Nathan Parrish

Tygiel

History 450

6 November 2003

From the Big Four to the Mass Market

From the 1860’s to the 1920’s, the economic landscape of California shifted from a indus-
trialist-centered production economy to a mass market consumption economy. Perhaps the best
end posts for this transition are the “Big Four” of the railroad era in the 1860’s and the mass spec-
ulation in oil, restate, and other industries of the 1920’s. In between, the continuous booms of
Southern California provided the crucial element of the mass market economy: population. These
three elements do more than demonstrate three different economic engines which drove Califor-
nia’s growth, however; they also provide examples of the corruption and collusion surrounding
the generation of vast amounts of money. Moreover, following the public exposure of such cor-
ruption, we see in each case the government stepping in to prevent (or at least mitigate) future cor-
ruption. This recurrent theme of explosive growth, the attendant corruption, and the regulation
which follows is the underlying process behind the evolutionary development of the California
economy.

Growth

Without question, the railroad industry was crucial to the ascension of California as an
economic powerhouse. While the Gold Rush placed California on the map in the minds of Amer-
ica (and indeed world-wide), it remained a remote outpost accessible only by a long and expen-
sive sea voyage or a long and arduous overland trek, restricting immigration and leaving
California an isolated market (Rice, 255). California was destined to grow as an export-driven
economy (a pattern already established by the hide and tallow industry of Mexican California),
and it was the transcontinental railroad which unlocked the rest of America as a massive market to
absorb California’s richness of resources and products. Furthermore, railroads within California
also connected previously isolated regions, and generally increased land values and individual
incomes (Rice, 276).

Oaklan
d is posited by Rice as an archtypical example of urban growth due to railroad con-
nectivity, with population growth from around 2000 in 1868 to 35000 in 1880 (277). Growing in
more than just population, Oakland became one of the first cities wired for telephones and elec-
tricity, and became an industrial and mercantile base as business centered around the railroad ter-
minus. Los Angeles provides a similar example of diverse economic growth due to the railroads,
particularly in contradistinction to San Diego. Upon securing a railroad connection in 1872 by
voting to subsidize Southern Pacific’s construction costs, it tripled from it’s 1870 population of
5,700 by 1876, when the link was actually completed. San Diego, lacking railroad connectivity,
showed no population growth during the 1870’s.

The transcontinental railroad opened the floodgates for immigration into California, fuel-
ing a succession of housing booms and creating a real estate industry which grew Southern Cali-
fornia from a sparsely populated ranching area into a major population center in a few decades.
Immigrants, particularly those from the mid-west, tended to be moderately wealthy immigrants
such as farmers who sold out their farms to move to the warmer climes of Southern California in
particular. This influx of moneyed settlers fueled not only a series of housing booms, but also
firmly established the mass market which would prove the next step in the evolution of the Cali-
fornian economy.

The mass market economy of California (and ultimately the United States and the devel-
oped world at large) can be seen to develop in the first three decades of the 20th century, in indus-
tries as varied as motion pictures, banking, and even oil speculation. Oil speculation is a
particularly poignant example of the transition from industrialist to mass market economy, as the
commodity concerned was certainly well exploited by individuals such as Getty. However, the
discovery of oil in the populous and diversely-owned Los Angeles area cr
eated a unique situation,
where an individual of modest means might become rich overnight were oil discovered beneath
land he held. The excitement generated by this prospect of instant wealth fueled mass speculation,
both in monetary terms and in the numbers of investors involved. As McWilliams points out, the
newcomers from the midwest brought in disposable capital which was invested in oil (as well as
movies and tourism) (242). This led to shady dealings such as the overselling of stock, exempli-
fied in the Julian fiasco, discussed in further detail below.

Corruption

A consequence of the economic expansion of California resulting from railroads, real
estate, oil and other market speculation was widespread corruption, both in terms of political she-
nanigans and economic exploitation. In the case of the railroads, it is difficult to draw a fine line
between, on the one hand, the proverbial “grease” that allows such a large economic and legal
operation to swing into motion, and outright corruption to line the pockets of those in a privileged
position. It is indisputable, however, that through the machinations of the Big Four, Southern
Pacific (née Central Pacific) built a monopoly transportation empire, which included not only rail-
roads but also sea transport (including such dealings as a rate and traffic agreement with Pacific
Mail Steamship Company) (Rice, 273). Whether utilization of this monopoly is construed as a
means to avert the impending financial disaster the company faced around 1870, or outright extor-
tionary profit maximization, the practices generally came at the expense of smaller shippers and
cities which had not so eagerly or warmly embraced the railroad. Thus the railroad began to face
much opposition which would ultimately lead to tight regulation, as discussed further below.

Rice points out that real estate speculation in California predates American possession,
with the purchase of an area on the Carquinez Strait by Thomas Larkin and Robert Semple (221),
but real est
ate speculation became an industry in its own right with the advent of boomers and
speculators in Southern California. Again, such an explosion of wealth, as detailed above, must
have a consequent explosion in corruption. McWilliams notes that the boom nature of Southern
California has “periodically corrupted the civic virtue of the body politic” (241). He notes the
high number of fraud actions in Los Angeles County courts, and the poor quality of much home
construction in the area, which “inclined many newcomers to believe that Los Angeles is one vast
conspiracy of crooked real-estate agents” (242). Specific instances of such corruption came to
light during the fallout in 1929, with the failure of Guaranty Building and Loan Association (its
president embezzling $8,000,000) and the American Mortgage Company (finding itself short
$18,000,000) (McWilliams, 246).

Corruption in oil speculation was also rampant, as epitomized by the Julian Company
debacle. This event in particular points up the mass-market nature of speculation, as Julian and his
cohorts’ efforts at selling to a large number of investors was wildly successful. When traffic in
Julian Petroleum stock was halted on May 7, 1927, 40,000 investors found themselves collec-
tively stripped of $150,000,000 (McWilliams, 245). McWilliams notes that in the fallout of the
Julian situation, not one individual within the company was ever convicted, and the legal proceed-
ings were tainted with “jury-fixing, bribery, and murder” (ibid).

Regulation

Public reaction to the corruption born of the economic explosion of California between the
1860’s and the 1920’s led to a slew of reform and regulation measures, many coinciding with the
ascendancy of the Populism and Progressive movements. Early developments in railroad regula-
tion included Granger case decisions in the 1870’s and the creation of a (then toothless) Railroad
Commission by the California constitution of 1879, but it was not until 1911 that the Stetson-
Eshelman Act enabled the fixing o
f rates by state authorities (Rice 337-338, 359). By this time,
however, state regulation of certain economic activities had come to be actively embraced by busi-
ness interests, reflecting the maturity of the California businessman. William F. Herrin, then a vice
president of Southern Pacific, gave voice to this new orientation by saying: “There could be no
more insidious or vicious practice than to favor one shipper or class of shippers at the expense of
others... Yet these vicious discriminations were frequent before they were abolished by the force
of government regulation” (ibid).

The Progressive era also saw regulation introduced in the real estate and financing indus-
tries. The Bank Act of 1909 took steps to protect those who had been fleeced in episodes such as
the bank failures mentioned above. A state superintendent of banks was appointed to ensure the
stability of banks and savings and loans. Further measures turned over tax assessment for proper-
ties to the counties, supervised by a state board of equalization (ibid). It is significant to note that
such legislation marks a shift in regulation from restrictions on big business to protections of indi-
vidual consumers, a reflection of the transition of the economy to one based on the mass market.

Further protections of consumers came with the Blue Sky law adopted in 1913. This cre-
ated a department of corporations empowered to investigate any company selling stock to the pub-
lic. In fact, this measure was not initially effective — consider that the Julian fiasco occurred in
1927 — but it does demonstrate the attempt of the state government to protect consumers who
were beginning to enter newly emerging mass-market investment economy. Other such consumer-
protection legislation includes the Pure Milk laws, and other reforms pushed by the Progressives.

The maturation of the California economy from the 1860’s to the 1920’s is marked by the
three interlinked processes of growth, corruption, and regulation. These processes function in a
 
similar fashion for the railroad industry, real estate, and market speculation, such as in oil. More-
over, these three industries show the evolution of the market base, from industrial commodities to
consumer commodities. Thus the growth of California can be seen not only in terms of quantity,
but in quality and character; in this it both reflects and predicts, as is so often the case, the larger
economic picture of the United States and the world.



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