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FSU ECO 3622 - Exam 2 Study Guide

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Growth of the American Economy Exam 2 Study GuideChapter 17Focus is on production; not necessarily consumptionWhat were the main manufacturing productivity advances?• Mass production innovations: Continuous flow production and scientific management• Technological changes, investment in human capital, new energy sources, and shifts in resources from lower to higher productivity all worked together. • Frederick W. Taylor: the most contributor to scientific management and efficiency• Railroads were the leaders in new management structures, and the new scale and size of business required new practices- this is where scientific management began to dominate.How and why were business organizations changed?• Economies of scale and industry concentration• Early business practices: gentlemen’s agreements; used for setting prices & pooling; used for prices and/or market territory• Typical issues with cartels arose- incentive to cheat and inability to enforce agreements• Later business practices: Trust and Holding companies. Trusts: legal device; stockholders of several operating companies formerly in competition turn over their shares to a group of trustees and receive certificates of trust. The trustees therefore have voting control of the operating companies, and the former stockholders receive dividends. These were soon outlawed, and alert corporate lawyers came up with holding companies to do practically the same thing. • Two phases of concentration movement: Phase I: Horizontal Mergers- combine small firms into larger firms to create economies of scale (Example: Standard Oil). Phase II: Vertical Mergers- one firm controls all phases of production (Example: American Tobacco Company, Carnegie Company)How did the change in organization affect government regulation?• Sherman Antitrust Act: passed in 1980• Declared illegal “every contract, combination in the form of trust, or otherwise, or conspiracy in restraint of trade among the several states”• Prescribes punishment for “every person who shall monopolize, or combine or conspire… to monopolize any part of the trade or commerce among the several states”• Landmark Supreme Court cases in 1911: Standard Oil and the American Tobacco Company• Federal Trade Commission created in 1914 with the Clayton Act; attempted to fill in holes from Sherman Act; price discrimination was key illegal practiceChapter 19• Between the Civil War and WWI, two issues in the monetary system were dominant: Deflation and Banking panicsHow did the banking system become a dual banking system?• Although the National Bank Act of 1863 created a new type of bank, it did not eliminate the older institutions chartered by the states. To make the national banks appear more sound than state banks, stuff legal reserve requirements were mandated, and double liability was imposed on the stock of national banks. A tax was levied against state bank notes, and many banks shifted to federal jurisdiction. Many assumed the state banking system would wither away, but this was very wrong. It was no longer necessary for a bank to issue notes to succeed- it could do well issuing only deposits. The revival in state banking began in about 1870, and by 1914 there were more state than national banks. The US therefore ended up with a dual banking system.Why couldn’t the US return to the gold standard after the Civil War?• During the Civil War, US prices increased much more than British prices. If the greenbacks were converted to gold at the prewar exchange rate, there would have been a flood of conversions in order to obtain the English pound. Imports would have soared and gold would have left the country very quickly.What monetary policies were implemented after the Civil War?• Treasury officials had recourse to two courses of action over the price level:• 1) The price level could be forced down quickly by contracting the supply of paper money. This could be done by running a budget surplus and burning up the greenbacks as they came in. • 2) A slower, less painful decline in prices could be achieved by holding the money supply constant and allowing the growth of the economy to bring about a gradual decline in prices• The first choice occurred from 1865-1868, but seemed to be too harsh. A general easing of money markets rather than a tightening then occurred until 1873. Afterwards, an even more passive policy took place- so that the price level would fall as the country “grew up” to its currency. After Democrats won control of Congress in 1874, there was an act providing for a return to gold payment in four years. Continued deflation brought British and US prices back towards each other. Between 1879 and 1900, the government maintained parity of all forms of money with gold, and America was on a de facto gold standard. Why was deflation persistent?• The basic problem was that the demand for money (and ultimately for gold, which was the base of the monetary system) was growing faster than the supply. Therapid increase in economic activity, growing financial sophistication, and the addition of more countries to the gold standard all increased the demand for gold. Meanwhile, the supply, although growing at a good rate by historical standards, could not keep pace. Why were investment banks created?• US firms had difficulty acquiring sufficient capital for larger projects• US banks had limited resources• Investment banks solved this problem by becoming intermediaries- finding sufficient lenders for firmsWhat events led to the Fed being created in 1913?• Three events were catalysts for reform:o 1) Panic of 1893o 2) Depression of mid-1890’so 3) Panic of 1907• 1913- Federal Reserve Act passed. It established 12 district banks. National banks were required to join, and state banks were allowed to join.Chapter 20General time period under consideration is between 1880 and 1930The nature of commerce hanged dramatically. Why were more people living in cities? What factors facilitated urbanization?• Prior to 1860, people were needed to work in transportation, banking, and trade-related activities; very little manufacturing in cities• After 1860, industry moved to the cities, and people were needed to work in the factoriesWhy did product differentiation and advertising become so important?• Prior to 1860, marketing and advertising were inefficient uses of resources because transportation and communication were not fully developed.


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