PREFACE
The formative era of American corporate capitalism took place between 1897 and 1919. The American industrial landscape of the late nineteenth century had been characterized by independent factories. No matter what their size, they typically were owned by entrepreneur industrialists, their families and often a few business associates. Almost overnight American business transformed into a vista of giant combinations of industrial plants owned directly and indirectly by widely dispersed shareholders. Business reasons sometimes justified these combinations. But they might never have come into being if financiers and promoters had not discovered that they could be used to create and sell massive amounts of stock for their own gain. The result was a form of capitalism in which a speculative stock market dominated the policies of American business. The result was the speculation economy.
Historians have studied virtually every aspect of the Progressive Era, including the social and philosophical changes that took place in Americans’ ways of living and thinking about their world, the dramatic technological and economic developments that occurred, the rise of big business, the growth in importance of the federal government, the fitful creation of American industrial policy, the establishment of the bargain between labor and capital, the changes in political relations between government and big business, the development of new styles of regulation and America’s assumption of its turn as the world’s dominant economic power. Vincent P. Carosso, Alfred D. Chandler, Jr., Louis Galambos, Eric F. Goldman, Samuel Hays, Richard Hofstadter, Morton J. Horwitz, Morton Keller, Gabriel Kolko, Naomi R. Lamoreaux, R. Jeffrey Lustig, Ralph L. Nelson, Mark J. Roe, William G. Roy, Martin Sklar, Hans B. Thorelli, James Weinstein and Robert H. Wiebe, among many others, have provided rich pictures of different aspects of the dramatic and related economic, social, political, legal, business and financial transformations that occurred during that period. The story that remains to be told is of the creation of American corporate capitalism through the birth of the giant modern corporation, the stock market it produced and federal efforts to tame both.
The story I tell is the economic equivalent of the political creation of the Republic. It is a story that needs to be told for many reasons. There is of course the simple virtue of understanding why the American corporate economy has taken its distinctive form, a good and sufficient reason in its own right. But that corporate economy recently has been beset with problems ranging from short-term management horizons that can damage the long-term health of business to the increasing willingness of corporate managers to externalize the costs of production for the benefit of their stockholders. The speculation economy is one in which business management focused on production is replaced with business management focused on stock price. Such a management goal might be consistent with healthy, sustainable and responsible business practices, but it also might not. Understanding the complex development of American corporate capitalism can help us better improve and sustain the strength of the American economy.
One lesson of the formative period is that meaningful reform can be achieved only by reforming the market, by reforming finance itself to create the incentives for stockholders and managers to relearn the lesson that profits come from industrial production, not from the breeze that blows toward tomorrow. It is a lesson that was often forgotten during these formative years and many times since.
And the story of the creation of American corporate capitalism illustrates the possibilities of capitalism and the variety of forms it can take. Some of these were present in the American corporate economy of the late nineteenth century. Closely held industrial capitalism, bank finance capitalism, capitalism in which publicly held permanent investments like bonds characterized the principal source of corporate finance, even a heavily regulated state-guided capitalism, all were possibilities before the election of Warren Harding. Many of these different forms of capitalism have appeared successfully in different regions, cultures and countries during the twentieth century. American corporate capitalism—stock market capitalism—was neither the necessary nor inevitable form of the American economy.
The story of the formative period is a story of problems misperceived, transformations not yet understood and misguided regulation. One lesson of this story is that modern American corporate capitalism is the result of human choices. It is a system we maintain out of choice. It is a system that has ramifications beyond the economic that have helped to embed social norms of individualism that interfere with the cooperation necessary for a successful economy and a thriving society. It is within our power either to change it, to modify its rough edges or to accept it as it is. But these choices can only be made with understanding. The story of the formative period provides critical insights into the making of modern America.
I have written this book for a number of reasons. First was my deep curiosity about how it came to be that the American economy today is so deeply grounded in the stock market. Several years into my research, I began to realize that this story had yet to be told and that it had greater significance than simply the intellectual engagement that sustained me. I began to see in the formation of American corporate capitalism the reasons for a number of contemporary business, economic and social problems, problems which so many are trying to solve today without understanding some of the important causes that this history helps to identify. Perhaps as important, I started to see the way our speculation economy affects the norms of American society, how it has pushed American social norms from a vision of collective life that achieved some currency during the Progressive Era to a more atomistic form of individualism that has both recalled an earlier American ideal and driven the future. Nowhere in American society is violent, competitive individualism more rampant than in the modern stock market.
Historians of the era, and those interested in history, are likely to be engaged by this critical phase of the development of modern America, and it is for them that I have tried to take such care in telling the story as accurately as my research has led me to understand it. But I hope that people engaged in business, public policy and law, and Americans who are concerned about the shape and direction of our society find this book equally helpful for the way it highlights the important ramifications of this transformation for American economic and business welfare and the character of American society.
Finally, the story I tell holds important lessons for citizens of other nations, even as the American form of corporate capitalism has affected the different ways many other countries do business. For almost two decades now, many countries have been at a decision point as to whether they will adopt the American way or pursue their own, or even whether they have much choice in the matter. This book teaches them that they do.
I have many people to thank for helping me through this project. First and foremost, my brilliant wife and colleague, the historian and legal scholar Dalia Tsuk Mitchell, deserves my gratitude for suggesting I explore history in the first place, for answering my endless questions about historiography, for sharing her knowledge of, and insight into, the Progressive Era, for listening to my endless lectures on the subject, for critically reading the manuscript over and over, for reminding me of the sources I had not yet read, for never letting me accept what I had shown her as good enough and for providing love and encouragement when I needed it the most. Theresa Gabaldon, Ira C. Lupu, Andrew Mitchell, Mary A. O’Sullivan, Daniel Raff, Christopher Ruane, Philip Scranton and Michael Selmi gave helpful feedback on various portions of the manuscript and a number of other colleagues throughout the country took the time to discuss aspects of the project with me. Arthur Wilmarfh was more than generous in sharing his encyclopedic knowledge of the financial and regulatory history of the era and by commenting on a number of chapters. Donald Braman, Charlie Cray and Renée Lettow Lerner were enormously kind to read and comment on portions of the manuscript at a relatively late stage. The comments by Berrett-Koehler’s readers—Charles Derber, Steven Johnson, Marjorie Kelly, Jeffrey Kulick and Steven Lyden-berg—were sometimes mercilessly helpful and forced me to sharpen my argument. Early workshops at the University of California, Los Angeles, Rutgers University and The George Washington University helped me begin to organize what at the time was nothing more than muddled thinking about some interesting research, and participants in workshops and conferences at the University of Pennsylvania, the University of Illinois, McMaster University, Columbia University, Washington & Lee University and Georgetown University, among others, helped me to sharpen and refine my ideas. Matthew Mantel of the Jacob Burns Law Library at The George Washington University Law School, aided at times by Leonard Klein and Germaine Leahy, was an indispensable help, as was the hardworking staff of the interlibrary loan department. My assistant, Toinetta Foncette, undertook the rather large task of keeping everything reasonably organized. I am also grateful for the assistance of librarians and archivists at the Baker Library of Harvard University, the Library of Congress, the New York Public Library, the Newark, New Jersey, Public Library, The National Archives Research Administration at College Park, the New York Historical Society and the American Jewish Archives.
My deep appreciation goes to my agent, Susan Schulman, for her constant faith in me. My debt to my publisher is perhaps unusually large, because working with Berrett-Koehler gave me the chance to work with the kind of corporation I have idealized throughout my career. My editor, Steve Piersanti, challenged me to write and think with a new level of clarity. Ian Bach, Peter Cavagnaro, Mike Crowley, Tiffany Lee, Dianne Platner and Rick Wilson were remarkably open to my comments, ideas and suggestions and made the process of producing and marketing a book both interesting and a pleasure, as did the production team at Wilsted & Taylor Publishing Services, especially my enormously patient copy editor, Nancy Evans. Jeevan Sivasubramaniam’s warmth, patience, humor, understanding and respect made him the managing editor every anxious author dreams of and, I hope, a real friend.
Finally, I am indebted to several excellent research assistants at The George Washington University Law School, including Matthew Benz, Martinique Busino, Zal Kumar, Adam Marlowe, Jacques Pelham and Misha Ya-novsky. My very special thanks go to two extraordinary research assistants whose efforts during the last year of work made it possible to complete the book in a timely fashion, Alexis Rose Brown and Emily Vincent.
It was a pleasure to work with all of you.
Washington, D.C.
April 2007