By Professor Barry Machado with Sargent M. McCormick
IRONY IN AMERICAN BUSINESS HISTORY
The subject of the McCormick brothers and their development of the “Virginia Reaper” and what later became the Chicago conglomerate, International Harvester, call forth-innumerable ironies and unintended consequences in American history. Here are but a few: Southern slaveholders elevate the Northern states, through the production of surplus grain and the creation of surplus labor, to a decisive industrial and manpower advantage in the Civil War. Thanks largely to the McCormicks’ invention, for instance, the North exported 200 million bushels of grain to Europe during the Civil War; by lightening the labor of all grain farmers and straightening their bent backs, the well-intentioned Virginians accelerate their nation’s urbanization and industrialization. These forces shatter, in turn, their beloved Jeffersonian agrarian way of life and transform farmers into a quaint, vanishing breed.
THE McCORMICK BROTHERS, BUSINESS VISIONARIES
In their lifetimes, Cyrus, William, and Leander McCormick did nothing less than to revolutionize agriculture and define an entirely new industry. They brought an end to centuries of harvesting grains by hand – with sickle, scythe, and cradle. In doing so, they became millionaires, the acknowledged giants of the new farm machinery business, and a household name around the world. But why was it the McCormick brothers who satisfied a long- standing need for labor-saving machinery on the farm? Who substituted animal muscle for human muscle? Setting the McCormicks apart from their rivals and competitors, and putting them in the vanguard of change, was their fluency in the languages of invention, marketing, and organization, a rare combination of gifts. As few have done, they successfully took their father’s invention, the first practical mechanical reaper, to market. To do so, they had to pioneer new and original methods of selling, advertising and distributing their product. There was no one to imitate. They would be the businessmen others would imitate, a model in fact for the future automobile industry.
The McCormicks’ entrepreneurial genius revealed itself in multiple, interrelated ways. Let us call it “The McCormick System.” Theirs' was a new business culture, an expression of Southern ingenuity rather than the more heralded Yankee ingenuity found in William Deering and John Deere. The McCormicks’ novel techniques overthrew the tradition of “caveat emptor” and substituted trust, accountability, brand recognition, and customer good will. To enlarge the market for their machine, the brothers introduced some ingenious devices. One powerful inducement was their so-called “free trial,” a written warranty with every sale, a money-back guarantee of a full refund if their product performed unsatisfactorily. A related inducement was their “installment buying plan.” In 1849 they sold their $120 reaper to farmers on the following terms: $30 down on delivery before harvest and the remaining $90, plus 6% interest, by December 1. (All shipping and freight costs, by the way, were at the purchaser’s expense.) Clearly, the brothers were willing to take large, unprecedented financial risks in order to market their product.
But it was not nearly the gamble one might think. They seem to have factored large accounts receivable into their calculations of price and profit. From 1849 until 1858 overdue and unpaid bills ballooned to over $400,000, potentially disastrous had they not been making around 150% profit per reaper.9 Moreover, they standardized their hefty profit margin by setting a price that was publicized, fixed and non-negotiable. There was to be neither haggling nor bargaining with the customer, nor any special rebates. Everyone paid the same price.
Another of the McCormicks’ innovations was the “field trial,” an especially effective piece of advertising and promotion in rural America. The brothers arranged public contests, free of charge to spectators, by rival reaper manufacturers. In fact, they invested heavily in advertising of all forms and even published a trade magazine circulated by their network of agents that achieved a large readership among farmers. They entered numerous state fairs and exhibitions to demonstrate “Old Reliable.” The prizes and awards they won, at home and abroad, helped make “McCormick” a universal brand name long before branding was a corporate craze. Such popularity permitted the McCormicks to charge more for their machines as well as pay their agents lower commissions.
In the early years, the McCormicks created a network of trained agents tied to them by exclusive contracts and exclusive territories. They ordered, received, delivered and repaired the reapers they made. Later, in the 1880s, the regional agents working on commission were replaced with salaried managers who oversaw franchised dealers. The organization was first-rate.
The Rockbridge County, Virginia, natives also knew how to adapt the ideas and inventions of others to their commercial advantage. Clearly, their invention stimulated the invention of more sophisticated farm machinery by those with greater inventiveness than they possessed. With all ensuing technological improvements, they tenaciously kept pace: Atkins’s Self-Rake Reaper; the Marsh brothers’ Harvester; Withington’s Wire Self- Binder; and Deering’s Twine Self-Binder. They were inventors and borrowers, too. Bill Gates could be the McCormick brothers reincarnated. Similarities in their respective strategies and tactics are striking.
As Cyrus Hall McCormick biographer William T. Hutchinson has pointed out, rather persuasively, “their days as an inventor closed with his patent of 1847.” Thereafter, they shrewdly purchased patents, patent rights, and licenses from others, paying royalties when necessary, while their expert attorneys battled in the courts in never-ending “patent wars” with their rivals. Their years in business were awash in litigation. They were undaunted.
The McCormicks’ most inspired decision, which was made in 1847, was to move the center of their operations westward, from the Shenandoah Valley to Chicago. They realized that the future of the reaper was in the Great Plains and on the western frontier. By getting there first, they “scooped” a big chunk of the domestic market. This, too, was a big gamble, for Chicago was then a far cry from the railroad hub that it later became. Their reaper preceded the railroad into Chicago by three years. In fact, they established their production facility in Chicago BEFORE the telegraph, canals, and railroads had arrived in that town of 17,000. The McCormicks bet on its future and won the lottery. Their company’s growth and Chicago’s growth intertwined for the rest of the century and beyond. The McCormick brothers emerged as Chicago’s first big industrialists, the businessmen who owned its largest factory.
The McCormicks' move to the “prairie market” ended the era of decentralized, sub- manufacturing that was characterized to a troubling degree by inadequate supervision, unreliability and poor quality control in places like Brockport, New York, and Cincinnati. With centralization of production in Chicago constant supervision, improvements in manufacturing processes, and economies of scale commenced. Since the McCormicks’ innovations in marketing and sales had solved many of the most difficult problems in the mass distribution of the reaper, in how to penetrate a national market of farmers, their first Chicago factory was free to attack the problem of production on a grand scale. When mass production integrated with mass distribution, the megacorp made its debut in the farm machinery sector. And the road to International Harvester was first illuminated.
McCORMICK’S FIRST CHICAGO FACTORY, 1848 – 1871
Between 1848 and 1871 the McCormick brothers regularly enlarged and improved their Chicago plant, which was designed with ready access to water and rail transportation. Comprised of both wood-working and iron-working departments, as well as a paint shop, and with docks on the Chicago River for receiving raw materials and shipping finished products, it was built to control costs. At first, some parts of the 1,200 pound reaper were manufactured elsewhere: sickles in Massachusetts; guard fingers in New Jersey; iron castings on the other side of Chicago. Raw materials arrived from all over the country and the world; white ash lumber from Michigan; pig iron from Pittsburgh and Scotland; steel from England. But the story of the next half-century was one of integration, of lowering costs by eliminating more and more outside suppliers and middlemen. By 1870, the McCormicks were producing 10,000 machines annually at the Chicago factory.
CONTINGENCY IN AMERICAN BUSINESS HISTORY
1871 MARKED AN IMPORTANT TURNING POINT IN THE HISTORY OF THE McCORMICK COMPANY.
The Great Chicago Fire of that year proved both a terrible misfortune, as the original factory complex burned to the ground with great financial loss, and a perverse twist of good luck. Contingency is a powerful force in the life of an institution. Without “The Fire,” one can readily imagine a different fate for the McCormick brothers, Cyrus and Leander, brother William having died in 1865. Led by Leander, they relocated and rebuilt in a visionary fashion, with allowances made for prodigious future growth, the McCormicks obtained additional advantages over their competitors through the most up-to-date equipment, greater economies of scale, and wholesale efficiencies.
Thereafter, at the vast 230-acre “McCormick City,” which employed 1,400 workers in 1884 and whose main factory building was ten times the size of its predecessor, the McCormick Harvesting Machinery Company, which replaced the old partnership, C.H. & L.J. McCormick, in 1879, operated furnaces and foundries, produced its own iron, ran sawmills and the largest twine mill in the world, and even manufactured its own bolts and nuts. The company also purchased mines and forests to assure steady supplies for its furnaces and sawmills. In time, virtually every part of the McCormick harvesting machines would be made at this complex.12 “McCormick City” anticipated Henry Ford’s industrial colossus at the River Rouge by twenty-five years. What was needed to transform “McCormick City” into the River Rouge was another technological breakthrough, the moving assembly line.
“McCormick City” liberated supply. Production doubled between 1870 and 1880. Between 1880 and 1884, when Cyrus McCormick died and his son Cyrus, Jr. took over management of the company, output nearly trebled. By 1891, annual output approached four times its 1880 figure.
THE CREATION OF INTERNATIONAL HARVESTER
America’s very first outbreak of “merger mania” occurred between 1898 and 1902. Over that span 212 major consolidations took place in American industry. One of those mergers involved the McCormick Harvesting Machinery Company. In 1902, it combined with its chief competitor, William Deering & Co. and three smaller rivals, to create the megacorp, International Harvester. With assets of $110 million, and control of 85% of U. S. production of harvesting machines, IH was “a virtual monopoly.” By 1909, it was the fourth largest corporation in America, as well as the largest farm equipment company in the world. The corporate behemoth rested securely on foundations put firmly in place by the McCormick brothers. In recognition of their central role in the creation of International Harvester, the remaining McCormick heirs received 43% of the new company’s stock. And Cyrus, Jr., was chosen its first President.
According to Alfred Chandler, the dean of business historians, the initiative for the merger came from U. S. Steel and the Morgan bankers who dominated that corporate giant. Elbert Gary, head of U. S. Steel, feared that both the McCormick and Deering firms intended to build their own steel rolling mills, depriving him thereby of lucrative contracts and valuable customers. Gary’s efforts coincided with a readiness on the parts
of William Deering and Cyrus McCormick, Jr. to halt, once and for all, the fierce, cutthroat competition that troubled their industry.
THE McCORMICK LEGACY
Today, the once great conglomerate, International Harvester, is no longer extant—having been undermined by the competitors, such as John Deere, in the early 1980s. By the end of it’s life, the company produced a variety of products but focused primarily on farming equipment, small and heavy-duty trucks, and construction equipment, a massive organization which worked well in good times, but prevented the company from innovating during times of economic strain. International Harvester was split up into three separate companies, Navistar, Case IH (Fiat), McCormick Tractors, and Cub Cadet. Despite the break-up, the legacy of the McCormicks and of International Harvester lives on in the immense philanthropic gifts, most of which can be seen on the walls of the great Chicago and Virginia institutions, as well as countless McCormick-International Harvester aficionados across the country, who still consider McCormick the first name in farming.
FOOTNOTES
1Robert Hall McCormick, had nine slaves. On the eve of the Civil War Cyrus owned “three or four” slaves, property which he hired out to his Walnut Grove neighbors while he lived in Chicago. See William T. Hutchinson, Cyrus Hall McCormick: Seedtime, 1809 – 1856 (New York, 1930), 17; William T. Hutchinson, Cyrus Hall McCormick: Harvest, 1856 – 1884 (New York, 1935), 38. Hereafter, cited as Vol. I and Vol. II.
2Herbert N. Casson, Cyrus Hall McCormick: His Life and Work (Chicago, 1909), 192.
3AlLeander made “long annual visits” to the Shenandoah Valley of his youth and Cyrus was elected in 1880 as the first president of the Virginia Society of Chicago. Hutchinson, Vol. II, 37 (fn. 1).
6Chapter Two, “A Legacy in the Heartland,” in Barbara Marsh, A Corporate Tragedy: The Agony of International Harvester Company (New York, 1985), 15 – 34, and Chapter Three, “Cyrus McCormick,” in Harold C. Livesay, American Made: Men Who Shaped the American Economy (Boston, 1979), shed abundant light on McCormick’s business innovations. Alfred D. Chandler’s The Visible Hand: The Managerial Revolution in American Business (Cambridge, MA., 1977), 305 – 7, 402 – 3, 406 – 11, details McCormick’s role in the “managerial revolution” that swept American industry in the late nineteenth century.
7Richard S. Tedlow, Giants of Enterprise: Seven Business Innovators and the Empires They Built (New York, 2001), 1. McCormick did qualify for inclusion in Daniel Gross, Forbes Greatest Business Stories of All Time (New York, 1966). See “Cyrus McCormick’s Reaper and the Industrialization of Farming,” 22 – 38.
8Casson, Cyrus Hall McCormick, 80.
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9Marsh, A Corporate Tragedy, 23; Hutchinson, Vol. I, 249.
10James Wallace and Jim Erickson, Hard Drive: Bill Gates and the Making of the Microsoft Empire (New York, 1992), 117, 135, 269, 342, 352, 381, 390.
11Hutchinson, Vol. II, 360. 12Casson is especially informative about the development of “McCormick City.” 13Chandler, The Visible Hand, 306 – 7. 14Marsh, A Corporate Tragedy, 4, 41 – 2; Chandler, The Visible Hand, 408 – 9.
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