The Industrial Revolution remains one of the most controversial episodes in American history. Many scholars have vilified the entrepreneurs of the time as "robber barons" and scoundrels with few exceptions. Business historians, in the main, have treated the Industrial Revolution with moral blinders on, objectively examining the history of the many corporations that were created during this period while refraining from drawing conclusions about the larger events.1 Its importance is obvious: the significance of the modernization of the American economy and its rocketing to global dominance cannot be understated. But was this robust growth effected by the exploitation of the workers or through shady business dealings alone? Stripped of moral reproach or microscopic specialization, what are the underlying facts of the revolution? In this essay, we will examine the nature and source of the Industrial Revolution in America—showing its different phases and explaining its causes—in an effort to understand how businessmen were able to realize a level of economic growth unprecedented in all of history.
Before we begin, was the Industrial Revolution really a revolution? Sociologist James DeFronzo, in his book Revolutions and Revolutionary Movements, defines revolution as a "social movement in which participants are organized to alter drastically or replace totally existing social, economic, or political institutions."2 This definition is not particularly useful here, though, because it primarily applies to political revolutions, such as those in Russia, China, and France. One could not call the Industrial Revolution a "social movement" since it was not society at all that changed the economic structures. Moreover, the Industrial Revolution did not alter the political institutions of America—the limited government present before the revolution was just as limited after it.3
Better is historian William N. Parker's phrasing: "'Revolution', as the word is used in economic history, commonly means a thoroughgoing change in production processes and in the social organization of labour, occurring at a faster than customary pace."4 The Industrial Revolution was a move away from cottage-based production and into the modern factory system. In addition, labor's role in production was more strictly delimited. No longer was production performed by apprentices at a master's direction—each apprentice doing varied work as required by each product or item. Instead, managers set up the factory such that each worker had but one task to perform and that manual task was repeated day in and day out, day after day. Using this conception of revolution, we can see that the Industrial Revolution is clearly a "real" revolution.
As mentioned earlier, our goal in this essay is to understand the nature of the American Industrial Revolution and the catalytic/causal forces that drove it. Over the years, there have been a number of different theories advanced to account for the Industrial Revolution and its spectacular production of wealth. The two most prevalent are Marxism and determinism. These two have had the most influence in American historical thought, but there have been others. These other theories tend to not have the same influence because they, like the aforementioned case studies of individual corporations, are insufficient for understanding.
The "great-man" theory, for example, posits that history is driven by superlative individuals and would have been totally different without them. In business history, this means that men like Rockefeller and Carnegie were the engines of the Revolution. I do not mean to downplay their importance, but the theory fails to account for the multitude of other firms that lacked such powerful leaders yet still played important roles.
Some have also argued that factors that are unique to America produced the stunning growth. American isolation from warring powers, its extensive natural resources, and its significant immigration have all been proposed as causes of economic growth. While these are all important factors, none of them are fundamental since other nations have lacked such factors and have still experienced significant growth. Thus, I will confine myself to examining only the two most important theories.
Of these, Marxism is, by far, the predominant explanation. In this theory, workers were responsible for production of goods. The entrepreneurs took these goods and marked them up in order to make a profit. In other words, big business prospered on the backs of its workers. As Lawrence Glickman put it, "wage slavery resulted from the difference in value between what workers produced and what they earned in wages, which was often said to have been stolen from them."5 Thus, the source of the Industrial Revolution's wealth generation was the exploitation of its workers. Karl Marx observed that, under capitalism, to "be a productive laborer is … not a piece of luck, but a misfortune."6 To be sure, Marxist theory recognizes that workers themselves did not have adequate capital to purchase the expensive machinery necessary for maximum production. Instead, Marxism holds that this machinery enabled "employers to use fixed capital, to increase the pace of production, lengthen the working day, and extract increased surplus."7
Why, then, did the Industrial Revolution happen when it did? Parker suggests that a "… change in technology or organization (or in both) in one sector conduce[s] to parallel or reciprocal changes in the other."8 In other words, the changing agricultural sector led to growth in the industrial sector. Parker, then, agrees with Marx: "the development of capitalism in agriculture required the displacement of the village system of tenure and work organization, and that displacement in turn 'released productive forces' which allowed commercial farming and modern factory industry to grow within a market economy, i.e. within a capitalist framework."9 The move of labor away from agriculture provided the capitalists human fodder to work their machinery and generate their profits.
Another important framework for explaining the American Industrial Revolution is determinism. Determinism in this context can be found in two variations: market and technological. Market determinism, propounded by historian Robert Higgs, holds that the revolution was the inevitable consequence of market forces. The individuals participating in the market are merely responding to economic laws through economic calculation. Higgs notes that although "[n]o one planned or directed of the organization of economic life in any formal, overall way" the market overall was "orderly and in many ways predictable."10 For Higgs, the central feature of the period was economic growth and he describes this period as one of economic growth through transformation: "changing patterns of demand; differing rates of productivity gain among industries; and changing resource endowments among regions."11 Further, "to the extent that people fail to adjust to the economy's transformed structure, economic growth is retarded."12 Individuals have little control over their destiny: they can either accept market imperatives and participate in the economic growth or they can reject them and risk being left behind. This is what Higgs' argument amounts to, though he goes into greater detail about the activities of the market forces.
Technological determinism similarly leaves individuals out of the equation. It is the theory that innovation begets innovation. The early innovations in textile manufacture led to improvements in power generation which led to innovations in metallurgy. This group of innovations led to the discovery of interchangeable parts and touched off a revolution in manufacturing because of it. That led to railroad development which spurred the iron and steel industries to greater heights of production.13 Historian Robert Fogel observes that the "process of innovation was … continuous, so that practically every decade of the nineteenth century produced important and far-reaching technological advances."14 Perhaps the best example of this view is historian David Landes, who wrote:
The heart of the Industrial Revolution was an interrelated succession of technological changes. The material advance took place in three areas: … substitution of mechanical devices for human skills; … inanimate power—in particular steam—took the place of human and animal strength; … a marked improvement in the getting and working of raw materials.15
These new technologies required large amounts of capital both to procure and maintain. This fact lead to innovations in business organization and finance in order to provide it. Economic growth, then, was attributable to a series of technological innovations, according to this view.
Both Marxism and determinism, popular as they may be, fail to fully explain the causes and nature of American growth during the nineteenth century. Marxism ignores the role of the entrepreneur because factories don't make themselves. Workers can only take jobs in the factories because an entrepreneur or group of entrepreneurs have raised the capital necessary for its construction and concocted a business plan justifying its existence. While workers are vital to production, their labor is not the most fundamental: it is the entrepreneur's that counts most.
Determinism completely eliminates human agency—and that is its failing. Technology does not develop naturally: it requires a human inventor, human entrepreneurs to realize its potential, human engineers to design machines to mass produce it, and human operators to work those machines. Technology is definitely an important factor in explaining how the Industrial Revolution produced the economic growth that it did, for it would be impossible to have the Industrial Revolution without the incredible productivity gains engendered by technology. Similarly, market forces did not drive entrepreneurs to produce except insofar as each entrepreneur discovered and calculated that he could do a better or less expensive job producing a product than others. It is ludicrous to argue that entrepreneurs were simply responding to market demands because examples abound of industrialists who created vast empires where market conditions were unfavorable.16 It is clear that individuals had important roles to perform in the prosecution of the Industrial Revolution. What is not clear is what factor or factors provided the impetus for the economic growth. We have ruled out worker exploitation, technology, great men, geography, and market forces as determinants. What's left?
Before we can fully answer that question, we must look at the nature of the American Industrial Revolution. The revolution took place over the course of the nineteenth century in two distinct phases, with the Civil War serving as the transition point. The first phase begins in the 1840s and ends at the start of the Civil War in 1861. The final phase begins during the Civil War and ends around the turn of the century. There is some overlap because the Civil War, though intensely disruptive and destructive of commerce, did foster some business innovations out of necessity. However one may demarcate the two phases, it is clear that there are differences between them. In the coming pages, we will examine each phase in more detail in order to illuminate these differences and perhaps thereby come to a conclusion about the cause and catalyst of the Industrial Revolution.
High growth characterized the first phase of the revolution. Unfortunately, there are conflicting estimates about this growth because explicit data about this growth are unavailable. The Bureau of the Census did not collect manufacturing statistics until the 1850 Census and it didn't break that data down by specific industries until the Census of 1880. For this reason, Simon Kuznets, Nobel Prize winner in economics, considered Censuses prior to 1880 to be unreliable for analytical purposes.17 Other economists, such as Robert E. Gallman, have made use of these intervening Censuses through statistical extrapolation to divine growth statistics for the period. Gallman examined two general measures of economic growth—total commodity output and value added by manufacture18—and found significant gains. Of total commodity output, he writes: "Between 1839 and 1899 total commodity output increased elevenfold…. Actual rates varied fairly widely, high rates appearing during the decades ending with 1854 and 1884, and a very low rate during the decade ending with 1869."19 Of value added by manufacture: "Gallman's series for value added in constant dollars of the purchasing power of 1879 shows a rise of 157 per cent from 1839 to 1849; 76 per cent from 1849 to 1859 …."20
Other measures of economic growth also support this characterization of the period. Per capita gross national product between 1839 and 1859 rose by 37%.21 This meant a substantial increase in the American people's standard of living. Exports rose from $71.8 million in the 1830s to $144.4 million in the 1850s. Imports rose from $62.7 million to $172.5 million for the same period.22 These indications of international trade indirectly show the vitality of the American economy. Also, an average of 259,821 people per year immigrated to America in the 1850s.23 Immigrants typically flock to prosperous nations. Perhaps the best way to understand the nation's economic growth is to examine the expansion of two vital industries: manufacturing and transportation.
Manufacturing is a very broad term denoting the production of goods from raw materials. Data, as noted earlier, is sketchy overall. Measures of coal output, pig iron production, and textile manufacture are available and reliable, however. Coal's importance to economic growth cannot be overemphasized. During the first half of the nineteenth century, power came from only two sources: water and steam. Water was, by far, the poorer source since a factory or mill had to be located adjacent to a fast moving stream in order to capture its flow. A machine powered by steam could be located anywhere, but steam requires an abundant source of energy to heat the water. That source of energy was wood or charcoal, a wood byproduct, until anthracite coal became available in the quantities necessary for industrial purposes in the 1830s. Coal had the advantage of burning hotter and longer than wood. By the mid-1840s, coal production had reached 2 million tons and the priced had dropped to $3 a ton (from close to $10 a ton in the early 1830s).24 By 1860, coal production hit 14 million tons and America was importing an average of 235,000 tons per year as well.25
The advent of coal spurred on the production of pig iron, which is crude iron cast in blocks. In 1840, anthracite coal was used for the first time to power a pig iron blast furnace. Sixty such furnaces were in operation by 1849 and 121 by 1853. Forty-five percent of all pig iron was produced using anthracite coal by 1854.26 Pig iron, though, is not something that a consumer wants. Iron only becomes useful once it is made into wrought iron. With the availability of inexpensive pig iron, wrought iron manufacturing enjoyed a renaissance of sorts during this period. "Not only did the output of establishments making axes, scythes, hoes, and plows increase, but for the first time the fabricating and assembling of interchangeable parts became widely used in making metal goods besides guns for the United States army," writes historian Alfred D. Chandler Jr. "Locks, safes, clocks, and watches were produced in large departmentalized factories." Chandler further notes that the production of interchangeable parts required specialized machinery which led to "the creation almost overnight of the American machine tool industry."27
But coal wasn't just important for pig iron production. The availability of an inexpensive fuel source increased the use of steam power. Factories that previously had to rely on a nearby stream could relocate to more propitious locations, closer to laborers and large markets. The textile industry, in particular, benefited from steam-powered machines. From 1840 to 1860, the number of spindles in operation had more than doubled to 5.2 million.28 Also, the number of bales of cotton consumed in domestic manufacture rose 143% from 1840 to 1850 and 47% from 1850 to 1860.29 This development made it possible for "the factory to replace the artisans, the small mill owners, and putting-out system as the basic unit of production in many American industries."30
But economic growth didn't just happen in the manufacturing sector. In fact, it was even more pronounced in the transportation arena. Prior to 1830, transportation was slow and erratic. Travel was primarily by horse and boat. Both means of travel had incredible shortcomings: horses could only pull so much and navigable waterways were not always convenient. The latter issue was mitigated by the construction of canals to link towns and waterways, although these canals froze over during the winter months. The coming of the train changed all that. Transportation was no longer constricted by terrain or climate considerations. The train could go anywhere anytime—rapidly. The first transitional steps were hesitant because of the significant entrenched interests in the form of turnpike, canal, and stagecoach operators.31 Even though 3,000 miles of track had been laid by 1840, the railroads were primarily used to connect commercial centers and to supplement waterways. Roads were short, generally not over fifty miles in length.32
Things changed during the 1840s and 1850s. Technological improvements in the production of locomotives, passenger cars, and rails in addition to uniform standards in tracklaying led to the rapid development of the nation's railroads. In 1850, there were 3,700 miles of canals—an increase of 700 miles since 1840—while railroads had almost 9,000 miles of track.33 During the 1850s, they added an additional 21,000 miles of track.34 More importantly, trunk lines connecting the east with the west were built by the giants of the industry: the Erie, the Baltimore and Ohio, the Pennsylvania, and the New York Central. By 1860, the railroad had displaced the waterways as the primary means of transportation for everything except agricultural products and lumber.35 Passenger traffic rose from 90.1 million passenger miles in 1839 to 1.88 billion passenger miles in 1859; freight traffic increased even more: from 32.8 million ton-miles in 1839 to 2.58 billion ton-miles in 1859.36
This era also saw a high number of inventions and technological growth. The annual number of patents stood at 544 in 1830, 993 in 1850, and 4,778 in 1860.37 Some of the more notable agricultural innovations were the steel plow in 1837, the grain elevator in 1842, and the McCormick reaper in 1846.38 Iron-making inventions abounded as well. As noted earlier, the first anthracite coal blast furnace was used to make pig iron in 1840. Heavy iron rails were first successfully rolled in 1845.39 Other inventions that had profound effects were the telegraph, invented in 1832 but unused until 1844, and the sewing machine, invented in 1846 but first mass produced by Isaac Singer in 1853.40 The telegraph made instantaneous communications possible and enabled railroads to coordinate traffic; the sewing machine destroyed the home-based clothing industry—workers could operate sewing machines in factories where managers could control quality and production.
The economy changed during this period on the microeconomic scale as well as the macroeconomic scale that we've been discussing. Individual businesses, with a few exceptions, tended to be specialized in their aims, fairly small, and managed by their owners. Specialization developed over time as production separated from distribution, which separated from marketing. For example, "an iron furnace of the 1850s normally made only pig (cast) iron; it did not convert the cast iron into semi-finished wrought iron or into finished products such as nails or hardware."41 Similarly, "an ironmaster of 1850 would simply turn over the marketing of pig iron to a separate businessman (an iron merchant like Baltimore's Enoch Pratt) who sold the goods and charged the ironmaster for his services."42 In the agricultural sector, the network of commodities dealers came into existence around this time. Commodities dealers dealt with what are today called "futures"—the purchase and sale of the anticipated product of future harvests. On the manufacturing side, we see the distinction drawn between wholesale and retail by merchant houses, who further specialized by handling one particular variety of goods. The merchant houses sold their wares to jobbers, whose role was to market to the thousands of retail establishments around the country.43 These arrangements enabled manufacturers to reach markets that they could not have reached before due to a lack of resources.
They lacked these resources because their operations tended, with a few exceptions, to be small. The largest American industrial firm at the end of the period under consideration was the Pepperell textile mill. It employed around 800 people—puny by today's standards.44 Most manufacturers had little in the way of physical plant or machinery. Alexis de Tocqueville noted in the 1830s that "what most astonishe[d] [him] in the United States [was] not so much the marvelous grandeur of some undertakings, as the innumerable multitudes of small ones."45 Even iron furnaces had in 1849, on average, around eighty workers and an average capitalization of $83,000—much smaller than one would expect given the quantities of iron they produced.46 They were small because they tended to be financed by a single person or by several people in partnership. Historian Robert Higgs argues that "most businessmen conducted their affairs within small and highly localized markets, and therefore proprietorships and partnerships predominated."47 The limits of capital for one person or a handful of people are pretty substantial. This small capitalization, though, encouraged Americans to enter into business. "The fact that it was easy to enter business nurtured the belief that the society was open and fluid, that this was a land of opportunity," notes historian Glenn Porter. "The goods most men bought were made and sold by small businesses, and because the capital requirements for most businesses were small, people could easily dream of owning and operating their own establishments."48
Management of these small businesses was informal and generally performed by the owners and partners. The Pepperell textile mill mentioned earlier could still be "toured and understood by a single manager in a matter of a few hours," even though it was the largest American industrial firm.49 The managerial hierarchy as we know it today simply did not exist. Salaried managers were employed at the large textile firms, but at few other places. Porter characterized the management of these small businesses thusly:
Relationships between owner-managers and their workers were also quite personal. Because the manager saw his few employees frequently and lived with them in the same town, he could at least be expected to know their names, the quality of their work, and perhaps even some things about their personal lives.50
We get a picture of a management not entirely different from the earlier system of masters and apprentices. The owners were the managers and they had a developed affinity with their workers.
The exceptions mentioned earlier to this smallness were the textile mills and the railroads. The average number of spindles per textile mill, for example, increased from less than 500 in 1815 to 2,000 in 1840 and 5,000 in 1860.51 During the 1840s, there were forty-one textile mills capitalized at over $250,000.52 The textile mills bigness, as impressive as it is compared to other enterprises, was dwarfed by the railroads. Railway investment went from $172.3 million in the 1840s to $737.3 million in the 1850s to over $1.1 billion by 1859.53 By 1860, there were numerous railroads capitalized at over $10 million and several at over $20 million.54 We will discuss the special case of the railroads in due course since they transcended the two phases of the American Industrial Revolution.
The second phase of the American Industrial Revolution began soon after the Civil War. If the first phase was characterized by high economic growth, we can call the second a period of extreme economic growth. Per capita gross national product rose at an average annual rate of 2%. Real gross national product grew at an annual average rate of 4%.55 As noted earlier, two useful measures of economic growth—total commodity output and value added by manufacture—reflect this impressive growth. Economist Robert Gallman notes that "between 1839 and 1899 total commodity output increased elevenfold…. Actual rates varied fairly widely, high rates appearing during the decades ending with 1854 and 1884, and a very low rate during the decade ending with 1869."56 Gallman found that the value added in constant dollars of the purchasing power of 1879 had risen 82% from 1869 to 1879 and 112% from 1879 to 1889.57 To illustrate the dramatic increase, Robert Higgs compares America's progress to other advanced industrial nations: "In 1870, after several decades of industrial growth, the United States had a manufacturing output equal to that of France and Germany combined, but only about three fourths as large as that of the United Kingdom; by 1913 the American manufacturing output equaled that of France, Germany, and the United Kingdom combined!"58 This land of opportunity attracted a total of more than 28 million immigrants between 1865 and 1915.59
Manufacturing's portion of total output during this period rose from 33% in 1869 to 53% in 1899 precisely because of this economic growth.60 In order to best illustrate the differences between the two phases of the revolution, we will try to focus on the same areas of manufacturing, transportation, and technology where possible. Unfortunately, this cannot be done exactly since industries were created during the second phase that didn't exist in the first and some industries present in the first had been replaced or displaced by the second.61
One of those that was displaced in the second half of the nineteenth century was the pig iron industry. Although production increased 100% from 1865 to 1870 and 130% from 1870 to 1880, iron's utility was waning in the face of competition from cheap steel.62 When Carnegie entered the steel business in 1872, the Bessemer steelmaking process was introduced into the United States in the late 1860s and early 1870s. Carnegie's Edgar Thomson Works in Pittsburgh was built entirely along the Bessemer process, one of the few steel mills to do so.63 Through the use of this process and the advent of the open-hearth furnace, steel production soared from 70,000 tons in 1870 and over four million tons in 1890 to twelve million tons in 1900.64 By the 1890s, Carnegie's Pittsburgh steel operations were outproducing Great Britain's entire steel industry by 700,000 tons annually!65
This period also saw the implementation of the factory system in sectors that had traditionally been labor-intensive. U.S. Commission of Labor Carroll Wright characterized this rapid increase of the factory system in his 1880 introduction to the special report on manufacturing in that year's Census:
Of the nearly three millions of people employed in the mechanical industries of this country at least four-fifths are working under the factory system. Some of the other remarkable instances of the application of the system [besides those in textiles] are to be found in the manufacture of boots and shoes, of watches, musical instruments, clothing, agricultural implements, metallic goods generally, fire-arms, carriages and wagons, wooden goods, rubber goods, and even the slaughtering of hogs. Most of these industries have been brought under the factory system during the past thirty years.66
One outstanding example of this recent mechanization can be found in the manufacture of cigarettes. Traditionally, cigarettes had been made by hand throughout the manufacturing process. In 1881, cigarette-making machines were introduced. By the mid-1880s, one machine could produce 120,000 cigarettes a day—dizzying when compared to the capacity of the most highly skilled hand workers, who could produce perhaps 3,000 cigarettes a day. The adoption of similar machinery revolutionized the match, soap, and grain-milling industries during the 1880s and 1890s.67
If the gains made by manufacturers were impressive, but those made by the railroads were stunning. This period saw the completion of the first transcontinental railroad in 1869 and subsequent transcontinentals in 1882, two in 1883, and one in 1893.68 Total mileage expanded from 52,922 in 1870 to 166,703 in 1890.69 Passenger and freight traffic reached ever-climbing heights: 7.7 billion passenger miles in 1882 and 12.5 billion passenger miles by 1890; 39.3 billion and 79.2 billion ton-miles in 1882 and 1890, respectively.70 Railroad capitalization also soared from $2.5 billion in 1870 to $10.1 billion in 1890.71 In the 1870s, the Pennsylvania Railroad alone issued $78 million in securities to help finance its expansion.72 That expansion must have produced the desired results since Pennsylvania Railroad freight locomotives hauled an average of 5.1 million ton-miles per year in 1881, up from 2.1 million ton-miles in 1870.73
These numbers are only a shadow of the economic impact wrought by the railroads. In 1880, three-fourths of America's steel output went into the production of rails. The amount of coal required to power the nation's 31,812 locomotives was staggering and inestimable. It is estimated that road construction and maintenance consumed over 71 million railroad ties in 1889-90 alone!74 The railroads also used large quantities of machine tools, copper, glass, India rubber, felt, and animal and mineral oils.75 The secondary or indirect benefits produced by the railroads is incalculable. Since they brought down the costs of transportation, they reduced the cost of manufactured goods. Since they offered reliable transportation and refrigerated cars, they brought produce and livestock to a national market. By enabling rapid postal delivery and granting rights-of-way to the telegraph companies, they enabled nearly instantaneous transcontinental communication. There can be no disagreement about the importance of the railroads to economic growth during the latter half of the nineteenth century.
The second phase of the American Industrial Revolution witnessed an incredible growth in technological innovation and invention as well. In the 1870s, as noted earlier, roller grinding was adopted in grain mills.76 The telephone also was introduced during that period.77 The street car was invented in 1871 and entered into use in 1873.78 The air brake came into widespread use in 1872 and the automatic coupler did in 1874.79 Electric power became available with the advent of the dynamo and the Edison central power system in 1881 and 1882, even though electric arc lighting was invented in 1878 and Edison developed the incandescent light bulb in 1879.80 Finally, the electric welding machine's invention in 1886 enabled the joining of metal without rivets.81
The revolution in manufacturing and technology also extended to a revolution in business organization. This second phase was dominated by business integrations, both vertical and horizontal. Vertical integration occurs when a business expands its operations from production into distribution, marketing, and raw-material production. The best example of vertical integration is Carnegie Steel, the huge steelmaker mentioned earlier. In the 1870s, Carnegie bought firms in order to gain access to the raw materials that they produced. He bought the Unity and the Larimer Coke works, the Scotia Ore mines, and a ferro-manganese mine in an effort to get at the coke and iron ore he so desperately needed.82 In the 1880s and 1890s, he gained control of the Henry C. Frick Coke Company, the prodigious Mesabi iron ore range, and many limestone quarries. In order to transport these raw materials, Carnegie bought a fleet of Great Lakes ore steamships and created a railroad of approximately one thousand miles of track. He founded mills to produce finished steel products like structural steel and rails in addition to the creation of sales outlets to market Carnegie's products.83 James Bridge, in his 1903 book entitled Inside History of the Carnegie Steel Company, noted that "from the moment these crude stuffs were dug out of the earth until they flowed in a stream of liquid steel in the ladles, there was never a price, profit, or royalty paid to an outsider."84
Another vertically integrated enterprise was Gustavus Swift and Company. Swift and Company was a meatpacking operation of nationwide scale that made extensive use of the railroads and telegraph. Before Swift, most cattle were shipped alive to towns near where the meat was to be consumed. This was inefficient because although only 40% of the meat was edible, 100% of the cow had to be shipped to the slaughterhouse.85 Swift bought cattle from the western ranches and then slaughtered them in six packing plants in cities near the frontier. There they were dressed and shipped via refrigerated car to Swift's branch houses around the nation. These branch houses were Swift's master stroke. Each branch house had its own refrigerated storage space and a sales staff to sell the beef.86 The only hurdle Swift had to overcome was consumer resistance to purchasing meat that wasn't slaughtered locally. He overcame this opposition by selling quality meat at prices that substantially undercut those of the local butcher.87 The vertical integration enjoyed by Carnegie Steel and Swift and Company enabled these companies to be "independent of the general market," as Carnegie himself put it.88 Vertical integration rendered them less affected by swings in the price or availability of raw inputs.
The other type of integration—horizontal—sought to control raw materials and distribution by purchase or integration with other firms in the same industry in order to realize economies of scale. By requiring such massive quantities of raw material and producing such massive quantities of finished goods, firms possessing horizontal integration made themselves a force to be reckoned with, thus allowing them considerable bargaining power. The quintessential example of horizontal integration is the largest industrial concern of the time, Standard Oil. Standard Oil started in 1867 when John D. Rockefeller acquired his first oil refinery in Cleveland, Ohio. Oil refining was a very competitive industry: there were many refiners and none of them could affect the market price of oil. These refiners did not particularly like this competition, which they (like many businessmen of the time) deemed ruinous. In 1882, Rockefeller and forty other oil refiners entered into a trust agreement whereby they turned over their common stock to nine trustees in return for dividends from the trust.89 Standard Oil wasn't perfectly horizontal since it owned some supplies of crude oil and the pipelines to transport it. By the 1890s, Standard Oil controlled over 90% of the oil refining capacity in the United States.90 As Chandler expressed the power of horizontal integration:
The transformation of a loose alliance of manufacturing or marketing firms into a single consolidated organization with a central headquarters made possible economies of scale through standardization of processes and standardization in the procurement of materials. Of more significance, consolidation permitted a concentration of production in a few large favorably located factories. By handling a high volume of output, consolidated factories reduced the cost of making each individual unit. They could specialize further and subdivide the process of manufacturing and also were often able to develop and apply new technological improvements more easily than could smaller units.91
These different forms of integration as well as the growing complexity of the organization required changes in the business structure. After the Civil War, corporations became the predominant form of business organization. The development of markets for corporate securities certainly created an incentive for incorporation since the division of ownership into readily transferable shares combined with formal markets for those shares allowed businesses to raise money for expansion through issuance of securities.92 Other changes to the business structure included a more formalized managerial hierarchy. Porter argues that "a hallmark of the modern business enterprise was its separation of ownership and control."93 As businesses grew more complex (and one can easily surmise the complexity of producing the economic growth mentioned elsewhere in this essay), they required the services of professional, full-time managers. Lower levels of managers could specialize in understanding and controlling one or two aspects of the corporation. Middle managers above them could supervise a few lower-level managers and top managers could supervise one or two middle managers. Information and control was thus transferred up the corporate hierarchy until supreme decision-making authority was vested in the president of the corporation, who typically owned very little stock in the company. To be sure, final authority resided with the Board of Directors. However, the Board of Directors typically represented the investment bankers and financiers and they tended to not delve into the operational side of management.94
We have now adequately presented the facts regarding the two phases of the American Industrial Revolution and we can now draw conclusions. Although they share some traits in common, it is clear that they are very different. The most significant differences between them are the higher rate of economic growth and the more sophisticated business structures in the second phase. It is my contention that the former is explained by the latter. The more complex organization enabled opportunities for growth to be realized. The earlier period had many of the same opportunities, but without the expertise and specialization inherent in a professional managerial hierarchy businesses just cannot expand as much. Let's be clear, I am not saying that technology was unimportant. Quite the contrary, I believe that technology was vital to the successful prosecution of the Industrial Revolution. However, technology would have been unavailable were it not for the efforts of entrepreneurs and managers in mass producing it. Likewise, I fully recognize the importance of capital markets and the greater availability of capital in the latter half of the nineteenth century as contributing factors to the economic growth. But capital does not make a factory work or organize complex production processes. These still require human thought, as exemplified by managers.
The "visible hand" of management, as Chandler put it, directed and orchestrated all aspects of production. This role came into existence during the second phase of the revolution. Although there did exist some managers before 1850, the position did not come into its own until after the Civil War. The multiunit business did not exist in the United States in 1840. The railroad, with its need for the safe, efficient movement of passengers and freight, required administrative coordination across business units and was the first truly big business in America.95 In manufacturing, modern management came about when technology allowed the factory system to be implemented. Output rose as machinery, plant design, and administrative procedures were improved by management.96
Once managers had administrative control of the production flows, they sought to grow the business in order to assure its continued success and existence. Their motivations for doing so were both defensive and productive.97 As we have seen with the vertical and horizontal integration of businesses, business expansion could stabilize and rationalize productive processes—as in the case of Carnegie Steel where vertical integration allowed Carnegie's steel mills to operate at full capacity by insuring adequate supply of raw materials or in the case of Standard Oil where horizontal integration allowed the trust to realize economies of scale by enlarging the oil refining capacity. Defensive expansion was most seen in the railroads. The construction of competing lines in already saturated markets arose from the need of the railroad to build great transportation systems. Once the business expanded, further expansion was made easier because the facilities and skills generated by the expansion were easily transferred to new functions.
These growth motivations by managers go far in explaining the incredible economic growth of the late nineteenth century and the rationalization of the production process goes the rest of the way. As philosopher Ayn Rand put it, "managerial work—the organization and integration of human effort into purposeful, large-scale, long-range activities—is, in the realm of action, what man's conceptual faculty is in the realm of cognition."98 This comparison to the mind is no accident, for that is precisely what managers embody in the economy—rational thought organizing process flows and strategically planning future expansion. The managerial revolution can properly be understood as the catalyst driving the American Industrial Revolution.
1 Mansel G. Blackford and K. Austin Kerr, Business Enterprise in American History, (Boston: Houghton Mifflin, 1986), ix. This comports with my experiences studying business history.
2 James DeFronzo, Revolutions and Revolutionary Movements, 2nd ed. (Boulder, CO: Westview Press, 1996), 8.
3 There was some increased regulation of industry towards the end of the Industrial Revolution—viz., the Interstate Commerce Commission—but it was constitutionally sanctioned and limited in scope.
4 William N. Parker, "Agrarian and industrial revolutions," in Revolution in History, ed. Roy Porter and Mikulás Teich (Cambridge: Cambridge University Press, 1986), 167.
5 Lawrence B. Glickman, A Living Wage: American Workers and the Making of Consumer Society, (Ithaca, NY: Cornell University Press, 1997), 25.
6 Karl Marx, Capital: A Critique of Political Economy, 3 vols., (Chicago: n.p., 1906), I, 558; quoted in David Montgomery, The Fall of the House of Labor, (Cambridge: Cambridge University Press, 1987), 62.
7 Parker, 174. Emphasis mine.
8 Parker, 168.
9 Ibid., 172.
10 Robert Higgs, The Transformation of the American Economy, 1865-1914: An Essay in Interpretation, Wiley Series in American Economic History (New York: John Wiley and Sons, 1971), 8.
11 Ibid., 16.
12 Ibid., 17.
13 Peter Temin, Causal Factors in American Economic Growth in the Nineteenth Century, Studies in Economic and Social History (London: Macmillan Press, 1975), 32.
14 Robert W. Fogel, Railroads and American Economic Growth: Essays in Econometric History, (Baltimore: Johns Hopkins Press, 1964), 129.
15 David Landes, The Unbound Prometheus: Technological Change and Industrial Development in Western Europe from 1750 to the Present, (Cambridge: Cambridge University Press, 1970), 1; quoted in Thomas C. Cochran, "The Business Revolution," The American Historical Review 79:5 (December 1974), 1449.
16 I am reminded specifically of James J. Hill, whose Great Northern Railway sat north of the heavily subsidized Northern Pacific Railroad and south of the heavily subsidized Canadian Pacific Railroad. Hill's contemporaries labeled his efforts "Hill's Folly." Henry Ford essentially created a market, the inexpensive automobile, where none existed before.
17 Temin, 13-5. Kuznets, though, worked with the data in the 1950s before the advent of modern computing.
18 The amount by which the value of their output exceeded the value of their raw-material inputs.
19 Robert E. Gallman, Trends in the American Economy in the Nineteenth Century, (Princeton: Princeton University Press, 1960), 15; quoted in Thomas C. Cochran, "Did the Civil War Retard Industrialization?" The Mississippi Valley Historical Review 48:2 (September 1961), 199.
20 Ibid., 199.
21 Blackford and Kerr, 84-5.
22 Harry J. Carman, Harold C. Syrett, and Bernard W. Wishy, A History of the American People: Volume I - to 1877, 2nd ed. (New York: Alfred A. Knopf, 1967), 474.
23 Cochran, "Did the Civil War Retard Industrialization?", 202.
24 Alfred D. Chandler, Jr. The Visible Hand: The Managerial Revolution in American Business, (Cambridge: Harvard University Press, Belknap Press, 1977), 76.
25 Carman, Syrett, and Wishy, 490.
26 Chandler, Visible Hand, 76.
27 Ibid., 76-7.
28 Carman, Syrett, and Wishy, 490.
29 Cochran, "Did the Civil War Retard Industrialization?", 201.
30 Chandler, Visible Hand, 77.
31 Carman, Syrett, and Wishy, 467-8. Interestingly, the Erie Canal operators persuaded the New York state legislature in 1833 to prohibit any railroad in the state from carrying freight. In 1844, an amendment was added allowing railroads to carry freight when the canal was inoperable (frozen over) and, incredibly, the restrictions weren't lifted until 1851.
32 Blackford and Kerr, 92. Chandler, Visible Hand, 82.
33 Temin, 39.
34 Blackford and Kerr, 92.
35 Chandler, Visible Hand, 83. These two items were produced near waterways and were still transported on them.
36 Lance E. Davis and others, eds. American Economic Growth: An Economist's History of the United States, (New York: Harper & Row, 1972), 497.
37 Carman, Syrett, and Wishy, 490.
38 Richard B. Morris, The Encyclopedia of American History, (New York: Harper & Row, 1976), 691, 794.
39 Ibid., 722.
40 Ibid., 794-5.
41 Glenn Porter, The Rise of Big Business, 1860-1910, (Arlington Heights, IL: AHM Publishing, 1973), 15.
42 Ibid., 16.
43 Blackford and Kerr, 108-10.
44 Ibid., 113.
45 Alexis de Tocqueville, quoted in Porter, 8-9.
46 Chandler, Visible Hand, 76.
47 Higgs, 39.
48 Porter, 8.
49 Blackford and Kerr, 113.
50 Porter, 21.
51 Carman, Syrett, and Wishy, 493.
52 Chandler, Visible Hand, 90.
53 Davis and others, 496. Chandler, Visible Hand, 90.
54 Porter, 32. "… [T]he Erie, the Pennsylvania, the Baltimore and Ohio, and the New York Central were capitalized at from $17 to $35 million." Chandler, Visible Hand, 90.
55 This meant a threefold increase in per capita GNP between the Civil War and World War I and an eightfold increase in real GNP. Higgs, 19.
56 Cochran, "Did the Civil War Retard Industrialization?", 199.
57 Ibid., 200.
58 Higgs, 48.
59 Ibid., 24.
60 Ibid., 47.
61 Industries created in the second phase include those that generated or used electric power, such as streetcars and telephones. Industries that had been replaced or displaced include the canals and pig iron, which was displaced by steel.
62 Cochran, "Did the Civil War Retard Industrialization?", 200.
63 Chandler, Visible Hand, 259.
64 Blackford and Kerr, 164.
65 Harold C. Livesay, Andrew Carnegie and the Rise of Big Business, The Library of American Biography, ed. Oscar Handlin (Boston: Little, Brown, 1975), 166.
66 Carroll D. Wright, "The Factory System of the United States," U.S. Bureau of the Census, Report of the United States at the Tenth Census (June 1, 1880), (Washington: 1883), 548; quoted in Chandler, Visible Hand, 246.
67 Blackford and Kerr, 169. In 1881 as well, a machine was produced that packed matches by the billions into boxes. Minneapolis millers average daily output amounted to 274 barrels in 1874 and 1,837 by the end of the 1880s. Chandler, Visible Hand, 253.
68 Morris, 611-2.
69 Alfred D. Chandler Jr., The Railroads: The Nation's First Big Business, The Forces in American Economic Growth Series (New York: Harcourt, Brace & World, 1965), 13.
70 Ibid., 14. By 1890, railroads carried twice as much freight as all other means of transportation combined. (Blackford and Kerr, 162)
71 Ibid., 15.
72 Blackford and Kerr, 154.
73 George Rogers Taylor and Irene D. Neu, The American Railroad Network, 1861-1890, (Cambridge, MA: Harvard University Press, 1956), 2.
74 Fogel, 138-9.
75 Chandler, Railroads, 22, 13, 23.
76 Higgs, 46.
77 Ibid., 45.
78 Morris, 796.
79 Ibid., 795-6.
80 Ibid., 796.
81 Ibid., 797.
82 Livesay, 119-20.
83 Blackford and Kerr, 171-2.
84 Porter, 54.
85 Ibid., 48.
86 Blackford and Kerr, 173.
87 Porter, 48-9.
88 Andrew Carnegie; quoted in Ibid., 54.
89 Blackford and Kerr, 175.
90 Ibid., 176.
91 Alfred D. Chandler Jr., Strategy and Structure: Chapters in the History of the American Industrial Enterprise, (Cambridge, MA: The M.I.T. Press, 1962), 31.
92 Higgs, 40.
93 Porter, 12.
94 Chandler, Visible Hand, 187.
95 Ibid., 485. Note: the specialized management structures and developments of the railroad industry could easily require a book in itself for explanation.
96 Ibid., 486.
97 Ibid., 486-9.
98 Ayn Rand, "The Cashing-in: The Student 'Rebellion'," Capitalism: The Unknown Ideal, (New York: New American Library, 1967), 262.