“The Rise of Big Business”

Industrialization in the United States1860s – 1900s

“The Rise of Big Business”

“Captains of Industry”

Railroads

CorneliusVanderbilt

Steel

AndrewCarnegie

Oil

John D.Rockefeller

Banking

J.P.Morgan

Technology

ThomasEdison

Unions

SamuelGompers

Andrew Carnegie

John D. Rockefelle

rSamuel Gomper

s

Cornelius Vanderbil

t Thomas Edison

J. P. Morgan

The BIG Picture!Businessmen such as

Carnegie, Rockefeller, Ford and Morgan developed new methods to expand business!

New business methods, help from the gov’t and “Captains of Industry” begin to take control of the U.S. economy...

1870

1880

1890

1900

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100,000120,000140,000

U.S. Businesses, 1870-1900

U.S. Busi-nesses, 1870-1900

New Business Methods: Advertising

Department Stores…1862, A.T. Stewart, NYCShopping becomes a

pastime!Urban consumers.

Mail-Order Catalogs…Montgomery Ward,

ChicagoSears & Roebuck,

1890sRural consumers.

New Business Methods: Rise of Corporations!Rise of corporations fueled the rise of “big business…”

Small businesses could not compete! Shut down in “hard times”

Proprietorship Partnership CorporationWho owns

it?1 person 2 or more Investors,

stockholdersHow is money raised?

* Savings, loans from banks * Partners invest own money, loans from bank

* Stock is sold, loans from bank

Advantages

* Easy! * Low fixed cost…* Small facilities!

* Partners share resp…* Low fixed cost…

* Limited liability for investors…* Low operating cost…

Disadvantages

* Difficult to raise money…* Limited opportunities for growth…* Owner has unlimited liability…* High operating costs…

* Disagreeing partners… * Owners have unlimited liability…* High operating costs…

* High fixed costs… * Large facilities and equipment…

Corporation: organization owned by many people but treated by law as though it were a person. Stockholders buy stock…Raise money, spread the risk! (vs. partnership,

proprietorship)

Created Economies of Scale…Could produce goods more efficiently, which allowed to

the rise of “big business”

Produce more goods @ cheaper price, continue to operate in harsh economic times, drive out small competition!

New Business Methods: Rise of Corporations!

New Business Methods: Help from the Gov’tSanta Clara County v.

Southern Pacific Railroad CompanySCOTUS, 14th

Amendment and Corporations…

Received protection just as individuals would!

New Business Methods: “Pooling”Competition created problems; low prices for

consumers!!!

Railroad pools:associations of competing railroads “for the

purpose of a proper division of the traffic at competitive points and the maintenance of equitable rates that may be agreed upon.”

Interstate Commerce Act, 1887

New Business Methods: BIG Business!By 1870s, competing businesses were merging

together, creating “big business”1. Mergers, Consolidation of Industry2. Creation of Trusts3. Holding Companies

Example of consolidation:1870, Rockefeller’s Standard Oil Company

owned 2% of the country’s crude oil…By 1880 – it controlled 90% of U.S. crude oil!

How did it do so???

3 New Business PracticesMonopolies:

Single company achieves control of an entire market!

Many states begin outlawing…

Trusts:Legal maneuver allowing

trustee to control several companies & run them as one.

Holding Companies:Produce no actual

product.Controls several

companies, merging into one large enterprise!

1. Monopolies

VERTICAL INTEGRATION“Carnegie Steel”

Steel Refineries

Railroad Lines

Raw Materials

Limestone Quarries

Iron Ore Fields

Coal Mines

HORIZONTAL INTEGRATION

“Standard Oil Company”

Refinery Refinery Refinery

2. Trusts

… by creating Trusts! Stocks would be traded in for trust certificates.

“Super-Corporation” created from many small corporations!

Standard Oil, 1882 – first TRUST!

New Business Methods: Trusts

New Business Methods: Investment BankingJ.P. Morgan

Buy large blocks of stock from companies looking to sell… (discounted)

Re-sell the stock for profit!

These investment bankers became interested in holding companies and trusts…

United States Steel, 1901