panic and mergers -- 2/25/14

Today's selection -- from The Great Merger Movement in American Business, 1895-1904 by Naomi R. Lamoreaux. In the Panic of 1893, one of the greatest economic calamities in American History, 500 banks were closed, 15,000 businesses failed, and numerous farms ceased operation. The unemployment rate in Pennsylvania hit 25%, in New York 35%, and in Michigan 43%. Soup kitchens were opened in order to help feed the destitute. Facing starvation, people chopped wood, broke rocks, and sewed in exchange for food. In some cases, women resorted to prostitution to feed their families. This panic also brought an unprecedented wave of mergers as businesses battled fierce price competition and scarce funding. More than 1,800 firms disappeared into consolidations, many of which forming giants that controlled at least 40 percent of their industries and as much as 70 percent. Some of the most famous products of this consolidation were U.S. Steel, DuPont, International Harvester, Pittsburgh Plate Glass, American Can, and American Smelting and Refining:

"Between 1895 and 1904 a great wave of mergers swept through the manufacturing sector. Nothing like it had ever been seen before, or has been seen since. ... The predominant process was horizontal consolidation -- the simultaneous merger of many or all competitors in an industry into a single, giant enterprise.

"Although some manufacturers had previously organized consolidations, there had never been so many in such a short time. The formation in 1882 of the Standard Oil Trust, the first consolidation, had stimulated a few imitations in the sugar, whiskey, lead, cordage, cottonseed-oil, and linseed-oil industries. New Jersey's passage in 1888 of a general incorporation law for holding companies gave the merger movement another shot in the arm, but it was not until the late 1890s that the idea of consolidation really caught on. In 1895, four consolidations were organized; in 1897, there were six. Then, in 1898, the number of new combines suddenly rose to sixteen, and, in 1899, to a high of sixty-three. By the next year the movement began to taper off. Twenty-one consolidations were formed in 1901, seventeen in 1902, and a scant three in 1904.

"Brief as the merger movement was, it threatened to make radical changes in the competitive structure of American industry. All told, more than 1,800 firms disappeared into consolidations, many of which acquired substantial shares of the markets in which they operated, Of the ninety-three consolidations whose market shares I have been able to trace, seventy-two controlled at least 40 percent of their industries and forty-two at least 70 percent. Even assuming that none of the remaining mergers achieved significant market power, this still means that more than half of the consolidations absorbed over 40 percent of their industries, and nearly a third absorbed in excess of 70 percent. Moreover, though some of the consolidations quickly lost their dominant positions, others -- including U.S. Steel, DuPont, International Harvester, Pittsburgh Plate Glass, American Can, and American Smelting and Refining -- still ranked among the nation's 100 largest corporations half a century later.

"Not surprisingly, contemporaries reacted to the great merger movement with alarm -- a mood that was reflected in the scholarly literature as well as in the popular press. According to Charles J. Bullock's 1901 survey of the literature on trusts, the number of works devoted to the subject grew, as did public concern, with the number of consolidations. ...

"My conclusion is that the consolidation movement was by no means an inevitable component of the development of large-scale industry; oligopolistic market structures could also have emerged as a result of a more gradual process of growth and adjustment. In the case of the late nineteenth-century United States, however, a particular conjunction of circumstances -- specifically the simultaneous rapid expansion of many capital-intensive industries in the early 1890s, followed by the deep depression of 1893 -- gave rise to abnormally serious price wars and consequently to the great merger movement."


author:

Naomi R. Lamoreaux

title:

The Great Merger Movement in American Business, 1895-1904

publisher:

Cambridge University Press

date:

Cambridge University Press 1985

pages:

1, 2, 5, 12
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