INDUSTRIALIZATION IN THE LATE NINETEENTH CENTURY

 

 

An Incredible Economic Expansion à 1860-1900

 

$3 billion in manufactures (1869) à $13 billion (1900)

 

Iron ore production quadruples

 

GNP triples

 

BIG BUSINESS emerges

 

Three major questions:

 

  1. What Caused/Helped It?

 

  1. How Did the Process Happen? (The 4 c’s)

 

  1. What Was the Effect On People? (How did they react? Who wins? Who loses?) 

 

 

1.            What Caused/Helped It?

 

A. Abundance of natural resources (oil, timber, iron, gold, cattle, copper)

 

B. Foreign investment – particularly from Great Britain

 

C. Tariffs provide government with money, but also help protect developing American industries

 

D. Processes for manufacturing

 

1-    economies of scale – by doing something bigger, one could do it cheaper;

 

2-    economies of scope – transportation networks enable a broader market for products

 

3-    division of labor – break down a process into various component parts

 

4-    continuous flow – keep the machines running all the time (Carnegie steel plants)

 

 

E. New methods of financing companies and administrating them

 

1-    limited liability [an investor is only liable for the amount of the investment he/she makes]

 

2-    more sophisticated accounting methods

 

3-    rudimentary management information systems (allow you to make more informed decisions at a moment’s notice)

 

BUT PROBABLY THE MOST IMPORTANT CAUSE OF THE INDUSTRIAL EXPANSION WAS…

 

F.  Transcontinental Railroads

 

            Unprecedented, Capital-intensive endeavor

           

As Cronon points out:

 

Previous transportation companies paid for the means of transport (vehicles – boats on canals) OR the method of transport (right of way – they maintained the canal), but not both.

 

 

HOW DO RAILROADS SPUR ECONOMIC DEVELOPMENT?

 

 

--create demand for and consume numerous resources: steel, timber, coal, iron, locomotives

 

(In fact, they create a guaranteed market for these goods, so these industries have incentive to expand)

 

--link raw materials to processing centers

 

(coal and iron ore to steel mills; cattle to slaughterhouses; timber to lumber mills; crude oil to refineries)

 

--link agricultural products to urban consumers thereby creating larger markets for farmers

 

(people eat better and cheaper; farmers have incentive to expand and mechanize production – as a result there is also a larger market for farm equipment like tractors, threshers, etc.)

 

--bring more food into the cities so larger populations can be fed; as a result industrial production takes off due to increased population (more workers) and the products from the factories are then shipped to new Western markets

 

--more jobs draws more people (immigrants); railroads help them settle in the West where they create demand for manufactured goods from eastern industrial cities

 

--speed the development and population of the West – railroads create jobs all along their routes

 

--increase demand for manufactured goods in the west because railroads brought people west; railroads now transport goods west for these people to buy

 

--provides a model for how to manage a big business: integrating operations, managing goods, people, and money

 

 

GOVERNMENT’S ROLE IN FACILITATING RAILROAD CONSTRUCTION:

 

Land grants – 200 million acres (the size of Belgium, The United Kingdom, and Spain combined)

 

Award of subsidies to railroad builders based on:

 

how fast they worked

how much track they laid

 

This incentive system ended up producing badly run railroad lines that often went bankrupt:

 

·         Because they were paid by the mile, they sometimes built winding, circuitous lines, or along scenic routes

o   Straight up hills

o   Around ridge for nice vistas

o   Completely inefficient – takes more power for a locomotive to get up a hill

 

·         Because they substituted cheaper and lighter wrought-iron rails, wooden culverts instead of durable Bessemer and steel to save time and labor (these ultimately failed and had to be re-laid)

 

·         Because they laid track year-round for speed and bonuses, even on snow and ice across the prairie, eventually some of the track was flooded out.

 

·         Because they laid track through unsettled, hostile Indian territory, inviting attack (stole horses, killed workers etc.)

 

·         Had to buy more expensive, poorer quality (but American made!) steel as part of the deal for subsidies

 

·         Bankrupt because of costs of construction were ultimately higher than the free land and subsidy incentives

o   Civil War capital and labor high anyway

o   UP and CP created their own supply companies, essentially "double-dipping" – did not keep costs down

 

NOT ALL RAILROADS RELY ON SUBSIDIES AND GRANTS

 

James Hill was able to build a profitable railroad line (The Great Northern) without government subsidies.

 

WHY?

 

·         Built slow; waited for best rates on goods to become available

 

·         Built for durability and efficiency, not scenery

 

·         Used best materials

 

·         Developed markets – imported crops and cattle for people to grow along his route

 

·         Develops international Asian markets by using rebates to reduce the cost of shipping

 

 

 

2.         How did the Process Happen? -- “THE 4 C’s”

 

1. COMPETITION

 

Drives down prices so no one makes a good profit 

 

Not efficient

 

2. COOPERATION

 

Companies form pools, but always seems like someone “cheats” by lowering prices

 

Not effective and raises suspicions of price fixing – threat of government intervention

 

3. COMBINATION/CONSOLIDATION

 

Horizontal Integration

(one oil company buys the other smaller oil companies)

 

Concentrate resources and take advantage of economies of scale

 

(This doesn’t work in low-tech/low-capital intensive industries such as salt and cord because it is easy to start up a new salt company or cord company – not much start-up capital needed)

 

  1. CENTRALIZATION

 

Vertical integration

(a company controls and profits from every step of the production and distribution)

 

 

By the turn of the century “Big Business” has emerged

 

WHY IS BIG BUSINESS SOMETHING NEW?

 

Features of Big Business

 

-- large pools of capital needed; makes it harder for start ups

 

-- huge fixed costs (overhead); more than operating costs

 

-- altered nature of ownership (little contact with the boss)

 

 

3. What was the effect on people? (Who wins? Who loses?)

 

            Small business often loses – but sometimes small businessmen sell out at a good price

 

            Consumers generally win (Walmart Effect)

                        Prices drop

 

            Companies fear government intervention for price gouging

 

Per capita income rises 2% a year during the Gilded Age

                        Between 1870 and 1910 it triples

 

            Average life expectancy for white males à 37 to 46

 

            Middle Class does ok – can buy more luxuries cheaper; have more free time

 

            Industrial workers wages’ rise but conditions are unsafe and there is no safety net; great inequalities of wealth

 

            200 a year die in Pittsburgh’s steel mills

`

 

            1900 – average work week is still just under 60 hours

 

            1900 – factory workers annual wages are around $400-$500

 

            Richest 1/10 receives 34% of the nation’s income

           

            Poorest 1/10 collects 3.4 %

 

            Big Business wins when the business is operated effectively

 

            Everyone must get used to a new economy based on the rules established by Big Businessmen like Rockefeller and Carnegie.