During the post-Civil War era, expansion in industry went hand in hand with concentration. The principal cause of this trend, aside from the obvious economies resulting from large-scale production and the growing importance of expensive machinery, was the downward trend of prices after 1873. The deflation, which resulted mainly from the failure of the money supply to keep pace with the rapid increase in the volume of goods produced, affected agricultural goods as well as manufactures, and it lasted until 1896 or 1897.
Contemporaries believed that they were living through a “great depression.” That label is misleading, for output expanded almost continuously, and at a rapid rate, until 1893, when production slumped and a true depression struck the country. Falling prices, however, kept a steady pressure on profit margins, and this led to increased production and thus to intense competition for markets.
According to the classical economists, competition advanced the public interest by keeping prices low and ensuring the most efficient producer the largest profit. Up to a point it accomplished these purposes in the years after 1865, but it also caused side effects that injured both the economy and society as a whole. Railroad managers, for instance, found it impossible to enforce “official” rate schedules and maintain their regional associations once competitive pressures mounted. In 1865 it had cost from ninety-six cents to $2.15 per 100 pounds, depending on the class of freight, to ship goods from New York to Chicago. In 1888 rates ranged from thirty-five cents to seventy-five cents.
Competition cut deeply into railroad profits, causing the lines to seek desperately to increase volume. It did so chiefly by reducing rates still more, on a selective basis. The competition gave rebates (secret reductions below the published rates) to large shippers in order to capture their business. Giving discounts to those who shipped in volume made economic sense: It was easier to handle freight in carload lots than in smaller units. So intense was the battle for business, however, that the railroads often made concessions to big customers far beyond what the economics of bulk shipment justified. In the 1870s the New York Central regularly reduced the rates charged to important shippers by 50-80 percent. One large Utica dry-goods merchant received a rate of nine cents while others paid thirty-three cents. Two big New York City grain merchants paid so little that they soon controlled the grain business of the entire city.
Railroad officials disliked rebating but found no way to avoid the practice. “Notwithstanding my horror of rebates,” the president of a New England trunk line told one of his executives in discussing the case of a brick manufacturer, “bill at the usual rate, and rebate Mr. Cole 25 cents a thousand.” In extreme cases the railroads even gave large shippers drawbacks, which were rebates on the business of the shippers’ competitors. (For example, the same New England trunk line not only made Cole’s competitors pay higher freight rates but also returned a percentage of the income from those rates to Mr. Cole!) Besides rebating, railroads issued passes to favored shippers, built sidings at the plants of important companies without charge, and gave freely of their landholdings to attract businesses to their territory.
To make up for losses forced on them by competitive pressures, railroads charged higher rates at waypoints along their tracks where no competition existed. Frequently it cost more to ship a product a short distance than a longer one. Rochester, New York, was served only by the New York Central. In the 1870s it cost thrity cents to transport a barrel of flour from Rochester to New York City, a distance of 350 miles. At the same time flour could be shipped from Minneapolis to New York, a distance of well over 1,000 miles, for only twenty cents a barrel. One Rochester businessman told a state investigating committee that he could save eighteen cents a hundredweight by sending goods to St. Louis by way of New York, where several carriers competed for the traffic, even though, in fact, the goods might come back through Rochester over the same tracks on the way to St. Louis!
Although cheap transportation stimulated the economy, few people benefited from cutthroat competition. Small shippers—and all businessmen in cities and towns with limited rail outlets—suffered; railroad discrimination speeded the concentration of industry in large corporations located in major centers. The instability of rates even troubled interests like the midwestern flour millers who benefited from the competitive situation, for it hampered planning. Nor could manufacturers who received rebates be entirely happy, since few could be sure that some other producer was not getting a larger reduction.
Probably the worst sufferers were the railroads themselves. The loss of revenue resulting from rate cutting, combined with inflated debts, put most of them in grave difficulty when faced with a downturn in the business cycle. In 1876 two-fifths of all railroad bonds were in default; three years later sixty-five lines were bankrupt. Wits called Samuel J. Tilden, the 1876 Democratic presidential candidate, “the Great Forecloser” because of his work reorganizing bankrupt railroads at this time.
Since the public would not countenance bankrupt railroads going out of business, these companies were placed in the hands of court-appointed receivers. The receivers, however, seldom provided efficient management and had no funds at their disposal for new equipment.
During the 1880s the major railroads responded to these pressures by building or buying lines in order to create interregional systems. These were the first giant corporations, capitalized in the hundreds of millions of dollars. Their enormous cost led to another wave of bankruptcies when a true depression struck in the 1890s.
The consequent reorganizations brought most of the big systems under the control of financiers, notably J. Pierpont Morgan and such other private bankers as Kuhn, Loeb of New York and Lee, Higginson of Boston.
Critics called the reorganizations “Morganizations.” Representatives of the bankers sat on the board of every line they saved and their influence was predominant. They consistently opposed rate wars, rebating, and other competitive practices. In effect, control of the railroad network became centralized, even though the companies maintained their separate existences and operated in a seemingly independent manner. When Morgan died in 1913, “Morgan men” dominated the boards of the New York Central; the Erie; the New York, New Haven, and Hartford; the Southern; the Pere Marquette; the Atchison, Topeka, and Santa Fe; and many other lines.
World History
