Corporate Structure, National Markets and Concentration: Changing Business Elites
One thing for certain, economic change during the Gilded Age profoundly transformed business elites and jurisdictional policy-making systems. It seems more natural to focus on the incredible shifts in jurisdictional economic bases, and to put to the side the rise and fall of business elites and their “managerial” workforce—the disproportionately powerful element of the Early Republic economic decision-making policy system. Our Chapter 1 policy model posits economic development as a policy area tends to be a “closed” policy system with business participation constant, dominant, and in the nineteenth century conducted principally by privately-governed EDOs. Shifts in business elite has to be critical in that context. As important is the recognition that “business elites” is a composite label; the changes during the Gilded Age, gave rise to new forms of business elites. Accordingly, we can trace, from the beginning so to speak, the arrival of new forms of business, organization the corporation, and the business elites it fostered.
Early Republic business elites in Eastern port cities were well-established wealthy cosmopolitan commercial/financial businessmen, landed aristocracy, and a few emerging manufacturing owners. Perhaps more than any other period in our history, they were a true business community. Business elites in newly settled cities, on the other hand, were entrepreneurial city-builders, less wealthy perhaps, but economically and politically more powerful in their smaller jurisdictions. In any case, the general merchant elite of the colonial era had long since given way to specialized firms, each doing one thing (such as transportation, logistics, insurance, construction, law, banking, retail) in one sector only. Whether wealthy Eastern shipper or frontier tavern owner, the predominant pre-industrial organizational structure operated a single-unit (operated exclusively in one sector only), family-owned or controlled firm. These family business men/women owned and managed their firm and produced for, or serviced a market which by today’s standards was “local”: a city and maybe its hinterland at the most.
Before the appearance of the multiunit firm, owners managed and managers owned. Even when partnerships began to incorporate, their capital stock stayed in the hands of a few individuals or families. The corporations remained single-unit enterprises which rarely hired more than two or three managers. The traditional capitalist firm can … be properly termed a personal enterprise.[1]
After the 1840’s[2], access through new transportation systems to new regional markets, emergence of a new industry, manufacturing, with its rural and immigrant factory labor force, assumed prominence in the local economic base. The Early Republic traditional business “system” and “community” changed. By the 1880’s a new community decision-making system was fast coming into place.
Where workers and owners may once have shared common experiences of community, schools, churches, civic groups, now barriers arose: the wealthy left congested residential areas for secluded, clean and fresh suburban areas, they sent their children to exclusive schools, their wives to expensive resorts … summer homes and trips abroad, and their families to newly built elegant churches where they could hear Sunday sermons about the virtue of wealth, the sorrows of poverty. And more and more, as the industrial worker took on a distinctly ‘foreign’ cast … the wealthy came to seem a homogeneous group: white, Anglo-Saxon, Protestant and Republican ….. We have to reckon, then, with the fact and the perception of a widening class rift.[3]
Changes in class structure and attitude were reinforced by changes in business structure and governance. “The rise of modern business enterprise brought a new definition of the relationship between ownership and management and therefore a new type of capitalism to the American economy”.[4] Business became larger in size, operated across several jurisdictions and states. Firms no longer concentrated within a single sector, but overlapped several. “Multiunit business enterprise replaced [the small traditional single-unit enterprise] when administrative coordination permitted greater productivity, lower costs, and higher profits than coordination by market mechanisms”.[5]
Importantly the ownership of multiunit firms depended on a new managerial class to operate their far-flung and specialized sub-units. Where the small single-unit firm was tied to local markets, owners could manage and own simultaneously—not so in the new capitalism. “Thus the existence of a managerial hierarchy is a defining characteristic of the modern business enterprise”[6] Managers became separated from ownership which, over time, withdrew from day to day affairs and decisions. Owners bought and sold firms; managers operated them and made them profitable. Business elites included both owners and managers, but the world view of each was quite different. And the pace of these changes was uneven, varying greatly among different sectors and industries.
Business Community in the Industrial City
The world view of each, quite different, yet over-lapping in key areas, was radically different and more segmented than that of the Early Republic. Using managers to access regional and national markets, the firm was able to rise above limitations by a the local market demand. Travel and the need to acknowledge other markets diffused the formerly exclusive attention business elites could attach to one community. These changes would carry over into the municipal (and state) economic development policy processes. The rate/effect of such change was uneven, varying by sector and industry. “Enlarged markets were essential …. Therefore, modern business enterprise first appeared to grow, and continued to flourish in those sectors and industries characterized by new and advancing technology and by expanding markets.[7]
Through “management” the modern corporation took on a “life of its own”. Managers of a corporation made capital mobility possible. Managers, however, were not all of the same ilk; they reflected the internal diversity of the corporation they managed. Salesmen competed with production managers, CFO’s with Public Relations—managers followed career paths based on differing expertise, training, experience and performance—not solely on family or inherited wealth. Their way of thinking, even value priorities, reflected their professional and occupational training and experience as well as new opportunities. “With the coming of a modern business enterprise, the businessman for the first time could conceive of a lifetime career involving a climb up the hierarchical ladder”.[8]
Managers focused on to how best to grow the firm, protect its sources of supplies/resources, make it more efficient, discover and seize advantage from new markets/products, and render the corporation more profitable. History will focus on the owners as “robber barons”, but it was the managers who won the race for corporate control. By the early twentieth century managers, not owners would be the driving force of the new capitalism—that however, is a story for Chapter 5.
After 1850, the railroads developed into our “first modern business enterprise”[9]. Transportation, because of its inherent characteristics, moved quickly thru stages and evolved into a Markusen oligarchy. “The evolution of the nation’s first modern business enterprise [railroads]—as well as the first modern managerial class—fall into two distinct chronological periods …. The first period extended from the beginning of the railroad boom in the late 1840’s to the coming of the economic depression of the 1870’s. It was a period of almost continuous growth of the network … and a period of impressive organizational innovation …. The second period of American railroad history, extending from the Depression of the 1870’s to the prosperous first years of the new century, was one of competition and consolidation [oligarchy-formation]”[10].
The story of the great “robber barons” is mostly a tale of the Great Railroad Cartels. The first cartel was assembled in 1874 at Saratoga Springs, New York by the Presidents of three major trunk line railroads. Others followed. From these cartels one can trace the rise of the western state Populist Movement and in later years, the Progressive Movement. These railroad cartels, epitomized by, the Northern Securities [Railroad] Company [Trust] of James J. Hill and Edward Harriman, prompted Teddy Roosevelt to begin his career as “trust-buster” in 1904. Strikes, monopolies, and rate-setting have accordingly dominated the history books. What is often less noticed is the owners and managers of other industries and sectors suffered from railroad concentration as did the jurisdictions in which they operated. Sectors and industries mattered in how one viewed the effects of railroad concentration. Managers, and owners, were not all in the same boat.
Managerial capitalism in sectors other than rail, sectors such as iron, coal, oil gas, steel, and durable and non durable manufacturing, production and distribution of perishable products—and most importantly, and “Middle Management” (salesmen, accountants/bookkeepers, supervisors, department heads) each danced to their own music. Middle management and professionals became the yeomen of the Progressive Movement, of scientific management, the drivers for structural reforms in American local government, advocates for municipal home rule, civil service, budgeting, and planning. Middle managers cast their middle class votes against political machines and they resisted central city annexation.
Top managers formed and led the boards of trade, real estate exchanges, and merchant associations. Resisting railroad cartels they created port authorities. They fought unions. Top managers advocated for the Chicago Exposition and future “City Beautifuls”, not to mention city manager form of government. Top managers provided the inspiration and muscle to launch our first jurisdictional economic development organizations and initiatives. And the owners? They became our new “corporate elite”, the members of the Civic Reform Clubs, the pre-1900 chambers of commerce, and the municipal research bureaus. In these years, three critically important segments of the business community came to life from the primeval soup of the Gilded Age: owners, the top management, and the middle management of the new corporations which formed the core of the jurisdictional economic base.
In this dynamic atmosphere it was also easy to miss the rise of yet another segment of the business community—composed of firms firmly anchored in the jurisdiction (Local Firms). Headquarters firms, modern corporate retail (catalog/department stores/franchises/specialty retail), banks, newspapers, hospitals, utilities, universities, and the always infamous real estate-based firms also joined the merchant associations and in later years, the chambers. Almost invisible are the thousands of small business, the mom and pops that ethnic groups formed, which provided personal and convenience services, enhancing societal mobility and jurisdictional quality of life. While sharing a private business perspective, local firms were not monolithic in cultures, work experiences, or policy priorities and were probably more inward-looking than their capital mobile managerial counterparts. They viewed local politics differently and political machines represented opportunity in exchange for tolerating a “wee bit of honest graft and seizing opportunities”. In these early years, this fourth segment of the business community also flourished.
Their “golden years” of the these segments, the first decades of the twentieth century, lay ahead in Chapters 4 and 5. But during the Gilded Age these business elite groupings forged identity/ mentality and acquired some measure of prosperity and wealth. Wealth accumulation fueled residential and commercial movement to the Big City periphery which will be described later in the chapter.
Macro-Economic Factors affect the Jurisdictional Policy System
Several obvious impacts on a municipal/metropolitan economic base should be noted. There is from this point on, a distinction between headquarters and branch firms and the business cycle. The presence of a headquarter firm in an economic base would be a plus under normal conditions. Ownership was more likely to be present, and potentially involved in the municipal/metropolitan economic development/political policy process—whatever that might mean. An argument can be made that the presence of a number of headquarters within the economic base would also generate a greater professional presence as well (lawyers, auditors, accountants, architects, and banking)—and the “most top” of top managers would be involved. Headquarter firms were an important component of the Gilded Age jurisdictional economic base and policy system.
The vulnerability of branch firms to swings in the business cycle—not to mention future sector shifts—will be an important driver of sub-state economic development. Branch is “manager” territory, and managers are more mobile and transitory. The effect on the local policy system is likely to be negative with managers being more inward looking and career mobile—less inclined to participate in community affairs. Also, the raw dependence of branch firms on access to final markets (transportation costs/technology, the customer) and supplier firms as well as normal market demand shifts, not to mention the vagaries of mergers and acquisitions, impart fragility to an economic base which requires constant attention by economic developers. Retention as a strategy rises in importance. So does attraction as a counter to profit life-cycle and oligarchic vulnerability
Business cycle probably entered our modern lexicon in the 1930’s Great Depression. But the arrival of the industrial city also meant that the macro economy became subject to chronic swings in economic activity (the business cycle) following from more or less predictable factor dynamics. “At some point the forces producing expansion play out and the cycle reaches its peak [boom]; thereafter the economy enters a contraction phase [recession/depression]. When the trough of the contraction is reached the economy is ready to turn around and enter an expansion phase [recovery]”[11]. Because urban economic agglomeration characterized our Big Cities the effects of the cycle could be magnified depending on the industry/sector cluster within the individual Big City economic base. Over time, the value of a “diversified economic base” came to be appreciated as this ameliorated to some extent the pernicious consequences of lean years.
The business cycle affect on a jurisdictional economic base reflects the composition of its industries/sectors (some being more counter-cyclical than others, and some growing/declining at different points in the cycle). As one might expect, the business cycle dynamic can hugely affect the workings of the jurisdictional economic development policy process, and even the entire policy system (other policy areas) as well. Taxes and citizen/worker prosperity, level of unemployment, and local purchasing power are constrained in lean years. Boom years are another matter entirely. It is my assumption that lean years in the business cycle place added stress and increase priority afforded to economic development as a policy area compared to other policy areas.
The rate of economic growth did not follow a “steady uniform pace”. The most rapid period of growth immediately followed the Civil War, another boom occurred between 1897 and 1907. Major depressions, or Panics, occurred in 1873-1878, 1882-1885, and 1892-1894[12]. Say it another way, in the thirty-five years following the Civil War to the turn of the century, booms held sway only eleven years, and panic about ten or eleven as well. Throughout this period, a long-term decline in average prices “masked real growth” and during the 1870’s wholesale prices fell by one-third, falling to pre-Civil War levels by 1879. In the fifteen years that followed 1879, wholesale prices declined by another third. Wholesale prices did not return to Civil War highs until 1910.
Unemployment reached 10% in five years of the 1870’s and six years of the 1890’s[13]. Ignoring the temptation to use the word “inequality”, disinflation (1) almost certainly increased social/political tensions and (2) did NOT negatively affect production output—which is why this era is not thought of as economically stagnant. No doubt both population growth/mobility and the huge number of stage 1 or 2 manufacturing firms played some role. In short, the era contained a serious streak of disinflation. Disinflation put a cap on wages and income and added to the natural stress of a business cycle.
As the reader plods through the endless chapters that follow, it might be wise to keep in mind the business cycle affects jurisdictional economic development policy outputs materially. Trend dynamics of the macro (national/international) economic system also play an enormous role, such as opening a closed economic development policy system, or, in boom, prosperous years, closing it. Agenda-setting, as well as other phases of the policy cycle are also affected. Cities experiencing chronic decline would due to secular trends open their policy systems—until considerable fatalism saturates the city fabric.
[1] Alfred D. Chandler Jr., the Visible Hand: the Managerial Revolution in American Business (Cambridge, Mass, The Belknap Press of Harvard University, 1977) p. 9.
[2] Alfred D. Chandler Jr., The Visible Hand: the Managerial Revolution in American Business (Cambridge, Mass, The Belknap Press of Harvard University, 1977)
[3] Alan Trachtenberg, The Incorporation of America: Culture and Society in the Gilded Age (New York, Hili and Wang, 2007), p. 79.
[4] Alfred D. Chandler Jr., the Visible Hand, op. cit. p. 9.
[5] Alfred D. Chandler Jr., the Visible Hand, op. cit. p. 6.
[6] Alfred D. Chandler Jr., the Visible Hand, op. cit. pp. 6-7.
[7] Alfred D. Chandler Jr., the Visible Hand, op. cit. p. 8.
[8] Alfred D. Chandler Jr., the Visible Hand, op. cit. p. 9.
[9] Alfred D. Chandler Jr., the Visible Hand, op. cit. p. 9.
[10] Alfred D. Chandler Jr., the Visible Hand, op. cit., p. 88: See Chapter 3 “The Railroads: The First Modern Business Enterprises, 1850s-1860’s, Chapter 4 “Railroad Cooperation and Competition, 1870’s-1880’s, (the Great Cartels), and Chapter 5 “System-Building, 1880’s-1890’s.
[11] Ralph Gray and John M. Peterson, Economic development of the United States (revised edition, 1974) (Homewood, IL, Richard D. Irwin, Inc, 1974), pp. 306-310 (quote p. 307).
[12] Ralph Gray and John M. Peterson, Economic development of the United States, op.cit, pp. 271-273. NBER identified thirteen cyclical declines from the Civil War to World War I. Only in seven of these declines did the decline last a full year.
[13] Ralph Gray and John M. Peterson, Economic development of the United States, op.cit,, pp. 273
Ron W. Coan 