The Great Merger Movement in American Business, 1895-1904

by Naomi R. Lamoreaux

Between 1895 and 1904 a great wave of mergers swept through the manufacturing sector of the United States' economy. This book explores the causes of the mergers, arguing that there was nothing natural or inevitable about turn-of-the-century combinations. Despite this conclusion, the author does not accept the view that they were necessarily a threat to competition. She shows that most of these consolidations were less efficient that the new rivals that appeared almost immediately, and they quickly lost their positions of market dominance. More over, in most of those few cases where consolidations proved to be more efficient, the nation was better off for their formation. Some exceptions occurred, however, and in these instances anti-trust policy should have had a significant role to play. Unfortunately, the peculiar division of power and authority that characterizes the Federal system of government prevented an effective policy from emerging. Ironically, anti-trust policy proved much more effective against small firms in relatively competitive industries than large firms in oligopolistic ones.

Genres: History, Economics, Finance, Business, American History

224 pages, Paperback

First published April 1, 1985

Reviews

[Frank Stein · Rating 5 out of 5]

What Lamoreaux shows in this wonderful and brief book is that the first great merger movement in American history was distinct from every other. In this period 75% of the firms that merged were consolidations of five or more. In the 1915-1920 wave it was just 14%. These were not vertical integrations but horizontal cartels, and over 3/4s of such large consolidations controlled at least 40% of their respective industries, and almost half controlled over 70%. Many of these, like US Steel, DuPont, International Harvester, Pittsburgh Plate Glass, American Can, and American Smelting and Refining, lasted until the 1980s or up until today.

Why did so many firms merge? Postwar scholarship discounted the drive to monopoly, and claimed there were efficiency reasons. But as Lamoreaux shows most of these mergers were from mass-production industries that expanded rapidly in the years up to the 1893 Panic, which had high fixed costs funded by debt and had trouble enforcing previous price pools (After the 1890 tariff led to an explosion in western tin plate mills, they had to organize two separate pools, which failed before merging in 1899 and then being brought into US steel). These often had bought up single-plant companies that had worn them down through depreciation and inadequate funding during the recession. If the new trust companies could secure special benefits, either through collective bargaining with workers across the industry or buying up raw materials (like the Mesabi Range of ore and US Steel, which once controlled 50% of US ore directly, and another 20% by leasing James J. Hill's mines), they could survive by pursuing a "dominant firm strategy," where they refused to engage in price competition but allowed extra efficiency to keep prices up and earn extra profits. But about 50% of such mergers couldn't keep efficiency up or secure special barriers to entry and failed.

Lamoreaux also shows that such mergers changed antitrust policy. At first, courts ruled that such "tight combinations" of actually co-owned firms were not a restraint on trade, partially because courts thought state-level incorporation statutes would take care of these problems. But once they decided to break up big mergers on the "rule of reason," they had to look for complaints from competitors. This made strategies like US Steel's, where they allowed other firms to take the rest of the market after they had secured their share, impossible to disentangle, because most of the company's competitors actually praised them as straightforward and honest. By contrast, the policy made cutthroat competitors more liable to antitrust prosecution.

Combined, this gradually unfolding story helped rewrite how I saw some of the biggest economic and political battles of the early twentieth century. By intense investigations into industry archives and general statistics, she illuminates economic and policy battles in a way that, still 35 years after it was published, hasn't been incorporated in the usual narrative.

[Sean Chick · Rating 3 out of 5]

An excellent response to Alfred Chandler.