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BETWEEN 1895 and 1907 the American economy experienced a momentous organizational convulsion. It was not only that the pace of merger activity increased, that over this thirteen-year period an average of 266 firms a year were absorbed by competitors.1 Much more important was the fact that the surviving enterprises were of a radically different nature. Whereas, before, scores of firms had competed somewhat independently in these various industries, now in many cases a single firm controlled a major share of the market. In 60 per cent of the consolidations that took place between 1895 and 1904, a single large corporation gained control of at least 62.5 per cent of its industry’s market as measured by capitalization. And in another 10 per cent of the consolidations it gained control of 42.5–62.5 per cent.2 By 1904, it was estimated, 318 corporations owned 40 per cent of all manufacturing assets.3

This Corporate Revolution, as it has been termed, marked the birth of what Adolph A. Berle and Gardiner C. Means later described as “the modern corporation.”4 From this period of consolidation came many of the large corporations that today play such an important role in the American economy. Of the 100 largest corporations in 1955, 20 were born in consolidation during this period; another 8 were the court-ordered offspring of the pre-1895 Standard Oil trust which had provided the model for the Corporate Revolution.5

From this Corporate Revolution have flowed many important political and social consequences, from the “trust busting” of the Progressive era to today’s organization man. The economic consequences, though not always so clearly recognized, have been at least equally important. In many an industry, including the most important ones, the Corporate Revolution spelled an end to competition, at least as economists have defined the term.6 Instead were created first monopoly, and then, later and more enduringly, oligopoly. It is important to understand this history because it reveals how the industrial structure of the American economy has evolved in the past, posing a challenge to both the economic theorist and the national policy-maker. The large bureaucratic corporation, or “megacorp,”7 that emerged from the Corporate Revolution to dominate nearly every oligopolistic industry was a quite different social institution from its predecessor, Alfred Marshall’s representative firm.8 It was no longer subject to the same life-and-death cycle which had previously applied to business firms. A professional, self-perpetuating management and an almost impregnable market position assured the megacorp of virtually continual existence, and this in turn forced the megacorp’s executive group to base its decisions increasingly on longer-run considerations. But it was not only along the time axis that the previous human limitations on a firm’s growth were transcended. The reorganization of production and new management techniques made it possible for the megacorp to expand to any size it might wish without suffering diseconomies of scale, and this in turn reinforced the megacorp’s already considerable market power. For the economic theorist the challenge posed was to adapt the traditional models of market behavior to the new institutional form; to the national policy-maker it was to see that a satisfactory degree of social control was maintained. That neither has met the challenge with complete success may well reflect a failure to understand the process by which oligopoly emerged from the Corporate Revolution.


While students of the 1895–1907 period do not deny that something approximating a Corporate Revolution did, in fact, occur, they are quite divided over its causes. The simplest explanation comes from those who wistfully look back to the days when competition was the general rule, even in key industries. “Few of our gigantic corporations,” Henry Simons wrote, “can be defended on the ground that their present size is necessary to reasonably full exploitation of production economies; their existence is to be explained in terms of opportunities for promoter profits, personal ambitions of industrial and financial ‘Napoleons,’ and the advantages of monopoly power.”9 This view had earlier found support from a one-time Princeton University professor, who gave this explanation for the Corporate Revolution: “It is not competition that has done that; it is illicit competition.” Added Woodrow Wilson, “It is competition of the kind that the law ought to stop, and can stop—this crushing of the little man.”10

The theory that the Corporate Revolution was caused by the machinations of evil, ambitious, and money-mad men suffers, however, from a major defect. Such men have never been in short supply throughout history. Why, in the years between 1895 and 1907, should they suddenly have been capable of transforming the structure of the American economy? The answer, in part, has been supplied by those who trace the Corporate Revolution to the growth and maturation of the American capital markets. “Our theory,” George Stigler has written,

… is that mergers for monopoly are profitable under easy assumptions that were surely fulfilled in many industries well before the mergers occurred. The only persuasive reason I have found for their late occurrence is the development of the modern corporation and the modern capital market. In a regime of individual proprietorships and partnerships, the capital requirements were a major obstacle to buying up the firms in an industry.…

I am inclined to place considerable weight upon one … advantage of merger: it permitted a capitalization of prospective monopoly profits and a distribution of a portion of these capitalized profits to a professional promoter. The merger enabled a Morgan or Moore to enter a new and lucrative industry: the production of monopolies.11

At first glance, the empirical data seem to bear out this contention. By 1895, the New York Stock Exchange “had reached a sufficiently advanced stage of development to be capable of playing an important role in the [subsequent] merger movement. The quantitative and qualitative growth of the New York Stock Exchange from the early 1880’s to the late 1890’s was appreciable and was apparently based largely on factors other than the financing of mergers.”12 Moreover, a large proportion of the corporate consolidations later had stocks listed by an organized capital market. Of the various consolidations which took place between 1897 and 1902, 68.4 per cent were listed on the New York, Boston, Philadelphia, or Baltimore exchanges.13

To connect the growth of the stock market with the Corporate Revolution, however, poses the nearly impossible task of separating cause and effect. One group of authors, for example, has attributed the growth of the stock market, or at least the market for industrial securities, to the consolidation movement.14 Even if this view is not accepted, it may well be that the growth of the capital market was a necessary precondition for, but not necessarily the primary cause of, the Corporate Revolution. And since it is difficult to believe that the strong-willed, independent owners of the many businesses that were consolidated agreed to merge their firms simply to enable promoters to foist overvalued stock on the public, one is inclined to look for that primary cause elsewhere.

One possibility frequently suggested is that economies of scale were growing more rapidly at this time than was the market, making economically feasible larger firms relative to the market. Alfred D. Chandler, Jr., for example, has pointed out the advantages which new marketing arrangements and vertical integration, together with the possibility of large-scale production, offered certain firms. “These pioneers in high volume manufacturing and distribution of both perishable and relatively complex durable goods,” he has written, “demonstrated the clear economies of scale. They provided obvious models for manufacturers who had until then found the existing wholesale network quite satisfactory.”15 While Chandler distinguishes the role played by economies of scale in the growth of large firms before 1895 from that which they played during the subsequent Great Merger Movement—economies of scale in his view being only a necessary precondition for, but not a sufficient cause of, the latter phenomenon—others, especially defenders of the giant enterprises thus created, have seen the need to exploit the advantages of greater size as creating the underlying pressure for consolidation throughout the entire period.

As Nelson has noted, however, the data are inadequate to determine the precise role played by economies of scale.16 What little evidence there is disputes the view that economies of scale were the precipitating factor in the Corporate Revolution, though they may, as Chandler suggests, have been a necessary precondition. Nelson himself cites the great diversity of industries involved in the Corporate Revolution. “It is hard to believe,” he concludes, “that such a variety of technological developments as would be needed to bring production economies of scale to these diverse industries could have converged in the same short period of time.”17 And although Donald Dewey, in analyzing the data on average plant size from 1869 to 1909, found a significant increase during this period, he could find no evidence of an acceleration in the trend after 1895 or shortly before. As for the specific role played by new marketing arrangements and the other means of achieving economies of vertical integration, it would appear that in many cases, as Chandler himself indicates,18 they came into being only after an industry had already been consolidated. To the extent that this was the case, the creation of new distribution networks was a result rather than a cause of the Corporate Revolution.

Another version of the above argument cites the completion of the national railroad network at this time. This development, it is held by Jesse Markham, increased the market area of the typical firm and enabled it to take advantage of potential economies of scale previously unrealizable. “… It can be crudely estimated,” he says, “that the area served by the average manufacturing establishment in 1900 was about 3.4 times as large as it was in 1882.”19 Joe S. Bain also links the Corporate Revolution to railroad development, but emphasizes a somewhat different effect. “Competition,” he says,

was intensified by the continuing growth of the railroad systems, which tended to bring all of the principal firms together in direct competition for a single national market. The economy was passing from a situation where a fairly large number of small manufacturers sold their products, each in a limited local market somewhat protected by high costs of transportation, to a situation where a few large firms vied among themselves for sales in a single market. In the new environment, price competition was potentially ruinous to all.20

According to Nelson,21 industries with high transport costs were, in fact, the ones mainly involved in mergers and consolidations. Moreover, the number of miles of railroad track in America increased substantially from 1882 to 1916, while the cost of rail transportation declined steadily. However, as Nelson also points out,22 at the time of the Corporate Revolution there was no sharp acceleration in the trend toward increased railroad trackage and falling freight rates. More important, much of the increased railroad mileage represented not an extension of the railroad network but an intensification of it—the double-tracking, for example, of an already existing line. Except in the non-industrial Southwest and Northwest, the era of railroad pioneering had come to an end at least a decade before the Corporate Revolution.

The Bain version of the railroad development hypothesis finds little support in the empirical data as well. For Nelson discovered that, in the case of many of the industries consolidated, plants were already concentrated within a narrow geographical area.23 Therefore, the completion of the national railroad network could not have led to ruinous competition by bringing previously separated local markets together in one large national market, because the markets had not previously been separated by high transport costs.

The Bain hypothesis does touch on another explanation of the Corporate Revolution, however, one that is frequently advanced by businessmen or the defenders of consolidation. “In the United States as elsewhere,” say Seager and Gulick,

the combination movement has resulted from the efforts of businessmen to throw off the restraints and avoid the wastes of unregulated competition. It is one of our conclusions that even after all of the economies of large-scale production have been realized, there remain wastes and losses that can be avoided only through the exercise of sufficient control over output to secure the highest attainable regularity in the operation of plants. The combination movement is therefore a natural and indeed inevitable business development, which is not in and of itself opposed to the public business.24

This argument, that businessmen agreed to consolidation in order to avoid ruinous competition, keep production levels steady, and maintain reasonable profit margins, has much in common with the explanation, rhetoric aside, that the consolidation movement was fostered by the desire for monopoly profits. Ignoring for the moment the question of whether or not monopoly results in certain economies, one should realize that the only difference between these two views is their difference of opinion as to what constitutes a “reasonable” profit. But whether the objective was, in fact, a “reasonable” or a “monopoly” profit, it was attained in much the same way—that is, by gaining control over an industry.

The evidence to support this thesis, that the Corporate Revolution was caused primarily by the desire to avoid “ruinous” competition, is quite substantial, if only on the basis of the actual results. As already noted,25 a substantial percentage of the consolidations, if market control was actually the motive behind them, achieved their objective. But this still does not solve the problem of timing. Like the evil-men explanation, which it closely resembles, the market-control hypothesis does not explain why businessmen should have become more highly motivated by this desire in 1895 than in previous times, or even why they should have been more successful in satisfying it.

The ruinous-competition explanation for the Corporate Revolution has sometimes been linked to the decline-of-growth argument, namely, that the American economy at the end of the nineteenth century experienced a fall in its rate of growth and that the slackened demand led to ruinous competition among firms fighting for their former share in a reduced market. As Myron Watkins has explained:

The opening of a new and wider market involves pioneering costs which call for the compact association of producers. But once a market has been opened by the joint action of the associated producers, its development attracts the ambition and varied talents of many producers, the prize for successful competition being high. The third and final phase is reached when the limit of the expansion of a given market has been touched, and the amount and character of its consumption have become settled and known. The gains from initiative and ingenuity are then no longer sufficient to hold producers upon an independent course, and they fall in together for their common enrichment at the expense of consumers.26

Nelson’s empirical study, however, throws great doubt on this explanation. Analyzing the data on production trends, Nelson found that the Corporate Revolution took place at a time of increasing growth rather than of decline. In fact, he discovered a high correlation between growth and merger, not only for the turn-of-the-century period, but also for subsequent periods of high merger activity. He also found that those industries which experienced consolidation or merger generally had higher growth rates than did the economy as a whole.27

A final economic explanation for the Corporate Revolution points to the high American tariffs in effect at this time. From 1883 to 1897, Republican-controlled Congresses steadily revised American tariffs upward, and they remained at a high plateau until the Underwood Tariff of 1913. For many years the belief was widely held that “the tariff is the mother of trusts.”28 Nelson attempts to dispose of this explanation by citing a similar British merger movement, also at the turn of the century, which, since Great Britain at this time was still deeply committed to a policy of free trade, occurred without the protection of tariffs.29 Even disregarding Nelson’s argument,30 the question of timing still remains. Why would high tariffs not have induced a wave of industrial consolidations before 1895?

Two non-economic factors have also been cited as explanations for the Corporate Revolution. One of these was the change in corporate law which took place in the late 1880’s. Before then, corporations were generally prohibited by common law from owning shares in other corporations, a prohibition which largely precluded the possibility of using the holding company as a means of effecting industrial consolidation. Then, in 1888, New Jersey enacted a new law permitting corporations chartered in that state to purchase stock in other corporations. Dewey, however, contends that this was no more than a contributing factor to the Corporate Revolution. Even before 1888, he says, other states conferred the same privilege on corporations or could do so by simple legislative enactment.31

The second non-economic explanation for the Corporate Revolution points to the changing legal attitude toward cartels and other forms of industry price control. The Corporate Revolution erupted, it is held, when the U.S. Circuit Court of Appeals in 1898 ruled in the Addyston Pipe & Steel case that cartel agreements were illegal under the Sherman Act. With this method of avoiding ruinous competition closed to them, businessmen were forced to turn to consolidation as the only alternative. “This contention has its grain of truth,” notes Dewey. “The condemnation of a cartel in the Addyston Pipe case … coincided with the start of the eighteen-month period that saw merger activity reach its peak, and at least two major consolidations—the mergers creating the United States Pipe and Foundry Company and the United Shoe Machinery Company—were precipitated by this decision, the promoters having previously inclined to some less irrevocable arrangement.”32 But, as Nelson points out, the Corporate Revolution had already begun, even before the Addyston Pipe decision was announced. Moreover, in Great Britain, where a similar merger movement was occurring, British courts were simultaneously declaring that cartel agreements were not necessarily illegal, even if they were unenforceable in a court of law.33

Thus, of the numerous explanations that have been offered for the great merger movement in American industry at the turn of the century, none seems wholly adequate.34 The evidence in support of any one of the explanations is, at best, inconclusive. Clearly, there is need for a better understanding of what actually happened during this critical phase of American economic development.

This monograph represents the beginning of an effort to provide that better understanding. It will attempt to place the events occurring between 1895 and 1907 in a larger historical context, that of the long-run evolution of the structure of American industry. It will do so by re-examining the historical evidence from the period as it pertains to a single industry, sugar refining, in light of present economic theory. Too often this evidence has been framed in moralistic terms, either decrying or defending the events reported. But the time has long since passed when such an approach serves any useful purpose. Like it or not, the Corporate Revolution is a fact of our historical experience, the precursor of today’s economic world. The time has now come to try to understand that revolution with the aid of modern economic analysis.

Recent developments in economic theory, especially in the field of industrial organization, provide the guide. The pre-conditions of competition, the behavior of cartels, the importance of barriers to entry, and other aspects of industrial organization are much better understood now than when the Corporate Revolution was actually taking place. The older historical evidence, meanwhile, stripped of its moralistic overtones, supplies the raw data. This evidence, much of which has been ignored previously, is to be found in business records, government documents, court papers, trade journals, newspaper accounts, and biographical materials. Together, these two elements—recent economic theory and the older historical evidence—make possible a comprehensive explanation of the Corporate Revolution, such as the one presented below.


The changes that have occurred in the structure of the American economy over time, the most dramatic of which was the Corporate Revolution itself, can best be understood in terms of a four-stage model. Each of the last three stages, while evolving directly out of the previous stage, has nonetheless, like the first stage, been characterized by a unique market structure. The number of competing firms, the importance of barriers to entry, and the extent of product differentiation are the factors that have determined the nature of each typical market structure, and since these are the factors that determine which theoretical model of pricing behavior is applicable in any given situation, they also indicate the nature of the competitive processes that have been at work during each successive stage.35 The exogenous force—that is, the engine of change throughout—has been technological progress, each stage representing the adaptive response of market structure to the evolving technical basis of economic activity. But technological progress as the engine of change should not be thought of as simply the effect of new production methods on an industry’s cost structure. It must be viewed in the larger sense of being the factor which historically has made possible entirely new industries, rising output per worker, reduced transportation and communications barriers, and more complex social organization—these developments both influencing and in turn influenced by the nature of demand in a subtle interplay of forces.36 It is only in this broader sense that technological progress may be said to be the independent variable in the four-stage process described below.37

The first of the four stages was the initial Period of Imperfect Competition. This was essentially a preindustrial stage during which handicraft techniques largely prevailed in the manufacturing sector—insofar as there was a manufacturing sector. The stage lasted from the time of the first colonial settlements in this country until the triumph of the factory system sometime during the two decades preceding the Civil War. While the precise timing varied in each industry, a useful bench mark was that parallel technological achievement, the transportation revolution, which by creating a vast domestic market both was stimulated by and in turn stimulated large-scale manufacturing. The typical market structure during this initial Period of Imperfect Competition reflected the conditions that underlie the theory of monopolistic competition today. Production was generally carried out by firms which, if not individually owned proprietorships, were at most only two- or three-man partnerships. Entry into any particular field, moreover, was moderately easy, being limited primarily by the skill required to perform the various handicraft operations and secondarily by the working capital needed to keep the business solvent. The distinguishing characteristic of the period, however, was the lack of uniformity among the goods produced. Because of the handicraft techniques employed, the quality of the product varied both among firms and even within the same firm over time. This gave rise to a product differentiation not unlike that achieved in more recent times by advertising and other forms of sales promotion. Each firm became known for the particular quality of its own product and the extent to which that quality varied. This product differentiation, together with the regional segmentation of markets, in turn provided the firm with partial protection against the forces of competition, thereby assuring some degree of stability and security.

The second stage in the development of industrial organization was the Golden Age of Competition, so called because of the tendency of so many persons in later years to look back on it with nostalgia. The first phase of this stage represented the culmination of a series of striking technological innovations, the effect of which was to make possible large-scale, low-cost production of manufactured goods. In addition, the new mechanical techniques, together with improved measuring devices, made it possible for the first time to turn out articles of uniform quality. The interaction of these developments with the transportation revolution and the creation of a vast domestic market has already been touched on. Together they led to an unprecedented expansion of manufacturing activity, variously timed in individual industries but most generally occurring in the years immediately after the return of prosperity in 1843.38

Two groups of entrepreneurs rushed to take advantage of the resulting opportunities: those who among the older artisan group were able to adapt to the new mechanical techniques and those who among the commercial classes were willing to risk their capital in less liquid enterprises. The former brought with them a tradition of workmanship, the latter the habits of commodity dealing. The characteristic business spirit of the period derived from both sources, producing a condition similar to that underlying the model of perfect competition later developed by economists. The large number of separate enterprises created to take advantage of the rapidly expanding market meant that no one firm could hope to influence the market by its actions alone. Technological improvements meanwhile created a degree of product homogeneity dictating the same type of independent pricing which had long characterized commodity markets. Each firm was forced to take the industry price as given and to seek to maximize its net revenue by varying output—even if from time to time it might bring about a change in that very industry price through its testing of the market. The countervailing power exercised by brokers, commission merchants, and wholesale dealers served to keep the new manufacturing markets “honest,” a true barometer of short-run supply-and-demand forces. In the long-run the still-relative freedom of entry—absolute capital requirements had increased but the wealth of the country had increased even more—performed the same function. Finally, the drive on the part of at least some individuals to continually improve both the product and the way in which it was manufactured meant that those who failed to adopt the new techniques found themselves at an increasing disadvantage—even if this disadvantage was not always immediately apparent.

The Golden Age of Competition, however, like many another heroic era, contained within it the elements of its own destruction. The same force of technology which so greatly reduced the costs of production and made it possible to turn out goods of uniform quality in large numbers also required a substantial investment in fixed assets, thereby making the capital-output ratio significantly high. This meant that whenever the demand for a firm’s product fell, it was under considerable economic pressure to try to expand its sales by cutting its price and in this way spread its overhead costs over a larger volume. As long as the revenue received more than covered the variable or “out-of-pocket” costs, it was to the advantage of the individual firm to shade its price in this manner—even if, as a result, the industry price fell below long-run average total costs.

In the long period of prosperity that lasted through the Civil War and on into the second term of the Grant administration, this proclivity toward price cutting posed no serious problem. The times of falling or stagnant demand, when they occurred, were relatively brief and soon forgotten in the subsequent further expansion of the economy. But in the years after the Panic of 1873—though here again the precise date varied for each industry—secular conditions changed. The times of falling or stagnant demand were now much more frequent.39 Equally important, the forces of supply—that is, the ability of new or existing firms to increase production—proved more vigorous than those of demand. Manufacturing firms no longer found it unusual to be forced for considerable periods of time to sell their output at prices below their long-run average total costs. This was particularly true of the marginal firms, those enterprises which had been less willing to modernize their plants during the earlier period of prosperity. For these firms there ensued a desperate struggle for survival, and in the process of that struggle they significantly influenced industry price levels. Somehow a few of them managed to hang on, shutting down when the price fell below a certain point but starting up again whenever it rose sufficiently to cover their out-of-pocket expenses. The result was to keep the industry price from reaching much higher than the average variable costs of the marginal firms. While a few of the more efficient enterprises could nonetheless earn an adequate return, the majority of firms could not.40

For the owner-entrepreneurs associated with these enterprises it was an entirely unsatisfactory state of affairs. In the long run, unable to cover their total costs, they faced probable economic extinction. The loss of both their capital and the social position which that capital afforded them was too great a blow to accept, and so these businessmen resolved to do something about their plight. The years from 1873 to 1895, the second phase of the Golden Age of Competition, thus constituted a period of transition presaging the Corporate Revolution as those who had invested their capital in manufacturing assets sought in various ways to mitigate the expropriating effects of competition.

The period as a whole was one of instability, for the ad hoc solutions that businessmen devised to cope with the situation inevitably failed to solve the underlying problem of excess supply relative to the demand. In most cases the first response of the manufacturing firms was to agree among themselves not to sell below a certain price or produce in excess of a given quantity. But like all such agreements heretofore, they were soon violated, sometimes even before they could be put into effect.41 The advantages of cutting the price were so great and the ability to police the agreements so limited that this result was all but inevitable—and the knowledge that the agreements would soon be violated was itself a factor contributing to their abrogation. While these cartel arrangements gradually grew more sophisticated with the creation of pools and common sales agencies, they nonetheless continued to suffer from a generally fatal defect: the agreements, obviously designed to suppress competition, were unenforceable in a court of law. Thwarted along these lines, businessmen turned to legal and extralegal alternatives. In some cases they simply sought additional tariff protection or even export subsidies. In others they tried to enlist the support of politicians and government officials for whatever scheme promised to bring relief from competition—and in the process helped set the tone for what has come to be known as the Gilded Age of Politics. Even so, in most cases the only real alternative was a more furious struggle for survival, the tactics employed becoming less restrained as the contest itself became more desperate.42

While instability was the general rule, the period was also one during which the solution to the problem of how to mitigate the effects of competition was gradually being worked out as a result of the cumulative experience in a few key industries. Even before 1873 the firms active in anthracite coal mining learned that control over transportation could be used to obtain control over the entry of new firms into the industry and thus to provide a check on competition from without.43 Earlier, Cornelius Vanderbilt and the organizers of the Western Union Company had demonstrated that the exchange of stock was an effective means of gaining control over the firms already in the industry and thus of assuring a check on competition from within.44 The Standard Oil Company, under the direction of John D. Rockefeller, then combined both these lessons to achieve an unprecedented degree of control over prices in the petroleum industry. With low-cost methods of production and railroad rebates providing the Standard Oil Company with an unmatchable advantage, rival refiners were left with the choice of either selling out to the Rockefeller group—generally for stock but, if they insisted, for cash—or facing competitive ruin.45

The importance of the Standard Oil example was not only the success it achieved on so large a scale but, even more important, the new legal device it created for controlling the various properties acquired. That new legal device was the trust form of business organization. It consisted of a group of trustees, the functional equivalent of a board of directors, in whom the stock of different corporations could be vested, giving the trustees absolute control over the management of the properties. In return for handing over their stock to the trustees, the shareholders in the various companies received trust certificates, the functional equivalent of common shares. This arrangement, besides making it possible to get around the common law prohibition on holding companies, enabled the very existence of the trust to remain a secret, since, unlike a corporation, the trust did not have to obtain a state charter.46 In the late 1880’s, as knowledgeable businessmen gradually became aware of the Standard Oil trust’s formation, a number of other industries were quick to follow petroleum’s example. The certificates of these trusts, traded in the New York Stock Exchange’s unlisted department, created the first significant market for industrial securities in this country.47

The trust form proper, however, was to have only a brief existence. Even as the Sherman antitrust law was being enacted into law in the summer of 1890, a New York court decision was rendering the trust form illegal.48 It was a decision soon to be confirmed by judicial rulings in other states.49 But the several combinations which had been organized as trusts were unwilling to return to the status quo ante. As was to be seen again many times in the years that followed, a competitively structured industry, once destroyed, was not easily resurrected. Instead, the several combinations took advantage of a change in New Jersey’s corporation law which conveniently permitted one corporation to own stock in another and thus gave sanction to the holding company.50 Still, before other industries were willing to follow the example of the trusts that were now transformed into New Jersey-chartered corporations, two questions had to be answered. The first was whether such corporations were legal under the Sherman Act. While the majority of distinguished corporate lawyers was convinced that they were consistent with the law, a definitive answer had to wait until the Supreme Court itself ruled on the issue. The second question was whether combinations of that type were sound from a business point of view. Doubts of this sort were greatly increased when the National Cordage Company, one of the trusts which had been reorganized as a New Jersey corporation, suffered a financial collapse which marked the onset of the 1893 Depression. The cordage combination had been victimized by rivals who organized new enterprises almost as quickly as they were bought out.51

Somewhat ironically, it was the 1893 Depression which conclusively demonstrated the advantages of industrial consolidation to businessmen. They could not help but notice that prices fell less rapidly and that their fellow capitalists suffered less severely in those industries which had been successfully consolidated. By the time economic conditions began to improve in 1895 and the stock market had regained its buoyancy, many businessmen no longer doubted the practical soundness of combination. Meanwhile, in its decision in the E. C. Knight case, the Supreme Court had removed whatever legal uncertainty still remained.52 Implicitly—or so it seemed at the time—the New Jersey holding company had passed the scrutiny of the law. If some businessmen still hesitated, preferring less formal and less permanent price-fixing arrangements even if they were unenforceable in the courts, they were less likely to hold back after the Addyston Pipe decision made such cartel practices a positive criminal offense.53

The first phase of the Corporate Revolution and the change it wrought in the structure of the American economy have already been mentioned. The long-frustrated desire of businessmen to avoid the expropriating effects of competition built up a pressure for consolidation which was suddenly released in 1895 by the coincident return of prosperity and the Supreme Court’s implicit approval of the New Jersey holding company. The by-this-time well-developed market for industrial securities greatly facilitated the process of combination and merger as investment bankers such as J. P. Morgan used the stock exchange to float the issues of the many newly created corporations. In fact, Morgan and his associates, with the wealth and experience gained in consolidating the nation’s railroads, and Rockefeller and his partners, with the even greater wealth and experience acquired in building up the Standard Oil empire, provided the impetus and leadership for a significant number of the consolidations. The culmination of this Great Merger movement, at least symbolically, came in 1901 when Rockefeller agreed to sell his Mesabi Range properties to Morgan, thus enabling the latter to go ahead with his plans to form the United States Steel Corporation, a combination of previous consolidations in the steel industry and this country’s first $1 billion company.54

The important point about this first phase of the Corporate Revolution is that its effect was to create in a large number of industries a single giant enterprise or, in other words, conditions closely approximating those underlying the economist’s theoretical model of monopoly. The second phase of the Corporate Revolution witnessed the transformation of this market structure into oligopoly and the consequent emergence of the modern corporation—or megacorp—characterized by multiplant operation and the separation of management from ownership. This second phase lasted roughly from the Rich Man’s Panic of 1907, following the federal government’s prosecution of the Standard Oil and American Tobacco companies, through the 1920’s—though once more it must be stressed that the dates varied for each individual industry, with the structure of some even relapsing into an earlier form rather than evolving into the next stage.

While the possibility of organizing as a holding company largely eliminated the problem of how to control competition from within an industry, the problem of how to control competition from without still remained. The groping for a solution to this problem was one of the distinguishing features of the second phase of the Corporate Revolution. The method adopted by the petroleum industry—forced rebates from the railroads—was not necessarily applicable to other industries. Moreover, as a result of the gradual strengthening of the Interstate Commerce Act and the new-found willingness of the executive branch under Theodore Roosevelt to enforce the law, the exaction of rebates involved an increasingly unacceptable degree of risk. The consolidation of an industry into a single enterprise, if it were to prove endurable, thus required that new ways of forestalling the entry of firms into the industry be devised. A few of the combinations ignored the problem entirely or else dealt with it inadequately. Bankruptcy and reorganization tended to be their fate.55 Most of the consolidations, however, were able to protect their market positions by erecting substantial barriers to entry.

This came about in a variety of ways, depending on the circumstances prevailing in each industry. Some of the monopolistic firms created were able to establish exclusive distribution systems by either taking over an existing dealer network or creating their own.56 Others managed to obtain sole control over strategic raw materials and thereby put themselves in a position to deny these materials to others.57 Of course, the older techniques of patent control and selective price cutting continued to be employed.58 To supplement and reinforce these methods of limiting entry, a new technique offering substantial economies of scale was developed and expanded. This new technique was national advertising.

These methods, however, could not suppress all outside competition. In some cases, firms had been allowed to remain outside the combination because their owners refused to join and, after they had given assurances that they would match the combination’s prices, it had not seemed worthwhile to press them further. To their numbers were soon added other firms, some established to take advantage of a specialized or geographically separated segment of the market, others formed by persons who, after selling out to the combination, found the enforced retirement unbearable. It seemed as though the sight of a single large corporation dominating an industry and enjoying substantial profits presented too tempting a target for outside interests to ignore; and while most of the efforts to invade the industry might fail, still a few firms managed to gain a foothold and survive at the fringe. As a result it was not unusual for the single large corporation created during the first phase of the Corporate Revolution to find itself coexisting with numerous but relatively insignificant smaller rivals.

This competitive “tail” of the monopolistic industry generally had little or no effect on the ability of the consolidation to control prices. But it did provide the basis for the later growth of firms able to match the original combination in size and strength. The emergence of powerful rivals was then given a considerable boost by the political and legal reaction which the first phase of the Corporate Revolution produced in its wake, a reaction that was to impose an upper limit on the share of the market which any one firm could control. This political and legal reaction, identified with the Progressive movement, was a second distinguishing feature of the second phase of the Corporate Revolution.

The fears and apprehensions to which the consolidation movement gave rise did not find a meaningful political expression until the presidency of Theodore Roosevelt. The concern, however, was not so much over the actual changes in economic structure as over the implied threat to the democratic order. The question, as many persons including the president saw it, was whether an economic power had been created which could and would dictate to the political institutions of the country.59 It was for this reason that Roosevelt, at a very early point in his administration, moved pre-emptorily in the Northern Securities case to reassert the primacy of the government—and in the process succeeded in reviving the moribund Sherman Act.60 Initially Roosevelt felt that eliminating railroad rebates was all that would be required. Denied any unfair advantage in transportation costs, only those consolidations which truly reflected economies of scale would be able to survive. Rut to his chagrin Roosevelt soon learned that simply eliminating railroad rebates was not enough. Other barriers to entry also existed, or were quickly devised to replace those found to be illegal. To attack what he viewed as “bad trusts,” that is, combinations whose market power rested on some unfair advantage, Roosevelt found himself forced to fall back on the Sherman Act—despite fears that it might subsequently be used indiscriminately against all combinations, whatever their social value.61 The dissolution and dismemberment of the Standard Oil, American Tobacco, and DuPont companies was the eventual result of this campaign.62

While Roosevelt sought to break up only the “bad” trusts, hoping in this way not to lose the benefits of large-scale production, his successor, the jurist and former law professor William Howard Taft, felt it was necessary to dissolve any consolidation formed primarily to achieve control over prices. Only those combinations whose market power was ancillary to some other purpose were, in his view, immune from prosecution under the Sherman Act. Taft’s successor, Woodrow Wilson, went one step further. All consolidations representing monopoly power, whatever the reason they were organized, were in his eyes illegal.63 But while the presidential attitude toward industrial consolidation was growing increasingly hostile, the judicial response continued to be equivocal. More to the point, the process of building up a body of case law on the subject was extremely time-consuming. Years of investigation and pretrial testimony were required before a suit could even be filed, and this preliminary work had to be done by the already overworked U.S. attorneys in a few major cities. Then, many more years were to pass before the case reached the Supreme Court and a final decision was handed down.64 Thus, when World War I broke out, the Wilson administration was still awaiting the results of an appeal to the Supreme Court brought by the International Harvester Company, defendant in a suit testing Taft’s theory that all combinations formed to exercise control over prices are illegal.65 The war was to change dramatically the larger social and political attitudes toward industrial consolidation.

The co-operation and material support in prosecuting the war which the Wilson administration received from many of the very same combinations that it had only a short time before planned to break up seemed to confirm the argument long advanced that the consolidations were necessary to achieve certain desirable social goals in general and the realization of operating economies in particular. Even the Wilsonian Democrats’ ardor for trust-busting cooled noticeably. Moreover, the growing repute with which the large industrial combinations now came to be held gave added weight to a concern long felt by the judiciary in weighing the merits of dissolution. Was it fair, they were forced to ask themselves, to impair the equity of the many stockholders who had invested in the combinations long after they were formed when there was every reason to believe that they were not illegal? The answer clearly depended on how great a social evil the combinations were.

The changing attitude toward industrial consolidation became evident in the Supreme Court’s decision in the United States Steel case, which was handed down in the spring of 1920.66 While the steel combination had not been guilty of the “unfair” tactics attributed to the petroleum and tobacco companies, its head, Judge Elbert Gary, had just the same taken the precaution of allowing U.S. Steel’s share of the market to fall from the more than 80 per cent it had controlled at the time of its formation to somewhat less than 50 per cent. The Supreme Court, in absolving the company of any violation of the Sherman Act under the “rule of reason,” seemed to be taking into account these specific facts as well as the larger social and political trends. Whatever the court’s specific motivation, however, the precedent was established that a corporation which accounted for less than half of an industry’s market and which avoided aggressive tactics to discourage competition was relatively safe from dissolution under the antitrust laws. It was this ground rule, together with the tendency of the smaller firms that managed to survive in the various consolidated industries to merge during the 1910’s and 1920’s in order to provide stronger competition, which was to transform the monopoly originally created by the Corporate Revolution into oligopoly. Meanwhile, an organizational transformation was also occurring within the giant corporations that were emerging during this period. This organizational transformation was the third and final distinguishing feature of the Corporate Revolution.

When first created the consolidations were generally little more than strong cartel arrangements, with the previously independent owner-entrepreneurs continuing to direct the operations of their own plants free of all outside interference except with respect to prices or output. As time passed, however, the central board of directors gradually increased its authority. The least efficient plants were scrapped entirely, marginal plants were held in reserve for peak periods of demand, and production was concentrated in the remaining plants where costs could be held to a minimum. As a result the consolidations were able to expand or contract production—the way in which changes in industry demand were now adjusted to—largely by starting up and closing down entire plants or plant segments. In this way, with the judicious management of inventories, it was possible to operate with something approaching constant marginal costs.67

Paradoxically, in order to exercise increased authority, the central board of directors had to delegate responsibility. The details of managing so large an enterprise were simply too great to be handled by any one small group of men. Managers for the various plants had to be appointed, charged with seeing to it not only that the plant was operated efficiently but also that over-all company policy was carried out down the line. In time these new plant managers replaced the former owner-entrepreneurs who had initially brought the properties into the consolidation. In addition, men knowledgeable in the ways of corporate law, finance, sales, and other specialized areas had to be brought into the central office to oversee the various staff functions, with new techniques of business administration being developed to co-ordinate their as well as the line executives’ actions.68 The result was the emergence of a managerial group whose power, derived from specialized knowledge of how the company was run, grew as that of the stockholders waned. The former owner-entrepreneurs who had originally joined together to form the consolidation found that as time passed it was to their interest to sell off their holdings of stock. In some cases this was done to diversify an investment portfolio. In other cases it was done to take advantage of inside information. In still other cases it was done out of pique over the loss of influence within the company. Whatever the reason, the tendency over time was for the stockholders to become more numerous and scattered, with a consequent growth in the management group’s power. This eventual separation of management from ownership, together with multiplant operations in an oligopolistically structured industry, was to produce the typical large corporation—or megacorp—of today.

The fourth stage in the development of industrial organization is the one in which we are presently participant-observers. This is the Era of the Conglomerate, in which the megacorps that have arisen in specific industries have branched out into various other industries through diversification. Since the phenomenon is still too recent for proper historical perspective, any analysis must be tentative. This is particularly true since theoretical models for understanding the behavior of oligopolistic industries are still lacking. Still, as a preliminary hypothesis, it may be suggested that the conglomerate form of industrial organization reflects the need of megacorps in maturing oligopolistic industries to find new outlets for the investment funds they are able to generate internally through their control over prices. On the one hand, the continued technological progress which has led to the expansion of certain markets and brought a decline in others has meant that a megacorp, no matter how formidable its position in any particular industry, could expect to maintain an adequate growth rate in the long run only by periodically shifting its resources and energies into an entirely new area of economic activity. Often, the technological change has been given a prodding by the megacorp’s own research and development efforts, which, if not actually responsible for creating the new products or new techniques, have at least enabled the megacorp to keep abreast of the evolving state of the industrial arts, thereby reducing the time lag between the discovery and the exploitation of new knowledge. On the other hand, the further advance of management techniques—a form of technological progress the importance of which has not always been sufficiently appreciated—has made it possible for multiproduct firms to avoid the predicted handicaps of bigness.69 In this current stage of the evolution of industrial organization in the United States, the megacorp has finally transcended the limits of its own original industry; and the economic theory which perhaps may be most relevant to its situation is that dealing with investment planning by nation-states.


The chapters that follow attempt to describe this evolution of industrial organization as it occurred in a single industry, sugar refining. This industry is of special interest for several reasons. First, it was intimately involved in many of the critical events of both the transition phase of the Golden Age of Competition and the subsequent Corporate Revolution. One of the first major industries to be consolidated, sugar refining was the center of the legal battles over the trust and holding-company forms of organization. Its securities were among the first of any manufacturing firm to be traded on the New York stock exchanges. Most important, it experienced many of the same challenges and tribulations as the other consolidated industries, eventually falling victim to the antitrust sentiment that was to help transform monopoly throughout the American economy into oligopoly.

On the other hand, the sugar refining industry has been virtually ignored by economic historians, despite the wealth of information which exists. The one attempt to describe the industry’s consolidation is a 121-page monograph written in 1907,70 but it probes neither widely nor deeply. It is in part this gap which the present monograph will attempt to fill. What follows, then, is in one sense simply the history of a particular business enterprise, the American Sugar Refining Company. It contains an account of the entrepreneurial activities of Henry O. Havemeyer and his colleagues in the sugar refining industry, a description of parallel developments in other industries, and an overview of antitrust and related legal actions. These various elements, however, are presented as part of a single, complex, interrelated process in order to illuminate more clearly what is, after all, the central focus of this study, the emergence of oligopoly in one industry as a result of the Corporate Revolution.

It would, of course, be silly to suggest that the chapters which follow “substantiate” in any meaningful sense the general historical model of the evolution of industrial organization outlined above. First, that model has been formulated by taking into account all available empirical evidence, which in this particular case means the original source material uncovered pertaining to sugar refining, as well as the extant secondary literature.71 It is thus fallacious to infer that any test of the model has been conducted. Second, a sample size of one industry, even if inflated to include the few other industries for which a comparable historical account already exists, is not very impressive. This is the basic weakness of all case studies. Still, it can—and will—be argued that the model presented above does provide a useful working hypothesis for the subsequent industry studies which it is hoped this monograph will stimulate. For on this question of what factors were responsible for the Great Merger movement at the turn of the century, the point has been reached where only in-depth investigations of individual industries over time are likely to shed further light. Surprisingly, only a few of the industries involved in the Corporate Revolution have been studied in this manner.72 The one merit that will be claimed for this monograph is that it adds yet another industry to the list.

1 Ralph Nelson, Merger Movements in American Industry, 1895–1956, p. 37.

2 Ibid., p. 102.

3 Henry R. Seager and Charles A. Gulick, Jr., Trust and Corporation Problems, pp. 60–61.

4 Adolph A. Berle and Gardiner C. Means, The Modern Corporation and Private Property.

5 Nelson, Merger Movements, p. 4.

6 George J. Stigler, “Perfect Competition, Historically Contemplated.”

7 “Megacorp” is used by the author as a better term to indicate what has variously been called the “large” or “modern” corporation. See his “Business Concentration and Its Significance,” esp., pp. 188–89.

8 Alfred Marshall, Principles of Economics, bk. 5.

9 Henry Simons, Economic Policy for a Free Society, pp. 59–60.

10 Edward C. Kirkland, A History of American Life, p. 424.

11 George J. Stigler, “Monopoly and Oligopoly by Merger,” pp. 28–30.

12 Nelson, Merger Movements, p. 91.

13 Ibid., pp. 92–93.

14 T. R. Navin and M. V. Sears, “The Rise of a Market for Industrial Securities, 1887–1902.”

15 Alfred D. Chandler, Jr., “The Large Industrial Corporation and the Making of the Modern American Economy.”

16 Nelson, Merger Movements, p. 103.

17 Ibid. Nelson also points to the fact that most of the mergers that took place were horizontal, between competing firms in the same stage of production. He then concludes that since most economies of scale result from vertical integration, the 1895–1907 consolidations were not designed to achieve economies of scale. I think Nelson errs in attributing most economies of scale to vertical integration.

18 Chandler, “The Large Industrial Corporation,” pp. 80–82.

19 Jesse Markham, “Survey of the Evidence and Findings on Mergers,” p. 156.

20 Joe S. Bain, “Industrial Concentration and Government Anti-Trust Policy,” p. 618.

21 Nelson, Merger Movements, pp. 82, 83.

22 Ibid., p. 82.

23 Ibid., pp. 85–87.

24 Seager and Gulick, Trust and Corporation Problems, p. ix.

25 See p. 1 above.

26 Myron Watkins, Industrial Combination and Public Policy, pp. 12–13.

27 Nelson, Merger Movements, p. 78.

28 Ironically, the author of this phrase was Henry O. Havemeyer, one of those responsible for consolidating the sugar refining industry, which was itself a major beneficiary of the tariff. See Havemeyer’s testimony before the U.S. Industrial Commission, Reports, 1, pt. 2:101.

29 Nelson, Merger Movements, pp. 132–33.

30 Tariffs, while obviously not a factor in the British merger movement, still might have played an important role in the American Corporate Revolution. They may be part of the explanation why what was only a movement in Great Britain was a revolution in the United States.

31 Donald Dewey, Monopoly in Economics and Law, pp. 53–54.

32 Ibid., pp. 54–55.

33 Nelson, Merger Movements, p. 136.

34 It should be noted that the various explanations cited may not necessarily exhaust all the possibilities, but they do cover the explanations most frequently advanced by students of the Corporate Revolution and, more to the point, they cover the explanations that have been subjected to quantitative investigation by Nelson in Merger Movements.

35 For a description and analysis of the various models of pricing behavior, see Donald Watson, Price Theory and Its Uses, pts. 4–6, and Leonard W. Weiss, Case Studies in American Industry.

36 Thus, while Douglass C. North is correct in stressing the importance of the nature of demand in the American growth process (The Economic Growth of the United States, 1790–1860), it is difficult to see how the nature of demand itself would have changed had it not been for prior changes in technology, in Europe if not in the United States. More generally, it may be suggested that consumer preferences are too stable a factor to produce by themselves any significant movement away from the static conditions of a long-run equilibrium.

37 The four-stage model, it should be stressed, is taxonomic rather than analytic. Thus there is no intention of suggesting that the separate stages have a specified time dimension or even that each necessarily led to the subsequent stage. The model is merely descriptive of what happened in the American economy cover a certain period of time, and the separate stages indicate which theoretical model of market behavior most closely approximates the market behavior actually observed.

38 North, Economic Growth, pp. 204–8. Economic historians are currently divided over the question of whether the decade beginning in 1840 marked a discontinuity in the growth rate of the American economy. Cf. George R. Taylor, “American Economic Growth Before 1840”; Paul A. David, “The Growth of Real Product in the United States Before 1840.” What is being suggested here is not that the over-all growth rate necessarily accelerated at about that time but rather that the pace of manufacturing activity suddenly spurted.

39 Rendig Fels, American Business Cycles.

40 On the destructive effects of competition, see the testimony of various manufacturers before the U.S. Industrial Commission, Reports, 1, pt. 2.

41 As a producer of wallpaper later testified before the Industrial Commission, after first describing how an agreement in his industry had succeeded in raising prices: “The greed of a number of manufacturers, however, did not allow this favorable condition of affairs to continue. They sold goods at less than scheduled prices and to cover up the transactions failed to report the sales to the [pool]. Fines were imposed for such violations when discovered, but they failed to check the evil, … and this dishonesty finally led to abandonment of the scheme” (ibid., 13:283).

42 See the studies of particular industries to be found in William Z. Ripley, ed., Trusts, Pools and Corporations; Seager and Gulick, Trust and Corporation Problems.

43 Eliot Jones, The Anthracite Coal Combination in the United States; Jules Bogen, The Anthracite Railroads; Pennsylvania, Legislature, Senate, Committee on the Judiciary, General, Report in Relation to the Anthracite Coal Difficulties with the Accompanying Testimony; Chester A. Jones, The Economic History of the Anthracite-Tidewater Canals; Marvin B. Schlegel, Ruler of the Reading.

44 Allan Nevins, Study in Power, 1:364.

45 Ibid., chaps. 4–14.

46 Ibid., chap. 21; John Dos Passos, Commercial Trusts, pp. 12–14.

47 Navin and Sears, “Market for Industrial Securities,” pp. 106–12.

48 People v. North River Sugar Refining Co.

49 Railway & Corporate Law Journal, 7 (January 18, 1890); State v. Standard Oil Company.

50 New Jersey, Statutes, 1889, chaps. 265, 269; see also Edward Q. Keasbey, “New Jersey and the Great Corporations”; Russell C. Larcom, The Delaware Corporation, chap. 1.

51 Arthur S. Dewing, A History of the National Cordage Company, pp. 4–32.

52 United States v. E. C. Knight et al., 156 U.S. 12 (1895).

53 United States v. Addyston Pipe & Steel Co., 175 U.S. 211 (1899).

54 Frederick Lewis Allen, The Great Pierpont Morgan, chap. 9; Nevins, Study in Power, chap. 32; John Moody, The Truth About the Trusts, pp. 490–93.

55 Arthur S. Dewing, Corporate Promotion and Reorganizations.

56 William S. Stevens, Industrial Combinations and Trusts, chap. 7; Ripley, Trusts, Pools and Corporations, p. 273; Watkins, Industrial Combination and Public Policy, pp. 73–76; Richard Tennant, The American Cigarette Industry, pp. 305–6.

57 Watkins, Industrial Combination and Public Policy, pp. 184–90; Eliot Jones, The Trust Problem in the United States, pp. 222–24.

58 Stevens, Industrial Combinations and Trusts, chap. 12; Ripley, Trusts, Pools and Corporations, pp. 280–303.

59 Richard Hofstadter, The Age of Reform, pp. 227–38.

60 Northern Securities Co. v. United States; see also William Letwin, Law and Economic Policy in America, chap. 6.

61 John M. Blum, The Republican Roosevelt, pp. 107–21; George E. Mowry, The Era of Theodore Roosevelt, pp. x–xi, 112, 130–34.

62 United States v. Standard Oil Co. of New Jersey, 221 U.S. 1 (1911); United States v. American Tobacco Co., 221 U.S. 106 (1911); United States v. E. I. DuPont de Nemours & Co.

63 Letwin, Law and Economic Policy, pp. 250–53; Henry F. Pringle, The Life and Times of William Howard Taft, 2:654–59.

64 It took five years to prosecute successfully the Standard Oil Company and three years to do the same to the American Tobacco Company. Suits with lower priority in the eyes of the Government generally required even longer to complete; the case against the American Sugar Refining Company, for example, required four years before it was even ready to go to trial.

65 United States v. International Harvester Co., 274 U.S. 696 (1927).

66 United States v. United States Steel Corp., 251 U.S. 441 (1920).

67 See Watson, Price Theory, chap. 11.

68 Alfred D. Chandler, Jr., Strategy and Structure.

69 Ibid., chap. 1, n. 27; Louis D. Brandeis, “Trusts and Efficiency,” pp. 223–24.

70 Paul L. Vogt, The Sugar Refining Industry in the United States.

71 See the Bibliography in this volume.

72 These are the petroleum and tobacco industries. See Harold F. Williamson et al., The American Petroleum Industry; Nevins, Study in Power; Tennant, American Cigarette Industry. Alfred Chandler and Stephen Salsbury are presently at work on a study of the DuPont Company and the gunpowder industry.

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