>>MARK HORGER: Let's discuss, now, some of the processes by
which in the late 19th century, more and more of the American
economy was dominated by a smaller and smaller number of
larger and larger business enterprises. This is a business world
that consumers today are relatively familiar with in which
many industries are dominated by a relatively small number of
relatively large firms, a world of Coke and Pepsi, a world of
Nike and Adidas, a world of Apple and Samsung.
These patterns spread in the late 19th century in a variety of
American industries. And there are basically two business
processes by which an industry that was previously dominated
by lots of small firms winds up under the control of a relatively
small number of relatively large firms, horizontal and vertical
integration. Horizontal integration is a relatively simple
process, and in some ways, isn't the most interesting of the two.
Horizontal integration means that two or more businesses that
do the same thing merge. And you saw a wave of these mergers
in a variety of industries in the late 19th century under a variety
of business forms. Businesses might form cartels or trusts or
holding companies, or other kinds of corporate structures that
made it possible to merge companies into one larger business
enterprise. But you also see a great deal of vertical integration
in the late 19th century and this is the more transformative
process.
Vertical integration is the process by which more and more
stages of the production of a product, from raw materials to the
actual product on the shelf come under the control of an
individual company. Let's talk about a few examples of
industries that were transformed by vertical integration in the
late 19th century. If it's 1840, and you are enjoying a steak in
Boston, I hope that that was recently a cow that was alive near
you in Boston shortly before it was turned into a steak.
But in the late 19th century in Chicago, one of the industries
that transformed Chicago into an industrial powerhouse was a
vertically integrated meat packing industry, where two
companies in particular, Armour and Swift, centralized the
production of meat in large factories in the Chicago area, and
they integrated vertically backward into owning their own
sources of cattle forward into marketing their own products
with their own brand name, shipping their products around
the country on their own refrigerated rail cars, such that by
1900, it was possible to buy nationally branded meat, the
production of which had come under the control of a single
vertically integrated company.
And these processes spread throughout the consumer
economy in the late 19th century. Frequently they came along
with developments in new kinds of continuous process
manufacturing machinery.
Here, for example, is one of the most innovative consumer
products of the late 19th century: the cigarette. This is
something called the Bonsack machine. This is a continuous
process machine, which means that a properly running
Bonsack machine allows you to pour a large amount of, quite
frankly probably relatively low quality tobacco in one end of
the machine, and cigarettes come out the other end, very very
quickly and efficiently.
This has an impact on how you sell tobacco. The way to profit
from the sale of tobacco in a situation like this is through
volume. There is a relatively high initial investment necessary
to build the machine, to build the factory, but once you've
invested that initial chunk of money, the actual raw material
cost per cigarette is quite small, and is a relatively small overall
percentage of the cost of the whole enterprise.
And so the way to profit through this is volume. And the
tobacco industry in the late 19th century integrated vertically,
and one of the things they did is that they integrated forward
into their own sales and advertising and marketing. Before the
invention of the Bonsack machine, most Americans who were
addicted to tobacco consumed it in hand-made forms. They
smoked cigars or they chewed tobacco, or they smoked pipe.
And the tobacco companies realized that they basically needed
to teach consumers that this was an acceptable way to be
addicted to tobacco.
And so the tobacco companies were quite innovative in their
advertising. The earliest baseball cards were not associated
with the bubblegum industry, they were associated with the
tobacco industry. These are cards advertising Old Judge
cigarettes from the late 1880's.
And the tobacco companies were concerned that American
men, who were the dominant tobacco consumers at the time,
would think that cigarettes would be insufficiently masculine a
way to be addicted to tobacco. And so you see them in their
advertising try to allay those fears. And the earliest baseball
cards were tied to the tobacco industry.
An example of a consumer industry that came into being
largely because of the emergence of this kind of continuous
process machine technology combined with vertical
integration was consumer film. This is an ad for the use of the
Kodak camera. In the 1880's, the Eastman Kodak Company
figured out a way to spread light sensitive, photosensitive
chemicals on an endless loop of celluloid in a continuous
machine process.
This made it a lot easier for people to take photographs.
Previously photography had been a relatively skilled, relatively
difficult thing to do. But once Kodak had invented this film
process, in order to profit from that, they needed to convince a
nation of Americans that they needed to be taking pictures
recreationally.
And so, Eastman Kodak integrated forward from the
manufacture of film into the manufacture of cameras. The
Kodak Brownie camera was literally a cardboard box with a
hole in it that contained a roll of film and a relatively simple
mechanism to open and close the lens.
And so, Eastman Kodak advertised to convince Americans how
and when and under what circumstances they should use
photography. These ads are similar in some ways to ads you've
probably seen advertising Apple products when the iPod and
the iPhone came out. The earliest Apple advertisements for
those products just showed people enjoying them and showed
you why your life was not as pleasant as it might be if you had
purchased this product. This is very much the same kind of
advertising.
As an indication of the degree to which entrepreneurs by the
1880's and 90's thought of the American rail network as
efficient and as national, is that the original business premise
of the Brownie camera around 1900 was that consumers
would buy the camera loaded with film and they would expose
the film, and then they would ship the entire camera, still
loaded with film, by mail back to upstate New York, And
Eastman Kodak would mail back their prints and the camera
refilled with film.
They eventually shifted to a different distribution model, but
the fact that it occurred to them that that would be a
reasonable way to convince more and more Americans that
they could take their own pictures gives you some idea of the
nature of the transformations in the economy that we're
talking about.
With respect to sporting goods, this was also an industry that
was transformed in the late 19th century as the result of some
of these business processes. Albert Spalding had been one of
the best pitchers of the 1870's, but he retired from baseball
relatively young to go into two businesses.
One was the business of owning baseball teams rather than
playing on them, but the other was sporting goods. And he
started with a storefront in Chicago, and through a process of
horizontal integration, merging with other sporting goods
companies, and vertical integration, integrating backward into
the production of his own products and forward into
marketing and advertising.
By 1900, Spalding sporting goods was essentially the trust in
control of the sporting goods industry in the United States. This
is Spalding's Baseball Guide from 1889. This was where the
official rules were printed every year. It gave you a summary of
the previous baseball season. It contained that year's editorials
from major league baseball about what was going on in
baseball and why they were the legitimate leaders of the game.
And then in the back were adds for a variety of Spalding
sporting goods.
This kind of mass production/mass distribution nationally
advertised economy is in core ways more or less the consumer
economy that we live in today. And this emerged in the United
States in the last quarter of the 19th century. And so one of the
most obvious and most important consequences of these
industrial changes was an economy more and more filled with
high volume, relatively low price, relatively low marginal
profit, that is the profit per item was relatively low, mass
produced, mass distributed consumer goods. Cigarettes,
sporting goods, cameras, processed foods, and a variety of
others.
This image is an advertisement for Montgomery Ward.
Montgomery Ward was one of the two leaders in the catalog
industry, the other one being Sears, and they had the business
idea that you could buy virtually anything from Montgomery
Ward by mail. You would mail them the money, they would
mail you the product, sort of the Amazon.com of the 1880's or
1890's.
And the catalog industry was like a lot of American industries
by the late 19th century in that it had grown, not usually
monopolistic. A monopoly is where one company controls the
entire industry. That happened in a few industries like oil, for
example, or tobacco. But in many industries what you got was
not total monopoly, but oligopoly, a relatively small number of
competing firms, Sears and Montgomery Ward, Armor and
Swift in meat. And this advertisement for Montgomery Ward is
in many ways a summary of this lecture.
In this advertisement, they've peeled away the walls of their
skyscraper in Chicago, showing you the bureaucratic
organization through which they efficiently move goods to you.
And in one of these departments, people are opening letters
and taking out orders and taking out money, and they send the
money to one department and they send the orders to another.
You probably have presidents and vice presidents in nice
corner offices in the taller part of the building up at the top.
And then the advertisement also reminds you that they're
vertically integrated. They're showing you the factories that
they use to make some of their products. They're showing you
what kind of a distribution network they have to bring it to
your door. This image gives you a pretty good idea of what
kinds of transformations have taken place in the consumer
economy in the last quarter of the 19th century.