The new year started with someone tipping me off about a documentary named The Men Who Built America. What followed was a six-hour binge watch. The history channel docudrama chronicles the lives of five American business titans — Vanderbilt, Carnegie, Rockefeller, Morgan, and Ford. What fascinated me about this series wasn’t just how the industrial innovations and business empires of these five individuals revolutionized modern society, but also how their paths crossed more often than I would’ve imagined.
History doesn’t repeat itself, said Mark Twain, “but it often rhymes.” The capitalistic rivalry among the 19th-century tycoons has an uncanny similarity to present day standoffs between business honchos. Which means, there might be crucial insights hidden in these century-old events which would give you a more informed perspective on how the modern business stories could unfold and their impact on society at large.
Unfortunately, the picturization was less than impressive. I wish someone would have given me that information in written format. So if you don’t have the patience to sit through six hours of over-dramatic narrative, then read on.
Vanderbilt was the 19th-century American business magnate who built his wealth in the transportation industry. He first built his fortune in inland water trade. Vanderbilt owned hundreds of ships and ferries. But when he saw the efficiency of transportation through the railroad, he took the bold decision of selling off his water transportation business and investing everything into railroads. A wise decision it was.
If you think market bubbles are a recent phenomenon, then you need to read history. In mid-19th-century, everyone was bullish about railroads and there were more than 350 railroad companies. The overcapacity created by the railroads was a bubble which, like all bubbles, imploded and most of those hundreds of railroad companies went bankrupt.
Vanderbilt, who controlled 40% of US railroads, realised that to avoid bankruptcy like others, he quickly needed to fill up his railroad capacity. That’s when he noticed the signs of a rising tide in another industry — oil.
John D. Rockefeller
Oil was the new gold and hundreds of oil exploration companies were popping up everywhere. Rockefeller figured that oil exploration was a business plagued with huge risks. So he focused on oil refining. People depended on kerosene for lighting their homes but the kerosene used by most was of subpar quality and even unsafe to use. Rockefeller launched Standard Oil as a safe option for domestic use of kerosene.
Rockefeller needed the railroads to transport oil from oil-rigs to his refineries. That’s when he cut a deal with Vanderbilt who offered cheap rates in return for an exclusive contract to carry Rockefeller’s oil barrels.
As Rockefeller’s business grew, he gave more business to Vanderbilt. So much so that Rockefeller depended heavily on railroads and Vanderbilt couldn’t help spotting that vulnerability. The economics of railroad business was deteriorating so the two big railroad operators — Cornelius Vanderbilt and Tom Scott — joined hands and asked for better rates from Rockefeller. Rockefeller didn’t see this as just an attempt to push him to the wall. He recognized it as a long term threat. His masterstroke was to create oil pipelines and get rid of the dependency on railways altogether.
Carnegie was Tom Scott’s protege and his life was about to change when Scott gave him the challenge of building a rail bridge across the Mississippi river. Necessity, they say, is the mother of all inventions and in case of Carnegie, it was certainly true. Carnegie figured that iron wasn’t strong enough to build such a long bridge. At that time, steel had already been invented but no one had solved the puzzle of producing steel in large quantities. Carnegie’s genius was in developing the capability to mass produce steel for his own use.
Like any new technology, steel was questioned as a reliable material for constructing a bridge. To showcase the strength of steel, Carnegie made an elephant walk across the Mississippi bridge. He not only won people’s trust, but he also created a new line of business for himself when he began supplying steel to the entire railroad industry.
When the railroad bubble burst, the demand for steel dried up and Carnegie had to start looking for new opportunities. A growing trend during those times was the migration of a large population of people to large cities like New York and Chicago. This mass migration created demand for buildings to house these people. The world’s first skyscraper was built in Chicago. It stood on Carnegie steel. America started growing up vertical on Steel and that laid the foundation of Carnegie’s steel empire.
As the industrial revolution picked up speed, it brought in bigger riches for the likes of Rockefeller and Carnegie. But some people were paying a hefty price — the factory workers. When Carnegie put him in charge of operations, Henry Frick, in an attempt to drive the profitability, raised working hours and cut the wages of the steel mill workers. Soon, a strike broke out in homestead mill. Frick hired Pinkertons (a private security company known to have more men than America’s national army at that time). The conflict turned bloody resulting in 9 workers being shot dead by Pinkertons. Carnegie had to fire Frick.
For Carnegie, the deteriorating economies of running steel business was probably the second thing in mind. The more pressing one was a threat from a financial mercenary — JP Morgan.
JP Morgan’s power and wealth became a force to reckon. On one instance he became the country’s banker when he lent $3 billion (in today’s money) to the American government to bail them out from collapse.
A little backstory on JP Morgan’s rise to power. He was the son of a wealthy banker notorious for consolidating industries and making profits from the transaction. While his father preferred making money in traditional ways, JP’s eyes were set on the horizon. A new invention caught his fancy — the light bulb.
Morgan funded Thomas Edison to set up a small power plant at Morgan’s backyard and lay 4000 feet of wiring to install 400 light bulbs in the house. Morgan’s home became the first private residence in the world to be powered by electricity. The countries’ elite were invited to Morgan’s house to showcase the new invention.
Against his father’s advice, Morgan invested $83million (in today’s money) with Edison and created Edison Electric Company. Until then, the dominant source of light in most American homes was the kerosene. As electricity started replacing kerosene, a threat of disruption loomed on the most powerful man in America — John Rockefeller.
While Edison was going full out on his DC electricity, his apprentice, Nichola Tesla, after failing to persuade Edison about the superiority of AC electricity, left him and convinced a new investor — George Westinghouse — to fund Tesla.
Pressured by JP Morgan to crush Tesla, Edison publicly electrocuted an elephant to prove the risks with AC. He didn’t stop there. He built the AC-powered electric chair for the state prisons hoping that it would instill fear in people’s mind for AC. People were literally shocked but Edison’s move backfired when the first electric chair execution ended up roasting the man and public remembered just two things — electricity is dangerous and Edison was involved.
To help Westinghouse get more funding, Tesla dissolved his royalty contract. Which means, even if Tesla’s company succeeded, he would never be rich. Edison General Electric got another blow when they lost out the contract for Niagra Power Station — the biggest at that time — to Tesla-Westinghouse’s company. A furious Morgan threatened Westinghouse with a patent lawsuit and forced him to give up Tesla’s AC patent. Morgan then bought a controlling stake in Edison General Electric, renamed it to General Electric, converted it to an AC electric company and let go of Edison.
Ironically, Morgan ended up playing the old move he learned from his father — eliminating competition by consolidating the industry. This modus operandi gets a name — Morganization. With General Electric, Morgan joined the ranks of Carnegie and Rockefeller.
Rockefeller, Carnegie, and Morgan
It’s amusing to see how these early billionaires found it exciting to get into each other’s way. It got Carnegie’s attention when Rockefeller made a significant investment unrelated to his oil business — a large iron ore mine. Rockefeller started selling the iron ore to Carnegie’s competitors at rock bottom prices. This forced Carnegie to negotiate a deal with Rockefeller and buy all the supply from the iron ore mine. Given Rockefeller’s limited knowledge about steel business, it was a masterstroke.
The legend has it that Rockefeller and Carnegie were always in a race for the coveted spot — the richest man in the world. Years of being in the steel business and still being behind Rockefeller in the race to be the richest eventually started wearing down Carnegie. So he finally said yes to JP Morgan’s offer of $480 million for Carnegie steel. That’s about $400 billion in today’s money. JP Morgan renamed his new business The US Steel which went on to dominate the steel business for the next 100 years.
Morgan-Carnegie deal resulted in Carnegie’s net worth ballooning to $310 billion(in today’s money). He finally beat Rockefeller.
As electricity started going mainstream, Rockefeller launched a targeted PR campaign against electricity, painting the new technology as dangerous and deadly. But he realised that it was too late and the demise of his kerosene business inevitable and arriving fast. That’s when he started looking for other byproducts of oil refining. In this search, he found gasoline as a promising option and started using it for gasoline engines to run machinery in his refineries. The gas-powered engines quickly became common in factories across the industry. Luckily for Rockefeller, the gasoline demand exploded when some people started putting gasoline engines on four wheels to invent a new mode of transport — the horseless carriage (automobiles).
So you see the recurrence of a pattern? An entrepreneur solves a hard problem for himself and then turns that solution into a product to be sold to others. Rockefeller did it with gasoline. Carnegie with steel.
While the steel and oil businesses made their owners wealthier than ever, the conditions for factory workers deteriorated to the extent that 10 percent of steelworkers were dying from work-related accidents every year. The monopolistic practices that these titans had created in their respective industries were soon going to be challenged by an outsider — Henry Ford. Ford started paying his factory workers double of what other industries were willing to pay.
Before Ford entered the automobile business, owning a car was a luxury. Those who could afford it hired licensed drivers. An association called ALAM held the patent for automobile and any new car manufacturer had to take permission from ALAM. When ford proposed an affordable car for the common man, ALAM rejected it.
Ford devised a plan. He challenged the fastest driver for a race. When Ford won the race, it helped him attract attention and investors. He ignored the ALAM, setup up his car manufacturing company and launched a car that was priced drastically lower than other cars.
ALAM sued Ford demanding royalties for every car that he sold. While the court case continued, Ford sped up his production. He was rolling out 15 Model A cars every day. Eventually, the court ruled against ALAM.
Ford’s innovation in automobiles was his efficient production model powered by something called — assembly line. It allowed Ford to assemble a car in less than 2 hours. As a result of efficiency, the workers got paid much higher daily wages. Not only that, Ford gave his employees the luxury of 40 hour work week (8 hours per day, 5 days a week).
As Ford was demolishing the monopoly of ALAM, there was another monopoly being shattered — Standard Oil. In an anti-trust lawsuit, the court ordered Rockefeller to dissolve Standard Oil. Standard Oil split into 36 smaller companies. Exxon, Mobile, and Chevron were among those smaller subsidiaries.
Yuval Harari, a noted historian and my favourite author, writes in his book Sapiens —
Unlike physics or economics, history is not a means for making predictions. We study history not to know the future but to widen our horizons, to understand that our present situation is neither natural nor inevitable, and that we consequently have many more possibilities before us than we imagine. For example, studying how Europeans came to dominate Africans enables us to realise that there is nothing natural or inevitable about the racial hierarchy, and that the world might well be arranged differently.
To apply Harari’s argument to the story of The Men Who Build America, it would be interesting to imagine the direction in which the world might have gone, had these five individuals not pushed the boundaries of their ambition.
It might seem that railroads, steel, oil, and automobiles were inevitable. But what if they were not?