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STUDY CASE Construction of the Central Pacific The term "robber baron" refers to a group of manipulative entrepreneurs who pursued controversial business careers between the Civil War and the early twentieth century. The best-known members of this semipiratical cohort include Andrew Carnegie, Jay Gould, J. P. Morgan, and John D. Rockefeller. These men, prominent in American history books, represent hundreds of others who together constituted a distinct element of unprincipled behavior within the business community of the time. They began their careers after the outbreak of the Civil War, when political and economic dislocations weakened the fabric of national commerce. The war opened the door to unscrupulous promoters, war profiteers, and government war contractors in league with corrupt politicians. The patterns of bribing politicians to gain favoritism learned at this time were carried over to economic activity after the end of the war. From the 1860s onward, the robber barons also availed themselves of economic opportunities in the developing western territories. Historians believe that the dislocations of the war coupled with a vast increase in the geographic scope of economic activity created a climate in which established norms of business ethics crumbled under the onslaught of ruthless competitors.1 The robber barons were buttressed in their actions by values of the time, which extolled the virtues of ruthless competition. Particularly popular were the works of Herbert Spencer (1820-1903). an English philosopher who popularized the doctrine called social Darwinism, Spencer's philosophy provided a moral basis for the accumulation of large fortunes through economic operations which, in the words of historian Henry Demarest Lloyd, made "the Black Flag the emblem of success on the high seas of human interchange." Spencer argued that life was a continuing process of adaptation to a harsh external environment. Businesses were engaged in a competitive struggle for survival in which the fittest survived. The strongest competitors benefited the human race by their survival and pros perity. This idea enabled the robber barons to justify any effective business tactic, no matter how harsh or cruel, as contributing to a positive end result in the evolutionary process. The widespread acceptance of Herbert Spencer's doctrines made predatory behavior seem acceptable. Parents proudly pointed to the actions of Gould, Rockefeller, and their ilk as examples worthy of emulation by their children. In the following quotation, John D. Rockefeller, Jr., speaking in a Sunday school address, is a convincing exponent of this brand of competition: 'Chester McArthur Destler, "Entrepreneurial Leadership among the 'Robber Barons': A Trial Balance," Journal of Economic History, vol, 6, supplement, 1946. M The growth of a large business is merely a survival of the fittest. . . . The American Beauty rose can be produced in the splendor and fragrance which bring cheer to its beholder only by sacrificing the early buds which grow up around it. This is not an evil tendency in business. It is merely the working out of a law of nature and a law of God.2 The construction of the Central Pacific Railroad is one of many examples of the infamous commercial activities of the time. Matthew Josephson, a left-wing historian and author of a widely read book entitled The Robber Barons (1934), describes the actions of three shop owners in California named Collis Huntington, Mark Hopkins, and Leland Stanford, In 1860 the three combined with a gold miner named Charles Crocker to form a group called the Pacific Associates. The four raised $200,000, which Huntington carried to Washington in a trunk in 1861 and handed out Hberally to members of Congress in pursuit of a federal charter for a railroad in California. After spending all the money, Huntington came home with the charter and promises of land grants and federal financial support for the fledgling railroad construction project. In 1863, after Leland Stanford became California's governor, the Central Pacific was able to invoke the power of state government. In May of that year, elections were held in San Francisco for a $3 million bond issue to finance fur ther construction of the railway. Leaving nothing to chance, Leland's brother, Philip Stanford, arrived at the polls in a buggy filled with bags of gold pieces and tossed them liberally into the outstretched hands of the crowd. The bond issue passed. Later, the Central Pacific raised funds by demanding bond subscriptions from towns through which the roadbed was to pass and by threatening to build elsewhere and cut towns off from "progress." In 1868, for instance, the Pacific Associates extracted 5 percent of the assessed valuation of all of Los Angeles County as the price for connecting the residents there with a rail line to the East. Such a levy was not unusual. In the meantime, Huntington attended to government relations in Washington by spending $200,000 to $500,000 during each legislative session to secure political favors. Construction of the Central Pacific proceeded, utilizing the backbreaking labor of up to 10,000 Chinese workers who were paid $1 a day. Many did not survive the job. The four Pacific Associates received a total of $79 million in bonds, government subsidies, and investor cash during construction of the railroad. Experts have estimated that almost half this amount was in excess of that needed for legitimate construction costs and its made way into the pockets of the four principals. The railroad, however, was built and in operation. There existed a substantial number in the society of that time who frowned upon dishonest behavior in business. Among them were the clergy and pop ulist protestors. For this group, the lawbreaking and corner cutting of the Quoted in Richard Hofstadter, "The Pervasive Influence of Social Darwinism," in Thomas Brewer, ed., The Rubber Barrens: Saints or Sinners? New York: Holt, Rinehart and Winston, 1970, p. 37. Pacific Associates and other corrupt entrepreneurs were sinful blows to the public interest. Today the actions of the Pacific Associates would lead to the resignation of public officials, fines by regulatory agencies, possible criminal prosecution of corporate executives, and a public hue and cry. But that is today. We must re-create the social atmosphere of another era to fully understand the Pacific Associates. The robber barons learned to manipulate the corporate form to their advan tage. They committed a hundredfold minor larcenies. They corruptly elicited government subsidy for their activities. And despite their paeans to the beauty of Darwinian competition, they replaced it with monopoly. But these observations do not cement a case against them. In fact, there may be much to be said for them. They burst upon the scene at a time of great ferment, when the economy was expansive and the nation was characterized in part by the raw wild-ness of the frontier spirit. They were all adapted to this turbulent atmosphere and far removed from the fastidious practices of the preCivil War eastern business establishment. And their accomplishments were enormous. In the words of an economic historian: Whatever their amoralities and ruthlessness, they helped to lead American business into the stage of full capitalism, creating gigantic organizations capa ble of servicing the entire continent or several sections at least. They led in extending the corporation into new and important fields of enterprise, in employing hired executives for routine administration and specialized tasks, and in reserving to themselves exclusively entrepreneurial functions of plan ning, high strategy, and risk taking.3 Seen this way, the robber barons contributed substantially to the foundations of the robust industrial economy that followed their era. In a utilitarian sense, an argument can be made that the benefits accruing to society from their business exceed the damage to the social fabric resulting from their bribes, deceits, and manipulations. Would more honest business activity have fostered similar economic devel opment? What would have happened if legal and cultural restraints had controlled the predations of the robber barons? These questions cannot be answered definitively. The historical record shows that law and social standards were too weak to force the robber barons into more ethical channels. Some scholars have argued that an amount of corruption existing during expansive periods in developing societies is desirable. If there exists in such societies a "functional corruption," which departs from ethical ideals but permits fluid, rapid growth by easing barriers that stem from rules, niceties, and rigid laws, then economic development may be faster. One student of social and economic development, Samuel Huntington, has argued that such "functional corruption" serves the public interest at the same time it promotes selfish gain. He writes: Destler, "Entrepreneurial Leadership among the 'Robber Barons.'" pp. 34-35. 67 Corruption may be one way of surmounting traditional laws or bureaucratic regulations which hamper economic expansion. In the United States during the 1870s and 1880s, corruption of state legislatures and city councils by railroad, utility, and industrial corporations undoubtedly speeded the growth of the American economy. ... A society which is relatively uncorrupta tradi tional society for instance where traditional norms are still powerfulmay find a certain amount of corruption a welcome lubricant easing the path to modernization. A developed traditional society may be improvedor at least modernizedby a little corruption.4 Today we have largely abandoned doctrines of Social Drawinism favor of new managerial ideologies that redefine the meaning of competition and social responsibility. This changed philosophical backdrop makes today's business environment hostile to wholesale corruption. In addition, generations of scandals and rising public expectations for business behavior have elevated ethical norms far above what they were during the days of the Pacific Associ ates. Some corruption in business may be inevitable, but it is less likely to be regarded as functional. Today, however, we have the difficult task of looking back more than a century to pass judgment on these robber barons and to clarify their morally ambiguous actions. QUESTIONS 1. Compare the benefits of the robber barrons activities to their costs. From a utilitarian standpoint, can their actions be justified by arguing that benefits exceeded costs? 2. Do you believe that "functional corruption" can be useful in a developing society? In a developed society? Or is honest commercial activity always preferable? 3. What forces in today's pluralistic society would prevent the robber baron type of exploitation? "Samuel Huntington, Political Order in Changing Societies, New Haven, Conn.: Yale University Press, 1968, pp. 68-69. _ ... View Full Document

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