Big Business and Consolidating Industry US History Chapter 5

The Rise of Big Business Before Civil War most manufacturing enterprises owned by a few people working in partnership Changed by 1900, big business dominated economy Big business not possible without corporation Organization owned by many people but treated like one person under law Owners in corporation called stock holders because they own shares of stock.

The Rise of Big Business Before 1830 hard to incorporate because needed to be a charter In 1830s states passed general incorporation laws where you didn’t need a charter Money from sale of stock meant corporations could invest in new technologies, hire more workers and purchase machines increasing efficiency Achieved economies of scale: cost of manufacturing decreased by producing goods quickly in large quantities

The Rise of Big Business All businesses have two kinds of costs: Fixed cost and operating costs Fixed costs: costs a company has to pay whether or not it is operating ie loans / taxes Operating costs: costs that occur when running a company ie paying wages Small manufactures had low fixed costs and high operating costs If sales dropped, cheaper to shut down until sales picked up

The Rise of Big Business Big manufactures had high fixed costs and low operating costs Made sense to continue running even in recession Could produce more goods cheaply and efficiently Continue to operate in poor economic times (cut prices) Able to negotiate rebates from railroads to keep operating costs low

The Rise of Big Business Small business couldn’t compete with large corporations due to high operating costs Many forced out of business (competition and importance of fixed costs) Many people criticized corporations for cutting prices and getting rebates Believed corporations behaving unethically

QUESTION What two factors led to the rise of Big Business in the United States? Why did they call owners of a big business stock holders? What are economies of sale?

Consolidating Industry Business leaders did not like competition that was forced. Falling prices great for consumers BUT bad for business profits. To stop prices from falling companies formed pools (agreements) to keep prices at certain level

Consolidating Industry American courts / gov’t suspicious of pools Interfered with competition and property rights Companies with pools No legal protection Could not enforce agreement through law Pools did not last One member always tried to out sell others by cutting prices 1870s many industries only had a few large corporations due to competition

Andrew Carnegie and Steel His life illustrates many factors that led to rise of big business Born in Scotland, poor Moved to US in 1848 Age 12 worked in textile factory (earned $1.20 per week) Then worked in telegraph office for Thomas Scott (who was superintendent and then became pres. Of Penn. Railroad) When Scott became pres. Of RR promoted Carnegie to superintendent.

Andrew Carnegie and Steel As supervisor of RR: Knew make $ by investing in companies that sold/made things the railroad needed Bought shares in iron mills and factories that made train cars / locomotives , AND company that built RR bridges By early 30s Carnegie was making $50,000 a year and quit job to concentrate on investments

Andrew Carnegie and Steel As part of Business Carnegie traveled to Europe Met Sir Henry Bessemer, who had invented new steel making process (high quality) Carnegie then opened steel company using that process in 1875 in Pittsburgh Carnegie began Vertical integration of steel industry One company owns all of the different business that it needs to operate More efficient, saved money and companies grew

Rockefeller and Standard Oil Successful business leaders also pushed for “horizontal integration”. Taking individual companies and combining them into one company When a company would lose value, they would sell to become part of a big company Most famous industrialist who did this was John D. Rockefeller

Rockefeller and Standard Oil When oil was discovered in Pennsylvania Rockefeller built refineries instead of drilling for oil 1870 his company, Standard Oil was largest oil company. Then he started buying out competitors 1880 controlled 90% of oil refinery industry (aka “monopoly”)

QUESTIONS 4. What are pools? Were they legally enforceable? 5. Explain what a vertically integrated company is. 6. Explain what a horizontally integrated company is.

NEW BUSINESS ORGANIZATIONS Amer. Feared monopolies Thought then company could charge whatever it wanted for products BUT others though it would keep low prices b/c if raised prices it would encourage competitors to come back Many companies that had monopolies in US were in competition globally so helped keep prices low Late 1800s to stop rise of monopolies, states made it illegal for one company to own stock in another. Companies found ways around law

NEW BUSINESS ORGANIZATIONS “TRUSTS” A legal arrangement that allows one person to manage another person’s property Person who manages property called trustee A way around law against owning stock 1882 Standard Oil first trust Trustee’s manage property, not own it so they could get around the law and control a group of companies as if they were one large company.

NEW BUSINESS ORGANIZATIONS “holding company” Does not produce anything, owns the stock of companies that do produce goods Started 1889 in New Jersey (first to pass this law of general incorporation) So a holding company could buy a business and manage it along with other businesses making it essentially one large enterprise

NEW BUSINESS ORGANIZATIONS “Investment Banking” Helped rise of corporations in 1890s Investment bankers would help put new holding companies together Most famous/successful is J.P Morgan Companies would sell stock to bankers at low cost and bankers would find people willing to buy and sell it to make a profit. J.P Morgan in 1901 bought out Carnegie and merged the steel company with a holding company making it worth $1.4 billion (first billion dollar company) By 1904 US had 318 holding companies

SELLING THE PRODUCT Giant manufacturing companies forced retailers to expand in size The large amounts of products made retailers want to look for ways to attract customers N.W. Ayer and Son: first advertising company, began large illustrated ads By 1900 retailers were spending over $90 million a year on advertising in newspapers and magazines

SELLING THE PRODUCT Advertising attracted readers to newest retail business, department stores 1877 one of the first department stores “The Grand Depot” in Philadelphia, soon were hundreds more Department stores provide a huge selection of products in one large, elegant building Store atmosphere made shopping seem glamorous and exciting

SELLING THE PRODUCT Chain stores, group of retail outlets owned by the same company, first appeared in the mid-1800s Focused on low prices versus a variety of services Woolworth’s, opened in 1879, became one of the most successful chain store in American History

SELLING THE PRODUCT To reach millions of people in rural areas, chain and department stores issued mail order catalogues Two of the largest were Montgomery ward and Sears, Roebuck and Co. Big catalogs distributed in mail and used illustrations and advertise thousands of items for sale

Questions 7. Explain what a trust is. 8. Explain what a holding company is 9. What is the difference between a department store and a chain store? 10. What were two of the largest mail-order catalogue retailers in the US in the 1800s? 11. Do you think that an individual today can rise from “rags to riches” like Andrew Carnegie did? Why or Why not?

QUESTIONS Use the visual on page 195 to answer the following questions (separate piece of paper) After comparing proprietorships and corporations, why do you think both still exist today? Based on the chart, what generalization can you make about the growth of the US businesses during those three decades? What might be an explanation?

QUESTIONS Look at the visual of vertical integration and horizontal integration on page 197 Answer the questions under analyzing visuals on the same paper as the previous questions at the beginning of class. Keep Paper for tomorrow