The thought of the US becoming the world’s richest and most powerful nation would have been unimaginable at the time of the country’s founding. In 1783, at the end of the American Revolution, the US was a marginal commercial center, far from the powers of Europe and the riches of Asia. It was a farm-based, subsistence economy with a small export trade in grains, tobacco, and salted fish and limited manufacturing.
In Smith’s time, businesses shared none of the characteristics of modern enterprise — no separation of ownership and management, no professional managers, and no corporate bureaucracies. Smith could hardly have foreseen the development of a large, complex corporation like GM, which by 1955 had 624K employees around the world.
Canals allowed for a substantial increase in the weight horses could pull on riverbanks and augmented the network of rivers to reach the interior of the country.
American cotton exports soared from accounting for a value of about $5M, or 16% of the total of American exports, in 1800 to a value of about $200M, or 60%, in 1860.
The sale of cotton brought wealth to a new class of plantation owners, financiers, and brokers. It also increased the reliance of the Southern economy on commercial agriculture and slavery and dampened its industrial development.
Despite deep connections to NY finance and New England textile mills, Southern cotton plantations lagged in adopting, in equal measure, the innovative technology that by the 1840s and 1850s was reshaping the North, including manufacturing machinery. Moreover, although plantations were profitable for the slave owners and their middlemen, they were costly for society. Slave patrols, for instance, monitored and policed much of the South to try to apprehend runaways.
In 1850, a whaling venture required a capital investment between $20K and $30K — far more than that needed for the average American farm ($2,258) and more, too, than the average manufacturing firm ($4,335). But a good haul yielded a high return, as evidenced by the large mansions that sprung up around the port of New Bedford in the early 19th century.
However, the question of tariffs soon became a major source of conflict between the North and South, with the manufacturing North generally supporting tariffs as a way to grow industry and the export-driven South opposing them because they raised prices on imported finished goods. The debate over tariffs was one major issue in the lead-up to the Civil War.
Strikes, however, proved largely unsuccessful. Participants were fired and often blacklisted by employers. In the 1840s, the textile mills began to transition to immigrant male labor.
In addition to textiles and firearms, the clock industry also adopted systems of factory production. In the 18th century, clocks were luxury goods — a tall clock was generally the most expensive item in the home of a wealthy colonist. In the early 19th century, Eli Terry developed a method of producing clocks in greater volume and at a lower cost.
The American system of manufactures emphasized standardized parts, highly mechanized production methods, and a preference for practicality rather than luxury. The American manufacturer is in some respects wiser than his foreign competitor, and in many instances leaves the ultra-ornate to be supplied from Birmingham and Sheffield, and directs his energies to the development of a better and less exuberant style, which he finds is demanded by the more refined amongst his countrymen.
SF, which had only 1K residents in 1848, grew to 36K by 1842. Chinese immigrants, in particular, flocked to California goldfields in the thousands.
Given their unprecedented scope and scale, railroads brought changes to the structure and organization of business. One was the promotion of a growing profession — the salaried manager. Once railroads spanned distances of 100 miles or more, managing them required new modes of communication. Schedules, budgets, and procedures could no longer be worked out by colleagues in a single office. Railroad owners began to respond to these conditions with new organizational structures, and the railroads also became one of the largest and earliest users of the telegraph to coordinate complex schedules. Indeed, as time went on, telegraph lines were increasingly laid or relocated along railroad tracks to assist with maintenance.
To raise money more effectively, railroad leaders formed corporations, an organizational form that became increasingly common in the US in the 19th century. Initial investors living in the region of a railroad frequently bought stock in the company, while European investors typically preferred bonds. Unexpected costs incurred by railroad companies often meant that the first sale of mortgage bonds was usually followed by a second and a third. In this way, railroads became a boon to financial markets.
Those with money to risk often reaped great rewards. Trade and speculation surrounding these stocks and bonds contributed to the growth of the NYSE.
These ornate department stores offered new and innovative sales policies. Macy’s, for instance, created a one-price policy to put an end to haggling. Wanamaker’s provided a money-back guarantee.
In the late 19th century, America’s cities, linked by telegraph and railroad, grew at prodigious rates. The fastest growing was Chicago, which wen from a fairly small town in 1840 (whose population was less than 5K) to the second largest city in the US (with nearly 1.1M people) by 1890.
Many began as partnerships, and some remained so for many decades. Others operated under a new legal structure called a trust or holding company, which allowed a small group of trustees to manage the activities of several companies. However, after the passage of a general incorporation law in New Jersey in 1896 and Delaware in 1899, most firms became limited liability corporations — the standard legal form for modern industrial enterprises.
The industrialist manager who ran the large corporations of the late 19th century became so dominant in the American economy that the historian Alfred Chandler argued that the economy was no longer run by the invisible hand of the marketplace but by the “visible hand” of management.
Rockefeller was a wholesale grocer in Cleveland when he first entered the oil business as a side pursuit in 1863.
The decision to become a corporation was strategic, making it easier to finance expansion without risking the loss of control over the company. As a result, the new Standard Oil immediately began a new phase of growth, and with a different strategy: rather than paying for acquisitions in cash, Standard offered to compensate acquired firms through the exchange of stock. This offer was attractive to some because it allowed acquired firms to share in, and benefit from, Standard’s success.
Rockefeller improved efficiency by finding ways to sell even the waste products from his refineries. As a result of those and other strategies, he cut the price of kerosene in half from 1865 to 1870, making it accessible to middle- and working-class families. Whereas whale oil was only affordable to the wealthy, the availability of inexpensive kerosene broadened the use of oil for home lighting. The high volume of production gave Standard powerful leverage in rate negotiations with railroads compared to its competitors. This approach was, in turn, advantageous for the railroads because they were able to run trains with only oil cars and plan a stead flow of traffic. Standard also built its own pipelines, which provided necessary storage capacity, as well as a steadier flow of crude oil into refineries.
He relocated his operation to Chicago, realizing that he could save a great deal of money if he butchered animals in Chicago and shipped only the meat eastward (as freight charges were determined by volume). His quest for efficiency also led to the development of a routinized butchering process, in which animal carcasses were suspended from hooks and moved along a “disassembly line” on overhead belts and pulleys.
He recalled being impressed by the level of luxury attained by other recent immigrant families. The father of the neighboring Negley family, he mused, “must have been a man of considerable ability and energy, judging from the estate he accumulated.” At age 14, Mellon discovered a “dilapidated copy of the autobiography of Dr. Franklin.” The book, he wrote, “delighted me with a wider view of life and inspired me with new ambition — turned my thoughts into new channels.”
Historians and literary critics began to refer to the late 19th century as the “Gilded Age,” in which a small, but conspicuous wealthy class masked widespread poverty.
The rapid spread of 2 new source of power, electricity and the internal combustion engine, brought significant changes to business and society. Communication technology also improved. Some historians have commented that these new sources of power and communication led to a “second industrial revolution” — just as water power, steam, and coal had launched the “first industrial revolution” a century earlier.
Like many door-to-door companies, Fuller Bush faced the problem of high employee turnover, as salesmen left the occupation because of the frequent rejections they faced from customers. In response, one salesman for the company introduced the “Fine and Dandy” club to stimulate positive thinking among employees.
One of the most significant changes to business administration during this period was the growing professionalization of management. What began as a pragmatic organizational role within large railroad companies increasingly became a career unto itself.
Born in Michigan in 1863, Ford was a machinist who had worked on steam engines for Westinghouse early in his career. His dream, however, was to “put America on wheels.” In 1900, this seemed more like pure fantasy than an achievable end: there were few paved roads, horses were the primary method of travel, and cars were still clunky and expensive.
Ford described the process of creating the moving assembly line as being inspired by the “disassembly line” he observed in meatpacking firms.
Ford’s goal was to own and control as much of the entire production process as possible — and to grow as big as possible. To do this, Ford began to acquire business spanning the entire supply chain, from timberlands and rubber plantations to iron ore mines and glassworks.
Ford’s Model T became the quintessential standardized product of the 20th century. A friend noted of Ford, “Standardization was his hobby.” In his autobiography, Ford was philosophical on the subject: “Machine production in this country has diversified our life, has given a wider choice of articles than was ever before thought possible — and has provided the means wherewith the people may buy them. Standardization, instead of making for sameness, has introduced unheard-of variety into our life.” Ford might have also noted that standardized products could be endlessly altered by users — such as was the case of his Model T, which became popular with associations of tinkerers who shared news of ways to customize Ford’s design.
By 1920, Ford had achieved his goal of selling affordable cars to Americans and, through the export-oriented Ford Motor Company of Canada, to other customers around the world. By then, however, many Americans owned cars, and there was even a market for used autos, which could sell for less than the price of a new Model T. Some customers, moreover, were in the market for a more expensive vehicle and wanted to trade up. The problem for Ford was that when Americans traded up, they often bought vehicles from Ford’s rivals.
In the early 20th century, the automobile industry, centered in Detroit, became so large that it spurred parallel growth in auxiliary sectors like glass, oil, steel, and rubber.
Initially, Pepsi sought to segment the market by price alone. However, with postwar inflation in the 1950s, Pepsi could no longer rely solely on low price and came up with a new strategy. In the early 1960s, Pepsi began to advertise its product to younger consumers with a “Pepsi generation” campaign, thereby “segmenting” the marketplace. In response, in 1963 Coca-Cola made several new additions to its product line, each with its own unique packaging and targeted consumer segments. Thus, like the automobile industry, the soda industry transitioned from being fragmented by many companies to being dominated by one company (Coke) and then eventually segmented by brands (including Coke, Pepsi, 7Up, and Dr Pepper).
Forecasting newsletter suggested to investors, bankers, and managers that the trends of prosperity and depression were decipherable. Most of these services simply celebrated the rising stock market of the 1920s and failed to foresee the impending market crash of 1929 and the ensuing Depression.
In a speech that year, Hoover pointed to the booming economy and announced the possibility that “poverty will be banished from this nation.”
IBM was a highly diversified company that sold many different business machines, but Watson focused his energy on improving the company’s information-processing capacities. The ability to quickly sort through volumes of stored data made IBM’s equipment invaluable following the passage of the National Recovery Act in 1933 and the Social Security Act of 1935 — both of which created an unprecedented demand for storing data. Sure enough, the US government soon became IBM’s biggest client. “The vital statistics of the whole country went onto punch cards.”
However, at the outset of the war in Europe, public opinion in the US was strongly isolationist. Congress passed 3 neutrality acts from 1935 to 1937, forbidding the shipment of arms to foreign combatants and prohibiting loans to belligerents. Roosevelt, though, was convinced that the US needed to ready itself for war by building up its military and increasing productive capacity to assist the Allies in the supply of munitions and machinery.
Existing factories also needed to be overhauled. Recalled GM president and CEO Alfred Sloan, “When we were mobilized during WW2, we were obliged to transform the great bulk of our operations almost completely, to learn rapidly and under great pressure how to produce tanks, machine guns, aircraft propellers, and many other kinds of equipment with which we had no experience at all.” This required the training of many thousands of workers.
By contrast, the US suffered 418K war-related deaths and its infrastructure emerged unscathed, in fact, stronger than it had been before. Its large corporations dominated global markets, its superior military power was unquestioned, and its capacity for technological innovation was unsurpassed.
Indeed, the decades immediately after the war were a golden age for American business. Manufacturers in the US became world leaders in oil, rubber, chemicals, pharmaceuticals, electric equipment, mass-produced machinery, appliances, automobiles, metals, processed foods, drink, and tobacco.
The postwar business norms of the 1950s encouraged a new, distinct culture and set of values. Those hoping to climb the corporate ladder no longer turned to Benjamin Franklin’s The Way to Wealth and its philosophy of dedication, perseverance, and thrift. Now, they looked to the advice of Dale Carnegie’s How to Win Friends and Influence People (1936), which advocated smiling, getting along, and ingratiating oneself with colleagues and clients as the key to success. Young executives, according to this new thinking, needed “people skills” to navigate corporate bureaucracies.
In 1955, Fortune published its first list of the 500 largest companies in the US, revealing the enormous scale and scope of the American economy. Businesses on the list fell into 3 broad groups. The first was large manufacturers in industries that made established or “stable technology” products (automobiles, oil, rubber, metals, and other nonelectric machinery). Such businesses typically competed with one another by making minor improvements in their products or in their processes of distribution or production. The second group was manufacturers in “high-tech” industries (such as aviation and chemicals), who competed through the commercialization of new R&D. The final category was manufacturers in “low-tech” goods (including clothes and food), where innovations usually occurred in marketing, branding, and distribution.
Many of these low-tech companies sought to avoid intense price competition in their respective industries by use of branded products. The breakfast cereal industry offers a window into the inventive marketing strategies that emerged. To stimulate demand, cereal manufacturers turned to TV, a new medium that was becoming increasingly popular.
Increasingly, starting in the 1950s, franchising had tremendous appeal to Americans who wanted to start their own businesses but either lacked the start-up capital or wished to avoid some of the risks of founding a business on their own.
Toyota outdid American competition through its famed “production system,” which took decentralization beyond what Sloan had imagined. Toyota’s approach revolved around a persistent effort to streamline systems to eliminate waste and allow flexible production for just-in-time delivery. By 1980, Japan surpassed the US as the world’s leading producer of automobiles.
In response to rising global competition, many American firms pursued a new strategy that they hoped would allow them to regain a competitive advantage. They became conglomerates, bringing varied businesses in different industries together into a single group. The 1960s was dubbed “the age of the conglomerate,” with more than 6K M&As in 1969 alone. Despite the rush to merge, however, the strategy was seldom successful.
In the decades from 1980 to the end of the 20th century, the American business landscape changed markedly. The post-WW2 period was the high point of managerial capitalism, during which managers at large US firms found markets for their products around the world. Executives and managers working at these firms often exhibited a strong degree of loyalty to their enterprises, banks were heavily regulated and pursued strategies of low risk and steady profits, and union membership was relatively high.
By contrast, the closing decades of the 20th century were more difficult to categorize. First, these decades were marked by deregulation. Starting in the late 1970s, American policymakers sought to reduce government restrictions in some industries to try to make companies more competitive.
Second, these decades saw the rise of shareholder capitalism, in which the long-standing balance of power among shareholders, boards of directors, and managers began to shift. Previously, shareholders at large public companies could seldom influence managers or executives. However, beginning in the 1970s, institutional investors began to grow large enough to monitor and even influence corporate leaders.
Finally, these decades were also a period of financial innovation, as banks broke away from the relatively conservative strategies of the 1950s and 190s. In the same years, activity on the stock market grew rapidly. The financial future of many Americans became entwined in the activities of the market, as nearly one-quarter of household wealth was tied to stocks. Financial transactions also became more complex as hedge funds, which pooled money from institutional investors, increased in numbers and operated in “derivatives,” new higher-risk products derived from conventional securities.
After the 1970s, however, the centre of technological innovation in computers shifted to the West Coast.
He believed that universities were a “natural resource” for industry — a necessary element of technological entrepreneurship. As Terman wrote, “Industry is finding that, for activities involving a high level of scientific and technological creativity, a location in a center of brains is more important than a location near markets, raw materials, transportation, or factory labor.” In this spirit, Terman set aside 209 acres of university land in 1951 to lease to private tech companies. Stanford Industrial Park, as it was known, became home to HP, Lockheed, Xerox (PARC), and GE, among others. Terman fostered academy-industry cooperation by encouraging faculty consulting, inviting industrial researchers to teach specialized courses, and creating an honors cooperative program that allowed students to earn degrees while working full-time.
SV firms came to draw talent from all over the world; in 1998, entrepreneurs originally from China and India were running 25% of startups in the region.
In 1981, the IBM PC was officially introduced, with a price tag of $1,565, and it was wildly successful. Sales were so great that in 1983 the company created a division to manage the manufacturing and distribution of the PC. This group’s output and revenues were large enough that, had it been an independent company, it would have made the Fortune 500 list that year. In 1985, Microsoft introduced a new OS, Windows 1.0, an advance that introduced a point-and-click interface.
The Internet did not originate in the business world. It was too daring a technology, too expensive a project, and too risky an initiative to be assumed by profit-oriented organizations.
The legal scholar Lina Khan compared Bezos’s strategy to Rockefeller’s at Standard Oil in the late 19th century: like Rockefeller, Bezos worked deliberately to build a business that could not only capture market share rapidly, but also defend against new market entrants, for example, by engaging in predatory pricing.
Entrepreneurs also introduced seminal institutional innovations, including the factory, corporation, the modern financial system, and the Internet-based firm. These innovations, often fought by established interests, brought tumult to existing methods of business and frequently unleashed the destructive features of capitalism, including shuttered factories, unemployed workers, and failed companies. This cycle of creative innovation and disruption has been a long-standing feature of US economic growth. “Constant, relentless change is the hallmark of capitalism.”
Indeed, the aspiration to pursue economic opportunities has inspired immigrants from around the world to come to the US. This democratic aspect of the US economy is often cited as an explanation for why American society is especially tolerant of the turbulent and chaotic nature of capitalism. Whereas in Germany and Japan a businessman who fails suffers a great permanent stigma, Americans smile benignly on entrepreneurs who go bust, and this gives the society as a whole an invaluable license to experiment.