Businesses and the Four Stages
|Early view of Illinois
- 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
- 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
- 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.
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.
- 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.
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
- 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.
- 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.
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.