lower prices, he drove his competition out of business, often offering to buy them out for pennies on the dollar. He also relentlessly hounded those who refused to sell out to him. Through his method of growth via mergers and acquisitions of similar companies—known as horizontal integration —Standard Oil grew to include almost all refineries in the area. By 1879, the Standard Oil Company controlled nearly 95% of all oil refining businesses in the country, as well as 90% of all the refining businesses in the world. Editors of the New York World lamented of Standard Oil in 1880 that, “When the nineteenth century shall have passed into history, the impartial eyes of the reviewers will be amazed to find that the U.S. . . . tolerated the presence of the most gigantic, the most cruel, impudent, pitiless and grasping monopoly that ever fastened itself upon a country.”

This video provides a brief overview of how vertical and horizontal integration work and how they contributed to the rise of big business, monopolies, and corporations during the Gilded Age.

Figure 4. John D. Rockefeller’s business practices were often considered predatory and aggressive. This cartoon from the era shows how his conglomerate, Standard Oil, was perceived by progressive reformers and other critics.

Seeking still more control, Rockefeller recognized the advantages of controlling the transportation of his product. He next began to grow his company through vertical integration, wherein a company handles all aspects of a product’s lifecycle, from the creation of raw materials through the production process to the delivery of the final product. In Rockefeller’s case, this model required investment and acquisition of companies involved in everything from barrel-making to pipelines, tanker cars to railroads. He came to own almost every type of business and used his vast power to drive competitors from the market through intense price wars. Although vilified by competitors who suffered from his takeovers and considered him to be no better than a robber baron, several observers lauded Rockefeller for his ingenuity in integrating the oil refining industry and, as a result, lowering kerosene prices by as much as 80% by the end of the century. Other industrialists quickly followed suit, including Gustavus Swift, who used vertical integration to dominate the U.S. meatpacking industry in the late nineteenth century.

In order to control the variety of interests he now maintained in industry, Rockefeller created a new legal entity, known as a trust. In this arrangement, a small group of “trustees” possess legal ownership of a business that they operate for the benefit of other investors. In 1882, all thirty-seven stockholders in the various Standard Oil enterprises gave their stock to nine trustees who were to control and direct all of the company’s business ventures. State and federal challenges arose, due to the obvious appearance of a monopoly, which implied sole ownership of all enterprises composing an entire industry. When the Ohio Supreme Court ruled that the Standard Oil Company must dissolve, as its monopoly over all oil refining operations in the U.S. was in violation of state and federal statutes, Rockefeller shifted to yet another legal entity, called a holding company model. The holding company model created a central corporate entity that controlled the operations of multiple companies by holding the majority of stock for each enterprise. While not technically a “trust” and therefore not vulnerable to anti-monopoly laws, this consolidation of power and wealth into one entity was on par with a monopoly; thus, progressive reformers of the late nineteenth century considered holding companies to epitomize the dangers inherent in capitalistic big business, as can be seen in the political cartoon below. Impervious to reformers’ misgivings, other businessmen followed Rockefeller’s example. By 1905, over three hundred business mergers had occurred in the United States, affecting more than 80% of all industries. By that time, despite the passage of federal legislation such as the Sherman Anti-Trust Act in 1890, 1% of the country’s businesses controlled over 40 percent of the nation’s economy.

capital: money provided by a bank or investors to start or expand a business

captains of industry: a nickname for some industrial business owners whose corporations grew rapidly, making them extremely wealthy and influential in the U.S. during the late 19th century

corporate mergers: the voluntary consolidation of two separate businesses and their assets into one entity

Cyrus McCormick: an American inventor and founder of the McCormick Harvest Machine Company; he was a major proponent of Taylorism and the assembly line structure of labor

differential shipping rates: a tactic used by Gilded Age transportation companies (railroads and shipping) where they would grant discounts on shipping costs to large businesses in order to attract them as customers and make more money

Gilded Age: the period of time between about 1870-1900 when the United States began industrializing rapidly and fostering the growth of “big business” and wealthy industrial magnates, but largely ignored the social and economic problems of the poor or working class

holding company: a central corporate entity that controls the operations of multiple companies by holding the majority of stock for each enterprise

horizontal integration: method of growth wherein a company expands through mergers and acquisitions of similar companies

incorporation/corporation: a corporation is a business that sells stocks to investors in order to gain capital and is run by a board of directors; incorporation is the legal act of making something (a business or other organization) into a corporation

Jay Gould: a railroad tycoon famous for his shady business deals and questionable tactics

mass production: the manufacturing of large amounts of a standardized product or item, usually by a mechanized process or an assembly line

monopoly: a corporation that controls the majority of commerce or business within a single industry

robber baron: a negative term for the big businessmen who made their fortunes in the massive railroad boom of the late nineteenth century; the nickname implied that they used shady or manipulative business practices in order to grow their wealth

J.D. Rockefeller: a prominent oilman of the Gilded Age, often described as one of the “robber barons”

Sherman Anti-Trust Act of 1890: authorized the federal government to dissolve monopolies to ensure free market competition

Taylorism: a Gilded Age theory of labor which stated that businesses should create a more “mechanical” labor structure in order to keep up with the demand for efficiency associated with the machine age; Taylorism usually involved unskilled labor, assembly lines, and a bureaucratic management structure

trust: a legal arrangement where a small group of trustees has legal ownership of a business that they operate for the benefit of other investors

Cornelius Vanderbilt: a prominent railroad magnate of the Gilded Age, often described as one of the “robber barons”

vertical integration: a method of growth where a company acquires other companies responsible for all aspects of a product’s lifecycle from the sourcing of raw materials through the production process to the delivery of the final product