Chapter 3 Lesson 3 THE RISE OF BIG BUSINESS Main idea: * During the late 1800s, some businessmen gained incredible amounts of wealth through effective & ruthless business practices. Eventually the federal government was forced to pass laws that cut back on corruption.

Corporations Develop Businesses – Until mid-1800s most were run by 1 person or family Because of industrialization, businesses had access to more resources and more people More help was needed to meet business needs Business leaders began to combine funds and resources to form new companies Corporation - group ownership of a business This was to increase investment and share risk Corporations have rights of individuals (buy & sell property, sue in court, etc…) Exposed to large amounts of capital ($) to invest in new technology, new industries, or expand operations

Issues Small Businesses couldn’t meet demand of rapidly growing economy: PROBLEMS: Expensive – $ needed to buy materials/machinery - $ needed to hire more workers - $ needed to expand operations Risky – Individual or small group ownership - Could lose all of your OWN $$$$ SOLUTIONS – Create a CORPORATION Expensive – Access to large amounts of capital ($) - Shared expense of expanding operations Risky – Shared risk of investments - Can only lose the $ you invest personally - Rights of Individual: enter contracts/loan & borrow $/own assets/pay taxes/corporations DON’T DIE - LIMITED LIABILITY = shareholders profit from dividends & stock appreciation/not responsible for Debt of company/do not pass debt on to relatives when die

Corporations Corporations Maximize Profit Monopoly Cartel Paid workers the lowest possible wages Paid lowest prices for raw materials Used advertising Invested in research laboratories Monopoly Total control of a type of industry by one person or one company. How to form a monopoly? -- Buy competition or run them out of business With no competition, business can set prices, wages, and standards of production (as to maximize profit) Cartel Businesses making similar products work together to keep supply low and prices high

Corporations Trust Companies assign their stock to a board of trustees, who combine them into a new organization (multiple companies being controlled as one). Legal way for Rockefeller to gain control of oil industry. Holding Companies 1889 law allowed corporations to own stock in other businesses without special permission Holding companies do not produce anything themselves, but owns the stock of companies that DO produce goods. Holding companies manage the stock of different companies – often merging them into one Investment Banking Investment bankers specialized in helping companies sell large blocks of stock at a discount. The Investment bankers would then sell large amounts of stock for HUGE profits. Example: JP Morgan bought out Andrew Carnegie, and merged Carnegie steel with other large steel companies called, U.S. STEEL.

Corporations Business Integration Vertical Integration System of consolidating firms involved in all steps of a product’s manufacturing. (Carnegie, Rockefeller) Carnegie steel = owned his own iron mining operations, railroads for transportation/distribution, factories for production, accounting department, etc… Horizontal Integration Consolidating many firms in the same business. (J.D. Rockefeller: Railroads/Oil) Rockefeller wanted to buy out his competition, but it was illegal in some states. So he formed trusts.

Horizontal & Vertical Integration

Robber Barons or Captains of Industry? Were these men Robber Barons or Captains of Industry? John D. Rockefeller – Standard Oil Company; Gained control of over 90% of U.S. oil industry; created trusts; 1st Billionaire in U.S. Andrew Carnegie – Carnegie Steel; 1st billion dollar company; Philanthropist (“Gospel of Wealth”) J.P. Morgan – banker; mergers; Negotiated the biggest business deal – U.S. Steel bought Carnegie’s Federal Steel Cornelius Vanderbilt – Railroads; Grand Central Railroad

Robber Barons or Captains of Industry?

Robber Barons or Captains of Industry? Robber Barons = negative view of industrialists; took advantage of workers/consumers for personal gain Captains of Industry = positive view; moving the nation’s economy forward Growth of Philanthropy – rich donating money to improve society (Rockefeller gave away 100’s of millions of dollars before he died!) “GOSPEL OF WEALTH” = Andrew Carnegie’s book, telling rich people to give money back to society. Build hospitals, colleges, libraries, etc…