Lesson 2: The Growth of Big Business

Lesson Focus

This lesson explores how railroads fueled the rise of 'Big Business.' We'll see how massive companies came to dominate industries by 1900, using vast resources to transform the American economy.

People to Know

John D. Rockefeller, Gustavus Swift

Learning Objectives

• Discover the methods big businesses used to achieve success, from efficiency studies to consolidating power and eliminating competition.
• Understand how the corporate business structure, including limited liability and stock sales, made it easier to fund and grow large-scale enterprises.

The rise of railroads and other large industries required more money than one person could provide.

To solve this, entrepreneurs formed the corporation, a business that sells shares of ownership to many investors.

Pay special attention to limited liability, which protected investors by ensuring they only risked the amount they invested. This encouraged more people to invest, helping companies raise the huge sums of money needed for expansion in the late nineteenth century.

Large companies had the capital to build huge, efficient factories.

They used economies of scale and efficiency studies from experts like Frederick W. Taylor to make better products at lower costs than smaller rivals.

As a result, big businesses could meet the demands of a national market and often drove smaller, local companies out of business because they simply could not compete with the lower prices and wider distribution.

The immense power of big business led many leaders to use ruthless tactics to eliminate competition.

They would sell products at a loss to bankrupt smaller rivals, bribe public officials, and crush labor unions to maintain control.

This created public fear about the corrupting influence of wealth, even as people enjoyed lower prices. Note that popular Horatio Alger novels often celebrated the “rags-to-riches” success stories of businessmen.

To control vast business empires, capitalists needed new organizational structures.

They created trusts, where a single board of trustees managed several companies, and holding companies, which existed only to own stock in other corporations.

These powerful tools allowed a few wealthy individuals to control multiple businesses in an industry, consolidating power and creating the huge business combinations that dominated the late nineteenth century.

To maximize profits and crush competition, business leaders combined companies strategically.

They used horizontal integration to join together firms in the same business, often creating a monopoly. They also used vertical integration to control every step of production, from raw materials to distribution and sales.

These two methods allowed a single corporation to gain complete control over its market, set prices, and eliminate independent competitors.