Entrepreneurs,
Business Practices,
& Govt Response
US History
The Good Ol’ American Work Ethic
• Most of the original immigrants in the 13 British
colonies were Protestant:
– Puritans in New England
– Quakers, then German Protestants in Pennsylvania
– Church of England in the Middle Colonies
• Common tradition in these religions is Calvinist
virtues – came to be called the “Puritan Work
Ethic”:
– Emphasis on hard work
– Self-reliance
– Contempt for vanity
Puritan Work Ethic
& Laissez-faire
• Late 19th century, “Puritan
work ethic” fit right along
with “laissez-faire”
economics—that is, “little or
no govt regulation of
business.”
– The idea: hard work and selfreliance are rewarded with
financial success.
– You don’t need a govt to help
you become successful (or
titles of nobility or a higher
class).
Cultural theme of the Second
Industrial Revolution
• Horatio Alger (18341899) made these ideas
about hard work leading to
success very popular in his
books.
– “Rags-to-riches” stories:
people who got wealthy by
saving, scrimping, being
honest, and working hard.
– Titles such as Do and Dare:
A Brave Boy’s Fight for
Fortune.
But Alger wasn’t so far off from
reality…
• The major entrepreneurs of this
century had extraordinary life
stories.
– Entrepreneur: a person who
organizes, manages and takes on
the risk of a business.
– Some examples we discussed
earlier: Jay Gould of Roxbury.
• Started off as tanner.
• Got involved in railroads.
• Tried to corner the gold market during
the Grant administration.
Entrepreneurs: Andrew Carnegie
• Steel magnate. (18341919)
• Very Alger-ian.
• Scottish immigrant;
started off in railroad
industry.
• Realized steel had growth
potential.
Entrepreneurs: Andrew Carnegie
• Carnegie employed vertical integration:
controlling business in each stage of the
production and distribution process.
–
–
–
–
Supply of raw materials (ore)
Transport of ore
Smelting
Distribution of steel
vertical
Entrepreneurs: Andrew Carnegie
• By 1900, Carnegie Steel produced ½ of the US’s
steel.
• In 1901 JP Morgan bought out the company and
formed US Steel.
• Carnegie retired and spent ½ billion dollars on
philanthropy.
Entrepreneurs: Andrew Carnegie
• Carnegie made $25 million / year before there
was income tax in the US.
– His workers earned $468 /year.
• Through economies of scale, he out-competed
other steel companies, forcing them into
bankruptcy.
– People lost jobs through his successful
competition practices.
• How did he justify this?
Social Darwinism | “Gospel of Wealth”
• Industrialists believed in “Social
Darwinism”: took the ideas of
Darwin (natural selection: “survival
of the fittest”) and applied them to
business and society.
– Yale professor William Sumner argued
that Carnegie and other millionaires were
examples of this in society.
– The poor naturally fell to the bottom and
died out.
– Supposedly a “good thing” for society.
Social Darwinism | “Gospel of Wealth”
• Carnegie: “Through a process
of pitiless testing we discover
who are the strong and who are
the weak.”
• BUT he also believed that the
wealthy owe a duty to society by
practicing philanthropy.
– This was known as the “Gospel of
Wealth.”
• Carnegie built museums and
libraries, promoted education
and research.
Entrepreneurs: John D. Rockefeller
• 1839-1937
horizontal
• Entered oil refining business in 1859.
• His approach: horizontal integration: taking
control over a limited part of an industry.
– Controlled all shipping and refining businesses.
– Also acquired related businesses: barrel making,
pipelines, railroads, storage facilities.
• True, he eliminated wastefulness and increased
profitability, but through ruthless business tactics.
Entrepreneurs: John D. Rockefeller
• Created Standard Oil Trust (1882).
– Ohio Supreme Ct disolved it.
• Next, he replaced it with Standard
Oil Company of New Jersey.
– US Supreme Ct dissolved that and turned
it into 34 separate companies.
• 1896 he retired as the richest man
alive.
• Like Carnegie, he became a major
philanthropist: created Rockefeller
Foundation.
Entrepreneur: J. Pierpont Morgan
• No rags-to-riches type, here.
– Born into banking family (1836-1913)
– Investment banker.
• Helped funnel Euro money into
American businesses.
• After CW, invested in railroads.
• By 1900 JP Morgan group were
directors in over 100 companies
worth more than $22 billion.
Entrepreneur: J. Pierpont Morgan
• This guy was so rich…[“How rich was he?”] that he
lent the US govt $65 million dollars in gold.
• 1901 bought out Carnegie Steel; turned it into US
Steel, the first billion dollar corporation.
• UNLIKE the other entrepreneurs, he believed in
“combinations” not free competition.
– Trusts, pools, etc.
– Supreme Ct broke up one of these in their decision
Northern Securities v. US (1904).
Entrepreneurs: Henry Ford
• 1863-1847
• Mechanical genius; from a farming
family in Michigan; big admirer of
Thomas Edison.
• Created Ford Motor Company in 1903.
• 1908 Model T produced through
assembly line
– One car every 93 minutes.
– First car average people could buy.
• Sought vertical integration: the total
enterprise from raw materials to
distribution.
Entrepreneurs: Henry Ford
• He absolutely opposed labor unions,
BUT
• He paid relatively high wages for
the time period.
– Industry standard: $2.93 for 9 hour
shift.
– Ford: $5.00 / day.
• He invented the dealer-franchise
system that Ray Kroc of
McDonald’s perfected.
Can business do it alone?
• Not really. That’s a myth.
• Already with Alexander
Hamilton, the fed govt supported
and promoted American business.
• One way 14th amendment was
interpreted: the Constitution
protected the rights of both
individuals AND corporate
persons (corporations).
– In the late 19th century, big
industrialists and economists
LOVED this idea.
“Robber Baron” or “Captain of Industry”?
• Through vertical or horizontal
integration, some of these
industrial leaders had major
power:
– Controlled resources,
production, distribution.
• Not everyone bought into
“Social Darwinism”:
– Critics questioned business
practices and private control of
American resources.
“Robber Baron” or “Captain of Industry”?
Robber Baron
Captain of Industry
(Negative)
(Positive)
Exploited workers
Created new products, often
affordable
Nasty business practices
Made efficient industries
Politically corrupt
Donated to charities
Discouraged competition (engaged
in monopolies)
Should the Govt Step In?
• All this criticism came to a
head: more and more people
called for the govt to stand up
to business.
– Even Adam Smith—the big
advocate of “laissez-faire”—
warned about monopolies in
business.
– Now govt regulation was
necessary to reign in monopoly.
Govt Intervention
• First, states started to step in.
• Directed primarily at farmers.
• 1870s railroad shippers exploited farmers in the
west by charging high rates to get goods to
market.
– “Short haul, long haul”: it cost more to ship
something to the next county than across the state.
• Granger laws—regulating railroad freight
rates—were set up by certain states.
– Railroad owners challenged these.
Railroads in 1870s-1890s
Where was the fed govt?
• For most part, Congress—especially the
Senate—was under the influence of
businesses and lobbies.
• However, they did occasionally take action
using the US Constitution’s “Commerce
Clause” (Article I, Section 8)
Fun Court Cases to Know
• Munn v. Illinois (1877): SC upheld
Illinois’s Granger Law.
– Reason: state govt IS allowed to regulated
private businesses in the public interest.
– MAJOR PRECEDENT!
Fun Court Cases to Know
• Wabash RR v. Illinois (1886)
– Whoops, spoke to soon: this ruling overturned
Munn v. Illinois.
– SC now said states can regulate railroads within
state boundaries, not those that go across states.
– Only Congress can regulate interstate
commerce.
– So now, farmers and the public look for
Congress’s help…
Fun Legislation to Know
• Interstate Commerce Act (1887)
– In response to Wabash v. Illinois.
– Congress set up Interstate Commerce Commission to
regulate railroad rates and prohibit pools.
– HOWEVER, some court challenges limited the ICC’s
effectiveness.
• Still, it set a precedent for federal regulation of commerce, that is,
interstate commerce.
Fun Legislation to Know
• Sherman Anti-Trust Act
(1890)
– Outlawed monopolies and
forbade trusts, pools, or other
“combinations” that restrict
trade.
– Not at all effective because:
• Courts didn’t uphold its
enforcement.
• Corporations came up with
other “combinations” to get
around the regulations.
5 pt Question
• Explain how the major entrepreneurs of the
19th century compensated for their
sometimes ruthless business practices?
– How did they justify their business practices?
– How did they justify the way they compensated
for it?
– How did state and federal govts rein in their
behavior (specific legislation and court cases).