A Brief History of Business
Most histories of business start with the premise that business began with the advent of money and the end of the
barter system. Many ancient civilizations therefore had a primitive business model with goods and services being
sold for what we would call cash. Trade among various cultures was also a feature of the ancient world, dating
back as far as the third millennium B.C. in Egypt. The Phoenecians, Greeks, and Carthaginians all created
wealthy and powerful trading states during the first millennium B.C.; the Roman Empire built much of its
dominance of the Mediterranean world on its continuous contact with other cultures and used its armies to help
enforce good trading terms with client states.
With the decline of the empire in the fifth and sixth centuries, barter returned throughout much of Europe until
the 12th and 13th centuries, when the city-states of Italy (Venice and Genoa among others) brought about a
tremendous resurgence of trade on the Mediterranean. By the time the great age of exploration arrived in the
late 15th century, the business of foreign trade, whether founded by monarchies or pools of investors, had been
well established.
The seven northern provinces that formed the Dutch Republic were flexible enough to respond to these
international market conditions; by the middle of the 17th century, the Dutch were the supreme economic power,
and Amsterdam was the world’s leading financial and commercial center. This balance of power shifted by the
beginning of the 18th century, when Britain led the world into an industrial revolution; this is the point when the
history of modern business can be truly said to have begun.
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The Industrial Revolution
In the late 17th and 18th centuries, economic power grew fastest in Great
Britain. It arose from a proliferation of inventions, the availability of
capital, a relatively fluid social order, a rising and mobile population, a
responsive legal system, a government with power divided between the
king and parliament, and an entrepreneurial spirit that was shared by all
of the social classes. These factors – collectively called the Industrial
Revolution – produced a profound change in the nature of commerce and
business.
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Inventions
Beginning in the 18th century, the pace of invention began to quicken as industrialization
created unprecedented opportunities for wealth – and a powerful incentive for invention.
The invention of the process of invention during the period of industrialization has been
called the most important invention of all.
One of the inventions that drove the Industrial Revolution was the steam engine. Before
the 17th century, there were essentially four means of applying power to do work: humans
(pushing, lifting, carrying, animals (pulling plows, transporting people, wind (powering
sailing ships and windmills), and water (turning water wheels). The steam engine changed
all this, providing a reliable source of power that could be used in many of the new
industries that were being developed at the time.
The first commercially successful steam engine was developed by Thomas Newcomen
(1663-1729) and first used in 1712. Newcomen’s primitive engine was improved upon by
James Watt (1736-1819), who produced a more efficient engine using rotary mechanics.
Thanks to Watt’s steam engine, factories were liberated from water wheels and built closer
to their sources of supply; ships could move in all directions, no longer dependent on the
directions of the wind or the currents. The steam engine also made possible critical new
mode of transportation – the railroad.
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Transportation
The invention of the steam engine also made possible steam-powered ships that could
travel to their destination more directly than sailing ships, reducing the time and costs of
voyages. Now goods that moved along the railroads to port cities moved overseas on
steamships, creating a vast flow of commerce between trading nations.
One of the reasons that Britain’s industrialization moved at the pace it did was the
availability of cheap transportation. From the 17th to the 19th centuries, Parliament passed
a number of acts that facilitated the construction of roads, canals, and railroads.
In 1829, George Stephenson (1781-1848) and his son Robert (1803-1859) successfully
demonstrated a steam locomotive that traveled on iron rails. In 1830 it was adopted by
the Liverpool and Manchester Railway and immediately put Britain ahead of the rest of
the world in a form of transportation that was even cheaper than shipping by canals.
Thereafter no country that aspired to industrialization could succeed without a network of
railroads to carry the goods.
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The Factory System
The first important industry to undergo profound changes during the Industrial
Revolution was the textile industry, which was transformed by a series of inventions.
Prior to 1700, most of the processes used to turn raw cotton or wool into fabrics were
performed by hand, often by people working at home. During the 18th century,
machines replaced human beings in all of the essential processes. This caused the cost
of production to drop over time; merchants were able to sell fabric at lower prices, thus
finding a mass market for their products.
The change from small groups of widely dispersed workers to mechanized processes
performed under one roof signaled the birth of the modern factory. Factories provided
employment to hundreds of thousands of workers who otherwise would have found no
employment or means of survival, although conditions in the factories and settlements
where the workers lived were often deplorable. And although Britain had a social
system based on class, it did not prevent entrepreneurs of the lower classes from rising
to become factory supervisors, managers and owners.
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Industrialization Spreads to Europe
As Britain was expanding under industrialization, it not only traded with European
countries but also was a party – somewhat reluctantly – to transfer of technologies and
ideas to the continent. European countries paid British engineers to help them establish
new industrial enterprises; they hired British workers to come to work for them and – as
they imported the goods of British industry – they learned how the goods were
manufactured. They even were the beneficiaries of British investment in some of their
enterprises. Investors thus had an incentive to transfer ideas and technologies to
receptive European countries. The more forward-looking of the continental countries
made full use of these advantages.
For example, Germany - rich in resources, especially coal – was aggressive in developing
its iron production capability. Germany ultimately excelled in industries that were
fostered by its many fine universities. It came to dominate the field of chemistry and
made important advances in the production and applications of electricity. French
engineers developed sophisticated weaving machines, notably the Jacquard loom, named
for its developer, J. M. Jacquard (1752-1834)
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Industrialization in the United States
In 1800 the United States was a new nation struggling to define itself; by 1900 it had the largest
economy in the world and was the world’s leading industrial nation. America’s extraordinary
economic growth during the 19th century is probably the most important business story in history.
The country, even before westward expansion, was vast in comparison with its population. There was
abundant fertile land on which to grow food and other useful crops such as cotton. Natural resources
were also abundant, in the form of wood, coal, iron and copper ores, and oil.
But America’s greatest resource was its people. A high birth rate provided most, but not all, of the
rapidly growing population. Added to this were waves of immigrants who were ambitious, energetic,
skilled, and entrepreneurial, eager to put their talents to work in the opportunities that the new
country afforded. The first United States census in 1790 enumerated fewer than 4 million inhabitants;
by 1870, there were almost 40 million inhabitants.
This rapidly growing population not only supplied labor to industry but was also a growing pool of
customers for the products of that industry. But even with this rapid population growth, there was a
constant shortage of workers; agriculture and industry simply grew faster than the population.
The country’s chronic labor shortage had two important effects on the growth of business and
commerce. The first was that wages rose, attracting both native workers and ambitious and talented
immigrants. The other was that agriculture and industry compensated for scarce workers by adopting
and developing new technologies to increase productivity. By 1830, a surprisingly early date,
productivity in the U.S. exceeded that of Great Britain.
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Transportation
Constructing roads, canals, and railroads to connect the vast expanses of the North American
continent required vast amounts of capital. The federal government did not have the financial
resources to pay for transportation projects as public works, so it was up to the states and the
private sector, including investors from abroad, to find most of the money. This created
opportunities for visionaries to build the arteries of commerce – and, at the same time, create
great wealth for themselves.
Canals
During the 18th century and the early 19th , water transportation was less expensive than land
transportation, especially after the introduction of steam power. The existing rivers were soon
supplemented and connected by systems of canals. The longest of these canals, and the one that
inspired a wave of imitators, was the Erie Canal. The governor of New York state, DeWitt
Clinton (1769-1828), understood the potential of connecting the Eastern seaboard with what was
then the interior of the country. He pushed through the state legislature an authorization for $7
million to build a canal from Albany on the upper Hudson River to Buffalo on Lake Erie – a
distance of 363 miles. It was one of the great engineering and construction projects of the
century. After overcoming many obstacles, the canal opened in 1825 to great success. Soon
many states and localities had built their own canals and created a web of water transportation.
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Railroads
America’s canals were soon displaced by an even more economical means of transportation – the
railroad. The building of the nation’s railroad system required enormous amounts of capital. Fortunes
were made by entrepreneurs who could combine building with financing – although it was sometimes
difficult to distinguish between the builders and scoundrels. The first great railroad entrepreneur was
Cornelius Vanderbilt (1794-1877). He began to invest in the stock of eastern railroad companies in the
1840’s; by the time of his death he controlled railroads that stretched from New York City to Chicago.
The watershed achievement of railroad building in the 19th century was the completion of the first
transcontinental railroad. As the nation expanded westward it clearly needed a rail connection to
California. In 1862, President Abraham Lincoln signed the Pacific Railway Act that authorized the
Union Pacific to build west from Omaha and the Central Pacific to build east from Sacramento until
they met at a still undetermined location. On May 10, 1869, the two lines celebrated their linking-up in
Promontory Point, Utah, northwest of Salt Lake City.
Following that first meeting of the tracks at Promontory Point, several other transcontinental lines were
laid, as well as many other trunk and feeder lines. As early as 1840 the total mileage of American
railroads was 4,510 – exceeding the total mileage of Britain and continental Europe combined.
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Inventors
Inventions and innovations had been essential to industrialization in Britain and Europe – and it was
the same in the United States.
Textiles American manufacturers were eager to learn about advances in technologies in their
industries, and offered bounties, high pay and advancement as inducements to ambitious Europeans
willing to emigrate. One of the most influential of these immigrant inventors was Samuel Slater
(1768-1835), who had apprenticed in Britain with Jedediah Strutt (1726-1797), developers of the
first water-powered spinning machine. In 1789, Slater immigrated to the United States, where he
engaged in a series of ventures to build water-driven spinning machines. He continued to develop
textile manufacturing technology and was a major innovator in the development of the American
factory system.
Steamships A number of inventors contributed to the development of a reliable steam-powered
shipping industry. The most important was Robert Fulton (1765-1815); in August 1807 his boat, the
Clermont, made a test run from New York City to Albany. Fulton proved the practicality of
steamboat travel the following year when his rebuild boat began weekly trips between the two
cities.
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The American System of Manufacturing
Inventors A number of inventors working in different industries developed manufacturing
processes that, taken together were more important than the products they manufactured. This
came to be known as the “American System” – special purpose machines and standardized work
processes that resulted in repetitive tasks that could be performed rapidly by relatively unskilled
workers. This system gave American industry a competitive edge in the growing world
economy.
Eli Whitney (1765-1825) is best known for inventing the cotton gin, the machine that separated
cotton seeds from cotton fiber. It revolutionized textile production, but was widely pirated, and
Whitney never realized the wealth that should have been his. He also developed a precision
process to make uniform parts that could be assembled interchangeably into finished guns – an
achievement that was arguably as important as the cotton gin.
Another important contributor to the “American System” was Cyrus Hall McCormick (18091884), who developed the grain reaper. This invention not only increased agricultural
productivity – releasing surplus farm workers for growing industry – but also refined the
efficiency of the manufacturing processes.
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Inventors (continued)
Thomas Edison The most prolific inventor of all was Thomas Alva Edison (18471931), who differed from earlier inventors by using a sustained and organized
invention process. In 1876, he combined his research laboratory with his
manufacturing facility. From then until his death in 1931, he worked tirelessly to
produce a steady flood of commercially viable products.
General Electric The model for institutionalizing innovation was established by
Charles Proteus Steinmetz (1865-1923), who fled Germany for New York in 1889,
and obtained employment with an electrical equipment company. He soon founded
his own laboratory, which in 1892 was acquired by the General Electric Co. In 1900
General Electric organized the first modern industrial research laboratory, and the
following year it promoted Steinmetz to chief consulting engineer.
Other companies, including DuPont, Corning Glass, Parke-Davis pharmaceuticals,
and Eastman Kodak, soon had their own research laboratories, which would be the
source of countless new products and processes over the coming years.
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Communications If commerce were to flourish in a country as large as the United States, there
needed to be not only a large and efficient transportation system, but also a way to speed
communications between far-flung areas. Initially, mail was conveyed by railroad; the Railway
Mail Service was established in 1869 as a separate branch of the Post Office Department. But
faster communications were needed – and, during the first half of the 19th century, a number of
inventors in Europe and the United States worked on the problem of transmitting messages by
means of electricity.
The Telegraph Samuel Finley Breese Morse (1791-1872) believed that the flow of electricity
could be made visible and that “intelligence” could be transmitted by wires across distances. He
and other experts constructed a machine that transmitted electrical impulses through a wire that
when drove another device at the other end to inscribe a series of dots and dashes on a moving strip
of paper. Morse devised a code of dots and dashes for the letters of the alphabet. The system thus
permitted messages to be sent almost instantaneously between two points.
On May 24, 1844, the message, “What hath God wrought,” flashed from the nation’s capital to
Baltimore and then back again. This was the beginning of the telegraph system and the coding that
became known as “Morse Code.” Morse’s company, the Morse Electromagnetic Telegraphy Co.,
licenses his patent; the Western Union Telegraph Co. ultimately came to dominate long-distance
telegraphic communications.
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Communications (continued)
The Telephone If words could be transmitted by code, inventors soon realized that the voice itself might be
transmitted, as well. Alexander Graham Bell (1847-1922) developed a system that converted sound waves to
a varying current of electricity. His father-in-law, Gardner Green Hubbard (1822-1897), submitted Bell’s patent
application on February 14, 1876. It was granted on March 1, 1876; some have called it the single most
valuable patent in history. In 1877 Hubbard headed a group that formed the Bell Telephone Company (later
renamed American Bell), although Bell ultimately lost interest in further developing the technology.
The Telephone System In 1880 Theodore Newton Vail (1845-1920) was hired to be the first general manager
of American Bell. Vail envisioned linking all of the phones in the U.S. into one system. He started by
persuading a potential competitor, Western Union, not to enter the telephone business, and he then acquired a
controlling interest in Western Electric to provide technology and equipment for his countrywide network.
In 1902 as head of American Telephone and Telegraph (a wholly owned subsidiary of American Bell), Vail
successfully fought and bought out most of his competitors. He realized, however, that the monopoly he was
creating would be vulnerable to government antitrust action. To forestall such action, he proposed a regulatory
commission to monitor AT&T’s business, ceased acquiring competitors, and agreed to connect his longdistance lines with any local independent operator that wanted to be a part of the system. In return, the
government agreed not to bring antitrust actions against the company.
The agreement lasted until 1974, when the U.S. Justice Department filed an antitrust suit against AT&T – “Ma
Bell” – which was then the world’s largest company. The company split itself into pieces, separating its longdistance and regional phone operations. The breakup launched competition within the telephone industry and
eventually the telecommunications revolution.
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Entrepreneurs and Financiers Industrialization and the growth of the American economy in
the 19th century created opportunities for many ambitious and talented entrepreneurs to become
extraordinarily wealthy. Along with their wealth came power – the power to shape industries,
and even the power to affect government.
John Pierpont Morgan (1837-1913) played a central role in shaping the course of American
industrialization. He established his own investment bank, J. P. Morgan & Co., in 1861. The
railroad boom was on, and railroads required huge amounts of capital that Morgan began to
provide. Morgan’s investment reach also extended to other industries; he underwrote Edison’s
incandescent light, invested in Edison’s power generation and distribution plants, and in 1892
financed the creation of General Electric. His greatest achievement in industrial finance was the
creation of the United Steel Corp., the largest industrial company in the world.
Andrew Carnegie (1835-1919) began investing at the age of 22 and established an iron works
company in 1864. He used these early investments to create an empire of iron and steel. He
relentlessly sought ways to reduce costs of production by gaining control of the entire process
from mining the ore, transporting it to the plants, buying the coke to convert the ore, and then
processing it with the latest technology. At the same time, he bought out competitors and
combined them into an ever-larger empire. In early 1901, Carnegie sold his company to J. P.
Morgan for the then unheard-of price of $480 million. Morgan combined Carnegie’s company
with his own to form the United States Steel Co.
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John Davison Rockefeller (1839-1937) entered the refining business in 1863 – four years after the
first oil well was drilled at Titusville, Pennsylvania, giving birth to the American petroleum industry.
Cleveland soon became a major refining center, but Rockefeller disliked the disorderly and
fragmented industry and moved to bring order to it. In 1870 he organized the Standard Oil
Company; his strategy was to buy smaller companies and combine them into a company large
enough to exert control over the market. By the end of 1872 Standard Oil had bought 34 competitors
and controlled almost all of the refining companies in Cleveland; by 1879 the company controlled
90% of America’s refining capacity.
In its search for a way of legally organizing its large and diverse business, the company tried a
number of organizational structures. In 1882 it created the first modern trust in American history, the
Standard Oil Trust in Ohio. But the Ohio attorney general brought suit against the trust, and in 1892
the Ohio Supreme Court annulled the charter. The company then moved the trust to New Jersey and
renamed itself Standard Oil (New Jersey). By this time the company owned an estimated threefourths of all the petroleum business in the United States.
The passage of the Sherman Antitrust Act of 1890 intensified attention on the giant company, and it
was constantly fighting efforts to break it up and limit its power. Court battles with the company
continued until a Supreme Court antitrust decision of May 15, 1911, dissolved Standard Oil Trust
and reorganized it into 38 companies.
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The Birth Of Marketing Industrialization not only created opportunities for mass production, but also led to
the development of mass markets – and mass marketing.
Mass Marketing Before the Industrial Revolution, products were mostly handcrafted and sold on a one-toone basis to customers. The mass production of consumer goods enabled retailers to sell quantities of similar
products to a larger base of customers. Selling to mass markets required companies to communicate to all of
their potential customers. Advertising, a small and scattered industry, began transforming itself into a
sophisticated group of comparatively large companies.
Retail Merchandisers The 19th century brought the ascendancy of merchandisers that combined distribution
with mass marketing. The growing urban population provided a concentrated market for John Wanamaker
(1838-1922), who saw an opportunity to create a new kind of store-the department store-that offered a wide
variety of wares under a single roof. He build his business around customer loyalty and wrote and bought
advertising that proclaimed his policies: a full guarantee on all merchandise, one price for all, payment in cash,
and a cash refund if the customer was not happy.
A different segment of the market beckoned to Frank W. Woolworth (1852-1919). In 1878, Woolworth was
working in a store in Watertown, NY, when he helped to create a new five-cent counter. He grasped the
potential of the idea of eliminating skilled, expensive clerks and replacing them with low-paid women clerks.
The following year, 1879, Woolworth tested his idea with his first store in Utica, NY, but it failed because of a
poor location That same year, he opened a similar store in Lancaster, PA, that was an immediate success.
Despite early setbacks, Woolworth persevered and continued to expand. Selling many low-priced products, he
relentlessly looked for low-cost merchandise, including toys, ornaments and glass goods from Europe. In 1900
he began to build a strong brand identity by creating uniform design for his 59 existing stores and by 1919
there were 1081 Woolworth stores in the US and Canada.
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