The Robber Baron Myth
The period between the end of the American Civil War and the turn of the century (so 1865 through to 1900) in the United States was a time of rapid economic growth that became known as the Gilded Age. During the 1870s and 1880s, the U.S. economy grew at the fastest rate in the country’s history, with real wages, wealth, GDP, and capital formation all growing massively.
The rapid pace of industrialization led to real wage growth of 60% between 1860 and 1890. This growth meant that American wages were much higher than those in Europe, especially for skilled workers, which drew in millions of European immigrants. The growth of railroads across the United States meant that large scale commercial farming could happen. Millions of acres of land became feasible for farming once the railroads were in place, providing a long-distance outlet for wheat, cattle and hogs that reached all the way to Europe.
Shipping live animals was slow and expensive, so major packing centers were set up in the mid-west that could ship meat in refrigerated freight cars to stores around the country. The railcars were cooled by slabs of ice that had been harvested in the north in wintertime, stored for use in the warmer times of the year and shipped around the country by rail. During the gilded age, the output of grain in the United States increased by 250% coal by 800% and miles of railway track by 570%.
National networks for transportation and communication were created and the corporation became the dominant form of business organization. Wealthy industrialists like Vanderbilt, Rockefeller and Carnegie built out and financed the infrastructure of the United States becoming fabulously wealthy in the process and were later labeled "robber barons" by their critics, who argued that their fortunes were made at the expense of the working class. Mom and pop businesses weren’t going to be able to build out railroad networks or oil refineries. A single mile of rail track cost more to install than most small businesses were worth.
So, although workers’ wages were rising a lot during this period, there was an advantage associated with scale, and wealth inequality was very high too. The term “The Gilded Age” was actually not in use at the time. It came into use in the 1920’s, taken from the name of a Mark Twain novel.
It was a pejorative term used to describe an era of contrasting wealth and extreme poverty. The idea was that the promised “golden age” had turned out to be a period of serious social problems masked by the thin gold gilding of economic expansion. Admirers of the gilded age industrialists and financiers would not agree with that characterization however and see these men not as Robber Barons but as "Captains of Industry" who built up the nation’s economy and the non-profit sector through acts of philanthropy.
This focus on philanthropy differentiated this group from European elites who at the time mostly held on to their wealth passing it down to their children. Andrew Carnegie donated over 90% of his wealth to charity saying that philanthropy was the duty of great industrialists. Rockefeller donated over half of his entire net worth to various charities over his life. These donations endowed thousands of colleges, hospitals, museums, academies, schools, music venues, public libraries, and charities. When we look at modern American billionaires they appear to have been inspired by this group, as many are very active philanthropists too. At the age of 11, Cornelius Vanderbilt quit school to begin working with his father, ferrying cargo in New York.
By the age of 16 he was able to buy his own boat and share the profits with his parents, who had lent him some of the money. Through aggressive marketing, shrewd deal making and undercutting the competition—traits that would stick with him all his life—he earned more than $1,000 in his first year. Vanderbilt was quick to recognize the importance of transportation to commerce in the rapidly growing country.
He realized that infrastructure was needed and decided that he, rather than the government, would provide it. Over the next 40 years, he built the largest shipping empire in the world, an amazing feat. Right before the Civil War Vanderbilt realized that rail was simply a better transportation technology. He sold all of his ships and invested everything he had into buying up and building out railroads, which allowed cheap and efficient transportation throughout the country, reduced transportation times, and linked up all of the parts of the country without direct access to waterways. As he was building out his railroads, he came into competition with the New York Central Railroad Company, a much larger firm who refused to do any deals with him. At 72 years old, he was 30 years past the average life expectancy, and his competitors saw him as an old man well past his prime.
Unfortunately for them, Vanderbilt owned the only rail bridge in and out of New York City. The gateway to the country’s largest port. Vanderbilt refused to allow their trains to use his bridge, creating a blockade between his competitors and the nation’s busiest port.
When news that their trains were cut off reached Wall Street, New York Central Railroad shares collapsed in value. As the insiders dumped their shares, Vanderbilt began slowly buying them up. In just days, Vanderbilt took control of his biggest competitor, creating the largest rail company in America.
Rather than being past his prime, Vanderbilt was just approaching it. He eventually went on to own 40% of the nation’s rail lines and soon became the richest man in America, with a net worth of over $100 million, the equivalent of $100 billion today. The railroad boom saw new tracks crisscrossing the country, tying it together and allowing commerce to flow in a way that was previously unimaginable. The new industry provided over 180,000 jobs (to both skilled and unskilled workers) and allowed the industrial and agricultural economies to boom like never before. In 1869 near the peak of his success, Vanderbilt began building a Train Station in New York that would bring his three railroads together. He built it, in a relatively remote and undeveloped tract of land north of New York City’s center of commerce.
Thousands of workers were employed over the next two years on the most ambitious construction project America had ever seen. Grand Central – his train station – was the biggest building in all of New York City at the time, and the biggest train station in the United States, covering some 22 acres. It might surprise New Yorkers today to hear that when built, Grand Central was in the outskirts of the city, in fact Vanderbilts advisors warned him at the time not to build in such a remote location. But this just shows how much of an impact Vanderbilt had in shaping New York City and the rest of the country. Grand Central was, (and still is) a wonderful building that demonstrates the importance of the rail industry at the time it was built, and the kind of wealth that that industry generated in the country.
In 1870 Vanderbilt began looking for a new edge. The big money in the rail industry was in moving cargo rather than people. At the time whale oil was the main fuel used for lighting, and also for machine lubrication. But a new fuel – kerosene – was beginning to replace it. Vanderbilt wanted his railroads to be involved in transporting this new cargo.
John D. Rockefeller (an oilman out of Ohio) believed that while gamblers drill for oil, businessmen refine it. He knew that if he could control refining, he could control the entire oil industry. At the age of 24, using borrowed money Rockefeller started a small refinery in Ohio, close to one of Vanderbilt’s train lines.
Rockefeller was the son of an actual Con-Artist – His father had been a travelling Snake oil salesman, who was rarely home. Rockefeller didn’t like his father and was very much his opposite. He was a deeply religious man who never drank alcohol and gave at least ten percent of his income to charity. John D. Rockefeller believed in thriftiness, hard work and efficiency, which he had learned from his mother.
His father boasted in later years that he cheated his son every chance he got, in order to keep him sharp. Rockefeller when he was older used to tell the story of a Baptist preacher who had told him to "make as much money as he could, and then give away as much as possible". He claimed that at that moment, (as a child) the financial plan of his life was formed.
He believed very firmly that God wanted him to become rich so that he could make the world a better place. His business success was quite simply “Gods plan.” Refineries at the time took crude oil and extracted kerosene from it (kerosene made up around 60% of the crude oil). They would then dump the remaining 40 percent of oil waste in rivers or in massive sludge piles, polluting the local environment.
Both drilling and refining at the time were dirty and dangerous businesses. Rockefeller (more due to his thrifty nature than anything else) didn’t believe in waste, so unlike other refiners none of the oil or waste products were dumped. He used some of the waste products to fuel the refinery. The rest was turned into lubricating oil, petroleum jelly, paraffin wax, and even tar for paving roads. Rockefeller ran the most efficient and profitable refineries around. Rockefeller was a relentless cost cutter.
He manufactured his own pipes and his own oil barrels rather than pay too high a markup. His oil was of high and consistent quality, and he named his company Standard Oil. Why that name? Well, Because Standard Oil was the only company in the industry willing to guarantee a uniform quality of kerosene.
Vanderbilt (of course) wanted to meet this young man, as the location of Rockefellers refinery in Cleveland meant that Standard Oil might be a good freight customer for Vanderbilts railroads. An exclusive deal with Rockefeller would mean Vanderbilts trains could run at full capacity. When they met, Rockefeller negotiated an - unheard of - thirty percent discount on rail transportation but agreed to ship more oil than he was actually producing at the time of the deal. Rockefeller had to scramble to increase the size of his operations, so that he could fulfill his side of the bargain. It turned out that if there was one thing Rockefeller was good at, it was growing the size of his business. Having struck this deal, Rockefeller now had a number of very real competitive advantages.
He was selling a high-quality branded product that customers trusted and was in high demand. Additionally, he had more efficient operations and lower transportation costs than anyone else in the industry. He could produce a better product than his competitors and undercut them in price. He quickly set about buying up every competitor he could.
Rockefeller would buy out the least efficient competing refiners and then either improve the efficiency of their operations, or just shut down the refineries altogether. He would push for discounts on oil shipments, undercut his competition and make all sorts of secret deals to get any advantage he could in business. In less than four months in 1872, in what was later known as "The Cleveland Massacre," Standard Oil absorbed 22 of its 26 Cleveland competitors. Standard Oil rapidly became the largest producer of refined kerosene in the United States, and his deal with Vanderbilt meant that he could ship his product to homes throughout the country at incredibly cheap rates. Rockefeller's efforts made him rich, but they also brought American consumers cheaper kerosene and other oil by-products than had been available before. Before 1870, oil light something only the wealthy could afford.
Over the following decade, kerosene became commonly available to the working and middle classes. The availability of affordable lighting provided many benefits to the country as a whole. It helped reduce crime after sundown, it extended the workday making American businesses more productive than before, and it allowed average people to read and educate themselves during the evenings which had never previously been possible. Over time Rockerfeller found himself producing more oil than Vanderbilt could transport. He had outgrown his deal.
Vanderbilt's biggest competitor was a man named Thomas Scott - the president of the Pennsylvania Railroad Company. Scott along with his protege, a young Scotsman named Andrew Carnegie offered Rockefeller a better transportation deal than he could ever have gotten from Vanderbilt. To Vanderbilts great frustration, Rockefeller began skillfully playing the railroads against each other, negotiating lower and lower transportation prices. With the railroads under his thumb, Rockefeller could supply every home in the nation with kerosene.
And with all of that profit, Rockefeller began vertically integrating his business – buying up oil wells, equipment makers – the entire oil industry. At the age of 33, John D Rockefeller was now the most powerful man in the country. Vanderbilt and Scott realized (maybe a bit too late), that together they had possibly created a monster. They decided that the only way to combat Rockefeller was for the railroads to start working together and fixing prices.
They decided to cooperate with each other and pull all of Rockefeller's cheap transportation deals. To Rockefeller, this is an absolute declaration of war, and he wasn’t going to let the railroads beat him with a dirty trick like that. In the refineries, oil was moved around over short distances using large pipes, pipes that Rockefeller had hired his own plumbers to build rather than pay a markup on. Rockefeller realized that if those pipes could transport oil over short distances, they could possibly also transport oil over longer distances. If Rockefeller could build a pipeline large enough, he would be able to cut the railroads out of the oil business altogether. Now, oil pipelines had been attempted before, but they always failed as the oil wouldn’t flow if the pipe was not airtight, and this was not an easy problem to solve.
Additionally lots of pumping stations would need to be built along the pipeline to keep it flowing. Stitching together hundreds of pieces of metal, with no air leaks, and numerous pumping stations seemed an impossible task. Nonetheless, Rockefeller hired the best and smartest people to solve this problem, and his workers began to work around the clock, laying over a mile and a half of pipeline every day. By the time Rockefellers pipeline was finished, it was over 4,000 miles long and it connected thousands of the world's most lucrative oil wells directly into Rockefeller's refineries. He had brought an end to the influence of railroads on the oil business and revolutionized the way energy products are transported.
Now, Thomas Scott still controlled the railway to Pittsburgh, where Rockefellers pipelines didn’t yet reach. The two men (who by this point hated each other) were unable to come to terms on transportation costs. Rockefeller (unwilling to give an inch) shut down his refineries in Pittsburgh.
This move, cost Rockefeller a fortune, but it destroyed the Pennsylvania Railroad Company. Scott was forced to lay off tens of thousands of workers and to drastically cut wages in order to stay in business at all. Railroad workers reacted to the cuts by going on strike and rioting in Pittsburgh.
The city was the epicenter of the worst violence in the nation during the Great Railroad Strike of 1877. More than 39 buildings and over a thousand train cars were destroyed in the violence and Thomas Scott's company was ruined. For 25 years, railroads had been the biggest industry in the United States, and anyone who could raise money had done so and had started laying tracks. Rockefeller's oil had made up nearly 40% of the cargo shipped on the rails and now it was suddenly transitioning to pipelines. There had been a huge railroad investment bubble and now there was huge overcapacity.
losing cargo meant losing money. Railroad companies began going bankrupt. Vanderbilt was well capitalized and was able to make it through the industry collapse. He died in 1877, with an estimated net worth of 105 million dollars.
Scott died a year later in 1878 with his business in ruins. The depression lasted until 1879 and by the time it was over, 1/3 of the country's railroad companies had gone bankrupt. The railroad-based economy of the United States had been overtaken by the oil boom. During the depression that was brought about by (amongst other things), the collapse of the rail industry, Rockefeller managed to further consolidate the oil business. He bought up Scotts rail assets at rock bottom prices too.
Rockefeller described it as the most difficult, stressful, and unpleasant time of his life. In the aftermath, the Commonwealth of Pennsylvania indicted Rockefeller on charges of monopolizing the oil trade. This was an accusation he would find himself dealing with – and fighting - for the rest of his life. Despite improving the quality and availability of oil products while greatly reducing their cost to the general public (the price of kerosene had fallen by nearly 80% since Rockefeller had entered the business), Standard Oil's business practices were creating a lot of controversy. Rockefeller was attacked by the press and by politicians for his monopolistic business practices, giving momentum to the antitrust movement. Rockefeller by this point controlled 90% of the world’s oil production.
He owned oil wells, pipelines, refineries, rail assets and distribution. His company, Standard Oil was the nation’s first monopoly. He wasn’t done though, in the 1890s, Rockefeller expanded into iron ore and the ore transportation business, leading to a collision with Andrew Carnegie, Thomas Scotts former protégé.
Andrew Carnegie - the man who would one day become the wealthiest man in the world grew up in poverty in Scotland. His father was a hand loom weaver who was put out of work by the introduction of steam-powered looms. At the age of 12, Carnegie arrived in the United States with his parents in search of a better life. He and his father first began working for a cotton mill.
Later Andrew got a job at a telegraph company and then at the age of 18 he started working for the Pennsylvania Railroad Company, where he met the company's president, Thomas Scott. By the age of 24 he was made the superintendent of the Western Division, quite a senior position for such a young man. After a few years, Carnegie left the Pennsylvania Railroad Company to run the Keystone Bridge Company. His success building bridges was tied to his history and contacts in the railroad industry, as the railroads not only needed bridges built, but a bridge building company needed to transport the necessary steel, and Carnegie could negotiate good prices with his former colleagues. When Carnegie first heard of James Eads' plans to build a bridge over the Mississippi River at St. Louis, he fought to win the contract.
It was an extremely complex and important project. A bridge spanning the Mississippi River would connect the east of the country to the west like never before. It would allow trains to take a more direct route across the country without having to unload cargo onto ferries and reload the cargo onto trains on the other side of the Mississippi.
The Eads Bridge would be the first bridge across the Mississippi south of the Missouri River. It was also an important proof-of-concept for steel construction technology. When the bridge was completed, it became the “world’s first important steel structure of any type” and revolutionized the way bridges and later buildings were built.
Eads secured 47 patents during his lifetime and many of those were taken out for parts of the bridge's structure and devices for its construction. To deal with the size and the power of the Mississippi River, the Eads Bridge had to be built out of structural steel rather than wrought iron which was the default material for large structures up until that point. The bridge’s foundations were the deepest underwater constructions in the world at the time and were installed using pneumatic caissons. Its center arch was the longest rigid span ever built at the time, at 520 feet.
The method of constructing the arches is cited as the first use of the "cantilever principle" for a large bridge. These engineering principles were later used to build the Brooklyn Bridge, which began construction a few years later. Recognizing its future, Carnegie turned his focus to the steel industry. At the time steel was extremely expensive and difficult to mass produce. For this reason it was mostly used to make small items like tableware.
One of Carnegies innovations was the cheap and efficient mass production of steel by improving on the Bessemer process, which allowed the high carbon content of pig iron to be burnt away during steel production. Steel prices dropped as a result of this innovation, and there was a whole new market for steel now that it was affordable and more easily produced. Sprawled over 100 acres just outside of Pittsburgh, Carnegie built the largest steel mill in the nation. It was capable of rolling out 225 tons of steel a day. His biggest customers were of course the railroads, but, after years of overbuilding, and due to Rockefellers new pipelines the railroads were now struggling to stay in business.
Desperate for a new market, Carnegie noticed the rapid urbanization taking place in cities like Chicago and New York. Buildings were going up as quickly as possible, and Carnegie saw that the future of the steel industry was not in rails but in structural steel, in girders and beams that could be used to build skyscrapers. When the world's first skyscraper was built in Chicago. Its thin brick walls hung on a structure manufactured from Carnegie Steel.
Over the next few years, over 100,000 new buildings were erected in Chicago alone. The modern American city was built using Carnegie Steel, and the skyscraper boom made Andrew Carnegie one of the wealthiest men in the world. Efficiency became Carnegie's focus. He introduced every cost-cutting innovation available, and by 1900 his plants were producing more steel than all of Great Britain was. Much like Rockefeller, Carnegie began vertically integrating his business. As he grew, he went on to control the most extensive integrated iron and steel operation ever owned by an individual.
His success did come at a cost though. He had been very vocal about the rights of workers to unionize in other industries, but laborers in his steel mills worked twelve-hour days, seven days a week, in hot and dangerous conditions. When industrial unrest stopped work at his main plant in Homestead Pennsylvania, Carnegie, who was visiting family in Scotland at the time, supported his plant manager, who locked out the workers and hired armed Pinkerton guards to break the strike, bringing in replacement workers. In the conflict that followed, twelve people were killed. Although Carnegie won the battle, he emerged with his reputation severely tarnished.
In 1900 the 64-year-old Carnegie sold his entire steel-making operation to J.P. Morgan for $480 million. Morgan shook on the deal saying, "Congratulations, Mr. Carnegie, you are now the richest man in the world." Carnegie spent the rest of his life giving his vast fortune away.
He had written an essay entitled "Wealth," in which he argued that “the duties of a wealthy man were to live modestly and to use his surplus money for the public good”. "The man who dies rich," according to Carnegie "dies disgraced." Carnegie spent a large portion of his wealth setting up more than 2,500 public libraries and supporting universities and colleges. By the time of his death in 1919, Carnegie had given away the majority of his wealth. Rockefeller and his son continued consolidating the oil industry until he retired in 1911. At that point, Standard oil had a 70% market share of the refined oil market.
The business had grown significantly due to the emergence of the automobile, which had been adopted in part as an environmental response to the problem of using horses for transportation in dense urban environments. Cities had become unlivable due to the buildup of animal waste, which was causing all sorts of health problems. In 1911 the Supreme Court found Standard Oil in violation of the Sherman Antitrust Act.
The court ruled that the trust engaged in illegal monopoly practices and ordered it to be broken up into 34 new companies. Most of the big oil companies that you have heard of today came from Rockefellers Standard Oil. Once he retired, Rockefeller, who had always been charitable donated more than half a billion dollars to various educational, religious, and scientific causes. He funded the establishment of the University of Chicago and the Rockefeller Institute. He passed away in 1937 at 97 years old.
So how wealthy were the robber barons? Well, of the group, Rockefeller was the wealthiest of them all. He was worth around 1.5 billion dollars by the time he died. If we inflation adjust that number, it becomes 31 billion dollars today. But that inflation adjustment calculation assumes that the money would have been kept in a bank account earning the risk-free rate for the last eighty years. Rockefeller didn’t have his money in cash, he owned a significant portion of the US energy industry.
Rockefellers wealth was 1.5% of American GDP at the time he died. Today, a man whose wealth was 1.5% of American GDP would be worth 345 billion dollars. According to this metric he was (and still is) the richest individual in American business and economic history. Today Elon Musk is the wealthiest American and is worth 200 billion Dollars, Warren Buffett is worth 100 billion dollars after having given half of his fortune to charity.
Neither really come close to the wealth of Rockefeller. The robber barons were extremely wealthy, and they enriched both themselves and the nation as a whole. The businesses they built turned the United States into the world’s greatest industrial power.
They didn’t grow wealthy through government handouts. At the time, government spending came to less than three percent of national income, so the US government just didn’t have the ability to spend enough to make them that wealthy. Their efficient operations made them rich, but also brought down the cost of important commodities for all Americans. Farmers across the country benefitted from Vanderbilts railroads which allowed them to bring their goods to market. The price of kerosene declined by two-thirds during the gilded age, as economies of scale allowed for greater profits at lower prices.
The price of steel fell too over the same timeframe, thanks to Andrew Carnegie’s emphasis on innovative processes and efficiency. Although the gilded age industrialists wanted to maximize profits by paying the lowest wages they could, they also provided jobs for millions of people. Their demand for labor pushed incomes in the United States above European incomes at the time which attracted millions of workers to the country. These workers flooded to America at a time when there were no immigration controls as they heard from friends and family of the opportunities and high wages available in the new world. There is almost no period in human history where the ordinary man saw such rapid and widespread an increase in well-being as during the second half of the 19th century. Monopolies are bad for the economy.
They are bad for customers and for workers, as monopolists are under no pressure to innovate and can keep prices high and wages low. Around the turn of the century, new laws were passed forbidding anticompetitive practices, and that had become necessary because of the huge monopolies that had been built up. While these men were far from being perfect, I’m not sure that it’s reasonable to characterize them as robber barons. That title came from a book called “The Robber Barons” by Matthew Josephson a left-wing journalist who wrote the book in 1934 in the depths of the Great Depression.
In his book he points at all profits as evidence of wrongdoing. The myth of the robber baron comes from the fallacy that one man's gain must relate to another man's loss. When you examine the lives of the 19th century industrialists, they may have been flawed individuals, but they built the modern economy which made the average American, and the country as a whole, considerably richer. If you enjoyed this video, you should watch this one next.
Have a great week and talk to you again soon. Bye.
2022-11-10 22:39
