Following the Civil War, large corporations developed that could consolidate business functions and produce goods more efficiently. Retailers began using new techniques to attract consumers. Show The Rise of Big Business What advantages do large corporations have over small businesses? By 1900, big business dominated the economy, operating vast complexes of factories and distribution facilities. The corporation, an organization owned by many people but treated by law as though it were a person, made big business possible. Stockholders own corporations through shares of ownership called stock. Selling stock allows a corporation to raise money while spreading out the financial risk. Before the 1830s, few corporations existed because entrepreneurs had to convince state legislatures to issue them charters. In the 1830s, however, states began allowing companies to become corporations and issue stock without a charter from the legislature. The freedom to form a corporation was one of the great benefits of the laissez-faire approach to economics in the later half of the 1800s. With the money raised from selling stock, corporations could invest in new technologies, hire large workforces, and purchase machines. This greatly increased their efficiency. They achieved economies of scale, in which the cost of manufacturing is decreased by producing goods quickly in large quantities. All businesses have fixed costs and operating costs. Fixed costs are costs a company pays even if it is not operating (loans, mortgages, and taxes). Operating costs are incurred when running a company (wages, shipping costs, buying raw materials). Small manufacturers usually had low fixed costs but high operating costs. If sales dropped, it was cheaper to shut down temporarily. Big manufacturers, however, had the high fixed costs of building and maintaining a factory, while operating costs were low. Operating costs, such as wages, were such a small part of total costs that it made sense to continue operating, even in a recession. In these circumstances, big corporations had several advantages. They could produce more goods at a lower cost and could stay open in bad economic times by cutting prices to increase sales. Rebates from the railroads further lowered their operating costs. Of course, this also led eventually to one of the major costs of laissez-faire economics: small businesses, many family owned, that could not compete with large corporations were forced out of business. Consolidating Industry What new business strategies allowed businesses to weaken or eliminate competition? Although a laissez-faire economy benefited consumers because the intense competition led to falling prices, business leaders did not like the intense competition that had been forced on them. Cutting prices to beat the competition also cut into profits. This situation demonstrated one of the potential costs of laissez-faire. With no regulations governing their competition, companies were also free to make deals with each other to fix prices by organizing pools, or agreements to keep prices at a certain level. Another term for a pool that is used today is cartel. American courts and legislatures, however, were suspicious of pools because they interfered with competition and property rights. As a result, even though the laissez-faire economy meant that companies could try to fix prices, companies that formed pools found that it also meant they had no legal protection and could not enforce their pool agreements in court. As a result pools generally broke apart whenever one member cut prices to steal market share from another. As a result, by the late 1870s, competition had reduced many industries to a few large highly efficient corporations. Andrew Carnegie and Steel The remarkable life of Andrew Carnegie illustrates the rise of big business in the United States. A Scottish immigrant, Carnegie went to work at age 12 in a textile factory. He worked his way up to become secretary to Thomas Scott, a superintendent of the Pennsylvania Railroad. When Scott was promoted, Carnegie became the new superintendent. Carnegie bought shares in iron mills and factories that made sleeping cars and railroad locomotives, as well as a company that built railroad bridges. By his early 30s, he quit his job to concentrate on his investments. As part of his business activities, Carnegie often traveled to Europe. On one trip, he met Sir Henry Bessemer, who had invented a new process for making high quality steel efficiently and cheaply. After meeting Bessemer, Carnegie opened a steel mill in Pittsburgh in 1875 and began using the Bessemer process. He boasted about how cheaply he could produce steel:
To make his company more efficient, Carnegie began the vertical integration of the steel industry. A vertically integrated company owns all of the different businesses on which it depends for its operation. Instead of paying companies for coal, lime, and iron, Carnegie’s steel company bought coal mines, limestone quarries, and iron ore fields. Vertical integration saved money and enabled many companies to expand. Rockefeller and Standard Oil New Business Organizations Many Americans feared monopolies because they believed that a monopoly could charge whatever it wanted for its products. They argued that one of the costs of laissez-faire economics was that it created large powerful corporations that could control prices, and manipulate politicians and laws to ensure that they did not face any new competition. Supporters of laissez-faire disagreed. They asserted that monopolies had to keep prices low because raising prices would allow competitors to reappear and offer products at a lower price. In some industries, even though a company had a near monopoly in the United States, it was not really a monopoly because it was competing on a global scale. Standard Oil, for example, came very close to having a monopoly in the United States, but it was competing against European oil companies and the competition forced the company to keep its prices low in the late 1800s and early 1900s. Trusts In the late 1800s, in an effort to stop horizontal integration and the rise of monopolies, many states made it illegal for one company to own stock in another company. It did not take long, however, for companies to find ways around the laws. In 1882 Standard Oil formed the first trust, a new way of merging businesses that did not violate the law. A trust is a legal arrangement that allows one person to manage another person’s property. The person who manages that property is called a trustee. Instead of buying a company outright, Standard Oil had stockholders give their stocks to a group of Standard Oil trustees. In exchange, the stockholders received shares in the trust, which entitled them to a portion of the trust’s profits. Since the trustees did not own the stock but were merely managing it, they were not violating any laws. The trustees could control a group of companies as if they were one large merged company. Holding Companies In 1889 the state of New Jersey further accelerated the rise of big business with a new incorporation law. This law allowed corporations set up in New Jersey to own stock in other businesses. Many companies immediately used the law to create holding companies. A holding company does not produce anything. Instead, it owns the stock of companies that do produce goods. The holding company manages the companies it owns, effectively merging them into one large enterprise. Selling the Product The creation of giant manufacturing companies in the United States pushed retailers to expand in size as well. The vast array of products that American industries produced led retailers to look for new ways to attract consumers. N. W. Ayer and Son, the first advertising company, began creating large illustrated ads instead of relying on the old small print line ads previously used in newspapers. By 1900, retailers were spending over $90 million a year on advertising in newspapers and magazines. Advertising attracted readers to the newest retail business, the department store. In 1877 advertisements billed John Wanamaker’s new Philadelphia department store, the Grand Depot, as the “largest space in the world devoted to retail selling on a single floor.” When it opened, only a handful of department stores existed in the United States. Soon hundreds sprang up, providing a huge selection of products in one large building. Chain stores, a group of retail outlets owned by the same company, first appeared in the mid-1800s. In contrast to department stores, chain stores such as Woolworth’s focused on offering low prices. To reach the millions of people who lived in rural areas, retailers began issuing mail-order catalogs. Two of the largest mail-order retailers were Montgomery Ward and Sears, Roebuck and Co. Their huge catalogs were widely distributed through the mail. They used attractive illustrations and appealing descriptions to advertise thousands of items for sale. SKILLS PRACTICE Work with a partner. Take turns using the following vocabulary words in sentences: corporation, consumer, monopoly, trust. Reviewing Vocabulary TEKS:3B, 27A TEKS: 3B, 15B Using Your Notes TEKS:3B, 15B Answering the Guiding Questions TEKS:3B, 15B TEKS:3B, 15B Writing Activity TEKS:3B, 27A How did businesses try to eliminate competition?Business leaders in the 1800s tried to eliminate competition by forming pools, trusts, monopolies, and through vertical and horizontal integration. Many companies organized pools to keep prices at a certain level, that is, they tried to keep prices from falling.
What are 3 ways businesses tried to prevent or break up unions?in what ways did employers try to stop the formation of unions? They required workers to sign contracts to not form unions, they hired detectives to point out union leaders, they used blacklists, and they used lockouts.
How were pools used to reduce competition in a market?Companies formed pools or other arrangements to keep prices at a certain level, to keep prices from falling. Businesses who were not part of the pool often found it difficult to compete and eventually went out of business.
How did the laissez faire economics encourage businesses to industrialize?Laissez-faire economics promoted industrialization by not allowing the government to interfere or to interfere as little as possible with the economic practice of the country. It managed to keep taxes low while encouraging private investment.
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What new business strategies allowed business to weaken or eliminate competition?
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