Big Business

American History

FYI

• Between the end of the Civil War and the end of the 1800s, industrialism replaced agriculture as the main source of economic growth.

Section 2-9National Markets• Expansion of the railroads created a huge

national market that revolutionized industries, spurring new ways of shipping goods such as in refrigerated cars and the development of chain stores that could undersell single retailers through mass purchasing.

• A new consumerism emerged as companies competed for customers, building lavish department stores and spending millions of dollars on advertising.

Section 2-10National Markets (cont.)

Section 2-11

How did the development of national markets affect business?

Businesses made mass purchases, set up chain stores for distribution, and shipped in bulk, using refrigerated cars if necessary.

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Business Basics

Corporations – government permission to sell shares of stock in a business to raise capitalDividends – stock owners profit from business profits

http://www.nyse.com/

The Stock Market Game

Stocks Quest Register, create login and password. Join a class Login: MoValley Password: bigreds

Starting today and ending March 5th (for now) Do not research +/or trade in other

classrooms.

Section 2-12• The growth of heavy industry and the

creation of vast nationwide markets brought about a basic change in business organization. Only large businesses gathering capital from many investors could afford to set up huge factories, install modern machinery, and employ hundreds of workers.

The Growth of Big Business

Section 2-13

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The Growth of Big Business (cont.)

• To manage these huge enterprises, entrepreneurs followed the example set by railroads and divided the various functions of a business into departments, putting each one under the direction of a separate manager.

• To survive ruthless competition and swings in the economy, some business owners employed the idea of a merger– the combining of several firms under a single head.

Corporations vs. Private Ownership

Economies of scale = the more you produce the less each next one costs – M&MsLimited Liability – stockholders only lose what they put in Stability – death in corporation doesn’t affect the stockholders

Section 2-14• Entrepreneurs who mastered the use of

mergers used one of two methods to combine companies: (1) horizontal integration, which merged competing companies in one business, or (2) vertical integration, which sought to control all aspects of production from acquisition of raw materials to final delivery of finished products.

The Growth of Big Business (cont.)

Section 2-15The Growth of Big Business (cont.)

Section 2-16• In the merger movement, Rockefeller

dominated oil, Swift and Armour controlled meatpacking, the Duke family held tobacco, and Carnegie towered over the steel industry.

The Growth of Big Business (cont.)

Andrew Carnegie

Lives the ultimate American Dream – immigrant to extremely rich1872 – visits Great Britain and steals the Bessemer Process, quits his job in the railroad and starts U.S. SteelCarnegie uses vertical integration to eliminate competition

Vertical Integration

Carnegie secures all phases of production to make sure he can produce the cheapest goods possible.So he buys up coal mines, iron mines, railroad and shipping lines, and all the steel mills he can afford.This way he can avoid the middle man and produce and sell the cheapest, highest quality steel in the world.

Success in Steel

By 1900 he earned $40 million in a year He also produced more steel in his mills than all of Great Britain combined.

John D. Rockefeller

Founder of Standard OilRockefeller used vertical integration – buys up oil fields, barrel making companies, pipelines, railroads, petroleum plants, refineries, and gas stations.He also uses horizontal integration to destroy his competition

Horizontal Integration

Bribed railroad officials not to ship any other company’s oil.Would set up gas stations across the street from existing ones – and because of vertical integration (he has cheaper gas) – he can undercut the other station’s prices and either buy them out or drive them out of business.

J.P. MorganMorgan is the first real monopoly player.Morgan is a banker whose genius lies in merging companies together.Convinces Carnegie to sell US Steel for $500 million (Carnegie becomes the richest man in the world). Then buys out the next 5 biggest companies also. Morgan becomes a billionaire overnight.

Monopolies

What Morgan did was technically illegal.The government did force the break-up of US Steel after +10 years. Monopoly is when there is no competition – Morgan bought the competition out. Democracy is competition – this ensures a cheaper, safer product. Ex > airplanes

Kellogg, Post and the Cereal Wars

Both invent and intend to sell cornflakes.Kellogg invents promotions (advertising) and takes the early lead.This advertising evolves into commercials etc…Making both extremely successful and rich.

Isaac Singer

Singer Sewing Machines – not the first sewing machine – but the first with only and up and down needle.This led to patent wars – everybody started to steal his invention – but the courts didn’t back him so he has to make money some other way.

Installment Plan

This is Singer’s way to make money.Installment Plan = payoff over timeSinger also made stores, mechanics, and salespeople available for help – kind of the first people friendly warranty.Singer becomes quite rich.

The Governments Response

Will be covered in more detail later.Quickly though, the government saw that the American public was getting the short end of the stick in the business world and decides to take action.This brings about the idea on the next page.

The Gilded Age

Gilded Age – coined by Mark Twain – means “Gold covered” but what it covers is rottenExample – an apple with a wormThe U.S. looks good on the outside but the real story is rotten.This is an extremely important idea that guides the U.S. for the next 30 years.

Section 2-18• The wealth generated by industrial

capitalism and big business created a class of “nouveau riche” whose lavish spending gave the late 1800s its name, the Gilded Age. The new capitalists became known as “robber barons.”

The Spirit of the Gilded Age

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• Many business leaders justified their activities by embracing the Social Darwinism of Charles Spencer, who applied Darwin’s “natural selection” to the evolution of society–a theory in which the weak fell and the strong forged ahead.

Section 2-19• Many of the robber barons who accepted

Social Darwinism also believed that the more fortunate should give back to society to benefit the public at large, inspiring philanthropic works.

The Spirit of the Gilded Age (cont.)

Section 2-17

“The day of the combination is here to stay,” declared John D. Rockefeller in the late 1800s. “Individualism is gone, never to return.” What might have prompted this statement?

Rockefeller was talking about the merger movement that had driven out individual competitors in many industries.

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