Entrepreneurs, Business Practices, & Govt Response

1. Entrepreneurs,Business Practices,& Govt Response US History

2. 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

3. 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 self-reliance are rewarded with financial success. • You don’t need a govt to help you become successful (or titles of nobility or a higher class).

4. Cultural theme of the Second Industrial Revolution • Horatio Alger (1834-1899) 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.

5. 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.

6. Entrepreneurs: Andrew Carnegie • Steel magnate. (1834-1919) • Very Alger-ian. • Scottish immigrant; started off in railroad industry. • Realized steel had growth potential.

7. 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

8. 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.

9. 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?

10. 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.

11. 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.

12. Entrepreneurs: John D. Rockefeller • 1839-1937 • 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. horizontal

13. 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.

14. 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.

15. 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).

16. 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.

17. 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.

18. 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.

19. “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.

20. “Robber Baron” or “Captain of Industry”?

21. 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.

22. 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.

23. Railroads in 1870s-1890s

24. 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)

25. 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!

26. 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…

27. 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.

28. 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.

29. 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).