Building such industrial empires was not easy, however, and posed creative challenges for business ventures. Heavy investment in machinery resulted in very high fixed costs (or overhead) that did not change much over time. Because overhead costs remained stable, manufacturers could reduce the per-unit cost of production by increasing the output of a product—what economists call “economy of scale.” Manufacturers thus aimed to raise the volume of production and find ways to cut variable costs—for labor and materials, for example. Shaving off even a few pennies from the cost of making each unit could save millions of dollars on the total cost of production. Through such savings, a factory owner could sell his product more cheaply than his competitors and gain a larger share of the market.

A major organizational technique for reducing costs and underselling the competition was vertical integration. “Captains of industry,” as their admirers called them, did not just build a business; they created a system—a network of firms, each contributing to the final product. Men like Andrew Carnegie controlled the various phases of production from top to bottom (vertical), extracting the raw materials, transporting them to the factories, manufacturing the finished products, and shipping them to market. In 1881, when Carnegie combined his operations with those of Henry Clay Frick of Pennsylvania, he gained not only a talented factory manager but also access to Frick’s coal business. By using vertical integration, Carnegie eliminated middlemen and guaranteed regular and cheap access to supplies. He also avoided duplications in machinery, lowered inventories, and gained increased flexibility by shifting segments of the labor force to areas where they were most needed. This integrated system demanded close and careful management of the overall operation, which Carnegie provided. He manufactured steel with improved efficiency and cut costs. His credo became “Watch the costs and the profits will take care of themselves.”

Businessmen also employed another type of integration—horizontal integration. This approach focused on gaining greater control over the market by acquiring firms that sold the same products. John D. Rockefeller, the founder of the mammoth Standard Oil Company, specialized in this technique. In the mid-1870s, he brought a number of key oil refiners into an alliance with Standard Oil to control four-fifths of the industry. At the same time, the oil baron ruthlessly drove out or bought up marginal firms that could not afford to compete with him. One such competitor testified to a congressional committee in 1879 about how Standard Oil had squeezed him out: “[Rockefeller] said that he had facilities for freighting and that the coal-oil business belonged to them; and any concern that would start in that business, they had sufficient money to lay aside a fund and wipe them out.”

Horizontal integration was also a major feature in the telegraph industry. By 1861 Western Union had strung 76,000 miles of telegraph line throughout the nation. Founded in 1851, the company had thrived during the Civil War by obtaining most of the federal government’s telegraph business. The firm had 12,600 offices housed in railroad depots throughout the country and strung its lines adjacent to the railroads. In the eight years before Cornelius Vanderbilt bought Western Union in 1869, the value of its stock jumped from $3 million to $41 million. Seeing an opportunity to make money, Wall Street tycoon Jay Gould set out to acquire Western Union. In the mid-1870s, Gould, who had obtained control over the Union Pacific Railway, financed companies to compete with the giant telegraph outfit. Gould did not succeed until 1881, when he engineered a takeover of Western Union by combining it with his American Union Telegraph Company. Gould made a profit of $30 million on the deal. On February 15, the day after the agreement, the New York Herald Tribune reported: “The country finds itself this morning at the feet of a telegraphic monopoly,” a business that controlled the market and destroyed competition.

Bankers played a huge role in engineering industrial consolidation. No one did it more skillfully than John Pierpont Morgan. In the 1850s, Morgan started his career working for a prominent American-owned banking firm in London, and in 1861 he created his own investment company in New York City. Unlike the United States, Great Britain had a surplus of capital that bankers sought to invest abroad. Morgan played the central role in channeling funds from Britain to support the construction of major American railroads. During the 1880s and 1890s, Morgan orchestrated the refinancing of several ailing railroads, including the Baltimore & Ohio and the Southern Railroad. To maintain control over these enterprises, the Wall Street financier placed his allies on their boards of directors and selected the companies’ chief operating officers. Morgan then turned his talents for organization to the steel industry. In 1901 he was instrumental in merging Carnegie’s company with several competitors in which he had a financial interest. United States Steel, Morgan’s creation, became the world’s largest industrial corporation, worth $1.4 billion. By the end of the first decade of the twentieth century, Morgan’s investment house held more than 340 directorships in 112 corporations, amounting to more than $22 billion in assets, the equivalent of $608 billion in 2012, all at a time when there was no income tax.