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Gentlemanly Price-Fixing and Its Limits: Collusion and Competition in the U.S. Explosives Industry during the Civil War Era

Published online by Cambridge University Press:  13 December 2011

Mark R. Wilson
Mark R. Wilson
Affiliation:
MARK R. WILSON teaches history at the University of North Carolina at Charlotte.
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Abstract

During the Civil War era, when the U.S. explosives industry was already dominated by a handful of firms, the leading manufacturers of black powder tried repeatedly–with mixed success–to fix prices in commercial and military markets. Their surviving correspondence reveals some of the dynamics of oligopolistic collusion and competition. In commercial markets, price-fixing by leading explosives makers was undermined not only by competition from small powder manufacturers but also by rivalry among their own selling agents. The same agency problems that made price-fixing more difficult, however, may have actually made it easier for manufacturers to sustain the social foundations of cooperation by allowing them to blame the failures of their agreements on forces outside their control. Maintaining cooperative relations over the long run proved useful to manufacturers in wartime military markets, in which price agreements were easier to sustain. But during the Civil War, the leading powder producers found that even successful collusion in the military supply business did not guarantee high profits, because government bureaus could prove to be demanding consumers.

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Articles
Information
Business History Review , Volume 77 , Issue 2 , Summer 2003 , pp. 207 - 234
Copyright
Copyright © The President and Fellows of Harvard College 2003

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References

1 Augustus G. Hazard to Du Pont Co., 7 Feb. 1863, folder 4, box 139, E. I. Du Pont de Nemours & Co. [EIDPDNC] incoming correspondence (accession 500, ser. I, part 1, ser. B), Manuscripts Department, Hagley Museum and Library, Wilmington, Delaware.

2 For historical studies that illustrate the instability of cartels during the nineteenth century, see Jones, S. R. H., “Price Associations and Competition in the British Pin Industry, 1814-40,” Economic History Review 26 (1973): 237–53Google Scholar; Levenstein, Margaret, “Mass Production Conquers the Pool: Firm Organization and the Nature of Competition in the Nineteenth Century,” Journal of Economic History 55 (1995): 575–611CrossRefGoogle Scholar; Graebner, William, “Great Expectations: The Search for Order in Bituminous Coal, 1890-1917,” Business History Review 48 (Spring 1974): 49–72CrossRefGoogle Scholar; Penen, R., “Oligopoly and Competition: Price Fixing and Market Structure among Timber Firms in Northern Scotland, 1890-1939,” Business History 21 (1979): 213–25Google Scholar; McCraw, Thomas K., Prophets of Regulation (Cambridge, Mass., 1984), 65–8, 77-9.Google Scholar For one important exception, see Grossman, Peter Z., “The Dynamics of a Stable Cartel: The Railroad Express, 1851-1913,” Economic Inquiry 34 (1996): 220–36CrossRefGoogle Scholar.

3 For one recent empirical study of collusive price agreements that identifies agency problems as a constraint on collusion, see Genesove, David and Mullin, Wallace P., “Rules, Communication, and Collusion: Narrative Evidence from the Sugar Institute Case,” American Economic Review 91 (2001): 379–98CrossRefGoogle Scholar. For another business history study that explores agency problems, see Ann Carlos, M. and Nicholas, Stephen, “Agency Problems in Early Chartered Companies: The Case of the Hudson's Bay Company,” Journal of Economic History 50 (1990): 853–75CrossRefGoogle Scholar.

4 See, for example, Porter, Glenn and Livesay, Harold, Merchants and Manufacturers: Studies in the Structure of Nineteenth-Century Marketing (Baltimore, 1971)Google Scholar.

5 For overviews of the industry during this period, see Gelder, Arthur Pine van and Schlatter, Hugo, History of the Explosives Industry in America (New York, 1927)Google Scholar; Wilkinson, Norman B., Lammot du Pont and the American Explosives Industry, 1850-1884 (Charlottesville, Va., 1984)Google Scholar. For a discussion of the changing roles of Du Pont selling agents during the years after the Civil War, see Zunz, Olivier, Making America Corporate, 1870-1920 (Chicago, 1990), 15–33Google Scholar. On the activities of the Du Pont Co. during the Civil War, see especially Chandler, Alfred D. Jr, “Du Pont, Dahlgren, and the Civil War Nitre Shortage,” Military Affairs 13 (1949): 142–9CrossRefGoogle Scholar; Hancock, Harold B. and Wilkinson, Norman B., “‘The Devil to Pay!’: Saltpeter and the Trent Affair,” Civil War History 10 (1964): 20–32CrossRefGoogle Scholar; Hancock, Harold B. and Wilkinson, Norman B., “A Manufacturer in Wartime: Du Pont, 1861-1865,” Business History Review 40 (Summer 1966): 213–36.CrossRefGoogle Scholar Particularly well documented are the price-setting efforts of the Gunpowder Trade Association (established in 1872) and the consolidation of the industry under the head of Du Pont during the latter part of the nineteenth century. See Stevens, William S., “The Powder Trust, 1872-1912,” Quarterly Journal of Economics 26 (1912): 444–81CrossRefGoogle Scholar; Elzinga, Kenneth G., “Predatory Pricing: The Case of the Gunpowder Trust,” Journal of Law and Economics 13 (1970): 223–40CrossRefGoogle Scholar; Grinde, Donald Andrew Jr, “The Gunpowder Trade Association: A Search for Stability, 1872-1912” (Ph.D. diss., University of Delaware, 1974)Google Scholar.

6 Although economists and historians have not yet done enough to highlight the importance of social relations in the economic arena, there are signs that this subject is now receiving more attention. For a discussion of economists’ traditional neglect of the importance of social bonds, see Granovetter, Mark, “Economic Action and Social Structure: The Problem of Embeddedness,” American Journal of Sociology 91 (1985): 481–510CrossRefGoogle Scholar. For examples of recent research that points to the importance of social relations among powerful economic actors, see Uzzi, Brian, “Embeddedness in the Making of Financial Capital: How Social Relations and Networks Benefit Firms Seeking Financing,” American Sociological Review 64 (1999): 481–505CrossRefGoogle Scholar; Berk, Gerald, “Communities of Competitors: Open Price Associations and the American State, 1911-1929,” Social Science History 20 (1996): 375–400Google Scholar; Lamoreaux, Naomi R., Insider Lending: Banks, Personal Connections, and Economic Development in Industrial New England (Cambridge, U.K., 1994)CrossRefGoogle Scholar.

7 In his article, Stigler insisted that students of industrial organization must consider not only sellers and their products but also buyers and purchasing arrangements. Stigler drew a sharp distinction between oligopolists’ commercial customers (whose heterogeneity he emphasized) and the government. According to Stigler, collusion by sellers is much easier when a government is the buyer, because a government—which he called an “ideal instrument for the detection of price-cutting”—makes the enforcement of price agreements easier by publishing specifications, bids, and prices. Stigler, George J., “A Theory of Oligopoly,” Journal of Political Economy 72 (1964): 44–61CrossRefGoogle Scholar.

8 Recently, more and more social scientists have begun to describe governments them-selves as heterogeneous entities staffed by men and women who may serve as powerful, semiautonomous social and economic actors. For evidence of convergence toward such a view among scholars of a variety of persuasions, see, for example, Basu, Kaushik, Prelude to Political Economy: A Study of the Social and Political Foundations of Economics (New York, 2000)CrossRefGoogle Scholar; Heckelman, Jac C., Moorhouse, John C., and Whaples, Robert M., eds., Public Choice Interpretations of American Economic History (Boston, 2000)CrossRefGoogle Scholar; Carpenter, Daniel P., The Forging of Bureaucratic Autonomy: Reputations, Networks, and Policy Innovation in Executive Agencies, 1862-1928 (Princeton, N.J., 2001)Google Scholar.

9 Some of the unique problems associated with government contracting, to be sure, are familiar to students of military-industrial relations, including some of those who have examined the Civil War era. The best historical overview of military-industrial relations in the United States is a series of volumes by Paul A. C. Koistinen, who covers the period through the end of the Civil War in Beating Plowshares into Swords: The Political Economy of American Warfare, 1606-1865 (Lawrence, Kan., 1996)Google Scholar. Many of the best studies in this field concentrate on military-industrial projects that involved cutting-edge technology, such as those in ordnance and shipbuilding. See, for example, Merritt Roe Smith, Harpers Ferry Armory and the New Technology: The Challenge of Change (Ithaca, N.Y., 1977); Hackemer, Kurt, The U.S. Navy and the Origins of the Military-Industrial Complex, 1847-1883 (Annapolis, Md., 2001)Google Scholar; Roberts, William H., Civil War Ironclads: The U.S. Navy and Industrial Mobilization (Baltimore, 2002)Google Scholar. Recent studies of the huge economic undertakings associated with Army procurement in the South and North during the Civil War include Wilson, Harold S., Confederate Industry: Manufacturers and Quartermasters in the Civil War (Jackson, Miss., 2002)Google Scholar, and Wilson, Mark R., “The Business of Civil War: Military Enterprise, the State, and Political Economy in the United States, 1850-1880” (Ph.D. diss., University of Chicago, 2002Google Scholar).

10 Grinde, “Gunpowder Trade Association,” 17.

11 In the 1850s, the large manufacturers sold their powder through a variety of channels, including direct sales to final users and sales to jobbers who purchased wholesale from the producers and tried to resell small batches at a profit. But until the beginning of the twentieth century, when Du Pont integrated vertically and began to use salaried agents across the country, the industry accomplished most sales via agents working on a commission basis. See Grinde, “Gunpowder Trade Association,” 12-14; Zunz, Making America Corporate, 15-33. For a set of letters to the Du Pont Co. from one small California firm that engaged in powder marketing during the 1850s, see White, James W., “Great Expectations: The Business Correspondence of Gibbons & Lammot, Gold Rush Black Powder Merchants,” California Historical Quarterly 55 (1976): 290–305CrossRefGoogle Scholar.

12 Van Gelder and Schlatter, History of the Explosives Industry in America, 174-91, 219-31, 253-60.

13 For a contemporary description of the manufacturing process, see “Manufacture of American Gunpowder,” Scientific American, 31 Aug. 1861, 139. According to one estimate, setting up a small mill in 1850 would have cost $3,000; a complex sufficiently large to produce enough powder to compete in national rather than local markets might have cost closer to $50,000. Grinde, “Gunpowder Trade Association,” 18-19.

14 Hazard to Du Pont Co., 11 Sept. 1851, folder 1, box 139, EIDPDNC incoming correspondence.

15 Hazard to Du Pont Co., 12 June 1857, folder 2, box 139, EIDPDNC incoming correspondence. One historian of the industry has concluded that it was common for the companies to share information and sell both raw materials and finished products to one another. Grinde, “Gunpowder Trade Association,” 31,45.

16 S. A. Smith to Du Pont Co., 3 Mar. 1853, 26 Mar. 1853,13 Aug. 1855, 22 Aug. 1855, box 235A; Hazard to Du Pont Co., 13 Mar. 1857, 26 Mar. 1857, 2 Aug. 1859, folder 2, box 139, EIDPDNC incoming correspondence.

17 Lammot Du Pont to Du Pont Co., 16 May 1859, box 87; Hazard to Du Pont Co., 8 Mar. 1860, folder 3, box 139, EIDPDNC incoming correspondence.

18 Hazard to Du Pont Co., 18 Aug. i860, folder 3, box 139, EIDPDNC incoming correspondence.

19 “Grinde, “Gunpowder Trade Association,” 10. Only 6 percent of Du Pont's sales of $752,200 in i860 were to the U.S. Army and Navy. Hancock and Wilkinson, “A Manufacturer in Wartime,” 214.

20 Laflins, Smith & Boies to Du Pont Co., 26 Mar. 1858, 6 July 1858, box 235A, EIDPDNC incoming correspondence.

21 This point is made briefly by Grinde, “Gunpowder Trade Association,” 32-3.

22 For a social analysis of Du Pont agents in Pennsylvania just after the Civil War, see Zunz, Making America Corporate, 15-33.

23 Hazard to Du Pont Co., 3 Sept. 1855, folder 1; A. E. Douglass to Du Pont Co., 15 Jan. 1857, Folder 2; A. E. Douglass to Du Pont Co., 25 Apr. 1860, folder 3, all in box 139, EIDPDNC in-coming correspondence. In some cases, smaller firms signed on to price agreements and joined their larger counterparts in complaining about violations. In 1860, Smith & Rand wrote to the Du Pont Co. to complain that the Du Pont agent had been failing to uphold their price agreement covering sales at Mauk Chunk, Penn. Smith & Rand to Du Pont Co., 18 Aug. 1858, box 327, EIDPDNC incoming correspondence.

24 Laflins, Smith & Boies to Du Pont Co., 20 Apr. 1857, box 235A, EIDPDNC incoming correspondence.

25 Hazard to Du Pont Co., 22 May i860, folder 3, box 139, EIDPDNC incoming correspondence.

26 Further research into the large volume of preserved correspondence between the Du Pont Co. and several of its agents might well shed light on this subject.

27 Both the British and the Russians purchased through Grinnell, Minturn & Co., a New York merchandizing firm. See Wilkinson, Lammot Du Pont, 35; Hazard to Du Pont Co., 1 Mar. 1855, folder 1, box 139, EIDPDNC incoming correspondence.

28 Hazard to Du Pont Co., 15 Mar. 1856 and 29 May 1856, folder 1, box 139, EIDPDNC incoming correspondence.

29 Van Gelder and Schlatter, History of the Explosives Industry in America, 248-9.

30 Hazard to Du Pont Co., 28 Aug. 1856, 10 Sept. 1856, 11 Sept. 1856, 12 Sept. 1856, 13 Sept. 1856, 14 Sept. 1856, 16 Sept. 1856, folder 1, box 139, EIDPDNC incoming correspondence. The U.S. Army and Navy gave Du Pont and Hazard the chance to lower their bids before placing the order. This was no winner-take-all system. Indeed, ordnance officers said that they preferred to spread powder orders among several firms. One navy officer informed the Du Pont Co. in September 1856, when he asked if they would agree to lower their bid from $20 to $18 a barrel, that it was “desirable to divide the supply of powder now required, equally among the manufacturers of established reputation.” D. W. Ingraham to Du Pont Co., 9 Sept. 1856, box 393, EIDPDNC incoming correspondence.

31 P. Hagner to Du Pont Co., 17 May 1859, box 5, series B, P. S. Du Pont office collection, accession 501, Hagley Museum and Library.

32 Hazard to Du Pont Co., 22 Sept. i860, folder 3, box 139, EIDPDNC incoming correspondence.

33 During the Civil War, the U.S. Army purchased about 13,000 tons of powder, for which it paid $6.6 million. With the navy consuming powder at about half this level, the total bill for powder used in the four-year conflict came to about $10 million. (This amounted to less than 1 percent of the North's total military procurement expenditures.) See “Report of the Chief of Ordnance,” in U.S. War Department, Annual Report of the Secretary of War, 1866 (Washington, D.C., 1867).

34 Hancock and Wilkinson, “A Manufacturer in Wartime,” 221-2, 226. Explosions continued to be a constant danger at the powder mills. The Du Pont Co. recorded ten explosions and forty-one deaths during war years. At the Hazard Co., one large explosion in 1862 killed nine men and halted production for nearly three months. Van Gelder and Schlatter, History of the Explosives Industry in America, 258.

35 Although this article points to the importance of learning more about the activities of military procurement officers and their departments, a detailed discussion of the ordnance bureaus in the North lies outside of its scope. For an overview of the organization and activities of the U.S. Army Ordnance Department in th e wartime North, see Koistinen, Beating Plowshares into Swords, 158-68. The wartime small arms industry is surveyed in Davis, Carl L., Arming the Union: Small Arms in the Civil War (Port Washington, N.Y., 1973)Google Scholar. It should be noted that the procurement of powder was much more of a challenge in the South, where military officials found it necessary to establish their own mills. The classic study of Confederate ordnance operations is Vandiver, Frank E., Ploughshares into Swords: Josiah Gorgas and Confederate Ordnance (Austin, Tex., 1952)Google Scholar.

36 Although federal law and military regulations required the use of advertising and competitive bidding in military contracting, procurement officers were allowed to depart from this rule in times of emergency. During the Civil War, Northern officers did use formal advertising and competitive bidding for many orders, but they also purchased millions of dollars worth of goods using methods that relied less upon open competition. See Nagle, James F., A History of Government Contracting, 2nd ed. (Washington, D.C., 1999), 166–96Google Scholar; Wilson, “Business of Civil War.”

37 This last company, which was reorganized after bankruptcy in 1855, expanded there-after to the point that it was the fourth-largest firm in the industry by the eve of the war (see Table 1). On the history of the Oriental Co., see Van Gelder and Schlatter, History of the Explosives Industry in America, 263; Dole, Frederick Howard, Windham in the Past (Auburn, Me., 1916), 229.Google Scholar

38 C. P. Kingsbury circular, 20 Apr. 1861, Ripley to Du Pont et al., 30 Apr. 1861, entry 17, Miscellaneous Letters Sent, RG 156 [U.S. War Department, Records of the Bureau of Ordnance], National Archives, microfilm copy at accession 352, Hagley Museum and Library.

39 Hazard to Du Pont Co., 28 Oct. 1862, folder 4, box 139, EIDPDNC incoming correspondence.

40 Hazard to Du Pont Co., 4 Dec. 1865, folder 5, box 139, EIDPDNC incoming correspondence.

41 Jackson to Du Pont Co., 16 Dec. 1861, box 278, EIDPDNC incoming correspondence.

42 Hazard to Du Pont Co., 9 Nov. 1863, folder 4, box 139, EIDPDNC incoming correspondence. Smaller manufacturers also participated in wartime price agreements. In early 1864, for instance, the Hazard and Du Pont companies corresponded with the Dover Powder Works in Dover, New Hampshire, on prices for military powder. Hazard to Du Pont Co., 25 Apr. 1864, folder 5, box 139, EIDPDNC incoming correspondence.

43 H. A. Wise to Du Pont Co., 21 Nov. 1861, entry 5, Miscellaneous Letters Sent, RG 74 [U.S. Department of the Navy, Record of the Bureau of Ordnance], National Archives, micro-film copy at accession 352, Hagley Museum and Library.

44 Du Pont Co. to Ripley, 30 Aug. 1862, 5 Sept. 1862,17 Sept. 1862,11 Feb. 1863,16 Feb. 1863, entry 31, RG 156, as above.

45 Du Pont Co. to Ramsey, 11 Mar. 1864, entry 31, RG 156, as above.

46 For example, A. Mordecai to Alfred du Pont, 11 Oct. 1842, 6 Aug. 1844, 11 Dec. 1844, box 18, Lammot du Pont Papers (series A, correspondence), accession 384, Hagley Museum and Library.

47 Wilkinson, Lammot Du Pont, 108.

48 The Hazard Co., second to Du Pont in estimated manufacturing capacity, rated “good,” as did two smaller firms, the Massachusetts Powder Co. and the Union Powder Works of New Hampshire. Smith & Rand's powder was described as “some very good.” Enclosure in T. T. S. Laidley to G. D. Ramsay, 2 Jan. 1864, entry 31, RG 156, as above.

49 Hazard to Du Pont Co., 22 Jan. 1864, 1 Feb. 1864, folder 5, box 139, EIDPDNC incoming correspondence.

50 Analytical tables, dated 12 July 1862 and 1 Oct. 1862, section 6, entry 201 (Letters and Telegrams Relating to Powder); H. A. Wise to Du Pont Co., 17 Nov. 1863, entry 6 (Letters and Telegrams Sent), RG 74, as above.

51 T. T. S. Laidley to Du Pont Co., l July 1862, box 5; Laidley to Du Pont Co., 12 Jan. 1864, 23 Jan. 1864, box 6, series B., P. S. Du Pont Office Collection. Laidley, who graduated from West Point in 1842, was a Mexican War veteran, who by 1862 already had twenty years of experience in the Ordnance Department. For a brief biographical sketch, see National Cyclopaedia of American Biography, vol. 7 (New York, 1897), 24–5.Google Scholar

52 Laidley to Ripley, 2 0 Aug. 1862, entry 1135 (Letters Sent from Frankford Arsenal), RG 156, as above.

53 H. A. Wise to Du Pont Co., 24 Feb. 1864, entry 6, RG 74, as above.

54 Du Pont Co. to Ramsey, 26 Jan. 1864, 27 Jan. 1864, entry 31, RG 156, as above; Hazard to Du Pont Co., 22 Jan. 1864, 1 Feb. 1864, folder 5, box 139, EIDPDNC incoming correspondence.

55 Wilkinson, Lammot Du Pont, 108; Hancock and Wilkinson, “A Manufacturer in Wartime,” 228-9.

56 Hancock and Wilkinson, “The Devil to Pay!”; Chandler, “Du Pont, Dahlgren, an d the Civil War Nitre Shortage,” esp. 148-9.

57 Hazard to Du Pont Co., 18 May 1863, folder 4, box 139, EIDPDNC incoming correspondence.

58 For a more extended discussion of this subject, see Wilson, “The Business of Civil War,” ch. 7. For a fine survey of attacks on profiteering and fraud during the Civil War more generally, see Brandes, Stuart D., Warhogs: A History of War Profits in America (Lexington, Ky., 1997), 67–107Google Scholar.

59 Hazard to Du Pont Co., 17 June 1864, Hazard to Henry Du Pont, 20 June 1864, folder 5, box 139, EIDPDNC incoming correspondence.

60 Porter and Livesay, Merchants and Manufacturers, 116-30.

62 Hazard to Du Pont Co., 22 July 1864, folder 5, box 139, EIDPDNC incoming correspondence.

63 Hazard to Du Pont Co., 22 Sept. 1864,28 Sept. 1864, folder 5, box 139; Jackson to Hazard, 24 Sept. 1864, box 278, EIDPDNC incoming correspondence; Du Pont to Ramsey, 23 Aug. 1864, entry 31, RG156, as above.

64 In fact, even for a company like Du Pont that has preserved its records extraordinarily well, historians have found it difficult to measure wartime profits. In 1862 and 1864, Du Pont reported profits equal to about 7 percent of sales, but in 1863 the company made an extraordinary payout of profits equivalent to 60 percent of that year's sales. This appears to have occurred because the company decided to liquidate part of the large rainy-day fund it had accumulated to hedge against major losses from explosions. Hancock and Wilkinson, “A Manufacturer in Wartime,” 231-4. In general, Hancock and Wilkinson's article exaggerates the boost to sales the war provided to Du Pont by failing to discount sufficiently for inflation.

65 On Du Pont purchases of saltpeter early in the war, see Chandler, “Du Pont, Dahlgren, and the Civil War Nitre Shortage.”

66 Hazard to Du Pont Co., 9 Oct. 1866, folder 6, box 139, EIDPDNC incoming correspondence.

67 Hazard to Du Pont Co., 4 July 1867, folder 6, box 139, EIDPDNC incoming correspondence.

68 The history of the explosives industry after 1865 is relatively well documented. See especially Grinde, “Gunpowder Trade Association”; Grinde, , “The Powder Trust and the Pennsylvania Anthracite Region,” Pennsylvania History 42 (1975): 207–19Google Scholar; Wilkinson, Lammot Du Pont, 187ff.

69 Stevens, “The Powder Trust”; Elzinga, “Predatory Pricing”; Grinde, “The Powder Trust.” See also Chandler, Alfred D. Jr, Strategy and Structure: Chapters in the History of Industrial Enterprise (Cambridge, Mass., 1962), 52–67Google Scholar.

70 Sklar, Martin J., The Corporate Reconstruction of American Capitalism, 1890-1916: The Market, the Law, and Politics (Cambridge, U.K., 1988), 16–17, 33-4, 55-6CrossRefGoogle Scholar.