Big Business Chapter 3 Section 3

The Rise of Big Business By 1900 we had gone from a few people owning a business to big business dominating the economy Corporation: organization owned by many people but treated as it were owned by one People who own it are called stockholders b/c they own shares of the company called stock Issuing stock allowed companies to raise money for big projects spread out the financial risk

The Rise of Big Business 1830s states no longer had to issue charters so corporations grew With money from stocks corporations could: Invest in new technology Hire larger workforce Purchase many machines Increase their efficiency

The Rise of Big Business 2 kinds of costs Fixed and operating Fixed – has to pay whether operating or not such as a mortgage/rent on the building Operating – wages, shipping, buying materials

The Rise of Big Business Big corporations Advantages: Produce more goods cheaply and efficiently Operate in poor economic times by cutting prices to increase sales rather than shutting down Negotiate rebates from railroads to lower their operating costs Small businesses with high operating costs could not compete with large businesses Some people thought corporations were being unethical for driving small companies out

Consolidating Industry Low prices made buyers happy Business owners didn’t like the competition Companies organized pools Agreed to keep prices at a certain level Courts suspicious of pools because it interfered with competition Companies that formed pools had no legal rights Pools didn’t last long because someone would lie and try to dupe the others and make money- dishonesty

Andrew Carnegie Scottish immigrant. Worked his way up from a clerk to head of his own steel company. Realized he could make a lot of money by investing in companies that served the railroad industry Bought shares in iron mills and factories that made sleeping cars By his early 30s he was making $50k a year

Andrew Carnegie Used the Bessemer process to produce steel cheap and efficiently Founded Carnegie Steel Co. in Pittsburg Bought up resources needed to produce steel: iron fields, coal mines, railroads. Known as Vertical Integration Gave away most of his fortune.

John D. Rockefeller Grew up in rural New York State. Invested in oil refineries. Founded Standard Oil Co. Bought up nearly every refinery in the US to dominate the industry (bought out his competitors) Known as Horizontal Integration Helped start the University of Chicago. SO Ohio-now BP; Amoco-BP; SONY-Mobil; SO NJ-Exxon; SOCA-Chevron; SO Atlantic-Arco; Continental Oil Co.-Conco; Oh Oil Co.-Marathon

John D. Rockefeller Horizontal integration: buy the companies that are not doing well to create a larger organization By 1880 he had a monopoly or controlled most of the industry SO Ohio-now BP; Amoco-BP; SONY-Mobil; SO NJ-Exxon; SOCA-Chevron; SO Atlantic-Arco; Continental Oil Co.-Conco; Oh Oil Co.-Marathon

New Business Organizations Fear monopolies b/c they could charge whatever they wanted Some liked them b/c if monopolies didn’t keep prices low, competition would reappear Became illegal to own stock in another company – one company could not buy stock in another…. This was to prevent monopolies and to try to stop horizontal integration

Trusts 1882 – Standard Oil… 1st one Didn’t violate the law Legal agreement that allows one person to manage another person’s property Trustee: person who manages property Standard Oil stockholders give their stock to trustees Stockholders get shares in the trust – and a portion of the trust’s profit Trustees did not own the stock they just managed it

Holding Companies Accelerated the rise of big business Corporations that chartered in New Jersey could own stock in other businesses without any special legislative action Holding Companies – does not produce anything Owns stock the stock of companies that do produce goods Manage the companies it owns and merges them into one large enterprise

Investment Banking Increased size of corporations 1890s – investment bankers put new holding companies together JP Morgan Companies would sell a lot of stock to investment bankers at a discount and the investment bankers would sell it for a profit

Investment Banking Interested in selling stock in holding companies that had merged many of America’s big business JP Morgan bought out Carnegie Merged Carnegie steel with other companies and created United States Steel Company

Trusts Trusts were used to get around prohibitions against monopolies. Monopolies are when one company/person controls all or most of the market for a product or industry. A present day example: Microsoft for computers; Apple for cell phones. A small group controlled all (or most) of the companies in a particular industry. Can fix prices, control competition so that the individual companies do not hurt each other. Trusts enabled Morgan to control most of America’s basic industries by 1900.

Selling the Product Retailers had to expand New products; retailers had to attract new customers NW Ayer and Son – advertising in newspapers and magazines 1900 - $90 million on advertising Grand Depot – “largest space in the world devoted to retail on a single floor”- Department Store Chain stores started appearing Woolworth’s ; Montgomery Ward; Sears