B005HFI0X2 EBOK (29 page)

The reign of the Model T lasted less than a decade. In the 1920s, General Motors surpassed Ford as America’s major carmaker. Formed from the merger of Oldsmobile, Buick, Pontiac, Chevrolet, and Cadillac, which became divisions of the new company, General Motors was headed by Alfred P. Sloan, who served as CEO from 1923 to 1946. Sloan sought to differentiate the market by providing different models for different income groups and advertising new models each year to encourage frequent replacement. The result was another American commercial innovation—“planned obsolescence.”

THE HOUSE OF INSULL

The creator of the major commercial electrical-transmission empire, Samuel Insull, like Henry Ford, was a protégé of Thomas Edison. After Insull went to work for one of Edison’s agents in Britain, Edison noticed him and hired him to be his secretary in 1881 at the age of twenty-two. By 1889, Insull was vice president of Edison General Electric in Schenectady, New York, and in 1892, when J. P. Morgan took control of the Edison companies, Insull was assigned to head Chicago Edison.

Originally customers of electrical utilities in the United States were charged by the number of bulbs that they used in homes or businesses. During a trip to his native Britain in 1894, Insull was surprised to find the coastal resort town of Brighton lit up at night, and discovered that the local power plant had invented a meter to measure how much each home or business used. Returning to Chicago, Insull introduced the meter to the US electrical industry.
³⁶

Surviving shakedowns by Chicago’s famously felonious political class, Insull flourished. By 1910, Commonwealth Edison Company, formed from the merger of nearly two dozen private utilities, was the world’s leading utility company. Insull took control of Chicago’s electric trolley lines, consolidating them into the Chicago Rapid Transit Company (CRT) or “L” (for elevated). Insull’s Middle West Utility Corporation grew by absorbing hundreds of electric-transit companies and electric utilities that became known as the House of Insull.

Insull’s empire was based on holding companies that evaded state regulations, at a time when there was no federal regulation. The holding companies were highly leveraged. They would prove vulnerable to downturns in the stock market and Insull would lose his business, his fortune, and his reputation in the Depression. But in the 1920s, the private electric-utility industry flourished, evolving into an oligopoly in which, by 1932, the eight biggest utility holding companies controlled 73 percent of the private electrical power industry. By the mid-1920s, the House of Insull, with 600,000 shareholders, controlled one-eighth of the electricity and natural gas used in the United States.
³⁷

MA BELL

While the automobile and electric power industries evolved into mature oligopolies, another industry based on a technology of the second industrial revolution, the telephone industry, became an outright monopoly in the United States. Here, too, J. P. Morgan played a critical role.

Appropriately enough, Theodore Vail, the mastermind of telephone monopoly, spent much of his early career as a bureaucrat in Washington, where he rose to be general superintendent of Railway Mail Service. Appointed general manager of Bell Telephone in 1878, he retired in 1888, after he was passed over for president of American Bell. In 1907, when J. P. Morgan obtained control of the board of directors of AT&T, Vail was brought back from retirement. With Morgan’s backing, Vail set about realizing his ambitious vision of “One system, one policy and universal service.”

Although Vail retired in 1919 and died the following year, his vision of AT&T as a public utility became the basis of the American telephone system until the 1980s. The Bell System was divided into a long-distance service and regional companies. Small telephone companies continued to exist, mostly in rural areas, but for all practical purposes the company that tried to endear itself to the public as “Ma Bell” was
the
telephone company for Americans for most of the twentieth century. Along with US Steel and General Electric, Ma Bell was one of the corporate leviathans that arose from the technologies of the second industrial revolution and the finance capitalism of J. P. Morgan.

EDISON AND THE MOVIE TRUST

Not all of the consolidated enterprises in industries based on the new technologies of the second industrial revolution could be justified by the efficiencies provided by increasing returns to scale or network effects. Some were old-fashioned predatory monopolies. That was the case with Thomas Edison’s movie trust.

Motion picture technology was developed simultaneously by a number of inventors on both sides of the Atlantic. William Kennedy Laurie Dickson and others on Edison’s laboratory staff developed a motion picture camera, the Kinetograph, and the Kinetoscope, a viewer with a peephole that evolved into the nickelodeon, a popular attraction at carnivals and fairgrounds. In addition to manufacturing the equipment, the Edison Manufacturing Company began to produce films, most of them short features showing celebrities, news events, disasters, and curiosities. Movie producers soon began to produce more ambitious, longer films, such as
The
Great Train Robbery
in 1904.

In 1908, Edison created the Motion Picture Patents Company (MPPC), a cartel uniting Eastman Kodak, the major supplier of film, and the distributor George Kleine, with eight motion picture companies in addition to Edison’s own. Unlike railroads, steel, oil, or other mass-production industries in which cartelization could be defended, the motion picture industry was an industry with low fixed costs and low barriers to entry in which monopolies and cartels were likely to be predatory. Independent filmmakers, many of them Jewish immigrants who had started in the nickelodeon business, were harassed when they refused to pay licensing fees to the motion picture trust. In order to escape adverse court judgments in New Jersey, many of the independents moved to California, where the legal climate as well as the weather for filming was more favorable, and founded Hollywood. In 1915, a federal court ruled that the MPPC violated federal antitrust law. In Hollywood, some of the independents, including Karl Laemmle, Adolf Zukor, and Louis B. Mayer, became “movie moguls” whose studio oligopoly proved to be as hostile to independent filmmakers as Edison’s movie trust had been.

FROM PIGGLY WIGGLY TO A&P

In the late nineteenth century, the railroad and the telegraph had created new kinds of distributors, including mail-order companies like Sears, Roebuck. In the early twentieth century, technology-driven commercial change produced dramatic innovations in how goods were bought and sold.

One innovation was self-service. In 1916, Clarence Saunders of Memphis, Tennessee, founded a chain of innovative grocery stores in which customers, instead of asking clerks for items kept behind the counter, would use baskets to pick up items marked with prices from the shelves directly. By reducing staff costs, the Piggly Wiggly chain allowed savings to be passed on to customers.

Another innovation was the department store. Some, including Macy’s and Bloomingdale’s in New York, began as small retail shops that grew, while others, such as Marshall Field and Company in Chicago, were the retail branches of companies that did most of their business in wholesale.

Then there were the chain stores. The greatest of these was A&P, founded by George F. Gilman as the Great American Tea Company. With his partner George Hartford, Gilman had established more than a hundred stores by 1880. The name was later changed to the Great Atlantic and Pacific Tea Company. Expanding into groceries, A&P created the “economy store,” with no home delivery, in 1913. Following Gilman’s retirement, George and John Hartford took over. By 1929, A&P had fifteen thousand stores and made more money than Sears, Montgomery Ward, and J. C. Penney combined.
³⁸

The first “dime store,” in which nothing cost more than a dime—which went considerably further in those days, to be sure—was established by Frank W. Woolworth in Lancaster, Pennsylvania, in 1879. Woolworth’s grew into another national chain.

The older mail-order businesses that survived were forced to adapt to the new world of car-based suburbs that was appearing even before World War II. Robert Wood Johnson, a former army general who worked for Montgomery Ward, argued that urbanization meant that the company should shift its focus from mail-order catalogs to retail outlets. For his prescience he was fired by Montgomery Ward, but he was hired by Sears, Roebuck, which he persuaded to buy large areas of land on the outskirts of cities for stores and parking lots.

The enormous cash flows of mail-order stores, department stores, and chain stores made it unnecessary for them to raise large sums by issuing stock. Unlike in the large industrial companies of the time, control tended to remain in the hands of the founding families such as the Hartfords of A&P, the Woolworths, the Wanamakers, and the Gimbels.

Small-town distributors were threatened by the innovative national retailers. As the largest retailer in the United States, A&P drew hostility similar to that directed at Walmart nearly a century later. Representative Wright Patman of Texas, a Jeffersonian populist, sought to destroy it with the Robinson-Patman Act, which tried to prevent chains from getting lower prices from manufacturers in order to charge less to consumers. When Patman next tried to pass a law imposing a federal tax on chain stores, he failed. A&P successfully defended itself by allowing the unionization of its workforce in 1938, thereby gaining organized labor as a constituency, and by skillfully wooing consumer groups and cooperatives.

FROM PRODUCERS TO CONSUMERS

In the new era of mass consumer demand for mass-produced goods, a new industry evolved in the United States: advertising. Appropriately, the American advertising industry was pioneered by Edward Bernays, a nephew of Sigmund Freud who applied his uncle’s insights into psychology to commercial advertising. Supported by advertising, radio became the first of the mass media, bringing a common popular culture into homes otherwise divided by region and class. The “consumer,” a type hardly heard of a generation before, began to replace the small producer as the symbol of middle-class America.

Consumer durables, of which the automobile was the most important, made up four-fifths of the growth in GNP in the decade between 1919 and 1929.
³⁹
Consumer credit was another innovation that spread rapidly in the 1920s. A. P. Giannini, the son of Italian immigrants in California, pioneered installment loans, thereby turning his tiny Bank of Italy into what at his death was the nation’s largest bank, the Bank of America. Many of America’s small one-office unit banks, however, lost much of the business of consumer lending to specialized consumer lenders and companies that financed customer purchases.

BIG BUSINESS, MANAGEMENT, AND WALL STREET

Partly in response to antitrust laws, many industrial corporations adopted “vertical integration,” solving the problem of coordination by bringing a variety of activities and every stage of the production process into a single, complex, hierarchical institution. Because such bureaucratic behemoths could not be run by a single entrepreneur, a new class of professional managers and a new discipline of scientific management developed in the late nineteenth and early twentieth centuries.

While ceding control over day-to-day operations to professional managers, the founders of industrial empires like Rockefeller and Carnegie found themselves relying on the developing stock market. The separation of ownership and control evolved as a result of the decision of large firms to become publicly traded corporations, a decision that created a market for their securities in addition to railroad bonds and stocks. During the merger wave of the late 1890s and early 1900s, only 6 percent of industrial stocks were sold to the public. Forty-nine percent was exchanged for the stock of other firms in mergers and 45 percent was issued by corporations to their own shareholders.
⁴⁰

In the 1920s, the stock market expanded as companies sold stock to employees and customers. The number of stockholders increased from 4.4 million in 1900 to 18 million in 1928.
⁴¹
Already by the early 1900s, the ratings agencies Standard and Poor’s and Moody’s were performing the function of rating stocks for investors.

Frequently swindled, middle-class shareholders contributed to the rapid evolution of the stock market in the years before 1929.

WONDER BOY

Following the election of Herbert Hoover to the presidency in 1928, President Calvin Coolidge, asked to make a decision, reportedly replied, “We’ll leave that to the Wonder Boy.”

Wonder Boy was one nickname for Hoover. The Great Engineer was another. Vannevar Bush, the MIT engineer who more than anyone else created the post–World War II system of federally funded research, admired Hoover and called him the Chief.

When President Warren G. Harding offered Hoover a post in his administration, Hoover chose the Department of Commerce, converting what had been a small and poorly funded agency into a powerful central directorate of several administrations and the economy as a whole. His Commerce Department absorbed the Bureau of Customs Statistics from the Treasury Department, the statistical programs for the farm machinery, meatpacking, naval stores, and woolen industries from the Department of Agriculture, and the Bureau of Mines and the Patent Office from the Department of the Interior.
⁴²
He also extended his influence over transportation, power and waterway development, and construction.
⁴³
Hoover was described by one contemporary as “Secretary of Commerce and Under-Secretary of all other departments.”
⁴⁴

“The only trouble with capitalism is capitalists. They’re too damn greedy,” Hoover observed.
⁴⁵
During his first week in the White House, he complained that “excessive fortunes are a menace to true liberty.”
⁴⁶
In his 1922 book
American Individualism
, Hoover called for a “progressive individualism.” “In our individualism we have long since abandoned the laissez faire of the 18th Century—the notion that it is ‘every man for himself and the devil take the hindmost.’ ” According to Hoover, “We have learned that the impulse to production can be maintained at a high pitch only if there is a fair division of the product. We have also learned that fair division can only be obtained by certain restrictions on the strong and the dominant.” Hoover wrote that progressive regulation in the early twentieth century was necessary because “we were threatened with a form of autocracy of economic power. Our mass of regulation of public utilities and trade is the monument to our intent to preserve an equality of opportunity. This regulation is itself proof that we have gone a long way toward the abandonment of the ‘capitalism’ of Adam Smith.”
⁴⁷