From The Gilded Age To The Internet Era, The Impermanence Of American Business Dominance

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The Breakers – Newport, Rhode Island

No place on Earth has preserved the Gilded Age’s opulence more than Newport, Rhode Island. With its temperate climate and sandy beaches, it has attracted summer visitors for two centuries.

The most famous of its residents were some of the country’s wealthiest families. They made their fortunes in the 18th and 19th centuries, predominantly in natural resources, transportation, and trade. They spent much of that largesse on mansions they called “cottages” because they stayed there for just eight weeks every summer. Above is a photo of the town’s most famous cottage, The Breakers. It was built by Cornelius Vanderbilt II, the grandson of Cornelius “Commodore” Vanderbilt.

The eldest Vanderbilt ran the New York Central Railroad, and when he died in 1877, he reportedly had amassed a fortune of $100 million. His son, William, took over the business and doubled that sum. As William’s eldest son, Cornelius II ran the railroad for the third generation and erected The Breakers as a monument to his family’s wealth.

The engine of the family’s riches – the railroad itself – peaked in the 1920s. By 1970, after several mergers, competition from airlines and the interstate highway system, and federal regulation, the company that once was the New York Central Railroad had declared bankruptcy.

Standing before The Breakers and considering what seems like the limitless wealth that enabled the Vanderbilts to erect it, it’s hard to believe it all collapsed. By the 1940s, the family had started welcoming tourists into the home, and in 1972, the Preservation Society of Newport County acquired the estate. The Breakers stayed in the family for just 77 years.

The unwinding of the New York Central Railroad, and The Breakers as its emblem, illustrate the impermanence of American business dominance. It’s a quality that also gives the American economy the dynamism it needs to evolve and grow. For this reason, it’s also central to our nation’s character.

The Vanderbilt business is not unique. Pop quiz: how many of the Fortune 500 of 1950 were still to be found in the Fortune 500 of 2014? Scroll down to the end of this post for the answer.

The next time you reflect on the dominance of today’s titans of industry, many of them in technology, remember the Vanderbilts and the railroad empire they built. While you’re at it, think about the Rockefellers (Standard Oil), the Berwinds (coal), and the Fairs (silver mining). Their companies and fortunes were once seen as invincible, too. Today, their names might get a few paragraphs in a high school history book. History tells us that in another 50 years it’s unlikely that Apple, Google, Microsoft and Facebook all will dominate as they do today.

Aside from the improbability of the enduring dominance of any one American business, the past crackles with harbingers of what might lie ahead for today’s American business royalty.

The New York Central Railroad began as a regionally dominant transportation company. Under the Transportation Act of 1920, federal regulation sought to enable national expansion for improved efficiency yet protect the national interest from the abuse of monopolist power. Congress tasked Professor William Z. Ripley of Harvard with spearheading a plan to consolidate regional railroads and strike this balance.

Though certainly well intended, a top-down, federal approach overseen by the smartest of the smart was the first step in what has become as a lousy track record of federal railroad system oversight. It failed to produce a transcontinental system resembling anything like the kind that has formed in Europe, while its nationalized carrier, Amtrak, is a perennial money loser.

Might today’s tech titans face a similar fate? After all, net neutrality rules, which are based on legislation of a similar vintage (the Communications Act of 1934), increasingly will influence how they invest and therefore how they can make money. Just as federal regulators brought the best of intentions to railroad operators with the plan to stave off monopoly abuses, the FCC now has federal backing to regulate the Internet with a very similar justification.

Even more probable than the unexpected negative consequences of federal intervention is the likelihood of competitive threats. We see this playing out right before our eyes. Just look at Yahoo and its 20 year rise and fall. The “next big thing” that will challenge today’s incumbents may be beyond our reckoning, but it will come. With it will emerge yet another round of creative destruction that will propel our economy forward.

History, therefore, shows us the ways in which the combination of competition and federal oversight can derail the most powerful of companies.

The answer to the quiz question above: just 61 of the Fortune 500 in 1950 were on the list in 2014. As this article shows, the other 88 percent have gone bankrupt, merged with other firms, or slipped off the list.

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