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The American History Series

Abbott, Carl Urban America in the Modern Age: 1920 to the Present, 2nd ed.

Aldridge, Daniel W. Becoming American: The African American Quest for Civil Rights, 1861–1976

Barkan, Elliott Robert And Still They Come: Immigrants and American Society, 1920s to the 1990s

Bartlett, Irving H. The American Mind in The Mid‐Nineteenth Century, 2nd ed.

Beisner, Robert L. From the Old Diplomacy to the New, 1865–1900, 2nd ed.

Blaszczyk, Regina Lee American Consumer Society, 1865–2005: From Hearth to HDTV

Borden, Morton Parties and Politics in the Early Republic, 1789–1815

Carpenter, Roger M. “Times Are Altered with Us”: American Indians from First Contact to the New Republic

Carter, Paul A. The Twenties in America, 2nd ed.

Cherny, Robert W. American Politics in The Gilded Age, 1868–1900

Conkin, Paul K. The New Deal, 3rd ed.

Doenecke, Justus D., and John E. Wilz From Isolation to War, 1931–1941, 4th ed.

Ferling, John Struggle for a Continent: The Wars of Early America

Ginzberg, Lori D. Women in Antebellum Reform

Griffin, C. S. The Ferment of Reform, 1830–1860

Hess, Gary R. The United States at War, 1941–45, 3rd ed.

Iverson, Peter, and Wade Davies “We Are Still Here”: American Indians since 1890, 2nd ed.

James, D. Clayton, and Anne Sharp Wells America and the Great War, 1914–1920

Kraut, Alan M. The Huddled Masses: The Immigrant in American Society, 1880– 1921, 2nd ed.

Levering, Ralph B. The Cold War: A Post– Cold War History, 3rd ed.

Link, Arthur S. and Richard L. McCormick Progressivism

Martin, James Kirby, and Mark Edward Lender “A Respectable Army”: The Military Origins of the Republic, 1763–1789, 3rd ed.

McCraw, Thomas K. and Childs, William R. American Business Since 1920: How It Worked, 2nd ed.

McMillen, Sally G. Southern Women: Black and White in the Old South, 2nd ed.

Neu, Charles E. America’s Lost War: Vietnam, 1945–1975

Newmyer, R. Kent The Supreme Court under Marshall and Taney, 2nd ed.

Niven, John The Coming of the Civil War, 1837–1861

O’Neill, William L. The New Left: A History

Pastorello, Karen The Progressives: Activism and Reform in American Society, 1893–1917

Perman, Michael Emancipation and Reconstruction, 2nd ed.

Porter, Glenn The Rise of Big Business, 1860–1920, 3rd ed.

Reichard, Gary W. Politics as Usual: The Age of Truman and Eisenhower, 2nd ed.

Reichard, Gary W. American Politics since 1968: Deadlock and Disillusionment

Remini, Robert V. The Jacksonian Era, 2nd ed.

Riess, Steven A. Sport in Industrial America, 1850–1920, 2nd ed.

Simpson, Brooks D. America’s Civil War

Southern, David W. The Progressive Era and Race: Reaction and Reform, 1900–1917

Storch, Randi Working Hard for the American Dream: Workers and Their Unions, World War I to the Present

Turner, Elizabeth Hayes Women and Gender in the New South, 1865–1945

Ubbelohde, Carl The American Colonies and the British Empire, 1607–1763, 2nd ed.

Weeks, Philip “Farewell, My Nation”: The American Indian and the United States in The Nineteenth Century, 2nd ed.

Wellock, Thomas R. Preserving the Nation: The Conservation and Environmental Movements, 1870–2000

Winkler, Allan M. Home Front U.S.A.: America during World War II, 3rd ed.

Wright, Donald R. African Americans in the Colonial Era: From African Origins through the American Revolution, 3rd ed.

American Business Since 1920: How It Worked

Third Edition

 

 

Thomas K. McCraw
William R. Childs

 

 

 

 

 

 

 

 

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Tells the story of how America’s biggest companies began, operated, and prospered post‐World War I

This book takes the vantage point of people working within companies as they responded to constant change created by consumers and technology. It focuses on the entrepreneur, the firm, and the industry, by showing—from the inside—how businesses operated after 1920, while offering a good deal of Modern American social and cultural history. The case studies and contextual chapters provide an in‐depth understanding of the evolution of American management over nearly 100 years.

American Business Since 1920: How It Worked presents historical struggles with decision making and the trend towards relative decentralization through stories of extraordinarily capable entrepreneurs and the organizations they led. It covers: Henry Ford and his competitor Alfred Sloan at General Motors during the 1920s; Neil McElroy at Procter & Gamble in the 1930s; Ferdinand Eberstadt at the government’s Controlled Materials Plan during World War II; David Sarnoff at RCA in the 1950s and 1960s; and Ray Kroc and his McDonald’s franchises in the late twentieth century and early twenty‐first; and more. It also delves into such modern success stories as Amazon.com, eBay, and Google.

  • Provides deep analysis of some of the most successful companies of the 20th century
  • Contains topical chapters covering titans of the 2000s
  • Part of Wiley‐Blackwell’s highly praised American History Series

American Business Since 1920: How It Worked is designed for use in both basic and advanced courses in American history, at the undergraduate and graduate levels.

Thomas K. McCraw (d. 2012) was former Professor and Isidor Straus Professor of Business History for the Harvard Business School, where he was instrumental in making Business History an important aspect of the MBA program. McCraw received a Pulitzer Prize in History in 1985 for his book, Prophets of Regulation (1984). He also served as editor of the Business History Review, as associate editor of The Encyclopedia of the United States in the Twentieth Century, and as president and trustee of the Business History Conference. He was a member of the Board of Syndics of Harvard University Press, the Council of the Massachusetts Historical Society, the advisory board of Nomura School of Advanced Management (Tokyo), and the editorial boards of Reviews in American History and Harvard Business Review.

William R. Childs was former History Professor at Ohio State University. He retired from teaching in 2014. Tom McCraw was his advisor at The University of Texas at Austin in the 1970s. After McCraw left for the Harvard Business School in 1978, he remained on Childs’ dissertation committee and hired him as a research assistant for his book Prophets of Regulation (1984). In addition to his two books and numerous articles and book reviews, Childs was editor of Essays in Economic and Business History (1995–1998) and has served on the Board of Editors for the Business History Review and Enterprise & Society.

INTRODUCTION

Past and Present

In 1920, most Americans lived very differently from the way they do now. In that year half of all Americans lived on farms or in very small towns. Many communities remained unconnected to the rest of the country by railways, highways, or telephones. Except for immigrants, most Americans did not travel more than 150 miles from where they were born.

Only one‐third of the nation’s homes had electricity in 1920. Cooking, cleaning, and laundry tasks consumed 70 hours a week. Today, after one of the greatest social changes in human history, that total has plunged to 15 hours because of the availability of such appliances as electric refrigerators, microwave ovens, washers and dryers, vacuum cleaners, dishwashers, garbage disposals, and fast food and take‐out restaurants.

In 1920 no Americans had a TV, computer, or cell phone, let alone an iPad or smart watch. They did not email, text‐message, or purchase retail goods and invest in the stock market online or with their cell phones. They did not take the family to eat at McDonald’s or any other restaurant chain. They did not fly in airplanes, draw cash from ATMs, or use credit cards. There were no malls or supermarkets (the shopping cart was not invented until 1937). Most Americans did not graduate from high school, given the pressure to find a paying job in their mid‐teens; today 85 percent graduate from high school. Only 1 person in 30 graduated from college in 1920; today 1 in 4 do so.

In 1920 care of children, the elderly, and the ill took place in the home; doctors often made “house‐calls.” Deaths from pneumonia, tuberculosis, cholera, diphtheria, measles, influenza, and typhoid fever ran at more than ten times the current rates. Premodern sanitary conditions held forth in many areas. Only 1 in 5 households had an indoor flush toilet. Controlling the size of families was difficult, as reliable birth control methods (other than abstinence) were unavailable or illegal. Most of these conditions true for America in the 1920s still exist for a majority of the world’s population.

Nearly four decades would pass before most Americans and some consumers in other nations enjoyed modern products such as refrigerators. In the invention, development, manufacturing, and marketing of such products, American firms led the way. By 1960, the year John F. Kennedy was elected president, 96 percent of American homes had electric refrigerators, but only 41 percent of French and 30 percent of English and Italian homes had them. That Europeans caught up to Americans by the end of the century suggests how ubiquitous the American‐style refrigerator had become.

The Story Told Here

The story of American business since 1920 logically divides into six periods: the 1920s; the Depression of the 1930s; the New Deal and World War II; the postwar era; the 1980s to the 2000s; and the Financial Crisis of 2007–2008 and the Great Recession of 2007–2009. In the chapters to follow, particular individuals, firms, and industries are highlighted in the era in which they made the most impact, even though their beginnings might have come earlier or they may remain important today.

Many of the chapters to follow take the vantage point of entrepreneurs working at firms in American industries, showing from the inside how businesses operated. The “overview” chapters describe and analyze the social, cultural, and political contexts of the evolving American capitalist system within which the entrepreneurs made management decisions. As the story unfolds over the twentieth century and into the twenty‐first, the internationalization of American business and comparisons between American‐style capitalism and other nations’ political economies become more prominent.

Trends

Four potent trends in American business since 1920 underpin the narrative that follows. None proceeded without temporary setbacks, but all kept moving forward:

  1. The relentlessness of change. All capitalist economies share this characteristic, but it applies with special force to the United States, where it is accurate to speak of relentlessly accelerating relentlessness. After 1920 the tempos of economic change grew faster, and then faster still. No generation in human history before 1920 has experienced more rapid and relentless change than have the generations following.
  2. A growing empowerment of consumers and entrepreneurs. Here the main driving force was the increase in per‐capita incomes by a factor of six from 1920 to 2014. This unprecedented rise in the nation’s affluence was accompanied by a profound shift in the nature of jobs. In 1920, 30 percent of the population worked on farms; today, 1.5 percent do so. In 1920, almost 30 percent of the population labored in goods‐producing industries such as mining, construction, and manufacturing; today the percentage is 12.6. Jobs in service industries such as retail sales, banking, restaurants, medical services, house cleaning, music teachers, etc. comprised nearly 40 percent of all jobs in the 1920s; today 80 percent of Americans work in the service sector. Together these two big changes – sharply rising incomes and radical redeployments in jobs away from agriculture and production toward services – brought tremendous gains in both consumer power and entrepreneurial opportunity. To cite just one example from early in the story: with the advent of motor vehicles, millions of Americans enjoyed a new sense of freedom and vast opportunities to start new automobile‐related businesses such as taxis, buses, and delivery services.

    The evolution of electronic media stimulated the growing empowerment of consumers and entrepreneurs as well. This growth began with AM radio in the 1920s, continued with FM radio and black and white television in the 1940s, accelerated with color television in the 1960s, and high definition television (HDTV) and digital cable in the 1990s and early 2000s, and today advances with streaming online content accessible by laptops and cell phones. Meanwhile, a small government project created in the 1980s – the Internet – led to the World Wide Web in the 1990s. Products and services competed for the consumer, and especially with the privatization of the Net in 1995, undreamed of opportunities beckoned the entrepreneur.

    This growing empowerment extended to groups previously excluded from complete participation in the capitalist system. In large measure because of national government responses to political pressure in the 1960s and 1970s, women and minorities exerted more influence as consumers and entrepreneurs during the latter decades of this story.

  3. An increasing tension between centralized and decentralized decision making in business, and the general triumph of decentralization. Constant decision making lies at the heart of business. Every hour of every day, millions of decisions are made within companies. But by whom? On what basis? In whose interest? During and after the 1920s, as many companies grew ever larger, tensions about decision making became increasingly complicated. The best‐run firms began to develop effective ways to push authority downward to the person best informed to make a particular decision, regardless of where in the hierarchy that person might rank. This was a gradual and often painful lesson for managers to learn, as many stories in this book will show. Companies whose leaders failed to learn the lesson not only suffered, but often perished. In the latter twentieth century, the tensions increased as financial considerations began to influence entrepreneurs to change the way they made business decisions. More and more the focus fell on making short‐term profits, rather than developing long‐range strategies that would ensure the emergence of useful new goods and services.
  4. Progress toward controlling the dark side of business, so that the system did not destroy itself from within. Competition can bring out the best and worst of human actions. The pressure to make profits often tempts managers to use every advantage, and that sometimes results in unethical and illegal behavior toward their competitors, workers, and consumers. New laws and regulations typically emerge after the exposure of serious problems, rarely in anticipation of them. The American economy is a mixed economy in which most businesses are privately owned and markets are the dominant form of coordination, but there is some government spending on oversight and regulation in order to promote social aims. There is in American business–government relations a constant tension between promoting business and regulating business. Governments promote entrepreneurship through enforcing contract law and supporting infrastructures (transportation, communications, and banks). In economies and societies embracing constant change, governments must always play catch‐up in their efforts to regulate business. In the years since the 1930s to the 1980s, US regulators did a fairly good job of reining in bad behavior without stifling entrepreneurship. The regulatory regime was not perfect, however, and in the 1970s government restraints began to loosen over a variety of industries. That loosening led to some positive results – more consumer choice and entrepreneurial activity in telecommunications and airlines – but also to the Savings and Loan Crisis of the 1980s and the Financial Crisis of 2007–2008.

A Matter of Size

Almost every business begins as a small firm (in today’s parlance, a “start‐up”). Those that become big do so because their managers develop winning formulas that meet the demands of the market. With one exception, all of the firms analyzed in this book are now big businesses (the Radio Corporation of America (RCA) no longer exists).

Their large size is also a function of the kinds of industries in which they operate. Firms that managed to survive long competitive struggles in automobiles, airplanes, consumer electronics, oil, chemicals, and other industries that require huge capital investments, almost always grew big – in the United States and elsewhere. But in the majority of industries, including printing, furniture, jewelry, pubs and restaurants, house painting, plumbing, carpentry, and repair services of all kinds, even successful companies rarely grow into big businesses. Only a few thousand of the millions of enterprises now operating in the United States are truly large. In no country in the world does a majority of the labor force work in a big business having more than 1,000 employees.

Businesses of different sizes deal with one another constantly. Big businesses buy from and sell to networks of small‐ and medium‐sized suppliers and subcontractors. The big firms generally have the preponderance of power in these relationships. But even tire manufacturers have very little bargaining power to set prices of new tires to the automobile manufacturers; almost all of their profits come from selling replacement tires direct to the consumer. And megastores like Walmart, large franchising systems like McDonald’s, and e‐commerce stores like Amazon exert tremendous power over their suppliers of any size.

Earlier political debates over whether business should be allowed to become and remain large often took place without the understanding we have now about how these business relationships developed. Small businesses have been prosecuted under antitrust laws to prevent them from banding together to compete with big firms, and in other cases to maintain more competitors while sacrificing economic efficiencies.

There is no question that sometimes businesses can grow too big; or that executives can be paid too much; or that lobbyists actually write legislation advantageous to their large corporate clients and not necessarily for consumers or the public. Starting with the railroads in the mid‐nineteenth century, these sorts of outcomes have happened many times in American history. The key issue is how long the electorate will tolerate abuses without pressing government to correct them.

The Key Internal Problem

The most difficult problem for management of a firm of any size is where to lodge the power to make different kinds of decisions. How do managers balance the necessity for centralized control and the equally strong need for employees to have enough autonomy to make maximum contributions and derive satisfaction from their work?

This balance between centralized and decentralized decision making applies to any organization of people. In the family, for example, these questions arise: Must the family eat together every night? Should the parent or the child set the appropriate bedtime hour? Should the adults or the students choose what kinds of clothing may be worn to school? No single rule will guarantee the best result every time, or in all families. Similarly, in the American military, which appears from the outside to be rigidly centralized (there are 23 different ranks), there has been a concerted effort to encourage officers throughout the command structure to respond to specific events around them within the larger context of the battle plan.

In business, good managers continuously evaluate and adjust the balance between centralized and decentralized decision making. The better a company is organized, the more naturally decisions gravitate to the spot where the best information on the particular issue is available.

This book illustrates the historical struggle over business decision making through the stories of individual firms. The failures of Henry Ford at Ford Motor Company and David Sarnoff at RCA to find the balance between centralized and decentralized decision making contrast with the successful stories of Alfred Sloan at General Motors, Neil McElroy at Procter & Gamble, Ferdinand Eberstadt and the Controlled Materials Plan during World War II, and Ray Kroc at McDonald’s. In the latter years under study, a radical decentralized approach burst onto the scene with the emergence of information technology and e‐commerce, where Jeff Bezos at Amazon, Meg Whitman at eBay, and Sergey Brin and Larry Page at Google led the way.

Broader Contexts

In addition to the four major trends outlined above, two broad contexts, overlapping in part, surround the narrative in this book: the notion of three industrial revolutions and the evolution from managerial capitalism to financial capitalism.

The story that follows began during the middle of the Second Industrial Revolution and ends in the midst of the third one; aspects of the first two informed the third. The definitions that follow apply to Western Europe and the United States; other areas of the world encountered the changes at later dates.

In the period of the First Industrial Revolution, which lasted from about the 1760s to the 1840s, steam engines powered by coal replaced human and animal energy. During this time, people began to regiment their work by the clock, not by the sun as they had done for millennia. Large factories appeared in the textile industry and a few others. Scale economies based on interchangeability of parts and sub‐division of labor enabled the mass production of cloth, clocks and watches, and small arms, all of which became less expensive to consumers. For the most part, market forces shaped competition among businesses. Financing of business was based on credit, and family connections often anchored this era of market capitalism.

Stretching from the 1840s to the mid‐twentieth century, the Second Industrial Revolution rested on technological changes in transportation – railroads, autos and trucks, airplanes – and communication – telegraph, telephone, and radio. Steam power gave way to electric and internal combustion engines, both of which required more coal and petroleum fuels to run the transport systems and machinery in larger factories and assembly plants. Mass marketing arose to distribute the increased mass production of goods. Large‐scale businesses and new forms of business evolved to make the transport, mass production, and distribution systems more efficient, thus reducing prices to consumers even more. During this era of managerial capitalism, financing took place in the stock markets and investment banking houses in Europe and the northeast US. American businesses in the late nineteenth and early twentieth centuries began to invest in mining operations, factories and distribution networks overseas, mainly in Europe and South America but in China as well.

With impetus from businesses needing to manage large amounts of information and military intelligence operations during World War II, the Third Industrial Revolution began at mid‐century and continues today to shape and reshape American business enterprise. It features information technology and knowledge work, and has sped up the divergence between the numbers of service sector jobs and those of agriculture, mining, construction, and manufacturing. Science‐based industries such as electronics, synthetic chemicals and pharmaceuticals, and computer hardware and software, along with an unparalleled expansion of financial services, have led economic growth. All kinds of businesses, of varying sizes, connect more to the global economy than ever before.

In the early decades of the twentieth century, numerous large‐scale businesses dominated the American economy. Firms in such industries as railroads, iron and steel, petroleum, and mining were highly capital intensive; large sums of money were required to operate them. Such sums came first from investors and then from retained earnings. Because these firms were so large (in the 1890s the Pennsylvania Railroad employed more workers than did the federal government), the management of them was separated from the ownership. Hundreds or even thousands of stockholders could not meet at one time to make decisions on how to manage the business. Instead, professional managers – more and more of whom were trained at business schools – made decisions on finance, manufacturing, marketing, and labor relations. And they did so with the long‐term health of the company in mind.

For the most part, these large business firms were managed within centralized, functional management structures that focused on reducing costs through developing scale economies. Some of them were vertically integrated firms in which raw materials acquisition, production, and marketing were directed from a central office. The professional managers oversaw large‐scale technologies like railroad and electrical systems, and steel manufacturing plants and large labor forces of factory workers, clerks, and secretaries. Together, managers and their staffs, and eventually factory workers, became part of the growing American middle class.

This form of managerial capitalism – centralized, functional, professional – evolved over the next century as business leaders struggled to respond to incessant changes in the markets. Many times the responses worked, but sometimes they did not.

American Business and the World

In 1920 the United States was already producing more agricultural and industrial goods than any other country, and its people were enjoying the highest per‐capita income. The growth of that income by a factor of six by the 2010s has no precedent in human history. Notwithstanding its faults, the most significant fact about American business since 1920 has been its outstanding economic performance. This generalization applies to all types of businesses – small, medium, or large and low‐tech or high‐tech. The longest interruption of this growth spiral was the Great Depression, but even then, many businesses grew.

The rags‐to‐riches story of the American Dream came true for enough people so that many others were motivated to try. And while most failed to achieve riches, standards of living improved for them and their children. On a per‐capita basis, Americans started more businesses, saw more of them fail, and then started still more new ones than the citizens of any other country.

This cycle of creation, failure, and re‐creation is a truism of capitalism. The Harvard economist Joseph Schumpeter (1883–1950) liked to argue that internal turbulence epitomizes modern business. Capitalism itself, he wrote, is a process of transformation. It “incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” Schumpeter’s metaphor for this process – a “perennial gale of creative destruction” – was more emblematic of the US economy than of any other.

Schumpeter and others labeled the agents of creative destruction entrepreneurs, a French word meaning business adventurers. The success of one entrepreneur did not necessarily mean the destruction of another entrepreneur, despite what the German socialist Karl Liebknecht said in 1907: “The basic law of capitalism is you or I, not both you and I.” Contrary to Liebknecht’s ideological assertion, the American capitalist system evolved as a positive sum game. As consumers’ purchasing power increased, more and more entrepreneurs and firms flourished.

The American Business Achievement

In most academic books on American history in the last half‐century, assertions of high achievement have been out of fashion, and for good reason. From about 1800 to the 1960s American history was taught as an uninterrupted march of progress: George Washington never told a lie; slavery would have died out without the need for a bloody civil war; women always had it better here than elsewhere; the US never took unjust military action. All of these teachings were highly inaccurate and questionable, and academics in the last half of the twentieth century rightly believed that perpetuating them ill‐served the interests of students and the nation.

Beginning in the 1960s, the pendulum of interpretation swung the other way. Historians focused on fuller coverage of the ugly aspects of the American experience, including racism, sexism, imperialism, and warped distribution of incomes. In the case of business, critics pointed out correctly that capitalist success of the American sort had an obnoxious side in its unbridled pursuit of money. American capitalism at its worst promoted a vulgar egocentrism that emphasized the materialistic self to the detriment of the spiritual. It elevated individual rights at the expense of familial and community duties. It made some people fabulously wealthy while others remained dirt poor. Its endless advertising assailed the senses and affronted the soul. It despoiled the land, water, and air of North America and contributed to global environmental degradation. Whether or not these negative aspects inevitably accompanied economic progress is not wholly understood, even by experts. The question remains a controversial topic among academics and public intellectuals.

Aspects of the dark side of American capitalism will appear in the story that follows but the main thrust of the book will remind the reader that what may have been lost in the criticism of the last half‐century is the irrefutable fact that American business enterprise has improved the material lives of millions of people.

To begin the story of the American business achievement since 1920, we turn first to the business leaders who made the motor vehicle the key consumer durable of the Second Industrial Revolution.