Economy in The Gilded Age
Understanding the Gilded Age Economy
Many argue that America's extraordinary economic development during the Gilded Age can be summarized by a handful of statistics.
In 1860, the nation's total wealth was $16 billion. By 1900, it was $88 billion. This translated into a per capita increase from $500 to $1,100. Driving this growth was an explosion in American manufacturing—in 1869, the manufacturing sector of the economy generated $3 billion, a figure which rose to $13 billion by 1900. This was accompanied by an increase in America's labor force from 13 million to 19 million people.7
Similarly, many economic historians suggest that America's economic development can also be reduced to a rather simple formula: the convergence of a handful of critical ingredients.
For starters, there was an unprecedented explosion of new industrial and agricultural technology. The United States patent office issued 440,000 patents between 1860 and 1900—12 times more than during the preceding 70 years. On the farms, steam tractors and mechanical reapers, harvesters, and combines all greatly increased agricultural productivity. By 1900, it required only 15 man-hours per acre to raise wheat, while a century earlier, it had taken 56 man-hours per acre.8
In the factories, the Bessemer blast furnace and the Siemens-Martin open hearth process radically changed steelmaking.
In America's office buildings, cash registers, adding machines, and typewriters transformed the way people did business. Alexander Graham Bell's telephone, developed in 1876, revolutionized business communication, while Thomas Edison's work with electricity lit homes and powered factories.
John D. Rockefeller employed new oil refining methods, while somewhat less famously, Charles Pillsbury and Cadwallader Washburn (Gold Medal Flour) developed technologies that delivered inexpensive high-quality flour to American kitchens.
Second, these growing industries generated goods for growing urban markets. During the Gilded Age, America's cities exploded. By 1900, America's 30 million city dwellers represented 40% of the American population—up from 20% in 1860. About half of these new urban residents were immigrants, the vast majority of them from Europe. During the 1880s, five million people came to America from overseas. During the 1890s, immigration slowed—but there was still a net arrival of 3.7 million people from abroad.9
The other half of this new urban population migrated to the cities from America's rural areas. Contrary to the popular myth that the American West would provide a safety valve for America's overcrowded cities, migration actually flowed in the opposite direction, from the country to the city. The new residents came for a variety of reasons—some came for the jobs offered by the expanding manufacturing sector, while others came for the conveniences and excitement city life offered. The 68,000 African Americans who moved to northern cities from the South during the 1870s came for their own more complex and distinctive reasons.10
Third, America's expanding infrastructure brought new goods and a growing population together. America's railroad network grew from 35,000 miles of track in 1865 to 242,000 in 1900.11
In addition, Pullman Palace sleeper cars made travel more comfortable, and refrigerated boxcars enabled meat, vegetables, and fruits to be transported across the country. In order to make this rail system more efficient, railroad companies switched to a standard rail gauge of 4' 8.5" between 1880 and 1890, allowing different railroads to use the same equipment.
In the name of efficiency, the railroads even used standardized time. At the stroke of noon (Eastern Standard Time) on November 18th, 1883, the railroads introduced a carefully devised system of new time zones, ending centuries of human experience in which each town set its own clocks to a slightly different time according to the position of the sun in the sky.
Fourth, financing for all of this came from an increased supply of capital—and from capital derived from new, more extended sources. Earlier in the century, most capital used for industrial expansion had come from the expanding companies themselves. But in the decades after the Civil War, individual personal savings increased and a whole new batch of institutions were created to capture and make available those savings to business borrowers—commercial banks, savings banks, and insurance companies all provided new vehicles for accumulating and dispensing the capital needed to fuel American economic growth.
And finally, new forms of business organization were devised that supported economic growth. Confronted by the ragged cycles of an immature industrial economy—volatile periods of boom and bust, overproduction and then contraction in individual industries—industrialists experimented with new forms of organization. They began by forming pools or cartels. In these loose associations, former competitors became informal partners and tried to smooth out the market through the adoption of "gentlemen's agreements" on production levels and prices.
Soon, these informal alliances evolved into more formal cooperative ventures among owners. By forming "trusts" and "holding companies," they avoided state laws forbidding monopolies while reaping the benefits of unified control over entire industries. In these associations, the stock certificates from several companies were exchanged for trust certificates, and then a board of trustees exercised governance over all of the theoretically independent companies within the trust.
The final step in this movement toward centralization was the merger movement of the late 1890s. Abandoning altogether the appearance of competition, industrial leaders simply absorbed their competitors. The movement began in 1897 with a record 69 mergers, and then accelerated. In 1898 there were 303 mergers, and in 1899, a whopping 1208 mergers.12
Technology, markets, infrastructure, capital, organization—the unprecedented economic growth of the Gilded Age can be attributed to textbook ingredients for economic development, a series of large structural transformations in the economy.
The Importance of Culture
Other economic historians, however, insist that this sort of analysis neglects equally critical ideological contributors to Gilded Age growth.
For starters, economic development was facilitated by a supportive culture—one which placed confidence in industrialists and businessmen and refused to permit government to interfere in their efforts. Most Americans embraced the principles of laissez faire economics, which argued that economic forces should be allowed to work themselves out with maximum freedom and minimal government interference.
Part of the logic was purely economic—it was believed that government involvement tended to hinder, or even prevent, economic development. But part of the argument was ethical. Laissez faire advocates argued that government interference distorted the natural and equitable forces of economic development. Government intervention was considered tantamount to "class legislation"—an unjust and artificial reallocation of economic resources and power from one group to another.
Laissez faire ideals enabled industrialists and entrepreneurs to operate with public support and without government interference. In addition, the philosophy was translated by the courts into a set of practical rules that enabled businesses to operate with even greater autonomy.
For example, during the last decades of the 19th century, the court strengthened rules increasing the sanctity of the contract. State laws that attempted to regulate the workplace, like restrictions on work hours and safety requirements, were repeatedly struck down by state courts with the argument that they violated the rights of employers and employees to enter into contracts freely. Courts also increasingly applied the "fellow servant" rule, which relieved employers of responsibility for workplace injury if a contributing cause was the negligence of another employee.
And the courts weakened unions by insisting that employers had a right to replace striking workers while at the same time denying that strikers had a right to organize boycotts.
For many historians, America's economic history during the Gilded Age can't be explained without reference to this philosophical and legal culture, which was so supportive of unregulated economic growth.
Yet still others insist that acknowledging the importance of this culture doesn't complete the story. These scholars insist that a handful of key players were critical to the particular way that America's economy unfolded. They argue that the skills and strategies of a handful of individual industrial giants were essential to America's extraordinary economic growth.
John D. Rockefeller
John D. Rockefeller, trained as a bookkeeper, built a monopoly over the oil business in less than a decade and brought order to a chaotic vital industry. When he entered the oil business, it was an industry subject to violent jags in production and prices. Each discovery of a new oilfield led to rapid overproduction by wealth-seeking adventurers.
But invariably, markets were soon glutted, prices collapsed, and producers went bust. Rockefeller's bean-counting sensibilities were repulsed by this disorder. And he recognized that control, and order, could be achieved by dominating a single bottleneck in the production process.
So, he began to acquire refineries.
In 1868, when he formed Standard Oil, the company was just one of 30 oil refining companies in Cleveland, processing only 5% of the nation's total oil. Over the next decade, Rockefeller built his monopoly by cultivating preferential treatment from the railroads that hauled his product. He negotiated secret contracts in which he leveraged his growing market share for lower transportation rates. These "rebates" enabled him to ship oil at a lower cost, allowing him to undercut his competitors by selling at a lower price.
But rebates were just the first step in his scheme. As his share of the oil refining business grew even larger, he was able to demand "drawbacks" from the railroads that desperately wanted his business—that is, a percentage of the hauling fees paid to them by other refineries. In other words, Rockefeller made money off the shipment of other refineries' oil.
By the mid-1880s, Rockefeller refined 90% of the nation's oil. By controlling this vital bottleneck in the production process, he had established a virtual monopoly over the entire industry. With almost every drop of the country's oil flowing through his refineries, he was able to shape price structures and production decisions at every other phase of the process, from the oil wells to consumers' homes.
His method of controlling one aspect of the production process—labeled horizontal integration—was soon imitated by other industrialists also anxious to eliminate their competitors and to bring a similar stability (and profitability) to their industries.
Andrew Carnegie
Andrew Carnegie did for steel what Rockefeller did for oil.
In the early 1870s, he realized that the steel rails being introduced in England were superior to the iron rails used in America, and that it was only a matter of time before American railroads imitated their English cousins. And so, he set about investing in steel. Utilizing the newest technologies, like the Bessemer blast furnace and the Siemens-Martin open hearth, he built the largest steel company in America.
And Carnegie could be as deliberate as Rockefeller in crushing his competitors—and more aggressive in crushing his workers' attempt to unionize. After first supporting the right of workers to unionize, he gave his plant manager, Henry Frick, a free hand in beating back the fledgling American Association of Iron and Steel Workers when the union tried to organize his Homestead steel plant outside Pittsburgh.
Despite the violence at Homestead, the public was generally more forgiving of Carnegie than they were of Rockefeller. One reason was because people found his industrial methods more defensible. Carnegie used vertical integration to bring stability to the steel industry: he worked to control the entire production process, from the iron mines through steel production and distribution.
By the time he retired, Carnegie's holdings were enormous. They included pig iron works, coke refineries, and a line of steamships, as well as steel works. But the public was more accepting of this sort of industrial monopoly than they were of Rockefeller's creation of a market bottleneck through horizontal integration. It seemed better to honor the spirit of market competition.
John Pierpont Morgan
J. P. Morgan completed the triad of America's great Gilded Age industrial giants. He similarly pursued monopoly-like control over his sector of the economy—but he ultimately established a more varied set of holdings than either Rockefeller or Carnegie.
Even his contemporaries disapproved of his earliest business deals—during the Civil War, he sold defective guns to the Union Army at inflated prices, and he installed a telegraph line in his office so he could buy and sell gold based on battle news from the front.
After the war, he brought the same shrewd instinct to his goal of monopolizing the railroads. As a result, by the end of the century, his assets included the South Atlantic, Reading, Erie, and Northern Pacific Railroads, and he held major stakes in the B&O, and the Atchison, Topeka, and Santa Fe Railroads as well.
But not content with controlling just the railroads, Morgan also built General Electric into a great industrial conglomerate by merging the Edison General and Thompson-Houston Electric Companies. And in 1901, he forged a merger between Carnegie Steel and several other companies to form U.S. Steel. Morgan's financial moves built the great industrial corporations that would lead the American economy's charge into the 20th century.
What's Missing?
It's hard to ignore the contributions of these industrial giants to the development of the American economy. But some historians suggest that focusing on these sorts of individuals still fails to capture the full character of the emerging industrial economy. Like the statistical portrait, or the reduction of the economy to a list of abstract ingredients, a focus on just a handful of powerful individuals fails to capture the character of the economy for the vast majority of America's 75 million people.
In particular, these approaches fail to reveal the impact of this particular form of economic growth on those at the bottom of the economic ladder.
The same economy that gave Carnegie, Rockefeller, and Morgan the opportunity to amass the largest fortunes in the history of the world also required unskilled industrial laborers to work an average of 60 hours per week for 10 cents an hour. (Accounting for inflation, 10 cents in 1880 was worth about as much as $2 today.)
So, a complete economic history of the Gilded Age requires an understanding of the nation's expanding underclass. But as these people left fewer records, historians have had to patch together the character of their existence by constructing a different sort of snapshot. Their lives were lived in America's growing urban slums, places most middle-class and wealthy Americans tried to avoid.
More than a million people were crammed into New York's 32,000 infamous dumbbell tenements—overcrowded, poorly ventilated fire traps. Chicago's slums were three times more densely packed than Calcutta's.13
In these living conditions, disease ran rampant: cholera, typhoid, tuberculosis, consumption. Nor did it help that city governments couldn't build water and sewage facilities fast enough to serve their rapidly swelling populations. In New Orleans, the census reported that pedestrians sank in the mud made by the "oozing of foul privy vaults." In Philadelphia, the city's water supply, the Delaware River, was replenished daily with 13,000 gallons of untreated sewage.14
In short, the economic history of the late-19th century can't be too narrowly summarized. The period's label, "Gilded Age," comes close to capturing the juxtaposition of enormous wealth alongside crushing poverty. But even this only hints at the underside of America's booming economy.
To complete the picture, you should look at some...well, pictures. In 1890, Jacob Riis, a police reporter for the New York Tribune, published How the Other Half Lives, a stark portrait of urban slum life. His classic work, complete with text and photographs, is available here.