Conventional economic wisdom comprises three tenets. One, is that competitive advantage relies on abundant locational resources. Two, that competition leads to the efficient allocation of physical, human, and financial resources that early economists believed were scarce. Three, that price discrimination defines competitiveness. Often, however, there are two games being played. One concerns direct competition between producers of products and services and the other game between promotors of company stocks. In this section we concentrate on the former.
The last half of the nineteenth century marked fierce competition between the very railroads that enabled national competition. Operators of local railroads competed for transnational trunk road connections to switch their freight loads onto their roads. The local road operators also competed with steamships. Needless to say, the quest for business often led to backroom deals. Andrew Carnegie, for one, amassed an early fortune from shares in companies steered to him by his bosses at the Pennsylvania Railroad. Speculation in public stocks of the railroads was also rife and commonly led to bankruptcies.
Of the early American railroads only the Great Northern Railway did not go broke. Most went broke through overcapitalization that resulted in the inability to pay dividends to stockholders. Railroads, like Great Northern, with the backing of banker J P Morgan, would take over the bankrupt roads and merge them. The result, as happened when a prior generation of steamboat operators went broke, was that passenger and freight prices inevitably rose. Morgan’s response, when challenged, was to assert that all he was doing was replacing “ruinous competition” with “cooperation.”
At around the time of “The Great Merger Movement” of the railroads, Theodore Roosevelt became president with the agenda of breaking up monopolies. The Northern Securities Company, which sought to merge the Great Northern, the Northern Pacific, and the Union Pacific roads, was formed and subsequently became an early victim of a 1904 ruling to dissolve by the Supreme Court. Some seven years later, the same court would order the breakup of Standard Oil, while others aggregated by Morgan, including General Electric and US Steel, remained intact under later administrations.
While the railroad mergers were taking place, a thirty-two-year-old by the name of Henry Ford was building an ethanol powered quadracycle in his father’s farm shed in Dearborn Michigan. From an early age Ford exhibited an interest in mechanics and at fifteen constructed his first steam engine. He was, however, not a natural businessman and is seen to have had multiple failures. Ford’s first failure was almost certainly after completing a machinist’s apprentice and setting up as a repairer of Westinghouse steam engines. He then went on to work for Thomas Edison before setting out on his own again.
In 1989, three years after building his first quadracycle when not working at the Edison Illuminating Company of Detroit, Henry Ford founded the Detroit Automobile Company. This company would fail due to the unrealistic expectations of an early financial return by investors. In 1903, Ford commenced a second automobile company and again would have a falling out with its investors. Initially named The Henry Ford Company, Ford’s second automobile venture was renamed Cadillac a year after Ford’s departure. By the decade’s end it was sold to General Motors. Unlike Henry Ford, General Motors’ co-founder, William C Durant, was not a mechanic and built an automobile empire from acquisitions.
With new investors in 1903, Henry Ford established the Ford Motor Company. Ford exhibited the physical robustness of Vanderbilt in that he raced motor vehicles that he built. Vanderbilt street raced his horses. Where Ford departed from Vanderbilt was that he avoided Wall Street and, like the steel magnate Andrew Carnegie, detested financiers. Ford’s stance is understandable, having witnessed the evictions of Thomas Edison and George Westinghouse from their respective companies by J P Morgan. Morgan, as has been demonstrated elsewhere, was a voracious acquirer and became a major shareholder in the New York Central after Vanderbilt’s death.