Panorama of the Hog line in the Chicago Stockyards (1900) - scroll right to see all of picture ->

THE AGE OF ENTERPRISE
2/5/02

"When I Was a Cowboy: Early American Songs of the West"
[Recordings from the 1920s & 1930s of songs from the 1870s]

I. Regional Unification in the 1870s and 1880s
        The Slaughterhouse Cases (1873)

II. Sources of US Economic Dominance
            A. Political Unity: Civil War
            B. Geographic Unity: Westward Expansion
            C. Economic Unity: The Modern Corporation
                    Railroads, Steel, Oil, Wheat, Lumber, Meat

 III. Why the Corporation Succeeds
            A. Governmental Support
                    State Incorporation Laws
                    Land Grants
                    Bonds/Stocks
                    Tariffs
                    National Guard and Army
                    Courts
            B. Private Innovations
                    Technology/Mass Production
                    Horizontal and Vertical Integration
                        Andrew Carnegie: U. S. Steel
                        John D. Rockefeller: Standard Oil

IV. Case Study: Meatpacking

           Cowboys + RR + Slaughterhouses
                    Gustavus Swift

I. Regional Unification in the 1870s: The Slaughterhouse Cases (1873)

Over the course of the past couple of weeks we have been looking at the different regions of the U.S. – the North, the South, and the West – and their relationship to one another.  

In the 1860s Radical Republicans hoped to establish the power of the North – through the power of the federal government -- over the other two. 

• In some ways they clearly succeeded – with the passage of the 13-15^th Amendments, with the building of the transcontinental railroad, and with the defeat of the Indian Nations and the gradual subordination of Mexican power in the West. 
  
• But in other ways they failed. They did not succeed in institutionalizing their vision of federally guaranteed civil liberties – in fact by the 1880s Congress was voting to exclude the Chinese from immigrating and was standing by while the South passed laws segregating public accommodations. Indeed, as early as the 1870s most Republicans were retreating from civil rights in favor of economic gain.

Slaughterhouse Cases -- One way of illustrating this shift from civil rights to economic gain is to look at a series of cases coming out of New Orleans, Louisiana, which were decided by the Supreme Court in 1873. Known as the Slaughterhouse Cases, these cases were the first in which the Supreme Court ruled on the meaning of the 13^th and 14^th Amendments. They involved the attempt of the Louisiana state legislature to take advantage of a consequence of the Civil War.

10855 – A herd of Texas cattle [free wild ‘longhorns," descended from cattle imported by Spanish settlers].

Over the course of the war cattle herds in Texas had been growing, as transportation from the Southwest to the Northeast was effectively cut off by fighting.  

By the late 1860s there was a huge supply of beef in Texas and a huge, unmet demand of beef in cities like New York. The butchers of New Orleans were ready to make a fortune slaughtering beef and preparing it for transport. 

The trouble was that the butcher’s slaughterhouses were spread out, for the most part, north of New Orleans on the Mississippi. They needed water from the river to hose down their buildings everyday and for disposal of animal remains. This system brought terrible epidemics of Yellow Fever to New Orleans every summer.

In 1869 the Louisiana state legislature (dominated by blacks and carpetbaggers) had closed all the slaughterhouses in New Orleans and incorporated the Crescent City Live-Stock landing and Slaughterhouse Company. This company was to be located south of the city, that is down river. The legislature thereby achieved two objectives: first, it gave many poor blacks who had learned to butcher as slaves, the opportunity to compete in the slaughterhouse business. All they had to do was to rent space in this great new slaughterhouse. And, second, the legislature eradicated Yellow Fever in New Orleans.

But not everyone was happy. The hundreds of butchers in New Orleans who had to give up their own operations and move to this one slaughterhouse were outraged. After due reflection, they sued under the 13^th and 14^th amendments, claiming that they were being reduced to involuntary servitude and denied the right to their property without due process of law. 

The Court ruled against the protesting butchers – arguing that the state had every right to regulate slaughtering on behalf of the public health. The immediate consequence of this case was to give a lot of poor black butchers a chance to support themselves and to improve the public health of New Orleans. 

But the bigger, long-term significance was to make the building of huge slaughtering houses easier and to make the consolidation of the meatpacking business more efficient.

I’ll return to the topic of meatpacking at the end of this lecture, but to understand this story better, it is necessary to stand back and look at the general conditions that enabled the meatpacking industry – as well as many others – to flourish as they did in the late nineteenth century. The Supreme Court helped, but it was hardly alone.

II. The Sources of the Economic Dominance of the U.S.

At the time of the Civil War, the United States was a third-rate economic power. The British dominated world markets, and although a few far-sighted analysts anticipated a possible economic threat from Germany, few suspected that the U.S. would soon be a serious competitor. But in the 1890s the US surpassed not only Germany, but also Britain to become the economic leader of the world.

- 1892 was the last year that the US had an unfavorable trade balance until 1971,

- by the middle of the 1890s American Steel makers were selling more steel than the British.

In less than 50 years, the US was transformed from a country of small farmers and individual producers to a corporate economy connected to an international market. Small artisans became wage laborers in an increasingly rational, scientific, efficient system of mass production.

How did it happen? How did a basically agricultural, former British colony assume this position of economic leadership so quickly?

A. Political Integration: First, the Civil War integrated the country politically into a federal system with a strong central government -- not as strong as either Charles Sumner or Thaddeus Stevens would have liked, but strong enough to support the development of an integrated economic system across the North American continent.

This integration was strengthened by a critical phrase in the U.S. Constitution. Article I, section 8 provided that Congress would have the right to regulate commerce among the several states. This provision guaranteed that the states could not pass laws that would interfere with trade among them. 

So, while the countries of Europe were throwing up every conceivable trade barrier to protect themselves from competition with one another, the US had a Constitution that prevented any such internal barriers.

B. Geographic Integration: The second advantage that the US enjoyed over its nearest economic competitors was its geographic integration. Britain and other European powers might have colonial empires, but the U.S. had a domestic empire created by the Westward expansion I discussed last week. This domestic empire was much easier to develop economically than any colonial empire ever could be once the railroads created an interconnected web throughout the country. Moreover, the vast US territory was incredibly rich in natural resources. It included the extraordinarily fertile land of the Mississippi Valley, as well as extensive mineral deposits.

C. Economic Integration: The political unity won with the Civil War, and the geographic unity won with Westward expansion were both critical elements of the United States' economic triumph, but both were merely preconditions to the economic integration that made the US a world leader by the year 1900 -- in the building of railroads and the production of steel, oil, wheat, lumber, and meat.

How was that economic integration achieved? That is the main question that I want to devote today's lecture to answering. The basic answer is that the US achieved unprecedented economic integration through its development of the modern corporation.

III. Why Corporations Succeed in the U.S.

The modern corporation developed here more quickly and with a greater payoff than anywhere else for 2 reasons:

(1) First, unlike England, the U.S. did not have a large class of wealthy landowners who could invest in private partnerships. Southern planters were as close as we could come and they were mostly bankrupt as a consequence of the war and the emancipation of their largest property interests: their slaves. 

American business men had to raise money by other means. They did so by appealing to the government for a variety of different kinds of support (which I shall spell out in a moment);

(2) Second, American business leaders innovated, through technology and organizational means, to create new kinds of businesses.

A. Governmental Support

1) State Incorporation Laws: The most valuable assistance provided by government were the laws of incorporation in each state. Building a big company like a railroad, for instance, not only required huge sums of money, it was incredibly risky. 

Railroads had enormous fixed costs: for rail beds, bridges, cars, engines, stations, engineers. And these costs had to be met before a penny of revenue was received.  Who knew if people would use the trains once they were built. By the 1860s railroad lines were stretching out into western regions of the country where there were few settlers. 

Even if the promoters realized their dream of attracting cattle ranchers to ship their steers north and east to Chicago, there was the problem of all those trains traveling back south and west empty.

Even if the U.S. had had landed aristocrats with disposable income, who among them would have been crazy enough to take that kind of risk. If his railroad failed, he could go bankrupt trying to pay off angry creditors. Enter the corporation.

A corporation is a kind of body, formed and authorized by law to act as a single person (even though it is usually formed by more than one person). The great thing about the laws of incorporation is that they allowed lots of people to invest in a company without any investor's having to fear that he or she would lose every penny if the company went broke. This ability to avoid risk was what appealed to the Radical Republicans who dominated the Louisiana state legislature in 1869, when they incorporated the great slaughterhouse that led to the Slaughterhouse cases. All that an investor in a corporation risked was the money that he or she invested in the stock of that corporation.

Up to the early nineteenth century, each corporation was created by an act of a state legislature. But by the middle of the century, the demand for bills of incorporation were so numerous that states began to pass general incorporation laws. Under these laws anyone could form a corporation by filling out certain forms and agreeing to certain state regulations. 

That's how most of the great companies of the later nineteenth century -- from railroad, to steel, oil, lumber, grain, meat companies were created (the Slaughterhouse in New Orleans was an exception, created by a special bill). The British could have done the same, but few did so; they did not have the same financial incentive (remember, they had all of those landed aristocrats with disposable income), and, besides, there was a disadvantage to the corporation: no individual stock holder could control the company.

Once a corporation was formed, it approached the challenge of raising money in one of several ways -- of of which required governmental support:

2) Land Grants: If the company was deemed by the state to provide an important public benefit, the state or federal government might make a land grant. Cornell University had its origins in the Morrill Land Grant of 1862. The Union Pacific Railroad was financed in part by land grants, both for laying tracks and to be sold off to settlers to raise revenue.

3) Stocks and Bonds: State legislatures and Congress authorized the sale of stocks and bonds. Because the start-up costs for many businesses were often very high, and because no one could be sure, once they were built, that they would attract enough customers to service their debts, the bonds that new businesses sold often had to be sold at a heavy discount. Today we would call them junk bonds. 

In the case of the Union Pacific the risks were deemed to be so great that the federal government guaranteed a portion of the bonds and gave the company the right to issue additional, unsecured bonds for every 20 miles of track it laid. 

Companies also had the right to issue stock. [Companies had to pay back bond holders -- who had, in essence -- loaned them money; they did not have to pay back stock holders]. 

At this point in American history there was no SEC, and there were no government regulators.  A company could sell as much stock as the public would buy. Basically, those who bought stock were betting that the companies in which they were investing would be profitable enough to pay off their bond obligations and then have enough left over to pay the stock holders handsome dividends. 

People who invested in the Union Pacific eventually made money; those who invested in the Southern transcontinental line, the Texas and Pacific, did not.  They would have done better to have invested in a diversified set of stock on the stock exchange.

4) Tariffs: Throughout the final half of the nineteenth century American companies also benefited from a protective wall of tariffs. 

Britain, in contrast, where free-market ideas prevailed, stood fully exposed to competition from its rivals' products. 

By the way, tariffs provided the federal government with its basic source of revenue, and revenue from tariffs was so high in the later nineteenth century that the federal government ran a surplus.

5) National Guard & Army/ Courts: Businesses benefited as well from the protection of the state from disgruntled laborers and from disgruntled citizens who lived next to noisy, smoke-belching, smelly new enterprises. 

When railroad workers struck throughout the country in 1877 to protest cuts in wages, the federal government sent in the army to break up the strike, and the courts upheld their authority to do so. 

When citizens sought financial relief from smoke-billowing trains that ran by their homes, the Courts ruled that the economic benefit to the community brought by the railroads outweighed any individual harm. 

In no other country did the legal system work in favor of business as reliably as it did here.

B. Private Innovations: In addition to these governmental supports, the American economy achieved unprecedented power through two further means: technological innovation and business organization.

1) Technology: The US was distinguished from other countries, first, by the rapidity of its technological progress. 

Britain was much further along than the US was at mid century in its technology. But it did not innovate as quickly as the US did principally because it had ample numbers of skilled workers and a guild tradition that made innovation more difficult (since technology usually threw workers out of work). 

The US, by contrast, was constantly short of skilled workers, a fact that made technological innovation essential to business development. British steel makers were horrified when Andrew Carnegie tore down a brand new steel plant to build a new plant based on the newly discovered Bessemer process.

Image: 10900 – a Bessemer converter at Carnegie’s Homestead steel works. The Bessemer process increased the quantity and quality to steel production by forcing a blast of air through the molten iron to burn off impurities.

As one British critic pointed out, his own company was using equipment it had used for 20 years. "That," Carnegie replied, "is what is wrong with the British Steel trade. Most British equipment is in use 20 years after it should have been scrapped."

2) Horizontal and Vertical Incorporation: The second source of rapid economic growth was basically organizational.  Early business tycoons like John D. Rockefeller in oil - and Andrew Carnegie in steel – thought of themselves as rugged individuals,

Image 10896 (Rockefeller) & 10897 (Standard Oil Refinery in Ohio) - 

Image 10899 (Carnegie) and 10901 (American Iron Works in Pittsburgh). 

Carnegie and Rockefeller thought of themselves as rugged individuals, creating with their own hands the businesses that brought America prosperity. 

But business leaders were the first, despite their early celebration of rugged individualism, to condemn individualism as a curse.

And this is why: Rugged individualism led to competition, and competition led to price wars, and price wars led to widespread bankruptcy.  

In an effort to cope with ruinous competition, business leaders resorted to pools -- loose federations of businesses that set prices for themselves. The trouble was that pools tended to break apart in hard times. Basically, there seemed to be only two ways left to deal with competition; one was to cut prices; the other was to buy out the competition. The most successful businessmen of the late nineteenth century did both.

This process came to be known as horizontal integration: dropping prices to near or below cost to drive competitors into bankruptcy and then buying the bankrupt company.

In addition to horizontal integration, business tycoons developed the idea of vertical integration. All businesses faced the vagaries of supply and demand. In steel, for instance, production could come to a grinding halt if the supply of iron ore was interrupted. On the other hand, a surplus could build up if there was no effective means of marketing the finished product. By buying up mines and developing sophisticated distribution systems, Carnegie was able to achieve dominance, not just in the U.S. but throughout the world. 

Image 10903 (Mesabi open it iorn mine in Minnesota, bought by Carnegie).

In brief, the distinctive feature of American business in the late l9thc was not merely the competitive individualism of men like Carnegie. Rather, what set American business apart from that of the rest of the world was its development of oligopolistic, vertically integrated business organizations over a vast territory. No other country in the world proved so skilled at this horizontal and vertical integration, whereby businesses from biscuit makers to oil producers brought stability through organization.

IV. Case Study: Meatpacking

Before closing today, I should like to pull together the various aspects of economic development I have been discussing with a specific example of how these aspects produced, in one generation, the transition from tiny businesses scattered all over the country to a huge, centralized, modern corporation.  As an introduction to your reading The Jungle, I want to tell you about Gustavus Swift and his creation of the world's largest meatpacking corporation in Chicago in the late nineteenth century. 

Image 10863 (Gustavus Swift).

At the time of the Civil War, the processing of meat was still, for the most part, a local and seasonal affair.  Most farm families raised, butchered, and cured their own meat, mostly pork, in January, when the temperatures were low enough to guard against spoilage before salting and smoking could preserve the butchered hog.  In communities where farmers raised a surplus, a local merchant might devote a couple of weeks each winter to the meat trade, once his warehouse had been cleared of the fall harvest of wheat, corn, or whatever.

With urbanization, however, the demand for meat increased, farmers and increasingly ranchers invested more in the raising of animals, meat-packing houses began to crop up and farmers would drive their animals to market during the cold months to be butchered.

There were two problems that limited how big the meat business could grow: 

(1) seasons: it was costly to build meat-packing plants that could only be used part of the year.  New Orleans got around this by salting meat, but while people were okay with slated pork, they didn’t much care for salted beef. The second problem was 

(2) distance: farmers and ranchers could only drive their animals so far before they lost so much weight that they would not be worth selling.  Only cities on major rivers, like New Orleans (300,000) could grow to any size.  Land-locked cities like Chicago were stymied at less than 30,000.

The problem of seasons was solved first in the East, which since the beginning of the 19thc had been cutting ice in the winter and storing it in insulated warehouses for later use. But ice was difficult to move over land.  It took the building of the railroad to allow Chicago meatpackers to have access to ice and to operate year-round. The railroad not only solved the problem of seasons; it also solved the problem of distance. With the advent of the railroad, animals could be transported great distances without losing valuable weight.

The ice trade was important for pork packing, but it was revolutionary for beef. As I mentioned a moment ago, Americans did not like cured beef, and therefore beef was shipped all the way from loading points in Kansas, and later Texas to New York for butchering. The Chicago meat market was pretty much restricted to the processing of pigs, which Americans would eat in a cured state. The question was, how could meat packers sell beef as well?

Enter Gustavus Swift, the king of beef. Swift began his career as a farm boy in New England. He bought steers, butchered them himself and sold the meat door to door on Cape Cod. Gradually, he opened butcher shops that sold by refrigerated wagon, door to door. By the early 1870s he had become the partner of a large Boston meat dealer and had decided to pursue his market closer to the source of supply: Chicago. And so Swift moved there in 1875.

He had no intention at first in becoming a packer. He simply wanted to be a meat dealer, who bought cattle and shipped them East. He should have been able to make money doing so, because western cattle were cheaper than eastern cattle, since land in the west was cheaper and it therefore cost less to raise each cow. Even with the cost of shipping by railroad, Swift stood to make a profit with his western raised beef. But at first he failed. Shipping live cattle all the way back East proved more expensive than he had anticipated: cows were always getting gored by their neighbors; they suffered stress from overheated cars; they lost weight by refusing to eat.

 
What to do? Swift decided to experiment in shipping dressed beef [meat that had been cut into pieces]. At first he did so in winter, and, having succeeded, he began experimenting with refrigerated cars (blocks of ice at either end of the car). Not only did Swift get around the problem of his shipment losing weight in transit, he discovered another benefit in shipping dressed beef. 

The usable meat in a typical steer was only about 55 percent of its total body weight. The rest -- skin, bones, joints, entrails, gristle -- was largely waste.  Dealers who shipped live cattle to butchers in the East were spending a surcharge to ship a lot of useless bones and other parts. 

Swift's more efficient manner of shipment resulted in lower prices for his customers. In fact, once Swift had perfected the dressing of beef, he figured out how to use all the by-products as well: buttons, fertilizer, glue, brushes, combs, gut strings, stearin, pepsin, lard, tallow, oleomargarine, and bouillon. No individual butcher could afford the capital investment to deal in such small quantities, but increasingly Swift could. And it was from the sale of by-products that his profit of approximately 1% on each steer was made.

A combination of technological innovation and the mass production techniques of the packing houses he built gave Swift an advantage over other meat dealers, but he became hugely successful only through systematic horizontal integration.

In the beginning he faced a big problem. Consumers did not like the idea of buying meat that had been killed a thousand miles away two weeks before they ate it. As one butcher in the Pittsburgh area said, "I sell no beef unless I see it killed." But local butchers proved no match for Swift. 

First he approached local butchers to form partnerships with them to sell his meat. Those who refused watched in horror as Swift sent in refrigerated railroad cars and sold the meat to all comers at below cost. Gradually he defeated the local butchers. 

By the 1890s Swift, Armor, and a couple of other Chicago meatpackers controlled the country's entire meat business and were butchering millions of animals a year. 

Image 10862 – The Union Stackyards in Chicago in 1878; Image 10864 – The hog line that our hero, Jurgis, in "The Jungle" confronts

The meat packing industry was merely one example of the business consolidation that was going on at the end of the nineteenth century. By 1900 1% of all businesses were producing 44% of all goods.

Many people in the late nineteenth century celebrated this consolidation.  It was, they believed, clear proof of survival of the fittest. There were certainly some tremendous benefits to this consolidation: in the meat industry, for instance, people were able to have meat all year long at a lower price than they had previously enjoyed. 

But not everyone responded positively to consolidation. Workers, farmers, and growing numbers of reformers protested that consolidation brought with it social costs too great for a democratic society to permit. I shall turn to these protests in the next several lectures.

10864 – the hogline