Early view of Illinois Central Railroad
[audio]Businesses and the Four Stages of Cooperation

  • Bankrupt means not having enough money to pay debts. A depression is a time when many companies decrease production and many people lose their jobs.
  • A boom is a time when companies make large profits and expand.

Too much expansion

  • Businesses expanded because there was a large demand for many products to make more profits.
  • When factories produce more products than they can sell, they cannot make enough money to pay their production costs and repay their loans.
  • Bad loans are the loans a company cannot pay back to the banks.
  • Too many bad loans can cause a bank to go out of business.
  • Two things banks did if they were worried about bad loans
    a. Stopped making as many loans.
    b. Demanded their loans be paid back immediately.
  • As a result of these bank's actions, more companies went out of business and banks then had even more bad loans.

The depression of 1873

  • When railroad companies borrowed huge amounts of money to build thousands of miles of new track, they started the depression of 1873.
  • The effect of this led the largest private banks in the U.S., railroad and manufacturing companies, other companies that sold supplies to the railroad companies went bankrupt, and many people lost their jobs due to the decrease in production.

[audio] Businesses Cooperate to Decrease Competition

The first stage of cooperation

  • Business owners began to discuss ways to decrease competition so that they could all continue making a profit.

The second stage of cooperation

  • Pools limited competition because large businesses that produced the same product agreed how much each company would produce and charge for its products.
  • Because the pool agreements were voluntary, companies broke them after the depression ended and companies started selling more products.
  • The railroads servicing St. Louis and Atlanta use a pool agreement to limit competition by giving each railroad a certain amount of goods to transport.

Cornelius Vanderbilt

  • Vanderbilt's New York Central Railroad connected the Great Lakes, Chicago, and Omaha (Nebraska).
  • Using pool agreements allowed Vanderbilt's New York Central to charge lower rates because shorter railroads between different big cities agreed to work together to form one long railroad.

The third stage of cooperation

  • The problem with pools was that companies could break them any time they wanted.
  • A trust is a group of businesses run by a single board of directors called trustees. It was a new type of agreement to limit competition on a regular basis, not just during a depression.

[audio] A petroleum industry trust

  • The primary use of petroleum during the last half of the 1800s was to burn in lamps to give light.
  • An oil refinery did a process of changing petroleum into kerosene or other more usable fuels.
  • Two ways that Rockefeller gained a competitive advantage:
    a. Price cutting
    b. Rebate
  • Forming a trust helped Rockefeller by eliminating competition and gaining more control over the petroleum industry.

Railroad companies also created trusts

  • Formation of a trust affects consumers to suffer from high prices due to lack of competition.

Other trusts

  • Several industries that formed trusts: producers of cottonseed oil; salt companies; sugar companies; the lead companies; the match companies; the rubber companies; and the whiskey manufacturers.

[audio]The fourth stage of cooperation

  • A holding company is a company that does not legally own enough of business to control what the business does but owns part of many businesses that operate each business.

The Northern Securities Company

  • Northern Securities Company is an example of a holding company, and it controlled the railroads in the West.
  • The competition between James Hill in the Great Northern Railroad and Edward H. Harriman in the Southern Pacific, Kansas Pacific, Union Pacific, and Texas Pacific Railroads created a problem of lowering the profits of both companies because competition forced both to lower rates further and further.
  • The Northern Securities Company solved Hill and Harriman's problem by legally joining their companies to form a single holding company, the Northern Securities Company.
  • This holding company affected the consumers of the Northern Securities Company because no competition made the price jump tremendously.