Chapter 14 – Section 3 Big Business

1. 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

2. 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?

3. The Role of Corporations corporation - (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

4. Economies of Scale corporations could use their large amounts of capital to pay for: new technologies a large workforce numerous 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

5. Economies of Scale 2 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

6. Consolidation of Industry Businesses 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

7. Andrew Carnegie and Steel Carnegie 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

8. 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

9. Trusts trust: 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

10. 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

11. Selling the Product Advertising Amount U.S. companies spent on advertising increased 10 times between 1865 and 1900 Department Stores Shopping changed from a chore to recreation (at least for those who had the money) Chain Stores No-frills stores focused on low prices Mail-Order Catalogs Remember, the majority of Americans still lived in small farming communities – mail-order catalogs connected them to big business as well