Entrepreneurs,Business Practices,& Govt Response

US History

The Good Ol’ American Work Ethic

• Most of the original immigrants in the 13 British colonies were Protestant: – Puritans in New England– Quakers, then German Protestants in Pennsylvania– Church of England in the Middle Colonies

• Common tradition in these religions is Calvinist virtues – came to be called the “Puritan Work Ethic”:– Emphasis on hard work– Self-reliance– Contempt for vanity

Puritan Work Ethic & Laissez-faire

• Late 19th century, “Puritan work ethic” fit right along with “laissez-faire” economics—that is, “little or no govt regulation of business.”– The idea: hard work and self-

reliance are rewarded with financial success.

– You don’t need a govt to help you become successful (or titles of nobility or a higher class).

Cultural theme of the Second Industrial Revolution

• Horatio Alger (1834-1899) made these ideas about hard work leading to success very popular in his books.– “Rags-to-riches” stories:

people who got wealthy by saving, scrimping, being honest, and working hard.

– Titles such as Do and Dare: A Brave Boy’s Fight for Fortune.

But Alger wasn’t so far off from reality…• The major entrepreneurs of this

century had extraordinary life stories.– Entrepreneur: a person who

organizes, manages and takes on the risk of a business.

– Some examples we discussed earlier: Jay Gould of Roxbury.

• Started off as tanner.• Got involved in railroads.• Tried to corner the gold market during

the Grant administration.

Entrepreneurs: Andrew Carnegie

• Steel magnate. (1834-1919)

• Very Alger-ian.

• Scottish immigrant; started off in railroad industry.

• Realized steel had growth potential.

Entrepreneurs: Andrew Carnegie

• Carnegie employed vertical integration: controlling business in each stage of the production and distribution process.– Supply of raw materials (ore)– Transport of ore– Smelting– Distribution of steel

vertical

• By 1900, Carnegie Steel produced ½ of the US’s steel.• In 1901 JP Morgan bought out the company and

formed US Steel.• Carnegie retired and spent ½ billion dollars on

philanthropy.

Entrepreneurs: Andrew Carnegie

Entrepreneurs: Andrew Carnegie• Carnegie made $25 million / year before there

was income tax in the US.– His workers earned $468 /year.

• Through economies of scale, he out-competed other steel companies, forcing them into bankruptcy.– People lost jobs through his successful

competition practices.

• How did he justify this?

Social Darwinism | “Gospel of Wealth”

• Industrialists believed in “Social Darwinism”: took the ideas of Darwin (natural selection: “survival of the fittest”) and applied them to business and society.– Yale professor William Sumner argued

that Carnegie and other millionaires were examples of this in society.

– The poor naturally fell to the bottom and died out.

– Supposedly a “good thing” for society.

Social Darwinism | “Gospel of Wealth”• Carnegie: “Through a process of

pitiless testing we discover who are the strong and who are the weak.”

• BUT he also believed that the wealthy owe a duty to society by practicing philanthropy.– This was known as the “Gospel of

Wealth.”

• Carnegie built museums and libraries, promoted education and research.

Entrepreneurs: John D. Rockefeller

• 1839-1937• Entered oil refining business in 1859.• His approach: horizontal integration: taking

control over a limited part of an industry.– Controlled all shipping and refining businesses.– Also acquired related businesses: barrel making,

pipelines, railroads, storage facilities.

• True, he eliminated wastefulness and increased profitability, but through ruthless business tactics.

horizontal

Entrepreneurs: John D. Rockefeller• Created Standard Oil Trust (1882).

– Ohio Supreme Ct disolved it.

• Next, he replaced it with Standard Oil Company of New Jersey.– US Supreme Ct dissolved that and turned

it into 34 separate companies.

• 1896 he retired as the richest man alive.

• Like Carnegie, he became a major philanthropist: created Rockefeller Foundation.

Entrepreneur: J. Pierpont Morgan

• No rags-to-riches type, here.– Born into banking family (1836-1913)

– Investment banker.

• Helped funnel Euro money into American businesses.

• After CW, invested in railroads.

• By 1900 JP Morgan group were directors in over 100 companies worth more than $22 billion.

Entrepreneur: J. Pierpont Morgan

• This guy was so rich…[“How rich was he?”] that he lent the US govt $65 million dollars in gold.

• 1901 bought out Carnegie Steel; turned it into US Steel, the first billion dollar corporation.

• UNLIKE the other entrepreneurs, he believed in “combinations” not free competition.– Trusts, pools, etc.

– Supreme Ct broke up one of these in their decision Northern Securities v. US (1904).

Entrepreneurs: Henry Ford• 1863-1847• Mechanical genius; from a farming

family in Michigan; big admirer of Thomas Edison.

• Created Ford Motor Company in 1903.• 1908 Model T produced through

assembly line– One car every 93 minutes.– First car average people could buy.

• Sought vertical integration: the total enterprise from raw materials to distribution.

                             

            

Entrepreneurs: Henry Ford

• He absolutely opposed labor unions, BUT

• He paid relatively high wages for the time period.– Industry standard: $2.93 for 9 hour

shift.– Ford: $5.00 / day.

• He invented the dealer-franchise system that Ray Kroc of McDonald’s perfected.

Can business do it alone?• Not really. That’s a myth.• Already with Alexander

Hamilton, the fed govt supported and promoted American business.

• One way 14th amendment was interpreted: the Constitution protected the rights of both individuals AND corporate persons (corporations).– In the late 19th century, big

industrialists and economists LOVED this idea.

“Robber Baron” or “Captain of Industry”?• Through vertical or horizontal

integration, some of these industrial leaders had major power:– Controlled resources,

production, distribution.

• Not everyone bought into “Social Darwinism”:– Critics questioned business

practices and private control of American resources.

“Robber Baron” or “Captain of Industry”?

Robber Baron(Negative)

Captain of Industry(Positive)

Exploited workers Created new products, often affordable

Nasty business practices Made efficient industries

Politically corrupt Donated to charities

Discouraged competition (engaged in monopolies)

Should the Govt Step In?• All this criticism came to a

head: more and more people called for the govt to stand up to business.– Even Adam Smith—the big

advocate of “laissez-faire”—warned about monopolies in business.

– Now govt regulation was necessary to reign in monopoly.

Govt Intervention• First, states started to step in.• Directed primarily at farmers.• 1870s railroad shippers exploited farmers in

the west by charging high rates to get goods to market.– “Short haul, long haul”: it cost more to ship

something to the next county than across the state.

• Granger laws—regulating railroad freight rates—were set up by certain states.– Railroad owners challenged these.

Railroads in 1870s-1890s

Where was the fed govt?

• For most part, Congress—especially the Senate—was under the influence of businesses and lobbies.

• However, they did occasionally take action using the US Constitution’s “Commerce Clause” (Article I, Section 8)

Fun Court Cases to Know

• Munn v. Illinois (1877): SC upheld Illinois’s Granger Law.– Reason: state govt IS allowed to regulated

private businesses in the public interest.– MAJOR PRECEDENT!

Fun Court Cases to Know

• Wabash RR v. Illinois (1886)– Whoops, spoke to soon: this ruling overturned

Munn v. Illinois.– SC now said states can regulate railroads within

state boundaries, not those that go across states.– Only Congress can regulate interstate

commerce.– So now, farmers and the public look for

Congress’s help…

• Interstate Commerce Act (1887)– In response to Wabash v. Illinois.

– Congress set up Interstate Commerce Commission to regulate railroad rates and prohibit pools.

– HOWEVER, some court challenges limited the ICC’s effectiveness.

• Still, it set a precedent for federal regulation of commerce, that is, interstate commerce.

Fun Legislation to Know

Fun Legislation to Know• Sherman Anti-Trust Act

(1890)– Outlawed monopolies and

forbade trusts, pools, or other “combinations” that restrict trade.

– Not at all effective because:• Courts didn’t uphold its

enforcement.

• Corporations came up with other “combinations” to get around the regulations.

5 pt Question

• Explain how the major entrepreneurs of the 19th century compensated for their sometimes ruthless business practices?– How did they justify their business practices?– How did they justify the way they compensated

for it?– How did state and federal govts rein in their

behavior (specific legislation and court cases).