The relentless revolution: a history of capitalism (31 page)

There was a downside. Corporations cost money in fees from lawyers and the government. Once gained, the privilege could be enjoyed free, a gift from the government and its people to private persons. The separation of shareholders from managers, celebrated in the lore about corporations, sometimes invited irresponsibility, if not outright corruption. High-flying corporate heads could fiddle with the books, contract with their own firms, or pay dividends out of capital instead of earnings. Worse they could sell new shares of stock to pay dividends, amounting to Ponzi schemes.
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Still, corporations became popular among American and British entrepreneurs. General incorporation laws in the nineteenth century made it easier and cheaper to turn private companies into public incorporated entities than it had been. This was particularly the case in the United States, where the states chartered thousands of limited liability companies. They far outnumbered those in Great Britain until halfway through the nineteenth century.

A bad experience in the eighteenth century had led the British Parliament to pass the so-called Bubble Act, restricting incorporation. Limited liability companies became popular there after 1856, although family firms were common well into the twentieth century.
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Even more encouraging to enterprise were the liberal bankruptcy laws, which favored business borrowers over their creditors—that is, making money over having money. When industrial incidents, such as a flying spark from a railroad engine, ignited a farmer’s haystack, the farmer had a difficult time winning a tort case against the railroad company. Laws, and even more emphatically judges, were loath to punish employers when their workers were hurt on the job. American law, much as it differed from state to state, usually came down firmly on the side of enterprise.
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Since the whole world is not composed of investors and entrepreneurs, the concept of limited liability did not always charm those who weren’t either. The principal complaint was avoidance of personal responsibility through the creation of an artificial entity. There was also a deep-seated suspicion of speculation and paper profits implicit in buying and selling something as seemingly unsubstantial as a share in a company expressed on a piece of paper. Lightly regulated until the end of the nineteenth century, corporations then became more subject to legislative and judicial restraint. Shareholders and managers insisted that corporate taxation represented double taxation since shareholders paid taxes on their dividend income.

The desideratum of investors was to protect their investments while receiving a regular and robust return. Easier said than done; the investor was at the mercy of his or her own ignorance about the business involved. On the other side of the investing equation, those who actually developed new applications of technology wanted investors who willingly took risks and left the operational details to them. The railroad builders’ voracious appetite for funds put pressure on the normal pools of capital. Necessity became the mother of invention. Financiers came up with debentures, long-term fixed-rate loans that operated much like government bonds. Another stratagem was to issue vendor shares to the suppliers and contractors of mining or railroad companies in lieu of cash. And then there were preferential shares that gave their holders the first crack at returns before dividends were paid to the holders of common shares. One of the great scams of American economic history was another Crédit Mobilier, this time an American company organized in 1867 to extract profits from railroad construction by inflating costs, which were assumed by government subsidies, which in turn paid for bribing members of Congress, which held off investigations until the presidential campaign of 1872.

A great deal of attention has been given to the excellence of the English and American corporation as a vehicle for capitalist expansion, but for small and medium-size enterprises, the costs could be discouragingly high. So much so that at the end of the nineteenth century, German legislators introduced a new business form, the private limited liability company in which partners could write legally enforceable contracts that specified the terms of the partners’ relationship. This eliminated the principal drawback of partnerships, the unexpected incapacity or irresponsible acts of a partner. The private limited liability company found a happier home in France and Germany with their civil code legal systems than in Great Britain and the United States, where the common law, favoring individual rights over state concerns, prevailed. So uncongenial was this type of partnership to common law countries that it was not available to entrepreneurs until 1907 in Great Britain or in the United States until the second half of the twentieth century.
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German industrialists and their bankers coalesced into a new class, not the gentry elite or the urban, professional middle class but one composed of industrial giants and their lucky associates who had been made millionaires. They were willing to raise the money for railroad projects; they supplied the cargoes to be shipped out as well as the new customers for the freight coming in. They mined coal and fabricated iron ore just as the European machine industry heated up. This global economy promoted specialization and an international division of labor. If the Junkers, who still dominated politics, sneered at these new men, they did so privately because most Germans saw these big industrialists as public-spirited men contributing to the great cause of strengthening the German Empire.
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Where enterprise became a kind of national pastime in the United States, in Germany it was confined to a class still inclined to admire aristocratic tastes.

The Protracted Depression of 1873

The year 1873 proved to be a bad one in the history of capitalism. A depression began that lasted in some areas for another twenty-six years! One of the problems with the free enterprise system comes from its dispersed decision making. With individuals and private companies acting on what they calculate as their best interest, it’s hard to know what’s going on generally. No one, as it were, is in charge. Prices and rates deliver information, but the causes behind the decisions that produced those particular prices and rates have to be interpreted. When things are going well, there’s little incentive to explore the meaning of market behavior. Only when things go sour do people clamor for explanations. In 1873 the challenge was greater.

Efficiencies in production outpaced effective demand. That is, there were more goods than people ready to buy them.
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In what you might call the adolescence of capitalism, trouble spots could gather like black clouds before a summer storm. People called them slumps, the word itself conveying an image that things would soon right themselves. Not so this time. A stock market crash in Vienna and the failure of a major bank in New York marked the beginning of two decades of economic instability. Added to the manufacturers’ inventory problems were bounteous harvests from America, Argentina, and Russia. Low grain prices wiped out thousands of those farmers throughout Europe who were still following traditional methods. Even French and English agriculture tanked.

The crisis of 1873 proved the integration of world markets when downturns in the United States and Europe plagued economies in South Africa, Australia, and the West Indies. The cumulative impact of long-term developments kicked in to prostrate most Western economies. America’s output increased in the last decades of the nineteenth century, but prices stagnated. Most industrialists had worked hard to keep wages low, inadvertently impoverishing potential buyers of their goods. Conservative attitudes toward the importance of thrift contributed to the problem. Still dominated by an aristocratic ethic, upper-class Europeans looked down upon the spending of ordinary people, especially if the display of their purchases threatened to blur the lines between people of refined taste and their social inferiors. Today we would just say that a trade glut caused the excess of goods over purchasers, but we would be wrong. There was also a cultural lag.

When the price of silver began to fluctuate wildly in the 1870s, the awkwardness of using both silver and gold as currency became apparent. Great Britain had maintained a single source of value, gold, to settle accounts, and Germany, the Scandinavian countries, France, Belgium, the Netherlands, and the United States followed suit in the 1870s. Now each country’s currency—mark, franc, pound, dollar—had a fixed exchange rate with gold. If a German investor sent two hundred marks to the United States, he or she could be sure exactly how many dollars it would be worth. The gold standard proved to be an invisible taskmaster, nanny, jailer, and seer. It influenced everything from imports and exports to the price of wages. If a country ran a trade deficit, gold left the country, causing a drop in the domestic purchasing power, which in turn hurt sales. Manufacturers had to lower costs to gain back customers. They generally did this by pushing down wages.
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The gold standard underwrote a new intensification of global trade, greatly aided by telegraphy, international business news, and improved oceanic transportation. People became more confident that their money would be fairly exchanged in other countries; they started investing abroad, especially in the United States, now the largest economy and also the land of the best opportunities for high returns on capital. Argentina and Egypt also benefited from the endless search for the best investment. The speculation that had buoyed Germans before the depression of 1873 began came to a halt. Still, the forward momentum of pent-up entrepreneurial energies proved stronger than the depression’s brakes. By 1880 the German economy was again in ascendance. But the 1880s and 1890s were also decades of hardship.

Midwestern American farmers almost threw a spanner into the new regime when they began railing against the new specie tyrant. Suffering from low prices in the 1890s, they blamed the fixed exchange of the gold standard for their woes. They advertised a list of the people’s enemies, starting with the British financial elite, followed by international bankers in general. They found a champion in the Democratic Party’s standard-bearer William Jennings Bryan, who brought delegates to the party’s convention in 1896 to their feet with his dramatic injunction to the money masters: “You shall not crucify mankind upon a cross of gold.” Things were touch and go until the Republicans triumphed over these renegade populists in the fall presidential election.

Though we rarely think of it this way, the United States too was undergoing a process of unification in the 1870s.
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The American Civil War—no eight-month romp like the Franco-Prussian War—had taken a terrible toll in lives, property, and peaceful pursuits during the four years between 1861 and 1865. By 1870 the last of the southern states had been readmitted into the union, and the North was ready to call it quits on reconstructing the states that had joined the Confederacy. Turning toward the West, in 1871 Congress passed the Indian Appropriation Act, which made Native Americans national wards and nullified all previous Indian treaties. The Civil War had interrupted the efforts to integrate California into the nation; four years after Appomattox, the Central Pacific tracks joined those of the Union Pacific from the east. A gold spike attached the two at Promontory Point, Utah. The transcontinental railroad connected the two coasts of the United States, pulling in all the sparsely settled places in between. The victorious North was ready to impose its national vision upon both the South and the West.

With the Civil War behind it, the United States could turn toward developing the vast tracks of unoccupied land acquired in 1803 in the Louisiana Purchase and through the treaty that ended the Mexican-American War in 1848. Meanwhile its urban population had been exploding. Total population grew twelvefold between 1800 and 1890 while those living in cities increased an astonishing eighty-seven times. Gustavus Franklin Swift helped forge economic ties across the continent with his invention of refrigerated railroad cars. Now the cattle ranging over the grazing lands west of the Mississippi River could be driven to Omaha, Kansas City, and Chicago to be slaughtered and their dressed meat shipped to the densely populated, urbanized East. In a society where almost everyone could afford to eat meat, refrigeration furnished the missing link between supply and demand.

Prosperity in the second half of the century, if not steady, still brought positive improvements in wages, public health, and food costs. The United States has long been viewed as the paradigmatic capitalist country. Its persistent economic advance has been laid to the favorable ratio of people to land, the absence of a feudal past, the rich endowment of just the right mineral resources needed in industry, and the hardworking, disciplined young men and women issuing from America’s family-owned farms.

Washington Irving coined the phrase “the almighty dollar” in the 1820s. A century later President Calvin Coolidge famously announced: “The chief business of the American people is business.” The insight buried in that rather banal observation should not be dismissed. There were very few competing values or career options in the nineteenth century. The father of Henry and William James, who was independently wealthy, bemoaned the fact that people in his country always asked him what he did for a living, an inquisitiveness that sent him sailing back to Europe.

In capitalism, the cumulative private decisions of participants exercised coercive force throughout the economy. Denied the protection of monopoly control, the most efficient operators forced the less efficient to imitate them or retreat from the active management of their resources. Capitalist activity was not dependent upon any particular person, region, or family. If one passed up a moneymaking opportunity, another would see the potential gain in it. This is an optimal assessment that has to be balanced against the fact that capitalist wealth also created rich opportunities for graft such as the bribing of politicians by the builders of the American transcontinental railroads.