1. Big Business and Consolidating Industry
US History
Chapter 5

2. 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.

3. 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

4. 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

5. 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

6. 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

7. 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?

8. 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

9. 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

10. 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.

11. 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

12. 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

13. 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

14. 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”)

15. 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.

16. 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

17. 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.

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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?

25. 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?

26. 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