Consolidated Industry in the United States

Laws of incorporation passed in the United States in the 1830s and 1840s made it easier for business organizations to raise money by selling stock to members of the public. The ability to sell stock to a broader public made it possible for entrepreneurs to gather vast sums of capital and undertake large projects. This led to the emergence of modern corporations as a major force in the United States after 1865. These large, national business enterprises needed more systematic administrative structures. As a result, corporate leaders introduced a set of managerial techniques that relied on systematic division of responsibilities, a carefully designed hierarchy of control, careful cost-accounting procedures, and perhaps above all a new breed of business executive: the middle manager, who formed a layer of command between workers and owners. Efficient administrative capabilities helped make possible another major feature of the modern corporation: consolidation (combining many things into one).

Businessmen created large, consolidated organizations primarily through two methods. One was horizontal integration-the combining of multiple firms engaged in the same enterprise into a single corporation. The consolidation of many different railroad lines into one company was an example. Another method, which became popular in the 1890s, was vertical integration-the taking over of all the different businesses on which a company relied for its primary function. Thus, Carnegie steel controlled mines and railroads as well as steel mills.

The most celebrated corporate empire of the late nineteenth century was John D. Rockefeller`s Standard Oil. Shortly after 1865, Rockefeller launched a refining company in Cleveland, Ohio, and immediately began trying to eliminate his competition. Allying himself with other wealthy capitalists, he proceeded methodically to buy out competing refineries. In 1870, he formed the Standard Oil Company of Ohio, which in a few years had acquired twenty of the twenty-five refineries in Cleveland, as well as plants in Pittsburgh, Philadelphia, New York, and Baltimore. He built his own barrel factories, warehouses, and pipelines. Standard Oil owned its own railroad freight cars and developed its own marketing organization. By the 1880s, Rockefeller had established such dominance within the petroleum industry that to much of the nation he served as a leading symbol of monopoly.

Rockefeller and other industrialists saw consolidation as a way to cope with what they believed was the greatest curse of the modern economy. "cutthroat competition." Most businessmen claimed to believe in free enterprise and a competitive marketplace, but in fact they feared that substantial competition could result in instability and ruin for all. As the movement toward consolidation accelerated, new vehicles emerged to facilitate it. The railroads began with so-called pool arrangements-informal agreements among various companies to stabilize rates and divide markets. But if even a few firms in an industry were unwilling to cooperate (as was almost always the case), the pool arrangements collapsed. The failure of the pools led to new techniques of consolidation. At first, the most successful such technique was the creation of the "trust"-pioneered by Standard Oil in the early 1880s and perfected by the banker J. P. Morgan. Under a trust agreement, stockholders in individual corporations transferred their stocks to a small group of trustees in exchange for shares in the trust itself. Owners of trust certificates often had no direct control over the decisions of the trustees, they simply received a share of the profits of the combination. The trustees themselves, on the other hand, might literally own only a few companies but could exercise effective control over many.

In 1889, the state of New Jersey helped produce a third form of consolidation by changing its laws of incorporation to permit companies to buy up the stock of other companies. Other states soon followed. These changes made the trust unnecessary and permitted actual corporate mergers. Rockefeller, for example, quickly relocated Standard Oil to New Jersey and created there what became known as a holding company-a central corporate body that would buy up the stock of various members of the Standard Oil trust and establish direct, formal ownership of the corporations in the trust.