made possible by the new technologies and being necessary to achieve the additional productivity associated with the use of these technologies. for example, before the civil war, most businesses were either sole proprietorships or partnerships serving local markets and consisted of small shops employing skilled workers involved in each aspect of the production process. at the same time that the spread of railroads lowered transportation costs and increased the size and number of potential markets, the greater availability of steam power enabled manufacturers to set up factories to take advantage of economies of scale in production. as a result, the optimal firm size rose substantially in many industries. in the cotton industry, for example, the median firm size ( measured as the annual value of gross production in 1860 dollars ) rose from $ 31, 000 in 1850 to nearly $ 100, 000 in 1870 ; similarly, in the iron industry, median firm size rose from $ 24, 000 in 1850 to more than $ 200, 000 in 1870. 23 in addition, large wholesalers ( and later, retailers ) emerged to take advantage of increased distributional efficiencies to sharply reduce the costs of moving commodities and manufactured goods from the farm or factory to retailers ’ shelves. these larger enterprises typically had to confront communications challenges not faced by smaller businesses. in particular, effective internal information flows were often crucial to the success of firms producing or distributing large volumes of inputs and outputs. the telegraph and the railroad - based postal service made prompt communication over great distances possible. but firms also had to set up hierarchical management systems to control the production process and to coordinate the flow of goods across the distribution system in order to take advantage of the economies of scale presented by technological change. advances in production processes in the early 1900s led to new challenges and opportunities for business organization. as noted above, the diffusion of the electric motor throughout the factory increased the use of continuous - process methods and the assembly line and thus accelerated the trend toward mass production. in addition, as early as the 1880s, manufacturers had begun to integrate forward into distribution ; one noteworthy example was the meatpacking industry, in which firms purchased refrigerated rail cars that allowed shipment of beef from centralized slaughterhouses to branch houses that served local markets. the advances in mass production techniques and the increasing complexity of many manufactured products led firms in other industries to integrate forward not only into distribution but also into retailing ; this vertical integration reduced transactions costs even more and further increased the optimal size of firms. indeed, many of the large corporations that arose at this time

the bond market - - especially in the high - yield sector. activity in the ipo market has subsided as equity investors have turned away from riskier ventures. taking into account also the decline in equity prices since the spring and the rise in the foreign exchange value of the dollar, financial markets are imposing more restraint on the economy than they have in recent years. a reassessment of risks is a natural and desirable byproduct of financial market adjustments, and of returning to more sustainable economic conditions. there is always a danger, however, that participants will overreact in such a period of adjustment. i do not today see such an overreaction, but we have to be aware that markets have turned excessively pessimistic in the past, with negative effects on economic activity. similarly, although investment growth appears to have slowed, it is still rapid by historical standards and the dollar remains firm. thus, i do not see, at this stage, evidence of a marked drop off in investment or of a sudden reversal in capital flows. however, it is prudent to be mindful of these risks in this transition period. conclusion in conclusion, let me remind you that, while these are challenging times for monetary policymakers and financial market participants, the u. s. economy is enjoying a period of unprecedented prosperity. our job at the federal reserve is to do our utmost to produce a stable economic environment of maximum sustainable growth without inflation so that these trends can continue. to produce such an environment we must be equally vigilant against the risk of either an extended period of growth unacceptably below potential, or a resurgence of inflation.