Chapter 14 – Section 3Big Business

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public.”

- Adam Smith

“There is one rule for the industrialist and that is: make the best quality of goods possible at the lowest cost possible, paying the highest wage possible.”

- Henry Ford

The Rise of Big Business

Prior to Civil War, small partnerships of very wealthy people formed most businesses

Even factories were fairly small

By 1900, the American economy was dominated by massive companies with multiple factories, hordes of employees, and modern managerial staffs

What caused the transition?

The Role of Corporationscorporation - (n) an organization owned by many people but treated by law as though it were a single person

governments have to pass laws allowing for incorporation

corporations can:• sue and be sued• own property• make contracts• pay taxes

stock – share of ownership in a corporation• allows companies to raise a

great deal of money while spreading risk

Economies of Scale

corporations could use their large amounts of capital to pay for:new technologiesa large workforcenumerous machines

Large size of corporations allowed for economies of scale

economy of scale: making goods more cheaply by using large manufacturing facilities to produce a great deal of a product in a small amount of time

Economies of Scale2 Kinds of Operating Costs• fixed• operating

fixed cost: cost a company must pay regardless of whether it is operating

operating cost: costs which occur when running a company, such as salaries, raw materials, etc.

Size of corporations gave them much lower operating costs than traditional business

Big business could operate even in a weak economy

Ability of big business to stay open during recessions and to produce goods more cheaply forced massive numbers of small businesses to close

Consolidation of IndustryBusinesses did not like competition because it cut into profits

Consumers benefit from competition because they can choose the best deal

In an attempt to keep prices (and therefore profits) high, big business organized pools

pool: agreement to keep prices at a certain level

Such agreements were illegal

Pools were also unstable – temptation for companies to cheat was often too great

Andrew Carnegie and SteelCarnegie was a Scottish immigrant to the U.S.

Worked his way up in the railroad industry from childhood

In his early 30s, was a railroad supervisor making a very good salary

Used his money to invest in businesses that sold to railroads, such as iron mills, railroad car factories, railroad bridges

Met Sir Henry Bessemer – inventor of a process to make high-quality steel cheaply and easily

Carnegie opens a steel mill in PA

Vertical and Horizontal Integration

vertical integration: company owns all of the business on which it relies for its materials and operation

• allowed large companies to sell products even more cheaply, become even larger

horizontal integration: combining many firms engaged in the same type of business into one corporation

• horizontal integration can lead to a monopoly

monopoly: when a single company achieves control of an entire market

Truststrust: legal concept that allows one person to manage another person’s property

By the late 1800s, many Americans have become fearful and suspicious of big business

To preserve competition, states had passed laws forbidding any company from holding stock in another company without state permission

Corporations formed trusts to circumvent (go around) those laws

Holding Companies

holding company: a company which does not produce anything, but owns stock in companies which do make products.

Purpose is to effectively create one large company

First state to legalize this arrangement was New Jersey

Significance is that holding companies further accelerated the rise of big business

Selling the ProductAdvertisingAmount U.S. companies spent on advertising increased 10 times between 1865 and 1900

Department StoresShopping changed from a chore to recreation (at least for those who had the money)

Chain StoresNo-frills stores focused on low prices

Mail-Order CatalogsRemember, the majority of Americans still lived in small farming communities – mail-order catalogs connected them to big business as well