What Are the Factors of Production? 

The change from an agricultural economy to an industrial one was possible because the United States had the resources needed for a growing economy. Among these resources were what economists call the factors of production: land, labor, and capital.

• The first factor of production, land, means not just the land itself but all natural resources. The United States held a variety of natural resources that had industrial uses.

• The second production factor is labor. Large numbers of workers were needed to turn raw materials into goods. This need was met by the rapid growth of population. Between 1860 and 1900, the population of the country more than doubled.

• The third production factor, capital, is the equipment—buildings, machinery, and tools—used in production. Land and labor are needed to produce capital goods. These goods, in turn, are essential for the production of consumer goods. The term capital is also used to mean money for investment. Huge amounts of money were needed to finance industrial growth.  One source of money was the selling of stock by corporations. Another was corporate savings, or businesses investing a portion of their earnings in better equipment.

Raising Capital 

With the economy growing after the Civil War, many businesses looked for ways to expand. 

To do so, they had to raise cap ital. They needed capital to buy raw materials and equipment, to pay workers, and to cover shipping and advertising costs.

 One way a company could raise capital was by becoming a corporation . 

A corporation is a company that sells stock, or shares, of its business to the public. The people who invest in the corporation by buying stock are its shareholders, or partial owners.

In good times, shareholders earn dividends cash payments from the corporation’s profits—on the stock they own. If the company prospers, its stock rises in value, and the shareholders can sell it for a profit. If the company fails, however, the shareholders  lose their investment. In the late 1800s, hundreds of thousands of people shared in corporate profits by buying and selling stocks in special markets known as stock exchanges.

Growth of Corporations 

The nation’s early corporations were created only for specific public benefits, such as the building of a highway. Soon many manufacturing and business firms were incorporating. Big corporations had several advantages over small manufacturing companies. Big corporations could produce goods more cheaply and efficiently. They could continue to operate in poor economic times by cutting prices to increase sales. Many were also able to negotiate refunds from the railroads, which lowered their operating costs further. Banks played a major role in this period of economic growth. Businesses borrowed money from banks to start or expand their operations. The banks, in turn, made profits on the loans.

-The Oil Business-

Monopolies in the steel business and other industries created the need for government regulation.

Steel also became a huge business in the late1800s. Steel is a strong and long-lasting form of iron treated with carbon—the ideal material for railroad tracks, bridges, and many other products. Before the 1860s, however, steel was not widely used because it was expensive to manufacture. The development of new manufacturing techniques helped overcome this problem. 

Two new methods of making steel—

• the Bessemer process, which was developed by Henry Bessemer of England 

•  the open-hearth process—changed the industry. 

With these new methods, mills could produce steel at afford able prices and in large quantities. 

In the 1870s, large steel mills were built close to sources of iron ore in western Pennsylvania and eastern Ohio. Pittsburgh, Pennsylvania  became the steel capital of the United States. Cities located near the mines and close to waterways like Cleveland, Ohio; Chicago, Illinois; Birmingham, Alabama; and Detroit, Michigan, also became centers of steel production. Andrew Carnegie 

The leading figure in the early years of the American steel industry was Andrew Carnegie, son of a Scottish immigrant. Starting as a telegraph operator, Carnegie worked his way up to become manager of the Pennsylvania Railroad. While in that job, he introduced the first successful sleeping car. In 1865 he left the railroad to invest in the growing iron industry.

Carnegie soon realized that steel would have an enormous market. After learning about the Bessemer process, he built a steel plant near

Pittsburgh that used the new process. Carnegie named the plant the J. Edgar Thompson Steel Works, after the president of the Pennsylvania Railroad—his biggest customer.

Vertical Integration

 By 1890 Andrew  Carnegie dominated the steel industry. His company became powerful through vertical integration (VUHR•tih•kuhl), combining firms involved in different steps of manufacturing. Carnegie bought iron and coal mines, warehouses, ore ships, and railroads to gain control of all parts of the business of making and selling steel.  When Carnegie combined all his holdings into the Carnegie Steel Company in 1900, he was producing one-third of the nation’s steel.

 In 1901 Carnegie sold his steel company to banker J. Pierpont Morgan. Morgan combined the Carnegie company with other businesses to form the United States Steel Corporation, the world’s first billion-dollar corporation.

Philanthropists 

Andrew Carnegie, John D. Rockefeller, and other industrial millionaires of the time grew interested in philanthropy—the use of money to benefit the community. The philanthropists founded schools, universities, and other civic institutions across the United States.

 Carnegie donated $350 million to various organizations. He built Carnegie Hall in New  York City, one of the world’s most famous concert halls; the Carnegie Foundation for the  Advancement of Teaching; and more than 2,000 libraries worldwide. Carnegie often wrote about social and political issues. He felt that a person who has great wealth also has a duty to use the surplus to help humankind. He stated that a “man who dies rich dies disgraced.” 

Rockefeller used his fortune to establish the University of Chicago in 1890 and New York’s Rockefeller Institute for Medical Research.

Corporations Grow Larger

 In 1889 New Jersey encouraged the trend toward business monopolies by allowing holding companies to obtain charters, a practice that some states prohibited. A holding company would buy control ling interests in the stock of other companies instead of purchasing the companies outright.

Rockefeller formed Standard Oil of New Jersey  so that the corporation could expand its holdings. Other states also passed laws that made  corporate mergers —the combining of companies—easier. Mergers concentrated economic power in a few giant corporations and a few powerful individuals, such as Rockefeller and banker J. Pierpont Morgan. 

By 1900 one-third of all American manufacturing was controlled by just 1 percent of the country’s corporations. These giant corporations were the driving force behind the great economic growth of the period, but they also posed problems. On the one hand, many Americans admired the efficiencies that large businesses provided. On the other hand, some argued that a lack of competition hurt consumers. Without competition, corporations had no reason to keep their prices low or to improve their goods and services.

Big Business and Social Science 

Some business practices in the late 1800s were based on a scientific idea known as social Darwinism. 

Charles Darwin, a British scientist, had published a theory in 1859 that all plants and animals evolved over long periods of time by a process known as natural selection. 

According to the theory, organisms competed for survival,  and those animals best adapted to the environment survived, while the others did not. Later thinkers applied Darwin’s biological theory to human society and business. Some industrial leaders, such as John D. Rockefeller, argued that “survival of the fittest” helped explain the growth of huge companies. As one supporter of social Darwinism put it,

“We have unmistakable proof 

that throughout all past time, there

has been a ceaseless devouring of

the weak by the strong.”

—from First Principles

by Herbert Spencer

Carnegie argued that big companies like his own were beneficial to society. The revolution in productivity enabled “the poor to enjoy what the rich could not before afford.” Companies that grew and thrived raised their workers' standard of living.

Government Regulation

 Due to increasing pressure from the public, government stepped in to regulate business. 

During the 1880s, several states passed laws restricting business  mergers. Corporations, however, avoided these laws by doing business in states that had no such laws. 

Public pressure for a federal law to prohibit trusts and monopolies led Congress to pass the Sherman Antitrust Act in 1890. The law sought “to protect trade and commerce against unlawful restraint and monopoly.” 

The act did not clearly define either “trusts” or “monopolies,” however. 

In its early years, the Sherman Antitrust Act did little to curb the power of big business. By contrast, in the 1890s the government did use the act to stop a strike by railroad workers that threatened to slow the nation’s mail delivery.